Sunday newspaper round-up: QE3, French outlook, Euro risks

4th Dec 2011 17:54

Business leaders have today called for a further £50bn to be pumped into the UK economy as fears grow of a new year recession. Bank of England policymakers are widely expected to this week hold their programme of quantitative easing at £275bn. Interest rates are likely to be frozen for the 33rd month in a row, at 0.5%. However, the British Chambers of Commerce (BCC) today warned of a worsening economic backdrop and argued for immediate action from the central bank at Thursday's rate-setting meeting. The business group pointed to last week's drastic downgrading of the nation's growth prospects for this year and next, government deficit cuts and the ongoing woes in the Eurozone. "In the face of these challenges, there is a strong case for the Monetary Policy Committee [MPC] to announce a further £50bn increase in the QE programme this week to £325bn," said David Kern, chief economist at the BCC, reports Scotland on Sunday."Yet as the crisis deepens, an alarming prospect looms: that France's own status could lapse, and thus its clout at the heart of the eurozone. France is by far the most vulnerable of the zone's six AAA-rated countries. It has the highest level of debt as a share of GDP. Its banks are particularly exposed to the troubled periphery, especially Italy. The spread of French over German bonds recently hit its highest level since the launch of the euro (though it has fallen back a bit), suggesting that traders are already anticipating a downgrading. Moody's, a ratings agency, has put France's AAA rating under surveillance, with a reassessment due in January. Guillaume Menuet, an economist at Citigroup, expects a negative outlook on French sovereign debt within weeks, followed by a formal downgrade in 2012," comments The Economist. "The worst scenarios for the euro, and for the economies that use it, have still not remotely been priced in to currencies or share prices. So the risks remain skewed towards far more wealth being written off before the crisis is past. This week's rally only intensifies that risk. Scattered around the world, there are reasons for cautious optimism. The US economy seems much stronger than a few months ago. China this started to ease monetary policy, to try to engineer a "soft landing." But anyone betting on a broad recovery would be wise to hedge that with a bet on the euro to go down. At some point that dog will bark," The FT's John Authers writes this weekend. In an article entitled "The eurozone's darkest hour is always just before dawn", Tony Barber, the FT's Europe editor, this weekend says that, "Arguably, the real question is not what EU leaders may or may not decide on Friday. It is what may happen in financial markets. A big bank failure, a run on deposits, a bond market strike - any of these events could shatter the eurozone. EU Summits once provided ingenious fixes to difficult problems. But this time a summit is unlikely to be enough." "They can't continue to muddle through," said Andrew Balls, who runs Pimco's European investments. "They'll either have to signal their position or you'll get a continued disengagement by investors from the eurozone." The stark assessment comes ahead of a gathering of European leaders in Brussels that has been billed as a summit that cannot afford to fail. (...) But as leaders battled the crisis, Jacques Delors, the former president of the European Commission, told The Daily Telegraph yesterday that the euro project was flawed from the start and accused the current generation of leaders of doing "too little, too late" to support the currency. Mr Delors, 86, who played a central role in the creation of the euro in 1999, said that the current crisis arose from "a fault in execution" by the political leaders who turned a blind eye to the fundamental weaknesses and imbalances of member states' economies, The Telegraph reports. Aviva, the FTSE 100 insurance group is exploring whether to raise funds by offloading some of its so-called back book of annuities - policies that provide retirement incomes to pensioners. Potential bidders could include industry consolidators such as Pension Corporation or Rothesay Life, part of Goldman Sachs. Although the plans are believed to be at an early stage, it is understood the company is only prepared to sell some of the annuity assets, rather than the entire portfolio, which is worth several billion pounds, insiders say. The FTSE 100 insurance group is exploring whether to raise funds by offloading some of its so-called back book of annuities - policies that provide retirement incomes to pensioners. Last month, Aviva saw its regulatory surplus capital fall from £4bn at the end of June to £2.7bn. At the time, the company said this was impacted by "market movements", with widening credit spreads accounting for about £700m and a further £400m reduction caused by falling equity markets, according to The Telegraph. JC Flowers, the American private equity firm, has set aside a £1.5bn "war chest" to buy mortgage books from British banks after failing to purchase Northern Rock. The US firm, founded and run by former Goldman Sachs banker Christopher Flowers, is to move to what one source called its "Plan B" for the UK market after it lost out to Virgin Money in the £1bn auction for the state-owned bank. The move also follows its failure to secure the purchase of Principality, the UK's seventh largest building society, which it had hoped to merge into its OneSavings Bank vehicle, which was formed from its acquisition of the Kent Reliance Building Society last year, says the Sunday Telegraph. The government is proposing to build up to 32,000 new wind turbines with many thousands more transmission pylons as it struggles to meet green targets. A report by Chris Huhne's Department of Energy and Climate Change says the huge expansion is essential if Britain is to meet its obligations to cut greenhouse gas emissions. At present, there are about 3,000 onshore wind turbines with a few hundred offshore. They have helped cut carbon emissions but generate only 1-2% of the nation's power. The energy secretary wants to convert all Britain's vehicles and homes to run on electricity by 2050 (...), The Times reports. A plan by one of Britain's biggest engineering firms to create 800 jobs in Bristol has been scuppered after losing a key contract to build parts for a new Airbus jet to a South Korean rival. GKN, the £3bn aerospace and car parts manufacturer, had been favourite to land a contract to make high-tech wing components for Airbus's revamped A320 at its plant in Filton. Despite frantic last-ditch negotiations between GKN and Airbus over the weekend, the plane maker now looks set to hand the lucrative deal to Korean Aerospace Industries instead. The lost contract deals a heavy blow to the ambitions of the coalition government, which has pledged to boost the importance of engineering and manufacturing to the economy, says The Times.AB