The Irish Suffer Austerity in Silence

Ireland is pounded by budget cuts that will amount to 20 percent of GDP, but protests are rare and with none of the violence seen in Greece or Italy.

In a village in County Cork in southern Ireland, about 50 farmers and business people meet after Mass on Sundays to protest against taxpayer bailouts of bankers. They hold up a banner, wait for the traffic to stop, and set off on their march 200 yards up the road and back to bemoan the collapse of the economy. 

As the first anniversary of Ireland’s €67.5 billion ($91.1 billion) bailout by the European Union and International Monetary Fund approaches, organizer Diarmuid O’Flynn says the group has struggled to break the 70-person mark ever since it started in March. “Where we’ve gone we’ve met with almost universal support, but nobody will fall in,” he says. 

“It’s what is called the bystander theory. The more people who witness a crime, the less likely somebody is to intervene.”

Not all protests are tiny. Irish police say 15,000 students in Dublin protested the government’s reintroduction of college fees on Nov. 16. A version of Occupy Wall Street has also sprung up there. 

Yet the protests haven’t approached the violence and chaos in the streets of Athens and Rome. In Ireland there was only one strike in the third quarter, and it involved about 17 people, according to a statement by the Irish Central Statistics Office. 

Greek unions have fought the government’s spending cuts by grounding airplanes, halting public transport, and allowing garbage to pile up on Athens streets. 

Portugal is set to face a general strike on Nov. 24, its second in a year. The peaceful, often subdued nature of Ireland’s protests supports the government’s insistence that the nation shouldn’t be lumped in the same category as the Mediterranean states.

“It is very clear that it sets Ireland apart from some other countries,” Istvan Szekely, a European Commission official overseeing the country’s bailout, said in Dublin recently.

Ireland was a relatively poor state until the 1980s, when the government intensified efforts to lure multinationals in cutting-edge industries such as software and pharmaceuticals with low taxes and a well-educated labor force willing to work for modest wages.

While Ireland boomed for years, the banks financed a real estate bubble that burst in 2008. Unemployment has tripled, most of the financial system has been nationalized, and government austerity measures from 2008 to 2015 will amount to more than €30 billion, or about 20 percent of gross domestic product.

The coalition government of Prime Minister Enda Kenny, who defeated his opponent in a general election on Feb. 25, has largely followed the austerity policies of his predecessor. Polls indicate he remains popular. “While the Irish are angry, they haven’t moved to active opposition,” says Eugene McCartan, who is part of a group that wants Ireland to leave the euro.

Analysts suggest a mix of reasons for the Irish willingness to accept austerity. Austin Hughes, chief economist at KBC Bank Ireland, says it’s partly because many Irish realize they fueled the boom and bust by pushing up property prices and seeking pay hikes that led to a loss of competitiveness. “There is a sense that everyone was at a party that went a little too wild,” he says.

Other analysts point to unions’ decision to work with the government. Finally, many of those who might have taken to the streets have left the country to find work. “This history of migration from Ireland is one of the reasons why we haven’t had more revolt and social protest,” says Chris Curtin, professor of political science and sociology at NUI Galway. “The protest is a walk-out.”

The markets have rewarded the Irish with yields of 8 percent on Irish bonds maturing in 2020. Comparable Greek bonds are yielding more than 25 percent. Yet there’s no end in sight for the austerity the Irish must endure. 

“The new government really doesn’t have any fixes or policy options that will better people’s lives in any kind of near-term future,” says Sean Kay, a professor of politics and government at Ohio Wesleyan University in Delaware, Ohio.

In Cork, the protester count in the village has dwindled to fewer than 50 as sports and farm work draw locals away. Says organizer O’Flynn: “Everybody is waiting for somebody else to protest.”

The bottom line: Ireland’s austerity measures from 2008 to 2015 will equal 20 percent of GDP. So far the Irish are taking them in stride.

 

Royal Alliance Capital Currency Review

Berlusconi exits as debts spiral

The 17-year political career of Silvio Berlusconi came to an end on Saturday, whilst Italy attempts to contain its current debt levels from spiraling out of control.

Berlusconi’s departure came after the country's lower house of parliament approved an urgently needed package of economic reforms designed to tackle the country's €1.9 trillion debt, revive its sluggish economy and prevent it from going the way of Greece. Sunday saw the appointment of Mario Monti. His task is to form a new government in an effort to shore up Italy’s government bond market; the third largest in the world.  

Euro fears escalated on Thursday as Italian bond yields went through the critical 7% level, prompting concerns a bailout will be needed. Sterling reached intra-week highs of €1.1784, taking the exchange rate to its highest level since March.

Euro zone economic data offered little support to the single currency. Investor confidence data weakened to a two-year low, whilst there was a 0.7% decline in European retail sales for October. There was also a 2.7% slide in German industrial production, whilst the EU Commission cut the 2012 growth outlook sharply to 0.5% from 1.8% previously.

Sterling fell to lows of $1.5864 versus the US dollar, before reversing losses on Friday to finish the week at $1.6080.  As widely expected, the Bank of England (BoE) left both interest rates and quantitative easing (QE) on hold in Thursday’s meeting. Markets will await the release of the meeting’s minutes on 23 November to find out the voting pattern of the Bank’s policymakers. Industrial production remained flat in September, whilst manufacturing rose 0.2%; its first rise since May this year. However, the UK’s trade deficit widened from £8.6bn to £9.8bn, increasing the risk of a downward revision to UK economic growth in the third quarter of 2011.

In a sparse week for economic announcements, the US dollar found itself tracking investor sentiment and the performance of global stock markets. With mid-week developments in Italy taking a turn for the worse, the US dollar added over three cents versus the euro. However, the dollar’s gains were short lived. Rumors of Berlusconi’s departure buoyed global markets, as the dollar pared gains made earlier in the week.

The Chinese yuan was unable to make any headway during the week as consumer inflation showed a decline in September. The Swiss franc continued its recent decline against both the pound and euro as Swiss consumer inflation data proved weaker-than-expected. Global commodity prices remained fragile, hindering the performances of both the Australian and New Zealand dollars. An increase in the number of new homes being built in Canada helped the Canadian dollar gain over half a cent versus sterling.

FTSE rebound stalls as Italy debt jitters flare again

Other stock indices in Europe also pull back, after markets send Spain, France and Austria’s borrowing costs higher. 

A tentative rally in Britain’s FTSE 100 stalled on Monday after Italy was forced to pay a high price to sell five-year bonds, amid mounting uncertainty over the ability of the country’s new government to resolve its debt woes.

The UK index of blue-chip shares eased 0.47%, or 26 points, to 5,519 and the All Share index gave up 0.44%, or 13 points, to 2,844.

Markets had earlier welcomed the resignation of former prime minister Silvio Berlusconi, and were also cheered by news that former EU commissioner Mario Monti had been given the task of forming an emergency government in Italy.

But Angus Campbell at Capital Spreads said that despite political changes in both Italy and Greece, investors remained sceptical that the eurozone debt crisis ‘could actually be resolved’.

‘The sombre mood was caused primarily by uncertainty that a new Italian administration would find itself with enough support in order to push through badly needed reforms,’ he said. Gains for equities would remain ‘hard to come by’ until there is more detail on how Monti would manage to achieve that, Campbell added.

Italy paid 6.29% in its €3 billion (£2.6 billion) auction, a euro-era high, up from 5.32%. However, the sale was covered 1.47 times, reflecting slightly better demand than at the earlier sale.

The yield, or interest rate, on benchmark Italian 10-year government bonds subsequently climbed 20 basis points to 6.72% – close to levels seen as ruinous in the long-term – after earlier retreating as low as 6.34%.

‘The unelected Mr Monti may well regret taking on this job and I don't expect him to last terribly long (like most Italian governments),’ warned Louise Cooper, markets analyst at BGC Partners. ‘I will be cutting and pasting scary Italian bond yield charts in the months, if not years, to come.’

Other stock indices in Europe also pulled back, as markets sent Spain, France and Austria’s borrowing costs higher in a sign that the crisis is continuing to spread. Germany’s DAX index fell 1.2% to 5,985, France's CAC 40 index slipped 1.28% to 3,109, and the FTSEurofirst 300 index of top European shares was 0.86% lower at 976.

Resources stocks were among the biggest fallers, amid the concerns over global demand and as commodities prices dropped. Vedanta Resources (VED.L) dropped 42p to £11.20 and Glencore International (GLEN.L) slid 12p to 429p.

Financials also suffered: Standard Chartered (STAN.L) weakened 46p to £13.56, Barclays (BARC.L) was off 5p at 174p and Royal Bank of Scotland (RBS.L) slipped 0.5p to 21.9p.

ITV (ITV.L) topped the leader board on the FTSE 100, taking on 2p to 67p, after a bullish third-quarter trading update from the broadcaster. Burberry (BRBY.L) claimed second place, taking on 44p to £14.21, ahead of interim results from the luxury goods maker.

Wall Street halted a two-session rally, tracking losses in Europe. The Dow Jones Industrial Average eased 0.17% to 12,133, the Standard & Poor's 500 index lost 0.58% to 1,257, and the Nasdaq Composite index shed 0.19% to 2,674.

Elsewhere, sterling sank 1.13% versus the dollar to $1.59 ahead of UK inflation data on Tuesday, and strengthened 0.14% against the euro to €1.166.

 

Overnight Markets: Wall Street rebounds on positive corporate news

The Dow Jones was up 113 points amid strong corporate earnings report and positive economic data. 

US stocks rebounded sharply on Thursday from the previous session's losses as positive corporate and economic news overshadowed gloom over worsening eurozone debt crisis.

The Dow Jones industrial average was up 113 points, or 0.96%, at 11,894. The Standard & Poor's 500 Index was up 11 points, or 0.86%, at 1,240. The Nasdaq Composite Index was up four points, or 0.13%, at 2,625. 

US companies released positive results, with Merck raising its dividend and Cisco reporting strong earnings, reinforcing the view that corporate America is showing strength.

Italy paid sharply higher rates for its one-year borrowing, but not as much as some had feared. French bond yields surged amid concerns over the country's credit rating. Standard & Poor's later blamed a technical error for the distribution of a message suggesting it had downgraded France's credit rating. 

Adding to the positive sentiment, Thursday's economic data showed new US weekly jobless claims declined to the lowest level since April, while the trade deficit unexpectedly decreased in September to its narrowest level since December.

In Greece, former European Central Bank vice-president Lucas Papademos was appointed to head the country's new crisis coalition.

Merck gained 3.5% after the drugmaker raised its quarterly dividend by 11%, its first increase since 2004. 

Cisco Systems jumped 5.7% after the network equipment maker's earnings beat estimates.

Energy shares rose after US crude oil gained 2.1%. Hess Corp added 4%.

Elsewhere, United Technologies rose 1.3%, while 3M added 1.7%. After the market closed, Walt Disney gained 2.9% in extended trading after reporting fourth-quarter revenue that beat expectations. 

On the negative side, Nordstrom sank 4.1% after the retailer didn't raise the upper end of its full-year profit forecast.

In Asia, equities bounced back on Friday in the afternoon session after positive US jobless data and the selection of a new Greek premier tempered concern Europe’s debt crisis won’t be contained.

The MSCI Asia Pacific Index gained 0.9% to 117, as of 1:52 p.m. in Tokyo. Australia’s S&P/ASX 200 rose 1% and South Korea’s Kospi Index jumped 2.5%. Hong Kong’s Hang Seng Index advanced 1.1%, while China’s Shanghai Composite Index added 0.6%. Japan’s Nikkei 225 Stock Average added 0.4%.

In company news, Sony climbed 2.9%, Hynix Semiconductor advanced 1.9% in Seoul and Genting Singapore slumped 4.8%.

 

Royal Alliance Capital Currency Review

Political tensions hurt euro

European political tensions again dominated headlines last week as the euro endured further losses against both the US dollar and sterling.

Greek Prime Minister, George Papandreou, called a referendum to seek wider support for the new bailout package, despite having undertaken protracted negotiations to agree its terms with other European leaders. However, Papandreou later withdrew the plan for a referendum after intense opposition. 

The added uncertainties prompted the euro to fall to intra-week lows of 1.1698 against the pound. Further political developments on Sunday saw the Greek Prime Minister announce his imminent resignation as Greek political leaders sealed a pact to form a national unity government. 

The new coalition comes in an effort to show that Greece is serious about taking the steps needed to stave off bankruptcy. Concerns Italy could become further embroiled in the crisis intensified on Monday morning, as fears grew over Italy's political uncertainty ahead of a second vote on Tuesday regarding the country's budget and a potential confidence vote on Prime Minister Silvio Berlusconi.

In his first meeting as President of the European Central Bank (ECB), Mario Draghi and the ECB council unexpectedly lowered interest rates from 1.5% to 1.25%, compounding the euro’s woes. The ECB's move reversed its decision to lift interest rates in July, at which time the sterling/euro rate had fallen to lows below 1.12. Although the pound has found it difficult to break through €1.17 in recent months, this resistance level might be broken if the ECB decides it has to cut rates further in the coming months.

A first estimate of UK Gross Domestic Product (GDP) indicated the UK economy grew by 0.5% during the third quarter. This represented a bounce in activity, after a second quarter performance which had been weighed down by the early Easter timing and an extra public holiday for the Royal wedding. 

However, this meant the year-on-year growth rate was also just 0.5%, which still points to a very subdued pace of recovery. A third fall in manufacturing activity in four months in October underpinned some pessimism over the outlook for the final quarter of 2011.

The US dollar lacked a clear direction against sterling last week, generally following wider stock market trends and changes in investors’ optimism levels. There were relatively few domestic surprises for the currency. 

The US Federal Reserve repeated its commitment to keep interest rates close to zero until at least mid-2013, although one Committee member wanted the central bank to take further measures to stimulate the economy. The latest non-farm payrolls jobs report fell slightly short of expectations, although revisions to past data suggested the employment picture might not be quite as bleak as previously thought.

The Australian dollar fell more than three cents against sterling last week as the Reserve Bank of Australia (RBA) lowered interest rates for the first time in more than two and a half years. In a move to bolster the Australian economy, the RBA cut its key interest rate to 4.5% as weaker global growth threatens to slow the nation’s resource-driven economy. 

The Japanese yen carried on its recent decline amid rumours the Bank of Japan is continuing to intervene to prevent its currency from appreciating further. The Canadian dollar lost support versus the pound as Canadian employment fell by 54,000 in October, contrary to the 15,000 rise expected by forecasters. Worse-than-expected employment data in New Zealand saw the New Zealand dollar fall to intra-week lows of 2.035 versus sterling.

 

Greek PM, opposition reach power-sharing deal

Greece's Prime Minister George Papandreou, left, Greek
President Karolos Papoulias, center and opposition
leader Antonis Samaras sit at the Presidential Palace
in Athens on Sunday, Nov. 6 2011. Greece's embattled
prime minister and the head of the main opposition party
reached an initial agreement to form an interim
government that will ensure the country's new European
debt deal and then lead Greece to early elections, the
president's office said.

Greece's embattled prime minister and main opposition leader agreed Sunday to form an interim government to ensure the country's new European debt deal, capping a week of political turmoil that saw Greece face a catastrophic default that threatened its euro membership and roiled international markets.

As part of the deal, Prime Minister George Papandreou agreed to step down halfway through his four-year term. He and conservative opposition head Antonis Samaras are to meet Monday to discuss who will become prime minister and the makeup of the Cabinet.

The new unity government's main task will be to pass the European rescue package, reached after marathon negotiations between European leaders barely a week ago _ a move considered crucial to shoring up the euro. The interim government will then lead the country into early elections, expected early next year.

Officials had been anxious to reach some form of agreement before a meeting of eurozone finance ministers in Brussels on Monday.

"Of course it's a breakthrough," government spokesman Elias Mossialos said. "It is a historical day for Greece, we will have a coalition government very soon, early next week. The prime minister and the leader of the opposition will discuss tomorrow the name of the new prime minister and the names of ministers."

Papandreou sparked the latest crisis by announcing last week that he was taking the hard-fought debt agreement to a referendum. That outraged European leaders, who said such a vote could raise the specter of Athens leaving the common currency _ setting off an unpredictable chain reaction that could drag down other European countries.

They also warned a vote would jeopardize the disbursement of a vital $11 billion (euro8 billion) installment of Greece's existing $152 billion (euro110 billion) bailout, which the country desperately needs to avoid the potential of a catastrophic default within weeks.

In the ensuing market turmoil, Italy _ which also faces severe financial difficulties, but is considered too big to bail out _ saw its borrowing costs spiral, sparking fears it could be dragged into the fray.

Papandreou withdrew the referendum plan Thursday in the wake of European anger and after it sparked a rebellion among his own Socialist lawmakers, many of whom called for him to resign. The turmoil also pushed the conservative opposition party to publicly declare it would back the debt agreement.

Any interim government that is formed with the support of both major parties will be almost guaranteed to push the European rescue package through parliament, even if it has to be approved by a reinforced majority of 180 of the legislature's 300 lawmakers.

The new European deal would give Greece an additional $179 billion (euro130 billion) in rescue loans and bank support. It would also see banks and private investors write off 50 percent of their Greek debt holdings, worth some $138 billion (euro100 billion).

The goal is to reduce Greece's debts to the point where the country is able to handle its finances without relying on constant bailouts.

Greece's lawmakers must now approve the package, putting intense pressure on the country's leaders to swiftly end the political crisis so parliament can convene and put it to a vote.

A planned meeting with the leaders of all political parties in parliament, which was to take place Monday evening, was canceled after two leftist parties refused to attend, the president's office said.

Sunday's agreement came after a late-night meeting between Papandreou and Samaras called by President Karolos Papoulias at Papandreou's request to end a two-day deadlock. Direct talks had failed to get off the ground because Papandreou had said an agreement had to be reached on a new government before he stepped aside, while Samaras insisted Papandrepou resign before the start of negotiations and demanded quick elections.

An opposition conservative party official said Samaras' New Democracy party was "absolutely satisfied" with the outcome of the talks and that party officials were to hold meetings late Sunday night with Finance Minister Evangelos Venizelos and his advisers to discuss how long it would take to finalize the new debt deal and when elections could be held.

"Our two targets, for Mr. Papandreou to resign and for elections to be held, have been met," the official said, speaking on condition of anonymity to discuss the process.

The Finance Ministry said a late-night meeting between Venizelos and opposition party members determined the "most suitable" date for elections was Feb. 19.

Two turbulent years after coming to power in a landslide election victory, Papandreou has seen his popularity plummet as his government has been forced to severely cut spending while hiking taxes to tackle a runaway deficit and debt that led Greece to become the first eurozone country to seek an international bailout.

Ireland and Portugal have since followed suit, but European leaders have been desperate to ensure other countries with larger economies are not also dragged down.

Merkel's blunt message: Save the euro to save Europe

Angela Merkel: No one should think peace
and prosperity…

German Chancellor Angela Merkel gave a blunt assessment of the stakes as European leaders struggle to solve their continent's government debt crisis and save their common currency, the euro.

"No one should think that another half-century of peace and prosperity is assured" if leaders in the European Union fail in this crisis, Merkel said last week to German legislators before a key vote on the latest financial rescue package.

The comment by Merkel, who grew up in the former East Germany and, as head of Europe's biggest economy, has taken the leading political role in steering Europe through its turmoil, alluded to the European Union's fulfillment of its main goal.

That goal was to bind Germany's fortunes to those of Western Europe to pacify the nation that had dragged the continent through two devastating world wars.

Merkel's dogged leadership, especially her speech on Wednesday to her own parliament, is noteworthy. She might lead the mightiest of Europe's nations, but Germany simmers with the rest of Europe in a cultural stew spiced by bitter memories of militarism and bloodshed. It is a mix of national sensibilities, bound by an abstract cultural heritage, that can be variously described as disciplined, casual, and reckless.

Backed by the economic might of the United States, Germany evolved from its status as a nationalist trouble-maker in the first half of the 20th century to the expected, though somewhat reluctant, saviour of Europe today, though it, too, has violated financial rules meant to ensure the euro's stability.

"If the euro fails, Europe fails," Merkel has said repeatedly, trying to convince Germans that their nation's long-term success depends on the prosperity of an ever-more unified Europe, even as her government takes baby steps toward fixing the problems.

One reason for Merkel's incremental approach is the increasing resistance in Germany - which prided itself on financial conservatism, at least until state-owned banks fell hard for subprime-mortgage bonds in the last decade - to opening its wallet to bail out countries that borrowed more than they could afford.

The counter-argument, by analysts in France and elsewhere, is that Germany, as the biggest European economy and one powered by exports that drew wealth from weaker economies to the south, now has to pay.

Bank of England injects further £75bn into economy

The Bank of England has said it will inject a further £75bn into the economy through quantitative easing (QE).

The Bank has already pumped £200bn into the economy by buying assets such as government bonds, in an attempt to boost lending by commercial banks.

But this is the first time it has added to its QE programme since 2009. There have been recent calls for it to step in again to aid the fragile recovery.

The Bank also held interest rates at the record low of 0.5%.

On Wednesday, data showed the UK economy grew by 0.1% between April and June, which was less than previously thought.

"In the United Kingdom, the path of output has been affected by a number of temporary factors, but the available indicators suggest that the underlying rate of growth has also moderated," the Bank said in a statement.

"The deterioration in the outlook has made it more likely that inflation will undershoot the 2% target in the medium term. 

"In the light of that shift in the balance of risks, and in order to keep inflation on track to meet the target over the medium term, the committee judged that it was necessary to inject further monetary stimulus into the economy."

Sterling fell by almost two cents after the announcement to $1.5280, its lowest since late July 2010.

'Warranted'

The CBI and the British Chambers of Commerce (BCC) business groups welcomed the Bank's move to expand the QE programme to £275bn, but said that on its own, its impact would be limited.

"This measure will help support confidence, but we need to recognise that its impact on near term growth prospects is likely to be relatively modest," said Ian McCafferty, the CBI's chief economic adviser.

"Only once the turmoil in the eurozone is resolved will confidence be fully restored."

David Kern, chief economist at the BCC, said: "Higher QE on its own is not enough and we urge the MPC [Monetary Policy Committee] to look at other radical methods.

"There is a strong case for the MPC to help boost bank lending to businesses by immediately raising its purchases of private sector assets."

The manufacturers' organisation, the EEF, said that the Bank's decision to act now, before the third-quarter estimates of GDP and its latest inflation forecast were released, "would indicate that members believed immediate action was warranted in order to head off a deteriorating growth outlook".

However, the National Association of Pension Funds (NAPF) is calling for an urgent meeting with the pensions regulator to discuss ways of protecting UK pension funds from the negative effects of QE. 

QE tends to push down long-term bond yields, therefore reducing the return on the investments made by pension schemes.

"Quantitative easing makes it more expensive for employers to provide pensions and will weaken the funding of schemes as their deficits increase," said Joanne Segars, chief executive of the NAPF.

"All this will put additional pressure on employers at a time when they are facing a bleak economic situation."

Complementary actions

The governor of the Bank of England, Mervyn King, wrote to the chancellor earlier on Thursday, setting out the MPC's case for expanding the asset purchasing programme.

In his letter of response, in which he authorised the move, Chancellor George Osborne said: "I agree that an increase in the ceiling would provide the MPC with scope to vary the stance of monetary policy to meet the inflation target."

In his speech to the Conservative Party conference earlier in the week, Mr Osborne said that the Treasury would look into "credit easing" - a way to underwrite loans to small businesses who are struggling to get credit now.

He confirmed this in his letter to Mr King: "Given evidence of continued impairment in the flow of credit to some parts of the real economy, notably small and medium-sized businesses, the Treasury is exploring further policy actions. Such interventions should complement the MPC's asset purchases."

Royal Alliance Capital Currency Report

Euro slips on Greece woes

Sterling found some momentum against the euro last week, reaching highs of €1.1662 on Friday. Concerns Greece might ultimately default on its debts, prompting large losses for European banks which own Greek government bonds, continued to weigh on the euro.

The German parliament voted to approve a higher contribution to the European Financial Stability Fund, the region’s communal bailout fund.

The Fund’s expansion is required for the second Greek bailout which was arranged in July, but is yet to be endorsed by votes in Malta, the Netherlands and Slovakia. 

Greece remains in talks to secure the next installment of 8 billion euros which it needs to avoid bankruptcy in October.

Euro zone business and consumer confidence deteriorated in September, whilst a surge in euro zone inflation to a three-year high of 3% weakened the case for the European Central Bank (ECB) to cut interest rates this week.

Despite the euro zone’s crisis, the sterling/euro rate is little changed compared to a year earlier. 

This suggests markets are wary of the UK’s close ties to the euro zone via banking sector and trade links. 

Nationwide house price data and Confederation of British Industry retail trade data gave little encouragement over the domestic outlook; house prices continued to ‘tread water’ last month, whilst trading on the high-street was the weakest for 16 months.
 
Sterling gained versus the US dollar, but still ended the week more than 6% lower than its recent peak at US$1.6618 on 19 August. Falls in sales of new and existing homes highlighted the US housing market’s continued malaise. 


US house prices were 4.1% lower in July compared to a year earlier. US second-quarter Gross Domestic Product (GDP) growth was revised up from 1.0% to 1.3% on an annualized basis, helped by stronger than previously estimated exports and consumer spending.

Commodity-bloc currencies such as the Australian, New Zealand and Canadian dollars dropped versus sterling; tending to lose ground as commodity prices weakened owing to concerns over the global growth outlook. 

Australian and Canadian domestic influences were limited; Australian jobs vacancies data gave some encouragement to the employment market outlook, whilst Canadian GDP growth of 0.3% in July was in line with market forecasts. The New Zealand dollar lost some support after a surprise credit rating downgrade by the Standard & Poor’s and Fitch credit rating agencies.

The EUR/CHF rate traded in a range between 1.2122 and 1.2263, having held above the 1.20 ‘minimum’ rate set by the Swiss National Bank on 6 September 2011. This enabled sterling to rise as high as 1.4177 versus the Swiss franc; its highest level since May.

Germany, France reach agreement on Europe's banks

French President Nicolas Sarkozy, right, reacts to
German Chancellor Angela Merkel after a meeting on
the financial crisis in Berlin, Germany, Sunday,
Oct. 9, 2011. The two leaders of the eurozone's two
biggest economies, say they have reached agreement
on strengthening Europe's shaky banking sector.

BERLIN - The leaders of Germany and France, the eurozone's two biggest economies, said Sunday they have reached an agreement about how to strengthen Europe's shaky banking sector amid the region's debt crisis.

"We are determined to do the necessary to ensure the recapitalization of Europe's banks," German Chancellor Angela Merkel following talks with French President Nicolas Sarkozy in Berlin.

A "comprehensive response" to the eurozone's debt crisis will be finalized by month's end, including a detailed plan on recapitalizing the banks, Sarkozy said at Berlin's chancellery.

"The economy needs secure financing to ensure growth. There is no prospering economy without stable banks," he said. "That is what is at stake."

However, both leaders declined to name a price tag for the new measures or elaborate further, saying the proposal must first be discussed with other European leaders.

Analysts have urged the eurozone to identify all the banks in the region that need to replenish their capital reserves, then decide whether to compel them to raise that money on the open markets and to provide government financing to the ones that can't.

Many experts say the capital cushions of many European banks must be strengthened in order to withstand a possible government bond default by Greece. Some analysts fear that a Greek default could cause a severe credit squeeze that would even threaten banks not exposed directly to Greece's debt because banks could be afraid to lend to each other.

The credit freeze following the collapse of U.S. investment bank Lehman Brothers in 2008 choked off lending to the wider economy and caused a deep recession.

Merkel did not provide details Sunday about how the recapitalization would work, saying only that all banks across the eurozone would be measured by the same criteria in coordination with, among others, the European Banking Authority and the International Monetary Fund.

Any solution must be "sustainable," Merkel added.

Sarkozy said the French-German accord on the proposal "is total."

Germany and France will now submit their proposal to shore up Europe's shaky banking sector to other European Union governments ahead of an Oct. 17-18 summit of the bloc's 27 leaders in Brussels, they said.

Both leaders expressed confidence that a comprehensive European response to the crisis will be finalized before a summit of the G-20 most developed nations in France Nov. 3-4.

"The global economy needs this summit to become a success, and the European Union will do its part" to ensure a positive outcome, Merkel said.

The IMF has said banks across the continent might need up to euro200 billion ($267 billion) in new capital. The EU disputes the IMF's estimate, but has warned that lending between banks and from banks to businesses is threatening to freeze up.

Earlier this week, Merkel said that banks must first seek to raise new capital on the market before turning to their government, insisting that the eurozone's newly strengthened euro440 billion ($590 billion) bailout fund would then only serve as a backstop if a member state can't cope with shoring up its banks' capital.

France, however, was reported to favor turning to the fund's resources right away instead of relying on a national facility to re-capitalize its banks , who are among the biggest holders of Greek bonds.

But Sarkozy sought on Sunday to dispel the notion of different approaches regarding the European Financial Stability Facility, saying "there are no disagreements."

German Finance Minister Wolfgang Schaeuble and his French counterpart, Francois Baroin, also took part in the two leaders' discussions.

Merkel and Sarkozy were set to have a working dinner following the news conference they gave at the chancellery.

Germany and France, which together represent about half of the 17-nation currency zone's economic output, regularly hold talks before EU summits to chart out joint positions.

The implosion of Belgian lender Dexia following its sizable exposure to Greek and other eurozone sovereign debt, meanwhile, added a sense of urgency to the talks.

France, Belgium and Luxembourg announced Sunday they had approved a plan for the future of the embattled bank, but they offered no details. France and Belgium became part owners of the bank during a euro6 billion ($7.8 billion) 2008 bailout.

While an all-out Greek default appears unlikely, bondholders might still face severe losses, with some analysts maintaining that Greece's debt must be cut by about 50 percent or more to attain a sustainable level.

Private bondholders agreed in July to take about a 20 percent cut on their holdings of Greek bonds as their participation in a second international euro109 billion bailout for the country.

But Finance Minister Schaeuble on Sunday joined Merkel and other eurozone officials in hinting that the agreement might have to be renegotiated.

"It is possible that we have so far assumed an insufficient percentage of debt reduction," he told German newspaper Frankfurter Allgemeine Sonntagszeitung.

Such a move will be discussed after the so-called troika of Greece's international creditors , European Central Bank, European Commission and IMF , submits its next progress report later this month, Schaeuble was quoted as saying.

Greece is currently struggling to meet budget and reform targets, but it needs an over all positive progress assessment by the troika to qualify for the next euro8 billion ($11 billion) installment of its euro110 billion package of international bailout loans to avoid bankruptcy.

US trade body to probe HTC's Apple technology complaint

Most HTC phones are based on Google's Android
operating system

A US trade watchdog will investigate a claim by Taiwanese phone firm HTC that its rival Apple has infringed its patents.

HTC filed the complaint with the US International Trade Commission (USITC) in August.

It is one of three that HTC has filed against Apple.

Apple has also accused HTC of copying its technology, and other global companies are also involved in what is being called a global patent war.

Korea's Samsung is currently fighting Apple in a number of European courts, as well as Australia.

In HTC's claim, which the US International Trade Commission (USITC) will investigate, the Taiwanese firm alleges that Apple has infringed its patents in smart phones, tablet computers and computers.

HTC is seeking to block the import of Apple products into the US.

Larger Europe Bailout Fund Could Weigh on Ratings: S&P

Europe's efforts to ramp up its fight against the euro zone debt crisis could potentially trigger credit rating downgrades in the region, a top Standard & Poor's official warned.

David Beers, the head of S&P's sovereign rating group, said it is still too soon to know how European policymakers will boost the European Financial Stability Facility, how effective that will be and its possible credit implications. 

But he said the various alternatives could have "potential credit implications in different ways," including for leading euro zone countries such as France and Germany. 

European officials, seeking more resources to protect the euro zone against fallout from its debt crisis, are considering ways to increase the impact of the 440 billion-euro fund by leveraging, although it remains unclear exactly how. 

Beers said it was evident, however, that policymakers cannot leverage the EFSF without limits. 

"There is some recognition in the euro zone that there is no cheap, risk-free leveraging options for the EFSF any more," Beers told Reuters. 

Some analysts say at least 2 trillion euros would be needed to safeguard Italy and Spain if the Greek crisis spreads. 

"We're getting to a point where the guarantee approach of the sort that the EFSF highlights is running out of road." -- Beers said in an interview late on Saturday. 

Euro zone member states provide guarantees to the EFSF, which makes loans to struggling member countries such as Greece. But countries such as Germany have signaled they will not commit to making more of their own money available. 

Beers said that reluctance is why policymakers are now discussing options such as leveraging the fund via the European Central Bank or via markets, or even the possibility of deeper fiscal integration in the euro zone. 

Beers declined to comment on implications of each of the scenarios for boosting the EFSF. 

However, one option could involve backing up the fund with money from the European Central Bank, eliminating the need for politically unpopular cash injections from hard-up European governments. 

That solution, although potentially reducing the impact on sovereign ratings, would probably increase liabilities in the ECB's balance sheet and possibly leave euro zone countries on the hook for restoring the bank's capital in the event of losses caused by an euro zone default. 

Leveraging the EFSF could also result in a downgrade of its own AAA credit rating. 

A deeper fiscal union between members of the euro zone, on the other hand, would increase borrowing costs for core European countries such as France and Germany, while providing relief to the more debt-heavy peripheral countries. 

S&P's warning echoes concerns expressed by some European policy-makers at semiannual meetings this weekend at the International Monetary Fund and World Bank in Washington. 

"We should not think of leveraging a public pot of funds as a free lunch," ECB Governing Council member Patrick Honohan told reporters. 

S&P, which cut Greece's credit rating deeper into junk territory in July, believes European policymakers are also finally realizing that Greece's debt restructuring will take place with significant haircuts. 

"Therefore, there are going to be some banks that might require additional capital," -- Beers said. 

S&P believes, however, that banks can still raise money in the market rather than relying only on government support. 

"The banks have to go out and talk with potential investors. There have been interesting developments this year, certainly banks in Europe have been raising capital," -- Beers said in the interview. 

Recession Risk 

On the economic outlook, S&P sees rising risks of recession in the United States and parts of Europe as their economies struggle to recover at the same time that major emerging market countries such as China and India tighten monetary policies. 

The implications of a double-dip recession for ratings of developed countries would depend on how governments respond to the crisis of confidence that is at the root of the economic weakness, Beers said. 

That response, he added, needs to go beyond lowering fiscal deficits and should include addressing market concerns about bank capital cushions and focusing on the structural drivers of the fiscal deficits, typically health care and state pensions. 

"If governments are unable to focus on the long-standing impediments to growth, then austerity alone is not going to give you growth," Beers said, citing the case of Italy. 

He also had a warning for Germany. Many economists, he said, had initially overestimated the country's growth performance for this year and are finally realizing that its fate is "inexorably linked to that of all its neighbors." 

"The idea that they could somehow decouple is now mostly discredited in terms of both its growth performance and, to some degree, their fiscal performance."