Tuesday, June 15, 2010

European recession next year "almost inevitable"-Soros

By Adrian Croft

LONDON, June 15 (Reuters) - Europe faces almost inevitable recession next year and years of stagnation as policymakers' response to the euro zone crisis causes a downward spiral, billionaire U.S. investor George Soros said on Tuesday.

Flaws built into the euro from the start had become acute, Soros told a seminar, warning that the euro crisis could have the potential to destroy the 27-nation European Union.

The euro's lack of a correction mechanism or of a provision for countries to leave it could be a fatal weakness, he said.

Germany had imposed its criteria on how a 750 billion euro ($1 trillion) euro zone rescue mechanism should be used and was imposing its own standards -- a trade surplus and a high savings rate -- on the rest of Europe, Soros said.

"But you can't be a creditor country, a surplus country, without somebody being in deficit," he said.

"That's the real danger of the present situation -- that by imposing fiscal discipline at a time of insufficient demand and a weak banking system, by wanting to have a balanced budget you are actually ... setting in motion a downward spiral," he said.

Germany would do relatively well because the decline in the euro had boosted its economy, he told the seminar on the euro zone crisis organised by two thinktanks, the European Council on Foreign Relations and the Centre for European Reform.

"Germany is going to smell like roses but (the rest of) Europe is going to be pushed into a downward spiral, stagnation lasting many years and possibly worse than that," he said.

"In other words, I think a recession next year is almost inevitable given the current policies," Soros said, later clarifying that he meant a recession in Europe as a whole.


"If there is no exit, (it) is liable to give rise to social unrest and, if you follow the line, social unrest can give rise to demand for law and order and (sow the) seeds of what happened in the inter-war period," he said.

Political will to forge a common fiscal policy in Europe was absent and since Europe was liable to move backwards if it did not advance, "the crisis of the euro could actually have the potential of destroying the European Union," he said.

European banks had bought large amounts of the sovereign bonds of weaker euro zone countries for a tiny interest rate differential, Soros said.

"That's one of the reasons why the banks are so over-leveraged and why the German and the French banks own Spanish bonds," he said.

"Now ... they have a loss on their balance sheets which is not recognised and it reduces the credibility of those banks so the banking system is in serious trouble," he said.

"The commercial paper market, for instance, in America is now refusing to lend to European banks so there is even a funding crisis and the ECB (European Central Bank) has to step in and the banks are unwilling to lend to each other," he said. (Editing by Chizu Nomiyama)

Friday, June 11, 2010

Retail Sales in U.S. Probably Rose, Sparked by Auto Bargains

By Bob Willis

June 11 (Bloomberg) -- Sales at U.S. retailers probably rose in May for the first time in three months as shoppers returned to automobile showrooms seeking bargains, economists said before a government report today.

Purchases climbed 0.5 percent, according to the median estimate of 76 economists surveyed by Bloomberg News. Sales probably increased 0.2 percent excluding autos, led by gains at service stations as gasoline prices rose, economists said.

The pending demise of some Chrysler LLC and General Motors Corp. dealers gave sales a boost as consumers, grappling with rising unemployment, sought discounts. Tax breaks and income supplements from the Obama administration’s stimulus plan are also propping up demand, even as the need to boost savings signals sustained gains in spending will be slow to develop.

“Spending improved as the fiscal stimulus put cash in consumers’ pockets,” said Ryan Sweet, a senior economist at Moody’s Economy.com in West Chester, Pennsylvania. “There are still a number of headwinds which threaten the economy’s recovery.”

The Commerce Department’s report is due at 8:30 a.m. in Washington. Economists’ forecasts for total sales ranged from a decline of 0.3 percent to a gain of 1.4 percent. Estimates for non-auto purchases ranged from a 0.5 percent drop to an increase of 1.2 percent.

At the same time, the Labor Department may report that 615,000 workers filed claims for jobless benefits last week, compared with 621,000 a week earlier, according to the survey median.

Job Cuts

Employers eliminated 345,000 workers from payrolls in May, the fewest since September and a sign the recession is abating, Labor figures last week showed. Retailers cut 17,500 positions, the smallest reduction since June 2008, the month before spending started to sink.

Sales of cars and light trucks rose to a 9.9 million annual unit pace in May from a 9.3 million rate the prior month, according to industry figures released June 2. Purchases reached a 9.1 million pace in February, the lowest level since 1981.

General Motors, Chrysler and Ford Motor Co., the only major U.S. automaker not in bankruptcy, all had smaller declines than forecast in comparison with May 2008.

“It’s just a slight uptick,” Ken Czubay, Ford vice president of sales and marketing, said on a conference call June 2. “This is still a very fragile industry.”

Only Essentials

The International Council of Shopping Centers last week said May same-store sales dropped 4.6 percent from the same month last year, more than double its forecast of a 2 percent decline. Macy’s Inc., Dillard’s Inc. and Saks Inc. were among merchants that reported steeper declines than analysts estimated as Americans focused on buying essentials rather than discretionary items.

With home values falling, credit tight and unemployment forecast to keep rising after reaching a 25-year high of 9.4 percent reached in May, consumers are reluctant to spend on anything beyond necessities such as gasoline and food.

Wal-Mart Stores Inc., the biggest retailer, projected last month that its U.S. comparable-store sales may rise as much as 3 percent in the 13 weeks through July 31.

With demand still weak, companies probably cut inventories by 1 percent in April, an eighth consecutive decrease, economists said another Commerce report at 10 a.m. will show.

Federal Reserve Chairman Ben S. Bernanke last week told Congress that the pace of decline in the economy was slowing and consumer spending had stabilized.

Spending “has been roughly flat since the turn of the year,” he said. While the fiscal stimulus will boost spending power, weak labor conditions, tight credit and falling wealth may limit sales, he said.

Bloomberg Survey

Initial Retail Retail Business
Claims Sales ex-autos Inv.
,000’s MOM% MOM% MOM%

Date of Release 06/11 06/11 06/11 06/11
Observation Period 6-Jun May May April
Median 615 0.5% 0.2% -1.0%
Average 613 0.5% 0.3% -0.9%
High Forecast 640 1.4% 1.2% 1.4%
Low Forecast 580 -0.3% -0.5% -1.3%
Number of Participants 45 76 71 52
Previous 621 -0.4% -0.5% -1.0%
4CAST Ltd. 610 0.6% 0.5% ---
Action Economics 610 0.5% 0.2% -1.2%
AIG Investments --- 1.1% 0.9% -1.3%
Aletti Gestielle SGR 620 0.4% 0.0% -1.2%
Ameriprise Financial Inc 612 0.4% 0.2% -1.0%
Argus Research Corp. --- 0.0% 0.2% -0.8%
Bank of Tokyo- Mitsubishi 625 1.2% 1.0% -1.0%
Bantleon Bank AG --- 0.4% 0.3% ---
Barclays Capital 615 0.4% 0.3% -1.1%
BBVA 615 0.5% 0.3% -1.1%
BMO Capital Markets 600 0.5% 0.2% -1.2%
BNP Paribas 606 0.6% 0.1% -0.7%
Briefing.com 610 0.3% 0.0% -0.8%
Calyon --- 0.5% 0.3% ---
CIBC World Markets --- 0.3% 0.1% -1.0%
Citi 590 0.5% 0.2% -0.8%
ClearView Economics --- 0.6% 0.2% -0.8%
Commerzbank AG 620 0.5% 0.1% -1.0%
Credit Suisse 610 0.4% 0.3% -1.0%
Daiwa Securities America --- 0.3% 0.1% -1.2%
DekaBank --- 0.6% 0.3% -1.0%
Desjardins Group 625 0.3% 0.1% -1.1%
Deutsche Bank Securities --- 0.5% 0.1% -0.9%
Deutsche Postbank AG --- 0.3% 0.1% ---
DZ Bank --- 0.5% 0.3% ---
First Trust Advisors 621 1.3% 1.2% -1.1%
Fortis --- 0.5% --- -0.8%
FTN Financial --- -0.3% -0.5% ---
Goldman, Sachs & Co. --- 0.7% 0.4% ---
Helaba 620 1.0% 0.6% -1.0%
Herrmann Forecasting 609 0.6% 0.3% -1.0%
High Frequency Economics 621 1.0% 0.7% -1.1%
Horizon Investments --- 0.3% 0.3% -1.2%
HSBC Markets 620 0.9% 0.7% -0.9%
IDEAglobal 625 0.5% 0.2% -0.8%
IHS Global Insight --- 0.9% 0.6% ---
Informa Global Markets 625 0.7% 0.2% -0.8%
ING Financial Markets 615 0.5% 0.1% -1.1%
Intesa-SanPaulo --- 0.3% 0.2% ---
J.P. Morgan Chase 625 1.4% 0.6% -1.0%
Janney Montgomery Scott L --- 0.7% 0.3% -1.3%
Johnson Illington Advisor --- 0.4% 0.1% -1.0%
JPMorgan’s Private Wealth --- 0.3% 0.2% 0.4%
Landesbank Berlin 600 0.3% -0.3% -1.2%
Landesbank BW --- 0.8% --- ---
Maria Fiorini Ramirez Inc 605 0.7% 0.5% ---
Merrill Lynch 580 0.4% 0.1% -1.0%
MFC Global Investment Man 599 0.1% -0.1% -0.5%
Mizuho Securities 625 0.1% 0.0% -1.2%
Moody’s Economy.com 615 0.5% 0.3% -0.9%
Morgan Stanley & Co. --- 0.1% 0.2% ---
National Bank Financial 600 0.6% 0.3% ---
Natixis --- 0.5% 0.4% ---
Newedge --- 0.4% 0.2% ---
Nomura Securities Intl. --- -0.1% 0.3% ---
PNC Bank --- 1.1% 1.0% -0.7%
Raymond James 595 0.3% 0.0% ---
RBC Capital Markets --- 0.4% 0.1% ---
RBS Securities Inc. 630 0.6% 0.4% -0.9%
Ried, Thunberg & Co. 620 0.9% 0.6% -0.9%
Schneider Foreign Exchang 610 -0.2% -0.2% -0.4%
Scotia Capital 630 -0.1% -0.2% ---
Societe Generale --- 0.7% 0.5% ---
Stone & McCarthy Research 640 0.8% 0.6% -1.1%
TD Securities 610 0.9% 0.3% ---
Thomson Reuters/IFR 610 0.8% 0.5% 1.4%
Tullett Prebon 615 0.4% --- -0.5%
UBS Securities LLC 625 1.1% 0.4% -1.0%
Unicredit MIB 600 0.2% 0.2% ---
University of Maryland 600 0.3% 0.0% -1.0%
Wachovia Corp. --- 0.2% 0.7% -1.0%
Wells Fargo & Co. 610 0.5% --- -1.2%
WestLB AG --- 0.1% 0.0% ---
Westpac Banking Co. 605 0.5% 0.1% -0.8%
Wrightson Associates 620 0.9% 0.6% -0.9%

Tuesday, June 8, 2010

Trichet Life Compass Points to Euro at Center of European Unity

By James G. Neuger and Simon Kennedy

June 8 (Bloomberg) -- Jean-Claude Trichet used a simple chart to convince European leaders the euro was in grave danger.

It was Friday, May 7. Spanish, Greek, Portuguese and Irish government bonds were plunging, sending shudders through world markets and fueling speculation Europe’s 11-year-old monetary union could collapse. The European Central Bank’s president traveled to an emergency Brussels summit of heads of government armed with graphs to dramatize how bad things were.

“My main message for the governments was: Some of you have behaved very improperly and have created an element of vulnerability for your own country, and by way of consequence for Europe,” Trichet recalls. “Now the situation calls for taking up responsibilities.”

By 3:15 a.m. the following Monday, Europe knew the price of that responsibility: an unprecedented 750 billion-euro ($900 billion) aid package to prevent a debt spiral, backed by a credibility-testing pledge from the ECB to purchase the bonds of distressed governments, all to keep the $11 trillion, 16-nation economic and monetary experiment afloat.

Guiding the euro’s fate from the 35th floor of the ECB’s headquarters in downtown Frankfurt, Trichet says he’s never known “calm waters” and is “used to crisis.”

Yet the turmoil casting a shadow over the last 17 months of his eight-year term is unlike anything he has faced before. Throughout his career he has battled crises, ranging from the oil-price surge when he was a French presidential aide in the 1970s, to the euro’s birth pangs and his acquittal in 2003 on decade-old charges of helping Credit Lyonnais SA cover up losses. As ECB chief he then had to confront the global credit crunch and recession.

Euro Survival

Now, investors are questioning the survival of the euro itself, along with the tight-money orthodoxy that Trichet has promoted as a central banker. As the 67-year old Frenchman nears retirement from the ECB in October 2011, he is having to rework parts of the German-inspired policy rulebook underpinning the euro in a bid to save the currency he helped create.

“If you cross a typhoon, the manual doesn’t help,” says Tommaso Padoa-Schioppa, 69, who served seven years on the ECB’s Executive Board and now chairs the European unit of Washington- based financial-services consulting firm Promontory Financial Group. “Trichet has had the ability to understand that the decisions during this crisis could not be exclusively based on the manuals written for ordinary times.”

One Size Fits All

The euro has slumped 19 percent against the dollar in the past six months as the fiscal crisis that started in Greece made money managers wary that some debt-swamped nations might default, or even revert to old currencies to devalue their way to salvation.

With investors selling sovereign paper from Athens to Dublin and buying safer German bonds, yield spreads ballooned in the first week of May, rendering the ECB’s one-size-fits-all monetary policy ineffective and threatening to tear the currency union apart.

So Trichet made the biggest gamble of his career, agreeing to buy government debt to halt the surge in yields in the hope politicians will respond by fixing their budgets, allowing the ECB to return to fighting inflation.

The risk is that profligate nations will renege on the deal, expecting stronger euro-area neighbors such as Germany and France to save them just as they rescued Greece.

Critics say the ECB has abandoned a founding principle not to bail out cash-strapped governments and may be left having to buy more debt, which could ultimately undermine its primary price-stability mandate.

Worsening Crisis

“The last months of Trichet’s presidency are going to be among the most difficult of his time,” says Laurent Bilke, a former ECB economist who is now with Nomura International Plc in London. “The ECB more and more will have to arbitrage between a financial stability role and price stability.”

A rare communications misstep by Trichet contributed to the worsening crisis at the start of May. Speaking in Lisbon on May 6, he told reporters that the purchase of government bonds wasn’t even discussed by ECB officials during their meeting that day.

His perceived ambivalence shook European markets and briefly helped drive the Dow Jones Industrial Average down almost 1,000 points.

Within 24 hours, ECB aides were talking to the region’s primary dealers, and Trichet was at the center of emergency consultations with EU leaders throughout the weekend to get a rescue package in place before Asian markets opened.

Vocal Opposition

Adding controversy to the bond move is the vocal opposition of Bundesbank President Axel Weber, a leading candidate to succeed Trichet next year, who said the policy creates “significant” risks.

Another German dissenter is Helmut Schlesinger, who ran the Bundesbank from 1991 to 1993 and raised its benchmark discount rate to a record high of 8.75 percent in 1992 to choke off the inflationary consequences of German reunification.

“Confidence in the system of European central banks is at stake,” says Schlesinger, 85. “The most important thing would be to keep the purchases of government debt to a minimum and stop them as soon as possible.”

Trichet defended his actions in four interviews with German print and broadcast media in the space of a week. The ECB is dealing with “the most difficult situation since the Second World War, perhaps even since the First World War,” he told Spiegel magazine in an article published May 15. The ECB prodded governments into acting, not the other way around, and the bond purchases will be offset to ensure they have no inflationary impact, he said.

Higher Goal

Trichet’s supporters say the program shows his ability to set aside dogma in pursuit of a higher goal.

“The ECB was flexible in its approach and willing to act very strongly when a clear crisis was building up,” says Marie Diron, who spent five years in the ECB’s economics department and is now at Oxford Economics Ltd. “What it was trying to do was restore normality in government bond markets and not lose sight of its price stability mandate or bailing out a country.”

As of June 4, the ECB had bought 40.5 billion euros of bonds.

“He has shown a lot of sang-froid and rigor and pragmatism in managing the crisis,” says Jean Arthuis, a French senator who worked alongside Trichet as finance minister from 1995 to 1997.

Inflation Fighters

Trichet learned his trade during the 1970s and early 1980s, when the U.S. Federal Reserve, under Paul Volcker, and the Bundesbank led the world in taming price pressures generated by oil shocks.

Their success in proving the mettle of independent central banks with a mission to fight inflation led the European Union to insist that all would-be euro users make their monetary authorities free of government control. It also ensured that the blueprint for the euro was the deutsche mark.

As head of the French Treasury from 1987 to 1993 and governor of the French central bank from 1993 to 2003, Trichet extolled the German mantra of low inflation and budget discipline to France’s elite, earning him a reputation as the Bundesbank’s representative in Paris.

Trichet “was able to resist political pressure coming particularly from his own government,” says Lamberto Dini, 79, a former Italian prime minister who knows Trichet from European exchange-rate negotiations in the 1980s. “When he was criticized because monetary policy was too strict and France wanted to ease up, he did not.”

Mining Engineer

Political haggling put the French civil servant -- trained first as a mining engineer, then in politics and economics before attending the Ecole Nationale d’Administration, the finishing school for the French leadership -- in charge of Europe’s money.

France acquiesced to the demands of Germany and the central banking community to let Wim Duisenberg of the Netherlands become the ECB’s first president at a summit in 1998, on condition he step down before the end of his term to make way for Trichet.

The deal set a precedent for political meddling with a central bank that, under the euro treaty, would not “seek or take instructions” from European or national leaders.

From the start, the ECB had to defend its turf, with Duisenberg saying in 2001 that “I hear, but I do not listen” to politicians’ pleas for lower interest rates.

Without the Dutchman’s gruffness, the courtly Trichet resisted similar pressure after taking over in 2003, deflecting calls from German Chancellor Gerhard Schroeder among others for easier credit.

Track Record

The result is a price-stability record that surpasses even the Bundesbank’s. Inflation in the euro region has averaged 1.98 percent since the ECB took control on Jan. 1, 1999, in line with its self-set target of “below but close to 2 percent.”

The ECB’s standing is now in jeopardy. Trichet’s detractors argue the decision to buy bonds breaches a rule that the central bank doesn’t rescue governments, undermining the independence it needs to breed confidence in the euro. They also say that the ECB risks stoking inflation by increasing the money supply.

To David Mackie, chief European economist at JPMorgan Chase & Co. in London, the danger is that a lack of follow-through from governments will leave the ECB exposed.

ECB in Danger

“If governments don’t deliver on the fiscal side, will the ECB get sucked into buying more and more amounts of outstanding debt?” asks Mackie, who predicts the central bank won’t raise interest rates on Trichet’s watch again. “The ECB has got itself into a situation where it’s in danger.”

It’s also far from certain that the asset purchases will work. By June 2, Spanish and Italian yield premiums over German bonds had exceeded pre-intervention levels. The Spanish spread was at 203 basis points yesterday, 39 basis points above its May 7 level. The Italian spread was 177 basis points and Portugal’s 264 basis points.

That may require the ECB to do even more to ease market strains. Policy makers next meet on June 10 in Frankfurt.

David Owen, chief European financial economist at Jefferies Group Inc. in London, says he would not be surprised if the ECB stopped sterilizing its bond purchases at some point, meaning it would effectively be printing new money.

Deficit Obstacle

Trichet’s success will partly be decided by governments’ ability to overcome sluggish economic growth and cut their deficits. Even with the ECB’s record-low interest rate of 1 percent and emergency liquidity measures for banks, the Paris- based Organization for Economic Cooperation and Development forecasts euro-region growth will be 1.2 percent this year, barely a third that of the U.S. The bloc has lagged the U.S. in seven of the euro’s 11 years.

The currency’s recent slide leaves it at $1.20, roughly in the middle of its historic trading range. It debuted at $1.17 in January 1999, troughed at 83 cents in October 2000 and peaked at $1.60 in July 2008. Economists at BNP Paribas SA and Capital Economics Ltd. are among those predicting it will return to parity with the dollar.

Amid accusations the euro now looks more like the Greek drachma than the German mark, Trichet blames governments for what went wrong. Greece’s budget deficit was 13.6 percent of output last year, Ireland’s shortfall was 14.3 percent and Spain’s 11.2 percent. Germany’s deficit was 3.3 percent.

‘Quantum Leap’

Trichet “had a lot of reasons to consider himself as playing a part in the euro’s story and he has a stake in its success,” says Eric Chaney, a former French Finance Ministry official and now chief economist at AXA Group in Paris. “That’s why he came to take such tough decisions like buying government bonds. It’s a big bet on the political will of the governments and the oppositions who may win elections.”

For now, governments are pledging to tighten their belts and the likes of Greece and Spain are introducing austerity packages. Trichet’s demand for a “quantum leap” in economic management may also be heeded, with finance ministers vowing on May 21 to stiffen sanctions on high-deficit countries.

Yet the history of the euro is littered with examples of governments casting aside central bankers’ appeals for fiscal prudence, from France raiding France Telecom SA’s pension fund in 1996 to Greece fudging its budget data to qualify for the currency in 2001.

“It’s definitely the biggest challenge of Trichet’s professional life,” says Joachim Fels, co-chief economist at Morgan Stanley in London. “This is his chance to save his legacy.”

Trichet himself is optimistic, noting that Europe often progresses through crisis.

“You must be inflexible on your long-term compass,” he says. “My long-term compass as a central banker is price stability. My life compass has been the deepening of European unity based upon reconciliation and a profound friendship to the service of prosperity and peace. This historical endeavor, which started 60 years ago and was reinforced by the fall of the Soviet Union, goes on.”

Friday, June 4, 2010

G-20 Central Banks Delay Exit on Euro Debt Woes (Update1)

By Simon Kennedy and Shamim Adam

June 4 (Bloomberg) -- Group of 20 central banks are delaying their withdrawal of emergency stimulus as Europe’s debt crisis shakes financial markets and threatens to hinder the global recovery.

G-20 finance chiefs begin talks today in South Korea after central banks from Australia to Canada identified investor reaction to Europe’s indebtedness as a hurdle to higher interest rates. European Central Bank President Jean-Claude Trichet has reversed his exit strategy to combat the euro’s biggest test, while the Federal Reserve’s Charles Evans and Dennis Lockhart signaled market stress will delay a rise in U.S. rates.

“Given the increase in uncertainty in the economy, it would be perfectly natural for people to be less eager to tighten,” William White, a former Bank for International Settlements chief economist who pointed to risks in financial markets before the 2008 credit crisis, said in an interview in Seoul.

The need for central bankers to keep rates lower for longer may spark tension in Busan, South Korea, as monetary policy makers intensify their public demands for fiscal authorities to restrain debt in return. The pressure is an echo of the 1990s, when then-Fed Chairman Alan Greenspan and counterparts lobbied leaders to narrow deficits that threatened a bondholder revolt.

Europe’s Rescue

Trichet, Chinese Finance Minister Xie Xuren and their G-20 counterparts convene today for the first time since a Greek-led sell-off in the bonds of the euro-area’s most indebted nations spurred the European Union to craft a 750 billion-euro ($918 billion) rescue plan and the ECB to buy the bonds of “dysfunctional” markets.

The package hasn’t been enough to pacify investors concerned sovereign debt is the biggest threat yet to the recovery from last year’s global slump.

The MSCI World Index of stocks has fallen 12 percent since mid-April and the rate banks say they pay for three-month loans in dollars last week reached the highest level since July. The market for corporate bonds closed on June 1 as concern European banks will take more writedowns and losses led investors to shun all but the safest government debt.

“Investors are going to stay cautious,” said Andrew Milligan, the Edinburgh-based head of global strategy at Standard Life Investments, which manages the equivalent of $214 billion. He predicts they will seek “ballast” for their portfolios amid volatility by buying investment-grade corporate debt. Bonds from governments with lower borrowing levels will also outperform, he forecast.

Credit Crunch

Central banks are concerned the biggest threat to the recovery is banks ceasing to lend and financial markets freezing as happened in 2008, rather than weaker European demand, said Julian Callow, chief European economist at Barclays Capital in London. He estimates Greece, Ireland, Portugal and Spain accounted for just 4 percent of world gross domestic product last year.

“They are traumatized by what happened in 2008,” said Callow, who previously worked at the Bank of England. “Investors are nervous again so central banks are picking up on that.”

Trichet’s ECB is leading the pullback, announcing May 10 it would intervene in markets to buy government bonds, renew its auctions of unlimited cash to banks for up to six months and revive a currency swap line with the Fed.

Shifting Forecast

Goldman Sachs Group Inc. Chief European Economist Erik Nielsen now expects the ECB to wait until the second quarter of next year to raise its benchmark rate rather than during the first three months of the year as he previously anticipated.

Other G-20 central banks are also taking note of Europe’s woes. Australia kept its key rate at 4.5 percent on June 1 and signaled it may leave it there for the “near term,” noting in a statement that “investors have generally displayed a good deal more caution.”

Turkey’s central bank said on May 18 that indebtedness elsewhere in Europe means “uncertainty over external demand is likely to remain important for a long time.” Russia’s Bank Rossii cut its main interest rate for the 14th time in as many months on May 31 to support its recovery, while Indonesia yesterday kept its benchmark unchanged at a record low.

‘Extended’ Period

Fed Bank of Chicago President Evans said May 31 he “wouldn’t be surprised” if the Fed’s policy of keeping rates near zero “gets extended just a little bit.”

Atlanta Fed President Lockhart said yesterday that “the pressures in Europe may slow the movement toward any removal of accommodation.” Bank of England policy maker Adam Posen said in a May 20 interview Europe’s crisis is going to inflict “some negative drag on the U.K.”

“If you have volatility in markets and implications for the financial system then central bankers are going to be concerned about the risks to growth so may be relatively more conservative in scaling back support,” said Paul Donovan, a UBS AG economist in London.

Even central banks that have raised rates may now be slower to do so. In India, where the Reserve Bank increased borrowing costs in March and April, Deputy Governor Subir Gokarn last month said officials will be more cautious with future moves. Bank of Canada Governor Mark Carney mentioned Europe and its crisis four times in a one-page statement on June 1, a signal his bank may not soon repeat its quarter-point rate rise.

Brazil Exception

Brazil, where inflation has exceeded the government’s target each month this year, may be an exception. Brazil central bank President Henrique Meirelles said the nation’s policy makers are in a “tightening mood.”

“We are committed to keeping inflation on target,” Meirelles said today in a Bloomberg Television interview from Busan.

The market jitters may also have given China reason to refrain so far from letting its currency rise against the dollar. G-20 members have repeatedly called for an end to the peg China adopted in July 2008 to aid its exporters. The euro’s 15 percent slide against the yuan this year already threatens to undermine Chinese shipments.

Twelve-month non-deliverable yuan forwards reflect bets the yuan will strengthen 0.7 percent from the spot rate of 6.83 per dollar compared with projections of a 3.2 percent appreciation at the start of May.

China’s Yuan

“China’s economic strength certainly justifies a stronger yuan and higher interest rates, but policy makers don’t want to give an impression that they are tightening at a time when exporters are suffering,” said Tomo Kinoshita, an economist at Nomura Holdings Inc. in Hong Kong.

In return for doing more to aid expansion, central banks may demand governments work harder to outline and enact plans to narrow budget gaps, with southern Europe an example of what may happen if they fail. Citigroup Inc. economists estimate G-20 governments must tighten fiscal policy an average of 8 percent of GDP over the next decade to reduce debt burdens to 60 percent of GDP.

Trichet said May 31 that he will no longer tolerate a lack of budget discipline in the euro area after all but Luxembourg and Finland last year violated a rule to hold budget deficits to less than 3 percent of GDP. Fed Chairman Ben S. Bernanke said April 27 that a failure to reduce the U.S. deficit may imperil the recovery by pushing up borrowing costs.

Finance ministers headed to Busan seeking to juggle the goals of protecting growth and consolidating budgets. U.S. Treasury Secretary Timothy F. Geithner said he wanted fiscal reform that was “growth-friendly,” while France’s Christine Lagarde said the G-20 was aiming to restore confidence in public borrowing, yet not “suffocate growth.”

Wednesday, June 2, 2010

Gold ATMs Going Global – A Sign for Currencies?

Posted on June 3, 2010 by Yohay

Gold to Go, the manufacturer of gold ATMs, is working hard to meet the demand for its vending machines. From a gimmick of two machines operating now, their business will grow to 50 quite soon. This is the result of the rising prices in gold. Is this is a sign for the Euro? For the Aussie?

Gold to Go is a German company that created a Automatic Teller Machine (ATM) for buying gold, similar to the everyday action of withdrawing cash – just gold coins or gold bars. The first machine was launched in Abu Dhabi about a month ago, and the second machine started operating in Germany last week. This was only the beginning.

It is now reported that there is high demand for these gold ATMs – they are not a gimmick anymore. The company is working hard on producing 50 additional machines. The ATMs will be deployed in all of Malaysia’s airports, in Italy, Turkey and Russia. Gold rates are updated every 10 minutes according to global gold prices.

Gold and forex

The company’s appeal to average customers shows that physical gold is becoming more popular also outside the electronic charts. While these funny machines aren’t only a gimmick anymore, their scale is still small. But it could be a sign.

This trend is a good sign for Australia, which produces gold, as well as for South Africa and other countries.

But it’s a bad sign for paper money, with weak currencies like the Euro being more vulnerable. One of the outcomes of the recent turmoil in Europe is new highs for paper gold. Gold touched $1250 per ounce on May 14th – a new all-time record. It’s now stable at $1233. The correlation between the Euro’s weakness and the strength of gold is very strong.

The drops in the Euro triggered a rise in gold prices. A rise in the demand for gold could trigger a sell off in the Euro.

While their own currency plunges, European might turn to shining metal. Gold slowly becomes a true “safe haven” currency, like in old times.

Speaking of safe haven currencies, the yen lost its role this week with the resignation of the Japanese Prime Minister. The political uncertainty in Japan may be temporary, but at least for now, gold seems to take the yen’s place, alongside the dollar. The greenback won’t lose its status as the world’s reserve currency. The talks a few months ago were definitely too soon.

The dollar clings to its throne. But gold, physical gold is behind it.