Posts Tagged ‘International Monetary Fund’

Greece hopes for solution, still opposed to bailout

February 20, 2015

ATHENS Fri Feb 20, 2015 1:40am EST

Greek Prime Minister Alexis Tsipras (R) and Finance Minister Yanis Varoufakis talk during the first round of a presidential vote at the Greek parliament in Athens February 18, 2015. Credit: Reuters/Alkis Konstantinidis

(Reuters) – Greece has made every effort to reach a mutually beneficial agreement with its euro zone partners but will not be pushed to implement its old bailout program, its government spokesman said on Friday.

“The Greek government has done all it should at every level in an effort to find a mutually beneficial solution,” government spokesman Gabriel Sakellaridis told Mega TV.

On Thursday, Germany rejected a Greek proposal for a six-month extension to its euro zone loan agreement, saying it was “not a substantial solution” because it did not commit Athens to stick to the conditions of its international bailout.

“We are not discussing the continuation of the (bailout) program,” Sakellaridis said. “The Greek government will maintain this stance today, although conditions have matured for a solution to be found at last.”

(Reporting by George Georgiopoulos, Editing by Angeliki Koutantou)


‘There is no macro-economic argument for further fiscal tightening. The only reason for doing so is on punitive grounds,’ says Greece’s YanisVaroufakis

Euro and Greek flags in Athens

Failure to agree a deal could set off a chain-reaction in Greece as capital flight accelerates, leading ineluctably to a sovereign default and ejection from the euro Photo: Alamy

The Daily Telegraph

Greece has vowed to reject any demands for further austerity at a last-ditch meeting with eurozone creditors on Friday, even though the country risks running out of money by next week without a deal.

Yanis Varoufakis, the Greek finance minister, said there can be no agreement if the EMU creditor powers continue to insist that Greece sticks to the terms of its EU-IMF Troika bail-out and increase its primary budget surplus from 1.5pc to 4.5pc of GDP by next year.

“We have bent over backwards to reach an accord. We are perfectly prepared to refrain from any moves that would jeopardize financial stability or Greek competitiveness. But what we cannot accept is that the fiscal adjustment, agreed by the last government, be carried through just because the rules say so,” he told The Telegraph.

The defiant stand by the Leftist Syriza government raises the risk of an irreversible showdown when finance ministers from the Eurogroup converge on Brussels on Friday for yet another emergency meeting.

While there is mounting irritation in EU circles over Germany’s refusal to give ground, and signs of a Franco-German rift are emerging, the Greeks are on thin ice. Failure to agree a deal could set off a chain-reaction as capital flight accelerates, leading ineluctably to a sovereign default and ejection from the euro.

“We have already done more fiscal tightening than has ever been done by any country in peace-time, and Greece is still in depression with declining nominal GDP. There is no macro-economic argument that can be made for further tightening,” said Mr Varoufakis.

“The only reason for doing so is out of ideology or on punitive grounds. All we are seeking is a way to end the debt-deflation cycle and restore the credit circuits of the Greek economy,” he said.

Mr Varoufakis sent a fresh proposal on Thursday to Jeroen Dijsselbloem, the Eurogroup’s chief, stating that Syriza is willing to “honour Greece’s financial obligations to all its creditors” and desist from any “unilateral actions” in exchange for bridging finance and a six-month interim arrangement. The Greek offer included the crucial proviso that Syriza will limit austerity to “appropriate primary fiscal surpluses .. that take into account the present economic situation”.

EU officials said the text was prepared in conjunction with Mr Dijsselbloem on Wednesday night. He drafted eight bullet points that would be “palatable” to the Eurogroup. These were accepted by the Greeks.

The plan had the enthusiastic support of the Jean-Claude Juncker, the European Commission’s chief. French president François Hollande also backed the compromise, going so far as to telephone Greek premier Alexis Tsipras on Thursday morning to congratulate him on the breakthrough.

Diplomats thought there was a “done deal”. The German finance ministry then issued a statement rejecting the text out of hand, causing consternation. “The letter from Athens offers no substantial solution. It focuses on bridge financing without meeting the conditions of the programme,” it said. Berlin later described the Greek demarche as a “Trojan Horse”.

It is far from clear whether German finance minister Wolfgang Schäuble has majority backing for a position that could lead to the break-up of monetary union by the end of the month – with unknown risks of financial and political contagion – or whether he has overplayed his hand. There is a loose parallel with developments at the European Central Bank, where a noisy German-led bloc was outmanoeuvred by a Franco-Italian alliance on quantitative easing.

Greece has quietly kicked the issue of debt relief into touch, and agreed to work with the various components of the Troika so long as the term is not used. It has yielded so much ground that there was uproar within the Syriza party in Athens on Wednesday night. A mutiny was narrowly quelled.

“Syriza have made a lot of mistakes and there isn’t much sympathy for them in the Eurogroup,” said Simon Tilford, at the Centre for European Reform. “But at the same time frustration is increasing at the intransigence of the Germans. Not every country is relaxed at the prospect of Greece being ejected from the euro. That would be the start of the real political crisis in Europe, not the end of it.”

The EMU-wide politics are complex. Madrid is insisting on an extremely tough line with Greece because it fears that any concessions to Syriza would be further grist to the mill of Spain’s Leftist Podemos party, which is pulling far head in the polls. Slovakia and the Baltic states are broadly aligned with Germany.

Officials at the International Monetary Fund and the Commission admit privately that the Troika’s fiscal targets have been overtaken by events and no longer make any sense. The Eurogroup nevertheless reiterated its demand for strict compliance with the old demands last Monday.

Greece is now prostrate. Tax arrears have reached €76bn and are rising by €1.1bn a month. “Greece is totally bankrupt. The ECB’s constant talk against us is causing a self-fulfilling deposit flight in the banks. It is so bad that anything could happen,” said one Greek official.

Germany appears to be working from the assumption that Syriza has no legitimate case and should abandon its election pledges, despite having won a landslide election victory with a mandate for radical change. Critics say this fails to acknowledge that the tectonic plates are shifting across Europe as electorates lose patience with austerity policies that have led to a longer slump than the 1930s.

Jacob Lew, the US Treasury Secretary, called Mr Varoufakis this week to urge a compromise and avert a potential disaster for the Greek people, but he has also called on the creditor powers to be more flexible. Washington has warned that Europe faces a “lost decade” if it persists with contractionary policies, a view shared by Britain, China and Japan.

Syriza’s leaders say Greece has gone as far as it possibly can to assuage creditors but has reached its limits. They await the verdict in Brussels with weary fatalism. “Whatever happens we are not going to accept humiliation or become a debt colony of the Eurogroup. We will uphold our sovereignty,” said one official.

Germany Rejects Greek Request for Bailout Extension

February 19, 2015

Greece, eurozone creditors poised for another round of tough negotiations

Greek Prime Minister Alexis Tsipras, right, and Finance Minister Yanis Varoufakis attend a presidential vote in Athens on Wednesday.  
Greek Prime Minister Alexis Tsipras, right, and Finance Minister Yanis Varoufakis attend a presidential vote in Athens on Wednesday. Photo: Associated Press
By Matthew Dalton and Alkman Granitsas
The Wall Street Journal

Greece and its eurozone creditors are poised for another round of tough negotiations over extending the government’s bailout program, after Germany summarily rejected a request for an extension sent by Athens on Thursday morning.

“The letter from Athens doesn’t offer a substantial proposal for a solution. In reality, it aims for a bridging loan without meeting the terms of the [bailout] program,” Martin Jaeger, spokesman for Finance Minister Wolfgang Schäuble, said in a statement a few hours after receiving the request.

Jeroen Dijsselbloem, the Dutch finance minister who leads meetings of the eurozone ministers, said they would meet on Friday afternoon in Brussels to discuss the situation, days after talks with Greek Finance Minister Yanis Varoufakis collapsed in acrimony. Officials had been hoping to deal with the extension request via a teleconference meeting, so the fact that they will meet in person is another sign that differences between Greece and its creditors remain significant.

Senior eurozone officials will first meet this afternoon to discuss the request before the finance ministers gather on Friday.

Greece has little more than a week before its €240 billion ($273 billion) bailout expires at the end of February, leaving the government without financing and its banks at risk of being completely cut off from the lending facilities of the European Central Bank. A move to cut off Greek banks could well force Greece to leave the eurozone.

Eurozone governments are seeking more clarity from Greece about its budget plans, particularly for this year, officials say. Greece’s letter only pledges to agree on measures that would “attain appropriate primary fiscal surpluses, guarantee debt stability and assist in the attainment of fiscal targets for 2015 that take into account the present economic situation.”

“It’s understandable,” said one eurozone official, “since their tax receipts are melting like snow before hot fire.”

The governments also want more detail on Greece’s pledge to keep in place “structural reforms”—such as cuts to its pension system—that are required under the current bailout. The new left-wing government of Prime Minister Alexis Tsipras was swept to victory in last month’s elections on pledges to scrap many of these measures.

A eurozone official said the letter sent by Athens on Thursday was too vague on crucial points and didn’t fulfill the conditions set by the ministers at their previous meeting on Monday.

The letter is missing a clear commitment from Greece to work with the European Commission, International Monetary Fund and ECB as the program’s supervisors and enforcers, the person said.

Likewise, Greece’s pledge to honor its debts appeared ambiguous and open to interpretation.

Nevertheless, European Commission President Jean-Claude Juncker sees the extension request as a positive sign that could help pave the way for a compromise between Greece and its eurozone partners, a spokesman for the commission said.

The letter is “a positive sign, which in [Jean-Claude Juncker’s] assessment could pave the way for a reasonable compromise in the interest of stability in the euro area as a whole,” said Margaritis Schinas, the spokesman.

The request comes after two weeks of stormy negotiations between Greece and its eurozone partners over the broad terms of a new financing deal for the country.

In consultation with European officials overseeing the bailout, the Greek government has been drafting the details of its request over the past several days, but insists that it won’t abide by the same reform and austerity measures under the current deal.

Voted into office in late January, Greece’s new Syriza-led coalition government has consistently rejected the austerity measures that it says have pushed Greece deep into recession. But with the government facing a cash crunch in the weeks ahead, the government wants to negotiate a new short-term deal to secure financing that would give it time to negotiate a new, long-term rescue deal to cover the following four years.

So far Greece says that it only wants a new loan agreement, but has been vague on what sort of budget and reform measures it would take in exchange for further funding.

Write to Matthew Dalton at and Alkman Granitsas at

India’s Economic Growth Surpasses China’s

February 15, 2015

India’s growth rate is suddenly rivaling, even outpacing, China’s. Can it sustain the momentum?


The progress of Asia’s two giants, China and India, can be neatly encapsulated by the imagery used to portray them. China is usually characterized as a dragon, aggressive and slightly frightening. India, on the other hand, is often described as an elephant—big and powerful, but also lumbering and slightly ungainly.

Unfortunately for India, the caricatures are all too accurate. For the past three decades, China has reigned as the world’s premier emerging economy; India always plodded behind, stumbling in China’s formidable wake. As China raced with fiery purpose from a poor, isolated nation into the world’s second-largest economy, India’s boundless potential remained mostly untapped, its people mired in poverty and its footprint on the global stage barely perceptible.

Mention China to an international executive and watch him salivate over 1.3 billion increasingly wealthy consumers. Mention India and listen to complaints about a bureaucracy that tramples free enterprise. That’s why foreign investors plowed $124 billion into China in 2013, according to the United Nations Conference on Trade and Development, but only $28 billion into India.

President Barack Obama and Indian Prime Minister Narendra Modi (R) arrive for a photo opportunity ahead of their meeting at Hyderabad House in New Delhi, Jan. 25, 2015. REUTERS/Adnan Abidi

All that’s about to change. The Indian elephant is set to outpace the Chinese dragon to become the world’s fastest-growing major emerging economy. According to official data released on Feb. 9, India’s gross domestic product in the last two quarters of 2014 surged 8.2 percent and 7.5 percent, topping China’s performance. For the current fiscal year, India’s government expects GDP to grow 7.4 percent, a hefty jump from 6.9 percent the previous year. “The stars do seem to be aligning in India’s favor,” says Cornell University economist Eswar Prasad. “Among the large emerging-market economies, India stands out.”

Granted, these eye-popping growth rates are the product of a controversial and confusing revision by India’s statisticians of how they calculate GDP. But even before this, some economists had been predicting that India would start to grow more quickly than China over the next two years. That’s because dramatic changes are afoot in both countries.

China’s era of supercharged expansion looks to be coming to an end. In 2014 the economy sank to its slowest growth in almost a quarter century, and many economists anticipate its pace will decline even further. The International Monetary Fund expects growth to fall from 7.4 percent in 2014 to 6.3 percent in 2016. To return to health, Beijing’s policymakers are trying to engineer a critical rebalancing from investment-led to consumption-driven growth—a tricky transition that’s proving much harder than it sounds.

India, on the other hand, is still sitting on the launchpad, waiting for true economic liftoff. Even after two decades of solid if not spectacular growth, it’s at an early stage of development compared with China. India’s GDP is a fifth of China’s. Nearly one out of four Indians remains trapped in absolute poverty, according to the World Bank, compared with only 6 percent of Chinese. Corporate India has scored a few impressive successes—most notably in IT services—but hasn’t left as deep a mark on the global economy as Chinese industry.

That gap is, to a great degree, a creation of politics. After China cracked open its Soviet-style economy to private enterprise and foreign investment in the early 1980s, India began liberalizing its state-dominated economy in 1991 by dismantling what was called the License Raj, an impenetrable web of regulations that allowed the government to control business. But the reforms didn’t go far enough. Many of India’s squabbling politicians continued to distrust the free market and foreign companies and held up reform in interminable debates and protests.

That set the two economies on very different courses. In China, factories and skyscrapers rose with authoritarian efficiency; in India, major investment projects were stalled by the bureaucracy. While China became the Workshop of the World, India missed out on the mass manufacturing that generates jobs and exports. As reform in India faltered earlier this decade, growth slumped, and confidence in the economy deteriorated. India’s policymakers, meanwhile, were often too politically paralyzed to repair the problems.

Now, however, a fresh, can-do spirit has captivated New Delhi. In May voters kicked out the ineffective Indian National Congress-led coalition and ushered the Bharatiya Janata Party into power in an overwhelming landslide. Prime Minister Narendra Modi has restarted India’s free-market reform program with the aim of spurring a China-like investment surge. In September he launched a “Make in India” campaign, with a roaring lion as its logo, intending to turn the country into a manufacturing powerhouse to rival China. To get there he loosened convoluted land acquisition laws that held back big projects and streamlined the cumbersome process of obtaining government approvals. He increased the limit on foreign ownership in the insurance sector and other industries. India under Modi “has already seen a move towards kick-starting the investment cycle, and we think reforms to boost investments can continue,” economists at Goldman Sachs wrote optimistically in a recent report.

India is also catching on to long-term trends that helped boost growth in China. Its Internet and computer usage is low compared with much of the rest of Asia, but new technologies are penetrating deeper and deeper into Indian society, which will provide a much-needed jolt to productivity. Goldman expects the number of Indian Netizens to rise almost two-thirds by 2018, to 410 million. India also possesses a demographic edge over China. Thanks to China’s one-child policy, its labor force is shrinking, which should drag down growth. India’s working-age population is expanding rapidly, which will give the economy a lift.

Modi’s reforms, combined with the new GDP revisions, could push growth to China-like rates. In a preliminary estimate, HSBC figures India’s growth in the next fiscal year could reach around 8 percent. Still, if India wants to sustain such superhigh growth, as China had for decades, much more has to be done. “Ultimately the question is if the reforms will be far-reaching enough,” says Cornell’s Prasad. “That is far from certain.”

Modi has barely gotten a start on some critical but politically sensitive reforms—most of all, overhauling archaic labor laws that discourage job creation and worker training and scare off manufacturers. To implement such controversial changes, he’ll have to overcome persistent resistance from unions, civil servants, and recalcitrant politicians. Although Modi and his allies command a majority in Parliament’s lower house, the upper chamber is still controlled by the opposition, which has foot-dragged on passing his reform measures. Modi’s BJP also lost local elections in Delhi to a small, anti-corruption party, a reminder that his political position is far from unassailable. And there’s always the risk that the Hindu nationalists, who form the backbone of the BJP, could stir up trouble. If Modi’s reforms stumble, so could India’s prospects.

Even with a sustained reform effort, India’s growth spurt may not match China’s past performance. With its more decentralized governing system and contentious political culture, India might not be equipped to marshal men and material in a China-like quest for industrial prowess. It’s also so far behind China that it could take decades of high growth to truly catch up. Research firm Oxford Economics projects that India’s per capita income will still be lower in 2030 than China’s is today. That means India’s rise may not have the globe-rattling impact of China’s. “India may grow faster than China, but that’s not to say that it will pack the same punch,” notes Frederic Neumann, co-head of Asian economics research at HSBC.

That’s not necessarily all bad. Perhaps India can develop in a more sustainable and balanced way than China, without the excessive waste and environment degradation that breakneck expansion spawned. At a time when China is slowing, Europe and Japan are flatlining, and other major emerging economies such as Russia and Brazil are struggling, the global economy needs a strengthening India to act as a reliable pillar of growth. We should all hope that the Indian elephant finally starts to charge.

“General Ceasefire” Agreement Between Russia and Ukraine, Merkel and Hollande All Smiles — Will Putin Give Up on “New Russia”?

February 12, 2015

MINSK Thu Feb 12, 2015 8:20am EST

(Reuters) – Germany, France, Russia and Ukraine agreed a deal that offers a “glimmer of hope” for an end to fighting in eastern Ukraine after marathon overnight talks.

But big hurdles remained on the path to peace and German Chancellor Angela Merkel , one of the sponsors of the talks, differed with Russian President Vladimir Putin over the reasons the deal took more than 16 hours of overnight talks to reach.

Germany’s Chancellor Angela Merkel (L) and France’s President Francois Hollande (R, front) walk after taking part in peace talks on resolving the Ukrainian crisis in Minsk, February 12, 2015. Credit: Reuters/Vasily Fedosenko

In a further sign of its fragility, a Ukrainian military spokesman said around 50 tanks, 40 missile systems and 40 armoured vehicles had crossed overnight into eastern Ukraine from Russia. It was not immediately possible to verify the statement. Moscow dismisses such allegations as groundless.

The agreement envisages a ceasefire between Ukrainian forces and Russian-backed separatists starting on Sunday, followed by the withdrawal of heavy weapons from the front line and constitutional reform to give eastern Ukraine more autonomy.

“The main thing which has been achieved is that from Saturday into Sunday there should be declared without any conditions at all, a general ceasefire,” Ukrainian President Petro Poroshenko told journalists.

Putin blamed Kiev for the length of the talks, the culmination of a dramatic diplomatic initiative by France and Germany following an upsurge in fighting in which the separatists tore through an earlier ceasefire line.

Merkel on the other hand, said Poroshenko “did everything to achieve the possibility of an end to the bloodshed”, while she said Putin put pressure on the separatists to agree to the ceasefire “towards the end” of the talks.

Tensions between Putin and the other leaders were evident at the meeting in Minsk, capital of Russian ally Belarus, and they did not appear together to announce the result.

The fighting has destabilised Ukraine both militarily and economically. As the deal was reached, Ukraine was offered a $40-billion lifeline by the International Monetary Fund to stave off financial collapse.


The agreement addressed some of the main stumbling points, including a “demarcation line” separating the separatists from Ukrainian forces, which the rebels wanted to reflect gains from a recent offensive which shredded an earlier ceasefire deal.

The compromise was that the rebels will withdraw weapons from a line set by the earlier Minsk agreement in September, while the Ukrainians will withdraw from the current frontline.

Ukraine will also get control of its border with Russia, but in consultation with the rebels and only after the regions gain more autonomy under constitutional reform by the end 2015.

The ceasefire and heavy weapons pullback would be overseen by Europe-wide security body, the Organisation for Security and Cooperation in Europe.

“We have managed to agree on the main issues,” Putin told Russian reporters.

“Why did it take so long? I think this is due to the fact that the Kiev authorities still refuse to make direct contact with the representatives of the Donetsk and Luhansk peoples’ republics,” he said, referring to two rebel-head regions in eastern Ukraine.

The French and German leaders briefed their media separately while Poroshenko’s briefing excluded Russian journalists.

French President Francois Hollande said there was still much work to be done on the Ukraine crisis, but the agreement was a real chance to ameliorate the situation.

He said pro-Russian separatists, who had at one point appeared to reject the deal, had signed up to it.

Pro-Moscow separatists tightened the pressure on Kiev by launching some of the war’s worst fighting on Wednesday, killing 19 Ukrainian soldiers in assaults near the railway town of Debaltseve.

As the fighting escalated, Washington has begun openly talking of arming Ukraine to defend itself from “Russian aggression”, raising the prospect of a proxy war in the heart of Europe between Cold War foes.

The outcome of the Minsk talks was expected to influence discussions at an EU summit in Brussels on Thursday, when sanctions against Moscow will be on the agenda. A deal could mean a softer line towards Moscow.


The talks in Minsk took place as an International Monetary Fund mission agreed a bailout to save Ukraine from bankruptcy.

The Fund provisionally agreed a $17.5 billion facility with Ukraine, part of a $40 billion funding package, IMF managing director Christine Lagarde said.

Kiev and NATO accuse Russia of supplying separatists with men and weapons. Moscow denies it is involved in fighting for territory Putin calls “New Russia”.

As the French and German leaders peace initiative was announced, pro-Russian rebels appeared determined to drive home their advantage ahead of a deal.

Armoured columns of Russian-speaking soldiers with no insignia have been advancing for days around Debaltseve, which has seen heavy fighting in recent days.

On the Russian side of the border, Moscow has begun military exercises in 12 regions involving more than 30 missile regiments, RIA news agency reported on Thursday, citing a Defence Ministry official.

(Additional reporting by Elizabeth Piper and Maria Kiselyova, Pavel Polityuk, Elizabeth Pineau, Polina Devitt, Aleksandar Vasovic, Alessandra Prentice, Margarita Chornokondatrenko, Gabriela Baczynska, Alexander Winning, Lidia Kelly, Richard Balmforth and Andrei Makhovsky; writing by Giles Elgood and Philippa Fletcher; editing by Janet McBride)

Ukraine Peace Talks Yield Cease-Fire Deal

February 12, 2015

Cease-Fire Agreed From Feb. 15, Russian President Says

By Andrey Ostroukh
The Wall Street Journal

MINSK, Belarus—The leaders of France and Germany brokered a renewed deal to end Ukraine’s 10-month conflict with Russia-backed separatists, reviving and amending a failed September cease-fire agreement in marathon talks that lasted through the night.

Russian President Vladimir Putin told reporters that the deal calls for a cease-fire starting on Sunday, with each side pulling back heavy weapons, as well as steps to give greater autonomy to the Russia-backed separatist regions in eastern Ukraine.

Details of the agreement weren’t immediately available. The deal came after 17 hours of talks in the Belarus capital of Minsk involving Mr. Putin, French President François Hollande, German Chancellor Angela Merkel and Ukrainian President Petro Poroshenko.

German Chancellor Angela Merkel, left, and French President François Hollande address the media after peace talks in Minsk on resolving the Ukraine crisis on Thursday.  
German Chancellor Angela Merkel, left, and French President François Hollande address the media after peace talks in Minsk on resolving the Ukraine crisis on Thursday. Photo: Reuters

German Foreign Minister Frank-Walter Steinmeier said leaders had hope for more, but said that the deal could end the “escalation spiral” of violence. French President François Hollande said the agreement brings serious hope for Ukraine and relief for Europe.

The deal would ensure the implementation of the last cease-fire, which was agreed to in Minsk in September but never took hold on the ground.

Mr. Putin blamed the last-minute delay on what he called Ukraine’s refusal to negotiate directly with the separatist leaders. There was no immediate response from Kiev to that.

Mr. Putin also said one area of disagreement remained about the town of Debaltseve, where Ukrainian forces have been under siege from rebels for days. Separatist leaders called on Kiev’s forces to surrender and abandon the town, something Ukraine so far has refused to do.

By Mr. Putin’s account the agreement appears to split the difference on one key area of controversy—the dividing line between the two sides on the ground.

Mr. Putin said Kiev’s troops would pull back heavy weapons from the current front line, which reflects months of rebel gains, while the rebels would pull their equipment back from the line in the original September agreements.

On the sensitive issue of the border between Russia and Ukraine, which has become a conduit for Russian support to the separatists, Mr. Putin said Ukraine would restore control over it in consultation with the rebels, an apparent concession from Kiev.

Kiev got some positive news Thursday morning, when the International Monetary Fund announced a new $17.5 billion aid package to help shore up Ukraine’s battered finances. Ukrainian Prime Minister Arseniy Yatsenyuk said the loan deal, part of a broader package of Western assistance, would help stabilize Ukraine’s plunging currency and set the country back on track for economic growth.

Write to Andrey Ostroukh at and Paul Sonne at


Ukraine peace talks begin, overshadowed by fighting

February 11, 2015

MINSK Wed Feb 11, 2015 1:59pm EST

(Reuters) – The leaders of France, Germany, Russia and Ukraine began peace talks in Belarus on Wednesday, while in Ukraine pro-Moscow separatists tightened the pressure on Kiev by launching some of the war’s worst fighting.

The Kiev army said 19 of its soldiers were killed in a day of pro-Russian separatist assaults near the railway town of Debaltseve, some of the worst losses it has reported in nine months of war.

Rebels who tore up a five-month-old truce in January are trying to encircle government forces in Debaltseve, a strategic location that would let them link up their main strongholds.

Fighting has already killed more than 5,000 people, and Washington is now openly talking of arming Ukraine to defend itself from “Russian aggression”, raising the prospect of a proxy war in the heart of Europe between Cold War foes.

A surge in fighting in the 24 hours before the summit, including a rocket attack that killed 17 people deep in government-held territory on Tuesday, could be intended to force Ukraine to accept a deal recognising the rebel advance.

The summit is being held in neighbouring Belarus under a Franco-German proposal to try to halt the fighting. Chancellor Angela Merkel and President Francois Hollande began talks with Ukraine’s Petro Poroshenko and Russia’s Vladimir Putin.

The four leaders met alone at about 1715 GMT and were due to go into a full summit with their delegations later.

A Belarussian representative said the four leaders meeting alone was an unexpected break with diplomatic procedure and it was not clear whether they would meet with their delegations as planned. The four were joined by their foreign ministers but had not yet moved into the official negotiating room.

Ukraine cease fire talks February 11, 2015. Russia’s President Vladimir Putin, Ukraine’s President Petro Poroshenko, Germany’s Chancellor Angela Merkel and France’s President Francois Hollande attend a meeting on resolving the Ukrainian crisis in Minsk.  Credit: Reuters/Mykola Lazarenko/Ukrainian Presidential Press Service

On arrival, Poroshenko said that without a de-escalation of the conflict and a ceasefire the situation would get “out of control”. Russian television showed him shaking hands with Putin.

Hopes for a breakthrough appear slim and would depend on Ukraine making most of the concessions, with advancing rebels unlikely to agree to halt and go back to previous positions.

Still, Moscow expressed optimism. A Russian diplomatic source said it was 70 percent likely that an agreement would be reached.

“The presidents aren’t travelling (to Minsk) for no reason,” the source said.

Foreign Minister Sergei Lavrov said there had been progress in the run-up to the summit but Kiev could be holding back a deal by insisting on control of the Russian-Ukrainian border, part of which is held by the separatists.

The talks are taking place while an International Monetary Fund mission is trying to negotiate a bailout to save Ukraine from bankruptcy brought on by corruption and mismanagement as well as war. Prime Minister Arseny Yatseniuk said he hoped for a loan deal within days.


Kiev and NATO accuse Russia of supplying separatists with men and weapons. Moscow denies it is involved in fighting for territory Putin calls “New Russia”.

If the French and German leaders were hoping their peace initiative would be met by conciliatory moves on the ground, the prospect of talks appears to have triggered the opposite, with the pro-Russian rebels determined to drive home their advantage.

Armoured columns of Russian-speaking soldiers with no insignia have been advancing for days around Debaltseve. Last week they captured the small town of Vuhlehirsk next to Debaltseve, and a reconnaissance unit was there on Tuesday salvaging equipment from abandoned Ukrainian trenches.

The squad’s commander said his men did not want a truce while they had government forces on the run.

On the Russian side of the border, Moscow announced war games on Tuesday on the eve of the talks.

The United States has been openly discussing arming the Ukrainian government, a move that is opposed by European allies who say it would escalate the conflict while falling far short of giving Kiev the firepower needed to win.

President Barack Obama says he has yet to make up his mind on the question of sending weapons. He spoke by phone overnight to Putin, and the White House said he warned the Russian leader that the costs would rise if Moscow kept aiding the separatists.

A decision by the West to provide arms to Ukraine could prompt a rapid escalation of Russian support for the separatists, the International Institute for Strategic Studies, a global security think tank, said on Wednesday.

Kiev military spokesman Vladyslav Seleznyov, briefing journalists on rebel attempts to encircle government forces holding Debaltseve, said the 19 soldiers had been killed “in shelling, rocket attacks and military clashes”.

In separatist-held territory, rebel authorities said six people were killed and eight seriously hurt when a shell hit a bus station in the city of Donetsk, eastern Ukraine.

Reuters journalists saw the body of a man behind the wheel of a minibus after the shell fell through the roof of the station, burning up the vehicle and another beside it.

(Additional reporting by Aleksandar Vasovic, Alessandra Prentice, Margarita Chornokondatrenko, Gabriela Baczynska, Alexander Winning, Vladimir Soldatkin, Aleksandar Vasovic and Andrei Makhovsky; Writing by Peter Graff and Richard Balmforth; editing by Janet McBride and Giles Elgood)

Why China Is Nervous About Its Role in the World

January 31, 2015

Jan. 29, 2015

China’s fear of closer ties between the U.S. and India may indicate growing economic problems at home

In the wake of President Obama’s historic trip to India, China issued an unsolicited and perplexing statement downplaying the relevance of the visit. As the White House pointed out in response, the only thing significant about China’s statement was the fact that the Asian nation felt the need to make it in the first place.

The rivalry between China and India for economic power and strategic control in Asia is longstanding and is likely to continue into the foreseeable future. But China’s taunt is not necessarily a sign of its hostility towards India but an inadvertent admission of its declining supremacy in the region.

China, once an accepted economic and military juggernaut and the darling of investors the world over, is now facing both economic and strategic challenges which could slow down its progress.

First, China’s economy seems to be shrinking. With industrial activity trending down and interest rate cuts yet to produce results, it’s looking likely that China’s meteoric economic rise may have peaked and, according to a report from the Conference Board, could lead to a 4% GDP growth rate in the future, which is considerably lower than in previous decades. Further problems plaguing China include a debt overhang, a real estate bubble, lack of competition, and an old-world industrial economy instead of a more modern information economy such as that of the U.S.

In addition, India’s economic growth is predicted to outpace China’s by 2016, according to the International Monetary Fund, a fact that doesn’t bode well for China’s dominance of Asia. That’s not to say that China will cease to be an economic power but that it may not be able to exert the same clout on the world stage that it once did.

Another major shift could be in China’s ability to use the specter of its military might to secure favorable trade terms with other nations. That specter, even as it grows, could be undermined by higher defense spending by India and Japan (aided by the U.S.), who are eager to contain China. At the same time, China can’t bank on Russia for support since the latter is facing its own crisis from low oil prices and economic sanctions. This could leave China isolated and weaken its position with trading partners.

Finally, there is the democracy factor. The recent protests in Hong Kong were an indication of the tenuousness of China’s draconian control over its people, and possibly of political upheaval to come.

Hong Kong based Vietnamese demonstrators carry Vietnam’s flag during a protest against China’s territory claim in Hong Kong May 25, 2014. Around 200 people marched on Sunday to declare Paracel Islands belong to Vietnam. REUTERS/Tyrone Siu (CHINA – Tags: POLITICS CIVIL UNREST TPX IMAGES OF THE DAY)TYRONE SIU—REUTERS

In economic terms, this means that although China has done a fairly good job of balancing free market principles with state run control, the desire of citizens for democracy could force China to relax regulatory control over businesses, embrace labor reform, and truly open its markets in the not-too-distant future. That’s good news for investors but depends heavily on the reaction of the Chinese government, whose response to pro-democracy forces could be unpredictable and severe. Also, a sudden rise in labor costs due to free market forces could in itself disrupt the economic ecosystem in China, and have a negative impact on both domestic and foreign companies that rely on the labor pool.

Given this context, it becomes easier to understand just why China is nervous about closer ties developing between the world’s two largest democracies, the U.S. and India, and why global investors should be wary of the Chinese economic miracle. For sure, China will continue to be an influential player and has demonstrated resilience in the face of difficulties before, but investors looking to make money from the region should still temper their enthusiasm with a realistic assessment of where the nation is now.

Sanjay Sanghoee is a business commentator. He has worked at investment banks Lazard Freres and Dresdner Kleinwort Wasserstein, at hedge fund Ramius Capital, and has an MBA from Columbia Business School.

China: Debt That Once Boosted Its Cities Now Burdens

January 28, 2015


Behind Nation’s Debt Load: Rampant Local Borrowing for Roads, Housing, Airports

A worker demolishes a building in Wuhan, China, which uses a local-government financing firm to borrow money for city projects that include six subway lines, three bridges across the Yangtze and a new airport. Photo: Reuters

By Lingling Wei and Bob Davis
The Wall Street Journal

WUHAN, China—A little over a year ago, a Chinese credit agency downgraded a government-owned financing company in this dusty industrial city. Default—nearly unheard-of in China on government bonds—was a possibility, it said.

But during discussions with lenders, city officials made sure Wuhan Urban Construction Investment & Development Corp. could keep borrowing, officials with knowledge of the matter say. The city during those discussions said it backed the finance firm, essentially guaranteeing the debt, and helped the company restructure its assets to entice investors to lend more.

Borrowing by firms like Wuhan Urban is a big reason China’s debt load is expanding. The International Monetary Fund says China’s debt is growing more rapidly than debt in Japan, South Korea and the U.S. did before they tumbled into deep recessions. Local-government borrowing is responsible for one-fourth of the buildup in China’s overall domestic debt since 2008.

Beijing in early December took a step to rein in rampant borrowing by local-government firms. China’s clearing agency for bonds surprised the market on Dec. 8 with new rules to prohibit investors from using low-grade debt to borrow cash. The order contributed to a selloff in mainland-Chinese securities ranging from government bonds to stocks, as investors sold liquid assets—including bonds from local-government financing companies—to raise cash. China’s markets have since rebounded but remained volatile.

The price of a 1 billion yuan Wuhan Urban bond tumbled as much as 2% after that move while investors pushed up the bond’s yield to compensate for greater risks, according to bond traders. Prices of the bond remained flat so far this month.

Wuhan Urban, whose debt jumped 20% in 2013, has borrowed big. A listed unit raised 650 million yuan ($103.9 million) in November from bond sales to underwrite a construction blitz that earned Wuhan’s mayor, Tang Liangzhi, the nickname Mr. Dig Dig.

“When it comes to raising funds for the purpose of developing the city, we leave no stone unturned,” Wuhan Urban said in a July report. Press officials at the company and the Wuhan government decline to comment. The mayor didn’t respond to inquiries.

Even before its latest step, Beijing had put forward plans to slow local-borrowing growth. But China’s local governments have a surprising ability to resist policies. Another central-government priority—reducing excess production in steel, cement and other industries—has foundered due to local opposition.

“The guys running local government financing operations won’t roll over and die,” says Fraser Howie, co-author of “Red Capitalism,” a study of China’s financial system. “These companies take on a life of their own.”

Officials in China’s Finance Ministry declined to comment other than to refer to its recent decree asking local governments to audit their debt and to report results to the Ministry this month. The central government has said publicly that local-debt problems are manageable.

Concluding a meeting to set economic priorities for 2015, the Communist Party earlier in December called rising debt a key concern, adding it would “take time” to reduce China’s heavy debt load.

Beijing has tried to contain local-debt growth since at least 2010. But according to IMF estimates, local-government debt reached 36% of GDP in 2013, double its share of GDP in 2008, and will increase to 52% of GDP in 2019.

Since the mid-1990s, after some local governments went on borrowing binges to build hotels and golf courses, the central government has banned city halls from selling bonds or borrowing directly from banks. Instead, localities borrow indirectly through so-called local-government-financing vehicles.

These entities raise money for local governments to fund roads, subways, airports, housing sites and other projects. Local governments implicitly guarantee the debt, helping the financing firms borrow no matter whether projects make sense. PRC Macro Advisors, a market-analysis firm in Hong Kong, estimates about half of new debt issued by the financing vehicles goes to roll over existing debt.

Roughly 8,000 local-government-financing firms across China are responsible for the rapid development of cities but also the glut of housing, industrial parks and other projects economists and officials say threaten China’s economic health. “If you’re building projects that can’t cover their cost, you’re spending money on keeping them going,” says Mr. Howie. “Some hospital somewhere isn’t being built; some small company isn’t getting money.”

In Bozhou, an eastern city of 470,000 people, the government’s main financing company, Bozhou Construction Investment Group, raised 1.8 billion yuan from bond sales in May to help renovate shantytowns and build roads and bridges.

The money isn’t sufficient to fund Bozhou’s dreams of becoming a major tourist center. The first of the new construction, a commercial area where city hall is located, is ringed by empty roads and buildings. The city figures it needs 5.2 billion yuan more to complete the district and other projects.

Bozhou, like many cities, is helping dress up its financing company so it can borrow more. In June, it merged Bozhou Construction with two other financing firms and renamed it Jian’an Holding Co. “The goal is to combine the fire power of the companies so that the rebranded company can borrow more from the capital markets,” says a Bozhou official with knowledge of the restructuring efforts.

A Bozhou-city press official referred questions to Jian’an Holdings, where a press official says the firm is “in transition,” declining to comment further.

Early in 2014, China’s premier and central-bank officials made clear that Beijing might allow some defaults, to chasten lenders and reduce credit growth. But as China’s economic growth fell below Beijing’s 7.5% target, willingness to allow defaults evaporated, say Chinese officials and economists.

“It’s the Japan syndrome,” says Fred Hu, chairman of Primavera Capital, a Beijing private-equity firm. “You keep pushing off problems. That creates a crisis, but a slow-motion crisis.”

In Wuhan, population eight million, city officials tout plans to spend 800 billion yuan between 2012 and 2016 to make the city a computer back office for the financial sector and to strengthen its position as a transportation hub.

Among projects under development: six subway lines, three bridges across the Yangtze and a new airport. Most of Wuhan’s ongoing and planned projects are funded by debt raised by Wuhan Urban. A 2013 report by China’s Finance Ministry criticized Wuhan for its debt run-up.

Wuhan, China, where trucks test a newly built bridge over the Yangtze river, has used a local-government financing firm to borrow money the city is using to strengthen its position as a transportation and computing hub. Published Credit: Reuters Photo: Reuters

According to the report, reviewed by The Wall Street Journal, the city heavily relies on land-sales revenues to repay debt. That is a dicey prospect, given rising public anger over land requisitions and a housing glut that is causing developers to cut back. “The city government faces very big risks associated with debt repayment due to the uncertain nature of land sales,” the report said.

In December 2013, China Credit Rating Co. cut Wuhan Urban’s credit rating, citing its growth in debt, which reached 122 billion yuan—73 yuan in debt for every 100 yuan in assets.

So the city government gave Wuhan Urban a makeover. It injected funds into one of the company’s listed units through an equity swap, helping the unit get regulatory approval in May to issue up to 1 billion yuan in bonds. China Credit restored the company’s previous credit rating.

“Overall, we believe there is a high likelihood that the city government will step in should the company run into any debt-repayment crisis,” says China Credit analyst Huo Zhihui.

Ding Bokang, chairman of Zenith Group, a Chinese investment bank that consults local governments on debt, says he is skeptical of such restructurings. “It’s just a way for local governments to keep borrowing.”

—Wynne Wang contributed to this article.

Write to Lingling Wei at and Bob Davis at


Cheap gas prices are ruining Russia’s economy

January 11, 2015


Cheap gasoline may be a blessing for drivers and a boon to the US economy, but it is wreaking havoc with oil-producing countries around the world.

Perhaps none has struggled as much as Russia, where the fall in oil prices has set off a cascade of economic crises and left the country flirting with a prolonged recession. One way to understand the current situation, and Russia’s uncertain future, is to take it one crisis at a time.

Budget crisis

To pay for education, the military, pensions, and other core government services, Russia doesn’t just rely on taxes. A huge amount of revenue comes direct from state-controlled oil companies. So as the price of oil drops, government revenues collapse and budget deficits pile up.

Oil has to be priced around $100 a barrel for Russia to balance its budget. At the current price of roughly $50, the government simply isn’t taking in enough money to pay for promised services.

Currency crisis

Oil is bought and sold in dollars. So after Russian companies sell their oil on the international market, one of the first things they do is convert those dollars to rubles. That way they can pay local salaries and conduct business inside of Russia.

When the price of oil falls, those companies earn fewer dollars, which means they have less money to convert into rubles. And rubles obey the same laws of supply and demand that govern everything else you might buy or sell: If companies have fewer dollars to convert, that means there’s less demand for rubles, and the value of the ruble goes down.

Since the summer, the price of oil has fallen over 50 percent.

Source: Nasdaq.

And the ruble has fallen about the same amount.


The Central Bank of Russia has taken some steps to try to stop this currency slide. Most notably, they hiked interest rates, which makes it more profitable for people to keep their money in rubles and thus should increase demand. The only trouble is that it also stifles spending, which hurts the economy.

Inflation crisis

A big drop in the value of a currency isn’t bad for everyone. Exporters tend to do really well, because the stuff they make becomes cheaper for overseas buyers. The tourism industry profits too, as travelers with dollars learn they can buy many more rubles for their vacation enjoyment.

Trouble comes when people need to purchase imported goods, or when they have mortgages or others debts in euros and dollars. In those cases, a decline in the value of the ruble means more expensive goods and heavier debts.

One reason the currency crisis in Russia is so dire is that Russian consumers rely heavily on imports, including for food and clothing. The decline of the ruble has driven up the cost of these items, leading to an increase in inflation and even spurring people to snatch up luxury items in an attempt to rid themsevles of rubles.

Banking crisis

This storm of crises is putting new pressure on Russian banks. To begin with, as the economy contracts there’s likely to be an uptick in defaults, which means the banks will have less money coming in. At the same time, the banks have their own debts to pay back — often in dollars — and the falling ruble is making those debts more costly. Finally, with western sanctions still in place from the Ukraine crisis, Russian banks have limited access to international financing and can’t easily renegotiate their obligations.

For a period in mid-December, banks in Russia were basically refusing to lend money to one another — an essential practice of functioning banking systems. The Russian government has had to bail out one mid-sized bank and it’s not impossible that we’ll see a rash of further bailouts in the future.

Geopolitical crisis

All of this together means the Russian economy is headed for a recession, and possibly something worse. Early on, the Central Bank had estimated that the economy would shrink 4.7 percent if oil stayed at $60. That’s already far worse than the contraction the United States experienced during the “Great Recession,” and now that oil has fallen to $50 and interest rates have increased, it may be optimistic.

Entering a severe recession is the kind of thing that might bring down a Western government, but Putin has remained defiant and polling suggests that his popularity is largely unharmed.

Source: Levada Center.

In mid-December, when the ruble was at its most volatile, Putin partly blamed the sanctions for crippling Russia, comparing his country to a bear that Western powers were trying to put “on a leash.”

If the economy craters, and Putin continues to cling to power, one fear is that he’ll turn this anti-Western rhetoric in a more belligerent direction, using nationalist rhetoric or military activity to distract from the economic situation.

What can Russia do?

At this point, Russia doesn’t have a lot of good options. It can hope that the price of oil rebounds. It can use some of the dollars it keeps in reserve to buy up rubles and perhaps stabilize the currency. It could even impose more dramatic “capital controls” to prevent Russians from trading their rubles into other currencies.

Perhaps most dramatic, and most unlikely, Russia could appeal to the International Monetary Fund for assistance. After all, that’s what the IMF is for, to help countries escape from a downward economic spiral. But there are two reason to think an international bailout is extremely unlikely. First, the IMF would have to agree to help a government still under intense sanctions for its annexation of Crimea. Seocnd, Putin would have to accept the terms of an IMF leash.

More from Evan Horowitz:

Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the United States. He can be reached at Follow him on Twitter @GlobeHorowitz

Euro Tumbles to Nine-Year Low

January 5, 2015

Currency Hurt by Greek Worries, Speculation About ECB Stimulus

By Tommy Stubbington
The Wall Street Journal

The euro tumbled to a nine-year low against the highflying dollar Monday, struck by nerves over Greek politics and steadily building expectations that the European Central Bank will soon beef up its stimulus program.

The euro sank as low as $1.1861 against the dollar in Asian trading hours Monday, below the nadir it struck in the early stages of the euro crisis in 2010, before picking up slightly to trade at $1.1927 early afternoon in Europe.

Analysts and investors said the move reflects growing fears over the election in Greece in late January that some worry could pave the way for the country’s exit from the eurozone.

The euro’s drop won’t be entirely unwelcome: ECB chief Mario Draghi has previously highlighted the strength of the euro as a drag on inflation, which is far below the central bank’s target. A weaker currency could also provide a much-needed boost to the region’s economy by making its exports cheaper to overseas buyers.

The latest jitters stem from a report in Saturday’s edition of German news magazine Der Spiegel, which suggested the German government is ready to let Greece drop out of the euro if needed.

“Political risk is back in markets, with the election in Greece unnerving investors,” said UBS economist Paul Donovan.

On Sunday, a poll showed a continued lead for Greece’s opposition party Syriza, whose antiausterity stance clashes with the terms of the country’s bailouts.

But despite the currency’s drop in recent months, pressure continues to mount on the ECB to broaden the range of its asset purchases to give a shot in the arm to the eurozone’s feeble economy and boost inflation, which has slowed almost to zero. German inflation weakened sharply in December, data on Monday showed, raising the odds that consumer prices in the eurozone as a whole fell last month.

Consumer price data for the eurozone as a whole is scheduled to be published on Wednesday. A survey for The Wall Street Journal indicated that economists expect annual price growth of 0.3%, well below the ECB’s target of just under 2%.

“A weaker euro should start to help the economy, but this will have an economic and inflationary effect that comes too late to head off QE [quantitative easing],” said Mads Pedersen, head of discretionary asset allocation for UBS Wealth Management, which oversees about $2 trillion of assets and currently has negative bets on the euro against the dollar.

Many investors think Mr. Draghi will this month announce large-scale purchases of government bonds, a policy known as QE, which could add about €1 trillion to the central bank’s approximately €2 trillion balance sheet. This pushes down bond yields, which move inversely to bond prices, and reduces the appeal of the euro to investors. The next monetary-policy meeting of the central bank’s governing council is on Jan. 22.

“Monetary policy looks very bearish for the euro,” said Jeanne Asseraf-Bitton, head of cross-asset research at Lyxor Asset Management in Paris, which manages more than $100 billion of assets and expects the ECB to announce a program of sovereign QE this month.

Still, given the sharpness of the recent move, Lyxor isn’t betting on further declines in the euro.

“We expected the euro to break $1.20 over the course of the year, not in the first couple of days,” Ms. Asseraf-Bitton said.

Expectations that a QE program could be on the way in January have kept bond yields in the eurozone pinned close to record lows. Germany’s 10-year bond was yielding just 0.5% Monday, while five-year German bonds yielded zero, having dipped into negative territory on Friday.

Spanish and Italian bonds were a touch weaker, while Greek bonds fell more sharply.

A rally in the dollar against a swath of currencies is putting further pressure on the euro, driven by the contrast in monetary policy between the euro area—where short-term interest rates are negative—and the U.S., where many investors expect the Federal Reserve to raise interest rates this year.

“The broad-based strength of the dollar remains the main theme in the currency market. We are therefore holding a net long dollar position,” said James Kwok, head of currency management at Amundi, which oversees more than $1 trillion of assets.

The International Monetary Fund’s latest Currency Composition of Official Foreign Exchange Reserves data underlined how far the euro has fallen out of favor among central bank reserve managers across the world.

“Nobody likes to hold a currency with a negative yield and with the central bank managing the currency explicitly wanting the value of the currency to go down,” Stephen Jen , founding partner at hedge fund SLJ Macro Partners in London, wrote in a note on Jan. 4.

The dollar rose to its strongest level in 11 years against major currencies last week, as investors globally bet on a recovery in the U.S. economy. On Monday, the British pound also fell to its lowest in 17 months against the dollar.

—Anjani Trivedi and James Glynn contributed to this article.

Write to Tommy Stubbington at


German inflation hits five-year low as eurozone prepares for QE

Consumer prices in the eurozone’s largest economy rise by just 0.1pc, pointing to the monetary bloc having fallen into outright deflation in December

The falling oil price is a major reason for the super-low inflation in Germany

 The Daily Telegraph

Germany is the latest eurozone country to fall prey to the forces of deflation, as it saw the lowest rise in consumer prices since October 2009.

Monthly consumer price inflation was just 0.1pc, down from 0.5pc in November and missing economists’ expectations. Economists had expected inflation of 0.2pc.

The news is likely to put further pressure on European Central Bank president Mario Draghi to inject further stimulus into the flailing monetary bloc when the ECB meets on January 22.

Regional inflation data for the country also pointed to disinflationary forces gripping the country.

Consumer prices in North Rhine-Westphalia eked up by just 0.1pc in December, down sharply from a 0.7pc in the previous month, while inflation in Bavaria rose by 0.3pc year-on-year, down from 0.8pc.

Speaking to a German newspaper last week, Mr Draghi admitted “the risk that we do not fulfil our mandate of price stability is higher than six months ago.”

His comments helped send the euro to a nine-year low against the dollar in Monday’s trading.

Deflation increases the debt burden on governments and encourages consumers to delay spending. Falling global energy prices contributed to Germany’s overall national inflation rate to drop to 0.2pc in December, down from 0.6pc in the previous month.

There is now a “high probability” overall eurozone inflation will turn negative for December when data are released later this week, according to Christian Schulz, senior economist at Berenberg. Inflation currently stands at 0.3pc in the 18-country monetary bloc.

“For the ECB, such low inflation rates in Germany should make it easier to argue the case of further monetary easing,” said Mr Schulz.

Jennifer McKeown at Capital Economics, said that if prices in the euro zone fell in December, the pressure for QE would become “irresistible”.


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