Ireland downgraded two notches by Moody's

DOWNGRADING ON THE CARDS:

Moody's Investors Service cut its rating on Irish government bonds by two notches to Baa3 from Baa1 and said the outlook on the ratings remains negative. The rating agency said the main drivers for the downgrade are the further weakening of the Irish government's financial strength and the uncertainty created by the solvency test required by the European Stabilization Mechanism, which is required for the provision of future liquidity support. Moody's said the ongoing austerity package in Ireland is weakening domestic demand and that the government's financial strength may suffer due to what may be the first in a series of policy rate increases by the European Central Bank.

India’s March inflation rises to 8.98% vs 8.31% in Feb

The wholesale price index (WPI) for the year rose to 8.98% in March as against 8.31% in February on higher fuel and manufactured product prices.

The reading for January was upwardly revised to 9.35% from 8.23%.

The food price index rose 8.28% and the fuel price index climbed 12.97% in the year to April 2. In the previous week, annual food and fuel inflation stood at 9.18% and 13.13%, respectively. The primary articles price index was up 11.40%, compared with an annual rise of 12.97% a week earlier.

With increased Inflation, market is expecting a 25 basis points and not a 50 basis points rate hike on May 3, 2011.

India's February IIP growth at slower-than-expected 3.6% versus 3.7% in January

Industrial growth slowed to 3.6 per cent in February, 2011, compared to 15.1 per cent expansion in the year-ago period, dragged down by poor performance of manufacturing and mining sectors. 

However, overall 15 out of 17 industry groups achieved positive growth in the second month of 2011. 

This was because of slippages in performance of capital goods and basic goods sector, though consumer goods sector continued to post good results.

The deceleration in IIP, according to Planning Commission Deputy Chairman Montek Singh Ahluwalia, will not impact the gross domestic product growth rate, estimated at 8.6 per cent during 2010-11, as the shortfall will be made up by robust farm sector growth. 

Further interest rate increases later this year remain likely.

Despite subdued industrial production results, hawkish rhetoric from senior RBI representatives in the past month suggests the next interest rate increase could come as early as 3 May.

The Reserve bank has already hiked policy rates eight times since March 2010 to tame inflationary pressure. 

The overall inflation in February was 8.31 per cent. 

It has remained above the 8 per cent mark since February 2010 and renewed concerns have been expressed over rising crude prices on account of the conflict in Libya. 

Meanwhile, the IIP for January 2011, has been revised upwards to 3.95 per cent, from 3.7 per cent. During April-February period of current fiscal, industrial growth slowed to 7.8 per cent, from 10 per cent in the same period of the previous financial year. 

The slower growth is due to a combination of factors -- higher base and slowing of investments. 

Higher input costs as well as tightening interest rates are expected to moderate the industrial growth going forward. 

Factory output was low in February as capital goods contracted by 18.4 per cent.

The sector had expanded by a robust growth of 46.7 per cent in February, 2010. In February, manufacturing growth plummeted to 3.5 per cent from 16.1 per cent during the same period a year ago.

However, production in the consumer non-durables segment went up by 6.1 per cent during the month under review. 

 

It had contracted by 0.8 per cent in the same period of 2010. Consumer durables segment grew by 23.4 per cent in February as against 29.1 per cent in the same month of last year. 

Overall consumer goods reported a rise of 11.1 per cent as against 6.3 per cent in February last year.

Intermediate goods reported a rise of 8.4 per cent during the month as against a growth of 15.9 per cent in February 2010. 

 

Mining growth also plummeted to 0.6 per cent in the month under review from 11 per cent in the comparable month of 2010. 

Electricity generation output rose by 6.7 per cent in February, compared to 7.3 per cent growth in the same month last year. 

The economy has expanded at more than 8 percent in the last three quarters, riding on strong manufacturing that contributes about 80 percent of the industrial output.  

India's exports jumped an annual 49.7 percent in February to $23.6 billion, while imports rose 21.2 percent to $31.7 billion, latest government data showed. 

European Central Bank hikes rates

The European Central Bank delivered its first rate hike since 2008 despite the euro zone’s newest debt woes in a bid to prevent rising inflation pressures from becoming entrenched.

The Frankfurt-based ECB raised its reference rate to 1.25% from 1%, the first hike since July 2008. The central bank also boosted other rates by a quarter point, raising its marginal lending facility rate to 2% and its overnight deposit facility rate to 0.5%.

The rate hike came as European officials wrestled with an ongoing debt crisis that claimed its third victim too, with Portugal following Greece and Ireland in requesting an emergency bailout after its borrowing costs soared to unsustainable levels. 

Traders had anticipated a hike since last month, when it was indicated that the rate-setting Governing Council would watch inflation developments with “strong vigilance,” a term used previously to signal rate hikes. 

Official data showed annual inflation running at 2.6%, topping the ECB’s target of near — but just below — 2%.

A rate hike may exacerbate the region’s long-running sovereign-debt problems. While the euro-zone economy is growing amid an industrial boom in Germany and other core countries, nations on the periphery are struggling with austerity measures designed to bring down huge budget deficits.

Now this act of ECB will act as a Double Sword and at the same time will not have any major impact on the economy, as already the economy is struggling with heavy Debt Burden. Instead of a SOLUTION, this and further rate hikes may turn into a BLOCKADE.  

BOJ Puts Up $11.73 Billion for Rebuilding

Days after the quake, the BOJ doubled its asset-purchase program to Y10 trillion to bolster sentiment in the world's third-largest economy. It has also been aggressively providing liquidity into the money market to meet any surge in funding demand.

The Bank of Japan has announced steps to get $11.73 billion in funds to the country's earthquake-ravaged areas but remained opposed to buying bonds directly from the government to assist reconstruction.

The central bank voted unanimously to keep its overnight interest-rate target at 0.0%-0.1%. But it cut its economic assessment, given expectations that the impact of the March 11 earthquake and tsunami and subsequent nuclear crisis will be widespread.

"Japan's economy is under strong downward pressure, mainly on the production side," the bank said in the statement. "The earthquake has sharply dampened production in some areas by damaging production facilities, disrupting the supply chain and restricting electric power supply; exports and domestic private demand have been affected accordingly."

The BOJ said it will offer ¥1 trillion in one-year loans at 0.1% to financial firms with branches in affected areas, to facilitate a smooth flow of cash to the quake-hit northeast. The central bank will also consider broadening the range of financial assets it accepts as collateral in a bid to secure "sufficient financing capacity of financial institutions in disaster areas."

Details of the two measures will be decided by the next monetary policy board meeting, on April 28, when the BOJ will also release its semiannual outlook on the economy and prices.

Apparent purchase ¥100 billion in Tepco corporate bonds—the maximum amount of debt in a single company that the central bank allows itself to buy under its own program—was still small compared with an outstanding balance of around ¥5 trillion in Tepco corporate debt, most of which is held by Japanese institutional investors.

Before the quake, Tepco bonds were considered a virtual derivative of Japanese government bonds, being as the company had a solid revenue stream as the utility for the entire Tokyo area.

Debt underwriting is generally a taboo among central banks on concerns that it would appear to give governments a blank check for uncontrolled spending. Still, the idea has surfaced intermittently as Japan has lurched from crisis to crisis over the past 20 years. It is banned by law under normal circumstances but possible if approved by Parliament.

Although the central bank lowered its economic outlook in the wake of the disasters that have left more than 27,000 dead or missing, it maintained a positive outlook for the longer term. It said the economy is likely to return to "a moderate recovery path" as exports and domestic demand are expected to pick up on the back of improvement in overseas economies and post-quake reconstruction.

Governor, Mr. Shirakawa expects supply chains to be restored by June or July, though he said he isn't sure when supply shortages caused by unstable electricity supply and damages at production sites will improve.

PORTUGAL: Debt Crisis (From missing its Budget Deficit Goal to its asking of Help from EU)

Portugal missed its 2010 budget-deficit goal

EVENT DATED: 31^st March 2011

Portugal missed its 2010 budget-deficit goal and had been forced to revise previous-year figures, a blow to market confidence in the country's fiscal management.

Amid the deepening financial crisis, President Aníbal Cavaco Silva set June 5 as the date for early elections, in a move to help lower political uncertainty.

The country is facing a deep financial, political and social crisis that will require a majority government.

Mr. Sócrates will act as caretaker prime minister until a new administration takes over. As Portugal's thin cash reserves and record financing costs push the country closer to a potential bailout, the prime minister has fiercely resisted pressure to follow in the steps of rescued EU members Greece and Ireland.

Portugal's official statistics agency said that the budget deficit stood at 8.6% of gross domestic product in 2010. Its target had been 7.3%. The deficit recalculation came after European Union statistics agency Eurostat said Lisbon needed to include a €2 billion ($2.83 billion) cash injection into nationalized Banco Português de Negócios and to recast loans to unprofitable mass-transport companies. Those loans are threatened with default and shouldn't be regarded as assets, Eurostat said.

Without the changes, the deficit would have been 6.8% of GDP, a figure the government has backed for months.

Portugal has been facing increased pressure to request a bailout, with some market watchers wondering if the country can reduce big budget gaps in time to avoid having to restructure its debts. After Ireland and Greece sought aid last year, Portugal became the next casualty of the euro zone's government-debt crisis.

Late Thursday, Portugal surprised markets by announcing that it would hold an extraordinary debt auction Friday to raise up to €1.5 billion. Saying it was "due to specific demand," the Treasury said it will hold an auction Friday morning of bonds maturing in June 2012.

The agency had said that it would issue government bonds in the second quarter, either through regular or extraordinary auctions, subject to market conditions. It also said it will continue to explore issuance opportunities through alternative funding instruments.

After the deficit revision, the finance ministry said it would meet its debt repayments but conceded that the situation has become worse than a week ago. The country has to make around €9 billion in bond repayments between April and June, but market participants are worried the government won't be able to cover all those payments given a surge in borrowing costs to unsustainable levels. Market participants expected the government have to request a bailout in the near term to deal with unsustainably high borrowing costs.

The political vacuum has unsettled investors.

The International Monetary Fund reiterated that Portugal hasn't requested any financial assistance from the IMF.

European policy makers have given Portugal and other highly indebted countries until 2013 to lower their budget deficits to the 3%-of-GDP limit set for euro-zone members.

The government had said it would seek to raise up to a total of €7 billion via Treasury bill sales, starting with an auction of up to €1 billion of six- and 12-month T-bills on April 6.

Portugal hasn't said how much cash it currently has on hand. It had €2 billion in cash at the end of 2010.

MOODY’S DOWNGRADES PORTUGAL

EVENT DATED: 05^th April 2011

Moody’s Investors Service on Tuesday delivered the latest in a series of ratings-agency downgrades to Portugal’s government bonds, citing fears the country will have difficulty meeting its deficit-reduction goals and underlining expectations the country will be forced to seek a bailout.

Moody’s said it sees increased political, budgetary and economic uncertainty in Portugal. The country’s minority government recently fell apart after failing to win support in parliament for a fourth round of austerity measures, setting the stage for a June 5 general election.

Moody’s cut Portugal's rating by one notch to Baa1 from A3 and put the rating on review for a possible further cut. The move comes after Moody’s cut Portugal’s rating by two notches last month.

“Moody’s believes that the government’s current cost of funding is nearing a level that is unsustainable, even in the short term. A critical part of the review will focus on the ability of the government to secure financing at a less elevated level, either through the capital markets or through [European Union] support,” Moody’s said.

The way the Portuguese bond yields soared to unsustainable levels, signaled a speculation that Lisbon will eventually be forced to follow fellow euro-zone members Ireland and Greece in seeking an international bailout in order to meet its funding needs.

In the wake of the downgrade, the cost of insuring Portuguese government debt against default through credit default swaps topped the cost of insuring Irish government debt for the first time since August.

Portugal also recently announced that its budget deficit was 8.6% of gross domestic product last year, above the government’s target of 7.3%. The 2009 deficit was revised up to 10% from a previous estimate of 9.3%.

Portgual faces a total of around 9 billion euros ($12.8 billion) in government bond redemptions in April and June.

Moody’s cited the budget revisions as a reason for the downgrade, as well as the nation’s “uncertain political outlook” and “short- and medium-term funding challenges.”

Fitch Ratings also cut Portugal’s rating by three notches to BBB-minus from A-minus. A cut by Standard & Poor’s left Portugal’s rating one notch above junk status at BBB-minus.

Portugal finally asks EU (EUROPEAN UNION) for help

EVENT DATED: 06^th April 2011

Portugal’s Prime Minister, Jose Socrates, told the nation that the assistance was “inevitable” after parliament rejected an austerity plan. 

Portugal has joined Greece and Ireland in receiving bailouts from the European Union and the International Monetary Fund.

The country faces around €4.3 billion ($6.2 billion) of bond redemptions in April, followed by a repayment of €4.9 billion in June. It’s unclear how much cash Portugal has on hand, but it can’t afford June’s repayment.

The total bailout may reach €80 billion, compared to the €85 billion Ireland received and €110 billion for Greece.

Ratings agencies have slashed Portugal’s sovereign-debt ratings within a whisker of junk status, following the minority government’s inability last month to pass a fourth round of austerity measures. The government also missed its 2010 deficit target.

Domestic financial institutions hold around 14% of Portuguese government debt. Other residents, including pension funds, hold 19%; the European Central Bank holds 17% through the Securities Market Program. Other nonresidents hold about 50%, of which euro-zone banks hold 18%.