ECB expected to lower growth forecasts, not rates

It faces dilemma as a rate cut could aggravate euro zone’s high inflation

FRANKFURT – THE European Central Bank (ECB) will make a cut of sorts this week – but with euro zone inflation stubbornly high, the cut will be in its growth estimates, not interest rates, said economists.

‘The ECB council will cut on Thursday its forecasts for growth in the euro zone, but not its main interest rate,’ said WestLB economist Holger Sandte, making a prediction widely shared by other experts.

The United States Federal Reserve has cut rates in recent weeks in an effort to stave off a recession, and increasing signs of a slowdown in the euro zone are adding to pressure on the ECB to follow suit.

More pessimism was generated last Friday by a sharper- than-feared fall in the European Commission’s euro zone economic sentiment indicator to its lowest level in two years.

‘What is a worry is the sharp collapse in euro zone economic confidence over the last year. This is consistent with euro zone growth dropping well below 2 per cent this year, possibly to around 1.5 per cent,’ said Bear Stearns economist David Brown.

‘The ECB is now under huge moral pressure to cut rates, especially with the euro on a surge towards US$1.55,’ he added.

But another data release last Friday showed the dilemma that ECB head Jean-Claude Trichet faces – that of stubbornly high inflation, something which a cut in rates could exacerbate.

Euro zone inflation clocked in at 3.2 per cent in January, the highest level since the launch of the euro single currency in 1999. The number was worse than expected and was well above the ECB’s preferred level of inflation of close to but less than 2 per cent.

But slowing growth is expected to dilute inflationary pressures, which in turn should allow the ECB to cut rates later this year, economists believe.

‘Under these conditions, the ECB could start cutting interest rates in spring’ and gradually lower its main lending rate to 3 per cent by the end of the year from 4 per cent currently, said BNP Paribas economist Clemente De Lucia.

Source: AGENCE FRANCE-PRESSE (The Straits Times 3 Mar 08)

MAS fears Asia will hurt if US engine seizes

A negative spiral can take hold, affecting even the real economy

(SINGAPORE) A sharp and deep recession in the United States will hit Asian economies, warned Heng Swee Kiat, managing director, Monetary Authority of Singapore (MAS), yesterday.

And in his first public comment on the global financial turmoil, Mr Heng said the credit crisis has now started to have an impact on the real economy.

Wading into the debate on whether Asia has de-coupled from the US, Mr Heng said the region has significant links with the world’s biggest economy through trade, investment and finance. Only if these linkages are significantly weakened can Asia be said to have de-coupled from the US, he said yesterday at a fund management conference.

Still, the short-term outlook for Asia remains generally positive barring any sharp deterioration in the global economy, he noted. The current forecast is for Asia ex-Japan to grow at a fairly healthy pace of around 7.8 per cent in 2008, one percentage point lower compared to last year.

Structural changes have taken place in Asian economies over the last 10 years, he pointed out. ‘Certainly, the fundamentals of the economies and financial markets in Asia have improved significantly since the Asian financial crisis,’ he said.

Most Asian economies have large foreign reserves and current account surpluses. There is a sizable educated and skilful labour force, and a growing middle class that forms a broad consumer base, he said.

Asian corporates and households are doing well after four years of robust growth. Asian capital markets are better developed. Asian banks are better capitalised, have less bad loans, and are better supervised and managed.

‘These are significant changes. However, a long-term or structural de-coupling of Asia from the US is possible only when the economic linkages through trade, investment and finance are significantly weaker,’ said Mr Heng.

Studies by MAS, and other economists, show that this is not the case at this stage, he pointed out.

What we are likely to see, however, is the weaker synchronisation of business cycles, he said.

‘The underlying momentum in the Asian economies will allow Asia to ride out the slowdown in the US if it is mild and short-lived. But a sharp and deep contraction will trigger the threshold where all economies will be affected, albeit in different degrees depending on their reliance on external demand,’ said Mr Heng.

On the global financial turmoil, Mr Heng said the credit crisis has now started to have an impact on the real economy.

Policy makers are facing the challenge of how to contain the spread of the credit crisis to the real economy, he noted.

‘What is striking is that the securitisation of loans was meant to be a mechanism for risk transfer. Instead, it became a channel through which shocks are amplified and transmitted throughout the system in unpredictable ways. These shocks have now started to have an impact on the real economy,’ he said.

In the US, the housing-sector correction is leading the slowdown in the economy. Consumer spending is constrained by high debt levels. Financial institutions have sustained large losses. And this is driving the turn of the credit cycle, which means restraint on both consumer spending and corporate investments.

Indeed, at this point there is a risk of being caught in a negative spiral involving tighter credit standards, reduced credit availability and slowing down of the macro economy.

‘The extent to which this spiral takes hold determines the extent of the US slowdown, and the extent to which the rest of the world will be affected,’ said Mr Heng.

‘Hence, the immediate challenge for policy makers is to contain the spread of the credit crisis to the real economy, to prevent this spiral.’

The full extent of the exposures is not yet known and central banks face different degrees of slowdown and inflationary pressures in their economies, he explained.

According to Mr Heng, a multi-pronged approach coordinated across jurisdictions, where necessary, was needed to tackle these challenges. ‘The situation is fluid, and we need to remain vigilant.’

 

Source: Business Times 20 Feb 08

2008 not necessarily like 2007: UBS

(ZURICH) UBS AG does not expect 2008 to be a year like 2007, when the Swiss bank wrote down US $18 billion in bad credits and posted the first loss since its creation, its chief executive was quoted as saying yesterday.

‘I view the environment as difficult due to great uncertainties related to the US economy. Nervousness will remain high in the markets. But you cannot conclude from that that 2008 will be a year like 2007 for UBS,’ UBS chief executive Marcel Rohner told newspaper NZZ am Sonntag.

UBS, the world’s largest manager of affluent people’s money, is Europe’s biggest casualty of the credit crunch by far. Investors fear the possibility of billions of dollars in new sub-prime writedowns.

Mr Rohner said UBS’s investment banking business would concentrate in 2008 on its strengths in customer business, such as equities and mergers and acquisitions advisory business.

‘Our goal is to give the businesses that do excellent work the space to develop further, while isolating the problem portfolios in the US mortgage market, managing them separately and quickly reducing the risks,’ he said.

UBS has published details of its exposure to problem areas in US debt, totalling US$88 billion at the end of 2007, including US$27.5 billion in sub-prime debt.

But Mr Rohner said the figure could not be used to predict losses, as it comprised highly diverse positions and risks. ‘The quality of our investment in leveraged buyouts, for example, is much better than in complex securities based on mortgages with poor debtor quality,’ he noted.

Mr Rohner said it was not currently possible to sell intact structured products. But where a collateralised debt obligation structure had become insolvent, UBS had been able to reduce its risks by selling the underlying securities at prices in line with their current valuation by the bank.

UBS’s private banking business has not been affected by the blow to the bank’s reputation, Mr Rohner said. Private banking recorded net inflows of more than 30 billion Swiss francs (S$38.8 billion) in the fourth quarter of 2007, and net inflows continued in January.

Mr Rohner defended the continuing payment of bonuses amid the losses, as the losses arose from real estate loans handled by a small part of the bank. Other areas of the bank had worked well and it was important to continue to motivate staff producing these results by treating them fairly.

 

Source: Reuters (Business Times 18 Feb 08)

IMPROVING OUTLOOK: UBS expects this year to be a better one

ZURICH – UBS does not expect this year to be like the last, when the Swiss bank wrote down US$18 billion (S$25.5 billion) in bad credits and posted the first loss since its creation, its chief executive officer (CEO) was quoted as saying yesterday.

‘I view the environment as difficult due to great uncertainties related to the United States economy. Nervousness will remain high in the markets. But you cannot conclude from that that 2008 will be a year like 2007 for UBS,’ CEO Marcel Rohner told Swiss daily newspaper NZZ am Sonntag.

UBS, the world’s largest manager of affluent people’s money, is Europe’s biggest casualty of the credit crunch by far. Investors fear the possibility of billions of dollars in new sub-prime write-downs.

Mr Rohner said UBS’ investment banking business would this year concentrate on its strengths in customer business, such as equities and mergers and acquisitions advisory business.

‘Our goal is to give the businesses that do excellent work the space to develop further, while isolating the problem portfolios in the US mortgage market, managing them separately and quickly reducing the risks.’

UBS has published details of its exposure to problem areas in US debt, totalling US$88 billion at the end of last year, including US$27.5 billion in sub-prime debt. But Mr Rohner said the figure could not be used to predict losses, as it comprised highly diverse positions and risks.

Last December, the Government of Singapore Investment Corp bought a 9 per cent stake in UBS for 11 billion Swiss francs (S$14.2 billion).

On Jan 30, UBS announced a 12.5 billion Swiss franc loss for the final three months of last year and a full-year loss of 4.4 billion Swiss francs, a record for the bank. This was due to a higher-than-expected US$14 billion write-down on assets connected to sub-prime mortgages in the US.

UBS was formed in 1998 after the Union Bank of Switzerland took over local rival Swiss Banking Corp.

 

Source: REUTERS (The Straits Times 18 Feb 08)

British home repossessions at 8-year high

(LONDON) British home repossessions last year hit their highest level since 1999 and are likely to increase, the Council of Mortgage Lenders (CML) said last Friday.

The trade group said that more than 27,000 homes were repossessed in 2007 and forecast that repossessions would rise to a total 45,000 in 2008 – still far fewer than the 75,000 homes that were repossessed in 1991 at the height of the last recession.

Economists expected a sharp rise this year as the global credit crunch bites.

‘The financial pressure on many home owners is increasing,’ said Howard Archer from Global Insight. ‘It seems certain that repossessions will trend up significantly during 2008, particularly if the economy suffers an extended marked slowdown and unemployment starts rising.’

Separate figures from the government showed that mortgage repossessions in England and Wales rose an annual 6 per cent in the last three months of 2007.

The mortgage lenders said that 13,500 homes were repossessed in the second half of 2007, marginally below the 13,600 in the first half and 10 per cent lower than they had forecast.

But the global economy now appears to be entering the slowdown presaged by the soaring rate of repossessions in the US that led to the dismantling of complicated credit derivatives underwritten by mortgages.

Britain’s economy grew by around 3 per cent last year but is expected to expand by less than 2 per cent this year.

‘The number of repossessions is likely to be higher in 2008 as a result of wider issues in the economy and the mortgage funding markets,’ said Michael Coogan, CML director-general.

 

Source: Reuters (Business Times 12 Feb 08)

Write-downs from sub-prime problems could touch $568b

German minister sounds warning as officials await audits from banks

THE bloodbath is not over yet.

Sub-prime-related write- offs may hit US$400 billion (S$567.8 billion) – more than treble the US$130 billion losses that Wall Street banks and other financial institutions have revealed in recent weeks, according to the world’s top finance officials.

Speaking on Saturday after last weekend’s Group of Seven (G-7) meeting in Tokyo, German Finance Minister Peer Steinbrueck said the grouping now feared that write-offs of losses on securities linked to United States sub-prime mortgages could reach US$400 billion.

This is also far bigger than the US Federal Reserve’s estimates for sub-prime losses last year of US$100 billion to US$150 billion.

According to Bank of Italy governor Mario Draghi, the next two weeks will be critical in revealing how much damage the credit crisis has done to the global financial system.

‘The next 10 days to two weeks will be crucial because we are going to have the first audited accounts from financial institutions since the crisis started,’ said Mr Draghi, who is the chairman of the Financial Stability Forum (FSF). The FSF, a committee of international regulators and central bankers, is heading an international inquiry into the crisis.

Some of the world’s biggest banks have already disclosed billions of dollars of bad credits related to the US sub-prime mortgage market collapse, but these are only preliminary estimates, he added.

‘Auditors have become more vigilant’ as the fallout from the sub-prime crisis continues to spread and audited accounts for last year could reveal a grimmer picture, Mr Draghi told The Business Times.

The FSF’s preliminary report at the G-7 meeting warned that ‘there remains risk that further shocks may lead to a recurrence of the acute liquidity pressures experienced last year’, adding that ‘it is likely we face a prolonged adjustment, which could be difficult’.

Mr Draghi also said regulators were ready to force banks to reveal their losses and replenish their equity ratios.

He did not rule out the possibility that governments might eventually need to inject capital into banks, although he stressed that market solutions should take precedence. The FSF will issue its full report on the causes of the credit crisis and ways to tackle it in April.

The G-7 policymakers, in their statement, painted a grim picture, saying the US economy may slow further, eroding global growth, while banks, despite falling interest rates, will tighten credit even further.

While the G-7 did not propose specific measures, European Central Bank (ECB) president Jean-Claude Trichet said countries will do what was necessary, both individually and collectively, to counter a ’significant market correction’.

Economists, however, said the ECB is held back from cutting interest rates by its fears of rising inflation.

‘The problems are going right through all parts of the financial markets and there’s not much the G-7 can do about this,’ Mr Gilles Moec, an economist at Bank of America in London, told Australia’s The Age newspaper.

‘There’s a danger that the downturn will become a self- fulfilling prophecy,’ he was quoted as saying.

 

Source: The Straits Times 12 Feb 08

Investors withdraw £1.7b from UK funds

(LONDON) Almost £1.7 billion (S$4.74 billion) was withdrawn from UK property funds in the last three months of 2007, data from the Association of Real Estate Funds (AREF) showed yesterday.

According to the survey of 64 funds with a combined value of £37 billion, the vast majority of investors continued to flee the sector after Britain’s extended commercial property boom hit the buffers in the summer and £939 million was withdrawn from the funds in the previous quarter.

More than £400 million was also raised by the funds in the fourth quarter.

Some of the respondents to the AREF survey have made it harder or more expensive for investors to exit their funds in recent months in order to shore up liquidity and avoid a firesale of property assets on the open market.

AREF members include authorised property unit trusts (known as APUTs) which are targeted at retail investors such as Legal & General UK Property Trust, M&G Property Portfolio, New Star Property Unit Trust, and the Norwich Property Trust.

 

Source: Reuters (Business Times 7 Feb 08)

French economic reforms may spark new dynamism in Europe: S’pore

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Republic’s interested in these reforms, says Lim Hng Kiang

IN PARIS

WITH global markets in a tailspin over fears of a US recession, the world clearly needs more growth engines.

Hence Singapore’s interest in the progress of economic reforms in France, which, if successful, could spark new dynamism in Europe, says Trade & Industry Minister Lim Hng Kiang. Mr Lim is in Paris as a member of Prime Minister Lee Hsien Loong’s delegation on a three-day visit to France.

Mr Lim was speaking to Singapore reporters yesterday morning, ahead of a day of meetings with the country’s economic tsars and business elite.

France’s Minister for the Economy, Finance and Employment, Christine Lagarde, hosted lunch for PM Lee.

The two leaders exchanged views on regional issues and the outlook for the global economy, including the US financial market woes and the impact on Europe and East Asia, according to Mr Lee’s press secretary.

Mr Lee also updated Ms Lagarde on Singapore’s economic restructuring and upgrading efforts, and on its growth priorities for the coming years.

On bilateral relations, they agreed to continue strengthening economic cooperation, and affirmed the importance of closer trade and investment linkages between Asean and the European Union.

President Nicolas Sarkozy, whom Mr Lee met on Monday, has set out far-reaching reforms to France’s entrenched social welfare system, including the end to its maximum 35-hour working week.

A more competitive Europe with strong economic growth will provide another growth engine for the global economy, Mr Lim told reporters.

In their meeting on Monday, French Prime Minister Francois Fillon updated Mr Lee on the progress of reform measures.

Investment inflows from France and Europe to Singapore have been ‘very strong’ in the last few years, Mr Lim said, despite the big focus on China and India.

Singapore, on its part, is courting new investments from France in sectors such as energy, digital media, ideogaming and petrochemicals.

Singapore is France’s second leading investment destination in Asia, after Japan, with investments in the Republic totalling some 3.5 billion euros (S$7.4 billion) at end-2005. More than 400 French companies, including familiar names such as ST Microelectronics and Air Liquide, are operating in Singapore.

Mr Lee was last night due to meet some of France’s top corporate chiefs at a private networking dinner organised by Singapore’s Economic Development Board. This morning, he will have breakfast with another group of French businessmen.

Besides business and the economy, other issues on security and cultural exchanges also figure in Mr Lee’s meetings with the French leaders. He met the Defence Minister Herve Morin yesterday afternoon.

 

Source: Business Times 23 Jan 08