NEWS,07.08.2012

Why Financial Discipline Won't Save Europe and How Governance Change Might Do the Trick

 

The EU has taken a hesitant but crucial step towards its own integration and the survival of the Euro. Through the provision of bank guarantees, the vicious circle between latent currency instability and deposit runs may have been broken. Bankia may be relieved that it will not be run into the ground by Spaniards' fear of a Euro-exit.This solution might have been politically complicated, but it was not fundamentally difficult. And we all know that the deeper and more difficult issues remain. Press and politicians alike focus on fiscal integration and the need to revisit sovereignty and fiscal discipline. Some, mostly southerners, argue that an integrated Europe is worth the cost and adjustments. Others, mostly northerners, are concerned with the potential costs to themselves or the project's long-term viability and desirability. The European project risks becoming a zero-sum game edging towards disaster, and all seem to be forgetting an important point: The problems of the south are structural rather than fiscal.If we consult the OECD's statistics on hours worked per worker, we see that the country with the highest national average after Korea is none other than Greece, which has been steadily closing in on the top spot. The Netherlands comes last, with Germany just ahead. How can this be? Don't Greeks sip ouzo on the beach while the virtuous Germans build cars? According to the statistics, that is entirely wrong. If we look closely, we see that the real problem for Greeks  at least, those with jobs is not that they're work-shy. It's their monstrous public sector, which is inefficient, often corrupt, and prone to meddling with the allocation of productive effort in the private sector. In other words, Greece's problems are fundamentally structural. Its administration is bloated and hopelessly bureaucratic, unable to reform itself. The story of Greece is the story of a failure in governance.These structural problems, which cause tax evasion (and are often seen to justify it), are not unique to Greece. Spain's massive banking mess with the Cajas de Ahorros is due to local politicians' influence on banks, and their iniquitous links to property developers. Italy, too, suffers from nepotism, political clientelism and corruption. It is precisely this endemic southern European disease (most acute in Greece) that the EU can fix.The problem with structural reform is that it upsets established links, interests and routines. It goes against the grain of the political and administrative infrastructure. It is always part of political rhetoric, yet rarely translates into practice. So EU restructuring projects may offer the continent a unique opportunity to tackle this problem. In Greece, the troika (the EU, ECB and IMF) provide the ideal potential vehicle for something that the Greek public desires, but its politicians cannot (or will not) deliver. What Europe now needs is a union that helps reform the governance of weaker countries. It's not about wealth transfer, but about a set of changes that help us all. This might fly in the north, too. It's time to use the EU as an objective yet proactive arbiter who will help restructure weaker countries through greater transparency and the redesign of their administrations.The benefits are manifest, but change is alarmingly slow. Greece's story is a case in point. The last three years have seen little progress in structural reform, particularly in areas like administrative rationalization or tax evasion. Greece has been able to get away with disastrous "fiscally equivalent" measures where structural goals were not met, leaving the original problem intact. The EU task force is an overwhelmed and unwelcome band of mid-level European bureaucrats who speak Greek; what is needed is a focused group of senior change managers with a strong mandate. Neither resourcing nor expertise has been planned for administrative reforms. And while the troika now recognizes the problem, the new Greek government is poised to defend the crumbling public administration and its protégés. So what can be done? EU Task Forces such as those operating in Greece should not just support ministers with expertise. They should be empowered to identify governance issues, corruption and administrative failings and suggest solutions. They should be able to require for Key Performance Indicators to be published and support their digestible presentation. They should facilitate Greek-led initiatives to bypass or report corruption and cronyism, and their recommendations should not be merely consultative. But doing so not only requires Greek politicians play along and accept that mandate, but also means the EU has to change its ways and its people. Change managers and governance experts must replace polite bureaucrats with conservative reflexes.Europe has a future, and at the heart of it lies improving the governance of the south and borrowing from the achievements of the north. This will require a change of approach, so that we find those with the skill -- and the will -- to lead the change effort. Redesign and execution should be the target, and the World Bank's recent change of heart, now offering assistance to help rebuild Greece is welcome. Let's hope that northern European leaders will push in this direction. Southern Europe's citizens may eventually have something to be thankful for.

Cuba's aging population will test economic reform

The scene at Havana's Victor Hugo Park is unfortunately typical, with a handful of boys kicking a soccer ball through trees while dozens of gray-haired seniors bend and stretch to the urgings of a government-employed trainer.So few children, so many elderly. It's a central dilemma for a nation whose population is the oldest in Latin America, and getting older.The labor force soon will be shrinking as health costs soar, just when President Raul Castro's government is struggling to implement reforms that aim to resuscitate an economy long on life support."We must be perfectly clear that the aging of the populace no longer has a solution," Castro's economic czar, Marino Murillo, told lawmakers in an alarmed tone last month. "It is going to happen, and that cannot be changed in the short term. ... Society must prepare itself."The aging of Cuba's population has its roots in some of the core achievements of Fidel Castro's revolution, including a universal health care system that has increased life expectancy from 69 years during the 1960s to 78 today, comparable with the United States.Abortions are free and it is estimated that half of Cuban pregnancies are terminated. High university graduation rates, generally associated worldwide with low fertility numbers, have Cuban women averaging 1.5 children, below the rate of replacement.Cuba's National Office of Statistics says about 2 million of the island's 11 million inhabitants, or 17 percent, were over 60 years old last year. That's already high compared to Latin America as a whole, where the rate is somewhere north of 9 percent, extrapolating from U.N. figures from 2000.That U.N. study shows Cuba's population is aging even faster than that of China, which has forbidden couples to have more than one child. Cuba's rate would be typical in a wealthy European nation. But Cuba lacks the wealth to cope with it.The trend is accelerating, with the number of seniors projected to nearly double to 3.6 million, or a third of the population, by 2035. During the same period, working-age Cubans are expected to decline from 65 percent to 52 percent.The future may look a lot like Emelia Moreno. Still vigorous at 75 years old, she lives alone in a small apartment in Central Havana and spends much of her time at a neighborhood senior center that provides 1,000 retirees with medical attention, meals and social activities such as singing and dance classes."Cuba is fighting so that people of a certain age don't feel too bad," she said.But her only child left for the U.S. a decade ago, and she knows that one day she'll be completely dependent on the government because she has no family to take care of her when she cannot."I had heard people talk about how they felt empty when a family member left, but I had no idea," Moreno said, caressing a photo of her daughter, Yeniset.The graying trend can be traced partly to the country's weak economy, resulting in the loss of people such as Yeniset, an outflow of 35,000 per year as people seek opportunity in the United States and elsewhere.Research shows emigrants are increasingly women of child-bearing age, which compounds the problem, according to Alberta Duran, who was among the first to examine the aging trend before retiring from her post at a Cuban sociological research institute."The aging population has been turning into Cuba's biggest demographic problem since the 1990s," Duran said.By 2021, more Cubans will be leaving the workforce than entering, according to government projections.The contracting labor pool presents a challenge for Cuba's goal of making the country more productive and efficient without abandoning its policy of providing for everyone's basic needs. Officials aim to eliminate 1 million redundant government jobs and grow a non-state sector that, it is hoped, will account for 40 percent of economic activity compared with about 15 percent today."Reform becomes more difficult due to emigration,"said Sergio Diaz-Briquets,a Washington-based expert on Cuban demographics. "Those who leave are the youngest, best-educated and most ambitious."And with the ranks of seniors increasing, Diaz-Briquets said, resources that could be used to stimulate the economic project inevitably will have to be diverted to care for the elderly.Demographers agree that Cuba's population has topped out around 11.2 million, and negative growth will be the rule for the foreseeable future.Murillo, the economic czar, said authorities are studying measures for next year to try to stimulate fertility rates, but he did not give details."We are going to have a serious problem with the availability of a labor force," Murillo acknowledged.In recent years Cuba has implemented a number of measures for the aging, including an expanded denture distribution program and establishing "grandparents' circles" of elderly citizens who get together for activities and help each other out when the relatives they live with are at work.Authorities recently asked seniors to keep active later in life by rolling the retirement age progressively back from 55 to 60 for women and from 60 to 65 for men. Raul Castro himself is already 16 years past his golden-watch moment, at 81.Cuba recently allowed retirees to return to work and still collect their pensions. They're also being encouraged to join the class of small-business owners setting up shop under Castro's reforms, though experts say that idea has limited potential.Aging populations present difficulties for countries around the world, and attempts to spur birth rates have produced meager returns, Diaz-Briquets said.But he suggested that if Castro's reforms can create more opportunities for private enterprise, Cuba might be able to woo immigrants from countries where extreme poverty is rampant and homicides are skyrocketing, places where the Communist-run island's free health care and relative public safety might seem a good alternative."The situation in Haiti and some Central American nations will continue to be even worse than in Cuba," Diaz-Briquets said, adding that a post-U.S.-embargo Cuba could be even more attractive to potential migrants from those countries. "The way things are going, and assuming some more positive scenarios for Cuba, the idea doesn't seem that outlandish."

 

NEWS,06.08.2012

NY: Standard Chartered hid huge Iran trade

Standard Chartered Bank (SCB) was accused on Monday by New York state regulators of hiding $250bn in allegedly illegal transactions with Iran for almost a decade.The regulators accused the London-based global bank of "systematic misconduct" which might have allowed terrorists and criminals to gain access to the country's banking system.New York's Department of Financial Services threatened Standard Chartered with fines and possible suspension of its license to operate in the state, the hub of the US financial industry, if it could not explain the transactions which allegedly violated US sanctions on Iran.The bank was ordered to appear before the department on August 15 "to explain these apparent violations of law and to demonstrate why SCB's license to operate in the State of New York should not be revoked.""For almost ten years, SCB schemed with the Government of Iran and hid from regulators roughly 60 000 secret transactions, involving at least $250bn, and reaping SCB hundreds of millions of dollars in fees."The transactions involved major state-owned Iranian banks including the country's central bank.The regulator said Standard Chartered falsified records and obstructed oversight "in its evident zeal to make hundreds of millions of dollars at almost any cost."The transactions "left the US financial system vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes, and deprived law enforcement investigators of crucial information used to track all manner of criminal activity," it said.The department said its investigation into the bank's also included evidence of possible illegal transactions with Libya, Myanmar and Sudan while those countries were under US sanctions.

European shares touch 4-month highs

European equities touched fresh four-month highs on Monday, with investors shifting into financials from the more defensive drug makers and food producers after the European Central Bank (ECB) opened the way for measures to fight the euro zone debt crisis.ECB President Mario Draghi last week laid out plans to buy bonds to lower borrowing costs for Spain and Italy. Although the plan was heavily conditional and markets were originally disappointed by the lack of immediate intervention, the prospect of eventual action has since helped drive down sovereign bond yields and boost risk appetite."He put enough in place to tide the market over for the next few months. He said he would be introducing more information over the next few weeks... so you can easily get caught offside by making the wrong decision," said Kevin Lilley, European equities fund manager at Old Mutual Asset Managers."My overweight position is in financials and the good thing is that financials are outperforming the cyclicals ... He is showing that he will take the necessary action, so I think people will become less risk averse as time progresses."Eurozone banks added 0.8%, taking their rebound over the past two weeks from an all-time low to around 21%, while insurers gained 2.4%. Other cyclical sectors, such as autos also outperformed, while healthcare and food sold off as investors adopted a more pro-risk stance in their portfolios. The improved sentiment helped the pan-European FTSEurofirst 300 was up 0.2% to 1083.22 by 1016 GMT, hitting levels not seen since early April after rallying 2.5% on Friday and posting its ninth consecutive weekly gain.The STOXX 50 index of euro zone bluechips rose 0.5% to 2,384.50, and technical strategist at SEB said more gains could follow."An alternated wave count points towards possible further gains up into the 2,422/2,499 Fibonacci projection area," they said in a note, highlighting resistance at 2,398 ahead of that.Germany's DAX, up 0.6% at 6,906.50 points, made its way towards the psychologically key 7,000 mark, above which it has only traded in two months since last August.Trading on the Spanish bourse was halted due to a technical glitch, but Italy, another possible beneficiary of ECB action, outperformed other major markets with a 0.8% rise. Some sign of an easing of nerves in the crisis was industry numbers showing Spanish and Italian equity funds posted their biggest weekly inflows since the first quarter of 2011 last week, even as Europe as a whole saw outflows.With policymakers signalling a willingness to backstop markets, strategists at Nomura suggested playing the market through the 'value' style."We still see room for inexpensive, under-owned risk assets to outperform in the second half ... Value in the global equity space is robust and capturable, leading us to continue emphasising a fairly cyclical, and higher-beta (1.2) global Focus List," its strategists said, highlighting stocks including car maker Daimler and miner Rio Tinto.Euro zone woes, however, continued to resonate through the second quarter earnings season, with 50% of European companies missing expectations to-date against just 29% of U.S. ones, according to Thomson Reuters StarMine. Companies that make money outside Europe outperformed, with Richemont topping the gainers board on Monday after the Swiss-listed luxury goods maker said its first half net profit could rise by as much as 40% thanks to strong demand from Asia and emerging markets.

Waiting in Vain for the Quick Fix

 

Investors are awaiting the miraculous delivery from crisis by the ECB and the Fed, but they are waiting in vain. The economic problems in the U.S. and Eurozone are mostly structural, not monetary. Unfortunately ideologues and politicians on both sides of the spectrum are interested in quick fixes rather than the real groundwork of economic progress. Consider the new U.S. unemployment announcement. If you are a college graduate, there is no employment crisis. 72.7 percent of the college-educated population age-25 and over is working. The unemployment rate is 4.1 percent. Incomes are good. If you have less than a high-school diploma, however, you are barely scrapping by. Only 40.4 percent of those without a high-school diploma have a job. Their unemployment rate is 12.7 percent. Incomes are too low to make ends meet. There are two Americas: the college-educated crowd that may have taken a hit in their retirement accounts, but who are generally doing well. Then there are the rest, around 60 percent of the population, who are increasingly dropping out of the middle class. Nearly one-half of American households are now classified as low-income, within twice the poverty line. Most observers other than the ideologues and economists can see why this is so. Those at the top have been favored in three ways during the past 30 years. The ongoing digital revolution has been their friend, adding heft to the knowledge economy. The globalization of trade has brought a surfeit of low-priced consumer goods (including the computers and smart phones that are their daily companions). And the money-fed political system has ensured a stream of political favors for the affluent: low tax rates, offshore tax havens, financial deregulation, mere hand-slaps for corporate abuse, and more. The rest of the labor force, however, is hurting. The digital revolution has automated millions of jobs. Globalization has offshored millions more jobs. And politics has increasingly neglected the bottom half of the population. The bottom half are fodder for TV-based campaign propaganda but not for policymaking. Tax cuts at the top are paid for by budget cuts on education, environment, and infrastructure. The Democrats are slightly better than the Republicans on this count, but the practical as opposed to rhetorical differences should not be exaggerated. And then there are the three miracle cures. Keynesians propose to solve the unemployment problem by another dose of temporary deficit-financed stimulus. The approach doesn't work. A stimulus might at best create another temporary construction bubble. Yet the effect would be at best temporary and the hangover would again be serious. In practice, the outcomes of stimulus packages are even more meager. The temporary tax cuts and transfer payments in the recent Obama packages have been more saved than spent, adding to public debt rather than to aggregate demand even in the short term. Quantitative easing by the Fed is a similarly weak salve. Monetary easing can potentially stoke more asset bubbles large and small, but cannot solve structural problems. Arguably the monetary hangovers are as bad as the fiscal hangovers. We are, after all, still digging out from the Hayek-type crisis of misplaced investment in real estate caused by excessive liquidity expansion during the past decade. Tax cuts combined with budget cuts are the third miracle cure: the idea of getting government "out of the way" to let the private sector lift the economy out of its doldrums. The absurdity is that this policy is that it's the opposite of what's needed to overcome a structural crisis of insufficient education and job skills. Poor kids need society's help, not its neglect. The Eurozone of course has its own added structural challenges. When German banks over-lent for most of a decade, and Spanish, Greek, Irish, Portuguese and Italian banks over-borrowed, the boom-bust cycle crossed national boundaries. ECB President Mario Draghi cannot solve the basic political problem that resulted. Southern Europe's debts need to be written down, and owners of German banks need to bear the losses. If that means that the German taxpayer ultimately must pay to recapitalize the banks, then so be it. A few northern European countries have successfully avoided the deep structural problems. They've done this not through monetary, Keynesian, or tax-cut policies, but by ensuring that every child receives a decent education and skill training, no matter whether they are born poor or rich. Families are backed by generous family support of various kinds. Active labor market policies promote school-to-job transitions. Therein lie the successful formulas of the German social-market economy, Scandinavia's famed social democracies, or the Netherland's polder model. In all of those countries, ample public financing levels the playing field across households. Structural crises between the haves and have-nots have been contained even as market forces have tended to widen income and skill inequalities. So where does that leave the U.S. and Europe in macroeconomic policymaking? The U.S. needs long-term public investments -- in education, skills, and infrastructure -- so that its dual economy can once again become an inclusive middle-class economy. Out kids should be in school and training, rather than in unemployment or low-skilled work. The Eurozone needs debt relief, cleaned-up banks, and social inclusion in the south that matches the more successful north. The entire rich world needs to understand that it faces a new era, in which its growth will be earned the hard way, by having sufficient skills and technology to warrant a significant wage premium over the emerging economies. And all countries rich and poor will need to plug two more structural holes. The first is the explosion of tax havens, the kind where Mr. Romney reportedly keeps his savings. Without adequate taxation of corporate and high-end income, there is no way to close budget gaps in the U.S. and Europe. The second is ecological. No economic trick, no amount of education and training, will suffice, if we do ourselves in by human-induced droughts, heat waves, famines, and floods. It's time, in short, to put away the gimmicks and to start thinking about the sustainable economic prosperity, built on education, skills, social inclusion, and environmental responsibility.

, Business News

NEWS,05.08.2012

Monti fears Europe could tear apart

Italian Prime Minister Mario Monti has voiced fears that tensions sparked by the eurozone crisis have already turned countries against each other and must not be allowed to rip Europe apart.Asked about resentment in Italy towards Germany and complaints of German arrogance in its handling of the debt crisis, Monti told Monday's edition of the German news magazine Der Spiegel that he was "concerned".He said he had talked about growing resentment in Italy not only towards Germany and at times Chancellor Angela Merkel but also towards the EU and the euro, with Merkel herself, according to an advance copy of Der Spiegel.But he said the problem went far beyond the relationship between Germany and Italy."The pressures, which have accompanied the eurozone in recent years, already bear the traits of a psychological breakup of Europe," Monti said. "We must work hard to contain it."And he warned that if the euro became a reason for Europe to drift apart, "the foundations of the European project" would be destroyed.The Italian prime minister also said he welcomed comments by the European Central Bank last week that the government bond market, where Italy and Spain's borrowing costs have soared, was distorted.The problems behind this, he said, must be quickly resolved to prevent further uncertainty about the ability of the eurozone to deal with the crisis.He also called on government chiefs to maintain clear room for manoeuvre in relation to their national parliaments. "If governments were to let themselves be bound completely by the decisions of their parliaments without maintaining their own scope for negotiation, Europe is more likely to break up than see closer integration," he warned.

Cayman Expat Tax: Haven's Planned Fee Could Damage Country's Economy

 

One among thousands of lawyers, accountants and other workers from around the globe, Paul Fordham is escaping cold weather and the taxman by working in a sunny British territory in the Caribbean. He and many others, however, worry they soon may be looking for another haven.The Cayman Islands have lost some of their allure by proposing what amounts to the territory's first ever income tax. And it would fall only on expatriate workers like Fordham who have helped build the territory into one of the most famous or, for some, notorious offshore banking centers that offer tax advantages for foreign investment operations."The discriminatory nature of the tax has stirred up so much uncertainty for people who moved here thinking they knew what they were getting into," said Fordham, an insurance sector specialist from the London area who moved to the main island of Grand Cayman 6 1/2 years ago. His recent attempt to sell his house collapsed because an interested buyer was spooked by the prospect of the islands' first direct tax.In the seaside capital of George Town, where financial experts in casually elegant clothes unwind over beer or white wine, conversations have been about little else since July 25, when Premier McKeeva Bush declared his intention to impose a 10 percent income tax on expatriate workers as part of an effort to bail the government out of a financial hole.Bush refuses to call it a tax, preferring instead to dub it a "community enhancement fee." The 10 percent payroll levy, as things stands now, will be imposed Sept. 1 on expatriates who earn more than $36,000 a year.It's a monumental shift for the territory of 56,000 people where zero direct taxation, friendly regulations and the global money they lured in recent decades helped transform the economy of the island chain, a dependency of Jamaica until 1959, from a reliance on seafaring, fishing and rope-making.Government data show 91,712 companies were registered as of March 2011. A total of 235 banks, including most of the world's top 50 banks, held licenses at the end of June as did 758 insurance companies. Assets for the registered companies totaled $1.607 trillion last September, down from $1.725 trillion a year earlier.Bush says the tax is necessary to meet British government demands that the territory diversify its sources of revenue beyond the fees and duties it now relies on, that have left his administration with a budget deficit."This is not an us-and-them story, no matter how many screaming headlines call this an expat tax," Bush told a crowd of critics and supporters late Wednesday during a four-hour meeting in a school gym, where each side vented complaints against the other.Opponents argue that a social contract may have been broken by targeting only the roughly 5,875 expatriates who are paid more than $36,000 a year, saying it could drive some away and hurt the financial services and tourism sectors that are now the pillars of the Caymans' economy. Government reports say a majority of the wealthiest residents are Cayman citizens.Numerous competing tax havens, from Jersey to the British Virgin Islands, impose income taxes on workers, but not on one sector of the population. Under a controversial "rollover" immigration policy, expatriates in the Cayman Islands already are required to leave the islands for a year after living and working locally for a period of seven years.Richard Murphy, director of British-based policy consultants Tax Research LLP, thinks fears are overblown that a direct tax on expatriates will cause an exodus."The finance industry in Cayman exists to sell to foreigners, and, like it or not, many are heavily invested in Cayman structures. They'll bear the additional price," Murphy said in an email.But leading businessmen argue that indirect taxes such as work permit fees, stamp duty on real estate deals and duties on imported goods already make the Caymans a relatively pricey place to do business. Work permit fees are typically 5 percent to 15 percent of salary and would remain along with the income tax, raising an expat worker's tax costs to between 20 percent and 30 percent of salary.Anthony Travers, chairman of the Cayman Islands Stock Exchange, described the tax plan as "probably the single greatest existential threat to the Cayman Islands in over 200 years.""The whole economic structure in the Cayman Islands has been based on having no direct taxation," he said in a phone interview.Many people complain that Bush's proposal was made without public consultation and note that it came roughly three years after a government-commissioned report said a payroll tax combined with the work permit fees would make the Caymans less competitive in the market for skilled professionals.And it's not just finance types who are troubled. At a small beach in downtown George Town, local fishermen gutted glistening jacks and snappers debated the merits of the new tax. They agreed that overspending and excessive hiring by the government was behind the islands' financial difficulties."The way I see it, this tax on expats is causing a division in this society and that's not good. It's too much spending by the government that got us here," said fishing boat captain Dennis Downs, sitting next to a table displaying the morning catch.Bush said he is looking for any feasible alternative for solving the government's revenue problems and rumors are swirling that he may withdraw the tax proposal because of the heated reaction.On Saturday, he told local TV station Cayman 27 that he was open to recasting the "community enhancement fee" on expats but only "if a solution can be found that does not affect ordinary Caymanians."Even if it is revoked, some believe damage has already been done."It has stirred up so much uncertainty," said Fordham. "It's hard to say if this place could ever be the same."

Venezuela Presidential Elections: Thumbprint Readers Stir Vote Fairness Fears

 

With President Hugo Chavez in his tightest re-election race yet, some of his opponents are warning that the use of thumbprint readers at Venezuelan ballot boxes could scare away voters, adding to fears about the fairness of the Oct. 7 vote.The country's electoral council has long used fingerprint scanners at the entrance to polling places to ensure voter identification. But this year, the readers will be hooked to the electronic voting machines themselves. Citizens must press down a thumb to activate the ballot system.Many say they fear that could let the government know how each person votes."If the thumbprint makes the machine work, how do you know it doesn't end up being recorded who you voted for?" asked Jacqueline Rivas, a 46-year-old housewife.Experts say there is no evidence the system has ever been used to reveal voters' preferences, and most opposition leaders, who stand to suffer if supporters don't vote, have been eager to assure the system is safe.But worries have persisted. Many Venezuelans say they see a pro-Chavez bias in the National Electoral Council and remember a previous scandal in which the names of Venezuelans who petitioned to recall Chavez in 2004 were publicly leaked. Hundreds of people alleged they were fired or suffered discrimination after their names turned up on the so-called "Tascon List," named after a pro-Chavez lawmaker who released it.Chavez later urged supporters to "bury the list" and put it behind them.Worries about the government obtaining the names of anti-Chavez voters led the opposition to destroy many lists of voters after a February primary, flouting a Supreme Court ruling that the lists should be turned over to the electoral council."A government that has fired people for thinking different, for voting different, that drew up the Tascon List and that puts out thumbprint machines, that puts in people's minds ... makes them fear the thumbprint," said Ramon Muchacho, an opposition politician.Opposition presidential candidate Henrique Capriles and his campaign aides have sought to assuage fears, saying that they are sure voters' choices will remain secret and that no one should cave to any government attempts at intimidation.Others who question the thumbprint readers include the vote watchdog group Sumate. Ricardo Estevez, the group's executive director, said past checks of the system have shown that safeguards are in place to ensure secrecy. "But the problem is the perception," Estevez said.When a voter presses a thumb to the reader, the image is instantly checked against a government database of thumbprints, which are collected when citizens apply for national identification cards.The National Electoral Council has been touting the system in television ads that show a smiling man pressing a thumb onto the screen as a voice assures voters that the automated identification system is a "secure key to vote."Sumate and other critics question how effective the system is, pointing to the statements by election officials that the thumbprint data are incomplete and saying the voter rolls haven't been audited to weed out errors and duplicate registrations.Diego Arria, a Chavez opponent who is a former Venezuelan ambassador to the United Nations, said the thumbprint system won't ensure that each voter casts only one ballot. "But it will work for something, and it's the fundamental aim: to intimidate voters."In addition to public employees who may fear for their jobs, there are also more than 1 million Venezuelans who have given their thumbprints when they applied for public housing, Arria said. "It serves to scare them."Even critics who say they're confident the vote will remain secret worry about the fairness of the election campaign, saying the electoral council tilts in Chavez's favor.Four of the five members of the council are either Chavez allies or perceived as favoring the president. The National Assembly, where Chavez backers have long held a majority, appoints the council members, who include a former congresswoman from Chavez's party and a former minister in his Cabinet. The council's former chief, Jorge Rodriguez, is now Chavez's campaign manager.The council has largely ignored opposition complaints that Chavez is hogging campaign airtime and abusing his presidential authority by regularly forcing all Venezuelan TV and radio stations to interrupt programming for his marathon speeches.Last week, council Vice President Sandra Oblitas accused Capriles of "contempt of the electoral authority" for ignoring council warnings about using a baseball cap with the colors of the national flag. Campaign regulations ban use of the flag's colors in electoral propaganda, but Capriles maintains he has done nothing wrong."In Venezuela, there's no electoral referee. There's a ministry of elections of the regime," Arria said. "When such a sophisticated system is put in their hands, it makes it more dangerous. "Tibisay Lucena, the president of the electoral council since 2006, insists the body is fully independent and defends the country's automated voting system, which also involves manual auditing of paper receipts printed out by the ballot machines."The Venezuelan electoral process is one of the most audited in the world," Lucena told reporters recently. "We have controls that make impossible any attempt to interfere with the public will."Capriles has been trailing in the polls, though the margin has varied widely in surveys. The Venezuelan polling firm Datanalisis found Chavez with a 15-point lead in one June poll, but also said 23 percent were undecided or didn't reveal a preference. The poll had a margin of error of nearly 3 percentage points."Beyond the automated system and other factors, we have no doubt that if we have low abstention and the presence of witnesses in all the voting centers, we're going to win," said Teresa Albanes, who leads the opposition's election commission.

NEWS,04.08.2012

Spain creeping towards full bailout

Spanish Prime Minister Mariano Rajoy inched closer today to asking for an EU bailout for his country, but said he needed first to know what conditions would be attached and what form the rescue would take.His comments, at his first post-cabinet meeting news conference since taking office last December, came a day after the European Central Bank signalled it was preparing to buy Spanish and Italian bonds but only after EU bailout funds were triggered and countries had asked for help.A source said separately that Spain would not decide whether to apply for several weeks.Buying bonds and providing aid would all be designed to bring down what have been prohibitive borrowing costs in the indebted countries.Rajoy said he was ready to do what is best for Spain, going far further than he did on Thursday when, during a press appearance with Italian Prime Minister Mario Monti, Rajoy three times declined to say whether he would seek the aid."I will do, as I always do, what I believe to be in the best interest of the Spanish people," Rajoy said yesterday."We still don't know what these measures are," he said, reference to a comment by ECB President Mario Draghi that the bank was examining non-conventional measures to defend the euro."What I want to know is what these measures are, what they mean and whether they are appropriate and, in light of the circumstances, we will make a decision, but I have still not taken any decision," he said.A source familiar with Rajoy's thinking confirmed this possibility was actively looked at and that Rajoy was ready to bear the political cost of a request.In a letter to Herman Van Rompuy on Friday, Rajoy urged the president of the European Council to work towards creating a euro zone-wide banking and fiscal union as soon as possible.He said he believed that the outline for a single supervisory system for the banking sector should be ready before the end of this year.Rajoy added he believed granting the European Stability Mechanism (ESM), the permanent bailout fund, a banking licence that would allow it to tap almost unlimited funds from the European Central Bank (ECB)ECB President Mario Draghi on Thursday said the fund was barred by European law from tapping the central bank for funding."In any case, whatever mechanism is put into place should be an umbrella mechanism, one that is applied equally to all the countries that meet its requirements," Rajoy said in the letter.Spain has already asked for aid for its stricken banks."People have said the main reason why he is not seeking help is because he is too proud. But this is not true. He requested an assistance for the banks because it was the adequate instrument to solve a specific problem. There is no opposition to do it again," the source said.An aid request would entail negotiating a memorandum of understanding with other euro zone countries and would likely bear strong conditionality, something Rajoy wants to discuss in detail before moving forward.Although Spain already complies with stringent EU and International Monetary Fund demands to reform its economy and has announced a package of 65 billion euros of tax hikes and spending cuts in July, the government fears it could now be asked to reform further the pension system.The measure is the last campaign pledge Rajoy has not been forced to break so far and could undermine even more the support for the government after it already fell sharply in recent weeks as hundreds of thousands of Spaniards took the streets to protests against austerity steps.A euro zone official told Reuters last week Spain had for the first time conceded at a meeting between Economy Minister Luis de Guindos and his German counterpart Wolfgang Schaeuble it might need a full bailout worth 300 billion euros if it's borrowing costs remain unsustainably high.Rajoy's office however denied that talks on this issue had taken place.People who discussed the question with Rajoy explain that he may still hope to avoid making the request because he thinks by just knowing that the EU rescue funds and the ECB are geared up would be enough to shield Spain from market pressures."The thinking is that the instruments need to be in place and possibly the risk premium will go down so much that there will be no need to go any further," said one senior politician.

Euro Crisis 2012: Greece Reportedly Saved From Bankruptcy By European Central Bank

 

The European Central Bank (ECB) has saved Greece from bankruptcy for the time being by securing it interim financing in the form of additional emergency loans from the Bank of Greece, German newspaper Die Welt said on Saturday.The ECB's Governing Council agreed at its meeting on Thursday to increase the upper limit for the amount of Greek short-term loans the Bank of Greece can accept in exchange for emergency loans, the newspaper said in an advance copy of the article due to appear in its Saturday edition.Until now the Bank of Greece could only accept T-Bills up to a limit of 3 billion euros ($3.70 billion) as collateral for emergency liquidity assistance (ELA) but it has applied to have this limit increased to 7 billion euros, the daily said, citing central bank sources.The ECB Governing Council gave this wish the green light, the paper said.The move should enable the Greek government to access up to an extra 4 billion euros of funds, the paper said, adding that this should ensure the country keeps its head above water until the "troika" of the European Union, the European Central Bank and the International Monetary Fund decide on the disbursement of the next tranche of money from its aid program in September.The ECB declined to comment, the paper said.

NEWS,03.08.2012

Argentina shows Europe how it's done

Bond payoffs are supposed to be boring, but Argentina's president is celebrating Friday's final $2.3bn payment on a bond given to people whose savings were confiscated a decade ago, calling it a lesson for European countries now mired in foreign debt. The nation's economic disaster left thousands with a grim choice after the government seized their dollar-denominated deposits to stop bank runs in 2002. They could switch to devalued pesos and regain access to what was left of their savings, or accept a piece of paper promising to repay the money in dollars over the next 10 years. Few had any faith in the government's promises back then. Argentina had just defaulted on more than $100bn in foreign debt, banks were shuttered, the economy was in ruins and streets were filled with pot-banging protesters whose chants of "throw them all out" would send five presidents packing. But Argentina has mostly paid up after all, making good on 92.4% of that defaulted debt so far, including $19.6bn in US currency over the years to cancel the Boden 2012 bond. Most of the hard-luck account-holders later sold the bonds at a loss, but as the government makes its last $2.3bn payment on Friday, the few stalwarts who kept the faith have been made whole, while earning a modest 28% profit over the years. "It was good business" for anyone who got the bonds early and held them, said Jorge Oteiza, a bond trader with Banco Comafi in Argentina. "To have the same buying power you had back then isn't bad." President Cristina Fernandez praised her government for meeting its commitments and blamed multinational financial institutions for the debt crises that afflicted Argentina back then and threaten Europe today. "This is the money that the banks should have returned to the Argentine citizens," she said during a national address from the Buenos Aires stock exchange Thursday night. Showing charts and rattling off numbers, she argued that her government has shown the world how to emerge from default without imposing austerity measures, growing its economy and strengthening the social safety net. This debt relief "has given us an immense independence from the activity of the market," she said to applause from the hundreds of guests she had invited onto the exchange floor. Argentina's foreign-currency debt has dropped from a daunting 166% of GDP at the end of 2002 to a more manageable 42% of GDP at the end of 2011, said Ramiro Castineira of the Econometrica consulting firm. "If before it was a burden to shoulder, now it's just a handbag. It doesn't restrict the economy as it did in the past," he said. However, the debt has grown in nominal terms during the same period, from $137bn to $179bn. Many economists suggest the official story is misleading at best, since the government has refused to pay billions of dollars in other bad debts while borrowing freely within Argentina, taking money from pension funds, provinces, state-owned banks and the central reserve to stimulate the economy and reduce its foreign debt exposure. In her determination to make Argentina financially independent, critics say Fernandez has only shifted the debt burden onto her citizens, imposing terms that could stunt the country's future growth. For example, the government promised to pay negative 0.25% interest over ten years for the $27.9bn it took from the treasury for debt relief, the central bank said. "It's wonderful to see Argentina pay down debt, but for every dollar they're paying down, they're borrowing two or three through the other window, and increasingly from their own people," said Arturo Porzecanski, an expert on emerging markets at American University in Washington. Economy Minister Hernan Lorenzino proudly described the Argentine recipe in a column Wednesday published by Telam, the government news agency: Spurn the requirements of the International Monetary Fund and World Bank. Strong-arm the so-called "vulture funds" into accepting lower returns on their risky bets. Nationalise private pension plans, the airline and now the YPF oil company, putting their assets to use creating jobs. And tap central bank reserves to pay down international debts. Frozen out of international markets as a consequence of the 2002 default, this government made breaking their rules a point of pride, Lorenzino suggested. "At first, they called us heretics and the international community turned its back on us," he recalled. But "this government makes policies today without conceding to international pressure, thinking first of those on the inside, and later on those outside." Lorenzino has said this government will not take on more international debts. Not that it could: Friday's payoff still doesn't resolve nearly $7.5bn it owes the US and other Paris Club nations, or the $11.2bn claimed in US courts by bond holdouts. Argentina also owes millions in court judgments to US companies, and Spain's Repsol Group wants $10.5bn for its shares in YPF that Fernandez expropriated this year. Many of these investors would try to seize any newly borrowed money before it reaches Buenos Aires. Lorenzino suggested that Argentina's renegade approach makes it better prepared to confront global crises because the portion of its debt held by the private sector has dropped from 124% of GDP a decade ago to 14% last year. "This was possible only under the concept of economic independence, political sovereignty and social justice," Lorenzino wrote. But this shift from private to public debt means that the government is essentially borrowing from Argentine taxpayers and bank account holders to stimulate its economy, at rates far below inflation, which is estimated at 25% a year or more. Unless this changes soon, the money could run out and there will be few other places to turn for help. "This is no longer an 'us-versus-them' problem," Porzecanski said. "At first they went after the big multinationals, then the 'filthy-rich bondholders,' then powerful institutions like the IMF. Now it has become a fight for financial resources within Argentina. That's why I think the end is coming."

 

A Better Job Report But Challenges Remain

 

When it comes to economic data, I have been dreading the employment report issued on the first Friday of every month. And I am not the only one.For the last few years, this release from the Department of Labor has signaled insufficient job creation. It has also pointed to an increasingly segmented labor market, where the highly educated and affluent do well while vulnerable segments of society see little improvement. In the process, the unemployment crisis has gotten more embedded into the structure of the American economy.So it was a major relief this morning that the July report was a lot better than prior ones.At 163,000, job creation came in ahead of consensus expectations of 100,000. Long-term joblessness fell from 5.4 million to 5.2 million. The employment gains were broad based in terms of sectors. And average weekly earnings rose slightly.This is all good news... and especially after way too many months of disappointments. Yet, and unfortunately, it is too early to relax.The report still contains flashing yellow lights; and the future is still too uncertain with respect to both domestic and international conditions.In July, the unemployment rate edged up slightly to 8.3% despite more Americans falling out of the labor force. In fact, the participation rate declined from 64.0% to 63.7%; and the employment-population ratio, which is the most comprehensive measure out there, slipped from 58.6% to 58.4%.Then there are the compositional issues. There was little relief for those who need it most, including too many Americans who risk slipping from being unemployed to being unemployable.For example, teenage unemployment rose from 23.7% to 23.8% while joblessness among those with less than a high school diploma increased from 12.6% to 12.7% (compared to a stable 4.1% for those with bachelor degrees and higher).Put these numbers together and what you get is a picture of an economy that is healing, but doing so gradually and unevenly.So much for the past and present; how about the future?Left to its own devices, the economy would continue to heal and, concurrently, job creation would accelerate. But will they?For the improvement in the labor market to continue and broaden, America needs to minimize the risk of derailment by three clear and present dangers: the reluctance of Congress to deal with the fiscal cliff, Europe's inability to get ahead of its crisis, and a possible geo-political shock emanating from Iran.In such circumstances, it would be reasonable to expect Congress to be giving the unemployment crisis the attention it needs and deserves. Our elected representatives should be working hard on ways to accelerate the economic healing and also minimize vulnerability to these potential shocks.Unfortunately they are too polarized to do so; and it looks like they won't until the November elections are behind them, at the earliest.So despite the latest monthly improvement, America's unemployment situation will remain a challenge. And many of us will continue to nervously await the monthly data releases.

NEWS,02.08.2012

 ECB signals bond-buying stint

The European Central Bank indicated today it may again start buying government bonds to reduce crippling Spanish and Italian borrowing costs but the conditions it set and the dissenting voice of its key German member disappointed markets.In the latest move to contain the eurozone crisis, ECB President Mario Draghi indicated that any intervention would not come before September - and only if governments activated the euro zone's bail-out funds to join the ECB in buying bonds."The Governing Council ... may undertake outright open market operations of a size adequate to reach its objective," Draghi told a news conference after the central bank's monthly meeting, using the central bank's code for bond-buying.The ECB kept euro zone interest rates at a record low 0.75 percent but Draghi said the council did consider a further rate cut on Thursday amid signs that an economic recession in peripheral European countries is spreading across the continent.A poll of nearly 50 economists after Draghi spoke found t hat most expect the ECB to start buying Italian and Spanish bonds in September and to cut rates t o 0.50 percent. .Draghi was under intense pressure from investors, European leaders and the United States to deliver on a pledge he made last week to do whatever it takes to preserve the euro by bringing high borrowing costs down.But shares and the euro fell after the ECB chief's remarks, and Spanish and Italian bond yields jumped, with Spain's 10-year paper vaulting over the 7 percent danger level."It is quite disappointing ... There is a lack of any action so he has basically passed the buck back on to politicians," said Ioan Smith, strategist at Knight Capital.Draghi said t hree ECB committees would now work on detailed methods of intervention and a decision on whether to go ahead would be taken at a later stage.If the central bank did step in to buy bonds, it would act to assuage investors' concerns raised when it asserted seniority over private bondholders by refusing to join a writedown on Greek debt this year, Draghi said. He did not say how.The ECB would also consider other "non-standard" measures to rein in the euro zone crisis, he said, hinting it might move to quantitative easing - or printing money - by not withdrawing all the money it creates to buy bonds.Unlike the U.S. Federal Reserve and the Bank of England, which have engaged in QE since 2008 by creating money to buy securities, the ECB has so far "sterilised" all its purchases by taking in an equivalent amount in interest-bearing deposits.The bank has already spent 210 billion euros buying bonds under its now dormant Securities Markets Programme (SMP) since May 2010, with limited effect, but Draghi said the new effort would be different in scope and conditionality.Any new ECB action would be focused on shorter-term debt and was conditional on euro zone governments using their bailout funds first, and on beneficiaries accepting conditions."Governments must stand ready to activate the ESM/EFSF in the bond market when exceptional financial market circumstances and risks to financial stability exist," he said.Italian Prime Minister Mario Monti said after talks with his Spanish counterpart Mariano Rajoy in Madrid that Draghi's statement marked "several steps forward", bu t it was premature to say whether Rome would apply for such help.Rajoy called the ECB decisions positive but repeatedly declined to say whether S pain would request an assistance programme, which he has so far resisted.The Washington-based International Monetary Fund said it welcomed the ECB's willingness to act."As we have also emphasised, monetary policy alone cannot solve the problems facing the euro area. But further monetary easing and unconventional support would ease tensions as other policies are implemented and take effect," an IMF official said.The ECB chief repeated that the euro was "irrevocable" and warned markets it was pointless to bet against the 17-nation single European currency. He also said the central bank was determined to counter any risk of "convertibility" - code for a possible break-up of the euro.But analysts were underwhelmed by his announcement of possible future action subject to conditions.Marchel Alexandrovich, senior vice president at Jefferies, added: "What Draghi has basically indicated is that the problem in the bond markets has to get considerably worse before the ECB steps in to help."The outcome of Thursday's ECB meeting mirrored Wednesday's U.S. Federal Reserve policy-setting meeting, which also dashed expectations of immediate new measures to revive the economy.The Fed stopped short of offering new monetary stimulus, though it signalled more strongly that further bond-buying could be in store to help a U.S. economic recovery that it said had lost momentum this year.ECB action is hamstrung by European treaty rules forbidding it from financing governments. Draghi said an ECB legal opinion had ruled out another possible "big bazooka" - giving the ESM bailout fund the right to tap ECB funds to boost its firepower.The ECB also has to find a way to get any measures past Germany, the euro zone's largest economy and its principal paymaster. The Bundesbank issues regular reminders of inflationary dangers stemming from bond purchases and the limits central banks face.Draghi said all members of the Governing Council endorsed Thursday's statement with one exception and he took the unusual step of mentioning Weidmann by name as the dissenter, suggesting he was prepared to outvote the German if necessary."It's clear and it's known that (Germany's) Bundesbank have their reservations about the programme of buying bonds. The idea is we now have the guidance, the monetary policy committee, the risk committee and the markets committee will work on this guidance and then (we) will take a final decision and the votes will be counted."Council members who have voted with Weidmann in the past, such as the Dutch and Luxembourg central bank chief and the German member of the ECB's executive board, did not side with him this time, suggesting the Bundesbank chief was isolated.But his acquiescence in ECB policy is widely seen as vital to preserve public support for the euro zone in Germany.

 

ECB Responds To Europan Recession, Debt Crisis By... Doing Nothing

Another day, another central bank failure.

The European Central Bank on Thursday stared a recession and financial crisis in the face and decided to do absolutely nothing about it. It was a page right out of the Federal Reserve's playbook, which on Wednesday stared a slowing economy and high unemployment in the face and decided to do absolutely nothing about it.Both banks hinted strongly at some sort of action coming after August, when Europeans come back from vacation. But then they have been hinting at action for months now, without taking any, so you can excuse financial markets for being a little disappointed."The lack of action from either the Fed or the ECB this week stands in stark contrast with their dour economic assessments," Marc Chandler, global head of currency strategy at Brown Brothers Harriman, wrote in a note. "The assessment and action will be brought into line, but not as soon as investors want."Just last week, for example, ECB chief Mario Draghi said his central bank would do whatever it took to save the euro. Apparently he just didn't mean they'd do it in a hurry or anything.The ECB kept its target interest rate on hold at 0.75 percent, or about half a percentage point higher than the Federal Reserve's own target rate. At a press conference, Draghi said the bank was preparing a plan to buy more European sovereign bonds to help ease funding pressures on Spain and Italy. But it also said those governments would have to ask for it first, preferably saying pretty please, with sugar on top. Spain and Italy could use the help sooner rather than later. At last check, Spanish 10-year bond yields had jumped back above 7 percent, a sort of Death Zone for government borrowing costs. You can't stay above that level for very long without needing a bailout. Italy's 10-year bond yield jumped above 6 percent, uncomfortably high.Investors fear the enormous economies of Spain and Italy will soon need bailouts, which could put a strain on all of Europe's finances. Such worries have brought manufacturing around the world, including in the U.S., to nearly a screeching halt.The response by policy makers has been noticeably lacking, marked by "Coordinated inaction by the world's leading central banks: The Fed, the ECB, the Bank of England, [Peoples Bank of China]," Wharton economics professor Justin Wolfers tweeted.In the Fed's possible defense, it has already slashed interest rates to nearly zero and launched multiple rounds of bond-buying. Some on the Fed worry the risks of further action outweigh the benefits. The ECB, meanwhile, is handcuffed by a single mandate, to worry endlessly about inflation, even when said inflation is non-existent. And the ECB has Germany, the continent's paymaster, looking over its shoulder and constantly pushing back against aggressive action.Draghi tried to put the ball back in the courts of the European politicians, all of whom are currently on vacation. Maybe while they're on the beach they're thinking hard about a dramatic fix to their problems, but history offers little reason to hope.Similarly, the U.S. Congress could take steps right now to help the U.S. economy, but again, history offers little hope.The only policy makers with free rein to do anything right now are the central banks, and they have taken the rest of the summer off.

Spain debt auction a success

Spain passed a key test on Thursday by easily selling €3.1bn of debt despite investors doubts that the European Central Bank will be in a position to help struggling eurozone economies when it holds its monthly meeting later in the day.Although the Treasury was forced to pay the second highest yield on its 10-year paper since the launch of the euro in 1999, analysts said the auction was solid in the current context. The cost of borrowing was nearly a full percentage point below the peak yield in the secondary market last week.The results lifted market sentiment, with the premium which investors pay to hold Spanish over German debt falling after the auction.Spanish bond yields, which had hit euro-era highs due to the possibility that Madrid would have to be bailed out, fell last week after President Mario Draghi said the ECB would do whatever it takes to save the common currency, within its mandate.But concerns that the ECB will now fail to meet the market's expectations when Draghi announces decisions of the Governing Council's monthly meeting at 12:30 GMT sent them up again in the last two days."The auctions were good, with better demand at the shorter maturities which looks to me like the auctions were driven by more short-covering demand," said Peter Chatwell, rate strategist at Credit Agricole in London."Certainly there is still a lot of doubt whether the ECB has the mandate to do anything which structurally tightens Spanish or Italian spreads."Sources have told Reuters that bold action - such as the ECB resuming controversial purchases of government debt issued by the most troubled eurozone economies to curb their borrowing costs - is at least five weeks away. However, Draghi may offer some clues on what is in the offing. On Thursday, Spain sold €.1bn of bonds, beating its target of €2bn to €3bn, though it paid higher rates than the last time the bonds were sold at a primary auction.The Treasury raised €1bn of the longer-dated, benchmark bond, due January 31, 2022, at an average yield of 6.647% compared to 6.43% when it was last sold in the primary market on July 5. The yield in the secondary market had reached 7.639 on July 24, before Draghi spoke last week.Demand was lower than the previous auction, with the bid-to-cover ratio at 2.4 compared to 3.2 a month earlier.A bond due July 30, 2014 sold €1.1bn at a yield of 4.774% and bid-to-cover ratio of 3.0. The same bond was last sold at a primary auction in March, 2011, at an average yield of 3.592%.A bond maturing October 31, 2016 sold at a yield of 5.971%, after 5.536% July 5. The Treasury sold €1bn of the paper which was 2.7 times subscribed compared to 2.6 times last month.

NEWS,01.08.2012

Record unemployment in eurozone

Joblessness in the eurozone hit on Tuesday its highest level since the single currency was born, a further sign of economic desperation as hopes erode that the bloc will be saved by its central bank this week.An additional 123 000 people were out of work in the eurozone in June, figures from Eurostat showed, bringing the unemployment rate to a record high 11.2% across the 17 countries that use the single currency.The rate hides wide divergences, with unemployment as low as 4.5% in Austria and as high as 24.8% in Spain, where a shrinking economy makes it ever more difficult to pay off debt.New data showed capital fleeing Spanish banks at a growing rate. Spain has come dangerously close to losing affordable access to financial markets, raising the prospect of a bailout that would swamp the euro zone's hastily erected defences. If Spain goes, Italy, with an economy twice the size, could follow.Eurozone leaders have spent the past week issuing statements promising to take whatever steps are necessary to rescue the currency, but none have raised expectations as much as Mario Draghi, head of the European Central Bank.His announcement last Thursday that the ECB would do whatever within its mandate to rescue the currency raised expectations that he will deliver forceful new steps this week to lower Spanish and Italian borrowing costs.But market sentiment has since soured, showing that investors doubt whether he can deliver.Germany, which says it is illegal for the ECB to bankroll government borrowing, squelched talk of any easing of its opposition to letting the eurozone's rescue fund borrow from the ECB so it could buy almost unlimited quantities of government bonds.Italian Prime Minister Mario Monti, who has campaigned for concerted action by the eurozone's rescue funds and the ECB to bring down ruinous borrowing costs for Spain and Italy, struck an optimistic tone."It is a tunnel but ... some light is appearing at the end of the tunnel. We and the rest of Europe are approaching the end of the tunnel," he told RAI public radio before talks in Paris with French President Francois Hollande.Monti said decisions taken at an EU summit last month were starting to bear fruit. "We are now seeing the results both in the willingness of European institutions as well as from the governments of individual countries, including Germany," he said.After lunching with Hollande, he said there was no time to lose and they had discussed deadlines, adding: "We cannot afford even a minute of distraction." The ECB's Draghi promise last week to act to preserve the euro raised investors' expectations of a resumption of a long-suspended government bond-buying programme. Investors are waiting to see what the ECB announces at a meeting of its policy-setting Governing Council on Thursday."Today will probably be a quiet last day of the month. Everybody is waiting for Thursday to see if Draghi can deliver," said Lex van Dam, hedge fund manager at Hampstead Capital, which manages $500m of assets."He'd better pull a big rabbit out of his hat."However, central bank sources cautioned against expecting dramatic action, saying bold moves could be at least five weeks away because other elements must first fall into place.They said Spain would first have to formally request a eurozone assistance programme, which it has so far resisted doing, and eurozone governments would have to agree to use their rescue funds to buy bonds in tandem with the ECB.Safe-haven German government bonds rallied on Tuesday and European shares fell as scepticism over the prospect of bold ECB action set in and Berlin repeated its opposition to a banking licence for the rescue fund. Monti, who will also visit Finland and Spain, said he was confident Spanish Prime Minister Mariano Rajoy would be able to tackle the country's problems.The scale of Rajoy's challenge was highlighted on Tuesday when figures showed that capital flight from Spain accelerated in May, the month when Madrid was forced to nationalise the fourth biggest lender, Bankia, and before eurozone countries agreed to help bail out Spanish banks. Capital outflows in the first five months of this year totalled €163.2bn - equivalent to about 16% of economic output. The same period last year saw a net inflow of €14.6bn.Spanish retail sales fell by 5.2% year-on-year on a calendar-adjusted basis in June, separate data showed, marking a 24th straight month of declines. Near-bankrupt Greece meanwhile reported that it is fast running out of cash as it awaits the next instalment of aid from international lenders. Deputy Finance Minister Christos Staikouras said that in the absence of €3.2bn needed to repay an ECB bond on August 20, Athens would lack the money to pay everyday public expenses ranging from police and other public service wages to pensions and welfare benefits."Cash reserves are almost zero," he told state NET television. "It is risky to say until when (they will last) ... but we are certainly on the brink."Speaking to reporters in London on Monday evening, Hollande voiced support for Monti's campaign to persuade euro zone leaders and institutions to act to reduce Italian and Spanish borrowing costs."European solidarity is of course about laying down discipline, but it's also about allowing countries that made hard choices to be rewarded with lower interest rates," Hollande said during a visit to the Olympic Games. "If countries undertake austerity measures and still have very high interest rates, how can they win the trust of their people?" he said.Monti spoke by telephone over the weekend with German Chancellor Angela Merkel, who is holidaying in northern Italy.Berlin agreed in principle at an EU summit in June that the eurozone rescue funds could buy bonds of countries that risk losing market access, but was angered when Monti said that such support should not entail any stricter economic conditions or international monitoring.There has also been renewed pressure from France, Italy and some central bankers to give the eurozone's future permanent rescue fund a banking licence so it can borrow money from the central bank to fight bond market contagion.The Sueddeutsche Zeitung said supporters of the idea were gaining ground in the eurozone, but the German Finance Ministry reiterated its opposition on Tuesday, sending markets down.A legal opinion commissioned by the ECB in March 2011 concluded that such a move would breach an EU treaty ban on monetary financing of governments. 

Eurozone factory downturn takes root

The eurozone’s manufacturing sector contracted for the 11th straight month in July as output and new orders plummeted, a business survey found on Wednesday. The data, which showed the downturn is deepening its roots in the core, will provide grim reading for policymakers who are battling to contain a debt crisis that has raged across the continent. Markit’s Eurozone Purchasing Managers’ Index (PMI) for the manufacturing sector fell to 44.0, the lowest reading since June 2009 and below a flash reading of 44.1 and June’s 45.1. The output index sank to 43.4, the lowest since May 2009, under June’s 44.7 and an earlier flash 43.6. Markit said it was in line with the official measure of production falling at a quarterly rate of over 1%. “The eurozone manufacturing sector’s woes intensified again in July. Manufacturing therefore looks to be on course to act as a major drag on economic growth in the third quarter, as the eurozone faces a deepening slide back into recession,” said Chris Williamson at Markit. After stagnating in the first quarter, narrowly avoiding a technical recession, a raft of gloomy data pushed economists in a Reuters poll last month to predict a contraction in the second and third quarters. In a bid to spur growth the European Central Bank cut interest rates to a record low of 0.75% in June and is expected to cut them again to 0.5% before the year is out. At its policy meeting on Thursday, it is expected to restart its dormant government bond buying programme with the aim of lowering Spanish and Italian government bond yields, which have reached levels unsustainable in the long-term. Bank President Mario Draghi vowed last week that “the ECB is ready to do whatever it takes to preserve the euro”.Earlier data from Germany, Europe’s largest economy, showed its manufacturing sector contracted at its fastest pace in three years last month and it was a similar story in neighbouring France. Spain, which slid deeper into recession in the second quarter, saw the 15th straight month of contraction, while Italy chalked up a year in contractionary territory. The PMI for Greece, where the debt crisis began, has been below 50 since September 2009. Ireland was the only country to show signs of emerging from the downturn, Markit said, where its PMI was above 50 for the fifth month. Factories across the eurozone cut prices at the fastest pace since early 2010, but the new orders index still fell to 42.8 from the previous month’s 43.5 and has only been lower once in over three years. New export orders were at an eight-month low. “The current weakness of global economic growth suggests that all producers face a challenging environment in export markets as well as at home,” Williamson said. Some of the output was generated by firms running down backlogs for the 14th consecutive month and workforces were cut for the sixth month to reduce costs. Unemployment across the bloc rose to a euro-era high of 11.2% in June, official data showed on Tuesday. 

Average UK home slumps to R2.12

House prices in recession-affected Britain slid in July on an annual basis by the biggest amount in nearly three years, a survey by major home-loans provider Nationwide showed on Wednesday.The average value of a home in Britain stood at £164 389 ($257 743, R2.12m) in July - down 2.6% compared with the same month in 2011, the lender said in a statement.They meanwhile dropped by 0.7% in July compared with one month earlier, it added."UK house prices declined for the fourth time in five months in July, with prices falling by 0.7%. This pushed the annual pace of price growth down to minus 2.6%, from minus 1.5% in June - the weakest outturn since August 2009," said Nationwide chief economist Robert Gardner."The weaker price trend observed in recent quarters is unsurprising, given the disappointing performance of the wider economy. Data released last week revealed that the UK recession intensified in the three months to July."