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July 23 (Reuters) – The Singapore dollar is ‘somewhat weaker” than its medium-term equilibrium level but it is likely to appreciate as the domestic economy expands, the International Monetary Fund said on Friday.
In its annual review of Singapore’s economy, the IMF said the modest and gradual rise of the Singapore dollar SGD= “appears consistent with internal and external stability”.
(Reuters) – The International Monetary Fund (IMF) wants to boost its lending resources to $1 trillion from $750 billion in order to prevent future financial crises, the Financial Times said on Monday.
The paper, without citing sources, said the IMF wants to agree financing deals in advance that will be specially tailored to individual countries, rather than respond to crises with conditional loan packages.
“Even when not in a time of crisis, a big fund, likely to intervene massively, is something that can help prevent crises,” IMF Managing Director Dominique Strauss-Kahn told the FT.
“Just because the financing role decreases, doesn’t mean we don’t need to have huge firepower… a $1,000 billion fund is a correct forecast,” he said.
The FT said South Korea, which currently chairs the Group of 20 leading economies, is hoping to convince the G20 countries to back the plan at the next summit in Seoul in November.
(Reporting by Karolina Tagaris; Editing by Michael Urquhart)
BUDAPEST, July 19 (Reuters) – Hungary’s government insisted on a new financial sector tax this year and ruled out further austerity measures at talks with international lenders that were suspended at the weekend, the economy minister said on Monday.
The forint plunged about 2.7 percent in early trading on Monday to 289.70 versus the euro EURHUF=D2 after a review of Hungary’s funding agreement signed in Oct. 2008 fell through on Saturday when lenders said the new centre-right government needed to take tougher measures to rein in the budget deficit. [ID:nLDE66G0AP]
Government bond yields jumped 20-25 basis points after the open in illiquid trade.
Talks with the International Monetary Fund (IMF) and the EU ended prematurely on Saturday without concluding the country’s programme review.
This means Hungary will not have access to remaining funds of about 5.5 billion euros ($7.1 billion) in its 20 billion euro financing deal until the review is completed.
Even though the country is not under immediate financing pressure, it has been using the IMF/EU loan as a safety net this year so the lack of agreement risks damaging investor confidence. [ID:nLDE66I08V]
Economy Minister Gyorgy Matolcsy told public television m1 on Monday that the IMF and EU have voiced concerns over a 200 billion forint tax planned by the government to contain the budget deficit and a bill which would cut the central bank governor’s salary.
“Hungary has experienced a programme of austerity over the past five years, we inherited this from the previous governments and we would like to do away with the unfortunate consequences of these steps,” Matolcsy said.
“We have told our partners that further austerity packages were out of the question.” The IMF said in a statement on Saturday that Hungary will need to take additional measures to meet its deficit targets this year and in 2011, set out in its current financing deal and in line with the country’s obligations with the European Union.
In a separate statement, the European Commission said the reducing Hungary’s deficit by next year “will require tough decisions, notably on spending.”
Hungary’s new government has pledged to meet this year’s budget deficit target of 3.8 percent of GDP, which Matolcsy reaffirmed on television on Monday, but he said this should be done primarily with the help of the planned tax on banks.
“We will impose the bank tax, we know this is a significant extra burden but we also know that with this we can achieve the 3.8 percent deficit,” he said.
“It is either bank tax or austerity, these are the two ways of thought.”
For highlights of Matolcsy’s comments click [ID:nLDE66I07T]
(Reporting by Gergely Szakacs and Krisztina Than; Editing by Ruth Pitchford)
July 19 (Reuters) – Hungarian government bond yields jumped by 20-25 basis points across the curve in illiquid trade at the open on Monday after government talks with international lenders ended inconclusively at the weekend.
Dealers said yields could rise further still and prevailing uncertainty in the absence of an agreement with the International Monetary Fund and the European Union would continue to weigh on the market. [ID:nLDE66G0AP]
(Reporting by Krisztina Than and Gergely Szakacs; editing by John Stonestreet)
July 19 (Reuters) – Hungary’s government stuck to its plans for a new financial sector tax this year and ruled out further austerity measures at talks with international lenders that were suspended at the weekend, the economy minister said.
Gyorgy Matolcsy also told public television m1 in an interview on Monday that International Monetary Fund and EU representatives have voiced concerns over the 200 billion forint tax and a bill which would put a ceiling on public sector pay, including the central bank governor’s salary.
A review of Hungary’s 20 billion euro funding agreement signed in Oct. 2008 fell through on Saturday after lenders failed to get sufficient clarity of the new centre-right government’s economic plans. [ID:nLDE66G0AP] (Reporting by Gergely Szakacs; Editing by Kim Coghill)
TOKYO, July 19 (Reuters) – The euro pulled back from two-month highs on Monday, as investors booked profits on its rally while lingering concerns about Europe’s sovereign debt problems looked likely to keep a lid on future gains.
High-yielding currencies like the Australian and New Zealand dollars were also under pressure as subdued U.S. data and falling equities .SPX led investors to shun risky trades.
Trade was light in Asia with Tokyo shut for a holiday.
The euro EUR= dipped 0.2 percent to $1.2904, pulling back from a two-month high of $1.3008 hit on Friday on trading platform EBS, with news that the International Monetary Fund and the European Union have suspended a review of Hungary’s funding programme putting some pressure on the single currency.
This means Hungary will not have access to remaining funds in its $25.1 bln package. [ID:nLDE66H021]. Dealers said this reminded investors of the region’s sovereign debt problems just days ahead of the results of stress tests on euro zone’s banks. The results are due out of Friday.
“While European leaders believe that the tests will bring confidence, the markets may not believe the sugar-coated figures with the euro primed for another leg down in the weeks ahead,” said David Scutt, forex trader at Arab Bank, Australia.
“Heavy selling pressure is expected to emerge ahead of resistance at $1.3100-10.”
Near term support for the euro is seen around the $1.2850 area, the 50 percent retracement of the euro’s fall from a high near $1.3820 on March 17 to a four-year low of $1.1876 hit in early June. Traders said there was talk of light stops around $1.2880.
The dollar edged up 0.1 percent against the yen to 86.64 yen JPY= but was not far from a seven-month low of 86.27 yen hit on Friday on EBS.
Latest data from the Commodity Futures Trading Commission showed speculators have been increasing long positions in the yen and cutting longs in the U.S. dollar.
EYES ON YEN
Traders said with U.S. yields heading lower, the dollar could break past support near its seven-month low.
Such a drop could spark speculation of potential Japanese intervention to restrain the yen, especially if the dollar drops to a 15-year low by breaching the November 2009 trough of 84.82 on EBS.
With the yen’s latest rise having brought it to levels that could cause pain to Japanese exporters, a focal point is whether Japanese authorities will take steps to curb the yen’s rise, through measures such as verbal or actual intervention, or additional monetary easing measures.
“We’re getting into the territory where the MOF will start to get a little bit more vociferous,” said Gareth Berry, a currency strategist with UBS in Singapore.
Berry said the Ministry of Finance (MOF) may start to express concern over the exchange rate, adding that such rhetoric could help limit the dollar’s downside.
“I think there is plenty of scope for further downside beyond 85 before we actually see an actual act of intervention,” he said.
Japan has not conducted any foreign exchange intervention in more than six years, having last intervened in March 2004.
When the dollar slid to the 84.82 yen trough against the yen in late November, the BOJ stepped closer to currency intervention than at any time in the preceding five years by checking exchange rates with commercial banks. [ID:nT35213]
Soon after, the BOJ called an emergency meeting in early December and decided to pump 10 trillion yen ($115.5 billion) in three-month funds into the banking system.
On Friday, a private survey showed U.S. consumer sentiment weakened in early July to an 11-month low and capped a week which saw U.S. data printing on the softer side, raising questions about the sustainability of a U.S. recovery. [ID:nN15208925].
A resulting slide in U.S. stocks .SPX hit growth-linked currencies like the Australian dollar, which dipped 0.2 percent to $0.8680 AUD=D4. Earlier, traders said a model fund was seen selling the Aussie, which shed 1.6 percent on Friday. (Additional reporting by Anirban Nag and FX analyst Krishna Kumar in Sydney; editing by Kazunori Takada)
(Reuters) – Ireland may not have the political will to bring its budget deficit in line with EU rules as planned by 2014 and could need six years more, the chairman of the smaller governing coalition party the Greens said.
Investors and European leaders have praised Ireland for austerity measures culminating in 4 billion euros ($5.2 billion) of spending cuts imposed in last December’s budget for 2010.
Green Party Chairman Dan Boyle told the Sunday Tribune it was “probably a heresy” for a government party to question whether the deficit could be cut to 3 percent of gross domestic product by 2014 from more than 14 percent in 2009.
“It is certainly doable if you want to be draconian every year,” Boyle was quoted by the newspaper as saying. “But is it politically feasible and is it socially possible?”
Boyle said he still expected the cabinet to deliver the 3 billion euros of savings planned for the 2011 budget in December and then the government could “take stock.”
“I do not see the public appetite continuing,” Boyle said. “It could be that we have neutral budgets for a period.”
Boyle said he was making his comments in acknowledgement of a report by the International Monetary Fund, which expressed doubts over Ireland’s ability to meet the 2014 target.
The Green Party last year debated quitting the alliance with Prime Minister Brian Cowen’s Fianna Fail party due to the strains of the fiscal tightening and bank rescue programme, but its members ultimately decided to stay on board.
BANK BAILOUT COSTS
In a talk show on public radio RTE on Sunday, Boyle said the next parliamentary election — due in 2012 if Cowen can keep the coalition in place until then — would provide an opportunity to debate possibly extending the 2014 fiscal target.
“We have to honor the commitment to the three billion (in savings) in 2011,” he said.
“I think we will have a debate maybe when the general election happens about whether 2014 is the year, whether it could be 2015, 2017, 2020, that we should measure the pain over a longer time period.”
Cowen and Finance Minister Brian Lenihan, main architect of the reforms and also from Fianna Fail, have been adamant Dublin must stick to austerity measures and meet the 2014 deadline.
Asked about Boyle’s remarks, a spokesman for Lenihan confirmed the official budget target remained 2014. He did not comment further.
If Ireland loosened its budget discipline, it could cause a flight of investors who already demand a hefty premium for holding Irish sovereign bonds. A row over fiscal policy could also destabilize the already fragile coalition.
(For an earlier analysis on Cowen’s survival prospects as PM please click)
So far, Green ministers have supported the reforms. Boyle is chairman of the party and a member of the upper house of parliament, but not a member of the cabinet.
The budget deficit has risen partly due to the cost of rescuing banks, chiefly nationalized Anglo Irish Bank. The bank costs last year gave Ireland the biggest deficit per GDP in the EU and could push the 2010 deficit as high as 20 percent.
Boyle said he also expected the state to raise its minority holding in another lender, Allied Irish Banks to a majority of up to 70 percent.
(Editing by Mark Heinrich)
DUBLIN, July 18 (Reuters) – Ireland may not have the political will to bring its budget deficit in line with EU rules as planned by 2014 and could need six years more, the chairman of the smaller governing coalition party the Greens said.
Investors and European leaders have praised Ireland for austerity measures culminating in 4 billion euros ($5.2 billion) of spending cuts imposed in last December’s budget for 2010.
Green Party Chairman Dan Boyle told the Sunday Tribune it was “probably a heresy” for a government party to question whether the deficit could be cut to 3 percent of gross domestic product by 2014 from more than 14 percent in 2009.
“It is certainly doable if you want to be draconian every year,” Boyle was quoted by the newspaper as saying. “But is it politically feasible and is it socially possible?”
Boyle said he still expected the cabinet to deliver the 3 billion euros of savings planned for the 2011 budget in December and then the government could “take stock”.
“I do not see the public appetite continuing,” Boyle said. “It could be that we have neutral budgets for a period.”
Boyle said he was making his comments in acknowledgement of a report by the International Monetary Fund, which expressed doubts over Ireland’s ability to meet the 2014 target. [ID:nLDE66D0F6] [ID:nLDE65N1GI]
The Green Party last year debated quitting the alliance with Prime Minister Brian Cowen’s Fianna Fail party due to the strains of the fiscal tightening and bank rescue programme, but its members ultimately decided to stay on board.
BANK BAILOUT COSTS
In a talk show on public radio RTE on Sunday, Boyle said the next parliamentary election — due in 2012 if Cowen can keep the coalition in place until then — would provide an opportunity to debate possibly extending the 2014 fiscal target.
“We have to honour the commitment to the three billion (in savings) in 2011,” he said.
“I think we will have a debate maybe when the general election happens about whether 2014 is the year, whether it could be 2015, 2017, 2020, that we should measure the pain over a longer time period.”
Cowen and Finance Minister Brian Lenihan, main architect of the reforms and also from Fianna Fail, have been adamant Dublin must stick to austerity measures and meet the 2014 deadline.
Asked about Boyle’s remarks, a spokesman for Lenihan confirmed the official budget target remained 2014. He did not comment further.
If Ireland loosened its budget discipline, it could cause a flight of investors who already demand a hefty premium for holding Irish sovereign bonds. A row over fiscal policy could also destabilise the already fragile coalition.
(For an earlier analysis on Cowen’s survival prospects as PM please click [ID:nLDE6650V4])
So far, Green ministers have supported the reforms. Boyle is chairman of the party and a member of the upper house of parliament, but not a member of the cabinet.
The budget deficit has risen partly due to the cost of rescuing banks, chiefly nationalised Anglo Irish Bank [ANGIB.UL]. The bank costs last year gave Ireland the biggest deficit per GDP in the EU and could push the 2010 deficit as high as 20 percent.
Boyle said he also expected the state to raise its minority holding in another lender, Allied Irish Banks (ALBK.I) to a majority of up to 70 percent.
(Editing by Mark Heinrich)
(Reuters) – The IMF and EU suspended on Saturday a review of Hungary’s funding program, set up in 2008 to save the country from financial meltdown, saying it must take tough action to meet targets for cutting its budget deficit.
Suspension of talks means Hungary will not have access to remaining funds in its $25.1 billion loan package, created by the International Monetary Fund and European Union and which it now uses as financial safety net, until the review is concluded.
Negotiations with the lenders had been expected to finish early next week. Analysts said the forint currency could fall sharply when financial markets reopen Monday due to uncertainty over the international safety net for Hungary, which has financed itself from the markets since last year.
“In an environment of heightened market scrutiny of government deficits and debt levels, the fiscal deficit targets previously announced — 3.8 percent of GDP in 2010 and below 3 percent of GDP in 2011 — remain an appropriate anchor for the necessary consolidation process and debt sustainability, and should be adhered to, but additional measures will need to be taken to achieve these objectives,” the IMF said.
“Sustainable consolidation will require durable, non-distortive measures, which the authorities need more time to develop,” it said in a statement.
HITTING WHERE IT HURTS MOST
Hungary’s new center-right government, which swept to power in April elections, has said it wanted to extend its current financing deal with lenders until the end of 2010 and seek a precautionary deal for 2011 and 2012.
Economy Minister Gyorgy Matolcsy made clear the government was keen to resume negotiations. “The government will of course continue talks with international organizations including the IMF and the EU,” he said in a statement published by the national news agency MTI Saturday.
Christoph Rosenberg, who led the IMF delegation to Hungary, signaled that the Fund wanted more on next year’s budget. “By definition when we come next time — unless we come next week — the government will have made more progress on the 2011 budget and that will be a very important budget,” he told Reuters.
In an interview, he also said the IMF had not discussed the possibility of a new financing deal for 2011 and 2012.
“We are aware of what has been said in public but in our meetings we didn’t really get to that point, because we obviously needed to first resolve the policy issues and those have not been resolved,” he said.
The EU issued a separate statement saying the conclusion of the review had to be postponed and further talks should be held at a later stage.
“Hungary has returned to a positive economic growth path and now has one of the lowest budget deficits in the EU. I welcome the authorities’ commitment to the 2010 deficit target,” said Olli Rehn, Commissioner for Economic and Monetary Affairs.
“However, the correction of the excessive deficit by next year will require tough decisions, notably on spending.”
Hungary needs the IMF/EU safety net to keep the trust of investors from whom it borrows. But the country remains vulnerable due to its high public debt, which is equal to 80 percent of GDP, and its strong reliance on foreign financing.
“If we do not have the safety net of international lenders, that hits us where it hurts most,” said MKB Bank analyst Zsolt Kondrat.
“One would definitely expect a weakening forint Monday. A 10-forint weakening (versus the euro) is quite plausible, and nobody knows how nervous the market’s reaction might be.”
The forint traded at around 282 to the euro Friday.
Neighboring Romania had to take tough steps last month to secure the release of its IMF aid and reassure investors.
(Reporting by Krisztina Than/Marton Dunai; editing by David Stamp)
(Reuters) – Hungary faces a fall in its currency and a surge in financing costs due to a failure to agree with lenders on its economic plans and it will need to reach a deal to retain the trust of investors.
Talks with the International Monetary Fund (IMF) and the EU ended prematurely on Saturday without a conclusion of the country’s program review, which means Hungary will not have access to remaining funds in its 20 billion euro ($26 billion) loan secured in 2008 until a deal is reached.
This is a risky path for a country which has a poor budget track record and which runs central Europe’s highest public debt at about 80 percent of gross domestic product, analysts said.
Although Hungary does not face an immediate pressure on state finances as its 2010 financing seems to be secure thanks to unused loans and cash reserves, it needs the lenders’ safety cushion as an external anchor of credibility.
A lack of agreement on the current program also excludes the possibility of a new precautionary deal for 2011 and 2012, which the country needs as a safety net, analysts said.
This will likely force the new center-right government, which took office in May after winning April parliamentary elections, to come to an agreement with the IMF and EU, but the timing of this is uncertain, they said.
“This is fairly bad news and a mistake from the government … the market impact will be negative with a likely over 1 percent or possibly bigger currency fall and a jump in yields,” said Zoltan Torok, analyst at Raiffeisen.
“I’m sure there will be an agreement, as they (the cabinet) simply will be forced to do it, but I don’t know when and the later it comes the worse.”
Hungary, which had to resort to a rescue loan from the IMF/EU in October 2008 to avert meltdown, has since stabilized its finances but its heavy reliance on foreign funding makes the country vulnerable to negative shifts in market sentiment.
This showed in early June when the government made confusing comments comparing its fiscal problems with the Greek debt crisis, which led to sharp market falls and seriously damaged the government’s policy credibility.
Then the cabinet committed to this year’s budget deficit target of 3.8 percent of gross domestic product (GDP) in an attempt of damage control to reassure investors.
But lenders said on Saturday further steps were needed to achieve the deficit targets this year and in 2011, and the government needs to work out durable measures and spending cuts to reduce the deficit and ensure sustainability.
UNCERTAINTY AHEAD
While the breakdown of talks with its lenders does not pose an immediate financing risk for Hungary, it is yet another sign of the government’s unpredictability in its policies and decisions which could alarm stability-loving investors.
Prime Minister Viktor Orban said after winning elections in April Hungary would not accept “diktats” from the IMF and EU in future negotiations as they are “not our bosses.”
The cabinet has been on a collision course with the central bank, mounting pressure on Governor Andras Simor to resign, and pledging to cut his salary which has triggered a strong warning from the European Central Bank (ECB) only last week.
“We doubt fundamentally the new government’s commitment to the IMF/EU deficit targets and their stubbornness around enacting their pet policies such as the banking tax and cutting the pay of the central bank,” said Peter Attard Montalto at Nomura in London.
“We now have proof that the supranational support for countries is softer and not unconditional … The IMF and the EU will not allow for moral hazard and free riders.”
The European Commission on Saturday urged the government to respect the full independence of the central bank.
While the market reaction is bound to be negative, it will be more on the confidence side rather than fundamentals as Hungary has no immediate need for the IMF’s money right now, said Gergely Suppan, analyst at Takarekbank.
Of the 2008 credit line secured from the IMF, the EU and the World Bank, Hungary still has about 3.5 billion euros in hand, and a further 1.4 billion at the central bank, which had total foreign exchange reserves of 35.2 billion at the end of June.
“Hungary’s government seems to have sufficient funds at the moment and FX reserves in the National Bank of Hungary (NBH) are high. Therefore, the implication of delay of this review is not that Hungary runs into immediate financing problems–they are not in dire need of the money,” said Christian Keller at Barclays.
While the government is likely to resume talks with lenders, uncertainty could prevail until the autumn, when Hungary holds municipal elections on October 3 where the ruling Fidesz party wants to cement its powers at the local level.
That is also when the government will need to finalize the 2011 budget, which the IMF said would be a key issue in any future negotiations.
“We think there is a mutual interest to get the negotiations back on track, but the government may not be willing to make the tough decisions it needs to make for agreement with the IMF-EU until after the local elections in October,” Keller said.
(Editing by David Holmes)
(Reuters) – The International Monetary Fund and the European Union have suspended a review of Hungary’s 20 billion euro ($26 billion) financing agreement, but left the door open for more talks with the new center-right Fidesz government.
The decision means Hungary, which uses the package as a safety net, will not have immediate access to undrawn funds of 5.5 billion euros from the financing deal slated to expire in October.
Here are some questions and answers on what lies ahead:
WILL THERE BE A MARKET BACKLASH?
The forint, central Europe’s second-worst performing currency behind the Serbian dinar this year, is bound to weaken, probably in excess of 1 percent, and government bond yields will rise when local markets reopen on Monday.
That will increase Hungary’s borrowing costs and heightened market volatility may also force the central bank, which will discuss interest rates at a regular rate meeting on Monday, into adopting a more hawkish line.
The bank kept interest rates at a record low of 5.25 percent at the past two meetings after 10 months of easing worth 425 basis points. All 25 analysts in a Reuters poll on Thursday expected the bank to hold fire again.
But some analysts said that after Saturday’s unexpected suspension of talks with lenders, the bank may consider a rate hike if markets plunge on Monday.
Falls in the forint will also put pressure on Hungarian households holding trillions of forints worth of foreign currency mortgages, primarily in the volatile Swiss franc, which hit record highs versus the forint in July.
With scarce details on the government’s plans for reforms and no clarity on its 2011 budget plans, a sustained period of uncertainty would have a negative impact on Hungarian markets.
WILL THERE BE AN AGREEMENT WITH LENDERS?
Analysts said despite the talks falling through this week, the government should eventually come to an agreement with the IMF and the European Union, but a deal may not materialize until local government elections due on October 3.
That will give more time for Fidesz to formulate plans on the 2011 budget and on how it wants to transform loss-making state transportation companies into viable businesses able to remain afloat without constant state support.
Analysts said the lack of agreement may also have been a tactical move by the government to postpone the announcement of painful budget cuts needed to cut the deficit below the EU’s 3 percent ceiling next year until after the October poll.
Hungary’s government must also seal a review of the current deal if, as announced earlier, it wants to secure a two-year precautionary agreement worth 10-20 billion euros to serve as a safety net in 2011-12.
DOES HUNGARY NEED IMF MONEY RIGHT NOW?
Hungary has been able to finance itself from the markets since last year and has all of its foreign issuance plans for this year already covered.
Earlier this week debt agency AKK sold all bonds on offer at an auction and raised its 10-year offer by 5 billion forints, with yields dropping about 25-30 basis points across the curve from the previous tenders two weeks earlier.
So far the state has drawn about 12.8 billion euros of the 20 billion available in the IMF/EU package and analysts have said it could safely finance this year’s budget deficit with the help of its available unspent IMF and EU funds worth about 3.5 billion euros. On top of this the central bank has called down 1.4 billion euros from the package and put it in its reserves.
CAN HUNGARY AFFORD TO ESCHEW AN IMF DEAL BEYOND 2010?
The government itself has said it would use a new agreement with the IMF and the EU as a safety net, and not rely on it to cover its funding needs for the next two years.
Analysts said not having a new agreement with international lenders after the current one expires in October would be risky as the deal would be an important credibility anchor but Hungary could still be able to finance itself from the markets.
In a worst case scenario, however, the lack of an agreement with lenders now may trigger a negative market reaction which would leave the government with no choice but to seek the IMF’s good graces again.
(Editing by David Holmes)
(For more stories on the Japanese economy, click [ID:nECONJP])
TOKYO July 14 (Reuters) – The International Monetary Fund will propose to Japan’s government that it raise taxes soon to help lower its bulging public debt, the Asahi newspaper reported on Wednesday.
The proposal could come as early as this week, the Asahi reported, citing sources with ties to the IMF. The non-binding recommendation would be part of the IMF’s annual economic assessment of the individual countries that make up the fund, the Asahi said. (Reporting by Stanley White)
DAEJEON, South Korea, July 12 (Reuters) – Asia has emerged as a global economic powerhouse but is faced with policy challenges from rising capital inflows and needs to watch out for possible shocks from Europe, the IMF’s chief said on Monday.
Managing Director Dominique Strauss-Kahn admitted to mistakes the International Monetary Fund made in helping several Asian countries overcome the 1997-1998 financial crisis but said its efforts eventually paid off by making the region more sound.
Strauss-Kahn also said during a conference, co-hosted by the IMF and the South Korean government, that it was working on ways to enhance or redesign its existing lending facilities and that details would be available by November.
“We may have made mistakes. Who doesn’t?,” he said during the conference in the central South Korean city of Daejeon. “We have learned how big the danger of volatile capital flows is and how big those capital flows may be.”
At the same conference, South Korean Finance Minister Yoon Jeung-hyun urged the IMF to take steps to help prevent another financial crisis, repeating the country’s call for a strengthened network of financial safety nets.
“I belive the IMF has an important contribution to make, by proposing and enacting concrete and realistic measures to strengthen financial safety nets around the globe,” Yoon said.
Yoon said efforts from developing countries were not sufficient to withstand external shocks on increases in volume and high volatility of capital flows.
Strauss-Kahn also acknowledged the argument that the IMF’s prescriptions offered in return for rescuing Asia’s emerging economies of South Korea, Thailand and Indonesia during the 1990s crisis could have been better structured.
“We have learned also that we need to focus conditionality on the real problems, not having a long list of conditions that may have little to do with the problems at stake,” he said at the conference on Asia’s growing role in the global economy.
He warned of remaining downward risks mainly involving the fiscal crisis in Europe.
“Obviously Europe is today with low growth and some risks of crisis on the fiscal side, which means that policymakers need to remain attuned to negative shocks including capital inflows,” he said.
He repeated his previous view that the U.S. dollar will remain the world’s major reserve currency for a long time, saying it will take a long time before alternatives such as the IMF’s special drawing rights (SDRs) emerge as a reserve money. (Additional reporting by Cheon Jong-woo; Editing by Muralikumar Anantharaman)
Voters dealt Kan’s Democratic Party of Japan a stinging rebuke in the election, depriving the DPJ and its tiny ally of a majority less than a year after the Democrats swept to power with promises of change.
The Democrats still have a dominant grip on the more powerful lower house. But they will need to seek new partners to control the upper chamber, which can block bills.
Below are key policies that could be affected by the outcome of the election:
FISCAL POLICY
Debt woes in the euro zone have turned the spotlight on Japan’s own massive debt, which the International Monetary Fund put at 217.7 percent of gross domestic product last year, far worse than Greece’s debt-to-GDP ratio of 115.1 percent.
Most of Japan’s debt is held by domestic investors, who are less sensitive to credit ratings agency downgrades than foreign investors, but that is slowly changing as the population ages and household savings fall.
Kan, a former finance minister, had made fiscal reform a top priority, floating a possible doubling of the 5 percent consumption tax. The main opposition Liberal Democratic Party also favors a rise in the sales tax to 10 percent, but the poor election results could make it harder for Kan to push forward debate on the politically touchy topic.
The government last month unveiled a mid- and long-term fiscal reform strategy. But the plan lacked specific ideas on how to meet ambitious targets such as balancing the budget and reducing its debt-to-GDP ratio.
A majority of voters agree fiscal reform is needed. But his apparent flip-flopping on a possible additional tax burden has put off many voters.
MONETARY POLICY
The Bank of Japan, which has stressed the need for a credible plan to cut back public debt, sees little need to ease monetary policy and feels it has done enough for now by outlining a loan program aimed at supporting industries with growth potential.
Political instability after Sunday’s election means it would be difficult for the government to carry out steps to support a fragile recovery in the world’s No.2 economy. That could renew government pressure for a more aggressive monetary policy. While the BOJ is independent from the government by law, direct pressure from the premier might be hard to resist.
The opposition Your Party, seen by some as a potential DPJ ally after it won 10 seats in Sunday’s poll, wants to revise the law governing the central bank to seek stronger government-BOJ cooperation to end deflation by making maximum employment one of the BOJ’s objectives, similar to a law governing the U.S. Federal Reserve.
YEN POLICY
Investors remain reluctant to test the government’s tolerance for a strong currency, although Tokyo has not intervened in the market since early 2004.
Kan caused a stir in January when he said he would work with the BOJ to weaken the yen, and that “it would be nice” if the Japanese currency slipped further.
He has subsequently toed the government line that stable exchange rates are desirable but levels should be set by the markets — but noted after becoming prime minister that there was a general view that a weaker yen would be better for Japan’s export-driven economy.
CLIMATE POLICY
Kan has stuck to a 2020 goal to cut Japan’s greenhouse gas emissions by 25 percent from 1990 levels, premised on an international framework in which major emitting countries would agree on ambitious targets.
The more powerful lower house passed a climate bill including that goal and a shortlist of domestic measures to achieve it, but the upper house ran out of time to enact the legislation. But the fate of the legislation is murky after the ruling coalition suffered a major setback in the poll.
POSTAL REFORM
The parliament session ended in mid-June without passage of a bill to scale back postal privatization. Kan has said he will resubmit the legislation, sought by his tiny coalition partner the People’s New Party, in an extra session in the autumn.
But without a coalition upper house majority, it looks almost impossible for the legislation to be enacted any time soon.
Not all Democratic Party lawmakers are keen on the legislation and banks complain it would give Japan Post an unfair advantage because of an implicit government guarantee.
Japan Post, which has retail banking and insurance services, is the world’s largest financial conglomerate with assets of about 300 trillion yen ($3,387 billion) and its fate could sway financial markets and industry.
The United States and Europe have said the draft legislation had not addressed their concerns about what they see as the preferential treatment that Japan Post receives compared with private-sector companies.
DIPLOMACY, SECURITY POLICY
The election defeat of the ruling coalition is unlikely to shift Japan’s foreign and security policies drastically.
The Democrats took power promising to steer a diplomatic course more independent of close ally the United States, but efforts by Kan’s predecessor Hatoyama to do so hit a roadblock when he failed to find an alternative to keeping a U.S. Marine airbase on the southern Japanese island of Okinawa.
Tokyo and Washington have basically agreed to implement a 2006 agreement to shift the Marines’ Futenma airbase to a less crowded part of Okinawa, host to about half the U.S. troops in the country.
But local opposition clouds the outlook for implementation, and experts worry that Hatoyama opened a Pandora’s box by fanning anti-base sentiment that could undermine the 50-year-old alliance.
The government will also likely keep stressing the need to deepen ties with other Asian countries including China, given Japan’s increasing reliance on the region for economic growth.
(Compiled by Leika Kihara, Hideyuki Sano, Charlotte Cooper, Yoko Nishikawa, Risa Maeda and Linda Sieg; Editing by Michael Watson)
(Reuters) – Japanese Prime Minister Naoto Kan’s government suffered a major blow in Sunday’s upper house election, threatening a policy deadlock that could thwart efforts to curb massive public debt and engineer growth.
Voters dealt Kan’s Democratic Party of Japan a stinging rebuke in the election, depriving the DPJ and its tiny ally of a majority less than a year after the Democrats swept to power with promises of change. [ID:nTOE66A02V]
The Democrats still have a dominant grip on the more powerful lower house. But they will need to seek new partners to control the upper chamber, which can block bills.
Below are key policies that could be affected by the outcome of the election:
FISCAL POLICY
Debt woes in the euro zone have turned the spotlight on Japan’s own massive debt, which the International Monetary Fund put at 217.7 percent of gross domestic product last year, far worse than Greece’s debt-to-GDP ratio of 115.1 percent. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on Japan's debt woes: r.reuters.com/sez92m Graphic on Japan poll results: r.reuters.com/sax86m More stories on the Japanese politics [ID:nPOLJP] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
Most of Japan’s debt is held by domestic investors, who are less sensitive to credit ratings agency downgrades than foreign investors, but that is slowly changing as the population ages and household savings fall.
Kan, a former finance minister, had made fiscal reform a top priority, floating a possible doubling of the 5 percent consumption tax. The main opposition Liberal Democratic Party also favours a rise in the sales tax to 10 percent, but the poor election results could make it harder for Kan to push forward debate on the politically touchy topic.
The government last month unveiled a mid- and long-term fiscal reform strategy. But the plan lacked specific ideas on how to meet ambitious targets such as balancing the budget and reducing its debt-to-GDP ratio. [ID:nTOE65L01H]
A majority of voters agree fiscal reform is needed. But his apparent flip-flopping on a possible additional tax burden has put off many voters.
MONETARY POLICY
The Bank of Japan, which has stressed the need for a credible plan to cut back public debt, sees little need to ease monetary policy and feels it has done enough for now by outlining a loan programme aimed at supporting industries with growth potential.
Political instability after Sunday’s election means it would be difficult for the government to carry out steps to support a fragile recovery in the world’s No.2 economy. That could renew government pressure for a more aggressive monetary policy. While the BOJ is independent from the government by law, direct pressure from the premier might be hard to resist.
The opposition Your Party, seen by some as a potential DPJ ally after it won 10 seats in Sunday’s poll, wants to revise the law governing the central bank to seek stronger government-BOJ cooperation to end deflation by making maximum employment one of the BOJ’s objectives, similar to a law governing the U.S. Federal Reserve.
YEN POLICY
Investors remain reluctant to test the government’s tolerance for a strong currency, although Tokyo has not intervened in the market since early 2004.
Kan caused a stir in January when he said he would work with the BOJ to weaken the yen, and that “it would be nice” if the Japanese currency slipped further.
He has subsequently toed the government line that stable exchange rates are desirable but levels should be set by the markets — but noted after becoming prime minister that there was a general view that a weaker yen would be better for Japan’s export-driven economy.
CLIMATE POLICY
Kan has stuck to a 2020 goal to cut Japan’s greenhouse gas emissions by 25 percent from 1990 levels, premised on an international framework in which major emitting countries would agree on ambitious targets.
The more powerful lower house passed a climate bill including that goal and a shortlist of domestic measures to achieve it, but the upper house ran out of time to enact the legislation. But the fate of the legislation is murky after the ruling coalition suffered a major setback in the poll.
POSTAL REFORM
The parliament session ended in mid-June without passage of a bill to scale back postal privatisation. Kan has said he will resubmit the legislation, sought by his tiny coalition partner the People’s New Party, in an extra session in the autumn.
But without a coalition upper house majority, it looks almost impossible for the legislation to be enacted any time soon.
Not all Democratic Party lawmakers are keen on the legislation and banks complain it would give Japan Post an unfair advantage because of an implicit government guarantee.
Japan Post, which has retail banking and insurance services, is the world’s largest financial conglomerate with assets of about 300 trillion yen ($3,387 billion) and its fate could sway financial markets and industry.
The United States and Europe have said the draft legislation had not addressed their concerns about what they see as the preferential treatment that Japan Post receives compared with private-sector companies.
DIPLOMACY, SECURITY POLICY
The election defeat of the ruling coalition is unlikely to shift Japan’s foreign and security policies drastically.
The Democrats took power promising to steer a diplomatic course more independent of close ally the United States, but efforts by Kan’s predecessor Hatoyama to do so hit a roadblock when he failed to find an alternative to keeping a U.S. Marine airbase on the southern Japanese island of Okinawa.
Tokyo and Washington have basically agreed to implement a 2006 agreement to shift the Marines’ Futenma airbase to a less crowded part of Okinawa, host to about half the U.S. troops in the country.
But local opposition clouds the outlook for implementation, and experts worry that Hatoyama opened a Pandora’s box by fanning anti-base sentiment that could undermine the 50-year-old alliance.
The government will also likely keep stressing the need to deepen ties with other Asian countries including China, given Japan’s increasing reliance on the region for economic growth. ($1=88.56 Yen) (Compiled by Leika Kihara, Hideyuki Sano, Charlotte Cooper, Yoko Nishikawa, Risa Maeda and Linda Sieg; Editing by Michael Watson)
July 9 (Reuters) – Any changes to the makeup of China’s massive pile of foreign exchange reserves will have to be gradual so as not to cause volatility in world markets, the International Monetary Fund’s chief economist said.
Shifts in the composition of the Chinese central bank’s more than $2 trillion portfolio would have to be “very, very slow”, Olivier Blanchard, the IMF’s economic counsellor and director of research, said at an Asia Society event in Hong Kong on Friday.
China bought a record $7.9 billion in short-term Japanese debt in May, a surge that some analysts said was a sign of foreign reserves diversification into the yen and away from the euro and the dollar. [ID:nTOE66705G] (Reporting by James Pomfret, writing by Kevin Plumberg; Editing by Chris Lewis)
June 25 (Reuters) – Romania’s Constitutional Court rejected some parts of a key austerity package related to pensions on Friday, endangering a vital IMF-led aid deal, local news agency Agerpres reported, citing judicial sources.
Bonds | Global Markets
The court said an official announcement would follow shortly.
Disbursement of about 2 billion euros in aid from the International Monetary Fund and the European Union depended on the court’s approval of a government move to slash state wages by a quarter and cut pensions by 15 percent.
The IMF deal is the main anchor for foreign investors, whose cash is vital to the struggling recession-hit economy. (Reporting by Luiza Ilie and Sam Cage; editing by Philippa Fletcher)
June 24 (Reuters) – Here are news stories, press reports and events which may affect Greek financial markets on Thursday:
Financials
GREEK IMF REPRESENTATIVE SEES GREECE WINNING AID
Greece is likely to have no problems in securing a second aid tranche of a giant European Union and International Monetary Fund bailout, the country’s representative at the IMF said on Wednesday. [ID:nLDE65N068]
CABINET TO DISCUSS PENSION REFORM BILL
Prime Minister George Papandreou chairs a cabinet meeting to discuss the pension reform bill, at 1100 GMT.
GREEK ANTI-AUSTERITY STRIKES HIT FERRIES, TOURISTS
Communist trade unionists blocked travellers from boarding ships at Greece’s largest port on Wednesday, stranding tourist ferries as part of protests against austerity measures in the debt-choked nation. [ID:nLDE65M18G]
GREEK APRIL C/A GAP STEADY AT 2.95 BLN EUR
Greece’s current account deficit was unchanged year-on-year in April at 2.95 billion euros ($3.6 billion), as lower trade and income account deficits were offset by a fall in the services balance, the country’s central bank said on Wednesday. [ID:nLDE65L1HI]
GREEK PARLIAMENT TO PROBE 2007 BOND ISSUE SCANDAL
Greek lawmakers have decided to investigate a bond scandal that helped topple the country’s previous conservative administration as part of a campaign to clean up politics soiled by decades of corruption. [ID:nLDE65M0PL]
OTE ELECTED FIVE NEW BoD MEMBERS
OTE (OTEr.AT) announced that it elected five new members to its board of directors, with Panagis Vourloumis retaining his place as chairman and CEO. [ID:nWGATGAA8]
Nevertheless, the decision does not exclude changes in the near future, financial daily Imerisia reported, adding that Deutsche Telekom (DTEGn.DE), which owns 30 percent of the company, has not announced its intentions regarding OTE’s management.
www.imerisia.gr
EUROPEAN STOCK INDEX FUTURES RISE, MINERS EYED
European shares were set to rise on Thursday, snapping two consecutive sessions of losses, tracking gains in Asia on hopes new Australian Prime Minister Julia Gillard would compromise on a controversial mining tax. [ID:nLDE65N05X]
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BEIJING, June 20 (Reuters) – China will keep the yuan’s exchange rate at a basically stable level, the central bank said on Sunday, suggesting that the country’s new currency regime will look a lot like the old one.
China announced on Saturday that it would resume making the yuan more flexible, signalling that it was ready to break a 23-month-old peg to the dollar that had come under intense international criticism.
But in a lengthy statement about how reform would proceed, the central bank explicitly ruled out a one-off revaluation, repeatedly said there was no basis for any big appreciation and added that the currency’s value was not far off its fair level.
Lack of a real rise in the exchange rate would provide ammunition for critics, especially hawks in the U.S. Congress, who say Beijing’s actions will speak louder than its words and that penalties should be imposed if it keeps the yuan artificially cheap.
Leaders of the United States, the European Union, Japan and the International Monetary Fund, among others, welcomed its vow to deepen yuan reform as a hopeful contribution to the balancing of the world economy.
All eyes on Monday will be on the daily reference rate set by the Chinese central bank to manage the yuan’s value. Many economists believe that Beijing will nudge the exchange rate higher in increments, not leaps.
Global equity markets may rally as the news, coming a week before a Group of 20 meeting in Canada, eases fears of a trade row between the United States and China at a delicate time for the world economy.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
For full coverage [ID:nSGE65I02M]
Breakingviews [ID:nLDE65I0D5]
Factbox on China's currency system [ID:nSGE65I02Q]
Text of China central bank statement [ID:nTOE65I017]
Analysis [ID:nTOE65J00K]
Graphic r.reuters.com/sut87k
New Tone, Same Old Yuan link.reuters.com/cad92m
Deferring need for rate rise link.reuters.com/wyc92m ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
The central bank on Sunday promised to implement “dynamic management and adjustment”, which could lead to the yuan falling, not just rising, against the dollar depending on how other currencies perform.
But the crux of the exchange rate system would be the same as it had been previously, meaning that the yuan is likely at most to return to the path of gradual gains against the dollar seen for three years until mid-2008.
“Keeping the yuan basically stable at a reasonable and balanced level is an important part of further promoting reform of yuan exchange rate formation mechanism,” the People’s Bank of China said, adding that gradual adjustment was needed in order to give firms time to adjust.
Chinese economists said the move was justified economically and, above all, had a political aim.
“This important declaration by the Chinese government coming before the G20 summit is a big concession to prevent the yuan’s exchange rate from being politicised by Western countries,” said Gao Shanwen, chief economist at Essence Securities in Beijing.
China said that freezing the yuan to the dollar since July 2008 had helped mitigate the impact of the global financial crisis and spur the world’s recovery.
With the economy on a more solid footing, it was time to enhance the exchange rate’s flexibility, though there were no grounds for “large-scale appreciation”, it said.
SURPRISE AND CONTROVERSY
The European Central Bank (ECB) and Jean-Claude Juncker, who heads the Eurogroup of euro zone finance ministers, welcomed in a joint statement China’s decision on the yuan, which is also known as the renminbi (RMB). [ID:nLDE65J03Z]
“Given China’s important role in the global economy, we encourage the authorities to allow for greater flexibility of the RMB effective exchange rate as a means of promoting balanced growth in China and in the world economy,” they said on Sunday.
European leaders have generally been less strident than those in the United States as the euro has fallen sharply against the Chinese currency, buying only 8.45 yuan EURCNY=R now compared with almost 11 in July 2008.
This helped euro zone exporters through the financial crisis. Last year exports from the bloc to China grew 4 percent while those to the U.S. fell close to 20 percent.
Markets have long been waiting for China to break the yuan’s peg to the dollar, but the timing still came as something of a surprise. One day earlier, senior officials had stressed that China would not be bullied into resuming yuan appreciation.
The country’s major newspapers carried no real reports of the policy about-face, just reprinting the central bank’s statement verbatim.
The lack of articles and commentaries for the time being likely reflected a push by the government to get everyone on message about what could be a controversial policy change.
On a few websites, readers still made their views heard.
“This is such worrying news! China, you have surrendered!” wrote one online reader of the Global Times, a popular tabloid.
“We’re so well-behaved, doing whatever the United States asks of us,” wondered another, sarcastically.
Whether U.S. critics of China’s currency regime will agree remains to be seen.
INTENSE CRITICISM
Beijing has faced a barrage of complaints from abroad for keeping the yuan artificially cheap even as the country’s export juggernaut roared back to life.
Much of the rest of the global economy remains sluggish and beset by unemployment in the wake of the financial crisis, and China’s policy is seen as stealing jobs from foreign markets.
U.S. patience with Beijing over the yuan has worn thin and lawmakers threaten to penalise it for a strategy they say is unfair and breaks rules of global trade.
Democratic U.S. Senator Charles Schumer, a leading critic, said China’s statement was too vague and pledged to press ahead with legal action to raise trade barriers.
U.S. Treasury Secretary Timothy Geithner, who has delayed publication of a potentially embarrassing report that could cite China as a currency manipulator, stressed that China’s actions would speak louder than words.
“This is an important step but the test is how far and how fast they let the currency appreciate,” he said. (Additional reporting by Ben Blanchard; Editing by Benjamin Kang Lim, David Stamp and Jon Loades-Carter)
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Ireland to auction bonds after Moody’s downgrade
July 20 (Reuters) – Ireland is due to auction bonds worth up to 1.5 billion euros on Tuesday, a day after Moody’s cut its credit rating citing mounting bank rescue costs and weak growth prospects.
Moody’s, which dropped the rating by one notch to Aa2, also changed its outlook to stable from negative, which helped make much of the hit to Irish bond markets on Monday short-lived.
Analysts expect the National Treasury Management Agency (NTMA) to meet its target to sell between 1 billion and 1.5 billion euros of 6- and 10-year bonds on Tuesday.
The NTMA almost invariably hits the top of its target size range but borrowing costs could rise compared with similar auctions in May and June as fresh bad news has emerged since then concerning Ireland’s ability to cut its budget deficit.
The cost of bailing out nationalised Anglo Irish Bank [ANGIB.UL] last year gave Ireland a budget deficit of 14 percent of gross domestic product, the highest in Europe, and this could rise to 20 percent this year, the state-funded Economic and Social Research Institute (ESRI) said last week [ID:nLDE66C0WA].
And while the Irish public has so far grudgingly accepted fiscal tightening, a senior official in Prime Minister Brian Cowen’s governing coalition said on Sunday voters might not be ready to accept all the further cuts on the way. [ID:nLDE66H07R]
The International Monetary Fund has also questioned Ireland’s ability to meet an EU deadline to get the deficit down to 3 percent of GDP by 2014. [ID:nLDE66D0F6]
Ministers have stood by the 2014 target and Cowen on Monday reacted to the Moody’s downgrade by saying domestic commentators had painted too negative a picture of the Irish economy.
He referred to praise from investors for his determination to cut spending, which has helped differentiate Ireland from other struggling euro zone member states.
“The message from outside this country is that Ireland is seen to be proactively confronting the challenges that it faces,” Cowen said. “There is a lot of support for what Ireland has been seeking to achieve.”
Ireland does not face any major bond redemptions this year and NTMA Chief Executive John Corrigan said on Friday it had raised enough funds to see Ireland through to the first quarter of 2011 regardless of the outcome of upcoming monthly auctions.
Having raised more than 80 percent of its planned 20 billion euro of borrowings this year, Corrigan said he aimed to have the 5 billion euro in debt maturing next year already funded going into 2011. [ID:nLDE66F0LP]
However, Corrigan also said that the spread of Irish bonds over German Bunds was disappointingly high.
Tuesday’s auction results are due around 0900 GMT.
(For scenarios on hurdles for the Irish fiscal drive please click [ID:nLDE66I10Z]) (Editing by Tomasz Janowski)