Central bankers agree on bank capital surcharge plan

Global banking regulators have agreed on a proposal to slap an extra capital charge on the world's biggest banks to make them safer by 2019.

The Group of Governors and Heads of Supervision said after a meeting in Basel on Saturday the proposal would be put out to public consultation next month.

'The additional loss absorbency requirements are to be met with progressive common equity tier 1 capital requirement ranging from 1 per cent to 2.5 per cent, depending on a bank's systemic importance,' the group said in a statement.

An additional 1 per cent surcharge would also be imposed if a bank becomes significantly bigger.

The plans, which need approval from world leaders in November, would be phased in between January 1 2016 and end of 2018.

The capital surcharge will come on top of the new 7 per cent minimum core capital all banks across the world will have to hold under new Basel III rules being phased in from 2013.

It appears the central bankers have opted for a smaller surcharge than foreseen but, in return, the surcharge will have to be in the form of top quality capital, such as retained earnings or common equity.

Banks were hoping they could use hybrid debt such as contingent capital to pad out the surcharge band.

The proposal, which was due to be finalized by last November but faced opposition from banks and some countries, will apply initially to so-called globally systemically important banks.

'These measures will strengthen the resilience of G-SIBs and create strong incentives for them to reduce their systemic importance over time,' the statement said.

There was no indication how many banks will be included.

Banks will face a surcharge according to an indicator that draws on five elements — size, interconnectedness, lack of substitutability, global (cross-jurisdictional) activity, and complexity.

The group of central bankers and the Basel Committee it oversees said they will continue to review the use of contingent capital.

The central bankers said they would support the use of contingent capital to meet higher national requirements than the global minimum.

However, even then, there would have to be a high-trigger for converting the debt into equity to help absorb losses on a going concern basis, the central bankers said.

Source : New Age

IEA’s oil release to have less impact than in past, say analysts

The tapping of emergency oil reserves by the International Energy Agency for the third time in history will not have the same negative impact on prices as it has in the past due to surging Chinese demand and supply outages in Libya.

US crude has already rebounded from the initial shock of Thursday's announcement, briefly rising more than $1 to above $92 on Friday after a near 5 per cent fall the previous session.

'It will have some transient impact, but in the big picture this is a little political thing and it will be a little hiccup in the market and then it will be gone,' said John Vautrain, director at Purvin & Gertz energy consultants.

The 28 member countries of the Paris-based IEA, formed in 1974 to protects consumers' interests following the Arab oil embargo, hold emergency stockpiles to be used in the event of an actual or potentially severe oil supply disruption.

The agency last used government-held stocks in September 2005 in the wake of Hurricane Katrina, sparking a near 20 per cent drop in US crude prices over the next two months. The market would not recover to its pre-hurricane level of $69.47 until April 2006.

Even more dramatically, the IEA's first dip into its emergency reserves in January 1991 during the Gulf War contributed to a 44 per cent drop in oil prices over a six-week period and helped start a long-term downturn in the market.

It would take nearly a decade for prices to return to $32 a barrel, the level before the IEA's action, due to a variety of reasons including a surge in global oil exploration and development.

Translated into today's market, US crude prices would fall to $78 from Wednesday's close of $95.41 under the 2005 scenario, while a repeat of 1991 would see prices plummeting below $54.

These scenarios, which would likely wipe out inflation worries for many countries and reignite global economic growth, could be far fetched

under the current environment.

'The drop in oil prices won't last as long as last time. It's going to be more like months, not years, before prices return,' said Tony Nunan, a risk manager with Tokyo-based Mitsubishi Corp.

US oil prices were seen rising to $103.39 over the next four weeks, said Reuters market analyst Wang Tao, as the bearish impact on prices from IEA's move was expected to be temporary.

Source : New Age

Advanced manufacturing can boost jobs: Obama

President Barack Obama says technological innovations such as robots can help pump jobs into the economy and spur growth in clean energy and advanced manufacturing.

In his radio and Internet address Saturday, the president echoed a plan he unveiled Friday in Pittsburgh to join the federal government, universities and corporations and re-ignite American manufacturing with an emphasis on cutting-edge research and new technologies.

'Their mission is to come up with a way to get ideas from the drawing board to the manufacturing floor to the marketplace as swiftly as possible, which will help create quality jobs, and make our businesses more competitive,' Obama said in his address, which was taped Friday during his visit to Carnegie Mellon University, where he saw a display of mini-robots that explore water and sewer pipes.

He also marvelled at robots that can defuse a bomb, mow a lawn, even scrape old paint.

With growing interest from the military, businesses and consumers, the Carnegie Mellon Robotics Institute has more than 500 technical experts and a $65 million annual budget.

The $500 million initiative is the latest effort by Obama to promote job creation in the midst of an economic slowdown that has reduced hiring and weakened his job approval standing with the public. Obama has tried to brave the weak economy by featuring job creation measures during weekly trips outside Washington and in his radio addresses. On Tuesday, he will visit an Alcoa factory in Bettendorf, Iowa.

The goal of his manufacturing plan, he said, is 'to help make sure America remains in this century what we were in the last — a country that makes things.'

Source : New Age

Italy jolted by financial market jitters

Jitters coursed through Italian financial markets on Friday following warnings of possible downgrades by ratings agencies and amid fears of contagion from Greece's sovereign debt crisis.

The spread between Italian and German 10-year bonds hit 212 basis points — their highest level since the creation of the euro, while banking shares suffered a shock plunge following market rumours of an imminent downgrade of Italy's sovereign rating.

'The contagion risks of the Greek crisis on other countries have been worrying the markets for several days and we see very clearly today that Italy is in the line of fire,' one analyst in Milan said on condition of anonymity.

Shares in Italy's largest bank, UniCredit, plunged more than eight per cent during trading before recovering somewhat to close down 5.54 per cent.

Other lenders were also hit by the volatility including Banca Popolare di Milano, Banca Monte dei Paschi di Siena, Intesa Sanpaolo and Mediobanca.

Italian business daily Il Sole 24 Ore called the action 'a midday of fire' and said there had been 'panic' and 'schizophrenic' trading in Milan.

The newspaper said there had also been a rumour that some Italian banks may not pass the stress tests being carried out on Europe's banking system.

It added that some traders were linking the volatility to the announcement in Brussels that Italian central bank governor Mario Draghi will replace Jean-Claude Trichet as head of the European Central Bank in November.

Draghi has earned a strong reputation in Italy for his handling of the financial crisis, which left the Italian banking system relatively unscathed.

The benchmark FTSE Mib index ended the day down 1.61 per cent, while other European bourses were only slightly down and London was up 0.41 per cent.

'I see hysteria on the risk of contagion... that is exaggerated,' Fabrizio Saccomanni, director general of the Bank of Italy and a favourite to replace Draghi, said in a speech in Rome.

Italian officials have warned of the possibility of speculative attacks in recent weeks and have said the actions of ratings agencies are unwarranted.

Source : New Age

Wall Street sinks on Europe’s debt misery

Wall Street dropped for a third day on Friday on worries about the Italian banking sector and Greece's debt crisis, but the S&P 500 managed to hold its 200-day moving average in a sign buyers still see value.

The Dow industrials and the S&P 500 fell for their seventh week in the last eight. The benchmark S&P 500 is down 7 per cent from its 2011 closing high at the end of April.

Investors are fearful that Greece's government may fail to pass an austerity plan next week, which could force a default on its debt repayments. The government faces an electorate vehemently opposed to the austerity measures.

'They (politicians) may not believe that financial markets are as sensitive to their decisions as they actually are, and there is a worry that somewhere along the line, some political vote goes against the market,' said Nicholas Colas, chief market strategist of the ConvergEx Group in New York.

The S&P 500 remained within striking distance of its 200-day moving average—a line that has been tested twice in recent trading and has so far acted as a springboard for stocks. The level was at 1,263.47.

'Every time you test a resistance or support level, you make it weaker,' Colas said. 'It's almost like a piece of metal. Every time you hit it, it grows more fragile and that's why people are really worried the third or fourth time.'

Problems in the euro zone appeared to intensify as shares of Italian banks UniCredit SpA and Intesa Sanpaolo fell sharply on concerns about their capital positions. Trading in their shares was briefly suspended.

The CBOE Volatility Index or VIX, Wall Street's barometer of investor anxiety, rose 9.4 per cent to 21.10. Some analysts say fear needs to rise further before the market reaches a bottom.

The Dow Jones industrial average dropped 115.42 points, or 0.96 per cent, to 11,934.58 at the close. The Standard & Poor's 500 Index fell 15.05 points, or 1.17 per cent, to 1,268.45. The Nasdaq Composite Index lost 33.86 points, or 1.26 per cent, to 2,652.89.

For the week, the Dow fell 0.58 per cent and the S&P 500 shed 0.24 per cent, while the Nasdaq gained 1.39 per cent.

Bank stocks fell on concerns about the economic outlook. The KBW Banks Index lost 1 per cent and the S&P Financial Sector Index shed 0.7 per cent. The sector has been the worst-performing this year, falling around 8 per cent.

On Thursday, the market welcomed Greece's agreement to a five-year austerity plan.

The euro declined against the dollar for a third straight session on worries Greece's parliament might not pass austerity measures needed for the country to secure more bailout funds.

In the latest economic data, new orders for long-lasting US manufactured products, known as durable goods, increased 1.9 per cent in May after dropping 2.7 per cent in April as bookings for transportation equipment rebounded strongly.

Oracle Corp fell 4.1 per cent per cent to $31.14 a day after the world's No. 3 software maker posted disappointing results, especially in hardware sales. Oracle's results sparked concerns about a bigger slowdown in technology spending.

Micron Technology Inc tumbled 14.5 per cent to $7.21 after the memory chipmaker recorded results below expectations late Thursday.

About 9.26 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq — well above the daily average so far this year of around 7.57 billion. Analysts said Friday's volume was much higher than average due in part to the rebalancing of the Russell 2000 Index.

Declining stocks outnumbered advancing ones on the New York Stock Exchange by a ratio of 19 to 11. On the Nasdaq, about three stocks fell for every two that rose.

Source : New Age

Egypt withdraws request for IMF, WB loans

Egypt will not borrow from the World Bank and International Monetary Fund after revising its budget and cutting the forecast deficit, even though a loan had been agreed, finance minister Samir Radwan said on Saturday.

The 2011/12 deficit in the first draft budget was forecast at 11 per cent of gross domestic product, but was revised to 8.6 per cent because of a national dialogue and the ruling army council's concerns about debt levels, the minister told Reuters.

'So we do not need to go at this stage to the Bank and the Fund,' Radwan said, adding Egypt, which had borrowed from the IMF under ousted president Hosni Mubarak, still had the 'best relations' with the two US-based institutions.

Egypt this month agreed on a $3 billion, 12-month standby loan facility from the IMF, which Cairo had said came with more lenient terms than usually associated with such lending.

The IMF and World Bank had been among a range of foreign countries and bodies to offer funds to Egypt to help cover a big budget shortfall after the economy was plunged into turmoil by the mass protests that drove Mubarak from office on Feb. 11.

Egypt's cabinet had approved on June 1 a budget for 2011/12 that increased spending by a quarter to create jobs and help the poor. That was revised with a new draft announced on Wednesday.

Gulf Arab states, such as Qatar and Saudi Arabia, are also among those who have offered support.

Radwan said Qatar had provided $500 million for budgetary support in the past week. 'That is a gift,' he said, when asked if there were any conditions attached to the Qatari cash.

The minister said the first draft of the budget, which forecast a deficit of about 170 billion Egyptian pounds, was discussed with activists, writers, the business community, trade unions and non-government organisations.

'As a result of this dialogue and given the concern of the military council not to have huge debts for the government that comes after the election, the deficit was reduced to 134 billion pounds, equivalent to 8.6 per cent of GDP,' Radwan said.

'The result is we didn't need outside finance. We are covering the largest part from local sources and we are waiting for outside support to come in,' he said.

'If we had gone with the other package, we would have needed to go (to the IMF),' the minister said, adding the new budget would not go back on a commitment to social justice.

Source : New Age