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FINANCIAL CRISIS

Borg warns of pump priming debt mountain

Sweden's finance minister Anders Borg warned EU leaders on Thursday that states cannot keep throwing good money after bad and called for a discussion to supervise the easing of expansionary fiscal policy.

Borg warns of pump priming debt mountain

Gothenburg will host the Ecofin Council meeting of European Union finance minsters and will be chaired by Anders Borg, representing the current EU chair Sweden.

“We are seeing a tentative recovery, obviously based on the very strong fiscal stimulus, monetary stimulus that we are now implementing,” Borg said before the meeting in Gothenburg on Thursday.

“Obviously then we would have to discuss the exit strategies. Even if the policy would have to remain expansionary it is necessary to start to design and communicate the exit strategies,” Borg added in reference to preparations in the autumn to return to a more balanced fiscal situation.

The leaders however were reluctant to put any fixed dates for a coordinated exit strategy to tackle bloated deficits.

“I think it is very difficult. I don’t think that the implication of this international crisis is a symmetric one for each of the countries,” said Portugal’s finance minister Fernando Teixeira dos Santos.

“It’s affecting every country differently. And every country will have to define its own exit strategy in its own time. I don’t think we can have a precise schedule or a common schedule,” he added.

With recovery set to remain “fragile and flaky” into 2011, according to Jean-Claude Juncker, Luxembourg Prime Minister and head of the 16 countries that use the euro, weak growth potential is holding states back from early withdrawal of massive stimulus funding.

The International Monetary Fund warned on Thursday that the fiscal legacy of the global crisis is “a high and rising (national) debt trajectory that could become unsustainable without significant medium-term measures.”

A spiralling drain on public finances also amounts to a political conundrum for leaders facing hard-pressed voters at home.

With millions of jobs already lost and amid further fears of rising inflation, Anders Borg, said economic policy would still be “very expansionary in the coming period.”

Twenty out of the 27 EU countries will be operating in the coming period above the bloc’s threshold for deficits, originally pegged at three percent of Gross Domestic Product.

Among the heaviest is France, which this week indicated in its new budget that its public debt will soar to 84 percent of national output in 2010, again well above the theoretical 60 percent limit agreed when setting up the euro.

Warning that states cannot keep throwing good money after bad for ever, Borg said the threat of 100 percent debt levels for the biggest countries in a few years’ time was of major concern.

“The crisis will have a negative impact on potential growth, so we need to boost labour supply and boost labour market flexibility to increase the potential growth of the European economies,” he added.

He said that making a “timely withdrawal of the temporary stimulus,” designed and communicated in advance, held the key.

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FINANCIAL CRISIS

US investors buy up north German state bank hit by financial crisis

Two German states said Wednesday they would sell troubled maritime lender HSH Nordbank in the first full privatisation of one of the regionally-owned "Landesbank" lenders hit badly by the financial crisis.

US investors buy up north German state bank hit by financial crisis
Photo: DPA

Leaders from Hamburg and Schleswig-Holstein states said at a news conference they would sell their 95-percent stake for one billion euros to investors led by two US funds, J. Christopher Flowers and Cerberus capital.

The European Commission ordered a change of ownership in exchange for its approval in 2009 of a €13-billion-euro rescue – one of two taxpayer-funded bailouts for the north German bank since the 2007-2008 financial crisis.

That rescue plan helped cover risky investments amounting to €60 billion, most of them in real estate and the shipping sector, which HSH built up in the pre-crisis years.

“Today we've reached an important milestone on the way to selling the states' holdings in HSH,” which had over the years proved “very costly to the taxpayer,” Schleswig-Holstein state premier Daniel Günther said.

Wednesday's deal must still earn a green light in a further competition probe by the Commission and from banking supervisors at the European Central Bank.

If it goes ahead, “the privatisation means that we can limit the damage to the states that has resulted from the bank's irresponsible strategy of expansion between 2003 and 2008,” Hamburg mayor and future federal finance minister Olaf Scholz said.

The sale was immediately criticized by Sahra Wagenknecht, leader of Die Linke (the Left Party), who described it as a gift to “the finance mafia.”

“Future profits will be privatized, tax payers will lose multiple billion euros and jobs are at risk – whoever calls that a success doesn't deserve to be finance minister,” she wrote on Twitter.

Hamburg and Schleswig-Holstein have taken on a portfolio of HSH's bad loans, meaning taxpayers could face a bill of up to €7 billion when they are eventually sold to private buyers.

The contract for Wednesday's sale also provides for HSH's payroll to be halved, to around 1,000 workers.

HSH's departure into the private sector leaves just five of the “Landesbank” lenders standing after a series of post-crisis interventions.