Instant View: Euro zone inflation drops to 15-month low

BRUSSELS | Thu May 31, 2012 6:44am EDT

(Reuters) - Euro zone inflation eased by more than expected to its lowest level in more than a year in May, giving the European Central Bank a little more room to lower interest rates to help revive economic growth across the continent.

Consumer price inflation in the 17 nations sharing the euro fell to 2.4 percent year-on-year in May from 2.6 percent in April, the EU's statistics office Eurostat said on Thursday. Economists polled by Reuters had forecast inflation of 2.5 percent.

ECONOMISTS' COMMENTS

LUC ABEN, VAN LANSCHOT

"It's in line with expectations. We expected inflation to trend downwards with the economic situation as the main reason. There's a slowdown not only in Europe, but also in China and India, which reduces pressure on commodities and therefore on inflation.

"As long as headline inflation remains above 2 percent it's crystal-ball gazing at the ECB. Do they have to do something? I think if it doesn't help, it doesn't harm either.

"If you look at money supply, credits and the way that money moves, we have to ask ourselves whether there would be a big difference if the ECB lowers rates to 50 basis points.

"Half of nothing is still nothing. The problem of the euro zone is not expensive money, it's far more structural than that. But I still think that the ECB will take a small step in the coming months."

CHRISTOPH WEIL, COMMERZBANK

"The decrease is caused by the fall in oil prices. Core inflation is still at 1.6 percent. The outlook depends on the oil price as well and we don't expect it to decline but to stabilize at current levels.

"That would mean that inflation would still have a 2 before the decimal point at the end of the year. We see inflation to be back in line with the ECB target in the spring of 2013.

"We have a downward trend, that took long enough, and inflation risk is low as well, if you look at wage developments in the euro zone. We are also facing a recession which means that companies will find it harder to pass on price increases. That means inflation risk is low and that gives the ECB leeway to further lower rates."

HOWARD ARCHER, IHS GLOBAL INSIGHT

"Some all too rare recent good news for the euro zone as consumer price inflation fell more than expected to a 15-month low of 2.4 percent in May. Inflation had previously been stuck in a 2.6-2.7 percent range through the previous five months after dipping to 2.7 percent in December from a three-year high of 3.0 percent over the three months through to November 2011.

"May's drop in consumer price inflation eases the squeeze on consumers' purchasing power, thereby providing much needed support to growth. It also facilitates an interest rate cut by the ECB sooner rather than later, and there is an ever more compelling case for this given the current deteriorating economic growth environment in the euro zone and the heightened uncertainty stemming from the situations in both Greece and Spain.

"While a breakdown of euro zone consumer price inflation in May is not yet available, it is highly probable that a marked retreat in oil prices helped bring down energy and transport costs in May. It is also very possible that core inflation edged down in reaction to weakened economic activity.

"Having been sticky through the early months of 2012, the prospects are improving for euro zone consumer price inflation to head lower. Oil prices have fallen back sharply in recent weeks, while there are mounting signs that underlying price pressures are easing in the euro zone in reaction to weakened economic activity and high and rising unemployment.

"The latest European Commission business and consumer survey shows that consumers' inflation expectations fell back sharply to a 16-month low in May while selling price expectations softened appreciably among manufacturers, service companies, retailers and construction companies.

"Meanwhile, the composite output prices index of the manufacturing and services purchasing managers' surveys indicated that prices fell modestly in May.

"Pressure on the ECB to take interest rates below 1.0 percent sooner rather than later is mounting from the deteriorating economic environment and threat to activity coming from the heightened tensions and uncertainty over Greece and Spain.

"And moderating consumer price inflation, sharply lower oil prices, slowing money supply growth, weakening consumer inflation expectations and moderating business pricing expectations indicate that inflation risks are easing appreciably and the ECB has increasing scope to take interest rates lower.

"We doubt that the ECB will be willing to cut interest rates at their June 6 policy meeting and will prefer to wait and see what happens with the Greek elections and their aftermath, as well as with near-term growth and inflation developments. However, we now expect the ECB to trim interest rates in the third quarter, with July a very real possibility."

MARTIN VAN VLIET, ING

"It was slightly lower than consensus in terms of the actual decline, probably reflecting energy and food price inflation.

"In terms of the inflation outlook, we expect the recent falling streak to continue, but it will be a slow process because we expect tax increases (in some countries), which are an upward force, and a weaker euro pushing up import prices.

"In terms of looking beyond the next 6-12 months, we can say there is still no clear sign of an upturn, underlying price pressures will remain muted, so maybe there is a case for further (monetary) policy easing.

"It may take until next year before inflation falls below 2 percent."

(Reporting By Philip Blenkinsop, Robert-Jan Bartunek and Barbara Lewis; editing by Rex Merrifield)

Biggest Greek bank warns of dire euro exit fallout

Thu, 31 May 2012

ATHENS — If Greece left the euro, living standards would plummet, incomes would be slashed by more than half, and inflation and unemployment would skyrocket, the National Bank of Greece warned.

In a report released ahead of an election on June 17 that may determine whether the country stays in the single currency, the country’s biggest bank said the risk of Athens exiting the euro was no longer just a theoretical possibility, warning that the fallout from such a move would be dramatic.

“An exit from the euro would lead to a significant decline in the living standards of Greek citizens,” the NBG wrote ahead of a vote which parties opposed to austerity measures that have kept Greece in the euro so far have a chance of winning.

The bank said per capita income would collapse by at least 55 per cent, the new national currency would depreciate by 65 per cent against the euro and a recession, now in its fifth year, would deepen by 22 per cent.

Painting a dire picture of post-euro Greece, it added that unemployment would jump to 34 per cent of the work force from around 22 per cent now and that inflation would rise to 30 per cent from its current level of 2 per cent.

The NBG is due to report its first quarter earnings yesterday and is expected to announce a loss. Greek banks, including NBG, have hemorrhaged deposits since the crisis began and are perceived to be in favour of retaining the euro because the alternative might trigger a run on their reserves.

The NBG said it wanted to contribute to dialogue about Greece’s future with respect to the euro.

Greece had to call a repeat election for June 17 after an inconclusive vote on May 6 left the parliament divided between parties that support and oppose the austerity steps that were a precondition of a second 130-billion-euro bailout agreed with the European Union and International Monetary Fund in March.

Tax rises and spending cuts insisted upon by the EU and IMF in order to save the country from default have caused a wave of corporate closures and bankruptcies, sparking angry protests that have often turned violent. More than half of Greeks aged 15-24 are unemployed, according to the latest figures.

While most Greeks want to keep the euro, about two thirds are against the deep salary, pension and job cuts that come with continued membership of the single currency, according to the latest opinion polls.

Greece’s conservatives have regained a tentative opinion poll lead that suggests they may be able to form a pro-bailout government committed to keeping the country in the euro. But the vote is still deemed too close to call. — Reuters

Euro Approaches Two-Year Low Against Dollar

By Catarina Saraiva and Lucy Meakin

 on May 30, 2012

The euro fell toward an almost two-year low. Photographer: Simon Dawson/Bloomberg2 

The euro fell to the lowest level in almost two years against the dollar as Spain struggled to rescue its troubled banks, adding to signs the European debt crisis is spreading to the region’s larger economies.

The 17-nation currency slid for a seventh day versus the yen, the longest losing streak in four months, after Italy sold less than its maximum target at a debt auction. The yen and dollar strengthened as investors sought safer assets after a European report showed economic confidence dropped more than economists estimated in May. Asian currencies weakened, pushing the Bloomberg-JPMorgan Asia Dollar Index to the lowest level since September 2010.

“The market has lost confidence in the euro,” said Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York. “We’re a little oversold but certainly the path is very clear to possibly testing $1.20 or the $1.1876 low of 2010. People are battening down the hatches and continue to trade very defensively.”

The euro declined 0.8 percent to $1.2407 at 12:17 p.m. New York time. The single currency fell 1.5 percent to 97.96 yen. It dropped to 97.76 yen, the lowest level since Jan. 18. The yen gained 0.7 percent to 78.89 per dollar after touching 78.87, the strongest since Feb. 17.

The shared currency fell to as low as $1.2386, the weakest since July 2010. It reached $1.1877 in June that year, which was the lowest level in four years, after escalating concern about Greece led to the bloc’s first bailout. Since its inception in 1999, the euro has traded as low as 82.30 U.S. cents, in 2000, and as high as $1.6038 in July 2008.

‘Downward Spiral’

The euro has depreciated 6.3 percent against the dollar this month, the most since September, and slid 7.4 percent versus the yen.

The yield on German two-year government notes fell to zero for the first time before trading at 0.010 percent. The average since the euro’s inception is 2.79 percent.

“The euro could go lower, maybe it can go down towards $1.20,” said Jane Foley, a senior currency strategist at Rabobank International in London. “The question is, will the downside risks turn into a downward spiral?”

Spain’s 10-year bond yield rose as high as 6.70 percent, approaching the 7 percent level that led to bailouts in Greece, Ireland and Portugal, after central bank Governor Miguel Angel Fernandez Ordonez resigned a month early amid criticism over the nationalization of Bankia group.

European Commission

The European Commission called for direct euro-bloc aid for troubled banks and touted a Europe-wide deposit-guarantee system and common bond issuance as antidotes to the debt crisis now threatening to overwhelm Spain.

The commission, the European Union’s central regulator, sided with Spain in proposing that the euro’s permanent bailout fund inject cash to banks instead of channeling the money via national governments. It also offered Spain extra time to squeeze the budget deficit.

“The focus was on Greece and the way the electorate sentiment was going,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. (WBC) in New York. “That’s now completely been pushed to the sidelines by concerns about Spain. Europe’s just so broad and lacking in policy coordination, that’s the problem.”

Greece’s New Democracy party and Syriza party are tied for first place in the country’s June 17 vote according to an opinion poll by Pulse, Naftemporiki newspaper reported.

The euro has declined 2.2 percent this year against nine developed-market counterparts tracked by Bloomberg Correlation- Weighted Indexes. The dollar climbed 2.8 percent, the best performer, while the yen lost 0.1 percent.

Italian Borrowing

The yen surged at least 0.5 percent against all 16 of its major peers tracked by Bloomberg after Italian borrowing costs climbed and European confidence plummeted, boosting investor demand for the safest assets.

Italy sold 5.73 billion euros of bonds as yields rose from the previous sale in April. The Treasury auctioned 10-year debt at a rate of 6.03 percent, the highest since Jan. 30. Investors bid for 1.4 times the amount offered, down from 1.48 last month. Italy also sold five-year notes to yield 5.66 percent, compared with 4.86 percent last month.

An index of executive and consumer sentiment among the euro member nations fell to 90.6 from a revised 92.9 in April, the European Commission said today. That’s the lowest since October 2009 and below the 91.9 forecast by economists, according to the median of 28 estimates in a Bloomberg News survey.

The 14-day relative strength index for the euro against the yen was under 20, below the 30 level that some traders see as a sign that an asset price may be about to reverse course. 

FOREX-Euro edges up but Spain fears leave it vulnerable

Tue May 29, 2012 4:22am EDT

* Euro stays near last week's low just below $1.25
* Doubts grow that Spain can support ailing banks on its own
* Eyes on whether Spanish govt bond yield hits 7 pct
* EUR short covering may be curbed ahead of Irish referendum


By Jessica Mortimer

LONDON, May 29 (Reuters) - The euro edged up against the dollar on Tuesday as investors cut hefty bearish bets in the currency, but worries about Spain's banking sector left it hovering close to its lowest levels in nearly two years.

Analysts and traders said the euro had good support at the $1.2500 level and Friday's trough of $1.2495, with bids around that area, but expected it would soon break lower given the extent of the concerns surrounding the euro zone debt crisis.

Worries about the cost of shoring up Spain's banking system lifted its debt yields on Monday, driving the gap between Spanish and German 10-year yields to euro era highs, as the risk grew that Spain may be forced to seek an international bailout.

The euro was up 0.2 percent at $1.2566, with traders citing demand from corporates and Middle East names.

Having failed to clear resistance at previous support around $1.2625 for three days in a row, however, the euro was vulnerable to another test of Friday's low, which marked its weakest since July 2010.

"We may see a bit of consolidation here but going forward we still have a euro that is very weak and vulnerable. The widening of spreads between Spain and Germany and Italy and Germany keeps worries about the debt crisis very much alive," said Niels Christensen, currency strategist at Nordea in Copenhagen.

"I don't see the euro moving above $1.27. It's only a matter of time before it breaks $1.25. This is psychological support but it's not a big level like the January low was (around $1.2624) and that has clearly broken."

The euro gave up most of the gains made on Monday after Greek polls showed more support for pro-bailout parties ahead of the country's election on June 17. That eased fears Greece may leave the euro zone.

Bids just below $1.25 may support the euro for now, though further losses could see it drop towards $1.2450, where traders reported stop-loss sell orders.

"Although pessimism over Greece is somewhat receding, worries about Spain are growing, with markets watching whether the Spanish bond yield will hit the seven percent mark," said Masafumi Yamamoto, chief FX strategist at Barclays in Tokyo.

Short-term, the euro may continue to be held up by bouts of short covering. Speculators bolstered short euro positions to record highs in the week ended May 22, leaving ample scope for a correction as they cut positions and book profits.

TROUBLES IN SPAIN

Many traders expect further downside in the euro as they fear troubles at Spanish banks hit by a bust in property could further complicate Madrid's efforts to rein in its debt.

Spain's fourth-largest lender Bankia has asked for a bailout of 19 billion euros, in addition to 4.5 billion euros the state has already pumped in to cover possible losses on repossessed property, loans and investments.

Prime Minister Mariano Rajoy on Monday again ruled out seeking outside aid to revive Spain's banking sector, though many investors are sceptical this will be possible.

Spanish 10-year bond yields rose above 6.5 percent on Monday. A level of 7 percent is seen as critical as euro zone countries that have previously requested bailouts did so soon after their 10-year yields rose above that mark.

Any buying in the euro may also be curbed ahead of Ireland's referendum on Europe's new fiscal treaty on Thursday, although the market is cautiously optimistic that the Irish will support the treaty on fear that a "no" vote could add fuel to the fire.

Against the yen, the common currency fetched 99.87 yen , not far from a four-month low of 99.37 yen hit last week. The yen, along with the dollar, was supported by the market's risk averse mood.

The dollar stood at 79.47 yen, not far from a three-month low of 79.002 yen.

The higher-yielding Australian dollar was up 0.4 percent at $0.9888, above last week's six-month low of $0.9690.

Euro zone bank safety net leaves holes unplugged

By Paul Carrel and John O'Donnell

FRANKFURT/BRUSSELS | Tue May 29, 2012 9:44am BST

(Reuters) - As the euro zone ponders a possible Greek exit, policymakers have not yet built a shield robust enough to prevent a bank run in one country sending others in the bloc deeper into crisis.

A push by the European Central Bank for the euro zone to stand behind struggling lenders is slowly gaining traction with government leaders but the bloc has yet to build backstops to prevent, or cope with, a sudden collapse of confidence in banks.

Last week, European leaders discussed pan-European means of supporting banks, measures the ECB hopes will include a bank resolution fund to deal with the fallout from the wind-up or restructuring of a failing lender.

Such a body would complement the 1 trillion euros of 3-year credit the ECB has lent in recent months to banks across the 17-country euro zone, which has helped oil the wheels of Europe's banking system where confidence is so low that most remain reluctant to lend to one another.

But a wave of withdrawals by depositors - either for fear that their government is too weak to stand behind its banks or that their country will exit the euro and switch their savings into a vastly devalued national currency - would represent a whole different scale of crisis.

Such pressure on Ireland's banking system prompted a national bailout by the International Monetary Fund and European Union.

Now investors are worried about the contagion effect a Greek exit from the euro zone could have on savers in other countries.

"Preventing bank runs in Italy, Spain and Portugal should be the top priority," said Berenberg Bank economist Holger Schmieding. "Policymakers need to make sure that the potential Greek precedent of a forced conversion of domestic euro deposits into a weak new currency would not spark a run on banks ... elsewhere."

The ECB is pressing the euro zone to set up a fund that would prevent this dangerous ripple effect, a message reinforced by ECB policymaker Joerg Asmussen last week.

"The recapitalisation of a troubled bank by its government may lead to a deterioration of the government's fiscal position," Asmussen said. "The deteriorating fiscal position in turn further weakens banks' balance sheets, through their holdings of sovereign bonds.

"This feedback loop has to be stopped ... A European bank resolution authority and a European deposit insurance scheme are two elements that could be used to address the nexus between sovereigns and banks."

Any pan-euro zone deposit guarantee scheme would need to be large in order to stem ebbing confidence.

The typical national guarantee in Europe now covers the first 100,000 euros on deposit, something that would do little to reassure corporate investors with millions.

It was the decision by companies in Ireland to withdraw deposits that accelerated its banking crisis.

The question of how to shut down or restructure teetering banks has risen to the top of European policymakers' agenda as concerns grow about the impact if Greece were to leave the euro zone, and as problems deepen in Spain's large banking sector, which is laden with bad property debts.

But policymakers are far from setting up a backup fund, not least because European paymaster Germany, who does not want to support laggard banks in Spain, is reluctant to finance it.

WAITING FOR DRAGHI

In the absence of a resolution fund or insurance scheme to deal with a bank collapsing, many investors expect the ECB would act to head off a bank run or a similar systemic threat.

ECB President Mario Draghi has said the 1 trillion euros the bank released into the financial system with twin 3-year, ultra-cheap lending operations - or LTROs - in December and February avoided a major credit crunch.

In the case of Greece, the belief is that the ECB would act again to contain a bank run, said Clemens Fuest, a professor at Oxford University and a member of the academic advisory board of the German Federal Ministry of Finance.

"The expectation seems to be that the ECB will prevent it by providing whatever liquidity is needed," he said, adding that this could either be from the ECB directly or as emergency funding from the Bank of Greece with the ECB's backing.

Greece's four largest banks received some help this week, with the country's bank stability fund approving an 18 billion euro injection of bailout money to rescue them.

If this proves insufficient and contagion spreads to other countries' banking sectors, policymakers may rapidly have to dust off plans to provide guarantees to weaker banks or inject further capital - scenarios discussed in the past but on which there has been no agreement.

CAPITAL FLIGHT

The banking environment has steadily deteriorated, according to statistics from the Bank for International Settlements, which chart the flight of capital from the euro zone's weakest members.

Figures from December last year show a sharp decline in deposits from abroad held in banks in Greece from $160 billion in late 2009 to less than $80 billion.

Ireland's bank deposits from abroad fell from $905 billion to $471 billion over that time and a similarly sharp fall was seen in Portugal.

Households and companies have almost 11 trillion euros on deposit with banks in the euro zone, with over 3 trillion in Germany alone, according to ECB statistics.

One way to reinforce banks would be to allow the euro zone's rescue scheme, the European Stability Mechanism (ESM), to inject capital directly into lenders - an idea which Spanish Prime Minister Mariano Rajoy is pressing but which Berlin opposes.

Under Europe's existing arrangements, countries like Spain - should they require assistance with their banks - must apply for a sovereign bailout programme, a humiliation too far.

"Taking on the risk of a bank failure at a European level through the ESM is far preferable to the much greater risk of a sovereign default," said John Fitzgerald, of the Economic and Social Research Institute, a Dublin-based think-tank.

In the absence of that, Berenberg's Schmieding said were Greece to leave the euro zone, Spain should apply to Europe's bailout funds for aid to recapitalise its banks.

The ECB could cut interest rates and - together with national central banks - supply banks with liquidity, he said, possibly with new long-term loans.

"COURAGEOUS LEAP"

Some ECB policymakers are open to considering a further LTRO, sources close to the bank say, but they face resistance from orthodox policymakers already worried by the balance sheet risks the ECB has taken on with the first two operations.

Germany's Bundesbank has already said the ECB should not significantly increase the risks associated with providing liquidity to Greece, and believes the impact of a Greek exit from the euro zone would be substantial but "manageable".

Easing the requirements on the collateral banks need to put up to access ECB funds is another way the central bank could help lenders short of liquidity - but such a technical step will not help if they become insolvent and a systemic risk.

Draghi is pressing governments rather than the ECB to take the decisive action and delivered a stark message last Thursday, saying: "We have reached a point in which the process of European integration needs a courageous leap of political imagination in order to survive."

(Additional reporting by Eva Kuehnen, editing by Mike Peacock)

FOREX-Greek polls help euro rebound but rally seen fading

By Anirban Nag


LONDON, May 28 (Reuters) - The euro recovered from two-year lows on Monday as Greek opinion polls showed parties which favour sticking with the country's international bailout deal gaining support, leading investors to cut some of the record bearish bets against the common currency.

Most investors were pessimistic over how long the rebound would last, with many worrying about the lack of growth in Europe and the fragile health of Spanish banks. These concerns have dragged the euro 4.7 percent lower in May and left it on track for its worst monthly performance since September.

The euro drew support from opinion polls which suggested a victory for the conservative New Democracy party in the June 17 election. That would make it more likely that the next Greek government will stick to the terms of the bailout agreed with the European Union and the International Monetary Fund, enabling it to stay in the currency club.

These expectations saw the euro rise 0.7 percent to $1.2595 , pulling away from Friday's $1.2495, its lowest level since July 2010. It hit a session high of $1.2625 as stop-loss orders above 1.2620 were triggered, although robust offers layered at $1.2630/50 would check gains, traders said.

Volumes though were on the lower side due to a holiday in some parts of Europe, with the U.S. also shut.

"Investors have got a bit exhausted selling the euro in the absence of more negative news," said John Hardy, currency strategist at Saxo Bank. "So we are seeing some consolidation after the euro's sharp drop from $1.33 to around $1.25."

Indeed, speculators bolstered their euro bearish bets to record highs in the week ended May 22, while dollar longs rose to the highest since at least mid-2008, leaving ample scope for a correction as they cut positions and book profits.

"Heading into the Greek elections we'll fluctuate a lot. Because the market is very, very short euro, reactions to any positive news may be bigger than those to negative news," said Mitul Kotecha of Credit Agricole Corporate and Investment Bank.

"That said, even if we get some good news from Greece, the weight of bad news elsewhere is likely to keep any bounce in the euro short-lived," he said.

Sentiment towards the euro took a knock towards end of last week as the state takeover of Spain's fourth-largest lender, Bankia, intensified worries that the rising cost of supporting banks may push the euro zone's fourth-largest economy to seek an international bailout.

The bank last week asked for rescue funding of 19 billion euros and its shares opened down 26.75 percent on Monday. On top of that, Spain revealed that its highly indebted regions faced 36 billion euros of debt refinancing bills this year, way above the previously stated 8 billion euros.

All of which drove the yield spread between 10-year Spanish and German 10-government bonds to a euro-era high.

TEMPORARY GAINS

The euro also rose against the Swiss franc to 1.2030 after the Swiss National Bank head Thomas Jordan said that Switzerland is drawing up plans for emergency measures including capital controls in case the euro collapses.

He added he will continue to defend a cap on the franc in the meantime. The euro had jumped to its highest since mid-March on Thursday on rumours that Swiss authorities were planning to impose taxes on bank deposits.

With the euro gaining some ground, the dollar index, which tracks its performance against a basket of major currencies, came off its highest level since September 2010, hit on Friday, to last stand at 81.958, down 0.5 percent on the day.

The dollar also lost 0.3 percent against the yen, last fetching 79.40, with traders citing dollar-selling by Japanese exporters who had missed a chance to sell it above 80.00 yen and are now doing so at lower levels.

The yen was further supported as the Bank of Japan minutes suggested a pause in easing, by complaining of "misunderstanding" in markets that they will keep loosening automatically until 1 percent inflation was in sight.

The Australian and New Zealand dollars jumped more than 1 percent against the dollar. The Aussie was bolstered by buying from real money investors and corporates and that helped it pull away from a six-month low of $0.9690 hit last week.

(Additional reporting by Antoni Sladkowski; Editing by Catherine Evans)      

Euro Crisis: Is the Currency (Finally) Doomed?

By Michael Schuman | @MichaelSchuman | May 24, 2012

Felix Kindermann/DPAZ/ABACAPRESS.COM

(L-R) Italian Prime Minister Mario Monti talks to German Chancellor Angela Merkel and 

French President Francois Hollande during the EU summit in Brussels, Belgium on May 23, 2012

Since the start of Europe’s debt crisis in 2009, there has been a steady drumbeat of predictions that the euro was doomed. The problems were too intractable, the debts too large, the political will too feeble. So far, the doomsayers have been wrong. The leaders of Europe have managed to put a bandage here and a few stitches there to keep the monetary union together. But now we really have to ask if the game is up. The years of half-measures, misguided policy and delusional stubbornness may finally be building up to crush the euro, like a cartoon snowball rolling downhill. Financial markets are clearly smelling an approaching debacle – the euro this week hit its lowest level against the dollar since mid-2010. 

Let’s take a quick look at the mounting evidence of impending catastrophe:

Europe has all but admitted that Greece will exit the euro zone. It seems impossible to me that the second round of elections in Greece on June 17 will produce a government that will strictly adhere to the austerity measures agreed to by the previous government in return for European Union bailout funds. Yet German Chancellor Angela Merkel has made it clear she has no intention of renegotiating. “We want Greece to remain in the euro zone,” she said after Wednesday’s summit of E.U. leaders in Brussels. “But the precondition is that Greece upholds the commitments it has made.” With that attitude, the leaders of Europe might as well boot Athens out of the union right now. Unless someone is willing to bend here, Greece won’t get its rescue money, and will likely run out of funds by early July, which could force the country to reissue its own currency. No wonder European finance ministers earlier this week talked of the need for contingency plans to combat a Greek exit.

(MORE: Euro Crisis: Why a Greek Exit Could be Much Worse Than Expected)

If a failed bailout doesn’t push Greece out of the euro zone, the slow-motion bank run will. Unless something is done to stop the flow of deposits out of Greek banks, the sector will eventually fail, and that, too, could propel Greece to ditch the euro. And if that happens, the Greek bank run could spread to other weak euro countries like Spain and Italy, nudging them out, as well, and threatening the entire union.

If Greece doesn’t tip off a wider crisis, then Spain just might. The situation in Spain continues to deteriorate. The zone’s fourth-largest economy finds itself in a nasty, no-win situation. If Madrid moves aggressively to fix its banks, which are burdened with massive bad loans from the country’s property bust, it could blow out the government’s finances (as in Ireland) and push the country towards a bailout. If Madrid continues to go slow on fixing its banking mess, uncertainty will persist, the economy will remain stagnate, and the country could slip towards a bailout. If the Spanish government asks the euro zone for funds to help shore up its banks, it could get cut off from private funding and end up needing a bailout. All I can say is: Oy vey!

Meanwhile, amid all of this chaos, the leaders of Europe have had no response. At their summit this week, European leaders announced no new initiatives for tackling the debt crisis. In fact, the divisions in Europe appear to be widening. Camps are emerging between those who want to move more decisively towards solving the crisis, by, for instance, issuing eurobonds, and those (in other words, Germany) who refuse to change course despite the mounting evidence that that course has failed.

(MORE: Is a Greek Exit from the Euro Inevitable?)

It comes as no surprise, then, that people are openly talking about preparing for an end to the euro. Martin Jacomb, chairman of Share Plc, wrote in the Financial Times that it might be best for Europe to simply throw in the towel and concede that the euro is a failure:

One way would be to accept that the opportunity to “save the euro” has been lost and for all 17 members to decide at once to revert to national currencies. The chance of differentiating between eurozone countries, weak and strong, has been lost.

Of course, nothing is inevitable. Even a Greek exit from the euro zone would not necessarily doom the entire currency. We’ve also hit these boil points in the crisis before – in May 2010, around the time of the first Greek bailout; and in November 2011, when Italy destabilized – and each time the leaders of Europe managed to yank a rabbit out of a hat and hold the monetary union together.

Yet the risks are rising that the debt crisis is slipping out of Europe’s control and the weight of the combined threats to the euro is becoming overwhelming. The world needs a firm plan of action from Europe: a euro-wide deposit insurance scheme to stop a euro-wide bank run; a real recapitalization program for weak euro zone banks; a clear plan on what to do with Greece; an expanded firewall to protect Spain and Italy from any Greek fallout; and a true agenda to support growth.

We’re not close to any of these steps. The more time slips away, the more likely the euro will, too.

(MORE: The Future of the Euro: Why Sentiment Alone Can’t Save the Union)

Euro drops sharply as fears take toll

By Alice Ross, Robin Wigglesworth, Scheherazade Daneshkhu and Peter Spiegel, FT.com

May 24, 2012 -- Updated 0211 GMT (1011 HKT)

Euro notes are pictured coming out of an ATM machine on June 22, 2011 in Athens, Greece

(Financial Times) -- The euro tumbled to its lowest level in almost two years as investors dumped riskier European equities amid signs that policymakers were bracing for the financial turmoil that could be unleashed by a Greek exit from the eurozone.

The single currency fell about a percentage point during European trading to its weakest level since the summer of 2010 as European leaders gathered in Brussels for an informal summit.

In a sign of how seriously eurozone countries are taking the possibility of a Greek exit from the single currency, it emerged that senior eurozone finance ministry officials had held a conference call on Monday during which each country was asked to detail the contingency planning their treasuries had done to prepare for a Greek departure.

European stock markets suffered their worst one-day drop in a month, while investors fled the riskier sovereign debt of the eurozone's periphery and piled into haven assets such as the government debt of the US, the UK and Germany.

"It looks like real panic, but it could get worse," said Christopher Iggo, chief investment officer for fixed income at Axa Investment Managers. "We could see real capitulation unless policymakers act decisively and massively."

The turmoil pushed Germany's 30-year bond yield below 2 per cent for the first time, even as the borrowing costs of Europe's more embattled countries shot up, underlining the severe strains in the continent's financial system.

The worries about the eurozone triggered sharp falls in oil and commodities markets. Brent crude, the global benchmark, hit its lowest level so far this year, falling to $105 a barrel.

The Bundesbank, Germany's central bank, said in a firmly worded monthly report that it viewed as unacceptable any relaxation of the terms of Greece's bailout -- as a majority of Greek voters had effectively demanded by backing parties that wanted revisions to those terms. The eurozone could manage the impact of a Greek exit, the Bundesbank said.

Taking an assertive line in Paris ahead of his first EU summit, François Hollande, France's new president, said he wanted eurozone leaders to discuss the role of the European Central Bank in providing further liquidity to banks and intervening in sovereign debt markets.

The sharp falls in the euro prompted calls that the single currency had finally cracked under the pressure of growing concerns over Greece's membership in the eurozone.

"Whatever the reasons it has held up so far, the euro does now finally seem to be crumbling," said Julian Jessop, chief global economist at London-based Capital Economics.

Asset managers and pension funds were on Wednesday cutting their euro exposure and moving into dollars, according to Citigroup. BNY Mellon said that appetite among its clients this week for the US dollar was twice as high as average over the past year.

G249X, German bonds

European importers caught short by the drop in the euro were scrambling to hedge their currency exposure, according to investment banks. The single currency barely moved against the dollar for the first quarter of the year, leading many companies to reduce their normal currency hedging activity.

"People have been caught by surprise," said Gerald Dannhaeuser, global head of foreign currency sales at Commerzbank. "Companies that need to hedge against a stronger dollar are more concerned now."

The relative strength of the euro in the face of escalating concerns over the eurozone debt crisis has puzzled companies and investors. The single currency rose 3 per cent against the US dollar in the first quarter of the year. But since the Greek elections on May 6, the euro has lost 4 per cent. By the close of London trading on Wednesday, the euro had fallen one per cent to $1.2544.

Additional reporting by Javier Blas in London

Euro Summit: PM Angry At Failure To Agree

By Robert Nisbet, Europe correspondent | Sky News

24 May 2012

A summit of European leaders has ended without clear agreement on how best to restore confidence in the euro, despite pleas from the British PM to get a grip on the crisis.

The informal dinner stretched into the night as the 27 leaders chewed on ways to boost growth.

These ranged from lending more money to small and medium businesses and redeploying structural funds to help generate youth employment.

The President of the European Council , Herman Van Rompuy, said the discussions were "focused and frank" and ended with broad agrement that in order for the single currency to survive, economic and monetary union needs to be taken to "a new stage".

Jose Manuel Barroso, the head of the European Commission stressed that everyone wanted Greece to remain in the euro but warned: "We will stand by Greece while Greece stands by its commitments" to international lenders.

That was echoed by the German Chancellor Angela Merkel, who said after the summit: "We want Greece to stay in the euro but we insist that Greece sticks to commitments that it has agreed to."

Greek voters go back to the polls on June 17 after an election failed to produce a viable coalition.

But sources say the dinner exposed deep divisions between Germany and France over how to tackle the crisis.

The new French President Francois Hollande suggested so-called eurobonds, backed jointly by all 17 euro countries, would help bring down borrowing costs in troubled nations.

Ms Merkel remains implacably opposed to the idea , which she believes runs contrary to EU laws and would let governments off the hook in countries like Greece.

Mr Hollande also suggested that Europe's new permanent bailout fund should be allowed to dip into the European Central Bank's reserves and pump cash directly into the troubled banking sector.

He thinks that would help avoid another credit crunch, but Germany believes it would set a dangerous precedent.

Also at the meeting, David Cameron delivered an uncompromising message to eurozone leaders: you must get a grip on the issues undermining confidence in the currency.

He told the 26 other leaders that no new money should be thrown at the crisis, but existing funds could be re-prioritised to kick-start growth and encourage youth employment.

Leaving the summit in the early hours, Mr Cameron said: "There were good innovative ideas that can help growth in Europe, but frankly there were some bad ideas too.

"A financial transactions tax is a bad idea, it will put up the cost of people's insurance, put up the cost of people's pensions, it would cost many many jobs, and it would make Europe less competitive and I'll fight it all the way."

Mr Cameron also said the European Central Bank should be "used" more effectively to deal with the crisis.

The Prime Minister is understood to have supported continued belt-tightening in countries such as Greece and Spain, but he has moved further away from the German stance that austerity measures should be the main response to the crisis.

Earlier in the Commons, the Labour leader Ed Miliband derided Mr Cameron as the "high priest" of austerity, who was losing the economic argument.

The Brussels summit was never designed to produce concrete proposals, but feed ideas on how to stimulate growth into a formal European Council summit on June 28.

However, the market reaction to continued stalemate in Greece, as well as problems with the banking system in Spain had put greater expectations on this gathering to produce a roadmap for growth.

Expectations which, once again, have been dashed.

War-Gaming Greek Euro Exit Shows Hazards in 46-Hour Weekend

Jana Randow and Gabi Thesing, ©2012 Bloomberg NewsTuesday, May 22, 2012

May 23 (Bloomberg) -- Greece may have only a 46-hour window of opportunity should it need to plot a route out of the euro.

That's how much time the country's leaders would probably have to enact any departure from the single currency while global markets are largely closed, from the end of trading in New York on a Friday to Monday's market opening in Wellington, New Zealand, based on a synthesis of euro-exit scenarios from 21 economists, analysts and academics.

Over the two days, leaders would have to calm civil unrest while managing a potential sovereign default, planning a new currency, recapitalizing the banks, stemming the outflow of capital and seeking a way to pay bills once the bailout lifeline is cut. The risk is that the task would overwhelm any new government in a country that has had to be rescued twice since 2010 because it couldn't manage its public finances.

"Leaving is difficult and messy, so anyone who thinks it's easy is just wrong," said Lorenzo Bini Smaghi, who left the European Central Bank's executive board last year, in a phone interview. "The Greeks must be rational and protect themselves from rash decisions that they will live to regret. Leaving the euro is not the answer to their problems." He declined to say whether he thought an exit would occur.

No Renegotiation

The specter of Greece leaving the euro was evoked when ECB executive board member Joerg Asmussen told Germany's Handelsblatt in an interview published May 8 that Greece couldn't renegotiate its bailout terms if it wanted to stay in the euro. President Mario Draghi responded May 16 that the ECB's "strong preference" was for Greece to stay in the euro.

The remarks followed elections May 6 that propelled the Syriza party, which calls for reneging on the bailout accords, into second place. Syriza may build on that support in June 17 elections, according to three opinion polls, complicating Greece's efforts to avoid running out of cash by early July.

Syriza's opposition to the terms of Greece's financial-aid program doesn't mean the country would have to abandon the euro should the party forms a government after the elections, party leader Alexis Tsipras said May 20. The Pasok Socialist party and the New Democracy party, which have taken turns running Greece over the past four decades, favor meeting the bailout terms.

First in Century

"This is the first time since the beginning of the last century that it's not about the left or right winning, it's about pro-bailout or anti-bailout," said Aristotle Kallis, professor of modern and contemporary history at Lancaster University in the U.K.

European leaders meeting today in Brussels are seeking to keep Greece within the 17-nation single currency as new French President Francois Hollande and German Chancellor Angela Merkel disagree on how much austerity is needed to stem the crisis.

In the end Greece will stick to its commitments, said Bill O'Neill, chief investment officer for Europe, Middle East and Africa at Merrill Lynch Wealth Management in London.

"We don't think Greece will walk away, even if the result after the June 17 election is difficult for the pro-bailout parties," he said in a May 21 interview on Bloomberg Television's "The Pulse" with Maryam Nemazee. "We don't think they will deliberately step away from the bailout. There will be a process of negotiation in a worst-case scenario, but we don't believe a Greek exit is going to happen."

18-Month Forecast

Still, Citigroup Inc. economists said in a May 7 research note that Greece's election results increase the risk of the country leaving the euro within the next year to 18 months to as high as 75 percent. More than 50 percent of investors surveyed by Bloomberg News predict an exit of a euro member this year.

A euro exit could be in the cards almost as soon as the new government is formed should new leaders decline to adhere to the bailout terms of spending cuts and economic modernization, said Marco Annunziata, a former International Monetary Fund executive who now works as chief economist at General Electric Co. in San Francisco.

"Time is of the essence," he said in a telephone interview. "Events may unfold faster than we expect. The key risk is that anti-reform statements by a new government might trigger a run on deposits."

Such a run could induce the ECB as early as the following Friday to cut off further funding to Greek banks at a time when the government lacks money to recapitalize them, said Carsten Brzeski, a former European Commission economist who now works for ING Group in Brussels.

Stocks Drop

Stocks fell in Asia amid concern at the dangers posed by any Greek departure from the euro, with the MSCI Asia Pacific Index losing 1.2 percent as of 11:44 a.m. in Tokyo. The euro was little changed at $1.2683. Former Greek Prime Minister Lucas Papademos said an exit for his nation would be "catastrophic" and have implications for the euro region, the Wall Street Journal reported, citing an interview.

"Although such a scenario is unlikely to materialize and it is not desirable either for Greece or for other countries, it cannot be excluded that preparations are being made to contain the potential consequences of a Greek euro exit," the Wall Street Journal quoted Papademos as saying. CNBC television separately quoted Papademos as saying there aren't preparations underway in Greece for a euro exit.

With further bailout payments suspended by EU leaders to await the government's direction and the country's coffers expected to run out of cash within two months, Greece's options would begin to narrow.

Bank Runs

A new government may have to respond with capital controls to prevent citizens, faced with potential devaluation of their savings, from withdrawing their money from banks, said Dawn Holland, a senior research fellow at the National Institute of Economic and Social Research in London.

"This has to happen very quickly, as capital flight has already happened," she said. "This is when things could get ugly too, as on an individual basis you cannot blame people for wanting to hold on to their euros."

Greek bank deposits dropped about 23 billion euros ($29 billion) in the nine months through March, or about 13 percent, to about 160 billion euros, central bank data show. President Karolos Papoulias said on May 14 that about 700 million euros had been withdrawn, without specifying over how many days.

Should the decision to discard the euro be taken, Greek officials would have to request a meeting of euro-area finance ministers and leaders to set the exit conditions.

New York Close

The departure preparations could come as soon as the New York bond market's close for the weekend at about 5 p.m. on a Friday. That's 11 p.m. in Frankfurt and Brussels, home to most European institutions, and midnight in Athens.

"We have to assume that some plans have already been made," said Gabriel Stein, a director at Lombard Street Research in London. "If not, people at the IMF and the ECB are failing in their duties to shareholders and taxpayers."

European Union Trade Commissioner Karel de Gucht told De Standaard in an interview published May 18 that European officials are already working on contingency plans.

An ECB spokeswoman who declined to be named reiterated the central bank's policy of not commenting on emergency plans or possible scenarios.

Central bankers in Europe have already started discussing the possibility of a Greek exit from the euro area and how to handle its fallout, Swedish Riksbank Deputy Governor Per Jansson told Bloomberg News in an interview May 11.

A Greek exit from the euro could be "technically" managed, ECB Governing Council member Patrick Honohan, who analyzed the breakup of the currency union between Ireland and the U.K. in a 1984 research paper, said in a speech in Estonia's capital, Tallinn, on May 12. It "is not necessarily fatal, but it is not attractive."

To stem any dollar shortages as a result of market panic, other central banks including the U.S. Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank probably would stand ready with swap lines augmented after the bankruptcy of Lehman Brothers Holdings Inc. in 2008.

On Saturday, finance ministers could converge on Brussels to prepare for the leaders' summit on Sunday in which Greece's exit plan would be finalized, Brzeski predicted.

He said he expects the best Greece can hope for is a one- time loan to soften the economic shock even as it pursues aid possibilities from the IMF.

'Stray Dog'

"Europe is likely to throw them a few bones to ensure they're not kicking the country out like a stray dog," Brzeski said.

While Greek officials negotiate in Brussels, lawmakers in Athens may announce on the Saturday that they plan to issue a new currency, likely to be called drachma. Like its predecessor it would float freely in the market. Banks, meanwhile, would be instructed to redenominate all assets and liabilities, including bank accounts, wages and outstanding debt, according to the exchange rate chosen.

"A country leaving the euro zone should introduce its new currency at parity with the euro," Capital Economics economists led by Roger Bootle wrote in a paper submitted for the 2012 Wolfson Economics Prize. "This would not only avoid the temptation for retailers to round up but also make clear to consumers that this had not been the case, and promote acceptance and understanding throughout the economy."

Cash Needs

At that time, the government could also commission a new set of banknotes and coins.

De La Rue Plc, a U.K. company that prints notes for more than 150 countries, is already preparing for a reintroduction of the drachma, the London-based Times newspaper said on May 18. The company has asked production staff to choose potential security threads for use in new banknotes and has retrieved covers from an old collection of copper molds, used for watermarks, the newspaper said, citing people it didn't name.

De La Rue declined to comment on the newspaper report.

Until the new notes and coins are delivered, euros might still be used for small purchases, while the share of electronic payments, such as bank transfers, and credit or debit card transactions, would increase as people try to save their euros, according to Lombard Street's Stein.

At the same time, the country may deploy its military as soon as early morning Saturday and close its borders, preparing to stamp euros into drachma as an interim solution once a public announcement has been made, Holland and Brzeski said.

Immediate Default

Greece would most likely also default immediately on its 280 billion euros of debt and find itself cut off from funding options that normally include IMF aid and the capital markets, according to Charlotte Gaitanides, head of European Studies at the University of Flensburg in Germany.

"Greece's economy is still uncompetitive," she said in a telephone interview. "The low value of the new currency will almost inevitably bring about a massive balance of payments deficit. So that means the country will have to go to the IMF."

Negotiations with the IMF would probably drag on for most of the weekend, with Greece trying to win compromises over implementing budget cuts. The IMF likely would seek the strictest possible conditions for aid from a country that has violated past terms, to ensure the support of poorer, emerging- market shareholders.

The IMF has to be "technically prepared for anything because it's our job," Managing Director Christine Lagarde said in an interview with Dutch public television broadcast on May 16. "I'm not suggesting that this is a desirable solution. I'm just saying that this is within the range of multiple options."

EU Membership

European ministers, now seeking ways to keep Greece in the euro, would in an exit scenario also focus on whether the country can stay in the 27-country EU, which guarantees it tariff-free trade and the free movement of citizens and labor.

"Europe won't retreat completely," said Thomas Mayer, chief economist at Deutsche Bank AG in Frankfurt, in a phone interview. "The situation already is extremely unstable in Greece and the last thing lawmakers would want is Greece falling back into anarchy."

The challenges of this historical undertaking may prove overwhelming to a brand-new government in a country that is already struggling with basic bailout conditions such as regular tax collection.

"I am completely convinced they could not orchestrate an orderly exit," said Erik Nielsen, chief economist at UniCredit SpA in London. "This is a country that can't implement laws, so how in the world are they going to secretly agree to print money, control the banks, control capital flows and think this is going to be orderly? It's completely impossible."

Public Fear

No matter how long the process takes, news may leak that Greece is preparing to leave monetary union, sending Greeks fearful for their savings into the streets. From that point, the national government and European authorities would be racing to finish negotiations, contain speculation and restore order before officially informing the public that the euro they knew was no longer there.

"There is no reason to think there won't be riots and violence," said Lefteris Farmakis, a strategist at Nomura International Plc in London. "It would be a pretty disastrous situation. People have no understanding of the consequences of a euro exit."

As Sunday draws to a close in Europe and afternoon arrives on the U.S. East Coast, traders in Wellington, New Zealand, would be the first to face the opening of bond and currency markets at 7 a.m. local time on Monday.

"The whole world will be online when New Zealand opens up," said Sean Keane, an analyst in Auckland at financial advisory group Triple T Consulting and former head of Asia- Pacific rates trading at Credit Suisse Group AG. "You'll have every fund manager in New York on Sunday watching what's going on."

--With assistance from Maria Petrakis in Athens and Chris Bourke in Wellington. Editors: Anne Swardson, John Fraher

To contact the reporters on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net; 
Gabi Thesing in London at gthesing@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

Yen Slides as Fitch Downgrades Japan

May 22nd, 2012 at 12:09

The Japanese yen fell today as Fitch Ratings downgraded Japan’s sovereign credit rating because country’s actions to reduce public huge public debt are too slow.

Fitch cut Japan’s long-term foreign-currency rating from AA to A+ and lowered the local-currency grade from to AA- A+. The outlooks on both rankings are negative. Some financial specialists recommended buying the yen against the dollar. They are reasoning that the yen is too attractive amid present turbulent times and the currency would bounce back rather soon.

USD/JPY was up from 79.29 to 79.83 and EUR/JPY rose from 101.62 to 101.96 as of 12:08 GMT today.

OECD sees euro crisis threatening world recovery

OECD sees world economy growing 3.4% in 2012

Reuters 5:40 a.m. CDT, May 22, 2012

The United States and Japan are leading a fragile economic recovery among developed countries that could yet be blown off course if the euro zone fails to contain the damage from its problem debtor states, the OECD said on Tuesday.

In its twice-yearly economic outlook, the Paris-based Organisation for Economic Co-operation and Development forecast that global growth would ease to 3.4 percent this year from 3.6 percent in 2011, before accelerating to 4.2 percent in 2013, in line with its last estimates from late November.

"The global economic outlook is still cloudy," OECD Secretary General Angel Gurria told reporters.

"At first sight the prospects for the global economy are somewhat brighter than six months ago. At closer inspection, the global economic recovery is weak, considerable downside risks remain and sizeable imbalances remain to be addressed."

Growth across the organisation's 34 members, generally the wealthiest in the world, would ease this year to 1.6 percent from 1.8 percent in 2011 and then reach 2.2 percent in 2013, the OECD said, also roughly in line with previous estimates.

Gurria said that public finances were "fragile", and in some cases "in dire straits", in OECD countries.

A perception that the burden of the economic crisis had not been fairly shared was fuelling a confidence crisis and European leaders should consider all possible measures to mend the bloc's debt problems.

"A bad outcome scenario in the euro area with implications for the rest of the world cannot be ruled out," he said.

The OECD forecast that the 17-member euro zone economy would shrink 0.1 percent this year before posting growth of 0.9 percent in 2013, though regional powerhouse Germany would chalk up growth of 1.2 percent in 2012 and 2.0 percent in 2013.

"We see a slow rebound of growth in the United States driven mostly by private demand, some pick-up in Japan and moderate to strong growth in emerging economies," OECD chief economist Pier Carlo Padoan told Reuters in an interview.

"We also see flat growth in the euro area which hides important differences, with northern countries growing and southern countries in recession," he added.

Although OECD economies were on the mend, the euro crisis could still spiral out of control with Greece struggling to remain solvent and Spanish banks needing to be recapitalised, Padoan said.

The European Central Bank's injection of one trillion euros ($1.3 trillion) of liquidity into the euro zone's banking system and an increase in European bailout funds and IMF reserves had helped keep the euro zone's debt crisis from spiralling out of control.

"If the situation gets worse, there are ways to enhance the firewall capacity which could include a stronger intervention or role of the ECB," Padoan said.

In particular, the ECB should not rule out buying government bonds again to keep borrowing costs down, lending to the ESM European bailout fund and cutting its benchmark interest rate, which currently stands at 1.00 percent. The ECB could also consider another injection of liquidity into the banking system.

U.S., CHINA ENGINES

In contrast to the euro zone, the United States was expected to continue to benefit from easy credit conditions and ultra-loose monetary policy, with the world's biggest economy forecast to grow 2.4 percent this year and 2.6 percent in 2013. In November, the OECD had forecast 2.0 percent for 2012 and 2.5 percent for 2013.

Although some budget tightening and a still weak housing market would be a drag on growth, private sector demand would continue to strengthen as the unemployment rate eased to as low as 7.5 percent by the end of 2013 from 8.1 percent in April.

The OECD said that while the United States needed to step up the pace of its fiscal tightening, if tax cuts were allowed to expire as scheduled in 2013 it could threaten growth.

Japan's economy was set to grow 2.0 percent this year and 1.5 percent in 2013 as a reconstruction boom after last year's earthquake and tsunami faded, although recovering world trade would offer support.

A rebound in global trade would be a bright spot for many economies, with the OECD forecasting a surge from 4.1 percent growth this year to 7.0 percent in 2013.

Export giant China was forecast to grow 8.2 percent this year and 9.3 percent in 2013 as interest rate cuts and increased social spending propped up domestic demand in the economy, which is not an OECD member.

Copyright © 2012, Reuters