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Why Ireland remains an issue It looked yesterday like the leprechauns were closing in on the pot o' gold. They still are, yet the banshees are back in the market as investors fret over the hard path ahead.
Ireland is reluctant to take a bailout to deal with its debt troubles and embattled banks, though admits it will, fearing the erosion of its sovereignty and what any strings attached will mean to its coveted low corporate tax regime, Globe and Mail correspondent Eric Reguly reports today.
"Although Ireland's central bank may now be engaging in the required dialogue to rescue the nation's finances, traders seem exceptionally wary of the path ahead and with various spats looming - such as questions over the country's incredibly low corporation tax rates - the debate could drag on for some time yet," said Anthony Grech, the head of research at IG Index.
Irish officials are talking terms with a joint mission from the European Union and the International Monetary Fund, and other governments in the euro zone group are pressing Dublin to act as quickly as possible to calm fears. The finance minister of Greece, for example, the country where Europe's debt crisis began, warned today that "time is of the essence."
Markets seem to agree.
"Talk of 'substantial contingency capital funding, for Ireland's banks by the Irish finance minister have also served to soothe frayed nerves in the investment community and the bond markets," said CMC Markets analyst Michael Hewson.
"However we've been here before earlier this year with Greece, with the apparent promise, or expectation, of imminent action, and then nothing.
"Furthermore there is no guarantee that Ireland would accept any money without certain guarantees about non interference in its ability to set its own tax rates, which some European ministers have stated is up for grabs.
"Event risks around this still remain, and it remains highly unlikely that markets will settle down properly until after the Dec. 7 when the Irish budget is due to be voted upon in the parliament. "
Are Portugal, Spain next? Observers of the European debt crisis are increasingly speculating that, once Ireland's out of the way, Portugal and Spain could be the next focus.
They, too, have denied they need help, but economists and others wonder when the next shoe might drop, though there are some encouraging signs.
"Lower Irish yields in the secondary market would help others on the euro zone fiscal sick list borrow at more favourable rates, by demonstrating that the greater Europe is willing to act at the point of crisis," said Avery Shenfeld of CIBC World Markets.
The New York Times reports today that a divided Portuguese government has rattled investors by allowing spending to rise over the past several months and has not gone far enough on reforms.
"We're walking on a razor's edge here," Antonio Nogueira Leite, a professor and former treasury secretary, told the newspaper.
"The more the Irish have trouble, the bigger the likelihood we will need help. But if we had done what we should have done four months ago, we would have been separated from the Irish problem."
So, asks Mr. Shenfeld, why worry about the fate of a tiny country like Ireland?
"Because it is just a peek as to what still lies ahead economically for larger Spain, which along with Portugal could be the bond-market-vigilantes' next target. Spanish debt risks represent a much heavier cloud over Europe's other banks, and that country could need a much larger backstop loan if it fails to hit its deficit targets. All good reasons why, at least until the dust settles, it's worth paring positions in the euro."
What's the real price risk? Are fears of inflation in the United States overblown, and is deflation still the real risk? Capital Economics believes so.
Some critics have attacked the Federal Reserves $600-billion (U.S.) quantitative easing program, in part over concerns that it will fuel inflation. The initiative is aimed at driving down longer-term interest rates by buying longer-term Treasurys, and the hope is that it will spur lending and buying.
There aren't signs of inflation in the U.S. at this point, and, said Paul Dales, U.S. economist at Capital Economics in Toronto, "nothing could be further from the truth" when it comes to questions of the Fed plan driving up inflation to uncomfortable heights. The Fed itself is on guard against deflation, and is trying to lift the inflation rate.
"The concern is that inflation will move higher over the next few years," Mr. Dales said. "But a closer look at the inflation figures suggest that is unlikely. In fact, deflation, rather than inflation, is the real risk.
While the so-called core rate, which strips out volatile items, has stabilized for services, that of goods has room to decline further, he said.
Mr. Dales noted that the price of autos, for example, for in October for the second consecutive month. Coupled with that is the fact that core inflation for goods has not yet completely tracked the decline in its corresponding measures at the producer level.
If core services inflation isn't on the rise, and the reading on the goods side is headed for a further drop, the "inescapable result" will be a decline in total core inflation. Considering that that reading is now at 0.6 per cent, it's possible it could dip below zero.
"Over all, comments that the Fed is 'playing with inflation' and that inflation doesn't need to be 'pushed higher' are misguided," Mr. Dales wrote.
"The truth is that the U.S. economy is not far away from outright deflation. That's why the Fed's asset purchases are completely justified.
"If anything, the Fed should be criticized for not buying more assets. We fear that $600-billion of asset purchases will not be enough to reduce the large amount of spare capacity and prevent at least a short bout of deflation."
Bernanke rejects critics' arguments For his part, Federal Reserve chairman Ben Bernanke was firing back at his critics today, saying the central bank's initiative was justified.
"The best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar, as well as to support the global recovery, is through policies that lead to a resumption of robust growth in a context of price stability in the United States," Mr. Bernanke told a conference in Frankfurt, according to Reuters.
Mr. Bernanke also took on Beijing over its currency policy.
While he didn't cite China specifically - though it doesn't take a rocket scientist to know what he was talking about - the central bank chief also said that "currency undervaluation by surplus countries is inhibiting needed international adjustment and creating spillover effects that would not exist if exchange rates better reflected market fundamentals."
China shoots back, too China's having none of it. Beijing's foreign ministry, in a statement on its website today, not only told the United States to shut up, but accused the U.S.-China Economic and Security Review Commission of a "Cold War mentality," according to The Associated Press.
The commission said in a report this week that China is deliberately holding down the value of the yuan to boost its exports. The U.S. has a swollen trade deficit with China, and has urged Beijing many times to allow the currency to appreciate.
"We urge this so-called commission to stop interfering in China's internal affairs and instead exert greater efforts to build mutual trust and co-operation between China and the U.S.," Foreign Ministry spokesman Hong Lei said in the statement.
China boosts reserve requirements China's central bank boosted reserve requirements for the country's banks again today, trying to keep a lid on credit, though it didn't hike interest rates as some had expected, and still fear.
The move by the People's Bank of China is the latest in a string of such moves. It has boosted that requirement before, and it has raised its key lending rate, as well as taking aim at rising food prices, the driver of the country's inflation rate.
"Beijing seems increasingly concerned about the inflation outlook and is willing to use a wide range of policy tools to get liquidity and price pressures under control," said strategists at RBC Dominion Securities.
The half-a-percentage-point increase in the required reserve ratio amounts to some 350-billion yuan in terms on the banks' ability to lend, said Mark Williams, senior China economist at Capital Economics in London.
"Another interest rate move is only a matter of time now that the government has made taming inflation its top priority," Mr. Williams said. "Food prices have risen further in the first half of November. We now expect a second benchmark interest rate hike next month."
Ontario has far to go on deficit Ontario has a long way to go in addressing its fiscal issues, economists say, noting that the economy is softening after a strong post-recession bounce.
Their comments followed the release yesterday of the province's fiscal update, in which Finance Minister Dwight Duncan slashed the projection for the 2010-2011 deficit by $1-billion to $18.7-billion, but made little changes to its revenue and spending goals, and projected budget shortfalls, for the following two fiscal years.
"Over all, this update did not take the opportunity to make a dent in the challenging longer-term path back to a balanced budget by fiscal year 2017-2018," said BMO Nesbitt Burns economists Michael Gregory and Robert Kavcic.
The BMO economists noted the pullback in Ontario's economy, projecting a "below-average growth profile" for the next two years as the strong Canadian dollar and soft demand in the United States hits export growth.
Stronger economic growth, higher non-personal tax revenues and lower debt expenses are helping pull down Ontario's deficit this fiscal year," they said.
"Unfortunately, the deficit improvement theme does not extend to future years, despite continued better-than-projected economic performance and lower-than-projected debt charges. A downwardly-revised tax base from last year and lower projected transfers from the federal government eat away at these windfalls. But this begs the question: Should they be allowed to?"
The two economists added that the mantra "Make hay while the sun shines" should accompany any credible deficit reduction plan, and that an election is in the offing.
"Deficit-friendly revenue and expenditure surprises should be allowed to fully flow to the bottom line. As for negative surprises, that's what 'contingencies' should be used for. Net new spending should be funded by ending the lowest priority programs. With a provincial election pending in less than a year, there is a temptation to only pay lip service to this mantra. We hope next spring's budget doesn't lead them into further temptation."
Toronto-Dominion Bank economist Sonya Gulati also wondered about the long-term outlook, noting that while Ontario's projections suggest the province is on track to eliminate the budget shortfall by the 2017-2018 fiscal year, a drawn-out period of deficit reduction can carry "a significant number of risks," with the "heightened probability" of economic and financial surprises down the road.
"With details as to how the government plans to achieve its 2-per-cent annual program spending growth rate target lacking to date, much of the heavy lifting required to get back to positive territory is still to come," she said.
Bailout express? Iceland Express, a nifty airline that flies to several locations, is adding flights to Dublin in the second half of next year, prompting an obvious joke about an express flight to ferry IMF officials from one basket case to another.
Iceland is, of course, the poster child of melted-down economies. It had its moment of fame long before Greece sparked the euro crisis.
The airline announced today that, along with Dublin, it will add flights to Belfast and Edinburgh next year as well. It's worth noting that it doesn't fly to Athens or Lisbon. But among its varied offerings, Winnipeg is its only Canadian destination.
From today's Report on Business
- Churchill hydro deal signals era of Atlantic co-operation
- Investors buy into GM's return
- Adhocracy: Tapping social media for a cause
- Canadian goal, global ambitions
And, read our Streetwise blog and Your Business section.