A scheme to segregate the problematic property loans of all Spanish banks under one roof is believed to be under discussion. The “bad bank” scheme, which is largely being orchestrated to avoid an international rescue programme similar to the ones required by Greece, Ireland and Portugal, would also help Spain retain credibility in international markets.

In a widely expected move, Bank of Japan (BoJ) today stretched its limit on government bond purchases by ¥10tr, but reduced funds set aside for fixed-rate market operations by ¥5tr, effectively increasing its version of quantitative easing by ¥5tr to ¥70tr. This will also help the Bank achieve its inflation target of 1%. BoJ voted unanimously to keep interest rates unchanged at 0.1%.

European Central Bank (ECB) President, Mario Draghi, said the €1tr ultra cheap funds offered by the Bank have created room for governments to reinforce their balance sheets and pursue structural reforms that would boost growth in the Eurozone. He said the ECB’s primary responsibility was to promote price stability in the region, while the responsibility to spur growth lay with governments.

The US Federal Reserve will hold its monthly policy meeting today. The Fed’s stance on the economy is expected to be slightly more optimistic, but any revision in interest rates seems unlikely. However, the Federal Open Market Committee (FOMC) meeting will be closely watched for indication on further QE in the near future.

Dutch Prime Minister, Mark Rutte, offered the resignation of his 18-month old minority coalition government to Queen Beatrix after the populist Freedom Party withdrew support over differences about budget cuts. The political vacuum could push the state into elections as early as June. The resultant uncertainty poses a threat to the nation’s AAA rating unless parties in and outside the coalition reach a consensus on budget cuts. The political paralysis in the Netherlands, which has been Germany’s closest ally in enforcing fiscal discipline in the Eurozone, could also affect implementation of EU’s fiscal compact. German Chancellor Angela Merkel’s fiscal compact seems to be in jeopardy with support from the Netherlands faltering and French presidential election frontrunner, Francois Hollande, vowing to renegotiate the agreement.

The HSBC Flash manufacturing purchasing managers’ index (PMI) moved up to 49.1 in April from 48.3 in March. Though the reading below 50 still implies contraction in factory activity, the recovery in the new orders and new export orders helped the headline index recover. The uptick in manufacturing suggests that monetary easing at the beginning of this year has stimulated factory activity. This should ease concerns about a hard landing of the economy, especially as recovery in the US is showing signs of cooling.

The global economy is expected to grow 3.3% as Asia and Latin America remain the main drivers, as per a poll by Reuters. Easing of the monetary policy in Asia is likely to spur growth in the region. Recovery in the US, though one of the best among its western peers, has not been as good as expected. Yet, the economy is expected to grow 3.2% in 2012 and 4.3% in 2013. The Eurozone, with large variation in the pace of growth among northern (Germany and France) and southern economies (Italy, Spain and Greece), could experience a mild recession until Q3 2012, leading to a contraction of 0.4% in 2012.

The balance sheets of 58 European banks, including BNP Paribas and Deutsche Bank, could shrink by about US$2.6tr, or 7%, in the next two years, if governments are not able to meet fiscal debt targets or if the Eurozone faces shocks that its firewall cannot contain, the International Monetary Fund (IMF) opined in its Global Financial Stability Report released yesterday. Though steps by the EU and the ECB have placated financial markets, global financial risks have not alleviated from six months ago, the IMF added.

Spain threatened economic sanctions against Argentina after the South American nation unveiled plans to expropriate Spanish company Repsol’s controlling stake in YPF. YPF is Argentina’s largest oil producer. Repsol, too, vowed to fight the takeover, terming it ‘unjustified’. Repsol valued YPF at US$18bn and said it would seek compensation accordingly. Argentina flatly refused to accept this price for YPF. On Monday, Argentina’s President, Cristina Fernandez, ordered the renationalisation of YPF in a populist move aimed at curbing the nation’s surging fuel import bill even as state finances worsen. Argentina is also at odds with Britain over oil exploration activities in the Falkland Islands, over which it claims sovereignty.

Spain’s borrowing costs on 10-year government bonds rose above 6% Monday as investors envisaged a new crisis brewing in the Eurozone. Madrid’s interest cost soared after Prime Minister Mariano Rajoy lowered the deficit target for 2012 amid fears of Spain entering a second recession since 2009 and effects of the ECB’s ultra-cheap funds begin to wane. Fear of the country’s banks needing recapitalisation with emergency EU funds, also fuelled the rise in yields. Spain aims to raise around €2-3bn at today’s auction. A more difficult sale of 2- and 10-year bonds, aimed at raising €1.5-2.5bn, has been scheduled for Thursday. Meanwhile, to placate investor fears, Madrid threatened to impose stricter control, as soon as May, over its 17 autonomous regions that breach spending limits.

The Spanish government’s bond yields and cost of insuring its debt rose to record highs Friday. This was likely fuelled by record borrowing by Spanish banks from the European Central Bank. Global markets would focus on the country’s success in auctioning 2- and 10-year bonds Thursday.

China’s economy grew at an annual pace of 8.1% in Q1 2012 compared to 8.9% in Q4 2011, marking the fifth consecutive quarter of falling output, the National Bureau of Statistics reported. Economists were expecting 8.3% growth. Though China’s Prime Minister Wen Jiabao has called for a monetary policy fine-tuning, a major swing is not expected, as the 8% rate of growth is not likely to be detrimental to job creation. Earlier, the government revised its growth forecast for 2012 to 7.5%.

European Central Bank (ECB) Executive Board member, Benoit Coeure, said markets have piled undue pressure on Spain, pushing its borrowing costs higher, whilst ignoring its reform initiatives. He also said that the ECB’s Securities Market programme should allow the purchase of debt of regional members, if needed.

As per a survey by the Bank of France, the French economy stagnated in Q1 2012, with no indication of a recovery in activity in the near term. The economy grew 0.2% in Q4 2011.

China registered a trade surplus of US$5.4bn in March (market expected a trade deficit of US$1.3bn), reversing the trade deficit of US$31.5bn in February as exports grew 8.9% outpacing the 5.3% increase in imports. Exports and imports rose 18.4% and 39.6%, respectively, in February. This is the first indicator not distorted by February’s Lunar New Year holiday and indicates the economy is headed for a soft landing. The economy is expected to slow down for the fifth consecutive quarter to 8.3% in Q1 2012.

European Central Bank President, Mario Draghi, said the current high unemployment and shrinking output warrants that ECB continues to operate in ‘crisis mode’. “Downside risks to the economic outlook prevail,” he added. Recently, Bundesbank President Jens Weidmann has led voices asking the ECB to start raking in the over €1tr it pumped into the Eurozone to soothe liquidity concerns and restore market confidence. Mr. Draghi appeared relaxed about Spain’s rising borrowing cost, terming the rise in yields as a signal that markets were eager for economic reforms.

Investors holding Spanish bonds were left jittery after the country’s government highlighted high public debt levels during its budget announcement yesterday. Spain’s debt-to-GDP ratio is expected to shoot up to 79.8% from 68.5% in 2011, the highest level in 22 years, despite the implementation of measures aimed at saving €27bn.

A quarterly survey by the British Chambers of Commerce showed that the UK economy avoided a recession, growing 0.3% supported by stronger exports. However, the economy is expected to expand around 0.6% during 2012, lower than the 0.8% growth estimated by the Office of Budgetary Responsibility. This shows that the path to normal growth is difficult. The survey also showed that employers exhibited the strongest desire to hire in nine months, raising hopes that unemployment (currently at 8.4%) would retreat.

The official Purchasing Managers’ Index (PMI) that captures activity in large factories rose to an 11-month high of 53.1 in March, bettering February’s 51.0. The PMI rebounded as domestic demand supported an increase in new orders (the related sub-index rose to 55.1 in March from 51 in February). The new export orders index, too, edged up to 51.9 from 51.1, although indicating subdued growth. On the contrary, the PMI compiled by HSBC, which focuses on activity in smaller factories, fell to 48.3 (flash reading 48.1) in March from 49.6 in February, indicating a marked slowdown in production.