NEWS,17.08.2012

What U.S. and Iranian Leaders Can Do to Avert War

 

It is clear that if U.S. and Iranian political leaders continue down the present course they will almost certainly lead us into another bloody war. Out of empathy for those who will do the fighting and dying, here are a few things they can do to avert conflict:

• U.S Political Leaders: Have the courage to stand up publicly to AIPAC lobbyists and their supporters who would pressure you to send our troops into another preventive war. While it remains unclear whether the Ayatollah Khamenei is sincere or engaging in strategic deception when he says that nuclear weapons are forbidden to Iran, he is almost certainly more likely to pursue them if he feels that his government is being backed into a corner with no way out.

• Iranian Political Leaders: Disavow statements made by President Ahmadinejad that have been interpreted as genocidal toward Israel. Your president's threatening statements in the context of your nation's nuclear pursuits -- whether peaceful or not -- have arguably done more harm to your cause than almost any other statement you've made or action you've taken. Israel not only appears to be poised to attack you unilaterally but will probably draw the U.S. in as well if it does. Your president's inflammatory and threatening rhetoric may result in a conflict that will likely cause great suffering to you and your people. On the other hand, the international community would undoubtedly be more open to your pursuit of nuclear energy if you distanced yourself from such irresponsible and seemingly irrational statements.

• U.S. Political Leaders: Stand up for American principles by imposing real political and economic costs on Israel for its settlement expansions and denial of Palestinian rights. Continued economic aid should no longer be a given but, rather, should be contingent upon the Israeli government's demonstrated progress in this area. American policymakers' selective application of human rights standards on this issue is an affront to the Muslim world as well as to American values and can only exacerbate the U.S.-Iran diplomatic situation.

• Iranian Political Leaders: Fully comply with IAEA inspections to allay the international community's concerns over alleged clandestine nuclear weapons sites. Time is needed to build trust. Set aside your pride and compromise on higher levels of uranium enrichment in order to avoid provoking U.S. and Israeli alarm. Viewing the unfolding of events from the U.S., it appears that American policymakers are poised to make the same foolish mistake they made with Saddam Hussein: that the absence of proof that your government is not engaged in nefarious activities means that you must be. Don't play into the hands of U.S. and Israeli hawks by playing Saddam's guessing game.

• U.S. Political Leaders: Acknowledge the courage behind such concessions if Iranian leaders commit to them and offer them more in return: not only alleviation of sanctions but positive economic and political incentives as well.

While there is no guarantee that these steps will lead to a peaceful outcome, continuing down the current road will only lead to greater economic deprivation and bloodshed. Though the current diplomatic impasse may appear insurmountable, commit to a renewed effort while there is still time. You owe it to the men and women you will be sending into battle if you fail.

Is Italy in Denial of Its Public Debt?

 

This week, the amount of government debt of Italy at the end of June was published: 1,972 billion euros. By this time it must have exceeded 2,000 billion euros ($2.4 trillion).Mario Monti, the Prime Minister cum Minister of Finance, toured the capitals of Europe to obtain support for Italy, indicating that Italian sentiment would turn anti-Euro without such help. He chose Berlin to accuse Germany of profiting from the European sovereign crisis. Needless to say, it immediately backfired. It was, to put it bluntly, particularly stupid. In an interview with the Wall Street Journal he stated: What we ask is that European authorities certify Italy's good conduct by translating that into interventions to keep spreads within reasonable limits. I have often told Merkel that, if this isn't done, she risks finding herself before an Italian parliament that repudiates Europe, monetary stability and the euro and is not friendly toward Germany.What is worse, however, is that he sent completely contradictory messages: he said that the European crisis was reaching the end of the tunnel.The reality is much scarier: Italy is facing 500 billion euros of refinancing and deficit financing between now and the end of 2013. The measures taken by the Italian Government did not translate into an interest rate decrease, let alone a debt decrease.When he states that Italy does not need a bail out he is right: not that Italy is not in need, but that there is no way the current resources, even if they were entirely allocated to Italy, would be sufficient to bail the country out.What is currently missing, however, is a serious crisis debt management. It would be perfectly possible to launch a consolidation bond issue, open to holders of 2012 and 2013 debt. With a maturity of 5 years and an interest rate of 5 percent it would not require any haircut from the banks and it would help the country bridge the reimbursement gap of the next two years.But Italy is scared to propose what would be a voluntary transaction. Should there be an increase in its refinancing rates, it would be a disaster.This lack of debt management might create the perfect conditions for a European tornado that would affect global markets everywhere. France would definitely be next. The main source of discontent for the investors is not only those facts. It is the benevolent way with which the Italian Treasury is handling the problem, shortening the maturities of its bonds,and not increasing its refinancing risk.We are talking about actions, not words. E la nave va...

World execs have confidence in Obama

Twice as many business executives around the world say the global economy will prosper better if incumbent US president Barack Obama wins the next election than if his Republican challenger Mitt Romney does, a poll showed on Friday. Democrat Obama was chosen by 42.7% in the 1 700 respondent poll, compared with 20.5%for Romney. The rest said "neither". The result was different among respondents in the United States, where a slim majority thought Romney would be better for their businesses than Obama.Obama maintains a seven-point lead over Romney among registered voters in the race for the November 6 presidential election, despite the fact Americans are increasingly pessimistic about the future, according to a Reuters/Ipsos poll conducted last week. The FT poll was conducted before Romney picked Wisconsin Congressman Paul Ryan as his vice presidential running mate at the weekend, a move that could dramatically shift the election debate between two sharply contrasting views of government spending and debt. Romney's choice for running mate gave him no immediate boost to his White House prospects.

NEWS,09.08.2012

China's inflation slows to 1.8% low

Chinese inflation hit a two-and-a-half-year low in July, official data showed on Thursday, giving the government further policy leeway to boost weakening growth. The country's consumer price index (CPI) rose 1.8% year-on-year (y/y) last month, the National Bureau of Statistics said, the fourth straight month of y/y easing and the lowest level since January 2010.The slowdown potentially gives authorities more ammunition to light a fire under the world's second-largest economy, which grew 7.6% in the second quarter for its worst performance since the height of the global economic crisis in 2008-2009.Authorities this year have taken measures including the rare step of slashing interest rates twice in quick succession while also lowering requirements for how much money banks must keep in reserve.Chinese leaders, including Premier Wen Jiabao, have expressed concern over the weakness in the economy and have hinted that the government may need to take further action to bolster growth.Sun Junwei, China economist at HSBC in Beijing, said the figure was in line with expectations and confirmed that inflation overall is trending downward."In general, China's inflation will likely be moderate and controllable in the future, which offers room for China to further loosen its (monetary) policy," she said.Sun added that if other economic data due out later on Thursday comes in worse than expected there could be a further cut in interest rates or bank reserve requirement ratios in August.China is scheduled to announce July figures in industrial production, fixed asset investment and retail sales later Thursday.Helping suppress the overall consumer price index was a decline of 0.9% in prices for transportation and telecommunications, according to the data.Inflation for the first seven months of 2012, meanwhile, was 3.1%, the bureau said."Inflation continues to peel off rapidly, highlighting an output gap that the government is trying to plug with rising state investment," economists at IHS Global Insight said in a report after the release of the July data.Producer price inflation (PPI), a leading indicator, declined 2.9% in July from the same month last year for the fifth straight month of contraction.Producer prices "continue to highlight the severe deflationary pressure rippling across the country", IHS Global Insight said, noting that "deflation, not inflation, is the greatest short-term threat to the Chinese economy".

Eurozone GDP to fall by 0.3% this year

The eurozone economy will contract by 0.3% in 2012 before recovering more slowly than expected next year to expand by 0.6%, a poll conducted by the European Central Bank (ECB) revealed on Thursday. The data came from the Survey of Professional Forecasters which the ECB carries out on a quarterly basis. It was published in the Frankfurt-based bank's monthly bulletin.The previous SPF survey predicted a 0.2% contraction for eurozone gross domestic product (GDP) this year and a 1% expansion in 2013.Recession-inducing austerity measures in some euro countries and "higher uncertainty" over the resolution of the single currency's debt crisis were "the main factors behind the downward revisions," the ECB said.Forecasters also said that eurozone unemployment would stay at its current high of 11.2% throughout 2012 and increase to 11.4% in 2013. Inflation was projected to fall from 2.3% to 1.7% over the same period.The ECB said it expected "weak" economic activity both in the second and third quarter of 2012 and only a "very" gradual recovery afterwards. "Risks surrounding the economic outlook for the euro area continue to be on the downside," it noted.The European Union statistical office, Eurostat, is to publish GDP figures for the second quarter of the year on Tuesday.

India's shock fall in industrial output

India's industrial production contracted by a shock 1.8% from a year earlier in June, as manufacturing output shrank in Asia's third-largest economy, official figures showed on Thursday, The data underscored the massive job ahead for India's new pro-market finance minister, P. Chidamabaram, who pledged this week to "restart the growth engine" of India's sharply slowing economy.Manufacturing output, which accounts for three-quarters of the index of industrial production, fell 3.2% from a year earlier in June, according to the government data.Manufacturing has been undermined by high interest rates to combat stubbornly high inflation, falling business confidence and Europe's debt crisis which has hit exports.The 1.8% shrinkage in output by factories, mines and utilities in June was the third contraction in four months and followed a revised 2.5% production rise in May.The industrial output reading was far below analysts' expectations, which were for an increase of 0.80%, according to a Dow Jones Newswires poll.The weak performance is likely to pile pressure on the central bank to ease interest rates to spur growth.The bank has said it wants inflation to come down before cutting borrowing costs, but Chidambaram has already indicated he wants lower rates, saying "sometimes it is necessary to take carefully calibrated risks".The weak numbers come as the left-leaning Congress-led government is under pressure over a string of graft scandals and its attempts to liberalise the still inward-looking economy to spur growth have led to gridlock in parliament.India's once-booming economy grew just 5.3% between January and March, its slowest annual quarterly expansion in nine years.Capital goods output, an important investment indicator, slid 27.9% in June from a year earlier.Goldman Sachs economist Tushar Poddar, who recently pared his full fiscal year growth forecast to 5.7% in contrast to the central bank's expectation of 6.5% expansion, saw more tough times ahead."Weak monsoons are also likely to impact rural consumption demand and exacerbate weakness in investment demand," Poddar said ahead of the data.Citibank has said if a nationwide drought is declared, which would be the country's third in a decade, growth could be as low as 4.9% as hundreds of millions of farmers depend on the annual rains for their income.

NEWS,29.06.2012

European leaders' breakthrough defied expectations

Europe's leaders finally rose to the challenge of a debt crisis that has hobbled economic growth and threatened the global financial system.Markets roared their approval after leaders of the 27 European Union countries backed bold ideas to help weak countries cope with rising debt levels and frail banks.For the first time in 19 summits since the start of the crisis, the EU leaders defied low expectations Friday by announcing plans to:

—    Bail out banks, without putting any financial burden on strapped governments.

—    Ease borrowing costs on Italy and Spain, the euro region's third and fourth largest economies.

—    Seek stronger, centralized regulation to European banks.

—    Rescue floundering countries, without forcing them to make painful budget cuts if they've already made economic reforms.

—    Tie their budgets, currency and governments more tightly.

Europe's leaders trumpeted the agreement. The prime minister of Ireland  one of the five euro countries that has required emergency funds  said the plans marked a "seismic shift in European policy." British Prime Minister David Cameron said that "for the first time in some time we have actually seen steps ... to get ahead of the game."The Dow Jones industrial average recorded one of its biggest gains of the year, and stocks advanced even further in Europe  in strong and weak countries alike. The benchmark stock index in Germany rose 4.3 percent, by far its best performance this year. Germany has the healthiest economy in Europe, and a warm reaction there was a crucial sign of approval for the plan. Prices for oil and other commodities shot higher.The decisions made at the European Union summit in Brussels won't end the crisis that has gripped Europe for nearly three years. Plenty of questions remain about how the bank bailouts would work, whether there's enough money committed to rescue banks and governments and whether impoverished, indebted Greece will be forced out of the euro club.But for EU leaders who have consistently underwhelmed their exasperated publics and nervous financial markets, Friday's plans marked a breakthrough.At first it looked like the summit would produce little more than a modest plan to stimulate growth in Europe. But Italy and Spain, whose borrowing costs have soared to dangerous levels, refused to sign off on a $150 billion spending plan unless something was done to ease their financial burdens.So the leaders signaled a willingness to expand the use of Europe's two rescue funds. The money could be used to buy bonds to drive down a country's borrowing costs. Or it could be loaned directly to troubled banks, which would EU leaders said would help break "the vicious cycle" in which weak banks and weak governments threaten to drag each other down.Before the summit, European leaders insisted that bailout funds be used only to rescue governments  like Ireland, Portugal and Greece. If money was going to be used for banks, it had to first go to a government, which then funneled it to the troubled banks. But that added to the debt on a government's books because it was responsible for repaying the money.So efforts to help the banks ended up raising fears about governments. That is why Spain's borrowing costs rose dramatically after the eurozone countries agreed to lend it $125 billion to rescue its banks.The EU plans also call for a single regulator probably the European Central Bank to oversee Europe's banks. Currently, banks are regulated by their national governments such as Spain's, which have been slow to recognize loan problems and shut down the worst banks.As part of a broad "banking union" the new regulator will likely get power to close failing banks if their national regulators won't do it. The plan is also expected to include deposit insurance across Europe. Individual European countries now insure bank deposits within their borders. But bank failures could overwhelm those national funds.The bank overhaul is supposed to be completed by the end of the year.The leaders said they were committed to linking their countries closer together economically and politically. But they put off the hard work of closer integration, which is likely to require countries to give up some of their taxing and spending powers to a European budget authority.Most analysts cheered the EU plans but worried about the questions left unanswered. And they said the bailout funds are too small to handle the tasks that could be thrown at them.Europe's two bailout funds have a combined $625 billion in lending power; up to $125 billion of that is already committed to helping Spain bail out its banks. The remaining $500 billion looks small compared to $3.1 trillion in Spanish and Italian bonds outstanding.The solution hovering in the background, say some economists, is the European Central Bank. The ECB could buy any necessary amount of government bonds, backed if need be by the bank's theoretically limitless power to create new money. So far the bank has been unwilling to take this step, which could risk running afoul of its mandate to fight inflation and a ban on central bank financing governments. The ECB's next policy meeting is Thursday in Frankfurt.The summit deal leaves out crucial details of just how any bank bailouts would work. Would bank creditors have to take a loss on their investments, or would taxpayers foot the whole bill? The deal didn't specify.If the banking regulator and a rescue fund take ownership stakes in failed banks, manage those stakes in the taxpayer interest while forcing losses on shareholders and creditors, it could be positive, said Clemens Fuest, an expert in public finance at Oxford University's Said Business School.Otherwise, simply charging taxpayers could be "a huge burden on growth in Europe for a very long time," Clemens said.

German lawmakers OKs fiscal pact, euro fund

German lawmakers on Friday approved Europe's new budget-discipline pact as well as the eurozone's permanent €500 billion ($623 billion) rescue fund, hours after Chancellor Angela Merkel defended concessions she made to financially troubled European nations at a summit.A solid majority of more than two-thirds of all lawmakers of Parliament's lower house endorsed the two sets of legislations in a late night session, following urgent calls by Merkel to back the projects deemed crucial to stabilizing the 17-nation currency zone.Merkel said supporting the fiscal pact and rescue fund sent "a signal of unity and determination, domestically and abroad; a signal toward overcoming the European government debt crisis sustainably, and a signal that for us Europe means our future.""With these agreements, we are taking irreversible steps toward a sustainable stability union," she said.The plans had support from Germany's two main opposition parties. A two-thirds majority was needed for the fiscal pact because it involves an internationally binding commitment to keep Germany's deficit low.Parliament's upper house, which represents Germany's 16 states, is expected to approve both plans later in the evening, but its approval doesn't mean that the legislation will take effect immediately.Germany's Federal Constitutional Court has asked President Joachim Gauck not to sign it into law immediately after Friday's parliamentary votes so that it has time to decide on expected calls for injunctions blocking the legislation. A decision could take as much as a few weeks.Lawmakers voted 491-111 Friday with six abstentions to back the discipline pact  the so-called fiscal compact to which 25 of the European Union's 27 members have signed up.Lawmakers also voted 493-106 in favor of the rescue fund, the European Stability Mechanism, with five abstentions.The fund is meant to be operational next month, which required lawmakers to pass the legislation at the latest on Friday. Germany must pay about €22 billion in capital to underwrite the fund, and it guarantees about a third of its lending capacity.Merkel noted that, in the future, countries will have to implement the fiscal pact to be eligible for aid from the ESM. "There is a legal link between solidity and solidarity, and I consider that very important," she said.In her speech a few hours after returning from the summit in Brussels, Merkel defended concessions she had made there. She assured lawmakers that help to struggling countries and banks will still come with strings attached and insisted that some decisions were misunderstood.Merkel had been opposed, at least in the near term, to some of the measures that she and the other 16 leaders of the euro countries agreed upon Friday. They include allowing Europe's bailout fund in the future to give money directly to a country's banks, without imposing strict austerity conditions on the government.German media headlines immediately after the summit portrayed the outcome as a political defeat, but Merkel said her tough-love approach was intact.Merkel told Parliament it was a "sensible decision" to allow countries that pledge to implement reforms demanded by the EU's executive Commission to tap rescue funds without having to go through the kind of tough austerity measures demanded of Greece, Portugal and Ireland. It was a concession to Italy and Spain in particular.Merkel insisted it was only about helping countries whose financial stability is threatened by high interest rates but don't need to be taken off markets all together.She said there will always be conditions and a time frame, which will be supervised, and told lawmakers they should read the EU Commission's current economic policy recommendations for Italyand Spain  "they are tough conditions.Heading in to the Thursday-Friday summit in Brussels, Merkel had appeared thoroughly uncompromising  insisting on the importance of getting budgets in order and improving eurozone strugglers' competitiveness while brushing aside talk of shared debt liability in Europe.But in a victory for Spain and Italy, she agreed that funds set up to bail out indebted governments could be allowed to funnel money directly to stressed banks, once an "effective single supervisory mechanism" for banks is set up.Merkel said that it was a matter of "several months or perhaps a year" but that having an effective supervisor that could set and enforce conditions "changes the conditions for the question of how we can deal with banks in the eurozone."

NEWS,27.06.2012

Europe's leaders at odds before summit

 

European leaders sound unusually divided before a high-stakes summit, with Germany's Angela Merkel saying total debt liability would not be shared in her lifetime and giving little support to Italian and Spanish pleas for immediate crisis action. Rome and Madrid have seen their borrowing costs spiral to a level which for Spain at least would not be sustainable as it battles to recapitalise banks ravaged by a burst property bubble and cut a towering government deficit. Spanish Prime Minister Mariano Rajoy said on Wednesday he would ask other European Union leaders to allow the bloc's bailout funds or the European Central Bank (ECB) to stabilise financial markets. Speaking in parliament before a meeting of European heads in Brussels on Thursday and Friday, Rajoy warned that Spain would not be able to finance itself indefinitely with 10-year bond yields near 7%. "The most urgent issue is the one of financing. We can’t keep funding ourselves for a long time at the prices we’re currently funding ourselves,” he told parliament. Even when there are profound disagreements, EU leaders have been burned by the markets enough times to generally make sure they sound united before major gatherings. But divisions have been exposed by the ousting of Nicolas Sarkozy by socialist Francois Hollande as French president and the fact that Rome and Madrid have muscled into the traditional Franco-German axis. The leaders held an unusually discordant news conference in Rome on Friday. Hollande said there must be more solidarity in Europe before countries hand over more sovereignty over their national budgets, while Merkel said she would not accept extra liabilities without overarching budget control. The pair will have a working dinner in Paris on Thursday evening, an opportunity to repair the damage. An initial attempt to smooth over differences came at a meeting of the four countries' finance ministers late on Tuesday after which nothing was said. In Rome, Italian Prime Minister Mario Monti said he would not simply rubber stamp conclusions at the EU summit and said he was ready to go on negotiating into Sunday evening if necessary to agree on measures to calm markets. With Hollande's support, Monti is pushing for the eurozone’s rescue funds to be used to help limit the spreads over German Bunds on bonds issued by countries that respect EU budget rules. Rajoy would settle for that or the ECB doing the same job by reviving its bond-buying programme. The proposal has run into stiff opposition from Germany, the largest economy in the EU and the bloc’s effective paymaster, and has been rejected by Jens Weidmann, the powerful head of the German central bank, the Bundesbank. Stock markets perked up last week on the hope that the 20th EU summit since the bloc’s debt crisis exploded into the open in Greece would come up with dramatic measures. Investors have since thought better of that view. European shares edged up on Wednesday and the euro was flat, with many investors out of the markets before the Brussels meeting. “People are waiting for the inevitable - which is that policymakers will probably fail to do what is necessary,” said Neil Mellor, currency analyst at Bank of New York Mellon.Borrowing costs Merkel stomped on the idea of mutualising debt - favoured by France, Italy and Spain - at a meeting of lawmakers from her Free Democratic coalition partners in Berlin on Tuesday, according to people who attended the closed-door session. “I don’t see total debt liability as long as I live,” she was quoted as saying, a day after branding the idea of euro bonds “economically wrong and counterproductive”. The words may have been carefully chosen and do not at face value rule out mutualising some portion of eurozone members’ debts as the end point of a drive towards fiscal union. Merkel finds herself in a dwindling minority but holds the eurozone’s purse strings and therefore nearly all the cards. German opposition SPD leader Sigmar Gabriel told the Financial Times that urgent measures were needed to lower eurozone sovereign borrowing costs, otherwise the currency bloc could “simply explode”. Italy and Spain argue that they are stretching every sinew to cut their debt mountains and need some support from their currency area peers to keep the markets at bay. Monti won the first two of four confidence votes on Tuesday called to accelerate the passage of his labour reform that has been criticised by both by labour unions and the business establishment. The final two votes, and definitive approval, are due on Wednesday. Spain which has been offered loans of up to €100bn to recapitalise its banks but is determined not to ask for a sovereign bailout - is considering raising consumer, energy and property taxes. Spanish Economy Minister Luis de Guindos said he had talked with the finance ministers of Germany, France and Italy already on Wednesday with further discussions planned. Eurozone finance ministers will also hold a conference call on the bailout of Spanish banks and this week’s request for aid from Cyprus, EU officials said. The request made Cyprus the fifth of the eurozone’s 17 states to seek aid from EU rescue funds after Greece, Ireland, Portugal and Spain. Underlining the parlous state of Spanish finances, figures showed the central government’s deficit had already reached 3.41% of annual gross domestic product through just the first five months of the year, close to its target for the whole year of 3.5%. Spain’s central bank said on Wednesday it expected recession to deepen in the second quarter of the year. The Brussels summit is expected to agree on a growth package pushed by France worth around €130bn in infrastructure project bonds, reallocated regional aid funds and European Investment Bank loans. Leaders will also discuss proposals for a banking union, but while they are likely to agree to give the ECB power to supervise big cross-border banks, Merkel is resisting any joint deposit guarantee or common bank resolution fund.

Italy to pass new labour laws ahead of EU forum

Italy’s Parliament is on Thursday set to approve a controversial labour market reform so Prime Minister Mario Monti can go to a key Brussels summit with it in hand to reassure his EU partners.The reform, which Mr Monti’s government says is key to restarting growth in the recession-hit economy, was to get final approval the day before the summit, as Italy races to prove it is doing what it takes to stave off the debt crisis. The summit starts on Thursday, June 28.Rome had called on Parliament to make sure the reform is approved in time, but Prime Minister Monti whose technocratic government depends on the support of bickering coalition parties has had to compromise on the details.Addressing Parliament on Wednesday, he said it was “important that Italy arrives at the summit with the force of a parliament-government tandem.”The project, which was unveiled in March after months of bitter disputes with trade unions, is based on the Danish “flexicurity” model, which aims to ensure both flexibility and security in the labour market.It includes incentives for employers to hire workers but also eases the procedure for letting them go in case of a downturn, and will help young people get jobs though apprenticeships, in a country hit by high youth unemployment. Workers will also all be eligible for a modernised welfare scheme from 2017.Greater labour flexibility is one of the so-called structural reforms that the European Commission, International Monetary Fund and Organisation for Economic Cooperation and Development have long advised Italy to adopt to invigorate its economy.Watered downBut Mr Monti’s original package was watered down as parties, trade unions and employer groups fought to defend their turf, leaving many economists fearing the reform is too timid to shake up the labour market.The centre-right insisted businesses be left wiggle room to give people shorter-term contracts, while the left demanded greater measures be included to protect workers.The country’s biggest union, the left-wing CGIL, says the reform risks increasing unemployment, while the Confindustria association says it does not go far enough in strengthening employers’ rights.

NEWS,21.06.2012

Auditors: Spanish banks need up to $78BN

Spain's troubled banks could need as much as (EURO)62 billion ($78.76 billion) in new capital to protect themselves from economic shocks, according to independent auditors hired by the government to assess the country's struggling financial sector.The Spanish government will use the auditors' report as the basis for their application for a bailout loan from the 17 countries that use the euro.Announcing the reports' findings Thursday, Deputy Bank of Spain Governor Fernando Restoy noted that this worst-case scenario was far below the (EURO)100 billion ($127.04 billion) loan offered by eurozone finance ministers two weeks ago.Spain's banking sector is struggling under toxic loans and assets from the collapse of the country's property market in 2008. Concerns that Spain's economy is so weak that it could not afford the cost of propping up its banks has sent its borrowing costs soaring to levels not seen since it joined the European single currency in 1999. The worry is that Spain could soon find itself unable to finance its debts by itself and join Greece, Ireland and Portugal in seeking a rescue loan for not just the banks but the whole country.The stakes are huge: Spain is the eurozone's fourth-largest economy and would seriously hit the bloc's finances should it need bailing out. The country is struggling through a recession with a 24.4 percent jobless rate. On top of this, government's main customers at its debt auctions are Spanish banks  the sector now being bailed out. In a sign of how reluctant the markets are to invest in Spain, the country had to pay sharply higher interest rates to raise (EURO)2.2 billion ($2.8 billion) in a bond auction Thursday.The audits of Spain's lenders, carried out by consultancies Roland Berger and Oliver Wyman, covered 14 banking groups that account for 90 percent of the sector in Spain. The country will use the reports' findings to decide how big a bailout loan to ask for.Restoy and Deputy Economy Minister Fernando Jimenez Latorre declined to outline individual banks' needs.In the auditors' stress test for the worst-case economic scenario  a fall in gross domestic product of 6.5 percent over the period 2012-2014  most of the banks were deemed to be in a "comfortable" position, Restoy said."We're not talking about the imperative capital necessities of the banks. We're not talking about someone urgently needing such and such an amount of capital to deal with their obligations," said Restoy. "We're talking about the capital that would be needed if we were to see a situation of extreme tension which is very unlikely to come about.""We should keep in mind we are not talking about how much capital an entity needs to survive. We're talking about how much capital an entity will need to confront a situation of extreme stress," he added.Economy Minister Luis de Guindos, in Luxembourg with eurozone colleagues to discuss Spain's aid request, said a formal petition would be made within few days. Eurozone finance ministers offered Spain a bailout loan of up to (EURO)100 billion on June 9. The terms of the loan  for which Spain, rather than banks, will ultimately be responsible for  still have to be negotiated.A more thorough series of audits by four other companies is scheduled to be completed by the end of July.Oliver Wyman Inc, gave a worst-case range of (EURO)51 billion-(EURO)62 billion in new capital needs while Roland Berger Strategy Consultants GmbH gave a single figure of (EURO)51 billion.The release of the audits Thursday will probably not eliminate market nervousness about Spain because more thorough audits of the nation's banks are now being conducted and those results are not expected until September, said Mark Miller, an analyst with Capital Economics in London."At face value it looks as if there is a reasonable safety margin given that up to (EURO)100 billion is potentially available," he said. "Having said that, the extent of the economic situation in Spain could even deteriorate beyond what is being described as an adverse scenario."Some investors will likely still be nervous over whether the auditors' reports discovered most if not all of the toxic assets on the balance sheets of Spain's banks, Miller said. And their fears are compounded by concerns that Greece might still end up having to leave the single currency, further destabilizing the eurozone and especially Spain.The results of the audits are good news for Spain because both companies came up with similar numbers and the overall figures were lower than some estimates of the banking sector's recapitalization needs, said Gayle Allard, an economist with Madrid's IE Business School."I think it's a fantastic result because there was talk of needs of (EURO)70 billion to (EURO)80 billion and that the loan could have been for (EURO)100 billion," she said.Investors could still easily find something to scare them about the results, Allard said, "but I don't think there's any reason to do so."She added: "The audits have come in better than anyone has expected, there's still some uncertainty, but if both of them are coming to the conclusion of those numbers we've got to be in the ballpark."

Eurozone Crisis Causing 'Deeper And More Broad-Based' Economic Downturn

The downturn in the euro zone's private sector is becoming entrenched, business surveys showed on Thursday, as falling new orders and employment levels dent confidence.June is the fifth consecutive month activity across the 17-nation bloc has declined, dragging down heavyweights Germany and France and likely increasing calls for the European Central Bank to take action to support the economy.Markit's Eurozone Composite Purchasing Managers' Index, a combination of the services and manufacturing sectors and seen as a guide to growth, held steady at 46.0 this month, the lowest since June 2009 when the bloc was mired in a deep recession.That was better than a slide to 45.5 predicted by economists but the index has been below the 50 mark that divides growth from contraction in all but one of the last 10 months."It is a worryingly steep downturn we are seeing and it is spreading from the periphery, which has been falling at an increased rate, through to Germany. It is becoming deeper and more broad-based," said Chris Williamson, chief economist at Markit.The data pointed towards a second quarter contraction of around 0.6 percent, Markit said.Having held steady at the start of the year, the bloc's economy will contract 0.2 percent in the current quarter and narrowly escape recession by stagnating again in the next, according to economists.While the ECB is not seen cutting interest rates from their record low of 1.0 percent anytime soon, a growing and significant minority are saying the bank will be forced to act as the outlook worsens.The danger of Greece crashing out of the euro zone eased after pro-bailout parties won weekend elections, but risks are mounting that Spain, the euro zone's fourth-largest economy, will need a full-blown international rescue.The two-and-a-half year old crisis has hobbled the global economy, and world leaders meeting in Mexico piled pressure on the euro zone to move towards a fiscal and banking union to fix the crisis that now threatens to engulf Spain.With uncertainty reigning, optimism among survey participants dwindled to its lowest level since March 2009. The business expectations index for services firms slumped to 50.8 from May's 57.4, the biggest one month drop since the aftermath of the Lehman Brothers collapse in late 2008."Companies are getting increasingly rattled by the crisis that is engulfing the region, and there are clear knock-on effects for the real economy," Williamson said.COUNTING THE COSTThe PMI for the dominant service sector nudged up to 46.8 from May's 46.7, beating expectations for 46.4, but chalking up a fifth straight sub-50 reading.It was a similar picture in the manufacturing sector, which drove a large part of the bloc's recovery from the last recession, where activity declined for the 11th straight month.Its 44.8 reading was the lowest since June 2009 and missed the 44.9 forecast. The output index for the sector fell to 44.4 from 44.6, the lowest since May 2009.And things are unlikely to improve anytime soon as composite new business declined for the 11th month, with the index coming in at 45.2, just up from May's 44.6. The survey also showed that firms have been running down old orders for a year.To reduce costs, and giving an indication of their prospects, factories reduced headcount for the fifth month, with the employment sub-index falling to 46.5 from 47.1, its lowest since January 2010."It's a sign that companies are expecting things to get worse and not better," Williamson said.Earlier data from Germany, Europe's largest economy, showed its manufacturing sector contracted at its fastest pace since June 2009 while its service sector barely expanded, posting its lowest reading in seven months.In neighbouring France activity declined in both sectors, albeit it at a more moderate pace than last month.

NEWS,19.06.2012

Growth the watchword at G20 summit

 

The leaders of the world's major economies embarked on the final day of the G20 summit Tuesday determined to kickstart growth and pull the eurozone back from the brink of disaster.European members were under extraordinary pressure from their international counterparts to loosen the straitjacket of their austerity programs and to allow the European Central Bank to open the lending floodgates.Beyond the summit conference center in the Mexican resort of Los Cabos, bond markets jacked up rates on Spanish and Italian debt amid self-fulfilling fears that the debt crisis that sank Greece was spreading once again.Germany's Angela Merkel remains the driving force behind the eurozone's austere determination to privilege deficit busting over stimulus spending, although US officials say her position is softening."Discussion here has been balanced: we need the right mix of consolidation and growth stimulus at the same time," Merkel told reporters on Tuesday, saying the previous night's showpiece dinner had been a "very frank and honest exchange."A draft version of the G20 final statement, which was to be finalized and published by the leaders on Tuesday, suggested that a formulation would be found that would commit the leaders to a pro-growth agenda."All G20 members will take the necessary actions to strengthen global growth and restore confidence," it said, vowing that eurozone members would safeguard the stability of the single currency in the face of volatile markets.The version seen by AFP allowed no hint that Merkel or her allies might crumble and allow the ECB to pump out cash or to pool German debt with that of the weaker eurozone members in order to create low-interest eurobonds.But it opened up the possibility of more lending and spending if the European economy continues to struggle."Should economic conditions deteriorate significantly further, those countries with sufficient fiscal space stand ready to coordinate and implement discretionary fiscal actions to support domestic demand," the draft reads.There was also an indication that Merkel was coming round to the idea of a more integrated EU banking system that would allow joint supervision and a unified system to pay back depositors in any failing institutions."We support the intention to consider concrete steps towards a more integrated financial architecture, encompassing banking supervision, resolution and recapitalization, and deposit insurance," the draft statement said."Markets expect that we work together more closely," Merkel told reporters on Tuesday morning, without specifically mentioning unifying the banking system.EU Commission chairman Jose Manuel Barroso bristled at hostile questioning over why his rich continent needed so much support from abroad, declaring: "We are certainly not coming here to receive lessons from nobody."US President Barack Obama cancelled a planned meeting with European G20 members after the official dinner hosted by Mexico's President Felipe Calderon ran long."Everything that could have been said at the Obama meeting had been said at dinner, so we were done with the topic," Merkel said.Obama called for Greece to be given more time to get its affairs in order, after parties committed to honoring the terms of its bailout agreement won a majority of seats in Sunday's parliamentary election.But Merkel -- fast becoming a hate figure among Greeks -- remained unmoved. "Elections cannot call into question the commitments Greece made. We cannot compromise on the reform steps we agreed on," she told reporters on Monday.Progress was made in Los Cabos in boosting the resources available to the International Monetary Fund to help protect vulnerable countries from the backwash of the eurozone crisis.IMF chief Christine Lagarde thanked emerging powers, led by China, for pledging enough to bring her pool for emergency loans up to $456 billion (361 billion euros) in exchange for a greater say in Fund affairs.In addition to summit sessions, the leaders were to hold a series of side meetings on Tuesday, notably a two-way between Obama and Chinese President Hu Jintao, and a possible reschedule of the cancelled US-EU talks.The summit was due to draw to a close with a ceremony at 2330 GMT, after which Calderon was to address the press.Next year's G20 summit will be held September 5-6 in Saint Petersburg, Russia.

 

Greek leaders poised for coalition deal

 

Greece's conservatives expect to be able to form a coalition Government with the Socialists today, allowing the two parties that dominated politics for decades to share power despite a major anti-establishment election vote.Conservative New Democracy leader Antonis Samaras has promised to negotiate less punishing terms for Greece's international bailout, after only narrowly beating a radical left-wing party that campaigned to scrap the austerity deal entirely.A senior New Democracy official expected agreement soon on a new cabinet with the PASOK Socialists and possibly another smaller centre-left party following Sunday's election, the second in as many months.Speaking late last night, he said a deal would be reached today that would involve more than a symbolic involvement by PASOK in the Government."They will participate actively," said the official, who declined to be identified.New Democracy and PASOK alternated in power from the fall of military rule in 1974 until last year, when Greece's economic crisis forced the arch rivals to share power in a pro-bailout national unity Government."Political leaders should be aware of the fact that this Government is Greece's last chance to remain in the eurozone," the centre-left daily Ta Nea said in an editorial."The Greek people are ready to reward the parties that manage to ease austerity and punish those that raise voices of dissent," it said.The comment underscored the widespread expectation in Greece that a new Government will be able to negotiate an easing in the tough conditions of the European Union and International Monetary Fund bailout despite resistance from Germany.Many Greeks hold both parties responsible for the nation's near bankruptcy, which forced it to take bailouts from the EU and IMF in 2010 and again this year.New Democracy narrowly won the election, averting the immediate risk of a Greek euro zone exit but raising doubts on whether the new Government can impose austerity cuts on a nation deeply divided over the price for bailout funds.After claiming victory over the radical leftist SYRIZA party to jubilant crowds, Samaras began yesterday the more sobering task of talking to rivals to cobble together a coalition.The greatly weakened PASOK, which finished third in Sunday's vote, has yet to commit to supporting Samaras, but its leader Evangelos Venizelos said talks must be wrapped up by today - signalling a deal would be agreed by then.The smaller, moderate Democratic Left party, which opposed the bailout backed by the conservatives and the Socialists, has also suggested it will offer conditional support to a Government led by Samaras.Venizelos was due to meet the head of Democratic Left, Fotis Kouvelis in the morning to gauge support for a three-way alliance with their traditional conservative rivals.With Greece just weeks away from running out of cash and a new government needed to negotiate the next instalment of funds from lenders, Greek political leaders appeared determined to avert the deadlock that followed an inconclusive vote on May 6."I am optimistic that this time they will agree to form a Government," a Greek banker who declined to be named told Reuters."They have realised that there is no margin of error or further delays. A third election would be a disaster."With New Democracy taking a 50-seat bonus under Greek electoral law for coming first, a New Democracy-PASOK alliance would have 162 seats, a majority in the 300-seat parliament.Adding the Democratic Left would give it 179 seats.Nation in crisis A difficult road lies ahead for Samaras, a US-educated economist who went to college with former Socialist Prime Minister George Papandreou.He inherits a nation in deep social and economic crisis, with an economy in its fifth year of a recession that has left one in five workers out of a job.A rising number of businesses are closing down, the number of homeless on the streets is growing and anger at austerity cuts is at boiling point.Samaras promised Greeks and prospective partners that he would water down the painful terms of the EU/IMF bailout."We will simultaneously have to make some necessary amendments to the bailout agreement in order to relieve the people of crippling unemployment and huge hardships," he said.Samaras campaigned on promises to cut taxes as well as raising unemployment benefits and pensions.The New Democracy official said the new Government would aim to accelerate and broaden a privatisation programme to top up state coffers, but also ask its creditors to spread 11.7 billion euros of further austerity cuts over four years instead of two.But any attempt to veer off the prescribed austerity path would not sit well with European partners already irritated by what they see as the slow pace of Greek reform.Germany, Europe's paymaster, has ruled out more than minor delays to some targets in the 130-billion-euro rescue package.Chancellor Angela Merkel said at a meeting of G20 leaders in Mexico that any loosening of Greece's agreed reform promises would be unacceptable and reiterated that Athens had to stick to its commitments.With an emboldened SYRIZA bloc led by former communist student leader Tsipras at the head of a powerful opposition, the new government could face protests soon after taking office.SYRIZA almost doubled its share of the vote since the previous election on May 6.

NEWS,18.06.2012

Greek leaders seek coalition, want to ease bailout

Greece's conservative leader has pushed for a new coalition government after a narrow election victory, pledging to soften the debt-laden country's punishing austerity programe despite opposition from Germany.A brief relief rally on international financial markets after Sunday's Greek vote quickly fizzled out as it became clear that Antonis Samaras's New Democracy had failed to win a convincing popular mandate to implement the deep spending cuts and tax increases demanded by the European Union and the IMF.Radical left-wing bloc SYRIZA and a host of smaller parties opposed to the punishing conditions attached to the $206 billion bailout won around half the votes cast, though fewer seats because the electoral system rewards the first placed party disproportionately.Samaras received a mandate to form a coalition government from the president today, but talks looked set to run into at least tomorrow. He said the country would meet its commitments under a bailout saving the country from bankruptcy and a dramatic exit from the euro zone.But Samaras added: "We will simultaneously have to make some necessary amendments to the bailout agreement, in order to relieve the people of crippling unemployment and huge hardships."Samaras met with SYRIZA's charismatic leader Alexis Tsipras, who ruled out joining the government, and with the third-placed PASOK Socialists, who did not commit. PASOK leader Evangelos Venizelos said negotiations "must be wrapped up" on Tuesday.The small Democratic Left party indicated it would be ready to support Samaras if the bailout deal could be softened.Greece's economy is forecast to contract 5% this year after shrinking 7% last year. Protests regularly choke the centre of Athens, some hospitals are running short of medicines, thousands of businesses have closed and beggars and rough sleepers are multiplying.During the election campaign, Samaras called for cuts in taxes, hikes in unemployment benefits, pension rises and two more years to meet fiscal targets.But Germany, already irritated at what it sees as the slow pace of Greek reform, ruled out more than minor delays to some targets in the rescue package - Greece's second since 2010.Chancellor Angela Merkel, speaking at a meeting of G20 leaders in Mexico, said any loosening of Greece's agreed reform pledges would be unacceptable and reiterated that Athens had to stick to the commitments it had already made.Germany says deal "not negotiable" Samaras voted in 2010 against the first $174 billion rescue because he thought it was too harsh. He now said Greece should have until 2016, not 2014, to meet fiscal targets set by under the bailout. Venizelos wants a further year to reform.German Foreign Minister Guido Westerwelle said the substance of the bailout agreement was "not negotiable", but he said creditors might be willing to offer some flexibility on timing for some of the targets, given the time lost in campaigning."We're ready to talk about the time frame as we can't ignore the lost weeks, and we don't want people to suffer because of that," he told German radio today.There was frustration in Berlin that Samaras had campaigned on a promise to renegotiate the bailout, given the scale of resistance among those stumping up the cash.European Central Bank Executive Board member Joerg Asmussen warned that extending the 2014 deadline for Greece to cut its budget deficit to below three percent of GDP would mean fresh money for Athens."I can only generally point out that if one is pressing to shift fiscal targets, one should be so honest to also say that as long as a country is running a primary deficit, extending the fiscal targets will automatically mean that there will be an additional external financing need," Asmussen said.With an emboldened SYRIZA bloc led by former communist student leader Tsipras at the head of a powerful opposition, the new government could face protests soon after taking office. SYRIZA almost doubled its share of the vote since a previous election on May 6, which produced stalemate.

US and EU haggle over trade barriers

The United States and the European Union, stung by past failures to liberalize trade, are struggling over how to tackle regulatory barriers in areas ranging from financial services to chemicals that pose the biggest obstacle to a transatlantic free trade pact.A joint US-EU working group is due to deliver interim recommendations this month on how to leverage one of the world's largest trade relationships to create more jobs on both sides of the Atlantic and bolster economic growth.Businesses both in the United States and Europe want Washington and Brussels to strike a deal that removes trade hurdles by requiring both to accept each other's consumer- and environmental-protection standards.They envision an agreement in which a car tested for safety in the United States would not have to be tested again in Europe, or a drug deemed safe by Brussels would not have to be approved by US government experts.There's a good chance the upcoming report from the team led by US Trade Representative Ron Kirk and European Union Trade Commissioner Karel De Gucht will be no more than a "stock-taking" of the talks so far, with the real meat of the recommendations in a final report near the end of the year.Peter Rashish, vice president for Europe and Eurasia at the US Chamber of Commerce, said he hopes for a forward-leaning document that sets the stage for ambitious talks that would begin when the final report is put out."We need a strong statement that a US-EU trade deal would be a big boost to jobs and growth, given the challenges both the US and the EU economy face right now," Rashish said.The United States and the EU have proven records of sealing bilateral free trade agreements, including deals each has struck with South Korea that some have suggested be used a template for a transatlantic pact.Also, tariffs on manufactured goods traded between the two economic blocs are generally low, and there are few sectors where dismantling the remaining tariffs would create political opposition to a pact. That has raised hopes a deal to eliminate the remaining duties could be struck quickly once talks begin.Drag on for years Even so, US and EU officials worry about launching negotiations that could drag on for years without success, such as the Doha round of world trade talks, which started in 2001 and never reached an agreement.A joint effort late in the administration of former President George W. Bush to eliminate European barriers to US poultry exports flopped so badly that the United States in frustration filed a case against the EU at the World Trade Organization."What you've got is a deep-seated suspicion on each side that the other side can't deliver," said Bill Reinsch, president of the National Foreign Trade Council, which represents major US exporters like Boeing, Caterpillar and Microsoft.Reinsch noted that the United States has disappointed the EU in recent talks on allowing foreign firms to bid on more US state and local government contracts."So there's this extensive poking around to figure what can be delivered," Reinsch said.Recent consultations have driven home how difficult it could be to address regulatory differences that impede trade in areas from food to chemicals to financial services, although both sides see a potentially big payoff from achieving that."What is really bothering companies on both sides of the Atlantic right now is not so much tariffs, but the duplication of regulatory requirements," a European official said.Those are harder to tackle because they involve regulators such as the US Food and Drug Administration, the European Medicines Agency and the European Food Safety Authority that are outside the purview of typical trade agreements."I think the regulatory piece is certainly the most challenging and I think we have to agree on what success would look like on regulatory matters" within the 18 to 24 months both sides hope it will take to reach a deal, Rashish said.That would probably require a recognition that some issues will still need further work after an initial free trade agreement is signed, he said.The US Chamber of Commerce has proposed starting with areas, such as autos, chemicals and pharmaceuticals, where the two sides have comparable, high-level standards to protect consumers and the environment but different specific requirements for The idea would be that after determining that US and EU regulatory regimes produce similar levels of protection, agreements would be reached to recognize each other's requirements in those areas as essentially equivalent, thereby removing them as barriers to trade, and setting a foundation for moving into additional areas, Rashish said.

NEWS, 14.06.2012.

Greeks pull cash from banks before election

 

Greeks pulled their cash out of the banks and stocked up with food ahead of a cliffhanger election on Monday (NZ time) that many citizens fear will result in the country being forced out of the euro.Bankers said up to 800 million euros ($US1 billion) were leaving major banks daily and retailers said some of the money was being used to buy pasta and canned goods in case of shortages, as fears of returning to the drachma were fanned by rumours that a radical leftist leader may win the election.The last published opinion polls showed the conservative New Democracy party, which backs the 130-billion-euro ($US160 billion) bailout that is keeping Greece afloat, running neck-and-neck with the leftist SYRIZA party, which wants to cancel the rescue deal.As the election approaches, publishing polls is now legally banned and in the ensuing information vacuum, party officials have been leaking contradictory "secret polls".Yesterday, one rumour making the rounds was that SYRIZA was leading by a wide margin."This is nonsense," one reputable Greek pollster said, on condition of anonymity. "Our polls show the picture has not changed much since the last polls were published. Parties may be leaking these numbers on purpose to boost their standing."The pollster said there was some consolidation, with voters turning to New Democracy and SYRIZA from smaller parties but the pool of undecided voters remained unusually large so close to the election and the result was impossible to predict.Both parties say they want Greece to remain in the single currency but SYRIZA has pledged to scrap the bailout agreement signed in March which has imposed some of the toughest austerity measures seen in Europe in decades.The European Union and International Monetary Fund have warned that Greece, which has only enough cash to last for a few weeks, must stick to the conditions of the bailout deal or risk seeing funds cut off.Euro or drachma dilemma New Democracy has been telling voters they must choose between the euro or the drachma, while SYRIZA promises to end the austerity measures imposed by Greece's international lenders, such as salary and pension cuts, that have driven many Greeks into poverty.Fears that Greece will collapse financially and leave the euro have slowly drained Greek banks over the last two years. Central bank figures show that deposits shrank by about 17%, or 35.4 billion euros ($US44.4 billion) in 2011 and stood at 165.9 billion euros ($US208.1 billion) at end-April.Bankers said the pace was picking up ahead of the vote, with combined daily deposit outflows from the major banks at 500-800 million euros ($US625 million to $US1 billion) over the past few days, and 10-30 million euros ($US12-36 million) at smaller banks."This includes cash withdrawals, wire transfers and investments into money market funds, German Bunds, US Treasuries and EIB bonds," said one banker, who spoke on condition of anonymity.Retailers said consumers were stocking up on non-perishable food while almost all other goods were seeing a huge drop in sales as cash-strapped Greeks have no money to spare in the country's fifth year of recession."People are terrified by the prospect of returning to the drachma and some believe it's good to fill their cupboard with food products," said Vassilis Korkidis, head of the ESEE retail federation."It's over the top, we must not panic. Filling the cupboard with food doesn't mean we will escape the crisis," he said.Supermarkets said they did not see a rise in profits as people spend less money. But sales of staples like pasta have gone up.A generation that suffered the deprivations of the Nazi occupation of Greece has traditionally raided supermarkets ahead of any impeding crisis, for fear people will go hungry. Their children have picked up the habit and are stocking up on basics."It's fear that is motivating people," said Anastassia Tzorbatzidou, mother of three, who says she has her shelves full. "When you have kids, it's better to have something."

Italy, France find common ground on crisis

 

The Italian and French leaders on Thursday found common ground on how to confront Europe's worsening debt crisis, emphasizing that budget discipline should not come at the expense of economic growth and calling for a region-wide move to boost market confidence.The leaders held their first bilateral meeting since President Francois Hollande took office last month as Italy's borrowing costs skyrocketed on concerns the country may be the next, after Spain, to need financial aid.The positions outlined by Italian Premier Mario Monti and Hollande, however, were at odds with those espoused by Chancellor Angela Merkel.Europe's crisis response `'has not been enough to protect the euro from market turbulence," Monti said. "We need to reinforce the weak points of the system" in both the real economy and finance. The two leaders agreed that focusing on growth does not mean abandoning budgetary discipline.`'But public account discipline is not enough to have growth, foster development and create jobs," Monti said.The two men also discussed launching eurobonds, jointly issued bonds that would spread debt risk that both support. Germany opposes the bonds out of concern they will lead to fiscal laxity.Monti pointedly noted that Italy and France have together contributed 40 percent of the eurozone's bailout funds to date, staking a claim for the legitimacy of their views.The need for action to boost market confidence in the euro was evident in the bond market movements on Thursday.Italy paid 5.3 percent to raise (EURO)3 billion ($3.76 billion) in three-year bonds from financial markets, up from 3.91 percent last month and the highest level since December.The high rate underscores how investors are increasingly worried Italy will be destabilized by market turmoil in Spain and might run into trouble servicing its debt as it wallows in a deep recession. Political wrangling over reforms has also raised questions over the government's ability to overhaul the economy.To boost confidence in the euro, Hollande said a solution must be forged not just between France and Italy, but with other countries ahead of a European summit on June 28."Growth is the first thing, the second is stability ... the third point is deepening euro monetary union," Hollande said.Monti's technocratic government came to power in November with broad, bipartisan support from political parties to reform the economy. However, lawmakers have in recent weeks shown signs of returning to the old Italian ways of political jockeying. Lobbies and some parties have pushed to water down some reforms.The lower house of Parliament passed a package of anti-corruption measures aimed at making Italy a more just society  something that Monti, a former EU competition commissioner, believes will help encourage more risk-taking and enterprise-building. After being bruised on labor reforms, Monti's government attached the package to three votes of confidence on the most contentions passages, all of which easily passed lower house votes. Despite the passage, there were many calls for changes when the Senate takes up the package  an indication of more political gridlock

NEWS, 06.06.2012.

European lender plants onus on euro zone governments

 

The European Central Bank today put the onus firmly on euro zone governments to solve the bloc's debt crisis, dashing expectations it could take near-term action despite saying the currency area's economy was under increasing threat.After the ECB left interest rates at 1%, President Mario Draghi said the bank was not open to trading with governments on the policy response to the crisis.Increasingly alarmed by signs Spain's banking crisis is opening a new front in the debt crisis, some in financial markets had hoped Draghi would signal a readiness for the ECB to take fresh action if euro zone governments take bolder action.Instead, Draghi said it was wrong for the ECB to fill a policy vacuum created by others and that there would be no quid pro quo between the central bank and governments."There is no sort of horse trading here," he told a news conference."Some of these problems in the euro area have nothing to do with monetary policy ... and I don't think it would be right for monetary policy to fill other institutions' lack of action."The respite the ECB bought the euro zone early this year by injecting over 1 trillion euros into its banking system with twin 3-year loan operations (LTROs) has faded, with borrowing costs for troubled countries such as Spain soaring again.Draghi played down prospects of any imminent third round of long-term money creation, saying LTROs and the ECB's dormant bond-buying programme were instruments that are in place but temporary and "not infinite"."The issue now is whether these LTROs would actually be effective," he said when asked about another round.Draghi said the decision to leave rates unchanged was taken by "broad consensus". He said a few members, but not many, of the bank had wanted a rate cut.The ECB has never before lowered its main refinancing rate below 1%. Berenberg Bank economist Holger Schmieding said it was an open question whether the ECB would cut rates in July."In addition, the ECB offered no hint today that it may re-activate its two most important non-standard measures, that is the 3-year long-term refinancing operations (LTROs) and the purchases of sovereign bonds," Schmieding said."This suggests that it would take a major further escalation of financial tensions for the ECB to go beyond a possible rate cut in July," he added.Draghi said markets tensions had not returned to the levels of late last year, when the ECB offered the 3-year LTROs, and stressed the euro zone was far from facing a situation like the one after the collapse of Lehman Brothers in September 2008.Although flagging the increasing threat to the currency area's economy, new ECB growth forecasts for 2012 were unchanged - in a -0.5 to 0.3% range. The prediction for the following year was barely changed either."The economic outlook for the euro area is subject to increased downside risks relating in particular to a further increase in the tensions in several euro area financial markets and their potential spillover to the euro area real economy," Draghi said.Markets were unsure how the ECB would react to a recent wave of weak economic data, knowing that the bank also wants to keep the pressure on euro zone leaders to tackle the crisis more effectively.The euro was steady at $1.25 after the decision, Europe's benchmark stock market was up 2% after a recent steep fall.Dilemma Jolted into action by Spain's banking crisis, EU leaders have started considering the form of economic union needed to make the bloc durable as well as more immediate measures to help Madrid.But that end-game is still months or years away and in the meantime investors view the ECB as the institution with the firepower to keep the crisis in check."For the time being, the ECB is sitting on its hands as the bloc's economy and financial markets deteriorate further," said Nicholas Spiro, managing director of Spiro Sovereign Strategy.

"The message from today's ECB meeting is a worrying one: any mutualisation of euro zone debt is a long way off yet credible interim measures to shore up confidence will not be forthcoming for the time being," Spiro added.In the run up to today's meeting, International Monetary Find chief Christine Lagarde said the bank had room to cut rates. Spain and other hard hit parts of the euro zone would also like the ECB to revive its bond buying programme to provide them with cover while they undertake planned repairs to their economies.Euro zone unemployment stood at a record 11% in April, business confidence has slumped and surveys of manufacturing have hit three-year lows, adding to conviction that the bloc's economy is set to drop back into recession.The bank's dilemma is that if does too much, pressure for government action falls. Yet if it does nothing, troubled sovereign debtors could find it harder and harder to finance themselves or maintain confidence in the banks that have bought much of their debt.Draghi said the ECB would continue to supply euro zone banks with all the liquidity they ask for at least until January 15 next year. It had said in October it would give euro zone bank unlimited access to central bank funding at least until July 10.Before the crisis, the ECB allotted a certain amount in its refinancing operations for which banks had to put in bids. Since the crisis began, the ECB has extended the maturity of such operations to as long as 3 years and has lifted funding limits.Most ECB watchers had expected it would keep its powder dry until after June 17 Greek elections and a crunch summit of EU leaders at the end of June, which Draghi and his colleagues hope will dispel any doubts about Europe's commitment to the euro.There are also growing signs that a decision on a bailout for Spain's debt-laden banks will have been taken by the end of the month.

 

EU seeks to shield taxpayers from bank failures

 

European officials proposed Wednesday a new system of financial regulations that aims to keep bank failures from costing taxpayers billions and bankrupting governments.Because many European governments are already overburdened with debts, rescuing their failed banks risks bankrupting some of them. Ireland has had to ask for an international bailout for that reason and investors fear Spain may be next.The banks, in turn, own huge amounts of their governments' bonds, which drop in value when investors lose confidence in the country's financial future. The result is that any fall in confidence in either the banks or the government tends to create a downward spiral requiring foreign financial aid.Under the European Commission's proposal, banks that posed no systemic risk to the stability of financial markets would simply be allowed to fail. Those whose failure did threaten to become unmanageable would be propped up in part by having unsecured creditors of the bank, such as bondholders and shareholders, take losses rather than having governments give them taxpayer money."We're going to break the link between banking crises and public budgets," said Michel Barnier, the European commissioner responsible for the internal market, as he outlined the measures in Brussels. "We don't want taxpayers to have to pay."If he ever achieves that, however, it will be too late to alleviate the current banking crisis afflicting Europe and one of its biggest economies, Spain, where banks are sitting on huge losses that the government cannot afford to plug. The Spanish government's borrowing rates are at painfully high levels around 6.25 percent on fears it will go bankrupt saving the banks.The Commission's complex proposal is not scheduled to take effect fully until 2018. In any event, it also needs the approval of the European Council, composed of the leaders of the 27 EU countries, and the European Parliament, and may be significantly altered in the process of gaining approval.At the moment in Europe there is no central regulator with the power to step in and force weak banks to ask investors for more capital to strengthen finances, or to break them apart and restructure them. There is also no central deposit insurance backstop, making it more likely that a bank failure would exhaust one country's fund to compensate depositors.In the United States, by contrast, state and federal banking regulators have the power to shut down failing banks. The Federal Deposit Insurance Corp. takes over the failed banks and sells their loans and deposits to stronger banks or private investor groups.And unlike in Europe, the FDIC guarantees deposits up to $250,000 per account. That prevents bank runs because depositors are protected if a bank fails.Barnier was at pains to emphasize that he had been working on the proposals for years, and they were not a response to the banking crisis in Spain or other recent bank bailouts.While Barnier said the new rules are necessary because so many banks operate across borders, he did not propose setting up a powerful central banking authority, as the Commission had suggested a weak earlier.Many analysts say Europe needs such a central banking authority, which would have the financial power to bail out banks anywhere in the eurozone, bypassing national governments that are often reluctant to admit the extent of problems in their domestic financial systems. It would also spread the cost of bailouts across multiple countries.The importance of such a measure was made clear in the U.S. bank bailouts in recent years. Insurer AIG, for example, failed financially and had to be rescued. Although it was incorporated in Delaware and headquartered in New York, neither state had to go bankrupt paying for the rescue. The burden was shouldered by the U.S. Treasury.Germany remains opposed to such a measure, however, fearing it will end up paying the bulk of bank rescues.Barnier's proposal is more likely to be welcomed in Berlin. He said it would strengthen the ability of national authorities to hopefully head off bank failures before they happen and to deal with them decisively when they do."If we're going to avoid in the future banking crises, each member state has to be equipped with the appropriate tools to take action in time, not when it's too late," Barnier said.All the national banking authorities would be operating with the same rules rules that would enable them to intervene early, require banks to draw up recovery plans, and even to dismiss the bank's management.If a bank was about to fail, national authorities would have the power to sell or merge the businesses, to create a temporary "bridge bank" to carry out essential functions, to separate good assets from bad ones, and to write down the bank's debts."The resolution tools will ensure that essential functions are preserved without the need to bail out the institution, and that shareholders and creditors bear an appropriate part of the losses," the commission said in an explanatory statement on the proposal.This last part having the bank's unsecured creditors take losses is being termed a "bail-in" in contrast to a taxpayer-funded bailout.Barnier acknowledged that the proposal would not have an immediate effect, but he said EU officials need to take both short-term and long-term actions to regain financial stability.Other measures that senior European officials have floated recently include creating a central deposit insurance scheme to reassure savers across the continent that their money will not disappear in case a bank runs into trouble. A key worry is that rumors of a bank failure might trigger a bank run, fueling panic that could spread across countries.