Archive for March, 2012

Italy’s Monti blames Germany, France for eurozone crisis

Italy's Monti blames Germany, France for eurozone crisis

Italian Prime Minister Mario Monti heaped blame for the eurozone debt crisis on Germany and France on Wednesday, saying they had set a poor example early in the bloc’s existence by flouting fiscal rules and exceeding deficit limits.

Italian Prime Minister Mario Monti on Wednesday said the root of Europe’s debt woes lay partly in the irresponsible parenting of Germany and France during the bloc’s infancy.

Monti told reporters in Tokyo that because the eurozone’s two largest players had not abided by fiscal rules, they had set a bad example for the rest of the continent.

“The story goes back to 2003 (and) the still almost infant life of the euro,” Monti said.

“It was in fact Germany and France that were loose concerning the public deficits and debts.”

The widely-respected technocrat, who replaced billionaire media magnate Silvio Berlusconi in November as head of the eurozone’s third largest economy, said the flouting of rules allowing for an annual budget deficit of no more than three percent of GDP was the issue.

He said despite recommendations, a meeting of ministers from European Union governments had decided not to punish France and Germany for going beyond the deficit limit.

“So the two largest countries in the eurozone had the (deficit) with complicity of Italy, which was then chairing under the rotation system the council of prime ministers of European Union.

“Of course if the father and mother of the eurozone are violating the rules, you could not expect… (countries such as) Greece to be compliant.”

Monti, who was speaking during a visit to Japan, was a member of the European Commission in the early 2000s when it recommended sanctions be levied against countries that were running over-the-top deficits.

The European Council – comprising elected politicians – vetoed the move.

Monti’s visit to Japan comes as Europe continues to stagger under the weight of runaway sovereign debt, with Greece at the forefront.

The eurozone is under pressure to boost the firepower of its debt rescue fund, with the 34-nation OECD on Tuesday pressing for a safety net of at least 1.0 trillion euros ($1.33 trillion).

Eurozone finance ministers are meeting on Friday and Saturday in Copenhagen to decide whether to increase the size of their debt rescue mechanism amid resurgent concerns about the financial health of Spain.

The OECD said the refinancing needs of vulnerable eurozone nations could top 1.0 trillion euros over the coming two years, on top of cash needed to recapitalise banks.

Italy alone needs some 750 billion euros to finance its debt, while Spain requires around 370 billion euros over the next three years.

Asked about the size of the hike in the eurozone firewall, Monti declined to give a specific figure but said: “I’m confident that the compact is solidly in place, the time for a conclusive and adequate decision on the firewalls has come.”

The premier, who was due to meet his Japanese counterpart later in the day, said he believed Europe now had a handle on its debt crisis and Italy was unlikely to suffer at the hands of the markets the way that Spain had.

“I think contagion (is) certainly not from Spain. Spain is I’m sure on a steady course of budgetary consolidation.

“And contagion as a whole I hope will soon belong to the past, now that more discipline is being adhered to by most member states and now that the firewalls are in the process of being fortified,” he added.

The Copenhagen meeting will also focus on Spain’s plans to rein in its public deficit to 5.3 percent of gross domestic product.

European leaders are concerned over Spain’s deficit, fearing it may become the biggest victim of a eurozone debt crisis that has already driven Greece, Ireland and Portugal to accept international bailouts.

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Dollar under pressure as sharemarkets fall

The Australian dollar is more than a third of a US cent lower and has extended losses against other major currencies after global stock markets dropped overnight.

In early trade, the Australian dollar was buying $US1.0388, down from $US1.0435 cents yesterday afternoon.

Market participants said the dollar, the worst performing major currency on Wednesday, was also stung by speculation that the Reserve Bank may cut interest rates from 4.25 pe rcent next week.

RBA officials have sounded content with rates in recent weeks and interbank futures imply only a 40 per cent chance of an easing to 4.0 per cent at the April 3 meeting.

The currency also suffered against the yen, which rallied across the board on speculation that Japanese investors were buying yen to repatriate funds ahead of the country’s financial year end.

The Aussie was recently trading at 86.05 yen, and also buying 77.96 euro cents, slipping below 78 euro cents for the first time since late December.

St George chief economist Hans Kunnen said the currency’s fall today mirrored the performance of resource stocks as pessimism spread through global markets.

Miners Fortescue, BHP Billiton and Rio Tinto were all trading lower at noon, helping to drag the ASX200 into negative territory at noon.

‘‘There is clearly some uncertainty about global economic growth that is being fed through to the stock market through resources and to the currency as well,’’ he said.

Stock markets in Europe and New York fell overnight and the negative sentiment spilled over into Asian markets,  with Japan’s Nikkei down 0.6 per cent at noon.

However, Mr Kunnen said, the Australian dollar could turn around later today as investors took advantage of its relatively low level.

‘‘I think, given the pace of the decline this morning, it may have a firmer afternoon if people re-assess their views that the world is not stopping to spin.’’

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Dollar exchange rate ‘in the ballpark’: RBA

The dollar is at levels consistent with Australia’s strong terms of trade, Reserve Bank assistant governor Guy Debelle says.

Mr Debelle told a conference in Sydney today that changes in the composition of capital flows, including bank funding sources, had affected the value of the currency.

Because of that, it was hard to tell whether the currency was overvalued or not. But “the exchange rate is in the ballpark where you’d expect it to be given the rise in the terms of trade,” he said.

While Australia’s terms of trade, or the ratio of export prices to import prices, peaked last year, it is expected to stay at very high levels.

At the peak, it represented an annual income boost of between 12 to 15 per cent of Australia’s $1.4 trillion in gross domestic product (GDP).

This is driven by a once-in-a-lifetime investment boom in the resources sector as miners dig deep to meet voracious demand from Asia, particularly China.

The dollar traded around $US1.0500 today. It broke above parity in late 2010 and went on to hit a post-float high of $US1.1081 last year.

Mr Debelle also played down worries about growing foreign demand for Australian government bonds, saying those buyers were mainly sovereign wealth funds that tended to buy and hold.

“They’re pretty sticky investors,” he said.

Australia’s AAA-rated government bonds have become highly sought after as the pool of top-rated countries shrink following the recent downgrade of the United States and France.

Mr Debelle also repeated some of the comments he made last week on bank funding.

He said the RBA could check the pressure private banks were under, but not necessarily how this would manifest itself in bank lending rates.

‘‘We can estimate what’s happening with funding costs with a reasonable degree of accuracy,’’ he said. ‘‘The idea that a particular quantum of change in funding costs automatically maps through to a change in lending rates is also not right – it presumes there’s some magical predetermined … margin for the banking system which is always being maintained.’’

Instead, banks acted independently in deciding how costs would flow through, Dr Debelle said.

‘‘One of the factors on the deposit side is competitive premiums,’’ he said. ‘‘Whether that manifests itself in narrower margins or whether you’re able to pass it all through to lending rates is a decision for the banks.

‘‘We’re not going to be able to calibrate things so finely, or to be so confident in saying our forecast is funding costs are going to rise by 10 basis points over a certain number of months and we’re going to pre-empt that.’’

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Germany says euro zone transaction tax won’t work

Finance Minister Wolfgang Schaeuble conceded for the first time on Monday that efforts to get a financial transaction tax implemented in the euro zone were doomed.

“We just can’t get it done,” Schaeuble said in Berlin, referring to efforts led by Germany and France to introduce a levy to replenish government coffers hit by the financial crisis.
He said Britain and several other European Union countries would not support the measure, popularly known as the “Robin Hood Tax”, adding he would only introduce such a tax on a pan-EU basis.
Schaeuble nevertheless was hopeful some countries in the European Union would begin implementing an enhanced stamp duty, including derivatives, this year but admitted this would not be possible in the broader bloc.
“But we just won’t get it done even in the euro zone,” he said, adding that there are some euro zone countries rejecting it. “So as a result we’ll try something else.”
Last week the Netherlands rejected the proposed financial transaction tax, dealing a heavy blow to the Franco-German bid for the levy.
Earlier this month, Germany’s push to win backers for the financial transaction tax met resistance among EU ministers who were divided on the question of how to collect more money from banks blamed for the financial crisis.
Having failed to win support for the measure from the United States and other members of the G20 leading economies, France and Germany then made a drive to end more than two years of debate on the issue in Europe.
The basis for the discussion is a European Commission blueprint for a tax that could raise up to 57 billion euros ($75 billion), with much of it coming from London, the region’s biggest trading centre.
Britain has said it will stop any such pan-European tax, fearing it would damage London’s financial hub. Mark Hoban, a junior treasury minister, reiterated this opposition on Tuesday.
Other countries, which have been supportive of the idea, also expressed reservations about implementing a tax.
Political leaders in Germany, which has national elections next year, and France, where two rounds of presidential elections take place in April and May, believe the tax will please voters who blame banks for the economic crash.
Chancellor Angela Merkel has repeatedly signaled she wants a result by March. France is set to introduce its own tax, which resembles Britain’s stamp duty on share trading, in coming months.
Last year, the European Commission proposed a plan to tax stock, bond and derivatives trades from 2014 across the EU. It would work in a similar way to Britain’s stamp duty of 0.5 percent on share trades, which raised almost 3 billion pounds in the financial year to April 2011.
Even if Britain opted out, trades carried out in London could be affected.

Any pan-European plan needs the backing of all 27 member states to become law, although a smaller scheme is possible.

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Europe risk has eased – Bernanke

Washington – Federal Reserve Chairman Ben Bernanke says the threats from Europe’s debt crisis have eased in recent weeks, but US money market funds remain exposed to risky European assets.

In testimony prepared for a congressional hearing on Wednesday, Bernanke noted developments that have minimised the danger. He pointed to bailout support that European leaders provided in exchange for deep budget cuts by the Greek government and he highlighted the agreement by private creditors to reduce Greece’s debt.

But he said Europe must take further steps, including strengthening its banking system still more and making “a significant expansion of financial backstops” to guard against troubles in one country spilling over to other nations.

“Europe’s financial and economic situation remains difficult, and it is critical that the European leaders follow through on their policy commitments to ensure a lasting stabilisation,” Bernanke said in remarks prepared for the House Committee on Oversight and Government Reform.

While US financial institutions have reduced their exposure to Europe, Bernanke said roughly 35 percent of assets in US prime money market funds are European holdings.

“US financial firms and money market funds have had time to adjust their exposures and hedge their risks to some degree… but the risks of contagion remain a concern both for these institutions and their supervisors and regulators,” Bernanke said.

Bernanke said that if Europe took a severe turn for the worse, the US financial sector would have to contend not only with problems stemming from its direct exposure to European loans and investments but also with broader market movements including declines in global stock prices, increased credit costs and reduce availability of funding.

To address those broader risks, Bernanke noted, the Fed conducted a stress test of 19 of the largest US financial institutions. Those tests, results of which were released last week, found that all but four of the 19 were strong enough to sustain a major economic downturn worse than the 2007-2009 Great Recession.

Bernanke said in his testimony that those results showed that a “significant majority” of the largest US banks would have adequate capital to withstand large loan losses from an extremely adverse situation. He said the tests were designed to capture both direct and indirect exposures of US banks “to the economic and financial stresses that might arise from a severe crisis in Europe”.

Bernanke and Treasury Secretary Timothy Geithner are both scheduled to appear before the House panel on Wednesday.

In his prepared testimony, Geithner said that the Obama administration was encouraged by the steps that Europe has taken to address the debt crisis.

“We hope European leaders will build on that progress with additional actions to calm the financial tensions that have been so damaging to global economic growth,” Geithner said.

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US stocks: Dow, S&P drop for 3rd day on global growth worries

The Dow and the S&P 500 fell for a third straight day on Thursday on concerns about the global economy’s growth outlook after manufacturing data showed a drop in new orders in both the euro zone and China.

The market has shown resilience recently, able to rebound off sluggish starts to the session, but Thursday’s trading could represent the first significant test of whether the S&P 500 can hold the 1,400 support level.

China’s manufacturing sector activity shrank in March for a fifth successive month, and in Europe, manufacturing in the euro zone contracted further, led by a decline in French and German factory activity, data showed.

Shares of FedEx Corp, the world’s No. 2 package delivery company, slumped on Thursday, dragging down the Dow Jones Transportation Average after the company warned of a lowered outlook due to Europe’s weak economy.

“The thought that the global economy might be entering a recession is what’s causing investors to take a pause from the rally,” said Jack DeGan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire.

“But I see this as no more than a short-term consolidation. We broke above the 1,230-1,360 range that we had been trading for over a year. As long as we don’t enter that range again, I think the decline we are seeing is short-term.”

Thursday’s data greatly reduced hopes that the euro zone could sidestep a recession, and indicated China’s slowdown has yet to wane.

The Dow Jones industrial average was down 69.51 points, or 0.53 percent, at 13,055.11. The Standard & Poor’s 500 Index was down 8.98 points, or 0.64 percent, at 1,393.91. The Nasdaq Composite Index was down 8.93 points, or 0.29 percent, at 3,066.39.

FedEx Corp shares fell 4.3 percent to $91.70. The Dow Jones Transportation Average lost 1.8 percent. European equity markets weakened for a fourth straight session, heading for their longest down run in four months.

Evidence of an improving U.S. job market failed to lift sentiment. The US Labor Department reported new claims for unemployment benefits fell last week to 348,000, the lowest level in four years.

In contrast to the overall market’s declines, Dollar General Corp advanced 3.6 percent to $46.37 after reporting higher-than-expected earnings and sales for the holiday quarter. The stock of the discount retailer, which prices most of its merchandise below $10, earlier hit a 52-week high at $46.95.

But McDonald’s Corp’s, a Dow component, fell 0.6 percent to $96.14 a day after the world’s biggest hamburger chain said Chief Executive Jim Skinner is retiring after more than seven years at the helm.

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Deutsche Bank Financial-Institutions Banker Hammes Said to Leave

Wolfgang Hammes, the co-head of European financial-institution investment banking at Deutsche Bank AG (DBK), has left Germany’s biggest lender, according to two people with knowledge of the matter.

Hammes, who was hired from Merrill Lynch & Co. in 2005, left for personal reasons, the people said, declining to be identified because the details are private. A press officer for Deutsche Bank declined to comment, and Hammes couldn’t be reached.

Tadhg Flood, who co-heads the unit, will continue to run the banking team that advises financial institutions including insurers and reinsurers in Europe, one of the people said.

Deutsche Bank ranks fifth in providing advice on global financial-services mergers and acquisitions, according to data compiled by Bloomberg. It advised the U.K. government on the sale of lender Northern Rock Plc to billionaire Richard Branson’s Virgin Money Holdings for 747 million pounds ($1.18 billion) in November.

It’s also one of four firms advising on the 750 million- euro ($990 million) initial public offering this year of Talanx AG, Germany’s third-biggest insurer, people with knowledge of the plans have said.

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