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Markets News Friday: IMF says interest rate on Irish bailout loan may fall; ECB says potential economic growth is unlikely to return to its pre-crisis path for many years
By Finfacts Team
Jan 21, 2011 - 9:03 AM

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IMF: David Hawley, Senior Advisor, External Relations Department, International Monetary Fund, on Thursday at a press conference in Washington DC, said that the Irish bailout loan, as with any IMF loan, is made at the SDR (the IMF's own internal currency known as a Special Drawing Right) interest rate, a rate that does move with the markets, but which is currently about 3.1%. He said there is a further dimension to this question, which refers to the possibility of the Irish interest rate falling, if there were an increase in the Irish quota in the Fund.

Hawley said there was a quota review agreed in 2008, "which we are hopeful will be approved shortly following consideration by the membership. Ireland is one of those countries whose quota stands to increase under this agreement. As a consequence of that, the amount of its loan relative to its quota would fall, and that would have a bearing on the interest rate that Ireland paid on its borrowing from the Fund."

The IMF portion of the €85bn IMF/EU rescue for Ireland was €22.5bn. The composite interest rate was 5.8%.

On Greece, Hawley said:
"You asked also about debt restructuring for Greece. I would note only that the Government of Greece has repeatedly stated that debt restructuring is not their intention, nor is it in their interest, and we agree with them on this point."

Eurozone: The European Central Bank says in its latest monthly bulletin that the financial crisis could have a lasting effect on the Eurozone’s potential output, and warned that potential economic growth is unlikely to return to its pre-crisis path for many years.

“It is likely that the financial crisis has led to a one-off permanent loss in the level of potential output, owing to the economic effects of the downsizing of some sectors, such as the financial and construction sectors, following their disproportionate expansion during the boom,” the ECB wrote in its January bulletin.

The ECB says longer-term factors, particularly the aging of the Eurozone population, could also hold down potential growth for many years to come, officials warn. “Without far-reaching structural reforms supporting long-term economic growth, it appears unlikely that the euro area will achieve the previously measured potential growth rates of 2% or above in the coming decade,” according to the bulletin.

Potential growth is a measure of an economy’s ability to expand without inflationary pressures. It is usually estimated by adding annual growth in productivity plus growth in the labour force.

Using estimates by the International Monetary Fund, Organization for Economic Co-operation and Development and European Commission, the ECB said potential growth in the common currency area was about 1.9% from 2000 to 2007. It fell to 0.9% from 2008 to 2010, while the U.S. is estimated to have had a 2.5% growth potential from 2000 to 2007, the ECB said, and 1.8% from 2008 to 2010.

China president Hu Jintao calls for deeper engagement with the United States. Insight with Boone Pickens, BP Capital Management founder/chairman and Gordon Chang, "The Coming Collapse of China" author:

Economic View: Countdown to the election now underway; Goodbody chief economist, Dermot O’Leary, comments - - "We could be in for an interesting and insightful seven weeks in Ireland. Under pressure from the junior coalition partner, the Taoiseach (Irish Prime Minister) has announced that a general election will take place on Friday 11th March.

Political risk in passing vital legislation over recent months has been present ever since the Government’s ultra-slim majority in the Dail became apparent. It was our view that this risk should have been done away with by the holding of a general election before the four-year plan, the Budget and the agreement with the IMF/EU was complete at the end of last year.

It is, therefore, not before time that we now know when these political risks will be removed. At the time of Ireland’s last election in 2007, the economy was only showing very early signs of a slowdown and thus parties were campaigning on how prosperity and growth can be maintained and the best way to share those gains. This time around the key issue will be the economy but for very different reasons.

Fine Gael and Labour, the two opposition parties that look most likely to be forming the next government have made it clear that some sort of re-negotiation of the EU/IMF aid package is required, with particular focus on the interest rate charged on the loans and the plans for the banking sector. Policies on the latter issue are likely to prove the most controversial. Whether these political promises will come to anything when that party gets into government is another matter, but the policies that will be laid out and possibly implemented post-March 11th will have important implications for Ireland over the coming years."

"China is practically growing at 10%...at least they've got the right kind of inflation which is generated by demand," David Bloom, global head foreign exchange at HSBC told CNBC:

Eurozone consumer sentiment falters; Ireland sets date for general election; Davy's Barry Dixon comments  -- "While the prospects of a slowdown in Chinese growth rates remains the main concern in global markets, latest consumer sentiment data in Europe suggest that a recovery in consumer demand could be bumpy. The January reading of euro zone consumer confidence fell to -11.4 from -11.0 in December, the second month in a row in which the reading has declined. This slight decline may reflect the impact of fiscal austerity measures kicking in across the region or it may simply reflect the impact of post-Christmas blues! Today's IFO in Germany is likely to give a more positive outlook for the manufacturing sector which will have a positive knock-on impact on employment and ultimately consumption. However, the positive impact may take longer than expected to be felt.

Meanwhile, the date for Ireland's general election has been set for Friday, March 11th. It is widely believed that the current Fianna Fail-led government will be replaced by a Fine Gael-Labour coalition. This is unlikely to lead to any significant changes to Ireland's four-year fiscal recovery plan, although Fine Gael has indicated that it intends to renegotiate the terms of the EU-IMF package. This is more likely to focus on the cost of funding rather than the actual amount.

The current meeting of European finance ministers may already be addressing this issue."

US health care costs rose 6.27 percent from November 2009 to November 2010, with David Blitzer, S&P 500 Index Committee chairman:

US Markets

In New York Thursday, the Dow fell 3 points or 0.02% to 11,823.

The S&P 500 fell 0.13% and the Nasdaq slid 0.77%.

Asia Markets

The MSCI Asia Pacific lost 1.1% Friday after it sank 1.5% on Thursday.

Japan's Nikkei 225 declined 1.56%; China's Shanghai Composite climbed 1.41%; Australia's S&P/ASX 200 Index dropped 0.59% and India's Sensex dipped 0.35%.

Asia benchmarks

Finfacts Reports

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Dr. Peter Morici: Post-mortem on the US-China Summit and House Republicans health care repeal
Japanese property falls by ‘a fifth in value over 30 months’
Markets News Afternoon: European Systemic Risk Board hold first meeting; US initial weekly jobless claims dip 37,000; Morgan Stanley reports 35% rise in Q4 2010 earnings
German government revises growth forecast for 2011; Food prices on the rise
UK manufacturing recovery is well on track driven primarily by export orders; Producer price inflation on the rise
Irish consumer prices rise by 1.3% in the year to December 2010

In Europe, the Dow Jones Stoxx 600 is up 0.30% in early trading Friday.

The ISEQ has risen 0.88% in Dublin.

CRH is up 1.22%; Elan has risen 1.59%; Dragon Oil added 1.92% and Kenmare Resources has jumped 19.35%.

Aer Lingus (Buy, Closing Price €1.04): Hoping to operate a full schedule today; Goodbody's Eamonn Hughes comments - - "As the week progressed, the number of cancelled flights in the dispute with the cabin crew escalated. However, we note this morning that the airline is hoping to operate a full schedule as it continues to source wet leases from a number of airlines, having hired nine aircraft by last night.

Yesterday morning, the number of cabin crew on suspension had reached c.80 and now appears around the 100 mark. The airline appears resolute in taking on the cabin crew, so there is always the possibility of industrial action. However, should the unions back down, the move would represent a substantial step forward towards delivering on the Greenfield project."

   

European Benchmarks

Irish Share Prices

Irish Stock Market Capitalisation by Company

Key Index Performance Statistics

Euribor Rates

AIB Daily Report

Bank of Ireland Daily Report

Currencies 

The euro is trading at $1.3539 and at £0.8503.

For live currency updates, check the right-hand column of the Finfacts home page.

The US dollar fell to $1.6038 per euro on Tuesday, July 15, 2008 - an-all time record.

Commodities

The Baltic Dry Index, a measure of shipping costs for dry commodities, hit an all-time High of 11,771 on the 21st of May, 2008. From that time it reversed and on the 5th of December, 2008 it hit a low of 663 - - close to a 1986 low.

The BDI closed at 3,005 on Thursday, Dec 31st - - a rise of 289% in 2009. The index averaged 59% lower in 2009 than a year earlier.

On Thursday, July 15, 2010, the index  fell for the 35th straight session, by 9 points, or 0.537%, to 1,700 points, Bloomberg report.

On Friday July16th, the BDI rose 20 points or 1.12% to 1,700 to break the 35-session losing streak.

On Thursday this week, the BDI fell 18 points or 1.30% to 1,393.

The Financial Times reported on Thursday that Australia’s flooding and fears of ship oversupply has pushed down a gauge of the cost of hiring ships to carry coal, iron ore and other dry bulk by nearly half since October to the lowest level since the aftermath of the financial crisis. The Baltic Dry index, the widely watched measure of dry bulk charter rates, fell to 1,453, nearly half the 2,784 peak reached on October 27, 2010.

Crude oil for February 2011 delivery is currently trading on the Chicago York Mercantile Exchange (CME/Nymex) at $89.96 per barrel up 37 cents from Thursday's close. In London, Brent for February delivery is trading on the International Commodities Exchange at $97.17.

Gold spot price

The spot price of an oz of gold is trading in New York at $1,347.90, up $2.30 from Thursday's close.


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