Archive for December, 2010

Estonia joins euro club riven by crisis, others wary

Friday, December 31st, 2010 | Finance News


TALLINN (Reuters) – Estonia could be the last new entrant for some years when it becomes the 17th euro zone member on January 1, with the club's deepening crisis of confidence likely to put off larger eastern European states for up to a decade.

European Monetary Affairs Commissioner Ollie Rehn and the prime ministers of Latvia and Lithuania meet in Tallinn on Friday to hail Estonia's euro entry from midnight, capping a drive for integration with the West and away from the influence of Russia that began with the collapse of the Soviet Union.

It also brings the euro to a former Soviet state for the first time. Baltic neighbors Latvia and Lithuania hope to join in 2014, cementing the independence they gained in 1991.

But elsewhere in the former Communist bloc, governments are not so certain. Poland, Hungary and other central and eastern European EU members have all promised to join the euro zone one day, but they are in no hurry.

They want to see how the debt problems of Ireland, Greece, Spain and Portugal are solved and fear losing flexibility of their exchange rates will make them less competitive and less able to withstand further financial ructions.

The debt crisis has also undermined the idea that being a euro zone member guarantees lower borrowing costs.

"There are more risks to being in the euro zone than being outside," Polish central bank governor Marek Belka said earlier this month.

Similar sentiments have come from the Czech Republic, where Prime Minister Petr Necas has said adopting the euro would not be to the country's advantage for a long time.

"The Czechs have always been more cautious and the Poles are getting more cautious too," said Capital Economics economist Neil Shearing.

Even if the euro zone survives in its current form, he said, the next new entrant would not be until 2015. Many economists now expect the larger eastern Europeans will not join before the end of the decade.


Leaders in Estonia, which will be the currency club's 17th and poorest member after a brutal recession in 2009 knocked almost a fifth off its GDP, have brushed off concerns the project might backfire.

"The euro area debt problems are not caused by the euro and the ongoing economic crisis. The seeds of the problems were sown decades ago," President Toomas Ilves said in a recent speech.

"Therefore the solving of the current problems make the euro only stronger and Estonia has the opportunity to be immediately involved in this process."

Prime Minister Andrus Ansip is set to be one of the first to take euros out of a cash machine set up specially for the event, and the head of the central bank will give a television address shortly before midnight on December 31.

In economic terms, the single currency bloc will barely notice the addition -- Estonia's gross domestic product is just 0.2 percent of the current euro zone's 8.9 trillion euros.

Unlike the Poles, Czechs and Hungarians, Estonia is also used to having little currency flexibility. Its kroon has been pegged to the euro under a tight currency board for 18 years and will be converted at a rate of 15.6466. The Latvian and Lithuanian currencies are also pegged to the euro.

Looking beyond the single currency zone's woes, the Baltic region is hoping euro membership will in time confer greater political and economic stability after the financial crisis set back a previously successful transformation from Communism.

All three Baltic nations went through Soviet, Nazi and then Soviet occupation again, so becoming part of western economic and security structures has been of prime importance. They joined NATO and a self-confident European Union in 2004.

"Over the longer term there are less risk of uncertainties and instability in the euro area than in the Baltic region and thus this should be positive for Estonia, despite the short-term challenges," said Nordea analyst Annika Lindblad.

(Additional reporting by Patrick Lannin in Stockholm; Editing by Patrick Graham and Lin Noueihed)


Euro has 1-in-5 chance of lasting decade: UK think-tank

Friday, December 31st, 2010 | Finance News

LONDON (Reuters) – The euro currency area has only a one-in-five chance of surviving in its current form over the next 10 years because of competitive imbalances between its members, a leading British think tank said on Friday.

The Center for Economics and Business Research said Spain and Italy would have to refinance over 400 billion euros ($530 billion) of bonds in the spring, potentially sparking a fresh crisis within the 16-nation euro area.

"The euro might break up at this point, though European politicians are normally able to respond to a crisis," said CEBR Chief Executive Douglas McWilliams in a list of 10 forecasts for 2011.

Sovereign debt crises in Greece and Ireland have rocked euro nations this year, leading some commentators to speculate that Germany could eventually lose patience with bailing out its more profligate neighbors, triggering a split in the currency bloc.

Chancellor Angela Merkel has repeatedly stressed Berlin's commitment to the euro and she said so again in her New Year message to the country on Friday.

"The euro is the foundation of our prosperity," she said. "Germany needs Europe and our common currency. For our own well-being and in order to overcome great worldwide challenges. We Germans assume our responsibility, even when it is sometimes very hard."

McWilliams argued that the deeper imbalances between the euro zone's stronger and weaker economies, which have become increasingly apparent since the 2008 financial crisis, would undermine the project in the long term.

"I suspect that what will break up the euro will be the failure of most of the countries to take the tough medicine necessary to make their economies competitive over the longer term," McWilliams said:

"We give it only a one in five chance of surviving in its present form for 10 years. If the euro doesn't break up, this could be the year when it weakens substantially toward parity with the dollar," he added.

(Reporting by Tim Castle; editing by Patrick Graham)


Oil to end the year up 12 percent, averages near $80

Friday, December 31st, 2010 | Finance News


SINGAPORE (Reuters) – Oil was set to close the year up more than 12 percent and average nearly $80 a barrel -- the second highest on record -- driven by a resurgence in global demand, an unusually cold winter and falling inventories.

After rallying to a 26-month high of $91.88 on Monday, U.S. crude edged lower on Friday, with the February contract down 14 cents at $89.70 a barrel by 1:42 a.m. EST. ICE Brent crude fell 10 cents to $92.99.

Oil prices were set to average $79.60 this year, second only to 2008's record average of $99.75.

U.S. crude stocks fell for the fourth straight week last week, but the drawdown was less than expected and put pressure on prices.

Crude stocks in the world's largest economy fell 1.26 million barrels to 339.43 million barrels in the week to December 24, the Energy Information Agency (EIA) said.

Gasoline supplies fell by 2.32 million barrels, almost a million barrels more than expected. Some of that may have been due to companies running down stocks ahead of the year-end, but some analysts saw the fall as indicative of rising consumption as the world's largest economy continues to recover from recession.

"The latest U.S. weekly data release show a continuation of the recent strength in oil demand," said analysts at Barclays Capital in a research note.

"December is set to be the strongest month of the year in demand terms, with particularly strong indications of gasoline demand."


Even with crude stocks slipping four straight weeks and prices peaking to a 26-month high of $91.88 a barrel earlier this week, OPEC output has risen only slightly in December as Nigerian supply increased, a Reuters survey found.

Supply from the 11 OPEC members with output targets has averaged 26.75 million barrels per day (bpd) this month, up from 26.70 million bpd in November, the survey of oil companies, OPEC officials and analysts showed.

Core OPEC ministers have indicated they would not provide more oil supplies to arrest oil's rally, saying $100 crude was a fair price.

Oil found support from a weaker dollar and positive U.S. economic data.

The dollar languished against the Swiss franc, hitting an all-time low, and fell to a seven-week trough against the yen. The dollar index (.DXY) was down 0.14 percent at 79.408.

The greenback declined despite supportive jobless claims and factory data that bolstered views the U.S. economy had gained momentum at year-end and was set for a stronger performance in 2011.

The positive data could cause the U.S. Federal Reserve to curb its recent initiatives to spur economic recovery, which could strengthen the dollar and limit price boosts for dollar-denominated commodities.

(Reporting by Randy Fabi; Editing by Manash Goswami)