y
A
25
e niv rsar n
Years
TUESDAY, SEPTEMBER 6, 2011
BUSINESS
Next ECB head calls for integration as yields rise PARIS: The euro-zone needs a “quantum” leap toward economic integration, the incoming chief of the European Central Bank said yesterday, as the bond yields of countries with shaky finances, like Greece and Italy, jumped amid increased investor tensions. Mario Draghi told a conference in Paris that among the common currency’s problems is a lack of coordinated fiscal policies and that the solution was more integration. He dismissed the idea of eurobonds debt issued jointly by the euro-zone countries. Some have argued this would help weaker countries borrow more easily because they wouldn’t have to pay such high interest rates, which in turn make their debts bigger. But stable countries like Germany would likely see their rates rise. Instead, Draghi suggested the euro-zone should adopt rules that would require more budget discipline. There is already a proposal that would require all euro-zone countries to balance their budgets.
Profligate spending during boom times funded by cheap debt is one of the root causes of the current crisis. Market tensions increased yesterday in Europe due to about the ability of some countries to fix their debt problems and a global financial sell-off triggered by worries that the US economy may slip back into recession. The difference in interest rates between the Greek and benchmark German 10-year bonds, known as spreads, spiraled to new records, topping 17.3 percentage points in the early afternoon yesterday. Yields on the Greek bonds were above 18 percent. High yields make borrowing more expensive for Greece, making it even harder to reduce its debt load. In fact, its yields are so high that Greece has been relying since last year on funds from a €110 billion ($157 billion) package of bailout loans from other European Union countries and the International Monetary Fund. On July 21, European leaders agreed on a sec-
ond bailout, worth an additional ?109 billion. Italy’s own 10-year bond yields jumped to 5.45 percent amid signs that the government in Rome is wavering in its commitment to enforce its austerity program. ECB chief Jean-Claude Trichet in recent days has called on Silvio Berlusconi’s government to push through with the deficit-cutting measures promised in August. Italy’s stability is of particular concern to traders because it would be too expensive to rescue for the euro-zone bailout fund. In an effort to steady the yields, the ECB has been buying Italian and Spanish bonds in recent weeks, driving down the interest rates. Trichet said yesterday that the debt crisis had revealed the weaknesses of the euro-zone and that one solution would be to eventually create a central finance ministry for the continent. Speaking at the same conference as Draghi, Trichet noted that one of the hallmarks of the crisis has been
that while the euro-zone economies are linked by their common currency, each country creates its own budget. That will need to change,
he said. “In the future, we can imagine a confederation ... with a minister of finance with responsibilities includ-
PARIS: European Central Bank president Jean Claude Trichet (right) listens to Bank of Italy Governor and Incoming European Central Bank president Mario Draghi as they attend a session of the Institut Montaigne in Paris yesterday. —AFP
ing the regulation of the solvency of the euro-zone,” he said. In the heyday of the boom, several European countries allowed their budgets to run larger deficits than the rules allowed. Countries like Greece and Portugal eventually came close to bankruptcy and were saved only by international rescue packages. Now their debts are threatening the entire euro-zone, with the large countries forced to bail them out. New legislation that would give those rules more teeth has been floundering for months as the European Parliament and EU member states have failed to agree on more automatic sanctions. Trichet called yesterday for those rules to be strengthened further as he has in the past. He has said that even the new legislation is not strong enough for the 17 euro countries, since states could still override penalties for overspenders. Elena Becatoros in Athens and Gabriele Steinhauser in Brussels contributed to this report. —AP
Swiss bank lobby bids to reassure on asset seizure Some wealthy Middle East clients scared off ZURICH: The Swiss Bankers Association is working with the government to give investors more legal certainty over asset seizure after some were alarmed by Swiss moves to freeze the accounts of ousted dictators, its head said yesterday.
MOSCOW: Russia’s President Dmitry Medvedev chairs a meeting on budget in the Gorki residence outside Moscow yesterday. —AFP
Ukraine, Russia give no sign of gas dispute end MOSCOW: As a new natural gas dispute bet ween Russia and Uk raine brews, the countries’ foreign ministers are giving no signs that a resolution is close. Ukraine last week announced that it wants to renegotiate a contrac t it signed in 2009 for Russian natural gas, saying the price is ruinous for the Ukrainian economy. Ukraine relies on Russian gas for its heavy industries and long had benefited from below-market prices. The latest contract roughly doubled the price for Ukraine; it now pays about $355 per 1,000 cubic meters. The dispute is likely to raise alarm in Europe, where memories of unheated homes in the depths of winter during a 2009 pricing war between Moscow and Kiev are still fresh. Customers across Europe experienced energy supply
interruptions after Russia cut off gas supplies to Ukraine, whose pipelines carry Russian gas westward. Ukrainian Foreign Minister Konstantin Grishchenko, after meeting yesterday with his Russian counterpart Sergey Lavrov, said Ukraine hopes for a solution through talks rather than taking the matter to international arbitration. Lavrov in turn said “we are guided by the universally accepted principle of respect to international obligations, including contracts and inter-government agreements.” Ukrainian Prime Minister Mykola Azarov said last week that the 2009 contract, signed by his predecessor Yulia Tymoshenko, contradicts a 2004 interg ove rnmental agreement between Moscow and Kiev and thus must be revised. —AP
Trichet calls for urgent action on Greek rescue PARIS: The head of the European Central Bank Jean-Claude Trichet called yesterday for urgent application of the latest debt rescue measures for Greece. Trichet also spoke of an “absolutely imperative” need to tighten up the monitoring of economies in the euro-zone, in a speech against a background of renewed concern over the Greek and wider euro-zone debt crisis. Trichet said that EU and national legislations enacting much tighter monitoring of national budgets, and which were due to be adopted within “a few days” were “clearly absolutely imperative.” He also said it was urgent to apply the EU
decisions taken on July 21 to provide Greece with a second debt rescue. “There also we have an immediate and imperative need for all of the decisions to be enacted,” he told the Institut Montaigne. Trichet spoke against a background of sharply renewed concern about the state of Greek finances and the wider euro-zone debt crisis. On Friday an audit mission from the EU, ECB and International Monetary Fund cut short its latest study of Greek finances, on which depends the next release of money from the first rescue, saying that Greece had more work to do on its crash program to reduce the public deficit. —AFP
“Switzerland has no interest whatsoever to have the wrong monies invested within its borders,” Swiss Bankers Association head Patrick Odier told a news conference. “But Switzerland has all the interest in making sure that Middle East or any other type of investors will find in Switzerland the state of law that protects them before accusing them,” he
said. In March, wealth managers said London is gaining in the battle for rich Middle Eastern families seeking shelter from political unrest at home, as its private banks and top end property sector tempt them away from Switzerland. “Switzerland wants to continue to attract these important countries where wealth creation is at its most,” Odier said. Keen to
clean up its image as a haven for ill-gotten gains, Switzerland has in recent years frozen the assets of numerous deposed leaders including the former rulers and their entourages of Tunisia, Egypt and Ivory Coast. In its annual report published yesterday, the Swiss Bankers Association said the government’s moves had resulted in a degree of legal uncertainty
among investors and said better coordination and communication were needed. The group is working with the Swiss government to draft a formal legal basis for blocking such assets to replace the emergency legislation used in the past. “ We are in discussion with government to develop a law that will protect investors,” Odier said. —Reuters
FTSE 100 plunges over lawsuit fears
NEW DELHI: World Trade Organization (WTO) Director-General Pascal Lamy (left) and Indian Commerce Minister Anand Sharma attend the inauguration of the WTO regional trade policy course centre at the Indian Institute of Foreign Trade in New Delhi yesterday. —AFP
Euro-zone retail sales up unexpectedly in July FRANKFURT: Retail sales in the 17 countries that use the euro unexpectedly rose 0.2 percent during July despite darkening forecasts about European growth, according to official data released yesterday. Compared with July last year, retail trade was down only 0.2 percent, the EU statistics agency Eurostat said. Both the monthly and annual figures were better than many analysts had expected. Some had foreseen a drop of as much as 1.0 percent from the year earlier. The uptick in July comes despite downbeat headlines about euro-zone leaders’ struggles to contain a crisis over too much debt in several euro-zone
countries. The volume of bad news has not only shaken financial markets but is also beginning to frighten businesses and consumers and weigh on production and consumption. Weakening growth indicators have led many observers to rule out further interest rate increases by the European Central Bank, which holds its monthly policy meeting this week, with an announcement on Thursday. The July figures follow an increase of 0.7 percent in June from the previous month, revised down from 0.9 percent, and an annual drop of 0.7 percent, revised from a decrease of 0.4 percent. —AP
LONDON: London’s leading shares index plunged into the red yesterday as shares in Britain’s banks were hit by fears over a lawsuit launched against them in the United States. Royal Bank of Scotland and Barclays both lost more than 7 percent while HSBC shed more than 1 percent after the Federal Housing Finance Agency (FHFA) filed claims against them and 14 other banks over the subprime mortgage scandal, dealers said. The wider FTSE 100 Index, still reeling from a dismal jobs report in the US on Friday and following a weak session in Asia, fell by more than 1 percent in early trading, they pointed out. The FHFA claims the banks misrepresented the quality of billions of dollars of home loans sold to America’s state-backed mortgage giants Fannie Mae and Freddie Mac. RBS has said the allegations are unfounded and it will defend them vigorously. Lloyds Banking Group, which is not on the FHFA’s target list, fell more than 3 percent as sentiment in the banking sector weakened. RBS, HSBC and Barclays could be forced to pay out more than 5 billion pounds in damages, according to reports. There was more gloom for the banking sector in a report by forecasters at the Ernst & Young ITEM Club. The financial services sector in the UK faces sluggish growth, the ITEM Club warned, threatening the recovery prospects of the wider economy. The worst US employment data for nearly a year, showing the number of people employed in August was flat, fuelled fears of a new global recession. The renewed concerns over growth hit the heavily weighted mining sector, sending shares in copper giants Kazakhmys and Antofagasta to the bottom of the FTSE 100. Meanwhile, Oil prices were also damaged by the concerns over global demand with Brent crude in London dropping nearly 1 percent to $111.58 per barrel. The retail sector was also on the back foot after accountancy firm BDO said the high street recorded its worst sales in two years in August as the riots that shook the UK had taken a heavy toll. —KUNA
UK services PMI suffers biggest drop in decade LONDON: Activity in Britain’s dominant services sector slowed at the fastest pace in a more than a decade last month, and firms’ confidence in future business weakened to a one-year low, adding to evidence of a stalling economic recovery. Sterling slipped to a one-anda-half month low versus the dollar after the data, and gilt futures rose to their highest in more than two weeks, as investors bet the figures increased the chance of monetary easing by the Bank of England. The Markit/CIPS services purchasing managers’ index (PMI) fell to 51.1 in August from 55.4 in July. This was the second biggest fall on record, and confounded forecasts for a gentler drop to 54.0, although the index stayed above the 50 mark that divides growth from contraction. The only time there was a bigger one -month fall in the
index was during the foot-andmouth disease crisis in April 2001, which hammered the agricultural sector and hurt tourism. “This survey really rings the growth alarm bells,” said Howard Archer, an economist at IHS Global Insight. “Even allowing for any impact from the riots and a correction after a surprise spike up in services activity in July, this is a hugely disappointing sur vey.” Companies cited economic uncertainty and slower growth in new business as the main reasons for weaker expansion last month. Survey compilers Markit said that riots across England in early August played only a minor role in depressing activity. Mark it economist Chris Williamson said the numbers pointed to a near-stagnation of the economy in the third quarter. “Forward-looking indicators
also suggest that the economy could weaken further at the end of the quar ter, raising the prospect of a slide back into contraction in the fourth quarter — if not the third-and will provide ammunition for those seeking a further injection of stimulus into the economy by the Bank of England,” he said. “The all-sector PMI is at a level which has always triggered interest rate cuts in the past,” he added. The figures confirmed expectations that the Bank of England (BoE) will leave interest rates at 0.5 percent this week and ignited speculation the central bank will consider injecting more stimulus into the economy later this year. “I t cer tainly helps nudge them that way,” said RBS economist Ross Walker. “I’m not convinced we’re going to see a polic y change this month, but
November certainly becomes quite interesting. A lot will depend on financial market conditions.” Last week, PMI surveys suggested that UK manufacturing was contracting at its fastest pace in more than two years, while construction activity grew at its slowest rate so far this year. Scotia Capital economist Alan Clarke said he believed August’s PMI figures pointed to gross domestic product shrinking by 0.25-0.50 percent in the third quarter, even though the data averages above the 50 level which generally separates growth from contraction. Companies’ input costs continued to surge, although at a slightly slower rate, but the prices they charged barely rose, suggesting demand was not strong enough to allow them to pass rising costs onto customers. —Reuters
HONG KONG: A woman walks with flowers past an RMB (renminbi) poster outside the Bank of China in Hong Kong yesterday. Hong Kong had 553.6 billion in yuan deposits by the end of June, up 517 percent compared with the same time last year. —AFP