Britannia Radio

The world’s economies limp on or - to put it more dramatically - hang on by their eyebrows.    More updates below. 

Christina Speight

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TELEGRAPH              16.6.09

1. ECB warning on banks rattles global markets

The European Central Bank has given its starkest warning to date on growing strains in the eurozone credit markets.

 

By Ambrose Evans-Pritchard

It said it is expecting fresh bank writedowns to hit $283bn (£173bn) by the end of next year.

"Policy-makers and market participants will have to be especially alert in the period ahead. The credit cycle has not yet reached a trough," said the ECB's Financial Stability Report.

"The deterioration in the macro-financial environment has continued to test the shock-absorption capacity of the euro-area financial system. Prospects for a significant turnaround in the short term are not promising," it said.

In a ghastly day for Europe's lenders, Moody's downgraded 25 Spanish banks as rising defaults eat into reserves.

"The extra cushion that banks had built up over the years against such risks is becoming increasingly thin. Unless some supportive measures are taken by third parties – by owners, or likely by the government – some banks' capital cushions will soon be affected by asset impairments," it said. Moody's also put UBS on downgrade review.

In Germany, the bank-rescue fund Soffin said deep recession was leading to a "massive sharpening" of bank losses on risk assets, endangering the capital base of the financial sector.

Fears that Europe may set off yet another credit crisis triggered a sharp retreat from "reflation trades" across the globe, with funds scrambling to take profits on equities and commodities after the exuberant bull run since March. US crude dropped $2 a barrel to $70. The Dow industrials dived 200 points on opening, eventually closing down 187 at 8.612, while Frankfurt's DAX fell 3.5pc.

The euro slumped to a three-week low of $1.3772 against the dollar, breaking down through key support levels. The single currency was already under pressure after the BRIC quartet of Brazil, Russia, India and China played down suggestions that their summit today would see an attack on the dollar's reserve status. Instead there appears to be a co-ordinated effort to talk up the dollar.

Hans Redeker, currency chief at BNP Paribas, said Europe's banks missed a chance to rebuild their capital reserves during the credit thaw. "US banks have raised $85bn since the stress tests, while Europe's banks have raised just $7.5bn. This is going to go pear-shaped in coming months as people lose confidence in the whole crisis management of Europe," he said.

The ECB's report said eurozone bank losses would reach $649bn by late 2010: split between $218bn on securities, largely written down already; and $431bn on loans, where the real damage lies. The banks have written down $150bn of loan losses so far.

The report said accounting rules were lax in some countries and there may be "under-reporting". There is a risk that "write-off rates could increase by more than currently anticipated".

Among the dangers is a "downward spiral" as the recession and credit losses feed on each other, further falls in commercial property prices (already down 11pc), and spill-over effects from Eastern Europe.

The report is likely to put pressure on Germany to come clean on its banking debacle by agreeing to public stress tests. France's finance minister, Christine Lagarde, favours transparent tests across the EU, but Berlin seems determined to buy time until after the elections in September.

The ECB advised banks to take advantage of state support quickly to protect themselves from "contagion risks". "There is no room for complacency," it said.

2. Markets tumble as IMF warns worst of crisis could be ahead

Markets around the world tumbled on Monday as Dominique Strauss-Kahn, managing director of the International Monetary Fund, said the worst of the global recession was yet to come.

 

By Angela Monaghan

The FTSE 100 closed down 2.6pc or 115.9 points at 4326.01. It was the lowest close in six weeks and was driven by falls in the mining sector as a stronger dollar hit metal and oil prices.

However Britain's blue chip share index has risen 25pc since hitting a six-year low in March. In the US the Dow Jones was down 187 points at 8612 while the CAC 40 in Paris and DAX in Frankfurt both closed down more than 3pc. The pound closed down more than a cent against the dollar at $1.6338.

 

Commenting on the meeting of the G8 finance ministers in Italy over the weekend, Mr Strauss-Kahn said: "Their stance is that we are beginning to see some green shoots but nevertheless we have to be cautious. The large part of the worst is not behind us yet."

In its annual report on the US the IMF revised its forecasts, It said the American economy will c ontract by 2.5% this year and expand modestly next year by 0.75%.  It had precicted the US would shrink by 2,8% in 2009 and show no growth oin 2010.  

OTHER HEADLINE NEWS TODAY

TELEGRAPH

==UK inflation higher than expected in May

Inflation slowed much less than expected in May to remain above the 2pc target for the 20th month in a row.

==Cheap mortgage fixes go

The era of cheap fixed-rate mortgages has come to an end, experts warn.

TIMES

==UK jobless to reach 12 year high of 2.27m