January 22 2013

In the broadcast today: What’s Next for the JPY after the BoJ Decision? Following the Bank of Japan’s decision to raise the inflation target but to postpone open-ended QE until next year, we examine today’s strengthening of the JPY and explore what the future might have in store for the Japanese currency, we analyze the latest trend developments in the USD/JPY currency pair, we keep an eye on the GBP/USD pair’s test of its monthly range bottom, we note yet another failure of the EUR to break higher vs. the USD, we highlight the market’s reaction to the Bank of Japan monetary policy announcement, the U.K. Government Borrowing, the German ZEW Index, and the U.S. Existing Home Sales, we discuss new forecasts from Citigroup and Commerzbank, and prepare for the trading session ahead.

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Economists warn that the continued rise in public borrowing has put Britain’s triple-A rating under threat. Global jobless to hit record 200m this year. Bank of Japan introduces inflation target of 2% and promises open ended QE to start in January 2014…

Powered by Guardian.co.ukThis article titled “UK credit rating under threat as borrowing rises again – eurozone crisis live” was written by Josephine Moulds and Nick Fletcher, for guardian.co.uk on Tuesday 22nd January 2013 15.19 UTC

3.15pm GMT

Spanish bond success eases pressure for bailout request

Spain’s successful 10-year bond (see below) eases the pressure on the country to seek a bailout. Annalisa Piazza at Newedge Strategy said:

After yesterday’s Eurogroup meeting (that somehow remained supportive on Spain) and cross-country spreads remaining under control since the start of the year, we have seen increasing speculation that Spain could possibly be able to avoid the request of a credit line to the ESM.

We still see risks for Spain in the coming months as a deeper than expected recession in 2013 would completely offset the positive effects of the fiscal consolidation process.

However, the request for aid doesn’t seem to be so imminent as expected.

Updated at 3.19pm GMT

3.07pm GMT

US existing home sales fall unexpectedly

Away from Europe, a blip in the US housing market recovery. Existing home sales unexpectedly fell by 1% in December to an annual rate of 4.94m units.

This was below the 5.1m forecast, as many Americans decided not to put their houses on the market since they were worth less than the value of their mortgage.

But despite that, the December figure was still the highest rate of sales since November 2009.

Updated at 3.11pm GMT

2.57pm GMT

EU ministers will again be tackling the thorny issue of its budget next month, according to the president of the European Council.

2.50pm GMT

Looks like things could have been stirred up by this morning’s spate of market rumours, which included speculation about the resignation of the Bundesbank head – swiftly denied as “utter garbage” – and a possible profit warning from Deutsche Bank.

Updated at 2.50pm GMT

2.15pm GMT

Confidence boost for Spain after wildly successful bond sale

And sticking with the debt markets, there has been a huge amount of demand for a new 10-year Spanish government bond.

Spain’s economy minister Luis de Guindos said demand was unprecedented, with investors putting in orders for a total of €24bn bonds; while bank desks said demand reached around €17bn.

In the end, Spain reduced the interest rate it was willing to pay on the bonds because of the huge flood of demand. But still it chose only to sell €7bn of bonds to leave appetite in the market.

Spain sold the bond via a syndicate of banks, rather than a public auction. This shows a renewed confidence from the country, as it gets to set price in a syndicated bond, rather than taking whatever price investors offer in an auction.

Final pricing of the bond was a spread of midswaps plus 365bp. That’s around 0.1% higher than current yields on Spanish 10-year bonds in the secondary market.

And with that, I’m handing over to my colleague Nick Fletcher.

Updated at 2.45pm GMT

1.50pm GMT

Ireland could apply for ECB support in bond market

Back to Brussels, where Irish finance minister Michael Noonan has said Ireland could apply for support from the European Central Bank’s bond-buying programme – the outright monetary transactions – but only after it has completed two-longer-term bond issues.

There is no inhibition on Ireland applying for OMT, but we would need to be fully back in the market first.

European commissioner Olli Rehn said the EC was working on a series of options to help Ireland and Portugal return to the markets and that the OMT was one possibility.

1.41pm GMT

Germany and France to propose deeper economic union

Meanwhile, German chancellor Angela Merkel and French president Francois Hollande have given a joint press conference in Berlin, where they said they would put forward proposals for a deeper economic and monetary union later this year. Merkel said:

France and Germany together want, by May, to put forward proposals – in preparation for the June European Council – for the stabilisation and deepending of the economic and monetary union. It is about a deeper cooperation in economic policy with the goal of social security, employment, growth and financial stability.

Updated at 1.45pm GMT

1.32pm GMT

Already the reaction the approval of the financial transaction tax (see below) is coming in.

Predictably the UK business group the CBI bemoans the move to levy trading at banks and calls for it to be limited to the eurozone countries.

Matthew Fell of the CBI said:

The UK government is right to reject a Financial Transaction Tax as damaging for jobs and growth. It is disappointing that eurozone economies are pursuing the FTT, whose costs ultimately fall on consumers and businesses, and will be a drag on the eurozone recovery. This tax must not impinge on non-participating member states by including extra-territorial reach into financial services activity conducted in the UK. As the UK’s largest single trading partner, a healthy European economy is in everyone’s interests so we urge participating member states to reconsider this tax.

But Danish MEP and Green economic affairs spokesperson said the European Commission must quickly follow up with a detailed proposal, so that the scheme can be implemented as soon as possible.

The Greens call on the Commission to present an ambitious proposal. It should cover not only shares but also bonds and derivatives, and there should be no exemption for pension funds. The FTT should also include provisions on an ‘issuance principle’, whereby financial institutions located outside of the participating states would also be obliged to pay the FTT if they traded securities originally issued within the EU. This will also make it more attractive for other member states outside the initial 11 to join.

1.28pm GMT

European finance ministers approved the financial transaction tax, despite fierce opposition from business groups. My colleague Phillip Inman reports (in a story soon to be up online):

EU finance ministers gave their approval at a meeting in Brussels, allowing 11 states to pursue a levy on financial transactions. The UK abstained in the vote alongside Luxembourg and the Czech Republic.

Eleven countries won the EU’s backing for a financial transaction tax (FTT), with Germany, France, Italy and Spain adding their names to eurozone neighbours Austria, Portugal, Belgium, Estonia, Greece, Slovakia and Slovenia.

The levy, which could raise as much as €35bn euros a year for the 11 countries according to one EU official, is held up as a way to restrict the exuberance of investment banks in times of economic growth.

A tax would raise the costs of individual trades, many of which economists suspect are carried out by banks to extract commission and fees from fund managers that handle large scale pension fund assets.

Opinion is divided over whether banks would continue to trade at current levels and pay the tax or cut back on the number of trades, potentially saving pension schemes millions of pounds.
Algirdas Semeta, the European commissioner in charge of tax policy, said: “This is a major milestone in tax history.”

12.32pm GMT

EU gives go ahead for Robin Hood tax

As expected, the EU finance ministers have given the go-ahead for the financial transactions tax – the so-called Robin Hood tax – for 11 eurozone countries including Germany and France.

12.06pm GMT

Lunchtime round-up

So, for a quick lunchtime round-up…

The UK’s triple-A rating is under threat as borrowing continues to rise, warn economists (see 10.28am)

The global jobless total will hit 202m this year, says the ILO (see 8.09am and onwards)

The Bank of Japan has introduced an inflation target, under pressure from the new prime minister (see 9.13am and more here)

Economic sentiment in Germany has hit a two-and-a-half year high (see 10.13am)

12.00pm GMT

Greek government threatens striking metro workers

Over to Greece, where the government has indicated that it could force striking metro staff back to work, as their prolonged walkout causes traffic chaos. Our correspondent Helena Smith reports:

With metro workers digging in their heels six days after they walked off the job, Greece’s governing coalition issued its strongest warning yet saying “there are limits” to strike action.

The walkout – the longest since the inauguration of the urban transit network in the 90s – has caused gridlock in the capital, prompting fury among Greeks. The front-page headline in today’s Ta Nea encapsulates rising passions: “1.5 million hostages on the roads of Athens” it said of the worsening traffic chaos.

Workers are protesting against collective work agreements in the civil service that the EU and IMF have demanded in exchange for emergency aid. But state-run TV channel NET insisted today that only “a minority” of the metro’s 1,300-strong staff were behind the action.

Quoting government sources, it said the government would not back down and showed the development and transport minister Kostis Hadzidakis saying: “I’m afraid the ways things are developing there is no respect for rules or limits …
what we are seeing is a minority who is threatening and a majority who are paying [the price].”

Hinting that staff would be forced to go back to work under court order, the normally mild-mannered politician warned “this will be brought under control”.

Despite courts determining their action to be “illegal and abusive”, unionists vowed to continue the strike saying their action was as much motivated by disagreement over economic reforms as the “acute heart attacks” two co-workers had suffered as a result of the transport minister’s threats.

11.50am GMT

UK manufacturing could be past its worst – economist

Back in the UK, the CBI industrial trends survey was a mixed bag. Orders (particularly export orders) fell in January but expectations for near-term output and employment improved.

Howard Archer at IHS Global Insight said:

 The overall impression is that the manufacturing sector may be past the worst after a pretty torrid 2012, but it still has its work cut out to return to sustainable growth in the face of ongoing challenging domestic and international conditions.

Signs that eurozone activity may have bottomed out around October and the recent appreciable easing of the region’s sovereign debt tensions does offer some hope for UK manufacturing exports. In addition, sterling’s recent retreat, particularly against the euro, will be largely welcomed by UK manufacturers as it should boost their competitiveness.

Taking a look at the actual numbers, the total order book balance fell back to -20% in January from -12% in December, driven by a sharp drop in export orders.

Despite that, the balance of manufacturers expecting to increase their output over the next three months climbed to 8% in January from zero in December and -9% in November.

Updated at 11.50am GMT

11.42am GMT

EU finance chiefs likely to approve Robin Hood tax

As the pictures come in from the meeting of the 27 EU finance ministers, it’s worth looking at the so-called Robin Hood tax that they have been talking about this morning.

This is the proposed levy on trading, known as the financial transactions tax, that Britain has so vehemently opposed. But reports suggest the 27 EU finance ministers will today approve it for the eurozone. Austrian Finance Minister Maria Fekter said before the meeting:

I expect that we will receive this authorisation today. This is the precondition for setting such a cooperation into motion.

We already know that Britain will abstain from the vote and Reuters is reporting that other countries have expressed concern about the impact on states that do not join the scheme.

Trading in London – Europe’s biggest financial centre – for example, will be affected, as the levy can be imposed regardless of where the transaction takes place if either the buyer or seller is based in one of the countries imposing the tax.

Updated at 11.58am GMT

11.10am GMT

Irish politicians welcome delay to EU loan repayment

But Ireland’s politicians were sounding a more positive note this morning, after the EU gave the country more time to repay its loans. Our correspondent Henry McDonald reports:

Irish finance minister Michael Noonan has said that the EU’s decision to give the Republic more time to repay its loans will boost confidence in the global markets.

Welcoming today’s decision in Brussels to extend the maturity of the rescue loans to Ireland and potentially lowering cost of the multi-billion euro bailout for Dublin, Noonan said: “We’re not talking about hundreds of millions, we’re talking about savings of a certain amount of billions. We’d have to quantify that when the work is done on it. We’re not talking about huge amounts of money, we’re talking about a significant amount.”

Noonan’s Cabinet colleague, the deputy prime minister Eamon Gilmore, however warned that “time is running out” for Ireland to get a deal on its banking debt from the country’s European partners.

The Republic is due to pay a crippling €3.1bn for the cost of rescuing the bank that nearly bankrupted the country – the Anglo Irish Bank.

Noonan, Gilmore and the taoiseach Enda Kenny have themselves banked their reputations on persuading the rest of the EU to shoulder some of the burden of the cost of rescuing Anglo. “We are now at a critical stage of the discussions with the [European Central Bank] on the promissory note,” said Gilmore. The ‘promissory note’ is Ireland’s IOU to Europe in respect to that part of the emergency loans that rescued Irish banks.

11.03am GMT

Over in Ireland, meanwhile, there are clear signs of the country’s ongoing unemployment problem. Simona Zudyte reports:

Seven days after staff denied it was shutting, the HMV store on Dublin’s Grafton Street confirms it is closing its doors for the last time. Even on Ireland’s premier shopping thoroughfare, here are signs of Ireland’s inability to curb its increasing unemployment, which is close to 15%.

10.56am GMT

Back in the UK, Labour have pounced on the poor public finance data (see 9.44am) as evidence that chancellor George Osborne’s Plan A is not working. Labour’s shadow chief secretary to the Treasury, Rachel Reeves, said:

David Cameron and George Osborne’s … failure on jobs and growth means they are now failing on the one test they set themselves – to get the deficit and debt down.
Borrowing is rising and is over £7bn higher than at the same point last year. And this is borrowing to pay for economic failure as a flat-lining economy and rising long-term unemployment have sent the welfare bill soaring and tax revenues have been revised down.
By squeezing families and businesses too hard, choking off the recovery and so pushing borrowing up not down, the government’s economic policies have badly backfired. But David Cameron and George Osborne have decided that millions of working families will pay the price with further cuts to tax credits and benefits while millionaires get a tax cut.

10.51am GMT

Cyprus could derail progress in eurozone – ECB’s Asmussen

Meanwhile, ECB board member Joerg Asmussen has said that problems in Cyprus could derail the fragile recovery in the eurozone. He said to Reuters:

Disorderly developments in Cyprus could undermine progress made in 2012 in stabilising the euro area. Cyprus could well be systemic for the rest of the euro area despite its size.

Cyprus’s economy represents just 0.2% of eurozone GDP and some states say it is not systemically relevant and therefore is not in need of a bailout. Asmussen clearly disagrees.

Under normal circumstances one would expect the direct impact of a default to be limited, and it’s obvious that without assistance [Cyprus] will default.

At the same time we should recognise that the situation is not normal. Even though the promise of the OMT and other important decisions have calmed the markets, this siutation is still fragile.

Updated at 10.52am GMT

10.28am GMT

UK to lose triple-A rating, say economists

Britain will lose its triple-A rating this year, says Rob Wood at Berenberg Bank, after public finance data showed chancellor George Osborne’s attempts to cut the deficit are failing. (see 9.44am)

The fiscal position is likely to drift further off course as the UK veers towards a triple-drip recession. There is only so long that the Chancellor’s combination of smoke and mirrors and optimistic growth assumptions can disguise the problem. The UK will probably lose its AAA credit rating this year with at least one rating agency.

James Knightley at ING notes that tax receipts are down, as the economy continues to flat-line and austerity fails.

The disappointment has come from the tax side mainly, with income tax revenues, corporation tax revenues and VAT revenues all down on the same period for financial year 2011/12. This highlights the weak state of the UK economy and the fact that austerity measures are failing to generate the improvement in government finances that were hoped for.

He too asks, how long can the UK can hold onto its AAA status?

With the US and France having been downgraded by one ratings agency in the past couple of years, another disappointing UK borrowing number and a widely expected contraction in 4Q12 GDP on Friday will intensify the threat of the UK suffering the same fate.

Howard Archer of IHS Global Insight says a downgrade would be humiliating for Osborne but would not have a great impact on the economy.

The loss of the UK’s AAA rating would clearly be seen as an embarrassment for the government given the emphasis it has frequently placed in the past on keeping the AAA rating. Indeed, Chancellor George Osborne made it a key focus for the UK’s fiscal austerity prioritization as soon as the government came to power in the summer of 2010.

However, we suspect that the loss of the AAA rating would have only limited negative impact for the UK economy. There are so few countries left now with a AAA rating, that to lose it would not be the stigma or major threat to market confidence that it would have been say a couple of years ago.

Updated at 10.28am GMT

10.13am GMT

Investor sentiment in Germany hits two-and-a-half year high

Germany’s confidence survey looks good, showing analyst and investor sentiment in the country rose sharply in January to hit its highest level since May 2010.

The ZEW index hit 31.5 for January, compared with 6.9 in December, and smashing through analyst forecasts of a reading of 12.

The report said sentiment had improved as the uncertainty over Europe had diminished. But the economic situation of important trade partners for Germany was still considered to be weak.

Overall economic perspectives for Germany over the next six months have brightened. And this boost in sentiment could soon result in companies investing more.

9.44am GMT

UK public borrowing rises as spending outstrips income

Back to the UK, where public finances continue to look pretty bad. The government borrowed (slightly) more than expected in December and spending grew faster than income.

So chancellor George Osborne continues to fail in his attempt to bring the budget deficit down.

Public sector net borrowing (excluding the impact of bank bailouts) – the government’s preferred measure – rose last month to 15.4bn, compared with 14.8bn in December 2011. Government receipts rose 3.6% on the year, while spending grew by 5.4%.

We’ll have reaction to those figures coming in shortly.

9.29am GMT

Weidmann resigning rumour DENIED

Apologies, it appears the rumour that Jens Weidmann was quitting as governor of the German central bank was unfounded. The Bundesbank press office has denied it fairly robustly. A press officer said:

This is totally utterly nonsense. I don’t know why you believe all these things on Twitter. He is right now in the weekly board meeting of the Bundesbank. He really enjoys his job.

Updated at 11.58am GMT

9.25am GMT

Rumours fly that Bundesbank’s Jens Weidmann could resign

While this is very much rumour and speculation at this stage, financial broker Abshire-Smith says there is talk in the market that the Bundesbank’s Jens Weidmann could step down.

That would be huge news for the eurozone, where Weidmann is often the only dissenting voice.

Updated at 9.33am GMT

9.18am GMT

The moves by the Japanese government to influence the Bank of Japan will trouble central bankers around the world. Jens Weidmann, governor of Germany’s Bundesbank yesterday warned of the dangers of bringing politics into central bank decisions (see 7.55am).

9.13am GMT

Bank of Japan introduces inflation target of 2%

Also overnight, the Bank of Japan has bowed to pressure from new prime minister Shinzo Abe and agreed to introduce an inflation target of 2%, in a bid to boost the economy.

In a joint statement with the government, the Bank of Japan said it would aim for a 2% annual increase in the nation’s consumer price index and take additional steps for monetary easing to achieve that goal, including “open-ended” central bank asset purchases similar to the strategy followed by the US Federal Reserve.

Japan’s economy has been plagued with debilitating deflation since the late 1990s – an all-round fall in prices, profit and incomes. But the promise of monetary easing has already weakened the yen, in a boon to the competitiveness of exporters, which make up much of Japan’s growth.

8.39am GMT

ILO urges governments to ease austerity

Having laid bare the jobless crisis around the world (see below), the ILO urged governments to ease austerity, which it said has made the global economic crisis much worse.

Austerity measures and uncoordinated attempts to promote
competitiveness in several European countries have increased the risk of a deflationary spiral of lower wages, weaker consumption and faltering global demand. In light of the global jobs and consumption deficit, countries should adapt the pace of their fiscal consolidation to the underlying strength of the economy and recognise that short-term stimulus may be needed to grow out of debt burdens.

Updated at 11.55am GMT

8.27am GMT

The true extent of the unemployment crisis is masked by a growing number of people dropping out of the jobs market altogether, the ILO said in its relentlessly gloomy report (see posts below).

That problem is particularly severe in the European Union, it said, where long-term unemployment and a weak economic outlook has discouraged people from looking for jobs.

Looking ahead, the ILO said, the global number of unemployed is expected to rise further to almost 211m over the next five years.

8.20am GMT

Global youth unemployment hits 12.6%

Youth unemployment, which is more than 50% in Spain and Greece, is a particular concern, the ILO said.

Globally, the youth unemployment rate – which had already increased to 12.6 per cent in 2012 – is expected to increase to 12.9 per cent by 2017.

The crisis has dramatically diminished the labour market prospects for young people, as many experience long-term unemployment right from the start of their labour market entry, a situation that was never observed during earlier cyclical downturns.

Some 35% of all young unemployed people have been out of a job for six months or longer in advanced economies, up from 28.5% per cent in 2007. It said:

Such long spells of unemployment and discouragement early on in a person’s career also damage long-term prospects, as professional and social skills erode and valuable on-the-job experience is not built up.

In Europe, this problem is particularly severe and the ILO estimates that 12.7% of all young Europeans are neither employed nor in education or training (almost 2 percentage points higher than at the start of the crisis).

Updated at 11.53am GMT

8.09am GMT

Recession in Europe pushes global jobless to 202m this year

The global jobless total will rise to a record 202m this year, says the UN’s jobs watchdog, the International Labour Organisation.

In a report released overnight, the ILO said there were some 197m people without a job in 2012. While almost 40m people had dropped out of the jobs market altogether as job prospects proved unattainable. The jobless total will rise by 5.1m this year and another 3m next, it predicts.

It says the recession in the eurozone has spilled over globally, primarily because of a decline in international trade.

Entering 2013, the crisis in the Euro area constitutes the single biggest risk to global employment trends for the year ahead. The financial crisis in the Euro area, brought on by a combination of banking sector distress and protracted financial and household deleveraging, coupled with high levels of sovereign debt and unsustainably high government bond yields in some countries, has emerged as a disruptive and destabilizing force not only in the Euro area itself, but also for the global economy as a whole.

And, in very strong language for such a report, the ILO lays the blame for the crisis squarely at the feet of ‘indecisive’ policymakers.

Incoherence between monetary and fiscal policies adopted in different countries and a piecemeal approach to financial sector and sovereign debt problems, in particular in the Euro area, have led to uncertainty weighing on the global outlook. Investment has not yet recovered to pre-crisis levels in many countries.

The indecision of policy-makers in several countries has led to uncertainty about future conditions and reinforced corporate tendencies to increase cash holdings or pay dividends rather than expand capacity and hire new workers.

Updated at 11.52am GMT

7.55am GMT

Bundesbank warns of currency war risk

Germany’s central banker Jens Weidmann has warned of the risk of currency wars as exchange rates become ever more politicised, writes the FT this morning.

Michael Steen in Frankfurt reports:

The erosion of central bank independence around the world threatens to unleash a round of competitive exchange rate devaluations, which leading economies have so far avoided during the financial crisis, the president of Germany’s Bundesbank warned on Monday.

Jens Weidmann, whose institution’s own fierce independence from political influence was the model for the European Central Bank when it was founded, said Stephen King, the chief economist at HSBC, was “perhaps right” in forecasting an end to the era of central bank independence.

“It is already possible to observe alarming infringements, for example in Hungary or in Japan, where the new government is massively involving itself in the affairs of the central bank, is emphatically demanding an even more aggressive monetary policy and is threatening an end to central bank autonomy,” Mr Weidmann said in a speech in Frankfurt.

“Whether intended or not, one consequence could be the increased politicisation of the exchange rate,” he said, according to a text of his speech provided by the Bundesbank. “Until now the international monetary system got through the crisis without competitive devaluations and I hope very much it stays that way.”

7.45am GMT

Today’s agenda

Merkel and Hollande will today be attending an event to commemorate the 50th anniversary of the Elysée Treaty, which normalised relations between Germany and France after the second world war. Also , the finance ministers of the 27 EU member states meet in Brussels this morning.

  • EU 27 finance ministers meet: 8am
  • UK public finances (December): 9.30am
  • Germany ZEW survey (January): 10am
  • CBI trends (January): 11am
  • Google, La Stampa, La7 briefing on Italian elections: 11am
  • Merkel, Hollande and EU’s Schulz at Elysee treaty event: 1.15pm
  • ECB’s Nowotny in discussion in Vienna: 4pm
  • ECB’s Draghi speaks in Frankfurt: 6pm
  • Bank of England’s King speaks at CBI Northern Ireland dinner: 7.45pm

Updated at 11.49am GMT

7.35am GMT

Good morning and welcome to our rolling coverage of the eurozone crisis. Overnight the International Labour Organisation put out a sobering report on global unemployment, which it expects to reach record highs this year. More on that shortly.

Later today we’ve got public finances data out for the UK, and an economic confidence survey in Germany. We’ll have details of those and all the latest developments in the eurozone and beyond, throughout the day.

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