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from MacroScope:

Euro zone may struggle with its own Lost Decade

Additional Reporting by Andy Bruce and polling by Rahul Karunakar and Sumanta Dey.

As Europe’s crisis drags on, the prospect of a Japanese-style lost decade of economic malaise is becoming increasingly real, according to a new poll. Half of the bond strategists and economists surveyed by Reuters are now expecting just such an outcome.

Many market participants have dismissed the fall of two-year German bond yields below their Japanese counterparts as being merely a result of a crisis-fueled flight to quality bid. Two-year German yields are now close to zero, offering returns of only 0.02 percent. By contrast, equivalent Japanese bonds are yielding 0.11 percent.

But a significant portion of analysts in a Reuters poll see something more sinister in the rapid narrowing of the premium investors require to hold German debt over Japanese bonds. One half of those polled – 12 out of 24 – said it is likely the euro zone is close to entering a period of prolonged low or no growth and inflation and low interest rates, with the other half saying it was unlikely.

According to Stephen Lewis, chief economist at Monument Securities:

I don't really see an early end to the financial crisis in the euro zone. I think it's very unlikely that Germany and the other countries will see eye to eye in the course of this year. That's going to keep the euro zone economy looking very weak for the next several quarters.

Europe's economy stagnated in the first quarter of 2012 and is expected to shrink 0.4 percent this year, according to another recent Reuters poll. Data on Thursday certainly pointed in that direction, suggesting even wealthier countries like France and Germany are also starting to feel the pinch.

from Breakingviews:

Summit silence on Greece is best option for now

By Pierre Briançon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

For once euro zone leaders did the right thing, the very thing they have been unable to do throughout the euro crisis: shut up. Their nine-line communiqué to say nothing on the subject was the only sensible option after their informal dinner Wednesday night. The other alternatives would only have made things worse. And whatever the pundits’ or markets’ expectations may be, it’s better for the euro summiteers to keep mum than to pretend having the answer which only the Greeks can provide.

Greece’s euro partners would like the second Parliamentary election, to be held on June 17, to become a de facto referendum on membership of the single currency. But they can’t insist too much without appearing to interfere in the Greek electoral process. The zone’s leaders are most probably ready to offer some concessions on the bailout programme to show that the euro is not just about pain and punishment. But they can’t reveal their hands before the election, because the radical parties rejecting austerity might feel emboldened and demand more concessions ahead of the vote.

Meanwhile, euro zone leaders and the European Central Bank must brace for the worst-case scenario of a Greek chaotic euro exit. But they can’t publicly admit that they’re planning for it, because it could amount to a self-fulfilling prophecy, and because markets turn south every time a European official simply mentions the possibility of Greece leaving the monetary union.

So what’s to do? Keep calm and carry on planning for the day after the Greek election - which, as it happens, will be the first day of the G20 leaders’ summit in Mexico. That may be difficult in a 17-country glass house and a 24-hour news cycle. But euro zone leaders must prepare plans for either dropping Greece, or supporting it with a plan to boost growth in an aggressive way. Strains in Spain, or Italy, might force them to the podium. But silence, in the next three weeks, will be golden.

from Breakingviews:

Italy’s new off balance sheet wheeze

By Neil Unmack

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Rome is in a bind. Arrears to local companies are choking the economy, but funding them upfront could push up the country’s debt and spook markets. So Italy is using banks to front some of the money in a way that avoids pushing up its debt at least for the time being.

Rome’s unpaid bills by local authorities and other government entities to private suppliers are estimated at about 70 billion euros, or 4 percent of GDP. Euro zone accounting rules allow governments to exclude commercial arrears from their public debt levels until they are paid. But accumulating arrears hurts the economy, and a European directive next year will force governments to recognise unpaid bills. Spain has started to bite the bullet; it recently recognised 35 billion euros of arrears owed by its regions as debt, and is taking out a loan to pay them off.

Italy has just announced a plan to clear up to 30 billion euros of arrears by year end - but in a way that won’t affect its reported debt levels. Some of the arrears will be netted off against unpaid taxes that the suppliers owe. A further 6 billion euros was set aside to clear arrears in last year’s austerity package.

To handle the remaining chunk, Rome has come up with an elaborate piece of financial engineering. Italian banks will lend to suppliers once they have obtained a certification to prove that the payments are legitimate. The loans leave the bank exposed to credit risk. But a separate central government-backed fund will provide banks with guarantees. Those, in turn, will cut the risk weighting on the loans so enabling banks to offer suppliers better terms. As these guarantees are contingent liabilities, they too should stay off the government’s balance sheet unless called on.

This jiggery-pokery is a stop-gap solution. At some point the government will still need to pay the bills. And going through the banks may be less speedy than the government just paying the supplier directly. Still, with debt equivalent to 120 percent of GDP and markets febrile from the Greek crisis, it easy to see why Rome prefers keeping things off-balance sheet.

from India Insight:

It’s time India bites the diesel bullet

"81 rupees?" asked an astonished TV anchor when an irate Bengaluru-based consumer called in after the recent 7.5-rupee hike in petrol prices. Perhaps cars that run on milk are now needed, the anchor suggested -- when the caller said the dairy product costs around 30 rupees a litre.

While milk-powered automobiles might be a distant dream, the reality remains that those relying on petrol vehicles will now need to do their budgeting again. If a falling rupee and high inflation were not enough, this steepest-ever rise in petrol prices will surely pinch.

The fact remains that petrol prices were decontrolled way back in June 2010. That move gave oil marketing companies (OMCs) freedom to revise prices and also gave the government some saving grace as ministers can now easily say that petrol prices are market driven.

Though the government cannot be blamed for this hike on paper, they do manage to influence OMC decisions. That is indicated by the fact that this hike comes after state elections and a day after the parliament’s budget session got over.

However, it is tough to understand why the government would allow OMCs to raise petrol prices, given the move will not help improve the fiscal situation as the government doesn’t subsidise petrol. It is the subsidy burden of other fuels that strains the government’s finances.

As Hitendra Dave, global markets head at HSBC in Mumbai explained -- This (the petrol price hike) has zero fiscal impact. This will only help oil marketing companies.

What was perhaps more needed at this stage was a revision or decontrol of other fuel prices, which could help boost the already weak economic sentiment.

from MacroScope:

Manifest currency? U.S. dollar’s global dominance not set in stone

Incumbency, it is often said, confers many advantages.

Sitting U.S. presidents certainly have reaped its benefits – in the past 80 years, only three have been unseated.

Most economists believe the same benefits apply to reserve currencies. Yes, the U.S. dollar may one day be supplanted as the leading international currency, the thinking goes, but that day is many decades away.

Then again, maybe not.

A new working paper from the National Bureau of Economic Research that looks more closely at the dollar's own rise to the top in the 20th century suggests, among other things, that "the advantages of incumbency are not all they are cracked up to be."

By looking at the currency denomination of foreign public debt issued by 33 countries from 1914 to 1946, the authors – University of California-Berkeley professor Barry Eichengreen and Livia Chitu and Arnaud Mehl of the European Central Bank – find that dollar-denominated bonds were nearly equal to those priced in sterling by the late 1920s. That's about two decades earlier than the date assumed by previous scholars.

When stripping out Commonwealth countries that had strong commercial and political links with Britain, the dollar overtook sterling in 1929.

from MacroScope:

Asian Americans hit hardest by long-term unemployment

Asian Americans have the highest rate of long-term joblessness of any ethnicity in the United States, according to a report from the Economic Policy Institute, a liberal think tank in Washington.

Last year marked the second year in a row that Asian Americans had the largest share of unemployed workers who were unemployed long term (i.e., for six months or more). In 2011, 50.1 percent of the Asian American unemployed were unemployed long term, up from 48.7 percent in 2010. In both of these years, the Asian American share slightly exceeded the African American share.

Federal Reserve Chairman Ben Bernanke and other central bank officials have argued long-term unemployment is an enormous challenge, but have been reluctant to apply additional monetary stimulus to the problem. In March, Bernanke said:

Although most spells of unemployment are disruptive or costly, the persistently high rate of long-term unemployment we have seen over the past three years or so is especially concerning.

from Global Investing:

Three snapshots for Wednesday

On Friday 283 companies in the S&P 500 had a dividend yield higher than the 10-year Treasury yield, at yesterday's close this had fallen to 266 but remains very high compared to the last 5-years.

Italian consumer morale plunged to its lowest level on record in May as Italians' pessimism over the state of the economy plumbed new depths.

Germany set a zero coupon on its new Schatz, the first time it has done so on debt of such maturity. The bid to cover ratio for the new bond at the auction was 1.7, compared with 1.8 at a sale of two-year debt on April 18.

The average yield at the sale was 0.07 percent.

from Expert Zone:

Should the RBI delay a rate cut?

(The views expressed in this column are the author's own and do not represent those of Reuters)

With the return of inflation, there are doubts whether the Reserve Bank of India (RBI) will go in for the next cut in repo rate any time soon. In April, inflation was up at 7.2 percent, 2 percent more than in March.

What is more disturbing -- the food component of inflation was in double digits. With the extreme sensitivity of the RBI to inflation, it is difficult to expect it to take kindly to the fall in industrial production and cut the repo rate.

Food inflation, however, is not the parameter for the RBI to go by because it is outside the impact area of RBI policy. No one buys food by borrowing from the bank and, whatever the interest rate, the expenditure on food will not be reduced and food inflation will not ease.

It is more relevant for the RBI to look at the core inflation or principally, inflation in the industrial sector. No doubt, prices of industrial products have also been rising but at a much slower rate. In April, prices of industrial products were up 1 percent over prices in March. Inflation in the industrial sector was 5.1 percent over the year, well within the RBI’s tolerance limits.

Industry is the major sector that responds to RBI policy. An increase in the interest rate will most certainly crunch investment and a cut, stimulate it. In March, for instance, investment was down 21 percent   because 142 projects involving an investment of 1,553 billion rupees were shelved, being rendered unviable due to the high rate of interest and absence of market for equity.

But the RBI’s single target is inflation. Even on April 17, the cut in repo rate was done quite reluctantly though it was a good beginning. It is critical that it has to be carried forward before it can regenerate investment and revive growth. The RBI had done that in 2008 when the economy had slowed down. The repo rate was 9 percent in 2008 and the RBI cut the rate by 1 percent in October, in spite of inflation raging at 12 percent. That cut was followed by another in November and once again in December. In just three months, the repo was down 2.5 percent from 9 to 6.5 percent, with inflation dropping to 5 percent.

from Global Investing:

Three snapshots for Thursday

Fears that Athens is on the brink of crashing out of the euro zone and igniting a renewed financial crisis have rattled global markets and alarmed world leaders, with Greece set to figure high on the agenda at a G8 summit later this week. This chart shows the impact on assets since the Greek election:

Euro zone banks now account for only 8% of total euro zone market value - they were over over 20% of the market in 2007:

Japan's economy rebounded in January-March from a lull in the previous quarter, shaking off the pain of a strong yen and Europe's debt crisis on solid consumer spending and rebuilding from last year's earthquake.

from MacroScope:

In QE3 waltz, Fed again steps toward easing

On again, off again. That’s been the story with prospects for another round of monetary stimulus from the Federal Reserve. Expectations for a third installment of quantitative easing, the much-debated QE3, had ebbed with improving economic data in the first quarter – but are now flowing anew.

Following a weak employment report for last month, the latest hint that more bond buys could be in the offing came from minutes of the central bank’s April meeting, which saw the Fed leave rates near zero and repeat that it would likely hold them there until at least late 2014. Policymakers appeared to be taking an increasingly dim view of economic prospects given an array of looming threats to growth, even if none are particularly new.

According to the minutes:

Participants identified several downside risks to the projected pace of economic expansion, including the fiscal and financial strains in the euro area and the possibility of an abrupt fiscal consolidation in the United States.

To Millan Mulraine at TD Securities, the more negative tone suggested a modestly greater inclination to lean in the direction of easing. In particular, Mulraine singles out this sentence in the minutes:

Several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough.

Writes Mulraine: