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Back in March, at the time of George Osborne’s budget I suggested that the growth forecasts being suggested were little more than fanciful and that his budget calculations were therefore unreliable.  On 29th November, when the Chancellor next updates us on the deteriorating state of the economy, in his Autumn statement, he is not only expected to reduce his growth forecasts to around 1 per cent for 2011 from 1.7 per cent, but he is also likely to reduce growth forecasts for 2012 to 1.2 per cent from 2.5 per cent.  Whilst these targets look more realistic, they do not factor in a severe European slowdown as our largest trading partner grapples with an evermore vicious credit contraction. Consequently according to the Financial times, Treasury insiders have admitted that George Osborne’s hopes of eliminating Britain’s structural deficit by the end of the Parliament are looking less likely. This is likely to be an issue in the Autumn statement as the Office of Budget Responsibility accepts lower growth and this implies that austerity measures may have to stretch beyond the next election.  In the week the Labour Party claimed that this revelation means the coalition is on course to borrow an additional £109 billion, more than it planned over the course of the Parliament, although the figure is disputed by Ministers.  Due to the new forecasts the OBR are expected to say that it is very unlikely that the Government will close the structural deficit by 2014-15, as predicted in last year’s budget, or even by 2015-16, which was the Chancellors fallback.  It is understood that the Treasury is even creating contingencies in case the OBR says the deficit will not be closed in 2016-17. Weaker growth, higher unemployment and less ‘spare capacity’ in the economy are thought to be the main reasons for the downgrade, meaning that the Chancellor will not eliminate the structural budget deficit until at least 2017.  Just eight months ago, the Office for Budget Responsibility said it believed the Government was on target for 2015.  Indeed, in March, the OBR even suggested that the Chancellor would meet the mandate early.  Whilst the jury remains out, as so much depends on factors beyond the Chancellor’s control, Barclays Capital believes that the Chancellor’s secondary target for debt to be falling as a percentage of GDP by 2016 will be achieved, although just.  Barclays also expects unemployment to rise to 8.5 per cent and remain there until 2016, rather than fall to 6.4 per cent, which is the official line.  They also believe that public sector job cuts will total 500,000 above the OBR’s 390,000 prediction. Fears that the UK economy is heading back into recession were heightened by a leading economic think-tank on Monday when it said the outlook for activity had deteriorated for a seventh straight month. The Organisation for Economic Co-operation and Development (OECD) thoughts strengthen the charge made by Labour that the slowdown in the UK economy predated the intensification of the eurozone crisis. But the OECD report also showed Britain was not alone in experiencing a gloomier economic outlook, with the other six members of the G7 group of industrial nations – the US, Canada, Germany, Japan, Italy and France – all experiencing slowdowns. The darkening international picture will enable the government to argue that weaker growth, higher unemployment and a bigger budget deficit are the result of factors beyond its control. On Wednesday, in its quarterly inflation report, the Bank of England warned of a deepening risk of a double-dip recession in the next year, putting the changes at 1 in 4.  Mervyn King said that external factors were putting an “unwelcome drag” on the country, with a lack of a credible plan to tackle the eurozone crisis being the biggest risk to growth prospects.  He, however, lent his support to the Government’s austerity plan which has come under increasing attach as the economy teeters on the brink of recession and unemployment soars.  The Conservative led Government is slashing public spending over the next 4 years to help erode a record budget deficit that peaked at more than 10% of national output.  King said that Britain was on the right path to deal with its debt and rebalance its economy, with a combination of fiscal austerity measures and a 25 per cent fall in sterling’s exchange rate.  The Central Bank revised down its growth forecast both this year and next year to 1 per cent, down from 1.5 per cent and 2.2 per cent respectively.  In 2013-14 the Bank has predicted growth of 2.5 per cent and 3 per cent, which many in the City believe still remains unrealistic. More encouragingly, the Bank see British inflation falling from its current 5.2 per cent to nearer 1.5 per cent by the middle of next year and staying below the Bank’s 2 per cent target until at least 2014.  The implication of this is that rates are not moving any time soon and even opens the door for more potential quantitative easing.  This forecast has seen analysts suggest that there is potentially another £75 billion worth of quantitative easing on the way before February.  This will take the total bill of asset purchase, as the Governor prefers to call QE, to £350 billion, as the Bank looks to boost money supply in the economy. In the week Martin Weale, an external member of the Bank of England's monetary policy committee, said there is a "very strong case" for extending the central bank's quantitative easing policy next year unless the outlook improves and The FT quoted Weale as saying on Thursday that it was "perfectly possible" the economy was already contracting. King defended the European Central Bank’s refusal to mount a full scale rescue of Italy, saying it was the responsibility of European Governments to orchestrate a bailout for ailing member states.  King said calls for the ECB to buy hundreds of billions of Euros worth of Italian debt misunderstood the role of the Central Bank, which could have an unlimited capacity to print money, but only meagre resources to cope with losses on its investments.  Without a unified Government behind the Central Bank, as in Britain and the US, a Central Bank would be unable to invest in countries that could go bust.  King said “being a lender of last resort is a million miles away from the ECB buying sovereign debt of national countries, which is being used and seen as a mechanism for financing the current account deficits of those countries, which invariably, if things go wrong, will create liabilities for the surplus countries.  In other words, it will be a mechanism of transferring from the surplus to the deficit countries and I think that is what the European Central Bank feels, and with total justification that it is not the job of a Central Bank to do something that a Government could perfectly well do itself”.  King’s intervention in the discussion of how to resolve the solvency crisis in the Eurozone is unlikely to win friends in the French Finance Ministry, which has argued for an expansion of the ECB’s role in buying Italian bonds to stem the crisis. Angela Merkel, the German Chancellor, has made it clear that Berlin would resist further pressure for the Central Bank to take a bigger role in resolving the debt crisis saying EU rules prohibit such action.  Whilst her comments appear very similar to our own Chancellors, she went on to say the only way for countries such as Italy Greece and Portugal to regain their competitiveness and convince private investors that they can pay off their debts is for creditor nations to write off more of their investments. Mervyn King made his comments on the day that official figures showed that unemployment had risen to its highest level since 1996.  The Office for National Statistics said its comprehensive, internationally comparable measure of unemployment rose 129,000 in the 3 months to September to total 2.62 million, the highest level since 1994.  This lifted the unemployment rate up to 8.3 per cent, the highest rate since 1996 and compares with 8.1 per cent in the 3 months to August.  The number of unemployed people between 16 and 24 known as youth unemployment rose 67,000 in the 3 months to September to total 1.02 million, a rate of 21 per cent.  The widely watched claimant account measure of unemployment, which measures the number of Britain’s claiming jobseekers allowance, rose by 5,300 to 1.6 million, giving a jobless rate of 5 per cent. Overall, employment fell by 197,000 on the quarter and 109,000 over the year, to 29.07 million, the biggest drop for more than 2 years, showing that the private sector is not offsetting the jobs lost in the public sector.  Economists expect unemployment to continue rising, with predictions for a peak next year ranging from 2.6 million to 3 million. UK inflation fell more than expected in October, dropping to 5 per cent, as lower petrol and food prices outweighed further rises in energy bills.  The Retail Price Index, which includes mortgage costs and was traditionally used in pay settlements, also fell moderately to 5.4 per cent from 5.6 per cent in September.  The RPI measure of inflation was expected to decline to 5.5 per cent, whilst the CPI figure was expected to fall to 5.1 per cent. The supermarket price war, which is the main reason for the easing back in inflation during October, is another sign of things to come, as real incomes continue to be squeezed in a way that has not been seen since the slump of the early 1980s and this is having a direct effect of consumer spending power.  Retail Sales numbers in the week were surprisingly strong in October, with volumes rising by 0.6 per cent from September and up 0.9 per cent from October last year, the strongest annual gain for six months.  Economists had been expecting a drop of 0.2 per cent on the month and for the numbers to be flat on the year.  Further investigation, however, shows that one of the main reasons for this increase in volumes was heavy discounting as Christmas came early and shops looked to entice the Christmas shopper with early bargains.  I anticipate that this Christmas rush will quickly run out of steam as austerity makes this year more frugal than it has been for a good few decades.  According to an opinion poll released by ComRes in the week, two thirds of Britons believe that the UK is heading for another recession as the Eurozone crisis and weak consumer confidence continue to damage the economy.  The poll, which was conducted on behalf of ITV News, found that 59 per cent of people are already cutting back on their spending, a fact that will have worrying consequences for the economy as household spending accounts for 65 per cent of Gross Domestic Product in the UK. Nationwide's consumer confidence index dropped to 36 from 45 in September, the lowest since the survey began in May 2004."A wave of disappointing economic news at home and ongoing uncertainty surrounding the Euro crisis has dealt a heavy blow to sentiment," said Nationwide's chief economist Robert Gardner. U.K. gross mortgage lending totalled £13.1 billion in October, a slowdown from September in a further sign that both consumers and banks are losing confidence amid the euro-zone debt crisis, figures from the Council of Mortgage Lenders showed on Friday. Gross mortgage lending was £13.7 billion in September and £11.6 billion in October 2010. Britain’s top 5 banks fell almost £1 billion short of fulfilling their commitments to lend money to small businesses in the first 9 months of the year.  Under last year’s Project Merlin agreement with the Government, Barclays, Royal Bank of Scotland, Lloyds Banking Group, HSBC and Santander pledged to increase lending to £76 billion for such companies in 2011.  They were due to hit £57 billion by the end of September, however, new data from the Bank of England in the week showed that the bank actually lend £56.1 billion to small businesses in the first 9 months of the year.  However, the figures also showed that banks were on track to meet their commitment to £190 billion of gross lending to all business this year, 50 per cent more than 2010.  They lend £157.7 billion by the end of September, surpassing their target by 11 per cent.

 

Despite goading from the White House, a US congressional "supercommittee" remains deadlocked on creating a deal to cut $1.2 trillion from government deficits over 10 years. The 12-member panel has until Monday to make public at the very least a tentative plan and until Wednesday to approve it or risk triggering very painful automatic cuts shared between some social programs and military spending. Defence Secretary Leon Panetta has warned that the automatic cuts, which would kick in come January 2013, would pose a national security risk by leaving the Pentagon weaker, slower and smaller than at any time since World War II. The committee, created in an August deal on raising the US debt limit, is frozen over Republican refusals to back Democratic calls to raise taxes on the very wealthy in return for cuts to cherished social safety net programs. Republicans have rejected tax rises on the wealthiest Americans on grounds that they would cripple job-creating investment even as the brittle US economy suffers under stubbornly high unemployment of more than nine percent. On Wednesday, adding pressure to situation US government debt passed the $15 trillion mark, roughly equal to 99 percent of the size of the total US economy, level economists consider worrying. Any deal would require majority approval on the committee, which is evenly divided between Democrats and Republicans, after which the full Congress would need to adopt it by December 23 to avoid the automatic cuts. The index of leading economic indicators jumped in October, suggesting some momentum building in the U.S. economy,according to data released on Friday. The leading index increased 0.9% last month after increasing 0.1% in September; it’s sixth consecutive increase in the index. The October increase was better than the 0.6% gain expected by economists. A gauge of U.S. home builders' sentiment rose to the highest level in 18 months during November as builders started to regain confidence in a troubled part of the economy. The National Association of Home Builders said on Wednesday that its housing market index surged to 20 from a downwardly revised 17 in October, reaching its highest point since May 2010. The results marked the second-straight monthly increase and were better than expected. Economists had forecast a reading of 18. Permits for housing construction climbed in October, indicating an upturn in optimism among homebuilders. The number of permits for future housing construction jumped to a seasonally adjusted annual rate of 653,000 last month, up 10.9% from the revised rate of 589,000 in September, higher than the expected 603,000. Housing starts, the number of new homes being built, edged down 0.3% to an annual rate of 628,000 units in October, down from a revised 630,000 in September. Forecasters had expected a rate of 604,000. The Mortgage Bankers Association reported Home foreclosure filings rose in the third quarter, as recent declines in the rate of new foreclosures came to an end, reported that foreclosures started for 1.08% of outstanding home loans, up from 0.96% in the second quarter. The jump in foreclosures came even as the rate of homeowners who are delinquent on their mortgages fell. Those only 30 days late making payments improved to 3.19%, the lowest level since the second quarter of 2007. And those 60 and 90 days or more late in making payments also declined, bringing the percentage of delinquent loans not in foreclosure to under 8%. The MBA said increased foreclosure filings by several big lenders led to the upturn in homes in foreclosure. The cost of living in the US declined in October, easing concerns about inflation but not settling a debate on whether the Federal Reserve should pursue further stimulus measures. Consumer prices fell a seasonally adjusted 0.1% from September, led by a decline in gasoline and other energy costs, the Labour Department said on Wednesday. Underlying inflation which excludes volatile energy and food costs volatile and is considered a better indicator of price trends by the Federal Reserve, rose by 0.1% in October. Annually consumer prices rose by 3.5% in October, above the Fed's comfort zone of close to 2.0%. U.S. industrial production climbed 0.7% in October while industries used 77.8% of their capacity. Manufacturing output in October climbed 0.5% on stronger production of autos, electrical equipment, appliances, and aerospace equipment. Factory output had increased only 0.3% each of the previous two months. U.S. retail sales rose in October as Americans shopped at electronics stores and on the Internet. Retail and food services sales climbed 0.5% last month from September to an adjusted $397.67 billion, the Commerce Department said on Tuesday, following a strong 1.1% gain in September. Economists had forecast only a 0.1% increase in October. Fitch Ratings has warned that it may reduce its "stable" rating outlook for U.S. banks with large capital markets businesses because of contagion from problems in troubled European markets. "Unless the Eurozone debt crisis is resolved in a timely and orderly manner, the broad outlook for U.S. banks will darken," Fitch said. "The risks of a negative shock are rising." On October 13, Fitch placed debt ratings of seven global banks with large trading operations on negative watch. The banks were Goldman, Morgan Stanley, Barclays, BNP Paribas, Credit Suisse , Deutsche Bank and Societe Generale. On Wednesday, the Treasury Department said China and other major foreign investors in September boosted their holdings of U.S. Treasury’s while selling off equities amid turmoil in Europe. Net purchases of U.S. Treasury notes and bonds by foreign investors totalled $84.52 billion, compared with net buying of $60.13 billion in August. China's holdings rose by $11.3 billion to $1.148 trillion, after falling in August. Japan remained the second-largest holder, lifting its holdings to $956.8 billion from $936.6 billion in August, according to the monthly Treasury International Capital report, known as TIC.

 

China said on Wednesday that it would "fine-tune" its monetary policy amid "global systemic risks", raising hopes of a relaxation of tight credit as growth in the world's second largest economy slows. The nation's central bank also warned that the eurozone crisis could "lead to global systemic risks if it spreads more to core countries," just as the Asian powerhouse suffers from a fall in exports due to lower demand abroad. China's economic growth eased to 9.1 percent in the third quarter from 9.5 percent in the second quarter due to government measures to tame inflation and economic turbulence in Europe and the United States. The central bank statement came after the International Monetary Fund on Tuesday warned that China's financial system is at risk from bad loans, booming private lending and sharp falls in property prices. In its inaugural evaluation of China’s financial sector the IMF reported that The Chinese financial system faces “a steady build-up in vulnerabilities” that require the government to relax its grip on banks, the exchange rate and interest rates. In the first such report, published about China after the assessments were made mandatory by IMF surveillance every five years for jurisdictions deemed systemically important. The IMF welcomed the progress that China has made in giving freer rein to market forces and strengthening regulation but warned of a series of short-term risks facing the world’s second-biggest economy, from defaults on infrastructure projects to the rise of a shadow banking system. Official data published on Friday depicted a soft landing for the Chinese real estate sector, with prices for new homes dipping by an average 0.15 per cent month-on-month in the 70 cities monitored by the national statistics bureau. House prices fell in 34 of the cities in October, twice as many as in September. Driven by the rising cost of food and fuel, Indian inflation remained high in October, with the wholesale price index rising at an annual rate of 9.73% in October, up slightly on 9.72% in September and comes despite falls in global fuel and commodity costs, which have failed to feed through to curb rising domestic food and fuel prices. Rising prices have been driven by a fall in the rupee, which is at its lowest level against the dollar for over two years and this has pushes up the cost of imported goods. Fuel price inflation was up 14.79% and food inflation up 11.06%. India's central bank has increased rates 13 times since March 2010 to try to hold back rising prices and In October, the Reserve Bank of India raised interest rates and cut its growth forecast for Asia's third-largest economy, with The RBI's main repurchase rate now stands at 8.5% and The rise in inflation came as a surprise to analysts, who had expected a slight fall. The Bank of Japan on Wednesday left its key rate unchanged at between zero and 0.1 percent, and held monetary policy despite increasing concerns over a high yen and the global economy. In its assessment the BoJ warned Japan's growth was slowing amid uncertainty abroad and market turmoil caused by the eurozone crisis. Japan's economy "has continued picking up, but at a more moderate pace mainly due to effects of a slowdown in overseas economies," the BoJ said. It warned: "The sovereign debt problem in Europe could result in weaker growth not only in the European economy but also in the global economy, particularly through its effects on global financial markets." Japan will "face an adverse effect from the slowdown in overseas economies and the appreciation of the yen as well as from the flooding in Thailand." The central bank, which expects the world's third-largest economy to eventually return to "a moderate recovery path", added that its policy board voted unanimously to keep its key rate unchanged between zero and 0.1 percent. Japan's economy rebounded in the third quarter, growing for the first time since March. GDP grew by 1.5% in the three months to the end of September, compared with the previous three months and comes after three quarters of contraction, and produced an annualised rate of growth of 6%. However there are a number of threats to Japan's fragile recovery including the strength of the yen, slowing global growth and the impact of the floods in Thailand on the supply chain of Japanese exporters. In a vote of confidence Standard & Poor’s has become the third ratings agency this year to upgrade Brazil’s sovereign debt to reflect the government’s strong finances. The move, under which Brazil’s foreign currency credit rating was raised one notch to “BBB” and its local currency rating to “A-“, emphasises the growing difference between the fast-growing large emerging markets, led by China, Brazil and India, and the advanced economies.Brazil’s gross domestic product is expected to grow at more than 3 per cent this year, less than half last year’s 7.5 per cent but still very strong by global standards. After spending heavily last year on credit, the government of President Dilma Rousseff has this year clamped down on state expenditure in a bid to limit the growth of the primary surplus, the budget balance prior to debt payments.

 

The European Central Bank retaliated against eurozone governments which have been calling for the bank to intervene more decisively to tackle the sovereign debt crisis, warning of severe economic and social costs if its credibility was put at risk. In his speech, Mr Draghi suggested the ECB's main job remained to ensure long-term low inflation. "Credibility implies that our monetary policy is successful in anchoring inflation expectations over the medium and longer term," he said. He called for governments to play their role in tackling the debt crisis through "solid public finances and structural reforms", as well as reforms to the way the eurozone works, as the bank came under intense pressure to step up ECB bond market intervention to temper a sharp rise in borrowing costs across the eurozone. ECB purchases on Friday eased yields on Italian debt, although the market focus shifted toSpain ahead of the weekend’s general election with Spain’s 10-year bond yield moving above that of Italy. Mr Draghi highlighted the failure of governments to make operational the European Union’s bail-out fund, the European Financial Stability Facility, which was launched 18 months ago. “Where is the implementation of these longstanding decisions?” he asked at Frankfurt’s European Banking Congress. Eurozone leaders have continued to clash publicly over the role of the ECB’s. The German government and Bundesbank have argued that it has already reached legal limits. But Spain’s leaders have joined French leaders in arguing for bolder action, whilst complaining that Madrid is being hit by record yields in the bond markets, despite having met EU demands for fiscal austerity and economic reform. David Cameron travelled to Berlin on Friday to persuade Angela Merkel, German chancellor that the ECB should become “lender of last resort” to the most debt-laden governments. The leaders then sent out conflicting signals on about how to solve the euro zone's debt crisis and admitted they had failed to narrow differences over the introduction of a financial transaction tax inEurope. At a news conference in Berlin, Prime Minister David Cameron and German Chancellor Angela Merkel tried to paper over divergent views on European policy, But they could not mask differences over how the single currency bloc's debt crisis should be handled, with Cameron calling for "decisive action" to stabilise the euro zone and Merkel making clear she favoured a "step-by-step" approach. Earlier in the week, the head of the Bundesbank, Germany's central bank, which is officially subordinate to the European Central Bank - openly opposed the ECB coming to the rescue of troubled Italy and Spain. German Chancellor Angela Merkel had reinforced that stance on Thursday saying "If politicians think the ECB can solve the euro crisis, then they are mistaken" and Mr Draghi's speech would appear to support this stance. Euro zone inflation held at 3.0 percent for a second month in October, with economists suggesting that it has probably peaked giving the European Central Bank room to cut interest rates and focus on growth. Currently at a three-year high, consumer prices in the 17-nation currency area rose 0.3 percent in October, the European Union's statistics office Eurostat said on Wednesday. Inflation was therefore above the ECB's target of close to, but under 2 percent, pushed up by higher oil, clothing and food prices. The euro zone economy grew just 0.2 percent in the third quarter as solid growth in Germany and France was reduced by countries at the Centre of the debt crisis and a growing number of economists expect the zone to slide into recession by early next year. Growth from July to September was the same as in the second quarter, but the outlook for the last three months of 2011 is poor, with the region's deepening debt crisis weighing on sentiment and consumer confidence. The European Commission expects the economy of the 17 countries using the euro to shrink 0.1 percent in the last three months of the year against the third quarter and to stagnate in the first quarter of 2012. The German economy grew 0.5 percent in July-September, in line with market forecasts, and second quarter growth was revised up to 0.3 percent from 0.1 percent. France, the euro zones second-biggest economy, expanded by 0.4 percent in the quarter, having contracted 0.1 percent in the previous three months. Spain, the euro zone's fourth largest economy, ground to a halt in the third quarter.  With the debt crisis set to curb activity further and the likely winners of Sunday's general election promising to tighten the fiscal screws further, recession cannot be ruled out. Portugal, recipient of an EU/IMF bailout, is already in recession and its slump deepened in the third quarter. Its economy shrank by 0.4 percent over the three months. The opposition People's Party won a crushing victory in Spain's election on Sunday as voters vented their anger on the ruling Socialists for the worst economic crisis in generations. The Socialists conceded a humiliating defeat as official results showed the PP projected to take an absolute majority of 187 seats in the 350-seat lower house, with 78 percent of votes counted. PP leader Mariano Rajoy is committed to bringing in even harsher austerity measures to appease financial markets. Spain has now become the fifth euro zone country where the government has fallen victim to the debt crisis, following Ireland, Portugal, Greece and Italy. The new Government takes over on the 20^thDecember.

 

The eurozone is closer to falling into recession after the region’s escalating debt crisis triggered a sharp drop in industrial output in September. Eurozone factory production decreased by a much larger than expected 2 per cent compared with August, the biggest monthly fall since September 2009, according to Eurostat, the European Union’s statistical office. Details of September’s industrial production data showed a 4.8 per cent fall in Italy compared with August, and a 5.8 per cent drop in Portugal and The disappointing data adds to signs that the business and investor uncertainty created by the eurozone crisis is hitting economic growth prospects. EU commissioner Michel Barnier on Tuesday presented new curbs on credit rating agencies.Whilst the new measures, yet to be approved, aim to tighten the rules of the ratings agencies, Barnier had to back down on plans to allow the temporary suspension of ratings for countries under EU-IMF bailout programmes. This is understood to have followed deep disagreement within the 27-strong European Commission executive in the hours before a delayed press conference. The former French cabinet minister has frequently fallen foul of London; home to four-fifths of the EU's financial services industry, for what big investors there have claimed is a campaign to weaken the City's grip. European Union negotiators agreed to a two percent rise in the bloc's budget for next year to 129 billion Euros, following more than fifteen hours of talks which ended in the early hours of Saturday morning. The deal was seen as a victory for those opposing demands by EU lawmakers to increase the budget by more than 5 percent. More than two thirds of the EU budget is spent on subsidies for farmers and regional aid funds, which finance road construction, environmental clean-ups and other projects. Some EU officials have suggested that limiting the budget rise to forecast inflation for next year could leave the bloc unable to pay its bills and threaten the EU budget's AAA credit rating. This is because while agreeing to limit their contributions to the EU budget to 129 billion Euros next year, governments gave in to the European Parliament's demands to allow EU spending commitments next year to go up to 147 billion Euros. Following an embarrassing leak of budget plans by German parliamentary officials Ireland's Fine Gael-Labour coalition government has had to confess to plans to imposing further austerity measures in order to avoid breaching European Union spending limits.  VAT will be increase by two percentage points to 23% as part of a looming €3.8bn austerity budget. On Friday The Government conceded that significant elements of the budget had been leaked by German politicians after they had been sent to the finance ministries of all 27 EU member states. The number of Irish mortgages in arrears for more than 90 days grew 11 percent in the third quarter, figures showed on Friday, highlighting growing strains on the country's banks and adding to pressure for the government to help struggling borrowers. More than one in 10 Irish home loans are not being fully repaid and the situation is deteriorating as unemployment remains stubbornly high and house prices continue to fall. The central bank said 99,346 mortgages were either in arrears or had been restructured at the end of September, representing some 13 percent of the total residential mortgage market and up from 95,158 mortgages at the end of June. The number of mortgages more than 90 days in arrears was 62,970 at the end of September, an 11 percent increase from the end of June. That represented 8.1 percent of all mortgages, up from 7.2 percent at the end of the previous quarter. Stress tests published last March that forced Irish banks into a 24 billion euro recapitalisation assumed that 6.7 percent of their combined mortgage book would never be paid back. Italy’s new leader Mario Monti has formed a technocratic government containing no politicians as the country attempts to stave off financial disaster ending outgoing PM Silvio Berlusconi's three-and-a-half year government and the media mogul's 17-year-long political dominance. Former European commissioner Mr Monti, who will be both prime minister and economic minister, announced his new cabinet of bankers, diplomats and business executives after two days of consultation. Among the unelected technocrats he appointed was Corrado Passera, chief executive of Italy's biggest retail bank Intesa Sanpaolo. He was named infrastructure and industry minister. A general election has to be held by the spring of 2013. During the week the upper house of the Italian parliament gave a vote of confidence to the country's new prime minister by 281 to 25, with no abstentions, after he unveiled an ambitious programme of reform. Former Italian Prime Minister Silvio Berlusconi said on Sunday that Mario Monti's technocrat government might not survive until scheduled elections in 2013 if it promoted reforms opposed by his centre-right party.

 

Addressing the Italian senate on Thursday night, Mario Monti said Europe was living through its "most difficult moments since the aftermath of the second world war". And he warned that "the end of the euro would pull apart the single market". The Monti government's first day in office however was clouded by a warning from former Prime Minister Silvio Berlusconi that it would last only as long as he and his supporters wanted. Berlusconi, who could still command a majority in the senate, was quoted as having told his followers in the upper house that he would be deciding whether to support the government bill by bill.Presenting his government's programme to the senate, Monti, a former European commissioner, sent a warning that Italians could expect yet another package of deficit-reduction measures. He said it would ensure "full implementation" of initiatives already agreed with European institutions. But he added: "We shall assess further correctives." Measures worth €80bn were wrapped in bill that was given final approval in parliament last Saturday, but plans to eliminate Italy's budget deficit by the end of 2013 have been derailed by an emerging consensus that the economy will barely grow next year.Calculations in Brussels and Rome have suggested that this could create a gap of about €25bn and One of Monti's first challenges will be to find ways of saving that sort of sum without inflicting too much pain on the public. Fitch, which downgraded Italy to A+ from AA- with a negative outlook last month, has warned it would cut the country's ratings to the low investment grade if Italy were unable to borrow at sustainable rates on the markets. Fitch said Italian bond yields had risen to a level which, if protracted, would place public debt on an unsustainable path.

 

The World Gold Councils latest quarterly report released on Thursday revealed that Central banks made their largest purchases of gold in decades in the third quarter, as a sharp drop in prices in September accelerated their shift to bullion as they increasingly diversified  sovereign wealth. The scale of the buying, at 148.4 tonnes on a net basis, was larger than purchases that have been disclosed. The WGC reported that China overtookIndia to become the largest consumer of gold jewellery in the third quarter. Chinese jewellery consumption rose 13 per cent from a year earlier to 138.6 tonnes, while buying from India - traditionally the world’s top consumer - fell 26 per cent. While technology demand remained stable at 120.2 tonnes, a strong rise in investment demand can be attributed to a large portion of the total gold demand. Gold investment demand, which includes demand for gold bars, coins, and ETF’s, reached 468.1 tonnes in the third quarter. This represents a 33% increase from last year’s third quarter. Interestingly, ETF’s and similar products only accounted for 77.6 tonnes of the total investment demand. This means 390.5 tonnes of investment demand came from investors buying some form of physical gold. Holders of physical gold are less likely to be speculators, and this physical demand is in my mind a clear sign that even after its good run gold is not in a bubble. With strong growing physical demand from investors and central banks, the outlook looks bullish for gold. Gold ended the week at US$1,724/oz, down US$64 from the previous week’s close. Elsewhere it was reported last week that John Paulson’s hedge fund Paulson & Co sold more than 10 million shares in the world’s largest gold backed exchange traded fund SPDR Gold Trust worth nearly US$2 billion. The sale came a few days after gold prices hit US$1,800, but failed to find enough support to stay above that level. Crude for December delivery fell $1.41 to close at $97.41 a barrel on the New York Mercantile Exchange. The December contract, which expired at the end of trading on Friday, hit a high of $100.15 a barrel and as low as $98.01 a barrel during the day. On the week, oil lost 1.6% snapped a six-week winning streak. Economic growth could be hindered unless crude oil prices fall from the current levels, the director of the International Energy Agency said on Sunday. "Prices are still quite high," IEA director Maria van der Hoeven told reporters at an energy conference in Saudi Arabia. "If oil prices are high on this level for a longer period it will have an impact on economic recovery, especially in developing countries.” ICE Brent crude prices settled at $107.56 a barrel in London on Friday and have remained above $100/bbl since February. Rice is the staple food for three billion people in Asia, the Middle East andWest Africa and its price is closely watched because of the impact on inflation and the potential for social unrest. So the return of India to the global rice market has been welcomed as it tries temper sharply rising prices caused by flooding in Thailand, the world’s largest rice exporter. Thailand usually accounts for nearly a third of global rice exports but the country’s worst floods in 50 years have damaged up to a quarter of its main crop, denting the exportable surplus. The shortage pushed up benchmark rice prices to a three-year high of $650 a tonne last month, triggering fears of a spike in food inflation in Asia. Since then New Delhi has lifted a four-year-old export ban on sales of non-basmati rice, filling the gap left by Bangkok and halted a wave of panic buying. After a good crop Vietnam, traditionally the world’s second-largest exporter should also help ease the situation.

 

Last week started with Angela Merkel, the German Chancellor, calling for Europe to build a political union to underpin the euro and help the continent emerge from its “toughest hour since the second World War” her thoughts expressed at the Christian Democrat Conference that the role of the European Central Bank remains at odds with France.  The French reacted with dismay in the week following comments by George Osborne, the Chancellor, linking the country to the Greek debt crisis and helped to fuel an increasingly acrimonious debate between Britain and its main partners in the European Union.  Mr Osborne’s remarks in a newspaper that “markets are even asking questions about France” were, France believes, inappropriate, although they are clearly evidenced by the growing disparity between German and French bonds.  After their decline in value in the week, it now costs Franceroughly double the level of Germany to borrow for 10 years, the largest difference since the European single currency was created. Speaking on Europe, David Cameron said Britain must remain part of the European Union to protect its economic interest, but a post-crisis Europe must not turn into a rigid block, with the power to hurt those on the periphery.  The eurosceptic Conservative leader, prime minister in the coalition, wants to maintain Britain’s influence in Europe, whilst also urging further integration in the eurozone as part of the solution to the debt crisis.  His worry seems to imply 2 tier Europe, with a core grouping continuing to see integration, whilst those on the peripheries are left out in the cold and Mr Cameron fears this could isolate Britain. Some of the right of Mr Cameron’s party have called for Britain to leave the European Union, or at least use the eurozone crisis as an opportunity to claim back powers from Brussels.  Cameron faced a rebellion by more than a quarter of his members of Parliament last month, who defied him to demand a referendum on the EU membership.  The episode had echoes of in-fighting over Europe which tore the Conservative Government apart in the 1980s and 1990s. French and Spanish borrowing costs shot up on Thursday and the spread between their bonds and those of Germany hit record highs, despite political leader’s promises to end the euro debt crisis.  French President Nicolas Sarkozy is thought to watch the bond spread very closely and he must be worried that markets are losing confidence in the ability of all eurozone countries, apart from Germany, to manage their public deficits and sovereign debt.  Spain was forced to pay 6.975 per cent to borrow for 10 years in the week, in an issue of €3.56 billion worth of bonds.  Not only was the rate paid higher than the 6.8 per cent yield that the bonds were trading at in the market, but the offer fell short of the amount that had been hoped to be raised.  Spain was, therefore, forced to pay their highest borrowing costs since 1997 on the sale of 10 year bonds.

 

The European debt crisis continues to move ahead at a worryingly increasing speed, whilst politicians continue to prevaricate about the remedies and investors refused to buy debt from not only the peripheral, but core member states at what are seen as sustainable levels.  The 7 per cent yield figure is viewed as critical, as above this level Greece, Portugal and Ireland have had to be rescued.  Ultimately, problems that the politicians are refusing to confront will end up being handled by the markets in a much more severe and harsher reaction.  Even if the immediate issue of the European Central Bank being allowed to print money is allowed by the German Government, and ultimately therefore by the German electorate, I remain convinced that this will not save the monetary union because at its heart the crisis is not about debt, it is about currencies.  The weaker states remain uncompetitive and it is simply impossible to force them to deflate their economies back to competitiveness by cutting wages by up to 30 per cent in many instances.  As the European political elite continue to deny this fact, markets are take matters into their own hands and Governments are finding that investors are unwilling to lend money to them in order to support overly-bloated welfare states, which historically they have borrowed funds to finance and need to now re-borrow to pay off earlier creditors.  Serious political capital needs to be spent on creating what will be the new norm, but unfortunately this is going to lead to deterioration in living standards for many in the West.  Decades of self-indulgence by the West has seen global economic power irreversibly move to Asia and this is not going to swing back. Greece has been told that they can write off 50% of their debt held by private entities, but not that owed to the IMF, ECB, or other public entities and This actually means something more like a 20-30% haircut in total debt and this is when A number of Commentators suggest that eventually Greece will write off closer to 80% of its entire debt, but this is a number that cannot be contemplated in European circles, as it is enough to cause a serious global banking crisis. The debt crisis has brutally revealed all the cracks in the economic and monetary union: the decade-long accumulation of public debt and the lack of competitiveness of some national economies, as well as shortcomings of the European treaties. Essentially, the southern part of Europe is on a sort of “gold standard,” with the euro being the fixed standard. The required adjustments are going to be painful if not suicidal for social order and cohesion if this modern day gold standard is not dismantled in some form. There are no easy answers if the weaker nations want to stay with the euro, but leaving brings with it, its own nightmare. The ECB was reported to be intervening aggressively in the market again at the end of last week buying Italian and Spanish debt, but there must come a point when some bail-out sceptics ask whether  the ECB is in fact not overstepping  its remit and  breaking treaty agreements by financing governments. The ECB's purchases, have bought politicians time which I believe has generally been squandered, but it has so far prevented a complete collapse of Europe’s financial system. Without a change in the ECB’s remit, market participants will constantly question both the banks willingness and its ability to continue intervening in markets and this reduces the effectiveness of the interventions. Putting the European Central Bank’s printing presses to work might at best bring some short-term relief, but it could have dire consequences, with both raising inflation and it will severely hindering vitally important incentives for reform. This would then inevitably lead to a depreciated currency and an even more destabilised eurozone. Despite the European Union’s most strenuous efforts, it appears to increasingly losing the confidence of financial markets who will force difficult decisions to be made on there rather than political preferences. Jean-Claude Juncker, the prime minister of Luxembourg and current president of the Euro-Group a few years ago joked, "We all know what to do, but we don't know how to get re-elected once we have done it," and that is as true today as it was then, if not more so. A lack of political capital has bankrupted our leading politicians to the point where they have just made a bad situation worse, by ducking difficult decisions. Markets however have no such restriction and this is why we should all be concerned about a lack of decisiveness from our weak willed political leaders. For the historians amongst us, the current German Finance Ministry is located in the old headquarters of The Luftwaffe.

 Solicitors and finance professionals from http://www.legalandfinancial100.co.uk