Tag Archive | "Breathing Room"

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Osborne Calls For Bolder BoE

Finance minister George Osborne stated his case for more aggressive and innovative Bank of England initiatives to help the country climb out of the economic rut that has led to a credit downgrade and has the economy on the verge of another recession. His address to Parliament was marred by jeers from Labor and their leader, Ed Millibrand.

While the politics is sticky, the current economic trends point to disaster unless a commitment to growth is in place. Osborne looks to the BoE to carry the ball by giving the economy some breathing room with an already stifling inflation rate.

Osborne made it clear that this was not the time to cut back on austerity. Prime Minister David Cameron and Osborne remain committed to the austerity strategy that is designed to narrow the deficit through curtailing public debt. Many Brits believe their success will determine the outcome of the elections in two years. The deficit reduction package is a five year plan.

Another EU Nation Long On Austerity, Short on Growth

However, as other EU nations have found, austerity without growth is a dangerous formula. Recession looms and the UK manufacturing output is discouraging.

Latest growth projections are dismal. Osborne announced the economy will grow about 0.6 percent this year. The finance minister projects 1.8 percent GDP expansion in 2014. He was quick to point out that the 1.8 percent would exceed the output of Germany and France.

Cameron and Osborne had paid a price politically for the struggling recovery. British sterling took another hit on Wednesday but the prospect of a more aggressive BoE seemed to stabilize equity markets.

Osborne called for the central bank to maintain its 2 percent inflation rate, if possible, but not at the expense of growth. He asked for the bank to devise a strategy to reduce the inflation rate over time if it became necessary to increase the rate by more than 2 percent to supply enough easing to stimulate growth.

Housing and Construction Must Lead Way

Of particular interest is the stagnant construction and housing industry. Osborne’s charge to the BoE would transform the mission to resemble the mandate of the US Federal Reserve, whose controversial three rounds of QE have sparked a slow, tenuous but steady recovery.  US equity markets have flourished in the meantime.

Most troubling in Osborne’s presentation is his paring of the 2013 GDP growth. The 0.6 percent is half the original 2013 projection of 1.2 percent.

Osborne said, “As we’ve seen over the last five years, low and stable inflation is a necessary but not sufficient condition for prosperity. The new remit explicitly tasks the MPB with setting out clearly the tradeoffs it has made in deciding how long it will be before inflation return to target.”

It looks like uneasy times are ahead for the Sterling and the UK economy.

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Greece Wins For Now

Late Monday night, euro zone finance ministers and the International Monetary Fund (IMF) reached an agreement that gives Greece more breathing room than expected. The agreement came after weeks of tense negotiations and for the time being appears to have thwarted the possibility of an unstructured default by Greece.

Greece’s Prime Minister, Antonis Samaras, was quick to applaud the deal and promised that “a new day for Greece” will commence on Tuesday. Greece has endured stern austerity cuts and has been unable to realize full value on several asset sales. The agreement has both short and long-term consequences for the ailing economy that has suffered seven recessions in recent years.

The central stipulation of the deal is that lenders agreed to reduce Greek debt by more than 40 billion euros, which should cut the sovereign debt to 124 percent of GDP by 2020. By 2022, Greek debt could fall to 110 percent of GDP if the finance ministers take the actions they agreed to on Monday.

2016 Could Provide First Budget Surplus

The 2022 goal reflects what many analysts project as an inevitable write-off of obligations due in 2016. It is in this year that Greece is projected to achieve its first primary budget surplus in many years. The idea of a projected write-off may be a stumbling block when the deal is presented to the Finnish, German and Dutch parliaments. German Finance Minister Wolfgang Schaeuble has already asked the German Parliament to consider the deal.

The entire agreement is scheduled to be approved and signed on December 16, 2012. Several international leaders praised Greece for its austerity measures, but there are serious questions about how the ailing nation can regain its economic footing.

Zero Interest for 10 Years

Among the terms of the agreement, finance ministers agreed to trim interest rates on sovereign debt loans and extend the term of the loan from 15 to 30 years. Interest on European Financial Stability Facility loans will be waived for ten years. If Greece cannot succeed under these generous concessions, there is no out in sight for the country.

Greece is set to receive 43.7 billion euro in for installments, but must meet the stringent austerity conditions. 34.4 billion euros will be advanced to the government in December. 10.8 billion euros will be allocated to  sustain the budget. Another 23.8 billion euros will be used to shore up the country’s ailing banking sector.

In a separate section of the agreement, the finance ministers agreed to return about 11 billion euros in profits accrued in their central banks which were prompted by actions taken by the European Central Bank (ECB). The IMF agreed to honor the deal after taking a different stance over the past few months. If the IMF had halted lending to Greece, the deal would not have been viable.

One portion of the deal dealt with handling hedge funds. The finance ministers agreed to deter hedge funds from manipulating interest rates by entering into a 10 billion euro program. This program will be used to purchase outstanding debt from hedge funds and private investors at $0.35 on the euro.

Samaras faces his own internal battles at home where the Greek Parliament is now controlled by a rival party, SYRIZA. This part has already renounced the deal as woefully inadequate in making Greece’s debt affordable.

Germany’s approval of the plan hinges on convincing Parliament that the country’s contributions will not be subject to a write-off. To ensure this, German funds will be earmarked into a strengthened “segregated account” that will prevent default.

The IMF came on board because it believes the extended term and favorable interest rate makes a Greek recovery possible. Some negotiators pointed out that the body would consider additional write-off if Greece continued to sustain its austerity budget. This new agreement is definitely a step in the right direction, but will come under close scrutiny from the Dutch, Finns and Germans.



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