ECB breaks new ground in crisis fight

FRANKFURT: The European Central Bank has broken new ground in the eurozone crisis with hints that it could start unlimited buying of stricken member states' bonds to drive down their crippling borrowing costs.

After initial disappointment at ECB head Mario Draghi's failure to take immediate action to help ailing countries at a meeting Thursday, many analysts were more encouraged after giving his remarks a second reading.

Draghi said the central bank could intervene directly in the bond markets under a programme known as SMP to help countries left high and dry in the crisis but this depended on governments holding up their end of the bargain.

He also said the ECB might consider additional measures to calm markets which have driven borrowing costs for Italy and Spain back near to levels that forced Greece, Ireland and Portugal to seek massive bailouts.

Under the SMP programme launched in May 2010 and suspended four months ago, the ECB had said its purchase of sovereign bonds was limited in both time and amount.

Christian Schulz of Berenberg bank said the ECB had "finally stepped up to the plate meaningfully" which could help head off further trouble.

"If the ECB convinces markets that it is providing a reliable safety net for solvent sovereigns which stay on the reform path, it may lure more investors back into these markets," he said.

"In that case, the ECB may not have to buy many bonds."

Draghi's comments Thursday disappointed markets expecting immediate action but on Friday, it was the complete reverse with Madrid and Milan soaring by 6.0 percent and more -- albeit helped too by better-than-expected US jobs data.

Borrowing rates for Spain and Italy remained dangerously high, however, but were down sharply after spiking on Thursday.

The ECB chief also stipulated that it would only intervene if Europe's rescue fund, the European Financial Stability Fund, and its permanent successor, the European Stability Mechanism, were also involved.

This would require countries in dire straits asking for bailouts, which go hand-in-hand with strict reform conditions and targets -- hard to swallow medicine for any government.

Erik Nielsen of Unicredit said he was concerned by such strings attached to aid and predicted a potential dilemma in the event of a government failing to reach agreement with the EFSF/ESM.

"Do they stick with their new doctrine and refrain from intervening and accept what could well be sovereign default, or do they risk their credibility?" he said, describing the potential catch-22.

However, the principle of conditionality is important, especially for the German central bank, the Bundesbank, which has repeatedly stressed its opposition to the bond-buying programme.

The bank, representing the interests of the eurozone's top economy and paymaster, argues that such moves in effect subsidise public deficits, run counter to the ECB's statutes and pose a serious threat to price stability.

But in an environment in which there seems little imminent danger of high inflation, German public opinion seems to be changing, according to a running theme in several newspaper editorials.

"In light of the drama (in the eurozone), you have to say that the narrow view of the Bundesbank no longer corresponds to the current reality in Europe," the daily Sueddeutsche Zeitung said.

Business daily Handelsblatt voiced concerns that the Bundesbank could end up isolated, particularly as German Chancellor Angela Merkel and her trusted finance minister, Wolfgang Schaeuble, welcomed Draghi's much-heralded pledge last week to "do everything" within the ECB's statutes to protect the euro.

"They have done and continue to do whatever they can within fairly strict limits imposed on them," said Gilles Moec of Deutsche Bank said, noting that the US Federal Reserve and the Bank of England had more room to manoeuvre.

"Draghi went as far as he could, in our view, to indicate in no uncertain terms that massive ECB support would be available as soon as the potential recipient countries -- presumably Spain and Italy -- accept to trigger the European support procedure."

In an upbeat assessment, Moec said that the ECB had "changed the way the current sovereign turmoil should be seen ... Draghi in our view is on his way to deliver on his promises from last week."

ADB cuts Asian growth forecast

BANGKOK - Developing Asia's 2012 growth prospects are being hit by the worsening eurozone crisis and a sluggish recovery in the United States, according to new figures released by the Asian Development Bank.

The bank revised its 2012 growth forecasts for the US and Europe, projecting US economic growth of 1.9 percent, down from 2.0 percent, and saying it expects the eurozone economy to contract 0.7 percent, up from 0.5 percent previously.

The bank said emerging economies were "increasingly vulnerable to weak economic prospects in the US and euro area".

Slowing growth in Asia's two largest developing economies, China and India, coupled with the unwinding of policy stimulus in other regional countries have also hit Asian growth prospects, the Manila-based bank said.

"Economic growth in developing Asia moderated during the first half of 2012 as slower growth in the US and euro area reduced demand for the region's exports," the report, released Wednesday, said.

"Worries over the economic strength of important developing (Asian) economies have also emerged recently," it added.

Developing Asian economies will expand by 6.6 percent in 2012 and 7.1 percent in 2013, the bank said, trimming its forecasts for 6.9 percent and 7.3 percent growth made in April.

A fall in net exports, industrial production, and fixed asset investment in China prompted the bank to lower its gross domestic product growth forecast for 2012 to 8.2 percent, down from 8.5 percent.

The ADB said India's prospects were clouded by a combination of high inflation and poor external and internal demand, and lowered its GDP growth forecast to 6.5 percent for 2012 from 7.0 percent previously.

Southeast Asia is likely to escape the worst impacts of the weaker global environment, the ADB said.

"A strong rebound in Thailand, healthy growth in the Philippines, and increasing consumer demand in Indonesia have helped the sub-region," the bank said in a statement.

The Southeast Asian economies were expected to post growth of 5.2 percent in 2012 and 5.6 percent in 2013, virtually unchanged from predictions made in April.

Eurozone crisis impact on S'pore banks not significant: Tharman

SINGAPORE - The direct impact of the Eurozone crisis on banks in Singapore is not likely to be significant, as loans and investments made by banks here in the Eurozone comprise around 5 per cent of their total exposures.

This was revealed by Deputy Prime Minister Tharman Shanmugaratnam in response to MP for Chua Chu Kang Ms Low Yen Ling's question on the spillover effects of the eurozone crisis on Singapore's banking sector and overall economy.

He added that banks in Singapore also have a low dependence on the Eurozone for funding, with less than 8 per cent of their funding coming from the Eurozone.

Credit supply in Singapore has also not been significantly affected by Eurozone bank deleveraging, he said.

While some Eurozone banks have reduced lending to conserve capital and liquidity, others have been able to obtain increased funding from their head office to support their Asian businesses.

More importantly, other well-capitalised banks with strong liquidity positions, including Singapore and other Asian banks, have stepped in as some Eurozone banks pulled back from their traditional strongholds such as trade finance.

In fact, on aggregate, trade finance activity has continued to grow, he said.

However, he acknowledged that should there be further, significant deterioration in the economies and financial markets of the Eurozone, the Singapore economy will not be insulated.

The spillover effects will manifest largely through the trade and financial channels, he said. Trade-related sectors, including manufacturing and transport, are likely to be the most adversely affected.
There could be some pullback in credit amidst heightened risk aversion, and financing costs could rise.

In the financial services sector, sentiment-driven activities such as stock broking and foreign exchange trading could also see a decline in transaction volumes.

Mr Tharman said the Eurozone situation remains very fluid and the Government is monitoring developments closely and stands ready to act should conditions take a turn for the worse.

"We will ensure that sound businesses continue to have access to financing, and that households and workers receive appropriate assistance," he reassured the public.

As for the specific measures, it will depend on the how the economic situation unfolds, he said.