By Jana Randow and Simon Kennedy - Dec 24, 2010 8:00 AM GMT+0800
Jean-Claude Trichet will retire as European Central Bank president next October with the euro area still needing record-low interest rates, according to economists who accurately predicted the region’s monetary policy this year.
The Frankfurt-based central bank will keep its key interest rate unchanged throughout 2011 amid low inflation, moderate growth and persisting fallout from the sovereign-debt crisis, said 12 of 17 economists in a Bloomberg News survey. The sample was taken among forecasters who correctly anticipated in January that the ECB’s benchmark would stay this year at 1 percent.
The new year approaches with Trichet celebrating his 68th birthday this week after leading Europe’s response to the turmoil, which at one point threatened to destroy the single currency and has already engulfed Greece and Ireland. Even after those nations received international bailouts, the cost of insuring Greek debt rose yesterday to the highest in a month and investors speculate that Portugal may be next to require aid. The euro has fallen 8.7 percent against the dollar in 2010.
“Problems in the banking sector won’t be resolved quickly, and banks in peripheral countries will continue to need support,” said Juergen Michels, chief euro-region economist at Citigroup Inc. in London. “There won’t be any major inflation pressures that would warrant a rate increase before 2012.”
The 17 economists questioned this month participated in a similar survey of 61 forecasters in January on the outlook for ECB policy in 2010. The median forecast then was the benchmark would be at 1.5 percent now with Deutsche Bank AG and Bank of America Merrill Lynch analysts among those predicting 2 percent.
Buying Bonds
The ECB cut its rate to 1 percent in May 2009 to fight the worst recession in its history. A year later the central bank began buying government bonds for the first time to ease credit- market tensions as investors focused on outsized budget deficits. As recently as this month, the ECB was forced to delay a further withdrawal of unlimited liquidity support to euro-area banks.
Lingering questions on whether Portugal and Spain require external help will keep the ECB “patient, cautious and prudent” as it leaves its rate on hold through next year, said Cedric Thellier, an economist at Natixis in Paris. He says the region faces a sluggish recovery even as Germany’s strength offsets weakness in the so-called peripheral economies.
Portugal’s credit rating was downgraded yesterday by Fitch Ratings to A+ from AA-. The company predicted the nation will suffer a recession next year.
The ECB this month forecast growth will slow in 2011 to about 1.4 percent from this year’s 1.7 percent, while inflation will advance to 1.8 percent from 1.6 percent. That’s still under the bank’s target of just below 2 percent. The region will expand in size in January as Estonia becomes its 17th member.
Recession Prospects
David Owen, chief economist at Jefferies International Ltd. in London, said the ECB’s numbers imply the “weakest growth on record.” Carl Weinberg, chief economist at High Frequency Economics Ltd. in Valhalla, New York, predicts the economy will “lapse into a deep recession, squeezed by a credit crunch and plagued by multiple bank failures.” Both forecasters expect no change in the main interest rate next year.
Adding to pressure on growth is the push to curb budget deficits to pacify investors. Portuguese 10-year bond yields rose by almost half a percentage point in the past two weeks. Those on similar Greek securities have returned to the 12 percent level they reached in May. The cost of insuring Greek debt jumped 38 basis points yesterday to 1,019, according to CMA prices for credit-default swaps.
Deficit Measures
Measures to restore order to budget deficits will amount to 1.3 percent of the euro zone’s gross domestic product in 2011, with Ireland and Portugal cutting back about 4 percent and Greece as much as 6 percent, according to Julian Callow, chief European economist at Barclays Capital. He also forecasts no rate change in 2011.
Analysts at UniCredit SpA, Royal Bank of Scotland Group Plc and Standard Chartered Plc are among five forecasters expecting the ECB to begin rate increases in the second half of 2011.
“The ECB will want to start re-establishing its anti- inflation credentials,” said Sarah Hewin, senior economist at Standard Chartered in London, whose forecast for a 1.75 percent rate was the highest of those surveyed. Jacques Cailloux, chief euro-area economist at RBS, expects an increase to 1.5 percent as strength in core economies such as Germany keep them “ring- fenced” from debt strains.
Surging bond yields prompted the ECB to step up bond purchases following Ireland’s aid package. The region’s central banks have bought 72.5 billion euros ($95 billion) of government debt since the bond program was announced in May. The ECB has also committed to aid banks with as much liquidity as needed through the first quarter for periods of up to three months.
Crisis Response
“The ECB made very clear that in their view the crisis needs to be resolved by governments,” said Ken Wattret, an economist at BNP Paribas SA in London and another forecaster who was right in 2010. “But governments aren’t very quick, so the ECB is going to feel continuously obliged to step in.”
Economists are divided over how long the ECB will take to return to its pre-crisis refinancing system of cash auctions. While Greet Vander Roost at KBC Asset Management in Brussels expects the exit to be finished by the end of the second quarter, Citigroup’s Michels says the ECB will keep supplying unlimited liquidity in weekly operations into 2012.
Michels’s scenario would turn responsibility for normalizing ECB monetary policy to the next president as Trichet’s central banking career comes to an end after almost two decades and eight years at the ECB. Who will replace him will be a subject of heated debate for leaders next year with Bundesbank President Axel Weber and Bank of Italy Governor Mario Draghi most often linked to the job.
“By next November it ought to be a lot clearer how the crisis is playing out,” said Callow of Barclays Capital. “The challenge for Trichet’s successor is to mold the euro area into a more cohesive economic and financial entity.”
ECB Rate at end of 2011
Analistas Financieras International 1 percent
Barclays Capital 1 percent
BHF-Bank AG 1.5 percent
BNP Paribas SA 1 percent
Capital Economics Ltd. 1 percent
Citigroup Inc. 1 percent
High Frequency Economics Ltd. 1 percent
Jefferies International Ltd. 1 percent
JPMorgan Chase & Co. 1 percent
KBC Asset Management 1 percent
Lloyds TSB Corporate Markets 1.25 percent
Natixis 1 percent
Royal Bank of Scotland Group Plc 1.5 percent
Standard Chartered Bank 1.75 percent
Societe Generale SA 1 percent
UniCredit Group 1.25 percent
Wermuth Asset Management GmbH 1 percent
Monday, December 27, 2010
Tuesday, December 21, 2010
Greece Faces `Heightened' Probability of Debt Rating Downgrade, Fitch Says
By Greg Chang and Anchalee Worrachate - Dec 21, 2010 10:51 AM PT
Greece may have its credit rating cut to non-investment grade by Fitch Ratings within six weeks after a review of the nation’s “fiscal sustainability.”
The assessment will focus on government measures to lower the budget deficit, the economic outlook and the “political will and capacity of the Greek state” to push through austerity measures, the company said in a statement today. Greece is rated BBB- at Fitch, its lowest investment-grade rating.
Fitch said it expects the review to be completed in January and there is a “heightened probability” of a downgrade.
Greece, the first euro-area nation to seek international aid this year, already has non-investment grade ratings at Moody’s Investors Service and Standard & Poor’s. The Greek bailout in May and subsequent aid for Ireland last month have so far failed to quell investors’ concerns that Europe’s debt crisis may spread to other nations.
“On the margin, this will further put pressure on peripheral spreads at the time when sovereign credit quality is a major concern,” said David Keeble, New York-based head of fixed-income strategy at Credit Agricole Corporate & Investment Bank. “But this is barely a surprise move. Fitch is the final guy to catch up. The market has moved way ahead.”
Moody’s has Greece on a Ba1 rating, while S&P has it on BB+. The extra yield investors charge to hold Greek 10-year debt over German bunds was at 898 basis points today, compared with a record of more than 965 basis points in May.
The so-called yield premium on Ireland’s debt, which rose to a euro-era high of 680 basis points on Nov. 30, was at 590 basis points today. Portugal was at 354 basis points.
Greece is cutting spending and raising taxes as a condition of its aid from the European Union and International Monetary Fund. The IMF said on Dec. 17 that the country’s rescue program has “continued to perform well” and it approved payment of another 2.5 billion euros ($3.3 billion) under the deal.
“The overall fiscal adjustment to date has been impressive,” the IMF said last week. “It is important that fiscal structural reforms be forcefully advanced to ensure a lasting consolidation.”
Greece may have its credit rating cut to non-investment grade by Fitch Ratings within six weeks after a review of the nation’s “fiscal sustainability.”
The assessment will focus on government measures to lower the budget deficit, the economic outlook and the “political will and capacity of the Greek state” to push through austerity measures, the company said in a statement today. Greece is rated BBB- at Fitch, its lowest investment-grade rating.
Fitch said it expects the review to be completed in January and there is a “heightened probability” of a downgrade.
Greece, the first euro-area nation to seek international aid this year, already has non-investment grade ratings at Moody’s Investors Service and Standard & Poor’s. The Greek bailout in May and subsequent aid for Ireland last month have so far failed to quell investors’ concerns that Europe’s debt crisis may spread to other nations.
“On the margin, this will further put pressure on peripheral spreads at the time when sovereign credit quality is a major concern,” said David Keeble, New York-based head of fixed-income strategy at Credit Agricole Corporate & Investment Bank. “But this is barely a surprise move. Fitch is the final guy to catch up. The market has moved way ahead.”
Moody’s has Greece on a Ba1 rating, while S&P has it on BB+. The extra yield investors charge to hold Greek 10-year debt over German bunds was at 898 basis points today, compared with a record of more than 965 basis points in May.
The so-called yield premium on Ireland’s debt, which rose to a euro-era high of 680 basis points on Nov. 30, was at 590 basis points today. Portugal was at 354 basis points.
Greece is cutting spending and raising taxes as a condition of its aid from the European Union and International Monetary Fund. The IMF said on Dec. 17 that the country’s rescue program has “continued to perform well” and it approved payment of another 2.5 billion euros ($3.3 billion) under the deal.
“The overall fiscal adjustment to date has been impressive,” the IMF said last week. “It is important that fiscal structural reforms be forcefully advanced to ensure a lasting consolidation.”
Friday, December 17, 2010
EU Leaders Create Debt-Management Mechanism From 2013
European Union leaders agreed to amend the bloc’s treaties to create a permanent debt-crisis mechanism in 2013 as they struggled to bridge divisions over immediate steps to stabilize bond markets.
A day after the European Central Bank armed itself with more capital to resist the crisis, the EU started to discuss measures such as offering shorter-term credits or using the bloc’s main rescue fund to buy bonds of distressed countries.
“My vision is of a Europe that grows ever closer together - - at different speeds in some cases, to be sure,” German Chancellor Angela Merkel told reporters after an EU summit in Brussels today.
For now, Germany ruled out topping up the current 750 billion-euro ($1 trillion) emergency fund or rushing aid to Portugal or Spain, reinforcing skepticism in markets about Europe’s search for the right formula to quell the fiscal contagion that threatens the euro.
The future setup “is to some extent window-dressing as it does not solve the current crisis,” said Carsten Brzeski, an economist at ING Group NV in Brussels. “European leaders failed to address the issue of debt sustainability and possible insolvency problems prior to 2013.”
The euro gained 0.1 percent to $1.3254 at 2:45 p.m. in Brussels, while bonds of Portugal, Spain, Greece and Ireland slipped. Moody’s Investors Service followed up warnings that it may cut the credit ratings of Spain and Greece by announcing today that it downgraded Ireland by five notches to Baa1 from Aa2, with a negative outlook.
Talks Under Way
Luxembourg Prime Minister Jean-Claude Juncker said deliberations are under way over more flexible use of the main 440 billion-euro component of the fund instead of waiting until the last minute to arrange all-or-nothing lifelines like the 85 billion-euro package granted to Ireland on Nov. 28.
Asked whether shorter-term credits or bond purchasing are up for debate, Juncker said measures being considered are “exactly those that you mentioned.”
Such steps would ease strains on the ECB, which has bought 72 billion euros of weaker countries’ debt since May to stabilize markets. Yesterday, the ECB shored up its capital base to guard against losses from the purchases, voting to almost double its capital to 10.76 billion euros.
“Let’s be candid,” International Monetary Fund Managing Director Dominique Strauss-Kahn said in an interview on “Charlie Rose” on PBS. “The European Union needs a little more time, until maybe the beginning of next year, to be able to produce a comprehensive package.”
No ‘Speculation’
Driven by a German public outcry against propping up fiscally reckless countries, Merkel opposed putting more money on the table or further entwining Europe’s economies through joint bond sales. Merkel didn’t rule out more flexible use of the current fund, declining to enter into “speculation.”
In a departure from German insistence that each country determine its own fate, Merkel said today that maintaining national fiscal discipline won’t alone put the 16-nation euro region on a sounder footing.
Merkel and French President Nicolas Sarkozy indicated that closer coordination of business tax rates might come back onto the agenda as Europe tries to forge a more unified economy and fix flaws in the euro’s makeup.
In a jab at Ireland’s 12.5 percent corporate tax rate, Sarkozy said “I don’t think you can have the lowest corporate taxes in the euro zone and then transfer your debt.” Spanish Prime Minister Jose Luis Rodriguez Zapatero said the tax discussion is an “important novelty” that will play out over years.
‘Needs to Mature’
Italian Prime Minister Silvio Berlusconi put calls for joint euro-area borrowing in the same category, noting the German opposition “but that the proposal needs to mature. It will be studied more deeply.”
On the summit’s main business, Germany won an EU commitment for a treaty amendment to set up a crisis-resolution system in 2013 that would allow financial aid “if indispensable” to underpin the euro and might force bondholders to bear some of the costs of future rescues.
German insistence on cutting bond values when countries get into trouble in the future triggered the latest phase in the debt crisis, culminating in Ireland’s support package and triggering concern that Portugal and Spain will be next.
While costs for bondholders aren’t mentioned in the two- sentence amendment agreed on last night, the leaders endorsed a Nov. 28 decision by finance ministers that writedowns may take place on a “case by case” basis in accord with IMF practices.
‘Useful Clarification’
ECB President Jean-Claude Trichet called the pledge not to mandate bond writeoffs a “useful clarification.”
Merkel needed the amendment to prevent German high-court challenges to the future aid mechanism, which the EU wants to get up and running when the current rescue package lapses in mid-2013.
The compromise text reads: “The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality.”
Merkel didn’t get everything she wanted. Germany originally pushed to allow financial aid only as a “last resort,” language that might have ruled out contingency credit lines or given the IMF the lead in sorting out Europe’s economic woes.
Last overhauled a year ago, the treaty is the EU’s equivalent of a constitution, binding on EU institutions in Brussels and on national governments’ handling of European affairs. All 27 countries, including the 11 outside the euro region, must ratify the amendment.
European finance ministers plan to work out details of the future system by March so it can take effect in the middle of 2013.
A day after the European Central Bank armed itself with more capital to resist the crisis, the EU started to discuss measures such as offering shorter-term credits or using the bloc’s main rescue fund to buy bonds of distressed countries.
“My vision is of a Europe that grows ever closer together - - at different speeds in some cases, to be sure,” German Chancellor Angela Merkel told reporters after an EU summit in Brussels today.
For now, Germany ruled out topping up the current 750 billion-euro ($1 trillion) emergency fund or rushing aid to Portugal or Spain, reinforcing skepticism in markets about Europe’s search for the right formula to quell the fiscal contagion that threatens the euro.
The future setup “is to some extent window-dressing as it does not solve the current crisis,” said Carsten Brzeski, an economist at ING Group NV in Brussels. “European leaders failed to address the issue of debt sustainability and possible insolvency problems prior to 2013.”
The euro gained 0.1 percent to $1.3254 at 2:45 p.m. in Brussels, while bonds of Portugal, Spain, Greece and Ireland slipped. Moody’s Investors Service followed up warnings that it may cut the credit ratings of Spain and Greece by announcing today that it downgraded Ireland by five notches to Baa1 from Aa2, with a negative outlook.
Talks Under Way
Luxembourg Prime Minister Jean-Claude Juncker said deliberations are under way over more flexible use of the main 440 billion-euro component of the fund instead of waiting until the last minute to arrange all-or-nothing lifelines like the 85 billion-euro package granted to Ireland on Nov. 28.
Asked whether shorter-term credits or bond purchasing are up for debate, Juncker said measures being considered are “exactly those that you mentioned.”
Such steps would ease strains on the ECB, which has bought 72 billion euros of weaker countries’ debt since May to stabilize markets. Yesterday, the ECB shored up its capital base to guard against losses from the purchases, voting to almost double its capital to 10.76 billion euros.
“Let’s be candid,” International Monetary Fund Managing Director Dominique Strauss-Kahn said in an interview on “Charlie Rose” on PBS. “The European Union needs a little more time, until maybe the beginning of next year, to be able to produce a comprehensive package.”
No ‘Speculation’
Driven by a German public outcry against propping up fiscally reckless countries, Merkel opposed putting more money on the table or further entwining Europe’s economies through joint bond sales. Merkel didn’t rule out more flexible use of the current fund, declining to enter into “speculation.”
In a departure from German insistence that each country determine its own fate, Merkel said today that maintaining national fiscal discipline won’t alone put the 16-nation euro region on a sounder footing.
Merkel and French President Nicolas Sarkozy indicated that closer coordination of business tax rates might come back onto the agenda as Europe tries to forge a more unified economy and fix flaws in the euro’s makeup.
In a jab at Ireland’s 12.5 percent corporate tax rate, Sarkozy said “I don’t think you can have the lowest corporate taxes in the euro zone and then transfer your debt.” Spanish Prime Minister Jose Luis Rodriguez Zapatero said the tax discussion is an “important novelty” that will play out over years.
‘Needs to Mature’
Italian Prime Minister Silvio Berlusconi put calls for joint euro-area borrowing in the same category, noting the German opposition “but that the proposal needs to mature. It will be studied more deeply.”
On the summit’s main business, Germany won an EU commitment for a treaty amendment to set up a crisis-resolution system in 2013 that would allow financial aid “if indispensable” to underpin the euro and might force bondholders to bear some of the costs of future rescues.
German insistence on cutting bond values when countries get into trouble in the future triggered the latest phase in the debt crisis, culminating in Ireland’s support package and triggering concern that Portugal and Spain will be next.
While costs for bondholders aren’t mentioned in the two- sentence amendment agreed on last night, the leaders endorsed a Nov. 28 decision by finance ministers that writedowns may take place on a “case by case” basis in accord with IMF practices.
‘Useful Clarification’
ECB President Jean-Claude Trichet called the pledge not to mandate bond writeoffs a “useful clarification.”
Merkel needed the amendment to prevent German high-court challenges to the future aid mechanism, which the EU wants to get up and running when the current rescue package lapses in mid-2013.
The compromise text reads: “The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality.”
Merkel didn’t get everything she wanted. Germany originally pushed to allow financial aid only as a “last resort,” language that might have ruled out contingency credit lines or given the IMF the lead in sorting out Europe’s economic woes.
Last overhauled a year ago, the treaty is the EU’s equivalent of a constitution, binding on EU institutions in Brussels and on national governments’ handling of European affairs. All 27 countries, including the 11 outside the euro region, must ratify the amendment.
European finance ministers plan to work out details of the future system by March so it can take effect in the middle of 2013.
Tuesday, November 30, 2010
EU Faces More Bailouts as Euro Contagion Spreads to Portugal: Euro Credit
By John Fraher and James Hertling - Nov 30, 2010 5:20 PM GMT+0800
The failure of the Irish rescue to stem a selloff across euro-region bond markets may spell more bailouts to come, starting with Portugal.
The costs to insure Portuguese debt against default rose to a record today and Spanish bonds slid the most since the euro’s debut for a second day, highlighting investor concerns that officials lack the tools to contain a debt crisis threatening the currency’s survival. The extra yield that investors demand to hold Italian debt over German 10-year bonds rose to the highest in more than 13 years.
“We are barely halfway through the current crisis in the euro zone,” Paul Donovan, deputy head of global economics at UBS AG in London, said in an interview with Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance” program. “Unless we can see a further significant decline in bond yields in Portugal, the market is going to expect another bailout. And then market attention will turn to Spain.”
Market declines began yesterday less than 24 hours after European Union finance ministers confirmed their second bailout of a euro nation after Greece’s in May, handing Ireland an 85 billion-euro package ($111 billion) to rescue its banks and bolster government finances. While EU officials also agreed on a mechanism to smooth bond restructurings after 2013, investors are speculating that debt-strapped nations won’t be able to cut deficits fast enough before then.
Euro Drops
The single currency dropped for a third day to a 10-week low of $1.3034. The premium on Spanish 10-year bonds over German bunds rose 28 basis points to a euro-era high of 295. The yield on Italy’s 10-year government bond rose 18 basis points to 4.83 percent, about 80 basis points more than Brazil. Portuguese credit-default swaps jumped 11.5 basis points to a record 551, after surging 40 basis points yesterday, according to CMA, a data provider.
The challenge for EU leaders is to stop the crisis without a fiscal union or a clear mechanism to kick profligate members out of the single currency.
Finance ministers found themselves meeting on Sunday, Nov. 28, to calm markets just six months after agreeing to a 750 billion-euro bailout package for the euro region.
While the fund’s size was supposed to head off future speculative attacks, Spanish Finance Minister Elena Salgado arrived at the meeting rejecting talk that she would soon join Ireland in seeking a bailout.
“Speculation exists because it’s part of the fabric of the markets,” she said. “We have certainty that we can control it.”
Focus Turns to ECB
Investors’ attention will soon turn to the European Central Bank, whose 22-member Governing Council will decide on Dec. 2 whether it can afford to stick to a plan to withdraw emergency stimulus at the start of next year.
While the ECB has so far signaled no willingness to deploy new measures, London-based HSBC Holdings Plc says it may provide more help to banks in Spain and Portugal and may even have to conduct broader asset purchases.
“The ECB will once again have a role to play to ensure that financial stability is maintained, albeit reluctantly,” said Janet Henry, chief European economist at HSBC in London. The ECB last week bought the most government bonds in two months.
Investors have also expressed concerns that the European Union’s bailout pot may be smaller than advertised and insufficient to save Spain, whose economy is twice the size of Ireland, Greece and Portugal combined. HSBC’s sums show the country needs 351 billion euros over the next three years.
Enough Cash?
In practice, the EU may only be able to deploy 255 billion euros of the 440 billion-euro European Financial Stability Facility, according to analysts at Nomura International Plc.
That’s because the rescue fund is financed by issuing bonds and in order to secure a AAA rating, governments agreed to set aside a pool of cash, depleting the total amount available to pump into economies. The rest of the bailout pool consists of 60 billion euros from the European Commission and 250 billion euros pledged by the International Monetary Fund.
“There isn’t enough official money to bail out Spain if trouble occurs,” Nouriel Roubini, the New York University professor who predicted the global financial crisis, said yesterday in Prague. While it’s “quite likely that Portugal” will be next in line for financial assistance, “the big elephant in the room” is Spain, he said.
At 9.3 percent of gross domestic product, Spain will have the largest budget deficit in the euro area this year after Ireland and Greece, the European Commission forecast yesterday. Portugal’s shortfall will be 7.3 percent of GDP.
‘Fiscal Union’
Some economists point out that the euro region may ultimately be strengthened by the current crisis if it forces EU governments to work more on coordinating fiscal policy. The Greek crisis led earlier this year to the creation of the euro region’s first bailout fund and Ireland’s rescue accelerated talks over a permanent crisis resolution mechanism.
“In the next 5 to 10 years there has got to be more of a fiscal union within the euro region than we have today,” said UBS’s Donovan. “One of the things that Europe does well is integrate in a crisis.”
Harvinder Sian, a senior fixed-income strategist in London at Royal Bank of Scotland Group Plc says the crisis needs to threaten Germany and its banks before a long-term solution for the euro region can be found.
Until now, German Chancellor Angela Merkel has been reluctant to spend her taxpayers’ money on bailouts. She sparked the latest stage of the crisis by demanding that bondholders help foot the bill of any future rescues.
“The problems need to hit Germany before more viable solutions such as more fiscal and political integration look likely,” Sian said. “That is, it may take a near death experience for the periphery and core EMU banking systems before this realization dawns.”
The failure of the Irish rescue to stem a selloff across euro-region bond markets may spell more bailouts to come, starting with Portugal.
The costs to insure Portuguese debt against default rose to a record today and Spanish bonds slid the most since the euro’s debut for a second day, highlighting investor concerns that officials lack the tools to contain a debt crisis threatening the currency’s survival. The extra yield that investors demand to hold Italian debt over German 10-year bonds rose to the highest in more than 13 years.
“We are barely halfway through the current crisis in the euro zone,” Paul Donovan, deputy head of global economics at UBS AG in London, said in an interview with Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance” program. “Unless we can see a further significant decline in bond yields in Portugal, the market is going to expect another bailout. And then market attention will turn to Spain.”
Market declines began yesterday less than 24 hours after European Union finance ministers confirmed their second bailout of a euro nation after Greece’s in May, handing Ireland an 85 billion-euro package ($111 billion) to rescue its banks and bolster government finances. While EU officials also agreed on a mechanism to smooth bond restructurings after 2013, investors are speculating that debt-strapped nations won’t be able to cut deficits fast enough before then.
Euro Drops
The single currency dropped for a third day to a 10-week low of $1.3034. The premium on Spanish 10-year bonds over German bunds rose 28 basis points to a euro-era high of 295. The yield on Italy’s 10-year government bond rose 18 basis points to 4.83 percent, about 80 basis points more than Brazil. Portuguese credit-default swaps jumped 11.5 basis points to a record 551, after surging 40 basis points yesterday, according to CMA, a data provider.
The challenge for EU leaders is to stop the crisis without a fiscal union or a clear mechanism to kick profligate members out of the single currency.
Finance ministers found themselves meeting on Sunday, Nov. 28, to calm markets just six months after agreeing to a 750 billion-euro bailout package for the euro region.
While the fund’s size was supposed to head off future speculative attacks, Spanish Finance Minister Elena Salgado arrived at the meeting rejecting talk that she would soon join Ireland in seeking a bailout.
“Speculation exists because it’s part of the fabric of the markets,” she said. “We have certainty that we can control it.”
Focus Turns to ECB
Investors’ attention will soon turn to the European Central Bank, whose 22-member Governing Council will decide on Dec. 2 whether it can afford to stick to a plan to withdraw emergency stimulus at the start of next year.
While the ECB has so far signaled no willingness to deploy new measures, London-based HSBC Holdings Plc says it may provide more help to banks in Spain and Portugal and may even have to conduct broader asset purchases.
“The ECB will once again have a role to play to ensure that financial stability is maintained, albeit reluctantly,” said Janet Henry, chief European economist at HSBC in London. The ECB last week bought the most government bonds in two months.
Investors have also expressed concerns that the European Union’s bailout pot may be smaller than advertised and insufficient to save Spain, whose economy is twice the size of Ireland, Greece and Portugal combined. HSBC’s sums show the country needs 351 billion euros over the next three years.
Enough Cash?
In practice, the EU may only be able to deploy 255 billion euros of the 440 billion-euro European Financial Stability Facility, according to analysts at Nomura International Plc.
That’s because the rescue fund is financed by issuing bonds and in order to secure a AAA rating, governments agreed to set aside a pool of cash, depleting the total amount available to pump into economies. The rest of the bailout pool consists of 60 billion euros from the European Commission and 250 billion euros pledged by the International Monetary Fund.
“There isn’t enough official money to bail out Spain if trouble occurs,” Nouriel Roubini, the New York University professor who predicted the global financial crisis, said yesterday in Prague. While it’s “quite likely that Portugal” will be next in line for financial assistance, “the big elephant in the room” is Spain, he said.
At 9.3 percent of gross domestic product, Spain will have the largest budget deficit in the euro area this year after Ireland and Greece, the European Commission forecast yesterday. Portugal’s shortfall will be 7.3 percent of GDP.
‘Fiscal Union’
Some economists point out that the euro region may ultimately be strengthened by the current crisis if it forces EU governments to work more on coordinating fiscal policy. The Greek crisis led earlier this year to the creation of the euro region’s first bailout fund and Ireland’s rescue accelerated talks over a permanent crisis resolution mechanism.
“In the next 5 to 10 years there has got to be more of a fiscal union within the euro region than we have today,” said UBS’s Donovan. “One of the things that Europe does well is integrate in a crisis.”
Harvinder Sian, a senior fixed-income strategist in London at Royal Bank of Scotland Group Plc says the crisis needs to threaten Germany and its banks before a long-term solution for the euro region can be found.
Until now, German Chancellor Angela Merkel has been reluctant to spend her taxpayers’ money on bailouts. She sparked the latest stage of the crisis by demanding that bondholders help foot the bill of any future rescues.
“The problems need to hit Germany before more viable solutions such as more fiscal and political integration look likely,” Sian said. “That is, it may take a near death experience for the periphery and core EMU banking systems before this realization dawns.”
Sunday, November 28, 2010
Ireland Wins $113 Billion Bailout as EU Ministers Seek to Halt Debt Crisis
European governments threw debt- strapped Ireland an 85 billion-euro ($113 billion) lifeline and scaled back proposals to saddle bondholders with losses in future budget crises, seeking to reverse the market selloff menacing the euro.
European finance ministers backed a Franco-German compromise on post-2013 bailouts that watered down calls by German Chancellor Angela Merkel for investors to be forced to take losses to share the cost with taxpayers. The ministers agreed that a future crisis-management system won’t automatically cut the value of bond holdings, easing away from a proposal that led investors to dump assets of Portugal, Spain and Italy.
The twin decisions on Ireland and the post-2013 crisis facility “should address the current nervousness in the financial markets,” European Union Economic and Monetary Commissioner Olli Rehn told reporters after an emergency EU meeting in Brussels today.
Ireland, swamped by the bursting of a decade-long real- estate bubble, became the second country after Greece to tap European aid as investors questioned whether Europe has the resolve and financial firepower to stem the panic. Ten-year bond yields soared in Portugal, Spain and Italy last week, in a vote of no-confidence in Europe’s handling of the debt shock that exposed flaws in the euro’s makeup and fueled doubts whether 16 countries belong in the same currency.
“The euro is under threat,” Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin, said before the Brussels meeting. “The market has got it into its head that it is going to pick off one country at a time.”
Fiscal Emergencies
Europe’s bailout of Greece in May and setup of a 750 billion-euro fund for fiscal emergencies drove the euro as high as $1.4282 against the dollar on Nov. 4. It has since fallen to $1.3241.
Germany, which built the euro on the principle of budgetary rigor, unleashed the latest phase of the crisis by demanding a “permanent” system as of 2013 that would enable fiscally troubled countries to restructure their debts cut the value of bond holdings.
The German push ran into criticism from central bankers such as European Central Bank President Jean-Claude Trichet, who warned that it would unsettle current bondholders. Romano Prodi, who as Italian prime minister shepherded Italy into the euro, said in a Nov. 26 Bloomberg Television interview that it was hazy on detail and led to “unthinkable problems” in the markets.
Germany backed away from the call for an automatic penalty on future bondholders, agreeing to give the International Monetary Fund a role in determining losses on a case-by-case basis. The new proposal would introduce “collective action clauses” for debt sold as of 2013, enabling fiscally hard-hit governments to renegotiate bond contracts. EU governments aim to enshrine it in the bloc’s treaties by mid-2013 and pair it with a new emergency liquidity fund to replace the one expiring then.
‘Useful Clarification’
“I had asked for a clarification,” Trichet said. He saluted the new proposal as a “useful clarification” that paves the way to an EU setup “fully consistent with the global doctrine, fully consistent with IMF policies.” Rehn said: “There’s plenty of herd behavior in the market. We want to clarify any possible confusion.”
Germany last week also muffled talk by the head of its central bank, Axel Weber, that the EU could put more money into the bailout fund if necessary.
Germany’s export-led economy has powered through the euro crisis, with business confidence at a record high in November and the government projecting growth of 3.7 percent this year, the fastest pace in over a decade.
German resilience contrasts with recession in Greece and Ireland, splitting the euro region between better-off countries in Germany’s economic slipstream and poorer ones on the continent’s fringes.
Cash Reserves
Ireland said it will pay average interest of 5.8 percent on the package, which breaks down into 45 billion euros from European governments, 22.5 billion euros from the IMF and 17.5 billion euros from Ireland’s cash reserves and national pension fund.
“I don’t believe there were any other real options,” Irish Prime Minister Brian Cowen told reporters in Dublin.
A day after more than 50,000 protesters marched through Dublin to denounce Cowen’s budget cuts to stave off financial ruin, the EU gave Ireland an extra year, until 2015, to get its budget deficit to the euro limit of 3 percent of gross domestic product.
Including the bill for propping up Irish banks, the deficit is set to reach 32 percent this year, the highest in the euro’s 12-year history.
Banking System
Cowen has overseen the collapse of Ireland’s banking system and public finances, leading to recession and unemployment of close to 14 percent. Cowen’s government is also unraveling. The Green Party, a junior coalition partner, wants January elections and some lawmakers from his own party are slamming his leadership.
Close banking links led Britain, a non-euro user that didn’t contribute to Greece’s 110 billion-euro rescue in May, to contribute 3.8 billion euros to Ireland’s package.
““That is money we fully expect to get back,” Chancellor of the Exchequer George Osborne told reporters in Brussels. “It’s in everyone’s national interest and it’s in Britain’s national interest that we get some economic stability in Ireland and indeed across the euro zone,”
The deal for Ireland shifted attention to Portugal, which last week passed the deepest spending cuts in more than three decades with the goal of getting back under the EU’s deficit limits by 2012.
Housing Boom
While Greece let the budget get out of hand and Ireland fell prey to a housing boom that turned to bust, Portugal suffers from a lack of competitiveness that kept average economic growth below 1 percent in the past decade.
Like Ireland, Portugal doesn’t immediately need money to run the government. It has completed this year’s bond sales and doesn’t face a redemption until April. The government debt agency plans to hold an auction of 12-month bills on Dec. 1.
“Portugal doesn’t see a need to ask for help,” German Finance Minister Wolfgang Schaeuble said.
Spain, the fourth-largest economy in the euro region, doesn’t need a bailout, Spanish Economy Minister Elena Salgado said.
European finance ministers backed a Franco-German compromise on post-2013 bailouts that watered down calls by German Chancellor Angela Merkel for investors to be forced to take losses to share the cost with taxpayers. The ministers agreed that a future crisis-management system won’t automatically cut the value of bond holdings, easing away from a proposal that led investors to dump assets of Portugal, Spain and Italy.
The twin decisions on Ireland and the post-2013 crisis facility “should address the current nervousness in the financial markets,” European Union Economic and Monetary Commissioner Olli Rehn told reporters after an emergency EU meeting in Brussels today.
Ireland, swamped by the bursting of a decade-long real- estate bubble, became the second country after Greece to tap European aid as investors questioned whether Europe has the resolve and financial firepower to stem the panic. Ten-year bond yields soared in Portugal, Spain and Italy last week, in a vote of no-confidence in Europe’s handling of the debt shock that exposed flaws in the euro’s makeup and fueled doubts whether 16 countries belong in the same currency.
“The euro is under threat,” Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin, said before the Brussels meeting. “The market has got it into its head that it is going to pick off one country at a time.”
Fiscal Emergencies
Europe’s bailout of Greece in May and setup of a 750 billion-euro fund for fiscal emergencies drove the euro as high as $1.4282 against the dollar on Nov. 4. It has since fallen to $1.3241.
Germany, which built the euro on the principle of budgetary rigor, unleashed the latest phase of the crisis by demanding a “permanent” system as of 2013 that would enable fiscally troubled countries to restructure their debts cut the value of bond holdings.
The German push ran into criticism from central bankers such as European Central Bank President Jean-Claude Trichet, who warned that it would unsettle current bondholders. Romano Prodi, who as Italian prime minister shepherded Italy into the euro, said in a Nov. 26 Bloomberg Television interview that it was hazy on detail and led to “unthinkable problems” in the markets.
Germany backed away from the call for an automatic penalty on future bondholders, agreeing to give the International Monetary Fund a role in determining losses on a case-by-case basis. The new proposal would introduce “collective action clauses” for debt sold as of 2013, enabling fiscally hard-hit governments to renegotiate bond contracts. EU governments aim to enshrine it in the bloc’s treaties by mid-2013 and pair it with a new emergency liquidity fund to replace the one expiring then.
‘Useful Clarification’
“I had asked for a clarification,” Trichet said. He saluted the new proposal as a “useful clarification” that paves the way to an EU setup “fully consistent with the global doctrine, fully consistent with IMF policies.” Rehn said: “There’s plenty of herd behavior in the market. We want to clarify any possible confusion.”
Germany last week also muffled talk by the head of its central bank, Axel Weber, that the EU could put more money into the bailout fund if necessary.
Germany’s export-led economy has powered through the euro crisis, with business confidence at a record high in November and the government projecting growth of 3.7 percent this year, the fastest pace in over a decade.
German resilience contrasts with recession in Greece and Ireland, splitting the euro region between better-off countries in Germany’s economic slipstream and poorer ones on the continent’s fringes.
Cash Reserves
Ireland said it will pay average interest of 5.8 percent on the package, which breaks down into 45 billion euros from European governments, 22.5 billion euros from the IMF and 17.5 billion euros from Ireland’s cash reserves and national pension fund.
“I don’t believe there were any other real options,” Irish Prime Minister Brian Cowen told reporters in Dublin.
A day after more than 50,000 protesters marched through Dublin to denounce Cowen’s budget cuts to stave off financial ruin, the EU gave Ireland an extra year, until 2015, to get its budget deficit to the euro limit of 3 percent of gross domestic product.
Including the bill for propping up Irish banks, the deficit is set to reach 32 percent this year, the highest in the euro’s 12-year history.
Banking System
Cowen has overseen the collapse of Ireland’s banking system and public finances, leading to recession and unemployment of close to 14 percent. Cowen’s government is also unraveling. The Green Party, a junior coalition partner, wants January elections and some lawmakers from his own party are slamming his leadership.
Close banking links led Britain, a non-euro user that didn’t contribute to Greece’s 110 billion-euro rescue in May, to contribute 3.8 billion euros to Ireland’s package.
““That is money we fully expect to get back,” Chancellor of the Exchequer George Osborne told reporters in Brussels. “It’s in everyone’s national interest and it’s in Britain’s national interest that we get some economic stability in Ireland and indeed across the euro zone,”
The deal for Ireland shifted attention to Portugal, which last week passed the deepest spending cuts in more than three decades with the goal of getting back under the EU’s deficit limits by 2012.
Housing Boom
While Greece let the budget get out of hand and Ireland fell prey to a housing boom that turned to bust, Portugal suffers from a lack of competitiveness that kept average economic growth below 1 percent in the past decade.
Like Ireland, Portugal doesn’t immediately need money to run the government. It has completed this year’s bond sales and doesn’t face a redemption until April. The government debt agency plans to hold an auction of 12-month bills on Dec. 1.
“Portugal doesn’t see a need to ask for help,” German Finance Minister Wolfgang Schaeuble said.
Spain, the fourth-largest economy in the euro region, doesn’t need a bailout, Spanish Economy Minister Elena Salgado said.
Tuesday, November 23, 2010
Ireland Long-Term Sovereign Rating Lowered by Standard & Poor's
By Christopher Anstey - Nov 24, 2010 9:34 AM GMT+0800
Ireland’s debt rating was lowered two steps by Standard & Poor’s, with a negative outlook, as the nation’s bailout of its banking system is set to escalate the government’s borrowing needs.
“The Irish government looks set to borrow over and above our previous projections to fund further bank capital injections into Ireland’s troubled banking system,” S&P said in a statement. Putting the rating on “CreditWatch with negative implications” reflects risk of a further downgrade if talks on a European Union-led rescue fail to stanch capital flight, it said.
The downgrade risks worsening an investor exodus from Irish bonds that has sparked contagion through the euro region, with Spanish bonds tumbling yesterday, pushing the 10-year yield premium over German bunds to a euro-era record. Ireland is hammering out an aid package with the EU and the International Monetary Fund to rescue its banking system.
S&P cut Ireland’s long-term sovereign rating to A from AA- and the short-term grade to A-1 from A-1+, today’s statement said. The reduction leaves its long-term grade five steps above junk, or high-risk, high-yield status, and five steps higher than Greece. It’s now on a par with foreign currency ratings of Israel, the Czech Republic and South Korea, according to data compiled by Bloomberg.
‘Lots of Risks’
“There are lots of risks in the European markets,” said Tomohisa Fujiki, an interest-rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo. “The flight to quality is supporting Treasuries.”
U.S. Treasuries have advanced the past three days, with 10- year notes slipping today in Asian trading. Yields on 10-year notes were at 2.787 percent as of 9:34 a.m. in Tokyo. The euro was up 0.3 percent at $1.34 after two days of losses.
Moody’s Investors Service said two days ago a “multi- notch” downgrade in Ireland’s credit rating was “most likely” because the bailout would increase its debt burden. Moody’s has an Aa2 long-term rating for the government, three steps higher than S&P’s new grade. Fitch Ratings has an A+ grade, one above S&P, data compiled by Bloomberg show.
An Irish finance ministry spokesman didn’t immediately respond to a call and e-mail seeking comment on S&P’s decision.
EU officials estimate that a rescue package for Ireland may amount to about 85 billion euros ($114 billion), according to two officials familiar with the talks.
Financing Breakdown
The European Commission cited the figure as a preliminary estimate on a conference call of euro-region finance ministers on Nov. 21, said the people, who spoke on condition of anonymity because the talks were private. Of the total, 35 billion euros would be earmarked for banks and 50 billion euros to help finance the Irish government.
“With domestic demand unlikely in our view to recover until 2012, gross debt to GDP at end-2011 looks set to exceed our previous projections of 120 percent,” S&P said today. Ireland’s gross domestic product has contracted for three consecutive years, and Irish Central Bank Governor Patrick Honohan has declared his country’s fiscal deterioration “worse than almost any other country.”
Ireland’s Finance Minister Brian Lenihan will today lay out a four-year deficit-cutting program, a proposal endangered by the ruling party’s coalition partner announcing it will exit the government next month. Opposition parties are calling for Prime Minister Brian Cowen to agree to an immediate election.
Risk Premium
The risk premium on Ireland’s 10-year debt over German bunds, Europe’s benchmark, widened 45 basis points to 589 basis points yesterday on concern that the budget may not pass and the government will fall. The yield spread reached a record 652 basis points on Nov. 11.
Irish banks forced the government to seek the bailout after loan impairments surged following the collapse of the country’s decade-long real estate boom in 2008. That year, the government pledged to back most liabilities, including all deposits in Irish banks, a promise that led the government to inject 33 billion euros to support the lenders.
As loan losses climbed, the government put the cost of the rescue at 50 billion euros in September this year, fueling investor doubts that Ireland could afford the rescue.
Allied Irish Banks Plc may be 99.9 percent state controlled after the government uses external aid to boost its capital levels, and Bank of Ireland Plc may be majority state controlled after the injection, broadcaster RTE said yesterday, without citing anyone.
Irish lenders core tier 1 capital level may be raised to 12 percent from 8 percent, according to the broadcaster.
The government may seek to share losses with Allied Irish’s subordinated bondholders, though senior debt would be honored, RTE also said.
Ireland’s debt rating was lowered two steps by Standard & Poor’s, with a negative outlook, as the nation’s bailout of its banking system is set to escalate the government’s borrowing needs.
“The Irish government looks set to borrow over and above our previous projections to fund further bank capital injections into Ireland’s troubled banking system,” S&P said in a statement. Putting the rating on “CreditWatch with negative implications” reflects risk of a further downgrade if talks on a European Union-led rescue fail to stanch capital flight, it said.
The downgrade risks worsening an investor exodus from Irish bonds that has sparked contagion through the euro region, with Spanish bonds tumbling yesterday, pushing the 10-year yield premium over German bunds to a euro-era record. Ireland is hammering out an aid package with the EU and the International Monetary Fund to rescue its banking system.
S&P cut Ireland’s long-term sovereign rating to A from AA- and the short-term grade to A-1 from A-1+, today’s statement said. The reduction leaves its long-term grade five steps above junk, or high-risk, high-yield status, and five steps higher than Greece. It’s now on a par with foreign currency ratings of Israel, the Czech Republic and South Korea, according to data compiled by Bloomberg.
‘Lots of Risks’
“There are lots of risks in the European markets,” said Tomohisa Fujiki, an interest-rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo. “The flight to quality is supporting Treasuries.”
U.S. Treasuries have advanced the past three days, with 10- year notes slipping today in Asian trading. Yields on 10-year notes were at 2.787 percent as of 9:34 a.m. in Tokyo. The euro was up 0.3 percent at $1.34 after two days of losses.
Moody’s Investors Service said two days ago a “multi- notch” downgrade in Ireland’s credit rating was “most likely” because the bailout would increase its debt burden. Moody’s has an Aa2 long-term rating for the government, three steps higher than S&P’s new grade. Fitch Ratings has an A+ grade, one above S&P, data compiled by Bloomberg show.
An Irish finance ministry spokesman didn’t immediately respond to a call and e-mail seeking comment on S&P’s decision.
EU officials estimate that a rescue package for Ireland may amount to about 85 billion euros ($114 billion), according to two officials familiar with the talks.
Financing Breakdown
The European Commission cited the figure as a preliminary estimate on a conference call of euro-region finance ministers on Nov. 21, said the people, who spoke on condition of anonymity because the talks were private. Of the total, 35 billion euros would be earmarked for banks and 50 billion euros to help finance the Irish government.
“With domestic demand unlikely in our view to recover until 2012, gross debt to GDP at end-2011 looks set to exceed our previous projections of 120 percent,” S&P said today. Ireland’s gross domestic product has contracted for three consecutive years, and Irish Central Bank Governor Patrick Honohan has declared his country’s fiscal deterioration “worse than almost any other country.”
Ireland’s Finance Minister Brian Lenihan will today lay out a four-year deficit-cutting program, a proposal endangered by the ruling party’s coalition partner announcing it will exit the government next month. Opposition parties are calling for Prime Minister Brian Cowen to agree to an immediate election.
Risk Premium
The risk premium on Ireland’s 10-year debt over German bunds, Europe’s benchmark, widened 45 basis points to 589 basis points yesterday on concern that the budget may not pass and the government will fall. The yield spread reached a record 652 basis points on Nov. 11.
Irish banks forced the government to seek the bailout after loan impairments surged following the collapse of the country’s decade-long real estate boom in 2008. That year, the government pledged to back most liabilities, including all deposits in Irish banks, a promise that led the government to inject 33 billion euros to support the lenders.
As loan losses climbed, the government put the cost of the rescue at 50 billion euros in September this year, fueling investor doubts that Ireland could afford the rescue.
Allied Irish Banks Plc may be 99.9 percent state controlled after the government uses external aid to boost its capital levels, and Bank of Ireland Plc may be majority state controlled after the injection, broadcaster RTE said yesterday, without citing anyone.
Irish lenders core tier 1 capital level may be raised to 12 percent from 8 percent, according to the broadcaster.
The government may seek to share losses with Allied Irish’s subordinated bondholders, though senior debt would be honored, RTE also said.
Monday, November 8, 2010
G-20 Spat Risk Eases as U.S. Eschews Pushing Targets
By Shamim Adam and Aki Ito - Nov 8, 2010 4:19 PM GMT+0800
U.S. Treasury Secretary Timothy F. Geithner refrained from pushing for current-account targets and China hailed the potential effect of Federal Reserve easing at a finance ministers’ meeting days before the Group of 20 summit.
The Fed’s move to buy $600 billion of Treasuries could contribute “tremendously” to global growth, Vice Finance Minister Wang Jun said after Asia-Pacific Economic Cooperation forum finance chiefs met in Kyoto, Japan, Nov. 6. At the same gathering, Geithner said current-account deficits or surpluses aren’t “something that is amenable to limits or targets.”
Policy makers from Asia to South America have warned that the Fed’s decision to pump liquidity into the U.S. will depress the dollar and spark flows of capital to emerging markets that threaten asset-price bubbles. China’s Vice Foreign Minister Cui Tiankai said Nov. 5 the U.S. step may hurt global confidence, while rejecting state-planning style targets for trade deficits.
“It looked like there was going to be quite a lot of conflict or lack of agreement going into the G-20 but this suggests there may be a bit more accord,” said Mitul Kotecha, head of global foreign-exchange strategy at Credit Agricole CIB in Hong Kong. “There is some toning down of the rhetoric on the Fed’s policy but in return, the U.S. will be looked upon to tone down” its push to shrink trade and investment imbalances.
Summit Agenda
Geithner said G-20 leaders, who meet in Seoul Nov. 11-12, are poised to approve last month’s agreement among finance ministers to avoid long-term current account surpluses or deficits, “assessed against indicative guidelines to be agreed.” The G-20 includes the largest developed and emerging nations, from the U.S. and Germany to Japan, China, India and Brazil.
While the Treasury chief said last month that 4 percent of gross domestic product was “likely to emerge as the basic benchmark countries look to,” he refrained from repeating that guideline in Kyoto. He instead noted policy makers have tried to address persistent trade and investment imbalances since the 1940s, and “it’s a process that’s going to take some time.”
China’s response to the Fed’s quantitative easing continued today, with Vice Finance Minister Zhu Guangyao saying it will provide a “shock” to the global economy and increase “hot money” flows to emerging economies. Zhu told reporters in Beijing the U.S. hasn’t “fully realized” the possible impact of the policy, which China hopes will help the global economy.
U.S. Responsibility
In Kyoto, Wang highlighted language in the APEC finance chiefs’ statement that nations with reserve currencies must be “vigilant against excess volatility disorderly movements.” The dollar has a majority of global foreign-exchange reserves, according to the International Monetary Fund.
“We pay close attention to the U.S. quantitative easing policy,” Wang said two days ago. “Quantitative easing policy that’s aimed at boosting the U.S. economy will help the revival of the global economy tremendously.”
Wang’s comments contrasted with those of Vice Foreign Minister Cui, who demanded an explanation from the Fed in a Nov. 5 press briefing in Beijing because “many countries are worried about the impact of the policy on their economies.”
Officials from China, Germany and Japan opposed a set target for current accounts in the past month even as Canada and Australia indicated openness to the idea. Among the G-20 nations, Saudi Arabia, Germany, Russia and China all run surpluses larger than 4 percent, and Turkey and South Africa have deficits bigger than that, according to the International Monetary Fund.
Geithner Objective
“We’re trying to make sure as the world economy recovers, that future growth is sustainable and we don’t see re-emerge the kind of excess imbalances on the trade side, either surpluses or deficits, that could threaten future growth and the future financial stability,” Geithner said at a joint press conference after the Kyoto meeting.
Thai Finance Minister Korn Chatikavanij said in a Nov. 5 interview with Bloomberg Television that while Geithner’s push to discuss global imbalances in trade and investment flows is a “constructive approach,” Southeast Asian nations oppose setting specific targets.
“We didn’t discuss a specific number,” Japan’s Finance Minister Yoshihiko Noda said after the APEC meeting. “However, both surplus and deficit countries must address these imbalances. We hold the same understanding that there is a need for multi- faceted cooperation to ensure that current accounts are sustainable.”
Capital Flows
Underlying the U.S. push to address the imbalances is the assessment by the Fed that a surfeit of Asian savings helped spark the credit boom earlier this decade, which ended in the biggest financial crisis since the 1930s. Now, officials from Asia to Latin America counter it’s the American central bank’s liquidity injections that are warping global capital flows and driving down the dollar.
Brazilian Finance Minister Guido Mantega escalated the international rhetoric in September, saying a “currency war” had begun, with nations seeking to cheapen their exchange rates to bolster exports. G-20 finance ministers and central bank governors then aimed to defuse the tensions with their Oct. 23 communique pledging to avoid “competitive devaluation.”
China has kept its currency’s advance against the dollar to less than 3 percent since mid-June, a strategy that’s contributed to other currencies rising and nations taking steps to prevent an “unfair disadvantage,” Geithner said last month.
Todd Elmer, a Singapore-based currency strategist, wrote today in a note to investors that Geithner’s “shift in rhetoric represents a modest dollar negative since it suggests the status quo which has resulted in trend dollar weakening is likely to remain in place.”
‘Strong Dollar’
Geithner told reporters in Kyoto two days ago that the U.S. views a “strong dollar” as in its interest and “we will never use our currency as a tool to gain competitive advantage.” The Dollar Index, which IntercontinentalExchange Inc. uses to track the dollar against the currencies of six major U.S. trading partners including the euro and yen, slid last week to the lowest level since December 2009.
Geithner’s plan was in part designed to broaden discussions beyond China’s exchange-rate policy, blamed by U.S. lawmakers and companies for keeping the yuan artificially low in a subsidy for local exporters.
“The fact that the Fed is undertaking quantitative easing has made it very difficult for U.S. officials to accuse other countries” of manipulating their currencies “when they are indirectly debasing the dollar,” Kotecha said.
U.S. Treasury Secretary Timothy F. Geithner refrained from pushing for current-account targets and China hailed the potential effect of Federal Reserve easing at a finance ministers’ meeting days before the Group of 20 summit.
The Fed’s move to buy $600 billion of Treasuries could contribute “tremendously” to global growth, Vice Finance Minister Wang Jun said after Asia-Pacific Economic Cooperation forum finance chiefs met in Kyoto, Japan, Nov. 6. At the same gathering, Geithner said current-account deficits or surpluses aren’t “something that is amenable to limits or targets.”
Policy makers from Asia to South America have warned that the Fed’s decision to pump liquidity into the U.S. will depress the dollar and spark flows of capital to emerging markets that threaten asset-price bubbles. China’s Vice Foreign Minister Cui Tiankai said Nov. 5 the U.S. step may hurt global confidence, while rejecting state-planning style targets for trade deficits.
“It looked like there was going to be quite a lot of conflict or lack of agreement going into the G-20 but this suggests there may be a bit more accord,” said Mitul Kotecha, head of global foreign-exchange strategy at Credit Agricole CIB in Hong Kong. “There is some toning down of the rhetoric on the Fed’s policy but in return, the U.S. will be looked upon to tone down” its push to shrink trade and investment imbalances.
Summit Agenda
Geithner said G-20 leaders, who meet in Seoul Nov. 11-12, are poised to approve last month’s agreement among finance ministers to avoid long-term current account surpluses or deficits, “assessed against indicative guidelines to be agreed.” The G-20 includes the largest developed and emerging nations, from the U.S. and Germany to Japan, China, India and Brazil.
While the Treasury chief said last month that 4 percent of gross domestic product was “likely to emerge as the basic benchmark countries look to,” he refrained from repeating that guideline in Kyoto. He instead noted policy makers have tried to address persistent trade and investment imbalances since the 1940s, and “it’s a process that’s going to take some time.”
China’s response to the Fed’s quantitative easing continued today, with Vice Finance Minister Zhu Guangyao saying it will provide a “shock” to the global economy and increase “hot money” flows to emerging economies. Zhu told reporters in Beijing the U.S. hasn’t “fully realized” the possible impact of the policy, which China hopes will help the global economy.
U.S. Responsibility
In Kyoto, Wang highlighted language in the APEC finance chiefs’ statement that nations with reserve currencies must be “vigilant against excess volatility disorderly movements.” The dollar has a majority of global foreign-exchange reserves, according to the International Monetary Fund.
“We pay close attention to the U.S. quantitative easing policy,” Wang said two days ago. “Quantitative easing policy that’s aimed at boosting the U.S. economy will help the revival of the global economy tremendously.”
Wang’s comments contrasted with those of Vice Foreign Minister Cui, who demanded an explanation from the Fed in a Nov. 5 press briefing in Beijing because “many countries are worried about the impact of the policy on their economies.”
Officials from China, Germany and Japan opposed a set target for current accounts in the past month even as Canada and Australia indicated openness to the idea. Among the G-20 nations, Saudi Arabia, Germany, Russia and China all run surpluses larger than 4 percent, and Turkey and South Africa have deficits bigger than that, according to the International Monetary Fund.
Geithner Objective
“We’re trying to make sure as the world economy recovers, that future growth is sustainable and we don’t see re-emerge the kind of excess imbalances on the trade side, either surpluses or deficits, that could threaten future growth and the future financial stability,” Geithner said at a joint press conference after the Kyoto meeting.
Thai Finance Minister Korn Chatikavanij said in a Nov. 5 interview with Bloomberg Television that while Geithner’s push to discuss global imbalances in trade and investment flows is a “constructive approach,” Southeast Asian nations oppose setting specific targets.
“We didn’t discuss a specific number,” Japan’s Finance Minister Yoshihiko Noda said after the APEC meeting. “However, both surplus and deficit countries must address these imbalances. We hold the same understanding that there is a need for multi- faceted cooperation to ensure that current accounts are sustainable.”
Capital Flows
Underlying the U.S. push to address the imbalances is the assessment by the Fed that a surfeit of Asian savings helped spark the credit boom earlier this decade, which ended in the biggest financial crisis since the 1930s. Now, officials from Asia to Latin America counter it’s the American central bank’s liquidity injections that are warping global capital flows and driving down the dollar.
Brazilian Finance Minister Guido Mantega escalated the international rhetoric in September, saying a “currency war” had begun, with nations seeking to cheapen their exchange rates to bolster exports. G-20 finance ministers and central bank governors then aimed to defuse the tensions with their Oct. 23 communique pledging to avoid “competitive devaluation.”
China has kept its currency’s advance against the dollar to less than 3 percent since mid-June, a strategy that’s contributed to other currencies rising and nations taking steps to prevent an “unfair disadvantage,” Geithner said last month.
Todd Elmer, a Singapore-based currency strategist, wrote today in a note to investors that Geithner’s “shift in rhetoric represents a modest dollar negative since it suggests the status quo which has resulted in trend dollar weakening is likely to remain in place.”
‘Strong Dollar’
Geithner told reporters in Kyoto two days ago that the U.S. views a “strong dollar” as in its interest and “we will never use our currency as a tool to gain competitive advantage.” The Dollar Index, which IntercontinentalExchange Inc. uses to track the dollar against the currencies of six major U.S. trading partners including the euro and yen, slid last week to the lowest level since December 2009.
Geithner’s plan was in part designed to broaden discussions beyond China’s exchange-rate policy, blamed by U.S. lawmakers and companies for keeping the yuan artificially low in a subsidy for local exporters.
“The fact that the Fed is undertaking quantitative easing has made it very difficult for U.S. officials to accuse other countries” of manipulating their currencies “when they are indirectly debasing the dollar,” Kotecha said.
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