Friday, October 26, 2012
Eurozone nears Japan-style trap as money and credit contract again
Data from the European Central Bank show that the tentative rebound in the money supply over the summer may have stalled again in September.
The broad M3 gauge -- watched by experts as an early warning signal for the economy a year or so ahead -- shrank by €30bn and is now down by €143bn since April. This is highly unusual.
The narrow M1 gauge watched for signals of activity six months head has held up better but also contracted in September, falling by €16bn.
"The message is clear," said Lars Christensen from Danske Bank. "The ECB needs to stop obsessing about fiscal issues and do real quantitative easing (QE) if it wants to stop the eurozone going the way of Japan."
Loans to firms and households fell 1.3pc as banks continue to shrink their balance sheet to meet tougher rules. Private bank lending has been falling almost continuously since April.
The ECB’s €1 trillion lending blitz to banks last Winter helped shore up Spain, Italy, and other sovereign states but has not filtered through into private lending as originally hoped.
"This credit contraction is what happened in Japan in the early 1990 and we have to be careful not get into deflationary spiral," said Prof Richard Werner from Southampton University, a Japan expert. "They to need to launch true QE or an expansion in broad credit creation, and it cant be done easily."
The disappointing ECB data came as the International Monetary Fund said Portugal faces "increasingly difficult" choices and may have to push through another round of austerity cuts.
The IMF approved the next €1.5bn tranche of rescue loans for Portugal but warned that "adjustment fatigue" has become a serious problem. "Risks to the attainment of the programme’s objectives have increased markedly. Social and political resistance to adjustment has heightened," it said.
Portugal’s public debt will reach 124pc of GDP next year. Economists say there are echoes of the debacle in Greece, where austerity eroded the tax base so badly that it became impossible to meet the deficit targets. The country then had to cut deeper, causing a vicious circle.
The eurozone's credit contraction helps explain the shift in rhetoric on Wednesday by the ECB’s president, Mario Draghi, who told the Bundestag that Euroland risks sliding into deflation.
He said the ECB’s plan for unlimited bond purchases -- known as Outright Monetary Transactions (OMTs) -- was necessary to stop a destructive dynamic taking hold in the crisis-stricken economies. "The greater risk to price stability is currently falling prices in some euro-area countries. In this sense, OMTs are not in contradiction to our mandate: in fact, they are essential for ensuring we can continue to achieve it," he said.
The IMF has warned that much of the apparent inflation in southern Europe is a statistical illusion, largely due to rises in VAT and other consumption taxes. The EU institutions do not adjust for this, a fact that has been widely criticised by outside economists.
The Fund warned that the underlying pressures are deflationary, and this process can be hard to reverse once it sets in. Officials in Frankfurt say Mr Draghi has been fully aware of this for a long time but has only recently won over the ECB council’s to his point of view.
"Draghi’s comments are a very big deal. We are clearly heading towards QE," said Marchel Alexandrovich from Jefferies Fixed Income.
There was some good news in the ECB data. While the eurozone core is sliding into a deeper downturn, the periphery is stabilizing and Italy’s monetary figures are springing back to life.
Simon Ward from Henderson Global Investors said the current 270 basis point spread in 10-year yields between Italy and France can no longer be justified, an argument also made by HSBC.
Italy will have a large primary budget surplus next year. Most of the country’s belt-tightening will be out of the way by mid-2013. It has already done much of the hard work that lies ahead in France. "Italy is a much better credit than people realize," said Andrew Roberts from RBS.
Spain is a different story but even there bank deposits have begun to rise again as the Draghi bond plan eliminates the risk of the eurozone break-up in the foreseeable future.
The Bank of Spain said deposits jumped €15bn in September, though the system has still haemorrhaged €153bn over the last year.
Inigo Fernandez de Mesa, the treasury’s secretary-general, said foreign investors have bought 50pc to 80pc of Spain’s debt at the most recent auctions. The country is now 95pc funded through the year, greatly reducing the need for a full rescue before Christmas.
The great unknown is how long the Draghi balm can keep soothing markets. It is unclear whether the ECB really has the political licence to buy Spanish bonds on the scale needed to eliminate all doubts about Spain’s solvency.
Nomura warns that if the ECB repeats the sort of pin-prick bond purchases of past interventions, it will make matters worse. The effect will be to push private investors down the credit ladder, without restoring confidence -- the mistake made with Greece, Ireland, and Portugal before they crashed into full rescues.
The ECB has said it will take equal status -- pari passu -- in Spain and Italy but refuses to do so in Greece right now where the matter is being put to the test, arguing that this would amount to monetary financing of deficits and be illegal. Investors may hang back from Club Med debt until this is nailed down beyond any doubt.
Sovereign debt strategist Nicholas Spiro said Euroland is in a comfortable impasse. "A deceptive calm has descended over eurozone debt markets. The "Draghi effect" is sufficiently potent for some in the markets to claim that the eurozone crisis is nearing its end."
"We believe such claims are premature and belie the risks associated with the bond-buying programme, to say nothing of the deep-rooted political, economic and institutional problems that continue to bedevil the eurozone."
The twin problems of bail-out fatigue in the North and austerity fatigue in the South are slowly getting worse, not better. "We believe the biggest risks in Europe are now in the political arena," he said.
The Telegraph
Missile Test Targets Electronics
A successful missile test has ushered in a new era of warfare in which the U.S. military can take out electronic targets without destroying a single building. The experimental missile fired bursts of high-power microwaves at several target buildings to fry the computers and electrical systems inside during a test at the Utah Test and Training Range on Oct. 16. Such results signaled success for the Counter-electronics High-powered Advanced Missile Project (CHAMP) created by Boeing Phantom Works and the U.S. Air Force Research Laboratory. "In the near future, this technology may be used to render an enemy's electronic and data systems useless even before the first troops or aircraft arrive," said Keith Coleman, CHAMP program manager for Boeing Phantom Works. The idea of using microwaves or electromagnetic pulses (EMPs) to knock out electronic systems without having to reduce cities or military bases to rubble first arose during Cold War nuclear tests. Nuclear explosions created EMPs that unexpectedly damaged some civilian power grids and facilities. That spawned the military dream of a nonlethal takedown weapon that could disable an enemy's radar, communications and targeting computers — effectively leaving them blind and unable to respond effectively to follow-up attacks by regular military forces. Such weapons could prove especially useful when assaulting enemies hidden in heavily populated cities or towns without causing civilian casualties. But the secrecy surrounding U.S. military weapons research led some critics to argue that microwave weapons represented an impossible dream as recently as last month. Such critics were apparently wrong. The CHAMP missile's microwaves proved so effective during the recent test that they knocked out some of the cameras used to record video footage of rows of computers blinking off. CHAMP went on to hit seven targets during the one-hour test. CHAMP's three-year, $38 million program could eventually deploy up to five prototype missiles. The latest testing seems to suggest that Boeing and the Air Force have succeeded in creating a functional missile capable of taking out many targets with multiple shots.
Spain jobless to 25 percent
MADRID (Reuters) - Spain's unemployment rate hit a record high in the third quarter, with one in four out of work and more expected to lose their jobs in 2013 as the next phase of government cutbackskicks in.
At exactly 25 percent, Friday's official number was the highest since the Franco dictatorship ended in the mid-1970s, and gives fresh impetus to calls by labor unions for a general strike next month.
That action is part of an increasingly vocal protest campaign against successive waves of spending cuts and tax hikes that, critics argue, has only served to put more people out of work rather than getting to grips with Spain's economic crisis.
"Weaker growth than expected, coupled with austerity, could easily see unemployment hit 26 percent next year," said Silvio Peruzzo, economist at Nomura in London.
The rate was 24.6 percent in the second quarter, and analysts had expected Friday's National Statistics Institute data to show a rise to 25.1 percent.
The number out of work stood at 5.8 million.
Of European Union countries only Greece, mired in an even more brutal recession than Spain and battling to stave off bankruptcy, has a higher jobless rate.
MORE PRESSURE
Friday's data puts further pressure on the government as it debates whether to seek international aid while it battles to bring down the public deficit in line with European Union demands in a recession that shows no sign of letting up.
Government forecasts show the economy contracting next year by 0.5 percent, but economists in a Reuters poll this week said they expect it to shrink three times faster.
"There is a debate over the optimistic growth outlook for next year by the government, which is given little credibility," Nomura's Peruzzo said.
Spain's financing needs are largely covered for this year, and its cost of borrowing from debt markets has eased significantly since August thanks to the European Central Bank's promise to buy the country's bonds should it call for financial help.
Its 10-year bond yields were higher on Friday, rising around 6 basis points to 5.69 percent.
But austerity measures worth over 60 billion euros ($78 billion) by 2014, are likely to crimp growth further, and cast more workers out of work.
Meanwhile, labor reforms pushed through this year aimed at making it easier for companies to hire and fire have encouraged many to make mass layoffs as demand remains fragile.
MORE TIME ON DEFICIT
The government expects the economy to shrink 1.5 percent this year, while the official outlook is for the unemployment rate not to fall below 24 percent until 2014.
Peruzzo said the outlook would only improve if Spain is granted more time to cut its public deficit, a move that is backed by the International Monetary Fund to help struggling euro zone countries.
"I've been out of a job for six months and am looking for work wherever I can get it," said German Herrero, 42. He said he lost his job at Vodafone after 12 years of service and had left his family behind in the eastern city of Albacete to search for work in the capital.
"If this fails, then I may think of going to England next year," he said.
The economy slipped back into recession at the end of last year. The government says 2013 will be the final year of recession for Spain, a view shared by the euro zone's largest bank Santander.
On Friday Madrid's transport system slowed to a skeleton service as workers protested against salary cuts. Protests have mounted over the past weeks, particularly against cuts to the country's healthcare system and education.
Some people in work have cause to complain too, going without paychecks as companies struggle to meet payments, while others have welcomed early retirement packages in fear of worsening times ahead.
"I'm happy as I was given early retirement at 55, but the situation is grim and Germany has the country by the neck," said Jose Albalt in a wet Madrid on Friday morning. He said he was offered a retirement package last year when the bank he worked for was merged with another and 1,200 jobs were lost.
Spain's banking system is undergoing a major restructuring process after property investments they made during a decade-long boom soured when the economy began to crash.
Yahoo News
U.S. Rushes to Stop Syria from Expanding Chemical Weapon Stockpile
The regime of embattled Syrian dictator Bashar Assad is actively working to enlarge its arsenal of chemical weapons, U.S. officials tell Danger Room. Assad’s operatives have tried repeatedly in recent months to buy up the precursor chemicals for deadly nerve agents like sarin, even as his country plunges further and further into a civil war. The U.S. and its allies have been able to block many of these sales. But that still leaves Assad’s scientists with hundreds of metric tons of dangerous chemicals that could be turned into some of the world’s most gruesome weapons.
“Assad is weathering everything the rebels throw at him. Business is continuing as usual,” one U.S. official privy to intelligence on Syria says. “They’ve been busy little bees.”
Back in July, the Assad regime publicly warned that it might just use chemical weapons to stop “external” forces from interfering in its bloody civil war. American policy-makers became deeply concerned that Damascus just might follow through on the threats. Since the July announcement, however, the world community — including Assad’s allies — have made it clear to Damascus that unleashing weapons of mass destruction was unacceptable. The message appears to have gotten through to Assad’s cadre, at least for now. Talk of direct U.S. intervention in Syria has largely subsided.
“There was a moment we thought they were going to use it — especially back in July,” says the U.S. official, referring to Syria’s chemical arsenal. “But we took a second look at the intelligence, and it was less urgent than we thought.”
That hardly means the danger surrounding Syria’s chemical weapons program has passed. More than 500 metric tons of nerve agent precursors, stored in binary form, are kept at upward of 25 locations scattered around the country. If any one of those sites falls into the wrong hands, it could become a massively lethal event. And in the meantime, Assad is looking to add to his already substantial stockpile.
“Damascus has continued its pursuit of chemical weapons despite the damage to its international reputation and the rising costs of evading international export control on chemical weapons materials,” the James Martin Center for Nonproliferation Studies, a leading think tank on weapons of mass destruction issues, noted in an August profile of Syria’s illicit arms activities.
Wired
Greece turning to desperate measures as citizens face starvation due to economic collapse
(NaturalNews) The European nation of Greece appears to be sliding ever so progressively into the abyss of total collapse, as illustrated by a recent government measure aimed at feeding the growing hordes of hungry, unemployed Greeks across the nation. A report translated into English from Voz Populi explains that, under the new law, Greek merchants will now be permitted to sell expired foods at a reduced rate to the nation's poorest citizens, who are becoming increasingly unable to afford basic necessities.
Since price control efforts have largely failed thus far, as have austerity measures aimed at reviving the nation's economy, the Greek government is grasping at straws to maintain some illusion of normalcy in a country where the unemployment rate has now breached 25 percent overall, and more than 54 percent among the youth population aged 15 to 24.
"We are sinking in a swamp of recession and it's getting worse," Dimitris Asimakopoulos, Head of the Greek small business and industry association GSEVEE, is quoted as saying by phillyBurbs.com. "180,000 businesses are on the brink and 70,000 of them are expected to close in the next few months."
As far as the expired food situation is concerned, products with both a month and day expiration date will be permitted to sell for an additional week, while products with a "best before" date that contains only a month and year marker will be permitted to sell for an additional month. Food products with only a year indicator will be allowed to sell for an additional quarter year, under the new law.
Because virtually all aspects of the Greek economy are unraveling, though, the measure is unlikely to make much of a difference in reducing overall food costs, as demand will still likely outpace supply. And repeated efforts to bail out the nation at the EU level continue to spark massive protests and labor strikes, which is only exacerbating the problem even further.
In defiance of proposed austerity measures that would further increase taxes on Greece's already-struggling private business sector, 70,000 protesters in Athens and at least 17,000 protesters in the town of Thessalonika recently took to the streets. The protests resulted in massive public service shutdowns, grounded flights, hospital and business closures, and public transport failures.
Learn more: http://www.naturalnews.com/037679_Greece_starvation_economic_collapse.html#ixzz2APKcJOCu
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