Reuters News - Fed seen launching fresh stimulus, details in question

By Pedro Nicolaci da Costa

WASHINGTON | Thu Sep 13, 2012 5:16am EDT

WASHINGTON (Reuters) - The U.S. Federal Reserve appears set to launch a third round of unconventional monetary stimulus on Thursday while signaling that a weak U.S. economy may warrant ultra-low interest rates for at least another three years. Not everyone believes the Fed will embark on another bond- buying spree, and plenty of doubts remain about the likely efficacy of such a move.
But Fed Chairman Ben Bernanke has made clear the central bank will not sit idly by while unemployment, currently at 8.1 percent, remains so far above levels consistent with a healthy economic recovery.
Many economists are confident the Fed's policy-setting Federal Open Market Committee will deliver a third round of quantitative easing, or QE3. On median, they see a 60 percent chance, according to a Reuters poll.
The FOMC will announce its decision at about 12:30 p.m. (1630 GMT) at the close of a two-day meeting.
"The market is firmly in the camp that the FOMC will deliver; it's just a question of how much," said Brad Bechtel, managing director at Faros Trading in Stamford, Connecticut.
Indeed, the likely details of any decision to purchase bonds - including the size and composition of any new asset purchase plan - are the subject of heated debate.
Many economists see the Fed leaning toward an open-ended bond-buying program that is conditional on the path of the economy, rather than lump-sum amounts with pre-established end dates as done in the past.
This could help carry the economy through the looming risks of a deeper European debt crisis and the looming tax break expirations and government spending cuts known as the U.S. fiscal cliff. Many economists believe businesses have already retrenched out of fear the economy could hit the shoals.
U.S. economic growth cooled in the second quarter, coming in at a tepid 1.7 percent annual rate, and forecasters do not believe it is doing much better now.
Employment data showed just 96,000 jobs were created last month, less than needed to keep up with population growth, hardening forecasts of an aggressive Fed move.
Growing expectations of further bond purchases have helped support U.S. and global stocks in recent weeks. Markets could be in for a steep sell-off if the Fed stops short of the expected action, while the dollar would probably rally.
Whether or not it buys bonds, economists widely agree the central bank will push back its estimate for when interest rates will finally rise. Since January, it has said it would likely keep borrowing costs near zero through at least late 2014; it is expected to push that date into 2015.
An hour and a half after its decision, the Fed will provide fresh forecasts that could show softer projections for economic growth and higher unemployment, which would help provide a rationale for any policy move.
Fed Chairman Ben Bernanke will discuss the Fed's decision during a news conference at 2:15 p.m. (1815 GMT).
DEPLETED TOOLBOX
The Fed's toolbox is considerably depleted in the wake of the financial crisis and deep recession that caused the central bank to cut official rates to zero and more than triple its balance sheet to $2.9 trillion.
But policymakers do have a few tools, additional bond purchases chief among them. Some analysts believe the Fed will opt for mortgage-backed securities purchases, which it conducted during the first round of QE, in an effort to give an extra push to a nascent U.S. housing recovery.
Most likely is a mix of Treasury bond and mortgage debt purchases, which would be aimed at putting downward pressure on already-low long-term borrowing costs. In the process, the Fed may choose to nix its current plan of selling short-term notes to buy long-term bonds, known as Operation Twist, if it feels the new measures supersede the program.
Given that interest rates are already so low, with the yield on the benchmark 10-year Treasury note at just 1.76 percent, many economists worry such steps would not address a fundamental problem in the economy - weak consumer spending driven by a dismal job market.
Indeed, many Republicans and a number of Fed officials feel the central bank has done more than enough already to try to spur growth. The prospect of a further easing of monetary conditions has put the Fed in an unusually bright political spotlight with less than two months before the presidential election.
Republican presidential nominee Mitt Romney has said he doubts QE3 would do much good.
Fed officials, however, have vowed to ignore politics, and with some consumers and businesses complaining about access to credit, they hope further bond buys prompt banks to lend more freely.
(Additional reporting by Gertrude Chavez-Dreyfuss in New York; Editing by Dan Grebler)

Reuters News - German court backs euro rescue fund with conditions

. President of the German Constitutional Court (Bundesverfassungsgericht ) Andreas Vosskuhle (C) arrives with other judges to give the ruling on the European Stability Mechanism (ESM) in Karlsruhe September 12, 2012.

Credit: Reuters/Kai Pfaffenbach

By Annika Breidthardt

KARLSRUHE, Germany | Wed Sep 12, 2012 5:35am EDT

(Reuters) - Germany's Constitutional Court gave a green light on Wednesday for the country to ratify the euro zone's new rescue fund and budget pact but gave parliament veto powers over any future increases in the size of the fund.

The eagerly anticipated verdict by the court in Karlsruhe, southern Germany, boosted global stocks and the euro currency as investors breathed a sigh of relief that the euro zone's rescue fund could take effect after months of delay.

"I think it should be seen as a positive step in the long road to solving theeuro zone debt crisis," said Henk Potts, market strategist at Barclays Wealth.

Rejecting injunction requests from 37,000 plaintiffs seeking to block the treaties, the court said ratification of the European Stability Mechanism (ESM) could go ahead with the "proviso" that German liability be limited to 190 billion euros, as agreed in the ESM treaty.

Any increase in that amount would require prior approval by the Bundestag lower house of parliament.

"No provision of this treaty may be interpreted in a way that establishes higher payment obligations for the Federal Republic of Germany without the agreement of the German representative," the court said in a statement.

The court also ruled that a clause in the ESM treaty which seeks to keep decisions of the fund confidential "must not stand in the way of the comprehensive information of the Bundestag and of the Bundesrat", meaning both houses would have the right to be consulted on the ESM's activities.

The plaintiffs, including eurosceptics from Chancellor Angela Merkel's ruling centre-right coalition and Left Party hardliners opposed to European integration, had argued that the treaties expose Germany to unlimited financial liability and cede too much sovereignty to centralized European authorities.

The court ruled as it has in the past that deeper integration of the European Union did not violate the German "Basic Law" as long as parliament was fully consulted.

When it comes into effect, the ESM will be a 700 billion-euro firewall against the spread of the three-year-old debt crisis. Only German ratification is still pending.

(Reporting by Annika Breidthardt and Diana Niederhoefer; Writing by Stephen Brown and Noah Barkin)

BBC News - Chip and pin 'weakness' exposed by Cambridge researchers

A vulnerability in the widely used chip and pin payment system has been exposed by Cambridge University researchers.

Researchers said cards could effectively be cloned by exploiting the security flaw

Cards were found to be open to a form of cloning, despite past assurances from banks that chip and pin could not be compromised.

Poor implementation of cryptography methods were behind the flaw, researchers said.

They accused some banks of "systematically" suppressing information about the vulnerabilities.

Pre-play attack

The team's research was presented at a cryptography conference in Leuven, Belgium, on Tuesday.

The paper said despite chip and pin being in use for over a decade, it was only recently "starting to come under proper scrutiny from academics, media and industry alike".

Each time a customer is involved in a chip and pin transaction, be it withdrawing cash or purchasing goods in a shop, a unique "unpredictable number" is created to authenticate the transaction.

The unpredictable number (UN), generated by software within cash points and other similar equipment, is supposed to be chosen at random.

But researchers discovered that in many cases lacklustre equipment meant the number was highly predictable, because dates or timestamps had been used.

"If you can predict [the UN], you can record everything you need from momentary access to a chip card to play it back and impersonate the card at a future date and location," said researcher Mike Bond in a blog post.

"You can as good as clone the chip. It's called a pre-play attack."

'Explicitly aware'

"The sort of frauds we're seeing are easily explained by this, and by no other modus operandi we can think of," researcher Prof Ross Anderson told the BBC.

"For example, a physics professor from Stockholm last Christmas bought a meal for some people for 255 euros ($326, £200), and just an hour and a half later, there were two withdrawals of 750 euros made from a nearby cash machine used by what appears to have been a clone of his card."

The researchers said they had been in contact with leading banks to detail the risks, but some had been "explicitly aware of the problem for a number of years".

"The extent and size of the problem was a surprise to some," the report said.

"Others reported already being suspicious of the strength of unpredictable numbers."

The paper added: "If those assertions are true, it is further evidence that banks systematically suppress information about known vulnerabilities, with the result that fraud victims continue to be denied refunds."

The team called for greater scrutiny from financial authorities into the security systems in use by banks.

In a statement given to the BBC, a spokeswoman for the UK's Financial Fraud Action group said: "We've never claimed that chip and pin is 100% secure and the industry has successfully adopted a multi-layered approach to detecting any newly-identified types of fraud.

"What we know is that there is absolutely no evidence of this complicated fraud being undertaken in the real world. It requires considerable effort to set up and involves a series of co-ordinated activities, each of which carries a certain risk of detection and failure for the fraudster.

"All these features are likely to make it less attractive to a criminal than other types of fraud."

Man-in-the-middle

Chip and pin is the leading processing and authentication method for credit and debit card payments, with many more than a billion cards in use worldwide.

Believed to be far more secure than previous technology, such as a magnetic strip, adoption of chip and pin had led to banks becoming more aggressive when dealing with compensation claims, the researchers said.

A British Crime Survey carried out in 2008-9 indicated 44% of fraud victims were not fully compensated. Of the 44%, 55% lost between £25 and £499, and 32% lost £500 or more.

However, refusal to offer compensation in some cases led to further investigation and vulnerabilities being discovered.

Prior research from the same team demonstrated how a relatively simple man-in-the-middle device - one that sits between two components in a process, such as a card and a chip and pin machine - can trick the system into thinking the correct pin has been entered.

In addition, malware attacks on terminals can put them at risk of being hijacked.

BBC News - Cable to confirm government plans for a business bank

Vince Cable is to confirm that the government is moving ahead with plans for a government-backed "business bank" to boost lending to UK companies.

 
Vince Cable will say the government is to focus its support on key economic sectors

In a speech later, the business secretary will say that he hopes such a bank would "shake up the market" and help boost overall lending to firms.

Also on Tuesday, a report by MPs criticised one of the government's existing business support schemes.

The Public Accounts Committee called the Regional Growth Fund "scandalous".

The committee said the £1.4bn scheme to help boost the private sector economies of struggling English regions had so far only seen £60m of funds reach businesses.

Details of what form the business bank will take have yet to be revealed. Nor have any details about what firms it will aim to lend to, or the length in years of any loan agreements.

Mr Cable will suggest in his speech that the future business bank could work with commercial banks such as the UK's Co-Op, and the British operation of German lender Handelsbanken.

At the same time, there has been some press speculation that the business bank may, ultimately, simply be an amalgamation of the current range of government-backed financial support schemes for companies, such as Funding for Lending, Enterprise Capital Funds and the Enterprise Finance Guarantee Scheme.

'Growth plan'

Mr Cable will also use his speech to say the government is refocusing its industrial policy on supporting key sectors of the economy, such as aerospace, the car industry and science.

Speaking at the TUC annual conference in Brighton, shadow chancellor Ed Balls said: "The economy has been choked off through lack of demand. And there's nothing in Vince Cable's announcement that will make any difference."

Mr Balls, who is due to speak before the conference later, will accuse the government of damaging the UK economy through its focus on deficit reduction.

Mr Balls will add that there needs to be a "change of course, and a plan for jobs and growth".

Reuters News - Germany says U.S. debt levels "much too high"

German Finance Minister Wolfgang Schaeuble delivers a speech during the award ceremony of the M100 media prize in Potsdam, September 6, 2012.

Credit: Reuters/Klaus-Dietmar Gabbert/Pool

BERLIN | Tue Sep 11, 2012 6:38am EDT

(Reuters) - German Finance Minister Wolfgang Schaeuble questioned on Tuesday how the United States could deal with its high levels of government debt after November's presidential election.

In a speech to the Bundestag lower house of parliament to open a debate on the 2013 German budget, Schaeuble said worries about U.S. debt were a burden for the global economy, hitting back at Washington which has criticized Europe for failing to get a grip on its own debt crisis.

In private, German officials often express concern about U.S. debt levels and the inability of politicians there to reach a consensus on how to reduce it, but Schaeuble's public remarks underscore the extent of the worries in Germany.

"Ahead of the election in the United States there is great uncertainty about the course American politics will take in dealing the U.S. government's debts, which are much too high," Schaeuble said.

"We need to remind ourselves of that sometimes and the global economy knows that and is burdened by it."

A weak economy and political gridlock in Washington have prevented meaningful debt reduction in the United States, which has run budget deficits topping $1 trillion for three straight years.

The issue has become a central theme of the U.S. election campaign with Republican candidate Mitt Romney accusing President Barack Obama of fiscal mismanagement, and the White House slamming Republicans in Congress for blocking government efforts to get the U.S. fiscal house in order.

Last year, U.S. lawmakers reached an 11th hour deal to increase the Treasury Department's borrowing authority, which had bumped up against a legal limit, averting an unprecedented default.

But Treasury Secretary Timothy Geithner has said the United States is likely to hit a $16.4 trillion borrowing limit by the end of the year.

The Paris-based Organisation for Economic Cooperation and Development (OECD) has warned against a sharp fiscal retrenchment in the United States, saying this could derail the fragile recover there.

Unless politicians agree on a plan, a wave of U.S. spending cuts and tax hikes - dubbed the "fiscal cliff" - are set to take effect in January, within months of the November 6 election.

German Chancellor Angela Merkel has established a close relationship with Obama and they are of one mind on many foreign policy issues. But members of her conservative party have welcomed the Romney campaign's focus on debt reduction.

(Writing by Noah Barkin; Additional reporting by Sarah Marsh, Alexandra Hudson and Michelle Martin; editing by Patrick Graham)

BBC News - Soros calls for Germany to 'lead or leave euro'

International financier George Soros has called for Germany to "lead or leave the euro" days before a crucial ruling on the eurozone's bailout fund by Germany's constitutional court.

Mr Soros is to outline his ideas in a speech on Monday in Germany

Mr Soros argued that the eurozone should target 5% economic growth.

That would require the bloc to abandon German-backed austerity measures and accept higher inflation, he says.

He also backed a new European Fiscal Authority financed by VAT receipts to oversee eurozone government finances.

In an article published in Monday's New York Review of Books, Mr Soros said that Germany should become a more "benevolent" leading country or exit the single currency: "Either alternative would be better than to persist on the current course."

'Debtors and creditors'

Mr Soros will also outline his ideas in a speech in Berlin later on Monday, just days before Germany's constitutional court rules whether the government's backing for the new ESM bailout fund is legal or not.

The constitutional challenge has already delayed the launch of the 700bn euro facility, originally scheduled for July.

Critics claim the mechanism is tantamount to German taxpayers funding foreign governments in breach of the country's constitution.

The ESM is an integral part of the European Central Bank's bond-buying scheme, announced on Thursday.

Debtor governments would have to make a formal request for help - a bailout - from the ESM or its sister fund the EFSF.

But, Mr Soros said that the ECB plan to ease the pressure on indebted nations such as Spain and Italy could deepen divisions within the eurozone.

The ECB's bond-buying programme may save the euro but it is also a step towards the permanent division of Europe into debtors and creditors, he said.

"The debtor countries will have to submit to supervision by the Troika but the creditors will not... and the divergence in economic performance will be reinforced."

Mr Soros said the prospects of prolonged depression and a two-tier Europe would "eventually destroy the European Union."

'Level playing field'

Instead, Mr Soros has advocated the creation of a European Fiscal Authority (EFA) to oversee the bailout funds and make key economic decisions for all eurozone governments to establish "a level playing field".

Indebted governments would be able to transfer debt in excess of a 60% of national income or GDP to a debt reduction fund which would agree to freeze the money owed for 10 years in return for the government carrying out agreed economic reform.

The EFA and debt reduction fund could be financed by a proportion of VAT receipts across the eurozone, tantamount to German and Finnish taxpayers lending money to the Spanish or Greek government, he says.

This is likely to prove unpopular with many in Germany, including the Bundesbank, which has continually argued that individual eurozone governments should be responsible for their own debt.

Germany's central bank is also likely to oppose Mr Soros' 5% economic growth target. For the region's wealth to grow so strongly, prices and wages are also likely to rise sharply leading to inflation above the ECB's 2% target for several years.

Mr Soros said the strong expansion in European wealth would allow the eurozone "to grow its way out of its excessive debt burden."

German exit

Mr Soros insists that "if the members of the euro cannot live together without pushing their union into a lasting, they would be better off separating."

Although, he pointed out, it matters who leaves the euro. He advocates a German exit instead of a departure by Greece and weaker economies.

"A German exit would be a disruptive but manageable one-time event, instead of the chaotic and protracted domino effect of one debtor country after another being forced out of the euro by speculation and capital flight."

By leaving, the euro is likely to fall in value making eurozone-made goods cheaper for consumers overseas and also in Germany.

However, a return to the Deutschmark would make German-made goods more expensive overseas and within the eurozone which could hurt German exporters.

Germany is also the home to the European Central Bank and the biggest national creditor to indebted nations within the eurozone such as Greece, Portugal and Ireland all of which would make Germany's exit from the eurozone logistically difficult.

Reuters News - Japan infuriates China by agreeing to buy disputed isles

A fishing boat with hoisted Japanese national flags, sails around a group of disputed islands known as Senkaku in Japan and Diaoyu in China in the East China Sea September 2, 2012.

Credit: Reuters/Chris Meyers

By Kiyoshi Takenaka and Sui-Lee Wee

TOKYO/BEIJING | Mon Sep 10, 2012 7:01am EDT

(Reuters) - Japan has agreed to buy a group of islands disputed with China from their private owners, a government official said on Monday, prompting an angry rebuke from China a day after Chinese President Hu Jintao warned against such an "illegal" move.

Japan aimed to nationalize the uninhabited islands in the East China Sea as soon as possible to control them in a peaceful and stable manner, Chief Cabinet Secretary Osamu Fujimura said.

The islands, called Senkaku in Japan and Diaoyu in China, are near rich fishing grounds and potentially huge maritime gas fields and have been at the heart of long-running territorial disputes between the world's second and third-largest economies.

Tension flared anew last month when Japan detained a group of Chinese activists who landed on the islands. But the row may now be having an economic impact, intensifying from merely an exchange of rhetoric, with a Chinese official saying Japanese car sales may have been hit in the world's biggest auto market.

"This is just the ownership of land, which is part of Japan's territory, moving from one (private) owner to the state, and should not cause any problem with other countries," Fujimura said.

"Having said that, we don't want the Senkaku issue to affect overall Sino-Japanese relations. Because it is important to avoid misunderstanding and unforeseen development, we have been closely communicating with China through diplomatic channels to this day."

But China was firm in its opposition to what it saw as a "political trend".

"This is a serious infringement of China's sovereignty and has seriously hurt the feelings of 1.3 billion Chinese..." the Foreign Ministry said in a statement. "The Chinese government and people express their resolute opposition and protest strongly."

Chinese Foreign Minister Yang Jiechi called in Japanese Ambassador Uichiro Niwa to lodge a strong protest, while state-run Xinhua news agency cited Premier Wen Jiabao as saying China would "never yield an inch" of territory.

JAPANESE CAR SALES HIT

Japanese Prime Minister Yoshihiko Noda initially floated the idea of nationalizing the islands in July to fend off the Governor of Tokyo, Shintaro Ishihara, a harsh critic of China, and his own plan to buy the islands which could have had even more severe diplomatic repercussion.

Fujimura did not disclose the purchase price, but Japanese media said last week the government was set to pay 2.05 billion yen ($26.26 million).

Relations between the Asian powers, plagued by Japan's wartime occupation of parts of China and present rivalry over regional clout, have been difficult for years. But economic ties are stronger than ever and both countries are believed to want to keep the feud from spiraling out of control.

However the islands row appears to have hit sales of Japanese cars.

Dong Yang, secretary general of the China Association of Automobile Manufacturers, said Japanese car sales in China had slowed in August and he believes it was related to the dispute.

Nissan's chief operating officer, Toshiyuki Shiga, said last week that the row was having "some impact" on sales of Japanese cars as manufacturers were having difficulty in holding big, outdoor sales promotion campaigns.

President Hu warned Japan against buying the islands on Sunday.

"It is illegal and invalid for Japan to buy the islands via any means. China firmly opposes it," China's CCTV quoted Hu as telling saying Noda on the sidelines of an Asia-Pacific Economic Cooperation (APEC) summit in Vladivostok.

"China will unswervingly safeguard its sovereignty. Japan must realize the severity of the situation and not make a wrong decision." ($1 = 78 yen)

(Additional reporting by Ben Blanchard and Xu Wan in Beijing; Writing by Nick Macfie)