Reuters News - China swings into capital account deficit in second quarter

Employees work at a Sany assembly plant in Lingang Industrial Park, near Shanghai June 28, 2012.

Credit: Reuters/Carlos Barria

BEIJING | Tue Jul 31, 2012 7:41am EDT

(Reuters) - China's capital and financial account swung into a deficit of $71.4 billion from a surplus of $56.1 billion in the first quarter as domestic firms and residents increased their holdings of foreigncurrencies amid the global turbulence, the nation's foreign exchange regulator said on Tuesday.

China has suffered sporadic capital outflows since late last year as choppy global markets have spooked investors and led them to pull funds from the country.

"The current situation is that domestic institutions and individuals increase their holdings of foreign exchange assets instead of the central bank. There is no sign yet of capital flight," the State Administration of Foreign Exchange (SAFE) said in a statement on its website, www.safe.gov.cn.

"As balance of payment and yuan currency approach the equilibrium and reasonable level, it is inevitable to see cross-border capital inflow and outflow, as well as two-way yuan currency fluctuations," it said.

Capital account deficit in the first half was $20.3 billion.

China's current account surplus widened to $59.7 billion in the second quarter from $23.5 billion three months earlier, according to the SAFE.

Current account surplus in the first half of 2012 was $83.2 billion, down 5 percent from a year earlier, the data showed. The surplus was equivalent to 2.3 percent of GDP, down from 2.7 percent in 2011, offering fresh evidence that the world's second-largest economy is relying less on external demand.

The surplus-to-GDP ratio has comfortably fallen below the threshold that U.S. Treasury Secretary Timothy Geithner thought was needed to keep the global economy well balanced.

China's current account surplus was about 6 percent of GDP in 2009 and 10.1 percent in 2007. The steady decline has been helped by the country's solid economic growth in recent years.

(Reporting by Langi Chiang and Kevin Yao; Editing by Jason Subler and Jeremy Laurence)

Reuters News - Euro zone crisis heads for September crunch

A structure showing the Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt July 11, 2012.

Credit: Reuters/Alex Domanski

By Jan Strupczewski

BRUSSELS | Mon Jul 30, 2012 5:41am EDT

(Reuters) - Over the past couple of years, Europe has muddled through a long series of crunch moments in its debt crisis, but this September is shaping up as a "make-or-break" month as policymakers run desperately short of options to save the common currency.

Crisis or no crisis, many European policymakers will take their summer holidays in August. When they return, a number of crucial events, decisions and deadlines will be waiting.

"September will undoubtedly be the crunch time," one senior euro zone policymaker said.

In that month a German court makes a ruling that could neuter the new euro zone rescue fund, the anti-bailout Dutch vote in elections just as Greece tries to renegotiate its financial lifeline, and decisions need to be made on whether taxpayers suffer huge losses on state loans to Athens.

On top of that, the euro zone has to figure out how to help its next wobbling dominoes, Spain andItaly - or what do if one or both were to topple.

"In nearly 20 years of dealing with EU issues, I've never known a state of affairs like we are in now," one euro zone diplomat said this week. "It really is a very, very difficult fix and it's far from certain that we'll be able to find the right way out of it."

Since the crisis erupted in January 2010, the euro zone has had to rescue relative minnows in Greece, Ireland and Portugal as they lost the ability to fund their budget deficits and debt obligations by borrowing commercially at affordable rates.

Now two much larger economies are in the firing line and policymakers must consider ever more radical solutions.

If Spain, the euro zone's fourth biggest economy and the world's 12th, loses affordable market financing the next domino at risk of falling is Italy - the euro zone's third biggest economy and a member of the G7 group of big wealthy nations.

A bailout of Spain would probably be double those of Greece, Ireland and Portugal combined, while Italy's economy is twice as large as Spain's again.

The European Union has already agreed to lend up to 100 billion euros to rescue Spanish banks. One euro zone official said Madrid has now conceded that it might need a full bailout worth 300 billion euros from the EU and IMF if its borrowing costs remain unaffordable.

European officials have spent the past few days issuing a series of statements declaring they will act to halt the crisis.

In the latest, issued on Sunday, Chancellor Angela Merkel and Prime Minister Mario Monti "agreed that Germany and Italy would do everything to protect the euro zone".

The wording was similar to remarks by European Central Bank chief Mario Draghi last week prompted buying in financial markets on the expectation that the bank would take steps to lower the cost of borrowing of Spain and Italy.

DEFLATING LIFE RAFT

The euro zone does not seem to have enough cash in the current setup to deal with a scenario of Spain and Italy needing a rescue, and a sense of doom is growing among some policymakers. Fighting the crisis, said the euro zone diplomat, is like trying to keep a life raft above water.

"For two years we've been pumping up the life raft, taking decisions that fill it with just enough air to keep it afloat even though it has a leak," the diplomat said. "But now the leak has got so big that we can't pump air into the raft quickly enough to keep it afloat."

Compounding the problems, Greece is far behind with reforms to improve its finances and economy so it may need more time, more money and a debt reduction from euro zone governments.

If Greek debt cannot be made sustainable, the country may have to leave the euro zone, sending a shockwave across financial markets and the European economy.

September 12 is a crucial date in the European diary. On that day the German Constitutional Court is scheduled to rule on whether a treaty establishing the euro zone's permanent bailout fund, the 500 billion euro European Stability Mechanism (ESM), is compatible with the German constitution.

A positive ruling is vital, because Germany is the biggest funder of the ESM, and the euro zone would be powerless to protect Spain or Italy without the ESM.

On the same day, parliamentary elections are held in the Netherlands where popular opposition to spending any more money on bailing out spendthrift euro zone governments is strong. The Dutch vote may complicate talks on a revised second bailout for Greece, which also has to be agreed in September.

Athens wants two more years than originally planned to cut its budget deficit to below 3 percent of GDP, so as not to impose yet more spending cuts on a country which is already in a depression.

This would mean Greece's 130 billion euro second bailout package may need to be increased by 20-50 billion euros, according to estimates by some euro zone officials and economists, and there is no appetite in the euro zone to give Greece yet more extra money.

More importantly Greece needs to bring its debt, which is equal to 160 percent of its annual economic output, under control. This means euro zone governments, which own roughly two thirds of it, may need to write part of it off.

Private creditors have already suffered a huge writedown in the value of their Greek debt holdings but so far euro zone taxpayers have not lost a cent on any of the bailouts.

LAST CHANCE OPTIONS

Policymakers are working on "last chance" options to bring Greece's debts down and keep it in the euro zone, with the ECB and national central banks looking at also taking significant losses on the value of their bond holdings, officials said.

If governments swallowed the bitter pill by also accepting a cut in the value of their contributions to loans already made to Greece, this would break a taboo and could provoke demands for similar treatment from Ireland or Portugal.

Peter Vanden Houte, chief economist at ING bank, said euro governments might be forced to accept a halving of the value of their Greek debt - known in the business as haircut.

"If Greece is to be saved, we must see some debt forgiveness from euro zone governments in the coming years because otherwise Greece is never going to come out of the situation it is in now," he said. "We are talking about potentially a 50 percent haircut, which would still mean the Greek debt would be (proportionately) around the euro zone average."

The euro zone would want concessions from Athens. "Most probably in exchange, euro zone partners will be more strict on Greek compliance with structural reforms and may ask Greece to give up some sovereignty," said Vanden Houte.

While no official discussions are underway on another Greek debt restructuring, euro zone officials say privately it may be necessary if Greece is to have a fighting chance.

"The Greeks might say they are in such a mess that to survive they we need to ease up the austerity a bit, and to still regain debt sustainability they will have to default on 30-40 percent of the loans," one euro zone official said.

"There would be a lot of people saying this is understandable, so maybe this makes sense and maybe we could have a reasonable discussion among the member states on how Greece can move forward," the official said.

The official speculated that euro zone debt forgiveness for Greece could be made dependent on progress in structural reforms or that it could be reviewed once Athens has to start paying back the capital of the loans in 10 years.

"Maybe we could agree to give debt relief of, say, 25 percent to make possible some changes in the program. Then we implement that for six months or a year and maybe we find out that we need to give them another 25 percent and at the end of the day we might get to a stable situation," the official said.

The situation will become clearer once international lenders produce a new debt sustainability analysis for Greece at the end of August.

THE BATTLE OF SPAIN

Preventing Spain and Italy from losing debt market access may require the crossing of another red line - ECB help in keeping down governments' borrowing costs.

Draghi signaled last Thursday the bank was ready to act, indicating it may revive its program of buying bonds of troubled governments on the secondary market.

"Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough," Draghi said. "To the extent that the size of the sovereign premia (borrowing costs) hamper the functioning of the monetary policy transmission channels, they come within our mandate."

However, Germany has always been hostile to the idea and the Bundesbank said on Friday that it continued to view it "in a critical fashion".

German Finance Minister Wolfgang Schaeuble dismissed suggestions Spain will ask the bailout fund to try to lower its borrowing costs by purchasing its bonds.

Spain faces high borrowing costs because investors fear they will not get their money back. The Spanish economy is shrinking, many of its autonomous regions need bailouts from Madrid and banks need the recapitalization of up to 100 billion euros.

Madrid still has to raise about 50 billion euros on the market by the end of the year. This may be impossible if its funding costs stay well above 7 percent for 10-year bonds.

Draghi's remarks knocked yields down by more than 40 basis points to below 7 percent on Thursday, but they could quickly climb back if the market does not see firm ECB buying soon.

The ECB also seems to be softening its stance on another taboo - giving the ESM a banking license so the fund can borrow from the ECB against euro zone government bonds.

If Spain or Italy applied for euro zone help in bringing down their borrowing costs, the temporary European Financial Stability Facility (EFSF) bailout fund or the ESM could help.

But with their combined firepower, under current agreements, of 459.5 billion euros until July 2013 and at 500 billion from July 2014, the funds do not have enough to impress markets.

If the ESM could refinance itself at the ECB, however, it would have virtually unlimited firepower for bond market intervention without causing inflationary pressure.

Discussions on the banking license for the ESM have been going on in the background for many months, officials said, with France openly calling for such a solution, but Germany, Finland and the Netherlands strongly against.

(Additional reporting by Luke Baker; Editing by David Stamp and Peter Graff)

BBC News - Spain unemployment hits new high

Some 5.7 million Spaniards, equivalent to almost one in four, are now seeking work, according to official figures.

Ever more Spaniards are looking for work

The country's unemployment rate rose to 24.6% during the April to June quarter, up from 24.4% during the previous quarter.

Separately, Spain's third largest bank reported an 80% fall in net profits.

CaixaBank said net profits fell to 166m euros ($203m; £129m) during the January to June period.

CaixaBank also set aside 2.7bn euros against its property assets, in accordance with reform requirements stipulated by the government in May.

On Thursday, Spain's biggest bank, Santander, reported that its profits halved during the period.

Intervention hopes

Spain's economy is in dire straits and economists see few signs of improvement any time soon.

"Things are only going to get worse," said Capital Economics' Ben May.

"With the economy unlikely to expand any time soon, and the dire position the economy is in, Spain is probably more likely to fall deeper into recession."

Earlier in the week, Spain's borrowing costs jumped above 7% on worries that the debt problems being faced by several of the country's regional governments would push Spain towards seeking a full bailout. Bond costs above 7% are generally considered to be unsustainable in the long run.

However, However, on Thursday, European Central Bank (ECB) president Mario Draghi said the bank would do "whatever it takes" to preserve the single currency.

Spanish bond yields fell back to 6.85% following Mr Draghi's comments, amidst expectations that the ECB might soon intervene in the market, for instance by buying bonds.

Later on Friday, French President Francois Hollande and German Chancellor Angela Merkel will discuss ways to quickly implement a plan to shore up the euro, agreed at the European Union Summit last month, a French source told Reuters.

A report in the French newspaper Le Monde also said that eurozone governments and the ECB were preparing to take action to cut borrowing costs for Spain and Italy.

Reuters News - Gold rises on ECB action hopes, subdued dollar

Gold Bullion from the American Precious Metals Exchange (APMEX) is seen in this picture taken in New York, September 15, 2011.

Credit: Reuters/Mike Segar

By Susan Thomas

LONDON | Fri Jul 27, 2012 7:09am EDT

(Reuters) - Gold rose on Friday, holding around a three-week high as the dollar softened a touch and stocks gained on hopes a vow by the European Central Bank chief to prevent a collapse of the euro zone signaled more action to tackle the debt crisis.

The euro fell against the dollar, after rallying to a two-week high on ECB President Mario Draghi's comments on Thursday, helping gold to hold onto gains well above $1,600, while world stocks rose. The dollar was flat against a basket of currencies. .DXY

A French newspaper also reported that the ECB and euro zone governments were preparing co-ordinated action to cut Spanish and Italian borrowing costs, further underpinning the rise in financial markets.

Gold has been particularly sensitive to moves in the wider financial markets in the absence of direction from physical demand, which has been weak in recent months. It tends to benefit from dollar weakness and sharper appetite for risk.

Spot gold was up 0.5 percent at $1,624.60 an ounce at 6:24 a.m. EDT (1024 GMT), off a session high of $1,625.10, its highest level since June 19. Gold has risen for the fourth session running.

U.S. gold futures for August delivery were up 0.5 percent at $1,623.40 per ounce.

"The biggest concern is the momentum. We've seen these moves higher on a number of times in past week but it doesn't seem to have much conviction," said Ross Norman, chief executive of precious metals trader Sharps Pixley.

"We need to see ongoing rallies of the sort we've seen in the last few days to convince the market that this is not just a relief rally but something more sustained."

Gold has held in a $75 range so far in July, its narrowest monthly spread since April.

The euro fell, retreating from a two-week high against the dollar, as investors sold into its recent rally on fresh doubts about whether the European Central Bank would take bold measures to tackle the sovereign debt crisis.

"We have heard all this before from Draghi and other Euro luminaries and so far, they have not backed up their words with action," Marex Spectron's David Govett said in a research note.

"However, I suspect we are now at a juncture where unless they act, the Euro may be doomed, so it would not surprise me at next week's ECB meeting to get some concrete evidence of action. This is what the market will wait to see."

French daily newspaper Le Monde, citing unnamed sources, said the ECB was willing to take part in the action on condition that governments agreed to tap the bloc's bailout funds, the European Financial Stability Facility and the European Stability Mechanism.

Govett saw resistance for gold at $1,625, although if the euro rallies again, the metal could test that level.

The precious metals market will also be sensitive U.S. gross domestic product numbers due on Friday, and its effect on the dollar.

U.S. GDP numbers will likely show that the world's largest economy grew at its slowest pace in a year in the second quarter as demand for automobiles waned, and this could push the Federal Reserve closer to easing monetary policy to spur the recovery.

BUYERS HOVER ON THE SIDELINES

Physical gold traders in number one consumer India stayed on the sidelines after prices stayed in the vicinity of their highest level in four weeks, driving away jewelers seeking to stock up for upcoming festivals.

The most-active gold for August delivery hit a high of 29,829 rupees per 10 grams on Friday.

Silver was up 0.6 percent at $27.67 an ounce, tracking gains in gold, after hitting a three-week high of $27.81 in the previous session. But confidence in the metal remained shaky, with investors wary of taking positions in the volatile metal.

Holdings of the world's largest silver-backed exchange-traded fund, the iShares Silver Trust, were unchanged on Thursday, as were holdings the largest gold-backed exchange-traded-fund (ETF), New York's SPDR Gold Trust.

ETFs, which issue securities backed by physical stocks of metal, have proved a popular way to invest in gold and silver in recent years.

Spot platinum rose 1 percent to $1,414.99 an ounce. Its discount to spot gold increased to $215.59 an ounce in the previous session, its deepest since early December. Spot palladium was up 1.5 percent at $572.49 per ounce.

Barrick Gold Corp (ABX.TO) and Newmont Mining Corp (NEM.N), the world's top two gold producers, both reported a sharp decline in their quarterly profits.

(Editing by William Hardy)

Reuters News - Analysis: Tax haven clampdown yields cash but secrecy still thrives

French gendarmes stand near an anti G20 demonstrator who takes part in protest against globalisation and tax havens at the French-Monaco border in Cap d'Ail, southeastern France, November 3, 2011.

Credit: Reuters/Eric Gaillard

By Chris Vellacott and Sinead Cruise

LONDON | Thu Jul 26, 2012 5:05am EDT

(Reuters) - A global campaign to tax trillions of dollars hidden in offshore tax havens has made revolutionary progress, an official leading the drive said, rejecting suggestions that the super rich are running rings around Western authorities.

Pascal Saint-Amans, director of a unit at the Organisation for Economic Cooperation and Development, also cast doubt on estimates that the havens are illicitly sheltering wealth equivalent to several hundred times the fortune of Bill Gates.

Leaders of the G20 group of leading Western and developing nations launched the campaign three years ago, aiming to claw back billions in lost tax revenue at a time when many governments are trying to cut huge budget deficits.

Saint-Amans said his gut feeling was that before the G20's initiative at its 2009 London summit, people could hide their wealth in offshore havens without any risk of legal reprisals.

"Now you are at risk and that's a major change. That's a revolution," Paris-based Saint-Amans told Reuters in a telephone interview. Even if money is transferred abroad, rules improving transparency have made it easier for the taxman to find it, said Saint-Amans, whose unit is tasked with leading the Western efforts to fight tax evasion.

The Tax Justice Network, a campaign group, estimated last weekend that as much as $21 to $32 trillion of financial assets are sheltered in offshore tax havens, representing up to $280 billion in lost income tax.

That total wealth would dwarf the fortune of Microsoft Corp cofounder and philanthropist Bill Gates. In March Forbes magazine ranked Gates second on its global rich list with total wealth of a mere $61 billion.

Saint-Amans suggested the TJN estimates might be overstated. "I was wondering where the equivalent of 450 Bill Gates are hiding from everyone. It looks like the equivalent 20,000 unknown billionaires in the world or 200,000 people with net worth of 100 million," he said.

The Scorpio Partnership, a consultancy that analyses the global private wealth management industry, estimates the amount of money held offshore by people worth at least $1 million at a more modest $8-$9 trillion.

NO MAGIC NUMBER

Saint-Amans, who heads the OECD's Centre for Tax Policy and Administration, acknowledged his organisation makes no equivalent estimate. "I would rather spend the resource improving the legal framework and putting an end to loopholes than trying to find the magic number," he said.

In a statement accompanying its research, TJN criticized the OECD and other international bodies for not doing enough to track offshore wealth, saying it was scandalous that institutions devoted so little research to the issue.

G20 leaders agreed at their London summit to crack down on tax evasion and banking secrecy, and asked the OECD to publish lists of tax havens according to how cooperative authorities there are on releasing information about offshore wealth holdings.

There are now 89 countries on the OECD's "white list" of jurisdictions that have implemented internationally agreed tax standards. These jurisdictions have between them signed more than 800 agreements on exchanging information with authorities other countries, Saint-Amans said.

"Until 2009, countries said being secretive is justified and fair. The change in the world is nobody says that any more, so that is a big change," he said.

Western tax authorities have individually stepped up efforts to net more money hidden abroad by their own citizens through a series of amnesties targeting people with accounts in jurisdictions such as Switzerland and Liechtenstein.

At the same time they have turned up the heat on citizens suspected of tax evasion. This has included using details of Swiss accounts originally stolen from HSBC by a former IT employee that found their way into the hands of tax authorities around Europe.

Britain's HMRC tax office expects an amnesty offering leniency to people with accounts in Liechtenstein if they come clean to raise about 3 billion pounds, while a similar deal on Swiss accounts will bring in up to 7 billion pounds.

Campaigners argue that such initiatives will achieve only limited success because a financial industry designed to ensure confidentiality across multiple jurisdictions makes it impossible to shut down tax fraud or money laundering.

"Anybody who's serious about holding money offshore ... will hold it through a trust," said Richard Murphy, a chartered accountant and director of Tax Research, a think-tank.

"You'd have the trust in one territory, the company in another territory, its directors in another territory and its bank account in a fourth territory. So making an application for information is not very simple."

TOO COMPLEX TO BE WORKABLE

Murphy dismissed the OECD's progress in cracking down on tax havens, arguing that implementation of information exchange between territories is limited in practice and the process too complex to be workable.

"They've set up a system where it's virtually impossible to apply for information ... The OECD claiming they are making progress is like checking the stable door has been shut way after the horse bolted. Not just the horse, the entire stable has bolted," he said.

The TJN research on offshore wealth - authored by James Henry, a former chief economist at consultant McKinsey & Co - highlights the "often unsavory role" played by banks in catering to rich individuals who want to hide money offshore.

Large private banks with offshore businesses reject the idea they aid tax evasion.

"Our Code of Conduct explicitly says not to assist clients in activities intended to breach their tax obligations," said a spokesman for Swiss bank Credit Suisse (CSGN.VX) who declined to comment specifically on the contents of the TJN report

But recent crackdowns by tax authorities in countries such as Britain, the United States andGermany have proved embarrassing for Swiss banks.

German tax authorities are investigating roughly 5,000 German clients of Credit Suisse while French officials have searched the homes of UBS (UBSN.VX) employees.

At least 11 Swiss banks suspected of helping wealthy American clients dodge taxes are currently subject to a U.S. investigation.

Saint-Amans said the OECD's efforts have focused on engaging with governments rather than imposing more supervision on financial institutions. The complexity of the industry, he said, meant that greater information exchange was the best way to tackle people using banking secrecy to break the law.

"I'm not sure that nationalizing the banking industry throughout the world is the solution. The fact you have private practitioners being involved in a sophisticated environment is why you need to favor transparency and exchange of information," he said.

Efforts to increase disclosure and combat both tax evasion and money laundering by international bodies such as the OECD and the Financial Action Task Force (FATF), a Paris-based inter-governmental body, have focused on self regulation.

"We've tried to ensure that what we're talking about is not to create some draconian system where we put a policeman in every financial institution which would be impossible to do," said a senior source at the FATF, which was set up to combat money laundering and terrorist financing.

Nick Matthews, anti-money laundering and offshore financial industry specialist at Kinetic Partners, said purging the world's financial system is "incredibly difficult".

"Clearly tax evasion leads to money laundering and is a crime but you would have money laundering even if there was no tax, because you still have proceeds from crime or corruption polluting the financial system," he said.

"That is why I say that no bank would ever stand up and claim that they are not being used to launder money. They appreciate that they are only as strong as their weakest link."

(Additional reporting by Katharina Bart and Martin de Sa'Pinto in Zurich; editing by David Stamp)

BBC News - IMF: Worsening eurozone crisis a 'key risk' to China

The International Monetary Fund (IMF) has warned that the worsening debt crisis in the eurozone poses a "key risk" to China's growth.

China relies heavily on demand from eurozone countries for growth of its export sector

The IMF added that China also faces domestic risks, not least from a sharper-than-anticipated decline in the property market.

However, the fund said China had ample room and the fiscal tools "to respond forcefully" to any such developments.

Growth in China's economy slowed to a three-year low in the second quarter.

Its economy expanded at an annualised rate of 7.6% in the three months to the end of June.

The fund said that it expects China's economy to grow by 8% in the current financial year, but warned that a lack of response to the deteriorating crisis in the eurozone, may cut that number by half.

"The main external risk continues to be spillovers to China from a worsening of the euro area crisis," the fund said.

"Assuming no policy response in China, growth could decline by as much as four percentage points in response to a one and three quarter percentage point slowdown in global growth."

The eurozone is a key market for Chinese exports and the fear is that if the debt crisis escalates it may dent consumer sentiment and demand, resulting in slowing exports to the region.

Domestic risks

The fund said internal issues are also a threat to China's economic growth, including the country's property sector.

Chinese banks lent out record sums of money in the past few years in a bid to sustain growth amid the global financial crisis. That resulted in a boom in the country's property market.

However, there have been fears of asset bubbles being formed and of the impact of a crash in property prices on China's overall economy.

As a result, Beijing has been trying to implement measures, in a bid to curb speculation and cool down growth in the sector.

The measures, which include a restriction in some cities on the number of homes an individual can own and higher down-payments for property purchases, have resulted in property prices falling in most Chinese cities.

However, the fund warned that a "disorderly decline in real estate investment could have significant implications for growth in China".

"Following a decline in real estate investment, activity would fall in a broad range of sectors, given the real estate industry's strong backward linkages to other domestic industries such as consumer durables, construction, light industry, electricity."

Among the other domestic risks, the fund said that Beijing needs to keep the local government debt in check, which has been a cause of concern for many analysts.

It added that policymakers need to put in place measures to "closely monitor and control the risks related to borrowing by local entities, especially local government financing vehicles".

The fund also urged China to reduce its reliance on investment to boost growth and instead focus on domestic consumption in the country.

Reuters News - Relentless market pressure pushes Spain closer to bailout

Traders look at computer boards at the stock exchange in Madrid June 12, 2012.

Credit: Reuters/Andrea Comas

By Paul Day and Julien Toyer

MADRID | Tue Jul 24, 2012 10:17am EDT

(Reuters) - Spain paid the second highest yield on short-term debt since the birth of the euro at an auction on Tuesday, reflecting a growing belief that the country will need a full sovereign bailout that the euro zone can barely afford.

Spain's increasingly desperate struggle to put its finances right has seen its borrowing costs soar to levels that are not payable indefinitely. Italy, commonly regarded as too big to bail out, has been dragged along in its wake.

The Spanish Treasury sold the three billion euros of 3- and 6-month bills it was aiming to although yields climbed with the six-month paper jumping to 3.691 percent from 3.237 percent last month.

"The most important takeaway from this auction is that Spain was able get all its debt out the door," said Nicholas Spiro of Spiro Sovereign Strategies. "Still, in March, Spain was able to issue six-month debt at a yield of under 1 percent, now it is paying 3.7 percent."

Spain had cushioned itself by securing well over half its annual debt needs in the first six months of the year when market conditions were more benign but that advantage has evaporated.

On Friday, the government said it expected the economy to remain in recession well into next year while the autonomous region of Valencia became the first to ask Madrid for aid to pay debt obligations it cannot meet. Others are expected to follow.

Spain's north-eastern region of Catalonia, responsible for a fifth of the country's output, said on Tuesday it was studying a government plan to help it meet a heavy funding schedule but will not decide whether to sign up until later this year.

On the secondary market, Spanish five-year government bond yields rose above 10-year yields for the first time since June 2001. Having to pay more to borrow shorter-term rather than longer-term is usually a sign that markets think the risk of a default or debt restructuring has increased.

"The spread between 5- and 10-years moved to negative today, which is a classic sign that the market thinks the current trends are unsustainable for Spain's fiscal dynamics," said Nick Stamenkovic, bond strategist at RIA Capital Markets.

The premium investors demand to hold Spanish 10-year bonds is now at its highest level since the birth of the monetary union, at 7.6 percent, while the cost of insuring Spanish debt against default has also hit record highs.

Ten-year yields of over 7 percent have proved to be a tipping point which eventually led to bailouts elsewhere in the euro zone, though de Guindos insisted on Monday Madrid would not need more aid.

Madrid has already asked for up to 100 billion euros to recapitalize its banks which have been battered by a four year economic downturn and a burst property bubble.

The government has launched a fresh 65 billion euros package of tax rises and spending cuts designed to chip away at its debt mountain but which will probably drive the economy deeper into recession.

The alarming spiral of Spain's debt costs has banished any hopes that a bailout of its banks, or a June EU summit which gave the euro zone's rescue funds a green light to intervene in the markets, has put the debt crisis into abeyance.

Spain and Italy have called on their partners or the European Central Bank to help ward off market pressure, although Italian premier Mario Monti said on Monday the ECB did not have to leap into action just yet.

The ECB has cut interest rates but has shown marked reluctance to revive its bond-buying program, the only mechanism that could lower borrowing costs at a stroke.

French Foreign Minister Laurent Fabius said further aid for Spain could take the form of an increase in Europe's rescue fund or action by the ECB.

"I hope it will not be necessary to intervene again," he told France 2 television. "If we have to intervene, it could be an increase in the firewalls ... or interventions by the central bank."

SPREADING PAIN

The euro zone as a whole is now subsiding into recession.

Business surveys on Tuesday showed the currency area's private sector shrank for a sixth month in July with the downturn that began in the euro zone's high debtors now becoming entrenched inGermany and France.

Ratings agency Moody's Investors Service lowered its outlook for Germany, the Netherlands and Luxembourg to negative from stable late on Monday, citing an increased chance that Greececould leave the euro zone, which could spark a wave of uncontrolled contagion.

It also warned Germany and the other 'AAA'-rated countries that they might have to increase support for Spain and Italy. Spanish Economy Minister Luis de Guindos flies to Berlin later to meet his German counterpart, Wolfgang Schaeuble.

For investors, Spain has become the focus but Greece - where the debt crisis first exploded - remains a powder keg.

Inspectors from the EU, ECB and International Monetary Fund return to Athens on Tuesday to decide whether to keep the nation hooked up to a 130-billion-euro lifeline or let it go bust.

The euro zone has said it will keep Greece afloat through August while the inspection takes place but analysts say Athens cannot hope to meet its bailout terms without more money or time.

The new Greek government is highlighting a deeper than expected recession for throwing it off course while its lenders say it is failing to push through privatizations, market liberalization and tax reforms. The government has failed so far to find nearly 12 billion euros of extra cuts stipulated by its agreement.

Prime Minister Antonis Samaras said Greece's economy could contract by more than seven percent this year, having already shrunk over each of the last four years.

"There are certainly delays in this year's agreed program and we must quickly catch up," Samaras told party colleagues. "Let's not kid ourselves, there is still big waste in the public sector and it must stop."

(Additional reporting by Manuel Ruiz, Dina Kyriakidou, Nicholas Vinocur, Marius Zaharia, Emelia Sithole-Matarise, Ana da Costa. Writing by Mike Peacock,; editing by Anna Willard/Janet McBride)

BBC News - Genetic entrepreneur to compete in Genomics X Prize

By Helen BriggsBBC News

A race to unlock genetic clues behind living to 100 is set to begin next year, after a US team announced it will compete for the $10m Genomics X Prize.

Genetic make-up contributes to longevity

Genetic entrepreneur Dr Jonathan Rothberg is entering the challenge to identify genes linked to a long, healthy life.

His team - and any other contenders - will be given 30 days to work out the full DNA code of 100 centenarians at a cost of no more than $1,000 per genome.

The race will start in September 2013.

Under the rules of the Archon Genomics X Prize, teams have until next May to register for the competition.

Dr Rothberg's team from Life Technologies Corporation in California is the first to formally enter the race.

Being able to sequence the full human genome at a cost of $1,000 or less is regarded as a milestone in science.

It is seen as the threshold at which DNA sequencing technology becomes cheap enough to be used widely in medicine, helping in diagnosis and in matching drugs to a patient's genetic make-up.

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If they can do a human genome in two hours with one little machine, it's just stunning. We have come a long way.”

Dr Craig VenterGenetic entrepreneur

One hundred people aged 100 have donated their DNA for the project.

Scientists believe people who reach a very old age may have certain rare changes in their genes which protect against common diseases of later life, such as heart disease and cancer.

If these genes can be identified by analysing the DNA codes of centenarians, it will help scientists search for new medical treatments and perhaps ways to prolong life.

However, many sample DNA sequences will be needed in order to get the accuracy needed to pinpoint changes on the scale of a few genetic letters among the three billion in the human genome.

Dr Jonathan Rothberg, a geneticist and entrepreneur, said the DNA of 100 centenarians is a good start towards finding "the fountains of youth".

He told BBC News: "One hundred people will give you a hint. One thousand will make you reasonably sure. Ten thousand will let you say, 'Hey, these are the genes involved in cancer or heart disease'".

Dr Craig Venter is the originator of the prize and one of the main players in the race to sequence the first human genome, which was completed in 2003.

He said he could never have imagined that genome sequencing would come this far in so little time.

He told the BBC: "I can't emphasise [enough] how impressed I am with the progress of technology and the dropping of the cost.

"If they can do a human genome in two hours with one little machine, it's just stunning. We have come a long way."

The X Prize Foundation offers awards for solutions to modern scientific challenges, from space to the human genome.

Any data gleaned from the X Prize will be shared with other scientists in the field, to aid the quest for insights into ageing.

Dr Craig Venter

• One of the scientists behind the effort to decode the first human genome sequence
• Venter and his team built the genome of a bacterium from scratch and put it into a cell to make a synthetic life form
• He has had his own DNA sequence decoded

Dr Jonathan Rothberg

• Pioneer of DNA sequencing
• His latest business venture, Ion Torrent, makes the Personal Genome Machine and the Ion Proton sequencer
• Rothberg claims his machines can sequence DNA more quickly and cheaply than ever thought possible
• The Ion Proton sequencer will be used for the challenge

BBC News - Treasury messing with UK clean energy policy, say MPs

By Roger HarrabinEnvironment analyst, BBC News

MPs have accused the Treasury of making the government's clean energy revolution unworkable and creating the risk of higher household bills.

 
The select committee has criticised government policy on subsidies for renewable energy

They said Treasury changes to the draft Energy Bill will increase the risk of borrowing for investors.

They added that it would put up the cost of renewable and nuclear power, with customers bearing the extra cost.

A Treasury spokesman said the aim was to achieve government goals while protecting businesses and consumers.

Tim Yeo, chairman of the energy and climate change select committee, said: "The Treasury has clearly intervened in the draft bill in a way that will put up bills to consumers and put off investors by increasing their risks.

"This is exactly the opposite of what the Treasury says it wants," he told BBC News.

It is the latest in a series of exchanges between the committee and the Treasury.

Mr Yeo recently criticised Chancellor George Osborne for, in his view, trying to undercut subsidies to onshore wind - the cheapest option of expanding the UK's renewable energy portfolio.

The Treasury has backed carbon pricing, which includes coal-fired power stations, in order to make alternatives more financially appealing

Policy worries

The MPs wanted Treasury ministers to answer questions about their influence on energy strategy, but they declined.

A Treasury source said it would be inappropriate for ministers to be questioned at this stage in parliamentary proceedings.

The committee has two major worries about the finance department's impact on the draft bill.

The first is about the long-term contracts for developers who are being asked by the government to plough billions in the UK's low-carbon infrastructure.

Originally, the Department of Energy and Climate Change (Decc) said the government would guarantee the contracts, thereby reducing the risk for investors and allowing them to borrow large amounts at a low rate of interest.

But the Treasury has since ruled that the government will not be the guarantor.

"This will result in higher borrowing costs, and make banks less likely to make loans," observed Mr Yeo. "It makes no sense."

Jerome Guillet, from Green Giraffe Energy Bankers - an international advisory firm - said: "The government keeps trying to come up with complicated ways of disguising the fact that it's subsidising nuclear and renewables.

"In fact it is continuing to subsidise them but the complications are making the financing more and more expensive," he told BBC News.

Does the cap fit?

The MPs' second worry is over the ongoing consumer subsidy to renewable and nuclear power generators, which are needed for the UK to meet its legally binding targets.

The Treasury says the subsidy will be limited to hold down the cost to consumers - but it won't reveal the size of the future cap.

"This is another thing that's putting up the risk for investors and increasing the cost of energy projects," said Mr Yeo.

"This is really counter-productive. How can investors be confident in planning long-term projects which will rely on price support if the government might turn round and say 'sorry, the cash has run out'. This is another perverse effect."

Mr Yeo is also fighting Treasury attempts to impose big cuts in subsidies to onshore wind farms.

'Don't like turbines'

"The chancellor is being urged by backbenchers to make major cuts to the support for onshore wind. That would cause serious damage to the industry.

"This is another thing that will have a perverse effect because onshore wind is the cheapest way of meeting our renewables targets," he said.

"Under the guise of reducing bills for consumers, the chancellor will actually be increasing consumers' bills.

"I don't know if the back-benchers realise this but surely the Treasury does - yet it keeps pressing on with an action that's clearly political to assuage MPs who don't like turbines in the countryside."

A Treasury spokesman said: "We have conversations will all departments because of the nature of what Treasury does - but we don't answer questions about other departments' policies," he said.

He also pointed out that the Treasury had introduced the controversial carbon price floor to push up the cost of fossil fuel generation, with the aim of making alternative low-carbon energy sources more attractive economically.

CBI director-general John Cridland said major energy investments were "hanging on critical decisions" that the government had to take.

"If they are to plan long-term investments, businesses need to know what the electricity market will look like in years to come," he said.