CLIPPING DE MATRIAS ECONMICO-FINANCEIRAS E INTERNACIONAIS 13/07/2012 FINANCIAL TIMES Matrias: - Chinese economic growth slows to 7.

7.6% - Emerging markets more positive on economy - US jobless claims fall to 350,000 - Athens cabinet pressed to deepen cuts - Italy sells debt despite downgrade - Rate cuts exert pressure on euro - UK fiscal outlook clearly unsustainable - Troika says Dublin on track to meet targets - Banks Libor costs may hit $22bn
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Chinese economic growth slows to 7.6%

By Simon Rabinovitch in Beijing Chinas growth fell to 7.6 per cent in the second quarter, its slowest since early 2009, as a property market downturn and weak exports weighed on the worlds second-biggest economy. Over the past two months, as evidence of the slowdown has mounted, the government has shifted its policy to a pro-growth stance, which analysts say is likely to bring about a recovery in the second half of the year. The expectation for weakness in the second quarter was pretty strong. But the investment number is the surprise. There appears to have been a significant pick-up. That is policy beginning to work,

said Ken Peng, an economist with BNP Paribas in Beijing. We are looking for a small rebound in the third quarter and a bigger rebound in the fourth quarter. The year-to-date investment figure jumped from 20.1 per cent in May to 20.4 per cent last month, an indication that the increase in investment in June alone must have been considerably stronger, following on the heels of the governments moves to stimulate the economy. The Chinese central bank cut interest rates last week, the second time in less than a month. Premier Wen Jiabao has also said that the government will look to increase public investment to stabilise the economy. A steep drop in inflation, to just over 2 per cent from last years high near 7 per cent, has cleared the way for more aggressive policy easing. The latest bank lending figures, published on Thursday, confirmed that the government is clearly trying to support growth. New loans reached Rmb920bn ($114bn) in June, up from Rmb793bn in May and more than expected. Yet officials have also repeatedly vowed that they will not unleash a massive stimulus programme as they did in late 2008 when the global financial crisis erupted. That boom in spending and bank lending fuelled debt worries that China is still trying to contain as well as a property bubble that it has been trying to deflate. Mr Wen has also been adamant that the government will not relax the measures that it has used to dampen property speculation, fearful that a big rebound in already lofty housing prices could ensue. If the second quarter does indeed prove to be the trough of this economic cycle for China, commentators who have described the current downturn as a soft landing would have some vindication. The peak-to-trough drop in growth would be 4.5 percentage points from 2010 to now. That contrasts with a plunge of 8 percentage points in the previous downturn, from 2007 to the start of 2009. The Shanghai Composite, Chinas main stock market, initially rose after the release, but was soon trading flat, while in Hong Kong, the Hang Seng index was slightly higher.

Emerging markets more positive on economy

By Martha Shanahan in Washington People in emerging economies are optimistic about their countries prospects, a contrast with the gloom enveloping the western world as the global financial crisis continues to put a damper on sentiment, according to a new poll from the Pew Research Center. While most of Europe and the US has remained exceedingly glum since the 2007/2008 financial crisis, the Pew survey found a striking contrast in China, Brazil, India and Turkey. People in these countries are twice as likely as Americans and more than three times as likely as Europeans to think economic conditions in their countries are good, the survey said. They were also more likely than counterparts in the US and Europe to say they are financially better off now compared with five years ago. In eight out of the 15 countries with comparable data from previous years, those surveyed were more negative about the economy than they were in 2008. In Europe, only Germans were positive generally about their economy. German confidence in the economy floats above the rest of the continent at 73 per cent as the countrys economy remained relatively strong while other parts of Europe suffer a devastating debt crisis. Just 2 per cent of Greeks and 6 per cent of Spaniards and Italians thought things were going well. In the US, the worlds largest economy, less than a third of Americans were positive about the state of the economy, a figure that was up from last year but has fallen overall since before the beginning of the US economic meltdown, the survey said. Americans were, however, twice as confident in their family finances as they were in the national economy. The Chinese were the most upbeat among those from emerging markets. A majority said they were satisfied with current national economic conditions and 69 per cent said they were content with their personal financial situation. This makes China, which has been combating an economic slowdown and labour market worries, the only surveyed nation whose citizens remained positive about their economic circumstances over the past

decade. Relative to the countrys population, the Chinese respondents were disproportionately urban. The survey also found that the financial crisis dealt a blow to confidence in capitalism, with the most doubters in Mexico and Japan. Worldwide, support for capitalism weakened in nine of the 16 countries for which there was trend data since 2007. The survey, conducted by the Pew Research Centers Global Attitudes Project, polled 26,210 people in 21 countries from March 17 to April 20 2012. The margin of error varied between countries, and ranged from 3.2 to 5.2 percentage points.

US jobless claims fall to 350,000

By Shannon Bond in New York US jobless claims fell to 350,000 last week, the lowest level in more than four years, but unusual seasonal factors may have fuelled the unexpected sign of improvement in the labour market. The drop of 26,000 from the previous week surprised economists who had predicted a slighter decline to 372,000. However, the labour department noted that some of the decrease may be due to fewer temporary lay-offs in the auto industry. Ford and Chrysler announced earlier this year that they would keep factories running in July to meet strong demand. That may have led fewer auto workers to file for unemployment benefits, suggesting that the apparent strength may not reflect a deeper improvement in employment. John Ryding and Conrad DeQuadros at RDQ Economics said: The claims data in early July are far less useful than normal in judging the underlying state of the labour market. It will take two or three weeks for this distortion to the claims data to unwind, which means this report will be of little use in forming early opinions on the July employment data. The four-week moving average of claims, which smooths out volatility, fell 9,750 to 376,500. The pace of hiring at US companies has slowed in recent months amid uncertainty over the global economy and the strength of the US recovery. Employers added just 80,000 jobs in June, continuing a run

of weak employment figures in the second quarter after a pickup in job creation at the beginning of the year. Continuing claims fell 14,000 to 3.3m in the week ending June 30, while the number of people who have expended traditional benefits and are now receiving emergency assistance fell to 2.6m in the week ending June 23.

Athens cabinet pressed to deepen cuts

By Kerin Hope in Athens Greeces technocrat finance minister pressed cabinet colleagues on Thursday for immediate spending cuts to put the 2012 budget back on track before talks begin with international lenders on a new medium-term reform programme aimed at keeping the country inside the eurozone. Yannis Stournaras gave ministers responsible for some three-quarters of budget spending a week to come up with cost-cutting measures, including reductions in military procurement and further cuts to health and local government spending. If sufficient savings could be identified, a senior finance ministry official said, it might be possible to avert a further 12 per cent wage cut for armed forces personnel, judges, academics and clerics, agreed with creditors but opposed by politicians in the new three-party coalition government. If we are able to propose alternative sources of financing for the budget, they may be accepted by the troika [the European Commission, the European Central Bank and the International Monetary Fund], the official said. The effort to identify new sources of funding ahead of the troikas return on July 24 highlights Greeces increasingly desperate fiscal position, with the economy now forecast to contract by as much as 6.9 per cent this year, against earlier projections of 4.5-4.7 per cent. Two successive election campaigns derailed the budget, leaving Athens to cover a 3bn funding gap equal to 1.5 per cent of gross domestic product before it can expect to receive any further disbursements from its second bailout package.

The government also has to push through legislation extending a special property tax for another year and raising prices for heating fuel to the same level as petrol, under a scheme to crack down on widespread fuel smuggling estimated to cost the budget more than 2bn a year in lost tax revenues. Greece missed a 2.4bn loan disbursement due in June because of political uncertainty, while another 4.1bn tranche due next month is likely to be delayed until September, pending a deal on the 2013-15 programme and a satisfactory progress report from the commission and the IMF. The delay will add to Mr Stournarass problems as revenues are lagging budget targets by about 1bn, raising concerns about whether the government will have enough cash to pay August pensions and salaries. However, European officials have given assurances that in spite of delays in making transfers to the budget, funds will be available to cover a 3.2bn sovereign bond repayment due in August. Even if the government implements the additional spending cuts requested by creditors, it will still face problems meeting this years budget deficit target of 6.7 per cent of national output as the economy continues to contract. The jobless rate rose from 22 per cent to 22.5 per cent in April, with unemployment among young workers reaching 51.5 per cent, according to preliminary figures released on Thursday by Elstat, the independent statistics agency. Regardless of talk about renegotiating the bailout terms, there is a strong argument for the troika to relax the deficit target to reflect the ongoing domestic depression, said an Athens-based economist.

Italy sells debt despite downgrade

By Guy Dinmore in Rome and Mary Watkins in London Italy on Friday managed to sell 5.25bn of medium and long-term notes at the top of the Treasurys planned issue range, as domestic banks continued to support government auctions despite the downgrade of Italys ratings.

Rome sold 3.5bn of three-year notes at an average rate of 4.65 per cent compared with 5.30 per cent at the previous sale in June. It was the lowest level since May. The Treasury also sold a range of other off the run bonds, with varying maturities. It sold 766m of seven-year bonds at 5.58 per cent, 600m of 10-year paper at 5.82 per cent and 384m of 11years at 5.89 per cent. The bid-to-cover ratio, which measures demand, was 1.7 times for the three-year paper and 2.3 times for the 11-year paper. Divyang Shah, global strategist at IFR Markets, said Italys ability to sell at the top end of the range was not surprising, given continued support from domestic banks. The real action is at the front end of the curve where we are seeing Holland and Finland, for example, with negative yields at two years, he said, as investors continue to gravitate towards assets in the core of the eurozone. In the secondary markets, yields on Italian benchmark debt were trading up 10 basis points at 6.01 per cent following the auction, while Spanish 10-year bond yields were up 3 points at 6.66 per cent. Moodys cut Italys rating by two notches to Baa2, leaving it just two grades above junk status on Thursday night, citing increased risks of higher borrowing costs in part due to contagion from Spain and a possible Greek exit from the euro, and the absence of foreign buyers of Romes debt. Italys deteriorating economic outlook was also a factor, with Moodys predicting a fall in gross domestic product of 2 per cent this year, in line with International Monetary Fund forecasts, putting pressure on budget deficit targets. Keeping Italy on negative outlook, Moodys said: Italys government debt rating could be downgraded further in the event there is additional material deterioration in the countrys economic prospects or difficulties in implementing reform. It said the key driver in the downgrading was Italys increased susceptibility to event risk, referring to an increased likelihood that Spain would require further external support and the increased probability of a Greek exit from the euro. Moodys also questioned the resources available in the eurozones bailout funds to provide a backstop to Italys debt of 1.95tn.

Mario Monti, prime minister, has not ruled out the possibility of applying for purchases by the funds of Italys debt on the open market in an effort to cap its interest rates. While acknowledging the strong commitment to structural reforms by Italys technocrat government which had the potential to materially improve Italys long-term prospects, Moodys said its negative outlook reflected the view that risks to implementing the reforms were substantial. It noted austerity and reform fatigue among the population as well as political uncertainty as Italy draws closer to elections early next year. Some analysts questioned Moodys arguments, suggesting the rating agency was behind the curve. But they also expressed concern over how long Italys already stretched banks will continue to make up for the absence of foreign investors. Barclays said in a note that it found the agencys decision somewhat perplexing, noting that Mr Montis government had the continued support of the main parties in parliament and that early elections looked unlikely. Barclays also argued that recent decisions taken in Brussels and by the Spanish and Greek governments went in the right direction of giving more stability to the euro area, while Italy was still maintaining a primary budget surplus before debt interest payments. Giorgio Squinzi, head of Confindustria, Italys main business association, said: This is just Moodys opinion. Italy and its manufacturing base was much stronger than Moodys suggested, he added. Nicholas Spiro, a sovereign debt analyst, said the result of Fridays auction was all the more impressive given Moodys downgrade. But he was downbeat over Italys prospects. Italy is caught in a pernicious circle in which the perennial lack of growth, the heavy public debt burden, mounting political uncertainty and the absence of a credible backstop for Italian debt are all feeding on each other, Mr Spiro said.

Rate cuts exert pressure on euro

By Alice Ross The euro fell below $1.22 for the first time since 2010 as analysts said last weeks rate cuts by the European Central Bank were putting significant downward pressure on the single currency. The euro hit a session low of $1.2165, extending its losing streak after the ECB cut headline rates 0.25 per cent last week and, more importantly, cut the deposit rates it pays to European banks by 25 basis points to zero. Analysts said the resulting disillusionment with the euro, with money market funds restricting new investments, helped to explain why the single currency was falling even as Italys borrowing costs fell at an auction on Thursday. Chris Walker, foreign currency analyst at UBS, said: The euro has really dislocated itself from the wider markets over the past week. It points towards structural outflows out of Europe and weve seen some evidence of that. BNY Mellon said its trading desk had seen sharp outflows from the euro in recent days with the main beneficiaries being the Swiss franc and the US dollar. The dollar was broadly stronger after the release of minutes from the US Federal Reserves Open Market Committee showed a mix of views on monetary policy, damping expectations of a further tranche of socalled quantitative easing in the near future. The pound fell 0.5 per cent to $1.5427 while the dollar rose 0.3 per cent against the Swiss franc to SFr0.9841. The Australian dollar made large losses against the US currency, falling 1.2 per cent to $1.0126 following weak employment data. The Australian dollar was also weaker against the yen, falling 1.7 per cent to Y80.31, as the Japanese currency strengthened after the Bank of Japan announced only a small addition to its asset purchase scheme. The US dollar fell 0.6 per cent to Y79.27, the euro lost 0.9 per cent to Y96.64 and sterling dipped 1 per cent to Y122.29.

The Bank of Korea surprised markets with a 25bp rate cut to 3 per cent, citing downside risks to growth. The dollar rose 1.2 per cent against the won to Won1,154.

UK fiscal outlook clearly unsustainable

Reuters LONDON Britains long-run fiscal outlook over the next 50 years remains clearly unsustainable, despite the government making some progress in reducing current borrowing and public sector pension commitments, an official watchdog said on Thursday. The Office for Budget Responsibility said it expected public sector net debt to fall from 74 per cent of gross domestic product in 2016-17 to a trough of 57 per cent in the mid-2020s, before rising increasingly quickly to reach 89 per cent of GDP in 2061-62. This was better than its long-run forecast last year, when it predicted debt would total 107 per cent of GDP by 2060-61. However, the OBR said more needed to be done to put Britains public finances on a secure footing where total debt was not steadily rising in the long run. On current policy we would expect the budget deficit to widen sufficiently over the long term to put public sector net debt on a continuously rising trajectory as a share of national income. This is clearly unsustainable, the OBR said. Danny Alexander, deputy finance minister, said the OBR report vindicated the decision in 2010 by the new Conservative-Liberal Democrat coalition to make deficit reduction a priority. The OBR analysis makes it clear that our medium-term consolidation plan is essential to restoring long-term sustainability in the public finances, Mr Alexander said. A deterioration in the primary balance in 2016-17 worth 1 per cent of GDP could increase projected public sector net debt in 2061-62 to around 130 per cent of GDP. This shows the scale of impact if the medium-term consolidation was not achieved, he added.

Labour argues that the coalitions pace of deficit reduction is self defeating during Britains current recession, as it retards the growth also needed for Britains public finances to be sustainable.

Troika says Dublin on track to meet targets

By Jamie Smyth in Dubin Dublin remains on track to meet its fiscal targets under its bailout programme despite a challenging economic environment and higher than forecast spending in the health sector, the troika of international lenders has said. The European Commission, European Central Bank and International Monetary Fund said on Thursday Irelands programme implementation remained strong and fiscal targets for the first half of 2012 were met. However, it called on Dublin to tackle overspending in the health sector and forecast only modest economic growth for 2012 and 2013. Growth prospects for the remainder of 2012 and into 2013 remain modest, with weak trading partner growth dampening export demand despite further competitiveness gains, said the troika in its seventh review of Irelands bailout. Dublin is halfway through its EU-IMF bailout programme and has consistently received positive assessment from the troika. But on its latest review mission, which ended on Thursday, the troika called on government to rein in public expenditure. Irelands budget deficit remains the largest in the euro area, and it is essential that the authorities maintain prudent control of expenditure, including in healthcare, it said in a statement. Irelands Health Service Executive is 280m over budget for the five months to the end of May, prompting Dublin to order a review of health spending. Brendan Howlin, Irelands minister for public expenditure, said ministers had discussed the overspend in health with the troika during their review mission. The pressure point in health is clearly identified but I wouldnt exaggerate it the overspend is 2 per cent of the overall health budget, he said. We are committed to meeting the fiscal targets.

The troika also warned about Irelands very high unemployment rate and called for a strengthening of job activation programmes, which are designed to get people back to work. Separately, Irelands national statistics office announced a major revision of growth figures, which show the Irish economy grew by 1.4 per cent of gross domestic product in 2011 and not the 0.7 per cent that it previously forecast. The upward revision of the growth figure in the final quarter also means the Irish economy did not slip back into recession in the second half of last year as previously suggested by the office. However, the new figures show the Irish economy contracted 1.1 per cent in the first quarter of 2012, compared with the fourth quarter of 2011, due to a dip in net exports and personal expenditure. Michael Noonan, Irelands minister for finance, said the upward revision of the growth figures for 2011 was positive and meant the overall size of the economy was 2.5bn bigger than expected. He said this would have a marginal impact on Irelands deficit and debt figures, which were keenly followed by investors. Despite the contraction of the economy in the first quarter, Mr Noonan said he saw nothing in the figures that would make Dublin shift from its forecast of 0.7 per cent GDP growth in 2012.

Banks Libor costs may hit $22bn

By Brooke Masters in London and Alex Barker in Brussels Twelve global banks that have been publicly linked to the Libor raterigging scandal face as much as $22bn in combined regulatory penalties and damages to investors and counterparties, according to Morgan Stanley estimates. The analysis, which the authors admit is crude, assumes that 11 more banks will be penalised like Barclays, which paid $456m last month to US and UK authorities for attempting to manipulate the London Interbank Offered Rate, the benchmark for $360tn in derivatives, loans and mortgages. The calculation excludes the potential fallout from ongoing US and European Union cartel investigations, which could result in multibillion-dollar fines.

Joaqun Almunia, the EUs competition enforcer, will on Friday say the year-old EU cartel probes into interest rate derivatives linked to Libor and two similar rates known as Euribor and Tibor are one of his top priorities. Mr Almunia will say that the shocking Libor scandal represents some of the banking sectors most irresponsible behaviour of the past. Should his concerns be confirmed, he wants the punishment to prompt a change in culture in a banking sector hitherto largely untouched by cartel enforcement. European Commission cartel investigations take several years to complete, but can result in fines of up to 10 per cent of turnover. Under EU law, investigators simply need to demonstrate there was an attempt to form a cartel, rather than prove its exact effect on the product market. Morgan Stanleys analysis is the most detailed effort so far to quantify the potential damage from the scandal, in which Barclays admitted to lying on its submissions to the Libor rate-setting process. The estimated fines would cut 4-13 per cent off banks earnings per share for 2012, or 0.5 per cent off book value, Morgan Stanley said. The analysis also puts a value on the potential risk from class action lawsuits. Each of the banks named would pay an average $400m, with individual charges ranging from $60m to $1.1bn, depending on the size of their derivatives books. The analysis assumes most of the other 11 banks will admit to roughly similar behaviour and will not receive the same discount as Barclays for early co-operation. Some banks say privately that they do not have to cope with emails as stark as those sent by the Barclays traders promising bottles of Bollinger in return for specific rate quotes. But Peter Wright, a former enforcement lawyer, said: Barclays was not accused of conducting its business with a lack of integrity. If this is an allegation that is being pursued against other institutions ... the financial penalty would be substantially higher. Sandy Chen, analyst at Cenkos, has argued that banks could pay up to 2bn in potential damages for every 1tn of Libor-linked derivatives contracts if plaintiffs could show Libor was understated by 5 basis points for the entire four year period 2005 to 2009 covered by the settlement. Barclays reported 35tn in notional

interest rate contracts at the end of 2011, while RBS reported 39tn but Lloyds had just 2tn, he wrote.