Employers Get More From U.S. Workers as Jobs Gain Lags Forecast

Companies in the U.S. are relying on existing workers and temporary employees instead of hiring, helping to explain why payrolls grew less than forecast in June.

The average workweek rose for the first time since February and temporary staffing climbed for a third consecutive month, according to Labor Department figures issued in Washington yesterday. The report also showed payrolls advanced by 80,000 workers, less than the median estimate in a Bloomberg News survey of economists, and the jobless rate held at 8.2 percent.


The need to boost hours and add provisional employees is a sign that sales are holding up in the face of a deepening slump in Europe and a slowdown in China and the rest of the world. Nonetheless, businesses may lack conviction that revenue gains will be sustained in light of the threats, making them reluctant to permanently expand payrolls.

“Firms are still seeing an increase in demand, and there is a need for more labor,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. “But there are so many risks out there that businesses don’t want to commit to hiring full-time employees.”

The median estimate of 84 economists surveyed by Bloomberg projected a 100,000 gain in payrolls. Forecasts ranged from increases of 35,000 to 165,000. The May advance in employment was revised to 77,000 from a previously reported 69,000.

The lack of a pickup in hiring fueled concern the world’s largest economy was slowing, pushing stocks down. The Standard & Poor’s 500 Index dropped 0.9 percent, erasing a weekly gain, to close yesterday at 1,354.68.
Longer Workweek

The average workweek climbed by six minutes to 34.5 hours in June, the report showed. Temporary staffing rose by 25,200, the biggest increase since February.

Candace Bailey, 24, has adapted her job-hunting strategy to weaker employment conditions.

“I’m primarily looking for full-time, but since it’s been a while, I’m definitely open to temporary work as well,” said Bailey, who lost her marketing job in Washington two months ago. “In the past two weeks or so, I’ve been definitely looking at temporary work until I find a full-time job.”

The pickup in hours “suggests there might be a little better momentum in the economy,” Bruce Kasman, chief economist for JPMorgan Chase & Co. in New York, said on a conference call. At the same time, there is “an absence of a real desire by firms to act on that in terms of hiring.”

The increase in the average workweek would be equivalent to a 325,000 gain in payrolls, according to estimates by economists at Nomura Securities International Inc. headed by Lewis Alexander.
Auto Sales

Automobiles are one area where demand is holding up. Cars and light trucks sold at a 14.1 million annual rate in June, up from May’s 13.7 million pace, Ward’s Automotive Group data showed. General Motors Co. (GM), Ford Motor Co. (F) and Chrysler Group LLC reported U.S. sales that topped analysts’ estimates, helping the industry surpass projections and stay on pace for the best year since 2007.

“We’re seeing strong demand for our current products as well as for our new models,” Bill Krueger, vice chairman of the Americas for Nissan Motor Co., said in a telephone interview yesterday. The Yokohama, Japan-based automaker plans to boost hours, add shifts or increase payrolls at plants in Tennessee and Mississippi “to really have the supply catch up with demand,” he said.

Manufacturers were among those asking existing employees to put in a longer workweek last month. Factory overtime climbed to 4.7 hours in June on average, the most in five years, yesterday’s report showed.
Hourly Earnings

In another bright spot, workers’ average hourly earnings rose to $23.50 in June from $23.44 in the prior month, yesterday’s report showed.

“For the 92 percent of folks who have jobs, their incomes are rising, raises are still happening,” said Chris Varvares, senior managing director of Macroeconomic Advisers LLC in St. Louis.

Consumers are benefiting from falling gasoline prices and lower inflation. The cost of living dropped in May by the most in more than three years, Labor Department figures showed last month. A gallon of regular fuel at the pump cost an average $3.36 as of July 5, down from this year’s peak of $3.94 in early April, according to AAA, the biggest U.S. auto group.

Retailers reported this week that same-store sales rose 0.3 percent in June from a year earlier, based on results from more than 20 companies tracked by Retail Metrics Inc. Luxury chains such as Saks Inc. (SKS) and discounters like TJX Cos. topped analysts’ expectations, while stores targeting middle-income consumers trailed projections.

Lowe’s Cos.

“What we are seeing today from an income perspective is our economy is modestly adding jobs,” Robert Hull, chief financial officer at Lowe’s Cos., the second-largest U.S. home- improvement retailer, said at a June 26 consumer conference in Boston. “That’s the good news. The bad news is it’s not sufficient to have a material impact on the unemployment rate.”

The “mixed” jobs report suggests that Federal Reserve policy makers are unlikely to take further action to boost the economy at their next meeting, such as a third round of so- called quantitative easing, said David Greenlaw, a managing director and economist at Morgan Stanley in New York.

“We don’t think the report was quite bad enough to tip the scales toward doing something like QE3,” Greenlaw said. “But I certainly think there’s plenty of fodder for discussion and definitely some indication that the Fed needs to be more worried about prospects for growth going forward.”
Presidential Election

Yesterday’s report deprived President Barack Obama of progress on voters’ overriding concern with just four months before the election.

Obama, speaking yesterday at a campaign stop in Poland, Ohio, called the addition of new jobs “a step in the right direction” though the economy has to grow “even faster.”

Republican presidential candidate Mitt Romney called the report “another kick in the gut.”

While Romney has suggested that Obama has done a worse job managing the economy than President Jimmy Carter, investors have given the U.S. a vote of confidence.

The S&P 500 has surged 68 percent under Obama, more than three times the 19 percent increase during Carter’s first 3-1/2 years in office starting in 1977.

Although unemployment is higher than the 7.5 percent level in May 1980, inflation is lower. Consumer prices rose 1.7 in May from a year earlier, compared with a 14.4 percent increase in May 1980.
Longest Stretch

Still, unemployment has exceeded 8 percent since February 2009, the longest such stretch since monthly records began in 1948.

Among those also having trouble finding full-time work is Dave Marshall of Tampa, Florida. The 23-year-old Army reservist, who works part-time for two security firms in the area, said he has been unable to find a job that utilizes his degree in sociology from the University of Florida in Gainesville.

“I am getting edged out by people with experience,” Marshall said. “There have been some entry-level positions that I have applied for, but the economy is so bad that the people who have been let go are also applying for entry-level positions and a lot of them have two, three years of experience.”

Nicole Sandler, 52, lost her job at Air America in January 2010 when the radio station closed. She was ineligible for unemployment benefits because she was a contractor.
Temporary Jobs

Sandler moved in with her fiance in Coral Springs, Florida, in April 2011 when she lost her house in Miami. She gets about $1,000 a month from a webcast she puts together five nights a week and takes temporary radio jobs when she can get them.

“I work but I’m still technically unemployed,” said Sandler. “I guess I could try to find a job doing something else, but at 52 to take an entry-level job I may as well do what I’m doing. What am I going to do, work in a supermarket?”

The jobs figures showed private employment, which excludes government agencies, increased 84,000 in June, the weakest in 10 months. Retailers cut payrolls by 5,400, while manufacturers added 11,000 workers.

The report “reminds everyone that confidence matters,” said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania. “In June, the European debt issue reached a boil and a meltdown could not be ruled out. That had to have a major impact on business confidence.”

Uncertainty about the U.S. government’s fiscal outlook may also be hampering hiring plans. Congress has yet to resolve the so-called fiscal cliff, which represents more than $600 billion in higher taxes and reductions in defense and other government programs in 2013 that will take place without action.

The best strategy for companies to follow when confronted with such uncertainty ahead of Dec. 31 is to “stay lean and keep your inventories taut,” Sandy Cutler, chief executive officer of industrial equipment-maker Eaton Corp. (ETN) in Cleveland, told a conference May 31.

Half Germans support giving more powers to Brussels-poll

Around half of Germans are prepared to give up some national powers to Brussels in the pursuit of a common European Union financial policy, according to a poll by Emnid for the German magazine Focus.

Some 49 percent of the 1,000 Germans surveyed for the poll supported handing over more power to the EU, in line with the closer European fiscal and political union championed by Chancellor Angela Merkel. Some 44 percent were opposed.

Voters for the opposition Social Democrats (SPD), Greens and Left party were particularly willing to give up some national competences, according to the poll, while voters for the parties in the ruling coalition were more reluctant.

In particular, some 63 percent of supporters of the pro-business Free Democrats (FDP), junior coalition partners in Merkel's coalition, were against giving up any more power to Brussels, according to the poll conducted between July 4 and 5.

This underlines the difficulties Merkel faces in getting her plans for closer political union agreed in Berlin, where patience within her own fractious coalition with measures to stem the euro zone crisis is wearing thin.

Merkel has proposed much tighter fiscal and political ties between EU member states as an essential precondition for any mutualisation of debt - a key demand of struggling southern countries such as Italy.

HORROR SCENARIO

Many voters in Germany, Europe's paymaster and its biggest economy, are fed up with shelling out billions of euros to prevent countries like Greece defaulting on their debts.

Some senior politicians, including Finance Minister Wolfgang Schaeuble, have said a referendum would be needed to give legitimacy to further political and fiscal union in Europe. This would be the first referendum in Germany since World War Two.

The alternative to debt mutualisation in order to overcome the crisis however is "a horror scenario", according to Germany's panel of economic advisers.

The so-called wise men on Friday published their latest report on how they believe Berlin should deal with the crisis, noting that while mutualisation of debt was risky, any other scenario was just as fraught.

The advisers noted that Germany had claims within the euro zone running up to 2.8 trillion euros, meaning a breakup of the common currency bloc would involve high risks for its largest economy, with many creditors unlikely be able to pay back their loans in full.

A euro zone breakup would probably result in a shock of the same scale as occurred after the collapse of Lehman Brothers in 2008, which led to a 5 percent contraction in the German economy.

In the long run, a re-introduction of a stronger Deutschemark would damage Germany's competitiveness on European and global markets, the wise men wrote in their report.

"It should not be overseen that German companies have benefited considerably in the past few year from the fact that they were producing in a currency bloc, whose currency was not seen as a typical 'strong currency' by markets," they added.

The wise men, whose advice the government does not have to follow, reiterated their call for a debt redemption fund.
 

Payrolls in U.S. Rose 80,000 in June; Jobless Rate 8.2%

American employers added fewer workers to payrolls than forecast in June and the jobless rate stayed at 8.2 percent as the economic outlook dimmed.

The 80,000 gain in employment followed a 77,000 increase in May, Labor Department figures showed today in Washington. Economists projected a 100,000 rise, according to the median estimate in a Bloomberg News survey. Growth in private payrolls was the weakest in 10 months.

Stocks fell on concern hiring has shifted into a lower gear, restricting consumer spending and leaving the economy more vulnerable to a global slowdown. The figures underscore concern among some Federal Reserve policy makers that growth isn’t fast enough to lower unemployment stuck above 8 percent since February 2009.

“The job market is soft,” said David Resler, chief economic adviser at Nomura Securities International Inc., who correctly forecast the payrolls gain. “I’d characterize our reaction as much the same way the Fed will react -- not surprised but disappointed. It’s just not the kind of growth we need to see at this stage in the business cycle.”

The Standard & Poor’s 500 Index dropped 0.9 percent to 1,354.68 at the close in New York. The yield on the benchmark 10-year Treasury note declined to 1.55 percent from 1.60 percent late yesterday.
Private Employment

“What we are seeing today from an income perspective is our economy is modestly adding jobs,” Robert Hull, chief financial officer at Lowe’s Cos., the second-largest U.S. home- improvement retailer, said at a June 26 consumer conference in Boston. “That’s the good news. The bad news is it’s not sufficient to have a material impact on the unemployment rate.”

Private payrolls increased 84,000 in June after a revised gain of 105,000 that was larger than initially reported. They were projected to advance by 106,000 in June, the survey showed. Last month’s change in private payrolls reflected a 2,000 increase in education and health services that was the smallest in almost two years.

At the same time, an increase in hours worked along with a pickup in wages last month indicate demand may hold up and keep the economy expanding. While companies may put off adding more workers to payrolls because of Europe’s debt crisis, gains in spending may be prompting them to ask their employees to put in a longer workweek.

The unemployment rate, derived from a separate survey of households, was forecast to hold at 8.2 percent, according to the Bloomberg survey median.
Underemployment Rate

The so-called underemployment rate -- which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking -- increased to 14.9 percent from 14.8 percent.

Among those having trouble finding full-time work is Dave Marshall of Tampa, Florida. The 23-year-old Army reservist, who works part time for two security firms in the area, said he has been unable to find a job that utilizes his degree in sociology from the University of Florida in Gainesville.

“I am getting edged out by people with experience,” Marshall said. “There have been some entry-level positions that I have applied for, but the economy is so bad that the people who have been let go are also applying for entry-level positions and a lot of them have two, three years of experience.”

Nicole Sandler, 52, lost her job at Air America in January 2010 when the radio station closed. She was ineligible for unemployment benefits because she was a contractor.
Temporary Jobs

Sandler moved in with her fiance in Coral Springs, Florida, in April 2011 when she lost her house in Miami. She gets about $1,000 a month from a webcast she puts together five nights a week and takes temporary radio jobs when she can get them.

“I work but I’m still technically unemployed,” said Sandler. “I guess I could try to find a job doing something else, but at 52 to take an entry-level job I may as well do what I’m doing. What am I going to do, work in a supermarket?”

Today’s report deprived President Barack Obama of progress on voters’ overriding concern with just four months before the election.

Obama, speaking at a campaign stop in Poland, Ohio, called the addition of new jobs “a step in the right direction” though the economy has to grow “even faster.”

Republican presidential candidate Mitt Romney called the report “another kick in the gut.”
‘Stand Up’

“The president’s policies have not gotten America working again, and the president is going to have to stand up and take responsibility for it,” Romney said at a hardware store in Wolfeboro, New Hampshire, where he’s vacationing this week.

While Romney has suggested that Obama has done a worse job managing the economy than President Jimmy Carter, investors have given the U.S. a vote of confidence.

The S&P 500 surged 70 percent under Obama through yesterday, more than three times the 19 percent increase during Carter’s first 3-1/2 years in office starting in 1977.

Although unemployment is higher than the 7.5 percent level in May 1980, inflation is lower. Consumer prices rose 1.7 in May from a year earlier, compared with a 14.4 percent increase in May 1980.

Still, joblessness has exceeded 8 percent since February 2009, the longest such stretch since monthly records began in 1948.

Only one president since World War II, Ronald Reagan, has stayed in office with a jobless rate above 6 percent. Reagan won a second term in 1984 with 7.2 percent unemployment in the month of the election; the rate had fallen almost three percentage points in the previous 18 months.

Staples Inc.

Companies like Staples Inc. aren’t anticipating lower jobless rates anytime soon.

“I don’t think we’re waiting around and holding our breath for that in the retail space,” Michael Miles, chief operating officer at the Framingham, Massachusetts-based office-supply retailer, said at a June 27 investor conference.

Today’s report showed employment at service providers increased 67,000 in June after a 98,000 gain, today’s report showed. Construction companies added 2,000 workers, while retailers cut 5,400 jobs.

Uncertainty about the U.S. government’s fiscal outlook may still be hampering hiring plans. Congress has yet to resolve the so-called fiscal cliff, which represents more than $600 billion in higher taxes and reductions in defense and other government programs in 2013 that will take place without action.
European Unemployment

Across the Atlantic, joblessness in the 17-nation euro area rose to 11.1 percent in May, the highest in records that begin in 1995, from 11 percent a month earlier, data showed this week.

“It is pretty clear that a lot of what is slowing the economy down are fears of financial catastrophe and what’s going on in Europe,” Austan Goolsbee, former chairman of the White House Council of Economic Advisers under Obama, said on Bloomberg Television.

Today’s report showed factory payrolls in the U.S. increased by 11,000, more than the survey forecast of a 7,000 increase and following a 9,000 increase in the previous month. Government payrolls decreased by 4,000.

Manufacturing is getting a boost from rising demand for new cars. Auto sales accelerated to a 14.1 million seasonally adjusted annualized rate in June, according to researcher Autodata Corp., completing the best first half since 2008.
New Models

“We’re seeing strong demand for our current products as well as our new models,” Bill Krueger, vice chairman of the Americas for Nissan Motor Co., said today in a telephone interview. He said the company will add a shift to its Tennessee plant to meet demand.

In a bright spot for American workers, average hourly earnings rose to $23.50 from $23.44 in the prior month, today’s report showed. The average work week climbed six minutes to 34.5 hours.

The number of temporary workers increased 25,200 in June after an 18,600 rise.

At the Fed, the slowdown in both economic and employment growth prompted officials to take additional steps to stimulate the expansion. The Federal Open Market Committee on June 20 extended Operation Twist to the end of the year. The program aims to push down long-term borrowing costs on everything from mortgages to car loans by extending the maturity of assets on the Fed’s balance sheet.
Concern Expressed

“This is going to be read as in line with the concern that they expressed about the labor market,” said Roberto Perli, managing director of policy research at International Strategy & Investment Group in Washington, who formerly worked in the Fed’s Division of Monetary Affairs. “It probably doesn’t contain any incremental information that leads them to believe that the situation is worse than they thought.”

At an April 25 press conference, Fed Chairman Ben S. Bernanke said job growth of about 100,000 a month is needed to keep the jobless rate stable, and increases of 150,000 to 200,000 are needed to reduce it.

Policy makers last month also downgraded their outlook for jobs and growth, saying they anticipate the unemployment rate will average 8 percent to 8.2 percent in the fourth quarter of this year versus an April estimate of 7.8 percent to 8 percent.

From Bloomberg

U.S. Stocks Fall for Week as Jobs Data, ECB Damp Optimism

U.S. stocks fell this week, after the Standard & Poor’s 500 Index reached a two-month high, as jobs data heightened concern about a slowing economy and Europe’s efforts to tame its debt crisis disappointed investors.

Industrial and financial stocks lost the most in the S&P 500 in the holiday-shortened week, sinking more than 1.2 percent, as eight out of 10 industries in the benchmark index retreated. JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and General Electric Co. (GE) led declines in the Dow Jones Industrial Average. Netflix Inc. (NFLX) surged 20 percent after an analyst said the company’s online audience exceeds cable and TV networks.

The S&P 500 lost 0.6 percent to 1,354.68 for the week, trimming its gain for the year to 7.7 percent. The Dow dropped 107.62 points, or 0.8 percent, to 12,772.47. Global stocks surged the previous week, with the S&P 500 rallying 2 percent, amid optimism that an agreement by European leaders would help contain the region’s debt crisis.

“The jobs report is the single most important economic statistic and unfortunately it’s not showing signs of health, which is weighing down on stocks,” said Lawrence Creatura, who helps oversee $363.6 billion as a Rochester, New York-based fund manager at Federated Investors Inc. “Europe has become a multi- year yo-yo of increasing expectations and subsequent disappointment.”

The S&P 500 erased a 0.4 percent advance for the week in the final session after American employers hired fewer workers than forecast in June, showing the labor market is making scant progress toward reducing joblessness. The unemployment rate held at 8.2 percent.
Cutting Rates

Investors entered the July 4 holiday with the S&P 500 at a two-month high as speculation grew that policy makers would act to spur economic growth. That advance came to a halt on July 5 after the European Central Bank reduced its benchmark rate to a record low, while President Mario Draghi said the cut may have only a limited effect on the euro-area economy. China also lowered rates in a bid to expand investments and consumption.

“Although the stimulus junkies liked the news from the ECB and China, the public comments of Mario Draghi clearly carried the most weight,” Mike Shea, a managing partner at New York- based brokerage firm Direct Access Partners LLC, said in an interview. “We start out the U.S. earnings season on a decidedly lousy note with the jobs report missing already low expectations, and anybody who was thinking we have set the bar low enough on earnings may run back and reassess their numbers.”
Earnings Season

Alcoa Inc. (AA) is the first Dow company scheduled to report quarterly results on July 9, and analysts forecast the largest U.S. aluminum maker will post an 82 percent drop in per-share profit. Analysts project a 1.8 percent decline in profits for S&P 500 (SPX) companies in the April-June period, which would mark the first year-over-year decrease since 2009.

Concern about a global economic slowdown put the S&P 500 last month on the brink of a so-called correction, or a 10 percent decline from a recent peak. The index slumped 3.3 percent in the second quarter, the biggest retreat since the period ending in September.

The Morgan Stanley Cyclical Index (CYC) of companies most-tied to economic growth slumped 0.5 percent for the week. DuPont Co., the most valuable U.S. chemical company, sank 3.3 percent to $48.90, while GE retreated 4 percent to $20. Industrial companies in the S&P 500 fell 1.4 percent for the biggest drop among 10 industries.
Banks Tumble

Financial stocks fell the second-most, losing 1.2 percent as a group. JPMorgan slumped 5.1 percent, the second-biggest decline in the Dow, to $33.90. The lender was ordered by a federal judge to explain why it shouldn’t be compelled to turn over e-mails sought by U.S. regulators in a probe of potential energy-market manipulation. Bank of America slid 6.4 percent to $7.66 for the biggest retreat in the 116-year-old stock gauge.

A group of six health insurers in the S&P 500 fell 4.2 percent as a group, with WellPoint Inc. (WLP) sinking 6.1 percent to $59.91. The second-largest U.S. health-plan provider has erased about 14 percent in the six days since the Supreme Court’s decision to uphold President Barack Obama’s health-care reform. Minnetonka, Minnesota-based UnitedHealth Group Inc. (UNH), the biggest health insurer, declined 4.6 percent to $55.82 for the week.

Consumer staples companies had the biggest gain as a group, climbing 0.5 percent. Limited Brands Inc. and Ross Stores Inc. (ROST) led a rally in retailers after reporting June sales that topped estimates. Limited Brands, the parent company of Victoria’s Secret, jumped 7.7 percent to $45.82 and discounter Ross added 7.4 percent to $67.12. Wal-Mart Stores Inc. (WMT), the world’s largest retailer, rose 2.4 percent to $71.36 for the biggest gain in the Dow.
Netflix, GM

Netflix advanced the most in the S&P 500, rising 20 percent to $81.89. The largest video-subscription service’s estimated 24 million domestic subscribers probably watched an average of 40 hours of programming online last month, analyst Rich Greenfield of BTIG Research wrote in a July 3 report. He based his estimate on a posting by Chief Executive Officer Reed Hastings.

General Motors Co. jumped 3 percent to $20.31. The automaker said sales climbed 16 percent in June, beating the 7.6 percent increase that was the average estimate of 11 analysts surveyed by Bloomberg.

German "wise men" reiterate call for redemption fund

Germany's panel of government economic advisors said on Friday the decisions made at last week's EU summit could stabilize the euro zone in the short term but do not solve the crisis which could still escalate further.

The panel of so-called wise men, whose advice the government does not have to follow, reiterated their call for a debt redemption fund, and joined a chorus of critics in Germany warning against the premature introduction of a banking union.

"The crisis remains unresolved and new escalations threaten if the existing vicious circle of banking crisis, sovereign debt crisis and macroeconomic crisis is not broken," they said in a statement.

"For this reason the panel of experts has presented the government with a report indicating ways to end the sovereign debt crisis and the measures needed to stabilize the banking sector in a sustainable fashion."

The wise man said they had elaborated on the concept of a European Redemption Pact, which they already proposed late last year. It would have a fixed time frame, they said, and allow for the possibility of linking aid to conditions.

"This differentiates it from European Central Bank (ECB) monetary policy measures," they said in the statement. "It can be constructed such that European and constitutional standards are respected."

The wise men, like many of their compatriots in leading economic roles, have warned that monetary and fiscal policy are becoming worryingly blurred and the ECB risks losing credibility by buying the bonds of heavily-indebted euro zone states.

In their presentation of the pact last year, they said it would involve countries with sovereign debt above 60 percent of GDP pooling their excess debt into a redemption fund with common liability. They would commit to reforms and see their debts repaid over 20-25 years.

Within a few years the redemption fund could have a volume of 2.3 trillion euros worth of bonds, the wise men's study said.

But Germany's Chancellor Angela Merkel had said the proposal would face several constitutional problems that would require changes of European treaties. She also said the proposal would be "impossible to implement in reality".

The wise men panel was also cautious on Friday about the plans for European banking union that Merkel signed up to last week, and that more than 150 economists criticized in a joint open letter in a German daily this week.

"The solution to the acute crisis cannot lead to the overhasty introduction of a banking union," the wise men said.

Under pressure to stem a two-year long debt crisis, euro zone leaders last week agreed to take a first step towards a European banking union and create a single banking supervisor for the area's banks based around the ECB.

The deal, which also included a pledge to let the euro zone rescue fund inject aid into stricken banks and intervene on bond markets, has been portrayed in German media as a defeat for Merkel and a victory for her Spanish and Italian counterparts.

Finance chiefs turn to EU's unfinished business

Euro zone officials are cautioning against expecting any quick action from the currency bloc's finance ministers when they meet on Monday to sort out the tangle of loose ends and disagreements left by last month's EU debt-crisis summit.

Banking supervision, the use of European Union bailout money, aid to Spain and Cyprus and how to deal with Greece -- together it could take months to finalize, despite pressure from financial markets for clarity on the details.

Leaders from the 17 nations sharing the euro reached a deal in the early hours of last Friday to give the European Central Bank greater oversight of the bloc's banks and to use the euro zone's rescue funds to reduce countries' borrowing costs.

But after going beyond what many diplomats, finance officials and investors had expected, critical elements were left vague. Time-frames may already be slipping and opposition is building in euro zone hardliners the Netherlands and Finland.

"You have a Finnish problem. You have a Dutch problem. You have a German problem too," said one euro zone diplomat, pointing to the reservations of those countries about what was announced at the summit and German Chancellor Angela Merkel's reluctance to help its partners without strict conditions.

The meeting's crowded agenda may hamper progress. Discussing an aid package for Spain's banks, dealing with a request from Cyprus for emergency help, and whether to ease the conditions of Greece's second bailout are also on the table.

Euro zone leaders have committed to ECB-led supervision for banks, which would then allow the permanent rescue fund - the European Stability Mechanism (ESM)- to recapitalize banks directly, rather than having to lend to governments.

That is seen as a major concession to Spain, which has requested a bailout of up to 100 billion euros ($125 billion) for its banks, but does not want to see that money added to its national debt and possibly push it towards a sovereign rescue.

Leaders agreed to remove the ESM's preferred creditor status when it lends to Spain, to calm investors who were worried they would not be repaid the money they had already lent.

They also decided that the ESM and the euro zone's temporary bailout fund, the EFSF, can buy euro zone bonds at auction and in the open market to lower borrowing costs, with some conditions attached but without a full program.

Potentially demystifying the ESM's role once it becomes operational this summer, one senior euro zone official said on Friday that countries who requested its aid for their banks would still need to provide guarantees. That might assuage German concerns about the ESM taking on too much risk.

The official said that if the ESM took an equity stake in a bank it would only be with a "full guarantee by the sovereign concerned" although he signaled this requirement could change in the "very distant future".

"Does it still remain the risk of the sovereign or does it become the risk of the ESM? It remains the risk of the sovereign because you have the counter guarantee of the sovereign," the official said.

POLITICAL PROBLEMS

In their summit statement on June 29, leaders told the Eurogroup of finance minister "to implement these decisions by July 9". That now looks optimistic.

Much depends on the ECB's crucial role as supervisor, which will need to be grounded in European law. It falls to the European Commission to propose such legislation, which is not expected until at least September.

"It will take at least until the first half of next year to be implemented," said Douglas Renwick, a director responsible for government credit ratings at Fitch Ratings.

The senior euro zone official echoed that sentiment, saying he saw the supervision ready only by the middle of next year.

Despite the obstacles to the broad package outlined by leaders, the range of measures agreed allow some short-term action, and vocal opposition to euro zone bond buying in the Netherlands and Finland is unlikely to ruin those plans.

Finland has said it opposes bond-buying in secondary markets, because it considers such purchases to be ineffective.

In emergency cases, the ESM's treaty allows for decisions to be taken with an 85 percent majority, and the Netherlands and Finland only account for 8 percent combined.

"The ESM discussion is being complicated by politicians talking to their electorates, but I think there is a consensus to move ahead with what was decided at the summit," said another euro zone official, briefed ahead of the Eurogroup.

TOUGH TROIKA

If only things were so straight forward for southern Europe.

Greece's new Finance Minister Yannis Stournaras said on Thursday he had been warned to expect a tough time at the Eurogroup, having acknowledged Athens was off course on its pledges linked to a 130-billion-euro rescue.

Ministers will discuss the findings of the "troika" of the European Union, the European Central Bank and International Monetary Fund from their first mission to Greece since the June 17 election. Another mission is due to return later in July.

"There will be no disbursement to Greece until the Eurogroup has determined the program is back on track," said the senior euro zone official, speaking on condition of anonymity because of the sensitivity of the matter.

Greece's Prime Minister Antonis Samaras wants to ease the terms of the bailout, but that would mean more money for Athens.

"Even if the second program as it stands were fully implemented, it is not clear that market access could resume (in 2015)," said David Mackie, an economist at JP Morgan. "A third program seems likely in any event."

For Spain, ministers are unlikely to sign off formally on an aid package for its banks as they are still awaiting an expert report on the situation, despite expectations of a July 9 deal.

From Reuter