Global Economy Outlook for 2013 Dims as Debt Woes Persist (CME)
By The Economist Intelligence Unit - Fri 16 Nov 2012 13:23:38 CT
Euro Zone Seen in Recession Second Straight Year
Global economic growth in 2013 will be weaker than previously forecast, with Europe heading for recession for the second consecutive year, amid political tensions and lingering effects of the 2008-09 financial crisis, the Economist Intelligence Unit said. Worldwide, Gross Domestic Product is projected to expand 2.3% next year, down from 2.5% in a previous estimate and only a slight improvement from the 2.2% growth expected this year, Economist Intelligence Unit analysts said in a new report. "Such a subdued rate of growth is exceptionally disappointing at this stage of an economic recovery, and underlines the fact that the world has not recovered fully from the 2008-09 financial crisis," the Economist Intelligence Unit said.
The group also forecast the euro zone economy will contract by 0.2%, after previously saying the region would grow 0.4%. Overall, trading conditions "remain difficult in many countries," and while China and the U.S. offer some bright spots, "the global economy still has serious problems - most notably the debt crisis in the euro zone… Austerity looks set to bite harder than we previously forecast."
Asia Stocks Rise for 2nd Day as Obama Pledges Budget Deal (Bloomberg)
Asian stocks gained, with the MSCI Asia Pacific Index (MXAP) heading for its second day of advance, after President Barack Obama expressed confidence that he and Congress would reach a budget agreement. Toyota Motor Corp., the world’s biggest carmaker, climbed 2.1 percent in Tokyo. Japan Tobacco Inc. jumped 6.6 percent as the government plans to postpone the sale of its stake in the cigarette maker. Billabong International Ltd. surged 11 percent in Sydney after the surf-wear maker said it’s considering a takeover. The MSCI Asia Pacific Index rose 0.8 percent to 120.82 as of 10:06 a.m. in Tokyo, with four shares gaining for each that fell. The regional benchmark index is extending its rally for a second day as Obama, who is visiting Asia this week, initiated talks with Republicans and Democrats to avoid the combination of $607 billion in automatic tax increases and spending cuts. Failure to avert the so-called fiscal cliff would threaten to throw the country into a recession next year.
“There were some early signs of some conciliatory language in the U.S. late Friday night that was encouraging,” said George Boubouras, Melbourne-based head of investment strategy at UBS AG’s Australian wealth management unit. The Swiss bank has about $1.5 trillion under management. “The market retracement this month is an opportunity to buy the dip as investors navigate through the political negotiation.” Japan’s Nikkei 225 Stock Average increased 1.4 percent, heading for its biggest four-day rally since March 2011. The Bank of Japan holds a meeting today amid speculation the country’s opposition party that advocates more aggressive monetary policy easing will take power in December’s election.
China’s Stock-Index Futures Rise After Home Prices Advance (Bloomberg)
China’s stock-index futures rose, signaling gains for the benchmark index, as Premier Wen Jiabao said the economy is stabilizing and the nation’s new home prices climbed in October in more cities than the previous month. Futures on the CSI 300 Index (SHSZ300) expiring in December, the most-active contract, added 0.2 percent to 2,179.80 as of 9:17 a.m. local time. China Vanke Co. may lead property stocks higher after a report showed home prices climbed in 35 of the 70 cities the government tracks, compared with 31 in September. Citic Securities Co. may lead an advance for brokerages after the Shanghai Securities News reported the government may allow them to diversify their invesments and relax capital requirements. The Shanghai Composite Index (SHCOMP) slid 0.8 percent to 2,014.73 on Nov. 16, while the CSI 300 Index declined 0.8 percent to 2,177.24. The MSCI Asia Pacific Index advanced 0.7 percent today after U.S. President Barack Obama expressed confidence that he and Congress would reach a budget agreement. The Shanghai Composite slid 2.6 percent last week as the Communist Party held a meeting to appoint new leaders. Xi Jinping was named general secretary, putting him in line to become president. China’s stocks pared losses in the last 30 minutes of trading on Nov. 16 after the government said it will cut the stock dividend tax by half for individuals who hold shares for at least one year as part of efforts to encourage long-term investment and reduce speculative trading. The index trades at 9.6 times estimated profit for 2012, compared with the 17.8 average multiple since Bloomberg began compiling the weekly data in 2006. It has fallen 8.4 percent this year. Trading volumes were 26 percent lower than the 30-day average on Nov. 16, according to data compiled by Bloomberg. Thirty-day volatility was at 12.8, compared with this year’s average of 17.1.
Japan Stocks Advance on Stimulus Hopes, U.S. Budget Talks (Bloomberg)
Japanese stocks rose, with the Topix Index heading for the biggest three-day gain since March 2011, as the yen fell amid speculation elections next month will hand power to an opposition party pushing for more stimulus and as U.S. budget negotiations appear to make progress. Canon Inc. (7751), the world’s biggest camera maker, gained 3.7 percent. Funai Electric Co., a television maker that relies on North America for half its sales, gained 2.1 percent after U.S. House Speaker John Boehner said talks with President Barack Obama were “constructive. ” Japan Tobacco Inc. jumped 4.7 percent as the government plans to postpone sale of its stake in the company.
The Topix rose 1.6 percent to 763.33 as of 9:24 a.m. in Tokyo, with more than seven shares advancing for each that fell. The index is set for a three-day gain of 5.6 percent, after the ruling party decided to dissolve parliament. The Nikkei 225 Stock Average (NKY) gained 1.4 percent to 9,153.33 today on volume about 60 percent above the 30-day intraday average. “Unless the Liberal Democratic Party loses the upperhand, the yen will continue to weaken,” said Toshiyuki Kanayama, a market analyst at Tokyo-based Monex Inc. Expectation the U.S. will reach an agreement on the so-called fiscal cliff “is fueling confidence among investors.” The Japanese currency fell to the lowest level in almost seven months before the Bank of Japan holds a meeting today amid speculation the opposition party will win next month’s elections.
Recap Stock Index Market Report (CME)
The December S&P 500 experienced a choppy to lower trade during the morning hours, pressured by weak US economic data, uncertainty surrounding the fiscal cliff and option expiration. US economic data this morning on October Industrial Production came in significantly weaker than expected, and that seemed to put added pressure on the market. The December S&P 500 registered a new low for the decline, falling to the lowest level since July 26th. Some traders noted that there were about five intra day swings in the index of nearly 10 points before turning higher later in the session. Midday support for the S&P 500 came from well-received comments from Congressional leaders and their willingness to work together on the fiscal cliff. The December S&P 500 finished the week down 20 points.
European Stocks Post Biggest Weekly Slump in Five Months (Bloomberg)
European stocks posted their biggest weekly drop since June amid concern President Barack Obama and Congress will fail to agree on a new budget, triggering $607 billion of automatic tax increases and spending cuts. EON AG slumped 16 percent after Germany’s biggest utility lowered its earnings forecast. Vodafone Group Plc slid 5.9 percent as the world’s second-largest mobile-phone company took a 5.9 billion-pound ($9.4 billion) writedown on its operations in Spain and Italy. SBM Offshore NV plunged 19 percent after saying it won’t meet its sales forecast for 2012. The Stoxx Europe 600 Index dropped 2.7 percent to 262.86 this past week, erasing its advance since the European Central Bank authorized an unlimited bond-buying program in September. The gauge has lost 4.3 percent since Obama won a second term on Nov. 6 amid concern that the president and Republican lawmakers will fail to avert a package of deficit-cutting measures.
“The way to play the fiscal cliff is to be very cautious in the short term,” Stewart Richardson, chief investment officer at RMG Wealth Management LLP said on Bloomberg Television in London this week. “The day after the election we saw another bad down day in equities and that gave us a technical signal that markets were vulnerable to the downside. We have seen that movement follow through this week.” Stocks have tumbled around the world on concern that the so-called fiscal cliff will push the world’s largest economy into a recession at the beginning of next year.
Emerging Stocks Drop in Week as Earnings Sink Eletrobras (Bloomberg)
Emerging-market stocks fell, extending the benchmark’s biggest weekly decline since May, as escalating Middle East tensions and concern over the U.S. economy cut demand for riskier assets. The MSCI Emerging Markets Index (MXEF) slid for a seventh day, losing 0.5 percent to 969.82 at the close of trading in New York, the lowest level since Sept. 7. The index declined 2.1 percent this week. Brazilian utility Centrais Eletricas Brasileiras SA (ELET6) had the biggest drop on the gauge, slumping to the lowest close since 2003 after quarterly earnings trailed estimates. Samsung Electronics Co. (005930) tumbled 1.8 percent, leading a retreat in emerging-market technology stocks.
The index pared losses after John Boehner, speaker of the U.S. House of Representatives, said talks with President Barack Obama over the so-called fiscal cliff were “constructive.” Industrial production in the nation unexpectedly fell 0.4 percent in October, data today showed. Palestinian missiles landed in areas around Jerusalem and Tel Aviv, while Israel stepped up its bombing on Gaza, buoying oil prices on speculation supply will be interrupted. “The risk-off mood continues to prevail,” Benoit Anne, head of emerging-market strategy at Societe Generale SA in London, said by e-mail. “I don’t think we are going to see a turnaround in the near term.” The iShares MSCI Emerging Markets Index exchange-traded fund, the ETF tracking developing-nation shares, gained 0.3 percent, paring its weekly loss to 1.4 percent. The Chicago Board Options Exchange Emerging Markets ETF Volatility Index, a measure of options prices on the fund and expectations of price swings, dropped 2.8 percent.
Trading Volume Remains Tepid as Economic and Regulatory Fears Grow (CME)
By Markets Media - Fri 16 Nov 2012 16:01:07 CT
Strong macroeconomic headwinds continue to buffet the trading environment. With the U.S. 'fiscal cliff' fast approaching, eurozone sovereign debt fears still at the forefront of investors' minds and new regulations set to stifle activity still further, there appear little reasons to be bullish. Trading volume on exchanges continues to be muted-for instance, U.S. equity volumes are on course to decline for a fourth consecutive year-and, following on from the typical summer slowdown, a low interest rate environment and general uncertainty around the pace of a global economic recovery continue to mean that volumes may remain tepid for some time yet. In Europe, the epicenter of the current macroeconomic crisis, many market participants there are struggling to see where the upturn is going to come from.
"There are many reasons for the current low trading volume, all centered around uncertainty in the environment," Kee-Meng Tan, managing director and head of agency broker Knight Capital's trading group in Europe, told Markets Media.
"There are very few catalysts for change due to the overhanging European sovereign debt issue. We have seen many U.S. funds reduce their exposure in Europe drastically. The uncertainty is also presenting few drivers for investment in the region.
"Uncertainty around regulation is keeping many people from making firm plans and investment in business until things become clearer. New regulations could conceivably make it much more expensive to do business in Europe. And a broader European Union financial transaction tax is certainly not going to help the situation."
Market participants are hoping that the current low volume environment is not due to a long-term structural shift in the market and that there will, at some point, be a sustained pick-up.
"You can see from the latest quarterly reports from the big exchanges around the globe, nobody will have a record year in 2012, unfortunately," Michael Krogmann, executive vice-president of Deutsche Börse, operator of the Frankfurt Stock Exchange, told Markets Media.
"Volumes are down not only in Europe, but across the globe. It is in all markets, cash as well as derivatives."
However, despite all the doom and gloom some market participants have reasons to be optimistic for the future.
For one, the initial public offering market appears to be showing signs of life. German mobile operator Telefonica recently made its IPO debut on the Frankfurt bourse, becoming Europe's largest new listing in more than a year.
"We've seen first very positive signals as the IPO market is back," said Krogmann. "The last IPO saw Telefonica Germany raise €1.5 billion. This was a big success for our market and there are signs of recovery in the cash market."
Krogmann added: "For the cash markets, it is a cyclical business. From my perspective, volumes will definitely come back in due course."
Yen Bears See Vindication in New BOJ Under Abe Watch: Currencies (Bloomberg)
For long-suffering bears on the yen, redemption is looking more likely if options are any guide. After appreciating more than 60 percent between July 2007 and June of this year, the yen has tumbled almost 10 percent against a basket of developed-market currencies, including a drop of 2.2 percent last week, data compiled by Bloomberg show. Option traders are paying record premiums to protect against further depreciation as Prime Minister Yoshihiko Noda calls for elections next month. The yen slid to the lowest in almost seven months today. Polls signal the main opposition Liberal Democratic Party will win elections on Dec. 16, led by Shinzo Abe who last week called for the Bank of Japan (8301) to pursue unlimited bond purchases and zero-to-negative interest rates. BOJ Governor Masaaki Shirakawa is due to step down in April after a five-year term.
“This is a major shift and the key event is the replacement of Shirakawa,” said Jens Nordvig, a managing director of currency research in New York at Nomura Holdings Inc. “It really is a change that would move the BOJ away from being the least expansive in terms of balance sheet use to potentially being ahead of the other central banks.” At the same time, trade surpluses that have served as a main pillar of support for the yen are starting to erode. Japan’s imports exceeded exports by 3.22 trillion yen ($40 billion) in the six months ended Sept. 30, the biggest trade deficit for a fiscal half-year period, according to Ministry of Finance data going back to 1979.
Treasuries Fall as Obama Sees Fiscal Cliff Resolution (Bloomberg)
Treasuries fell, headed for the steepest loss in almost two weeks, after President Barack Obama expressed confidence the U.S. will avoid the automatic spending cuts and tax increases scheduled to occur at year-end. Nomura Holdings Inc., one of the 21 primary dealers that underwrite the U.S. debt, is trimming its position as officials make progress on the so-called fiscal cliff. Treasuries also fell before an industry report that economists said will show sales of previously owned U.S. homes were near the most in two years in October. “There’s a high probability that the fiscal cliff will be resolved,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third-largest publicly traded bank by assets. “The economy is improving gradually. Investors should put their money in equities.”
Ten-year yields increased one basis point, or 0.01 percentage point, to 1.59 percent as of 10:05 a.m. in Tokyo, Bloomberg Bond Trader data show. The 1.625 percent security due in November 2022 declined 1/8, or $1.25 per $1,000 face amount, to 100 9/32. The rate is less than the 10-year average of 3.68 percent. The last time yields rose as much was Nov. 6. “I am confident we can get our fiscal situation dealt with,” Obama said yesterday at a news conference in Bangkok, where he started a three-nation Asian trip. Before Obama left, he began on a round of deficit-reduction talks with top Republicans and Democrats to avoid the combination of $607 billion in automatic tax increases and spending cuts that threatens to throw the country into a recession.
Treasuries Rally Is Longest Since July on Fiscal Cliff (Bloomberg)
Treasuries had the longest rally in almost four months as President Barack Obama and lawmakers started tax-and-spending talks to avoid the so-called fiscal cliff, stoking demand for refuge. The yield on the 10-year note touched a 10-week low yesterday as House Speaker John Boehner offered a “framework,” including increased revenue, as part of a debt-reduction package. Some Federal Reserve officials said the central bank may need to buy more U.S. debt next year to bolster the economy, according to policy-meeting minutes, while volatility in Treasuries dropped to a five-year low. The U.S. will sell $13 billion in 10-year inflation-indexed securities on Nov. 21.
“If the powers that be in Congress are able to come up with a plan to get a resolution to the fiscal cliff, something of substance, then the market would view that as relatively good news,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC in New York. “The market is waiting to see the specifics and to hear a plan, as opposed to just positive rhetoric, which is certainly a first step.” The benchmark 10-year yield fell three basis points, or 0.03 percentage point on the week, to 1.58 percent in New York, according to Bloomberg Bond Trader prices. The price of the 1.625 percent security due in November 2022 gained 1/4, or $2.50 per $1,000 face amount, to 100 13/32. The yield touched the least since Sept. 5. The market was closed Nov. 12 for Veterans’ Day. The four-week drop in 10-year yields was the longest stretch of declines since the period ended July 20. It traded in a range of eight basis points this week, the narrowest on a weekly basis since April.
Obama Says He’s Confident of Reaching Fiscal Cliff Deal (Bloomberg)
President Barack Obama expressed confidence that he and Congress would reach an agreement that will avoid the automatic spending cuts and tax increases that are scheduled to occur at the end of the year. “I am confident we can get our fiscal situation dealt with,” Obama said at a news conference in Bangkok, where he began a three-nation trip that will include the first visit by a sitting U.S. president to Myanmar. Before Obama left for Asia, he began on a new round of deficit-reduction talks with top Republicans and Democrats in a bid to avoid the combination of $607 billion in automatic tax increases and spending cuts that threatens to throw the country into a recession next year. He arrived in Asia today on his first foreign trip since re-election, underscoring the region’s importance to U.S. growth. The Nov. 17-20 trip is built around a summit in Phnom Penh, Cambodia, where Obama will meet with leaders from China, Japan, Russia, India and other Asia-Pacific countries.
Speaking in a region where some nations are still moving toward allowing greater political and economic freedom, Obama said the squabbling in Washington is an outgrowth of one of the key strengths of the democratic system because it ensures that all sides are heard. “Democracy is a little messier than alternative systems of government but that’s because democracy allows everybody to have a voice,” he said at a joint news conference with Thailand’s Prime Minister Yingluck Shinawatra. “And that system of government lasts. And it’s legitimate. And when agreements are finally struck, you know that nobody is being left out of the conversation and that’s the reason for our stability.”
Record-Low Mortgage Rates May Lift Housing: U.S. Economy Preview (Bloomberg)
The lowest mortgage rates on record probably helped keep sales of previously owned U.S. homes close to a two-year high in October, and underpinned construction of new residences, economists said before two reports this week. Purchases of existing dwellings held at a 4.75 million annual rate last month, according to the median forecast in a Bloomberg survey before tomorrow’s report from the National Association of Realtors. Housing starts eased in October to an 840,000 pace from a four-year high of 872,000 units in September, Commerce Department figures may show Nov. 20. Demand for residential real estate is also being propelled by more affordable properties, progress in the labor market and improving consumer sentiment. The data underscore what Federal Reserve Chairman Ben S. Bernanke called “signs of improvement” in the market, which is helping fuel the expansion as manufacturing cools.
“Housing has definitely become a bright spot in the economy, while all the international-facing sectors are doing much worse,” said Yelena Shulyatyeva, U.S. economist at BNP Paribas in New York. The economy should sustain a “modest recovery” through year-end, she said. Existing-home sales have improved after reaching a 3.39 million annual rate in July 2010, the lowest since comparable records began in 1999. In the buildup to the subprime lending collapse and recession, purchases reached a peak of 7.25 million in September 2005.
China Home Prices Gain in Half Cities Tracked as Market Steadies (Bloomberg)
China’s new home prices rose in October in more cities than the previous month, indicating the government will refrain from relaxing curbs on the property market. Prices climbed in 35 of the 70 cities the government tracks, compared with 31 in September, according to data from the statistics bureau yesterday. Prices fell in 17 cities. Investors are gauging the government’s policy direction on real estate, rolled out over two years to rein in surging home prices that raised concerns about affordability, after the Communist Party unveiled the new generation of leaders last week. The measures have had a “relatively good” effect and the government will “steadfastly” enforce property controls, Housing Minister Jiang Weixin said at a press conference in Beijing last week.
“The government has sent out signals that they will not loosen property policies because they don’t want to see a big price rebound,” said Shen Jian-guang, a Hong Kong-based economist at Mizuho Securities Asia Ltd. “At the National People’s Congress next March, it probably could claim victory for controlling property prices.” Delegates and officials gather every March for the annual meeting of the National People’s Congress, the highest governmental body. The northwestern city of Urumqi led gains in October, with a 0.5 percent increase from September, according to the data. Among major cities, the southern business hubs of Guangzhou and Shenzhen recorded gains of 0.4 percent each. Beijing prices rose 0.2 percent, while those in Shanghai and 17 other cities were unchanged.
China’s Next Step on Yuan Is Convertibility, Zhou Says (Bloomberg)
China’s central bank governor said convertibility will be the next step in the overhaul of the exchange-rate system as calls grow for the nation’s new leadership to deepen changes in the economy to sustain growth. “For the central bank, I think the next movement related to the yuan is going to be reform of convertibility,” Zhou Xiaochuan said at a conference in Beijing on Nov. 17. “We are going to realize it, we are moving in this direction, we need to go further, we will have some deregulation.” Zhou’s comments underscore pledges by the ruling Communist Party, which last week completed the most important phase of a once-a-decade power transition, to promote freer movement of capital in and out of the country for investment purposes and to make the exchange rate more market based. The reforms may be part of a broader sweep of changes the nation’s new leadership, headed by Xi Jinping, will be pressured to roll out in the world’s second-biggest economy over the next decade.
“Expectations are high” for change as government intervention, ranging from excessive regulation to rigid price controls, has become “unbearable” over the last couple of years, said Li Jiange, head of the country’s biggest investment bank and a vice chairman at the government-run company that holds stakes in state-owned lenders. Li, who spoke at a conference in Beijing on Nov. 17, is chairman of China International Capital Corp., and a vice chairman of Central Huijin Investment Co., a unit of the nation’s sovereign wealth fund.
China’s Xi May Unveil Plan for Change Late 2013, CICC Head Says (Bloomberg)
China’s new leadership, headed by Xi Jinping, will probably unveil new market-oriented changes in late 2013, according to Li Jiange, head of the country’s biggest investment bank. Li, chairman of China International Capital Corp. and a vice chairman of state-owned Central Huijin Investment Co., which holds stakes in the nation’s biggest lenders, said the focus will probably be on reducing government intervention in the economy and breaking up state monopolies. Li spoke at Caixin Media’s annual conference in Beijing yesterday. China last week completed the most important phase of a once-a-decade power transition with Xi taking over as head of the ruling Communist Party and Li Keqiang, set to become premier in March, made No. 2 in the party hierarchy. They inherit an economy burdened by slower growth, an aging population, widening income disparity and environmental degradation that’s fueling social unrest.
“Expectations are high” for the new leadership to make changes as government intervention, ranging from excessive regulation to rigid price controls, has become “unbearable” over the last couple of years, said Li, who previously worked for the Development Research Center, an organization that advises the State Council, China’s cabinet.
Southeast Asia Will Be Less Export Dependent by 2017, OECD Says (Bloomberg)
Southeast Asia’s growth will remain resilient over the next five years as stronger investment and private consumption reduce dependence on exports for expansion, the Organization for Economic Cooperation and Development said. Europe’s sovereign debt crisis and a slowdown in advanced economies have had a “limited” impact on Southeast Asian nations with most of the effect experienced through trade, the Paris-based OECD said in a report released in Phnom Penh today. The region, along with China, may face risks stemming from volatility of capital inflows in the medium term, it said. The prospects for developing Asian nations contrast with the fiscal and demographic challenges faced by more advanced economies, as higher public spending and younger populations support domestic demand and lure investment even as global expansion weakens.
Increased government expenditure on social safety nets and health will encourage household spending and reduce the need for precautionary savings in emerging Asia, according to the report. “A combination of cyclical factors, government policies, and longer-term shifts in economic structure that have supported consumption growth over the past several years are likely to continue to underpin its growth over the medium term in Southeast Asia, China and India,” the OECD said in its 2013 outlook for the region. Governments in Southeast Asia have loosened fiscal policies to spur growth. Philippine President Benigno Aquino is increasing spending to a record and seeking more than $16 billion of investments in roads and airports, while Malaysian Prime Minister Najib Razak is also boosting outlays.
Miles Says Bank of England Can Do More If U.K. Slump Persists (Bloomberg)
Bank of England policy maker David Miles said there is more the central bank can do to boost growth if the recessionary conditions gripping the U.K. economy persist. “We may need more stimulus,” he said in an interview with Sky News television yesterday. “That will depend on how the headwinds holding back growth play out.” The bank’s Funding for Lending Scheme “will have some positive impact as we go into next year, but if it turns out that not enough has been done, that the economy’s going to stay in a recessionary state and that’s going to drive inflation down, there is more we can do. We have not run out of ammunition,” he said. Bank of England Governor Mervyn King gave a gloomy assessment of the economy last week, saying gross domestic product may shrink in the current quarter and that the road to recovery will be “long and winding.” He held out the prospect of further asset purchases after the Monetary Policy Committee voted this month to halt the program at 375 billion pounds ($596 billion.)
Miles said yesterday that pressure on wages had allowed officials to keep monetary policy at this “very expansionary setting” and cautioned against tightening conditions too soon.” “It would be a mistake to try and get back to more normal monetary policy too quickly when the recovery that we’ve seen has been pretty anemic,” he said. He dismissed any prospect of a return to “more normal” growth rates in the near term. “It may not be three, six months but if you look beyond that, a year, 18 months, two years, I would expect we’ll get back to more normal rates of growth.”
European Finance Chiefs Seek to Close Greek Gap Amid IMF Spat (Bloomberg)
European finance ministers aim to stitch together Greece’s next aid payment this week as a sputtering euro-area economy and a spat with the International Monetary Fund cloud efforts to resolve the debt crisis. The finance chiefs are due to meet in Brussels tomorrow for the second time in a week after they agreed seven days ago to keep Greece’s bailout aid flowing. In addition to a disagreement between the European Union and IMF over softening Greece’s debt target, the ministers will attempt to re-engineer the current bailout without asking taxpayers to put up more money. The talks are “likely to be tense as all players set out their positions,” Thomas Costerg, an economist at Standard Chartered in London, said in an e-mail. “Greece’s debt can is likely to be kicked further down the road, but we could see some constructive statements.”
The meeting of the ministers from the 17-member euro area underscores continuing skirmishes among EU officials confronting rising unemployment and a slowing economy as they struggle with the three-year-old debt crisis. The finance chiefs’ talks will precede a Nov. 22-23 EU summit to resolve the bloc’s budget, a project threatened by a dispute with the U.K. With tens of thousands of Europeans staging protests last week against austerity measures and unemployment, shifting dynamics in other European countries could foreshadow renewed conflict -- an early election in Italy, a regional vote in Spain and an approaching bailout package for Cyprus.
Spain Deepens EU Budget Deadlock as Rajoy Spars With Van Rompuy (Bloomberg)
Spanish Prime Minister Mariano Rajoy rejected a proposal for the European Union budget made by its president Herman Van Rompuy, while European Commission President Jose Manuel Barroso requested “solidarity” from members. “The EU president’s current proposal is not acceptable for Spain,” Rajoy told reporters today following a two-day summit of Ibero-American leaders in Cadiz, southern Spain. While the European Commission’s initial proposal was “a good starting point”, Spain rejects a second proposal made by Van Rompuy due to plans for cohesion funds and a “radical” reduction in the budget for the common agricultural policy, Rajoy said. Spanish opposition deepens a deadlock between European governments over the bloc’s budget for 2014 to 2020 before a Nov. 22-23 summit of EU leaders. With unemployment at 26 percent after a five-year economic slump, Spain’s struggle to restore growth is at the heart of a debate about how to balance reordering public finances and stimulating growth.
“The most important and substantial point is that the Spanish government doesn’t like this proposal, so we have informed the institutions and we hope a more reasonable one can be made that can be agreed on by all,” Rajoy said. Barroso, with whom Rajoy said he had discussed budget issues, earlier today rebuked governments that are resisting efforts to lessen the impact of what he termed a “social emergency” in some European Union countries. “It seems unimaginable to me that at this socially difficult moment in Europe, some governments keep proposing cutting some of our proposals in the next budget,” Barroso told reporters. Van Rompuy yesterday said in Vienna that a deal on the budget “requires political will, compromises and concessions by all.” EU leaders need to show in talks about bloc’s 2014-2020 budget next week that they “can make difficult decisions in difficult times,” he said.
Lagarde to Defend IMF Credibility in Euro-Area Talks on Greece (Bloomberg)
International Monetary Fund Managing Director Christine Lagarde said she’ll defend the IMF’s credibility in talks on Greece this week, signalling a potential clash with euro finance chiefs over Greek debt sustainability. Lagarde cut short a visit to Southeast Asia yesterday to return to Europe for a meeting with euro-region finance ministers in Brussels on Nov. 20. With the two sides deadlocked over the timeline for reducing Greek debt levels, Lagarde said she was approaching the talks feeling “patient and resilient.” Speaking in an interview in the Philippine capital Manila before leaving for Europe, Lagarde said she’ll seek to “operate independently” while sticking to the fund’s rules, suggesting no retreat from her position in the negotiations. Maintaining the “solidity of our advice” on Greece will be just as important as ensuring the country’s program works, she said.
Lagarde took issue last week with European governments’ decision to push back a debt reduction target by two years to 2022 against the fund’s recommendations, raising questions over whether the IMF would keep financing Greece. Agreement on how to reduce Greece’s debt to sustainable levels is key to disbursing the next tranche of aid under the bailout that euro nations co- finance with the IMF. “We never leave the table,” Lagarde said in the interview when asked about dropping support. She declined to answer a question on whether the IMF has room for maneuver in the negotiations.
Pound Weakens on Speculation Bank of England Will Resume Easing (Bloomberg)
The pound fell against the euro and the dollar this week as the Bank of England said U.K. growth will remain “subdued,” leaving the door open for further stimulus to boost the economy. The U.K. currency snapped a three-week advance versus the euro as a report showed Britain’s retail sales fell more last month than economists forecast, adding to signs the economy is struggling to recover. Sterling has still strengthened almost 4 percent against the 17-nation currency this year as the euro- area debt crisis spurred demand for safer assets. U.K. government bonds were little changed this week. “Weak economic numbers and comments from the Bank of England presented a downside risk for sterling in the near term,” said John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in London. “Our view remains, however, that as long as the euro debt crisis is unresolved, sterling will benefit from a safe-haven status.”
The pound declined 0.3 percent this week to 80.15 per euro at 5 p.m. in London yesterday, after strengthening 1.7 percent during the previous three weeks. The U.K. currency fell 0.2 percent this week to $1.5866. It fell to $1.5829 on Nov. 15, the weakest level since Sept. 5. The central bank lowered its forecasts for the U.K. economy in its quarterly inflation report released Nov. 14, and said there was a heightened risk of “persistent low growth.”
