May 6th, 2010 13:35:19 GMT

Fed’s Bullard: Potential Sov Default Risk to Econ Outlook

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–Continued Signs of U.S. Economic Recovery

By Brai Odion-Esene

WASHINGTON (MNI) – St. Louis Federal Reserve President James
Bullard warned Thursday that a potential sovereign credit default poses
a risk to the continued economic recovery in the United States.

Noting ongoing signs the economy is healing, Bullard said the one
risk to the outlook is the fallout from potential sovereign debt default
as conditions continue to deteriorate in Greece and other countries.

He pointed to the rising costs of sovereign debt protection in
Greece, as well as in Portugal, Spain and Italy.

Bullard also voiced concern about the debt burdens of U.S. states,
noting the high debt to personal income ratio of the 10 most populous
states.

In remarks to the Century Club at Washington University’s Olin
Business School, Bullard noted the growing number of economic indicators
showing improvement, such as employment growth, manufacturing, vehicle
sales and consumer spending.

“There are continued signs of recovery. GDP growth has been
positive for three consecutive quarters,” Bullard said. “Manufacturing
has rebounded, and labor market conditions are slowly improving.”

However, the high unemployment rate, the corporate bond market as
well as the absence of a rebound in residential and non-residential
construction remain negatives for the U.S. economy, Bullard said.

Turning to the current debate in Congress about U.S. financial
regulatory reform, Bullard called for the Federal Reserve to retain its
supervisory role.

“The Fed should continue to supervise state member banks and bank
holding companies of all sizes. Understanding the entire financial
landscape helps the Fed make sound monetary policy decisions,” Bullard
said.

He argued that the Fed’s regional structure is designed to keep
some power out of New York and Washington and allow for input on key
policy questions from around the U.S.

“It is important that the Fed remain connected with Main Street
America, and not become biased toward the very large, mostly New
York-based institutions,” he said.

Bullard also warned that current proposals for auditing monetary
policy could diminish the independence of the Fed.

“Erosion of Fed independence could result in a 1970s-style period
of volatility. The consequences for the U.S. and the global economy
would be large,” Bullard said.

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,M$$CR$,M$X$$$]

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May 6th, 2010 13:26:58 GMT

No anti-Euro sentiment on ECB council

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Belonging to euro has brought about tremendous advantages.

The ECB left out discussion of exit strategy in its statement. Trichet says that was for the sake of space, not because it has been dropped as a priority.

2 Comments

May 6th, 2010 13:25:38 GMT

ECB Trichet: EMU Countries Must Curb Debt Or Risk Reputations

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BRUSSELS (MNI) – Eurozone countries are putting their reputations
on the line if they delay cutting their budget deficits and public
debts, European Central Bank President Jean-Claude Trichet said on
Thursday.

“The longer the fiscal correction is postponed, the greater the
adjustment needs become and the higher the risk of reputational and
confidence losses,” Trichet said at a press conference after the ECB May
meeting in Lisbon.

“Instead, the swift implementation of front loaded and
comprehensive consolidation plans, focusing on the expenditure side and
combined with structural reforms, will strengthen public confidence in
the capacity of governments to regain sustainability of public finances,
reduce risk premia in interest rates and thus support sustainable growth
over the medium term,” he said.

Concerns about high-debt and deficit countries have pressured the
euro in recent days, sending the single currency to a 14-month low
against the dollar.

After Greece signed onto an aid package from the Eurozone and the
International Monetary Fund worth E110 billion over three years last
weekend, markets speculated that other high debt countries such as
Portugal and Spain could need similar assistance.

Trichet said the “fiscal consolidation will need to exceed
substantially the annual structural adjustment of 0.5% of GDP set as a
minimum requirement by the Stability and Growth Pact.”

–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com

[TOPICS: MT$$$$,M$$FX$,M$$EC$,M$X$$$,M$$CR$,MGX$$$]

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May 6th, 2010 13:15:22 GMT

ECB Trichet: ECB Didn’t Discuss Buying Govt Bonds At May Mtg

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BRUSSELS (MNI) – The European Central Bank didn’t discuss the
possibility of buying government bonds at its monetary policy meeting
today, European Central Bank President Jean-Claude Trichet said.

“We did not discuss this option,” Trichet told reporters at a press
conference in Lisbon after the meeting. He later declined to comment on
reports that one of his Council colleagues, Bundesbank President Axel
Weber had expressed opposition to the idea of buying government bonds.

“I won’t comment on what my Council colleagues might say,” Trichet
said. “We did not discuss the matter, and [I've got] nothing else to say
on that.”

Markets have speculated that the ECB could begin to buy government
bonds as a way to alleviate bond market pressures, particularly on
high-debt countries like Greece, Spain and Portugal, in the light of
recent sharp spread widening of those countries’ securities.

Greece has been offered a E110 billion lifeline from the Eurozone
countries and the International Monetary Fund to take it out of the
market for up to 18 months. To support this decision, the ECB said it
would suspend the minimum credit rating threshold for Greek debt
instruments used as collateral at the central bank.

Trichet also said the Governing Council didn’t discuss a default
procedure for the Eurozone. “Greece will not default,” he said. “Default
is out of the question; it’s as simple as that.”

–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com

[TOPICS: MT$$$$,M$$FX$,M$$EC$,M$X$$$,M$$CR$,MGX$$$]

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May 6th, 2010 13:09:00 GMT

Trichet drops back to punt

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Trichet is avoiding the tough questions, saying the ECB did not discuss purchasing government bonds at the meeting, full stop. He will entertain no other questions on the matter. He also gave a long, convoluted, and unconvincing answer on why Greek bonds were singled out for different collateral rules.

Merkel said in Parliament that Europe could not handle the Greek situation alone, requiring the IMF to step in. That helped push the EUR to session lows at 1.2705.

5-6 punt

22 Comments

May 6th, 2010 13:05:16 GMT

US’s Geithner:Regultrs Must Have Authorty Over Shadow Fin Sys

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WASHINGTON (MNI) – U.S. Treasury Secretary Tim Geithner said
Thursday regulators must have the authority to control risk in the
shadow financial system, a shortcoming that, had it been addressed,
would have made the financial bailout and emergency measures
unnecessary.

In the post-Depression era, the financial system outgrew
protections imposed on banks and “A large parallel financial system
emerged outside of the framework of protections established for
traditional banks,” Geithner said in testimony prepared for delivery
before the Financial Crisis Inquiry Commission on the causes of the
financial crisis and the case for reform.

In other episodes, the failure to exercise regulatory oversight
correctly or completely was found to lie at the root, “But a principal
cause of the crisis was the failure to provide legal authority to
constrain risk in this parallel financial system,” Geithner said.
“Prudential regulations were limited to banks, and did not extend to the
parallel financial system.”

“Moreover, accounting and disclosure requirements and regulatory
capital requirements helped encourage the shift in risk to the parallel
financial system, without adequately capturing the remaining exposure of
banks to those risks,” he said.

Without adequate capital or attention to risk, the shadow financial
system – which despite the name operated in the open and was as large as
the traditional banking system – was more vulnerable to a traditional
bank run.

“The emergency financial response to the run that started in the
parallel financial system was necessary to protect our economy from an
even greater calamity. But if our regulatory and supervisory systems had
had the tools and authorities to prevent risks from accumulating in
unregulated sectors of the financials system in the first place, such a
large emergency response would not have been necessary,” Geithner said.
“That is a key reason why financial reform is so essential.”

He noted that the “long period of relative economic and financial
stability,” contributed to the build up of the parallel system by
encouraging borrowers and investors to take on more risk.

But unlike the troubles faced by the government-sponsored
enterprises “this market grew up without any explicit or implicit
government insurance or any history of government support in a crisis.
This was a pure failure of market discipline,” the Treasury chief said.

Outlining the key features of the financial regulatory reform
proposals before Congress, Geithner said the old system “did not evolve
to keep pace with growth and innovations in our financial services
industry. The constraints imposed by banking regulation were significant
enough to encourage activity to move away from banks in search of
lighter regulation, lower capital requirements, weaker consumer
protections, and better tax and accounting treatment.”

But he warned: “The lesson of this crisis, and of the parallel
financial system, is that we cannot make the economy safe by taking
functions central to the business of banking, functions necessary to
help raise capital for businesses and help businesses hedge risk, and
move them outside banks, and outside the reach of strong regulation.”

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,M$$CR$,MGU$$$,MFU$$$,MK$$$$,MT$$$$]

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May 6th, 2010 12:54:41 GMT

US Jobless Claims -7,000 To 444,000 In May 1 Week

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By Ian Mckendry and Kevin Kastner

WASHINGTON (MNI) – Initial claims for U.S. state unemployment
benefits fell 7,000 to 444,000 in the May 1 week after seasonal
adjustment, according to data released by the U.S. Labor Department
Thursday morning.

The level was above the 440,000 level expected in a Market News
International survey of economists. Initial claims were revised up to a
451,000 level in the April 24 week from the originally reported 448,000
level.

A Labor analyst said that seasonal adjustment factors expected a
decline in unadjusted claims of 6.3%, which would have been a drop of
about 27,000 claims. Unadjusted initial claims actually fell 7.9%, or
33,783 to a level of 392,629.

Tennessee was estimated this week due to recent flooding in some
government offices.

The initial claims seasonally adjusted 4-week average declined
4,750 to 458,500 in the May 1 week.

In the April 24 employment week continuing claims fell by 59,000 to
4.594 million, and were down 152,657 unadjusted.

The seasonally adjusted insured unemployment rate remained at 3.6%
in the April 24 week, which is well below the 4.7% in the comparable
week a year earlier.

The unemployment rate among the insured labor force is well below
that reported monthly by the Labor Department because claims are
approved for the most part only for job losers, not the job leavers and
labor force reentrants included in the monthly report.

The Labor Department said that there were 153,786 more unadjusted
Emergency Unemployment Compensation benefits claims in the April 17
week, bringing that category to 5,354,259. Extended benefits claims,
however, declined by 997 to 201,487 not seasonally adjusted.

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: MAUDS$,MT$$$$,M$U$$$,MAUDR$]

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