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In Europe, Signs of 2nd Recession With Wide Reach-nytBy LIZ ALDERMAN AND JACK EWING

Published: October 4, 2011

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PARIS — The European debt problems that have roiled global financial markets for the last 18 months are

showing signs of turning into a far deeper challenge: Europe’s second recession in three years.Enlarge This Image

Corentin Fohlen for The New York Times

Orders are slowing for Emin Leydier in France, a bellwether company that makes boxes. More Photos »

Greece, Ireland, Portugal and Spain are already in downturns or fighting to avoid them, as highunemployment and austerity belt-tightening take their toll. But in the last few weeks, even prosperous

Germany and France, the Continent’s powerhouses, have started to be dragged down, hurt by the ebbing

of business orders from indebted countries in the rest of Europe.

European stocks continued their latest plunge on Tuesday, as the German financial giant Deutsche Bank,

 buffeted by the debt crisis, reduced its profit forecast for the year. Investors were also jolted by news that

the French-Belgian investment bank Dexia might be the region’s first large bank to need a government

rescue as a result of the current debt crisis.

It is not just the Continent’s problem.

The United States, a major banking and trading partner with Europe, is stuck in its own rut — prompting

the Federal Reserve chairman, Ben S. Bernanke, to warn Tuesday that “the recovery is close to faltering.”

He told a Congressional panel that the economy could fall into a new recession unless the government

took further action.

United States stocks ended up for the day, but had bounced wildly on jitters about Europe and rising fears

that Greece would have to default on its sovereign — or government — debt. The Greek finance minister

said Tuesday that the country could continue to pay its bills at least through mid-November, after other

European finance ministers said Greece would not receive its next installment of bailout money before

next month, if then.

 A downturn in Europe, if it happens, could help tip America back into recession and would undoubtedly 

ricochet around the world. Europe’s banks are among the most interconnected in the world, and the

euro is the world’s second-largest reserve currency after the dollar.

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The 17 European Union nations that share the euro together account for about one-fifth of global output.

 And emerging markets that are important customers for European exports, like China and Brazil, are

 beginning to retrench.

“We are the epicenter of this global crisis,” Jean-Claude Trichet, the president of the European Central

Bank, said on Tuesday at the European Parliament.

 A growing chorus of analysts now predict that Europe is heading for an outright recession. “The sovereign

debt crisisis like a fungus on the economy,” said Jörg Krämer, the chief economist at Commerzbank. “I

thought it would be just a slowdown,” he said. “But I have changed my mind.”

Goldman Sachs predicted Tuesday that both Germany and France would slip into recession, although

other forecasts are less grim.

 Already, the euro zone economy has slowed to essentially zero growth. It could stay in a slump, many 

economists say, at least through next spring. If that happens, tax revenue is likely to fall and

unemployment, already high, is expected to rise, making it even more difficult for Europe to address thesovereign debt crisis and protect its shaky banks.

In a sign of how quickly the ground is shifting, the European Central Bank might lower interest rates on

Thursday — just a few months after it started raising them in what is now seen as a misguided effort to

stem incipient inflation.

Distress is increasingly evident across Europe.

Philippe Leydier, a French businessman, had been feeling more upbeat until this summer, when orders for

his company’s corrugated boxes suddenly began to slide. Orders fell further last month, as auto parts

makers, electrical engineering firms, farmers and other industries reduced production.

“The euro crisis and the financial crisis linked to the debt of European countries is serious,” said Mr.

Leydier, whose box and paper manufacturing firm, Emin Leydier, in Lyon, often provides an early signal

of seismic shifts in economic activity. “European governments need to find a solution — and fast.”

In Italy, which has the euro zone’s third-largest economy, after those of Germany and France, a 45 billion

euro austerity program aimed at reducing debt has many worried about a recession. On Tuesday, the

ratings agency Moody’s downgraded Italian government bonds by three notches, to A2 from Aa2, and kept

a negative outlook on the rating.

Paolo Bastianello, the managing director of Marly’s, an Italian clothing retailer, is increasingly 

discouraged.

 At the start of the year, Mr. Bastianello was more optimistic that Europe would escape its troubles and

that the government might seriously tackle Italy’s problems. “But the turbulence of the markets and the

uncertainty about this abnormal mass of public debt just scare people away from buying,” he said.

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Enlarge This Image

Filippo Massellani for The New York Time

A factory near Vicenza for Marly's, an Italian clothing retailer. An executive there is pessimistic. More Photos »

Multimedia

Slide Show

 A Threat of Recession in Europe

Interactive Feature

Tracking Europe's Debt Crisis

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Fears of Another Recession on Both Sides of the Atlantic

Related

 As Euro Crisis Deepens, Calls for Central Bank to Act (October 5, 2011)

Rescue Aid to Greece Delayed as Pressure Rises for Reforms(October 4, 2011)

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Not everyone is so pessimistic. Some German executives say sales remain healthy, at least so far. “We

don’t see any impact on our business,” said Roland Busch, a member of the management board of 

Siemens, the electronics and engineering giant based in Munich.

“The economy is cooling down but not more than that,” said Mr. Busch, who oversees a unit that supplies

traffic control systems, streetcars and other products for public works.

Expecting demand for urban infrastructure improvements to grow, Siemens plans to add about 150 people

over the next two years to its 850 employees at its complex in Sacramento that makes light-rail cars.

Bucking the trend almost everywhere else in the developed world, unemployment in Germany continues

to fall, and there are shortages of skilled workers in several important sectors.

Jens Weidmann, who runs Germany’s central bank and serves on the executive board of the European

Central Bank, predicted last week that the nation would hit “a soft patch” but escape recession.

Commerzbank predicts German growth will slow almost to zero in the fourth quarter of 2011, but notdecline. At best, though, it expects Germany to grow by no more than 1 percent in 2012.

The International Monetary Fund is a little more optimistic, predicting growth of 1.3 percent next year in

Germany after a healthy 2.7 percent this year.

But the I.M.F. recently acknowledged that it, too, had overestimated the rate of Europe’s recovery. It now 

forecasts that growth in the euro zone will slide to 1.1 percent in 2012, after a 1.6 percent gain this year. In

Spain, where tens of thousands of protestors have called for the government to ease its austerity plan, the

I.M.F. expects growth to pick up to 1.1 percent next year from 0.8 percent this year.

Still, unemployment in Spain remains at 20 percent, and youth joblessness is nearly twice that rate. Pfizer,

the American pharmaceutical giant, said last week it would cut 220 Spanish jobs.

The economy is worse in Portugal, which is operating under a bailout agreement with the European Union

and the I.M.F. The I.M.F. warned the new prime minister, Pedro Passos Coelho, that Lisbon still needed to

find an additional 1 billion euros in budget savings. But further austerity may only deepen the downturn,

 with Portugal’s economy expected to fall by 1.8 percent this year and 2.3 percent in 2012.

João Figueiredo, the owner of a small ship repair yard in Lisbon, expects his first annual loss since 2002.“There are now many clients who are late in their payments and whose money I will probably never see,”

he said.

The worldwide dimension of the financial crisis, Mr. Figueiredo added, made the outcome even more

uncertain. “We’re now in the middle of a crisis that started in American real estate and then crossed over

to Europe, and it seems really nobody has any idea where this will go next and for how long.”

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Portugal’s slump convinced François Libner, the president of Libner S.A., a French manufacturer of 

delivery truck bodies, that it was hopeless to keep trying to sell there.

 After growth in Portugal, Greece, Spain, and Italy started to trail off last year, he shifted his focus to

Germany. Mr. Libner figures it will take at least a decade for any real growth to return to Southern Europe

particularly in Spain and Greece, which he classifies as “a catastrophe.”

Mr. Libner said he hoped Paris’s efforts to bring the country’s deficit and overall debt into line with

European rules would allow France to keep its AAA bond rating — provided that European leaders figure

out how to contain the debt crisis to Greece. If that happens, he said, Europe could rebound quickly, as

investors regain faith in the viability of the euro union.

But if it does not happen, and Europe’s banks become further ensnared in the crisis — he shuddered at the

thought. “We can pay for Greece, but not for all of Europe,” he said. If the crisis swells, he added, “we

 won’t have the means to pay for all of this.”

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Europe Races to Stem Crisis Rescue Plan for Bank Fuels Concern Over Greek Contagion; Italy Downgraded • Larger 

By MATTHEW DALTON And DAVID ENRICH

Oct. 5 2011

Euro-zone governments suffered a blow Tuesday in their efforts to contain a deepening sovereign debt crisis as one of 

the Continent's biggest banks, dogged by fears about its exposure to Greek and Italian debt, was on the verge of a

government-backed breakup.

WSJ's Francesco Guerrera tells Evan Newmark U.S. investors should pay very close attention not only to the economic events across Europe,

but particularly to the financial strain on Belgium's Dexia bank. AP Photo.

Bank executives and government officials zeroed in on a drastic plan to break up DexiaSA, a Belgian-French bank that

is one of Europe's 20 largest in assets.

Also Tuesday, Moody's Investors Service downgraded Italy's debt rating by three notches to A2 and indicated it might

lower it again soon. The Italian government said in a statement that Moody's decision was expected and reiterated its

pledge to balance its budget by 2013.

WSJ's Charles Forelle reports European markets were spooked by comments by Luxembourg Prime Minister Jean-Claude Juncker, who

indicated Greece's July bailout package could be up for review. Photo of Juncker from REUTERS/Francois Lenoir 

Tuesday's developments show how Europe's interlocking sovereign debt and banking crises are feeding into one

another. Worries that the Greek government, whose financial troubles started the turmoil last year, won't fully repay its

debts trigger concern that the region's other weak economies may also eventually default. This in turn heightens

worries about the region's banks, many of which are loaded up with sovereign bonds. But, as Dexia's troubles indicate,

banks can often only escape their troubles by looking for financing from governments, some of which are already

struggling with heavy debts themselves.

The vicious cycle is undermining confidence in Europe's financial system and its economy, further threatening shaky

economic recovery in the U.S. and around the world.

Fears of a spreading crisis caused a global stock market selloff Tuesday. U.S. stocks spent most of the day in negative

territory before mounting a dramatic rally and soaring in the final hour of trading, bolstered by reports that European

leaders may consider further steps to stabilize the region's finances. Asian markets Wednesday morning were mixed in

early trading, with Japan down 0.9% while Australia gained 1.3%.

Enlarge Image

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European financial ministers concluded a two-day meeting in Luxembourg Tuesday in which they discussed Greece's

deteriorating finances and the possible imposition of bigger losses on holders of Greek government bonds than

originally agreed to in July. That July decision at a meeting of euro-zone leaders unsettled financial markets.

Governments have also been discussing further increasing available rescue funds to help other weak governments and

banks in case higher losses for bondholders in Greece trigger another serious fright in financial markets.

Dexia depends more heavily on wholesale financial markets than any other major European bank, putting itself first in

the firing line as investors, spooked by worries about bank holdings of shaky government bonds, have retreated from

lending to the region's banks.

European banks were among the worst performers Tuesday, with the shares of most major lenders falling at least

several percentage points. Dexia shares closed down 22.5% at €1.01, following a 10% drop on Monday.

Belgium and France, two countries that have so far avoided being deeply embroiled in sovereign debt problems, said

Tuesday they would guarantee funds raised by Dexia as it resolved its crisis. As a result, borrowing costs for both

governments rose Tuesday.

Enlarge Image

Dexia's troubles extend to the U.S. where it backstops between $10 billion and $15 billion in municipal bonds that have

been used to finance public projects in communities such as New York City and Everett, Wash. Dexia's recent

problems have caused interest rates on the bonds to rise in some cases. It's unclear whether cities with Dexia-backed

bonds will have to pay even higher rates or be able to obtain new backstops from other banks.

A string of banks has already fallen victim to Europe's nearly two-year financial crisis. After an epic and ill-fated

property-lending binge, several of Ireland's large lenders went belly up, saddling the Irish government with

overwhelming losses that forced the country to accept an international rescue last year.

In Spain, the government has taken over, recapitalized or otherwise restructured more than a dozen local savings

banks, which were reeling from their exposure to the country's deteriorating real-estate market.

And in Greece, whose fiscal woes originally ignited the euro-zone crisis, the local banks are on life support, relying

heavily on loans from the European Central Bank and other sources to fund their daily operations.

What sets Dexia apart is that it is based outside the countries at the heart of the euro zone's sovereign-debt crisis.

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More

• Europe Considers Wider Greek Write-Down

• Dexia's Troubles Cost U.S. Cities

• U.S. Bank Bonds Get Pelted

• Heard on the Street: Dexia Back at Bailout Trough

• MarketBeat: Why Dexia's Problems Matter 

After a meeting Tuesday night on Dexia, Belgian government ministers said they would support the creation of a "bad

bank" that would house the bank's bond portfolio and other noncore assets. Dexia's Belgian retail subsidiary will be

reinforced and depositors will be protected, Dominique Dehaene, spokesman for Prime Minister Yves Leterme, said.

The details of this plan, including whether the bad bank would receive government guarantees for its assets or 

liabilities, "will be part of negotiations in the hours and days ahead," Mr. Dehaene said.

According to people familiar with the matter, Dexia's break-up plan calls for segregating at least €125 billion of assets

into the bad bank, that should benefit from Belgian and French government guarantees. The proposed bad bank willinclude a portfolio of bonds worth €95 billion, about €30 billion in loans deemed nonstrategic, and Dexia's municipal

lending businesses in Italy and Spain. The latter assets may bring the overall value of the bad bank to over €200 billion.

Into the bad bank will go €21 billion of bonds from weak euro-zone economies.

Belgian Finance Minister Didier Reynders, left, and Prime Minister Yves Leterme speak about Belgian-French financial services group Dexia in

Brussels on Tuesday.

Dexia is also expected to sell off its asset management business and DenizBank, its fast-growing retail bank in Turkey.

Its Paris-based public finance arm, Dexia Municipal Agency, would be sold to the French savings banks Caisse des

Depots & Consignations, or CDC, and La Banque Postale, people familiar with the matter said. The Belgian retailbanking unit may be left as a stand-alone business.

"It will be drastic," said one person with knowledge of the discussions. "Any other solution won't be accepted by

financial markets."

Dexia has spent the past three years trying to undo a decade of over-zealous lending to governments and local

authorities across the world using volatile wholesale funding. The seize-up of financial markets in the aftermath of the

Lehman Brothers' collapse exposed deep flaws in Dexia's business model.

More than half of its wholesale funding comes due in the next year, but the bank has only a small pool of liquid assets

on hand that would make it easier to refinance that looming pile of maturing debt, according to Andrew Lim, an analyst

with Espirito Santo Investment Bank in London.

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Europe to lead daring Sun mission-BBCBy Jonathan AmosScience correspondent, BBC NewsOct. 4 2011The probe will orbit closer to the Sun than any previous spacecraftContinue reading the main story

•

Europe is to lead the most ambitious space mission ever undertaken to study the behaviour of theSun.

Known as Solar Orbiter, the probe will have to operate a mere 42 million km from our star - closer than anyspacecraft to date.

The mission proposal was formally adopted by European Space Agency (Esa) member states on Tuesday.

Solar Orbiter is expected to launch in 2017 and will cost close to a billion euros.

Nasa (the US space agency) will participate, providing two instruments for the probe and the rocket to send it

on its way.

The Esa delegates, who were meeting in Paris, also selected a mission to investigate two of the greatmysteries of modern cosmology - dark matter and dark energy.

Scientists are convinced that these phenomena dominate and shape the Universe but their nature has so far eluded any satisfactory explanation. The discovery in the late 1990s of dark energy and its influence on cosmicexpansion was recognised with a Nobel Prize earlier in the day for three scientists.

Solar Orbiter was a favourite to win the Cosmic Vision contest because of its advanced development

The Euclid telescope will map the distribution of galaxies to try to get some fresh insight on these dark puzzles

Like Solar Orbiter, Euclid's cost will be close to a billion euros. However, the mission still needs to clear somelegal hurdles and formal adoption is not expected until next year. A launch could occur in 2019.

"They are both exciting missions, and it was really good to hear today that the physics Nobel Prize wasawarded to research on the accelerating Universe, which is of course linked to Euclid," said Alvaro Gimenez,Esa's director of science.

"And I'm really looking forward to Solar Orbiter, which will become the reference for solar physics in the yearsto come," he told BBC News.

The two missions have emerged from Esa's Cosmic Vision exercise, which is planning missions up to 2025.

They were selected after four years of debate and definition involving researchers and engineers from acrossEurope.

The pair had to argue their case in direct competition with other compelling mission ideas, including at the finalstage of selection a proposal for a planet-hunting telescope called Plato.

Esa itself will be investing about 500-600m euros in each venture, with individual member states paying for theinstruments that will be carried on the spacecraft. National governments will also fund their own scientists toprocess and interpret the data returned by the missions.

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Solar Orbiter was always regarded as something of a favourite in the race. The concept had been indevelopment since the 1990s, and so the technologies it requires were perhaps better understood than manyof its rivals.

Euclid will not only tell us about the "dark Universe", it will acquire some fabulous pictures

Its mission will certainly be challenging as it attempts to acquire measurements of the energetic particles andmagnetic fields found close by our star.

The spacecraft will provide remarkable views of the Sun's polar regions and farside. Its elliptical orbit will betuned such that it can follow the star's rotation, enabling it to observe one specific area for much longer than iscurrently possible.

Throughout, Solar Orbiter will be staring into the "furnace". The main workings of the spacecraft will have tohide behind a shield to protect it against temperatures higher than 500 degrees; its instruments will need topeek through small slots.

"Solar Orbiter is not so much about taking high-resolution pictures of the Sun, although we'll get those; it'sabout getting close and joining up what happens on the Sun with what happens in space," explained TimHorbury from Imperial College London and one of Solar Orbiter's lead scientists.

"The solar wind and coronal mass ejections - these big releases of material coming off the Sun; we don't knowprecisely where they're coming from, and precisely how they're generated. Solar Orbiter can help usunderstand that."

Tuesday's meeting of Esa's Science Policy Committee sanctioned a memorandum of understanding (MOU)with Nasa for its contributions to Solar Orbiter. Delegates also approved a multilateral agreement (MLA) withthe national agencies in Europe that will be providing the payload instruments.

Solar Orbiter will need to be protected by a multi-layered heatshield

Euclid will map the spread of galaxies and clusters of galaxies over 10 billion years of cosmic history.

Its optical and infrared detectors will look deep into space to see how the light from far-distant galaxies hasbeen subtly distorted by intervening unseen, or dark, matter.

It will also map the three-dimensional distribution of galaxies. The patterns in the great voids that exist betweenthese galaxies can be used as a kind of "yardstick" to probe the expansion of the cosmos through time - anexpansion which appears to be accelerating as a consequence of some unknown property of space itself referred to by scientists as dark energy.

"Euclid will give us an insight into how structures in the Universe are growing and whether they are growing atthe rate we expect from General Relativity (our theory of gravity on large scales)," said Bob Nichol, a Euclidscientist from Portsmouth University.

"But aside from all that, Euclid should also deliver a picture of the Universe that has Hubble clarity over thewhole sky. Euclid will detect billions of objects and they will all be there for us to go look at. And when we lookback 50 years from now, that could be the one thing about Euclid we all say was worth it - a tremendouslegacy for our children," he told BBC News.

Euclid is currently a mission that Europe plans to undertake on its own.

It may not remain that way for long, however.

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The Americans are desperate to run a similar mission they call WFirst (Wide-Field Infrared Survey Telescope).But budget pressures mean this spacecraft is unlikely to be built until after Euclid has flown, giving Europe aclear lead in one of the most important fields of modern astrophysics.

Esa has in the past offered Nasa the opportunity to take a 20% partnership in Euclid.

"The door is always open to the Americans, and we are ready to co-operate with them if they come with areasonable proposal," said Dr Gimenez.

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Europe won't let monetary union fail: Geithner-Reuters

WASHINGTON | Tue Oct 4, 2011 7:57pm EDT

(Reuters) - Treasury Secretary Timothy Geithner said on Tuesday that Europewill not let its monetary union fail, but must move more aggressively to erect thefinancial capacity to safeguard it.

"They're not going to let the euro break up. They're not going to let European monetary union fall apart," Geithner said in an interview with "CNN's Erin Burnett OutFront" show.

"They're going to stand behind their financial system. They're going to take the steps to move closer to fiscal union,with the broader disciplines on budget policy you need to make monetary union work," Geithner added.

He said European policymakers are now talking about a more comprehensive, stronger financial firewall to supporttheir financial system.

"But they've got to more quickly move, with more force," he added.

Asked whether the U.S. government should bail out a bank the size of Morgan Stanley (MS.N) if one were to becrippled by the European crisis, Geithner said, "Nobody in my position could answer a question like that."

He added, however, that the U.S. financial system was in a much stronger position than six months ago, 12 months

ago and 18 months ago to weather pressures from Europe and slowing growth around the world.

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Oil nears $78 amid hopes of Europe financial fix-AP

Oct. 5 2011By PAMELA SAMPSON

The Associated Press

BANGKOK — Oil rose to near $78 a barrel Wednesday in Asia amid hopes that Europe will contain the debt crisisthat has engulfed Greece and threatens to destabilize other countries that use the euro.

A gas station attendant fills up an automobile's tank with the gallon price of $3.17 in Wakefield, Mass., Tuesday, Oct. 4, 2011. Oiltumbled to below $76 a barrel Tuesday as fears intensified that Greece may not be able to crawl out from beneath a mountain of debtwithout defaulting.(AP Photo/Charles Krupa)

A gas station attendant fills up an automobile's tank with the gallon price of $3.17 in Wakefield, Mass., Tuesday, Oct. 4, 2011. Oiltumbled to below $76 a barrel Tuesday as fears intensified that Greece may not be able to crawl out from beneath a mountain of debtwithout defaulting.(AP Photo/Charles Krupa)

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Benchmark crude for November delivery was up $2.29 to $77.96 a barrel at midday Bangkok time in electronictrading on the New York Mercantile Exchange. The contract fell $1.94 to close Tuesday at $75.67 a barrel in NewYork.

Oil prices have fallen from $100 in late July as the financial crisis swirled around Greece. The country, which is onthe brink of bankruptcy, will not receive its next installment of a rescue loan without meeting strict austeritymeasures imposed by international lenders.

But sentiment recovered on Tuesday following reports that Europe was taking steps to bolster its banking sector,which is thought to be heavily exposed to Greek debt and could face crushing losses if the country defaults. WallStreet ended higher after a day of wild gains and losses. The Dow gained 1.4 percent, while the Standard andPoor's 500 rose 2.2 percent and the Nasdaq composite rose 3 percent.

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"The rebound in stocks managed to pull the energy complex off the bottom from what had been a steep late-sessionsell-off," energy trader and consultant The Schork Group said in a report. "Which way the equities go today willdetermine much of where oil will go."

In London, Brent crude rose $1.88 to $101.67 per barrel on the ICE Futures Exchange. Brent lost $1.92 to finish at$99.79 per barrel on Tuesday, the first time it ended lower than $100 since February.

In other energy trading, heating oil rose 2.9 cents to $2.75 per gallon and gasoline futures added 4.5 cents to $2.53per gallon. Natural gas rose 1.7 cent to $3.655 per 1,000 cubic feet.

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France, Belgium move to aid ailing European bank 

View Photo Gallery — European leaders are at a crossroads: They must pull closer together or risk the euro currency project

falling apart.

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By   Anthony Faiola and Howard Schneider, Tuesday, October 4, 6:23 PM

LONDON — European officials moved to shore up confidence in the region’s banks on Tuesday, moving to

stem panic over the state of Belgian lender Dexia and starting talks about a possible effort to strengthen

the financial system by pumping in billions of dollars in new capital.

The sudden concern over Dexia, which is heavily invested in European government bonds whose value is

now in doubt, highlighted the threat that euro-zone bank failures could trip up the world economy.

Oct. 4 (Bloomberg) -- William Rhodes, a senior adviser to Citigroup Inc., talks about efforts to resolve the European sovereign debt

crisis and plans to get more firepower out of the region's 440 billion-euro ($581 billion) rescue fund. Rhodes also discusses U.S. trade

and the role of the International Monetary Fund with Francine Lacqua on Bloomberg Television's "The Pulse." (Source: Bloomberg)

More On This Story 

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The governments of France and Belgium, co-owners of Dexia since an earlier 2008 bailout, pledged

support for the lender and reassured depositors that they would not lose their money. The bank may be

heading for a restructuring that would segregate its government bonds and other suspect investments in a

new “bad bank.”

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 With Dexia’s stock price plummeting, European finance ministers in Luxembourg indicated that they may 

finally embark on a course urged for months by the United States and officials at the International

Monetary Fund. This could involve a broad effort to bolster capital levels among Europe’s major banks.

Problems in the banking system — particularly doubts about the value of government bonds — have

prompted banks to stop lending to each other and, according to analysts at the IMF and elsewhere, begun

to undermine the region’s already tepid economic growth.

U.S. officials in recent weeks have intensified their focus on Europe’s problems and the potential threat to

the U.S. recovery. Treasury Secretary Timothy F. Geithner warned of “cascading default, bank runs and

catastrophic risk” posed by the region. Federal Reserve Chairman Ben S. Bernanke told Congress on

Tuesday that at a minimum Europe’s problems “have hurt household and business confidence,

and . . .pose ongoing risks to growth.”

 According to wire service and other reports from Luxembourg, finance ministers have been discussing a

regionwide move to boost bank capital.

“There is an increasingly shared view that we need a concerted, coordinated approach,” European

economic and financial commissioner Olli Rehn told the Financial Times after the meeting. “There is a

sense of urgency among ministers and we need to move on.”

The problems at Dexia set off fresh alarms about whether banks may face losses stemming from Europe’s

government debt crisis. Bank failures in Europe could trigger the kind of worldwide financial seizure seen

after Wall Street investment bank Lehman Brothers collapsed in late 2008.

Dexia’s problems go back at least that far, when it received billions of dollars from European governments

and the U.S. Federal Reserve to stay afloat.

The bank’s troubles have returned, with the danger now resulting from troubled bonds issued by ailing

countries such as Greece rather than from subprime mortgages in the United States.

On Tuesday, Dexia’s plight was further aggravated by broader concerns among investors in European

government bonds. This anxiety spiked after European officials meeting in Luxembourg suggested thatthey may force private bondholders to take far steeper losses as part of a deal to bail out near-bankrupt

Greece. Such losses would deal a particularly strong blow to Dexia, which specializes in lending to

governments and holds billions of dollars in bonds issued by Greece and other nations swept up in the

debt crisis, including Italy, Spain, Portugal and Ireland.

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Dexia, like some other financial firms, has struggled to raise money to make loans as credit markets have

tightened in recent weeks amid growing fears among investors. On Monday, Moody’s warned it could

downgrade the bank’s credit rating because of concerns over its ability to maintain an adequate cash flow.

The ratings agency also cut the credit standing of Italy on Tuesday, the latest in a series of downgrades of 

the highly indebted country.

In a joint statement, the French and Belgian finance ministers said their governments would “take all

necessary measures to protect savers and creditors” at the bank, offering an implicit guarantee to

depositors and raising the possibility of pumping more cash into the bank if needed.

Borrowing costs for both nations rose Tuesday amid concerns that any backstop would increase the

already-high debt loads of Belgium and France. The need for more bank rescues in the months ahead

could weigh even more on the stressed nations of Europe.

Dexia’s troubles are evidence that Europeans authorities have failed to spot weaknesses in their banking

sector. Dexia, for instance, easily passed a “stress test” conducted by European regulators only weeks ago

that was aimed at identifying weak banks. The question now, analysts say, is how many more weak links

are out there.

“You can’t have credit markets this paralyzed without doing significant damage to the banking system,”

said Louise Cooper, markets analyst at BGC Partners in London. “Why are credit markets bad? Because

they are worried about solvency. And why is that? Because of worry about the euro-zone crisis and

politicians’ ability to sort it out.”

 A report by Goldman Sachs has suggested Europe’s largest banks may require between $40 billion and

$125 billion in the event of broad losses from their holdings in Greek, Irish, Portuguese, Italian and

Spanish debt.

Economists are increasingly concerned that Europe is dragging its feet on dealing with its troubled banks

and lacks a plan to recapitalize them. The euro-zone nations have agreed to expand the powers of their

existing rescue fund, set up to help foundering governments, so it can help save banks.

But the measure has not yet come into effect. That is because all 17 nations that use the euro must first

ratify it, and as of Tuesday, the Netherlands and Slovakia had yet to vote on its approval.

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France to Keep Fracking Ban to Protect Environment,

Sarkozy Says-BloombergOctober 04, 2011, 10:43 AM EDT

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By Tara Patel 

Oct. 4 (Bloomberg) -- France will maintain a ban on fracking until there is proof that shale gas exploration won’t

harm the environment or “massacre” the landscape, President Nicolas Sarkozy said.

“Development of hydrocarbon resources underground is strategic for our country but not at any price,” Sarkozy said

during a visit to Ales in southern France. “This won’t be done until it has been shown that technologies used for

development respect the environment, the complex nature of soil and water networks.”

The French government plans to revoke shale permits, including one held by Total SA, because of concerns over

the environmental repercussions of hydraulic fracturing, or fracking, which was made illegal in July. This process,widely used in North America, involves pumping water and chemicals into rock to release gas.

The government is in the process of canceling the Montelimar permit held by Total and the Nant and Villeneuve-de-

Berg licenses granted to Schuepbach Energy LLC, according to a statement yesterday from the environment and

industry ministries. Lawmakers voted to make fracking illegal last June, making France the first country in the world

with such a ban.

‘Massacre’ of Mountains

Development of shale gas reserves in these regions could come “at the price of fragmenting the soil that would

massacre the almost spiritual scenery” of the Causses and Cevennes mountain landscape, which was added as a

UNESCO’s world heritage site in June, Sarkozy said today.

Ales, where Sarkozy made his speech, is at the foot of the Cevennes mountains in the Gard department, which

borders Aveyron, where European Green party lawmaker and prominent anti- fracking campaigner Jose Bove is

based.

“We had to cancel the permits but research must continue,” Budget Minister Valerie Pecresse said earlier on iTele

television. “All big developed countries are trying to find non-polluting technologies to develop this incredible

resource.”

Describing fracking as “potentially toxic,” she said France needs “alternative energies and shale gas is one of them.”

Total, Europe’s third-biggest oil company, had urged the government to allow it to push ahead with exploring

Montelimar without using fracking. The company said it would use conventional exploration methods to evaluate the

potential of the permit and did “not envisage the use of the hydraulic fracturing technique.”

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Awaiting Notification

“We have had no official notification about the future of this permit,” Total spokeswoman Sandra Dante said by

telephone. “We are waiting for this information to see the legal basis of the decision to revoke the permit.”

Total’s report to the French administration on exploration plans for the permit “contained no ambiguity” that the

company would not use fracking, she said.

Schuepbach’s press service didn’t immediately respond to a message requesting comment left on its answering

machine.

Total is producing natural gas from U.S. shale. The French company entered the business last year when it agreed

to pay $800 million for 25 percent of Chesapeake Energy Corp.’s assets in the Barnett Shale field in Texas. Total

also plans to develop unconventional gas in Algeria, Argentina, Australia, Canada, China, Denmark and Poland,

company executives have said. Total is now readying to start drilling in Argentina.

Conventional Deposits

In addition to Total and Schuepbach, companies including Vermilion Energy Inc. and Toreador Resources Corp.

hold permits in the Paris Basin where they planned to explore for shale oil. Vermilion had already drilled a well using

fracking technology.

Out of a total of 64 exploration permits in France, the holders of 61 have now said they won’t look for shale oil and

gas or will limit their operations to conventional deposits, the government said yesterday. Anyone caught using

hydraulic fracturing in France faces fines and prison under the ban.

The world will need to move beyond traditional fields to ensure energy security, the International Energy Agency

said.

“Development of unconventional gas is welcome,” IEA Chief Economist Fatih Birol said today at a press conference

in Paris. “Shale gas can be produced in a sustainable way without harming the environment.”

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Germany Urges Support for Syria Resolution

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Germany's foreign minister says failure by the Security Council to agree on a resolution condemning the

 violent crackdown on dissent in Syria risks undermining the United Nation's authority.

Guido Westerwelle says the world must "show solidarity with those people who are on the streets now" in

Syria demanding democracy, freedom and human rights.

European nations are calling for a vote Tuesday on a U.N. resolution that would consider sanctions if the

Syrian government doesn't immediately halt its military crackdown against civilians.

 Westerwelle said after a working lunch in The Hague the international community will be weakened if it

cannot "find a common language in respect to these atrocities and to this repression in Syria."

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Germany Debating Rules For Sovereign DefaultOct. 4 2011

• Text

BERLIN (Dow Jones)--Germany's Deputy Economics Minister Stefan Kapferer has called for creating guidelines to

regulate an orderly insolvency of a euro-zone member, in a letter to Joerg Asmussen, his counterpart at the Finance

Ministry.

The letter highlights how the debate over resolving the euro-zone debt crisis is increasingly moving towards establishing a

proper framework for sovereign default, despite being short on detail about the specific rules that may be needed.

In the letter, which Dow Jones Newswires has seen, Kapferer said the point of any insolvency rule is to provide a long-

term growth perspective for countries with structural budget deficits. He suggested creating a European Monetary Fund as

a successor to the still not approved European Stability Mechanism. The EMF, a controversial concept that has not found

many friends in the euro zone, should be an independent body that would oversee any sovereign insolvency, wrote

Kapferer.

"We need a comprehensive restructuring process for these countries," Kapferer wrote. "Therefore it is necessary to

establish an orderly procedure to re-establish a country's competitiveness."

Kapferer said the current state of debate over the future European Stability Mechanism calls for making private investors

share the costs of a sovereign rescue by imposing haircuts, but that "the concrete procedure for a (sovereign) debt

restructuring has not been regulated". The planned ESM is the euro-zone's permanent bailout fund, which, if created,

would replace the temporary European Financial Stability Facility by mid-2013.

Kapferer refers to a "resolvency" procedure, which he defines as steps to lead a country out of insolvency to make its

economy competitive again. To do so, the letter notes, there need to be objective rules, free of political influence, to

determine if a country is capable of repaying its debt. Any sovereign insolvency must follow a previously established

procedure. It may be necessary to restrict a country's sovereign right to ensure that the government can continue

functioning.

The role of the EMF would be to oversee the restructuring process and mediate between the indebted nation and its

creditors. As a first step, restructuring could begin with an automatic extension of sovereign debt maturities.

"This would quickly come as relief to the debtor nation and reduce the need for new financing," Kapferer wrote.

Kapferer proposed imposing sanctions on both debtors and creditors if no restructuring agreement can be reached.

Asmussen was not available for comment. But the Finance Ministry said the suggestions from the Economics Ministry

"could prove fruitful" in ongoing negotiations in Europe over the guidelines for the EFSF. The Finance Ministry reiterated

its position that once the EFSF rules are agreed will it be possible to discuss the ESM. The Finance Ministry made no

mention of Kapferer's suggestion to create a European Monetary Fund.

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Germany celebrates the 21st anniversary of itsreunification-Washington Post

By Associated Press, Published: October 3

BERLIN — Germany is celebrating the anniversary of its reunification 21 years ago after four decades of 

Cold War division.

Chancellor Angela Merkel and President Christian Wulff are attending the main ceremony marking

Monday’s anniversary in Bonn, the former German capital.

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 West Germany and communist East Germany were united on Oct. 3, 1990, less than 11 months after theeast opened the Berlin Wall.

Merkel — who grew up in East Germany — said ahead of the anniversary that “some serious differences”

remain, notably in that unemployment remains higher in the east.

But she said in her weekly video podcast that “we are on the right track.” She added that “we can look back

 with great pride on reunification.”

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast,rewritten or redistributed.

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Moody's slashes Italy credit rating-Reuters

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By Catherine Hornby and Daniel BasesNEW YORK/ROME | Tue Oct 4, 2011 8:19pm EDT

(Reuters) - Moody's lowered its rating on Italy'sbonds by three notches onTuesday, saying it saw a "material increase" in funding risks for euro zone

countries with high levels of debt and warning that further downgrades werepossible.

The agency downgraded Italy to A2 from Aa2, a lower rating than it holds on Estonia and on a par with Malta andkept a negative outlook on the rating.

The euro pared gains against the dollar and Japanese yen immediately following the announcement which comesafter Moody's rival Standard and Poor's cut its rating on Italy by one notch to A/A-1 on September 19.

The cuts underline growing investor concern about the euro zone's third largest economy, which is now firmly at thecenter of the debt crisis and dependent on help from the European Central Bank to keep its borrowing costs under control.

"The negative outlook reflects ongoing economic and financial risks in Italy and in the euro area," Moody's said in astatement.

"The uncertain market environment and the risk of further deterioration in investor sentiment could constrain thecountry's access to the public debt markets," it said.

It added that Italy's rating could "transition to substantially lower rating levels" if there were long term uncertaintyover the availability of external sources of liquidity support.

Italy's mix of chronically low growth, a public debt mountain amounting to 120 percent of gross domestic productand a struggling government coalition has caused mounting alarm in financial markets.

Moody's decision came as little surprise after the agency said on September 17 that it would finish a review for possible downgrade of its rating on Italy within a month.

But it highlights the growing vulnerability of the euro zone, which is already struggling to contain the crisis in the far smaller Greek economy and which would be overwhelmed by a crisis of a similar scale in Italy.

"It's not that unexpected but it doesn't help the situation at all," said Robbert Van Batenburg, Head of EquityResearch at Louis Capital in New York.

"They have already traded as if there was somewhat of a downgrade in the works, so it will probably force Italianpolicymakers to embark on more austerity programs. It will put another fiscal strait-jacket on them."

VULNERABILITY

Moody's said the likelihood of a default by Italy was "remote" but it said the overall shift in sentiment on the euroarea funding market implied a greater vulnerability to a loss of market access at affordable rates.

Italy's relatively modest budget deficit, conservative financial system and high level of private savings had kept it onthe sidelines of the euro zone crisis while countries like Greece and Ireland were sucked down.

"Italy is being punished not because its finances suddenly deteriorated, but because investors have become moresensitive to its long-standing weaknesses," said Nicholas Spiro, managing director of Spiro Sovereign Strategy inLondon.

He said markets appeared to be focusing on the weakened center-right government's lack of progress in stimulatingthe stagnant economy, which many analysts expect to stall or even slip into recession next year.

"The bond markets are more concerned about Italy's ability to grow than its commitment to reducing a fiscal deficitthat is already one of the smallest in the euro zone," he said.

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Prime Minister Silvio Berlusconi shrugged off the downgrade immediately, saying the Moody's announcement hadbeen expected and the government was committed to its public finance target, which sees the budget beingbalanced by 2013.

The government last month pushed through a 60 billion euro austerity package -- bringing forward its originalbalanced budget target by one year -- in return for support for its battered government bonds from the ECB.

Berlusconi's center-right coalition has been deeply divided over policy and personal issues and further distracted byan array of scandals surrounding the prime minister.

Opposition leaders have called repeatedly for the government to resign over its handling of the economy and thereis widespread speculation that Berlusconi could be forced out of office before his term expires in 2013.

Italy's borrowing costs have soared over the past three months and have only been kept under control by the ECBsupport but in recent weeks they have begin to climb back to potentially dangerous levels.

An auction of long term bonds last month saw yields on 10 year BTPs rise to 5.86 percent, their highest level sincethe introduction of the euro more than a decade ago.

The center-right government has been under heavy pressure over its handling of the escalating crisis and recentlycut its growth forecasts through 2013.

It is now expecting the economy to expand by just 0.6 percent next year, down from a previous projection of 1.3percent.

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UPDATE 2-Italy to balance budget even without growth-EconMin-Reuters

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• UPDATE 4-EU's Barroso puts burden on the ECB to act on crisisWed, Sep 28 2011Analysis & Opinion

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• How big a gamble will China take on Europe?Related Topics

• Financials »Tue Oct 4, 2011 11:38am EDT

* Tremonti says can achieve budget goal even without growth

* Italy aims for balanced budget in 2013

* Says Spain helped by prospect of new govt (Adds comments on Spain, Italy)

LUXEMBOURG, Oct 4 (Reuters) - Italy would be able to meet its goal of balancing the budget by 2013 even if itseconomy stopped growing, Economy Minister Giulio Tremonti said on Tuesday, seeking to reassure jitteryfinancial markets.

Italy, now firmly at the centre of the euro zone debt crisis, is expected to show minimal growth both this year andnext, complicating plans to control its 1.9 trillion euro public debt pile.

Speaking after a meeting of European finance ministers, Tremonti said Italian public finances would hold up "even if growth is zero".

"We can guarantee a balanced budget even without growth," he said.

Italy's fractious centre-right government has been under heavy pressure over its handling of the escalating crisisand recently cut its growth forecasts through 2013.

It is now expecting the economy to expand by 0.6 percent next year, down from a previous projection of 1.3 percent.

The government last month pushed through a 60 billion euro austerity package -- bringing forward by one year to

2013 a goal to balance its budget -- in return for support for its battered government bonds from the EuropeanCentral Bank.

European authorities have asked Italy to boost its growth potential by liberalising its tightly-regulated labour andservices markets, but the government has so far failed to agree on any significant reforms.

The crisis has sent Italy's borrowing costs soaring and pushed it further up the list of euro zone problem countries,with the risk premium paid on its bonds compared with benchmark German Bunds now higher than the equivalentSpanish spread.

Tremonti said Madrid's decision to call early elections could be among factors explaining the lower risk premiumsthat Spain paid on its debt compared with Italy.

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The yield gap between 10-year Spanish and safer German bonds stood at around 344 basis points on Tuesday,lower than the 383 basis point difference between Italian bonds and the euro zone benchmarks.

"In the case of Spain this could depend on Spain calling early elections and on the prospect of a new government,"Tremonti said.

Tremonti , who has been at odds with Prime Minister Silvio Berlusconi, said his comments did not appl y to Italy butthey look set to feed long-running speculation over rifts in the government, which has faced mounting calls to resign.

Spanish Prime Minister Jose Luis Rodriguez Zapatero has called elections for Nov. 20, four months earlier than

originally planned.An opinion poll in the right-leaning El Mundo newspaper on Sunday showed Spain's conservative oppositionPeople's Party (PP) has extended its lead over the ruling Socialists and is on-course to win a parliamentary majority.The poll put the PP ON 47.4 percent, versus 31.8 percent for the Socialists. (Reporting by Francesco Guarascio;editing by Stephen Nisbet)

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Spain: jobless claims soared 95,000 last month-APOctober 04, 2011|Daniel Woolls, Associated Press

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The number of people filing for unemployment benefits in Spain shot up by nearly 100,000 in September,

a surprisingly big increase even in a month that tends to be bad for workers as vacation season contracts

expire.

Tuesday’s figures from the Labor Department are likely to stoke renewed worries over the Spanish

economy at a time the government is trying to appease investors fretting over its strategy to deal with

hefty borrowings.

The department blamed the anemic state of Spain’s economy and the effect of austerity measures on the

 job market for the bigger than usual increase in September claims. It added that government’s forecast

that 2011 would end with net job creation, albeit small, will probably be wrong.

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Spain Regions Rush to Sell $1.3 Billion Property to

Cut Deficit-buisness week

By Sharon Smyth 

Oct. 5 (Bloomberg) -- Catalonia and Andalusia, two of Spain’s largest and most indebted regions, are trying to sell

$1.3 billion of real estate by the end of the year as the country tries to slash its budget deficit and keep borrowing

costs from ballooning.

“We put the cream of the crop in the portfolios to ensure the sales are completed,” Jacint Boixasa, director of assets

for Catalonia, said in interview in Barcelona. “Our target is to sell 550 million euros ($742 million) of real estate by

year- end, which is relatively little time.”

Spanish regions, which control more than a third of public spending, will play a pivotal role in the nation’s effort to

cut its deficit to 6 percent of gross domestic product this year from 9.2 percent in 2010 as the country tries to avoid

following Greece, Ireland and Portugal in requiring a bailout. In August, Moody’s Investors Service put Spain’s creditrating on review for a downgrade, citing the worsening finances in the regions.

Catalonia is trying to find buyers for 37 properties including the Barcelona stock market on Paseo de Gracia, Spain’s

fourth-most expensive commercial street, as well as the Catalan Agriculture Ministry on Gran Via. Jones Lang

LaSalle and Madrid- based real-estate consultant Aguirre Newman are advising the government on the sales.

Andalusia hired BNP Paribas SA to help raise at least 400 million euros selling 76 properties including the cultural

department in Granada and youth centers in Malaga, according to the region’s treasury department. The

government will pay around 30 million euros a year to lease the buildings after the sale.

Offers Made

Office property investment in Madrid and Barcelona, Spain’s biggest markets, dropped 56 percent in the first half

from a year earlier to 276.6 million euros as buyers avoided countries on Europe’s periphery, according to Aguirre

Newman, a real-estate broker based in the Spanish capital. Prime office rents in Madrid declined to 27.09 euros a

square meter in July from 27.50 euros in January and slipped to 16.80 a square meter from 17.05 euros in

Barcelona.

“We have 10 non-binding offers -- mainly from Anglo-Saxon investors -- for the entire portfolio that exceed our

target,” Manuel Sanchez Galey, general director of finances for Andalusia’s treasury department, said in an

interview in the regional capital, Seville. “I am completely confident we will close the deal on time.”

He declined to identify any of the bidders because the process is confidential. A spokesman for BNP Paribas in

Spain wouldn’t comment.

Counting on Proceeds

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Catalonia and Andalusia, whose economies match the size of Portugal and Ireland, have 38.5 billion euros and 13.5

billion euros of debt respectively, ranking them the first and fourth- most indebted of Spain’s 17 regions in nominal

terms, according to data from the Bank of Spain. Both regions have included the future proceeds from the property

sales in their 2011 budgets. Valencia and Madrid are the second and third most indebted regions.

“We have to get this right,” Sanchez Galey said. “We are carrying out the first sale of regional government-owned

real estate ever on this scale. People will be watching closely.”

The sales may pave the way for other debt-laden regions, said Patricio Palomar, head of research at CB Richard

Ellis Inc. in Spain. Last year, public-sector property sales in Europe totaled 1.1 billion euros, or 7.5 percent of all

disposals by building occupiers, with Sweden, the U.K., Germany and Italy representing 75 percent of the total,

according to CB Richard Ellis.

Plenty to Sell

“Spanish administrations have traditionally been buyers not sellers of real estate, so there are a lot of assets that

could be sold,” Palomar said in an interview in Madrid.

Selling so much property in just a few months will be challenging said Vanessa Gelado, vice president of Drago

Real Estate Partners Ltd. The company took part in Pearl Group Plc’s 2.04 billion-euro purchase of 1,152 Banco

Santander SA branches in 2007.

“They are working against the clock,” she said in an interview. “It’s not impossible for them to do it, but the calendar

is very tight.”

The debt burden of Spain’s 17 semi-autonomous regions’ surged to a record 133.2 billion euros, or 12.4 percent ofgross domestic product, in the second quarter from 11.6 percent in the previous three months as tax revenue from

real estate and land sales dropped.

All the regions except Catalonia pledged to limit their deficits to 1.3 percent of gross domestic product to help cut the

national budget gap, currently the third highest in the euro region after Greece and Ireland.

Biggest Deficit

Following local elections last year, the incoming government of Catalonia said the 2010 deficit was 60 percent wider

than its predecessors had acknowledged. It plans a deficit equal to 2.7 percent of GDP this year, more than twice

the national government goal.

Fitch’s downgrades of the regions could affect their property sales because the governments themselves would be

the tenants in most of the properties offered.

“The credit rating of the tenant who is going to occupy your buildings is very important as it has a huge impact on

the cost of your financing,” Gelado said. “Rating cuts aren’t good news.”

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Though investors tend to favor government tenants because of the steady income they generate, buying Spanish

state property may be less attractive than it was five years ago, said Simon Martin, head of research and investment

strategy at Tristan Capital Partners, a London-based real estate investment company with 2.8 billion euros of assets

under management.

Martin said he isn’t looking to invest in the assets being sold by Catalonia and Andalusia.

Rental Plans

The buildings Catalonia sells will be rented back by the regional government for a maximum of 37 million euros a

year with leases of 20 years or more, according to Boixasa.

Catalonia’s Boixasa said the properties on offer are a competitive investment as other assets are hurt by economic

concerns and Europe’s sovereign debt crisis.

“Stock markets continue to fall,” he said. “Fixed income is returning less and less, companies and countries keep

having their ratings cut, so what investment options do I have?”

The Euro Stoxx 50 index has dropped 25 percent and more than $6 trillion was wiped from equity values globally

this year as political leaders struggle to contain a debt crisis that has Greece teetering on the edge of a default.

Investors demand a yield of 1.96 percent to hold German 10- year bonds, considered the safest debt in Europe.

That is 29 basis points up from the 1.67 percent yield of the bunds on September 22, the lowest since at least 1992,

according to Bloomberg data.

“Regional governments are guaranteeing the rents and I find it very hard to believe that a regional government could

default,” said Gelado. “But in the post-Lehman world where anything can happen, you have to ask yourself whether

it could.”