Greece woes China to buy bonds

 

Greece is wooing China to buy up to €25bn of government bonds, reports the FT.  Goldman Sachs has been promoting a Greek bond sale to Beijing and the State Administration of Foreign exchange (Safe), which manages China’s $2,400bn foreign reserves, and added $139bn of new reserves in the last quarter of 2009 alone. But people close to Safe said China already held a significant amount of Greek debt and was wary of adding to that. Another proposal for the Bank of China or the Chinese sovereign wealth fund to acquire a strategic stake in the National Bank of Greece, the country’s flagship commercial lender, seems to get nowhere. Kathimerini reports that the finance ministry is preparing a dollar issuance for March and eventually also a yen issuance.

 

Juncker says euro area must co-ordinate more than budgets

In an interview with Les Echos, Jean-Claude Juncker says the euro area has go beyond co-operation on budgetary poilcy. In the last year it has become dramatically clear that more policy co-ordination is needed, if Europe wanted to make its weight felt on the international stage. The euro area needs to address internal imbalances, and it needs procedures to deal with countries that pursue unilateral strategies. In particular, he calls on France and Germany to overcome their difference on the question of economic governance. Juncker says he and the eurogroup cannot be made responsible for this still unresolved problem.

 

Munchau on what the euro area needs to do now

In his column in FT Deutschland, Wolfgang Munchau says the long-term survival of the euro area can no longer be taken for granted if the current system of governance were to persist for ever. At the very least, the euro area needs a crisis resolution mechanism to deal with situation as in Greece, which could easily spill over to other European countries. Portugal, Ireland and even Spain are at threat. Ad hoc intervention mechanism will ultimately fail for political reasons, as they are not politically legitimate.

 

Stiglitz calls on Europe to show solidarity for Greece

Joseph Stiglitz argues in a forceful column in the Guardian that European leaders acted irresponsibly when they condemned Greece for excessive deficits. Comments from the ECB and other officials have compounded Greece's problems by sending interest rates soaring , they also put at risk the recovery of the Greek economy.  With Europe's economy still weak, an excessively rapid tightening of its budget deficit would risk throwing Greece into a deep recession. Stiglitz calls on Europe to show solidarity with Greece and appreciate their efforts. He suggests that the EU should reframe the short run budget targets  and use primary deficits rather than structural deficits. The European Investment Bank could even undertake countercyclical investments to offset deflationary impacts of the budget cuts. The EU should show support for Greece’s efforts in every possible way.

 

Bini-Smaghi warns on bubbles

The Wall Street Journal reports Lorenzo Bini-Smaghi as saying that excessively low interest rates for too long could fuel another asset price bubble. “If the aim is to lower long-term rates, it may also encourage market participants to take substantial long positions in the fixed income market,” he said, and risk suffering heavy losses when policymakers exit from their accommodative policies. The risk of such losses “may induce the central bank to further delay the exit to avoid penalizing banks,” Bini Smaghi said, which is what happened during 2002-2004.

 

 

IMF raises 2010 growth forecast

In its latest World Economic Outlook the IMF revised upwards its growth global forecast to 3.9% this year, though the the recovery is proceeding at different speeds.  El Pais notes that Spain is the only large economy for which the IMF forecasts in 2010 is still negative. Spain is expected to contract (-0.6%)  in 2010. The recovery will only be take up in 2011(0.9%), with the aftermath of the housing collapse and persistent high unemployment still compromising growth prospects.

 

Zapatero’s complacency

Le Monde picks up a Breakingviews.com commentary according to which Zapatero has not yet prepared the Spanish for austerity measures.  There is no way out of this crisis other than through a fall in wage costs, which could restore Spain’s competitiveness, but this would require a fall in payroll taxes, lower income taxes, and a fall in a real earnings – none of which is on the political agenda in the country. Otherwise Spain risks being trapped in a spiral of decline.

 

 

Roubini says Spain threat to the euro area

Nouriel Roubini now gets really gloomy about the eurozone saying in an interview with Bloomberg that Spain poses a looming threat to the euro region holding together. For all the focus on Greece, Spain could become a bigger threat to the euro zone because it’s the region’s fourth-largest economy and has higher unemployment and weaker banks. Roubini suggests that down the line the euro zone could split up into a strong center and a weaker periphery with some countries to exit monetary union altogether.

 

 

China starts tightening monetary policy

Beijing enforced tighter monetary policy in an attempt to temper inflation expectations by ordering some banks to temporarily hold lending after the sector extended a total of €114bn in new loans in just the first two weeks of January, reports the FT. The rush to lend was partly driven by the expectation that the government will tighten monetary policy in the coming months, prompting officials to implement administrative measures ahead of schedule.  This caused commodity prices for oil and other metals fell as uncertainty increased over the outlook for demand from China.

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