Archive for May, 2010

ECB ups bond purchases as Spain vows labor law (Reuters)

Monday, May 31st, 2010 | Finance News

The European Central Bank disclosed increased purchases of euro zone government bonds on Monday as Spain assured investors it would reform its rigid labor market even if employers and trade unions cannot agree.

The ECB began buying up mostly Greek, Portuguese and Spanish bonds on May 3 in a disputed action to help stabilize the euro zone and support an emergency $1 trillion package agreed by the European Union and the International Monetary Fund.

The central bank said in a statement it had settled 35 billion euros in bond purchases by May 28, up from 26.5 billion a week earlier. It did not detail the nationality of the debt but ECB officials have said it is mostly from south European countries hardest hit by financial market turmoil.

ECB governing council member Axel Weber, president of Germany's powerful Bundesbank, urged a tight cap on the bond buying program and said the extraordinary steps taken to ease the euro zone debt crisis posed a risk to price stability.

"The purchases of government bonds in the secondary market should not overshoot a tightly-capped limit," Weber said in a speech prepared for delivery in Mainz, Germany. He did not suggest a figure.

Spain, the fourth largest euro zone economy, saw its credit rating downgraded a notch by Fitch Ratings agency from the maximum AAA to AA+ late on Friday after a 15 billion euro austerity program squeaked through parliament by a single vote.

Market reaction to the downgrade was limited, partly because U.S. and British markets were closed for holidays on Monday.

The euro recouped losses incurred after the Spanish debt downgrade to trade at around $1.23. The 10-year Spanish-German bond spread widened only slightly but Spanish stocks fell 0.7 percent while the index of leading European shares gained 0.4 percent.


Spanish Economy Minister Elena Salgado told a conference in Madrid that the government aimed to pass a much anticipated labor market reform by the end of June with or without consensus with the unions and business representatives.

The minority Socialist administration extended the deadline for an agreement by one week from Monday but officials have said the social partners are still far apart.

The left-leaning daily El Pais said the government planned to allow companies to make greater use of cheap work contracts for a broader range of employees, reducing redundancy payments and making it easier to fire workers.

Trade unions have threatened to strike if the government imposes the reform by royal decree, a move that would set the ruling Socialists on a collision course with their traditional allies in organized labor.

In a sign of continued international concern about the impact of Europe's problems, China warned that Europe's struggle to contain ballooning debt posed a risk to global economic growth, raising the specter of a double-dip recession.

Premier Wen Jiabao, addressing business leaders during an official visit to Japan, issued his warnings a day after France admitted it will struggle to keep its top credit rating.

"Some countries have experienced sovereign debt crises, for example Greece. Is this kind of phenomenon over? Now it seems that it's not so simple," Wen said. "The sovereign debt crisis in some European countries may drag down Europe's economic recovery.

He added it was too early to wind down stimulus deployed during the 2007-2009 financial crisis.

Governments around the world ran up record debts during the $5 trillion effort to pull the economy out of its deepest slump since the Great Depression and now face a tough balancing act: how to reduce debt without choking off growth.

ECB governing council member Mario Draghi warned that austerity programs by European governments could snuff out a fragile recovery unless they were coordinated internationally.

"These are difficult courses of action and unless coordinated at the international level they risk extinguishing the hesitant economic recovery," he said.

As if on cue, economic sentiment in the euro zone fell in May, defying analysts expectations of a slight improvement, in part due to the wave of austerity announcements.

However, ECB President Jean-Claude Trichet said the economy may expand more than expected in the second quarter.

The fact that not just the fiscally weakest southern European countries, but also nations at the euro zone's core are under pressure to cut debt and deficits amassed during the financial crisis, is adding to concerns.

On Sunday, France said keeping its AAA credit rating would be a stretch without some tough action on its deficit, while Germany indicated it might resort to raising taxes to bring its shortfall closer to the EU's limit of 3 percent of gross domestic product.

France, the euro zone's second-largest economy, expects the budget deficit to hit 8 percent of GDP this year, but aims to bring it down to the EU limit by 2013. Germany, Europe's biggest economy, expects its deficit to exceed 5 percent of GDP in 2010.

(Additional reporting by Sarah Morris in Madrid, Martin Santa and Sakari Suoninen in Vienna, Marc Jones in Frankfurt; Writing by Paul Taylor; Editing by Ron Askew)

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Algerian president fires CEO of state oil firm (AP)

Monday, May 31st, 2010 | Finance News

ALGIERS, Algeria – Amid a growing corruption scandal, Algeria's president has fired the CEO and all top managers at the state-owned oil firm that dominates the North African country's economy, local media reported Monday.

CEO Mohammed Mezian and the four vice presidents of oil company Sonatrach were officially removed by presidential decree Sunday, the official APS news agency and other media reported, quoting the official government register.

They had already been jailed or placed under house arrest because of an investigation into the suspected embezzlement of hundreds of millions of dollars.

Sonatrach extracts oil and natural gas and is by far the largest Algerian company, providing about 90 percent of the country's entire exports. One of its fired managers also ran Tassili Airlines, the country's second-biggest, where a separate corruption investigation has been opened.

The presidential announcement came after Chakib Khelil, a former OPEC chief, was fired from Algeria's Energy Ministry on Friday amid the graft allegations.

Khelil, who is a close ally of Algerian President Abdelaziz Bouteflika, is not under investigation, but the French-language daily Liberte questioned in an editorial Monday whether his eviction from government could pave the way for charges against him.

A longtime government figure with close ties to the U.S. oil industry, Khelil was strongly identified as one of the president's men.

Khelil was replaced by Youcef Youcefi as minister for energy and oil. Nordine Cherouati was named Sonatrach's new CEO. Both new figures are considered close to the military, which has been at the center of Algeria's behind-the-scenes power play since the country's independence in 1962.

Observers viewed their nomination as confirming the lead role taken by the military-affiliated secret service, known as the DRS, in pushing for an anti-corruption probe.

While oil-related firms have been at the center of the corruption investigation that has been going on for months, national construction, highways, tramways, telecommunications, port businesses and other state-controlled activities are also under scrutiny. Several government or town hall officials have been charged over the past few months.

The head of police, Ali Tounsi, was murdered in his office by a colonel in February. Algerian media said he was targeted in revenge for a corruption probe into army contracts.


Associated Press Writer Alfred de Montesquiou contributed to this report.

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Trichet sees need for ‘budgetary federation’ (AP)

Monday, May 31st, 2010 | Finance News

PARIS – European Central Bank President said Monday that Europe needs "the equivalent of a budgetary federation" as a watchdog over eurozone governments' public finances as a response to the continent's government debt crisis.

In an interview in French daily Le Monde Jean-Claude Trichet said that existing European treaties would permit the kind of "control and surveillance" of government's public finances.

"Surveillance of budgetary policies, of eurozone economies' competitiveness, and of structural reforms must be radically improved," Trichet was quoted as saying. "We are a monetary federation. Now we need the equivalent of a budgetary federation in terms of the control and surveillance of the application of public finance policy."

He suggested new institutional arrangements would not be needed "at first," meaning the basic EU treaties would not have to be changed — a long and politically difficult process.

Existing EU rules have not been enough to get countries to coordinate their fiscal management and keep them from running up too much debt.

In the interview, Trichet said he supports European Union plans for EU oversight to go further and monitor how EU economies are performing.

Earlier this month European Union officials urged a crackdown on widespread government overspending, calling for much closer economic coordination between EU nations to curb the acute debt crisis that started in Greece and has threatened to sink the shared euro currency.

The plan presented by the EU's executive commission advocated unprecedented scrutiny of countries' spending plans even before they go to their national parliaments — and new financial penalties for rulebreakers.

That would deepen the ties that bind 16 nations in Europe's currency union and would curtail some nations' power over their own economies in an attempt to keep more reckless spenders like recently bailed-out Greece from dumping their debts on all eurozone members.

Trichet said he "doesn't understand" criticism of the plan, notably in France, according to Le Monde.

In a speech in Vienna on Monday, Trichet also refuted criticism of the ECB's controversial program to buy government bonds and support the bond market,

Trichet said the bank "sterilizes" its intervention so offset the impact on money supply. "The Securities Markets Program should not be confused with quantitative easing. In simple words: We are not printing money," Trichet said, according to a copy of his speech on the ECB's website.

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