Wakeup Call: USD Higher

Daily Forex Fundamentals | Written by Saxo Bank | Dec 09 09 08:40 GMT |

This development is confirming the negative correlation break-down from Friday and suggests that USD bulls have more to hope for in the short term. Calendar Economic Data Releases Country Time (GMT) Name Saxo Consensus Prior US 15:00 Wholesale Inventories MoM (OCT) -0.5% -0.9% What's going on? The USD goes higher and now firmly trades above its 55 DMA in most crosses (but not USDJPY). This development is confirming the negative correlation break-down from Friday and suggests that USD bulls have more to hope for in the short term. That also means that stocks are likely to be under pressure. The S&P500 edged lower and now flirts with the trendline support since March (1085 today). The technical picture has produced a risk-reward favoring 'dip-buying', but only above the trendline support. Geithner seeks to extend the $700B TARP until next October. FX FX Daily stance Comment EURUSD - Sell upticks toward 1.4750. Next downside objective at 1.4635, then <1.4500. USDJPY 0/+ Beware large range. Interested in strategic long, but only at good price (low 87.00’s perhaps). EURJPY 0/- Might be overdone short term. Sell ahead of 131.00, for a try lower again. GBPUSD - Sell as the big 1.6250 support area is giving way – could try 1.6000 soon. USDCAD + Interesting upside down head and shoulders in play around 1.07. Buy with stops below 1.0550. Equities Equities Daily stance Comment DAX 0/- Sell at the break of 5665 targeting 5635. S/L above 5682. FTSE 0/- Sell at the break of 5217 targeting 5191. S/L above 5233. S&P500 0/- Sell at the break of 1087 targeting 1079. S/L above 1090. NASDAQ100 0/- DJIA 0/- Futures Commodities Daily Stance Comment Gold 0/- Sell at the break of 1124 and target 1110. Stop above 1130. Silver 0/- Sell at the break of 17.42 and target 17.15. Stop above 17.50. Oil (CLF0) 0/- Sell at the break of 72.35 and target 70.50. Stop above 72.80. FX Options FX-Options Comment EURUSD Vols follows higher as dollar bullishness continues. Back end risk reversals still point towards a higher dollar so expect this theme to continue. USDJPY Mid to back end continues to see good bids as spot fails to rally. Upside JPY puts are also being aggressively bid so the market is well positioned for a move higher in spot. AUDUSD Few downside strikes starting to see good bids. The rest of the curve remains steady. Gamma is expected to ease after tomorrow’s employment report. Saxo Bank Analysis Disclosure & Disclaimer Saxo Bank A/S shall not be responsible for any loss arising from any investment based on any recommendation, forecast or other information herein contained. The contents of this publication should not be construed as an express or implied promise, guarantee or implication by Saxo Bank that clients will profit from the strategies herein or that losses in connection therewith can or will be limited. Trades in accordance with the recommendations in an analysis, especially leveraged investments such as foreign exchange trading and investment in derivatives, can be very speculative and may result in losses as well as profits, in particular if the conditions mentioned in the analysis do not occur as anticipated. Saxo Bank utilizes financial information providers and information from such providers may form the basis for an analysis. Saxo Bank accepts no responsibility for the accuracy or completeness of any information herein contained. Any recommendations and other comments in Saxo Bank's analysis derive from objective fundamental macro economical and company specific calculations, statistical and technical analysis, and subjective general market assessment. If an analysis contains recommendations to buy or sell a specific financial instrument, such recommendation should be seen as Saxo Bank's opinion that the specific instrument will respectively outperform the relevant market or underperform compared to the market. Saxo Bank's recommendations should statistically correspond to an even distribution between buy and sell recommendations. The recommendations may expire promptly due to market volatility and in general, Saxo Bank does not anticipate its recommendations to be valid more than one month. An analysis will be updated if and only if a market development or other issues relevant to the analysis render a new analysis on the same topic relevant. Saxo Bank's analysis does not cover any specific financial product over time but only products which Saxo Bank's strategy team finds it important to cover at any given point in time. In order to prevent conflicts of interest, Saxo Bank has established appropriate business procedures, incl. procedures applicable to research and analysis to ensure objective research reports. Saxo Bank's research reports have not been discussed with the parties, e.g. issuers of securities, mentioned in the analysis. Saxo Bank is under supervision by the Danish Financial Supervisory Authority. Saxo Bank does not engage in corporate finance activities and accordingly, Saxo Bank's employees, incl. the persons responsible for an analysis, do not receive remuneration associated with investment banking transactions.

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Currencies: Risk Aversion Contiues To Set The Tone For Currency Trading

Daily Forex Fundamentals | Written by KBC Bank | Dec 09 09 08:26 GMT |

Sunrise Market Commentary Global bonds advance on fears for some after-shocks of the great financial crisis The German yield curve bull steepened after Fitch cut Greece's credit rating to BBB+. It raised fears about the solvency of the country. Intra-EMU government yield spreads all saw some widening, but in a measured way. Post-payrolls losses have now been completely erased, underlining the still bullish underlying bond sentiment FX: risk aversion contiues to set the tone for currency trading A series of negative headlines on Dubai and market worries on the budgetary situation in Greece caused investors to look for safe haven shelter. This triggered to ‘usual' reaction on the currency markets. The yen was the winner; the dollar a good second. The headlines on Greece reinforced the correction in EUR/USD The Sunrise Headlines On Tuesday, US Equities opened with significant losses as downgrades sparked renewed concerns over deteriorating public finances. Dow/S&P ended the session 1% lower led by energy shares. This morning, Asian stocks show limited losses. According to people familiar with the matter, US Treasury Secretary Geithner plans to tell Congress that the Obama administration will extend the $700 billion TARP that expires on December 31. Yesterday, Greece saw its credit rating downgraded by Fitch to the lowest level in the euro zone as fears mounted over its deteriorating public finances. Moody's downgraded Illinois' general obligation bond rating to A2 from A1 citing the state's financial woes stemming from the US recession. Japan's economy grew at a far slower pace in the third quarter than first estimated as capital spending fell. GDP rose an annualized 1.3%, significantly slower than the 4.8% reported last month. The Bank of Canada held its key interest rates near zero as expected, but repeated its pledge to hold overnight rates at 0.25% until the end of June 2010, even though it said economic recovery is gathering momentum. Crude oil ($73.12) dropped for a fifth consecutive session on Tuesday, ignoring a report which showed that inventories fell last week. Gold prices ($1 131/ounce) fell to its lowest level in three weeks. Today, the eco calendar contains only the UK trade balance. Also in the UK, the Chancellor reveals the pre-budget report, while in the US and Germany auctions will take place. EUR/USD On Tuesday, some kind of crisis feeling returned to global markets. Moody's cutting the ratings of six Dubai-linked companies was one factor reducing the appetite for riskier assets. In a separate call, the rating agency also indicated that the AAA credit ratings of the US and the UK may test the boundaries of the top credit rating. Last but not least, there was a lot of market talk on the fiscal situation of Greece and around noon, Fitch cut the credit rating of the country to BBB+ from A-. On top of that, the industrial production data came out much weaker than expected. All this provided a euro-negative cocktail. During the morning session EUR/USD held op rather well. Initially, the damage on the European stock markets was rather limited, too. However, the indices came under pressure around noon and the Greece downgrade reinforced the sell-off. This global correction and decline in appetite for risk dragged also EUR/USD lower. Selling pressure mounted as soon as US traders got involved. EUR/USD fell back to Monday's lows at the start of US trading and the break below this 1.4755 support area triggered additional stop-loss selling. The EUR/USD cross rate stayed under pressure further out in the session, even as there was market talk of ongoing central bank buying interest to diversify away from the dollar. EUR/USD closed the session at 1.4704, again a loss of more than one big figure compared to the 1.4827 close on Monday evening. Today, eco calendar contains again only some second tier releases, both in the US and in the euro zone. So global market tensions/developments will continue set the tone for price action on global markets and in EUR/USD. The question is whether the budgetary problems of Greece (and potential similar problems for other sovereign issuers) will become a factor of lasting importance for trading on global markets or whether it will fade as easy as the Dubai story did two weeks ago? The least one can say is that, even after Friday's payrolls, risk (and for example not the improving growth outlook in the US or expectations on monetary policy) remains the key driver for EUR/USD trading. This morning, we have the impression that the heat is cooling. This might slow the correction of EUR/USD. However, sentiment remains fragile and it shouldn't come as a surprise if investors would stay cautious going into the end of the year. If so, this would also cap the short-term rebound potential of the single currency. Global context. For quite some time, the swings in risk appetite/risk aversion are the main drivers for price action on the currency markets. Improving investor sentiment towards risk was seen a good reason to sell the US dollar to set up carry trades in higher yielding/riskier assets. Lingering uncertainty on the huge US financing needs, some international debate on the status of the dollar and the Fed's intention to run an expansionary monetary policy for a prolonged period of time offer additional ammunition for carry traders to use the dollar rather than other currencies. This has put the dollar in a vulnerable position. Already, for quite some time, we indicated that we would stay dollar skeptical as long as we don't get a clear signal that the Fed is coming closer to reversing its very stimulating monetary policy. Recently, several key Fed members, including Bernanke, refrained from giving such a signal. Last week's better than expected US payrolls made investors contemplating whether the tipping point in the Fed's policy approach is finally coming closer. We still expected the Fed to keep a wait-and-see approach for some time to come. Bernanke's semiannual testimony before Congress in February might be a good time for the Fed to change its assessment, in case the economic developments would allow it to do so at that time. Of course, markets can anticipate on such a development. Recently, we already indicated that the theme of risk appetite/aversion at some point might stop playing its role as a guide for currency trading in general and EUR/USD in particular. Will considerations on the relative growth performance or on monetary policy take over as new trading theme? Over the previous two days, this was not yet the case. Risk aversion and some euro negative headlines (Greece) hammered the euro, but this is no dollar positive choice yet. So, EUR/USD trading is developing in some kind of no-mans land, still looking for a new trading theme. This could trigger some erratic trading going into the end of the year. As indicated above, in this context, we keep a very close eye on the technical picture. Looking at the (technical) charts, the break of EUR/USD above the range top at 1.4438/48 and above the 1.4719 (Dec 2008 high) improved the picture, but the move continued to develop in a gradual way. Nevertheless, the corrections, if any, were very limited, too. The pair tested several times the longstanding uptrend line since March, but until Friday a break didn't occur. Thursday's rejected test of the highs and Friday's subsequent correction obviously broke the short-term positive momentum in the pair. We amended our short-term bias from positive to neutral. For now, our working hypotheses is for the EUR/USD to settle in a sideways trading pattern between 1.4626 (Nov low) and 1.5145. A break of the range bottom would indicate that a more pronounced rebound of the dollar might be on the cards. For now, we don't not front run on such a move. Nevertheless, given the longstanding build-up of USD short positions, we wouldn't be surprised to see some further unwinding of USD shorts. So, in a day-to-day perspective, a sell on upticks approach looking for return action to the 1.4626 range bottom, remains preferred. The 1.4450/85 area (previous high/previous low) is the key level to watch out for medium term. A sustained break below this level would suggest a MT trend reversal EUR/USD: euro weakness or dollar strength Support comes in at 1.4665 (Reaction low), at 1.4641/26 (Uptrend line since June/Reaction low), at 1.4611 (38% retracement), at 1.4585 (Daily envelope), at 1.4554 (1st target ST double top off 1.4800) and at 1.4880 (Oct low) and at 1.4455 (2nd target off 1.4800). Resistance stands at 1.4743/75 (Daily envelope/Breakdown hourly), at 1.4835 (STMA), at 1.4864/67 (Reaction highs), at 1.4934/50 (Boll midline/ MTMA), at 1.5012 (Weekly envelope). The pair is in oversold territory. USD/JPY On Tuesday, risk averse investors' behaviour was again the name of the game for USD/JPY trading. Both the dollar and the yen are supposed to take up the function of safe haven in case of market tensions. However, when the storm is strong enough, the yen is still a bit more preferred over the dollar. Yesterday, there were enough negative headlines (Dubai and Greece in particular) for the yen to outperform the dollar. USD/JPY drifted gradually lower for most of the session and closed at 88.43, compared to 89.51 on Monday evening. This morning, Japanese Q3 growth was revised sharply lower from the preliminary release (0.3% Q/Q VS 1.2% Q/Q). This was not really good news for the Japanese stock markets. However, impact on yen trading was very limited and short-lived. USD/JPY briefly popped up to the 88.70 area after the release. However, global uncertainty kept the yen well bid and USD/JPY is again setting new reaction lows in the 88.10 area at the moment of writing. Global context: USD/JPY reached a reaction high in the 97.80 area early August. Despite positive global investor sentiment, the dollar could not hold on to its gains against the yen. The link between USD/JPY and global investor risk aversion/risk appetite became less tight. The dollar (and not the yen) was said to have become the preferred funding currency for carry trades. So, price action in USD/JPY to some extent joined the global dollar trend (decline). The long-term trend obviously remains USD/JPY negative. We have a long-standing sell-on upticks approach. However, from a tactical point of view we were reluctant to challenge the possibility of USD/JPY interventions from the BOJ at sub 87 levels in USD/JPY. Friday's, US payrolls sparked a nice USD/JPY rebound. However, Monday's and Tuesday's price action suggests that this move has no strong legs. We hoped to get an opportunity to reinstall USD/JPY shorts closer to the 92.32/53 previous highs. However, this looks quite far for now. In a day-to-day perspective, a cautious sell-onupticks approach is still preferred. However, from here, the yen rebound might slow with markets contemplating the risk of BOJ action. USD/JPY: yen supported by safe haven flows Support is seen 88.17/02 (Reaction low/daily envelope), at 87.80/50 (50% retracement/Break-up daily), at 87.099 (62% Retracement), at 86.46/32 (MT break-up/ starc bottom). Resistance comes in at 88.70 (Reaction high/daily downtrend line), at 8956/76 (Reaction high + daily envelope/ breakdown hourly), at 90.41 Daily channel top of 101.45) and at 90.78(Reaction high). The pair is in neutral territory. EURGBP Over the last 24 hours, the EUR/GBP cross rate had a rollercoaster ride. Early in the session the poor UK BRC retails sales and some negative headlines from Moody's on the UK AAA rating hammered the UK currency. The industrial/manufacturing production data brought no relieve either. On top of that, the lingering doubts/negative headlines on Dubai credit risks weighed on the US banking sector and on sterling. So; EUR/GBP rebounded from the 0.9020 area at the start of trading in Europe to test offers in the 0.9095 area just before noon. However, later in the session, the euro negative headlines (Greece) came to the forefront and the EUR/GBP reversed all the earlier gains. Later in the session, a positive NIESR UK GDP estimate helped the UK currency to recoup its losses. EUR/GBP closed the session at 0.9027, little changed from the 0.9016 close on Monday evening. Today, the UK eco calendar is again interesting. The trade balance figures deserve some attention, but the market focus will be on UK Chancellor Darling announcing the Pre-budget report. The UK government will have to strike a very difficult balance between giving the economy enough oxygen and convincing markets on a credible deficit reduction plan. Looking at the price action this morning, investors are a bit skeptic as to whether this balancing act will succeed. EUR/GBP spiked higher at the open of the European markets. Global context: Since early August, sterling sentiment deteriorated again as the BoE raised the asset purchase program to £175B. On top of that, BoE's King kept a dovish tone, indicating that the Bank intended to maintain a loose policy for a prolonged period of time. This triggered a new sterling selling wave. At the September and October meetings, the BoE took no additional policy steps. However, the debate on additional QE steps was still ongoing. Nevertheless, a sterling short-squeeze kicked in mid October, even as speculation on additional QE continued. The November BoE decision to raise the amount of asset purchases (surprisingly) didn't bring any harm for sterling and reinforced the feeling that the sterling correction might have further to go. From a fundamental long term point of view, we don't see any reason to turn sterling positive in a context where the BoE is lagging the ECB in scaling down (a much more aggressive) monetary stimulation. The sterling constructive sentiment changed again after the publication of the Minutes of the November policy meeting as the BoE discussed the possibility of cutting the discount rate. EUR/GBP regained the 0.8900 area. So, the downside alert in EUR/GBP has been called off. The pair regained the 0.9060/78 resistance, but failed to hold above this level after Friday's correction. This makes the ST picture neutral for EUR/GBP. Range trading in the 0.8900/0.9240 trading range is the preferred scenario going into the end of the year. Within this range, we continue to slightly prefer a buy-on-dips approach in line with our long-term fundamental bias. EUR/GBP: 0.9000 offering decent support Support comes in at 0.9019 (Reaction low hourly), at 0.9013/08 (Boll Midline/Reaction low), 0.8991 (Reaction low), at 0.8979/66 (25 Nov low + weekly envelop + daily envelope/Breakup daily) and at 0.8945 (Reaction low). Resistance is at 0.9063/78 (Daily envelope + reaction high/broken weekly MTMA), at 0.9017 (Reaction high), at 0.9145/54 (Weekly envelope/ 30 Nov high + Boll top). The pair is in neutral conditions. News EMU: German IP shows unexpected decline German industrial production showed an unexpected decline in October. On a monthly basis, industrial production fell by 1.8% M/M, while the consensus was looking for an increase by 1.0% M/M. However, the previous figure was upwardly revised from 2.7% M/M to 3.1% M/M. The details show that the decline was broadly based as manufacturing & mining (-1.6% M/M), construction (-2.4% M/M) and energy (- 3.4% M/M) all dropped. The decline in manufacturing and mining was led by a 3.5% M/M fall in capital goods, but also consumer goods (-1.9% M/M) fell, while intermediate goods rose by 0.6% M/M. The first decline in three months might be due to the end of the car-scrapping scheme, which dampened demand for cars, but also the stronger euro might have reduced exports. Other: UK industrial production flat in October In the UK, industrial production came out flat in October, while the consensus was looking for an increase by 0.5% M/M. Also the previous figure was downwardly revised from 1.6% M/M to 1.3% M/M. Looking at the details, manufacturing came out flat, while mining & quarrying (0.6% M/M) and oil & gas (1.0% M/M) increased. Electricity, gas & water supply fell by 1.5% M/M in October. This outcome indicates that last month's rebound due to the reopening following the summer closures was only short-lived. In December, the CBI industrial trends survey showed increase in total orders (-42 from -45). The breakdown showed a worsening in export orders (-41 from -37), finished stocks (15 from 20) and expected volume of output (-7 from 4), while average prices rose marginally (-6 from -7). Although the headline index is now at the highest level in one year, the order book remains at very weak levels Download entire Sunrise Market Commentary Disclaimer: This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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Forex Technical Analytics

Daily Forex Technicals | Written by FOREX Ltd | Dec 09 09 08:12 GMT |

CHF The pre-planned break-out variant for buyers has been implemented, but with loss in several points in attainment of minimal anticipated target. OsMA trend indicator, having marked close parity of party activity gives grounds for supposition of probable rate range movement, however, with priority of bullish direction in planning trading operations for today. Hence and considering bearish direction of indicator chart, we can assume probability of rate return to close 1,0220/40 support levels, where it is recommended to evaluate the development of the activity of both parties in accordance with the charts of a shorter time interval. As for short-term buying positions on condition of the formation of topping signals the targets will be 1,0280/1,0300, 1,0340/60 and (or) further break-out variant up to 1,0400/20, 1,0460/1,0500. The alternative for sales will be below 1,0160 with the targets of 1,0100/20, 1,0040/60. GBP The pre-planned break-out variant for sales has been implemented with attainment of minimal anticipated target. OsMA trend indicator, having marked parity of both party activity as a result of the previous trading day, gives grounds for supposition of probable rate range movement, but with priority of sales in planning trading operations for today. Therefore, at this point, considering bullish direction of indicator chart, we can assume probability of rate return to close 1,6300/40 levels, where it is recommended to evaluate the development of the activity of both parties in accordance with the charts of a shorter time interval. As for short-term sales on condition of the formation of topping signals the targets will be 1,6200/40 and (or) further break-out variant up to 1,6140/60, 1,6060/80, 1,5980/1,6020. The alternative for buyers will be above 1,6440 with the targets of 1,6480/1,6500, 1,6540/60, 1,6620/60. JPY Earlier opened and preserved long positions have not had any positive result in attainment of anticipated targets. OsMA trend indicator, having marked fall in both party activity does not clarify the choice of planning priorities for today. Hence, we can assume probability of reaching channel line 2 at 87,80/88,00 levels, where it is recommended to evaluate the development of the activity of both parties in accordance with the charts of a shorter time interval. As for short-term buying positions on condition of the formation of topping signals the targets will be 88,40/60, 89,00/20 and (or) further break-out variant up to 89,60/80, 90,20/40, 90,80/91,00. The alternative for sales will be below 87,60 with the targets of 87,00/20, 86,40/60, 85,80/86,00. EUR The pre-planned break-out variant for sales has been implemented with overlap of minimal anticipated target. OsMA trend indicator, having marked parity of both party activity in the bigger picture, gives grounds for supposition of probable rate range movement, however, with priority of planning sales for today. Hence and considering current indicator chart direction, we can assume reaching 1,4760/80 levels, where it is recommended to evaluate the development of the activity of both parties in accordance with the charts of a shorter time interval. As for short-term sales on condition of the formation of topping signals the targets will be 1,4700/20, 1,4640/60 1,4580/1,4600 and (or) further break-out variant up to 1,4520/40, 1,4460/80. The alternative for buyers will be above 1,4860 with the targets of 1,4900/20, 1,4960/80. FOREX Ltd www.forexltd.co.uk

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FX Technical Analysis

Daily Forex Technicals | Written by Mizuho Corporate Bank | Dec 09 09 07:57 GMT |

EURUSD Comment: Below 'channel' support, trading in the middle of the Ichimoku 'cloud', though above retracement support and thereby confusing many. Knee-jerk reactions in thin year-end markets will probably rattle nerves. The idea that the US dollar is the 'risk averse' trade is risible. Strategy: Possibly attempt small longs at 1.4710; stop below 1.4600. Short term target 1.4800, then 1.5000 Direction of Trade: → Chart Levels: Support Resistance 1.4665 " 1.4736 1.4626 1.48 1.4600* 1.4867 1.4565 1.4906 1.4515 1.495 GBPUSD Comment: Dropping below the bottom of the 'flag' and the Ichimoku 'cloud' balances as we retrace 61% of the previous rally, the US dollar gaining against all currencies this week, hardest hit the Swedish krona. The move is corrective so watch once again for signs of forming an interim base today and maybe through to year-end. Beware thin year-end markets. Strategy: Attempt small longs at 1.6200; stop below 1.6100. First target 1.6450 then 1.6700 Direction of Trade: → Chart Levels: Support Resistance 1.6167 " 1.6288 1.6134 1.6335 1.6000* 1.64 1.59 1.6477 1.58 1.6516 USDJPY Comment: Reversing all of Friday's rally and hovering back at the 26-day moving average. Expect hesitation here today, around the 50% retracement and the 9-day moving average at 87.80. A sustained break below here targets key support around 85.00. Strategy: Attempt small shorts at 88.05, adding to 89.00; stop above 89.60. Short term target 88.00, then 86.00. Direction of Trade: → Chart Levels: Support Resistance 88.00* " 88.7 87.80* 89.18 87.38 89.56 87.00* 90.11 86.5 90.78 EURJPY Comment: Sooner than we had hoped Yen crosses have reversed most or all of last week's gains, underlying the fact that the trend is more likely to be for a stronger Yen. Now hovering just under the lower edge of a very messy band that has held for most of this year. A weekly close below 127.75 might tip the balance and push this one down sharply at year-end. Strategy: Attempt small shorts at 129.35, adding to 130.50; stop above 131.15. Cover ahead of 127.00 Direction of Trade: → Chart Levels: Support Resistance 129.17 " 130 129 130.27 128.55 131.00* 128 132 126.95** 132.5 Mizuho Corporate Bank Disclaimer The information contained in this paper is based on or derived from information generally available to the public from sources believed to be reliable. No representation or warranty is made or implied that it is accurate or complete. Any opinions expressed in this paper are subject to change without notice. This paper has been prepared solely for information purposes and if so decided, for private circulation and does not constitute any solicitation to buy or sell any instrument, or to engage in any trading strategy.

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South Korean Producer Prices Fall, Household Lending Climbs

By Sungwoo Park and Bomi Lim

Dec. 9 (Bloomberg) -- South Korea’s producer prices dropped for a seventh straight month in November and bank lending to households rose, highlighting the difficulty policy makers face on when to raise interest rates.

Prices paid to producers fell 0.4 percent from a year earlier, after a 3.1 percent decline in October, as a stronger currency reduced the cost of imported materials used to manufacture goods, the Bank of Korea said today. Bank lending to households rose for a second consecutive month in November on increased mortgage loans, the bank said in a separate statement.

Central bank Governor Lee Seong Tae kept the benchmark rate at a record-low 2 percent for a ninth month in November, and the board meets tomorrow for its monthly review of borrowing costs. The economy expanded 3.2 percent in the third quarter, boosted by exports plus local spending, and Goldman Sachs Group Inc. expects the Bank of Korea will increase the key rate by 75 basis points in 2010, and another 50 basis points in 2011.

“The global economic recovery will be led by developing nations,” Goohoon Kwon, an economist at Goldman Sachs, told a briefing in Seoul today where he announced the rates forecast. “Korean exporters are really well positioned because of their large exposure to emerging markets.”

South Korea’s exports rose for the first time in 13 months in November as demand for the nation’s semiconductors, display panels and auto components increased.

Stocks, Currency

The benchmark Kospi stock index has climbed 45 percent this year and sales at the nation’s main department stores gained the most in 14 months in October. The Korean won has risen 24 percent in the past year against the U.S. dollar, making it the best-performing currency in the region.

Loans to households climbed 2.6 trillion won ($2.2 billion) last month to 408.2 trillion won, the Bank of Korea said today. Mortgage lending increased by 1.6 trillion won.

“Household credit is a potential risk factor that the central bank should remain concerned about in general terms,” said Lee Sung Kwon, an economist at Good Morning Shinhan Securities Co. in Seoul. “But the growth rate in November does not appear to be a critical factor in triggering adjustments to the benchmark rate in the near term.”

Loans to companies climbed 2.2 trillion won to 517.8 trillion won, today’s report showed. The broadest measure of money supply, M2, grew 10.5 percent in October from a year earlier, the central bank said today in a separate statement.

South Korea’s economy will expand next year at 4.5 percent, the International Monetary Fund said yesterday. Even so, the nation will maintain accommodative policies to generate jobs and investment as the economy faces uncertainties, the Finance Ministry said last week. Governor Lee said Nov. 12 the central bank will maintain an accommodative policy stance for the time being with an emphasis on sustaining economic activity.

Prices for industrial goods, which include products ranging from textiles to oil, plastics and computers fell 1.2 percent from a year earlier, today’s report showed.

Electricity, water and gas prices advanced 6.7 percent, while services costs rose 0.6 percent, according to the report. The cost of agricultural, forestry and fisheries products declined 2.3 percent.

To contact the reporter on this story: Sungwoo Park in Seoul at spark47@bloomberg.net; Bomi Lim in Seoul at blim30@bloomberg.net

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Bollard May Signal N.Z. Rates on Hold Until Mid 2010

By Tracy Withers and Dan Petrie

Dec. 9 (Bloomberg) -- New Zealand central bank Governor Alan Bollard may signal that he is in no rush to raise interest rates as the economy gradually recovers from recession.

The Reserve Bank of New Zealand will leave the official cash rate at a record-low 2.5 percent at 9 a.m. in Wellington tomorrow, according to all 12 economists surveyed by Bloomberg. Bollard will reiterate that he doesn’t expect to raise borrowing costs until the second half of 2010, analysts say.

Bollard said on Oct. 29 he expected to keep the cash rate at 2.5 percent until at least July because the economy’s recovery was just getting under way and needed more stimulus. Traders are betting he may raise borrowing costs as early as April amid reports of improving business and consumer confidence plus surging house prices.

“The pickup has been no stronger than the Reserve Bank already anticipated,” said Craig Ebert, senior economist at Bank of New Zealand Ltd. in Wellington. “The Reserve Bank has time up its sleeve before any reversal of policy stimulus becomes imperative.”

Four economists expect a rate increase in the first quarter of next year and six predict the first move in the second quarter. Traders are betting the cash rate will rise 163 basis points over the next year, according to a Credit Suisse index based on swaps trading. A basis point is 0.01 percentage point.

Currency to Rise

Banks have boosted estimates for the New Zealand dollar, assuming Bollard may raise rates as soon as March, according to a Bloomberg News survey. The currency will likely rise 6 percent to 75 U.S. cents by March 31, according to the median estimate in the poll of 32 strategists.

The currency traded at 70.87 cents at 4.30 p.m. in Wellington. It has gained 22 percent against the U.S. currency the past six months.

Central bankers around the world are now assessing when to remove stimulus as the global economy recovers. Australia and Norway have started raising rates and the Federal Reserve has committed to scale down buying of mortgage-backed debt.

Reserve Bank of Australia Governor Glenn Stevens raised his benchmark rate for an unprecedented third straight month last week to 3.75 percent. He will increase borrowing costs to 4 percent at his next review on Feb. 2, according to all 16 economists in a Bloomberg News survey.

European Central Bank President Jean-Claude Trichet on Dec. 7 said interest rates in the euro area are appropriate.

Job Losses

In New Zealand, trader expectations of a rate increase have diminished since Bollard’s Oct. 29 statement amid signs that the economic recovery will be gradual and the jobless rate is likely to rise further, curbing spending.

The economy grew 0.1 percent in the three months to June 30, the first expansion in six quarters. Analysts expect growth will be maintained in the third and fourth quarters, led by rising export prices and demand for housing.

House prices have increased 9.4 percent since a low in January and property sales in October surged 36 percent from a year earlier, according to the Real Estate Institute.

A stronger housing market helped drive consumer confidence to a 22-month high in October, according to an index compiled by Roy Morgan Research and ANZ National Bank Ltd.

Prices of New Zealand’s commodity exports jumped the most in 23 years in November, led by dairy prices, according to an ANZ National index published last week.

Signs of a global recovery and rising commodity prices boosted business confidence to a 10-year high last month, according to a separate ANZ National survey.

Finance Minister

Finance Minister Bill English said today the economy is improving and could do better than forecast in his May budget. Still “the picture is patchy” and the government is yet to see business confidence convert into investment and jobs, he told parliament’s finance & expenditure select committee.

A challenge for the economy is the high jobless rate, English said. Unemployment was at a nine-year high of 6.5 percent in the third quarter and could reach 8 percent, the New Zealand Institute of Economic Research said last week.

English has expressed concern that the New Zealand dollar’s gain will curb export returns and restrain growth.

Manufacturing sales contracted in the third quarter, according to a government report yesterday. A second report showed home and non-residential construction shrank in the same period.

Cavalier Corp., an Auckland-based carpet manufacturer, is forecasting little sales growth as the weak construction industry and rising unemployment reduces demand.

“We expect consumer confidence to remain fragile for at least the remainder of this financial year while unemployment remains high,” Chief Executive Officer Wayne Chung told the company’s annual meeting on Nov. 12. “Our outlook is for residential carpet sales to remain flat and for a further softening in the commercial carpet sector.”

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net; Daniel Petrie in Sydney at dpetrie5@bloomberg.net

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China Said to Plan 8 Trillion Yuan Loans Cap for 2010

By Bloomberg News

Dec. 9 (Bloomberg) -- China’s banking regulator plans to slow new lending to between 7 trillion yuan ($1 trillion) and 8 trillion yuan next year, a person familiar with the matter said.

The China Banking Regulatory Commission’s recommended range compares with 8.9 trillion yuan of new local-currency loans in the first 10 months of this year. The person spoke on condition of anonymity because he isn’t authorized to discuss the matter publicly.

China is trying to ensure credit flow is enough to support an economic recovery while limiting the risk that this year’s lending boom will lead to bad loans and asset bubbles. The country will maintain a “moderately” loose monetary policy to keep economic growth from slowing, according to a statement from the annual central economic work conference that ended Dec. 7.

“This is pretty much in line with market expectations and should arm the government with enough bullets to maintain an economic recovery,” said She Minhua, a Shanghai-based analyst at Haitong Securities Co.

Phone calls to the CBRC’s press office weren’t answered.

The government’s 4 trillion yuan stimulus package and record bank lending helped ailing exporters refinance debt and provided funding for an acceleration in fixed-asset investment, reigniting economic growth that had fallen to the lowest in more than a decade.

Credit Standards

A debt-fueled increase in investments “may imply additional demand for loans in the future, to complete the underlying project,” the Bank for International Settlements said in a quarterly report published this month. Should China tighten monetary policy, that could “leave projects incomplete and lead to a build-up of bad loans.”

China’s credit boom may erode the quality of bank balance sheets as the jump in lending was “unavoidably” linked to an easing of credit standards, the BIS said.

The nation’s house prices jumped the most in 14 months in October, adding to concern that record lending may create asset bubbles in the world’s fastest-growing major economy. The benchmark Shanghai Composite Index has gained 78 percent this year as the economy recovered.

“History shows that credit growth of 13-14 percent can support fixed-asset expansion of over 20 percent,” She said. “So 7 trillion yuan of new loans will be adequate to keep existing projects floating and add on some new ones.”

The regulator in October said it would tighten regulation of personal loans to ensure that bank credits are not misused and “enter the real economy.” A “significant” part of loans doled out by banks may have flowed into equity and property markets, the BIS said.

Capital Eroded

China’s new loans may slow to 7 trillion yuan next year, UBS AG forecast last month. “We believe slower credit growth in 2010 will be key to avoid a boom-bust scenario in the economy,” UBS economist Wang Tao said in a Nov. 30 report.

China’s five largest banks submitted plans to regulators for raising money after unprecedented lending eroded their capital, four people with knowledge of the matter said last month. Chinese lenders would need as much as a combined 368 billion yuan to keep their capital adequacy ratios at 12 percent, according to BNP Paribas.

The CBRC’s loan target requires approval from the central government, the person said. The 7 trillion yuan to 8 trillion yuan range is similar to one proposed by Tang Shuangning, former vice chairman of the regulator, on Nov. 21.

--Philip Lagerkranser. Editors: Andreea Papuc, Malcolm Scott.

To contact the Bloomberg News staff for this story: Philip Lagerkranser at at lagerkranser@bloomberg.net

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Hatoyama Stimulus to Avert Recession, Leave Deflation

By Aki Ito and Keiko Ujikane

Dec. 9 (Bloomberg) -- Japanese Prime Minister Yukio Hatoyama’s 7.2 trillion yen ($81 billion) stimulus will help the nation avert another recession next year without overcoming the deflation that threatens the economy’s longer term prospects.

The spending, unveiled ahead of a government report today that showed growth in the third quarter was slower than initially estimated, included employment subsidies, loan guarantees and incentives to buy energy-efficient products.

Hatoyama compiled his first stimulus package since becoming premier in September after the yen surged to a 14-year high against the dollar, threatening the export-led recovery. The plan may keep the economy afloat until the rebound in overseas demand reaches households, according to Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co. in Tokyo.

“In the short term, it will help avert a double-dip recession,” Miyazaki said. “This stimulus won’t do enough to fight deflation, and it didn’t include anything to weaken the yen.”

The yen surged to 84.83 on Nov. 27, the highest level since 1995, and has advanced 4 percent against the dollar in the past three months. It traded at 88.56 per dollar at 9:19 a.m. in Tokyo from 88.43 late yesterday.

Slower Growth

The Nikkei 225 Stock Average fell 1.3 percent after the Cabinet Office said the economy expanded at an annual 1.3 percent pace in the three months ended Sept. 30, slower than the 4.8 percent reported in preliminary figures last month. The figure was revised to reflect a Finance Ministry survey that showed companies slashed spending at a record pace in the period.

Economists say Hatoyama’s package will help growth next year. Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo, predicts it will add 0.2 percentage point to gross domestic product, while Yasuo Goto, chief economist at Mitsubishi Research Institute, forecasts it will bolster GDP by 0.5 percentage point. The economy will expand 1.2 percent in 2010, according to the median estimate of 14 economists surveyed by Bloomberg News.

Not everyone says the spending will help the economy. Morgan Stanley Asia Chairman Stephen Roach said Hatoyama needed to be “much more aggressive” with his policies.

Second Lost Decade

“It’s tiny,” Roach said of the stimulus in an interview on Bloomberg Television yesterday. “This is an economy that went into its worst recession, the second lost decade, late last year and is barely coming out. The new government is not off to a good start in formulating policy strategy.”

The stimulus lacked focus on policies that could bolster the nation’s growth prospects in the long term, such as corporate tax reductions and incentives for companies to invest in developing industries, according to Yasukazu Shimizu, a senior market economist at Mizuho Securities Co. in Tokyo.

Mitsubishi’s Goto says the stimulus doesn’t guarantee Japan will be able to shake off falling prices and policy makers must be prepared to take further action.

“Deflationary pressure in the Japanese economy is so strong that the measures unveiled so far won’t be enough to overcome it,” said Goto, a former Bank of Japan official. “The real issue is whether they’re going to be prepared to fire a second or third bullet when the need arises.”

Bank of Japan

The central bank released a 10 trillion yen credit program last week, satisfying calls from government ministers for it to do more to fight declining prices.

Nobuaki Koga, head of Japan’s largest labor union, applauded the government’s efforts to spur growth by saving jobs.

“This is worth praise,” said Koga, head of the Japanese Trade Union Confederation, known as Rengo. “It includes employment measures and I support the main pillars. Bigger would be better, but there are fiscal limitations.”

Recent data indicate the recovery is losing steam. Industrial production grew at its weakest pace in eight months in October and a report yesterday showed merchant sentiment tumbled by a record amount in November. Exports fell for the 13th straight month in part because of the yen’s strength.

Fujio Mitarai, head of the nation’s biggest business lobby and chairman of Canon Inc., said last month the government needs to take “urgent steps” to stem the yen’s gains.

Debt Burden

Hatoyama’s ability to revive the economy has been limited by the nation’s swelling debt burden, which is already the largest in the industrialized world. He said the package was a reflection of the government’s will to spur growth without blowing out growing public debt.

“This reflects our intention to resuscitate the economy,” Hatoyama told reporters in Tokyo yesterday. “There was a sharp debate from differing perspectives on what must be done, on whether the economy or fiscal discipline take priority, and I think that should be recognized.”

The premier’s sliding popularity may hurt his party’s momentum ahead of the July upper house elections in July 2010. His approval rating fell below 60 percent for the first time, declining to 59 percent from last month’s 63 percent, the Yomiuri newspaper reported this week.

Some say the measures, which extended policies inherited by the previous administration, are merely a stop gap to prevent the economy from deteriorating before the election.

“The package doesn’t help the economy much, the DPJ’s just afraid of being blamed if there’s a double-dip slump,” said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. “I don’t think there’s any legitimate logic for implementing these measures except for political reasons.”

To contact the reporter on this story: Aki Ito in Tokyo at aito16@bloomberg.net; Keiko Ujikane in Tokyo at kujikane@bloomberg.net

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Japan Economy Grows 1.3%, Less Than Initial Estimate of 4.8%

By Keiko Ujikane and Tatsuo Ito

Dec. 9 (Bloomberg) -- Japan’s economy expanded less than a third of the pace initially reported in the three months to September as companies slashed spending.

Gross domestic product rose an annualized 1.3 percent, slower than the 4.8 percent reported last month, the Cabinet Office said today in Tokyo. The revision, which was deeper than the predictions of all but one of the 17 economists surveyed by Bloomberg News, also showed that price declines accelerated.

Stocks fell after the report underscored concern about the sustainability of a recovery that is under threat from deflation and a rising yen. Prime Minister Yukio Hatoyama unveiled a 7.2 trillion yen ($81 billion) stimulus package yesterday to ensure the economy avoids another recession next year.

“These numbers were weak,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. “The stimulus will have a positive effect on the economy. But it’s not, in any way, enough to offset how steeply third-quarter GDP was revised.”

In nominal terms the economy shrank 0.9 percent last quarter, more than the 0.1 percent contraction in the preliminary report. The GDP deflator, the broadest indicator of price declines, slid 0.5 percent, revised from a 0.2 percent increase. The gauge has only risen twice in the past decade.

“This is a reminder of the deflation gap,” said Shuichi Obata, senior economist at Nomura Securities Co. in Tokyo, the only company to forecast a decline in the deflator. “It will be important to see how much Japan can recover while deflation continues.”

Nikkei Slides

The Nikkei 225 Stock Average slid 1.3 percent, led by Honda Motor Co. and Mizuho Financial Group Inc. The yen traded at 88.45 per dollar at 12:56 p.m. in Tokyo from 88.40 before the report. The currency has weakened since climbing to a 14-year high of 84.83 per dollar on Nov. 27. The median estimate of economists surveyed by Bloomberg News was for an annualized 2.8 percent expansion.

Investment by companies drove the downward revision in last quarter’s growth. Capital spending fell 2.8 percent in the three months through September from the previous quarter. That compares with a 1.6 percent increase reported last month.

“The recovery in capital investment will be dull,” said Yasuhiro Onakado, chief economist in Tokyo at Daiwa SB Investments Ltd., whose 1 percent prediction for growth was the most accurate of analysts surveyed. “Capacity utilization levels are still low, meaning that companies are saddled with idle assets and have no room for new investment.”

Record Cuts

The economy expanded 0.3 percent in the third quarter from the previous three months, the Cabinet Office said, slower than the 1.2 percent first reported. The cuts in both quarterly and annualized growth were the biggest since the survey was introduced in 2002, the government said, voicing concern about the size of the revision.

While the initial report gave the impression export growth is spreading to the domestic economy, “we’ll need to reexamine that,” Keisuke Tsumura, a parliamentary secretary at the Cabinet Office told reporters.

Consumer spending, which makes up about 60 percent of the economy, climbed 0.9 percent, compared with a 0.7 percent gain initially reported. Exports increased 6.5 percent from the previous quarter, compared with the 6.4 percent first published.

Some exporters are scaling back their spending plans as the yen’s rise to a 14-year high threatens their profits and market share.

Toyota Cuts Investment

Toyota Motor Corp., Japan’s biggest automaker, aims to cut capital investment by 70 billion yen from its initial plans for the year ending March, the most among major companies, a Nikkei Inc. survey showed on Nov. 30.

Sony Corp., forecasting its first consecutive annual loss since its listing in 1958, said last month that it will eliminate 250 jobs at its information devices unit to reduce costs. The company will close down a factory in Miyagi Prefecture making magnetic heads and transfer some of its touch- panel production to China.

Falling prices have been squeezing profit at home, prompting the government to declare last month that the country is back in deflation and push the Bank of Japan to do more to spur the economy. The central bank released a 10 trillion yen credit program last week, a move that Deputy Prime Minister Naoto Kan said yesterday had a “considerable impact” on weakening the yen.

Yesterday’s stimulus includes employment subsidies, loan guarantees and incentives to buy energy-efficient products. Japan has compiled four spending packages since September 2008 totaling more than 29 trillion yen. Some economists say these measures won’t be enough to support growth.

“Consumer spending will probably start to decelerate in coming quarters,” said Seiji Adachi, a senior economist at Deutsche Securities in Tokyo. “People won’t keep purchasing durable goods just because the government has extended incentives.”

To contact the reporters on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net; Tatsuo Ito in Tokyo at tito@bloomberg.net.

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Darling May Tax Bonuses, Raise Debt as Election Nears

By Gonzalo Vina and Robert Hutton

Dec. 9 (Bloomberg) -- Chancellor of the Exchequer Alistair Darling today may boost the U.K. Treasury’s borrowing and raise taxes on bankers, part of the Labour government’s effort to revive voter support before next year’s election.

The BBC reported that banks awarding bonuses above a specific threshold will have to pay a levy of about 50 percent on them. It didn’t say where it got its information. Darling speaks at 12:30 p.m. in Parliament.

“Nobody wants to drive banks and bankers away from the City of London, they’re important for our economy,” Business Secretary Peter Mandelson told GMTV. “But we’re seeing in some respects a return to the short-term bonus culture that got us into trouble in the past, so it’s reasonable for the chancellor to deliver a message to the banks.”

Trailing in opinion polls before an election that he must hold by June, Prime Minister Gordon Brown is balancing the need to clamp down on a record budget deficit while extending support to voters struggling in the deepest recession since 1980.

Darling may add 30 billion pounds ($48 billion) to the government’s borrowing forecasts for the next four years, according to the median estimate of 37 economists surveyed by the Treasury last month.

The chancellor will maintain plans to trim government spending over the next two years, an official at the Treasury said, asking not to be named because details remain confidential. Total managed expenditure will be 671.4 billion pounds in the year through March and 701.7 billion pounds the following fiscal year, the official said.

‘Belt-Tightening’

“It’s not going to be painless what the chancellor announces this afternoon, but it’s not going to be reckless,” Mandelson said. “He’s going to introduce some belt-tightening measures, but he’s not going to act in a way that will slam on the brakes on the recovery that’s underway.

The report will contain a pledge to maintain current spending levels for schools, hospitals and police. That will mean cuts in other government programs beyond 2012, the official said.

The pound fell for a fifth day today, weakening 0.2 percent to $1.625 against the dollar. The currency will stay under “downward pressure” because the budget report today will fail to reassure investors Britain can shore up its finances, Citigroup Inc. economists said today.

Already, the chancellor has said he will claw back money from bankers after the industry benefited from the 117 billion pounds of support the Treasury granted financial institutions since the credit crisis started in 2007.

Taxpayer Bailout

“They need to realize that there would not be a bank standing today if taxpayers hadn’t put their hands in their pockets,” Darling said on Dec. 7. “The industry as a whole does need to show some degree of restraint.”

Brown’s Labour government and David Cameron’s Conservative both have promised measures to rein in the culture of bonus payments in the City, London’s financial district.

“There is a feeling out there that these guys are overpaid and the public wants retribution,” said Keith Pilbeam, a professor of financial economics at City University in London. “There is an idea that they need punishing because they haven’t really suffered at all during this crisis.”

Where the two parties diverge is on just how quickly the government should curb the deficit. In March, Darling forecast a shortfall of 175 billion pounds in the year through March 2009. At more than 12 percent of gross domestic product, it’s the most among the Group of 20 nations. Cameron says the deficit is the biggest threat to the economy and may weaken Britain’s top-notch credit rating.

Deficit Reduction

“We can’t solve the problem of the deficit straight away, but what there’s an absence of is a credible plan,” Cameron said yesterday. “I don’t think anyone’s going to be impressed with a plan that doesn’t at least have some early action in it.”

Darling said Dec. 7 that voters “don’t buy the argument that there should be a decade of austerity” and that “going further and faster” on curbing the deficit “would be ruinous.”

Five polls since the beginning of November have signaled the Conservative lead over Labour is narrow enough to deny the opposition an outright victory in the election. Those findings coincided with Brown and Darling stepping up attacks on bankers who they blame for causing the economic crisis.

A Populus Ltd. survey finished Dec. 6 showed the Conservatives with an eight-point lead over Labour, not enough to win a majority in the House of Commons.

Banker Concern

Barclays Plc President Robert Diamond yesterday said plans to impose a windfall tax on bankers’ bonuses are unwarranted, and that the U.K. risks putting the City at a competitive disadvantage.

The tax proposal “isn’t supported by the principles we adopted” in response to the financial crisis, said Diamond, who oversees the London-based lender’s investment-banking division.

Darling earlier this week said he will not be “held to ransom” by bankers who have cried foul about the levy. Bonuses for financial services employees may rise by 50 percent to 6 billion pounds this year, the Centre for Economics & Business Research Ltd. said in October.

Moody’s Investors Service yesterday said its top debt ratings on the U.S. and the U.K. may “test the Aaa boundaries” because their deficits are worsening. With the Institute for Fiscal Studies expecting tax increases to plug the hole in its public finances, Darling is looking for targets.

“Banks won’t be able in such a short timeframe be able to give everyone a big salary increase, so I think they will identify the bonuses fairly easily,” said City University’s Pilbeam.

To contact the reporters on this story: Gonzalo Vina in London at gvina@bloomberg.net or Robert Hutton in London at rhutton1@bloomberg.net

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Almunia Says EU Officials Ready to Assist Greece in Budget Plan

By John Fraher and Kevin Costelloe

Dec. 9 (Bloomberg) -- The European Union’s economic affairs commissioner said officials are ready to help Greece get to grips with its budget deficit after concerns about its public finances sparked a rout in Greek government bonds.

The European Commission “stands ready to assist the Greek government in setting out the comprehensive consolidation and reform program, in the framework of the treaty provisions for euro-area member states,” said Joaquin Almunia, who is in charge of economic and monetary affairs, in a statement late yesterday. He didn’t say what form any assistance could take.

Greek stocks and bonds tumbled yesterday after Fitch Ratings cut its rating on government debt to BBB+ and two other major ratings companies are threatening to follow suit. Greece, the lowest-rated country in the euro region, is struggling to cut a budget deficit of 12.7 percent.

The benchmark Athens Stock Exchange General Index dropped as much as 6.1 percent, its biggest intraday decline since Nov. 26. The spread between the Greek and German 10-year benchmark bonds widened to 221 basis points from 130 basis points on Oct. 5. That compares with 23 basis points for Finnish 10-year bonds.

Almunia’s comments come as investors debate whether EU governments would bail out Greece if it was unable to pay its bills. Former German Finance Minister Peer Steinbrueck said in February that euro members would “in reality” rescue states in difficulty. Almunia said yesterday Greece “is a matter of common concern” for euro nations, echoing language he has used since November. He didn’t elaborate further.

No Bailouts?

At the same time, the worst financial crisis since the Great Depression has abated since February and European governments have made no effort to elaborate how a bailout would happen in practice.

“In today’s markets, the risk of using Greece as a showcase of the ‘no bailout clause’ is too dangerous,” said Wim Boonstra, chief economist at Rabobank Nederland. “In the current situation it’s in the interests of the other countries that Greece does not fail.”

Greek Finance Minister George Papaconstantinou said yesterday his government, which came to power in October promising higher spending and wages, will cut the budget deficit in a “fair” consolidation of public finances.

That’s not enough for some European finance officials, who are increasing pressure on Greece government to take lasting measures to reduce the deficit.

“The situation in Greece is very difficult,” European Central Bank President Jean-Claude Trichet said Dec. 7. “We all know the figures, and we all know the very important, courageous decisions that have to be taken to put the situation back on track.”

Almunia said yesterday “the commission will continue to monitor the situation in Greece very closely.”

To contact the reporter on this story: John Fraher in London at jfraher@bloomberg.net; Kevin Costelloe in Brussels at kcostelloe@bloomberg.net.

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