Reuters News - Spain debt woes spur flight from risk assets to U.S. bonds, dollar

By Chikako Mogi

TOKYO | Thu May 31, 2012 1:45am EDT

(Reuters) - Asian shares and commodities slid while the euro fell to its lowest in almost two years against the dollar on Thursday, as surging borrowing costs in troubled Spain raised fears that it could fail to rescue its banks and may need to seek a bailout.

Investors fled from risk assets to U.S. government bonds, with the benchmark 10-year Treasury yield falling below 1.6 percent in early Asian trade on Thursday, its lowest in at least 60 years. The 10-year Japanese government bond yield hit a nine-year low of 0.810 percent.

The dollar and the yen were also beneficiaries of escalating risk aversion although gold, a traditional safe-haven asset, struggled in the face of the greenback's strength.

MSCI's broadest index of Asia-Pacific shares outside Japan.MIAPJ0000PUS tumbled as much as 1.6 percent, and was set for its worst month in eight months with a drop of nearly 12 percent. The pan-Asia index was down 0.3 percent for the year.

The index was dragged down as some key Asian bourses - Hong Kong .HSI, Australia .AXJO and Korea .KS11 - temporarily fell to negative territory for the year.

Japan's Nikkei .N225 was down 1.4 percent on the day and on track for its biggest monthly drop in two years. .T

European shares were likely to tread lower, with spreadbetters predicting major European markets .FTSE .FCHI .GDAXI would open down as much as 0.2 percent. U.S. stock futures were nearly unchanged. .EU .L .N

"The situation in Spain at the moment is untenable, not only is there concern over the state of its banking sector but there is little confidence its government will actually be able to bail them out," said Michael Creed, an economist at the National Australia Bank.

A caution by Spain's central banker that Madrid will miss deficit targets for this year pushed Spanish 10-year yields above 6.7 percent, close to 7 percent, a level seen as unsustainable and which could push Spain to seek a bailout just as Greece, Portugal and Ireland have done.

The cost of insuring against a Spanish default scaled a record high near 600 basis points whileItaly, which is also struggling with huge public debt, saw its 10-year yield top 6 percent for the first time since January.

Yields on all German bond maturities hit record lows on Wednesday, pushing the premium investors demand to hold Spanish debt over German debt to its highest since the launch of the euro at around 543 basis points.

FIRM DOLLAR SLAMS COMMODITIES

Oil prices extended losses and copper hit 2012 lows near $7,422 a metric ton (1.1023 tons) on Thursday. <MET/L>

U.S. crude futures eased 0.3 percent at $87.59 a barrel and were set for their worst month since late 2008. Brent crude fell 0.3 percent at $103.15 a barrel, on track for its worst month in two years. <O/R>

"Investors were already exposed to the problems in Spain, but what really disturbed the market were oil prices and U.S. bond yields which broke out of range to hit long-period lows," said Lee Seung-wook, an analyst at Kiwoom Securities.

The dollar index .DXY, measured against a basket of major currencies, extended its rally to 83.11, its highest since September 2010.

The strong dollar and intensifying risk aversion sent the Thomson Reuters-Jefferies CRB index .CRB, a global benchmark for commodities, tumbling 1.7 percent to its lowest levels since September 2010 on Wednesday. A stronger dollar typically weighs on dollar-based commodities.

The dollar index was on the verge of closing above its 100-month moving average at 81.82, which would generate a buy signal which in turn could spur a sustained period of dollar strength for the next couple of years to as high as 101.00-106.00, some analysts said.

The index has in the past 30 years generated four successful buy signals which have resulted in significant dollar moves, they added.

EURO UNDER FIRE

The euro fell to a 23-month low of $1.2358 and a 4-1/2 month low against the safe-haven yen at 97.36.

"There is no exit in sight currently for the euro to get out of this downtrend because there is no shortage of negative news," said Hisamitsu Hara, chief FX manager at Bank of Tokyo-Mitsubishi UFJ.

"Problems in Spain, a large euro zone economy, heighten fears while the risk of Greece leaving the euro bloc raises contagion concerns. The euro remains depressed, with players cautiously testing the downside".

Hara added that the euro could weaken until support at the$1.19 level. The euro last dipped below $1.19 in June 2010.

The yen rose to a 3-1/2 month high against the dollar at 78.71.

Hara said wariness over Japanese authorities intervening to prop up the dollar was likely to prevent the U.S. currency from falling sharply further.

The European Commission threw Spain two potential lifelines, offering more time to reduce its budget deficit and offering direct aid from a euro-zone rescue fund to recapitalize distressed banks.

But any relief from the news was quickly offset by the latest Greece polls showing parties for and against a bailout neck-and-neck or very close to each another, ahead of a June 17 election that may decide whether Greece remains in the euro.

Asian credit markets weakened, with the spread on the iTraxx Asia ex-Japan investment-grade index widening by 8 basis points.

(Additional reporting by Reuters FX analyst Krishna Kumar in Sydney, Joonhee Yu in Seoul and Luke Pachymuthu in Singapore; Editing by Ed Lane)

BBC News - India growth rate slows to 5.3% in first quarter of 2012

 Yogita Limaye reports from Gujarat on the problems caused by the weak currency

The Indian economy grew at the slowest rate since 2003 in the first three months of 2012, due to a widening trade gap and poor investment.

India's gross domestic product (GDP) rose 5.3% in the first three months of 2012, down from 7.8% in the same period last year, official figures show.

The growth figure was well below market expectations of 6.1%

India is the third-largest economy in Asia but has been struggling with inflation and currency weakness.

Since July last year, the Indian rupee has seen one of the biggest declines among Asian currencies, dropping more than 27% against the US dollar.

"Shocking numbers as growth was even lower than lows witnessed during the financial crisis," said Anubhuti Sahay from Standard Chartered Bank in Mumbai.

The BBC's Yogita Limaye in Mumbai said that just a year ago India was aspiring for double digit growth.

But a global slowdown has reduced external demand, and high inflation coupled with a weak rupee has made things more expensive within the country.

BBC News - Spain in focus as EU readies euro zone economic strategy

European Commission President Jose Manuel Barroso gives a thumbs-up as he makes a speech during The State of the Union conference in Florence May 9, 2012.

Credit: Reuters/Giampiero Sposito

By Jan Strupczewski and Francesco Guarascio

BRUSSELS | Wed May 30, 2012 1:52am EDT

(Reuters) - The European Commission will set out its economic strategy for the euro zone on Wednesday, spelling out measures to balance growth with unpopular fiscal consolidation that will be particularly pointed for Spain and Italy.

The Commission will issue specific recommendations for each of the 27 European Union members, as well as for the 17 sharing the euro. Once endorsed by EU leaders in June, the executive's plans will become binding for the 27-nation bloc.

Italy, the euro zone's third biggest economy and a country under close market scrutiny because of its large debt and slow growth, is likely to get praise for its fiscal consolidation efforts under technocrat premier Mario Monti, a draft document obtained by Reuters shows.

"The policy response to ensure sound public finances and tackle Italy's long-standing structural weakness has been determined and wide-ranging," reads the draft, which may be yet changed before adoption.

"Italy has been implementing a bold fiscal consolidation strategy which should allow correcting the excessive deficit by 2012 and achieving ... a broadly balanced budgetary position in structural terms by 2013, one year earlier than recommended."

Spain, struggling to wrestle down its deficit and recapitalize its debt-laden banking system, is unlikely to get such a positive write-up.

There has been speculation that the Commission, the guardian of EU rules, will shift its emphasis from austerity to growth, without which euro zone debts cannot be reduced.

New French President Francois Hollande has championed a greater focus on growth over budget cuts and Commission President Jose Manuel Barroso reiterated on Tuesday that the euro zone needed both to regain investor confidence.

He also said the EU's budget rules, the Stability and Growth Pact, should take into account differences between states - a possible shift in emphasis towards growth, one that could benefit countries such as Spain and Italy, whose excessive debts could yet pose a threat to the future of the currency bloc.

"We will ... set out our line on implementing the Stability and Growth Pact in a growth-friendly and differentiated way applying its in-built scope of judgment," Barroso said in a speech, comments that imply a degree of flexibility.

While Spain has repeatedly said it does not want to be cut any slack, it would make its budget consolidation efforts more manageable if it had longer to meet the target. Similar flexibility would help several other strapped euro zone states.

Spanish 10-year borrowing costs have surged to 6.5 percent on investor concerns about the cost of rescuing the country's banking sector and supporting its indebted regions. A seven percent yield was the tipping point that pushed Ireland and Portugal into taking EU/IMF bailouts.

SHIFT OF EMPHASIS?

Some economists expect a switch in the Commission's focus to structural budget deficits, which exclude one-off items and the effects of the economic cycle, from headline deficits, which at a time of recession are larger.

"The Commission will monitor the impact of tight budget constraints on growth, enhancing public expenditure, and on public investment," Barroso said.

"If necessary, the Commission will give guidance on the scope for possible action within the boundaries of the European Union and national fiscal frameworks."

The draft report on Italy says the priority areas for Rome are its public finances, reforming labor markets, education and market regulation, as well as making taxation more growth friendly and a more efficient organization of the judiciary.

It calls on Italy to adopt laws that would implement an agreed balanced budget rule and urges the government to tackle Italy's grey economy - such as undeclared work. But it says Rome's reform plans are ambitious and relevant.

Spain has vowed to reduce its budget deficit, which stood at 8.9 percent of GDP last year, to 5.3 percent in 2012 and 3 percent in 2013. With its economy in recession, many officials believe the targets are overly ambitious.

Some policymakers have said Madrid could get more time to reduce its deficit if it presented a credible 3-4 year plan of fiscal adjustment.

The need for more time was underlined last week, when previously undisclosed data showed Spain's 17 autonomous regions will need to refinance 36 billion euros of debt this year, rather than the 8 billion euros initially expected. It also faces a 19 billion euros bill to rescue troubled lender Bankia.

(Reporting By Jan Strupczewski, editing by Mike Peacock)

BBC News - China and Japan to start direct yen-yuan trade in June

China will allow direct trading of the yuan and the Japanese yen, in a move aimed at promoting trade between Asia's two biggest economies.

China has said it is looking to make its tightly controlled currency fully convertible

This means the two countries will not be using the US dollar as an intermediary.

China, which sometimes has a tense relationship with Japan, is the country's biggest trading partner.

China's central bank said the China Foreign Exchange Trade system would launch this trade, starting next month.

"This is part of China's broader strategy to reduce dependence on the dollar," said Dariusz Kowalczyk from Credit Agricole CIB in Hong Kong.

He added that the yen was chosen because of the large amount of trade between the two countries and that "this could lead to an expansion of trading with other currencies".

In December, the leaders of Japan and China agreed to mutually promote direct trading between the two currencies based on market principles.

The People's Bank of China said the move would help lower currency conversion costs and help facilitate bilateral trade and investment.

Japanese Finance Minister Jun Azumi told reporters that trading under a new regime will start in Tokyo and Shanghai on 1 June, according to Reuters News agency.

"By conducting transactions without using the third country's currency, it will bring merits of reducing transaction costs and lowering risks involved in settlements at financial institutions," said Mr Azumi.

"That will contribute to improve convenience of the both countries' currencies and reinvigorate the Tokyo market."

Japanese media are reporting that this is the first time China has let a major currency other than the US dollar trade directly with the yuan.

BBC News - Rare Martian Pink diamond at auction in Hong Kong

A rare pink diamond is expected to fetch at least $8m (£5m) when it goes under the hammer in Hong Kong.

The Martian Pink is an extremely rare stone

The Martian Pink diamond is about 12 carats in size. Pink diamonds as large as this are extremely rare.

The gem was named by famed American jeweller Ronald Winston in 1976, the same year the US sent a satellite to Mars.

The most famous pink diamond in the world belongs to Queen Elizabeth II.

The Williamson Pink was given to the British queen for her wedding in 1947 - the cut, 23.6-carat round stone was later set in a brooch.

The Martian Pink is estimated to be worth $8-12m, says Christie's auction house.

It is the largest round fancy intense pink diamond to ever go under the hammer, says Christie's.

Reuters News - Insight: U.S. hedge funds find ways to trade euro misery

By Svea Herbst-Bayliss and Katya Wachtel

BOSTON/NEW YORK | Mon May 28, 2012 2:04am EDT

(Reuters) - Two decades ago, George Soros rose to fame and fortune on his now-historic trade in which he took on the Bank of England and shrewdly wagered on a devaluation of the British pound.

But it's unlikely the current European monetary crisis and worries about Greece's potential exit from the euro zone will give rise to an investing legend like Soros, who made $1 billion in 1992 by betting on a decline in the price of the pound.

Instead, there are a multitude of strategies to play Europe's troubles, and many different participants, according to U.S. hedge fund managers.

"There is not room for one player to have such impact," said John Brynjolfsson, whose California-based Armored Wolf hedge fund has been betting against the euro for quite some time. "Financial markets are so much bigger today."

A spokesman for Soros, who last year converted his Soros Fund Management to a family office and stopped managing money for outside investors, could not be reached for comment.

Brynjolfsson and several other U.S. money managers who are trying to profit from Europe's misery say they expect the current crisis to produce a lot of winners.

So far this year, the euro is down 3.3 percent against the U.S. dollar.

U.S. money managers say it's hard to swing for the fences the way Soros did because institutional investors are far more squeamish about having too much money riding on any single trade. There is also heightened sensitivity from pensions and endowments to taking an investment strategy that might spark political outrage from European leaders.

Another thing working against the rise of a new Soros is that trading the euro zone, or even the fallout from a Greek exit, is a much more complicated than betting against a single currency.

Money managers are playing the euro zone crisis by trading currencies, wagering on the direction of bank stocks or using derivatives like credit default swaps to bet on potential corporate and bank failures. Greenlight Capital's David Einhorn recently said he is bullish on gold and gold miners, in part because of concern about the fallout from a euro zone meltdown.

Some managers are even going both short and long on different European sovereign debt, depending on their views of the financial stability of different countries.

Adam Fisher, manager of the $320 million Commonwealth Opportunity Capital hedge fund, noted that Soros faced a "single country, not 17 different countries, one decision maker, not 17."

Fisher's fund, which has more than 80 percent of its money invested in Europe, is taking a somewhat contrarian position by owning the European sovereign debt of Germany, the Netherlands, Italy and Spain.

Hedge fund managers point out that given the up-and-down nature of the euro zone crisis, most hedge funds have been in and out of trades or forced to adjust positions depending on the changing political winds.

Earlier this year, for instance, it looked like concern about Greece exiting the euro had passed. But with the recent results of the Greek election at odds with the austerity measures demanded by its currency partners, the risk of a Greek departure from the euro zone has risen dramatically.

Recently, Fisher said his Los Angeles-based fund had reduced the size of some of its more bullish sovereign debt trades because he believes there will be "violent" market swings this summer.

"It is going to be incredibly difficult to manage risk through that environment," said Fisher, whose fund was up 8.8 percent through April. "I don't think hedging will do anything. The way you hedge, is you sell. You don't subtract risk by adding risk."

Brynjolfsson, a former top portfolio manager for bond mutual fund firm Pacific Investment Management Co, is betting on Greece exiting the euro. He said it will be hard for European leaders to take the necessary steps to appease the Greek government without infuriating politicians in other euro zone countries.

"As the wheels began falling off the bus, we adjusted to have a short bias and that has worked out," said Brynjolfsson, whose $750 million hedge fund is up 2 percent this year, largely on its short bet against the euro.

Axel Merk, president and chief executive officer of Merk Investments, an investment advisory firm that specializes in currencies, said the growing problems with Greece and the euro zone led him recently to dump all the euros in his $517 million Merk Hard Currency Fund, which is up 2.29 percent for the year.

Merk now favors the Singapore dollar, which has climbed 1.34 percent since January.

Ray Dalio's $120 billion Bridgewater Associates gained 23 percent in 2011 in part because of profits made from a series of European bets, said a person familiar with the Westport, Conn.-based fund who declined to discuss specifics of the strategy. In a recent interview with Barron's, Dalio said European banks "are now over-leveraged and can't expand their balance sheets" and European nations "don't have enough buyers of their debt."

Dalio may be the U.S. money manager who comes closest to rivaling the Soros of two decades ago. His hedge fund is the industry's largest and he widely regarded as one of the most successful managers.

Among the ways funds are playing the European turmoil, some are betting against the fortunes of Spanish and Italian banks instead of simply focusing on sovereign debt.

John Paulson, among others, bets against European sovereign debt as way to hedge the overall portfolio of his Paulson & Co hedge fund firm.

Daniel Loeb's Third Point fund put on a long position in Portuguese sovereign bonds in the first quarter because the New York-based manager believed the nation is in better shape than others in the euro zone.

"Portugal's debt profile is more consistent with Italy's than Greece's, its banks are substantially healthier than Spain's, and its government has enacted more aggressive labor reforms and is more stable than regimes in both countries," Loeb wrote in a May 16 investors' letter seen by Reuters.

If nothing else, the European crisis is forcing managers to keep coming up with new strategies to trade. One might say it's almost become an incubator for hedge fund managers to stretch their investment acumen.

Merk said he might look again at Europe if the political and financial situation gets more clarity. But he would likely do it a bit differently.

"If there is clarity in the process again, then we will certainly look at Europe again," he said. "But not through Greek debt, but through German bills."

(Reporting By Svea Herbst-Bayliss and Katya Wachtel; edited by Matthew Goldstein, Jennifer Ablan, Martin Howell)

Reuters News - European shares, euro gain as Greek fears ease

Credit: Reuters

LONDON | Mon May 28, 2012 3:15am EDT

(Reuters) - European stocks rose for a third consecutive session early on Monday and the euro bounced off two-year lows, as Greek opinion polls showing rising support for pro-bailout parties calmed speculation of a disorderly exit by Athens from the single currency.

Global share markets, commodities and the euro were all recovering from sharp falls last week, when investors fled to the safety of the U.S. dollar on mounting concerns about Greece, Spain's banking sector, and a lack of immediate policy responses from European leaders.

"Today it really comes down to what is going on in Greece, the idea that Greece will stay within the euro zone calms the market," said Ben Taylor, a trader at CMC markets.

The FTSE Eurofirst index of top European shares opened up 0.5 percent at 989.57 points after last week notching up its first weekly gain in a month.

The euro jumped 0.8 percent to $1.2615, pulling away from Friday's level of $1.2495, its lowest since July 2010.

Concerns over Spain were likely to weigh on investors after a government source said Madrid may issue more debt to recapitalize the country's fourth-largest lender, Bankia, increasing its funding challenge.

But trading volumes should remain muted on Monday, with U.S. markets closed for Memorial Day, while markets in a number of European countries, including Switzerland, were closed for a bank holiday. Monday is also a bank holiday in France and Germany, although their equity markets were open.

(Reporting by Richard Hubbard; Editing by David Holmes)

Reuters News - Europe slowdown adds more tension to Greek drama

Credit: Reuters/Yorgos Karahalis
Fri May 25, 2012 6:22am EDT
(Reuters) - Europe's economic slowdown has hit the engine-room of the euro zone, including Germany, gloomy new indicators have revealed, adding urgency to the region's struggle to keep Greece's debt crisis from tearing the single currency apart.

So far, the 17-nation euro zone's downturn has been confined mainly to its periphery, but an index measuring broad economic activity across the monetary union in May showed its weakest outcome since mid-2009, during the global financial crisis.

The composite PMI on Thursday indicated core nations such as Germany and France were being caught up in the downturn, even as they made contingency plans to deal with financial and economic turmoil in the event Greece quits the euro.

Italy, which could be on the front line of speculative attacks on euro markets if Greece went back to the drachma, put a brave face on the situation, saying the most probable outcome was still that Greece would remain in the euro zone.

"Anything can happen, but I think the most probable outcome is the one which is most positive for Greece and for all of us," Italian Prime Minister Mario Monti told Italian TV.

He said Greece's euro zone partners had been wrong to insist on overly rapid reforms and fiscal adjustment, and that he did not expect it would be long before European countries were ready to introduce common euro zone bonds.

"Italy is very much in favor of the creation of euro bonds when the time is right, and we do not expect it to be too far off," Monti told an earlier news conference.

At least half of euro zone governments, as well as banks and large companies, are making contingency plans in case Greece decides to quit the euro. Despite Monti's comments, his deputy economy minister said Rome was ready for such a possibility.

GREEK ELECTIONS

Greek voters will signal their intentions at a fresh general election on June 17, a ballot that has turned into a referendum on whether Athens should continue with an austerity drive that is the price of continued fiscal support from its euro partners.

Greece's anti-bailout leftist SYRIZA party is maintaining a lead ahead of the elections, according to an opinion poll on Thursday. Greece held elections on May 6 but that vote left parliament divided evenly between groups of parties that support and oppose austerity conditions attached to a 130 billion euro ($164 billion) rescue agreed with lenders in March.

The Public Issue/Skai TV poll showed SYRIZA leading with 30 percent of the vote, four points ahead of the conservative New Democracy party, which is backing the bailout. If repeated on June 17, this would fall short of enabling SYRIZA to govern alone but give it a decisive role in forming a new government.

Greece's deficit means that without the EU/IMF money, which would stop flowing if Athens were to tear up the agreement on reforms, it would not be able to pay salaries and would have to leave the euro zone and start printing its own currency.

However, another opinion poll indicated support for SYRIZA did not mean Greeks wanted to ditch the euro.

Three-quarters of decided Greek voters back the euro, according to an Ipsos poll, which surveyed people in Greece, Germany, France, Italy and Spain on whether they would vote to keep the euro if their countries held a referendum tomorrow.

"Regardless of the turmoil and the debate that's going on in these crucial countries, it would seem that for the time being, people want to stick with the euro," said John Wright, senior vice president of global public affairs at Ipsos.

Many Greeks, though, are not taking chances on banks being able to keep their money safe and have resorted to hiding cash at home - creating a new target, police say, for gangs that usually prey on "hard targets" such as the banks themselves.

No one knows how much cash is stashed in Greek homes - in cupboards, at the back of the ice-box, beneath the floor or under the mattress - but it could well be in the billions, and burglars are after their share of loot.

EURO BONDS

Common euro bonds, which would allow weaker nations like Greece to borrow with the collective backing of the bloc, are back on the agenda as Greece's possible exit looms larger.

France's election on May 6 of a Socialist president, Francois Hollande, has changed the tone of the debate on euro bonds. He urged a reluctant German Chancellor Angela Merkel and other European leaders at talks on Wednesday to consider recourse to euro bonds among other measures.

Merkel, seen as an architect of the austerity prescription for Greece, now looks increasingly vulnerable on the euro zone crisis. Other European leaders have rallied around Hollande's call for a new emphasis on growth alongside debt-cutting.

On euro bonds, Germany's opposition Social Democrats (SDP) and Greens have taken a similar line to Hollande. But there were signs on Thursday they might instead accept a compromise plan to mutualise only a proportion of members' sovereign debts.

This would involve mutualising the debts of euro zone countries beyond 60 percent of GDP.

The euro crisis has also thrown a spotlight on the vulnerability of commercial banks to a full-blown crisis of confidence in the single currency, especially in the indebted countries of southern Europe, such as Spain.

Spain is considering creating a single nationalized bank out of its failed lenders, including problem lender Bankia, if the state cannot find buyers for state-rescued banks, a senior Economy Ministry source said.

BBC News - UK economy shrank more than thought

The UK economy shrank by 0.3% in the first three months of the year, more than previously thought, revised figures have shown.




Jane Foley, Rabobank: "Head-winds from the eurozone are extremely strong"


Last month's initial estimate from the Office for National Statistics (ONS) showed a contraction of 0.2%.

The downward revision was due to a bigger contraction in construction output than previously estimated.

Over the last year and a half, the economy has fluctuated between quarters of growth and contraction.

In the final three months of last year, the economy also shrank by 0.3%, meaning the UK is back in recession.

There are concerns that the UK economy will shrink again in the second quarter of the year - the governor of the Bank of the England Mervyn King has warned that the Queen's Diamond Jubilee could reduce output.

Following the revised figures, shadow chancellor Ed Balls described Prime Minister David Cameron and Chancellor George Osborne as "complacent and out of touch".

"It's now clear that this is a recession made in Downing Street by this government's failed policies," he said.

"Despite all the problems in the euro area, France, Germany and the eurozone as a whole have so far avoided recession and only exports to other countries stopped us going into recession a year ago. The result is that Britain is now in a weaker position if things get worse in the eurozone in the coming months."

Government spending
The revised figures for the first quarter showed that output in the construction industry fell by 4.8% compared with the initial estimate of 3%.

An increase in government spending of 1.6% - the biggest rise since the first quarter of 2008 - went some way to offsetting this contraction. This was driven largely by spending on health and defence.

The figures also showed unchanged growth in the service sector of 0.1%, while household spending increased by the same amount.

Compared with the previous year as opposed to the previous quarter, growth fell by 0.1%, the first annual drop since the final three months of 2009.

The first quarter's growth figure will be revised again next month.

When the first estimate of the GDP figures was released last month, a number of commentators expressed surprise at the data, and some still argue that the latest figure does not accurately reflect the performance of the UK economy.




"Our reading is the construction sector was not as weak as the official data suggests, implying that overall the economy performed better than today's release shows," said Philip Shaw at Investec.

"Nonetheless, the economy is not recovering properly and with the uncertainty over Europe hanging over the outlook as well, our suspicion is the Monetary Policy Committee [of the Bank of England] will sanction further quantitative easing (QE) at some point later on this year."

The Bank has already pumped £325bn into the UK economy through its QE programme to try to boost growth, but has said it is open to the idea of further cash injections.

Earlier this week, the head of the International Monetary Fund, Christine Lagarde, said that if the economic recovery continues to falter, the UK should consider more QE. She also suggested the Bank could cut interest rates below the current record low of 0.5%.

She did, however, back the government's austerity drive designed to cut the UK's budget deficit.

A number of observers argue that the coalition's spending cuts have played a large part in the UK's return to recession. In recent weeks, there have been growing calls across Europe for a greater focus on growth, as opposed to austerity, to help drive the economic recovery and reduce debt levels.

BBC News - China pledges measures to boost demand and investment

China has said it will take measures to boost demand and investment amid fears of a slowdown in its economy.

China has previously used stimulus measures to sustain its high rate of growth

On Wednesday, the government said it will encourage private investment in sectors such as energy, railways and telecommunications.

The move comes as its export sector, one of the biggest drivers of growth, has been hurt by falling global demand.

Policymakers have also found it tough to boost domestic consumption enough to offset a decline in foreign sales.

"Downward pressure on the economy is increasing," the government said in a statement issued after a cabinet meeting led by Premier Wen Jiabao.

It added: "We must proactively take policies and measures to expand demand and to create a favourable policy environment for stable and relatively fast economic growth."

Getting worried

China's growth has been slowing in recent times. Its economy expanded by an annual rate of 8.1% in the first quarter, the slowest pace in almost three years.

The government has set a target of 7.5% growth in 2012, the lowest since 2004. However, there have been fears that China's economy may witness a bigger-than-expected slowdown in the near term.

Those fears have been fanned further in recent days as the eurozone debt crisis has taken centre stage again after voters in Greece backed politicians who have voiced their opposition to state spending cuts.

There are concerns that as the debt crisis escalates, it may dent consumer sentiment in the region and further hurt demand for China's exports.

"China seems concerned enough about its own growth slowdown and downside risks coming from the European crisis that it will do more to stimulate its economy, even pre-emptively," said Dariusz Kowalczyk of Credit Agricole CIB.

Policy easing?

Triggered by fears of a slowdown in the economy, China has been easing its policies in a bid to sustain growth.

China's central bank has cut the reserve ratio requirement, the amount of money that banks need to hold in reserves, three times in the past six months.

The cuts give more money to banks to lend in the hope that increased lending will result in higher spending and boost domestic demand.

Mr Kowalczyk said that the government's latest statement indicated that it will ease its policies "via pressuring banks to lend more".

He added that the central bank may further reduce the reserve requirements for banks in the coming months as well as cut interest rates.

Reuters News - EU urges Greece to stay in euro, plans for possible exit

1 of 6. Germany's Chancellor Angela Merkel (R) leaves an informal European Union leaders summit in Brussels May 24, 2012. EU leaders discussed ways to revive their economies on Wednesday night, with growth and jobs on the agenda along with the situation in Greece.

Credit: Reuters/Francois Lenoir

By Claire Davenport and Luke Baker

BRUSSELS | Thu May 24, 2012 1:41am EDT

(Reuters) - European Union leaders, advised by senior officials to prepare contingency plans in case Greecedecides to quit the single currency, urged the country to stay the course on austerity and complete the reforms demanded under its bailout program.

After nearly six hours of talks held during an informal dinner, leaders said they were committed to Greece remaining in the euro zone, but it had to stick to its side of the bargain too, a commitment that will mean a heavy cost for Greeks.

"We want Greece to stay in the euro, but we insist that Greece sticks to commitments that it has agreed to," German Chancellor Angela Merkel told reporters after a Wednesday evening summit in Brussels dragged long into the night.

Three officials told Reuters the instruction to have plans in place for a Greek exit was agreed on Monday during a teleconference of the Eurogroup Working Group (EWG) - experts who work for euro zonefinance ministers.

The Greek finance ministry denied there was any such agreement but Belgian Finance Minister Steven Vanackere, said: "All the contingency plans (for Greece) come back to the same thing: to be responsible as a government is to foresee even what you hope to avoid."

Two other senior EU officials confirmed the call and its contents, saying contingency planning was only sensible.

In its monthly report, Germany's Bundesbank said the situation in Greece was "extremely worrying" and it was jeopardizing any further financial aid by threatening not to implement reforms agreed as part of its two bailouts.

It said a euro exit would pose "considerable but manageable" challenges for its European partners, raising pressure on Athens to stick with its painful economic reforms.

Greek officials have said that without outside funds, the country will run out of money within two months and there remains the threat that if it crashes out of the euro zone, other member states could be brought down too.

A document seen by Reuters detailed the potential costs to individual member states of a Greek exit and said that if it came about, an "amiable divorce" should be sought with the EU and IMF possibly giving up to 50 billion euros to ease its path.

Although EU leaders' minds will have been focused by that prospect, disagreements have flared over a plan for mutual euro zone bond issuance and other measures to alleviate two years of debt turmoil, such as giving countries like Spain an extra year to make the spending cuts demanded of them.

"The idea is to put energy into the growth motor. All the member countries don't necessarily share my ideas. But a certain number expressed themselves in the same direction," new French President Francois Hollande told reporters.

For the first time in more than two years of crisis summits, the leaders of France and Germany did not huddle beforehand to agree positions, marking a significant shift in the axis which has traditionally driven European policymaking.

Instead, Hollande met Spanish Prime Minister Mariano Rajoy in Paris to discuss policy, before the pair travelled to Brussels by train.

Despite fears Greeks could open the departure door if they vote for anti-bailout parties at a June 17 election, Spain, where the economy is in recession and the banking system in need of restructuring, is at the front line of the crisis.

After meeting Hollande, Rajoy said he had no intention of seeking outside aid for Spain's banks, which are laden with bad debts from a property boom that bust and still has some way to go before it touches bottom.

But his government said its rescue of problem lender Bankia would cost at least 9 billion euros and it is also seeking ways to help its highly indebted regions meet huge refinancing bills.

SHIFTING SANDS

Socialist Hollande's election victory has significantly changed the terms of the debate in Europe, with his call for greater emphasis on growth rather than debt-cutting now a rallying cry for other leaders.

That has set up a showdown with conservative Merkel, whose primary objective is budget austerity and structural reform.

At his first EU summit, Hollande chose to make a stand on euro bonds - issuing common euro zone debt - despite consistent German opposition to the idea. "I was not alone in defending euro bonds," he said.

Merkel showed no sign of dropping her objections to the proposal, which she has said can only be discussed once there is much closer fiscal union in Europe. "There were differences in the exchange about euro bonds," she said bluntly.

The Netherlands, Finland and some smaller euro zone member states support her.

No major decisions were made at Wednesday's summit, which was intended to promote ideas on jobs and growth ahead of another meeting at the end of June.

But debate was intense, not just over euro bonds but over how to rescue banks and whether to give more time to struggling euro zone countries to meet their budget deficit goals.

"We haven't come together to confront each other ... but we have to say what we think - what are the right instruments, the right methods, the right steps, the right initiatives to raise growth," Hollande said.

The leaders discussed broad measures to stem the fallout from a winding up or restructuring of bad banks, EU officials said, with the European Central Bank pressing for the bloc to stand behind its struggling lenders but with Merkel's approval seen as far from guaranteed.

At the heart of the discussion are proposals from the European Commission for a legal framework to wind up or reorganize insolvent banks so as to avoid a repeat of the multi-trillion-euro taxpayer bailouts during the financial crisis.

Another suggestion is for the euro zone's rescue funds to be allowed to recapitalize banks directly, rather than having to lend to countries for on-lending to the banks. But that is another idea with which Germany is uncomfortable.

Having rallied on Tuesday, European stocks dropped 2.2 percent as investors priced in a lack of dramatic policy action. The euro tumbled against the dollar to its lowest since August 2010 and Spanish and Italian borrowing costs climbed.

A German two-year debt auction gave a stark illustration of how money is dashing for safe havens. Investors snapped up the 4.5 billion euros of paper on offer even though it came with a zero coupon - offering no return at all.

SEARCH FOR GROWTH

With the euro zone registering no growth in the first quarter and threatening to slip back into recession, policymakers touted three ideas to provide stimulus:

- 'Project bonds' backed by the EU budget to finance infrastructure projects alongside private sector investment.

- Doubling the paid-in capital of the European Investment Bank, the EU's co-financing arm, to a little over 20 billion euros.

- Redirecting structural funds which tend to flow to poorer countries, to other areas where they might reap more immediate growth rewards.

Even if all three proposals were to be activated quickly, economists say they will not provide a sufficient shot in the arm to the euro zone and the wider EU economy.

(Additional reporting by Jan Strupczewski, John O'Donnell, Catherine Bremer and Marine Hass in Brussels and Julien Toyer in Madrid. Writing by Mike Peacock, editing by Anna Willard and Giles Elgood)

Bloomberg News - World Bank Says Asia Must Watch Inflation As Expansion Slows

Nelson Ching/Bloomberg

Employees perform welds on parts for Geely Automobile Holdings Ltd. Emgrand 7 series automobiles at the company's factory in Cixi, Zhejiang Province, China.

By Karl Lester M. Yap and Michael Heath - May 23, 2012 4:33 AM GMT+0200

The World Bank said policy makers in Asia’s emerging economies must guard against inflation risks and be prepared to reverse policy easing, even as slowing growth in China and Europe’s sovereign-debt turmoil hurt exports.

Growth in developing East Asia, which excludes Japan and India, will probably ease to 7.6 percent this year from 8.2 percent in 2011, the Washington-based lender said in a report today. In November, the forecast for 2012 was 7.8 percent. The region’s reliance on European demand and Chinese commodities consumption make it vulnerable to slowdowns in those markets, the World Bank said.

Asian policy makers, many of whom have cut interest rates this year, are under renewed pressure to support growth as the world grapples with the threat of a Greece exit from the euro. The Organization for Economic Cooperation and Development said yesterday Europe’s debt crisis risks spiraling and seriously damaging the global economy and Chinese Premier Wen Jiabao’s pledged this week to focus more on bolstering growth.

“Even as the region’s monetary authorities seek to advance growth with policy loosening, inflation risks cannot be overlooked,” the World Bank said in its East Asia and Pacific economic update, citing the potential for an oil-price shock. “An uptick in activity, aided by accommodative monetary policies, also poses an upside risk to inflation, so policy makers should be prepared to reverse recent easing.”

Greek Impasse

While Australia has resumed easing policy, nations from Indonesia to Thailand have paused after cutting rates early this year, before Greece’s political impasse after inconclusive elections deepened the European crisis and sent Asian currencies and stocks tumbling this month.

The MSCI Asia Pacific Index (MXAP) of stocks has fallen about 10 percent this month, as the region’s largest economies struggle with internal and external risks. China’s growth is slowing and Japan’s sovereign-rating was lowered by Fitch Ratings yesterday.

China’s shipments abroad rose less than estimated in April, while the Philippines, Thailand and Malaysia all reported export declines in March. Compounding weakening demand from Europe is the growth slowdown in China, which bought 21 percent of emerging East Asia’s exports in 2010, up from 8.8 percent in 2000, according to the World Bank.

“Exports has become more difficult, and that in part works into the slowdown in East Asia,” Bert Hofman, the World Bank’s chief economist for the East Asia and Pacific region, said in an interview with Bloomberg Television. China’s growth is forecast to slow to 8.2 percent this year from 9.2 percent 2011, and “that has its effect not just on China but also on the region because it’s harder to sell goods to China,” he said.

2013 Outlook

The World Bank expects growth in developing East Asia to accelerate to 8 percent next year, with China expanding 8.6 percent.

“On the positive side, there’s of course the recovery from the floods in Thailand which greatly contributes to the region,” Hofman said. “There is stronger growth in the Philippines, which was much affected by the Japan earthquake and tsunami. So those are the positive factors that keep growth going. And domestic demand is holding up quite nicely.”

The region has to find new sources of growth locally as over the next couple of years growth in Europe and the U.S. will be “very modest,” Hofman said.

Wen’s Pledge

Chinese Premier Wen’s pledge to focus more on bolstering growth has spurred speculation the government will step up efforts to combat a slowdown in the world’s second-largest economy. Wen called for “putting stabilizing growth in a more important position” and didn’t mention concern about inflation in remarks published May 20 by the official Xinhua News Agency. China may announce stimulus actions in the near term, according to a May 21 front-page commentary in the China Securities Journal.

“China’s government does have sufficient policy space in case things slow down a bit too rapidly,” Hofman said. “They have large fiscal space still and even on the monetary side they’ve been relaxing a little bit and they could relax a little bit further.”

China will start to slow down over the next 20 years and the 10 percent growth rates seen in recent years are going to be more difficult to achieve, he said. “We think gradually a slowdown to something like 5 percent at the end of next decade is a perfectly reasonable path.”

China’s current-account surplus, which trebled between 2003 and 2007 and topped 10.1 percent of gross domestic product in 2007, has fallen to 2.7 percent of GDP in 2011 and may stay down in the next few years as China rebalances amid weak global demand, the World Bank said in today’s report.

A current-account surplus below 3 percent of GDP suggests that the real value of the yuan is closer to equilibrium than it was in the past decade, when the country increased the flexibility in the exchange rate, it said. Still, it isn’t clear whether China’s external surplus will remain in check once global growth revives, the lender said.