Financial life in a big town

European Union Economic and Monetary Affairs Commissioner Olli Rehn said authorities are

China

China will roll out measures to boost consumption this year as it strives to meet challenges posed by a global slowdown, Commerce Minister Chen Deming said.

The government is studying policies to encourage spending on energy-saving products, and will take other measures including the promotion of online shopping and tourism, Chen told the ministry

Greece’s government warned Tuesday that the debt-crippled country will have to ditch the euro if it fails to finalize a second, euro130 billion ($169 billion) international bailout.

Spokesman Pantelis Kapsis said negotiations in the next three or four months with international debt monitors will “determine everything,” including whether Greece escapes a disastrous bankruptcy.

Greece is being kept afloat by a first, euro110 billion ($142 billion) international bailout agreed in May 2010, after investors shocked by the country’s huge budget deficit and debt mountain demanded sky-high interest rates to continue buying Greek bonds.

An additional bailout was agreed in October, when it became clear that the first batch of funds would not suffice, but that deal has yet to be finalized.

Sorting out the details of the bailout, which also foresees a euro100 billion writedown of Greece’s privately held debt, is the main task of the coalition government headed by former central banker Lucas Papademos, whose short mandate is expected to expire in early April.

“This famous loan agreement must be signed, otherwise we are outside the markets, out of the euro and things will become much worse,” Kapsis told private Skai TV.

In return for its first batch of rescue loans from its European partners and the International Monetary Fund, Greece imposed deeply resented austerity measures to contain its budget deficit _ set to hit at least 9 percent of GDP last year despite repeated spending cuts and tax hikes.

Kapsis said further cutbacks, possibly including new taxes, might be required to address a revenue shortfall,

“We will see what the shortfall is and it is very likely that measures will be required,” he said. “I also don’t believe it is easy to impose new taxes, but what does cutting spending mean? To close down the public sector?”

“There is no easy solution,” Kapsis said.

The details are expected to be determined during talks later this month with debt inspectors from the EU, the European Central bank and the IMF, who will determine whether the country receives its next loan installment.

“We can’t take (approval of the next installment) for granted,” Kapsis warned.

Source

Working almost to exhaustion and persuading countries one by one, European leaders agreed Friday to redefine their continent _ hoping that by joining their fiscal fortunes they might stop a crippling debt crisis, save the euro currency and prevent worldwide economic chaos.

Only one country said no: Britain. It will risk isolation while the rest of the continent plots its future.

The coalition came together in a marathon negotiating session among the 27 European Union heads of government _ hard bargaining that began with dinner Thursday evening and ended after 4 a.m., when red-eyed officials appeared before weary journalists to explain their proposed treaty.

It was a major step forward in the long, postwar march toward European integration. It was two decades ago, on Dec. 9 and 10, 1991, that European negotiators drafted a treaty in Maastricht, Netherlands, to unite their politics, create a central bank and, one day, invent a common currency.

The agreement _ with 23 countries in favor and three more saying they are open to the idea _ would force countries to submit their budgets for central review and limit the deficits they can run.

A crisis over sovereign debt that consumed Greece and spread to Ireland, Italy, Portugal and Spain threatened to explode into a worldwide financial crisis capable for forcing the global economy into recession.

“This is the breakthrough to the stability union,” German Chancellor Angela Merkel said. “We are using the crisis as an opportunity for a renewal.”

To prevent excessive deficits, countries in the treaty will have to submit their national budgets to the European Commission, the executive body of the EU, which will have the power to send them back for revision.

They must also bring their budgets close to balance. Except in special circumstances, the budget deficit of a country must not exceed 0.5 percent of gross domestic product, the amount of goods and services produced by its economy. An unspecified “automatic correction mechanism” would punish the rule-breakers.

Germany and France insist that fiscal union is the best way to regain market trust, badly shaken by the escalating financial crisis. Most economists think it will not be enough.

They say the euro countries need to have enough money on hand to guarantee everyone can pay their debts. Euro leaders put off until March a decision on whether to provide money on top of a euro500 billion, or $668 billion, bailout fund for euro countries.

European leaders did agree to add euro200 billion to the International Monetary Fund to help ailing countries.

Only 17 of the 27 European Union countries use the euro currency, and its stability has been threatened by the massive national debts of some of those 17. All but two of the non-euro countries _ Britain and Denmark _ are committed to adopting it eventually.

The countries that use the euro found they had friends among those that do not. At least six and as many as nine non-euro countries are willing to bind themselves to the euro countries in a pact aimed at having their economies converge.

Britain said no for two reasons: Prime Minister David Cameron’s Conservative Party includes a strong anti-EU element, and Cameron, despite trying deep into the night, failed to win an exemption from regulation for the British financial industry.

The other leaders would have none of it: Bankers and lack of regulation are viewed on the continent as a prime cause of the financial crisis.

“What was on offer is not in Britain’s interest, so I didn’t agree to it,” Cameron said. “We’re not in the euro, and I’m glad we’re not in the euro. We’re never going to join the euro, and we’re never going to give up this kind of sovereignty that these countries are having to give up.”

Britain, which prides itself on its fierce independence, joined the then-European Economic Community in 1973 _ only after French President Charles de Gaulle, who had vetoed the U.K.’s membership along with Germany’s leader, fell from power.

Since then, it has retained a frosty skepticism toward the ambitions of France and Germany to forge ever closer political and fiscal ties. It eschewed both the euro single currency and the Schengen open borders policy, fearful of losing power to determine its own fate.

French President Nicolas Sarkozy blamed the British leader for scuttling what could have been an EU-wide treaty. He said Cameron’s exemptions for British finance “seemed to us unacceptable.”

Some countries may face parliamentary opposition to the pact, which would allow for unprecedented oversight of national budgets.

Stocks and the euro climbed on the news of the treaty, even though it offers only a long-term solution and leaves many details to be worked out. Stocks rose 3.4 percent in Italy, 2.5 percent in France and almost 2 percent in Germany. In New York, the Dow Jones industrial average rose 1.5 percent and vaulted back over 12,000.

Borrowing costs for European countries fell, but only slightly, a sign of cautious confidence from the bond market. The yield on the benchmark Italian government bond fell to 6.33 percent, down about 0.05 percentage point. A yield above 7 percent is considered unsustainable.

One by one through the long night, the leaders of the 17 euro nations persuaded the non-euro nations to come along.

Hungary, the Czech Republic and Sweden said they would need to consult their parliaments. The six other EU countries that use currencies other than the euro _ Denmark, Poland, Bulgaria, Romania, Latvia, Lithuania _ agreed right away. The leaders want the treaty written by March.

The countries hope to help European nations tame their long-term debt. Such an agreement is considered necessary before the European Central Bank and other institutions commit more money to lower the borrowing costs of heavily indebted countries like Italy and Spain.

How exactly that will happen remains unclear. Financial markets around the world had hoped the ECB would buy massive amounts of national bonds, flooding the market with money and lowering borrowing costs. But ECB President Mario Draghi dashed those hopes Thursday and said there was no plan to buy more bonds.

On Friday, Draghi called the treaty agreement “a very good outcome for the euro area, very good.

“It is going to be the basis for much more disciplined economic policy for euro-area members,” he said. “And certainly it is going to be helpful in the present situation.”

A breakup of the euro would have disastrous consequences. It would almost certainly trigger a financial crisis while banks figured out who owned what and while countries leaving the union awkwardly transitioned back to their own sovereign currencies.

Such a disorderly exit could cause banks to become fearful and stop lending money to each other. In 2008, a credit crisis followed the bankruptcy of Lehman Brothers investment house and triggered a meltdown in the stock market.

Source

Stocks rallied Wednesday on hopes that a deal to save the euro would be agreed at a summit of European leaders at the end of the week.

Investors are betting EU leaders will agree on Friday a strategy that will allow the 17 countries that use the euro to link up their economies more closely. The tighter budget rules, proposed by the leaders of Germany and France, could then allow the European Central Bank to play a bigger role in solving the crisis by buying up the bonds of the most-imperiled countries.

“The market is becoming optimistic that the ECB will aggressively step up its action as both a reward for political action or in reaction to the threat of recession,” said Jane Foley, an analyst at Rabobank International.

Ahead of Friday’s meeting, the ECB is expected to cut interest rates on Thursday, possibly by as much as half a percentage point. If it did sanction such a big move, then the rate would fall to 0.75 percent and below the 1 percent that had previously been considered the floor.

Lower interest rates would help the eurozone economy, which has been sliding back toward recession under the weight of the debt crisis that threatens to spread from the relatively small economies such as Greece to much-bigger Italy and Spain.

Concerns that this could happen have eased this week. That was most evident in the performance of Italian and Spanish bond prices. Both have recovered this week, sending their yields _ the interest rates the countries would pay to borrow on markets _ down to more manageable rates. The yield on Italy’s ten-year bond was at 5.75 percent on Wednesday, way down from the 7 percent level it had traded at in recent weeks.

In Europe, Germany’s DAX rose 0.4 percent to 6,051 while the CAC-40 in France rose 1 percent to 3,212 paperless payday loans. The FTSE 100 index of leading British shares was 0.4 percent higher at 5,593.

Wall Street was poised for a solid opening too _ Dow futures were up 0.5 percent at 12,176 while the broader Standard & Poor’s 500 futures rose 0.6 percent to 1,262.

The euro was trading flat on the day at $1.3400.

U.S. Treasury Secretary Timothy Geithner said Wednesday he is very encouraged with the progress Europe is making in coming up with a plan to shore up the euro in the wake of a crippling debt crisis. Geithner’s comments to reporters followed a meeting with French Finance Minister Francois Baroin on the second day of his whirlwind trip through Europe.

“A more upbeat tone from Geithner in his support for Europe’s efforts to unify fiscal policy across the eurozone has been well received by investors,” said Jordan Lambert, a trader at Spreadex.

Earlier in Asia, Japan’s Nikkei 225 jumped 1.7 percent to end at 8,722.17 _ its highest close in a month. South Korea’s Kospi added 0.9 percent to 1,919.42 and Hong Kong’s Hang Seng gained 1.6 percent to 19,240.58.

Mainland Chinese shares edged higher, with the benchmark Shanghai Composite Index climbing 0.3 percent to 2,332.73, ending a five-session losing streak.

Oil prices meanwhile edged higher alongside stocks _ benchmark crude for January delivery was up 51 cents to $101.79 a barrel in electronic trading on the New York Mercantile Exchange.

____

Pamela Sampson in Bangkok contributed to this report.

Source

Ask the people who invest billions for a living to name their favorite picks for 2012 and you’ll get a smorgasbord worthy of a holiday party: Brazilian stocks, U.S. junk bonds, and government debt from Colombia. Ask them what they dislike and they’ll name one of the top-performing investments this year: U.S. government bonds.

Investors can rattle off a long list of reasons to avoid Treasurys. They pay next to nothing and are bound to plunge in value whenever interest rates begin climbing from their historically low levels. It seems nobody likes Treasurys, yet everybody keeps buying them anyway.

“Our least favorite asset is Treasurys,” said Christine Hurtsellers, chief investment officer for fixed-income at ING Investment Management during a recent press briefing. “We still have a lot, but it’s hard to make the argument for them.”

It’s a tricky problem for bond-fund managers at a time when everyday Americans are trusting them with more of their savings. Among investors, there’s a solid belief that Treasury prices must fall and push interest rates up at some point. But those who have bet on a Treasury market collapse this year got burned.

Bill Gross, the bond-world version of investment sage Warren Buffett, dropped nearly all Treasury holdings from the fund he manages at Pimco in early 2011. He argued that if Republicans held up lifting the government’s borrowing limit, the country would risk default. Borrowing rates would spike as the world’s investors dropped U.S. government debt, just as they have in Europe.

Most of what Gross predicted came true. The debt-limit fight raised worries about default and led to Standard & Poor’s taking away the country’s AAA credit rating in early August. But instead of spiking, U.S. borrowing rates plunged as traders sold everything else to buy U.S. government debt. The race into Treasurys helped drive the entire bond market up 3.8 percent from July to September. Gross got the big picture right but his big bet against Treasurys didn’t pan out. Pimco’s Total Return Fund lost 1.2 percent, its worst quarterly performance in three years.

It’s been a recurring story since the financial crisis hit in 2008. For three years running, pundits have predicted that investors will eventually refuse to finance the U.S. government’s $15 trillion in debt and the Treasury market will collapse. But worries over the U.S. economy and the perilous state of Europe’s financial system keep drawing banks and money managers from around the world back to the U.S. dollar and Treasurys.

That demand continues to push U.S. government bond prices up, the main reason why the Treasury market has returned 8.5 percent this year, despite microscopic yields, according to Bank of America-Merrill Lynch data. The benchmark for stock market funds, the S&P 500 index, has returned less than 1 percent, including dividend payments, and that’s with a 7.4 percent surge over the past week.

“It’s been a pretty strong year for bonds,” said Michael Gitlin, director of fixed income at T. Rowe Price, “and it’s largely a result of Treasurys.”

Judging by the gauges money managers usually check before making a move, buying Treasurys still looks like a bad idea. Consider this sample:

(asterisk) The benchmark 10-year Treasury pays just 2 percent a year. Take inflation into account and the payout on Treasurys equals negative 1.5 percent, what finance types call the real rate.

(asterisk) Treasury yields pay less than top-grade corporate bonds at 3.7 percent and even less than the stock market’s 2 percent dividend yield.

“My colleagues say there’s little value in 10-year (Treasurys) and I’d agree,” Gitlin said. “People have been saying there’s a fixed-income bubble. No, there’s a Treasury bubble.”

If there’s so little to like about U.S. government bonds, why are the world’s investors still buying Treasurys instead of dumping them? In a word, it’s Europe.

As the crisis seemed to spread from country to country this year, the world’s traders plowed more money into Treasurys. The higher the demand for U.S. debt, the lower the interest rate, or yield. So when it looked like Greece might default on its debts earlier this year, the yield on the 10-year Treasury note sank below 3 percent. And when attention turned to Italy and its government debts the yield sank even further, dipping below 2 percent in September. The shift of money out of Europe and into the U.S. has pushed Europe’s borrowing rates to dangerous levels while causing U.S. interest rates to sink.

“You can hate the budget situation and hate the low yield, but if there’s a panic it’s the asset that outperforms,” said Robert Robis, head of fixed-income strategy at ING Investment Management.

A good reason to hold Treasurys, in other words, is that the Treasury market remains the world’s favorite hiding spot. So, for many fund managers Treasurys aren’t exactly an investment. Buying Treasurys is like taking out an insurance contract, Robis said. They’re protection against global financial trouble.

The ING Global Bond fund, for instance, has 15 percent of its $641 million in Treasurys, less than the 20 percent in the benchmark Barclay’s bond index. Robis said having none would be like betting European governments will come to a quick solution to the region’s debt crisis and that the U.S. economy will soon recover its health.

“There’s still a need to hold Treasurys,” Robis said. “Just don’t expect to make a fortune off them.”

Source

The number of people applying for unemployment benefits fell last week to the lowest level since early April, a sign that layoffs are easing and hiring may pick up.

The Labor Department says weekly applications dropped by 5,000 to a seasonally adjusted 388,000. It was the fourth decline in five weeks.

The four-week average, a less volatile measure, dropped to 396,750. That’s the first time the average been below 400,000 in seven months.

Applications need to consistently drop below 375,000 to signal sustained job gains payday loan lenders. They haven’t been that low since February.

The total number of people receiving benefits also fell to the lowest level since Sept. 2008, when Lehman Brothers collapsed and the financial crisis intensified.

Source

BERLIN

ROME