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Recession in the US might have been avoided, but stock market glee will fade and March could bring the start of $1.2tn cuts. Negotiations ahead will be complicated by the inevitable arrival of the US at its $16.4tn debt ceiling, the legal cap on government borrowing…

Powered by article titled “Fiscal cliff still in view for Americans facing income and spending cuts” was written by Nils Pratley, for The Guardian on Wednesday 2nd January 2013 20.16 UTC

It’s a triumph! The fiscal cliff has been avoided, US politicians have discovered the spirit of compromise and stock markets are booming. Happy new year.

Sadly, none of the above is accurate. First, the largest part of the cliff remains, since $1.2tn of spending cuts over a decade will start to be implemented from March if no further deal can be done. Second, it’s stretching credibility to conclude the bipartisan mood in Washington is softening; the compromise that will see income taxes rise slightly for the richest Americans is so modest that it could have been struck weeks ago without brinkmanship.

Third, the stock market glee requires context. A one-day rise of 2% or so in share prices is not be sniffed at but we’ve seen larger rallies greet overhyped “fixes” for the eurozone crisis.

These usually fade once investors reflect that the avoidance of an immediate calamity is not the same thing as a determined attempt by politicians to address an underlying debt problem. Reaction to the US fiscal fudge could follow the same script: near certain recession has been avoided, but that’s not much to shout about.

So fans of clifftop dramas should settle back and prepare for another episode as the March deadline approaches. Indeed, Barack Obama barely paused before warning Republicans that they’ve “got another thing coming” if they believe spending cuts alone will be the focus of the next round of talks.

In other words, even the tax element of the tax-and-spending debate has not been settled definitively.

What’s more, negotiations ahead will be further complicated by the inevitable arrival of the US at its $16.4tn debt ceiling, the legal cap on government borrowing.

The new year deal did not contain a provision for an increase – the clearest illustration of how compromise was achieved only by ignoring the tougher issues.

It’s a case of out of the frying pan and into the fire, concluded John Ashworth, senior economist at the thinktank Capital Economics. “Given the cantankerous nature of the negotiations over the past 10 days, it is now very possible that we will see another standoff over those spending cuts and the debt ceiling that leads to a shutdown of the federal government by late February or early March,” he predicts.

That worry, it hardly needs saying, is unlikely to prompt cash-rich US companies to decide that this is the moment to increase investment and hire more workers.

Consumers will also be nervous; many now face immediate cuts in their disposable incomes because the less-heralded element of the deal was the agreement not to extend the temporary reduction in payroll taxes, the equivalent of UK national insurance contributions. For those earning $50,000 a year, it means a $1,000 cut in income.

Surely, it might be said, the political stakes are now so high and the confidence of US consumers so fragile, that a so-called “grand bargain” on tax and spending can be thrashed out at the second attempt. Don’t bet on it.

The missing ingredient in this drama is alarm in financial markets. The US can still borrow for 10 years at less than 2% (partly because the US Federal Reserve is buying US debt and other assets at a rate of $85bn a month), the dollar is relatively stable and the US economy is still growing.

As Richard Lewis, at the fund manager Fidelity Worldwide, puts it: “We are unlikely to see much change in behaviour unless or until serious dollar weakness calls time on Washington shenanigans.”

If the muddle-through option is still on the table in March – and it probably will be – don’t be surprised if the politicians again grab it. © Guardian News & Media Limited 2010

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Salutary lessons can be learned from past financial crises. Boom-bust events tend to follow a classic arc: a tale with a grain of truth in it is seized on and peddled to credulous investors by an unholy alliance of greedy optimists and swindlers…

Powered by article titled “Bubbles, tulips, booms and busts: same story, different dates” was written by Heather Stewart, for The Observer on Sunday 23rd December 2012 00.08 UTC

Perhaps one of the most cheering moments of 2012 was when Sir Mervyn King summoned Barclays chairman Marcus Agius and told him that after the appalling revelations about Libor-fixing, the bank’s chief executive Bob Diamond would have to go – or, as the Sun headline had it: “Sign on, You Crazy Diamond.”

Both King’s high moral tone and the headline-writers’ cheek seemed refreshingly modern – but for anyone wandering the damp streets of London with half an hour or so to kill during this festive season, a corner of the British Museum offers a healthy dose of historical perspective on these and many other events over the past torrid five years.

Tucked away in Room 69a, just around the corner from a display of Roman pottery, is a small temporary exhibition dedicated to “Bubbles and Bankruptcy: Financial Crises in Britain Since 1700″.

One exhibit is a cartoon from Punch, published after the Bank of England bailed out Barings (yes, that Barings) in 1890. A stiff-looking woman with an apron made of banknotes – the Old Lady of Threadneedle Street – crossly hands out cash to a queue of cowed financiers, saying: “You’ve Got Yourself into a Nice Mess With Your ‘Speculation’!” It must be reassuring for King to regard himself as today’s incarnation of that starchy matron.

It’s also salutary – and somehow comforting – to see artifacts from the events of the recent crash boxed up in glass cases as historical exhibits: an empty champagne bottle from the flotation of the ill-fated Northern Rock; a Steve Bell cartoon of ravenous fat cats having their toenails gingerly clipped by George Osborne; and a handful of credit cards from the bailed-out banks.

These now-poignant objects sit alongside exhibits illustrating a bevy of other investment frenzies and financial crises: the South Sea bubble, tulip mania and the railway investment boom – and bust – of the mid-19th century.

Apart from the facile (but nonetheless true) insight that there’s nothing new under the sun, the exhibition holds one or two other lessons for today’s policymakers.

The first is that these boom-bust events tend to follow a classic arc: a tale with a grain of truth in it is seized on and peddled to credulous investors by an unholy alliance of greedy optimists and downright swindlers.

An engraving in one case shows a certain Gregor MacGregor, a dashing-looking Scottish general who went off to Latin America and came back claiming to have discovered a lush territory called Poyais. He raised an extraordinary £200,000 – detailed in minute letters on a loan document on display – from investors convinced by the tale of vast, untapped riches in a faraway colony.

Unfortunately for MacGregor and the hundreds of would-be settlers who believed his tale and boldly set out across the Atlantic from Leith, Poyais turned out to be largely uninhabitable, and his backers lost their money.

Anyone reading the wild predictions about the potential riches to be made from exploiting shale gas deposits in the US should recognise the ring of a story so compelling that, given enough time, it could easily become a vast investment bubble. Fortunes will be made, but also lost.

A share certificate from the Sheffield and Retford Bank is a reminder that when Britain’s railways arrived, they certainly transformed the economy and created millionaires; but many of the early firms set up to drive brand-new lines across great tracts of the country went bust. The Sheffield and Retford made many loans to these companies. When they defaulted, the bank failed.

Some of the items on display also highlight the way that Britain’s political and social elites have always been prone to being seduced by smooth-talking investors. An 18th-century ballad, the Bubblers Medley, printed at the time of the South Sea crash, talks of the “Stars and Garters” tempted into the scheme alongside “harlots” from Drury Lane.

However, Gordon Brown and Alistair Darling should note that while the then chancellor of the exchequer, John Aislabie, did buy shares in the South Sea company, he shrewdly sold them before the crash – as visitors can see from the bill with his signature – making them over to some more gullible citizen.

When veteran bank-watcher Sir Donald Cruickshank appeared before the parliamentary commission on banking standards recently, he also called for some historical perspective, urging its members to immerse themselves in a copy of Anthony Trollope’s The Way We Live Now.

Reading the rip-roaring adventures of shady financier Augustus Melmotte, who takes London by storm with his eye-watering wealth, drawing politicians and aristocrats into his net, it’s hard not to think of the charming chancers in charge of Britain’s banks, who convinced us (and themselves) they were financial geniuses before the crisis – and were revealed to be self-deluded at best.

True, Melmotte certainly wouldn’t resort to the vulgar “done … for you big boy” tone of the emails that surfaced in the Barclays Libor settlement, but the sentiment is similar. Or, as Cruickshank put it: “I don’t think bankers are any worse than they have been before: they always calibrate off society … We have been here before.” © Guardian News & Media Limited 2010

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U.K. manufacturing is down, construction is struggling, exporters are having a torrid time – and then there’s the eurozone recession. Here is a view of the current conditions in the U.K. manufacturing, housing, construction and banking sectors…

Powered by article titled “UK economy: the problem sectors” was written by Phillip Inman, economics correspondent, for The Guardian on Friday 7th December 2012 20.32 UTC


Industrial output is now at its lowest level since May 1992 and manufacturing is 20% down on its peak. Latest figures showed a month-on-month fall of 0.8%, far worse than economists had expected and the 16th consecutive month when manufacturing output was lower than the same month a year earlier.

The Office for National Statistics found most areas of manufacturing were on the slide, with chemical production and wood and paper manufacture leading the downturn.

A fall in the value of the pound and the opening up of new destinations for UK exports – such as Indonesia and Columbia – have failed to lift the sector, which is far more dependent on trade with the euro area than ministers would like. The British Chambers of Commerce said the sector remained well managed and prepared for an upswing, but needed more government help to boost exports to fast developing countries.


There may be plenty of cranes on the London skyline, but the construction sector outside the capital is dead. Commercial building, the lifeblood of most large firms, has failed to recover from the financial crisis. The hole in the heart of Bradford, where a Westfield shopping centre is already four years late, is an example of building projects that have remained strictly on the drawing board.

Civil engineering has suffered from a lack of infrastructure improvements after a near-£30bn cut in public investment spending. The CBI has urged the government to use the downturn to upgrade the road and rail network. The Treasury encouraging upgrades to the broadband network has failed to counteract falls in investment elsewhere.


The Bank of England has become increasingly frustrated at the unwillingness of banks to increase their lending to businesses and households. In the summer it set up an £80bn Funding for Lending scheme that allows banks to offer cheaper loans to customers. Banks have reported using the money to lower mortgage rates, but anecdotal evidence suggest older, more creditworthy customers have gained while first-time buyers remain on the sidelines. More importantly, many economists argue the loans on offer are small in comparison to the size of the problem.

The UK’s major banks remain in a dire financial situation and need to build up their capital reserves to protect themselves against another financial crash. The central bank governor, Sir Mervyn King, insisted earlier this month that UK banks were well-capitalised but said it would be “sensible” to improve their resilience further. He warned “an erosion of confidence” was damaging economic activity, creating “a spiral characteristic of a systemic crisis”.


British exporters are having a torrid time battling the headwinds of the slowing Chinese economy, the eurozone crisis and uncertainty in the US over the fiscal cliff (the tax rises and spending cuts timed for January which could halt US economic progress in its tracks).

According to the latest figures from the ONS, in the three months to October the country racked up its biggest trade deficit since records began. The trade gap widened to a record £28bn, from £25bn in the quarter ended July, the ONS said, as sales of goods into the rest of the European Union declined sharply.

George Osborne promised more help for exporters with loan and credit guarantees through the government’s UKTI export arm. But the sums remain small compared to the size of export orders and firms seem reluctant to take risks in the current economic environment.


Housebuilders have largely shed the debts acquired in the crash and become profitable again. But building remains at historic lows. The last time the UK built so few homes was in 1931.

MPs and business groups have called for a 1930s-style house building boom, but with no success so far. Ministers are planning to rip up planning rules to allow developers a clear route on greenfield sites, but even if this plan goes ahead, it will be some time before there are any spades in the ground.

Developers, which already have several years of plots on their books with planning permission, have refused to increase the number of new homes while customers are constrained by high mortgage borrowing costs. They blame the banks for withholding credit or charging too much for credit as the main reason for their inactivity.

Prices are slipping, putting another brake on investment in the sector. Halifax said prices are likely to stay flat next year after a 1.3% fall in 2012. Most families are unwilling to buy homes in a market where prices are falling, though buy-to-let investors have snapped up thousands of homes since the downturn, increasing the size of the rental market.

The eurozone

The machine at the heart of the eurozone is spluttering: the Bundesbank has sliced more than 1 percentage point off its forecast for economic expansion in Germany next year – highlighting severe aftereffects of the sovereign debt crisis.

The German central bank revealed the crushing blow to confidence and growth that has struck the euro area when it cut its projection for growth in 2013 from the 1.6% it had expected six months ago to a grim 0.4%. It also said the German economy, Europe’s largest, will grow only 0.7% this year, down from its previous forecast of 1%. The downgraded forecast shows Germany is no longer immune from the downturn in the rest of the currency bloc.

Separately, the German finance ministry said industrial output fell 2.6% in October, while manufacturing crashed by 2.4%, providing “further evidence that the economy’s backbone is quickly losing steam,” said the ING analyst Carsten Brzeski.

Without an expansive and confident Germany, it is almost certain the eurozone’s double-dip recession will continue into 2013, dragged down by severe contractions in the southern states.

There is also a feedback loop into UK trade should Germany suffer a prolonged fall in demand. Germany and the rest of the EU still comprise over 50% of UK exports, despite the government’s emphasis on redirecting trade elsewhere to rapidly developing economies in Asia, Africa and South America. © Guardian News & Media Limited 2010

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Former prime minister, who resigned in 2007, appears to have put troubles behind him as his party decisively regains power with resounding victory in Sunday’s election. Yen drop to a new low after the pro-easing Liberal Democratic Party wins…

Powered by article titled “Japanese election victory hands Shinzo Abe a chance for redemption” was written by Justin McCurry in Tokyo, for The Guardian on Sunday 16th December 2012 16.57 UTC

Japan’s voters appear to have short memories. Shinzo Abe, who is assured of becoming prime minister after his party’s resounding victory in Sunday’s election, last led the country in 2006, but stepped down after a troubled year in office.

The official reason given for his abrupt resignation was a chronic bowel ailment, which the leader, 58, says he now controls with a new drug. But his health condition may have been a cover. Abe’s first administration was marred by scandals and gaffes. Months before he quit, his Liberal Democratic party [LDP] suffered a heavy defeat in upper house elections.

Abe says he has learned the lessons of his inglorious debut as prime minister. His tenure began with encouraging diplomatic overtures to Beijing and Seoul over historical and territorial disputes. It ended with accusations that he had filled his cabinet with close friends who were woefully under-qualified for their posts.

Sunday’s resounding election victory has given him one last shot at redemption, as only the second Japanese politician to serve twice as prime minister since the war.

Behind Abe’s soft-spoken manner and aristocratic background lurks a fervent nationalist, which led one liberal commentator to describe him as “the most dangerous politician in Japan”.

Abe has often said he went into politics to help Japan “escape the postwar regime” and throw off the shackles of wartime guilt. In its place he has talked of creating a “beautiful Japan” defended by a strong military and guided by a new sense of national pride.

“I have not changed my view from five years ago when I was prime minister that the biggest issue for Japan is truly escaping the postwar regime,” he said in a recent magazine article.

Abe’s biggest ideological influence was his maternal grandfather, Nobusuke Kishi, who was arrested, but never charged, for alleged war crimes. He went on to become prime minister in the late 1950s.

Decades later, confronted with an aggressive China and nuclear-armed North Korea, Abe is eager to fulfil his grandfather’s dream of giving Japan’s military the teeth he believes it has been denied by the country’s postwar pacifism.

His return to office will surely ring alarm bells in Beijing and Seoul. Abe says he will not cede ground in territorial disputes with China and South Korea. He is also the founding member of a group of rightwing MPs who support a revisionist version of history that plays down, or overlooks, Japanese militarism’s worst excesses in Asia in the first half of the 20th century.

Abe’s confirmation as prime minister later this month represents his last chance to take care of unfinished business. Japan, and the wider region, is waiting to see if he stays true to his beliefs or, as some expect, gives way to a more pragmatic Abe Mark II. © Guardian News & Media Limited 2010

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Global stock markets and euro rise after ECB president Mario Draghi’s ambitious plan to keep the eurozone together. U.S. unemployment rate declines but job creation disappoints, raising the odds of additional easing by the Fed…

Powered by article titled “Draghi’s eurozone rescue plan continues to boost shares and euro” was written by Julia Kollewe and Graeme Wearden, for The Guardian on Friday 7th September 2012 17.22 UTC

European Central Bank president Mario Draghi’s rescue plan for the eurozone brought cheer to financial markets for a second day, while pressure built on Portugal, which was expected to announce further austerity measures.

The Italian stock market added 2.1%, while the Dax closed up 0.7% and Spain’s Ibex, France’s CAC and the FTSE 100 in London all finished the day 0.3% higher after “Super Mario’s” ambitious plan announced on Thursday to keep the eurozone together by sanctioning “unlimited” bond buying by the ECB.

Asian markets also staged a strong rally, with Japan’s Nikkei index posting its biggest gain in five months, of 2.2%.

The euro rose against the dollar, climbing near the $1.28 level for the first time in three months.

Spanish and Italian borrowing costs declined sharply, with the yield, or effective interest rate, on Spanish 10-year debt dropping 0.4 percentage points to 5.6% – the first time it has been below 6% since May. Six weeks ago it had surged to 7.6%, deep in the danger zone where borrowing costs become unsustainable, and at the start of this week it was still around 7%. The Italian equivalent fell a quarter of a point to 5% – in late July before Draghi’s commitment to “do whatever it takes” to preserve the euro it was at 6.75%. The cost of insuring Spanish debt also tumbled.

The 10-year Portuguese yield was down 0.4 points to its lowest level since March 2011. Although as high as 8.1%, that compared with 18% in February.

The Dow Jones industrial average hovered between gain and loss after the US Labour Department said the US had added just 96,000 new jobs in August, far below expectations. The Dow hit its highest level since December 2007 on Thursday, but the jobs report focused investors on the US’s own problems.

The pound got a fillip from the weak US jobs data, climbing to above $1.6 for the first time since mid-May. Surprisingly strong industrial production data also brought some cheer to Britain. Factory production in Germany was also stronger than expected, rising by 1.3% in July.

The Federal Reserve meets next week and economists speculated that the poor jobs figures will add further pressure on the central bank to act. Chairman Ben Bernanke indicated in a speech last week that he was concerned about the slowing pace of the US recovery and the still high unemployment rate.

The Portuguese prime minister, Pedro Passos Coelho, was expected to set out fresh austerity measures last night in a televised address billed as a “declaration to the country”. Measures such as a VAT rise, cuts to the public sector payroll, or new tax measures were expected.

Spain gave no hints on when it might make a formal bailout request to trigger the bond-buying programme. Deputy prime minister Soraya Sáenz de Santamaría said the plan would be discussed at next week’s meeting of European finance and economy ministers in Cyprus.

“While markets are currently happy that the ECB’s bond purchase scheme stands ready to be activated, getting the Spanish and Italian governments to agree to programmes is likely to be fraught with difficulties,” said Grant Lewis at Daiwa Capital Markets. “Indeed, the positive market reaction makes their activation less likely by taking the pressure off the Spanish and Italian governments. So, it may well require a significant deterioration in market sentiment once again to ultimately trigger the programmes that lead to ECB purchases.”

German chancellor Angela Merkel expressed support for the ECB over the creation of the bond-buying programme, and said the central bank was right to insist on conditions in return for any assistance provided through the scheme. Meanwhile, the Bundesbank, Germany’s central bank, refused to back the plan, and it did not go down well in parts of the German media. Top-selling tabloid Bild led the way, warning that the ECB’s “blank cheque” could make the euro “kaputt”.

Handelsblatt criticised “the democratic deficit of the euro rescuers” and linked the ECB’s latest action to next Wednesday’s ruling by Germany’s Constitutional Court on the legality of the eurozone’s new bailout mechanism and budget rules. This is another crunch day in the euro – a rejection of the European Stability Mechanism and the fiscal pact would plunge the eurozone into fresh turmoil. A Reuters poll of 20 top lawyers found unanimous agreement that the court will throw out the request for a temporary injunction to halt the ESM and the pact. However, 12 of those questioned also expect the court to insist that German liability has to be limited. © Guardian News & Media Limited 2010

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European Central Bank president Mario Draghi announced the details of a bond-buying program to bring down borrowing costs. Here is a list of 10 essential terms that traders need to know before the ECB plan is activated…

Powered by article titled “ECB bond-buying: 10 essential terms” was written by Josephine Moulds, for on Thursday 6th September 2012 11.45 UTC

European Central Bank president Mario Draghi is expected to announce the details of a bond-buying programme to help keep down borrowing costs of crisis-hit countries later on Thursday. Leaks suggest it will involve unlimited purchases of government debt that will be “sterilised” to assuage concerns about printing money.

The bond-buying scheme is rumoured to be called the “outright monetary transactions”, with a shorthand title of OMT.


The life of a bond, at the end of which it will be repaid in full. A bond’s maturity can be as short as a year to as long as 100 years.


This refers to how likely you are to be repaid if a bond issuer goes bankrupt. Bondholders with seniority over others will be paid back before other bondholders. There was some concern that the ECB would demand seniority over other bondholders when it undertook the bond-buying scheme, but leaks now suggest otherwise.


Was the ECB governing council united in backing Thursday’s decision, or was there opposition? Bundesbank head Jens Weidmann has spoken out against a bond-buying programme before – is he now onside? Was the ECB split over interest rate levels, or were the decisions unanimous? Draghi’s answer to these questions (which will surely come up) could be crucial.

Pari passu

A Latin phrase meaning “equal footing”. In the bond markets, this means bondholders will be treated the same if a bond issuer goes bankrupt. Any purchases the ECB makes as part of its bond-buying programme are expected to be pari passu with other bondholders.

Collateral requirements

The ECB asks banks for collateral in return for taking out cheap loans. If they relax collateral requirements, they can accept a wider range of assets as collateral from banks. They have already relaxed these requirements, and can now accept everything from bundles of car loans to mortgage-backed securities.


This is the way the ECB would keep the Germans happy, by imposing conditions on receiving assistance from the ECB; so, if the ECB helps keep a country’s borrowing costs low by buying up its bonds, that country may have to agree to some strict austerity. Without conditionality it would be easier for the ECB to unilaterally intervene.

Convertibility risk

This refers to the risk that you will buy bonds denominated in euros but could ultimately be paid back in lire or drachma (or deutschmarks) if the country taking out the debt leaves the eurozone before the end of the bond’s life.

Unlimited intervention

Exactly what it says on the tin. Expectations are that the ECB will not put a limit on its bond buying. This is seen to be an improvement on the previous bond-buying programme, which was limited in size and therefore lacked credibility in the markets. If other traders do not believe the ECB has the firepower (or inclination) to buy enough bonds to bring down yields, they may continue to bet on them rising.


This makes sure the money supply does not increase as a result of the bond-buying programme. When the ECB buys bonds, it is injecting liquidity into the financial system, effectively creating new money. To counteract that, the ECB has in the past followed bond purchases by subsequently draining an equal amount of liquidity from the system. It does this at the weekly deposit tender by increasing the rates it will pay commercial banks to deposit money with the ECB. The idea is that this will encourage banks to deposit more money with the ECB, thereby taking it out of the system.

Yield cap

Rumour had it that the ECB would set a yield cap on certain countries’ government bonds. This would mean if the yield looked like it would break through that level, the ECB would start buying bonds to push prices higher and bring yields back down. © Guardian News & Media Limited 2010

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Mario Draghi expected to announce plan to buy unlimited quantities of government debt from troubled eurozone members. German Chancellor Angela Merkel tells lawmakers she opposes unlimited European Central Bank bond purchases…

Powered by article titled “Euro rises on report of ECB plan to buy unlimited debt” was written by Larry Elliott, economics editor, for on Wednesday 5th September 2012 14.19 UTC

The euro rose on the foreign exchanges on Wednesday after the Bloomberg financial news service reported that the European Central Bank was preparing to announce plans to buy unlimited quantities of government debt from troubled members of the single currency.

Quoting central bank officials, the agency said the ECB was ready to take action to bring down the interest rates on borrowing paid by countries such as Italy and Spain. Full details of the blueprint are likely to be disclosed by Mario Draghi, the ECB president, on Thursday after a meeting of the central bank’s governing council.

According to the Bloomberg, the ECB plans to “sterilise” its bond-buying by removing money from elsewhere in the eurozone economy such as by selling bonds or restricting the money supply. This could ease fears that action to help the weaker members of the 17-nation bloc will lead to an explosion in the money supply.

The ECB is likely to concentrate on buying short-term debt – bonds that mature within three years – in the hope that it will provide breathing space until longer-term measures are in place.

Germany has been critical of Draghi’s plan to “do whatever it takes” to prevent a breakup of the single currency, but Bloomberg said the ECB expected the proposals to be adopted despite the misgivings of Angela Merkel and the president of the Bundesbank, Jens Weidmann.

Some analysts have been expecting Draghi to set a target level for bond yields of eurozone countries, but this is not thought to form part of the proposal.

The euro rose by half a cent after the apparent leak of the Draghi plan, although some analysts remained cautious. “I think the market saw the word ‘unlimited’ and jumped before realising that the ECB would not expand its balance sheet as it would sterilise all its purchases and thus this was not the kind of aggressive monetary expansion that FX traders were looking for,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.

“Net takeaway is that if this is sterilised it will probably not be enough to keep the bond vigilantes at bay. Furthermore, the backing away from any specific yield targets is exactly the lack of clarity that the FX market will not like.” © Guardian News & Media Limited 2010

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Ben Bernanke describes US economy as ‘far from satisfactory’ and shares concern over unemployment and growth. The Fed Chairman keeps the door open to another, third round of quantitative easing should the economy worsen…

Powered by article titled “Markets pick up as Fed chairman signals possibility of third round of QE” was written by Dominic Rushe in New York and Phillip Inman, for The Guardian on Friday 31st August 2012 21.56 UTC

US central bank chief Ben Bernanke sparked a surge in share values on Friday after he signalled his willingness to embark on a third phase of money creation to boost the US economy.

The Dow Jones industrial average closed the day with a gain of 90 points after the chairman of the Federal Reserve gave a robust defence of past central bank interventions, which, traders said, prepared the ground for a third round of quantitative easing should the economic picture worsen. France’s CAC and the German DAX closed up 1%.

In his much anticipated a speech in Jackson Hole, Wyoming, Bernanke described the current economic situation as “far from satisfactory”. He said that high rates of unemployment were a “grave concern, not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for years”.

His speech to the annual central bank symposium came ahead of September’s meeting of the Federal Reserve’s open markets committee (FOMC), which sets US economic policy. Recently released minutes from its last meeting show the committee has become increasingly concerned about the US recovery and is weighing further action.

However, since the last FOMC meeting, more positive economic news has emerged on jobs and housing. Next week the closely watched non-farm payroll survey of monthly employment trends will be released. After a sharp rise over the winter, job growth slowed in the spring, but appears to be picking up again.

He urged European leaders to make faster progress in tackling the debt crisis affecting Greece and other indebted eurozone countries. His concerns that Europe may drag the US back into recession were highlighted by figures showing that unemployment across the zone remained at an all-time high in July.

The European Union’s statistical agency, Eurostat, said 88,000 more people were without a job in July, pushing the total out of work in the eurozone to 18m, the highest level since monetary union in 1999.

The 11.3% unemployment rate, up 1.2 points from a year earlier, failed to come down after joblessness increased in Spain and bailed-out Greece. In Spain youth unemployment stood at 52.9%, in Greece at 53.8%.

Any monetary action by the Fed is likely to trigger a furious response from elements within the Republican party who have criticised his past actions and warned against new measures.

Mitt Romney, the Republican presidential candidate, has made it clear he will replace the Fed chief, who he accuses of putting taxpayers’ cash at risk, if he is elected in November.

The House financial services committee chairman, Spencer Bachus, told Bernanke last month at a congressional hearing: “The truth is the Federal Reserve cannot rescue Americans from the consequences of failed economic and regulatory policies passed by Congress and signed by the president.”

The initial US quantitative easing programme from November 2008 to May 2010 saw the Fed buy $1.75tn in debt held by mortgage providers Fannie Mae and Freddie Mac, a range of mortgage-backed securities and government bonds, mostly from the country’s 3,000 banks.

A second round, dubbed QE2, involved an additional $600bn. “Operation Twist” began in September 2011 with a pledge to swap $400bn in short-term loans for longer term bonds, with an extension in June adding a further $267bn.

Bernanke offered a strong defence of his actions at Jackson Hole. “A balanced reading of the evidence supports the conclusion that central bank securities purchases have provided meaningful support to the economic recovery while mitigating deflationary risks,” he said.

In a swipe at Republican critics who accuse him of jeopardising hundreds of billions of taxpayer funds following the expansion of Federal Reserve loans, he said loans by the Fed since the bank rescues of 2008 had earned money for the exchequer.

David Zervos, head of global fixed income strategy at US investment bank Jefferies, said it was unlikely the Fed would back a further round of central bank lending before the presidential election in November.

“The idea that the Fed would come out with unconventional monetary policy, such as credit easing of some kind, seems to be a little bit of a stretch,” he said.

“This was a backstop speech that gets Bernanke through. If the data turns or Europe turns, then the Fed is back in.”

Gus Faucher, senior economist at PNC Financial Services, said: “It sure sounds to me like he is getting ready to act.”

He said the FOMC would now be waiting for the non-farm payroll figures. In July, the US added 163,000 new jobs, more than many economists had expected. Faucher is predicting that 130,000 new jobs were added in August, while other analysts are expecting about 100,000.

“If it comes in below 100,000, I think the Fed will act,” he said. “That would be four out of five months below 100,000. That’s not good enough.” © Guardian News & Media Limited 2010

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Bank of England cut its growth projections for the UK economy and opened the door to more quantitative easing, Sir Mervyn King warns there is still some way to go before economy recovers as Bank predicts growth will flat-line this year…


Powered by article titled “Bank of England cuts UK growth forecast” was written by Larry Elliott and Simon Goodley, for on Wednesday 8th August 2012 10.29 UTC

Sir Mervyn King, the Bank of England governor, hinted at further action to boost the ailing UK economy on Wednesday after Threadneedle Street slashed its 2012 growth forecast to zero and said inflation was back under control.

King said there was no urgent need for fresh stimulus, but signalled more money creation through the Bank’s quantitative easing (QE) programme in response to an economic performance that has “continually disappointed expectations of a recovery”.

Against a backdrop of a worsening crisis in the eurozone and tighter lending conditions imposed by UK banks, the Bank’s quarterly inflation report cut its growth forecast for 2012 from the 1.25% pencilled in three months ago and believes the bounce-back in 2013 will be weaker than previously anticipated.

King said: “The overall outlook for growth is weaker than in May, reflecting downside news in the near term and, in the medium term the possibility that the weakness in output and productivity growth that we have seen since the financial crisis persists. GDP growth is more likely than not to be below its historical average rate in the second half of the forecast period.”

The governor said it would not be until 2014 that activity returned to its pre-recession peak in 2008 and used an Olympic analogy to underline that recovery would be long and hard.

“Unlike the Olympians who have thrilled us over the past fortnight, our economy has not yet reached full fitness. But it is slowly healing. Many of the conditions necessary for a recovery are in place, and the monetary policy committee [MPC] will continue to do all it can to bring about that recovery. As I have said many times, the recovery and rebalancing of our economy will be a long, slow process. It is to our Olympic team that we should look for inspiration. They have shown us the importance of total commitment when trying to achieve a goal that may lie some years ahead.”

King said it would take a “bit of time” to assess the impact of the Bank’s new funding for lending scheme (FLS), which came into force last week and is designed to encourage banks to lend more at lower interest rates. Last month Threadneedle Street announced a £50bn increase in its QE programme to £375bn by November, and the governor said further purchases of government gilts to create money was an option.

On the foreign exchanges, the pound rose slightly after King expressed strong reservations about cutting the bank rate from its historic low of 0.5%. The governor said there was a risk that such a move could prove counterproductive by making life more difficult for some banks and building societies.

Vicky Redwood, UK analyst at Capital Economics, said it would not take much to tip the nine-strong MPC towards further action. “We expect another £50bn [of QE] to be announced in November when the current purchases are completed.”

The governor strongly defended the Bank’s forecasting record against accusations that it had persistently been over-optimistic about the outlook for growth, pointing to a euro crisis that “goes on and on and on” as the reason for the latest downgrade as it pushes up costs for domestic borrowers.

King said tumbling inflation would eventually boost consumer spending by raising real incomes, while the FLS was “bigger and bolder than any initiative so far tried to get the banks lending again”.

Labour seized on the admission in the inflation report that banks might use the FLS to inflate their profits rather than lowering interest rates, and said it was time for a Plan B.

Rachel Reeves MP, Labour’s shadow chief secretary to the Treasury, said: “With growth forecasts slashed yet again, not just this year but in future years too, it is clear that we cannot go on with the same failing plan from this government. The chancellor’s policies aren’t only causing short-term pain, but long-term damage to our economy too. And despite the crisis in the eurozone, Britain is just one of two G20 countries in a double-dip recession.”

King said the Bank found it difficult to explain why the jobs market had been so resilient at a time when official figures have shown the economy deep in a double-dip recession. Threadneedle Street has lowered its longer-term growth projections for the economy in the belief that there has been permanent damage caused by the deepest and longest downturn since the second world war.

John Hawksworth, chief economist at PricewaterhouseCoopers, said: “It seems likely that we have entered a ‘new normal’ period where growth will be relatively subdued by historic standards for some years to come as the banking system remains impaired and global commodity prices remain relatively high and volatile.” © Guardian News & Media Limited 2010

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Leaders in Brussels divided over how to interpret summit accord aimed at easing pressure on highly indebted states, Spanish banking rescue was the main issue confronting ministers on Monday, but there were mixed signals over who would be liable…

Powered by article titled “Eurozone talks stuck on detail of bank rescue fund plan” was written by Ian Traynor in Brussels, for The Guardian on Monday 9th July 2012 18.10 UTC

Eurozone leaders are meeting in Brussels to try to build on a “breakthrough” summit 10 days ago that agreed to ease the pressure on highly indebted states by injecting rescue funds directly into troubled banks.

But the meeting has been plagued by divisions over how to interpret the summit accord and how the decisions should be implemented.

The Spanish banking rescue was the main issue confronting ministers on Monday, but there were mixed signals over who would be liable for the mooted direct recapitalisation of the country’s financial sector.

The summit resolved to break the invidious link between failing banks and weak sovereigns by agreeing to use eurozone bailout funds to recapitalise banks directly, not via governments, to avoid pushing up debt levels. But since the summit, eurozone creditor governments have backtracked on the pledges over how the accord will be implemented.

While the Germans and other north Europeans insist that direct bank injections can be contemplated only once a new regime of banking supervision is in place (likely to take a year), senior Eurogroup officials signalled that even in the event of bailout funds going straight to banks, the host country would still be burdened. If the main bailout fund, the European Stability Mechanism, took equity in troubled banks, the host government would need to underwrite the risk and be liable if the bank went bust, the officials said.

“The ESM is able to take an equity share in a bank, but only against full sovereign guarantees. It remains the risk of the sovereign. There’s some degree of mystification going on here,” said a senior official.

That was contradicted by the European commission, which stressed there would be no liability for the host state if its banks were rescued.

With the troika of the commission, the European Central Bank and the International Monetary Fund scrutinising the performance of Greece, Cyprus and Spain, the senior official added that it would be the end of August before any decisions were taken on Greece and Cyprus.

Spain was expected to dominate Monday night’s session, the quandary made more urgent as the yield on Madrid’s benchmark 10-year bonds nudged 7.2%, past the point of the affordable.

The ministers were to try to reach a “political understanding” on a memorandum between the eurozone and Madrid to be finalised later this month. In Brussels there is talk of emergency Eurogroup talks around 20 July or an extraordinary summit. Ministers could also confer by videoconference before the August holiday.

In what appeared to be a reference to Spain, Draghi said last week that bailout funds to banks would burden the host country only temporarily since the money would come off the books once the new banking supervisory regime was in place. Eurogroup officials, however, cast doubt on whether Spain would benefit, pointing out that the memorandum of understanding with Madrid was likely to extend only until 2014 and it could take that long for the new procedures to be implemented.

On Greece, the officials said “there would be no more disbursement” of eurozone bailout funds until the current troika mission was complete and had assessed how far Athens’ austerity and structural reform programmes had been blown off track by the political turbulence of the last three months. © Guardian News & Media Limited 2010

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