Geithner headed to Europe to meet with Sarkozy and key officials

Treasury Secretary Timothy F. Geithner will head to Europe next week to meet with French President Nicolas Sarkozy, new Italian leader Mario Monti, and other key government officials to discuss their efforts to resolve the debt crisis

Geithner, who has been urging European leaders to take more forceful action, will travel there for three days beginning Tuesday "for discussions with his counterparts on their efforts to reinforce the institutions in the Euro area," the Treasury Department said Friday.

In addition to meetings with Monti and Sarkozy, a key player along with German Chancellor Angela Merkel in trying to address the European debt crisis, Geithner will meet with European Central Bank President Mario Draghi and Jens Weidmann, president of Germany's central bank.

Geithner also has meetings scheduled with the finance ministers of Germany and France, as well as with Mariano Rajoy Brey, the prime minister-elect of Spain.

The Federal Reserve joined with the European Central Bank and four other central banks this week to ease the crisis. In a coordinated move, the central banks made it easier for European leaders to access U.S. dollars cheaply in hopes of avoiding a freeze in credit markets.

Geithner told reporters Thursday that he supported the action.

"I think this was a responsible, sensible way for the Federal Reserve and other central banks to try to diminish some of the pressures you're seeing on European financial institutions," he said. The U.S. has an interest in doing that to reduce the need of European banks to shed assets, which could harm global economic growth, Geithner said.

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Photo: Treasury Secretary Timothy F. Geithner, left, French Central Bank Governor Christian Noyer and French Finance Minister Francois Baroin at the G20 finance summit in Paris in October. Credit: EPA

Fed says it takes no risk in lending dollars for Europe

Stocks soared Wednesday as global markets lauded central banks’ decision to funnel more money into the financial system, a move mainly aimed at assisting struggling European banks.

But the agreement to expand so-called currency liquidity swap arrangements among the Federal Reserve, the European Central Bank and four other central banks could be viewed another way: an act of desperation.

“It suggests that policymakers’ concerns about the outlook are significant and have increased substantially,” economists at Nomura Securities International wrote in a report.

For its part, the Fed insisted that it's taking no real risk under the program.

Europe is the epicenter of global financial worries, of course. Soaring market interest rates on government bonds across the continent over the last month have further weakened European banks. That’s because their bond holdings have dropped in value with each rise in rates.

In shades of 2008, fear of a new round of bank failures has made lenders worldwide increasingly reluctant to do business with European banks. That has made it more difficult for some banks to get the dollars they need to repay their own debts -- for example, when a U.S. money market fund calls in a loan it previously made to a European bank.

To avert a new global credit squeeze, the Fed agreed to make more dollars available to the ECB and other central banks, and to cut the interest rate for such loans. That, in turn, will allow the ECB to lower the cost of dollars it lends to individual commercial banks.

The Fed noted on its website that it lends only to other central banks under these arrangements, and that the borrowing central bank “therefore bears the credit risk associated with the loans.”

In other words, the Fed isn’t on the hook if the ECB’s dollar loans to individual banks go bust.

The Fed also said it doesn’t bear any risk of currency loss on the loans, if for example the euro’s value were to fall against the dollar. (The euro rose Wednesday, gaining 1% to $1.345.)

The swap program doesn’t attack the most pressing problem in Europe, which is the surge in government bond yields. The central banks aren’t directly funneling money to cash-strapped European governments.

“These actions do not address solvency issues in European sovereigns,” analysts at Keefe Bruyette & Woods wrote in a note to clients.

Still, bond yields fell across most of Europe on Wednesday. The yield on two-year French bonds slid to 1.29% from 1.58% on Tuesday. Italian two-year bond yields eased to 6.93% from 7.10%, the third straight drop after reaching a euro-era high of 7.66% on Friday.

Despite the Fed’s assurances, one of the central bank’s harshest critics -- Rep. Ron Paul (R-Texas) --  attacked the swap agreements.

“Rather than calming markets, these arrangements should indicate just how frightened governments around the world are about the European financial crisis,” Paul said in a statement.

“The Fed is behaving much as it did during the 2008 financial crisis, only this time instead of bailing out politically well-connected too-big-to-fail firms it is bailing out profligate government spending” in Europe,  Paul said.

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Photo: The Federal Reserve building in Washington. Credit: Andrew Harrer / Bloomberg News

Central banks join forces to ease debt crisis

Reacting to the deepening Eurozone debt crisis, the Federal Reserve and five other major central banks joined forces Wednesday to offer European lenders easier access to dollars in an attempt to quell growing fears of a global funding crunch.

The Fed said its coordinated action with the European Central Bank, the Bank of Japan and three others was intended to "ease strains in financial markets" and mitigate the resulting effects of a credit squeeze for businesses and households.

The announcement gave an immediate lift to European markets, and U.S. stock futures surged.

The action, which follows a similar coordinated move in September, lowers the cost of so-called dollar swap lines to increase the flow of cash to European lenders. The new pricing would take effect next Monday.

Separately, the People's Bank of China announced a plan to inject more cash into its economy by lowering bank reserve requirements by a half a percentage point. It was Beijing’s first monetary easing in three years, and comes amid signs of economic slowing in the world's second-largest economy.

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Photo: The U.S. Federal Reserve building in Washington. Credit: Bloomberg News

Portugal, Belgium hit by rating cuts; Eurozone yields jump again

With European government bond markets already in severe distress, the credit-rating companies keep delivering their equivalent of a blast of pepper spray.

Bond yields surged again across Europe on Friday, one day after Fitch Ratings cut Portugal’s debt rating to “junk” status, meaning below investment-grade.

After markets closed, Standard & Poor’s dealt yet another blow to Eurozone debt, cutting Belgium’s rating to AA from AA+.  S&P cited growing doubts that Belgium will be able to reduce its debt load as the continent’s economic situation deteriorates.

Meanwhile, Moody’s Investors Service lowered Hungary’s debt rating to junk on Thursday, and Greece reportedly was trying to drive a harder bargain with creditors as it negotiates to have a large portion of its debt forgiven.

All of this made Friday a bad day to try to borrow in the Eurozone, but Italy tried anyway -- and paid a high price. Investors demanded a 6.5% yield on $10.6 billion of six-month Italian treasury bills, up from 3.09% just a month ago.

After Fitch’s downgrade of Portugal, the yield on 10-year Portuguese bonds jumped to 12.64% from 12.21% on Thursday.

Before S&P’s announcement on Belgium, 10-year Belgian bond yields rose to a euro-era high of 5.86% from 5.74% on Thursday. Two months ago the yield was 3.82%.

Investors have been hoping for a major new incentive by European authorities to stop the debt crisis from spreading. But on Thursday, a meeting of German Chancellor Angela Merkel, French President Nicolas Sarkozy and Italian Prime Minister Mario Monti left markets with no reason to expect immediate new help.

Merkel again rejected the idea of Eurozone governments issuing bonds backed by all countries in the currency union, which in effect would make Germany responsible for other nations' debts.

But in a bad sign for Merkel, yields also rose further Friday on German bonds, which until this week had been the one haven left in European debt markets. The 10-year German bond yield ended at 2.26%, up from 2.19% on Thursday and 1.97% a week ago.

European stock markets mostly managed to rebound a bit on Friday after steep losses in recent days. But the euro currency was hammered, falling 0.9% to $1.323. The euro has tumbled from $1.353 a week ago and $1.419 on Oct. 27.

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Photo: German Chancellor Angela Merkel, French President Nicolas Sarkozy and Italian Prime Minister Mario Monti at a meeting Thursday in Strasbourg. Credit: Rolf Haid / EPA

Dollar surges as global fears rise and Japan tries to beat down yen

The dollar is back to playing the strongman of world currencies -- a bad sign for markets if it continues.

The buck soared Monday against other major and minor currencies as Japan intervened to halt the yen’s surge and as new worries about Europe fueled a classic rush for safety.

Markets also were on edge after securities firm MF Global filed for bankruptcy, a casualty of Europe’s financial crisis.

The DXY index of the dollar’s value against six other major currencies jumped almost 2% to 76.54, its biggest one-day move this year. But the gain just pushed the index back to where it was Oct. 20.

The dollar surged in September as Europe seemed closer to a meltdown and as global recession fears mounted. In October the buck reversed course as stock markets rallied and investors began to feel more comfortable taking risks in other currencies.

On Monday, safety considerations once again trumped everything else. The euro tumbled 2.2% to $1.383 by 1 p.m. PDT as rising Italian bond yields cast fresh doubt on Europe's financial rescue plan.

The dollar’s biggest move was against the yen, which had hit a record high against the greenback Friday, posing an ever-rising threat to Japan’s export economy.

That finally pushed the Japanese government into action Monday, selling yen and buying dollars in the open market. The dollar jumped 3.1%, to 78.18 yen from 75.82 on Friday. But the U.S. currency still is down against the yen year to date. It was at 81.12 yen at the end of 2010.

"We started currency intervention this morning in order to take every measure against speculative and disorderly moves and to prevent risks to the Japanese economy from materializing," Prime Minister Yoshihiko Noda told parliament.

In the struggling global economy every country prefers a weak currency because everyone wants to export their way back to health.

It’s not a coincidence that U.S. stocks plunged in September as the dollar shot higher. Some of the worst-performing shares in September were those of U.S. exporters such as Boeing and Caterpillar, which potentially have a lot to lose if a rising dollar makes their products more expensive overseas.

On Monday Boeing and Caterpillar helped lead the Dow Jones industrial average’s slide. The Dow fell 276.10 points, or 2.3%, to close at 11,955.01. Boeing fell 3.3% and Caterpillar lost 2.4%.

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Stocks slump as rising Italian yields cast doubt on Europe rescue

Another jump in yields on Italian government bonds is raising fresh doubts about Europe's latest plan to solve its debt crisis, and hammering markets worldwide.

The Dow Jones industrial average was down about 165 points, or 1.4%, to 12,064 at 11:40 a.m. PDT, after surging 3.6% last week.    

Most European stock markets fell 2% to 4% on Monday after soaring last week. The euro tumbled 1.4% to $1.394.

The annualized yield on Italy’s 10-year government bond rose to 6.09%, the highest level since early August, up from 6.02% on Friday. The yield on two-year Italian bonds surged to 4.99%, up from 4.75% on Friday and the highest rate since 2008.

Markets no longer are focusing on Greece, which everyone knows is broke. When European leaders on Thursday announced their new plan to end the debt nightmare, a major goal was to halt the "contagion" before it engulfed Italy, the world’s third-largest bond market.

If global investors begin to think that Italy can’t repay its debts, the crisis could become a cataclysm.

A key element of the plan is the expansion of Europe’s $600-billion rescue fund for member states and banks. The focus is on boosting the firepower of the fund, known as the European Financial Stability Facility, to $1.4 trillion by leveraging it.

The fund is expected to eventually guarantee bonds issued by deeply indebted countries, particularly Italy. The goal: Bring down interest rates on those securities to levels the countries can afford by making investors more confident about buying them.

But the continuing rise in Italian bond yields shows that many investors and traders doubt the plan will work -- or they believe the Europeans will drag their feet implementing it. Although the broad framework of the rescue was announced Thursday, many of the details are still to be filled in.

Meanwhile, Italy’s political crisis is deepening, as calls mount for embattled Prime Minister Silvio Berlusconi to resign. Luca Cordero di Montezemolo, chairman of carmaker Ferrari, wrote in a letter to the newspaper La Repubblica that Italy needed a new government to take much bolder action to rein in spending and revive the economy.

"There is not a minute to lose. The savings of Italian people, social cohesion and Italy's membership [in] the euro are all at risk," he said.

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Asian stocks, euro rise on European rescue plan

Asian stock markets and the euro currency rallied on Thursday on word of Europe’s new plan to contain its two-year-old government debt crisis.

Share prices were up across the Asia-Pacific region at midday, with Japan’s Nikkei-225 index up 1.4%, the South Korean market up 1.2% and Australian shares up 2.3%.

The euro currency rose 0.5% to $1.398 from $1.391 on Wednesday. The euro has rebounded from its recent low of $1.318 on Oct. 3.

Yields rose on U.S. Treasury bonds trading in Asia, a sign that some investors were moving out of the classic haven of American government debt. The 10-year T-note yield edged up to 2.23% from 2.21% on Wednesday.

The plan to boost the firepower of Europe's rescue fund for struggling member states to an estimated $1.4 trillion "might just finally convince the skeptical markets that this time the backstop against contagion is for real," said Christopher Rupkey, economist at Bank of Tokyo-Mitsubishi.

European authorities will be bracing to see how the continent’s bond and stock markets react when trading opens at midnight PDT.

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Gold surges, stocks fall on new Europe worries

Gold zoomed and stocks pulled back Tuesday as markets faced new worries about Europe’s down-to-the-wire talks aimed at ending its debt crisis.

European stocks fell late in the session after a meeting of European Union finance ministers set for Wednesday was canceled. Yet authorities said the planned meeting of EU heads of state would proceed.

The EU leaders’ summit has been expected to produce the framework for bolstering the continent’s banks and boosting the firepower of the $600-billion rescue fund for Eurozone member states.

Herman Van Rompuy, the European Council president, sought to downplay the cancellation of the finance ministers’ meeting, telling Reuters that the ministers “may meet in the coming days to fine-tune decisions that will be taken tomorrow.”

The euro currency isn’t showing any signs of panic: The euro was trading at $1.393 at about 11 a.m. PDT, up slightly from Monday.

But some investors and traders rushed into gold, the classic haven. Near-term gold futures in New York jumped $49.30 to $1,700.80 an ounce, the first move above $1,700 since Sept. 22.

European stock markets were mostly down between 1% and 1.5%, relatively modest losses.

On Wall Street, stocks also were lower after rallying Monday to their highest levels since early August. The Dow Jones industrial average was off 131 points, or 1.1%, to 11,781 at about 11 a.m. PDT.

[Updated at 1 p.m. PDT: The Dow ended the session down 207 points, or 1.7%, to 11,706, after three straight daily gains.]

The U.S. market also was weighed down by the latest dismal report on consumer confidence.

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Photo: The European Union flag flying near the Parthenon in Greece, the epicenter of Europe's two-year-old debt crisis. Credit: Petros Giannakouris / Associated Press

Chinese inflation remains high amid signs of economic slowdown

Inflation in China moderated in September for the second consecutive month, but still remained stubbornly high amid growing signs of a global slowdown.

China’s consumer price index, the main gauge of inflation, grew 6.1% from a year earlier, down slightly from a 6.2% rise in August.

The index remains far above the 4% annual target set by the central government, making it difficult to loosen monetary policy if China’s economy is pulled into a global decline.

There’s evidence that the world’s second-largest economy may be slowing down.

Trade data released Thursday showed Chinese exports decreased in September over slackening European demand and a strengthening yuan, the country’s currency.

Prices for crude oil and copper fell on news of the data, reflecting jitteriness in China’s ability to import commodities as voraciously as it has in the past.

Meanwhile, thousands of small businesses in China’s coastal provinces are reportedly being squeezed by the country’s credit crunch. China’s State Council said it would support the small firms by increasing loans and offering tax breaks.

But central leaders say reining in inflation remains an overall priority –- dulling expectations that policymakers will loosen credit, drop interest rates or lift buying restrictions in China’s stagnant residential property market.

“For the moment, we remain in policy stasis -– no more tightening, but no real loosening -– while Chinese authorities nervously eye developments in the Eurozone,” said Alistair Thornton, an analyst for IHS Global Insight in Beijing. “It is the Eurozone and U.S. that form the greatest downside risk for China’s outlook.”

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China's trade surplus shrinks on weakened global demand

For the second consecutive month, China's trade surplus narrowed in September on slower growth in imports and exports, reflecting a weakening global economy.

Trade data released Thursday showed Chinese exports rose 17.1% last month from a year ago, down from 24.5% growth in August. Meanwhile, imports grew 20.9% from a year ago, compared with 30.2% in August.

Demand for Chinese exports was hit especially hard in financially troubled Europe. Exports to the continent grew 9.8% in September from a year ago, compared with 22.3% in August.

Exports to the U.S. grew 11.6% year-on-year in September, tapering slighting from a 12.5% gain in August.

"China's export growth is feeling the chill from the intensifying crisis and weakening demand from the West," economists at HSBC said in a research note.

China’s trade surplus shrank to $14.5 billion in September, compared with $17.8 billion in August and $31.5 billion in July.

That could ease some of the international pressure on Beijing to quickly raise the value of its currency, known as the yuan and renminbi.

A U.S. bill that passed the Senate and is now before the House would slap import tariffs on countries such as China if they're found to have weakened their currency to create an unfair trade advantage. 

The yuan was set at an all-time high against the dollar on Tuesday before the Senate vote on the tariff bill, at 6.348. It has crawled down slightly Thursday to 6.373.

Brian Jackson, a senior strategist for the Royal Bank of Canada, said the focus on the yuan exchange rate against the dollar ignores China's loss of trade competitiveness with other countries besides the U.S.

"Although the yuan has stalled against the dollar since mid-August, it has appreciated considerably against the euro and other Asian currencies over this period, so in trade-weighted terms China's currency has strengthened significantly over the last two months," Jackson wrote in a note to clients.

He added: "So although Washington is ramping up the pressure on Beijing to move faster on the currency, Chinese officials will be able to cite today's data as evidence that exporters are already feeling the pinch from the recent appreciation of the yuan in trade-weighted terms."

Currency appreciation aside, Chinese exporters have been under intense inflationary pressure and worsening credit shortages. Hundreds of companies in coastal provinces are reportedly closing. 

Speaking to reporters after releasing the trade data, Vice Customs Minister Lu Peijun said several uncertainties threatened the stability of exports for the rest of the year, chiefly demand from the West and yuan fluctuations. 

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China calls on U.S. to oppose currency legislation

China warned the U.S. against trade protectionism hours after the Senate, reacting to Beijing's perceived undervalued currency, passed a bill that would slap tariffs on Chinese goods.

In a written statement posted on its website, China's Foreign Ministry urged rejection of the bill.

"This proposed bill in the name of so-called 'exchange rate misalignment' is protectionism and a serious violation of World Trade Organization rules,” Ma Zhaoxu, a Foreign Ministry spokesperson, said in the statement. "This won't solve America's own economic and employment problems."

China's central bank also issued a statement Wednesday defending the value of the country's currency, known as the yuan or renminbi.

"The American Senate has repeatedly ignored the facts, has constantly pestered [China] on the renminbi exchange issue in order to find an external excuse for its own malaise," the statement said.

The legislation, which would penalize any country found to be holding the value of its currency down to create an unfair trade advantage, is largely targeted at China, which is believed to undervalue its yuan by upward of 25%.

The bill still needs to pass the House, where it faces stiff opposition from Republican leaders wary of a trade war and harm to U.S. business interests in China. The Obama administration has not demonstrated support of the legislation either.

The American Chamber of Commerce in China urged lawmakers to oppose the legislation, saying the U.S. would benefit more by pressuring Beijing to open its domestic market to American firms.

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Photo: China's currency controls have been blamed for an unexpectedly large global trade surplus. Credit: How Hwee Young / EPA