Strauss-Kahn: Europe has ‘only weeks’

Strauss-Kahn: Europe has ‘only weeks’

DOMINIQUE Strauss-Kahn has made a rare public appearance after sexual-assault charges against him were dropped, declaring a Eurozone collapse would not solve Europe’s sovereign debt crisis.

Speaking at a forum in Beijing in his first public appearance since resigning under pressure earlier this year, the former International Monetary Fund (IMF) managing director stressed the continent’s banks must be recapitalised.

He told reporters that European banks are more willing to reduce lending than raise new capital to meet higher capital adequacy ratio standards – a development that has negative implications for the regional economy.

A fundamental solution to the debt crisis should be based on economic development and growth, and there should not be excessive focus on austerity measures, he said, adding that the IMF’s strategy for Greece has not been well adopted, which he called “a pity.”

Mr Strauss-Kahn predicted it will take a long time for the European Union to emerge from the crisis.

France and Germany need to compromise and come to an agreement on a plan to move forward, he said, adding that the relationship between the two countries’ leaders is not as strong as in the past.
Mr Strauss-Kahn also said the global monetary system is not working properly and needs to be improved, and that a functioning system depends on orderly cross-border capital flows.

He said the IMF should also consider adding more currencies to the basket that forms Special Drawing Rights, a kind of synthetic currency created by the IMF. The current SDR basket includes the US dollar, euro, Japanese yen and British pound.

The yuan is a “natural candidate” for inclusion in the SDR basket, but it must first float freely, he said.

He also said emerging economies, such as Brazil, India and China, should have higher quotas for financial contributions to the IMF and more voice on the IMF board, the fund’s main decision-making body.

Read more: http://www.news.com.au/world/strauss-kahn-speaks/story-e6frfkyi-1226226266319#ixzz1h9I1KFeN

Euro Project Intellectually, Morally, Democratically Bankrupt

By Mike Shedlock

12/13/2011

It is disgusting to see UK Prime Minister David Cameron all but throw away the victory he achieved when he vetoed the Merkozy treaty.

Please consider these sniveling, apologetic snips from the New York Times article Cameron Says His Veto on Europe Treaty Protects Britain

Mr. Cameron, a Conservative, seemed at pains to offer soothing words to those afraid that he had so alienated his European allies that Britain was bound to leave the European Union altogether.

“Britain remains a full member of the E.U., and the events of the last week do nothing to change that,” Mr. Cameron said. “Our membership of the E.U. is vital to our national interest. We are a trading nation, and we need the single market for trade, investment and jobs.”

Olli Rehn, the European commissioner for economic and monetary affairs, said Britain could hardly wall off its financial industry, the bustling City of London. “I regret very much that the United Kingdom was not willing to join the new fiscal compact, as much for the sake of Europe and its crisis response as for the sake of British citizens and their perspectives,” Mr. Rehn said. “We want a strong and constructive Britain in Europe, and we want Britain to be at the center of Europe, and not on the sidelines. If this move was intended to prevent bankers and financial corporations in the City from being regulated, that is not going to happen.”

Mr. Rehn also offered a reminder that Britain had approved “the six-pack of new rules tightening fiscal and economic surveillance” that goes into force on Tuesday. “The U.K.’s excessive deficit and debt will be the subject of surveillance like other member states,” he said, “even if the enforcement mechanism mostly applies to the euro area member states.”

Mr. Cameron faced a few gentle questions about whether to hold a national referendum on Britain’s membership in the European Union, something the anti-Europe faction dearly wants, he batted them briskly away.

Threats From Rehn

Clearly Olli Rehn will stop at nothing to get what he wants, and by sucking up to the EU, Cameron practically admits he is willing to sell the UK down the river next time, for a few useless promises.

UK not to Blame

Telegraph writer Boris Johnson nails it with We’re right about the euro – that’s why Europe is angry

I know some people are unsettled to see all these powerful Europeans getting so very, very cross. Angela Merkel has said that we weren’t even negotiating properly. Nicolas Sarkozy can hardly bring himself to mention Britain by name and has been filmed apparently refusing to shake David Cameron’s hand. Across the Continent, the papers are full of wrathful headlines about the general arrogance and stupidity of the Englanders/Anglais/Inglesi. I watched some poor Lib Dem Euro MP who seemed about to explode with disgust at the UK’s handling of the recent summit.

And there must be many people in this country who find themselves a bit spooked by the vitriol of the criticism. For some days, the BBC has been telling us in sepulchral tones that we are “isolated” and “marginalised” – as if a decision had been taken to abandon us in our misty island like a bunch of woad-painted savages.

Now look. It wasn’t the Anglo-Saxon bankers who caused the trouble in the eurozone, Sarkozy mon ami. It was the utter failure of the eurozone countries – starting with France, incidentally – to observe the Maastricht rules. It was the refusal of the Greeks to control their spending or to reform their social security systems. In Greece and Italy, the democratic leaders have been effectively deposed in the hope of appeasing the markets and saving the euro; and what makes the leaders of the eurozone countries even more furious is that it doesn’t seem to be working.

They blame David Cameron for “vetoing” a new EU treaty, when really he has done no such thing. It is perfectly open to the other EU countries now to go ahead and form their own new fiscal rules. If they want, they can decide to create an economic government of Europe. They may decide that now is the time – even though electorates are already feeling alienated from the political process – to hand sensitive decisions on tax and spending to unelected bureaucrats. It strikes me that this would be an amazingly dangerous thing to do, since the peoples of this Supra National And Fiscal Union (Snafu) would rapidly discover that they could no longer remove their government from office. I doubt very much that it would work, since there seems no particular reason why national governments should respect a collection of new “binding” rules any more than they respected the “binding” rules of Maastricht – not unless there is some secret proposal to enforce them by violence with a Euro-army.

But even if the Snafu has little prospect of success, there is no reason for David Cameron to commit this country to a project that is intellectually, morally and democratically bankrupt.

Intellectually, Morally and Democratically Bankrupt

Indeed the Euro project is exactly as Boris Johnson describes. And that is precisely why Cameron should have gone on the offensive and put membership in the EU to popular vote instead of making sniveling, apologetic statements to appease Merkel and Sarkozy,  both of whom will be gone after the next set of elections.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Mike Shedlock

Mike Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management.

12/20/2011 11:26 AM

A Currency Crisis Debate

‘The Euro-Zone Bailout Programs Must Be Stopped’

How to save the euro? Some believe that the European Central Bank is the key to any solution. Others think that the euro zone should be contracted and the weak members squeezed out. SPIEGEL spoke with two leading German economists about the currency’s future. Their one area of agreement? Something must be done quickly.

SPIEGEL: Mr. Starbatty, Mr. Bofinger, can the euro still be saved?

Starbatty: All of the measures that are currently planned take effect in the long term. But rescue measures are needed now. That’s why many politicians want to pull out the so-called bazooka and inject money into the market through the European Central Bank (ECB) or introduce euro bonds. Both are deadly sins. It would be better to shrink the monetary union to a hard core that can sustain the euro.

Bofinger: That would be a disaster. But I agree with you that time is of the essence. The highly indebted countries must be able to borrow at moderate interest rates so they don’t go bankrupt. This could be achieved with euro bonds. And if they can’t be implemented that quickly, the ECB has to stabilize the system. In doing so, it would not create inflation but would in fact avoid deflation.

SPIEGEL: Aren’t you worried that the pressure to push through austerity and reforms would subside as soon as the ECB unpacked the bazooka?

Bofinger: German politicians have not acknowledged that these countries have already reduced their deficits significantly. Compared to 2009, deficits have declined in all of the crisis-ridden countries. And Italy is the second-most solid G-7 member state, just behind Germany. The markets haven’t even noticed this.

Starbatty: Politicians want to buy time for the debtor countries by lending them money, hoping to get it back when these countries recover. But this strategy doesn’t work. The markets know that and are driving up yields.

SPIEGEL: Yields are going up because investors are selling the bonds. How can this investor flight be stopped?

Starbatty: Because the trouble spots in the euro zone are not being isolated, the sparks are jumping over to the healthy countries. Everyone knows that if the weaker countries are to be rescued, two countries — Germany and France — will ultimately be doing all the heavy lifting. So the most important question is: How long are the Germans willing to pay? And how long are the French in a position to pay? Investors believe that it won’t be much longer, and so do the rating agencies.

Bofinger: You correctly describe how the euro zone behaves today, with 17 different countries trying to address the problems individually. In fact, the real question is whether Germany can be everyone’s guarantor in the end. That’s why we have to turn things around and say: We will now act as a unit. If Italy can go into debt through euro bonds, it will always be able to raise money, even it has to refinance €300 billion ($400 billion) in debt next year. This deprives speculators of the ability to play off individual countries against one another.

Starbatty: I’ll say it again: I think this is a deadly sin. A community of liability always results in the careless handling of other people’s money.

Bofinger: Of course, the bonds have to be tied to stricter requirements for fiscal discipline.

Starbatty: We had a fixed rule: the no-bailout clause…

SPIEGEL: …which states that no euro country can be liable for the debts of another.

Starbatty: But this rule has been pushed aside. Madame Christine Lagarde, the former French finance minister, says that we violated the treaty to rescue the euro. And that would happen again.

Bofinger: I don’t think so, not if the rules are well made.

Starbatty: I think you’re a little naïve. People will introduce new budget rules to get euro bonds, and as soon as they have them, they’ll forget about the rules the next time there’s a problem.

Bofinger: With euro bonds, it would be much more difficult to destabilize the system. Once everything is safeguarded, I can, if necessary, throw out all the countries that don’t abide by the rules. For example, each country would have to have its budget approved by European Parliament. If the fiscal policy were viewed as inadequate, surcharges could be imposed on national taxes.

SPIEGEL: That would amount to a fiscal union.

Bofinger: We wouldn’t even have to go that far. Temporary surcharges on income and value-added tax would be enough. This possibility would have to be enshrined in the national constitutions.

SPIEGEL: That, however, would require amending the national constitutions.

Bofinger: I believe that in return for euro bonds, most countries would be willing to agree to that.

Starbatty: You’re always saying “could” and “ought to.” Such normative sentences are unconvincing to an economist, who works with facts. So far, it has always been shown that rules haven’t shaped behavior, but that in fact behavior has affected the rules.

Bofinger: If there is no confidence in the political process, then allowing the whole thing to blow up would be the logical next step. Because the market is not working as a tool of discipline. The market is chaotic. Up to 2008, it didn’t see what was going on in Greece, and then it woke up. Now it hasn’t noticed that countries have reduced their deficits; in fact, it is not differentiating at all.

Starbatty: You get into trouble when you try to eliminate the laws of economics. I can tell you what will happen when your euro bonds arrive. After two or three months, you’ll face the same problems as before.

SPIEGEL: So the ECB will have to bring out the bazooka, after all?

Starbatty: Inflation is always the long-term consequence of government financing through the central bank. If the ECB takes the same amount of paper and simply prints larger numbers on it, it is tantamount to counterfeiting.

Bofinger: Where would money be printed? What are you talking about?

Starbatty: The bazooka means nothing other than printing money.

Bofinger: If the ECB buys bonds from a commercial bank, that bank receives a credit to its account with the ECB. Not a single euro is printed in such a case. Inflation could only occur if the bank, given the low interest rate on its deposit with the central bank, started issuing loans on a large scale. The way the economy is developing, banks are not about to start throwing around loans. But even if they do, the ECB can raise interest rates at any time to curb lending.

Starbatty: The central bank is forbidden by law to finance countries directly. Of course, it depends on the economic circumstances, but in the long run the counterfeiting will lead to inflation. In the past, if a ruler minted twice as many coins from a certain amount of treasure or gold or whatever, they were worth less. What the ECB is supposed to do is exactly the same thing.

Bofinger: You’re talking about a growing money supply. But what the ECB is doing doesn’t increase the money supply. It only increases when the banks issue more loans. Besides, what the ECB is doing isn’t prohibited. These are classic open market operations, and not direct purchases of new government bonds.

SPIEGEL: If the investor flight from government bonds continues, the ECB will likely be unable to avoid underwriting government bonds directly.

Bofinger: The ECB only has to signal that it won’t allow the interest rates on these bonds to go above 5 percent. It can control this through the secondary market.

Starbatty: I think the use of euro bonds and the use of the bazooka are dangerous. You think they’re great.

Bofinger: No, I’m just saying that we’re in a situation like the one we had in the fall of 2008. The financial system has to be stabilized directly, and then the rules have to be changed as quickly as possible. But tell me what it is that you want!

Starbatty: Consolidation of the euro!

Bofinger: Who? How?

‘It Will Really Blow Up in Our Faces’

Starbatty: The bailout programs, which are in violation of the treaties, must be stopped. Countries that believe they should be part of the group can make an effort. Those who would rather get out so that they can devalue their currencies and become competitive again, should do so. Otherwise the whole thing will blow up in our faces. I agree with you on that.Bofinger: But in such a case, it really will blow up in our faces. When countries start withdrawing, there will be a chain reaction.

Starbatty: You should accept the reality that countries will not solve their problems in the monetary union.

Bofinger: But the problems aren’t God-given. They result from the fact that Italy and Spain have to pay 7 percent in interest.

Starbatty: Because of their problems!

Bofinger: No, because the markets are in a panic. They aren’t reacting to fiscal data, or else the Japanese and the Americans, who aren’t trying as hard as Italy, would also be paying 7 or 8 percent. Investors are simply worried about their money, and they are adhering to a herd mentality.

Starbatty: No. Investors pay close attention to whether a country can manage its debt. And when they feel that it can’t, they prefer to get out sooner rather than later.

Bofinger: But then it becomes a self-fulfilling prophecy: The more investors flee, the higher the interest rates go, and the more unlikely it becomes that a country can service its debts.

Starbatty: Before it joined the monetary union in 1995, Italy had a 6.2 percent share of the world market. In 2009 it was only 2.8 percent. How is the country supposed to generate the necessary surpluses? These problems will not be solved by euro bonds or by the money-printing press.

Bofinger: If countries like Portugal have a competition problem, it’s also because they, to a far greater extent than Germany, have encountered new competition from countries like China and Russia. This would also have happened without the euro.

Starbatty: But if they had had their own currency they would have been able to devalue it.

SPIEGEL: So are the euro countries too different to be welded together in a single currency, as euro critics have claimed from the start?

Bofinger: There are also big differences in productive capacity in the United States. The problem is that we in Germany have tried to become even stronger by holding back wages. It is now clear that this was the wrong policy. We contributed to the decrease in competition within the euro zone, just as the Spaniards and the Portuguese did on the other end.

Starbatty: The mistake lies in the fact that the weak countries in the monetary union have not changed their policies. They have used the low interest rates to have a party instead of modernizing their economies. Germany has behaved differently, which is why we now have a large divide in the monetary union. Some are overly competitive, while others can’t keep up anymore. The Greek euro is greatly overpriced, while the German euro is heavily undervalued. That’s why we, like the Chinese, are in the dock.

SPIEGEL: Can the differences in the monetary union be reduced, or will the strong countries have to support the weak permanently?

Starbatty: Transfers are the automatic consequence when you have different economies within a monetary union. The weak import stability and export jobs. You see this in northern and southern Italy, as well as in western and eastern Germany. There will be more transfers unless this changes. And they won’t amount to about €15 billion, as they have in the EU until now, but will be much larger. But this doesn’t work without amending the constitution, because the euro zone will then take on strong federal characteristics. Otherwise we will be going before the Federal Constitution Court once again. There needs to be a referendum.

Bofinger: I see no reason for permanently high transfers. Countries are already in the process of reducing their current account deficits. The condition is that the economy doesn’t collapse, that interest rates are reasonable and that growth potential is increased.

Starbatty: You’re always talking in conditional sentences. As an economist, you ought to know that the consequence of a transfer union is not that the weak are no longer weak, but that the strong are no longer strong.

SPIEGEL: The only way to talk about the breakup of the monetary union is in conditional sentences. Mr. Starbatty, how do you imagine this in concrete terms?

Starbatty: Of course, it’ll be a painful watershed moment if something breaks apart that took 12 years to grow together. But then again, there is the saying: It’s better to have an end with horror than horror without end.

SPIEGEL: The withdrawal of Greece, Italy and other countries would have dramatic consequences, for the financial system, for example.

Starbatty: If Greece reintroduces the drachma, the markets will overshoot at first. But that isn’t a problem for Greece. We’ve seen the same thing happen in Argentina, Thailand and Indonesia.

Bofinger: Devaluation was certainly not a delight for these countries.

Starbatty: No, but these countries are once again respected members of the global economy. Of course, the banks would have problems if Greece were to go bankrupt. You can’t reach into the pockets of a naked man. But then Greece could start over again.

Bofinger: You talk about Greece, but you ignore the chain reaction. It’s naïve to believe that we would just be tossing a little ballast overboard to allow the little ship to keep sailing. You’re kicking the can down the road, and in the end we’ll be all alone in this ocean of globalization. No, the only motto we should follow is this: all or nothing. If you let the genie out of the bottle, it won’t come to rest until we’ve returned to the 1998 level.

SPIEGEL: Mr. Bofinger, Mr. Starbatty, thank you for this interview.

Interview conducted by Martin Hesse and Armin Mahler

Translated from the German by Christopher Sultan

Euro Crisis Is Worse Than 2008

4 comments |  December 20, 2011

Many pundits have compared the current crisis in Europe with the 2008 financial crisis in America. They tend to say things like “this is going to be like 2008” or “this may be as bad as 2008.” What these pundits fail to see is that this crisis will actually be much worse than 2008. The reason is simple, we are in worse shape in every aspect of the crisis than where we were in 2008.

Starting point

Entering the 2008 financial crisis, the economies of the world were in a relatively healthy state. Unemployment rates around the world were at the lower end of their long-term averages. Currently, as we enter the euro crisis, unemployment rates around the world are elevated. Elevated unemployment is especially high in the nations that are about to enter the toughest times, the PIIGS. This means that things will get worse from an already bad place vs 2008 where things got worse from a good place.

Monetary Bullets

At the start of the last crisis, interest rates in the U.S. where over 5%. This allowed the Fed to reduce rates to combat the weak economy. Currently, interest rates in the U.S. are at 0%. This means that the Fed cannot lower rates further to induce growth if the economy slides into recession. The Fed is also limited in what it can do as far as QE3 goes. Political pressure is mounting on the Fed, and it appears as though there is little more the Fed can do. Other central banks throughout the world face a similar situation. Rates are near record lows at the ECB, BOJ, and BOE. The ECB cannot do “QE” because Germany will not allow it. The BOE has already started a significant QE program that appears to be having little impact. The central bankers have simply used up most of their bullets.

China

In 2008, China was able to help lead the world out of recession and back to growth. China cut interest rates, and initiated a major stimulus program that worked. Today, China cannot cut rates aggressively because inflation is a major worry. China is also facing a collapse in parts of the real estate market, this is leading to a China story that does not bode well for the rest of the world as it did in 2008.

Fiscal Policy

Just as central bankers have used up most of their bullets, so too have politicians. Major governments simply cannot increase the deficits much further right now. In 2008, governments across the globe were able to initiate large stimulus and bailout programs to help the economy. Now, governments simply are unable to spend money to help heal the economy. This is most obvious is troubled EU nations Italy and Spain. The economies in these nations are entering terrible recessions, but the governments cannot spend money to stimulate the economy. Rather, both Italy and Spain are being forced into massive austerity that will only further hurt growth. The coming economic depressions in Italy, Spain, Portugal, Ireland, and Greece, will bode very badly for healthy EU nations such as Germany, France, and Britain. Unfortunately, these nations won’t be able to stimulate their economies either because they simply cannot afford to do it. The problems with austerity are discussed in more detail here.

Bank Guarantees

In 2008, the U.S. Government was able to put a halt to the banking crisis by guaranteeing the deposits in the U.S. banking system. In Europe, no central authority exists to guarantee the banking system. Right now, the responsibility falls upon each nation to guarantee its own banking system. This presents a major problem: many large banks in PIIGS nations cannot be saved because the governments do not have the money. Perhaps the depositors will be saved, but stock and bond holders will almost certainly be wiped out. Even healthy nations such as Germany and France will have difficulties saving their banks because the banks are very large and the governments have limited funds. The only hope to save the banking system may be the Soros solution discussed here.

Political Chaos

In 2008, there was something of a political unification that helped to stand behind the economy. While not everyone supported government actions, these actions were still able to be implemented. Examples include TARP, Fannie (FNMA.OB) and Freddie (FMCC.OB) bailouts, GM and Chrysler bailouts, the massive stimulus, etc… In Europe, for anything to happen 17 nations must agree to it. Each nation has different interest that it is trying to protect. The agreements must also be reasonable enough that each nation can pass the legislation through its own government. The EU political process is making is so that policy makers are unable to act with the speed and force needed to bring the crisis under control.

Conclusion

Things are much worse than 2008. The prudent thing to do is reduce risk and move into safe heaven assets such as Treasurys (TLT) and the U.S dollar (UUP). Importantly, gold (GLD) is not (discussed here) one of these safe heaven assets to move into.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

UK boycotts IMF eurozone rescue scheme; ECB bank warning

20 Dec 2011 | 07:30
Investment Week

Categories: Economics / Markets

Topics: Eurozone

eurozone

Britain has not joined with other European countries to provide 150bn euros (£125bn; $194bn) to the International Monetary Fund(IMF).

This is despite the European Central Bank warning the eurozone’s stability was still under threat.

Eurozone countries including Germany, Italy and Spain as well as several outside the eurozone gave their support to the scheme, which could help countries struggling to pay their debts.

But Britain’s decision not to take part meant EU finance ministers failed to reach their target sum of 200bn euro.

The UK government wants an increase in IMF resources to be part of a broader process involving all G20 nations, the BBCreports.

“The UK has always been willing to consider further resources for the IMF, but for its global role and as part of a global agreement,” the office of Chancellor George Osborne said in a statement.

European Central Bank president Mario Draghi said yesterday he had no doubts the euro would survive.

But the bank also warned risks to the eurozone’s stability had increased and in the worst-case scenario, there could be a return to a global recession, according to the BBC.

In its twice-yearly Financial Stability Report it said the risk of two large banks defaulting within the next year had risen to the highest level in four years.

The ECB also warned some eurozone banks had become addicted to central-bank funds.

Read more:http://www.investmentweek.co.uk/investment-week/news/2133811/uk-boycotts-imf-eurozone-rescue-scheme-ecb-bank-warning#ixzz1h9GvS7bh 
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Japan discussing mutual bond purchase with China

In this photo taken Tuesday, April 5, 2011, a clerk holds up a bundle of 100 yuan notes at a bank in Beijing, China. (AP Photo)

In this photo taken Tuesday, April 5, 2011, a clerk holds up a bundle of 100 yuan notes at a bank in Beijing, China. (AP Photo)

TOKYO (Kyodo) — Finance Minister Jun Azumi acknowledged Tuesday that Japan and China are discussing the possibility of purchasing government bonds from each other for financial stability in Asia, with Prime Minister Yoshiko Noda set to visit Beijing next week.

A senior Japanese government official separately said Tokyo would use its foreign exchange funds to buy up to $10 billion worth of Chinese government bonds. The two countries are expected to reach an agreement when Noda meets with Chinese leaders on Sunday and Monday.

“It is diplomatically important to strengthen relations (with China) by holding the yuan,” Azumi told reporters, referring to the Chinese currency. But he also denied such a move would amount to a policy shift by Japan on its foreign exchange reserves, the second-biggest in the world after China’s, saying confidence in the U.S. dollar as the world’s key currency would not be undermined.

China, which has actively diversified its investments using foreign exchange reserves, has been expanding the portfolio of Japanese government bonds.

For Japan, holding Chinese bonds is likely to help it secure crucial information about the economy and financial market in China, the official said, while the Japanese purchase of the bonds could help push for a more international use of the yuan, as well as for more transparency in Chinese foreign exchange policy.

“There will be a huge benefit” for both countries, Azumi said.

The countries are also expected to reach a comprehensive accord on financial collaborations, including co-investment in a fund for environmental protection.

Japan has enhanced its commitment to economic stability in Asia. In October, when Noda visited Seoul, the Japanese and South Korean governments agreed to expand their currency-swap arrangement to provide dollar funds to each other in times of liquidity shortage in global financial markets.

(Mainichi Japan) December 20, 2011

EUROPEAN OPENING NEWS INCLUDING: Eurozone finance ministers agreed to provide EUR 150bln in bilateral loans to the IMF for bailout use

Tue 8:06 am

ASIA

JGBs edged down overnight as share prices recovered after panicky selling on news of the death of North Korean leader Kim Jong-Il. JGBs were trading at 142.34 (-0.02) at 0556GMT. (RTRS)

Japanese All Industry Activity Index (Oct) M/M 0.8% vs. Exp. 1.0% (Prev. -0.9%, Rev. -0.7%)

Japanese Leading Index (Oct F) M/M 92.0 vs. Prev. 91.5

Japanese Coincident Index (Oct F) M/M 91.4 vs. Prev. 90.3 (RTRS)

Japan is in talks to purchase Chinese government debt to strengthen economic ties according to Japan’s finance minister Azumi. (Sources) Japan’s Azumi said Japanese purchases of Chinese government bonds shouldn’t cause big changes in the USD trend, and said ‘our confidence in the USD won’t change even if we buy Chinese bonds’. 

Bank of Japan said private financial firms took USD 9.035bln of 2-week dollar loans through a Bank of Japan funding operation. (Sources)

The Chinese central bank will likely cut the required reserve ratio for banks again in the near term after the monetary authority last month announced its first lowering of the requirement in three years. (China Securities Journal/Xinhua News Agency) Meanwhile, China central bank adviser Li Daokui said conditions are ripe for promoting interest rate liberalization.

US

T-notes saw modest gains yesterday after ECB’s Draghi said substantial risks to the economy still remained and reiterated that ECB bond-buying programme is temporary and not infinite, which saw risk off sentiment across several asset classes. Participants will look ahead to today when the Treasury will be holding its USD 35bln 5y note auction. At the pit close, T-notes settled at 131.10, up 4+ ticks. Finally DJIA finished -0.84% at 11766.41 , S&P 500 finished -1.18% at 1205.32 and Nasdaq 100 finished -1.02% at 2215.27

Yesterday’s USD 35bln 2y note auction drew a yield of 0.240% vs. exp. 0.240%, b/c was 3.45 vs. avg.3.61 (prev. 4.07), indirect bidding was 21.6% vs. avg. 35.48% (prev. 42.24%) and the allotted at high was 91.24%. (RTRS)

The Federal Reserve is expected to release this week a proposal for how it will oversee the largest US banks, the proposal is set to include rules on new capital and liquidity requirements to absorb market shocks. The European debt crisis put US banks at risk of financial contagion, and a disorderly outcome threatens to ongoing US economic recovery according to the San Francisco Reserve Bank. (RTRS) Fitch said that the Fed’s Basel III rules could put a further strain on US banks.

EUROPE

**EU finance ministers failed to agree on raising ESM/EFSF EUR 500bln joint ceiling according to an EU source**. (RTRS) The official said the two funds can run alongside each other but the limit will not be raised. Finance ministers also failed to make a decision on how ESM voting rules would work, with the proposal to allow the ESM to make decisions based on an 85% supermajority blocked by Finland.

Eurozone finance ministers agreed to provide EUR 150bln in bilateral loans to the IMF for bailout use according to an EU statement. Czech Republic, Poland, and Sweden are also willing to provide loans to the IMF, although the UK will wait until early 2012 to define their contribution. (Sources) The EU sees the German share of the IMF boost at EUR 41.5bln, French share at EUR 31.4bln and Italy’s share at EUR 23.5bln. 

The IMF announced it approved a EUR 2.9bln disbursement to Portugal and said that total disbursements to Portugal are around EUR 13.6bln. (Sources)

The IMF said it is critical that Portugal preserve with pushing through an ambitious fiscal program and structural reforms to put its economy on stronger footing in the face of weakening global environment.

Monetary policy is not the solution to the Eurozone debt crisis and unlimited bond buying is incompatible with the ECB’s official mandate according to Bundesbank board member Nagel. (Die Welt)

FX

Australia’s central banks chose to cut interest rates this month because of the dangers the European crisis posed to global growth, even though some factors suggested there was no strong need for an easing according to the RBA minutes. (RTRS)Some factors did not suggest any strong need to cut interest rates, and the RBA noted soft credit growth, declining asset prices and inflation to be consistent with target over the next two years. The RBA minutes also said the Australian economy had been slightly stronger than was the case around the middle of the year. RBA saw domestic inflation within target in the next couple of years and saw no signs of strain in the local money markets’ in November. 

Japan’s government said it will boost the size of its war chest to intervene in the foreign exchange markets by JPY 30trl to be able to flexibly respond to any movement in the currency market. (Sources)

COMMODITIES

WTI crude futures extended gains in early Asian trade on the risk of supply being disrupted from Kazakhstan, as oil workers protested for a third day in the Central Asian oil producer. However, gains were capped as investors stayed cautious over the ongoing Eurozone debt crisis and uncertainty resulting from the death of North Korean strongman Kim Jong-il. WTI crude futures were trading at USD 94.46, up USD 0.58, at 0623GMT. (RTRS)

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For nation shall rise against nation, and kingdom against kingdom: and there shall be famines, and pestilences, and earthquakes, in divers places.
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