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THE THEME of world’s economic SLOWdown today: MORE $TIMULU$ please, NECESSARY indeed

MEPs to pass economic governance ‘two-pack’
Published: 13 June 2012

The new economic governance rules to strengthen eurozone budgetary discipline, known as the ‘two-pack’, are expected to be passed by a thin majority in a vote today (13 June) in the European Parliament.

The European Commission presented the two new regulations (1 and 2) on 23 November 2011, hoping to draw a line under the leniency that allowed Greece and other eurozone countries to let their public debt and deficits explode.

The two new regulations include the following:

All eurozone countries would need to submit draft budgets each year to the Commission by 15 October for prior examination.
The Commission would then have the power to request changes and ask for the budget to be redrafted if member states whose finance situation is deemed unsustainable.
The Commission might be asked to defend its decision before national parliaments.
National debt forecasts would have to be done by independent institutes.

The two regulations are being adopted under Article 136 of the EU treaty, which allows eurozone countries to adopt more stringent rules for themselves.

It excludes countries that do not use the single currency.

During a parliamentary debate yesterday (12 June) in Strasbourg, MEPs appeared divided over the proposals that are supposed to step up Commission powers over surveillance of eurozone countries’ national budgets and oversight of the economic policy plans.

The two-pack builds on the ‘six-pack’, a group of economic governance regulations that entered into force on 13 December 2011.

Under proposal tabled in November, the European Commission would be able to administer countries that have sought international financial assistance to keep them from bankruptcy (see background).

MEP Ramon Tremosa i Balcells (ALDE, Spain) said the Parliament would vote on an instrument that will help Europe out of its finance crisis, namely the redemption fund. MEP Derk Jan Eppink (Belgium, ECR) warned that the draft report on budgetary control goes way beyond the EU legislation.

The MEPs’ debate didn’t give a clear indication on who is supporting the final proposal and who will vote against it, but leader of the Socialists and Democrats group Hannes Swoboda told EurActiv in an interview that he hoped the proposal will be passed.

“I would say there will be a 55% majority,” said Swoboda, who hopes for strong support especially from the political groups that drafted the Parliament’s responses – the European People’s Party and the Socialists and Democrats.

The two-pack was approved by a very slim majority of the Parliament’s Economic and Monetary Affairs Committee in mid-May.

Because of the split result, MEPs decided to postpone opening trialogue negotiations with EU ministers and referred both proposals to the plenary in order to gauge the level of support of the house for the texts and avoid EU ministers taking advantage of the Parliament’s weakness as revealed by the committee vote.

The divisions between political groups rest primarily on the timing. While the European People’s Party wants the rules to be adopted rapidly, the Socialists want to postpone adoption to take into account the political changes expected from parliamentary elections in Greece on 17 June.

Monitoring of budget proposals

The first leg of the two-pack concerns the monitoring of draft budgetary plans of eurozone nations. It also requires that the countries consult the Commission and other members of the eurozone before adopting any major economic and fiscal policy reforms.

The second regulation is responsible for strengthening economic and budgetary surveillance of euro member countries experiencing serious financial problems. According to the new rules, the European Commission could place a country under legal protection and demand a debt settlement plan and implementation of other measures.

The amended proposals give the Commission more control over eurozone countries’ fiscal policy but those increased powers would be subject to more democratic control and the budget cuts couldn’t be made at the expense of killing growth.

The committee draft reports also propose setting up a European Debt Redemption Fund to mutualise all the eurozone countries’ debts in excess of 60% (around €2.3 trillion).

The repayment of this debt would then be carried out over 25 years, thereby buying time for structural reforms to be carried out. It would also require the Commission to present a roadmap for introducing eurobonds as well as to present a mechanism for funding infrastructure investment equal to 1% of GDP (around €100 billion).

Euro zone agrees to lend Spain up to 100 billion euros

6:34pm EDT

By Jan Strupczewski and Julien Toyer

BRUSSELS/MADRID (Reuters) – Euro zone finance ministers agreed on Saturday to lend Spain up to 100 billion euros ($125 billion) to shore up its teetering banks and Madrid said it would specify precisely how much it needs once independent audits report in just over a week.

After a 2-1/2-hour conference call of the 17 finance ministers, which several sources described as heated, the Eurogroup and Madrid said the amount of the bailout would be sufficiently large to banish any doubts.

“The loan amount must cover estimated capital requirements with an additional safety margin, estimated as summing up to 100 billion euros in total,” a Eurogroup statement said.

Spain said it wanted aid for its banks but would not specify the precise amount until two independent consultancies – Oliver Wyman and Roland Berger – deliver their assessment of the banking sector’s capital needs some time before June 21.

“The Spanish government declares its intention to request European financing for the recapitalization of the Spanish banks that need it,” Economy Minister Luis de Guindos told a news conference in Madrid.

He said the amounts needed would be manageable, and that the funds requested would amply cover any needs.

A bailout for Spain’s banks, beset by bad debts since a property bubble burst, would make it the fourth country to seek assistance since Europe’s debt crisis began.

With the rescue of Greece, Ireland, Portugal and now Spain, the EU and IMF have now committed around 500 billion euros to finance European bailouts.

Washington, which is worried the euro zone crisis could drag the U.S. economy down in an election year, welcomed the announcement.

“These are important for the health of Spain’s economy and as concrete steps on the path to financial union, which is vital to the resilience of the euro area,” Treasury Secretary Timothy Geithner said.


Officials said there had been a heated debate over the International Monetary Fund’s role in Spain’s bank rescue, which Madrid wanted kept to a minimum. It will not provide any of the money.

In the end it was agreed that the IMF would help monitor reforms in Spain’s banking sector, while EU institutions would ensure Spain stuck to its broader economic commitments.

IMF Managing Director Christine Lagarde said the euro zone’s plan was consistent with the IMF’s estimate of the capital needs of Spain’s banks and should provide “assurance that the financing needs of Spain’s banking system will be fully met.”

Sources involved in the talks said there had also been pressure applied on Madrid to make a precise request right away, but Spain had resisted.

Euro zone policymakers are eager to shore up Spain’s position before June 17 elections in Greece which could push Athens closer to a euro zone exit and unleash a wave of contagion. Spain’s auditors could report back after that date.

Nonetheless, analysts said financial markets may be calmed by the announcement when they reopen on Monday.

“The figure of up to 100 billion is more encouraging and pretty realistic; it’s an attempt to cap the problem,” said Edmund Shing, European head of equity strategy at Barclays.

“The issue, however, is there is still a lack of detail about where the money’s coming from, which is crucial. The market will treat it with some caution until they see how it will be funded.”

The Eurogroup said the funds could come from either from the euro zone’s temporary rescue fund, the EFSF, or the permanent mechanism, the ESM, which is due to start next month. Finland said that if money came from the EFSF, it would want collateral.

EU sources said there was a preference to channel money to Spain through the ESM, rather than the EFSF. Under the ESM, an approval rate of 90 percent or less is needed to trigger aid, and the fund also has more flexibility in how it operates.

“That’s why it’s so important that the ESM … be ratified quickly,” German Finance Minister Wolfgang Schaeuble said.

The Spanish government has already spent 15 billion euros bailing out small regional savings banks that lent recklessly to property developers. Spain’s biggest failed bank, Bankia, will cost 23.5 billion euros to rescue and its shareholders have been wiped out.

“Whatever the formula being used, we need to say two things: first the innocent should not suffer for the guilty, second public money should come back to public coffers,” said Socialist opposition chief Alfredo Perez Rubalcaba after speaking with Prime Minister Mariano Rajoy on Saturday morning.


The race to resolve the banks’ troubles comes after Fitch Ratings cut Madrid’s sovereign credit rating by three notches to BBB, highlighting the Spanish banking sector’s exposure to bad property loans and to contagion from Greece’s debt crisis.

It said the cost to the Spanish state of recapitalizing banks stricken by the bursting of a real estate bubble, recession and mass unemployment could be between 60-100 billion euros ($75-$125 billion).

Italy could yet get dragged in too. Its industry minister, Corrado Passera, said the economic situation in Italy had improved since the end of 2011, but remained critical.

“Europe was more disappointing than we had expected, it was less capable of tackling a relatively minor problem such as Greece,” Passera told a conference on Saturday.

While Spain would join Greece, Ireland and Portugal in receiving a European financial rescue, officials said the aid would be focused only on its banking sector, without taking the Spanish state out of credit markets.

That would be crucial to avoid overstraining the euro zone’s rescue funds, which would struggle to cover Spanish government borrowing needs for the next three years plus possible additional assistance for Portugal and Ireland.

Conditions in the plan did not appear to add to the austerity measures and structural economic reforms which Rajoy’s government has already put in place.

“Since the funds being asked for are to attend to financial sector needs, the conditionality, as agreed in the Eurogroup meeting, will be specifically for the financial sector,” de Guindos said.

EU and German officials have cited national pride in the euro zone’s fourth largest economy as a barrier to requesting a full assistance program.

The European Commission and Germany both agreed in principle last week that Spain should be given an extra year to bring its budget deficit down below the EU limit of 3 percent of gross domestic product because of a deep recession.

The Eurogroup also said money could be funneled to Spain’s FROB bank fund although the government would “retain the full responsibility of the financial assistance”.

Irish Finance Minister Michael Noonan said the funds would be provided through the EFSF or ESM at the same interest rates which apply to funds provided to other bailout countries.

(Additional reporting by Luke Baker and Justyna Pawlak in Brussels, Erik Kirschbaum, Annika Breitdhardt and Matthias Sobolewski in Berlin, Antonella Ciancio in Italy, Conor Humphries in Dublin and Martin Santa in Bratislava. Writing by Mike Peacock and Fiona Ortiz.)

China’s Slowing Inflation, Output Growth Add Stimulus Pressure
By Bloomberg News – Jun 9, 2012

China’s consumer prices rose the least in two years in May and industrial output and retail sales trailed estimates, adding pressure for more stimulus after the first interest-rate cut in three years.

Inflation slowed to 3 percent from a year earlier, the National Bureau of Statistics said yesterday, compared with the 3.2 percent median forecast in a Bloomberg News survey. Production increased 9.6 percent, lower than a projected 9.8 percent gain, and retail sales climbed 13.8 percent, the Beijing-based bureau said in separate statements.

The data add to concern global growth is stalling as Greece teeters on the edge of exiting the euro, Spain struggles to restore confidence in its banking system, and U.S. job growth weakens. Premier Wen Jiabao may introduce additional stimulus to protect a full-year growth target of 7.5 percent even as the nation wrestles with bad loan risks from local government debt.

“These data should defeat any remaining complacency that the policy response has been adequate to maintain steady growth,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “More dramatic easing, especially in housing and local government financing vehicles is urgently needed and necessary to avoid a hard landing in the Chinese economy.”

China customs data today may show exports and imports grew last month by less than the government’s 2012 target of 10 percent. Overseas sales increased 7.1 percent from a year earlier while purchases rose 5.5 percent, according to the median estimates in Bloomberg News surveys of economists.
Credit Growth

Shen, who previously worked for the European Central Bank, said he expected at least one more reduction in interest rates and three cuts in banks’ reserve requirements this year.

The People’s Bank of China lowered benchmark lending and deposit rates by 25 basis points effective June 8, taking one- year borrowing costs down to 6.31 percent and the one-year savings rate to 3.25 percent. It also allowed banks more leeway to set their own interest rates.

The reserve ratio has dropped by 150 basis points, or 1.5 percentage point, in three cuts since November to spur credit growth and now stands at 20 percent for the biggest banks.

Chinese stocks fell June 8, capping the biggest weekly slide this year, after the central bank’s rate cut added to concern the nation’s economic slowdown is deepening. U.S. shares rallied, driving the Standard & Poor’s 500 Index to its best weekly gain since December, amid speculation European and American central banks will join China in trying to spur economic growth.
‘Benign’ Outlook

Slowing inflation “is what gave the central bank the confidence to cut interest rates,” said Liu Li-Gang, head of Greater China economics at Australia & New Zealand Banking Group Ltd. in Hong Kong, who accurately forecast the consumer-price reading. “Given the falling producer prices, China’s inflation outlook remains benign and we expect another cut in banks’ reserve requirements in June to boost slowing economic activities.”

Stephen Green, head of Greater China research at Standard Chartered Plc in Hong Kong, forecasts two 25 basis-point reductions in benchmark one-year interest rates in the second half, assuming further weakness in economic data through July and continued “difficulties” in the euro area.

China’s industrial production growth was below 10 percent for a second month in May, yesterday’s data showed, the first time that’s happened in three years. Power output rose at the second-slowest pace in three years excluding distortions caused by the timing of the Lunar New Year holiday.
Appliance Sales

Retail sales, which aren’t adjusted for inflation, rose the least in almost six years, excluding the January and February holiday months. Growth in sales of home appliances slid to 0.5 percent compared with a 15.4 percent gain in May last year, after the government ended incentive programs.

Deliveries of passenger vehicles to dealerships by automakers including Toyota Motor Corp. and Honda Motor Co. rose 22.6 percent last month from a year earlier to 1.28 million units, the China Association of Automobile Manufacturers said in Beijing yesterday. The rebound came after deliveries fell 0.1 percent in May last year as Japanese automakers cut production after Japan’s earthquake.

Fixed-asset investment, excluding rural households and not adjusted for inflation, rose 20.1 percent in the first five months, compared with the median economist estimate for a 20 percent gain. That was the weakest increase for a January-May period since 2001, according to previously released data.
‘Sharp’ Deflation

The producer-price index fell 1.4 percent in May from a year earlier, compared with the median estimate for a 1.1 percent drop. That’s the third straight decrease and the longest stretch of declines since 2009.

“China’s producers are seeing sharp deflation, pointing to a worrying lack of final demand,” said Alistair Thornton, an economist at IHS Global Insight in Beijing. The decline in prices, combined with the “sharp” drop in the prices gauge in May’s purchasing managers’ index, “points to considerable sluggishness in domestic manufacturing activity” and should “act as a spur for the government to move more aggressively,” he said.

Anhui Conch Cement Co. (914), the nation’s biggest cement producer, warned June 7 its first-half profit probably fell more than 50 percent as prices of its products “dropped significantly” due to slower growth in fixed-asset investment.

China’s economy expanded 8.1 percent in the first three months from a year earlier, the fifth quarterly deceleration and the slowest pace in almost three years. Growth may slide to 7 percent to 7.5 percent this quarter, Lu Ting, head of Greater China economics at Bank of America Corp. in Hong Kong, wrote in a note yesterday.

“We expect the government to start and speed up more projects on the one hand and to make project financing easier” by cutting reserve requirements and interest rates, approving more corporate bond issuance and lifting lending restrictions, he said.

–Zhou Xin. With assistance from Ailing Tan in Singapore, Cynthia Li in Hong Kong, Penny Peng and Chua Baizhen in Beijing. Editors: Nerys Avery, John Liu


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