Finance news. My opinion.

July 30, 2008

Report: U.S.-China trade displaced 100,000 Ohio workers

Filed under: management — Tags: , — Professor @ 9:12 pm

Little more than half a decade since China entered the World Trade Organization, a resulting trade deficit has triggered the loss of more than 100,000 jobs in Ohio, says a report from the Economy Policy Institute released Wednesday.

A study by the Washington, D.C.-based group pegs the nation’s net job loss to China between 2001 and 2007 at about 3 million jobs, 102,700 of which were in Ohio. About 17,000 of the Ohio jobs were lost between 2006 and 2007.

The report found Ohio absorbed the fifth-highest net job loss. The share of workers displaced in the state accounted for less than 2 percent of Ohio’s 2001 work force. By comparison, Idaho lost a net 14,700 jobs since 2001, and the total accounted for more than 2.5 percent of its 2001 work force – the highest percentage among the states.

Driving a “crisis in manufacturing employment” in the nation, the report states, are the effects of monetary exchange rates and an imbalance in U.S. exports and its Chinese imports. Exports to China are commodity-intensive, while Chinese imports are almost exclusively manufactured products.

The report pegged the U.S. trade deficit with China last year at $262 billion, up from $84 billion in 2001. That’s an average annual increase of more than 20 percent.

The report acknowledge the nation’s trading relationship with China resulted in workers being re-employed in other industries, but it found displaced workers lost an average of $8,146 in pay yearly since 2001 absolutely free credit report. About three of every four displaced American workers moved into jobs that paid hourly wages of $17.80 or less, or at most $35,600 a year.

The report also found about 90 percent of the U.S. net job loss was spread evenly among workers with a high school education, some college training and a college degree.

The report calls for a “fundamental change” in the U.S.-China trade relationship, particularly with exchange rate policies and labor standards in the Asian nation’s economy.

For details, click here to download the full report.

The nonprofit institute bills itself as a non-partisan think tank advocating a fair economy.



Source

July 29, 2008

Zhou Says China Seeks Policy `Continuity, Stability

Filed under: economics — Tags: , , — Professor @ 9:54 am

China's central bank governor Zhou Xiaochuan underscored “continuity and stability'' in monetary policy after economists said they detected a bigger emphasis on supporting growth as the economy slows.

July 25 and 27 statements by the Communist Party's political bureau and the central bank didn't use the term “tight monetary policy,'' featured in previous government statements. JPMorgan Chase & Co. economist Frank Gong and Lehman Brothers' Sun Mingchun saw a shift to a more pro-growth policy.

“The central bank mentioned policy continuity and stability,'' Zhou said late yesterday in the western city of Xi'an when asked about the omission. Zhou was speaking after a meeting of East Asia-Pacific central bankers

Weakening export demand because of the U.S. housing slump and an international credit squeeze has stoked concern that growth may slump in the world's fourth-biggest economy, costing jobs and leading to bad loans and sinking profits. Government options to stimulate the economy and protect exporters include loosening bank lending quotas, boosting government spending and restraining gains by the yuan.

Zhou said people should read the statement after the central bank's second-quarter monetary-policy meeting “accurately and comprehensively.''

China is trying to damp inflation that soared to a 12-year high of 8.7 percent in February cash advance usa. Last month's rate was 7.1 percent.

Policy `Fine-Tuning'

Ting Lu, an economist at Merrill Lynch & Co. in Hong Kong, said yesterday that China was “fine-tuning'' economic policy.

Donald Straszheim, vice chairman of Roth Capital Partners, a U.S. investment bank specializing in emerging markets, said it was the biggest policy shift in five years.

The government will slow the pace of currency gains to protect exporters, keep interest rates unchanged and maintain the reserve requirement for banks at a record 17.5 percent of deposits, Los Angeles-based Straszheim said.

China's economy grew at the slowest pace since 2005 in the second quarter. Gross domestic product rose 10.1 percent from a year earlier, down from 10.6 percent in the first quarter, as exports weakened and the government curbed lending.

The Politburo said last week that maintaining growth and fighting inflation were the top priorities for the second half of 2008. It said the nation aimed for “steady and relatively fast'' growth.

The central bank's statement was similar. In its previous quarterly statement, the People's Bank of China said it was sticking with a “tight'' monetary policy.

Source

July 28, 2008

Asian Nixonomics May Spell Subsidy-Driven Stagflation

Filed under: marketing — Tags: , , — Professor @ 9:36 am

Asian governments from India to Malaysia, clinging to budget-busting fuel subsidies, may end up paying an even higher price: saddling their economies with an extended period of stagflation.

“Subsidies will come increasingly in the way of future growth,'' says Kalpana Kochhar, a senior adviser for the International Monetary Fund's Asia-Pacific Department in Washington. “Not passing prices through and keeping artificial price and wage controls never works.''

Governments are being forced to choose between two unattractive alternatives: run up bigger deficits by continuing to shield citizens from soaring energy prices, or start to withdraw subsidies, fueling inflation and political backlash. Inflation has already reached decade highs throughout the continent and played a role in destabilizing politics.

The result will be a combination of slower annual growth, amounting to 7.6 percent in 2008, and accelerating inflation of about 6.3 percent in East Asia, which excludes Japan and the Indian subcontinent, according to a July 22 report from the Asian Development Bank. The region averaged 8.4 percent gross domestic product growth and 3.2 percent inflation in 2004-2007, according to ADB figures.

The consequences for Asia “may prove more socially and politically noxious'' than the currency crisis of the late 1990s, says Uwe Parpart, chief Asia economist and strategist for Cantor Fitzgerald Hong Kong Capital Markets. Unlike the region's rapid recovery in 1997-98, “there is no V-shaped exit from inflation, only a long and painful one,'' he says.

Nixon's Controls

The current Asian experience is reminiscent of the U.S. after President Richard M. Nixon's wage and price controls were dismantled in 1974. That experiment has “gone down in history as one of the biggest failures in public policy,'' Kochhar says, culminating after Nixon left office in the country's worst economic downturn since the Great Depression.

Stagflation Asia-style would erode the economic gains that the ADB estimates have lifted 300 million people out of poverty since 1990.

Though subsidies “may temporarily help alleviate symptoms of underlying inflationary pressures, they bypass the fundamental supply and demand balance and thus can ultimately be more costly,'' the ADB said. “Increased food and energy subsidies erode fiscal ability to provide social protection and support for a slowing economy and reduce funds available for development.''

Expanding Economy

Inflation will exceed growth rates in Indonesia, the Philippines, Thailand, Vietnam and Singapore. A forecast last week by UBS AG projects that India's economy will expand 7.1 percent in the year ending March 2009, down from 9.1 percent in fiscal 2008 and slower than the projected 8.7 percent inflation rate.

Goldman Sachs Group Inc. today cut its growth forecast for Asia, saying exports are weakening and faster inflation is forcing central banks to raise borrowing costs. Asia excluding Japan will grow 8 percent in 2008, slower than the 8.2 percent predicted previously and weaker than the region's 9.4 percent expansion last year, the report said.

Indonesia's growth, 6.3 percent last year, is “insufficient'' to reduce poverty and create jobs, the Paris- based Organization for Economic Cooperation and Development said in a report last week that recommended reducing subsidies for fuel and electricity to create a better investment climate.

Higher deficits, rising prices and slower growth also would leave governments less to spend on needed improvements such as roads and utilities.

Pillar of Growth

At stake is one of the pillars of the Asian economic miracle of the last decade. Below-market fuel and power costs made it cheaper for manufacturers in export-dependent economies to operate, giving them a competitive advantage over rivals in other markets. Subsidized prices also left consumers with more disposable income, boosting demand for goods and services.

Now, higher costs will erode the export edge. That may lead to more shuttered factories in countries such as China that already have more manufacturing capacity than they need to meet domestic and foreign demand, putting millions of people out of work.

Hong Kong companies may close 20,000 plants in the neighboring Chinese province of Guangdong this year as higher wages and fuel prices raise costs, the Hong Kong Small and Medium Enterprises Association said last month faxless online payday advances.

More unemployment and less disposable income also imperil the domestic consumption that China and other nations have been trying to foster to reduce their dependence on foreign markets.

Missed Opportunity

“Governments have missed the opportunity in the good times to change the subsidies and now are facing greater challenges in political, social and fiscal terms,'' former International Monetary Fund Managing Director Rodrigo de Rato said in a June 24 speech in Singapore.

Handouts that began as long ago as the end of World War II have held down the prices Asian consumers pay for essentials from cooking gas to motor fuels. For example, official Chinese gasoline prices are about 23.50 yuan ($3.44) a gallon, about 18 percent less than in the U.S.

Subsidized gasoline costs the equivalent of $3.15 a gallon in Malaysia, even after Prime Minister Abdullah Ahmad Badawi's government raised prices by 41 percent in June. That is enticing motorists from neighboring Thailand, where gas is $3.91, and Singapore, where it's $5.95, to cross the border to fill their tanks.

Unaffordable Subsidies

Now, with the price of crude oil up more than 60 percent in the last 12 months, governments are finding they can no longer afford to keep subsidies at historic levels, nor can they risk the shock of abolishing them. So other countries including China, Indonesia, Sri Lanka and India are also starting to make consumers pay more for fuel to limit the impact of subsidies on their budgets.

Even after India raised fuel prices, Prime Minister Manmohan Singh's government will still pay about $42.5 billion in oil subsidies this year, more than twice as much as last year, and about six times the entire education budget.

That's robbing India of funds it needs for power and other infrastructure improvements to correct deficiencies that shave 2 percentage points from annual economic growth, the Finance Ministry estimates.

Malaysia, which spent $10.8 billion on fuel subsidies last year, has shelved $1.1 billion in public-works projects on railroads and highways.

`Got to Give'

Indonesia's government, waning in popularity, may spend as much as $22.2 billion in energy subsidies this year. That's about the same amount President Susilo Bambang Yudhoyono estimates Indonesia needs to invest annually on development programs for highways and ports. Subsidy costs may reach $33.3 billion next year.

“The social and political fabric is preventing governments from taking the next step to put an end to subsidies,'' says Vishnu Varathan, a regional economist at Forecast Singapore Pte. “Something has got to give.''

In Malaysia, Abdullah's ruling coalition lost a record number of parliamentary seats in the March election, ceding its two-thirds majority and losing five of 13 states.

India's Singh has also suffered defeats as prices in the world's second-most populous nation have increased to the highest level in 13 years. His Indian National Congress party has had nine setbacks in 11 provincial elections since January 2007.

Charges `Inevitable'

Higher gasoline, diesel and cooking-gas charges are “inevitable'' as India can't afford to shield its 1.2 billion people forever, Singh said last month as he raised prices. Allies in his coalition government protested the increase, amid concern it will hurt the 52 percent of Indians who live on less than $2 a day.

Adding to his problems, Fitch Ratings this month cut its outlook on Indian debt to negative, citing spending on food and fuel subsidies. Standard & Poor's and Moody's Investors Service cut Pakistan's credit rating in May. S&P, Moody's and Fitch all lowered their outlook for Vietnam's debt in May and June.

“Subsidies for consumers and businesses have helped growth, but at these prices, Asia can no longer afford the luxury,'' says Tomo Kinoshita, chief economist for Asia outside Japan at Nomura Holdings Inc. in Hong Kong.

Source

July 24, 2008

India May Lift Foreign Restrictions on Banks, Chidambaram Says

Filed under: legal — Tags: , — Professor @ 12:30 pm

India's government, fresh from surviving a confidence vote this week, will push to lift restrictions on overseas investors controlling privately-run banks, Finance Minister Palaniappan Chidambaram said.

Stalled legislation removing a 10 percent cap on foreigners' voting rights in banks may be revived before laws on pensions and insurance when parliament convenes next month, Chidambaram said.

“Bills in advanced stages of consideration will be taken up first,'' Chidambaram said in a telephone interview from New Delhi. “We seem to have acquired the political space to take the liberalization process forward.''

The banking index tracking 17 lenders is set for its biggest weekly gain after Prime Minister Manmohan Singh remained in power with support from new allies who replaced communists opposed to foreign investment. The bill would give ING Groep NV, the largest Dutch financial services company, more control over Bangalore- based ING Vysya Bank Ltd. with its 44 percent stake.

“There is likelihood of further reforms,'' said Tushar Poddar, a Mumbai-based economist at Goldman Sachs Group Inc. “Given the limited time at the government's disposal, and the motley group of new allies, reforms are by no means certain.''

Manmohan Singh's five-year tenure comes to an end in May. Amar Singh, whose Samajwadi Party replaced the communists as the government's main ally, said on July 10 he may back legislation easing curbs on foreign companies seeking to expand in insurance, pensions and banking.

Removing Cap

The bill to remove a 10 percent cap on the voting rights of foreign investors in non-state banks is pending in parliament while a parliamentary committee is considering the bill to open the pensions business to overseas investors, Chidambaram said.

The draft bill to raise the foreign investment ceiling for insurers to 49 percent from 26 percent is with the government, he said. The banking and pension bills have been languishing in parliament for three years and the finance minister announced the insurance measures in 2006.

“All three are on the agenda of the ministry of finance,'' Chidambaram said. “We are looking into various aspects of the foreign direct investment regime, trying to see whether further liberalization is possible.''

New York-based American International Group Inc., the world's largest insurer by assets, New York Life Insurance Co. and Prudential Plc, based in London, are among insurers that are restricted to 26 percent stakes in their ventures in India cash advance.

Reviving the reforms may entice Lloyd's of London, the world's largest insurance market, to scale up its operations in India, where it writes about $400 million of business, spokeswoman Louise Shield said July 10.

Greater Role

Manmohan Singh's plans to give overseas companies a greater role in India's financial industry were blocked by his erstwhile communist partners, who this month withdrew support over the nuclear accord with the U.S.

Singh got 275 votes in his favor and 256 against in the confidence vote in the 541-member lower house, a margin that will force Chidambaram to secure backing from opposition parties to ensure the government's pending legislation is approved.

“In a parliamentary democracy, the ruling party reaches out to all opposition parties,'' Chidambaram said.

Chidambaram also said the government will revisit plans to list shares of government-run companies.

“Listing improves governance. There are many companies looking for capital,'' Chidambaram said, without revealing which company will sell shares. “We have to see what the market is like and what the appetite in the market is like.''

India's stock market surged more than fourfold in the first 3 1/2 years of Singh's administration as the 75-year-old prime minister presided over an economic expansion that averaged 8.9 percent a year, the fastest since independence in 1947.

Record Sales

This year, foreign investors, who bought a record $17.2 billion of stocks in 2007, have turned sellers as the benchmark equity index has lost about a third of its value. The central bank expects growth in Asia's third-largest economy may slow to 8 percent this year, dragged down by record high oil prices.

To contain inflation, Reserve Bank of India Governor Yaga Venugopal Reddy has raised interest rates 15 times and ordered banks to set aside more reserves eight times since October 2004. The governor will unveil the next monetary policy statement on July 29, which will be Reddy's last policy announcement if he retires as scheduled in September.

India will announce its decision regarding the country's next central bank governor “well in time,'' Chidambaram said.

Source

July 22, 2008

Bankruptcy may loom for Mervyns

Filed under: online — Tags: , , — Professor @ 11:09 am

Mervyns LLC is struggling to avoid bankruptcy, according to media reports Monday.

Company officials reportedly are trying to persuade vendors to ship merchandise for their crucial back-to-school season.

This occurred after the company lost a source of financing from a lender, CIT Group Inc., which has dramatically reduced business loans, according to a report in the Wall Street Journal. If the effort fails, bankruptcy is a possibility for the midrange department store chain based in Hayward, which operates 177 stores in California and six other western states. The company employs about 23,000 people.

Roy Berces, a Mervyns spokesman, said Monday he could not comment on reports of the retailer's financial difficulties. He did say, however, that Mervyns still plans to open a new 80,000-square-foot store Friday in Newark, just north of NewPark Mall. The company plans to close its NewPark store, as well as another store at Alameda Towne Centre later this month.

In May, Mervyns announced plans to close five to 10 underperforming stores, but open another five in its core western market payday loans. One of those is slated to open at Inland Center in San Bernardino in October.

Some retail industry analysts said four years ago the company would not survive a sale by its longtime parent company, Target Corp. However, Target sold an intact Mervyns to a consortium of investors for $1.2 billion, which then proceeded to close about 70 underperforming stores and exit several markets in the Midwest and South. The investment group, currently led by Sun Capital Partners Inc. of Boca Raton, Fla., has also begun opening new stores during the past two years.


dgoll@bizjournals.com | 925-598-1436


Source

Comments Off

July 17, 2008

First Community Bank profit drops

Filed under: online — Tags: , , — Professor @ 8:39 pm

First Community Bank Corporation of America reported after-tax income for the quarter ended June 30 of $158,000, or 4 cents a share, compared to $760,000, or 19 cents a share, for the same period in 2007.

Second quarter 2008 results included a $537,000 increase in the provision for loan losses, a $196,000 decrease in net interest income and a $316,000 increase in non-interest expenses, the bank said in a release. The expense increase reflected an investment in new branches and infrastructure to support growth, the release said.

For the six months ended June 30, after-tax income was $707,000, or 17 cents a share, compared to $1.5 million, or 37 cents a share, for the year-ago period cashadvance. The bank ended the second quarter with $482 million in assets, an increase of 3 percent, or $15 million, from March 31.

First Community (NASDAQ: FCFL), based in Pinellas Park, operates 10 offices along the west coast of Florida.



Source

Comments Off

July 16, 2008

Sri Lanka

Filed under: marketing — Tags: , — Professor @ 11:12 am

Sri Lanka's central bank kept its benchmark interest rate unchanged for a 17th straight meeting to spur economic growth without further stoking the fastest inflation in Asia.

The Central Bank of Sri Lanka held its repurchase rate at 10.5 percent, the highest level since 2002, according to a statement issued in Colombo today. All 14 analysts surveyed by Bloomberg News predicted the decision.

Policy makers across Asia are grappling with soaring consumer prices even as a slowdown in the U.S. economy stifles demand for the region's exports. Inflation in Sri Lanka jumped to 28.2 percent in June, as bus fares rose by as much as 27 percent in May and train fares nearly doubled last month.

“The central bank would probably use the recent slowdown in growth as an excuse not to raise rates, even though a much sharper slowing of the economy is required to ensure macroeconomic stability,'' said Ashok Parameswaran, senior emerging markets analyst at Invesco in New York.

The yield on the 16 percent bond due in April 2009 was little changed at 18.45 percent at 9:27 a.m. in Colombo, according to First Capital Treasuries Ltd. The rupee was at 107.62 to the dollar, after closing yesterday at 107.65, according to Hatton National Bank Ltd.

Indonesia's central bank increased its benchmark interest rate for a third straight month in July, aiming to keep inflation below 12.5 percent this year. The Reserve Bank of India last month lifted its key rate twice to a six-year high of 8.5 percent. Thailand and the Philippines will probably both raise borrowing costs this week, according to Bloomberg surveys.

`Further Tighten'

Sri Lanka would “further tighten'' monetary policy by lowering the 2008 target for growth in reserve money, or the currency in circulation and commercial banks' deposits at the central bank, to 11.75 percent from 12.5 percent, according to today's statement cash advance loan. Consumer price gains are expected to ease from about August, the bank said earlier this month.

“Unlike other banks in the region, the Central Bank of Sri Lanka prefers to control the quantity of money as its main policy instrument,'' said Prakriti Sofat, an economist at HSBC Holdings Plc in Singapore. Slowing growth should also “see demand-pull pressures on inflation abate.''

Economic growth weakened to 6.2 percent in the first quarter from a year earlier, from 7.6 percent in the previous three months. Escalating violence in the country's 25-year civil war, including bomb attacks in Colombo, curbed spending in the $27 billion economy.

Transport Costs

Sri Lanka's central bank has also kept monetary policy tight by reducing the amount of cash in the banking system and controlling credit demand.

Credit growth in Sri Lanka's private sector slowed to 15.1 percent in April from a year earlier, the lowest level since the end of 2003, according to the central bank. June's higher inflation rate was expected and due to an increase in fuel and transport costs in May, the central bank said.

Railway, education, health and postal employees stayed away from work July 10 to demand a 5,000 rupee ($46) monthly pay rise.

Sri Lanka's inflation may slow to 14 percent by the end of this year, central bank Deputy Governor W.A. Wijewardena said May 15. The increase in prices will ease to “around 8 percent'' by the end of 2009, he said.

The central bank said in January it was targeting annual inflation of about 10 percent for 2008.

Source

Comments Off

July 9, 2008

Trinity Hunt acquires Castlewood Treatment Center

Filed under: business — Tags: , — Professor @ 9:45 pm

Trinity Hunt Partners, a Dallas-based private equity firm, has bought St. Louis-based Castlewood Treatment Center, an acute eating disorder treatment services facility, the firm said Wednesday.

Trinity Hunt partnered with Mark Schwartz and Lori Galperin, directors of Castlewood, to expand the treatment center, which has a waiting list of more than double its capacity of ten patients.

Trinity Hunt declined to disclose how much the acquisition cost, but the firm specializes in buying middle-market companies with enterprise values between $15 million and $150 million in the health-care, business services, niche manufacturing, aerospace services, media and consumer products industries, according to the company.

Trinity Hunt's investment in Castlewood, which employs 35 people, represents the firm's entrance into behavioral health services, making a $25 million commitment to this strategy. Trinity Hunt does not plan to lay off any workers, said Elizabeth Cornelius, a spokeswoman for the firm.

"The partnership with Trinity Hunt will provide the expansion and development of Castlewood's program, which focuses on intensive treatment for clients with acute physical and psychological conditions," Galperin said in a statement no fax payday loan.

"The eating disorder and trauma sectors are currently underserved by the health-care industry," Schwartz said in a statement. "Looking forward, we plan to open similar facilities in areas of the country with the greatest need to help improve quality of care for those suffering from eating disorders."

Located on 15 acres surrounded by a state park in suburban St. Louis, Castlewood offers a continuum of care for anorexics and bulimics through residential treatment, day treatment and intensive outpatient services.


kvolkmann@bizjournals.com


Source

Comments Off

July 6, 2008

Steel Urges Caution on Expanding Safety Net for Banks

Filed under: finance — Tags: , — Professor @ 3:51 pm

U.S. Treasury Undersecretary Robert Steel urged caution when it comes to expanding the federal safety net to financial firms that don't take consumer deposits.

“I think to pull too many other institutions into that arena is a mistake,'' Steel said today during a panel discussion at an Aspen Institute conference in Colorado.

The remarks illustrate Treasury concerns about any regulation that might encourage reckless behavior as it considers proposals that would allow for an orderly dissolution of non-deposit taking financial firms that run into trouble.

Treasury Secretary Henry Paulson, in a speech earlier this week in London, called for regulatory changes in the U.S. that would allow financial firms to go out of business without threatening market stability. He identified a legal gap that leaves unspecified how to deal with failures of companies that don't take deposits, such as investment banks.

Federal Deposit Insurance Corp. Chairman Sheila Bair has urged that an agency be given power to take over and liquidate investment banks in an orderly manner. The FDIC has that power over lenders whose deposits it insures.

“If we over-prescribe regulation, we're going to reduce market discipline, which has the moral-hazard effect of encouraging people to take risk because they think they'll be bailed out,'' Steel said today.

U.S. regulators and legislators are debating plans to alleviate the yearlong credit crisis that has caused $402 billion of writedowns and credit losses worldwide. Paulson has proposed giving the Federal Reserve broader powers as a “macro- stability regulator.''

House Testimony

Paulson and Fed Chairman Ben S. Bernanke are scheduled to testify July 10 before the House Financial Services Committee on financial-market regulation http://payday-z.com. The two officials will also respond to lawmakers' questions about the Fed's decision in March to agree to take on about $30 billion in illiquid Bear Stearns Cos. debt and open lending to investment banks.

Other speakers on today's panel said regulators should be careful about spelling out what types of institutions they will bail out and when.

“It is a good idea to have it be really unclear as to whether the Fed is going to save something or not,'' said William Mayer, who was CEO of First Boston until 1990 and is now a partner at Park Avenue Equity Partners in New York. “The worst thing we could do is say here are the commandments, and right here is where we stop. I don't believe you'd want to do that.''

`Uneven' Progress

Steel said he expects financial markets to make “uneven'' progress as they recover from the subprime mortgage crisis.

“My instinct is that while we'll continue to make progress from here, that not everything is functioning normally, it'll be uneven,'' he said.

Steel said so-called monoline insurance companies, which expanded their traditional business of underwriting municipal bonds to include more complex securities, underestimated the risk associated with structured credit products.

“They basically sold insurance at what looks to be too cheap a price,'' Steel said. “The jury isn't completely out on this and the monoline insurance companies still have positive cash flow, and they're going into, basically pulling off the road and letting this unwind.''

Source

Comments Off

July 5, 2008

Spain, Ireland `Thrown to the Wolves

Filed under: money — Tags: , , — Professor @ 4:57 pm

Jose Mauricio Rodriguez Montalvo rents a room from his sister to help her afford her basement flat in Madrid as mortgage costs soar.

“She's crying over the Euribor,'' the 12-month money- market rate used to set Spanish mortgages, Montalvo, 28, said in an interview. “We're just praying it won't keep going up.''

For homeowners in Spain and in Ireland, struggling to stay afloat amid the wreckage of a decade-long real-estate boom, those prayers are going unanswered. The European Central Bank yesterday increased its benchmark rate to 4.25 percent to fight inflation, pushing both economies a step closer to recession.

The two countries are particularly vulnerable to higher lending costs because their housing industries account for about 10 percent of their economies, twice the EU average. Montalvo's family has seen its monthly mortgage payment leap 50 percent to 2,080 euros since the ECB began raising rates in December 2005.

“They have been thrown to the wolves,'' said Stuart Thomson, who helps manage $46 billion in bonds at Resolution Investment Management Ltd. in Glasgow, Scotland. `It's much easier to bring inflation lower if you're willing to have a recession in economies like Spain, Italy and Ireland.''

The Irish economy contracted for the first time in more than a decade in the first quarter. Growth in Spain was the slowest in 13 years in the period, and economists surveyed by Bloomberg News see a 45 percent probability of a recession, or two consecutive quarterly contractions, within the next year.

Balancing Act

The ECB has more than doubled its key rate in less than two years under its mandate to control prices. Euro-region inflation accelerated to 4 percent last month, the fastest in 16 years, on soaring food and oil costs, even with growth slowing.

Trichet yesterday signaled further rate increases weren't imminent as he strikes a balance between taming inflation and not choking economic growth. Still, while he acknowledged some countries will be harder hit than others by the rate increase, he said the bank must serve the entire euro region just as the Federal Reserve sets policy for all 50 U.S. states.

“If you concentrate on California or Florida, it is not at all like Massachusetts or Alaska,'' he said in an interview with Ireland's RTE radio. “It is the same in our case and we have to make a judgment what is good for the full body of the 320 million people'' in the euro area.

Fraction of Germany

Spain and Ireland make up less than 15 percent of the region's economy and their economies together are about half the size of Germany's. Growth in Europe's biggest economy accelerated in the first quarter to the fastest pace in 12 years and manufacturing was still expanding in June. Spanish industry contracted by the most on record.

Spanish Prime Minister Jose Luis Rodriguez Zapatero has called on the ECB to be “flexible'' in setting monetary policy payday advance online.

The interest rate increase is “more bad news,'' said Joan Burton, finance spokeswoman for Ireland's Labour Party. “Many families are now faced with the very real prospect of negative equity, which has serious economic and social consequences.''

The Euribor has risen almost 30 basis points since June 5 when Trichet first signaled higher rates. That made new mortgages more expensive and will make existing ones costlier as 98 percent of Spanish home loans and around 80 percent in Ireland are on a variable rate. The jump in costs has sapped demand for housing.

Housing Slump

Home starts in Spain plunged 70 percent in March from a year ago and dropped around 60 percent in Ireland. The slowdown prompted Dublin-based realtor Lisney to lower salaries by 10 percent for its 170 workers. The Irish unit of CB Richard Ellis plans to cut around a 10th of its workforce.

“Transactions have dried up,'' said Guy Hollis, managing director of CBRE in Ireland. “It's not going to last forever, but we have to be prudent.''

The building boom going bust is tarnishing a decade of gains. Ireland's economy has grown the most in the euro area since monetary union in 1999, while Spain created more than a third of new jobs in the region.

After years of “inappropriately low'' interest rates, Spain and Ireland are now feeling the “hangover,'' said Alan Ahearne, a lecturer at Ireland's National University and a former economist at the Fed.

Earnings Outlook

Irish banks including Allied Irish Banks Plc had their 2008 earnings estimates cut by Merrion Stockbrokers yesterday because of expectations for deteriorating credit quality.

The decade-long expansion does leave Spain and Ireland with resources to ease the pain of the slowdown. Zapatero's government will use a budget surplus of 2.2 percent of gross domestic product to finance 18 billion euros of measures to prevent defaults and aid unemployed construction workers.

Ireland, with the second-lowest government debt in the euro area after Luxembourg, will maintain a 184 billion-euro infrastructure investment plan.

That may not be enough to buffer the hard landing. The Spanish downturn destroyed 75,000 jobs in the first quarter when the unemployment rate jumped the most in three years to almost 10 percent. Ireland's jobless rate rose to a nine-year high of 5.7 percent in June, according to figures published today.

“Central banks are paid to cause a recession now and then,'' said Fortis Investments Chief Investment Officer William De Vijlder. “Maybe it's a shock to put it like that, but that's reality.''

Source

Comments Off
Newer Posts »

Powered by WordPress