BBC News - German business confidence rises in June

Germany's Ifo index of business sentiment rose slightly in June, raising hopes that the eurozone's largest economy is returning to stronger growth.

As Germany's Sebastian Vettel wins another Grand Prix, his country's economy may also be on the up

The index rose to 105.9, up from 105.7 the month before.

Germany's economy shrank by 0.7% in the final quarter of 2012, and grew just 0.1% in the first quarter of 2013.

But the Organisation for Economic Co-operation and Development is forecasting 0.4% growth for the year.

Germany's Ifo think tank calculates its headline index by taking into account companies' current view of the business climate and their outlook for the next six months.

Signs of increasing confidence reduce fears that the German economy may slip back into negative territory.

Ifo economist Kai Carstensen said: "Although assessments of the current business situation are slightly less positive, firms are increasingly optimistic with regard to their future business outlook."

Europe's powerhouse economy is primarily export led, so lack of demand from its recession-hit European trading partners has slowed growth.

The eurozone as a whole - comprising the 17 European countries which adopted the euro currency - contracted in the first quarter of 2013, its sixth consecutive quarterly fall.

Countries like Greece, Portugal, Spain and Italy continue to act as a drag on growth, as they struggle to reduce their debt mountains through austerity measures, public sector reforms and bank restructuring.

Bloomberg News - India Funding Strain Grows as Fed Outlook Hurts Rupee

Dhiraj Singh/Bloomberg

Indian ten rupee banknotes are arranged for a photograph. The rupee touched the weakest level versus the dollar on June 20.

India faces growing strain to fund the widest current-account deficit in major Asian nations after the rupee slid to an all-time low on concern the U.S. will curb monetary stimulus as its economy improves.

The deficit narrowed to $21 billion last quarter, from $32.6 billion or a record 6.7 percent of gross domestic product in October to December, the median of nine estimates shows in a Bloomberg News survey before data due June 28. The Reserve Bank of India estimates the sustainable level at 2.5 percent of GDP.

The rupee touched the weakest level versus the dollar on June 20 after Federal Reserve Chairman Ben S. Bernanke said the U.S. central bank will probably taper bond purchases this year if the American economy performs as it projects. The potential for reduced stimulus exposes emerging nations from India to Indonesia and Brazil to the risk of capital outflows.

“The prospect of the U.S. unwinding stimulus means that funding the shortfall will get more challenging,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. “Even if the deficit narrows, it will remain too high for comfort.”

The rupee depreciated 2.9 percent last week and touched an all-time low of 59.98. The S&P BSE Sensex index retreated 2.1 percent, while the yield on the 8.15 percent government bond due June 2022 rose to 7.62 percent from 7.53 percent.

The currency’s 8.4 percent tumble this quarter is the worst in Asia, according to data compiled by Bloomberg. India is prepared to take action to reduce volatility as needed, Raghuram Rajan, the top adviser in the Finance Ministry, said June 20.

Biggest Risk

The imbalance in the current account, the broadest gauge of trade, is the biggest risk to an economy that grew a decade-low 5 percent in the year ended March, according to the Reserve Bank.

Foreign-direct investment in India fell the most in more than a decade last fiscal year, increasing reliance on stock and bond inflows to fund the shortfall.

Overseas investors have sold a net $2.1 billion of Indian bonds and bought a net $4.2 billion of stocks so far this quarter. That’s less than first-quarter fixed-income purchases of $2.3 billion and share inflows of $10.2 billion.

Imports of gold and crude oil, and subdued exports amid an uneven global recovery, have stoked India’s current-account gap.

The International Monetary Fund estimates the shortfall at 4.9 percent of GDP this year, compared with 3.3 percent in Indonesia and a surplus of 2.6 percent in China. India’s imbalance is the widest in Asian economies with GDP exceeding $100 billion, the data shows.

Dollar Strength

“While the deficit is expected to narrow gradually this year, the combination of rising U.S. yields and the potential rise of the dollar will mean that India will continue to face funding risks,” said Chetan Ahya, an economist at Morgan Stanley in Hong Kong.

India has boosted taxes on gold imports to tackle the current-account gap.

The government is also considering easing restrictions on foreign-direct investment in a range of industries to woo capital, according to Finance Minister Palaniappan Chidambaram.

Those steps are part of a nine-month policy push by Prime Minister Manmohan Singh’s administration to bolster growth and avert a credit-rating downgrade.

Other measures have included paring the budget deficit, loosening foreign-investment rules in the retail and aviation industries and easing caps and levies on purchases of local bonds by overseas investors.

Foreign Reserves

The trade deficit in the 12 months ending March 2014 “should be lower than last year” as gold imports moderate, Commerce Secretary S.R. Rao said in a June 18 interview.

The Reserve Bank left interest rates unchanged this month, snapping three straight reductions, and said inflation, growth and the balance of payments will determine monetary policy.

Currency reserves stood at $290.7 billion as of June 14, Reserve Bank data show, about 9.4 percent lower than an all-time high of $321 billion in 2011. They “provide a cushion” against shocks, Fitch Ratings said June 12, when it boosted the outlook on India’s sovereign rating to stable from negative.

Still, sustained intervention to steady the rupee amid the high current-account imbalance is a challenge as it depletes reserves, according to Yes Bank Ltd.

“India’s current-account deficit reflects lopsided economic management that failed to address supply issues,” said Arun Singh, an economist at Dun & Bradstreet Information Services India Pvt. in Mumbai. “It will take some more time before calm returns.”

Elsewhere in Asia today, Taiwan’s unemployment rate in May was unchanged from April, while Vietnam and Singapore will release inflation data. A report may show German business confidence increased in June, while the Dallas Fed will release its index of Texas manufacturing activity.

BBC News - EU agrees euro rescue fund guidelines for banks

Eurozone finance ministers have agreed guidelines on how the eurozone's emergency bailout fund can inject money directly into struggling banks.

German Finance Minister Wolfgang Schaeuble said many details were yet to be agreed upon

The power to directly help banks by the 500bn euro ($660bn; £427bn) European Stability Mechanism is seen as a key move in stabilising the eurozone area.

The ESM will be able to inject up to 60bn euros into troubled lenders.

However, governments will have to ensure that banks seeking aid meet minimum capital requirements.

Banks with a capital buffer - a tier one common equity ratio - below 4.5% would have to receive help from their own government before the ESM can step in.

In addition, the bank's shareholders, bondholders and possibly even large depositors, may also have to contribute ahead of any funds from the ESM, a process known as a bail-in.

"This instrument will help preserve the stability of the euro area and remove the risk of contagion of the financial sector to the sovereign, thus weakening the vicious circle between banks and sovereigns," said the chairman of eurozone finance ministers, Jeroen Dijsselbloem.

"An appropriate level of bail-in will be applied before the bank is recapitalised by the (bailout fund), in line with EU state aid rules and applying principles of the forthcoming bank recovery and resolution directive," he added.

Details

A decision to allow the ESM to help out banks was made in June 2012, when the Spanish banking system needed urgent funding.

However, Germany has been wary of allowing the fund to bail out banks without national governments sharing the burden.

Speaking after the meeting of ministers, German Finance Minister Wolfgang Schaeuble said: "`We have made an important step on the way to the banking union by agreeing on the main points for a future regime for direct bank recapitalisation."

However, he added that many details were yet to be agreed.

"We must avoid that there are false expectations in connection with the direct bank recapitalisation," he said.

"Those that expect any bank that needs capital can go to the (bailout fund), that's nonsense."

On Friday, finance ministers are expected to try to agree rules over how to apply a share of any losses to large depositors when banks fail.

When Cyprus sought financial help in March, one of the conditions imposed was that large depositors in its two biggest banks had to contribute to the banks' restructuring, the first example of a eurozone bail-in.

Reuters News - World Bank watching Fed, ready to respond

World Bank President Jim Yong Kim speaks at a Thomson Reuters Newsmaker event, at Canary Wharf in east London June 19, 2013.

Credit: Reuters/Stefan Wermuth

By Paul Ingrassia and Mike Peacock

LONDON | Wed Jun 19, 2013 7:53am EDT

(Reuters) - The World Bank is concerned about the spillover effects on developing countries of a slowing of U.S. money creation and will move to provide affordable capital when borrowing costs rise, its president said on Wednesday.

The U.S. Federal Reserve has sparked a bout of financial market turmoil since its chief, Ben Bernanke, announced on May 22 that the Fed could, before the year is out, begin slowing the pace at which it creates dollars.

Emerging markets, the recipients of much of that money as it has been printed, have borne the brunt of investors taking fright.

"We're constantly watching what the spillover effects are of these unconventional monetary policies on developing countries especially," Jim Yong Kim told Reuters in an interview.

"If the United States does back off ... and slows down its (asset-buying) quantitative easing, borrowing costs will go up and we think they will also go up for developing countries. And that's a real concern."

The Fed holds a policy meeting on Wednesday. Analysts expect it to keep options open about such a move later in the year following some mixed recent economic data.

Kim did not expect capital outflow from emerging markets on anything like the scale seen in the Asian financial crisis of the late 1990s. Nor did he expect the Fed's policy switch to be "short and sharp".

"Ben Bernanke ... has been a clear and steady voice on what's needed," he said.

But he conceded that a world economy awash with money created by central banks, and withJapan now embarking on an unprecedented stimulus program, was in "uncharted territory".

"If the price of capital starts going up then we are going to have to move to find ways of creating new instruments for making capital available for infrastructure," Kim said.

The bank is working on a global infrastructure facility to do that. Kim said middle income countries were prepared to invest because they knew World Bank involvement would "crowd in" private capital too.

"We think this is urgent so we are moving pretty aggressively," he said. "As interest rates go up we have to work to provide capital at rates which make sense for developing countries."

DERISKING

Kim said it was remarkable how many emerging economies recovered so quickly from the 2007-2009 world financial crisis.

"We think it's because they made a lot of tough choices early on. They went through their fiscal consolidation, they looked at their public sector expenditures and rationalized them," he said.

But equally remarkable is that in an era of ultra-low interest rates these countries could not get access to affordable long-term investment. "They're saying we did all the right things ... and yet we still don't have access to capital," Kim said.

"Just like in 2008, we have to be the countercyclical arm that is ready to move to soften the blow on the developing countries," he said.

In the longer-term, the World Bank had a pivotal role to play in "derisking" infrastructure projects, particularly in Africa, so long-term private investors come in.

"Private sector investment is going to become such a huge part of our own strategy," Kim said.

He cited the example of the Inga III dam in the Democratic Republic of Congo which he said had the potential to provide electricity for the whole of sub-Saharan Africa barring South Africa.

Yet international investors are understandably cautious about getting involved in a country which has been wracked with violence during a long insurgency.

The World Bank and United Nations were trying to create "a little cocoon around that project so that we can in fact attract institutional investors".

"We have to find some way of creating a governance structure that would weather the vicissitudes of Democratic Republic of Congo politics. We think it's possible," Kim said. "So watch that space."

(Editing by Jeremy Gaunt.)

BBC News - G8 leaders agree tax evasion measures

Leaders of the G8 major economies have agreed new measures to clamp down on money launderers, illegal tax evaders and corporate tax avoiders.

David Cameron; "You have to collect the taxes that are owed. That is only fair for companies and for people who play by the rules"

Governments agreed to give each other automatic access to information on their residents' tax affairs.

They will also require shell companies - often used to exploit tax loopholes and invest money anonymously - to identify their effective owners.

The summit communique urged countries to "fight the scourge of tax evasion".

The measures are designed to combat illegal evasion of taxes, as well as legal tax avoidance by large corporations that make use of loopholes and tax havens.

The summit in Northern Ireland also saw the launch of free trade negotiations between the EU and US, which UK Prime Minister David Cameron, who was hosting the summit, dubbed "the biggest bilateral trade agreement in history".

Tax, trade and transparency - dubbed "The Three Ts" - were placed at the top of the UK's agenda for its presidency of the G8, which consists of the UK, US, Germany, France, Italy, Russia, Canada and Japan.

But the summit has been overshadowed by the conflict in Syria.

The G8 leaders - including Russian President Vladimir Putin, an ally of Syrian leader Bashar al-Assad - backed calls for Syrian peace talks to be held in Geneva "as soon as possible".

Mr Cameron said the leaders had managed "to overcome fundamental differences", but no timetable for the Geneva talks was given, and the statement made no mention of what role Mr Assad could play in the future.

Shadowy arrangements

Leaders agreed that multinationals should tell all tax authorities about what taxes they pay and where.

"Countries should change rules that let companies shift their profits across borders to avoid taxes," the communique said.

It follows revelations about the ways in which several major firms - including Google, Apple, Starbucks and Amazon - have minimised their tax bills.

Illegal activities, including tax evasion and money laundering, will be tackled by the automated sharing of tax information.

Ahead of the summit, the Organisation for Economic Co-operation and Development (OECD), proposed to share tax information by building on an existing system set up by the US and five major European economies, but on a global scale.

"This international tax tool is going to be a real feature of ensuring that we get proper tax payment and proper tax justice in our world," said Mr Cameron, who claimed that it meant "those who want to evade taxes have nowhere to hide".

The OECD includes all of the G8 members except Russia.

Among the information to be shared will be who actually ultimately benefits from the shadowy shell companies, special purpose companies and trust arrangements often employed by tax evaders and money launderers.

Earlier in the day, Chancellor George Osborne unveiled plans for a UK register of companies and their owners.

The White House also announced a similar plan for the US.

Last week the UK also unveiled a deal with its crown dependencies and overseas territories - including the Channel Islands, Gibraltar and Anguilla - to start sharing more information on which foreign companies bank their profits there.

About a fifth of offshore tax havens, which are used by multinationals to shelter cash from the tax authorities, are British dependencies.

"Of course Britain's got to put its own house in order," said Mr Osborne, adding that the government would launch a consultation on whether the register should be published or just be available to the HMRC.

Speaking during the summit, Mr Osborne said more progress had been made on reforming the global tax system in the past 24 hours than the "past 24 years".

Conflict zones

The G8 communique also demanded more transparency from mining firms.

It follows revelations that many major mining companies use complex ownership structures in the Netherlands and Switzerland to avoid paying taxes on the minerals they extract in developing countries.

"Developing countries should have the information and capacity to collect the taxes owed them," the communique said.

"Other countries have a duty to help them."

The governments agreed that mining companies should disclose all the payments they make, and that "minerals should not be plundered from conflict zones".

"We agreed that oil, gas and mining companies should report what they pay to governments, and that governments should publish what they receive, so that natural resources are a blessing and not a curse," said Mr Cameron.

Ransom crackdown

The G8 leaders also agreed to stamp out ransom payments to kidnappers for the release of hostages.

Mr Cameron said tens of millions of dollars in ransom money had been paid around the world in the last three years.

UK government officials have often expressed their frustration at alleged ransom payments being made to secure the release of French, Italian and other European hostages seized in the Sahara and elsewhere, says the BBC's Security correspondent Frank Gardner.

But since those governments have never publicly owned up to paying ransoms this G8 agreement may be easier to sign than to enforce, he adds.

BBC News - Swiss bill to ease bank secrecy blocked

The lower house of Switzerland's parliament has rejected a bill that would allow Swiss banks to pass client information to the US tax authorities.

The bill was rejected by 126 votes to 67

The bill is the result of pressure from the US following revelations that Swiss banks had helped American account holders to evade taxes.

The US had demanded action by 1 July, but the Swiss parliament summer session ends this week.

The bill will now go back to the Swiss Senate.

The lower house decided by 126 votes to 67 not to discuss the bill. A second rejection by the lower house would effectively kill the draft law.

The bill would allow Swiss banks to sidestep strict secrecy laws and release information relating to clients' accounts.

It also contained secret clauses requiring the banks to pay an estimated $10bn (£6.4bn) in compensation for lost tax revenue.

Swiss politicians are in no mood to change their laws because Washington tells them to, reports the BBC's Imogen Foulkes from Berne.

The Senate very reluctantly approved the bill last week, after it became clear the US would indict Swiss banks, and possibly even cut them off from the dollar market if it did not go through.

A long tradition of banking secrecy is becoming a political crisis for Switzerland, adds our correspondent. Switzerland has also come under pressure from the EU over the issue.

In January Switzerland's oldest private bank, Wegelin, closed after being indicted and fined $58m by the US authorities after admitting in court to helping American customers to hide more than $1.2bn from the Internal Revenue Service.

In 2009, Swiss bank UBS paid $780 million and handed over details of more than 4,000 accounts in order to avoid indictment.

Reuters News - Analysis: This time, bond investors think a Fed pullback is real

A view shows an eagle sculpture on Federal Reserve building, in Washington August 22, 2012.

Credit: Reuters/Larry Downing

By Karen Brettell

NEW YORK | Thu Jun 13, 2013 3:07pm EDT

(Reuters) - This time, the Fed is serious.

That's the judgment of U.S. government bond investors who believe the Federal Reserve is close to paring back its $2.5 trillion, 4-1/2-year bond purchase program, and it's causing turmoil in the U.S. Treasury market.

Trading in Treasuries has turned notably more volatile in recent days and volatility may continue as traders try to adjust to a marketplace in flux.

In the last six weeks, benchmark 10-year U.S. Treasury note yields have surged to 2.19 percent, from 1.60 percent at the beginning of May.

As a result the market has seen a sharp outflow from bond funds and notable lack of demand in Treasury bond auctions. The fund outflows and the rise in volatility offer a worrying glimpse of how markets are likely to behave as the Fed works to scale back its enormous monetary stimulus of the U.S. economy.

"When you see the volumes and the movements developing in differentmarkets, then it shows you that the transition from accommodation to tapering to eventual sideline and then subsequent tightening is going to have a lot of bumps in the road," said Steve Rodosky, head of Treasuries and derivatives trading at Pimco, which runs the world's largest bond fund.

Expectations for future volatility in the government bond market have also jumped. The Merrill Lynch MOVE index .MERMOVE1M, which estimates future volatility of long-term bond yields, jumped to 84.7 on Monday, its highest level in almost a year, from a multi-year low of around 50 at the beginning of May, to 79 on Thursday.

Fighting the Fed has long been seen as a losing strategy. After four years of record monetary stimulus, however, many investors are unsure of what to do when the Fed is not the primary driver of market moves.

Investors have fled from bond funds as rates rise, pulling $10.93 billion from bond funds in the week ended June 5, according to the Investment Company Institute, the biggest weekly outflow since October 15, 2008. Bond flows had previously seen inflows for 21 straight months, according to ICI.

"There is no difference in voice in the market any more. There are a few very large players and every single one of them pretty much follows the Fed, so when the Fed withdraws everyone tried to withdraw at the same time and there's no other side of the market," said Gang Hu, head of U.S. linear rates trading at Credit Suisse in New York.

At the same time, large dealer banks are less able to absorb large debt sales as new rules meant to reduce risks taken by institutions result in smaller bank balance sheets, potentially adding to price volatility. This week's quarterly auctions by the U.S. Treasury of three, ten and thirty year debt have all been notably weak.

"The ability of dealers to warehouse the shedding of risk is much more limited due to the regulatory environment, which argues for an exaggerated price move to these flows," Merrill Lynchanalysts said on Wednesday in a report.

INFLECTION POINT

Not everyone sees a Fed pullback from its bond buying program in the near-term, especially with inflation below the Fed's target of 2.0 percent and unemployment above the target of 6.5 percent.

"The markets seems to have gotten an idea that it could be very soon; we think that's a complete misread and is very unlikely," said Michael Schumacher, head of global rates strategy at UBS in Stamford, Connecticut.

But many see the market as nearing an inflection point at which it will either become clear that the Fed's easing has put economic growth on a solid enough track to stop expanding the Fed's balance sheet, or that the benefit of further easing is outweighed by the risk of asset bubbles and market distortions.

"You've got another maybe 12-18 months of (QE) and at that point you should expect rates to go higher," said Tad Rivelle, chief investment officer of fixed income at TCW, where he helps manage $135 billion in assets.

"QE does have enormous power, but that power is not under the precise direction and guidance of the Fed. Lacking the ability to specify exactly where the excess of liquidity ultimately ends up suggests that it can leak out into emerging markets, it can run into the housing market, it can run into the equity market," Rivelle said.

The negative effects of the Fed stepping out of the market have been felt before, between the central bank's earlier quantitative easing or "QE" programs, but they were temporary as theeconomy sputtered anew and the Fed stepped back in. Many investors believe, however, that this time the economy is better placed to absorb the shock as the Fed stops expanding its balance sheet.

A return to a more normal level of interest rates will result in a zero total return over the next five years for investors benchmarked to the popular Barclays U.S. Aggregate Bond Index, said Zane Brown, fixed income strategist at asset manager Lord Abbett & Co LLC in Jersey City, New Jersey.

"May is a microcosm of what we might expect over the next several years because finally people did lose money in fixed income in May," Brown said.

The longer the Fed's purchases continue, meanwhile, the more difficult it may be for traders to adapt to a market without its regular presence.

"The Fed has to somehow manage to take its hand off the market and let the market function again, let the natural supply and demand function again," said Credit Suisse's Hu.

(Additional reporting by Herb Lash; Editing by David Gaffen and Clive McKeef)