Archive forMarch, 2012

G7 economic recovery fragile, patchy – OECD

The Organisation for Economic Cooperation and Development (OECD) anticipates two-speed growth in the G7 nations, with the Eurozone lagging behind North America. It estimates G7 economies will grow at an annualised rate of 1.9% in Q1 and Q2 2012, and advised central banks to continue with policy easing to support the fragile recovery. The OECD forecasts that the US will record 2.9% and 2.8% annualised growth in Q1 and Q2 2012, respectively. This contrasts growth expectations in Europe. During Q1 2012, Germany is expected to grow 0.1%, while Italy and Britain could contract 1.6% and 0.4%, respectively. Britain could return to growth in Q2 2012, expanding 0.5%, while the Italian economy is expected to continue in recession, contracting 0.1%. The organisation estimates surging oil prices could reduce growth by 0.1–0.2% in 2012.

Eurozone firewall of little long-term use – ECB’s Weidmann

European Central Bank policymaker and head of Germany’s Bundesbank, Jens Weidmann, said increasing Eurozone’s firewall does little other than buy time, and is likely to face political and financial limitations. Instead, leaders should focus on structural reforms to address the monetary union’s core problems. Weidmann remarks directly contradict OECD chief Angel Gurria’s call to build the ‘mother of all’ firewalls in the Eurozone. Eurozone finance ministers meet tomorrow to discuss combining their two rescue funds to increase the region’s crisis-fighting capacity to around €700bn.

Europe needs to exceed market expectations – OECD’s Gurria

Angel Gurria, Secretary General, Organization for Economic Co-operation and Development (OECD), said Eurozone ministers need to ‘overshoot market expectations’ while deciding on their firewall. Mr. Gurria has repeatedly demanded €1tr be set aside to combat the region’s crisis. However, finance ministers, who are meeting at the end of this week, are more likely to combine their two rescue funds (totalling about €700bn). They also aim to push the IMF into supporting the debt-ridden European economies.

Faster recovery required to fight unemployment – Bernanke

US Federal Reserve Chairman Ben Bernanke said that there was a need to speed up the US recovery to counter unemployment. Currently, unemployment stands at 8.3%. His comments suggested that the US Fed was ready to maintain an easy monetary policy to allow business and consumer confidence and demand to catch momentum.

UK economy probably averted a recession

The British economy could have managed to avoid a recession in Q1 2012, Bank of England (BoE)’s policymaker Martin Weale said in an interview with the Bath Chronicles newspaper. He, however, warned that the recovery would continue to be ‘choppy’, as stretched household budgets would not allow consumer spending to recover. The expected spike in data due to the Queen’s Jubilee celebrations and the Olympics would make it difficult to read the real underlying changes in the economy and we may have to wait until Q1 2013 for a more stable picture to emerge, he added.

Eurozone economy contracts beyond expectation in March

The Eurozone economy declined more than expected in March, with factory activity in France and Germany dropping much below what most economists had predicted. Markit’s Eurozone Composite PMI fell to 48.7 (consensus forecast 49.7) in March from 49.3 in February. A level below 50 indicates a contraction. The surveys indicated that business activity in Europe’s major economies, France and Germany, is beginning to decline, raising fears of a recession. Job losses in the Eurozone increased at the fastest pace since March 2010.

China’s factory activity shrinks for fifth consecutive month

The HSBC flash manufacturing purchasing managers’ index released today retreated to 48.1 in March from 49.6 in February (a four-month high), heavily influenced by the fall in the sub-index of new orders to 46.2, the second successive decline. A reading below 50 indicates factory activity is shrinking. However, HSBC, the index’s sponsor, considers 48 to be more significant for the economy.

North-south divide to continue in the Eurozone – Nowotny

Ewald Nowotny, the European Central Bank policymaker, in discussion with Der Standard’s website (an Austrian newspaper), said that the north-south divide in the Eurozone is likely to continue over the next three years. He added the crisis has highlighted the comparative inefficiency of economies in the south – Greece, Italy, Spain and Portugal – compared to export-oriented northern states such as Germany, Finland and The Netherlands. He also mentioned a rise in oil prices posed a major threat to Eurozone inflation.

Cold snap froze economic activity in Germany – Bundesbank

The Bundesbank noted that the German economy had recovered after contracting 0.2% in Q4 2011 in January, but plunging temperatures in the first half of February thwarted a sustainable recovery in industrial activity. However, forward-looking indicators suggest the economy is picking up. Due to a robust labour market, consumer spending has improved and there is willingness to invest. This, Germany’s central bank added, is specially benefitting the construction sector.

Eurozone contemplates expanding ESM’s firepower

Eurozone finance ministers are meeting on 30th and 31st March to consider the expansion of European Stability Mechanism, their permanent rescue fund, to about €700bn, Eurozone officials said. Currently, the European Financial Stability Fund (EFSF), the region’s temporary fund, and ESM can jointly lend up to €500bn. The G20 nations and markets are pressurising the Eurozone to commit more funds, in case larger Eurozone members such as Italy or Spain need to be rescued. However, Germany is adamantly opposed to the expansion. Also, fears of default by Italy or Spain have subsided, weakening the case for capacity increase.

Italy’s major political parties back Monti’s reforms

Italy’s Prime Minister Mario Monti received the support of the country’s main opposition parties to implement tough labour law reforms aimed at making the economy more competitive. Now the reforms need to be approved by the unions before being passed by Italy’s parliament. The parties also accepted the technocrat premier’s firm stance on justice and corruption.

Fitch lowers UK’s rating outlook to negative

Fitch revised the outlook on UK’s credit rating to ‘negative’ from ‘stable’, warning that the nation may lose its AAA rating in the next two years if it fails to cut public debt to a more sustainable level. The ratings agency expects sovereign debt to stabilise at around 94% of GDP by 2014-15.

Eurozone stabilising – Draghi

At a conference in Paris, the European Central Bank (ECB)’s President Mario Draghi said that the Eurozone economy was showing signs of stabilising. Ultra-cheap loans (€1tr) disbursed by the bank and fiscal reforms by governments in the region provided respite to markets, allaying fears of inflation. Earlier, German banks had expressed concern that loans given by the ECB could increase inflation in the region. Mr. Draghi, however, disagreed, and urged banks and governments to use the ECB’s funds to implement pro-growth reforms.

Greece secures final approval, spotlight now on Spain

Eurozone finance ministers gave their final approval to the €130bn bailout for Greece; the fund is expected to last up to 2014. Just as the Greek default threat takes a backstage, Spain announced that it has undershot its deficit target of 6.0% of GDP for 2011 and would not be able to meet the EU’s deficit target of 4.4% for 2012 either. Deficit for 2011 stood at 8.5%, and Spain expects 5.8% deficit in 2012 as it enters a recession. Madrid wanted the Eurogroup to consider slower-than-anticipated economic growth and the higher starting point while setting the goal for 2012. Nonetheless, it reaffirmed its commitment to restricting the imbalance to 3% by 2013. The Eurozone finance ministers have stretched the deficit target to 5.3% for this year, but mounted pressure on Spain by saying that meeting the target for 2013 was most important.

Greece could get bailout today, while EC inspectors visit Spain

Eurozone finance ministers are expected to sign off on a €130bn package for the country after ascertaining it has met the tough terms necessary to avail of the rescue fund. The International Monetary Fund (IMF) would also discuss granting Greece a four-year €28bn loan to support reforms at its board meeting this week. Meanwhile, inspectors from the European Commission would visit Spain to assess the country’s budgetary situation after it reported a larger-than-expected budget deficit in 2011.

Private creditors clear Greece bond swap deal

Greece announced that 85.8% of its private creditors holding bonds worth around €152bn have agreed to the bond swap deal. This exceeds the minimum threshold required for the deal to go through. It also announced enforcing collective action clauses on bonds worth around €177bn regulated under Greek law that were not tendered for swaps. The private sector involvement (PSI) deal, which is aimed at shaving €100bn from Greece’s outstanding debt, is a pre-requisite to draw the second €130bn bailout. The country’s Finance Minister Evangelos Venizelos is expected to speak with Eurozone finance ministers, who will formally sign off on Greece’s rescue package later in the day.

Greece’s fate to be decided today

The chances of Greece securing the €130bn bailout brightened as signs emerged that the bond swap deal, a pre-condition to the bailout, would be successful. Yesterday, thirty banks and funds holding 40.8% of Greece’s €206bn debt pledged support to the bond swap offer. They joined other Greek and international banks and pension funds-(holding about €120bn of Greece’s debt) that have already consented to the deal. This brings the acceptance threshold closer to the 75% minimum level required for the deal to go through. Eurozone finance ministers, who have conditionally accepted the deal, are expected to sign off Greece’s bailout in a conference call on Friday if Greece’s bond swap deal is finalised.

IIF pegs Greece default loss at EUR1tr

The Institute of International Finance (IIF) estimated a disorderly default by Greece could cost the Eurozone more than €1tr. In a staff note, it said that a default would raise the cost of rescuing other weaker members-the cost of bailing out Ireland and Portugal could increase to €380bn over the next five years, while Italy and Spain would require about €350bn in external funding; also, it believes policymakers would have no control over the crisis. IIF stressed that bank recapitalisation alone would cost about €160bn. Furthermore, it added Greece would have to exit the Eurozone, causing a financial shock to the European Central Bank, which would raise questions about the stability of the single currency zone. Meanwhile, the Greek Debt Management Agency confirmed the Finance Minister’s views about imposing the Collect Action Clauses (CACs) that would make the debt swap deal binding on all bondholders, if a majority of the creditors sign up voluntarily.

Thursday deadline for Greece’s swap deal

The Institute of International Finance (IIF), which represents Greece’s private lenders, backed the country’s bond swap deal that entails a 53.5% write-down in the value of their bonds, with real losses amounting to 74%. This would effectively wipe out around €100bn of Athens’ debt and reduce it to a more sustainable level. Private lenders – banks, insurers and institutional investors – have until Thursday night to accept the swap deal. Meanwhile, Greece’s Finance Minister Evangelos Venizelos told Reuters the terms of the bond replacement deal were the best Greece could offer and warned that the nation would not hold back from enforcing ‘collective action clauses’ (CACs), making the swap compulsory if acceptance by private creditors is not voluntary. However, if less than 75% creditors participate, the deal would be called off. This would certainly result in a default and place the Eurozone back into a debt crisis.

China lowers growth target to 7.5% for 2012

While addressing the annual parliamentary session, Chinese Prime Minister, Wen Jiabao, set a modest 7.5% growth target for 2012. The target was lowered from 8% in a widely anticipated move by investors as the country shifts focus to stable economic growth and calms inflationary pressures. The Premier also added expanding consumer demand, which would be achieved through better income distribution, was the priority for 2012.

EU finance ministers focus on growth in summit

EU finance ministers debated about the right balance between government spending cuts and implementing pro-growth measures in the first summit (after two years) that was not clouded by the debt crisis talks. Greece’s second bailout received a provisional approval. Today, 25 of the 27 EU members would sign the fiscal compact to amend their respective constitutions to implement stricter budgetary norms.

Eurozone banks lapped up €530bn of ECB funds

Eight hundred banks borrowed €530bn under the European Central Bank (ECB)’s second long-term refinancing operation (LTRO). This will include €300bn net new money as €230bn would be used by banks to roll over central bank loans taken previously. Borrowings totalled €489bn in the first LRTO in December.