Bank of England hikes rate again as UK enters recession

LONDON - The Bank of England hiked its interest rate again on Thursday to combat soaring inflation as it warned that the UK's economy had already slipped into recession.

The BoE's decision caps a busy week for central banks as its peers in the United States and elsewhere in Europe further tightened their own monetary policies in global efforts to tame runaway inflation.

The British central bank's decision had been postponed from last week following the death of Queen Elizabeth II.

The BoE met most market expectations as it lifted its key rate by 0.5 percentage points to 2.25 percent, repeating its August increase that had been the biggest rise since 1995.

Some commentators had speculated that the BoE could mirror the European Central Bank and the US Federal Reserve and spring a jumbo hike of 0.75 percentage points -- which would have been the BoE's largest in three decades.

Across the world, consumer prices have galloped to their highest levels in decades on rampant energy and food prices in the wake of Russia's war on Ukraine.

Central banks have responded by increasing their rates, fanning recession fears because they push up loan repayments for consumers and companies alike, thereby exacerbating the UK's cost-of-living crisis.

The BoE said the UK had already entered recession.

The Fed on Wednesday unveiled a 0.75-percentage-point increase, its third straight jumbo hike, one day after Sweden's Riksbank shocked markets with a jump of a full percentage point.

On Thursday, the Swiss National Bank unleashed a 0.75-percentage-point hike that lifted its policy rate out of negative territory for the first time since 2015, meaning depositors no longer have to pay to park their money at the bank.

On Thursday, the Norwegian central bank raised its rate by 0.5 percentage points, taking it to its highest level in more than a decade.

Bucking the trend, the Bank of Japan kept its ultra-loose monetary policy unchanged, sending the yen to a fresh 24-year low against the dollar.

The BoE earlier this month defended itself against accusations of being too slow to tackle sky-high inflation, after new Prime Minister Liz Truss proposed to review its operational independence.

- Tax cuts -

UK inflation eased to 9.9 percent in August but remains near a 40-year high.

Truss on Wednesday launched a six-month plan, starting in October, to pay about half of energy bills for businesses, charities, hospitals and schools, as she sought to soften the economic blow of sky-high prices.

The premier had already announced plans for a two-year energy price freeze for cash-strapped households.

Finance minister Kwasi Kwarteng will unveil Friday a mini-budget of tax cuts designed to boost economic activity, and will also outline the vast cost of the energy assistance.

Yet the package threatens to ultimately push inflation higher as a result of strengthening demand, according to US bank Citi.

"While the capping of energy prices is disinflationary in the first instance, we continue to see many of these measures as boosting demand and increasing the risk of more embedded inflation," wrote Citi analysts in a research note.

Commentators also warn the measures will ravage public finances that are already reeling from huge spending during the deadly Covid pandemic.

Barclays bank analysts estimate that the government's total cost-of-living expenditure could reach a colossal £235 billion ($267 billion).

Agence France-Presse

Central banks must act quickly on inflation, warns BIS

ZURICH, Switzerland - Central banks must not let inflation become entrenched, with the threat of stagflation looming over the global economy, the Bank for International Settlements warned Sunday in its annual economic report.

BIS, considered the central bank of central banks, said institutions will have to move swiftly to ensure a return to low and stable inflation, while limiting the impact on growth.

"The key for central banks is to act quickly and decisively before inflation becomes entrenched," said BIS general manager Agustin Carstens.

"If it does, the costs of bringing it back under control will be higher. The longer-term benefits of preserving stability for households and businesses outweigh any short-term costs."

BIS's flagship report said that in restoring low, stable inflation, central banks should seek to minimize the hit to economic activity, in turn safeguarding financial stability.

BIS said engineering a so-called soft landing had historically been difficult, and the starting conditions now were making the task all the more challenging.

"It would be more desirable if we could have a soft landing because that would mean that the tightening of monetary policy could be more subdued," Carstens told a press conference.

"But even if this is not the case, definitely the priority should be to combat inflation," to prevent the world economy from slumping. 

STAGFLATION DANGERS

After the shock of the Covid-19 pandemic, central banks initially saw the return of inflation as temporary as the economy picked up again.

But the rise in prices has sharply accelerated since Russia's invasion of Ukraine in February.

BIS said the global economy risked entering a new era of high inflation.

The dangers of stagflation -- stagnant growth coupled with rising prices -- loom large, as a combination of lingering disruptions from the pandemic, the war in Ukraine, soaring commodity prices and financial vulnerabilities cloud the outlook, it added.

Policymakers must press ahead with reforms to support long-term growth and lay the groundwork for more normal fiscal and monetary policy settings, BIS said.

While the European Central Bank plans to raise interest rates in July and then again September, the US Federal Reserve on Wednesday carried out its largest rate hike since 1994.

The Fed announced a 0.75-percentage-point rise and said it is prepared to do so again next month in an all-out battle to drive down surging inflation.

1970s COMPARISON

Established in Basel in 1930, the BIS is owned by 62 central banks, representing countries that account for about 95 percent of global gross domestic product (GDP).

In its annual report, the BIS looked at the stagflation of the 1970s, when the oil shocks of 1973 and 1979 caused inflation to jump.

In 1973, oil prices had more than doubled in the space of a month. Oil occupied a much more central place in the economy, it said.

Moreover, inflation was already rising before the oil shock, while the global economy is now emerging from a long phase of low inflation.

But the BIS also highlighted other points of vulnerability, including the current high level of private and public debt.

And with Russia's war in Ukraine, inflation this time is not only based around oil, but also other sources of energy, agricultural raw materials, fertilizers and metals.

The most pressing challenge for central banks is therefore to bring inflation down to low levels, according to the BIS.

High inflation situations tend to be self-reinforcing, warned the BIS, especially when wages spiral into an attempt to offset rising prices.

Agence France-Presse

Central banks urged to ‘print lots of money’ to support world economy

MANILA – Central banks should take advantage of low inflation to “print lots of money” to support their economies as governments around the world implement lockdowns to check the spread of COVID-19, an analyst said on Tuesday. 

The risk of sparking hyperinflation, similar to what happened in Zimbabwe and Argentina is very low right now, according to Jeffrey Halley, senior market analyst at currency trader OANDA.

“It's actually not a bad time to do it because we basically have zero to no inflation in the world,” Halley said in an interview with ANC. 

"There’s never been a better time for governments to go and print lots of money and throw it at the economy."

Halley said small businesses could benefit from central banks “directly giving money” to businesses because firms are more concerned about cash flow rather than interest rates. 

“Small businesses don’t care what their borrowing costs are. They care about having enough money to pay their staff and their invoices at the end of the month.”

He said that some of the major world economies might be in for a “hard landing” despite the stimulus programs they have announced. 

“I think what we really have to understand here is that these stimulus packages are here to keep the lights on in the global economy they’re not there to be a magic panacea that turns that ship around and immediately starts growth up again.”

source: news.abs-cbn.com

Australia central bank cuts rates to record low on virus fears

SYDNEY, Australia - Australia's central bank on Tuesday slashed interest rates to a record low on fears the deadly coronavirus outbreak could push the country into recession.

The Reserve Bank of Australia said it had lowered rates by 25 basis points to 0.50 percent in an effort to offset the impact of COVID-19.

The announcement came as other institutions, such as the Federal Reserve and European Central Bank, indicated they were willing to take action to mitigate the economic pressure of the outbreak.

Bank Governor Philip Lowe said global economic growth was expected to be lower in the first half of 2020 because of the novel coronavirus, while it was also having a "significant effect" on the domestic economy.

Australia's education and travel sectors, which are heavily reliant on China -- where it started -- have been particularly hard hit and surrounding uncertainty is also likely to impact spending.

"Given the evolving situation, it is difficult to predict how large and long-lasting the effect will be," Lowe said in a statement.

"Once the coronavirus is contained, the Australian economy is expected to return to an improving trend."

Agence France-Presse

China cuts loan rate as it battles coronavirus impact

BEIJING - China on Thursday announced it would cut interest rates in a bid to boost the economy, as it battles the economic fallout of the new coronavirus outbreak.

The reduction in the loan prime rate (LPR) -- one of the preferential rates commercial banks impose on their best customers and which serves as a reference for other lending rates -- is the latest measure to help companies struggling through the epidemic.

The one-year LPR was lowered to 4.05 percent from 4.15 percent, the People's Bank of China (PBoC) said in a statement.

The five-year LPR -- on which many lenders base their mortgage rates -- was also lowered to 4.75 percent from 4.8 percent. 

The LPR, released on the 20th day of every month, is based on rates of the central bank's open market operations, especially medium-term lending facility rates.

The rate reduction comes as Beijing battles to control a virus epidemic that has infected over 74,500 people in the country.

The outbreak is threatening to put a dent in the global economy, with China paralyzed by vast quarantine measures and major firms such as iPhone maker Apple and mining giant BHP warning it could damage bottom lines.

The central bank said earlier this month it would offer a 300-billion-yuan ($43-billion) boost to help businesses involved in fighting the epidemic.

Julian Evans-Pritchard of Capital Economics said the rate cut would "help companies weather the damage from the coronavirus at the margins".

But he said the ability of firms to postpone loan repayments and access loans on preferential terms would be more important in the short-term.

"We expect the People's Bank to continue loosening monetary conditions in the coming weeks, especially given signs that the coronavirus disruptions have started to weigh on employment," he said.

"But rate cuts alone will provide limited relief to the millions of small private firms that are suffering the most from the epidemic and are poorly served by the formal banking (sector)."

source: news.abs-cbn.com

US Fed to hold steady at final 2019 meeting

WASHINGTON -- The Federal Reserve on Wednesday was due to resume its final policy meeting of 2019, with markets overwhelmingly expecting the central bank to leave interest rates untouched.

After cutting rates 3 times in the summer and fall, policymakers have said they are now pausing to watch how the world's largest economy performs.

With robust job growth and steady consumer spending, central bankers believe the United States has proved "resilient" in the face of a slowing world economy and a trade war with China, both of which have helped send American manufacturing into decline.

The Fed is due to announce its latest decision, along with a new set of economic forecasts, at 1900 GMT on Wednesday (3 a.m. Thursday in Manila), followed by a news conference by Fed Chairman Jerome Powell shortly afterward.

The forecasts could be of more interest, providing a window on where central bankers think the economy is headed.

Job creation shot well past expectations last month, according to official data released Friday, wiping away fears that employers' demand for labor has begun to fade.

"This just leaves the Fed very comfortably on the sidelines for 2020, or at least as we enter the new year," Diane Swonk, chief economist at Grant Thornton, told AFP.

Futures markets as of Tuesday predict the Fed will be on hold until September of next year. But some economists think another rate cut could come before the summer.

Consumer spending and confidence are strong. The housing market has picked up. Unemployment is still very low as hiring continues. GDP growth slowed in the third quarter but was still better than feared.

SOME DARK CLOUDS

The chances of a recession within the next 12 months, according to the New York Federal Reserve Bank, have also begun to decline -- though odds are still pretty high at about one in three.

If Washington and Beijing manage to seal a partial trade deal and at least cease hostilities, the end to uncertainty could give businesses a sharp boost.

The United States, Mexico and Canada on Tuesday agreed to modify a new trade agreement so that it can pass the US Congress, which also removes a source of uncertainty.

However, economists say the Fed could soon begin to feel pressure to resume cutting rates.

Even with the more positive data, dark spots in the economy have mostly persisted. Adjusted for inflation, consumer spending in October was the weakest since February. Business investment is soft. Exports have decreased and much of the manufacturing sector has had a year to forget.

Should GDP growth fall below two percent in the final quarter of this year and the first quarter of 2020, the Fed could be compelled to add stimulus to the economy, according to Rubeela Farooqi of High Frequency Economics.

"They might be forced to move by the end of the first quarter," she told AFP. 

Agence France-Presse

Paul Volcker, US Fed chief who led war on inflation, dead at 92

WASHINGTON — Former US Federal Reserve chairman Paul Volcker, who tackled American inflation in the 1970s and 80s and later lent his name to landmark Wall Street reforms, has died in New York.

Volcker, who headed the US central bank from 1979 to 1987, was 92. The cause of his death Sunday was complications from prostate cancer, his daughter Janice Zima told AFP.

Tall and known for his dead-pan humor, Volcker forged a career as a financier and fiercely independent public servant who wielded monetary policy with authority and acumen. 

A Democrat, he advised American leaders of both major parties, starting with Richard Nixon in 1971 at the US Treasury, where he helped guide the US exit from the gold standard.

His tenure ended with Barack Obama as Volcker promoted stricter banking regulation in the wake of the 2008 global financial crisis.

But it was as Federal Reserve chairman, first under Jimmy Carter and then Ronald Reagan, that he left his deepest mark, albeit during difficult times, and earned the respect of economists around the world. 

"I am deeply saddened by the passing of Paul Volcker. He believed there was no higher calling than public service," current Fed chairman Jerome Powell said in a statement. 

"His life exemplified the highest ideals -- integrity, courage, and a commitment to do what was best for all Americans. His contributions to the nation left a lasting legacy."

After announcing his candidacy for the White House in 2015, Donald Trump expressed admiration for Volcker, saying "there was something very solid about him."

Carter said Monday he was "deeply saddened" to learn of Volcker's death, calling him "a giant of public service," suggesting his actions may have helped cost Carter a second term but were still "the right thing to do."

President Barack Obama, House Speaker Nancy Pelosi and Bank of England Governor Mark Carney also issued statements paying their respects to Volcker.

Amid the oil crisis in the late 1970s, the American economy suffered rampant inflation. Carter bucked the advice of aides who said installing Volcker at the Fed would mean "tough medicine."

HOLDING FIRM 

With inflation -- which Volcker described as too much cash chasing too few goods -- hitting an eye-watering 14 percent annually, he made no secret of his plans to raise interest rates.

"I don't think there is any feeling or any evidence around at the moment that the economy is suffering grievously from a shortage of money," Volcker testified during his Senate confirmation.

With Volcker at the helm, the Fed raised interest rates from 11 percent to 20 percent (today, by comparison, they are in a range of 1.5 to 1.75 percent).

Such drastic tightening was especially painful and hit during a recession. Auto dealers sent him car keys in coffins. Building contractors mailed him wood planks they could not use, since homes were not selling. 

Farmers drowning in debt drove tractors to encircle the central bank's offices.

But the hard-nosed Volcker gave no ground. "He becomes intellectually stimulated by a crisis," his late wife Barbara said, according to the author William Neikirk.

The firm stance paid off, with inflation falling to 3 percent by 1983. Along with the Iranian hostage crisis, it also helped cost Carter his chances at reelection.

Volcker left the Fed in 1987 and joined James Wolfensohn's investment firm. Wolfensohn later became president of the World Bank.

The former Fed chief reemerged on the public scene 20 years later during the global financial crisis as an Obama adviser. 

A critic of banks' high-risk trading and their executives' gigantic pay packages, he proposed what would become known as "the Volcker rule," restricting so-called proprietary trading. 

The regulation was blasted by Frank Keating, then head of the American Banking Association, as too complex and onerous for implementation -- and came under fire again in the anti-regulation era of President Donald Trump.

The ABA on Monday offered its "deepest condolences," saying Volcker left "a giant legacy of dedicated public service."

A grandson of German immigrants, Volcker was born in 1927 in Cape May, New Jersey, developed a love of fly-fishing and studied at Princeton and Harvard.

A father of 2, he remarried at age 83 in 2010, taking his long-serving assistant as his bride, 12 years after the death of his first wife, Barbara.

Agence France-Presse 

Fed to cut rates for first time in a decade this month

A quarter-point Federal Reserve interest rate cut in July is almost a done deal, according to economists in a Reuters poll, who expect another later in the year amid rising economic risks from the ongoing US-China trade war.

Expectations in the July 16-24 poll for the first rate cut in more than a decade have firmed this month after several Fed members have strongly hinted policy easing is coming soon, pushing US stocks to new record highs.

While that lines up with most major central banks, which have turned dovish in recent months, the latest poll shows economists, like financial markets, have settled on a 25 basis point cut in the federal funds rate to 2-2.25 percent rather than a half-point reduction.

Over 95 percent of 111 economists now predict a 25 basis point cut at the July 30-31 meeting. Only two economists polled expected a 50 basis point reduction and a further two said the Fed would hold steady.

"The biggest reason for the Fed to cut rates is because it has been priced into the markets for a while now. If they didn't follow through and cut, it would cause a bit of a shock," said Andrew Hunter, senior US economist at Capital Economics.

"I think the recent general message from the Fed seems to be that it's more about downside risks to growth rather than the economy being already weak."

Indeed, while some forward-looking indicators on activity in the US economy have dipped, the unemployment rate is the lowest in 50 years and Wall Street is at a record high - not normally the environment for a change in the interest rate cycle.

Fed rate expectations have taken a U-turn this year, going to a holding pattern earlier in the year from a steady tightening path expected beforehand to a series of cuts. Indeed, just a month ago, the US central bank was still forecast to keep policy on hold for now and ease next year.

But since then, concerns about the impact from the trade war on already-slowing growth as well as weak inflation pressure have got policymakers increasingly concerned.

"Our reasoning for policy easing - slowing growth against a backdrop of subdued inflation and elevated uncertainty - is consistent with the Fed's reasoning for insurance cuts," noted economists at Goldman Sachs.

"By contrast, market-implied odds are consistent with a turn in the cycle, which we do not foresee in the near-term."

The US economy likely lost momentum last quarter and is now forecast to have expanded at an annualized pace of 1.8 percent in the April-June period, down from 3.1 percent reported for the first quarter, according to the poll. Growth is expected to hover around that rate in each quarter through to end-2020.

More than 75 percent of common contributors from last month either downgraded their growth outlook or kept it unchanged.

The latest consensus points to another rate cut in the final quarter and nearly 40 percent of respondents predicted a follow-up cut was likely to come as early as September.

But interest rate futures are pricing in three rate cuts this year - in July, September and December.

Beyond this year, the US central bank is forecast to keep policy on hold until 2021, the poll showed.

"We don't think this is the start of a full-on easing cycle; rather, these cuts are about providing a bit more accommodation to offset trade headwinds," said Josh Nye, a senior economist at RBC.

"Fifty basis points of easing would fall short of what markets are currently pricing in over the next year, but should be enough to placate investors that are concerned monetary policy has become a bit too restrictive."

The Fed's preferred measure of inflation - the change in the core personal consumption expenditures price index - has remained below the 2 percent target since the start of 2019 and is not expected shoot significantly higher anytime soon.

With the economy still growing and inflation on an even keel, there was a clear gap between what the economists say the Fed is likely to do and what they recommend.

Asked what the Fed should do at this month's meeting, nearly two-thirds of over 75 respondents said cut rates by 25 basis points. Five said policymakers should cut by 50, while the remaining - over 25 percent of economists - said they should do nothing.

"The issues that are affecting the US economy right now and the inflation environment won't be helped by lower rates," said Thomas Simons, senior economist at Jefferies.

"What is weakening economic forecasts going forward is trade tensions. Lowering rates 25 or 50 basis points is not going to change that situation. From a fundamental point of view, it doesn't make sense to us."

source: news.abs-cbn.com

Trump downbeat on Fed as markets nosedive

WASHINGTON - US President Donald Trump on Tuesday marked Christmas with a renewed attack on the central bank over plunging stocks, as he aired a catalog of grievances in a downbeat gathering at the Oval Office.

High on the laundry list was the Democrats, whom he blamed for a partial government shutdown which dragged into its fourth day -- paralyzing key federal services such as national parks -- with no end in sight.

He denounced opposition lawmakers for denying him funding for his southern border wall and denounced them as hypocrites for criticizing his firing of FBI chief James Comey.

"It's a disgrace what's happening in our country. But other than that, I wish everybody a very Merry Christmas," the president said as he fielded reporters' questions after talking with members of the armed forces.

With the stock market on track for its worst December since the Great Depression, Trump berated the Federal Reserve for its stewardship of the economy, a regular recent complaint.

"They're raising interest rates too fast because they think the economy is so good but I think that they will get it pretty soon, I really do," Trump said.

His comments came after Asian markets suffered a holiday rout, with Tokyo suffering its worst finish since April 2017 after a brutal run on Wall Street that saw US stocks sink for a fourth straight session.

NO FORESEEABLE END

Markets have been roiled by ongoing uncertainty in the US, with Treasury Secretary Stephen Mnuchin berated for holding a call with the six biggest US banks and then reporting on Twitter that the six CEOs have "ample liquidity" available.

Investors were also unnerved by weekend news reports that Trump had asked about the possibility of firing Federal Reserve Chairman Jerome Powell, accounts that Mnuchin said Trump has denied.

Asked by reporters whether he had confidence in Mnuchin, Trump answered "yes I do," calling the treasury chief a "very talented, very smart person."

The stock market malaise comes with Trump refusing to sign a budget bill to keep the government funded as he demands $5 billion for a US-Mexico border wall -- a pillar of his election platform.

Trump acknowledged the impasse has no foreseeable end date, telling reporters he couldn't say when the government would fully reopen.

"I can tell you it's not going to be open until we have a wall, a fence, whatever they'd like to call it," he said.

Trump reaffirmed his claim on Twitter Monday that he had approved a contract for the construction of 115 miles (185 kilometers) of wall in Texas, although the White House has not offered any details on the project.

He said he would visit that stretch of the border "at the end of January for the start of construction."

HOME ALONE

The president said he aimed to have a "renovated or brand new" barrier stretching up to 550 miles across the 2,000-mile border by Election Day 2020, without explaining how it was going to be paid for.

Sections of fencing have been repaired along the US-Mexico border but no new wall has been built, and top Senate Democrat Chuck Schumer said over the weekend the president "must abandon the wall, plain and simple" to reopen the government.

Trump ended the Oval Office exchange by railing against the Democrats and Comey, whom he sacked as FBI director in May 2017 -- a move he later said stemmed from frustration over the federal investigation into possible ties between the Trump campaign Russian interference in the 2016 US vote.

Trump had already set an unfestive holiday tone in a Christmas Eve tweetstorm in which he expounded on the shutdown and his controversial withdrawal of US troops from Syria, launching another attack on the Federal Reserve.

"I am all alone (poor me) in the White House waiting for the Democrats to come back and make a deal on desperately needed Border Security," he posted toward the end of a volley of more than a dozen tweets.

Later Monday, Trump raised doubts over the existence of Father Christmas with a seven-year-old as he and wife Melania answered children's calls to defense agency NORAD's Santa tracker phone line.

"Are you still a believer in Santa Claus? Because at seven it's marginal, right?" the president asked the child.

source: news.abs-cbn.com

Bitcoin breaks $10,000 barrier, raising fears of bubble

SINGAPORE - Bitcoin broke above the $10,000 mark for the first time on Wednesday as the virtual currency continued a stratospheric rise that has seen it increase more than tenfold this year.

The cryptocurrency surged to a high of $10,059 in early Asian hours, according to Bloomberg News, though the recent surge in the volatile unit has fuelled fears of a bubble.

Launched in 2009 as a bit of encrypted software written by someone using the Japanese-sounding name Satoshi Nakamoto, Bitcoin has had a roller-coaster ride that has taken it from just a few US cents to its current sky-high valuation.

Traded on specialist platforms, with no legal exchange rate and no central bank backing it, Bitcoin is monitored and regulated by its community of users, and is used to buy everything from pizza to a pint in a London pub.

But it has attracted widespread criticism, from financial industry titans to governments.

JP Morgan Chase boss Jamie Dimon in September slammed the unit as a "fraud" and said he would fire his employees if they were caught trading it, while China has shut down Bitcoin trading platforms and South Korea's prime minister Tuesday voiced fears it could lead the young to get involved in fraudulent crime.

Analysts say the popularity has been driven by growing interest from major investors and a decision last month by exchange giant CME Group to launch a futures marketplace for the currency, which has not been listed on a major bourse before.

But there is growing unease with the rate of growth, which has seen it increase in value from a 2017 low of $752 in mid-January.

"This is a bubble and there is a lot of froth. This is going to be the biggest bubble of our lifetimes," warned hedge fund manager Mike Novogratz at a cryptocurrency conference Tuesday in New York, according to Bloomberg News.

Commentators also suggest some are buying it as an alternative bet in times of global economic uncertainty.

But critics point to its volatility, an apparent vulnerability to theft and its use in illicit purchases online.

In one of the most high-profile scandals to hit the currency, major Tokyo-based bitcoin exchange MtGox collapsed in 2014 after admitting that 850,000 coins -- worth around $480 million at the time -- had disappeared from its vaults.

Bitcoin's use on the underground Silk Road website, where users could use it to buy drugs and guns, was also presented as proof it was a bad thing.

Despite concerns, most observers believe it is unlikely to suffer heavy falls soon.

source: news.abs-cbn.com

Fed chair nominee Powell defends push to review financial regulations

WASHINGTON - Jerome Powell, President Donald Trump's choice to lead the US Federal Reserve, defended plans to potentially lighten regulation of the financial sector during a controversy-free hearing on his nomination to take over the central bank.

Tapped to replace current chair Janet Yellen, Powell on Tuesday skirted several efforts by members of the Senate Banking Committee to draw him into the debates preoccupying Capitol Hill.

Powell refused to analyze the impact of proposed tax cuts or, as some of his colleagues at the Fed have done, argue for more immigration to boost the labor force. He said economic growth was likely bound in a range of between 2 and 2.5 percent annually, short of Trump's 3 percent goal, without a jump in productivity that many economists regard as unlikely.

In general the 64-year-old lawyer stuck close to script, reciting the current Fed consensus that interest rates are due to continue rising gradually, that the course of inflation remains a mystery, and that weak wages and low labor force participation indicate the jobs market still has room to improve.

Early in his time as a governor, Powell, a lawyer who has spent the bulk of his career in the private sector as an investment banker, shared some conservative concerns about the extent of the Fed's crisis response.

But he ultimately came to agree that the benefits of current Fed policy, with years of loose money allowing time for displaced workers to trickle back to the job market, outweighed the risks - and that future crisis would require the Fed, as he said in his opening statement, "to respond decisively."

The sharpest and most detailed exchanges involved financial regulation, an area Powell has focused on during his years as a Fed governor and where he said it was time to take a pause and evaluate where things stand eight years after the end of a deep 2007 to 2009 recession.

"I am not characterizing what we are doing as deregulation...It is looking back and making sure what we did makes sense," Powell told the committee. "It does not help anyone for banks to waste money."

Powell said he wanted to be sure regulations were "tailored" to the size and role of different institutions, perhaps allowing smaller banks more latitude to trade securities and make other investments, and decreasing the frequency and intensity of "stress tests" for all but the largest financial companies.

In a statement that may surprise some analysts and regulatory experts, he declared the problem of banks that were "too big to fail" all but solved. Asked if any firms were still so large that their collapse would cause wide-ranging harm to the financial system, he responded "I would say no to that."

Over the course of the roughly 2-hour hearing none of the senators voiced opposition to Powell, though the back and forth over regulation prompted Democrats to question whether he would coddle Wall Street, while Republicans wondered if the Fed would go far enough in lightening the burden on financial businesses.

No Senate committee or floor vote has been scheduled yet, but Powell is expected to win confirmation before Yellen's term expires in early February.

There was no obvious market reaction to Powell's appearance in Congress. Analysts, meanwhile, noted the near-rote response to some questions and wondered what that portends when Powell - who would be the first non-economist to hold the top Fed job since the 1970s - confronts conditions that require him to improvise.

Trump nominated Powell from a list of 5 finalists that included Yellen, seeing in him a way to extend Fed policies that have driven unemployment to 4.1 percent and the stock market to record highs, but without having to renominate a veteran of prior Democratic administrations.

Powell's hearing "contained few signs that he will bring any new thinking or a change of approach," wrote Michael Pearce, US economist for the Capital Economics consulting firm, referring to the nominee as "closely guarded" in his reiteration of existing Fed talking points. "We are increasingly worried that a policy mistake in either direction is possible in the years ahead."

Compared to some other confirmation hearings in the Trump era, however, Powell's was an almost congenial affair. During 5 years as a Fed governor, with deep ties to the region as a Maryland native and former Treasury Department official, he has built relationships with both Democrats and Republicans on the panel who said they respected his work.

Perhaps as a result, much of the questioning involved efforts to draw him out on issues like whether the tax plan being debated on Capitol Hill would - as Republicans argue - boost economic growth, or simply explode the debt as Democrats contend.

Powell dodged, resorting to a common Fed stance that tax and spending policy is up to elected leaders and outside the Fed's authority.

"I am not an expert on what analysis is out there," Powell said.

source: news.abs-cbn.com

Bubble or breakthrough? Bitcoin keeps central bankers on edge

FRANKFURT - Central bankers say the success of bitcoin and other cryptocurrencies is just a bubble.

But it keeps them awake at night because these private currencies threaten their control of the banking system and money supply, which could undermine the monetary policies they use to manage inflation.

With bitcoin smashing through the $8,000 level for the first time this week after a 50 percent climb in eight days, they are also worried they will be blamed if the market crashes.

This is why several central banks are advocating regulations to impose control. Others are even looking at whether to introduce their own digital currency and are testing payment platforms.

"The problem with bitcoin is that it could easily blow up and central banks could then be accused of not doing anything," European Central Bank policymaker Ewald Nowotny told Reuters.

"So we're trying to understand whether bank activity in relation to cryptocurrency trading needs to be better regulated."

The global cryptocurrency market is worth $245 billion which is tiny compared to the trillion dollar plus balance sheets of the Bank of Japan, the U.S. Federal Reserve or the ECB.

These institutions issue yen, U.S. dollars and euros, both by creating physical cash or by crediting banks' accounts, as is the case with their bond-buying programs.

Cryptocurrencies, however, are not centralized. They do not pass through regulated banks and traditional payment systems. Instead, they often use blockchain, an online ledger of transactions that is maintained by a network of anonymous computers on the internet.

This has raised concerns about their vulnerability to hackers, as underlined by a score of incidents in recent months, and their use to finance crime.

Cryptocurrencies holders also have a claim on a private, rather than a public entity, which could go bust or stop functioning.

For these reasons, and given their low adoption by retailers, central banks have dismissed cryptocurrencies as risky commodities with no bearing on the real economy.

“Bitcoin is a sort of tulip,” ECB Vice President Vitor Constancio said in September, comparing it to the Dutch 17th century trading bubble. “It’s an instrument of speculation."

LEGAL TENDER

China and South Korea, where cryptocurrency speculation is popular, banned fundraising through token launches, whereby a newly cryptocurrency is sold to finance a product development.

Russia's central bank said it would block websites selling bitcoin and its rivals while the ECB told European Union lawmakers last year "they should not seek... to promote the use of virtual currencies" because these could "in principle affect the central banks' control over the supply of money" and inflation.

Yet Japan in April recognized bitcoin as legal tender and approved several companies as operators of cryptocurrency exchanges but required them register with the government.

The ECB, the Bank of Japan and Germany's Bundesbank are already testing blockchain, admitting it may have a future use for the settling of payments.

The BOJ last year set up a section in charge of fintech to offer guidance to banks seeking new business opportunities, and joined up with the ECB to study distributed ledger technology(DLT) like blockchain. They concluded that blockchain was not mature enough to power the world’s biggest payment systems.

LUKEWARM

Commercial banks have so far been lukewarm to existing digital currencies.

But with electronic payments already supplanting cash, they're alert to the danger that they would lose business if their clients decided to switch to them.

For this reason, Swiss banking giant UBS is leading a consortium of six banks trying to create its own digital cash equivalent of each of the major currencies backed by central banks.

This would allow financial markets to make payments and settle transactions more quickly.

This poses risks for central bankers, as the guardian of the banking and payment system.

"(We could) wake up one day and most of the big banks have been eviscerated and most of that activity has moved elsewhere," St. Louis Fed President James Bullard told Reuters in a recent interview.

This could lead to a financial crisis if regulators lost sight of the activity, he said.

Some central banks such as Sweden's Riksbank and the Bank of England are also looking at the merits of introducing their own digital currency.

Holders would have a direct claim on the central bank - just like with banknotes but without the inconvenience of storing large amounts of cash.

In Sweden, where most retail payments are electronic, the Riksbank said it was looking into an e-krona for small payments between consumers, companies and authorities.

"An e-krona would give the general public access to digital complement to cash guaranteed by the state and several payment services suppliers could connect to the e-krona system," the Riksbank said.

A central bank digital currency (CBDC) could also change the way monetary policy is carried out by allowing central banks to inject liquidity directly into the real economy, bypassing the financial sector, if they want to boost inflation.

This could help make monetary policy more effective, according to a study by economists at the Bank of England.

But it could also be risky if depositors were tempted to convert their bank deposits into central bank money during a banking crisis, accelerating any run on commercial banks.

A senior Bank of Japan (BOJ) official said on Wednesday that although technology is revolutionizing banking, digital currencies will not replace physical money any time soon.

"It's too far off," Hiromi Yamaoka, head of the BOJ's payment and settlement systems department, said on the sidelines of a forum on financial innovation hosted by Thomson Reuters.

"It would change the banking system too drastically." (Additional reporting by Balazs Koranyi in Frankfurt, Howard Schneider in Washington, David Milliken in London and Leika Kihara in Tokyo; editing by Anna Willard)

source: news.abs-cbn.com

U.S. Fed raises rates, unveils cuts to bond holdings

WASHINGTON - The U.S. Federal Reserve raised interest rates on Wednesday for the second time in three months, citing continued U.S. economic growth and job market strength, and announced it would begin cutting its holdings of bonds and other securities this year.

The decision lifted the U.S. central bank's benchmark lending rate by a quarter percentage point to a target range of 1.00 percent to 1.25 percent as it proceeds with its first tightening cycle in more than a decade.


In its statement following a two-day meeting, the Fed's policy-setting committee indicated the economy had been expanding moderately, the labor market continued to strengthen and a recent softening in inflation was seen as transitory.

The Fed also gave a first clear outline on its plan to reduce its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities, most of which were purchased in the wake of the 2007-2009 financial crisis and recession.

"The committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated," the Fed said in its statement.

The central bank said it would gradually ramp up the pace of its balance sheet reduction and anticipates the plan would feature halting reinvestments of ever-larger amounts of maturing securities.

The Fed said the initial cap for Treasuries would be set at $6 billion per month initially and increase by $6 billion increments every three months over a 12-month period until it reached $30 billion per month in reductions to its holdings.

For agency debt and mortgage-backed securities, the cap will be $4 billion per month initially, increasing by $4 billion at quarterly intervals over a year until it reached $20 billion per month.

U.S. stocks rose after the Fed announcement, while the dollar reversed some of its earlier losses.

"The Fed announcing an update to their reinvestment principles leaves September open. The start of balance sheet runoff and the fact that they haven't slowed their projected path of rate hikes suggest they can do both balance sheet and rate hikes at the same time," said Gennady Goldberg, interest rate strategist at TD Securities.

Fed Chair Janet Yellen was holding a press conference at 2:30 p.m. EDT (1830 GMT).

EYES ON INFLATION

The Fed has now raised rates four times as part of a normalization of monetary policy that began in December 2015. The central bank had pushed rates to near zero in response to the financial crisis.

Policymakers also released their latest set of quarterly economic forecasts which showed temporary concern about inflation and continued confidence about economic growth in the coming years.

They forecast U.S. economic growth of 2.2 percent in 2017, an increase from the previous projection in March. Inflation was expected to be at 1.7 percent by the end of this year, down from the 1.9 percent previously forecast.

A retreat in inflation over the past two months has caused jitters among some Fed officials who fear that the shortfall, if sustained, could alter the pace of future rate hikes. Earlier on Wednesday, the Labor Department reported consumer prices unexpectedly fell in May, the second drop in three months.

The Fed's preferred measure of underlying inflation has retreated to 1.5 percent, from 1.8 percent earlier this year, and has run below the central bank's 2 percent target for more than five years.

Expectations of any fiscal stimulus in the near term from the Trump administration have also waned with campaign promises on tax cuts, regulation rollbacks and infrastructure spending either still on the drawing board or facing hurdles in Congress.

Interest rates are seen rising one more time by the end of this year, according to the median projection of the forecasts released with the Fed's policy statement, in keeping with the previous forecast.

Estimates for the unemployment rate by the end of this year moved down to 4.3 percent, the current level, and to 4.2 percent in 2018, indicating the Fed believes the labor market will continue to tighten.

The median estimate of the long-run neutral rate, which is seen as the level of monetary policy that neither boosts nor slows the economy, was unchanged at 3.0 percent.

Minneapolis Fed President Neel Kashkari dissented in Wednesday's decision.

source: news.abs-cbn.com

PH remittances hit 9-month high in Sept

MANILA, Philippines - Cash remittances from Filipinos overseas, which help power domestic consumption, grew 5.3% to $1.94 billion in September, data from the Bangko Sentral ng Pilipinas showed. This was the highest level since December.

Remittances in January to September reached $16.5 billion, up 5.8 percent from last year.

The steady deployment of overseas Filipino workers remained one of the key drivers of growth in remittance flows, the central bank said in a statement.

Total personal remittances, which represent the sum of net compensation, household-to-household transfers in cash and kind, and capital transfers of overseas Filipino workers, rose 6.8 percent in September from a year earlier to $2.14 billion.

The central bank expects cash remittances from Filipinos abroad to grow 5 percent this year. Cash remittances in 2012 reached $21.39 billion, up 6.3 percent from a year earlier.

The major sources of cash remittances in September were the United States, Saudi Arabia, the United Kingdom, United Arab Emirates, Singapore, Canada and Japan. Remittances have held up well despite the global economic turmoil, keeping domestic consumption robust, which in turn helped offset weak global demand for the country's exports.

A super typhoon that devastated the central Philippines could slow the country's economic growth in the fourth quarter, but the government's full-year target of 6-7 percent is still within reach, according to Economic Planning Secretary Arsenio Balisacan.

source: www.abs-cbnnews.com

Sandiganbayan urged to decide on Marcos jewels

MANILA, Philippine – The special division of the Sandiganbayan has been urged by government lawyers to resolve the forfeiture case involving jewelries confiscated from the Marcos family in 1986.

The “Malacañang Jewelry Collection," composed of sets of gems and baubles, are believed to be worth between $110,055 and $153,089.

The set of jewels was turned over the Central Bank after it was left abandoned in the Palace by the Marcoses.

Lawyers of the Presidential Commission on Good Government (PCGG) and Office of the Solicitor General (OSG) earlier asked the graft court to declare the jewels forfeited in favor of the State.

The Marcos family, meanwhile, claimed that the motion for partial summary judgment filed by the government was improper because a first motion was denied on November 20, 1997.

On December 29, 2010, however, the graft court denied the Omnibus Motion of the Marcoses.

With the ruling, government lawyers said the Sandiganbayan can now decide on the ownership dispute.

"Verily, the proceeding to forfeit these assets by summary judgment is ripe for judicial determination and disposition," they said.

The lawyers argued that the jewels should go to the government because the total assets of the Marcoses previously forfeited by the courts were already well beyond their lawful income of $304,372.43 in 1986.

The government lawyers are: Assistant Solicitor General John Emmanuel F. Madamba; associate solicitors Moses V. Florendo and Camille R. Buhain; PCGG commissioners Richard R.T. Amurao and Ma. Ngina Teresa V. Chan-Gonzaga; and PCGG Legal Division chief Ma. Luisa M. Narvadez.

source: abs-cbnnews.com

High noon at ECB over bond-buying plans

RANKFURT - Tempers may well fray at the European Central Bank's policy meeting this week as president Mario Draghi seeks to head off German-led resistance to the bank's anti-crisis armoury.

As financial markets look to the ECB to come to the eurozone's rescue yet again in the seemingly never-ending debt crisis, the meeting could see a face-off between Draghi and the head of Germany's Bundesbank, Jens Weidmann.

The German central bank chief has made no bones about his opposition to a bond-buying programme aimed at helping the most debt-wracked member states.

And newspaper reports have even suggested that Weidmann has repeatedly threatened to resign over the issue, as did his predecessor Axel Weber and the ECB's former German chief economist Juergen Stark.

Expectations are indeed running high for the ECB governing council's regular monthly meeting on Thursday.

At last month's meeting, Draghi had said the central bank "may" resume bond purchases, albeit under strict conditions that are still in the process of being worked out.

But markets may be disappointed if they bet on Draghi revealing the details or resuming the bond buying this week, analysts warned.

"Despite the high expectations in the markets, the ECB is likely only to present an interim report on the bond purchase programme at the council meeting to be held on Thursday," said Commerzbank economist Michael Schubert.

Capital Economics economist Jennifer McKeown agreed.

"We expect the ECB to disappoint markets this week with its plans for peripheral government bond purchases. President Draghi is likely to state that such purchases will be limited and that they will not begin until after the EFSF or ESM have bought bonds themselves," she said, referring to the eurozone's two rescue funds.

The ECB initially launched its bond-buying blitz under the Securities Market Programme (SMP) in 2010 to help debt-wracked eurozone countries that were finding it difficult to drum up financing in capital markets.

It has since accumulated 208.5 billion euros ($260 billion) in bonds from Greece, Ireland, Portugal, Italy and Spain as part of the programme.

Nevertheless, the SMP has lain dormant for much of this year, despite expectations it could be restarted any time.

Weidmann -- who insists he is not the only person to suffer "stomach pains" about the programme -- argues the bond purchases, which have worked in the past at bringing down the borrowing costs of crisis-hit countries, are tantamount to monetary financing, where the central bank prints money to pay off a country's debt. And that is expressly forbidden under the ECB's statutes.

He also fears the measures will fuel inflation, ease the pressure on over-spending governments to get their finances in order and erode the independence of the ECB.

But Weidmann's opposition is not the only problem.

The ECB has said any new bond purchases will only be carried out in parallel with the EFSF and its successor the ESM or European Stability Mechanism, a permanent 500-billion-euro rescue fund that should have been up and running at the beginning of July, but has been held up by Germany's Constitutional Court.

The court is scheduled to decide on September 12 whether the ESM can be signed into law, or whether its fate must wait until next year when the court will make a final ruling on the fund's compatibility with the German constitution.

"If the court's judgement means that the ESM cannot take effect in the planned format, the ECB will also have to redefine the details of its programme," said Commerzbank's Schubert.

"For that reason, Thursday's council meeting is likely to decide only on those details that are independent of the ESM," the analyst said.

Of course, the ECB has other tools at its disposal to help fight the crisis fires, such as a further reduction in eurozone interest rates.

Since the crisis re-erupted late last year, the central bank under Draghi has brought borrowing costs down to an all-time low of 0.75 percent.

Additional easing may be on the cards if the eurozone economy -- which already contracted by 0.2 percent in the second quarter -- weakens further.

The ECB is set to publish its updated economic forecasts on Thursday and the Austrian central bank head Ewald Nowotny indicated a downgrade is likely.

Nevertheless, not all the recent data have been negative, so it is possible the ECB may sit tight and hold back from cutting rates until a future meeting," said Commerzbank's Schubert.

source: interaksyon.com

June inflation eases to 2.8%

Inflation eased to 2.8 percent in June from 2.9 percent in May, the National Statistics Office reported on Thursday.

"The downtrend was brought about by the slower annual increments posted in the indices of alcoholic beverages and tobacco; housing, water, electricity, gas, and other fuels; transport; and recreation and culture," the NSO said.

The Bangko Sentral ng Pilipinas had forecast an inflation rate of between 2.5 and 3.4 percent last month.

The actual June figure brings the year-to-date average to three percent, or at the low end of the BSP's full-year target range of up to five percent.

The NSO said tuition hikes across the country pushed up inflation month-on-month to 0.5 percent in June from 0.1 percent in May.

"Price increments in the heavily-weighted food items such as chicken, pork, fruits, vegetables, eggs, milk, cheese and sugar were also noted. In addition, higher prices of selected school supplies, clothing, footwear and household items and increased salary of household helper contributed to the uptrend," the NSO said.

Food inflation alone picked up to two percent in June from 1.7 percent in May.

"The still-weak global growth prospects, the recent appreciating peso trend and the generally-benign inflation forecast of most market participants set against our country's current above-trend economic growth path support our view that inflation will remain close to the low end of our target range," BSP Governor Amando Tetangco Jr. said in a statement.

"In addition, oil prices have come down from their recent highs. That said, we continue to be watchful, particularly of developments in the Middle East, to check their impact on oil price volatilities and our own domestic growth," he said.

"We will take appropriate action to help ensure our inflation targets are not breached either at the upper or the lower bounds," he added.

Next policy rate hike in 1Q 2013

In a research note, HSBC said the low inflation rate was due to falling transportation costs and a favorable base effect.

"On the heels of the latest sovereign upgrade, the good news continues. Headline inflation continues to be remarkably benign, staying at or below three percent for the fifth consecutive month," said Trinh Nguyen, HSBC economist.

"However, on a trend basis, price pressures are climbing again. Even then, for the rest of the year, headline inflation is expected to come in at the bottom of the central bank’s three to five percent target. As such, the BSP has scope to keep rates accommodative for the time being," Nguyen added.

HSBC expects the next policy rate hike to occur in the first quarter of 2013.

source: interaksyon.com

Switzerland draws up eurozone collapse action plan

GENEVA -- Switzerland does not foresee a break-up of the eurozone but is nonetheless drawing up an action plan in the event of its collapse, the country's central bank chief said on Sunday.

Thomas Jordan, who became chairman of the Swiss National Bank (SNB) last month, told the SonntagsZeitung newspaper that a working group was discussing measures to combat any strengthening of the safe haven Swiss currency.

The bank intervened in September to stem the rise of the Swiss franc which had soared as investors sought a secure place for their cash, hurting Swiss exports and the tourism industry.

Jordan said the eurozone crisis had worsened in recent weeks and he foresees bumpy times ahead.

"The working group is focussing mainly on instruments to combat a strengthening of the franc," said Jordan.

"We have to be prepared for the scenario of a currency union collapse, although I don't think that will happen.

"One measure would be capital controls, that's to say controls directly influencing the flood of capital into Switzerland," he said, declining to give further details.

Jordan said the bank would defend its exchange rate floor against the euro of 1.20 francs. It closed at 1.2014 on Friday.

The SNB has consistently said it will enforce the minimum rate and is prepared to buy unlimited quantities of foreign currencies if necessary.

The cap was introduced after the franc posted a sharp gain in value last year, going from 1.23 to the euro at the beginning of July to less than 1.05 a month later.

"Maintaining the minimum price is the monetary policy that we will continue with determination for the foreseeable future," Jordan said.

The euro had extended its slide against the dollar Friday, dipping below $1.25, under pressure from uncertainty over the future of Greece in the eurozone, and the risk of contagion from its debt crisis.

Jordan succeeded former bank head Philipp Hildebrand who quit in January over a controversial dollar trade by his wife.

source: interaksyon.com

International alarm over euro zone crisis grows

BERLIN/ROME - International alarm over Europe's debt crisis hit new heights on Tuesday, with President Barack Obama pressing the bloc's big countries to show leadership as talk of a Greek default escalated and markets heaped pressure on Italy.

German Chancellor Angela Merkel sought to quash talk of an imminent Greek default or exit from the euro zone, but confusion over whether she would issue a joint statement on Greece with French President Sarkozy sent markets gyrating up and then down.

Confidence in the 17-nation currency area was further dented when Italy was forced to pay the highest interest rates since joining the euro in 1999 to sell 5-year bonds.

"I think there is a possibility, if the wrong steps are taken, that the system goes off the rails," Sergio Marchionne, the CEO of Italian carmaker Fiat, told reporters in Frankfurt when asked if the euro's survival was at risk.

Merkel said in a radio interview that Europe was doing everything in its power to avoid a Greek default and urged politicians in her own coalition to weigh their words carefully to avoid creating turmoil on financial markets.

Her economy minister said earlier this week that there should be no taboos in stabilizing the euro, including an orderly bankruptcy of Greece. And lawmakers from her coalition have said in recent days that Greece may have to leave the euro zone -- a move Citigroup's chief economist warned would lead to "financial and economic disaster."

"As soon as Greece has exited, we expect the markets will focus on the country or countries most likely to exit next from the euro area," Willem Buiter said in a note published on Tuesday.

Merkel, in an interview with RBB inforadio, said Europe would use all the tools at its disposal to prevent a Greek default and warned that an exit from the bloc would immediately lead to "domino effects.

In financial markets, stocks and the euro rose on Tuesday on hopes Europe's top powers will supply fresh support for Greece.

MSCI's all-country world equity index rose 0.9 percent and Wall Street rebounded. The Dow Jones industrial average closed up 44.73 points, or 0.40 percent, at 11,105.85. The Nasdaq Composite Index gained 37.06 points, or 1.49 percent, at 2,532.15.

BERLIN-PARIS CONFUSION

Merkel and French President Nicolas Sarkozy conferred by telephone on the crisis at the start of the week, and senior French sources told Reuters they would issue a joint statement on Greece, sending the euro and Greek bank stocks higher.

Less than an hour later, a spokesman for Sarkozy changed course and denied a statement was planned, sending markets into reverse.

The mixed signals reinforced the sense in the markets that European countries are unable to unite behind a common approach

U.S. President Barack Obama told Spanish journalists in a group interview published on Tuesday that euro zone leaders needed to show markets they were taking responsibility for the debt crisis. Weakness in the global economy would persist so long as it is not resolved, he said.

The Institute of International Finance, a bank lobbying group, warned in a report that prolonged inability to deal with Europe's debt issues put its banking system at severe risk.

"In a pattern echoing that of the 2007-2009 financial crisis, there is a growing risk of the real economy and financial conditions being locked into a mutually reinforcing downward spiral," the IIF warned.

In a measure of the alarm in Washington, Treasury Secretary Timothy Geithner will take the unprecedented step of attending a meeting of EU finance ministers in Poland on Friday. It will be his second trip to Europe in a week after he met his main EU counterparts at a G7 meeting last weekend.

Obama said that while Greece is the immediate concern, an even bigger problem is what may happen should markets keep attacking the larger economies of Spain and Italy.

"In the end the big countries in Europe, the leaders in Europe must meet and take a decision on how to coordinate monetary integration with more effective coordinated fiscal policy," the news agency EFE quoted him as saying.

Geithner is likely to urge euro zone finance ministers on Friday to speed up ratification of changes to their bailout fund, but a U.S. official said he would not push for an increase in the fund's size.

ITALY YIELDS SOAR

Markets have already priced in the near certainty of a Greek debt default. Credit default swap prices suggest a 90 percent probability of default in the next five years, according to CDS pricing data provider Markit.

Greece has said it only has a few weeks' cash and needs the 8 billion euro tranche in October to pay salaries and pensions.

Domenico Lombardi, president of the Oxford Institute for Economic Policy and a senior fellow at Washington's Brookings Institution, said European policymakers must act fast to ward off a full-blown market attack on Italy.

"Italy is the key to contain this crisis. It is the last window of opportunity before a serious prospect of a meltdown of the euro," Lombardi said.

Pressure on Italy mounted on Tuesday at a bond auction that showed the limits of European Central Bank efforts to hold down Rome's borrowing costs by buying government bonds in return for austerity measures to cut its budget deficit.

The five-year bond yield hit a euro lifetime high of 5.60 percent despite ECB purchases in the secondary market that led to the resignation of the central bank's German chief economist, Juergen Stark, last Friday.

"Nothing that we've had, be it at a domestic level in Italy, be it at a pan-euro zone level, or above all from Germany, indicates that anyone really is getting to grips with presenting euro zone policy with one voice," said Marc Ostwald, an analyst at Monument Securities in London.

A Financial Times report that Rome had asked China to buy "significant" quantities of its bonds in recent talks provided little support.

A Brazilian government official told Reuters that BRICS major emerging markets were in initial talks about increasing their holdings of euro-denominated bonds in an effort to help ease the euro zone crisis.

A Treasury spokesman said Italian Economy Minister Giulio Tremonti met Chinese officials last week including the head of its sovereign wealth fund. But an Italian ministerial source told Reuters the talks had centered on possible Chinese investments in Italy's industrial sector, not its bonds.

Chinese leaders have repeatedly offered verbal support to Greece, Portugal and Spain but encouraging words have not so far been matched by spectacular action.

Obama's comments suggested that Washington is trying to nudge European governments toward closer fiscal union or a bigger bailout fund to recapitalize teetering banks but European politics, especially in Germany, make that difficult. — Reuters

source: gmanews.tv