World Markets Simplified

 
ICICI Direct reports weakening of Bajaj Auto owing to serious threats in domestic & export market

ICICIdirect has maintained `Hold` on Bajaj Auto (BAL) with a price
target of Rs 1,460 as against the current market price (CMP) of Rs
1,561 in its report dated Jan. 23, 2012. The broking house gave the
following rationale:
Not thrilled! Core growth remains fragile:

Bajaj Auto (BAL) reported its Q3FY12 numbers with sales coming in
above our estimate at Rs 50.63 billion (I-direct estimate: Rs 48.68
billion) a 21.2% YoY jump. It was driven by a mix of volume growth (up
13.6% YoY) at 1.07 million units and higher realization/ unit (up 5.0%
YoY) to Rs 47,276. BAL had hiked prices 3.5% to offset the DEPB impact
coupled with benefits arising from a depreciating rupee as average USD
rate for the quarter was higher 3.3% QoQ at Rs 49.4. RM cost as
proportion to sales declined 103 bps QoQ as EBITDA margins got
enhanced to 21.0% (up 90 bps QoQ). Reported PAT was ahead of our
estimates at Rs 7.95 billion (I-direct estimate: Rs7.88 billion), a
jump of 19.2% YoY. However, we will analyze beyond these numbers
further in the report.

Highlights of the quarter:

Bajaj Auto`s overall volume growth of 13.6% YoY was led by three
wheeler growth of 18.8% YoY and motorcycle volume growth of 12.9% YoY.
Although the export volume growth is robust at 28.4% YoY, we remain
cautious on the domestic growth front as early signs of an industry
wide slowdown have started creeping in. The weak domestic market
performance is reflected in a QoQ dip of 7.6% with overall domestic
sales in December sliding below the 2 lakh unit mark for the first
time in FY12. Bajaj Auto (Q,N,C,F)* had previously undertaken a price
hike across its export segment to cover the impact of DEPB. The
recently launched Boxer-150 cc has not met expectations with BAL
looking at repositioning the same. The management expects Q4FY12
industry growth to slide down to 5-6% and does not expect a ``V-
shaped` rebound for the same in FY13 in line with our bearish stance
for the segment.

Valuation:

We believe BAL`s domestic volume growth is under serious threat as
witnessed in the last couple of months and exports have been the only
shining light. On exports also, we believe competition from Honda and
Hero MotoCorp would be stiff. Any appreciation of the rupee could
impact our estimates negatively. At the CMP of Rs 1,561, the stock is
trading at 13.7x FY13E EPS. We have valued the stock at 13.9x FY13E
EPS to arrive at a target price Rs 1,460. We maintain our HOLD rating
on BAL.

 

 

 

 
What is this?

Will it be the next BIG thing?

Tata Motors of India thinks so. What will the Oil Companies do to stop it?

It is an auto engine that runs on air. That's right; air not gas or diesel or electric but just the air around us. Take a look.



Tata Motors of India has scheduled the Air Car to hit Indian streets by August 2012



The Air Car, developed by ex-Formula One engineer Guy N. For Luxembourg-based MDI, uses compressed air to push its engine's pistons and make the car go.

The Air Car, called the "Mini CAT" could cost around 365,757 rupees in India or $8,177 US.

The Mini CAT which is a simple, light urban car, with a tubular chassis, a body of fiberglass that is glued not welded and powered by compressed air. A Microprocessor is used to control all electrical functions of the car. One tiny radio transmitter sends instructions to the lights, turn signals and every other electrical device on the car. Which are not many.

The temperature of the clean air expelled by the exhaust pipe is between 0-15 degrees below zero, which makes it suitable for use by the internal air conditioning system with no need for gases or loss of power.

There are no keys, just an access card which can be read by the car from your pocket. According to the designers, it costs less than 50 rupees per 100 KM, that's about a tenth the cost of a car running on gas. It's mileage is about double that of the most advanced electric car, a factor which makes it a perfect choice for city motorists. The car has a top speed of 105 KM per hour or 60 mph and would have a range of around 300 km or 185 miles between refuels. Refilling the car will take place at adapted gas stations with special air compressors. A fill up will only take two to three minutes and costs approximately 100 rupees and the car will be ready to go another 300 kilometers.

This car can also be filled at home with it's on board compressor. It will take 3-4 hours to refill the tank, but it can be done while you sleep.

Because there is no combustion engine, changing the 1 liter of vegetable oil is only necessary every 50,000 KM or 30,000 miles. Due to its simplicity, there is very little maintenance to be done on this car.

This Air Car almost sounds too good to be true. We'll see in August. 2012

 
Global - Economy and Market 

 
Global - Economy and Market

Gasoline pushes inflation up in January

WASHINGTON - Gasoline prices jumped in January, leading overall consumer prices higher and offering a reminder of the risks energy costs pose to the economic recovery.

Bernanke says recovery slow but small banks climbing back

WASHINGTON - The weak economic recovery has made it harder for banks to make money from loans but the financial conditions of smaller institutions appear to be solidifying, Federal Reserve Chairman Ben Bernanke said on Thursday.

Manufacturing, housing data flag underlying strength

WASHINGTON - U.S. manufacturing output rose in January and a gauge of factory activity in New York state hit a 1-1/2-year high in February, showing a solid underpinning for the economic recovery. Housing starts rose more than expected in January as groundbreaking on rental property surged, boosting hopes the still-weak housing sector could help economic growth this year.

Fed is open to boosting economy if recovery falters

The Federal Reserve appears willing to stimulate the U.S. economy more if necessary, according to minutes of the central bank's January meeting. Officials are worried that recent signs of a strengthening economy are short-lived, the minutes show.

Europe posts economic shrinkage for Q4

The EU and eurozone economies each contracted 0.3% in the fourth quarter, sending Belgium, Italy, the Netherlands and Portugal into recession. The gross domestic product of Germany, Europe's biggest economy, declined 0.2%. France, the second-largest, saw GDP grow 0.2%.

Greek cabinet tackles austerity, rescue hopes rise

ATHENS - Greece's cabinet tackled on Saturday how to implement austerity demanded by the EU and IMF as a 130-billion-eurorescue seemed within reach, while the euro zone considered modifying a deal with private creditors to help Athens reduce its huge debts.

China says it will invest in Europe's bailout funds

People's Bank of China Governor Zhou Xiaochuan said China will invest in the EU's rescue funds and maintain its euro investments. "China will always adhere to the principle of holding assets of EU sovereign debt," he said. "We would participate in resolving the euro debt crisis." Premier Wen Jiabao made a similar statement.

China cuts banks' reserve ratios for second time

SHANGHAI - China's central bank cut the amount of cash that commercial lenders must hold as reserves on Saturday for the second time in nearly three months, the latest step to shore up the slowing economy. The government is reluctant to give the green light to another bout of big bank lending, with inflation risks lingering and, more importantly, policymakers are determined to cool down the property sector to ward off a speculative bubble. Few analysts believe the central bank will cut interest rate cuts this year, with annual inflation staying stubbornly higher than the one-year deposit rate of 3.5 percent.

China: January New Loans

• Banks lent out Rmb738.1bn in new loans in January, less than the market's expectation of a Rmb1tn rise, although we believe this was influenced by the fewer working days in January this year due to the Chinese new year festival.

• This coincides with the government's measured easing approach, but we need to take into account the amount of new loans in February to view the whole picture. M2 growth also decelerated further to 12.4% yoy in January.

• We suspect lending must have been very slow after the robust activities during the first week after the calendar new year. Banks granted a large sum of credit to local governments and local investment vehicles in the first week of January, but that momentum might have quickly cooled off.

• We think the current credit easing is selective, with property developers being excluded. Demand from businesses for real investments is also weak. The liquidity situation has improved, however, especially among the SMEs. We think growth prospects remains biased on the weak side.

Japan slowly wakes up to doomsday debt risk

TOKYO - Capital flight, soaring borrowing costs, tanking currency and stocks and a central bank forced to pump vast amounts of cash into local banks -- that is what Japan may have to contend with if it fails to tackle its snowballing debt.

India - Economy and Market

Industrial production provided a modest downside surprise relative both to consensus and our own forecast – coming in at 1.8% yoy. This was down from 5.9% in the previous month, while we estimate that output fell 1.6% on a seasonally adjusted month-on-month basis.

What's the underlying trend? In truth, production has been even more volatile than normal in the last few months, falling very heavily in October, before bouncing back even more strongly in November and then partially correcting in December. The best guide to the underlying trend is probably given by the three month-on-three month seasonally adjusted annualized rate. This has moved up from a low of -13% in October to 3.3% in December. As such, it is beginning to look as though production has bottomed in underlying terms – a view supported by the strong improvement we have seen in India's manufacturing PMI.

India's January wholesale price inflation came in at 6.6% yoy, slightly below the market's and our expectations, and the lowest inflation rate since 2009. We estimate that WPI rose only 0.1% on a seasonally adjusted basis from the previous month.

Another piece of good news is that the RBI's measure of core inflation, the manufacturing WPI ex-food, also moderated to 6.7% yoy from 7.7% in December, and the lowest level since January 2011.
These developments further support our rate cut call. We recently changed our interest rate view, and are now expecting the first repo rate cut to come in March (rather than April), with reductions totaling 175bps by January 2013.

 
Yeah, we had the same response as our readers when we saw that freak move in the EURUSD. Apparently, despite the fact that absolutely nothing has been resolved,Reuters just ran a headline that "Euro zone reaches deal on second Greek bailout package." And that is all it took for the EURUSD headline scanning algos to surge by 60 pips. That there nothing substantial in it, or that this is merely a rephrasing of the actual Bailout 2 announcement from before, is irrelevant. Here is what the actual Reuters report said.

Euro zone finance ministers struck a deal early on Tuesday for a second bailout programme for Greece that will involve financing of 130 billion euros and aims to cut Greece's debts to 121 percent of GDP by 2020, EU officials said.

"The financial volume (of the Greek package) is 130 billion euros and debt-to-GDP (will be) 121 percent. Now it's down to work on the statement," one official involved in the negotiations told Reuters.

Another official confirmed that the financing would total 130 billion euros with the aim of reducing Greece's debts from around 160 percent of GDP now to 121 percent by 2020.

So just the little matter of the statement, which is what has be en the actually stopping block for the past 6 months. And incidentally, the broad strokes of this announcement is a carbon copy of the second bailout deal reached back in the summer of 2011. Inother words, there is nothing substantial to this, and is merely boilerplate. But it was good enough to fool the algos. Now the only question is how long until this latest and greatest deal concoction falls apart again, and the whole farce is repeated all over.

 

 
To fund a deficit of 600,000 crores, the RBI might need to print 200,000 crores


Advance Taxes Are Not Enough

December, was when corporates (and individuals) pay another chunk of advance tax. This should have bolstered government revenues, but it seemingly has not. Total tax revenue in December, net of what was paid to the states, was Rs 99,944 crores, just 5.3% above the previous year. For the April to December time period, tax collections are just 7.5% higher.

Consider that India's Gross Domestic Product has grown 16% in "nominal" terms — that is, before inflation is removed. Government tax revenue should grow at the nominal rate (at least), but increasing inflation has eaten substantially into profits and thus, to taxes.

Meanwhile, government expenditure is growing at nearly 14%. No wonder the deficit is now at Rs 3.8 lakh crore, which is already more than 90% of the budgeted deficit for the entire year.
Lower Corporate Profits

Analyzing the December quarter results which are being announced now tells us that corporate profits, from the 400 top companies, have fallen 1.5% from the same quarter a year back. The September quarter was also a declining number. While revenues have grown 26%, expenses have grown even more at 32%. A lower corporate profit number doesn't just cut directly from government revenues, it makes valuations of their stocks lower (and the government owns a large chunk of PSUs).
The Lack of Enough Non-Tax Revenue

Last year, a bulk of non-tax revenue came from selling the 3G and BWA spectrum. This year the government expected to sell equity stakes in public sector companies like ONGC and BHEL, which has not yet happened largely because the government believes the market prices are too low.

The government has tried innovative means of revenue. It has asked government owned companies to buy back their shares with their surplus cash. Nearly 30,000 cr. worth shares of large companies like L&T and Axis bank lie with SUUTI, a special purpose vehicle that was created when US-64, a mutual fund, was bailed out by the government. These could be sold, but prices will drop if the news is public, so the idea is to sell the shares into another SPV and use accounting magic to make the non-tax number. The most innovative, perhaps, was to attempt to charge Vodafone with an income tax order of more than 8,000 cr. after they bought the telecom company, Hutch; the Supreme Court has since ruled against the government.
Bailouts and Oil Subsidies

While expenses are up 14%, they don't include certain large ticket items. The oil deficit — the under-recovery because we price diesel, LPG and kerosene below market prices — is now 97,000 crores, and is likely to grow to about 125,000 crores. A good portion of that will have to be financed by the central government. There is an increase in the acquisition prices of food from farmers, there's more fertilizer subsidy, increase in payments to NREGA, and so on. For the last quarter, there are also bailouts of Air India, additional capital to the public sector banks and the whole election process to keep expenses higher.

 
Greece ended months of uncertainty by finally securing a new bailout and debt-restructuring agreement with euro-zone finance ministers, but doubts remain over whether Greece will be able to meet the ambitious terms of the accord.

The finance ministers agreed on the long-awaited €130 billion ($171.9 billion) deal after haggling into the early hours of Tuesday morning to settle the final details.

Officials said the meeting, which lasted nearly 13 hours, produced a plan that would reduce Greece's debt to 120.5% of gross domestic product by 2020. International Monetary Fund Managing Director Christine Lagarde said that target was lowered from 129% at the start of the meeting.

Private-sector creditors agreed to take a write-down on their bonds of 53.5%—more than the 50% write-down that had been conceded before the meeting. The private-debt exchange is expected to cut Greece's debt by €107 billion, according to the Institute of International Finance, which negotiated on behalf of bondholders.

According to a statement from the finance ministers, Greece would also benefit from an arrangement in which the European Central Bank would distribute profits on its estimated €45 billion to €50 billion in holdings of bonds it bought in the secondary market in 2010-11 to euro-zone governments, which may then use them to help Greece.

Profits on an estimated €12 billion of bonds held by national central banks in the euro zone will be passed on to Greece, reducing its debt by €1.8 billion before 2020. The meeting decided against the central banks participating in the private-sector debt exchange.

The ministers also agreed to a further reduction in interest rates on the €53 billion in loans from the euro-zone made as part of the first bailout agreed upon in May 2010, saving some €1.4 billion.

"The deal is a good result for Greece, for the euro zone and for the markets, we hope," said Italian Prime Minister Mario Monti after the meeting.

Even with the agreement, economists expect the deal will leave longer-term questions about Greece's ability to pay off even its reduced debt burden. "There are downside risks. This is clear," said the IMF's Ms. Lagarde. "It's not an easy program. It's a very ambitious program."

The problem: The Greek economy must become more competitive through across-the-board wage cuts, allowing the country to export its way back to economic health. But that hoped-for export boom could take years to materialize.

After months of political brinkmanship and unrest on the streets of Athens, a deal on Greek debt may at last be in sight. Heard on the Street's Simon Nixon has the latest details. Photo: Associated Press

Meanwhile, falling wages will only deepen Greece's recession, making the government's debt burden—still large even after the restructuring—harder to bear.

The ministers agreed that the European Commission, the European Union's executive arm, would have "an enhanced and permanent presence on the ground" in Greece to better monitor Greece's economic performance.

Greece also agreed to put money corresponding to the following quarter's debt servicing bill into a special segregated account, and would agree to introduce a change in the Greek constitution to ensure priority is granted to debt repayments.

The second bailout would offer Greece €130 billion in loans on top of the €110 billion it received from the euro zone and the IMF in May 2010. The IMF, concerned about its large exposure to the euro zone, is expected to offer just a minimal contribution this time around, leaving euro-zone governments to shoulder the vast majority of the second loan package.

The IMF agreed to provide €30 billion of the first bailout, but officials last week expected its contribution to be just €13 billion this time around.

The agreement will set in motion an exchange of an estimated €200 billion of Greek government bonds in private hands for new bonds with roughly half of their face value, which must be completed by the middle of next month. That exchange could set off legal disputes with disgruntled bondholders.


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Analysts said the accord would have to be approved by some national parliaments in the euro zone, potentially causing uncertainty. A further test of the program will come in the months ahead, when the tough austerity measures Greece passed to secure the aid package are supposed to come into force.

These include yet another round of spending and pension cuts for an economy in its fifth year of recession, coupled with a 22% cut in the minimum wage.

With elections tentatively scheduled in April to replace the coalition government of Prime Minister Lucas Papademos, Greek politicians may become increasingly wary of standing behind the measures that just passed Parliament over popular outcry, analysts said

Their worries were heightened by comments from Antonis Samaras, the leader of the New Democracy party who is likely to be prime minister after the elections, who told Parliament last week: "I want to avoid the jump over the cliff today, to buy time, to restore normality and to go to elections tomorrow…. This is why I ask you to vote in favor of the new loan agreement today and to have the ability tomorrow to negotiate and to change the current policy which has been forced on us."

Marie Diron, an economist at Oxford Economics, said, "They have to satisfy the euro-zone governments while at the same time making very tough measures acceptable to their population. That is something a technocratic government can perhaps manage, but after the election it might become much more difficult for an elected government to satisfy these two goals."

Some euro-zone governments have taken a harder line with Greece. German, Dutch and Finnish officials have become increasingly skeptical that Greece will implement the painful economic policies its Parliament backed.

Dutch Finance Minister Jan Kees de Jager, speaking before the finance ministers' meeting, called for "permanent" oversight of the Greek government by officials of the so-called troika—the European Commission, the ECB and the IMF.

"When you look at the derailments in Greece, which have occurred several times now, it's probably necessary that there's some kind of permanent presence of the troika in Athens," Mr. de Jager told reporters upon arriving at the finance ministers' meeting. "Not every three months, but more permanent."

If Greece dutifully adheres to policies prescribed by the troika, the economic impact could be harsh, Ms. Diron said.

"Cuts in the minimum wage will bite very hard," she said.

Lowering the minimum wage is supposed to address some of the failures of the previous austerity packages, which focused on reducing the government's borrowing needs

 
SP TULSIAN.

Q: What about his potential news on Sterlite and Sesa Goa, how do you read it?

A: The background in which this news has germinated is that Vedanta group is looking to transfer stakes held by them in Cairn India to Serlite Industries. Sterlite Industries is going to become the holding company. If I move on this premise, it is a very positive move. But, ultimately everything boils down to the swap ratio because couple of years back Sterlite had moved similar proposal, which was against interest of minority shareholders. It was a bit complicated and they were forced to drop that proposal.

Cairn India holds 39% stake. I am excluding 24% stake held by Sesa Goa. So, if they transfer 39% stake into Sterlite Industries, eventually taking the current price as the base, they will be able to raise their stake in Sterlite Industries to about 75%. I am seeing this as a precursor by the group to initiate a move to purchase the residual stake of the government to the extent of 29% in Hindustan Zinc and 49% in BALCO.

Collectively, the group will require about Rs 23,000-24,000 crore for buying both these stakes. They need Rs 17,000-18,000 crore for Hindustan Zinc and Rs 4,000-5,000 crore for BALCO.

Ultimately, they will be looking to raise this kind of money based on cash flow of Cairn India. If Sesa Goa gets merged with Sterlite, this stake of Vedanta transfer to Sterlite, Sterlite will be holding 58-59% in Cairn India. Cairn India will be making a cash profit of about Rs 10,000 crore every year. So, they will be looking upon to capitalize this cash generation for buying out residual stake.

Otherwise in the present form, the balance sheet of Sterlite Industries will get stretched. There is no other point in buying residual stake in any other company because both these stakes are presently held by Sterlite Industries. So, it is a composite move and if that happens then Sterlite Industries will be the holding company for ferrous metal business, non-ferrous metal business and crude.

Apart from that, all the stakes in these three businesses will be more that 50%. So, everything will get consolidated on the top-line and bottom-line. In this background, there will not be in fear of company discounting for Sterlite valuations. If that happens, it will be very positive for Sterlite Industries overall and its shareholders, but one has to look for the swap ratio. I am presuming that swap will happen based on present market capitalization of all the companies.

 

 

 

An exclusive preview of an economic report on China, prepared by the World Bank & government insiders is alarming:

China could face an economic crisis unless it implements deep reforms, including scaling back its vast state-owned enterprises and making them operate more like commercial firms. "China 2030," a report set to be released Monday by the bank & a Chinese government think tank, addresses some of China's most politically sensitive economic issues, according to a half-dozen individuals involved in preparing and reviewing it.

It is designed to influence the next generation of Chinese leaders who take office starting this year, these people said. And it challenges the way China's economic model has developed during the past decade under President Hu Jintao, when the role of the state in the world's 2nd largest economy has steadily expanded. 

 
Shares of Anil Agarwal-led Vedanta group company Sterlite Industries and Sesa Goa are in News .

Here are few reasons/Views behind the Restructuring of the stocks.

1) Lack of clarity about a restructuring exercise: Media reports indicate that Vedanta Resources (VED) may restructure holdings in group companies. "Vedanta's stated strategy is to simplify and consolidate its corporate structure. Management reviews options to deliver this strategy on an ongoing basis and will update the market as appropriate," the company has said in a statement.

2) Restructuring per se will not impact valuations of the VED Group but valuations assigned to various assets will determine whether value stays at Sterlite or shifts to the parent company, brokerage firm Kotak said in a report. Citing media reports, Kotak says three restructuring scenarios are possible.

3) Vedanta may merge Sesa Goa with Sterlite: Sterlite is reportedly in talks with the government to acquire 49 per cent stake in Balco and 26 per cent stake in Hindustan Zinc (HZ). Sterlite does not have sufficient assets to fund this acquisition. Sesa's cash flow and the debt leverage it can provide can potentially aid acquisition of HZ stake and Balco stake. Such a scenario is neutral at a fair merger ratio, Kotak says. Besides, this might indicate lack of avenues for strategic utilization of Sesa's cash, the brokerage firm adds.

4) Merger of Sesa Goa and complete ownership of Vedanta Aluminium (VAL). This could be negative in case Sterlite has to assume the entire debt of VAL. Fair value impact in such a case could be Rs. 35 per share, Kotak says.

5) Sterlite becomes the holding company for all VED assets excluding KCM: Negative if Sterlite assumes VAL's entire debt. "We compute impact of Rs. 40 per share on Sterlite's fair value with the assumption of (1) merger ratio of 1:2 between Sterlite and Sesa Goa, ratio of market price before speculation of restructuring, (2) acquisition of 40% stake of VED in Cairn India at CMP of Rs390/share and (3) Sterlite assumes VAL's entire debt and does not pay equity value," Kotak says.

6) This value shift can be prevented if (1) VED assumes part of the debt (even if it transfers the entire ownership in VAL), or (2) compensates Sterlite through a favorable merger ratio of Sesa, though Sesa shareholders may object, or (3) sells its stake in Cairn India at a discount to the market price to ensure that Sterlite's minorities are not impacted by any restructuring plan, the brokerage firm adds.

7) Of particular note will be whether value shifts from Sterlite to VED or stays with Sterlite, Kotak notes. This will be determined by the valuation exercise for VAL, a company with combined debt (internal and external) of US$5.5 billion but EBITDA potential of US$200-300 million (without bauxite and captive coal).

8) The Ministry of Environment and Forests rejected VAL's application for the bauxite mine and stopped the expansion phase of the alumina refinery. This has impacted the existing operations and expansion projects. It has a highly leveraged balance sheet (Rs. 276 billion of debt at the end of December 2011 and is essentially surviving on corporate guarantees given by VED and Sterlite. It is difficult to be sanguine on VAL's operations.

10) The management has highlighted its intent to resolve equity holding of Vedanta by March 2012. Dual listing structure is in the offing. Expected structure reduces risk for Sterlite. Merger ratios scenario analysis indicates Sterlite is well below worst case, Macquarie said in its report.

 

 

 
MARK COLVIN: The International Monetary Fund says the world economy is in danger of another 1930s crash.

It would see countries defaulting on their debt and widespread panic on global financial markets.

The IMF forecast came after European finance ministers failed to reach a debt restructuring agreement with private bond holders in Greece last night.

As David Taylor reports there are now just weeks remaining before Greece's economy reaches the point of no return.

DAVID TAYLOR: European finance leaders are running out of time. Last night saw yet another failure of European ministers to negotiate a plan to keep private bond holders at bay.

Key figures from the leadership team commissioned to solve the crisis are no longer shy about where they see things are headed.

CHRISTINE LAGARDE: We could easily, easily, slide into what we call a 1930s moment. A moment where trust and cooperation break down and countries turn inward. A moment ultimately leading to a downward spiral that could very much engulf the entire world.

DAVID TAYLOR: International Monetary Fund managing director Christine Lagarde.

But they're not giving up without a fight.

CHRISTINE LAGARDE: I believe that we can avoid such a scenario. I say this for a simple reason; because we know what must be done.

DAVID TAYLOR: That includes increasing the size of the massive European bailout fund and imposing fire walls around the more robust European economies to prevent financial contagion, a financial contagion that could eventuate if Greece suffers a disorderly default on its debt.

At this point, that's exactly where we are headed.

Last night a group representing private Greek investors met with finance ministers to negotiate new terms for their holdings.

The authorities need the investors to accept some pretty dismal returns on their investments, huge losses to be exact. Understandably they're reluctant to do that but they may have no choice.

Russell Jones is the global head of fixed income strategy at the Westpac Bank.

RUSSELL JONES: To allow that to happen you have to have an interest rate which is comfortable for them. If it's too high, quite simply they will default on their bonds, they won't pay anybody back anything and that's not what the authorities want.

DAVID TAYLOR: But as investors walked away from the negotiating table last night, they increased the chance they'll receive absolutely nothing. That's because Greece is unlikely to receive any more aid money if it's unable to strike a deal with those debt investors. That would leave Greece facing complete financial collapse by the end of March.

RUSSELL JONES: There has to be something done by around the third week in March because at that stage the Greeks have got a very large payment that they have to make.

So that is the absolute deadline for any negotiations on this issue. And clearly they would like to have something in place somewhere before that if they possibly could.

DAVID TAYLOR: And if they don't meet that deadline Greece defaults?

RUSSELL JONES: Greece defaults and not in an orderly way, in a very disorderly way. And the danger with that is it sparks another round of very bad contagion to other countries in the euro zone. They get tarred with the same sort of brush as Greece. It could be a very, very difficult period for financial markets.

DAVID TAYLOR: Fact is strategists at this point are genuinely uncertain about what lies ahead.

RUSSELL JONES: We haven't had a default in a major industrial nation since the Second World War. This is not something we're very used to. It's not something that policy makers are necessarily comfortable with. In fact they're very uncomfortable with it. We don't know what the connotations will be. It's a very uncertain process.

DAVID TAYLOR: What is certain however is what investors are looking for Greece to achieve in the next 10 years, if of course it can make it through the next couple of months.

Berenberg Bank senior economist Christian Schulz.

CHRISTIAN SCHULZ: Is Greece going to be able to regain competitiveness within the euro? Is Greece going to have a sustainable debt level after 2020?

DAVID TAYLOR: Questions that wouldn't carry so much weight if much of the euro zone wasn't dependent on Greece's ultimate economic survival.

The fear is if Greece falls, other, larger economies like Italy will also bite the dust; a scenario nobody can afford.

The IMF will release its latest world growth figures later tonight – figures economists will analyse very closely.

 

 

 
Eurozone crisis live: Greek deal on knife edge

9.01am: Spain has just released GDP figures for the fourth quarter and 2011. Its economy shrank by 0.3% between October and December from the previous quarter (following zero growth in the third quarter), and grew by 0.7% over the year as a whole.

The Bank of Spain also estimates that the economy will contract by 1.5% this year, and return to meagre growth of just 0.2% in 2013.

8.47am: Reuters is reporting that EU ambassadors have agreed to impose an embargo on Iranian oil imports, but decided to postpone the full implementation of the ban until 1 July. The news agency cited a senior EU diplomat.

The EU's 27 foreign ministers, who are meeting in Brussels today, still have to formally approve the ban. EU governments will have to stop signing new contracts with Tehran as soon as the ban is in place, but will be able to fulfill existing contracts until 1 July.

8.43am: The Footsie is now up nearly 20 points at 5749, a 0.3% rise. On the continent, shares have also edged higher, with the Dax in Frankfurt up 5 points and the CAC in Paris 12 points ahead. The euro is trading around $1.2925. Markets are nervous ahead of the eurozone finance ministers' meeting in Brussels, with a Greek debt deal shrouded in uncertainty.

8.26am: Today's meeting of eurozone finance ministers in Brussels has a very full agenda to consider, says Michael Derks, chief strategist at FxPro.

There is the latest draft of the fiscal compact to discuss, a review of the progress made in the Greek debt talks, and a conversation on a draft for the European Stability Mechanism (ESM). The latter apparently includes collective action clauses, although any debt write-offs will need to comply with IMF standards. Germany and France are both keen to wrap up the ESM issue as soon as possible, although it can only take effect once it has been ratified by those countries representing 90% of its capital. It is unlikely that any of these issues will be fully resolved at this meeting, although some progress will be made.

Interestingly, these days the single currency is setting less store in meetings such as these, in sharp contrast to those held in the final quarter of last year. After threatening $1.30 at one stage early on Friday, the euro drifted back to near $1.29.

8.07am: Brent crude futures were steady around $110 a barrel this morning, as concerns about European demand were outweighed by fears over supply disruptions from the Middle East.

Eurozone finance ministers meeting in Brussels today will discuss what terms of a Greek debt restructuring they are ready to accept as part of a second bailout package for Athens.

The debt swap discussions with private creditors have been aimed at reducing Greek's debt to 120% of GDP, from around 160% of GDP. Without a second bailout Greece will not be able to pay back €14.5 bn of maturing bonds in March, which would likely trigger a messy default and could plunge the eurozone into disarray.

EU governments are also expected to agree new economic sanctions against Iran over its nuclear programme today.

Ben Le Brun, market analyst at OptionsXpress, told Reuters:

Both of these meetings are going to be crucial in dictating oil prices. Any indication of a plan getting approved to tackle Greece's debt would support oil. An Iranian oil embargo would also boost prices as demand continues to improve.

8.04am: The FTSE 100 index in London has opened more than 10 points higher at 5739, a 0.2% gain.

Many Asian markets – China, Hong Kong, Singapore and South Korea – were closed for the Lunar New Year holiday. Stock markets that were open for business were mixed, amid light volumes. Japan's Nikkei was flat at 8,765.90.

7.59am: The main event today is the meeting of EU finance ministers this afternoon. Here's today's agenda:

• Franco-German finance and economy council meets in Paris. Press
conference – 10.15am GMT (11.15am CET)
• Eurozone consumer confidence of January – 3pm GMT
• European finance ministers meet in Brussels – 4pm GMT (5pm CET)
• Christine Lagarde gives speech on 2012′s economic challenges -
5.30pm GMT (6.30pm CET)

Bond auctions
• Germany to sell €3bn of 12-month bonds – 10.15am GMT
• France to sell up to €8.3bn of Treasury bills – 1.50pm GMT

7.30am: Good morning and welcome back to our rolling coverage of the world economy and eurozone debt crisis. Hopes of a deal in Greece with private bondholders in time for the eurozone finance ministers' meeting have dwindled after the bondholders' representative, Charles Dallara, managing director of the Institute of International Finance, left Athens on Saturday.

Creditors have made their 'best offer,' and are not willing to take any more than a 65% to 70% loss on the current value of Greek debt (with a coupon of 4%-4.5%, while the IMF has indicated it wants a coupon closer to 3%).

Even that wouldn't be anywhere near enough to tackle Greece's mounting debt burden, says Michael Hewson, market analyst at CMC Markets.

Let's not forget that we started out at a 21% haircut at last July's EU summit and the number has kept going up, at the same rate that Greece's economy has been spiralling down.

It remains unlikely that a deal will be reached by the end of today's EU finance ministers' summit, as originally hoped. Even so Greek officials remain confident that a deal can be reached by the next EU summit on 30th January but time is short, given the deadline of a €14.5bn bond repayment in March.

 
European Union ambassadors agreed on Monday to impose an embargo on crude oil imports from Iran, to be phased in by July 1. EU foreign ministers are expected to approve the measure later in the day.

Following are key facts about prior EU sanctions against Iran and economic relations between the bloc's 27 states and OPEC's second largest producer.

EXISTING SANCTIONS

The EU has gradually imposed sanctions on Iran since 2007 as part of Western efforts to put pressure on Tehran over its nuclear work. Sanctions include those agreed by the United Nations and autonomous EU measures. Current EU sanctions include:

- Trade ban on arms and equipment that can be used for repression, and a ban on goods and technology related to nuclear enrichment or nuclear weapons systems, including nuclear materials and facilities, certain chemicals, electronics, sensors and lasers, navigation and avionics;

- Ban on investment by Iranian nationals and entities in uranium mining and production of nuclear material and technology within the EU;

- Ban on trade in dual-use goods and technology, for instance telecommunication systems and equipment; information security systems and equipment; nuclear technology and low-enriched uranium;

- Export ban on key equipment and technology for the oil and gas industries (ie exploration and production of oil and natural gas, refining and liquefaction of natural gas). Ban on financial and technical assistance for such transactions. This includes geophysical survey equipment, drilling and production platforms for crude oil and natural gas, equipment for shipping terminals of liquefied gas, petrol pumps and storage tanks;

- Ban on investment in the Iranian oil and gas industries (exploration and production of oil and gas, refining and liquefaction of natural gas). This means no credits, loans, new investment in and joint ventures with such companies in Iran;

- Ban on new medium- or long-term commitments by EU member states to financial support for trade with Iran. Restraint on short-term commitments;

- EU governments are banned from extending grants and concessional loans to the Iranian government. Provision of insurance and re-insurance to the Iranian government and Iranian entities (except health and travel insurance) is banned;

- EU financial institutions must report to national authorities any transactions with Iranian banks they suspect concern proliferation of financing; banks must notify transfers above 10,000 euros to national authorities and request prior authorization for transactions above 40,000 euros (with humanitarian exemptions);

- Iranian banks are banned from opening branches and creating joint ventures in the EU; EU financial institutions are banned from opening branches or bank accounts in Iran;

- Ban on the issuance of and trade in Iranian government or public bonds with the Iranian government, central bank and Iranian banks;

- EU governments must require their nationals to exercise vigilance over business with entities incorporated in Iran, including those of the Iranian Revolutionary Guard Corps and of the Islamic Republic of Iran Shipping Lines;

- National customs authorities must require prior information about all cargo to and from Iran. Such cargo can be inspected to ensure trade restrictions are respected;

- Cargo flights operated by Iranian carriers or coming from Iran may not have access to EU airports (except mixed passenger and cargo flights). No maintenance services to Iranian cargo aircraft or servicing to Iranian vessels may be provided if there are suspicions that it carries prohibited goods;

- Visa bans are imposed on persons designated by the UN or associated with or providing support for Iran's proliferation-sensitive nuclear activities or for the development of nuclear weapon delivery systems, and on senior members of the IRGC; as of January 22, visa bans and asset freezes apply to 113 persons (41 designated by the UN and the rest by the EU);

- Asset freeze on 433 entities associated with Iran's proliferation-sensitive nuclear activities or the development of nuclear weapon delivery systems; and senior members and entities of IRGC and the IRISL (UN designations cover 75 entities); these entities include: companies in banking and insurance sectors, the nuclear technology industry and in the field of aviation, armament, electronics, shipping, chemical industry, metallurgy, the oil and gas industry, and branches and subsidiaries of IRGC and IRISL.

HUMAN RIGHTS

In addition to the nuclear track, the EU has imposed travel bans and asset freezes on 61 Iranians seen as responsible for human rights violations.

ECONOMIC RELATIONS

The EU had a free-trade agreement with Iran until 2005 and Tehran's refusal to cooperate with the IAEA on its nuclear work. Europe remains an important trade partner. Ninety percent of EU imports from Iran are either oil or oil-related products. In 2010, the EU imported 14.5 billion euros worth of goods from Iran and exported 11.3 billion euros of goods to it.