Wednesday, 30 November 2011

Greece must stay in euro, needs drastic reform: PM

ATHENS, Dec 01 ( - Greece needs to stay in the euro and realises its economy needs drastic reform, the country's prime minister said in a letter to international creditors in which he promised to stick to the terms of a debt reduction deal.

The European Union had demanded the assurance from Prime Minister Lucas Papademos, and similar written pledges from leaders of the two parties that back his coalition government, before releasing an 8 billion euro tranche of aid which Greece needs to avoid bankruptcy next month.

"The Greek people recognize the need for a major economic and institutional transformation and they overwhelmingly support euro area membership, which they perceive as crucial for the success of this effort," Papademos said in the letter he sent to the European Union, the European Central Bank and the International Monetary Fund on Tuesday.

"The government will take all measures necessary in order to implement the decisions of the Euro Summit of 26 October 2011 and achieve the objectives of the economic programme," he wrote in the letter, which his office sent to journalists on Wednesday. He referred to an October 26 EU deal to cut Greece's crippling debt.

"(The government) is determined to continue the process of fiscal consolidation and structural reform in order to secure sound public finances and improve the country's international competitiveness," he added.

EU finance minister agreed to release the 8 billion lifeline tranche on Tuesday after receiving the prime minister's letter.

Papademos, a former vice president of the ECB, was appointed by Greece's two major parties to lead a national unity government earlier this month, with the task of implementing the October 26 debt cut deal.

Disbursement of the 8 billion euro tranche remained in limbo, however, because conservative party leader Antonis Samaras initially balked at providing the written pledges the EU had demanded.

Euro zone membership is necessary for Greece to overhaul its economy, Papademos said, dismissing the view proposed by some economists that the country might be better off outside the single currency.

"Participation in the euro area ensures the preservation of price stability, promotes financial and economic stability and facilitates the implementation of the deep and broad reforms required for the revival of the economy," Papademos said in the letter. h.

Euro takes breather after rally, Aussie dips

 SINGAPORE: The euro stabilised on Thursday after rallying the previous day as major central banks acted together to ease a credit squeeze stemming from the euro zone's debt crisis, while the Australian dollar gave back some of its hefty gains.

The euro held steady at $1.3452, having jumped to a one-week high of $1.3533 on Wednesday after central banks of the United States, euro zone, Canada, Britain, Japan and Switzerland lowered the cost of dollar loans to the banking system.

Market players, however, are sceptical that this will be enough to spur a sustained rally in the euro and risky assets, since the joint action is aimed at easing symptoms of the euro zone's debt crisis rather than treating the cause.

"It may be effective in alleviating some of the excessive tensions in the money market. But the market still hasn't been shown any convincing steps aimed at solving the (euro zone's) debt problems," said Masahide Sato, vice president at Mizuho Corporate Bank's forex division in Tokyo.

"There could be a little more short-covering in the euro ahead of the year-end, but that may be all," he said.
The euro could rise toward $1.3600 or so by the end of December, Sato said, adding that one possible upside target might be the 55-day moving average that now comes in around $1.3622.

Currency speculators increased their net short position in the euro to 85,068 contracts in the week ended Nov. 22, up from 76,147 the week before, data from the US Commodity Futures Trading Commission shows, suggesting the euro could gain support if such positions are unwound.

"A psychological boost more than anything else in the long run. It doesn't address any kind of real fundamental problem," said Sacha Tihanyi, senior currency strategist for Scotia Capital in Hong Kong, referring to the enhanced liquidity backstop announced by the major central banks.

"I don't think this is going to be something that's going to kick off a two month rally in risk assets unless you see it combined with something of a more structural nature coming out of the euro zone," he added.


After dipping to a seven-week low last Friday, the euro has gotten some reprieve this week on short-covering, helped by signs that Germany and France are pushing for more rapid, deeper fiscal integration among euro zone countries, and hopes for IMF assistance for Italy.

A push in the direction of fiscal union among euro zone countries and a stronger commitment to fiscal discipline could open the way for the European Central Bank to step up its bond-buying programme and calm turmoil in euro zone debt markets, market players say.

EU finance ministers expect the ECB to step in forcefully to calm bond markets if EU leaders agree to move towards fiscal union at a summit on Dec, 9, the Polish EU presidency said on Wednesday.

Commodity currencies, which were given a lift on Wednesday after China cut its reserve requirements for commercial lenders for the first time in three years, gave back some of the previous day's gains.

The Australian dollar fell 0.7 percent to $1.0209 after having jumped 2.8 percent on Wednesday. Tough resistance is seen around $1.0335/40, the 61.8 percent retracement of its fall from late October to late November.

The boost in market confidence from the central banks came at an opportune time for Spain to issue up to 3.75 billion euros of bonds later on Thursday.

Analysts say the auction could well go like Italy's sale of three and 10-year bonds on Tuesday, which drew reasonable demand but saw yields leap to levels deemed unsustainable for public finances.
The dollar edged up 0.1 percent against the yen to 77.70 yen.

The dollar may pierce through a layer of dollar offers from Japanese exporters lurking above 78.50 yen and rise towards 79.00 yen over the coming days if the current move into riskier assets is sustained, said a senior spot trader for a major Japanese bank in Tokyo.

Copyright Reuters, 2011

Britain blames euro crisis for lower growth

In this video image British Treasury chief George Osborne George gives his Autumn Statement to the House of Commons in central London, Tuesday, Nov. 29, 2011, flanked by Prime Minister David Cameron, right. (AP Photo/PA Wire)
British Treasury chief George Osborne is Autumn Statement to the House of Commons in central London, Tuesday, Nov. 29, 2011, flanked by Prime Minister David Cameron, right. (AP Photo/PA Wire)

LONDON (AP) -- The British government blamed the euro crisis for a big downgrade of the country's growth projections and warned that it will only achieve its deficit-reduction goals if European leaders deliver a big, bold solution soon.

Britain's Treasury chief George Osborne said Tuesday that Europe's third-largest economy was being buffeted by the slowdown in the eurozone. Though Britain retains the pound, having opted out of joining the euro, around 50 percent of the country's exports go to the 17-nation eurozone.

"If the rest of Europe heads into recession, it may prove hard to avoid one here in the U.K.," Osborne told the House of Commons.

A number of economic indicators have shown that the eurozone is heading for recession in the wake of a crippling debt crisis that's shown alarming signs of spreading from the relatively small economies of Greece and Ireland to much-bigger Italy and Spain.

Given the sharp deterioration in the eurozone, Osborne said the government was "undertaking extensive contingency planning to deal with all potential outcomes of the euro crisis."

Osborne told lawmakers that the independent Office for Budget Responsibility now expects Britain's GDP to grow by 0.9 percent this year, around half the 1.7 percent rate predicted in March. For next year, the OBR predicts growth of 0.7 percent, sharply down from the 2.5 percent prediction in March.

Its forecasts are in line with the Bank of England though slightly better than Monday's projection by the Organization for Economic Cooperation and Development that showed Britain already slipping into a mild recession.

"Even though we believe there is an equal chance that growth will come in above or below our central forecast, the probability of a much worse outcome than the central forecast is greater than the probability of a much better one," the budget office warned.

Nevertheless the lower growth forecasts mean that government tax revenues will likely be lower than anticipated and that spending on such things as unemployment benefits will be higher.

Osborne argued that the independent analysis of the OBR found the debt challenge was "even greater than we thought because the boom was even bigger, the bust even deeper and the effects will last even longer."

As a result, he said the structural deficit -- the bit that doesn't go away when the economy improves -- won't be eliminated until 2016-17, later than previously thought.

He also said the debt-to-GDP ratio at 67.5 percent this fiscal year would increase to 78 percent in 2014/15 before falling. Though rising, Britain's debt burden is below many euro countries' equivalent rates, including Germany's.

In response, Osborne outlined a series of fresh spending cuts to keep the government on track. He also risked a fresh clash with the unions, who are preparing a big walkout Wednesday, by announcing that public sector pay rises will be capped at 1 percent for two years.

Job losses in the public sector are also expected to be way more than anticipated. The budget office said it anticipates 710,000 by early 2017, a big rise from the previous forecast of 400,000 by the first quarter of 2016.

Osborne became Britain's finance chief in May 2010 after an inconclusive election that saw the Conservative Party govern only in coalition with the Liberal Democrats. Deficit reduction has been the main economic purpose of the government after the banking crisis of 2008 pushed the British economy into recession and took a big swipe at the country's public finances.

Markets have so far given the government the benefit of the doubt, and the country's borrowing rates in the markets remain very low, especially in contrast to a number of the euro countries. Its ten-year yield stands at 2.06 percent, even lower than Germany's 2.33 percent.

The opposition Labour Party said the latest growth projections exposed the "truly colossal failure " of Osborne's focus on cutting spending.

"With prices rising, with unemployment soaring, families, pensioners and businesses already know it's hurting," said Labour's economic spokesman Ed Balls. "With billions of pounds more in borrowing to pay for rising unemployment, today we find out the truth: it's just not working."

Even after Tuesday's downgrades, many analysts think that the new growth projections are too rosy and that more spending reductions may have to be considered in the years ahead.

"Looking ahead, we expect further growth downgrades to push the borrowing forecasts even higher in future budgets and statements, deepening concerns about the U.K.'s fiscal position and testing Mr. Osborne's commitment to his own rules," said Jonathan Loynes, chief economist at Capital Economics.

Osborne offered a few treats for taxpayers: he canceled a rise in petrol tax due in January, curbed rises in rail fares and found more money for early education, infrastructure construction, state pensions and some benefits. As previously announced, he promised a 20 billion pounds ($31 billion) program to underwrite loans to small and medium-sized businesses.

He also raised the bank levy -- charged against the balance sheets of major banks -- from 0.075 percent to 0.088 percent -- but he repeated his opposition to a tax on financial transactions, calling that "a tax on pensions."

Osborne appealed to unions representing two million public sector workers to cancel a one-day strike set for Wednesday.

"Call off the strikes tomorrow. Come back to the table," Osborne appealed to the unions, which are angry about proposed changes to pensions.

(Mainichi Japan) November 30, 2011

Euro rescue plan in Brussels is short on detail

Euro zone ministers meeting in Brussels have agreed to increase the firepower of their rescue fund as experts say time is running out the save the euro.

No figures were released to say exactly by how much the European Financial Stability Facility would be beefed up – one trillion euros still appears to be the preferred target.

Jean-Claude Juncker, Eurogroup President explained:

“Important progress has been made to deliver the package agreed at the Eurosummit on the 26th of October and build more effective firewalls against the crisis. This shows are common commitment and our common determination to do whatever it takes to safeguard the financial stability of the euro area.”

Ways to support the EFSF have been looked at from getting private investors to participate to enabling the International Monetary Fund to take up any short fall.

“We also agreed to rapidly explore an increase of the resources of the IMF through bilateral loans following the mandate from the G20 Cannes summit so that the IMF could adequately match the new firepower of the EFSF and cooperate even more closely with it,” added Juncker.

Also on day one of the two-day meeting ministers finally agreed to release an eight billion euro segment of Greece’s bailout to help it avert a default next month.

Copyright © 2011 euronews

Euro-Area Ministers Agree on Bond Guarantees, EFSF Financing

By Gregory Viscusi and Josiane Kremer

Nov. 30 (Bloomberg) -- Euro-area finance ministers approved enhancements to their bailout fund while backing off setting a target for how much firepower they plan to muster to stem a growing debt crisis.

After a series of stop-gap accords failed to protect Italy and Spain from widening bond yield, the ministers met in Brussels under growing pressure from U.S. leaders and financial markets to find ways to boost the European Financial Stability Facility’s effectiveness. They agreed to create certificates that could guarantee up to 30 percent of new issues from troubled euro-area governments and to create investment vehicles that would boost the EFSF’s firepower to intervene in primary and secondary bond markets.

“It’s impossible to give one number; it’s a process,” EFSF Chief Executive Officer Klaus Regling told a press conference in Brussels, backing off an earlier goal of 1 trillion euros ($1.3 trillion). “We will need money if countries make a request, and market conditions change over time.”

While saying it won’t meet the previously stated goal, Luxembourg Prime Minister Jean-Claude Juncker said the fund’s capacity will be “very substantial.”

The bond certificates could be up and running next month, Regling said, while the investment vehicles could be operational in January. “Many investors are interested and will participate if we have solidly commercial product,” Regling said. “But don’t expect massive inflows immediately. The needs will come over time.”
IMF Resources

Juncker, who heads the euro group of finance ministers, also said the euro area will work on boosting the resources of the International Monetary Fund so that it can “cooperate” more closely with the EFSF.

“There are some marginal technical changes regarding intervention in primary and secondary markets, but overall it’s very similar” to previously published documents on the EFSF’s role, said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “Dec. 9 might have more meat, hopefully, otherwise markets will be yet again disappointed.”

European heads of government meet Dec. 9 in Brussels, in a meeting that is likely to be dominated by the debt crisis that began in Greece two years, spread to Ireland and Portugal, before driving up Italian and Spanish bond yields over the summer, and now is hurting even Germany’s ability to sell debt and threatening France’s top debt rating.

--With assistance from Rebecca Christie, Angeline Benoit, Mark Deen, Lorenzo Totaro, Jonathan Stearns, Nejra Cehic and Rainer Buergin in Brussels, Stephanie Bodoni in Luxembourg and Sandrine Rastello in Washington. Editors: Patrick G. Henry, Jones Hayden

To contact the reporters on this story: Josiane Kremer in Brussels at; 
Gregory Viscusi in Brussels at

To contact the editor responsible for this story: James Hertling at

Tuesday, 29 November 2011

Euro ministers seek rescue package

Finance ministers from the eurozone are meeting to try to resolve a solution to protecting the currency

The 17 finance ministers of the eurozone hve converged on EU headquarters in a desperate bid to save the currency - and to protect the global economy from a debt-induced financial tsunami.

They discussed ideas that would have been taboo only recently, before things got so bad: countries ceding fiscal sovereignty to a central authority; some kind of elite group of euro nations that would guarantee one another's loans - but require strong fiscal discipline from anyone wanting membership.

The fear is that the crisis - which has already forced bailouts of Greece, Ireland and Portugal - could engulf bigger economies such as Italy, the eurozone's third-largest. If Italy were to default on its debt the fallout could spell ruin for the euro project itself and send shockwaves throughout the global economy.

In a reminder of the urgency, Italy's borrowing rates shot up to rates above 7%, an unsustainable level on a par with rates that forced the others to seek bailouts.

At the top of the agenda is finding a means to more fully integrate the eurozone's disparate nations - ranging from powerful Germany to tiny Malta - both politically and financially. And the ministers must do it fast, without the delays caused by democratic niceties like referendums that have led many EU reforms to take years to implement.

France's finance minister, Francois Baroin, said that countries should integrate their budgets more closely and monitor one another's spending.

He said France and Germany - which have largely been calling the shots on efforts to overcome the crisis - will make proposals on how eurozone countries can monitor one another under such a new system.

The 17 ministers are expected to discuss jointly issuing so-called eurobonds - an all-for-one, one-for-all way of having the different countries guarantee one another's debts. Right now each nation issues its own bonds, meaning that while Italy pays above 7%, Germany pays about 2%.

Having stronger countries like Germany stand behind the general European debt would lower Italy's borrowing rates - and perhaps avoid a debt spiral that leads to a national bankruptcy. At the same time, it would raise Germany's cost of borrowing, and that is why Germany has been fiercely opposed to the eurobond proposal.

Proponents of elite bonds say the proceeds could be used to help the eurozone's weaker countries deal with their debts, in return for strict conditions being imposed on their budgets. Critics argue that further fragmenting the eurozone into strong countries and weak countries would benefit no one.
Press Association

Asian Shares up by 1.6 Percent; Euro Gains on Eurozone Hopes

Asian shares and the Euro extended their rally into a second day on Tuesday, as investors were buoyed by expectations that European policy makers will outline details of how they will leverage a bailout fund so as to avert contagion in sovereign debt markets.
Asian Shares
Asian Shares

MSCI's broadest index of Asia Pacific shares outside Japan rose 1.6 percent, adding to Monday's jump of more than 2 percent. The index hit a seven-week low last Friday. Japan's Nikkei closed up 2.3 percent, moving further away from two-and-a-half year lows also hit last week.

U.S. stocks snapped a seven-session losing streak on Monday, partly supported by robust holiday sales, helping to buoy some Asian markets with export exposures to the United States, such as Korea and Taiwan, while defensives and beaten-down energy and materials sectors pulled Hong Kong and Shanghai shares higher.

"Some positive sentiment hit the markets which, after a recent steep decline, were offering good valuations and encouraging temporary buy back," said Hirokazu Yuihama, senior strategist at Daiwa Capital Markets.

Asian markets largely shrugged off a French media report citing several sources as saying Standard & Poor's could change the outlook of France's top-notch rating to "negative" within the next 10 days but European share markets were set to dip.

Eurozone finance ministers will meet later on Tuesday to approve detailed operational rules for the region's bailout fund - the European Financial Stability Facility (EFSF) - paving the way for the 440 billion Euro facility to draw cash from investors.

However, with a history of initiatives that fall short of market expectations, analysts at Barclays Capital warned it would be premature to be confident that Europe's leaders are close to a solution to the 2-year-old debt crisis.

"So far, European summits have delivered compromise solutions that have been deemed either less than credible or too complex by markets," they said in a note, "The recent round of proposals does not seem any different and suggests that investors should exercise caution buying risky assets, especially after a rally that has been aided by light market positioning."

Italy Auction in Focus

The Euro inched up 0.3 percent to $1.3364 on Tuesday, after rising more than 1 percent on Monday to a high of $1.3398. The dollar index measured against six key currencies slipped 0.3 percent.

Commodities, a gauge for investor risk appetite, were steady after Monday's rally, with gold inching up 0.1 percent above $1,700 an ounce and oil steadying after a rise of more than $1 on Monday.

"We are fairly cautious, given very few reasons to be optimistic, and I doubt if optimism can be sustained throughout the week, especially with many meetings and bond supplies," said Frances Cheung, senior strategist for Asia ex-Japan at Credit Agricole CIB in Hong Kong.

Germany and France are reportedly working on proposals for a more rapid fiscal integration in Europe ahead of a European Union summit on Dec. 9 but the European Central Bank has defied calls for a stepped-up role in helping resolve fiscal problems within the 17-member Eurozone. Concerns about the ability of the highly-indebted Eurozone countries to pay off ballooning public debts have made their sovereign bonds a prime target for market attacks, pushing yields to levels widely seen as unsustainable.

Market players were closely watching the outcome of this week's auctions, with up to nearly 19 billion Euros in new bonds expected to be issued by Belgium, Italy, Spain and France.

Italy plans a 8 billion Euros bond sale later on Tuesday. Ten-year bond yields were stuck above 7 percent, a level that forced Greece, Ireland and Portugal to seek international aid.

Tension in the Eurozone money market and banks' reluctance to lend to each other further intensified on Monday, with three-month Euribor rates, traditionally the main gauge of unsecured interbank Euro lending and a mix of interest rate expectations and banks' appetite for lending, rising to 1.477 percent from 1.475 percent.

Reflecting global market strains, the Bank of Japan supplied dollars in market operations for the fourth time this month on Tuesday, providing $100 million in an operation maturing in three months and $1 million maturing in a week.

EURO GOVT-Bund inch up; Italy debt sale in focus

Nov 29 (Reuters) - German Bund futures were steady in early trade on Tuesday with markets hoping policymakers will make some progress in tackling the region's debt crisis which has pushed borrowing costs for some countries to eye-watering levels.

But there was little respite for battered sovereigns and banks with French daily La Tribune reporting that Standard & Poor's could change France's triple-A rating outlook to negative within days, while Moody's warned it could downgrade the subordinated debt of 87 banks across 15 countries on concerns that governments would be too cash-strapped to bail them out.

Meanwhile, Italy will sell between 5 and 8 billion euros of 3- and 10-year bonds, likely having to pay more than 7 percent, after yields soared again last week.

"The Italian debt remains extremely cheap and the current attractive yields should lead to decent demand," said Annalisa Piazza, market economist at Newedge Strategy.

December Bund futures were 9 ticks higher at 133.97, with 10-year yields down 2 basis points at 2.235 percent.

The region's finance ministers are set to agree details of bolstering their bailout fund (the EFSF) to try and stem contagion in bond markets but those hoping for more may be disappointed with a history of initiatives that have fallen short of market expectations.

"While the effectiveness of the leveraged EFSF remains questionable, we also doubt that the finance ministers will be able to pull anything materially new out of the hat tonight," said Commerzbank strategist Benjamin Schroeder.

"Going into this and next week's summits hopes should be kept elevated though, so we feel comfortable with a short bias in the Bund future for now." 

(Reporting by Kirsten Donovan)

Monday, 28 November 2011

Euro Climbs Against Dollar, Yen And Pound

(RTTNews) - In early European deals on Monday, the euro gained against the currencies of U.S., U.K. and Japan on hopes that the European leaders would announce fresh measures to resolve the region's debt crisis.

Italy's La Stampa reported Sunday that the International Monetary Fund is preparing EUR 600 billion financial assistance for Italy to support the country if the debt situation worsens.

The loan will give Italy's new Prime Minister Mario Monti about 12 to 18 months to launch economic reforms to balance its budget. Italy would pay an interest rate of 4 percent to 5 percent on the loan, while the amount may vary between EUR 400 billion to EUR 600 billion, the newspaper said.

The euro jumped to a 4-day high of 1.3362 against the dollar and a 5-day high of 103.92 against the yen, compared to Friday's close of 1.3237 and 102.88, respectively. The next upside target level for the euro is seen at 104.5 against the yen and 1.340 against the dollar.

A monthly survey conducted by the Shoko Chukin Bank revealed today that Japan's small business confidence indicator declined to 45.8 in November from 46.4 a month ago.

Against the pound, the euro strengthened to 0.8611. If the euro-pound pair rises further, it may target the 0.862 level. At Friday's close, the pair was quoted at 0.8575.

House prices in the U.K. fell for a seventh consecutive month in November, the latest survey results from Hometrack showed. Prices fell 0.2 percent month-over-month in November, at the same pace as in the previous month, marking the sixteenth monthly decline in 17 months.

Separately, the British Chambers of Commerce trimmed the growth outlook for the U.K. economy and said the impacts of the Eurozone debt crisis have been more serious than previously predicted.

The industry group now expects the economy to grow 0.9 percent this year, slower than the previously predicted 1.1 percent. In 2012, the economy is expected to grow 0.8 percent compared to the previous forecast of 2.1 percent, while the gross domestic product outlook for 2013 is cut to 1.8 percent from 2.5 percent.

Looking ahead, the Organization for Economic Cooperation and Development is set to release the latest forecast for the world economy at 5.00 am ET.

U.K.'s Distributive Trades survey from the Confederation of British Industry is expected at 6.00 am ET.

From the U.S., new home sales for October is due at 10 am ET.

by RTT Staff Writer

Germany, France press coercive euro zone debt rules

By Stephen Brown and Jan Strupczewski

BERLIN/BRUSSELS (Reuters) - Germany and France stepped up a drive on Monday for coercive powers to reject national budgets in the euro zone that breach EU rules, as a market rout of European debt eased temporarily on hopes of outside help for Italy and Spain.

The OECD rich nations' economic think-tank said the European Central Bank should cut interest rates and step up purchases of government bonds to restore confidence in the euro area, which now posed the main risk to the world economy.

In Brussels, finance ministers of the 17-nation currency area meeting on Tuesday are due to approve detailed arrangements for scaling up the European Financial Stability Facility rescue fund to help prevent contagion in bond markets, and release a vital aid lifeline for Greece.

Berlin and Paris aim to outline proposals for a fiscal union before a European Union summit on Dec. 9 increasingly seen by investors as possibly the last chance to avert a breakdown of the single currency area.

"We are working intensively for the creation of a Stability Union," the German Finance Ministry said in a statement. "That is what we want to secure through treaty changes, in which we propose that the budgets of member states must observe debt limits."

It dismissed a report by the newspaper Die Welt that Germany and the five other euro zone states with top-notch AAA credit ratings could issue joint bonds for themselves and partners.

Moody's Investors Service warned that the rapid escalation of the euro zone sovereign debt and banking crisis threatened all European government bond ratings.

"While Moody's central scenario remains that the euro area will be preserved without further widespread defaults, even this 'positive' scenario carries very negative rating implications in the interim period," the ratings agency said in a report.

Finance Minister Wolfgang Schaeuble acknowledged on Sunday that it may not be possible to get all 27 EU member states to back treaty amendments, saying agreement should be reached among the 17 euro zone members.

"That can be done very quickly," he told ARD television, adding that it only required changing an additional protocol to the EU's Lisbon Treaty.

Sources familiar with the Franco-German negotiations said they were also exploring a deal among a smaller number of countries outside the EU treaty if necessary.


The leaders of two smaller euro zone countries, Finland and Luxembourg, voiced unease about the Franco-German plans because they appeared to bypass the European Commission, which is seen as a guarantor of equal treatment for all member states.

"We don't find this type of system good and I am not too sure if it will get wider support. The disadvantage of this proposal is that it would bypass the EU, the Commission would have a very small role," Finnish Prime Minister Jyrki Katainen told reporters.

Luxembourg Prime Minister Jean-Claude Juncker, who chairs euro zone finance ministers, also warned against looking for instruments outside the EU treaty.

In France, Agriculture Minister Bruno Le Maire said euro zone countries would have to give up some budget sovereignty to save the euro from hostile "speculators".

"We won't be able to save the euro if we don't accept that national budgets will have to be a bit more controlled than in the past," Le Maire told Europe 1 radio.

"We are in an economic war with a number of powerful speculators who have decided that the end of the euro is in their interest," he said.

Handing over fiscal sovereignty to the executive European Commission is politically sensitive in France, which has a strong Gaullist, nationalist tradition.

President Nicolas Sarkozy's office sought to quash a weekend newspaper report that Berlin and Paris were planning to confer "supranational powers" on Brussels, suggesting such intrusion would only apply to countries such as Greece that were under EU/IMF bailout programmes.

Asked whether the Commission would be granted intrusive powers over national budgets in the euro zone, Le Maire said: "Why not? The French people have to realise what is at stake -- the preservation of our common currency and our sovereignty.

"We'll see if it's the council (of ministers) or some other European institution (that exercises these powers). What matters is that we ensure that budget discipline is respected within the euro zone. Otherwise the euro itself is threatened."

He acknowledged that France and Germany were still at odds over greater ECB intervention to rescue the euro but said: "We will have to find a compromise."

On financial markets, the euro regained ground after slipping below $1.33 in Asia and European shares jumped on hopes of fresh measures to fight the debt crisis. Italian, Spanish, French and Belgian bond yields fell, as did the cost of insuring those countries' debt against default.

But relief may be short-lived as the rally was partly due to an Italian newspaper report that the International Monetary Fund was in talks to lend Italy up to 600 billion euros -- more than its entire war chest -- which the IMF flatly denied.

The European Commission also said Italy had not asked for any amount of money and there were no discussions at European level on aid for Rome.

IMF inspectors are due in Rome this week to examine Italy's public finances after former Prime Minister Silvio Berlusconi agreed earlier this month to submit to regular monitoring of his promised austerity measures and economic reforms.


EU officials say some sort of IMF programme could make sense for both Italy and Spain as part of a multi-pronged response, involving the ECB and the euro zone rescue fund, to supervise reforms and restore investor confidence in their debt.

A senior EU source confirmed that both Berlusconi and the European authorities had rejected an IMF offer of a 50 billion euro precautionary credit line for Italy in talks on the sidelines of the Cannes G20 summit on Nov 3. The source said the sum would have been insufficient to convince markets.

Reuters reported exclusively last week that Spain's People's party, due to form a government by mid-December, is considering seeking IMF aid as one option for shoring up public finances.

In its world economic outlook, the Organisation for Economic Cooperation and Development forecast growth in the euro area will slow -- under a baseline scenario of "muddling through" -- to 0.2 percent in 2012 from an estimated 1.6 percent in 2011.

Urging "a substantial relaxation of monetary conditions", the OECD said banks would need to be well capitalised and policies put in place for sovereigns to finance themselves at reasonable rates.

"This calls for rapid, credible and substantial increases in the capacity of the EFSF together with, or including, greater use of the ECB balance sheet," the OECD said.

OECD chief economist Pier Carlo Padoan said current plans to leverage the euro zone bailout fund were insufficient. What was needed was a multiple of what was currently on the table.

Euro zone leaders initially planned to leverage the EFSF up to 1 trillion euros, but the fund's head said it is now unlikely to achieve that.

EFSF chief Klaus Regling was quoted by lawmakers as telling German coalition lawmakers that leveraging by a factor of 4-5 was "no longer reachable because of the clear deterioration of the market environment". Instead, it might be 3-4 times the fund's size.

The fund has had trouble selling its own bonds to raise funds and has yet to attract the pledges it hoped to get from countries with sovereign wealth to invest.

(Additional reporting by Leigh Thomas in Paris, Emelia Sithole-Matarise in London, Matthias Sobolewski in Berlin, Ian Chua in Singapore,; writing by Paul Taylor; editing by Philippa Fletcher/Mike Peacock)

Friday, 25 November 2011

Russia Holds Rates as Euro Crisis Drains Liquidity: Economy

Russia’s central bank refrained from cutting interest rates as Europe’s debt crisis exacerbates a cash shortage in the economy, putting pressure on policy makers to keep a grip on capital outflows.

The central bank left the refinancing rate at 8.25 percent after two increases this year, as predicted by all 24 economists in a Bloomberg survey, Bank Rossii said today in Moscow. Tighter lending conditions and a liquidity shortfall will likely “remain for the medium term,” the bank said.

Lenders in eastern Europe may face a credit squeeze as banks further west withdraw cash from the region to cope with the European debt crisis, Christine Lagarde, the International Monetary Fund’s managing director, said Nov. 7 in Moscow. The Russian regulator has signaled it may limit operations between domestic lenders and foreign banks.

“Policy makers are becoming increasingly worried about a liquidity squeeze in the banking sector,” Neil Shearing, a London-based senior emerging-markets analyst at Capital Economics Ltd., said by e-mail. “The problem for the central bank is that cutting interest rates significantly would risk stoking capital outflows, thus intensifying the liquidity squeeze facing banks.”

The government of Prime Minister Vladimir Putin, who plans to return to the Kremlin next year, has been battling to staunch capital flight that may reach $70 billion this year, compared with a previous forecast for $36 billion of outflows, according to the central bank.

‘Very Concerned’

Bank Rossii is “very concerned” about capital outflows that hit $64 billion in the first 10 months, Chairman Sergey Ignatiev said last week.

The ruble kept declines against the dollar, depreciating 0.5 percent to 31.6150 at 6:18 p.m. in Moscow, heading for its weakest closing level since Oct. 7. The Russian currency has fallen 2.5 percent against the dollar this week, bringing its loss since the end of July to almost 13 percent.

The ruble’s depreciation since August may fan price growth next month as commodity exports power economic growth above 4 percent, which “isn’t bad,” Ignatiev has said. Inflation was 7 percent on Nov. 21 from a year earlier, compared with 7.2 percent at the end of October, according to the central bank.

Lowest Since 1991

The world’s largest energy exporter is trying to cap inflation at 7 percent, which would be the lowest year-end level since the Soviet Union collapsed in 1991. Putin is seeking to keep price growth from eroding purchasing power before parliamentary elections next month and presidential polls in March.

The central bank signaled today that a shortage of cash in the banking system will probably continue.

Russian units of foreign banks including UniCredit SpA (UCG) have started lending excess cash to their parents since the middle of the year amid the euro region’s turmoil, using “central bank liquidity” and funds from their Russian operations, Deputy Economy Minister Andrei Klepach said Oct. 27.

Bond yields in Italy and Spain have soared on concern their debt levels may force them to join Greece, Ireland and Portugal in seeking international aid. Italy’s 10-year notes yielded 7.11 percent yesterday after rising 47 basis points this week.

Italian Debt Sale

Italy sold 8 billion euros of six-month Treasury bills, the maximum target. The Rome-based Treasury sold the 183-day bills to yield 6.504 percent, up from 3.535 percent at the last auction on Oct. 26. Demand was 1.47 times the amount on offer, compared with 1.57 times last month. The country’s bonds extended their decline after the sale.

Earlier, Spanish two-year notes slid, pushing the yield to more than 6 percent for the first time since the euro was created in 1999. The rate climbed as high as 6.12 percent and was at 6.06 percent.

German two-year debt rose for the first time in three days as Belgium’s de Tijd newspaper reported European Central Bank Governing Council member Luc Coene as saying the central bank may cut interest rates given the current situation.

The cost of insuring against default on European financial- company debt rose to a record, according to traders of credit- default swaps.

Of the 10 Russian banks with the most foreign transactions, seven are subsidiaries of Western banks, Alexander Vinogradov, an official at the central bank’s regulatory and oversight department, told reporters in Moscow yesterday.

‘Drying Up’

“We’re concerned about that from the liquidity standpoint,” he said, adding that the operations are “drying up” Russia’s money market.

The central bank has been monitoring foreign lenders’ subsidiaries since a credit squeeze that began in late 2008, he said. Among the biggest foreign lenders with local subsidiaries are Societe General SA through its OAO Rosbank (ROSB) unit, UniCredit, Raiffeisen Bank International AG (RBI) and Citigroup Inc. (C)
Foreign banks “facilitated” capital flight three years ago during the country’s record economic slump, Putin has said.

Bank Rossii met with the subsidiaries of western European banks over the past few weeks to order them to limit lending to support their parent companies in dealing with Europe’s debt crisis, Kommersant reported today. Vladimir Lavrov, a central bank spokesman, said he had no information on the matter.

‘Direct Indicator’

Russia’s largest deposit-taking banks are now paying households an average of 9 percent on their top ruble deposits, up from 7.88 percent in mid-November, according to central bank data. The rising rates paid by lenders are a “direct indicator that banks have a problem with liquidity now,” according to Konstantin Nemnov, a portfolio manager at TKB BNP Paribas Investment Partners who helps manage 22 billion rubles in debt.

“If there were more liquidity, it would clearly assist our work,” he said today by telephone from St. Petersburg. “The negative pressure on interest rates will continue regardless because of the capital outflows.”

Budget spending at the end of the year, traditionally a source of ruble weakening, is unlikely to ease the liquidity crunch, Clemens Grafe, chief economist at Goldman Sachs in Moscow, said in a telephone interview today. He forecasts no lending-rate changes until the second-quarter of 2012.

The budget surplus widened to 3.2 percent of economic output in the year through October, or 1.4 trillion rubles, according to Finance Ministry data. More than 60 percent of the amount, or 896 billion rubles, has already been placed with Russian banks through the ministry’s deposit auctions, according to Bank Rossii data.

“The budget can basically finance its spending out of the deposits that they already hold with commercial banks, which they didn’t have in the past,” he said. A “healthy” surge in repo demand over the past two months is being driven by the budget policy and also “there have been big banks that overcommitted themselves on the lending front.”

To contact the reporter on this story: Scott Rose in Moscow at

To contact the editor responsible for this story: Balazs Penz at

Fischer urges Germany to pay price of saving euro

Former German Foreign Minister and REWE consultant Joschka Fischer (L) briefs the media next to REWE CEO Frank Hensel during a news conference in Vienna September 6, 2011.  REUTERS/Herwig Prammer

(Reuters) - Former foreign minister Joschka Fischer urged Chancellor Angela Merkel on Friday to admit to Germany that ceding central bank independence and some sovereignty, and underwriting other states' debts, was the inevitable price of saving the euro.

"There is no way round it: the price of the stability union will be a 'transfer union' and vice-versa," Fischer told Reuters in an interview.

German critics of bailing out over-indebted members of the euro zone such as Greece call this process a 'transfer union', whereby fiscally-disciplined countries like Germany pay for the excessive debts and deficits of their European partners.

"You can't have one without the other -- that is the price of the euro," said Fischer, who was a strong advocate of Europe as foreign minister from 1998-2005, when his Greens shared power with Gerhard Schroeder's Social Democrats (SPD).

Fischer, a sharp critic of conservative leader Merkel's leadership in the sovereign debt crisis, said her government was always doing "too little, too late. Which means the solutions to the debt crisis are getting more and more costly."

Merkel should stop resisting calls from financial markets and foreign governments to back a stronger role for the European Central Bank and to jointly-issued euro zone bonds, the former Greens politician said.

"At the moment there is no perfect solution," said Fischer, who has retired from German politics and became a consultant to the Nabucco gas pipeline project in 2009.

His old party and the SPD back the idea of euro bonds -- which Merkel says would just remove the incentive for states to reign in debts and spending by levelling off interest rates and could threaten the top credit rating of countries like Germany.

However none of Germany's parliamentary parties currently dare to question the central tenet of an independent ECB, which Germans consider the best defence against the hyperinflation that the country suffered between the two world wars.

Merkel's current focus in the euro crisis - beyond urging the implementation of decisions to boost the euro-zone bailout fund and recapitalise banks - is to seek fiscal discipline via centralised monitoring of the budgets of European states.

This would require what she touts as "limited treaty changes" enabling countries to cede some sovereignty to the European Union's executive Commission, which would appoint a "Budget Commissioner" and impose sanctions on rule breakers.

Fischer said what Europe needed was a massive handover of sovereignty to Brussels, in order to convince financial markets that the bloc is serious about defending the euro.

"So far in the crisis the markets have been in the driving seat, because they didn't believe politicians would face up to the consequences of having a common currency and say where they wanted to go," said Fischer.

With an agreement among all 27 EU members unlikely, Fischer said, the 17 euro members should agree treaty changes among themselves to create "an avant-garde, a vanguard".

(Writing by Stephen Brown; Editing by Rosalind Russell)

Thursday, 24 November 2011

Euro Falls, Credit Risk Rises to Record on Merkel Bond Comments

The euro weakened, Italian bonds declined and the cost of insuring European government debt against default rose to a record after German Chancellor Angela Merkel ruled out joint euro-area borrowing.
The euro depreciated 0.2 percent to $1.3336 at 4:45 p.m. in London. The yield on Italy’s 10-year bonds climbed above 7.1 percent. The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments rose three basis points to 381. The Stoxx Europe 600 Index fell 0.2 percent after swung between gains and losses. Standard & Poor’s 500 futures slid 0.1 percent. U.S. markets are closed today for Thanksgiving.
Euro bonds are “not needed and not appropriate,” Merkel said at a press conference with Italian Prime Minister Mario Monti and French President Nicolas Sarkozy in Strasbourg, France. More than $4 trillion has been erased from the value of equities worldwide this month as rising borrowing costs in the euro-area stoked concern the debt crisis will derail economic growth.
“The market sees a ‘no’ and reacts to it,” said Martin Huefner, chief economist at Assenagon GmbH in Munich, which manages more than $4.7 billion of client assets. “We’re going to see a deterioration of equity markets in the coming months to the point where something will have to be done. The market would be euphoric to get euro bonds. Apparently the pressure is not big enough yet.”
The euro weakened 0.3 percent against the yen and 0.1 percent versus the Swiss franc. The yen advanced against all but two of its 16 major counterparts.
Portugal Downgrade
The yield on Italy’s 10-year bond climbed 14 basis points to 7.11 percent, while similar-maturity French debt yields rose three basis points to 3.72 percent.
Portugal’s bonds fell, with 10-year note yields climbing 90 basis points to 12.21 percent after Fitch Ratings cut the nation’s credit grade one step to BB+, the highest junk status.
Germany’s 10-year bond yield rose as much as 12 basis points to 2.26 percent following the business confidence data, before trading five basis points higher to 2.20 percent. Two- year note yields increased three basis points to 0.47 percent.
The Munich-based Ifo institute’s business climate index, based on a survey of 7,000 executives, increased to 106.6 from 106.4 in October. Economists expected a decline to 105.2, according to the median of 40 forecasts in a Bloomberg News survey.
Three shares advanced for every two that fell in the Stoxx 600 even as the benchmark gauge closed at the lowest level since Oct. 4. Oil and health-care stocks led declines while basic- resources and automakers advanced.

Beating Estimates

Raiffeisen Bank International AG gained 5.9 percent after eastern Europe’s third-biggest lender reported profit that topped analyst estimates. Dixons Retail Plc jumped the most since May, jumping 7.1 percent after the U.K.’s largest electronics retailer reported a smaller first-half loss (DXNS) than analysts had predicted.
The Nikkei 225 Stock Average sank 1.8 percent after S&P signaled it may be getting closer to lowering Japan’s sovereign grade. Japanese Prime Minister Yoshihiko Noda’s administration hasn’t made progress in tackling the public debt burden, S&P said.
The MSCI Emerging Markets Index (MXEF) added 0.4 percent, paring earlier gains. Brazil’s Bovespa index advanced 0.1 percent while Russia’s Micex Index lost 0.8 percent. Banks led Turkey’s ISE National 100 Index down 2.9 percent after Merkel’s comments. The Hang Seng China Enterprises Index climbed 1 percent in Hong Kong after the Chinese central bank lowered reserve-ratio requirements for some rural lenders. India’s Sensex rose 1 percent.
-- With assistance from Shiyin Chen in Singapore, Julie Cruz in Frankfurt, Emma Charlton, Will Hadfield, Adam Haigh and Michael Shanahan in London. Editors: Stephen Kirkland, Michael Shanahan
To contact the reporters on this story: Stephen Kirkland in London at
Shiyin Chen in Singapore at
To contact the editor responsible for this story: at