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Financial Focus

THE UK GOVERNMENT could have to wait to implement its credit easing programme until the spring of next year as it contends with EU law. The government is desperate to flood the economy with cheap credit as soon as possible to combat a funding crunch that is choking off growth. However, it has to steer a difficult course between banks’ requirements and a list of technical rules from the European Commission (EC), which writes the EU’s “state aid law”. EC guidelines limit how much aid can be given per firm (500,ooo euros), to what degree thheir loans can be made cheaper (15%), the maximum term of the loan (two years) and what the cash is used for (investment and working capital, but not acquisitions). A spokesman for the treasury said: “The credit easing proposals are being designed to comply with state aid regulations.”

ITALIAN Prime Minister and finance minister Mario Monti vowed to meet fiscal targets by setting out a fresh round of austerity measures even as data showed that Eurozone unemployment has hit a euro-era high. Monti, who was attending his first meeting as finance minister, also denied that Italy is seeking a rescue from the IMF, saying that the country will eliminate its structural deficit in 2013 “even in the face of a possible deterioration in the economic cycle”. However, he admitted that Europe must use the credibility of the European Central Bank, the IMF and its bailout fund “better and more consistently”.

MARKETS: FINANCIAL SPREADBETTERS expect the leading European benchmark indexes to rise today, extending a sharp four-session rally as investors’ risk appetite continues to improve following joint action from top central banks to boost liquidity. The FTSEurofirst 300 index of top European shares surged 3.6% yesterday extending its gains from a low on Friday to 10%, propelled by coordinated action from the world’s major central banks to provide cheaper dollar funding to European banks facing a credit crunch. The emergency move by the U.S. Federal Reserve, the European Central Bank, and the central banks of Japan, Britain, Canada and Switzerland – reminiscent of joint action to stabilise global markets in the 2008 financial crisis after the collapse of Lehman Brothers — was seen as a strong signal that central banks have ample fire power to prevent the euro zone crisis from spreading.

CURRENCIES: THE YEN weakened against 14 of its 16 most-traded counterparts as Asian stocks extended a global equity rally, curbing demand for haven assets. The yen traded near a two-week low against the euro after six central banks led by the Reserve acted to lower the cost of borrowing dollars for banks. The greenback held its biggest loss in three weeks versus the 17-nation currency before data that may show improvement in U.S. manufacturing and employment.

ENERGY:

OIL rose a fifth day after central banks took steps to ease a European debt crisis that threatens economic growth, countering speculation a bigger-than-expected rise in U.S. crude supplies signals weakening demand. Futures climbed as much as 0.5% after gaining 0.6% yesterday to cap a second monthly increase.

COMMODITIES:

THE COMBINATION of a record cotton crop and falling consumption will expand global stockpiles by the most since 2005, driving further declines in the price of this year’s worst-performing commodity. Harvests will increase 7.5% in the 12 months ending in July, as demand drops to a three-year low of 114.27 million bales, the U.S. Department of Agriculture estimates.

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