Weekender: Papandreou, Bernanke and the Twist

by CC September 18, 2011 5:36 pm • Commentary

Next Week’s Tape: Fed Up



NAHB housing index for September


Weekly ICSC-Goldman chain-store sales

August housing starts and building permits

Weekly Redbook retail sales

Day One, FOMC policy meeting


Weekly MBA mortgage applications index

Existing home sales for August

FOMC policy announcement


Weekly jobless claims

Leading indicators for August


New York Fed President Bill Dudley speaks

San Francisco Fed President John Williams speaks







Adobe Systems


ConAgra Foods


Bed Bath & Beyond

General Mills

Red Hat


Discover Financial Services






The Fed in the week ahead is widely expected to pull the trigger on a new easing program, as the European debt crisis continues to boil.

The housing market will also be a focus when new and existing home sales data is released Tuesday and Wednesday. New data this past week showed a jump in foreclosure starts, signaling that a big wave of foreclosed properties will hit the struggling housing market early next year.

The Dow and S&P 500 had their best week since July and second best week since July 2010, as European officials showed support for Greece. The Nasdaq did even better — jumping 6.3 percent, for its best week since July, 2009.

Market expectations are high that the Fed will announce a new program — dubbed “operation twist” — at the end of its two-day meeting Wednesday.

“Twist” is different than the much larger scale “QE2” quantitative easing program which involved the purchase of $600 billion in Treasury securities. Fed watchers expect this program to raise the duration of the securities the Fed holds, not the amount. The program, in theory, could reduce long-term interest rates as the Fed buys more securities in the middle and longer end of the yield curve.


FRANKFURT — Europe appeared to be lurching toward a moment of decision in its sovereign debt crisis Sunday, as Greece struggled to meet conditions for additional  aid amid rising German impatience with the cost.

Prime Minister George A. Papandreou of Greece canceled a planned trip to Washington to meet with his cabinet Sunday, in what looked like an increasingly desperate attempt to show foreign benefactors that the government can keep the promises it made in return for aid. Without the aid, the country would certainly default on its debt, an event that economists have warned could lead to bank failures in other countries and ignite another financial crisis.

“Greece’s imminent default is assured,” Carl B. Weinberg, chief economist at High Frequency Economics in Valhalla, New York, wrote in an e-mail Sunday. “Without an injection of cash within the next weeks, the nation will run out of resources to service its debt.”

Other analysts are less pessimistic, arguing that European leaders will do what is necessary to save Greece once they are confronted with the ugly ramifications of a default. These might include having to rescue banks, particularly in France and Germany, that have large holdings of Greek bonds, as well as putting even more acute pressure on other highly indebted euro zone countries like Italy and Spain. In the worst case, the euro could come apart, setting back the cause of European unity by decades.

When political leaders do the math, they may realize it is cheaper to save Greece than engineer a bank rescue only two years after the last round of bank bailouts, analysts said.

“You can stabilize the banking system and let the sovereign go through the roof, but that is not the most efficient way to do it,” said Guntram B. Wolff, deputy director of Bruegel, a research organization in Brussels.

Still, political leaders outside the euro zone have displayed concern that the European approach to the crisis lacks urgency. Timothy F. Geithner, the U.S. Treasury secretary, attended part of a meeting of European finance ministers on Friday and Saturday in Wroclaw, Poland. It is rare for a U.S. official to attend such a meeting, known as Ecofin, and it was Mr. Geithner’s first time.

“I can’t remember the last Ecofin meeting a U.S. Treasury secretary has attended,” said Nick Matthews, an economist at Royal Bank of Scotland. “It is a clear signal of how serious the sovereign debt crisis has become and an indication that it has gone beyond Europe and is threatening on a global dimension.”

The finance ministers failed to make substantial progress toward resolving the debt crisis or to make any pledge to recapitalize Europe’s banks.


Greece on Sunday pledged to take the tough decisions needed to avoid default but announced no new austerity measures to secure international bailout funds next month.

Prime Minister George Papandreou canceled a visit to the United States to chair a cabinet meeting on Sunday, a day before European Union and International Monetary Fund inspectors hold a conference call with Finance Minister Evangelos Venizelos to hear how Greece will plug this year’s budget shortfall.

Venizelos told reporters after the meeting Greece needed to fully meet 2011 and 2012 budget targets, stop generating debt and start producing surpluses next year, but did not outline how these would be achieved.

“If we want to avoid default, to stabilize the situation, to remain in the euro zone … we must take big strategic decisions,” he said.

The cabinet will meet again after talks with the EU and IMF inspectors to specify policy, he said. He hinted at steps to further shrink the public sector by saying Greece would focus on cutting state spending rather than generating revenues in 2012.

At stake is an 8 billion euro ($11 billion) loan tranche from a 110 billion euro bailout secured last year, which Greece needs by October before it runs out of money.

Papandreou canceled his U.S. visit to deal with the deepening crisis at home as euro zone partners made clear further funding for the debt-ridden country would hinge on adhering to agreed fiscal targets.


President Barack Obama will propose a new levy on U.S. taxpayers making more than $1 million to help trim the nation’s debt, adopting a suggestion from billionaire investor Warren Buffett, according to an administration official.

The tax will be among recommendations the president makes to a special congressional committee charged with finding ways to cut $1.5 trillion from the nation’s long-term deficit, according to the official who wasn’t authorized to speak on the record. Obama is set to unveil his deficit-cutting proposals tomorrow.

The president hasn’t settled on the top earners’ new minimum tax rate, which is designed to make sure the wealthiest taxpayers don’t pay a lower effective rate than middle-income earners, the official said. Obama has already proposed limiting some deductions for those in the highest income brackets, taxing carried interest as regular income and ending breaks for gas and oil companies to pay for a $447 billion jobs package.