Friday, December 9, 2011
OTTAWA — Such is the severity of post-recession malaise engulfing the world that CIBC's chief economist invokes Biblical comparisons to warn the end of the "famine" is years away.
"Akin to Pharaoh's dream for Egypt, the global economy could well be in the midst of seven lean years, as the debt-financed bounty of the prior expansion left a growth famine in its wake," Avery Shenfeld said in his year-end economic outlook.
The Pharoah's dream, contained in Genesis, portends seven years of prosperity followed by seven lean years. Now halfway though those leans years, which began with the recession in 2008, Canada, and the world around it, will be mired until mid-decade in a prolonged slump, Shenfeld said.
For Canada, that means unemployment will remain elevated, the dollar will drop, wage gains will be meagre and growth will be scant, Shenfeld and other CIBC economists say.
"As an open economy, Canada can't help but feel the disappointment of a barely half-speed world. Excepting Europe, we're not destined for recession, but global growth will barely top three per cent next year, and 2013 won't be a whole lot better, well below the bounteous five per cent pre-recession pace."
"The countries in Europe that have been first to tackle budget deficits through tax hikes or spending cuts have paid the price in growth. That same malaise is spreading to other European countries, he says, and its echo will be felt as governments pull back from stimulus in North America."
Even that sombre outlook assumes "intelligent policy making" in Europe will prompt aggressive action to keep its downturn from worsening.
Shenfeld has lowered his forecast for growth in the Canadian economy in 2012 to two per cent from 2.1 per cent, and predicts that will extend through 2013.
As a result, Shenfeld has drastically revised his outlook on when the Bank of Canada will resume raising interest rates, saying the central bank will now hold rates at the current one per cent for the next two years. The previous call was for rate hikes to resume in the second half of 2012, with two quarter-point increases through year end.
Labour markets will also suffer. In a separate CIBC report, economists Benjamin Tal and Emanuella Enenajor, say tepid U.S. growth and a recession in Europe will hinder any Canadian jobs turnaround, and that a monthly pace of only 10,000 hires per month should send the unemployment rate from the current 7.4 per cent to 7.7 per cent by mid-year.
Meanwhile, the dollar will dip to 92 cents U.S. by early summer. Shaky global markets will hurt the resource-linked loonie before it returns to parity by year-end as global crisis fears diminish, Shenfeld said.
A key source of Canada's weakness ahead is the U.S., Canada's largest trading partner, where even deeper fiscal restraint than in Europe will land in 2013, and growth will only inch ahead at 1.9 per cent for the next two years, the CIBC reports said.
"It might not be until closer to mid-decade that we start to see enough private-sector momentum, including a full rebound in home building, to allow the U.S. economy to accelerate to the four-per-cent-plus growth rate needed to materially bring down the jobless rate," said Shenfeld.
On the Canadian housing front, Tal said prices will level off over the next two years and then drop by 10 to 15 per cent as eventual rate hikes kick in.
In the midst of all that gloom, there are some positive points. Our two-per-cent growth rate will outpace all but one of Canada's G7 peers, say Tal and Enenajor.
Meanwhile, business spending on construction and equipment, including several private-sector megaprojects will guard against recession risks in Canada, while consumer spending is expected to "brave the economic headwinds."
Read more: http://www.ottawacitizen.com/business/Economist+warns+global+slowdown+will+Biblical+scale/5831205/story.html#ixzz1g2zO804Q
The latest round of fighting erupted on Thursday when an Israeli air strike targeted a car on a crowded Gaza street, killing two militants who Israel said were planning attacks against its civilians and soldiers.
Palestinian gunmen responded with a barrage of rockets fired deep into southern Israel, some landing near the city of Beersheba, causing no injuries.
Early on Friday, Palestinian medical officials said a second Israeli air strike hit a Hamas training camp in Gaza City, sending shrapnel flying into nearby houses, killing one civilian and wounding 13 others, mostly women and children.
A Hamas spokesman said the initial air strike was a crime and accused Israel of ratcheting up violence in the area.
"We hold the government of the Zionist occupation (Israel) fully responsible for this crime and for the new escalation," spokesman Fawzi Barhoum said.
The Israeli military confirmed both air strikes had been carried out. It said the two men killed in the first strike had been planning an attack on Israeli civilians and soldiers along Israel's border with Egypt's Sinai peninsula.
"(They) were affiliated with a terrorist squad that intended to attack Israeli civilians and soldiers via the western border," an army statement said.
Hamas, an Islamist group sworn to Israel's destruction, has ruled the Gaza Strip since 2007.
The army statement said one of the militants had been involved in planning a suicide bombing in the southern Israeli resort of Eilat in 2007 in which three Israeli civilians were killed.
Violence between Israel and Gaza militants had abated recently although on Wednesday Israeli troops killed one Palestinian gunman and wounded another in a cross-border raid, witnesses and hospital officials said.
However, even with the number of events, the total losses this year from the storms, flooding and droughts is $52 billion, not even close to the most expensive year on record, according to the National Oceanic and Atmospheric Administration.
In 2005, Hurricane Katrina alone cost $145 billion in today's dollars. It was the most expensive natural disaster in U.S. history and, with more than 1,800 deaths, the highest fatality toll since a 1928 hurricane in south Florida.
The disasters in 2011 caused more than 600 deaths, the agency said. The Groundhog Day blizzard, Hurricane Irene, manytornadoes and drought-fueled wildfires in Texas, New Mexico and Arizona crossed the $1-billion threshold.
The increase in losses from hurricanes has more to do with population growth and increased home building near beaches than it does with climate change, scientists from NOAA say.
But, they added, "there is evidence that climate change may affect the frequency of certain extreme weather events. An increase in population and development in flood plains, along with an increase in heavy rain events in the U.S. during the past 50 years, have gradually increased the economic losses due to flooding. If the climate continues to warm, the increase in heavy rain events is likely to continue. There are projections that the incidence of extreme droughts will increase if the climate warms throughout the 21st century."
About 343 tornadoes in 13 states in late April was the most costly disaster, with total losses greater than $10.2 billion and insured losses of $7.3 billion. Tuscaloosa, Ala., was badly hit, and 240 of the 321 deaths were in Alabama.
Close behind was a drought and heat wave across Texas, Oklahoma, New Mexico, Arizona, southern Kansas and western Louisiana. The total direct losses to crops, livestock and timber have approached $10 billion; both direct and total economic losses will rise as the drought continues.
The weather fueled wildfires across Texas, New Mexico and Arizona, with losses over $1 billion from just the fires.
Hurricane Irene cost more than $7.3 billion in damages and resulted in 45 deaths.
The Joplin tornado in Missouri was the deadliest single tornado in 61 years, with 160 deaths. That tornado, along with 179 others across 15 states in late May, cost $9.1 billion, with $6.5 billion in insured losses.
Los Angeles Times
European banks need an extra 114.7bn euros (£97.7bn) to survive the eurozone debt crisis, the region's banking authority has said.
The European Banking Authority said the overall shortfall, including an emergency capital buffer, is 13.1bn euros (£11.1bn) for German banks and 7.3bn euros (£6.2bn) for French banks.
Meanwhile in Spain, the shortfall comes to 26.2bn euros (£22.3bn) and 15.4bn euros (£13.1bn) for those in Italy.
The banks now need to raise that capital and have until January 20 to present their plans - and until mid-June to complete them.
It comes as the European Central Bank said it would offer cheaper loans for banks struggling amid the financial crisis.
President Mario Draghi spoke at a news conference after the bank cut the base rate of interest for the 17 Eurozone countries to 1%, taking it back to the record low of earlier this year.
Mr Draghi said the bank will offer European banks more measures to ease their cashflow, including three-year loans and easing of spending criteria from January 2012.
He said the decision to cut the base rate was not unanimous.
The quarter point cut is aimed at countering the twin threat of recession and deflation caused by the region's debt crisis.
Mr Draghi also warned that inflation is likely to stay above 2% for several months to come.
Markets were unimpressed, however, with his efforts to try and deal with the eurozone crisis.
During his speech, the FTSE 100 turned negative, and was down 0.5%.
By the close of the markets, the FTSE was down 1.14% at 5483.77, the CAC closed down 2.53% at 3095.49 and the DAX lost 2.01% at 5874.44.
The main European markets did not take any comfort either from what they heard; the CAC was down 2.1% and the DAX lost 1.7%.
The bank has also downgraded its growth figures for next year, saying the outlook remains highly uncertain.
Mr Draghi said: "The intensified financial market tensions are continuing to dampen economic activity in the euro area and the outlook remains subject to high uncertainty and substantial downside risks."
He has previously hinted that further bond purchases were possible if Europe's leaders can come up with a credible plan to enforce budget discipline among the 17 countries that use the euro.
Fiscal transfers from Germany to other countries in the euro zone will be essential to resolving the euro zone debt crisis in the long term, Erik Britton, director at Fathom Consulting told CNBC.
"What needs to happen is the bitter pill needs to be swallowed. In particular Germany needs to accept the need for a fiscal transfer from itself to other countries in the euro area," Britton said.
He said the transfer would need to be large and continue for an indefinite period to be effective.
"[It needs] to have mechanisms in place to have such fiscal transfers indefinitely into the future. The magnitude of that transfer is large. We're talking about hundreds of billions, maybe 1 trillion euros.
"Unless and until we get to that story and there is some acceptance of that, I don't see a solution to this crisis in the long term," Britton added.
European leaders meet on Friday to thrash out the details of a solution to Europe's debt woes. German chancellor Angela Merkel and French President Nicolas Sarkozy held the first of their pre-summit meetings on Monday and submitted a letter to European Council President Herman Van Rompuy outlining the key issues on Wednesday. The Franco-German proposals include a treaty change for either the 17 euro zone nations or all 27 EU states leading to greater fiscal union and new tighter budget rules.
Britton argued the transfer of payments from Germany would not involve a blank check for profligate nations safe in the knowledge that Europe's paymaster would ride to the rescue.
"There is a price for fiscal transfers. It is not going to be like: 'Be as profligate as you like and I will bail you out'. The price is real, savage austerity now and fiscal discipline and agreements to fiscal discipline later," Britton said.
US treasury secretary Timothy Geitner, who is in Europe for talks with key European leaders meets with French president Nicolas Sarkozy Wednesday to discuss the ongoing debt crisis.
Stephen King, group chief economist, at HSBC, told CNBC.com that a fiscal transfer involving Germany alone would not be enough.
"The question is where does the money come from? I don't think the tax base of Germany would be big enough. That is why Europe went to China a few weeks ago asking for its help and people talk about the ECB being big enough," King said.
He added his skepticism about a fiscal union's ability to resolve the euro zones debt problems.
(Reuters) - Ratings agency Moody's downgraded the debt of BNP Paribas (BNPP.PA), Societe Generale (SOGN.PA), and Credit Agricole (CAGR.PA) on Friday, citing deteriorating liquidity and funding conditions.
Moody's cut its ratings on the long-term debt of BNP and Credit Agricole by one notch to Aa3, concluding reviews that began in June and were continued in September. Societe Generale's long-term debt was cut by one notch to A1.
The downgrades were driven by the increasing difficulties the banks were having in raising funding and the worsening economic outlook, Moody's said.
The French banks' ratings are still roughly level compared with their European peers, reflecting their strong retail operations and stableearnings.
The downgrade nevertheless comes at a sensitive time for the banks, which have seen their shares pummeled and when they have been forced to cut their outstanding loans and potential risk as available short-term funding has evaporated.
Socgen said in a statement it was surprised by the decision and challenged the ratings agency's reasoning, adding that its third-quarter results had shown its "capacity to adjust rapidly its management of short and long-term funding needs in the current unfavorable market environment".
In addition, its exposure to crisis-hit nations such as Greece, Italy and Spain was "modest and manageable," the bank said. BNP Paribas and Credit Agricole could not immediately be reached for comment.
BNP and Socgen's shares both dipped close to 4 percent at the market open but recovered to trade up 1.1 percent and 0.8 percent respectively by 1027 GMT as investors weighed the downgrades against steps to boost European banks' liquidity announced by the European Central Bank on Thursday.
"The ECB's three year refinancing is good news for the banks since it reduces the risk of a breakdown in the sector," said Romain Burnand, co-founder of Moneta Asset Management. "That offsets the disappointment some investors are feeling about progress in the European summit talks."
All three banks have seen their access to short-term funding sharply curtailed this year as U.S. money market funds stopped buying French banks' debt because of fears about their exposure toeuro zone sovereign debt. The sector as a whole has increasingly traded in line with broader optimism or pessimism about potential solutions to the regional debt crisis.
GLIMMER OF GOOD NEWS
Late on Thursday Europe's banking watchdog, the European Banking Authority (EBA), said the region's banks must find 114.7 billion euros of extra capital, more than predicted two months ago, to make them strong enough to withstand the euro zone debt crisis and restore investor confidence.
But in a glimmer of good news for the French banks, the EBA said they needed to find 7.3 billion euros ($9.7 billion) in fresh capital by mid-2012, lower than a previous estimate of 8.8 billion euros.
Moody's said its ratings did take into account the fact that all three French banks were likely to benefit from state support if the crisis deepened.
"Liquidity and funding conditions have deteriorated significantly for
"The probability that the banks will face further funding pressures has risen in line with the worsening European debt crisis."
All three of the banks have undertaken programs to sell assets to reduce their outside funding needs, but Moody's said that since many European banks were doing the same thing such asset sales might not generate as much money as the banks hoped.
BNP has $47 billion, or 23 percent, of outstanding bonds coming due next year, while SocGen has $27.5 billion, or 13 percent of its outstanding bonds maturing and Credit Agricole has $31.4 billion, or 16.5 percent, expiring, according to Thomson Reuters data.
MANAGING ITS WAY THROUGH?
BNP has said that it has already raised 8 billion euros ($10.65 billion) towards its 2012 medium-to-long-term funding requirements and still needs to raise another 20 billion.
BNP Chairman Baudouin Prot reiterated in an interview with the Frankfurter Allgemeine Zeitung that France's largest bank, was managing its way through a situation in which dollar funding has become much harder to access.
"We are finding the means without having to turn to the ECB or the Fed," he was quoted as saying.
Asked why BNP doesn't make more use of the ECB, Prot said: "It generally has a certain stigmatization attached to it. It could give the impression that there is no alternative."
SocGen said last month that its medium/short-term issuance for 2012 had been set at between 10 and 15 billion euros, roughly half its 2011 bond sale total.
The Moody's downgrade comes shortly after Standard & Poor's placed its ratings on BNP, Credit Agricole, and Societe Generale on "credit watch with negative implications" on December 7.
S&P had earlier put a series of European states, including France, on watch negative over fears that political leaders were not moving decisively enough to curb the deepening sovereign debt crisis.
Iran exhibited the top-secret US stealth drone RQ-170 Sentinel captured on Sunday, Dec. 4. Its almost perfect condition confirmed Tehran's claim that the UAV was downed by a cyber attack, meaning it was not shot down but brought in undamaged by an electronic warfare ambush.
This is a major debacle for the stealth technology the US uses in its warplanes and the drone technology developed by the US and Israel. The state of the lost UAV refutes the US military contention that the Sentinel's systems malfunctioned. If this had happened, it would have crashed and either been wrecked or damaged. The condition of the RQ-170 intact obliges the US and Israel to make major changes in plans for a potential strike against Iran's nuclear program. Earlier Thursday, DEBKAfile reported: The Obama administration's decision after internal debate not to send US commando or air units into Iran to retrieve or destroy the secret RQ-170 stealth drone which fell into Iranian hands has strengthened the hands of the Israeli faction which argues the case for striking Iran's nuclear installations without waiting for the Americans to make their move.
Senior Israeli diplomatic and security officials who followed the discussion in Washington concluded that, by failing to act, the administration has left Iran not only with the secrets of the Sentinel's stealth coating, its sensors and cameras, but also with the data stored in its computer cells on targets marked out by the US and/or Israeli for attack. DEBKAfile’s military sources say that this knowledge compels the US and Israel to revise their plans of attack for aborting the Iranian nuclear program.
Like every clandestine weapons system, the RQ-170 had a self-destruct mechanism to prevent its secrets spilling out to the enemy in the event of a crash or capture. This did not happen. Tehran was able to claim the spy drone was only slightly damaged when they downed it. The NATO spokesman claimed control was lost of the US UAV and it went missing, a common occurrence for these unmanned aircraft. The enigmas surrounding its capture continue to pile up. How did Iran know the drone had entered its airspace? How was it caused to land? Most of all, why did the craft's self-destruct mechanism which is programmed to activate automatically fail to work? And if it malfunctioned, why was it not activated by remote control? Thursday, Dec. 8, The New York Times and the Wall Street Journal reported that from Sunday, Dec. 4, when Tehran announced the stealth drone's capture, the Obama administration weighed sending special commando forces into Iran from bases in Afghanistan to bring the downed aircraft back to Afghanistan or blow it up to destroy the almost intact secret systems - either by a sneak operation or by an air strike.
Iranian officials said the drone was detected near the Iranian town of Kashmar, 200 kilometers from the Afghan border and presumably moved to a military or air base inside the country. The NYT disclosed that the special force would have used "allied agents inside Iran" to hunt down the missing aircraft, the first time Washington has admitted to support from "allied agents" operating covertly in Iran. In the end, the paper quoted a US official as explaining that the attack option was ruled out "because of the potential it could become a larger incident." If an assault team entered the country, the US "could be accused of an act of war" by Tehran. The Obama administration's internal discussion on how to handle the loss of the high-value reconnaissance drone was followed tensely in Jerusalem.
The decision it took against mounting a mission to recover or destroy the top-secret Sentinel was perceived in Israel as symptomatic of a wider decision to call off the covert war America has been conducting for some months against Iran's drive for a nuclear bomb – at least until the damage caused by RQ-170 incident is fully assessed. A senior Israeli security official had this to say: “Everything that’s happened around the RQ-170 shows that when it comes to Iran and its nuclear program, the Obama administration and Israel have different objectives. On this issue, each country needs to go its own way.”
MOSCOW - Russian Prime Minister Vladimir Putin accused the United States of encouraging protests over Russia's parliamentary election and said hundreds of millions of dollars in foreign funds were used to influence the vote.
In his first public remarks about daily demonstrations by protesters alleging Sunday's vote was fraudulent and unfair, Putin said US Secretary of State Hillary Clinton "gave a signal" to Kremlin opponents.
"She set the tone for some opposition activists, gave them a signal, they heard this signal and started active work," Putin said.
Putin said some of the demonstrators who have protested daily over allegations of election fraud were pursuing selfish politicalaims and that most Russians do not want politicalupheaval.
"We are all adults here and we understand that some ... of the organizers act in accordance with a well-known scenario and in their own mercenary politicalinterests," he said.
The United States has expressed serious concern about the conduct of the Russian election, which Clinton suggested was not free or fair.
EU members which use the euro have agreed to a tax and budget pact to tackle the eurozone's debt crisis.
But a German and French attempt to get all 27 EU states to back changes to the union's treaties was dropped after objections from the UK.
Prime Minister David Cameron had insisted on an exemption for the UK from some financial regulations.
Instead, eurozone members and others will adopt an accord with penalties for breaking deficit rules.
The new tougher rules on spending and budgets will now be backed not by an EU treaty but by a treaty between governments. It will be quicker to set up but it may prove less rigorous, says the BBC's Europe editor Gavin Hewitt in Brussels.
But, he says, Europe has taken a big step towards closer integration, with binding rules over tax and spending, and sanctions against countries that overspend.
European Council President Herman Van Rompuy said the leaders of 26 countries had indicated a desire to participate, pending consultation with their parliaments.
There is now a two-speed Europe - after this long night, the French president accepted that.
There is, too, considerable antagonism towards Britain - it used its veto in what is seen in Brussels as Europe's hour of need.
What is unclear is whether European institutions can be used to implement a treaty between governments.
If EU officials are in the room, David Cameron has already laid down a marker that he expected the UK to be involved. It is all a recipe for further tussles.
The big question is what effect all this will have on the eurozone crisis. The main impact will lie in the long-term - the agreement has little to say about the debt mountains and the absence of growth in most of Europe.
Read Gavin's thoughts in full
Mr Cameron said he had not signed up to the deal because, he said, it was not in Britain's interests.
"Those countries that sign this treaty... we wish them well because we want the eurozone to sort out its problems, to achieve that stability and growth that all of Europe - Britain included - needs," he said.
EU leaders aim to have the pact ready to take effect by March.
Among the measures agreed on, leaders pledged to provide more money for the International Monetary Fund (IMF) to fund bailouts.
IMF chief Christine Lagarde welcomed the deal as "a really good step in the right direction".
But the announcement from Brussels failed to lift the markets, which are still hoping for more intervention by the European Central Bank (ECB), and European stocks traded slightly down on Friday.German praise
Nearly 10 hours of talks could not produce an agreement involving all member states. Instead, the 17 members of the eurozone will work on a separate deal outside EU treaties. They will be joined possibly by nine other countries, the EU statement said, leaving the UK as the only exception.
Continue reading the main story
Euro agreement - from the papers
The Guardian says Britain is "facing isolation in Europe" after David Cameron vetoed a revision of the Lisbon treaty.
In the Economist, the Charlemagne's notebook blog describes the agreement - and Britain's non-participation - as Europe's "great divorce".
The Financial Times says EU leaders are "struggling to cope" with what it describes as "a profound split".
The New York Times describes the agreementas "not a perfect solution," because it could be seen as institutionalizing a two-speed Europe - but it says the pact could be ratified much more quickly than a full treaty amendment.
On Friday, Danish Prime Minister Helle Thorning-Schmidt said she would have to consult parliament before agreeing to sign up, according to a Danish press report.
Hungary's Europe Minister Eniko Gyori told the BBC her country was willing to join with the consent opf parliament - contradicting earlier reports. A revised EU statement said Hungary had signalled its intention to join the process.
Mr Sarkozy said the sticking point had been Mr Cameron's insistence on a protocol allowing London to opt-out on proposed change on financial services.
"We could not accept this," he said.
During the talks, eurozone leaders agreed to work on new budgetary rules, which envisage automatic penalties.
The main measures agreed to as part of the new agreement, called a "fiscal compact" include:
David Cameron: It is better to have eurozone countries make arrangements separately a cap of 0.5% of GDP on countries' annual structural deficits
"automatic consequences" for countries whose public deficit exceeds 3% of GDP
the tighter rules to be enshrined in countries' constitutions
European Stability Mechanism (ESM) to be accelerated and brought into force in July 2012
adequacy of 500bn-euro (£427bn; $666bn) limit for ESM to be reassessed
Eurozone and other EU countries to provide up to 200bn euros to the IMF to help debt-stricken eurozone members
The German Chancellor, Angela Merkel, praised the plan of action, saying it would contribute to securing the euro.
"I believe that after long negotiations this is a very, very important result because we have learned from the past and from mistakes and because in future [there will be] binding decisions, binding rules, more influence from the commission, more community and with that higher coherence."
ECB chief Mario Draghi said the accord would lead to much more discipline in economic policy, calling it "a very good outcome for the euro area".
Our correspondent says the immediate test will be whether this agreement persuades the ECB to act more aggressively in the markets and so lower the borrowing costs of troubled countries like Italy and Spain.