Actual finance blog

LONDON — World stocks and the euro fell sharply on Monday as investors feared a messy Greek default within weeks unless Athens implements the austerity measures demanded by its international lenders.

International lenders told Greece on Monday that it must shrink its public sector and improve tax collection to secure a vital 8 billion euro rescue payment next month.

After a rare four-day rally in world stocks last week, markets fear the crisis is worsening again after Greece’s prime minister cancelled a U.S. trip to chair an emergency cabinet meeting at home and German Chancellor Angela Merkel suffered a regional election loss.

EU finance ministers also failed to make progress on the debt crisis at the weekend, and the focus is now shifting to a conference call between Greece and its international lenders at 1600 GMT to see how Greece plans to make up its budget shortfall and avoid a disorderly default.

With the gloom so widespread, investors took little comfort from expectations that the Federal Reserve would introduce new measures to stimulate the U.S. economy later this week.

“It’s no more a link between markets and economics, but a link between markets and politics. The politicians should have seen the crisis coming and done more, but the problem is they are not proactive,” said Koen De Leus, strategist at KBC Securities, in Brussels.

“We are just going from one crisis to another. It’s a nightmare for the markets.”

The MSCI world equity index fell 1.1 per cent on the day, after posting its biggest weekly gain since early July last week in buying largely driven by short-term players.

Long-term asset managers have been either staying on the sidelines, or steadily cutting back on exposure to risky assets. The MSCI index is around 5 per cent above its one-year low hit earlier in September.

European stocks lost nearly 2 per cent, led by sharp losses on the banking sector, while emerging stocks dropped nearly 2.2 per cent. U.S. stock futures pointed to a weaker open on Wall Street later.

The euro fell more than 1 per cent to $1.3632.

POLICY RISKS

Events this week promise a heavy dose of policy action.

Finance ministers of the BRIC emerging economies — Brazil, Russia, India and China — meet later this week to discuss steps to offer support to the euro zone.

Market sentiment may change if they buy euro-denominated bonds, as suggested in preliminary talks, after the European Central Bank’s 70 billion euro bond-buying spree over the last five weeks or so failed to stop the crisis from spreading to Spain and Italy.

Investors will also be watching U.S. President Barack Obama’s deficit-reduction plan on Monday aimed at covering the cost of his recent jobs bill.

U.S. crude oil was down 1.4 per cent to $86.76 a barrel.

Bund futures rose 78 ticks.

The dollar gained 0.7 per cent against a basket of major currencies, supported by expectations that new Fed measures would be focused on the maturities of the debt it buys rather than on expanding its already swollen balance sheet.

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CHARLOTTE, N.C.,

The tax credit package put forth by House and Senate leaders Wednesday includes:

Things keep getting worse for Bank of America.

The nation’s largest bank reported a loss of $9.1billion during the second quarter, partly due to an $8.5 billion settlement with investors. That agreement, reached in June, settled claims that the bank had sold the investors poor-quality mortgage bonds.

The Charlotte, N.C. bank has been hamstrung by litigation and demands from investors who want Bank of America to buy back the bonds that it sold years ago. In the quarter, the bank set aside an additional $1.9 billion to fight litigation bringing the total mortgage-related charges in the second quarter to $20.7 billion. The bank does not disclose the total amount reserved for litigation costs.

The reported loss available to common shareholders was 90 cents per share, wider than the 85 cents a share loss expected by analysts surveyed by FactSet. Excluding charges related to investor settlements, Bank of America Corp. earned $3.7 billion, or 33 cents per share. That compares with net income of $3.1 billion, or 27 cents a share, in the same quarter last year. The bank’s revenue declined 54 percent to $13.2 billion from $29.1 billion in the same period last year.

While several of the bank’s businesses reported positive earnings, almost all of them saw declines in revenue. Loan losses in its consumer businesses dropped for the fifth consecutive quarter. More of the bank’s customers paid on time, which led to a 60 percent decline in the amount the bank puts aside for credit losses from last year.

Bank of America’s credit card division reported income of $2 billion, up $1.2 billion from the year-ago quarter, as customers paid on time. However, revenue declined by $1.4 billion.

Commercial banking was another bright spot, reporting net income of $1.4 billion, up $566 million from a year ago. But revenue in the division decreased $73 million from a year ago.

Its Merrill Lynch investment banking unit reported fees of $1.6 billion, a 28 percent increase from a year ago.

Bank of America shares were up less than 1 percent in pre-market trading to $9.77.

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FRANKFURT

OTTAWA

The traditional cottage country spring real estate market has been delayed by unseasonably cool weather, and the Victoria Day weekend looks to be a bit of a washout.

But realtors are hopeful that this year will be better than last as the economy shakes off the shackles of the recession and enters a recovery mode.

U.S. Treasury Secretary Timothy F. Geithner said budget deficits threaten to erode the nation’s economy and security and can’t be reduced with “magical thinking.”

“Neither Congress nor the administration should be able to use unrealistic assumptions about future economic growth or future political courage, or other forms of magical thinking, to minimize the magnitude of the reforms that will be necessary,” Geithner said today in a speech at the Harvard Club in New York.

Geithner said U.S. “fiscal problems are so pressing that they threaten to undermine the foundations of our future economic strength” and the country’s ability “to protect our national security interests.”

Lawmakers and the Obama administration are trying to reach a bipartisan accord on cutting long-term deficits as part of a plan to raise the legal limit on the national debt. Senate Republican leader Mitch McConnell of Kentucky said his party wants “significant” cuts in spending and no tax increases as a condition for lifting the limit.

In response to a question, Geithner said the U.S. benefits from global confidence in the dollar, especially during times of financial and economic stress when investors turn to the currency as a safe haven.

“That is an important thing we want to preserve and protect about the United States,” he said. He declined to comment on recent investment trends for the dollar and other currencies.

Debt Ceiling

On the debt ceiling, the U.S. was $25 million under the $14.294 trillion limit as of yesterday, according to Treasury data released today. Geithner said yesterday he had taken measures to stay below the limit until Aug. 2.

The ceiling “relates only to commitments we have made in the past,” Geithner said today. “Rather than debating whether we should pay our past bills and whether default would in fact be so bad; rather than designing schemes to allow us to continue to make interest payments by breaking our commitments to seniors and veterans, we should be working together to narrow our differences on how to solve the causes of future deficits.”

Geithner wrote lawmakers to say he had declared a “debt issuance suspension period,” which allows him to free up borrowing room from the Civil Service Retirement and Disability Fund and the Government Securities Investment Fund. The steps, widely expected as Republicans and Democrats argue over when and how to raise the debt cap, won’t affect retirees or government operations.

‘Not an Option’

Geithner reiterated today that “the debt limit must be increased. It is simply not an option for Congress to evade the basic responsibility to protect America’s creditworthiness.”

In his first public comments related to the arrest over the weekend of International Monetary Fund Managing Director Dominique Strauss-Kahn on sexual assault and attempted rape charges, Geithner said the IMF needs to get its leadership in place because its chief is “obviously not in a position” to run the lender. Geithner also said John Lipsky, the IMF’s acting managing director, is competent and capable.

On fiscal issues, Geithner said the administration’s effort to overhaul the corporate tax code to reduce deductions and loopholes likely won’t be completed in the next two months because it is trying to tackle broader budget issues.

“We’d like to take a run at doing this ahead of the election,” he said.

Geithner said the U.S. should get its deficit below 3 percent of gross domestic product, from 10.9 percent of GDP projected for the current fiscal year ending Sept. 30. The U.S. also needs a “debt cap so that politicians cannot choose to live with unsustainable deficits,” he said.

Speaking later on a panel after a screening of the HBO film “Too Big to Fail,” Geithner said Europe has the capability to handle the region’s debt crisis. “They just have to do it,” he said.

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Congratulations, graduates! As you pick up your sheepskin this spring, heed the sage advice of art professor Gary Bolding, delivered at a Florida commencement a dozen years back.

“Graduates, your families are probably very proud of you right now,” he said. “They weren’t altogether confident that you would ever make it through potty-training; so you can’t begin to imagine the enormity of their sense of relief today. Without question, today would be an extremely opportune time to ask for money.”

Yep, hit up Mom and Pop for that final allowance payment. Consider it reparations.

After all, we old boomers have left you in a fine pickle. We let the cost of college run so high that many of you are deep in hock on student loans. (Two-thirds of new college grads owe student debts averaging $24,000.) Then we let greed run wild in the banking system. As a result, you’re graduating into 9 percent unemployment.

As a guilty geezer, the least I should do is point out how to avoid living under a bridge. In brief:

Americans increased their spending in March as they paid more for gasoline and groceries, suggesting income gains may need to pick up to prevent a bigger squeeze on household finances.

Purchases rose 0.6 percent after a revised 0.9 percent gain the prior month that was higher than previously estimated, the Commerce Department said today in Washington. After adjusting for changes in prices, the spending that accounts for 70 percent of the economy rose 0.2 percent in March.

Workers are finding limited success asking for pay raises, a reason Federal Reserve policy makers will maintain record monetary stimulus after ending large-scale bond purchases in June. Another report showed business activity grew in April at a pace that’s consistent with steady expansion in manufacturing.

“A larger share of consumers’ money must be allocated toward gasoline and food,” said Michelle Meyer, a senior economist at Bank of America Merrill Lynch in New York. “Manufacturing is continuing to expand and looks healthier than other parts of the economy.”

Stocks gained as results at Caterpillar Inc. (CAT) and Goodyear Tire & Rubber Co. beat estimates. The Standard & Poor’s 500 Index climbed 0.2 percent to 1,363.61 at the 4 p.m. close in New York.

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