Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


US welcomes loosening of renminbi peg
By Alan Beattie and James Politi in Washington
Copyright The Financial Times Limited 2010
Published: July 9 2010 02:39 | Last updated: July 9 2010 02:39
http://www.ft.com/cms/s/0/4250604c-8af0-11df-bead-00144feab49a.html


The US declined to name China as a currency manipulator in a politically sensitive report on Thursday, citing Beijing’s loosening of the renminbi peg in June as “a significant development”.

The report had been delayed from April as part of a process of quiet diplomacy to encourage China to allow some flexibility in the exchange rate.

The renminbi, which was allowed to float upwards by 21 per cent between July 2005 and July 2008, was then repegged in response to the financial crisis. Beijing said on June 19 it would permit some movement but did not commit itself to a target.

Tim Geithner, Treasury secretary, said: “What matters is how far and how fast the renminbi appreciates.”

Mr Geithner, who has been criticised by some lawmakers for failing to push Beijing hard enough, said: “We will closely and regularly monitor the appreciation of the renminbi ... in close consultation with Congress.”

Key lawmakers said that China would have to allow faster appreciation of the renminbi then previously. Sander Levin, chairman of the House ways and means committee, said: “This is a first step, but clearly only that.”

Members of Congress have threatened legislation to restrict Chinese imports on the grounds that the currency is undervalued and preventing US companies from competing.

“We must monitor China’s progress but also give serious consideration to all options in the event, as was the case in 2005-08, that China fails to take the additional necessary steps,” Mr Levin said.

Naming a government a manipulator, which involves a complex set of criteria, carries no sanctions except a commitment to start negotiations, which in the case of the US and China have been under way for years.

Meanwhile, the International Monetary Fund said on Thursday the US economy had rebounded faster than expected but faced the threat of contagion from sovereign debt problems in Europe.

In an advance summary of its annual health check of the US economy, the IMF said: “While still modest by historical standards, the recovery has proved stronger than we had earlier expected, owing much to the authorities’ strong and effective macro-economic response.”

The release of the report was accompanied by good news on the economy, which contrasts with a run of recent disappointing data. The number of Americans filing for jobless claims last week fell more than expected, offering some measure of comfort that the recovery in the labour market is advancing, albeit slowly.

But the IMF warned that, along with risks of renewed weakness in the US housing market, international events of recent months had introduced risks to the recovery.






South Korea surprises with rate rise
By Christian Oliver in Seoul
Copyright The Financial Times Limited 2010
Published: July 9 2010 06:04 | Last updated: July 9 2010 06:04
http://www.ft.com/cms/s/0/26ac1136-8b06-11df-bead-00144feab49a.html


South Korea unexpectedly raised its benchmark interest rate on Friday for the first time since the global downturn because of fears about inflation.

Seoul joins other Asian countries – including most recently Malaysia, Taiwan, India and New Zealand – in adjusting to a swift recovery in economic activity.

The Bank of Korea had held interest rates steady at a record low of 2 per cent for 16 months despite widespread concerns, including from some South Korean officials, that rates should be hiked to avoid overheating.

The International Monetary Fund joined the chorus earlier this week after an official mission to Seoul, warning of the need to “avoid falling behind the curve”.

The Bank of Korea on Friday raised the base rate by 25 basis points. Economists at international banks said they expected another 50bp hike before the end of the year.

The rise comes on the back of increasingly robust economic projections from South Korea, which expects the economy to grow by 5.8 per cent this year, up from 0.2 per cent last year.

Exports are booming, with June shipments rising almost a third from a year earlier. Large manufacturers such as Samsung Electronics are faring especially well and Seoul predicts a current account surplus of $15bn (€11.8bn, £9.9bn) this year. Capital investment, which slid 9 per cent last year, is expected to grow by 15.6 per cent this year.

The central bank said it wanted to cool inflationary pressure in the nationwide housing market, except for Seoul, that had experienced a “highly upward trend” despite the introduction in recent months of regulatory measures to ease price increases.

The decision to hold rates for so long proved controversial among international investors and even among financial officials.

Opposition politicians had accused Lee Myung-bak, the president, of exerting pressure to freeze rates before regional elections in June in which the president’s party ended up faring badly. The controversy also factored into the debate over Mr Lee’s appointment in March of a new central bank governor, Kim Choong-soo, who was seen as more dovish than his predecessor.

Inflation is expected to remain at around 3 per cent this year and next, comfortably within the government’s target of 2 to 4 per cent. However, fuel, power and food costs have triggered some price volatility in Asia’s fourth biggest economy.

The Bank of Korea stressed on Friday that it remained wary of financial volatility on the back of debt problems in Europe.

Brian Jackson, senior emerging markets strategist at the Royal Bank of Canada, said Asia’s recent rate hikes could provide ammunition for any economic set-backs.

“Another possible motivation for the rate hikes we have seen [across Asia] in recent weeks is that this will provide scope for rate cuts later on if growth turns out to be weaker than expected,” Mr Jackson said.







Spain to allow cajas to sell 50% of equity
By Mark Mulligan in Madrid
Copyright The Financial Times Limited 2010
Published: July 8 2010 19:33 | Last updated: July 8 2010 20:13
http://www.ft.com/cms/s/0/e386d236-8abc-11df-8e17-00144feab49a.html


Spain’s troubled savings and loans banks will be able to sell up to 50 per cent of their equity to private investors under a package of sweeping reforms aimed at bolstering the institutions that have been the focus of recent investor worries over the financial health of the country.

The reforms, to be approved on Friday, will also seek to curb political meddling in the institutions – cajas – by restricting the number of elected public officials allowed on their management and supervisory boards.

José Luis Rodríguez Zapatero, the Spanish prime minister, described the shake-up as the “most important in the history of the Spanish banking system”.

“This is a fundamental reform of great depth,” he said, while promising to make the cajas’ governance “more professional and democratic”.

The reforms would open up the equity of cajas to private investors. Under current rules, cajas are restricted to selling non-voting securities known as “participative quotas”, as well as normal shares in listed industrial holding subsidiaries.

The Spanish prime minister, who has come under immense pressure this year to speed up economic reforms, said the rules would “strongly limit” the number of elected officials named to the boards.

He said there was an “incompatibility of elected officials being members of the cajas’ governing bodies”. While the banks are, essentially, public institutions, politically-motivated lending to civil works or well-connected property developers, builders and other companies has often clashed with commercial risk criteria.

The reforms, which take effect on Friday are the latest step in a broad overhaul of the cajas, which account for about half the assets and deposits in the Spanish financial sector.

Two of an original 45 cajas have been rescued by the Bank of Spain, while most of the rest have agreed mergers or are finalising tie-ups designed to strengthen their balance sheets.

The central bank reported last week that it had already committed €10.2bn from a special fund set up last year to help recapitalise merging lenders.

Another €88.8bn is, in theory, available to help fund further consolidation, although this will ultimately depend on liquidity and pricing in bond markets.








France and Germany push for transaction tax
By Gerrit Wiesmann in Berlin
Copyright The Financial Times Limited 2010
Published: July 9 2010 15:18 | Last updated: July 9 2010 15:18
http://www.ft.com/cms/s/0/e64dd66c-8b49-11df-a4b4-00144feab49a.html


Germany and France are pressing ahead with their plan for a tax on financial transactions in the European Union by raising the issue for discussion at the bloc’s next meeting of finance ministers early next week.

In a letter to the Belgian EU presidency, Wolfgang Schäuble, German finance minister, and his French counterpart Christine Lagarde asked for “an informal discussion” at Tuesday’s session of the EU’s Ecofin council.

“Germany and France will jointly make proposals for discussion in order to carry forward a European solution,” the ministers said in the letter, seen by the Finanical Times, and called the tax “both feasible and necessary”.

The letter marks the start of what looks set to be a controversial discussion among EU members – as they seek to implement EU-wide bank levies and tougher regulation of banks and banker bonuses.

In parallel to national efforts, EU countries have asked the European Commission to consider the feasibility of introducing such a tax in Europe and to make suggestions of its own as to how one could be implemented.

The initiative comes three weeks after the EU’s driving duo failed to get a global agreement about a transaction tax at the G20 summit in Toronto – both countries at the time promised a European initiative instead. By raising the issue at the Ecofin council, these two countries are signalling that the tax remains a priority.

German officials concede that the fate of the tax lies largely in the hands of the UK government, which is expected to protect the interests of the City of London as Europe’s premier financial centre.

But officials also note that David Cameron, prime minister, has shown himself more open towards the European Union than many had expected – and that he has a big budget deficit, which new taxes could help plug.

In spite of the uncertainty of implementation at European level, Berlin has already budgeted €6bn revenues from the tax in its four-year, €80bn budget-consolidation package, which was agreed by the cabinet this week.

Mr Schäuble this week tried to play down London’s hold over the tax – or parts of his budget – by saying the 16-member eurozone should consider introducing it if the 27-member European Union failed to agree on the tax.

But other policymakers have already questioned such a move. Ewald Nowotny, a member of the European Central Bank’s governing council, said a transaction tax would only work in Europe if London was included.




Trichet plays down eurozone gloom
By Ralph Atkins in Frankfurt
Copyright The Financial Times Limited 2010
Published: July 8 2010 20:46 | Last updated: July 8 2010 20:46
http://www.ft.com/cms/s/0/24034cb2-8ac8-11df-8e17-00144feab49a.html


The world should not write off the eurozone, the European Central Bank president said on Thursday, as a surge in German exports highlighted Europe’s economic resilience.

Moving to shore up financial-market confidence in the 16-nation bloc, Jean-Claude Trichet said that global gloom over its prospects was overdone. Economic data “are not confirming this pessimism”. A double dip into recession “is not at all what we are observing”, he added.

His comments underlined ECB confidence that emergency measures to stabilise Europe’s 11-year-old monetary union are taking effect. Mr Trichet even cited this weekend’s all-European football World Cup final between the Netherlands and Spain as a reason “one should not underestimate Europe”.

Emergency bond purchases by the ECB were already on a declining trend amid improving market sentiment, Mr Trichet noted, in a possible hint that the programme might soon end. Launched in May at the height of the eurozone debt crisis, the programme is controversial in Germany, where Axel Weber, Bundesbank president, has warned that it risks igniting inflation. ECB bond purchases last week totalled just €4bn, down from €16.5bn in its first week of operation.

Mr Trichet was also cheered by European Union plans to publish bank “stress tests” this month, which the ECB believes will further strengthen investor confidence. Economists have complained over the lack of detail about the test scenarios, which the ECB helped compile, warning that they might not be rigorous enough.

Eurozone growth has been boosted by exceptional second-quarter growth in Germany, which saw exports rise 9.2 per cent and industrial production by 2.6 per cent in May compared with April.

In spite of his upbeat tone, however, Mr Trichet said the ECB would not revise its forecasts showing eurozone gross domestic product rising just 1 per cent this year.

Last week, the ECB withdrew €442bn in 12-month loans it granted to banks a year ago. Some were rolled over into shorter-term ECB loans but about €250bn in liquidity was removed from the financial system – pushing up market interest rates and, in effect, tightening monetary policy.

Mr Trichet made clear the ECB was not yet trying to steer market-borrowing costs back towards its main policy rate, which the ECB left unchanged at 1 per cent. Eurozone market rates rose sharply yesterday, with average overnight borrowing costs up from 0.554 per cent to 0.591 per cent.

Additional reporting by David Oakley in London