September 26, 2020

Europe Heeding International Call to Do More to Spur Growth

Yet in a change, signs suggested that European leaders were starting to agree, with more high-ranking ministers and officials talking up the need to slow the pace of budget cutting and bolster growth on the Continent.

At the outset of the gathering of finance ministers and central bankers last week, the I.M.F. lowered its global growth forecasts, again citing weakness from Europe. And Christine Lagarde, managing director of the fund, separated nations into three groups that might be described as strong, trying and laggards.

In the first group she placed the developing and emerging economies that are the engine of global growth. In the second she put countries that are gaining momentum in their recoveries, like the United States. The third group, she said, contains countries that continue to struggle with their policy response to the crisis — not growing, and hindering global growth. That group includes many countries in high-income Europe, including Britain, Germany and Italy.

At a news conference during the meetings, Ms. Lagarde said such countries should try “anything that works” to create jobs. That starts “with growth and a good policy mix, which relies on not just one policy but a set of policies that will include fiscal consolidation at the right pace,” she said, also citing structural changes and loose monetary policy as necessary.

The debate at the meetings focused on helping to identify that right mix of policies, with officials from the fund and countries including the United States arguing that austerity had sapped too much demand, too soon, from the Continent. In the past, European officials tended to brush off such advice. And some powerful officials continued to do so last week, instead emphasizing budget cutting to soothe financial markets.

“Fiscal and financial sector adjustments remain crucial to regain lost credibility and strengthen confidence,” said Wolfgang Schäuble, the finance minister of Germany and a powerful voice promoting austerity in Europe. “At the current juncture, it is in particular the responsibility of the advanced economies, including Japan and the U.S., to follow through with ambitious fiscal consolidation over the medium term.”

George Osborne, the British chancellor of the Exchequer, echoed that sentiment, even as high-level officials at the fund repeatedly criticized the government of Prime Minister David Cameron for its campaign of budget cuts.

“The priority for most advanced economies is still to restore fiscal sustainability,” Mr. Osborne said in a statement. “Continued consolidation is needed over the medium term, supported by highly accommodative monetary policy.”

But the fund downgraded its growth estimates for several large European economies, including those of France and Germany, last week. Many have re-entered a period of economic contraction, with their unemployment rates continuing to rise. In light of that, other European officials said a renewed focus on growth — by slowing budget cuts, changing deficit targets or taking other measures — might be appropriate.

“They are preaching to the converted,” Olli Rehn, the European commissioner for economic and monetary affairs, was quoted by Reuters.

“In the early phase of the crisis, it was essential to restore the credibility of fiscal policy in Europe because that was fundamentally questioned by market forces,” Mr. Rehn added. “Now, as we have restored the credibility in the short term, that gives us the possibility of having a smoother path of fiscal adjustment in the medium term.”

In a communiqué, the finance ministers and central bank governors of the Group of 20 large economies said: “We have agreed that while progress has been made, further actions are required to make growth strong, sustainable and balanced.”

They urged a closer banking union in the euro zone and for “large surplus economies” to take “further steps to boost domestic sources of growth.”

In her opening remarks, Ms. Lagarde also cited Japan as having continued to struggle with slow growth. But at the spring meetings, Tokyo won plaudits for its ambitious new campaign of fiscal and monetary stimulus to bolster demand and end the deflation that has plagued the economy for more than a decade.

Some finance ministers had questioned the Bank of Japan’s aggressive easing of monetary policy, arguing that it was aimed at pushing down the value of the yen and as a result unfairly favoring Japanese exports. If other countries followed suit to try to devalue their currencies, it could set off a round of “currency wars,” some warned.

But the Group of 20 communiqué stated that “Japan’s recent policy actions are intended to stop deflation and support domestic demand,” a tacit nod to the recent round of easing. And the I.M.F. raised its estimates of Japan’s growth on the back of the government’s new policy moves.

At the meetings, Dr. Jim Yong Kim, the new president of the World Bank, also outlined his policy goals: the effective eradication of extreme poverty in a generation. The world has achieved the Millennium Development Goal of halving extreme poverty by 2015. To cut the rate to 3 percent by 2030, Dr. Kim said, would require strong, inclusive growth.

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S.&P. Downgrades Italy’s Credit Rating a Notch

The ratings firm cut Italy’s long- and short-term sovereign credit ratings to “A/A-1” from “A+/A-1+.” The rating is still five steps above junk status.

The ratings agency has a negative outlook on Italy’s ratings and listed Italy’s political issues and heavy debt load as the main factors contributing to the downgrade. It anticipates that political differences will likely limit Italy’s ability to respond decisively to its debt crisis.

“What we view as the Italian government’s tentative policy response to recent market pressures suggests continuing future political uncertainty about the means of addressing Italy’s economic challenges,” SP managing director David T. Beers wrote in a research note outlining the credit rating downgrade.

Last week, Italy’s Parliament gave final approval to Premier Silvio Berlusconi’s government’s austerity measures, a combination of higher taxes, pension reform and spending cuts. The planned cuts and taxes sparked street protests in Rome similar to those in other European countries trying to come to grips with the economic crisis.

Berlusconi has said that the government’s austerity measures will shave more than 54 billion euros ($70 billion) off Italy’s deficit over three years.

The European Central Bank had demanded stiff austerity measures to calm markets roiled for weeks over doubts about how serious Italy is about coming to grips with its debt. Italy is the eurozone’s No. 3 economy and has a deficit to gross domestic product ratio of 120 percent, one of Europe’s highest.

The bank has spent billions over the last month buying up Italian government bonds in a bid to lower Italy’s borrowing costs and keep it from becoming the next eurozone nation to need an international bailout. The SP downgrade, however, could lead to higher borrowing costs for Italy because it implies that investors face greater risks when buying Italian debt.

SP said that weaker economic growth will likely limit the effectiveness of the government’s economic plan.

“We believe the reduced pace of Italy’s economic activity to date will make the government’s revised fiscal targets difficult to achieve,” SP said.

The firm projects that Italy’s real gross domestic product will grow at an annual average of 0.7 percent between this year and 2014, down from an earlier projection of 1.3 percent growth.

Italian officials have reportedly held talks with China’s sovereign wealth fund in an effort to persuade Beijing to buy Italy’s government bonds or invest in its companies. The nation’s financial crunch also has prompted Rome to consider selling stakes in major state-owned companies such as power utility Enel or oil and gas supplier Eni, according to news reports.

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Moody’s Warns of Possible Downgrade to Japan’s Debt Rating

HONG KONG — Moody’s warned on Tuesday that it may downgrade its sovereign debt rating for Japan, joining other ratings agencies in taking a more pessimistic view of the Japanese economy after the March 11 earthquake and tsunami.

The disaster hit an economy that was already struggling with persistently anemic growth, periodic deflation, an aging population and high government debt levels.

Moody’s kept its rating for Japanese bonds unchanged at Aa2, but said its decision to review the rating for a possible downgrade had been prompted by “heightened concern that faltering economic growth prospects and a weak policy response would make more challenging the government’s ability to fashion and achieve a credible deficit reduction target.”

Without an effective strategy, the ratings agency said, government debt “will rise inexorably from a level which already is well above that of other advanced economies.”

Although a financing crisis is unlikely in the near- to medium-term, “pressures could build up over the longer term,” Moody’s said. “Moreover, at some point in the future, a tipping point could be reached, and at which the market would price in a risk premium to government debt.”

The Japanese economics minister, Kaoru Yosano, said in a news conference in Tokyo that he was unhappy about Moody’s move but added that the government must preserve fiscal discipline.

“The government and politicians must always bear in mind the need to maintain fiscal discipline and must act to achieve this end,” Mr. Yosano said, Reuters reported.

Unlike most of the rest of Asia, the Japanese economy had not yet fully recovered from the impact of the global financial crisis, and the massive economic and fiscal costs of the March 11 disaster have caused the economy to contract sharply, tipping Japan into its second recession in less than three years.

Data published on May 19 showed that Japan’s economy shrank at an annual rate of 3.7 percent in the first quarter.

A rebound is widely expected to kick in once rebuilding work gathers momentum, and as battered supply chains normalize.

The Economy and Trade Ministry reported on Tuesday that industrial output in April climbed 1 percent from the previous month, a marked improvement from the 15.5 percent plunge in March. The rise was below what analysts had expected, but nevertheless supported the overall picture of an economy that is clawing its way back to pre-quake levels.

Anecdotal evidence — news of factories opening up again and of companies normalizing production plans — has shown that the situation continued to improve in May, economists at Credit Suisse in Tokyo wrote in a research note. Industrial production, they wrote, “is moving toward a V-shaped recovery.”

Still, power shortfalls and the lingering crisis at the earthquake-stricken Fukushima Daiichi nuclear power plant cloud the overall picture.

In addition, Japan’s government debt levels are by far the largest among the world’s major advanced economies, while growth in the medium term is unlikely to rise much above an annual rate of 1 percent, despite the expected post-quake rebound, many analysts say.

Moreover, political infighting hampers the ability of the government to achieve a steady reduction in the budget deficit.

“New fiscal measures are unavoidably necessary to close the primary deficit,” Moody’s said in its report on Tuesday. “To that end, the government intends to introduce a comprehensive tax reform program in June. However, Japan’s divided Diet — in which the opposition Liberal Democratic Party controls the Upper House — and the intensifying level of political challenges” to Prime Minister Naoto Kan “continue to threaten to bog down such efforts.”

The assessments echo those by Standard Poor’s, which downgraded its rating for Japan to AA- in January and lowered its outlook on that rating to negative in late April.

Fitch Ratings also lowered its outlook for Japan to negative last week, and likewise said a “stronger fiscal consolidation strategy” was necessary.

The Japanese stock market, meanwhile, shrugged off the warning from Moody’s. The Nikkei 225 index closed 2 percent higher, at 9,693.73 points, on Tuesday.

The index has recovered from the low of 8,605.15, plumbed in the week after the quake, but remains below the level of 10,360 points, where it was shortly before the quake struck.

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