Eurozone crisis live: G7 warns of currency war risks, UK inflation unchanged

G7 will not target exchange rates, but is concerned about the recent yen moves. Yen weakening to be discussed at the G20 meeting this weekend. Mariano Rajoy says Spain will return to growth in 2013. UK inflation sticks at 2.7% in January…



Powered by Guardian.co.ukThis article titled “Eurozone crisis live: G7 warns of currency war risks” was written by Josephine Moulds and Nick Fletcher, for guardian.co.uk on Tuesday 12th February 2013 12.46 UTC

2.08pm GMT

G7 concerned about yen movement, says official

The earlier G7 statement on currencies was apparently misinterpreted, and was designed to express concern about the Japanese yen. That’s what a G7 official is saying, according to various wires.

We reported on the concerns about a currency war earlier.

Updated at 2.11pm GMT

1.56pm GMT

France unlikely to meet 2013 deficit target, says state auditor

France has very little chance of meeting its target of cutting its deficit to 3% of output this year, according to the country’s state audit body.

The court of auditors – not part of the government – called on the EU to clarify how it would deal with member states if they did overshoot their budget target.

France has promised to cut its nominal deficit to 3% from 4.5% in 2012, but a deteriorating economy has meant the target has seemed increasingly unlikely to be achieved.

Updated at 2.21pm GMT

12.46pm GMT

Meanwhile, Germany’s deputy finance minister has told DJ/FX Trader that they expect Ireland to exit its bailout programme at the end of this year, and Portugal could could follow it.

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

Updated at 1.48pm GMT

12.42pm GMT

There is a feeling that the G7 is protesting too much about the currency wars.

12.41pm GMT

No exchange rate problem in Europe

The EU finance chiefs and European policymakers have emerged from their meeting and are being grabbed by reporters on their way out.

A few lines coming through.

German finance minister Wolfgang Schaüble says we have no exchange rate problem in Europe “yet”. He says there were intense money-laundering talks with Cyprus. He adds:

The crisis is not over, we’re on a good track.

Spanish finance minister Luis de Guindos says the Ecofin meeting did not discuss losses to Cypriot savers. He says the rise in the value of the euro shows investor confidence.

While the vice-president of the European commission, Olli Rehn, says the EC is not working on any sovereign debt restructuring plan for Cyprus. Asked if depostiors in Cyprus could lose money, he says:

We are working on a solution for Cyprus that would ensure its financial stability and debt sustainability.

Updated at 12.42pm GMT

12.25pm GMT

UK inflation report preview

Looking ahead to the Bank of England’s inflation report out tomorrow, which will be scoured for clues that the central bank intends to carry out more stimulus in the coming months.

Howard Archer of IHS Global Insight says:

We suspect that the February Inflation Report will leave the door open to more QE. Once again the Bank of England will likely have the dismal task of raising its consumer price inflation forecasts and cutting its GDP growth projections. This has been the depressing trend for some considerable time now.

With economic activity likely to remain fragile and limited, we believe that the Bank of England will eventually decide to give the economy a further helping hand with another £50 billion of QE. This could well happen in the second quarter, or it may come soon [after] Mark Carney takes over as Bank of England Governor in July.

Updated at 12.28pm GMT

12.19pm GMT

Finmeccanica chief executive arrested

Over to Italy, where the police have arrested the chief executive of the country’s biggest defense and aerospace group, Finmeccanica, which owns the part-British helicopter group AgustaWestland. The Wall Street Journal reports:

[Giuseppe] Orsi is under investigation in a bribery case related to the €560 million ($750 million) sale of 12 helicopters by a Finmeccanica division to India in 2010, according to Finmeccanica and the prosecutor in the case. Mr. Orsi hasn’t been charged.

Mr. Orsi has over the past months repeatedly denied making any bribes.

The company Finmeccanica and its helicopter division, AgustaWestland, are also themselves under investigation in the case, according to the company and the prosecutor. Both companies have denied wrongdoing.

12.06pm GMT

No sign of a currency war – economist

Here’s Christian Schulz of Berenberg Bank on the G7 currencies statement:

The statement shows that the G7 are united and continue to cooperate. No sign of a currency war. Despite criticism from some such as Germany’s Bundesbank, the G7 do not seem to be too worried by the Japanese move to increase their inflation target and more aggressive easing.

In particular the eurozone and the ECB, which have recently borne the brunt of the adjustment, seem unphased by the euro at $1.35 and ¥126. More ECB action than the very modest verbal intervention by ECB president Draghi to slow the appreciation remains unlikely.

He says it looks like it would take a lot for the countries to intervene in the currency markets.

The G7 would only cooperate and potentially intervene in case of abrupt exchange rate movements, which could hurt the economy. This might address French concerns a bit by slowing further appreciation of the euro. However, the threshold for interventions seems to be high, as the 25% depreciation of the Japanese yen against the euro since July has not triggered one.

11.51am GMT

Spain and Italy borrowing costs rise

Italy and Spain have both issued short-term debt today and it seems political instability in both countries has driven borrowing costs higher.

Spain sold €5.6bn of short-term debt, with higher borrowing costs on its 12-month bills. The average yield on the 12-month debt came in at 1.548%, up from 1.472% in January.

Reuters said the rise in yields showed the corruption scandal within the ruling People’s party and an economy mired in recession is starting to weigh on investor appetite.

Italy, meanwhile, secured an average yield of 1.09% on its 12-month debt, up from 0.86% last month, but still way below last year’s peak of 3.97%.

It is thought that traders are reacting to political tensions ahead of the elections this month.

Updated at 11.57am GMT

11.27am GMT

UK pay falls behind inflation

The team on the Guardian’s datablog has plotted how pay has fallen behind inflation in the UK, squeezing household budgets. They write:

Living standards have been falling consistently over the past twelve months, as inflation has run well above the rate of pay increases, which the latest labour market data showed averaging at less than 2%.

11.20am GMT

UK inflation beyond Bank of England’s control – economist

So for a bit more reaction to the UK’s 2.7% rate of inflation. Labour have predictably gone for the “out-of-touch government” line.

Shadow treasury minister Cathy Jamieson said:

This out of touch Government has got its priorities all wrong. Instead of giving a £3 billion tax cut to the very richest George Osborne should be acting to kick-start our economy and help people on modest incomes who are feeling the squeeze.

While Chris Williamson of Markit says the factors driving inflation higher are largely beyond the control of the Bank of England.

Looking into the detail of the January inflation data, the main upward pressures came from an 8.5% jump in alcohol and tobacco prices, a 19.7% leap in education costs due to the rise in tuition fees, a 3.5% increase in utility prices and a 4.2% upturn in food prices. All of these are sources of inflation which are not related to (or affected by) central bank policy. They are either “administered prices”, reflecting changes in government policy and taxation, or are prices set globally, as in the case of oil and many food commodity prices.

Weak demand is meanwhile keeping price pressures low elsewhere in the economy – as is illustrated by a mere 0.2% year-on-year increase in clothing prices, which dropped 5.4% in January, and a modest 0.8% rise in prices for household goods, which fell 2.3% during the month. There is little that can therefore be done to bring inflation down further for the goods and services that are typically influenced by domestic monetary policy, as these prices are already falling.

He expects the Bank of England to turn a blind eye to the causes of higher inflation and instead push on with demand-boosting stimulus to help revive the economy.

But, he says, policy will probably be kept on hold (and the quantitative easing programme maintained at current levels) until a clear picture emerges of how the country has fared in the first quarter.

Updated at 11.35am GMT

11.10am GMT

OECD urges global tax avoidance clampdown

Meanwhile, an OECD announcement has been rather overshadowed by the G7 currency statement.

The Paris-based thinktank has called for a clampdown on tax avoidance by large multinational companies. Reuters reports:

A sweeping overhaul of international corporate tax rules is urgently needed to stop savvy big companies escaping the payment of billions of euros to cash-strapped governments, the OECD said on Tuesday.

Governments face growing demands from voters to force big companies with extensive international business to pay more tax in wake of mounting evidence that many use differences between different countries’ rules to reduce their tax bill.

Updated at 11.36am GMT

11.06am GMT

Hopes that G20 will echo G7 commitment to floating exchange rates

Currencies will be on the agenda again at the G20 meeting in Moscow later this week, and there are hopes they will issue a similar statement.

ECB vice-president Vitor Constancio told Reuters today that they too should reaffirm their commitment to floating exchange rates.

We, of course, want that everyone else respects those principles.

Asked what he expected to come out of the G20 meeting, he said:

I expect that these principles will be reaffirmed, pure and simple.

But there is some scepticism that any agreement could be reached at the larger group of 20. Channel 4′s economics editor says:

Constancio also said there was no currency war going on at the moment.

10.44am GMT

The G7 comprises the US, UK, France, Germany, Italy, Canada, and crucially Japan. But traders say the statement did not go far enough to calm the brewing currency wars.

10.35am GMT

Heated currency rhetoric prompted G7 statement

There is growing concern about the potential for currency wars, as countries fight to remain competitive in the global market.

The problem arises when individual countries undertake measures to stimulate their economies – like the huge quantitative easing programme in the US – that devalues their currency, making their exports look cheaper on the international markets.

But, while the US Federal Reserve and the Bank of Japan are rapidly printing money, the ECB is reining in its stimulus, with banks paying back some of the cheap money it doled out last year.

That could drive the euro even higher, which is the last thing the eurozone economy needs right now.

French finance minister Pierre Moscovici yesterday warned of the effect a rising euro could have on European growth. But he was rebuffed by German officials, who promptly said that exchange rates should not be manipulated.

The heated rhetoric has obviously got some people worried, prompting the G7 statement today. Reuters has a good backgrounder here.

Updated at 10.37am GMT

10.12am GMT

Rajoy says ‘business as usual’

Mariano Rajoy’s message was one of business as usual, reports our correspondent in Madrid, Giles Tremlett, who is at the Economist conference, where the Spanish prime minister was speaking.

He writes:

A characteristically bland appearance by Mariano Rajoy at The Economist conference in Madrid this morning did not produce startling headlines but did show that the Spanish PM is forthrightly intent on continuing with both austerity and reforms.

The word corruption, which is what most worries Spaniards after unemployment and recession, did not pass his lips – and he did not accept that the two party system in Spain has become a problem, increasing corruption levels and damaging the country’s reputation elsewhere.

He continues to insist that Spain will grow again towards the end of the year or next year. He clearly is not interested in changing the constitution either to allow Catalonia a right to self-determination or to change the system of political parties and the way it operates.

More reforms will come this year to further reduce the size of the public administration and to turn Spain itself into a single market, getting rid of barriers erected by regional governments.

The overall message was one of business as usual in government – Rajoy’s priority is the economy and other matters appear to be simple distractions.

Updated at 10.34am GMT

10.08am GMT

The G7 says it will consult closely with regards to actions in foreign exchange markets. It reaffirms that fiscal and monetary policies oriented towards domestic objectives and countries will not target exchange rates.

The (rather brief) statement in full:

We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate.

10.04am GMT

G7 will not target exchange rates

As leaked, the G7 has reaffirmed its commitment to exchange rates set by the market. It says:

Disorderly movements in exchange rates have adverse implications for stability.

9.58am GMT

UK inflation will hit 3% this year

Britons will continue to suffer rapidly rising prices for some time, according to the experts. Our economics editor, Larry Elliott, reports:

The Bank of England is predicting that it will be up to two years before annual price increases fall back to the Government’s 2% target.

Jeremy Cook, chief economist at foreign exchange company World First said: “While this figure suggests that inflation has stabilised within the target range we expect this to be the last reading for a while that sees CPI below the 3.0% level. While the Bank of England’s asset purchase programme isn’t in itself inflationary, the devaluation of sterling is. Our largest import through 2013, because of the Bank’s monetary policy, will be inflation.

“Home-grown price pressures are also increasing with transport, food and utilities boosting upwards in the latter part of 2012; this will continue to erode wage value through 2013, hurting consumer confidence and limiting spending.”

But the government argued that it was not all bad. A Treasury spokesman said:

Inflation is down by almost a half from its peak of 5.2 per cent. The government has taken continued action to help with the cost of living, by announcing a further increase in the tax-free personal allowance and freezing fuel duty for more than two years.

Updated at 10.13am GMT

9.53am GMT

The statement on currencies, we are expecting in eight minutes, will reaffirm that G7 members will not target exchange rates, Dow Jones reports, citing and EU source.

Updated at 10.13am GMT

9.50am GMT

UK inflation will stay above 2% target – economist

UK inflation is likely to stay above the Bank of England’s 2% target for a while yet, says Capital Economics.

Vicky Redwood writes:

Inflation held at 2.7% for the fourth month in a row in January (in line with the consensus forecast) and is likely to rise a bit further before falling later this year.

Given the clues in last week’s MPC statement, it looks like tomorrow’s Inflation Report will show inflation projected to be above its target for most of the next two years, partly reflecting the inflationary impact of sterling’s recent fall. Nonetheless, the Committee has already said that it is prepared to “look through” the increase.

Indeed, if the economy continues to struggle, above-target inflation should not be a barrier to further stimulus. What’s more, we still expect inflation to fall back towards the end of this year as underlying price pressures fade further.

The main factor keeping inflation high was, apparently, alcohol, where prices recovered after the Christmas sales.

9.33am GMT

UK inflation sticks at 2.7%

In the UK, inflation remains stubbornly high at 2.7%. Although that was slightly better than forecasts of a rise to 2.8%.

The wider measure of retail prices came in slightly higher than expected at 3.3%.

We’ll have all the reaction to that news, as it comes in.

9.24am GMT

G7 to make statement on currencies

Having said that the meeting of the 27 European finance ministers may not be that dramatic, it seems there will be a statement on currencies.

Reuters is reporting that the G7 will publish a statement on currencies at 10am, citing a source at the Ecofin meeting of the finance chiefs.

9.19am GMT

There’s nervousness in the markets ahead of the UK inflation figures (due out in 10 minutes). The pound has fallen to a six-month low against the dollar and slipped against the euro, with investors reportedly anxious about the bleak outlook for the UK economy.

Updated at 10.14am GMT

9.13am GMT

And that is that. Unsurprisingly, there were no questions allowed from the floor. But we’ll have plenty more from Spain during the day, when ECB chief Mario Draghi comes to town.

9.11am GMT

Draghi’s OMT decision was correct – Rajoy

Rajoy says Draghi’s decision to announce the OMT bond-buying programme was correct. The pair meet later in the day to discuss it further. Spain is not yet eligible for ECB help in bringing its borrowing costs down because it is not part of a bailout programme.

He concludes:

I promised not to raise taxes. I have not kept my promises, but I think I have carried out my duties.

Updated at 9.21am GMT

9.02am GMT

Asked about the financing of political parties, Rajoy says that it is not so much a problem with the regulations but with compliance with the regulations. Still, he confirms that there will be an announcement with regards to improvements in this area in the coming days.

Updated at 11.33am GMT

8.53am GMT

Catalonia will not separate from Spain – Rajoy

Rajoy insists that Catalonia will remain part of Spain.

Updated at 9.26am GMT

8.46am GMT

Rajoy says doubts over Spain’s public finances have been removed, and the focus for Spain is now on growth.

Updated at 10.15am GMT

8.36am GMT

The Economist is asking whether the Spanish people have lost faith in their two main parties.

Rajoy gives a very long answer. He says Spain is lucky in that it does not have extremist parties.

It is true that there are lots of things that can improve. But Spain is a country with a free press.

8.30am GMT

Spanish PM predicts economy will grow by end of 2013

Rajoy says Spain’s economy will return to growth in the latter part of 2013 and in 2014.

Updated at 9.26am GMT

8.24am GMT

Spanish PM Mariano Rajoy has started his speech at the Economist conference, but so far it’s all about the Spanish economy. You can watch him live here. We’ll wait and see if the Economist questions him on the secret payments scandal.

The magazine last week printed a scathing critique of Rajoy, calling for a public inquiry into the scandal. It wrote:

The problem facing Spain is that the only people who can clean up this mess are those who created it. Alongside a proper inquiry, Mr Rajoy should start cross-party talks to reform the party system. Otherwise both he and his traditional opponents may drown in a wave of angry populism.

Updated at 10.15am GMT

7.57am GMT

Banks should pay to wind down rivals – ECB

Banks should pay to wind down their failing rivals, but sometimes taxpayer money will be needed in this process, ECB vice-president Vitor Constancio said this morning.

Reuters reports:

There may be a need for “temporary use of public money when, for example, a bridge bank needs to be created” Cosntancio told a bank regulation conference in Helsinki.

The contribution of public money should be in the form “of credit lines that need to be repaid later on”.

He added that banks should be the first line of funding for any bank resolution schemes.

Updated at 10.16am GMT

7.51am GMT

Moody’s cuts growth outlook for G8

Also overnight, rival ratings agency Moody’s cut its outlook for the world’s advanced economies, even as risks to the global economic recovery appear to be diminishing.

It now forecasts real GDP growth for the G8 will be around 1.4% in 2013, 0.2 percentage points lower than its previous forecast in November, reflecting recent weak data.

Despite this revised outlook, Moody’s said factors that may have derailed economic growth have abated following a relative period of calm in global financial markets, with the US steering clear of the fiscal cliff, and the eurozone debt crisis continuing to ease.

7.47am GMT

S&P upgrades Ireland to ‘stable’

There was good news for Ireland overnight, when ratings agency Standard & Poor’s joined Fitch in lifting the country’s sovereign debt rating outlook to stable, after Dublin struck a bank debt deal that improved its chances of exiting its bailout programme by the end of 2013.

Ireland has been subject to biting austerity but looks like it could be on the road to recovery, with economic indicators starting to point the right way. Yesterday, data showed consumer confidence in the country (measured ahead of the bank deal) surged in January from 49.8 to 64.2.

Updated at 7.48am GMT

7.40am GMT

Cyprus banks checked for money laundering before bailout

Eurozone finance ministers yesterday came to what looked like a compromise over Cyprus, with a private company dispatched to look into claims of money laundering on the island before it gets any European aid.

My colleague Phillip Inman reports in today’s paper:

European finance ministers have insisted that Cyprus allows private investigators to check the island’s banks for breaches of money-laundering rules ahead of a €17bn (£14.5bn) rescue deal.

The Eurogroup said investigators would be despatched in a matter of days to the capital Nicosia and will report back to its next meeting in March.

The move follows allegations that Russian oligarchs have deposited billions of roubles in illegal funds in the island’s banks. It was agreed by Cyprus’s government despite concerns that the country is rapidly running out of cash.

Jeroen Dijsselbloem, the Dutch finance minister and head of the Eurogroup, which is comprised of the 17 eurozone members, said the investigation was a precondition for any discussion of the terms of a bailout.

“We have agreed a private firm needs to get involved and we have agreed we need a report in March,” he said.

7.34am GMT

Good morning and welcome back to our rolling coverage of the eurozone crisis and other global economic events.

Spanish prime minister Mariano Rajoy could face his first public grilling this morning, since the scandal enveloping his ruling PP party broke.

Then, later in the day, ECB chief Mario Draghi will speak in Spain’s parliament to discuss the bond-buying programme.

Over in Brussels, the finance chiefs of all 27 EU member states meet this morning but the agenda (for once) is light and nothing conclusive is expected to come of it.

Back in the UK, the ONS will issue key inflation numbers, although markets will await tomorrow’s quarterly inflation report from the Bank of England for clues over where monetary policy is headed.

Updated at 8.14am GMT

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