Central Banks Take Joint Action to Ease Debt Crisis

 The Federal Reserve moved Wednesday with other major central banks to buttress the financial system by increasing the availability of dollars outside the United States, reflecting growing concern about the fallout of the European debt crisis.

The banks announced that they would slash by roughly half the cost of an existing program under which banks in foreign countries can borrow dollars from their own central banks, which in turn get those dollars from the Fed.  The banks also said that loans will be available until February 2013, extending a previous endpoint of August 2012.

“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the banks said in a statement. The participants in addition to the Fed were theBank of England, the European Central Bank, the Bank of Japan, the Bank of Canada and the Swiss National Bank.

Stocks soared in response to the announcement, as some analysts hailed evidence that governments were showing greater determination to address the crisis. The Standard & Poor’s 500-stock index, a broad gauge of the American stock market, was up more than 3 percent in early trading. The DAX, which tracks Germany’s market, was up more than 4 percent late in the European trading day. Read more at NYTimes

EU's Rehn: Euro zone will integrate or slowly fall

The euro zone will either undergo much deeper integration or will gradually fall apart, EU Economic and Monetary Affairs Commissioner Olli Rehn told the European Parliament on Wednesday.

"The economic and monetary union will either have to be completed through much deeper integration or we will have to accept a gradual disintegration of over half a century of European integration," Rehn said in a prepared speech.

Some of the integration may have to be accomplished through a change to the European Union treaty, and although it would not be an immediate solution to the debt crisis, it would create a stability union to prevent crises in the future.

Germany and France are pushing for changes to the EU's Lisbon Treaty, the fundamental law underpinning the union, to introduce much stricter controls over euro zone national budgets and prevent unchecked debt growth. Read more at Reuters

China steps on the economic accelerator

China is cutting the amount of money banks need to hold in reserve, freeing those funds to stimulate the Chinese economy.

The People's Bank of China said Wednesday it will lower its reserve requirement ratio for financial institutions by half a percentage point. It was the first such cut in the ratio since 2008, and a change in course after the ratio was raised five times this year.

The cut is effective Dec. 5.

The move is intended to increase liquidity, ramping up the flow of money into the economy to make up for concerns about slackening demand for Chinese products both domestically and abroad, particularly from Europe.

China has experienced rapid growth recently, leading many to worry that the economy could be overheating and runaway inflation could take hold. In response, the government had taken several steps to control soaring inflation without stifling growth. Read more at CNNMoney...

F.H.A. Audit Sees Possible Bailout Need

Chances are nearly 50 percent that the Federal Housing Administration will need a bailout next year if the housing market deteriorates further, the agency’s independent auditor said ina report released Tuesday.

The F.H.A., which offers private lenders guarantees against homeowner default, has just $2.6 billion in cash reserves, the report found, down from $4.7 billion last year.

The agency’s woes stem from the national foreclosure crisis. In the last three years, the F.H.A. has paid $37 billion in insurance claims against defaulting homeowners, shrinking its cash cushion.

The auditors determined the agency’s level of supplemental cash reserves by projecting losses on its mortgage portfolio and counting them against expected premium revenue. This year, the audit found that the F.H.A. supplemental reserve was less than one-quarter of a percentage point of its current portfolio: $2.6 billion against a $1.1 trillion mortgage portfolio, as of Sept. 30. Legally, the housing agency is required to keep a 2 percent cash buffer, a target it has not met since 2008. Read more at NYTimes

World markets slammed by bond warning

European stocks were getting slammed Monday, after Moody's Investors Service issued a dire warning on French bonds, and Asian markets were dampened by pessimistic remarks made by a high-ranking Chinese official

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French bond yields have been on the rise, along with Italian and Spanish bonds -- raising some red flags for Moody's.

Moody's report on Monday focused on the wide spread between French and German 10-year bond yields, the latter considered to be the gold standard of stability in the European bond market.

"Last week, the difference in yield between French and German 10-year government bonds breached 200 basis points, a euro-era record amid increased economic and financial market uncertainty in the region," wrote Alexander Kockerbeck, senior credit officer for Moody's in Frankfurt. Read more at CNN Money

Is Spain the next Italy?

Is Spain the next Italy?

The short answer is no. But the two countries are begging for comparison, since they're among the largest economies in the eurozone. And they share the less-than-stellar distinction of seeing their bond yields soaringto sickening heights.

Spain's 10-year bond yield was trading at 6.37% on Friday. That's better than the 6.9% high it recently hit but it is still uncomfortably close to 7%. That was the benchmark crossed by Ireland, Greece and Portugal before they got bailed out by their eurozone neighbors.

Italy's bond yields crossed into the danger zone last week, when yields on Italian 10-year bonds traded as high as 7.48%. That marked the first foray above 7% since the euro was launched in 1999. And it sent waves of fear across world markets, with U.S. stocks sinking more than 3%. Read more at CNN Money

Dow drops over 300 points amid concerns about debt load

U.S. stock prices tumbled Monday, as growing concerns about heavy debt loads both domestically and abroad added more uncertainty to a troubled market.The Dow Jones industrial average was lately down over 300 points. It was the index’s third day of losses in the past four.

A U.S. congressional committee is expected to concede defeat in its bid to lower the deficit, renewing the debate over taxes and spending at a time when the impending expiration of payroll tax breaks and jobless benefits could undermine the economy.

The committee's co-chairs will issue a statement later Monday, according to sources, declaring the bipartisan committee was unable to reach a deficit-reduction deal because of deep divides over taxes and spending. Read more at MSNBC

Europe is biggest threat to corporate earnings

Corporate earnings have enjoyed double-digit growth for eight straight quarters, but that euphoric run may be coming to an end, thanks to Europe's worsening debt crisis and a tepid U.S. economy.

In fact, for every one company in the S&P 500 that has issued a positive outlook for the fourth quarter, 3.5 have been pessimistic, according to earnings tracker Thomson Reuters. 

That's the highest since the second quarter of 2001, and well above the historic average of 2.3.

"Companies always tend to under promise, but we are hearing a more genuine concern [and] Europe is a big factor," said Greg Harrison, corporate earnings research analyst at Thomson Reuters.

It's been about 18 months since Europe's debt problems intensified into a full-blown crisis. Greece is still not out of the woods, and worries about a deepening contagion into larger eurozone economies, such as Italy, have convinced economists that Europe is on the brink of a recession. Read more at CNN Money

Postal Service reports massive $5 billion loss

NEW YORK (CNNMoney) -- The U.S. Postal Service released its annual financial results on Tuesday, and they're nothing to write home about.

The agency reported an annual loss of $5.1 billion, as declining mail volumes and mounting benefit costs take their toll. The Postal Service said its losses would have been roughly $10.6 billion if not for the passage of legislation postponing a $5.5 billion payment required to fund retiree health benefits.

Revenues from First-Class Mail, the Postal Service's largest and most profitable product, declined 6% from the previous fiscal year to $32 billion. Total mail volume declined by 3 billion pieces, or 1.7%.

"The continuing and inevitable electronic migration of First-Class Mail, which provides approximately 49 percent of our revenue, underscores the need to streamline our infrastructure and make changes to our business model," Postal Service CFO Joe Corbett said in a statement accompanying the figures.

Postmaster General and CEO Patrick Donahoe said in the statement that the Postal Service must reduce its annual costs by $20 billion by the end of 2015 to return to profitability.

Read more...

Netflix subscribers offered class-action payout from Wal-Mart

NEW YORK (CNNMoney) -- Millions of current and former Netflix customers woke up Wednesday to an e-mail about a class-action lawsuit involving the price of online DVD rentals.

It's legit, and it's the latest twist in a legal saga that started two years ago.

In May 2005, Wal-Mart and Netflix struck a pact: Wal-Mart would scrap its struggling DVDs-by-mail subscription service and instead encourage its customers to sign on with Netflix. In return, Netflix agreed to promote Wal-Mart's DVD sales business.

But in 2009, a group of Netflix subscribers banded together and filed a lawsuit charging the two companies with collusion. The gist of their complaint is that the two companies agreed to carve up the market and stay off each others' turf: DVD rentals for Netflix and DVD sales for Wal-Mart. The deal helped Netflix entrench itself as the market's dominant player and raise its subscription prices, the lawsuit alleges.

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US consumer prices dip on cheaper fuel

US consumer prices fell by 0.1% in October, the first fall since June, helped by falling petrol prices.

Fuel prices fell 3.1% in October, the US Labor Department said. However, fuel price movements remain volatile, having risen 2.9% the month before.

The latest figures mean consumer prices saw an annual rise of 3.5%, down from September's figure of 3.9%.

Stripping out food and petrol costs, so-called core prices increased by 0.1% - the same as the previous month.

The prices paid for new cars, air fares and hotels all declined but the cost of rent went up by 0.4% in October.

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Opening up the Pacific

MOST Americans have not heard of the Trans-Pacific Partnership (TPP), a free-trade area of countries dotted around the Pacific Ocean. They will soon. This weekend it has suddenly emerged as the most promising trade liberalisation initiative since the Doha round of world-trade talks stalled in 2008. On November 11th, Japan, the world’s third-largest economy, announced its intention to join America and eight other countries in negotiating what its advocates hope will emerge as the new gold standard for free trade in the world’s most dynamic economic zone. Reuters reports that if the ten-country deal is concluded, it will cover a market 40% bigger than the European Union. The news has electrified the summit of Asia-Pacific Exporting Countries (APEC) convening in Honolulu this weekend. President Barack Obama, who acts as the meeting’s host, hopes the TPP will be the cornerstone of an APEC-wide free-trade area. With the euro zone in shambles, that would further shift the world’s centre of economic gravity from the Atlantic Ocean to the Pacific.


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Bank of Japan issues growth warning as it holds rates

The Bank of Japan (BOJ) has warned that the country's economic growth may be hurt by the eurozone debt crisis, flooding in Thailand and a strong yen.

It said the euro crisis was stifling demand from Europe, while disruption to supply chains due to the Thai floods was affecting Japanese manufacturing.

The warning comes just days after Japan reported that its economy grew by 1.5% in the third quarter.

The BOJ left its key interest unchanged between zero and 0.1% to boost growth.

"Japan's economy continues to pick up but at a more moderate pace, mainly due to the effects of a slowdown in overseas economies," the central bank said in a statement.

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Computer maker Dell warns Thai floods will hurt revenues

Dell has warned its revenues could be hit by a worldwide shortage of hard drives caused by the flooding in Thailand.

Thailand is a production hub for many global firms, and severe flooding has hurt a wide range of industries.

US-based Dell is the world's third-largest personal computer maker.

The earnings warning came as Dell announced revenues of $15.4bn (£9.7bn) and net profits of $893m (£564m) for the third quarter of 2011.

Shares in Dell fell by 2% in after-hours trading in New York, after the warning and after analysts said revenues had slightly missed expectations.

Brian Gladden, Dell's chief financial officer, told Reuters that the Thai floods may mean the company has to give priority to "higher-end customers and products".

Read more...

Why the United States is not Italy

Italy's debt crisis raises an uncomfortable question in the United States: Is America like Italy?

Both countries' government debt levels are too high. Italy's gross debt is 120% of its economy, and U.S. gross debt is already at 100%, according to data from the International Monetary Fund.

And the United States can't continue to ignore its long-term fiscal problems indefinitely.

But the U.S. debt situation is not as immediately critical as Italy's for several reasons.

Economic growth: Italy's economy has ranged between slow and stagnant for the past decade and is expected to remain stagnant for the next several years.

Indeed, Nariman Behravesh, chief economist at IHS Global Insight, expects Italy's economy to contract this year, sending the country into recession.

By contrast, while the U.S. economy has been recovering slowly and its growth prospects in the next few years aren't knocking anyone's socks off, they are still far stronger than Italy's. Read more at CNNMoney

Dreams and realities-A battle over American-led free trade brews in Asia

Barack Obama recently signed a ground-breaking free-trade agreement (FTA) with South Korea, after years of Washington foot-dragging. He signed FTAs with Colombia and Panama on the same day. On November 12th-13th the president hosts an Asia-Pacific trade jamboree in Honolulu which, he seems to hope, will give momentum to the idea of a remarkably ambitious free-trade zone at just the time when global trade talks are going nowhere.

Mr Obama’s plans hang on negotiations for a little-known but rather liberal trade grouping, called the Trans-Pacific Partnership (TPP). These will take place on the sidelines of the annual summit of APEC (Asia-Pacific Economic Co-operation), a gathering long famed for its waffling. Currently, TPP members number only four small economies: Brunei, Chile, New Zealand and Singapore. But over the past year America, Australia, Malaysia, Peru and Vietnam have made progress in talks to join the club.

Were America a member, its trade with its eight fellow TPP members would amount to little more than 5% of all its foreign trade. But some quietly hope that the TPP will serve as a “docking station” for an APEC-wide free-trade area. That would further move the global centre of economic gravity from the Atlantic Ocean to the Pacific.

An announcement was expected after The Economist went to press that will heavily influence such an outcome. In Japan the prime minister, Yoshihiko Noda, was expected to declare that his government would join the TPP talks, despite strong reservations even from within his own party. Japan’s share of America’s trade, at 5.6%, exceeds that of all the current TPP partners put together. A combination of American and Japanese heft could, say TPP advocates, entice other countries, such as Canada, to join the group. Even China, where some are deeply suspicious about the project, might eventually feel compelled to join. Read more the Economist

As European Nations Teeter, Only Lenders Get Central Bank’s Help

Since the beginning of the financial crisis, the E.C.B. has been lending euro area banks as much money as they want, trying to maintain the liquidity that is the lifeblood of the global financial system.

But because the bank has refused to offer the same service to countries likeItaly, it is not confronting the euroarea’s most fundamental problem. As a result, liquidity is drying up anyway.

In an atmosphere of mistrust reminiscent of the aftermath of the Lehman Brothers collapse in 2008, European banks are demanding higher interest rates for the overnight lending that is essential to keep money circulating. Some, fearing other banks’ vulnerability to the debt of Italy and other beleaguered countries, are refusing to make such loans at all.

But the biggest fear — the one implicit in all the talk of “contagion” and a potential “Lehman moment” — is not that any one bank will succumb to a liquidity crisis. It is that an entire country might do so, if it can no longer obtain the credit it requires to stay in business. Read more at NY Times

The devil in the deep-sea oil

Deep in the South Atlantic, a vast industrial operation is under way that Brazil’s leaders say will turn their country into an oil power by the end of this decade. If the ambitious plans of Petrobras, the national oil company, come to fruition, by 2020 Brazil will be producing 5m barrels per day, much of it from new offshore fields. That might make Brazil a top-five source of oil.

Managed wisely, this boom has the potential to do great good. Brazil’s president, Dilma Rousseff, wants to use the oil money to pay for better education, health and infrastructure. She also wants to use the new fields to create a world-beating oil-services industry. But the bonanza also risks feeding some Brazilian vices: a spendthrift and corrupt political system; an over-mighty state and over-protected domestic market; and neglect of the virtues of saving, investment and training.

So it is worrying that there is far more debate in Brazil about how to spend the oil money than about how to develop the fields. If Brazil’s economy is to benefit from oil, rather than be dominated by it, a big chunk of the proceeds should be saved offshore and used to offset future recessions. But the more immediate risks lie in how the oil is extracted.

The government has established a complicated legal framework for the fields. It has vested their ownership in Pré-Sal Petróleo, a new state body whose job is merely to collect and spend the oil money. It has granted an operating monopoly to Petrobras (although the company can strike production-sharing agreements with private partners). The rationale was that, since everyone now knows where the oil is, the lion’s share of the profits should go to the nation. But this glides over the complexity in developing fields that lie up to 300km (190 miles) offshore, beneath 2km of water and up to 5km of salt and rock.

To develop the new fields, and build onshore facilities including refineries, Petrobras plans to invest $45 billion a year for the next five years, the largest investment programme of any oil firm in the world. That is too much, too soon, both for Petrobras and for Brazil—especially because the government has decreed that a large proportion of the necessary equipment and supplies be produced at home. Read More at The Economist 

Trade War in Solar Takes Shape

The United States and China are gearing up for a trade war that could catch American users of solar energy in the crossfire.

The Commerce Department in Washington on Wednesday opened an investigation sought by American manufacturers who accuse the Chinese of “dumping” solar panels into the United States at prices, aided by government subsidies, lower than the cost of making and distributing them.

Anticipating that move, the government-controlled Chinese solar industry has been unusually vitriolic this week. A trade group accused the White House of turning the commercial complaint into “a political farce, which is very likely a publicity show initiated by the Obama administration for the coming election.”

Meanwhile, a new American trade group was formed this week, representing buyers and installers of solar-energy systems. It argues that any new Commerce Department restrictions on Chinese solar panels would slow the adoption of clean energy technology in the United States and could cost thousands of American jobs. Some environmentalists also oppose policies that might slow the adoption of solar energy.

Solar power is a politically charged issue in Washington, in part because of the bankruptcy this summer of a solar panel maker, Solyndra, after it had received more than $500 million in federal loan guarantees. Read More at New York Times 

Europe: Debt crisis 1, G-20 zero

The debt crisis in Europe continues to hang over the global economy after a summit of world leaders last week failed to produce any tangible new solutions.

The Group of 20 summit in Cannes, France, ended with broad promises from global heads of state to support economic growth and create jobs.

But the closed-door talks yielded scant details on the comprehensive plan the European Union agreed to on Oct. 27.

"Things are likely to get worse before they get better," said Mohamed El-Erian, chief executive of the giant bond fund Pimco, in an interview with CNNMoney's Poppy Harlow.

The Oct. 27 plan includes a series of measures to address the crisis, including debt relief for Greece, new capital requirements for banks and plans to build a financial "firewall" around vulnerable euro area economies. Read more at CNNMoney

China to the rescue?

It wasonly a matter of time before China was heralded as Europe’s escape route from its debt crisis. News that Nicolas Sarkozy, the French president, called Hu Jintao, his opposite number in China, after the crisis summit on October 27^th sparked speculation that China might put substantial amounts of money into the debt of troubled euro-zone borrowers. The chatter grew louder when Klaus Regling, the head of the European Financial Stability Facility (EFSF), the euro area’s bail-out fund, visited Beijing a day later. And a poor post-summit Italian bond auction has made the need for a deus ex machina seem even greater.

China certainly has lots of money to invest. its foreign-exchange reserves are reckoned at $3.2 trillion. It trades more with the EU than any other partner. It has exposure to the euro already. How much is not known, but currency analysts suspect that about a quarter of those reserves are already euro-denominated, giving it an incentive to keep the currency strong. It also suits China to play the part of a constructive economic actor.

Then again, we have been here many times before during the euro-zone saga. You can trace the growing seriousness of the crisis by the list of countries that have had talks with the Chinese about investments: first Greece, then Portugal, Spain and now countries at the very core of the euro zone. The pattern to date has always been the same: lots of encouraging rhetoric, perhaps even a little cash, but not enough to meet initial expectations.

There is at least something different on offer now. In the past, investment in euro-zone debt has meant taking on as much risk, and sometimes more risk, than the Europeans themselves have been willing to absorb. No one could ever explain why the Chinese would want to do that. Now China will be able to choose to invest in euro-zone debt that is ensured by the EFSF, or to buy senior tranches of the special-purpose vehicles (SPVs) that the EFSF will capitalise. China would explicitly be taking less risk than the Europeans. Read more at The Economist

In Turmoil, Greece and Italy Deepen Euro Crisis

 With political turmoil still plaguing Greece and descending upon the much larger economy of Italy, the fate of the euro and market stability worldwide hinged Tuesday on whether two of Europe’s most tangled and unresponsive political cultures could deal with their tightening fiscal gridlock.

The prospect of a new transitional, technocratic government in Greece, and signs that Silvio Berlusconi’s resilient hold on power in Italy was weakening in advance of a crucial parliamentary vote on Tuesday, did little to reassure investors that either country was prepared to grapple with the deep structural changes that investors are demanding to restore growth and reduce deficits.

In both places, it is not only the economy that is on trial, but also the ability of democratic government to make highly unpopular choices.

The crisis gripping Mr. Berlusconi’s government deepened as interest rates on the country’s debt rose on Tuesday to 6.74 percent, the highest since the introduction of the euro more than a decade ago and nearing levels that have led to bailouts elsewhere. Read more at NYTimes

Euro-Area Manufacturing Production Contracts

Europe’s manufacturing industry contracted for a third month in October, adding to signs the euro-area economy is edging toward a recession.

A manufacturing gauge based on a survey of purchasing managers in the 17-nation euro region fell to 47.1 from 48.5 in September, London-based Markit Economics said today. That’s below an initial estimate of 47.3 published on Oct. 24. A reading below 50 indicates contraction.

Europe’s economy is showing signs of a deepening slump as its worsening debt crisis erodes the confidence of consumers and executives alike. The Organization for Economic Cooperation and Development on Oct. 31 lowered its euro-region growth projections for this year and next and called on the European Central Bank to lower its benchmark interest rate at its meeting tomorrow.

“We remain of the view that the ECB will be cutting interest rates before long,” Nick Kounis, head of macro research at ABN Amro in Amsterdam, said before today’s report. “Although we think that interest rates will be left on hold this week, we expect a rate reduction in December.”

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International back scratching

BRIBERY involves two parties, not one. Lambasting officials in poor countries for their sticky fingers is easier (and less open to legal challenge) than investigating the outsiders who suborn them. On November 2nd Transparency International (TI), a Berlin-based campaigning group, published its Bribe Payers Index. Based on questions to 3,000 businessmen, this ranks 28 countries (accounting for 80% of global trade and investment) by the perceived likelihood of their companies paying bribes when doing business abroad. Construction and industries involving government contracts, unsurprisingly, were the dirtiest. This index shows a different side of bribery from TI's Corruption Perceptions Index, which focuses on corruption in the public sector. Putting them together, there is a strong correlation between corruption in the public and private sectors.

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Japan Faces $510 Billion Loss From Intervening to Curb Yen, JPMorgan Says

Valuation losses on Japan’s foreign-exchange reserves minus yen liabilities totaled 35.3 trillion yen at the end of 2010, according to Finance Ministry data. The losses may swell further as the yen is projected to climb to 72 versus the dollar by September 2012, said Tohru Sasaki, head of Japan rates and foreign-exchange research at JPMorgan Chase in Tokyo.

“It’s difficult to change the trend of the currency market” with intervention, said Sasaki, who used to work in the foreign-exchange division of the Bank of Japan, at a forum in Tokyo yesterday. “Even if the action can stem the currency’s gains temporarily, the yen will eventually appreciate.”

Japan on Oct. 31 intervened in foreign-exchange markets to weaken the yen for the third time this year after the currency gained to a postwar record. Finance Minister Jun Azumi said he will continue to intervene until he’s “satisfied.”

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Greek referendum is coin-flip on euro exit

I say "while it lasts" because the opposition is mobilising a parliamentary manoeuvre to bring down the government, which may succeed - returning Europe to its status quo of containable trauma.

If Greeks reject the 50% controlled default on the debts they owe to the banking sector, then the arithmetic I revealed on Newsnight on the eve of the Euro summit comes into play - without a 50% haircut, and a further 130bn euro bailout, on top of 110bn, Greek debt spirals out of control and the country goes bust.

At this point, the value of the debt falls to maybe 10% of its face value and Greece has broken all the rules of euro membership.

The euro leaders will be faced with the option of a forced transfer of taxpayers' money to shore up the entire Greek economy with no surety, and no "local representatives" as currently planned. Or Greece leaves the euro. Read More...