China growth worries weigh on stocks, boost Treasuries

By Walter Brandimarte

NEW YORK | Tue Mar 20, 2012 11:19am EDT

(Reuters) - Renewed concerns about China's economic growth weighed on global stocks on Tuesday, giving a boost to safe-haven U.S. government bonds and the dollar.

U.S. crude oil prices dropped nearly 2 percent as increased supply from Saudi Arabia and a return to pre-war exports from Libya eased pressure on the market.

Concerns about the scale of China's economic slowdown resurfaced as BHP Billiton (BHP.AX), the world's largest miner, said it was seeing signs of "flattening" iron ore demand from the country.

U.S. stock indexes traded more than half a percentage point lower after a rally on Monday drove the S&P 500 to a level less than 10 percent shy of its 2007 all-time high.

"It seems like a market that probably just needs to take a rest, but I wouldn't be surprised (if) we rally into the day," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

"It is now a focus back on the fundamentals on the economy and those news items aren't quite as daunting. It's really just fine tuning."

The Dow Jones industrial average .DJI was down 66.41 points, or 0.50 percent, at 13,172.72. The Standard & Poor's 500 Index .SPX was down 6.54 points, or 0.46 percent, at 1,403.21. The Nasdaq Composite Index .IXIC was down 20.25 points, or 0.66 percent, at 3,058.07.

The S&P 500 has gained more than 11 percent so far this year as a steady flow of strong U.S. economic data encouraged stock investors. Tuesday's U.S. housing data was mixed, however, with housing starts falling in February, but permits for future construction jumping to the highest level since October 2008.

World stocks measured by the MSCI All-Country World Index .MIWD00000PUS dropped 0.76 percent, after closing on Monday near levels last seen in late July.

In Europe, the FTSEurofirst 300 index .FTEU3 fell 0.9 percent as autos and miners were hit by worries of a Chinese economic slowdown.

"Stocks are being driven down on reports of major discounts amongst the luxury good car brands in China and comments about weak iron ore demand," said Richard Batty, strategist at Standard Life Investments, with $248.37 billion of assets under management.

The dollar rose 0.1 percent against a basket of major trading-partner currencies, according to the U.S. Dollar Index .DXY, as Chinese economic worries weighed on growth-related currencies.

The euro, however, was stable against the greenback at $1.3233.

U.S. crude oil prices dropped 1.6 percent to $106.78 a barrel, also pressured by the strength of the dollar, which makes the commodity more expensive to non-U.S. investors.

Benchmark 10-year Treasury notes were trading 1/32 higher in price to yield 2.37 percent, down from 2.38 percent late Monday, while 30-year bonds gained 11/32 to yield 3.46 percent, down from 3.48 percent.

(Additional reporting by Chuck Mikolajczak; Editing by W Simon and Dan Grebler)

Yen Reverses Losses on Speculation Declines Overdone

  By Mariko Ishikawa - Mar 19, 2012 11:59 AM GMT+0400

The yen reversed daily losses against the euro and dollar on speculation its recent declines were excessive and as Asian stocks pared gains.

The euro touched a 4 1/2-month high against the yen after German Chancellor Angela Merkel said European officials have discussed combining the euro-area’s bailout funds to reinforce the region’s financial firewall. Demand for the 17-nation euro was also supported before Italian Prime Minister Mario Monti holds talks with unions and employers to revise labor laws.

The yen gained 0.5 percent to 109.37 per euro as of 7:55 a.m. in London after earlier sliding to 110.15 yen, the weakest since Oct. 31. Japan’s currency gained 0.4 percent to 83.08 per dollar. The common currency bought $1.3161 from $1.3175 on March 16.

The MSCI Asia Pacific Index (MXAP) of stocks rose as much as 0.4 percent before trimming gains to 0.2 percent.

The yen has declined 1.5 percent in the past week, the worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar lost 0.3 percent, while the euro slid 0.2 percent in the same period.

The greenback’s 14-day relative strength index against the yen was at 69.9 today, near the 70 level some traders see as a sign an asset may reverse direction. The euro’s RSI versus the yen was at 67.

European finance ministers have discussed “combination possibilities” for the permanent and temporary rescue funds ahead of a March 30 meeting in Copenhagen, Merkel said on March 16. Ministers may decide to increase the region’s crisis fund to a total capacity of 692 billion euros ($911 billion) when they meet, a euro-area official said separately.

An easing of Europe’s debt crisis has offered breathing room for Italy’s Monti to seek a labor-market overhaul. The Italian premier’s planned changes include a revision of firing rules and an expansion of jobless benefits.

The Australian dollar rose against the greenback after Reserve Bank Governor Glenn Stevens expressed confidence in China, the South Pacific nation’s largest trading partner. “China will have cycles like other economies, but it seems likely that the Chinese economy will grow pretty strongly on average for a while yet,” Stevens said, according to the text of a speech delivered in Hong Kong today.

The so-called Aussie climbed 0.2 percent to $1.0607.

To contact the reporter on this story: Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

Euro Zone Exports Rise For Third Straight Month

03/16/2012 | 06:56am

-- Euro-zone exports rise for third straight month in January
-- Data supports hopes manufacturing will support economy
-- Trade deficit wider than expected as imports rebound

LONDON -- A third straight rise in euro-zone exports in January bolstered hopes that manufacturers will help the region avoid a severe downturn, while a rebound in imports offered a tentative sign domestic demand is on the mend.

The 17-nation currency bloc posted a trade deficit of EUR7.6 billion in January, the European Union's statistics agency Eurostat said Friday. That's smaller than the EUR16.1 billion gap recorded in January 2011 but more the EUR7.0 billion shortfall predicted in a survey of analysts by Dow Jones Newswires.

The euro zone typically posts trade deficits in winter months due to large imports of fuel and energy. The winter of 2010/2011 was particularly cold, and the EUR16.1 billion trade deficit for that January was the highest on record.

Exports in January 2012 rose 1.3% in seasonally adjusted terms, Eurostat said. That is the third straight monthly increase, and will raise hopes that strength in the region's manufacturing base will support the economy and limit the current downturn.

Data last week showed Germany, the region's biggest economy and manufacturing heartland, posting a strong rise in exports in January of 2.3%.

"The third successive rise in euro-zone exports in January boosts hopes that improving foreign demand will help the euro zone return to growth sooner rather than later," said Howard Archer, economist at IHS Global Insight, a consultancy. He said recent weakness in the euro will help exporters.

The bloc's economy contracted in the final three months of 2011, with six of its 17 nations already in recession--defined by two consecutive quarters of falling output.

A growing number of European leaders are calling for a renewed focus on fostering trade and other sources of growth, to offset cuts in government spending and help the region escape its long-running sovereign debt crisis. The heads of 12 governments including Italy and Spain, the third- and fourth-largest euro-zone economies, wrote to the European Commission in February calling for "concrete steps" to modernize the economy, including new trade deals with other countries around the world.

Imports to the euro zone in January jumped 2.4%, rebounding from four straight months of decline, Eurostat's figures showed. Those figures have been adjusted to exclude the effects of high energy imports, typical in the winter.

The rise in imports was one cause for the trade deficit being wider than expected in January. But Archer said it also offers a tentative sign that consumer demand--crucial to the euro zone's economic recovery--may be firming.

"This [rise] raises hopes that domestic demand may be stabilizing overall across the euro zone," he said.

But he noted "it is likely that import values were pushed up by higher prices."

-By Alex Brittain, Dow Jones Newswires; +44 20 7842 9203; alex.brittain@dowjones.com

Greece gets second 130-billion-euro financial bailout

Thursday, March 15, 2012, 2:00 [IST]

Berlin, Mar 14: Euro zone finance ministers on Wednesday formally approved the second 130-billion-euro financial bailout for debt-laden Greece and ordered the release of the first instalment of 39.4 billion euros to avert a bankruptcy.

They appreciated the steps taken by the Greek government so far to implement wide-ranging reforms and tough austerity measures agreed with the European Union and the International Monetary Fund (IMF) in return for the assistance.

They also lobbed the deal reached last week between the Greek government and its private creditors on a voluntary bond exchange programme, which will reduce its debt mountain to a sustainable level over the next eight years.

After Greece fulfilled all conditions set by the EU and the IMF to receive the assistance, "all required national and parliamentary procedures" also have been completed, Luxembourg's prime minister and chairman of the euro group Jean-Claude Juncker said.

The ministers have asked the euro zone's temporary bailout fund European Financial Stability Facility (EFSF) to disburse the first tranche, which Greece urgently needs to avoid defaulting on its repayment obligations for 14.5 billion euro debts due on March 20.

A part of the assistance will also be used to finance the write-down of Greece's debts by private creditors.

The second financial rescue programme, which runs until 2014, is a "unique opportunity" for Greece to take its economy back to a sustainable path and it should not be missed, Juncker said in a press statement after a conference call of senior finance ministry officials of the 17 nations using the euro.

PTI

Bailout can make Greek debt sustainable, but risks remain: EU/IMF

By Jan Strupczewski

BRUSSELS | Tue Mar 13, 2012 7:53am EDT

 

(Reuters) - Greece's second bailout package can make its debt sustainable, but Athens will have to stick firmly to agreed policies until 2030 and may need more money after 2014, an updated debt sustainability analysis by international lenders shows. 
 
The analysis, prepared by the European Commission, the European Central Bank and the International Monetary Fund for euro zone finance ministers and obtained exclusively by Reuters, shows that after the debt swap at the weekend, Greek debt could fall to 116.5 percent of GDP in 2020 and 88 percent in 2030.

"Results show that the program can place Greek debt on a sustainable trajectory," said the analysis, marked strictly confidential. However, it also warned that the debt trajectory was extremely sensitive and the program was "accident prone".

It said the restructuring of privately held Greek bonds would help to initially reduce debt, but that debt would spike up again to 164 percent of GDP in 2013 due to the shrinking economy and incomplete fiscal adjustment.

"Once the fiscal adjustment is complete, growth has been restored, and privatization receipts are accruing, steady reductions of the debt ratio commence. Greece would have to maintain good policies through 2030 to reduce the ratio below 100 percent of GDP," the report said.

The euro zone may also have to be prepared to lend even more money to Athens, the report said.
It said that when Greece tries to return to markets after 2014, it would first have to issue short-term debt and still pay high interest rates because its debt ratio would still be high, it would have senior debt to pay back first and it would need to establish a considerable track record with the market.

"This would initially discourage large issuances and imply continued reliance on official financing, as committed by Euro area member states on standard EFSF borrowing terms, provided Greece successfully implements its program," the report said.


  
LOTS OF RISKS

The road to sustainable debt will be long and fraught with risks, the authors said, underlining the delicate balance Greek politicians are going to have to make in the coming decades.

"The Greek authorities may not be able to implement reforms at the pace envisioned in the baseline," it said.

"Greater wage flexibility may in practice be resisted by economic agents; product and service market liberalization may continue to be plagued by strong opposition from vested interests; and business environment reforms may also remain bogged down in bureaucratic delays," it said.

It may take Greece much more time than assumed to identify and implement the necessary structural and fiscal reforms to improve the primary balance from -1 percent in 2012 to the required 4.5 percent of GDP, it said.

"Concerning assets sales, delays may arise due to market-related constraints, encumbrances on assets, or political hurdles. And of course a less favorable macro outcome would itself further hurt policy implementation prospects," it said.

In the less favorable scenario, the debt ratio would peak at 170 percent of GDP in 2014. Once growth recovers, fiscal policy achieves its target and privatization picks up, debt would begin to slowly decline. Debt to GDP would fall to around 145.5 percent of GDP by 2020.

The analysis forecasts that after another year of recession this year, the Greek economy will stabilize in 2013 and see a mild recovery in 2014-2017 and then growth at its potential rate of 2.5 percent annually.

Athens is expected to generate a primary surplus of 4.5 percent in 2014 from a 1 percent deficit this year -- a crucial factor because if the primary surplus is stuck below 1.5 percent of GDP, Greek debt would be on an ever increasing path.

Greece is expected to obtain 45 billion euros from privatization until 2020, although it is likely to get only 12 billion by 2014, the report said. If it gets on 10 billion euros by 2020, the debt ratio in that year would be 130 percent.

(Reporting by Jan Strupczewski; editing by Rex Merrifield)

Analysis: Greek default may be gift to other euro strugglers

By Mike Dolan

LONDON | Wed Mar 7, 2012 4:42am EST
 

(Reuters) - Greece's tortuous debt restructuring and threat of retroactive laws to compel reluctant creditors heaps regulatory risk onto investors but may make voluntary sovereign debt revamps more attractive and likely for other cash-strapped euro sovereigns and their creditors.

Thursday could mark a climax of the Greek debt workout with private creditors due to respond to an offer that would see them effectively write off more than 70 percent of the face value of their bonds in return for new debt with a series of sweeteners.

With Greek government bonds currently trading at less than 20 cents in the euro and the risk of a total wipeout if Greece decided to unilaterally refuse all payments, a majority will likely go for it. Legally-binding majorities are another matter.

Athens said this week it aims for 90 percent acceptance but if the takeup is at least 75 percent then it would consider triggering so-called "collective action clauses" retroactively inserted into the bonds issued under Greek law -- about 85 percent of the 200 billion euros being restructured.

Those clauses in practice force all affected creditors to comply.

But it's this distinction between debt issued under domestic laws and that sold under internationally-accepted English law that some say has consequences for other troubled euro nations eyeing Greece's so-called Private Sector Involvement, or PSI.

A GIFT FROM GREECE
In essence, English-law Greek bonds, as is the case for many emerging market sovereigns, trade as if they were senior to local-law debt -- at almost twice the price in fact right now. That's because the terms of foreign-law bonds cannot be altered by an Athens parliament, and agreement for debt swaps is needed bond-by-bond, unlike local laws that aggregate majorities across all debtors and make blocking minorities more difficult to muster.

A paper released this week by Jeromin Zettelmeyer, deputy chief economist at the European Bank for Reconstruction and Development, and Duke University Professor Mitu Gulati reckons this legal gulf could well encourage other debt-hobbled euro zone countries and their creditors into mutually acceptable and beneficial debt restructurings.

This would involve an agreed switch in the legal status of the debt in return for relatively modest haircuts.

"Holders of local-law governed bonds in other euro zone countries that are perceived to be at risk might want to make a trade for English-law governed bonds," the economists wrote. "Depending on how much these bondholders would be willing to pay to make this trade, it could serve the interest of the country as well to make it."

The sovereign gets a chance to reduce a crippling debt burden while bondholders get greater contractual protection in any future restructuring.

Given that the Greek precedent of retroactive legislation vastly increases the allure of foreign-law bonds, which credit rating firm Moody's says now make up less than 10 percent of all euro zone government bonds, a window of opportunity may open up.

"Effectively, this is a large gift from the Greeks to the parts of the euro zone that face debt crises. By conducting its debt exchange in the way it did, Greece has in effect resurrected the plausibility of purely voluntary debt-reduction operations in Europe."

Although Berlin, Paris and Brussels insist the Greek case is a one-off and European Central Bank liquidity has insulated the wider banking system, Portugal's 10-year bonds still trade as low as 50 cents in the euro and many creditors reckon it will be very difficult for the country to avoid some restructuring.

Even the 10-year debt of fellow bailout recipient Ireland, which many investors reckon has the underlying economic capacity to go back to the markets next year, is still trading at less than 90 cents in the euro and many doubt its imminent market return.

"We still expect a sizeable growth undershoot and deficit overshoot and expect that Ireland will need a second financing package (which may include PSI) beyond 2013," economists at Citi said on Monday.

What's more, if Europe's new fiscal pact is rejected by voters in a planned referendum there in the coming months, Ireland would lose access to the financial backstop of the European Stability Mechanism and likely unnerve many investors.

Yet voluntary debt swaps with some debt relief stemming from more modest haircuts than Greece may well be the best way to ensure these two countries avoid outright default and return to private financing in a reasonable amount of time.

And if such exchanges were wholly voluntary, it would also mean credit default swap insurance would not pay out -- a stated aim for many euro policymakers concerned about the speculative nature of a market where it's possible to buy insurance on something you don't own.

One danger is that the prospect of countries opting for such a swap may scare creditors in larger countries like Italy and Spain where currently no bond haircut is expected by the market, thanks in large part to the ECB's liquidity injections.

And the upshot for many economists is that there will be a longer-term price to pay for governments for tinkering with the rules of the game, as many investors view it, via the likes of retroactive bond legislation and obfuscation of CDS markets.

"Investors will expect a premium for bearing this regulatory risk," Morgan Stanley's Manoj Pradhan told clients in a note, adding that only central bank liquidity floods were now obscuring the resultant higher financing costs and there would be a dangerous blurring of lines between macro and market risks.

But given that indiscriminate cheap lending was seen as at least partly responsible for the credit binge and bust of the past five years, maybe higher risk premia are not all bad.

(Editing by Stephen Nisbet)

Irish referendum likely to decide fate of euro zone

March 1, 2012

DUBLIN: The fate of the euro zone is once again in the hands of Irish voters after Ireland's attorney-general recommended that a referendum be held on the EU's latest fiscal compact treaty.

The Irish prime minister, Enda Kenny, told parliament that, on the advice of the republic's chief law officer, ''on balance'' a referendum should be held.

The Taoiseach said he and his deputy prime minister, Eamon Gilmore, were confident the Irish people would endorse the EU treaty as it was in the country's interest.

The agreement is the linchpin of a German-led plan to impose budget discipline across the EU, especially the 17-nation euro zone, which is dealing with a stubborn debt crisis that has rocked the region's economy.

Mr Kenny is expected to fight for concessions from Brussels on the terms of Ireland's far reaching euro bailout as the price for heading off a potentially embarrassing electoral rejection of the ''fiscal compact''.

Ireland, which has twice rejected EU treaties, must hold a referendum on any international treaty that has an impact on the country's sovereignty. Arrangements for organising the referendum would be made in a few weeks, Mr Kenny told the parliament.

Mr Gilmore said the referendum would come down to a vote for Ireland's economic stability and recovery.

Irish voters threw the entire EU reform program into chaos when they first rejected the Lisbon treaty, although after a series of amendments the republic's electorate later endorsed a second treaty.

With more than 14 per cent of the Irish workforce unemployed, there are fears within the Fine Gael-Labour coalition in Dublin that voters might use the next referendum to punish the government over its domestic policies, such as the continuing cost-cutting austerity program and the continued recession.

Mr Gilmore, Irish Labour leader, urged a ''yes'' vote in the EU fiscal compact referendum, saying it was necessary to secure the republic's recovery.

Guardian News & Media, Los Angeles Times