Asia FX By Cornelius Luca - Mon 08 Oct 2012 16:52:14 CT (Source:CME/www.lucafxta.com)
The financial markets were adverse to risk on Monday amid renewed concern about the Eurozone peripherals and expected weak earnings for the third quarter in the US. Political and economic uncertainty in Greece and Spain continue despite the launch of Eurozone's permanent bailout fund, the European Stability Mechanism. The foreign currencies ended divergently, but opposite of the way they closed on Friday. The European currencies fell, while the yen and the commodity currencies rose. The US stock markets fell. Gold, oil and silver closed down as well. The short-term outlook for the major currencies is sideways. The medium-term outlook for most of the foreign currencies is slightly bullish. The LGR short-term model is short on all foreign currencies. Good luck!
Today's economic calendar
UK: BRC retail sales monitor for September
UK: RICS housing price balance for September
Japan: Current account for August
Japan: Eco watchers survey: outlook / current for September
Australia: National Australia Bank's business confidence for September
Asian Stocks Decline as IMF Cuts Global Growth Forecasts (Bloomberg)
Asian stocks dropped, with the regional benchmark index heading for its second day of decline, after the International Monetary Fund cut its global growth forecasts as its member countries convene in Tokyo this week. Honda Motor Co. (7267), Japan’s second-biggest carmaker by market value, slid 1.4 percent in Tokyo. Altech Co. slumped 6.3 percent after the Japanese distributor of industrial machinery lowered its full-year net income forecast. Oil Search Ltd., Papua New Guinea’s biggest oil producer, climbed 3.1 percent in Sydney after signing exploration license agreements with Total SA affiliates. The MSCI Asia Pacific Index (MXAP) fell 0.1 percent to 122.03 as of 9:29 a.m. in Tokyo, before markets in China and Hong Kong open. The regional benchmark index gained 4 percent last month amid speculation China will add to measures to boost growth in the world’s second-largest economy, following moves by central banks in the U.S. and Japan.
“Asia is of course a world major trader and major exporter, and it’s suffering from not only a slowdown in China, but also across all of Europe,” said Matthew Sherwood, Perpetual Investments’ head of investment markets research in Sydney. Perpetual manages about $25 billion. “We are looking at balance-sheet risks in each individual company because we are in a capital-constrained world. Therefore, companies that can fund their own balance sheets are in a very strong relative position.”
Japan Stocks Decline After IMF Cuts Global Growth Outlook (Bloomberg)
Oct. 9 (Bloomberg) -- Japanese shares fell as markets opened after a public holiday, with the Nikkei 225 (NKY) Stock Average headed for its first loss in three trading days, after the International Monetary Fund cut its global growth outlook. Komatsu Ltd. (6301), a construction-machinery maker that gets 80 percent of its sales overseas, dropped 2.3 percent. Honda Motor Co. (7267) paced losses among automakers on a report it plans to cut Chinese production along with Toyota Motor Corp. and Nissan Motor Co. (7201) Daiichi Chuo Kisen Kaisha slid 3 percent after saying it may cancel ship orders, pare its fleet and sell new stock. CellSeed Inc., which develops regenerative medicine, soared 14 percent after a Japanese professor won the Nobel Prize for his research on stem cells. The Nikkei 225 dropped 0.4 percent to 8,829.95 as of 9:47 a.m. in Tokyo. The broader Topix Index retreated 0.2 percent to 735.82, with 21 out of the 33 industry groups falling.
Shares also fell after a report showed expansion of Japan’s current account surplus slowed in August. “Asia is of course a world major trader and major exporter, and it’s suffering from not only a slowdown in China, but also across all of Europe,” said Matthew Sherwood, Sydney-based head of markets research for Perpetual Investments, which oversees about $25 billion. “We are looking at balance-sheet risks in each individual company because we are in a capital-constrained world. Therefore, companies that can fund their own balance sheets are in a very strong relative position.”
U.S. Stocks Drop on Apple Slump as Europe Ministers Meet (Bloomberg)
U.S. stocks retreated, following last week’s advance in benchmark indexes, after Apple (AAPL) Inc. paced a decline in technology companies and as European finance ministers met to discuss the region’s government debt crisis. Apple, the world’s most valuable company, slumped 2.2 percent and dropped below $600 billion in market value. Facebook Inc. (FB), operator of the biggest social networking company, slid 2.4 percent after being downgraded at BTIG LLC. Netflix Inc. (NFLX), the world’s largest video-subscription service, advanced 10 percent after the shares were raised at Morgan Stanley. The Standard & Poor’s 500 Index slid 0.3 percent to 1,455.88 at 4 p.m. New York time, after climbing 1.4 percent last week. The Dow Jones Industrial Average fell 26.50 points, or 0.2 percent, to 13,583.65. Volume for exchange-listed stocks in the U.S. was 4.1 billion shares, the lowest since July 3.
“We’re back to dealing with the issues in Europe,” Bruce McCain, chief investment strategist at the private-banking unit of KeyCorp (KEY) in Cleveland, said in a phone interview today. His firm oversees $20 billion. “We’re going back to a period where investors become less enthusiastic as they realize the problems of the world have not gone away.” European finance ministers met in Luxembourg today to discuss Spain’s overhaul effort and closer banking cooperation, while German Chancellor Angela Merkel visits Greece tomorrow for the first time since the crisis erupted. The World Bank said policy makers in Asia’s emerging economies have room to provide more fiscal stimulus as China’s slowdown drags the region’s growth to an estimated 11-year low in 2012.
Bank Profit Leading S&P 500 as U.S. Income Growth Falters (Bloomberg)
As third-quarter earnings season begins, the companies analysts are most bullish about are the ones whose stock prices are farthest below their highs -- banks. While financial institutions in the Standard & Poor’s 500 Index climbed 24 percent in 2012 for the biggest rally in nine years, they remain 58 percent below the record of February 2007, according to data compiled by Bloomberg. Signs of a housing recovery prompted Wall Street firms to raise estimates for profit growth to 21 percent for the third quarter and 32 percent in the fourth, the most of 10 S&P 500 industries. Bulls say banks will continue to rally as Federal Reserve stimulus boosts earnings and helps companies from BB&T Corp. to KeyCorp and Wells Fargo & Co. (WFC) rebound from the 84 percent drop during the financial crisis. Bears say gains will be limited to traditional lenders and increased regulation will drag down firms that depend on trading and underwriting for revenue.
“As transactional volume increases for consumer, housing and business credit, there is an opportunity to increase earnings” among regional lenders, said Michael Shaoul, chairman of New York-based Marketfield Asset Management, which oversees $3 billion. Firms outside of the “purer banking model” face too much regulation, he said in an Oct. 3 e-mail.
Earnings Growth Disappears as Spending Cuts Hit Limit (Bloomberg)
Profit gains earned through job cuts and factory closings in the absence of a global economic recovery are starting to reach their limit. Third-quarter profits and sales for the Standard & Poor’s 500 Index (SPX) probably fell in unison for the first time in three years, according to analysts’ estimates compiled by Bloomberg. Per-share earnings may have dropped 1.7 percent on average after they were little changed in the second quarter. Sales may have slipped 0.6 percent, the data show. While most companies plan to keep a lid on spending, lower expenses aren’t leading to the same kinds of increases they reported earlier this year. Hewlett-Packard Co., the world’s largest personal-computer maker, already forecast full-year profit that trailed analysts’ estimates, FedEx Corp. (FDX) cut its annual earnings forecast and Intel Corp. (INTC) projected lower third- quarter sales, with all three citing softening demand.
“A lot of the earnings growth that we’ve seen has been related to cost reductions,” said Peter Jankovskis, co-chief investment officer for Oakbrook Investments in Lisle, Illinois, which manages more than $3 billion. “Now many of those cost reduction efforts have run their course. Without revenue growth, there is no room for profit to expand further.” Alcoa Inc. (AA), the largest U.S. aluminum maker, kicks off the third-quarter earnings season tomorrow and is projected by analysts to report a 13 percent drop in sales, the biggest drop in three years, on plunging prices for the commodity. That may wipe out per-share earnings, according to estimates.
European Stocks Retreat Most This Month; Cookson Sinks (Bloomberg)
European stocks dropped the most this month as the World Bank cut its East Asian growth forecast and investors awaited a meeting of euro-area finance ministers for signs on how they will tackle the debt crisis. Cookson Group Plc (CKSN) sank 12 percent as the world’s biggest maker of ceramic linings for metal smelters said annual results will miss its forecasts. KBC Groep NV (KBC) retreated 5.2 percent as the bank’s strategy update disappointed investors. Eurobank Ergasias SA advanced 5.1 percent after a takeover offer from National Bank of Greece SA. (ETE)
The Stoxx Europe 600 Index (SXXP) lost 1 percent to 271.43 at the close of trading, the largest decline since Sept. 28. The measure climbed 2.1 percent last week as the U.S. unemployment rate dropped to the lowest level since 2009 and stress tests bolstered confidence in Spanish banks. The gauge has advanced 11 percent in 2012 as the European Central Bank approved a plan to buy bonds of the most-indebted euro-area members and the Federal Reserve unveiled a third round of stimulus measures. “Europe is still short of showing any indications of growth,” Jakup Petur Baerentsen and Mikkel Petersen, equity advisers at Nordea Private Bank in Copenhagen, wrote in a report. “Any good news this week will most likely have to come from Spain -- if the nation makes a formal request for a bailout from the euro zone and the International Monetary Fund.”
Emerging Stocks Fall as Europe Says Spain Won’t Tap Rescu (Bloomberg)
Emerging-market stocks fell, spurring the biggest decline in the benchmark index (VXEEM) in over a week, as commodities fell and as European leaders said Spain isn’t on the verge of asking for a rescue. The MSCI Emerging Markets Index (MXEF) lost 1.1 percent to 997.93 at the close of trading in New York, slipping for the first time in three days. The BSE India Sensitive Index sank the most since July 26 while the Shanghai Composite Index (SHCOMP) slid 0.6 percent as China’s markets re-opened after a week-long break. Brazil’s Bovespa Index rose 1.3 percent with Vale SA (VALE3), the world’s largest producer of iron ore, gaining the most since Sept. 10.
European finance ministers set up a full-time 500 billion- euro ($648 billion) fund to aid debt-swamped countries while saying that Spain, its biggest potential near-term customer, isn’t on the verge of tapping it. Decisions were put off on Greece’s next aid payment and on an assistance program for Cyprus. German Chancellor Angela Merkel visits Greece tomorrow for the first time since the crisis erupted. The 21 nations in MSCI’s developing-nations gauge send about 30 percent of their exports to the European Union on average, according to data compiled by the World Trade Organization. Crude and copper fell amid speculation the region’s slowdown will curb demand. “Markets are very nervous regarding the growth outlook and they are waiting on any information from the political sphere as a driver,” Michael Ganske, head of emerging-market research at Commerzbank AG, said by phone from London.
Treasuries Rise Most in Almost Two Weeks (Bloomberg)
Treasuries rose the most in almost two weeks after the International Monetary Fund cut its economic forecasts and said there is an “alarmingly high” risk of a steeper slowdown. U.S. government securities also gained after stocks fell around the world yesterday, increasing demand for the relative safety of debt. The yield on benchmark 10-year notes fell four basis points, or 0.04 percentage point, to 1.70 percent as of 9 a.m. in Tokyo, based on Bloomberg Bond Trader data. The price of the 1.625 percent security due in August 2022 gained 3/8, or $3.75 per $1,000 face amount, to 99 10/32. It was the steepest increase since Sept. 26. The U.S. is scheduled to sell three-year notes today, the first of three sales of coupon-bearing Treasuries this week totaling $66 billion.
Euro Remains Lower After IMF Cuts Europe’s 2013 Forecast (Bloomberg)
The euro remained lower following a decline yesterday after the International Monetary Fund slashed its growth forecast for the currency bloc as European leaders struggle to contain the region’s debt crisis. The shared currency maintained a drop against the yen before data from Italy tomorrow that economists say will show the nation’s industrial production decreased the most in more than two years. German Chancellor Angela Merkel visits Greece today for the first time since the crisis began in 2009. “The euro is struggling to strengthen,” said Kengo Suzuki, a currency strategist in Tokyo at Mizuho Securities Co., a unit of Japan’s third-largest bank by market value. “The economic outlook is not bright in Europe.” The euro was unchanged from yesterday at $1.2968 as of 8:07 a.m. in Tokyo after losing 0.6 percent in New York. It was little changed at 101.54 yen following a 1 percent drop, the biggest slide on a closing basis since July 20. The dollar was at 78.32 yen from 78.33.
The 17-country euro area economy will expand 0.2 percent in 2013, down from the projection of 0.7 percent three months ago, the Washington-based IMF said in its World Economic Outlook report today. The region’s economy will contract 0.4 percent this year, the fund forecast. The world economy will grow 3.3 percent this year, the slowest since the 2009 recession, and 3.6 percent next year, the IMF said, compared with July predictions of 3.5 percent in 2012 and 3.9 percent in 2013. The IMF now sees “alarmingly high” risks of a steeper slowdown. Industrial production in Italy dropped 9.7 percent in August from a year earlier, according to the median estimate of economists in a Bloomberg News survey, which would be the biggest decline since October 2009. Italy is the euro area’s third-largest economy.
World Bank cuts East Asia GDP outlook, flags China risks (Reuters)
The World Bank cut its economic growth forecasts for the East Asia and Pacific region on Monday and said there was a risk the slowdown in China could worsen and last longer than many analysts have forecast.
IMF Sees ‘Alarmingly High’ Risk of Deeper Global Slump (Bloomberg)
The International Monetary Fund cut its global growth forecasts as the euro area’s debt crisis intensifies and warned of even slower expansion unless officials in the U.S. and Europe address threats to their economies. The world economy will grow 3.3 percent this year, the slowest since the 2009 recession, and 3.6 percent next year, the IMF said today, compared with July predictions of 3.5 percent in 2012 and 3.9 percent in 2013. The Washington-based lender now sees “alarmingly high” risks of a steeper slowdown, with a one-in-six chance of growth slipping below 2 percent. “A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component,” the IMF said in its World Economic Outlook report. “The answer depends on whether European and U.S. policy makers deal proactively with their major short-term economic challenges.”
The IMF’s 188 member countries convene in Tokyo this week as low growth damped by fiscal consolidation in the richest economies hurts developing counterparts from China to Brazil. As the IMF urged measures to boost confidence, uncertainties out of Europe show no sign of abating, with leaders still divided over a banking union and Spain resisting a bailout. “Confidence in the global financial system remains exceptionally fragile,” the IMF said. “Bank lending has remained sluggish across advanced economies” and increased risk aversion has damped capital flows to emerging markets, it said.
Shift in Global Growth Engines Signals Gain After Pain (Bloomberg)
A revolution in the world economy targeted at revving up new growth engines ultimately will produce gain after pain. Three years into recovery, with economies lumbered by debt and limited bank credit, policy makers are trying to segue to a more balanced expansion from the drivers and excesses that caused the worst recession in six decades. The U.S. is further along as it spurs manufacturing and exports, while trading giants Germany and China seek to fan domestic demand. Europe’s struggling states want to swap government largess for trade. While the aim is more-sustainable growth -- and current- account trade data suggest a rebalancing is under way -- the rebirth is leaving the world low on power for now and still could fail if any of the regions don’t pull their weight. The International Monetary Fund will underscore the risks when it revises down its outlook tomorrow.
“As you go through these adjustments, it’s quite painful,” said Jim O’Neill, chairman of Goldman Sachs Asset Management in London. “But coming out the other side with a different structure, we should have a much stronger world economy.” A more even keel after the last credit-powered expansion would help the stocks of companies biased toward emerging-market consumers and U.S. manufacturing over those tied to commodities and infrastructure, said John Bilton, European investment strategist at Bank of America Merrill Lynch in London.
Business Hiring Calms Concerns About U.S. Fiscal Cliff (Bloomberg)
Business hiring is holding up, allaying concerns about a U.S. economic downdraft in the face of a looming fiscal cliff. Companies added an average 121,000 workers a month in the third quarter, up from 88,000 in the second quarter, according to Labor Department figures released on Oct. 5. Total payrolls, including government, increased an average 146,000 a month, compared with 67,000 in the prior period. “We’re not seeing a further loss of momentum, and that’s a very important positive,” said Bruce Kasman, chief economist for JPMorgan Chase & Co. in New York. A pullback in business investment had fanned concerns that companies would begin to pare hiring in anticipation of $600 billion in government spending cuts and tax increases at the start of 2013. The Congressional Budget Office has warned the economy will fall into recession if Congress allows the fiscal squeeze to go ahead.
The jobs numbers suggest the economy is expanding at a “trend-like pace” of around 2 percent, Kasman said. That would be in line with the 2.2 percent average quarterly growth rate of gross domestic product since the 18-month recession ended in June 2009. Job gains have averaged 146,000 a month so far this year, compared with the 153,000 average last year. In an effort to speed up the recovery, the Federal Reserve last month announced a third round of asset purchases and extended its horizon for near-zero interest rates at least through the middle of 2015.
India Growth to Drop to Decade Low Amid High Inflation, IMF Says (Bloomberg)
Indian growth may weaken to a decade- low this year after investment stalled, the International Monetary Fund said, as it called for interest rates to remain unchanged until the nation’s high inflation rate eases. Gross domestic product will rise 4.9 percent in 2012, less than a July forecast of 6.1 percent, the Washington-based lender said in its World Economic Outlook report today. The expansion will accelerate to 6 percent next year, it said, helped by improving overseas markets and a boost to confidence from a recent government policy revamp. “The outlook for India is unusually uncertain,” the IMF said. “Monetary policy should stay on hold until a sustained decrease in inflation materializes.” India’s government began the policy overhaul last month to boost the economy and avert a credit-rating downgrade, snapping months of political gridlock. The steps to curb expenditure on subsidies, contain a fiscal deficit and permit more investment from abroad triggered a surge in the rupee and buoyed stocks.
“There is an urgent need to reaccelerate infrastructure investment, especially in the energy sector, and to launch a new set of structural reforms, with a view to boosting business investment and removing supply bottlenecks,” the IMF said. “Structural reform also includes tax and spending reforms, in particular, reducing or eliminating subsidies, while protecting the poor.” The government’s recent policy changes are “very welcome,” the fund also said. Its forecast for economic growth in 2013 compares with an estimate of 6.5 percent in July. Indian inflation probably accelerated to 7.71 percent in September, a nine-month high, according to a Bloomberg News survey before a report due Oct. 15. The Reserve Bank of India has left interest rates unchanged since a cut to 8 percent from 8.5 percent in April, the first reduction since 2009.
Record Crash Prompts Indian Exchanges to Seek New Limits (Bloomberg)
Indian exchanges asked the market regulator to narrow the range it allows some stocks to trade after erroneous orders caused a record plunge in the S&P CNX Nifty (NIFTY) Index, according to officials familiar with the proposal. Price limits for 216 of the biggest and most liquid stocks should be lowered from 20 percent to 9 percent, the three officials said. The measure was proposed to the Securities & Exchange Board of India by exchange executives at a meeting in Mumbai on Oct. 6, said the people, who asked not to be identified as the talks were private. Trading in the benchmark Nifty and some stocks stopped for 15 minutes on Oct. 5 after the 50-stock gauge sank 16 percent. The incident, which briefly erased $58 billion in value, is the latest in a series of mishaps that has put pressure on regulators globally to prevent market errors.
Bad trades sent Kraft Foods Group Inc. (KRFT) up as much as 29 percent on Oct. 3, and in May, the Nasdaq Stock Market blamed software for delays in order confirmations in the debut of Facebook Inc. “Everyone is very sensitive to these electronic errors,” Adam Mattessich, head of international trading at Cantor Fitzgerald LP, said by phone from New York on Oct. 5. “It’s the kind of thing that could be nothing or it could become a financial calamity.”
ECB May Need to Cut Rates Given Deflation Risk, IMF Says (Bloomberg)
The European Central Bank should keep interest rates low for the foreseeable future and may need to cut them further given the risk of deflation, the International Monetary Fund said. Euro-area inflation will slow to 1.6 percent in 2013 “and risks from domestic wages and profits are to the downside,” the Washington-based IMF said in its World Economic Outlook today. “The probability of falling prices is unusually high, reaching almost 25 percent. This projection gives the ECB ample justification for keeping policy rates very low or cutting them further.” While the Frankfurt-based ECB cut its benchmark interest rate to an historic low of 0.75 percent on July 5 and took its deposit rate to zero, President Mario Draghi signaled last week that further easing may have only a limited effect on the economy. The IMF warned that Europe’s sovereign debt crisis, now in its third year, could escalate and that the economic outlook has worsened.
The IMF cut its forecast for growth in the euro area next year to 0.2 percent from its July prediction of 0.7 percent and said the economy will contract 0.4 percent this year as governments continue to reduce spending. It lowered its 2013 growth forecast for Germany, the region’s largest economy, to 0.9 percent from 1.4 percent.
Europe Salutes Greek Budget-Cutting Will, Raising Aid Prospects (Bloomberg)
European finance ministers hailed Greece’s determination to cut the budget and reshape its recession-wracked economy, raising the chances that aid will keep flowing to stop the country from careening out of the euro. European officials paired the encouragement with a demand that Greece commit to a list of 89 policy steps before an Oct. 18-19 leaders’ summit, and left open whether the next 31 billion-euro ($40 billion) loan installment would be paid out in one go or dribbled out in smaller pieces. Creditors muffled doubts about Greece’s fiscal health hours before German Chancellor Angela Merkel, the dominant figure in Europe’s bailout politics, set off on her first trip to Athens since the crisis broke out in October 2009.
“I’m impressed by the performance of the Greek government, by the willingness of the coalition parties in Greece to undertake whatever will have to be undertaken in order to respond to our wishes,” Luxembourg Prime Minister Jean-Claude Juncker told reporters in Luxembourg late yesterday after chairing a meeting of euro finance chiefs. Juncker’s cheerleading and Merkel’s impending visit marked a show of support for Greek Prime Minister Antonis Samaras, who campaigned against deeper budget cuts, only to embrace them after taking office in July as the only way to keep Greece in the 17-nation euro zone.
Rajoy’s Deepening Budget Black Hole Outpaces Spain Deficit Cuts (Bloomberg)
The black hole in Spain’s budget has grown faster than Prime Minister Mariano Rajoy’s attempt to cut it, portending the same dynamic that has squeezed Greece. The harshest austerity since the return to democracy in 1978 has failed to contain the deficit as the economy sinks deeper into recession. The shortfall rose in the first half of the year, as it did in the previous 12 months. Even after a sales-tax increase and health-care cuts kick in this quarter, it may still approach last year’s 9.4 percent of gross domestic product, said Ignacio Conde-Ruiz, an economist at the independent Applied Economic Research Foundation in Madrid. The fiscal and political consequences of demanding austerity in a shrinking economy highlight the dilemma facing Rajoy. To trigger a European financial lifeline, he may have to impose yet more cuts, repeating the pattern seen in Greece, Portugal and Ireland.
“There is no chance that Spain will hit its targets,” Megan Greene, director of European economics at Roubini Global Economics LLC, said in a telephone interview. “The deficit targets are economic suicide.” Rajoy, who meets French President Francois Hollande tomorrow in Paris, has introduced more than 100 billion euros ($130 billion) of tax increases and spending curbs amid a slump that is hollowing out his revenue base and pushing unemployment to 25 percent. The 57-year-old premier is also facing a secession threat from Catalonia, mounting popular protests and unrest from regions forced to rein in their own spending.
Euro Finance Chiefs to Give Positive Greece View, Rehn Says (Bloomberg)
Euro-zone finance ministers meeting today are likely to make a positive statement on Greece’s progress toward meeting austerity targets needed to free the nation’s next bailout payment, European Union Commissioner for Economic and Monetary Affairs Olli Rehn said. “It’s important that this can be concluded in the coming weeks,” Rehn said in an interview in Helsinki on Oct. 6. “Negotiations have progressed well in the past few days and last night. This is why I assume and expect the euro-group to give a positive and supportive statement on Greece’s progress.”
Negotiations between the government of Prime Minister Antonis Samaras and Greece’s official lenders stalled amid Greek reluctance to sign off on more pension and wage cuts as the nation suffers a fifth year of recession. Greece needs to find spending cuts to maintain access to 240 billion euros ($313 billion) in rescue funds and is trying to reach an agreement with its official lenders to release the next payment of 31 billion euros. The funds would primarily be used to recapitalize Greek banks and boost liquidity in the cash-starved economy. “It will take some time before the report can be finalized as it takes more work than simply an agreement over the measures Greece commits to balance its budget and carry out structural reforms,” Rehn said.
Europe Starts $648 Billion Aid Fund, Rules Out Immediate Use (Bloomberg)
European governments set up a full- time 500 billion-euro ($648 billion) fund to aid debt-swamped countries and, not for the first time in the three-year crisis, expressed confidence that the extra financial muscle won’t be needed anytime soon. Finance ministers from the 17 euro countries declared the European Stability Mechanism operational, while saying that Spain, its biggest potential near-term customer, isn’t on the verge of tapping it. Decisions were also put off on Greece’s next aid payment and on an assistance program for Cyprus. Creation of the ESM “makes the strategy of member states credible and equips the euro area with much better tools to appropriately respond to future crises,” Luxembourg Prime Minister Jean-Claude Juncker told reporters in Luxembourg today before a meeting of euro finance chiefs that began at 5 p.m.
The fund’s birth was eased by the European Central Bank’s offer in August to buy bonds of fiscally struggling countries, which has driven down interest rates in Spain and Italy and bought European governments time to address the root causes of the crisis. Spanish 10-year bonds yielded 5.71 percent today, down from a peak of 7.62 percent on July 24. Italian 10-year yields have fallen to 5.08 percent from 6.60 percent and the euro has risen 7.6 percent to $1.2971 over the same period. The ESM will replace the temporary European Financial Stability Facility, which has spent 192 billion euros of its 440 billion euros on loans to Ireland, Portugal and Greece. The two funds will run in parallel until the EFSF is phased out in mid- 2013.
Controlled by euro finance ministers, the ESM can lend directly to governments, intervene on bond markets, offer credit lines and provide loans that can be used to recapitalize banks. It would be authorized to pump capital into banks directly only once the euro zone sets up a central supervisor, possibly in 2013. The ESM inherited those powers from the temporary fund. For now, it will go without two other EFSF tools that have yet to be used: debt-insurance certificates and co-investment vehicles that were designed to use leverage to multiply their impact. Finance ministers touted Spain’s economic overhaul, declined to press the Spanish government for more budget cuts and said a bank-aid program set up in July will cost far less than the 100 billion euros allocated for it. Payouts under that program will be handled by the ESM starting in November.
