Bloomberg News - The Euro's Next Existential Crisis

The euro's future still looks far from secure. The European Central Bank is defending its independence amid an attack on its negative interest-rate policies by Germany. European Commission President Jean-Claude Juncker admitted last week that "the European project has lost parts of its attractiveness." Greece is still wrangling over the terms of its next bailout payment. And at the end of this week, a geeky decision in a corner of the bond market could send the bloc back into crisis mode.

A credit-rating agency called Dominion Bond Rating Service is scheduled to complete its review of Portugal’s financial fitness on Friday. Moody’s, Standard & Poor’s and Fitch all view Portugal as undeserving of investment-grade status; put another way, Portugal is deemed a risky, junk-rated borrower. DBRS, though, has maintained its country classification at investment grade.

So long as at least one of the four rating agencies judges Portugal to be worthy, its government debt remains eligible to participate in the ECB's bond-buying program. But if the country drops to sub-investment grade at all four, the ECB’s own rules forbid it from buying any more Portuguese government securities -- purchases which have ballooned to almost 15 billion euros ($17 billion) in the program's one-year lifetime.

So if DBRS lowers the nation’s grade -- a distinct possibility, given the weakness of the Portuguese economy and the fact that the judgments of three other assayers of creditworthiness are all worse than DBRS’s -- it could trigger a renewed crisis in the euro area.

The ECB's purchases are arguably responsible for keeping Portugal's 10-year borrowing cost at an average of a bit less than 3 percent in the past six months. Compare that with Greece, which doesn't qualify for ECB assistance and has had an average yield of almost 9 percent since October, and it becomes clear how valuable ECB eligibility is -- and how financially damaging it might be for Portugal if it was shut out after a downgrade:

Surely Portugal can’t be a kind of simultaneously dead-and-alive-Schrodingers-cat? Surely it either is or isn’t investment grade, and therefore either should or shouldn’t qualify for the ECB program?

Unfortunately, rating assessments are fraught with subjectivity and bias, as the world learned to its cost during the credit crisis. Where one analyst sees a life-threatening debt-to-gross-domestic-product ratio, another may see indebtedness that’s merely troubling.

DBRS affirmed Portugal's investment-grade rank in February, but with some important caveats:

The high level of government debt remains a major challenge, exposing the country to shocks. Growth prospects remain modest, posing a risk to the sustained improvement in public finances. DBRS would be concerned if durable growth fails to materialize.

Portugal's annual economic growth rate slowed to 1.3 percent in the final quarter of 2015, down from 1.4 percent in the third quarter and 1.5 percent in the second. For the first quarter and second quarters of this year, economists are predicting a further slump to 1.2 percent. Unemployment, which peaked at 18.5 percent three years ago, is starting to tick up again, and rose to 12.2 percent in December from 11.9 percent at the end of the third quarter.

Moreover, Portugal's banks are becoming increasingly entangled in the government's balance sheet, according to figures compiled by Bloomberg Intelligence analyst Jonathan Tyce. The government's reliance on its banks via loans and bond holdings has surged in the past year:

About 80 percent of that Portuguese bank exposure to sovereign risk is to their domestic government, with much of the rest likely to be Spanish exposure, says Tyce. A rating downgrade and a sudden spike in Portuguese yields would have a knock-on effect, driving up borrowing costs for Spain and Italy.

With the ties that bind bank vulnerability to government risk still not severed, a downgrade would spell big trouble for a banking industry that's already in less than perfect shape.

It might not happen. DBRS may decide that Portugal is still investment grade. But with a debt burden that's still hovering around 130 percent of GDP, up from 84 percent at the start of the decade and double what it was 10 years ago, and an economy that seems to still be deteriorating, that'd be a brave stance.

Even if DBRS does junk Portugal, the ECB might finagle a way to keep it in the bond-buying program by finding an excuse to grant a waiver on the rating qualification. That, though, would almost certainly prompt protests from Germany. Greece may then demand a similar exemption.

EU officials, who failed to make progress at the weekend on how to address the issue of sovereign risk in the finance industry, may find themselves scrambling for cover as Friday puts Europe's debt crisis back in the headlines. And, once again, the ECB may find itself forced into political decisions that really aren't part of its mandate. At least (sarcasm alert) there isn't an important referendum looming that could see the union starting to break up.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor responsible for this story:
Therese Raphael at traphael4@bloomberg.net

BBC News - Landlord 'surge' pushes up mortgage lending

A "late surge" among landlords aiming to beat a stamp duty rise led to a big jump in mortgage lending in March.

Gross mortgage lending hit £25.7bn last month, the Council of Mortgage Lenders (CML) said. This was 59% higher than in the previous March.

A 3% stamp duty surcharge was introduced on 1 April for purchases of homes that are not the buyer's main residence.

The CML said it now expected sales to drop off after the extra tax came in.

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The stamp duty surcharge, announced in Chancellor George Osborne's Autumn Statement, relates to second homes and buy-to-let properties in England, Wales and Northern Ireland.

In Scotland, the equivalent tax - the Land and Buildings Transaction Tax (LBTT) - has also been up-rated.

The result of the 1 April start date was a surge in purchases from landlords in March, according to the CML. This potentially had a knock-on to other buyers who might have found mortgage brokers and solicitors were busier than usual, slowing the buying process.

Gross mortgage lending was 43% higher than February, the CML said.

"The distortion caused by this stamp duty change appears to be larger than any previous stamp duty change we have seen," said CML economist Mohammad Jamei.

"As a result, we expect there will be about 10,000 fewer mortgaged transactions each month in the second quarter of 2016 than would otherwise have been the case, offsetting the increase in activity seen in March."

The surge was also recorded in property sales data from HM Revenue and Customs (HMRC).

There were 161,990 properties sold in the UK during the month, the highest monthly number since June 2006, and up from 92,690 sales in February.

Stamp Duty Bands
Price band	Standard rate	Buy-to-Let/ 2nd home
Up to £125,000	0%	3%
£125,001 to £250,000	2%	5%
£250,001 to £925,000	5%	8%
£925,001 to £1.5m	10%	13%
£1.5m+	12%	15%
Source: HMRC (England and Wales)

A Treasury spokesman said: "The new higher rate of stamp duty on additional properties will help double the affordable housing budget and support even more first-time buyers fulfil their ambition of owning their own home. ‎

"House purchases vary widely across the seasons and we always expected some buyers to bring forward their purchases - indeed this was factored into our costing when the policy was announced. We expect this to level out in the coming months."

The Bank of England has announced plans to subject landlords to a series of new affordability tests.

Their personal income and expenditure could be scrutinised by lenders before they decide to give them a mortgage.

Landlords may also have to prove that they can afford a rise in borrowing costs.

By Kevin PeacheyPersonal finance reporte

BBC News - Asian banks' bad debt pile highest since global financial crisis

Bad debts at Asian banks have climbed to their highest since the global financial crisis and the trend will likely worsen as regional economies battle against China's slowdown and volatile oil and commodities prices, a Reuters data analysis shows.

The bad loans pile at 74 major listed Asian banks, excluding Indian and Japanese banks, reached $171 billion at the end of 2015, the survey of banks showed, the highest since at least 2008. Non-performing loans (NPLs) jumped 28 percent from a year earlier, nearly twice the growth in 2013.

Indian and Japanese banks were not included as their fiscal year ends in March.

With economic growth in the region slowing, analysts expect the asset quality of Asian lenders will continue to deteriorate as banks start publishing quarterly earnings, forcing them to make writedowns that will hurt profit and depress valuations.

Asian central banks have cut interest rates to ensure abundant liquidity, but uncertain economic growth and weak export demand will likely lead to more loan defaults in the near term, analysts and bankers said.

"We expect asset quality to weaken and bad loans to increase ... the key factor we see is Asia entering into more challenging phase of the credit cycle," said Gene Fang, Moody's associate managing director for financial institutions group.

"In the recent past, we saw relatively strong growth and low interest rates, which encouraged loan growth and higher leverage. But growth has now weakened, most significantly in China, which is impacting the rest of the region."

The average ratio of bad loans to gross credit for 29 Asian banks for which this data is available stood at 1.9 percent last year - the highest since 2009, the survey showed. In 2008, the ratio stood at 2.5 percent.

In China, where the economy grew 6.9 percent in 2015 - the weakest pace in a quarter of a century - bad loans surged to a decade-high at the end of December, with Moody's expecting continued asset quality pressure over the next 12-18 months.

Top Chinese lenders including Industrial and Commercial Bank of China (601398.SS), Agricultural Bank of China (601288.SS) and Bank of Communications (601328.SS), will report March quarter results next week.

Last year, the total bad debt pile for all listed and unlisted Chinese banks stood at $297 billion.

Japanese banks' average ratio of bad loans to gross credit stood at 2.5 percent at the end of last year, a slight improvement from 2.7 percent at the end of 2014, Thomson Reuters data showed.

In India, where the central bank is forcing a debt clean-up, total distressed debt surged nearly a third between September and December to $120 billion. The March quarter will probably show a further increase, analysts said.

Thailand's fourth-largest bank Kasikornbank (KBANK.BK), which published quarterly results on Wednesday, expects the ratio of non-performing loans to total loans to rise to 3.5–3.6 percent this year from 2.7 percent last year, Admit Laixuthai, a senior vice president at the bank, told Reuters.

"NPLs for the whole banking system are likely to rise further this year as the overall economy remains weak … I can't tell when NPLs will peak. It depends on the economic situation."

(Additional reporting by Manunphattr Dhanananphorn in BANGKOK; Editing by Lisa Jucca and Jacqueline Wong)

BBC News - UK unemployment rises to 1.7m

UK unemployment rose by 21,000 to 1.7 million between December and February, the Office for National Statistics (ONS) says.

That is the first increase since the May-July period of last year.

The unemployment rate remained at 5.1%, which is still down on the same time last year, when it was 5.6%.

Earnings, including bonuses rose by 1.8% in the three months to February, which is a slowdown from the 2.1% rate for the previous three-month period.

"It's too soon to be certain, but with unemployment up for the first time since mid-2015 - and employment seeing its slowest rise since that period - it's possible that recent improvements in the labour market may be easing off," ONS statistician Nick Palmer said.

There were 31.41 million people in work in the three months , a rise of 20,000 on the September to November period.

Delayed hiring?

Some economists believe uncertainty linked to the 23 June referendum on EU membership could be deterring companies from taking on new staff.

"Last week the Bank of England said that concerns about the EU referendum had begun to affect the real economy," said Ben Brettell, senior economist at Hargreaves Lansdown.

"The increase in unemployment announced today adds some weight to that hypothesis. It's possible businesses are delaying decisions about hiring and investment until after June's vote, which could lead to a slowdown in the first two quarters of this year.

"Nevertheless, the bigger picture is that the UK labour market remains in reasonable health," he added.

The increase in unemployment was too low to change the rate when expressed to one decimal place, which stayed at a decade low of 5.1%.

Public sector falling

The figures also show that there were 5.35 million people employed in the public sector for December 2015. This was scarcely change compared with September 2015 but it was down 50,000 from a year earlier.

The ONS said the number of people employed in the public sector has been generally falling since March 2010.

In the private sector there were 26.07 million people employed for December 2015 - that is 113,000 more than for September 2015 and 529,000 more than for a year earlier.

In the October to December 2015 period the number of UK nationals working in the UK increased by 278,000 to 28.2 million compared with the same time in 2014. At the same time the number of non-UK nationals working in the UK increased by 254,000 to 3.22 million

Bloomberg News - U.K. Plans Unlimited Fines for Helping Corporate Tax Evasion

Companies whose staff help people evade tax face being hit with unlimited fines under proposed U.K. rules.

HM Revenue & Customs on Sunday published a 59-page consultation setting out draft legislation for the new corporate crime of failing to prevent tax evasion. This makes employers liable for the actions of staff unless they put “reasonable” precautions in place to prevent such behavior.

“The new corporate offense aims to overcome the difficulties in attributing criminal liability to corporations for the criminal acts of those who act on their behalf,” the document said. “Attributing criminal liability to a corporation normally requires prosecutors to show that the most senior members of the corporation were involved in and aware of the illegal activity.”

The consultation said this had the effect of encouraging management in large corporations to “turn a blind eye to the criminal acts of its representatives in order to shield the corporation from criminal liability.” By making them liable by default, the aim is to encourage them to understand what staff are up to.

The new rules were proposed before the publication of the “Panama Papers,” which have dragged Prime Minister David Cameron’s government into a row about tax. He was forced to publish his personal records this month after his father was named in the leaked papers, in relation to an investment fund he set up in Panama.

BBC News - Five EU nations launch tax crackdown

The five largest economies in the European Union have agreed to share information on secret owners of businesses and trusts.

It is a concerted attempt to show their leaders are responding to public concern over the Panama Papers leak.

The UK, Germany, France, Italy and Spain have agreed to the data exchange.

Treasury officials told the BBC the move would make it harder for businesses and wealthy individuals to operate without paying correct taxes.

Information on the ultimate "beneficial owners" of companies and trusts would now be automatically exchanged.

The five countries are now pushing for the rest of the G20 nations with the world's largest economies to follow suit.

That would mean data exchange on previously secret tax information between countries such as America, Saudi Arabia and China.

Some might see any such extension as unlikely.

The UK government has already announced that it will make its register of beneficial ownership public - and is privately urging the other four signatories of the deal to agree that the public can have access to the information.

"Today we deal another hammer blow against those who hide their illegal tax evasion in the dark corners of the financial system," Mr Osborne said at the annual International Monetary Fund spring meeting in Washington.

"Britain will work with our major European partners to find out who really owns the secretive shell companies and trusts that have been used as conduits for evading tax, laundering money and benefitting from corruption."

The exchange is unlikely to placate critics who say that not enough has been done to crack down on global tax avoidance and tax evasion, often via offshore trusts and companies based in tax havens.

'Working together'

Jeremy Corbyn, the Labour leader, has suggested that some tax havens under British jurisdiction such as the British Virgin Islands should face direct rule from the UK if they do not reform their tax laws.

The move on data exchange comes ten days after the leak of 11.5 million documents known as the Panama Papers which revealed how some businesses and wealthy individuals avoided and evaded tax using complicated networks of highly secretive companies.

"It is Britain and our European partners setting the pace on beneficial ownership transparency of not just companies but also trusts with tax consequences - and I expect that the rest of the world will move to follow our example," Mr Osborne said.

"It shows the benefit of working together. No single country can tackle international tax evasion alone - and Britain should never fool itself into thinking that it can do this by itself."

The agreement was announced at an unprecedented joint press conference of the finance ministers of the five EU countries at the IMF.

Mr Osborne was joined by Wolfgang Schauble of Germany and Michel Sapin of France.

Also at the announcement was Christine Lagarde, managing director of the IMF, and Angel Gurria, Secretary General of the OECD, the international body charged with setting new global tax rules on information sharing and transparency.

Reuters News - With plenty of punch, central bankers wait in vain for the world to drink

A customer counts his U.S. dollar notes in a bank in Cairo, Egypt March 10, 2016.

REUTERS/AMR ABDALLAH DALSH

Central bankers usually worry about when to remove the punch bowl of cheap finance but when they gather in Washington, D.C. this week they will face a different problem: how to force the world to drink.

Amid a flood of cheap money and a historic experiment with negative interest rates, households, corporations and banks in the developed world have turned their backs on borrowing. Credit growth has flat-lined and an array of metrics indicate the world has become a more cautious place, potentially upending whatever bang for the buck central banks might expect.

In the U.S. households are paying down mortgages instead of borrowing against homes to fund consumption, altering behavior that arguably helped fuel the 2007 financial crisis but that also contributed to economic growth. A Chicago Federal Reserve Bank composite index of household, bank and corporate leverage has been below average for nearly four years.

European and U.S. companies are socking away cash and the Bank of Japan's descent into negative rates has yet to boost consumption, corporate investment, or even faith in an economic rebound.

Even as global liquidity expands, the appetite for it remains moribund.

“You can’t create demand from thin air. What’s needed is to create an environment in which companies and households feel confident to spend,” said a senior Japanese policymaker directly involved in Group of 20 negotiations that will continue in Washington this week.

“There’s a growing sense globally that monetary policy alone cannot cure all problems.”

HOW TO INFLATE DEMAND

The policymakers assembled in Washington will be focused on how to inflate demand. Along with more cautious consumers and companies in developed nations, China is in retreat and likely to scale down investment and purchases of raw materials as its economic transition continues.

The IMF's preferred and oft-repeated solution is for government spending to pick up the slack, particularly on infrastructure, as well as for labor market and other reforms that will make economies grow faster because they are more efficient.

Absent those measures, the economic outlook is likely to remain mediocre. The IMF cut its growth forecast for the fourth time in a year.