Tuesday, October 4, 2011
Greece’s prediction that it would miss a deficit target despite more austerity measures helped London’s blue-chips begin the last three months of the year in the red and traders were talking of “Groundhog day” on the bourse.
Concerns around Greece’s teetering finances and prospects for global growth meant there was a strong sense of deja vu as banks and mining stocks once again led the index lower. Vedanta Resources was the sharpest faller, sliding 91p to £10.10 while fellow miner, Xstrata shed 29.9 to 790.9p. High street lenders, Royal Bank of Scotland and Lloyds Banking Group dropped 1.03 to 22.46p and 1.41 to 33.46p respectively.
Morgan Stanley was taking no chances on the miners, reducing its earnings predictions to reflect a lowering of price forecasts by the broker’s commodities team.
“Rising risks of a developed market recession and deteriorating prospects of global growth have prompted our commodities team to revise house price forecasts. We have reduced our base metals estimates by an average of 16pc, and kept our iron ore prices unchanged,” said Morgan Stanley. “Notably, we upgraded gold and silver prices to reflect strong safe-haven demand for both metals.”
The Chartered Management Institute (CMI) said it saw little prospect of an early recovery. It called for the coalition Government to go further and faster with its deficit reduction programme to improve longer-term prospects and introduce incentives to provide some growth stimulus.
Only 8pc of the 616 CMI members polled for the organisation's half-yearly economic survey expected to see any growth in the economy over the next 12 months, and more than two-thirds felt the economy will sink back into recession.
The survey results also delivered another blow to Mr Cameron's hopes that the private sector can fill the gap left by the public sector rundown. They show private sector managers are most pessimistic about the employment outlook with 81pc expecting further cuts compared with 73pc in the public sector.
There are also signs of impatience with the speed of the spending cuts. While 60pc expect their business to suffer from the reduction in Government spending, 25pc are critical about the way the programme is being handled..
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The Greek debt crisis is getting worse rather than better, Canadian Finance Minister Jim Flaherty said on Monday as he urged European leaders to take clear and decisive action to avoid a banking meltdown.
“Ultimately the whole world would be affected if there were a bank meltdown, a credit crunch, coming out of Europe. So this is a serious situation and it’s been serious for quite some time. It’s getting worse because of the continued uncertainty,” Mr. Flaherty told Sun TV.
“It is quite frustrating and that’s why we’re trying to impress on them (European leaders) that these are extraordinary times – you can’t follow normal processes.”
In earlier remarks at a news conference, he urged European ministers meeting on Monday to be decisive and remove uncertainty on Europe.
“We want them to take the bull by the horns here, deal with the issues, be clear about what they’re doing and bring it to a conclusion,” the Conservative minister said.
Greece’s admission that it would miss its deficit target this year despite harsh new austerity measures sent stock markets reeling on Monday and raised new doubts over a planned second international bailout.
Canada’s bank exposure to Europe and particularly Greece is relatively small, Mr. Flaherty said, “but knock-on effects to the world economy can be difficult, and that’s what we’ve been worried about constantly with respect to Greece and some of the other largely indebted economies in Europe.”
He added: “We want the eurozone members to be decisive, to remove the uncertainty, and to be clear in their commitment about what they’re going to solve the problem. This problem is soluble in Europe, and it’s up to the Europeans to solve it.”
Mr. Flaherty will make a speech at a financial conference in New York on Wednesday and he said he would urge European bankers there to move forward on the debt crisis.
He repeated his government’s willingness to launch new economic stimulus measures if necessary, but he said government fiscal policy is already stimulative and more measures are not required at present.
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Activity in the UK construction sector slowed to "near stagnation" in September, a closely-watched survey has suggested.
The Markit/Cips construction purchasing managers' index (PMI) fell to 50.1, just fractionally above the 50 "no-change" threshold that separates expansion from contraction.
In August, the index had read 52.6.
Markit said fewer new orders was the reason behind the slowdown, but added that staffing levels rose slightly.
Confidence in the sector remained relatively subdued, the research group said.
Also on Tuesday, builders' merchant Wolseley announced a return to full-year profit but said recent weaker economic forecasts were likely to have an impact on its markets.
On Monday, Markit/Cips data showed surprise growth in the manufacturing sector.
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(Reuters) - An angry China warned Washington on Tuesday that passage of a bill aimed at forcing Beijing to let its currency rise could lead to a trade war between the world's top two economies.
China's central bank and the ministries of commerce and foreign affairs accused Washington of "politicising" currency issues and putting the global economy at risk after U.S. senators voted on Monday to start a week of debate on the bill.
The response suggested China sees a greater risk from the proposed bill than it has in the past when U.S. lawmakers attempted to put forward similar legislation to speed up the pace of appreciation in the yuan, or renminbi.
Beijing made similar remarks last year after the House of Representatives passed a currency bill that later failed to make any further progress in Congress.
Tuesday's coordinated salvo and the central bank's warning of a trade war and a slowdown in China's exchange rate reforms indicated Beijing was taking the latest currency bill more seriously.
"It is very rare for three different ministries of the country to refute something so quickly and strongly, showing how deeply the Chinese government is concerned about the yuan bill," said Wang Zihong, a researcher at the China Academy of Social Sciences, a top government think tank.
"The strong responses made by the Chinese government may also suggest that the possibility would be quite high this time that the United States will pass the final bill in the end and that Beijing is worried about the possible negative impact on China's exports resulting from the legislation," he said.
U.S. Senate vote opened a week of debate on the Currency Exchange Rate Oversight Reform Act of 2011, which would allow the U.S. government to slap countervailing duties on products from countries found to be subsidising their exports by undervaluing their currencies.
U.S. lawmakers, eyeing 2012 elections, said keeping China's currency undervalued had cost American jobs and that a fairer exchange rate would help cut an annual trade gap Washington puts at more than $250 billion.
"By using the excuse of a so-called 'currency imbalance', this will escalate the exchange rate issue, adopting a protectionist measure that gravely violates WTO rules and seriously upsets Sino-U.S. trade and economic relations," foreign ministry spokesman Ma Zhaoxu said in a statement posted on China's official government website (www.gov.cn) on Tuesday.
"China expresses its adamant opposition to this."
Ma urged U.S. legislators to "proceed from the broader picture of Sino-U.S. trade and economic cooperation" and "forsake protectionism."
He repeated Beijing's position that it will continue to gradually reform its currency policy, "strengthening the flexibility of the renminbi exchange rate."
China's exchange rate has long been a bone of contention between Beijing and Washington. The yuan has appreciated some 30 percent against the dollar since it was revalued in 2005, although critics say it is still valued too low and gives Chinese exporters an unfair advantage.
The emergence of China as the world's fastest-growing major economy has led to often testy relations with the United States. The most recent tension was over U.S. plans for a $5.3 billion upgrade of the F-16 A/B fighter fleet of Taiwan, which Beijing considers to be a breakaway province.
CAN THE BILL PASS?
Monday's vote bolsters prospects for the bill to clear the Democrat-run Senate later this week, but prospects for action in the Republican-controlled House of Representatives are murky.
If the bill did clear both chambers, it would present President Barack Obama with a tough decision on whether to sign the popular legislation into law and risk a trade war with Beijing, or veto it to pursue a more diplomatic approach.
"My colleagues, both Democrats and Republicans, agree that China's deliberate actions to devalue its currency give its goods an unfair competitive advantage in the marketplace," said Senate Majority Leader Harry Reid.
China has routinely denied claims that its policies are responsible for trade imbalances and a high rate of unemployment in the United States, saying that structural problems were to blame.
"It is widely understood that the renminbi exchange rate is not the cause of China-U.S. trade imbalances," Ma said.
China's central bank said in a statement that the bill failed to address the underlying issues in the U.S. economy.
"The yuan bill passed by the U.S. senate will not solve its problems, such as insufficient savings, high trade deficit and high unemployment rate, but it may seriously affect the whole progress of China's reform of its yuan exchange rate regime and may also lead to a trade war which we would not like to see."
Ma said Beijing would continue "proactive" and "gradual" reform of the currency and the central bank added Chinese inflation had already pushed the real yuan exchange rate further "toward the equilibrium."
Ministry of Commerce spokesman Shen Danyang said the United States was trying to pass on the blame for its own failings.
"Trying to turn domestic disputes onto another country is both unfair and in violation of standard international rules, and China expresses its concern," he said in a statement issued on the ministry's website.
The Senate move had to be viewed in the context of deepening economic and political uncertainties in the United States, as well as dwindling approval ratings ahead of next year's elections, the state news agency Xinhua said in a commentary.
"U.S. politicians are using the pretext of creating jobs and playing the China currency card -- the practice of diverting attention from domestic conflicts has almost become a political convention in recent years," it said.
Shen said any move by the United States to force the yuan to appreciate would undermine joint efforts to revive global economic growth, which took another blow on Monday with data showing that global manufacturing shrank in September for the first time in over two years.
"It will weaken China-U.S. efforts to join hands and together promote global economic recovery," he said. "The global economic is in a complex, sensitive and changeable period, and so even more needs a stable international monetary environment."
U.S. critics of China's currency policy have gained some traction as a weak economy keeps U.S. unemployment stuck above 9 percent and as 2012 presidential elections draw near.
Passage of the bill by the Democratic-controlled Senate would send it to the House, which is run by traditionally free-trade-friendly Republicans.
A China currency bill passed the House last year with 99 Republican votes, but lapsed because the Senate took no action. This year, the bill already has more than 200 House co-sponsors and this week supporters expect to reach 218, the number needed to pass it.
However, House Republican leaders have not shown a great appetite to pursue currency legislation, and it is unclear if the bill would ever face a vote in that chamber.
As with similar legislation in the past, the Obama administration has not taken a public stance on the bill, although White House spokesman Jay Carney said on Monday that the president shares "the goal it represents."
The Senate decision was a sign that China was being made a scapegoat by struggling western economies, said Wang Jun, researcher at the China Center for International Economic Exchanges.
"Maybe the United States will not be the only and last country to do so. With the worsening of the European sovereign debt crisis, we must also be on high alert that euro zone countries could also press China on the exchange rate issue.
"We need to launch some pre-emptive measures to hit back against any more attacks," Wang said.
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Franco-Belgian financial group Dexia called an emergency board meeting on Monday after concerns about its exposure to Greece and a Moody's warning about its liquidity position raised pressure on Belgium and France to act.
Dexia shares tumbled 10 per cent on Monday after Greece said its steps to avoid bankruptcy were falling short and credit agency Moody's raised concerns about the lender's access to funds.
Investors pegged losses among Wall Street banks overnight to the sharp falls in Dexia.
The bank summoned board members for a board meeting late on Monday, a source familiar with the matter told Reuters.
Belgian and French finance ministers were also meeting together with other euro zone leaders on Monday evening. Belgium's Didier Reynders said the two states, both Dexia shareholders, would do all that was required to support their banks.
"Whether it is Dexia or another, we are following the situation day-by-day," Reynders told reporters on arriving at the Eurogroup meeting in Luxembourg.
"To help the banks... the first thing to do is to help Greece. If you resolve the Greek problem you are a long way along the path," he continued, adding that Dexia was not among the most troubled banks in the continent.
The mid-tier bank has neverthelss one of the largest exposures to Greece among overseas lenders and has been at the centre of media speculation in recent weeks that it will split or needs another bailout, potentially from taxpayers.
According to a source familiar with the situation, Dexia's shareholders were keen to avoid a capital increase, but the group was likely to put a part of its French municipal lending unit Credit Local for sale.
Alex Koagne, analyst at Natixis in Paris said there could not be any demerger until capital was pumped in.
"An injection is needed so the bank can withstand losses on toxic assets," he said.
He estimated Dexia needed 5 billion euros in additional capital to have a 9 per cent common equity Tier 1 ratio under Basel III rules.
Dexia is not the only European bank facing a need for capital as regulations become tougher, profits sag and lenders face losses on sovereign bonds if the euro zone crisis is not resolved.
Banks face a 148 billion euro capital shortfall under a base case and a 227 billion shortfall under a stressed scenario, according to analysts at JPMorgan, who say Unicredit , Deutsche Bank , Lloyds , Societe Generale and Barclays each face a deficit of over 7 billion euros under its stressed scenario.
If banks are unable to raise the capital privately, government ownership of the sector could jump to 22 per cent from 7 per cent now, JPMorgan analyst Kian Abouhossein said in a note.
European bank stocks were down 2.6 per cent by 1056 GMT, with French banks BNP Paribas , Societe Generale and Credit Agricole , each down over 3 per cent.
Dexia, which received a 6 billion euro ($US8 billion) bailout from Belgium, France and other major shareholders at the height of the financial crisis in 2008, held 3.8 billion euros of Greek sovereign bonds at the end of June and had a credit risk exposure to the country of 4.8 billion euros.
Dexia's market capitalisation is only 2.5 billion euros, and its core capital is seen as insufficient to absorb big hits.
The company has taken a 338 million euro hit to cover a 21 per cent loss on Greek sovereign debt maturing by 2020, part of a plan agreed by private sector investors in July.
But with market prices indicating investors could suffer a loss of 50 per cent or more, Dexia's Greek bill could be more than 1 billion euros more.
Dexia Chairman Jean-Luc Dehaene said after a board meeting last week that neither Dexia nor its shareholders wanted the group to break apart and that it would continue to examine options to strengthen its balance sheet.
Dexia came unstuck when short-term credit dried up in the depths of the 2008 financial crisis, since a large proportion of its long-term lending to public authorities was financed by short-term borrowing.
Moody's said on Monday Dexia had experienced further tightening of its access to market funding.
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Eurozone finance ministers have put off until next month any decision to give the green light for a further €8bn bailout for Greece despite recognising that the Athens government had made some considerable progress in slashing the country's debts.
Jean-Claude Juncker, Eurogroup chairman, repeatedly made plain early on Tuesday that none of the eurozone countries was urging a Greek default and categorically denied that there was any question of Greece leaving the euro area.
In a move certain to disappoint markets, the 17 finance ministers sent signals they had no intention of agreeing to reboot the zone's rescue fund of €440bn closer to the €2tn or more demanded by leading investors and analysts. EU officials reiterated that there was "no Plan B".
But Juncker and Olli Rehn, the EU economic and monetary affairs commissioner, indicated that ministers had for the first time discussed measures to improve the bailout fund's efficiency and effectiveness in order to raise its firepower – code for raising the guarantees it needs for buying up more government bonds in the secondary market. Juncker said: "We consider that we should by no means increase the fund's financial volume."
He dropped a broad hint that private bondholders would be forced to pay more than the 21% "haircut" agreed at the 21 July meeting that increased the fund's volume and approved the second €109bn bailout for Greece – ascribing that to "technical" reasons.
Juncker and Rehn recognised Greece had made strides towards overcoming its debts and budget deficit but said that the Athens government had to be stricter about structural reforms and more ambitious in implementing privatisations.
It emerged that the ministers will be asked to approve the fresh €8bn aid as late as at a new meeting on 13 November once inspectors from the troika of European commission, European Central Bank and IMF have given their latest – and delayed – progress report on compliance. Juncker insisted that Greece could meet all its financial obligations – and suggested the new tranche of aid would be paid out in November.
After the Greek cabinet sent the euro and stock markets plunging on Monday by admitting on Sunday the country would not meet its target budget deficit this year or next, Evangelos Venizelos, had sought to win favours by insisting that the new budget was "very ambitious".
Entering Monday night's talks, he declared that the intention was to present "for the first time after many years" a primary surplus of €3.2bn next year compared with a deficit of €29bn only two years ago. He said the fiscal consolidation had been "very strong and very fast."
On Sunday Greece said its deficit would be 8.5% of GDP this year compared with a target of 7.6% and 6.8% in 2012 compared with a target of 6.5% but Venizelos insisted it had taken "all the necessary and difficult measures to fulfil its obligations".
He said: "Greece is a country with structural difficulties but Greece is not the scapegoat of the eurozone." Even so, anxieties about a Greek default sent the euro to a 10-year low against the yen and a nine-month low against the US dollar.
The French president, Nicolas Sarkozy, meanwhile said he would meet the German chancellor, Angela Merkel, in Berlin on Sunday for talks on "ways and means to accelerate the economic integration of the eurozone economy".
Ostensibly, the eurozone's two most powerful political figures are preparing the way for the crucial summit of the 17 member countries that will take place on 18 October or a day after a summit of all 27 EU countries, including the UK.
But the talks are bound to raise market hopes that the pair will come up with an outline plan for substantially increasing the scope of the European financial stability facility (EFSF) that can be put to the eurozone summit without necessarily boosting its funds. Slovakia assured ministers that its parliament would endorse the enhanced EFSF by 14 October.
Christian Noyer, Bank of France governor, indicated he was open to a scheme that would allow the EFSF to be leveraged – most likely by increasing the guarantees it can rely on to buy up more bonds and make bigger precautionary loans to countries suspected of being in trouble.
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