UPDATE 4-Carney signals earlier British rate rise, sterling soars

Britain could become the first major economy to tighten monetary policy since the 2008 financial crisis, Bank of England Governor Mark Carney has signalled, sending sterling shooting towards a five-year high against the dollar on Friday.

British government bond yields soared, construction stocks tumbled and interest rate futures priced in a first hike by December after Carney said rates could rise sooner than markets had thought - his most hawkish comment to date.

"There's already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced," Carney said in a speech late on Thursday alongside British finance minister George Osborne.

"It could happen sooner than markets currently expect."

Few economists had expected rates to increase until the second quarter of next year given the central bank's previous guidance that there was plenty of scope for Britain's economy to expand further without causing inflation.

A Reuters poll of economists on Friday showed most expect a rate rise will come by March 2015, three months earlier than a previous poll published two weeks ago. Only a minority expect a rate rise before the end of this year.

A rise in BoE rates this year would be the first since 2007 and put it ahead of both the U.S. Federal Reserve and the European Central Bank. The Fed is still pumping extra stimulus into the U.S. economy while the ECB cut interest rates to record lows last week and said it may not have finished easing.

Carney said Britain's economy still had room to grow without pushing up inflation, but added that he saw little sign yet of a slowdown in the pace of expansion that the central bank had pencilled in for the second half of the year.

"The change reflects the reality in the economy. It is flying now. Employment is rising at a record pace and we see no sign of economic growth slowing from its current pace," said Rob Wood, chief UK economist at German bank Berenberg.

The pound hit a 5-1/2 year high against a trade-weighted basket of currencies and came with in a hair's breadth of its highest in almost five years against the dollar.

Short sterling rate futures fell <0#FSS:>, pricing in the first hike by December. The interbank interest rate curve (SONIA) also pointed to a rate rise by year's end. On Thursday it had pointed to a rise in the first quarter of 2015.

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Rating's agency Standard & Poor's upgraded its outlook for Britain's triple-A credit rating to stable from negative late on Friday, although rivals Moody's and Fitch have still kept it a notch below triple-A.

An interest rate rise before a national election next May could hurt perceptions of the Conservative-led coalition government by raising mortgage costs and eating into disposable income, which the opposition Labour party says is being eroded by rising prices for everything from energy to transport.

"It is absolutely without question that those people who are right on the edge at the moment will, with a small increase in interest rates, be pushed over the edge," Conservative lawmaker Mark Garnier told Reuters.

HITTING VOTERS IN THE POCKET?

Although Britain's $2.5 trillion economy has won back the output lost in the convulsions of the 2008 crisis, Garnier said it could be a hard sell to convince voters of the recovery if they felt they had less money in their pockets.

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"We can't just go to people and say: 'Yes, it's costing you more, but overall the economy is bigger'. They'll just turn around and say 'Well, it's not bigger for me'," he said.

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While Britain's economy is growing fast now, its recovery began much later than in the United States or Germany, and wages have fallen significantly in real terms since the financial crisis.

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Carney also said the central bank would weigh carefully the merits of tackling housing market risks, including an undesirable loosening in mortgage underwriting standards, when its Financial Policy Committee meets later this month.

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House prices in London have soared in the past year and though rises outside the capital have been more modest, Carney cautioned that average household debt was 140 percent of disposable income - higher than in most other countries.

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Osborne said he would grant the BoE new powers to impose maximum loan-to-value and loan-to-income ratios on mortgage lending, a step which Carney welcomed.

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Last month, a minority of BoE policymakers said the case for a rate rise was "more balanced" and that interest rates might need to increase sooner rather than later to ensure they did not need to rise sharply.

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But Carney had until now appeared less keen to contemplate tightening, emphasising that Britain's economy was still a long way from full strength.

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On Thursday, he said that more important than the timing of a first rate rise was that future increases be "gradual and limited", in part due to high household indebtedness and a drag on growth from a stronger currency.

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He also said the timing of a rise would depend on incoming data, and the bank had no fixed plan on when to raise rates. (Writing by David Milliken and Guy Faulconbridge; Additional reporting by Kate Holton, William James, Andy Bruce, Anirban Nag and Tricia Wright; Editing by Paul Taylor and Peter Graff)

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Taste for little luxuries suggest Japan's tax rise hangover fading

Bartender Yoshiro Tsuneoka smiled with satisfaction between popping open bottles of champagne. It was midweek, 8 pm, and business was good at the tiny bar in downtown Tokyo.

Watching a bevy of young professionals quaffing sparkling wine, there was little sign that an increase in Japan's sales tax in April caused anything more than a hiccup in the economy.

"Sales have been doing well for a while now and we've noticed no change after the tax increase," Tsuneoka said above the sound of clinking glasses. "We get a broad range of customers, and their spending hasn't changed."

Japan needs people spending with confidence if a radical strategy adopted by Prime Minister Shinzo Abe is to succeed in breaking the economy free of two decades of deflation and sub-par growth.

Government data covering the period after the tax was increased to 8 percent from 5 percent at the start of April has begun to trickle in. Household spending and retail sales in April dropped the most in three years.

But policymakers need to wait until July or so for a fuller picture of the tax impact.

For the time being, champagne sales and other untraditional measures may offer a good early read on consumption, which makes up 60 percent of the economy.

A sharper downturn in spending could have big consequences, potentially prompting the Bank of Japan to increase its massive monetary stimulus and complicating Abe's attempts to rein in the developed world's biggest debt burden.

Politicians painfully remember the deep recession that followed the last tax hike in 1997 - although that downturn coincided with the Asian financial crisis.

If the economy re-gathers pace after absorbing the initial impact of the sales tax, it would allow Abe to focus on reforms to boost Japan's long-term growth, and make it easier for him to decide later this year whether to go ahead with a planned second increase in the tax.

Bank of Japan mandarins are known to keep tabs on informal indicators, like the price of a budget haircut or "gyudon" bowls of stewed beef on rice. How easily businesses can pass higher costs on to consumers is fundamental to the central bank's drive to generate 2 percent inflation.

TOUCH OF INDULGENCE

Whereas people with a taste for champagne might not be representative of the average Japanese household, the IT startup employees and web designers drinking at Tsuneoka's bar are not especially wealthy either.

But they have a choice what to do with their money, and clearly prefer to keep on spending for the temporary pleasure given by the imported bubbly.

Paying less than 1,000 yen ($9.80) a glass, they are only drinking a mid-tier label, not the fancier stuff costing 20 to 70 percent more.

_0">

Japan's imports of champagne and other sparkling wine climbed 18.8 percent by volume in April from a year earlier, barely slowing from March's 21.1 percent rise and extending a series of increases that began late last year.

_1">

This is in line with brisk sales in what advertisers call the "petite luxury" market, where slapping a "premium" label on a product can help it fetch a higher price.

_2">

Take the example, of rice balls, or onigiri, sold at Seven-Eleven convenience stores in greater Tokyo.

_3">

In the first two weeks of May, these stores sold more than 2 million "Gold Onigiri" rice balls, about 20 percent more than expected, even though they, at 200 yen each, the cost twice as much as the chain’s most basic onigiri, said parent company Seven & i Holdings ( id="symbol_3382.T_0">3382.T).

_4">

The optimistic mood is also evident in the way people dress, according to sales staff at stores in Tokyo's Ginza shopping district. Women are going for brightly coloured lipstick and clothes, whereas customers tend to choose drab colours when times are tougher. Even Japan's typically, dowdy middle-aged men are buying brighter colours for the summer, sales people say.

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TARGET POPULATION

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"Companies are targeting the 40 percent of the population that earns 8 million yen or more per year," said Yoshiyuki Sodekawa, research director at Dentsu Innovation Institute, which studies market trends for advertising giant Dentsu.

_8">

This demographic, which compares with Japan's median wage-earner income of 4.4 million yen ($43,000), "accounts for much more than 40 percent of total spending and is leading the recovery in consumption now."

_9">

Critics of "Abenomics" say the premier's policies have largely ignored low-income "working poor" and that this could shackle consumer spending.

_10">

But, in a sign that more downmarket consumers remain willing to spend, Fast Retailing Co Ltd ( id="symbol_9983.T_1">9983.T) said on Tuesday it will raise prices by around 5 percent at its domestic Uniqlo casual clothing stores as sales rose for two months after the tax hike.

_11">

More broadly, department store sales recovered in May, and sales of home electronics rebounded to where they were last year, surveys by Dentsu Innovation Institute show.

_12">

For supermarkets, a near real-time measure shows prices steady after stripping out the tax hike, a sign that spending there too is firm.

_13">

The UTokyo Daily Index, a gauge of prices at 300 supermarkets nationwide compiled by Tokyo University professors, has fluctuated modestly above and below year-earlier levels for the past two months and was up 0.13 percent as of Monday.

_14">

Back in April, the Reuters Breakingviews Abenomics index, a compendium of Japanese economic data, inched down to 85.97 from 96 in March as consumption wobbled, though wages, lending and housing starts held up.

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SUSHI WARNING

_1">

Consumer sentiment is quickly recovering from the tax hike, according to a "lifestyle index" from Hakuhodo Institute of Life & Living, an arm of Japan's second-biggest ad agency.

_2">

The index, measuring the willingness of consumers in Tokyo, Nagoya and Osaka to spend, fell to 43.7 in April from 53.8 in March before bouncing to 44.3 in May and 47.2 in June.

_3">

"People are saying they want to spend money on services, like going to the beauty salon or going out to eat," said Akemi Natsuyama, the institute's R&D director. "They also want to buy computers, mobile phones and cameras."

_4">

Not all consumption measures, however, point upward. Consider the Tuna-Mackerel Index, a gauge crafted by economist Kenta Ishizu at Mizuho Securities to act as a leading indicator of consumer demand.

_5">

The idea is that when consumers are feeling flush, they will pay up for the more expensive "maguro" tuna of sushi fame, and when they are hard up, they will opt for the lowlier "aji".

_6">

Although the economy has gathered strength over the past year and a half thanks to Abenomics, the index has trended lower since mid-2013 and recently went into negative territory, indicating a preference for the cheaper fish.

_7">

The problem, Ishizu says, is that inflation is now outpacing wages, despite a recent round of pay raises and bonuses.

_8">

Core consumer prices rose 3.2 percent in April from a year earlier, the fastest in 23 years and far outstripping a 0.9 percent rise in total cash earnings.

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"Consumer spending cannot be an engine of economic growth unless people expect their wages to rise next year," Ishizu said.

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(Additional reporting by Chang-Ran Kim; Editing by Simon Cameron-Moore)

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Fed should stop sending profits to Treasury, economist argues

The U.S. Federal Reserve should suspend payments to the Treasury to avoid a potential cash crunch when the time comes to raise interest rates, according to former Richmond Fed policy adviser Marvin Goodfriend.

Such a reversal in policy is critical to protecting the Fed's inflation-fighting credibility, Goodfriend said in an interview Thursday, because otherwise the central bank will find itself needing to print money to pay for its obligations as it raises interest rates, an untenable situation in his view.

"It's not good idea for a central bank to ever put itself in the position of having to create money to stabilize the value of money against inflation," said Goodfriend, now an economics professor at Carnegie-Mellon University. "You are throwing fuel on the fire."

The U.S. central bank has sent about $320 billion to the Treasury since 2010. The money comes from interest earned on the Fed's massive portfolio of bonds acquired in its ongoing effort to push down borrowing costs and boost the economy.

The Fed pays for those bond purchases by creating reserves in the accounts of banks that hold funds at the Fed. When the time comes to raise rates from their current near-zero level, the central bank plans to prevent those reserves from flooding back into the financial system by raising the rate of interest it pays on them.

Economists have previously flagged the possibility that doing so could reduce the amount of money the Fed sends to the Treasury, while boosting the Fed's payments to banks, creating what some central bankers have called an "optics" problem.

Goodfriend points to another danger: the possibility that if rates rise high enough, to 3.75 percent, the Fed will no longer make enough money on its interest income to cover its rising interest payments to banks.

The issue is not potential insolvency; the Fed can print money by creating reserves. The issue, according to Goodfriend, is in creating new reserves in order to pay banks interest on existing reserves. "The credibility of the Fed's anti-inflation policy would be jeopardized," he said in a paper presented at a Bank of Japan conference late last month.

The Fed could have avoided the problem, Goodfriend said, if it had recognized its bond-buying stimulus for what it is - a massive "carry trade" by which the Fed created reserves to finance its purchases of bonds, which generate higher interest.

Firms running such a strategy typically retain profits made at the outset to cover the losses they will likely encounter when the trade is eventually unwound, Goodfriend explained. The Fed, however, has been transferring its profits to the Treasury, leaving it with a too-thin cushion against eventual losses, he said.

If the Fed starts retaining its earnings now, he said, it could build a $60 billion buffer by next March, enough to make a meaningful difference in preventing a cash crunch.

(Editing by Eric Walsh)

U.S. Fed plans changes to annual bank stress tests

The U.S. Federal Reserve on Thursday proposed tougher conditions for banks to pay dividends or buy back shares as part of a number of changes to its annual stress tests to measure banks' ability to withstand financial shocks.

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Banks need to ask the Fed for approval for shareholder payouts each year, part of a set of new rules to make banking safer after the financial crisis.

Banks must submit capital plans that disclose whether they intend to pay dividends or buyback shares, as well as any planned increases in capital through raising new debt or shares.

The new rule would prevent banks from increasing dividends or buying back shares if they did not meet the capital increases that they had pledged to the Fed.

"Some large bank holding companies included issuances of capital instruments in their capital plans, but did not execute these planned issuances," the Fed said.

For instance, if a bank had planned a $50 million stock issuance, and combined dividends and stock repurchases of $100 million, but it only raised $25 million in new shares, it would have to reduce the shareholder payout by $25 million, the Fed said in its proposed rule.

The central bank also shifted the dates by which banks have to submit their capital plans.

The biggest banks with more than $50 billion of total assets would need to submit their plans by April 5, three months later than under the current rule makings.

The industry has until Aug. 11 to comment on the proposed rule which would then come into force in the 2015-2016 stress test cycles, the Fed said.

(Reporting by Douwe Miedema; Editing by Cynthia Osterman and Lisa Shumaker)

Taste for little luxuries suggest Japan's tax rise hangover fading

Bartender Yoshiro Tsuneoka smiled with satisfaction between popping open bottles of champagne. It was midweek, 8 pm, and business was good at the tiny bar in downtown Tokyo.

Watching a bevy of young professionals quaffing sparkling wine, there was little sign that an increase in Japan's sales tax in April caused anything more than a hiccup in the economy.

"Sales have been doing well for a while now and we've noticed no change after the tax increase," Tsuneoka said above the sound of clinking glasses. "We get a broad range of customers, and their spending hasn't changed."

Japan needs people spending with confidence if a radical strategy adopted by Prime Minister Shinzo Abe is to succeed in breaking the economy free of two decades of deflation and sub-par growth.

Government data covering the period after the tax was increased to 8 percent from 5 percent at the start of April has begun to trickle in. Household spending and retail sales in April dropped the most in three years.

But policymakers need to wait until July or so for a fuller picture of the tax impact.

For the time being, champagne sales and other untraditional measures may offer a good early read on consumption, which makes up 60 percent of the economy.

A sharper downturn in spending could have big consequences, potentially prompting the Bank of Japan to increase its massive monetary stimulus and complicating Abe's attempts to rein in the developed world's biggest debt burden.

Politicians painfully remember the deep recession that followed the last tax hike in 1997 - although that downturn coincided with the Asian financial crisis.

If the economy re-gathers pace after absorbing the initial impact of the sales tax, it would allow Abe to focus on reforms to boost Japan's long-term growth, and make it easier for him to decide later this year whether to go ahead with a planned second increase in the tax.

Bank of Japan mandarins are known to keep tabs on informal indicators, like the price of a budget haircut or "gyudon" bowls of stewed beef on rice. How easily businesses can pass higher costs on to consumers is fundamental to the central bank's drive to generate 2 percent inflation.

TOUCH OF INDULGENCE

Whereas people with a taste for champagne might not be representative of the average Japanese household, the IT startup employees and web designers drinking at Tsuneoka's bar are not especially wealthy either.

But they have a choice what to do with their money, and clearly prefer to keep on spending for the temporary pleasure given by the imported bubbly.

Paying less than 1,000 yen ($9.80) a glass, they are only drinking a mid-tier label, not the fancier stuff costing 20 to 70 percent more.

_0">

Japan's imports of champagne and other sparkling wine climbed 18.8 percent by volume in April from a year earlier, barely slowing from March's 21.1 percent rise and extending a series of increases that began late last year.

_1">

This is in line with brisk sales in what advertisers call the "petite luxury" market, where slapping a "premium" label on a product can help it fetch a higher price.

_2">

Take the example, of rice balls, or onigiri, sold at Seven-Eleven convenience stores in greater Tokyo.

_3">

In the first two weeks of May, these stores sold more than 2 million "Gold Onigiri" rice balls, about 20 percent more than expected, even though they, at 200 yen each, the cost twice as much as the chain’s most basic onigiri, said parent company Seven & i Holdings ( id="symbol_3382.T_0">3382.T).

_4">

The optimistic mood is also evident in the way people dress, according to sales staff at stores in Tokyo's Ginza shopping district. Women are going for brightly colored lipstick and clothes, whereas customers tend to choose drab colors when times are tougher. Even Japan's typically, dowdy middle-aged men are buying brighter colors for the summer, sales people say.

_5">

_6">

TARGET POPULATION

_7">

"Companies are targeting the 40 percent of the population that earns 8 million yen or more per year," said Yoshiyuki Sodekawa, research director at Dentsu Innovation Institute, which studies market trends for advertising giant Dentsu.

_8">

This demographic, which compares with Japan's median wage-earner income of 4.4 million yen ($43,000), "accounts for much more than 40 percent of total spending and is leading the recovery in consumption now."

_9">

Critics of "Abenomics" say the premier's policies have largely ignored low-income "working poor" and that this could shackle consumer spending.

_10">

But, in a sign that more downmarket consumers remain willing to spend, Fast Retailing Co Ltd ( id="symbol_9983.T_1">9983.T) said on Tuesday it will raise prices by around 5 percent at its domestic Uniqlo casual clothing stores as sales rose for two months after the tax hike.

_11">

More broadly, department store sales recovered in May, and sales of home electronics rebounded to where they were last year, surveys by Dentsu Innovation Institute show.

_12">

For supermarkets, a near real-time measure shows prices steady after stripping out the tax hike, a sign that spending there too is firm.

_13">

The UTokyo Daily Index, a gauge of prices at 300 supermarkets nationwide compiled by Tokyo University professors, has fluctuated modestly above and below year-earlier levels for the past two months and was up 0.13 percent as of Monday.

_14">

Back in April, the Reuters Breakingviews Abenomics index, a compendium of Japanese economic data, inched down to 85.97 from 96 in March as consumption wobbled, though wages, lending and housing starts held up.

_15">

_0">

SUSHI WARNING

_1">

Consumer sentiment is quickly recovering from the tax hike, according to a "lifestyle index" from Hakuhodo Institute of Life & Living, an arm of Japan's second-biggest ad agency.

_2">

The index, measuring the willingness of consumers in Tokyo, Nagoya and Osaka to spend, fell to 43.7 in April from 53.8 in March before bouncing to 44.3 in May and 47.2 in June.

_3">

"People are saying they want to spend money on services, like going to the beauty salon or going out to eat," said Akemi Natsuyama, the institute's R&D director. "They also want to buy computers, mobile phones and cameras."

_4">

Not all consumption measures, however, point upward. Consider the Tuna-Mackerel Index, a gauge crafted by economist Kenta Ishizu at Mizuho Securities to act as a leading indicator of consumer demand.

_5">

The idea is that when consumers are feeling flush, they will pay up for the more expensive "maguro" tuna of sushi fame, and when they are hard up, they will opt for the lowlier "aji".

_6">

Although the economy has gathered strength over the past year and a half thanks to Abenomics, the index has trended lower since mid-2013 and recently went into negative territory, indicating a preference for the cheaper fish.

_7">

The problem, Ishizu says, is that inflation is now outpacing wages, despite a recent round of pay raises and bonuses.

_8">

Core consumer prices rose 3.2 percent in April from a year earlier, the fastest in 23 years and far outstripping a 0.9 percent rise in total cash earnings.

_9">

"Consumer spending cannot be an engine of economic growth unless people expect their wages to rise next year," Ishizu said.

_10">

_11">

_12">

_13">

_14">

(Additional reporting by Chang-Ran Kim; Editing by Simon Cameron-Moore)

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Words cannot rid securitized debt of 'bad boy' image in Europe

Six years after mind-blowingly complex securitized debt brought the global financial system to its knees, the bankers behind the market are wary of official efforts to rehabilitate it in Europe.

In the years leading up to 2008, when loans were transformed into bonds, many were repackaged again and again, acquiring triple A ratings despite links to U.S. sub-prime mortgages, and earning the nickname "toxic sludge".

Yet the European Central Bank (ECB) and Bank of England (BoE) say they want to revive more straightforward asset backed securities (ABS) in the hope of ramping-up lending to credit-starved businesses and rebooting the regional economy.

Attendees at the industry's annual meeting in Barcelona say it will take more than positive words to overcome their pariah status in Europe and worry that official efforts to exclude the riskier parts of the market will make it unworkable.

"Don't confuse words with action," James Hewer, a partner at PwC's structured finance team, told delegates at a meeting far more low key than those before the crisis, when bankers supped cocktails and, one year, danced to the Gypsy Kings.

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For a graphic on asset backed securities in Europe and the United States click on link.reuters.com/rus99v.

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Delegates are cheered by the calls for a revival of the moribund market from London and Frankfurt but skeptical it can be a meaningful driver of economic growth unless the regulatory clamp down triggered in the wake of the crisis is eased.

Bankers want regulators globally to reduce the amount of capital that lenders, who create the debt, and insurance companies, who could buy it, must set aside in case the bonds lose their value, as in 2007.

To facilitate that, the ECB and the BoE want to create a new category of "high-quality" asset-backed securities that would have lower capital charges. The definition is still being worked out but it would include loans to businesses and exclude sub-prime mortgage securities and exotic derivatives.

Bankers worry, however, that such a definition might end up being too narrow and would make securities falling outside it untradeable, shrinking an already shallow market and further deterring investors who like to have a deep supply.

To get the market going, the ECB has signaled that it might buy "simple and transparent" securities itself but bankers argue such assets are thin on the ground because banks have already parked them with the central bank in return for cheap funding.

“You do have an investor base out there, but a large part of it disappeared because of the Bank of England and the ECB themselves,” said Gordon Kerr, head of Structured Finance Research, DBRS.

The ECB's decision last week to offer further cheap funding to banks via "targeted longer term refinancing operations" may also discourage banks from issuing asset backed securities if they can get funding cheaply from Frankfurt, delegates said.

_0">

TARRED WITH SAME BRUSH

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The transformation of mortgages, business loans and consumer debt into securities that can be sold on to investors makes economic sense because it gives banks a source of funding and frees up their balance sheets, in theory reducing lenders' risk.

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It also enables companies to tap capital markets directly. Car companies who provide finance to customers, for example, can repackage those repayments and sell them on to investors.

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Used recklessly, however, securitization can be catastrophic.

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The repackaging of mortgages given to risky U.S. borrowers fueled the last financial crisis because they were not valued correctly and were bundled into a suite of products whose riskiness was not reflected in the ratings assigned to them.

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So lucrative was this financial wizardry for Wall Street that some mortgages were created just to enable more securitization.

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Securitization experts in Europe argue they are being blamed for the sins of their U.S. peers. European asset backed securities are traditionally simple and transparent. Their default rates held up well during the crisis, coming in at around 1.4 percent between mid-2007 and the first quarter of 2013 compared to 17.4 percent in the United States.

_7">

U.S. authorities did not clamp down as hard on the securitization industry, where it is a bigger source of funding for the economy than in Europe, and the market there has had more of a recovery with $2.2 trillion worth of securities issued in 2013, around two-thirds of the pre-crisis annual rate.

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The market in Europe, where issuance levels are under half the pre-crisis annual rate, is also constrained by the different ways in which information on securitized debt is disclosed across Europe, making it difficult for investors to get a clear overall picture of what they are buying.

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Indeed, the biggest problem will be trying to get investors on board rather than giving banks more incentives to take part.

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Janet Oram, a director at asset manager Blackrock, warned that with the new goodwill being shown to the market from regulators, bankers would have to tread carefully.

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"We can't afford to take a step wrong," she said.

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(Additional reporting by Eva Taylor in Frankfurt and Sarah White in Madrid; writing by Carmel Crimmins; editing by Philippa Fletcher)

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Once a model for Africa, Ghana's economy loses its shine

Rising bond yields, mounting inflation and a weakening currency have taken the shine off Ghana, a country until recently hailed as a model for African growth.

An oil boom helped fuel five years of GDP growth above 8 percent making Ghana an emerging market star, a stable democracy whose population of 25 million was moving steadily into middle income status.

It is now, however, paying a steep price for not coming through with a new tranche of fiscal reforms. Political consensus is stymied, the public is dismayed by rising costs and the dream of new wealth is on hold.

Analysts put the immediate difficulty down to a delay in announcing reforms, saying it makes it harder for the government to meet its 2014 economic targets and has increased the chance it will eventually need a bailout from the International Monetary Fund (IMF).

It has also created a perception of policy drift at a time of economic trouble rather than decisive action to shore up gains made during the boom years in which the gold and cocoa exporter started pumping oil.

"The situation is becoming quite critical. There has been a chronic underestimation of the seriousness of the problem by the authorities," said Angus Downie, head of economic research at Ecobank.

In May, faced with worsening economic indicators and rising calls for action, the government of President John Mahama said it would adopt a "home grown" stabilization policy rather than resort to an IMF financial assistance program. [ID:nL6N0NZ3L1]

Such a policy would necessarily include spending cuts, steps for increasing revenue and an answer to costly public sector wages, the single biggest contributor to the rise of the deficit in 2012 to 11.8 percent.

The government held a strategic planning meeting last month but is yet to announce new reforms. Instead, it is urging patience and pointing to measures to tighten foreign exchange rules and raise rates, coupled with subsidy cuts last year.

Officials also say a Eurobond to be issued in U.S. dollars in July will lower debt costs, while seasonal cocoa inflows will steady a currency that has fallen 28 percent this year, the steepest decline in Africa. They also say that Ghana's mid-term prospects remain strong.

PRINTING MONEY

In the meantime, ordinary people are feeling the pinch, particularly with inflation running at 14.8 percent.

Anastancia Bokpe, who operates a restaurant in the east Legon suburb of the capital, said she has been forced to nearly double the price of her popular goat soup.

As a result, she fears losing the custom of the office workers, builders and civil servants who patronize her business because they too are under financial pressure.

"Prices of ingredients in the market have been changing almost every month .... The only way I could still remain in business is to pass on a fraction of the price hikes to the consumer," she told Reuters.

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"We are already in a severe hardship and things are rather getting worse."

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For their part, economists lament what they say is government indecision dating back to November's annual budget.

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"There have been no fiscal reforms that suggest the deficit will narrow significantly this year," said Yvonne Mhango of Renaissance Capital in Johannesburg.

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Authorities aborted two auctions of longer-dated bonds due to high yields and concerns of risk-averse portfolio investors. Yields on the weekly auction are at a three-year high.

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Central bank governor Henry Kofi Wampah said the bank was funding the deficit but that the amounts fell within the allowed limit of 10 percent of revenue collection and any excess would be redressed by the end of the year.

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"We know the government is about to issue a Eurobond soon which we can use to replace the financing we have made, so it's not out of the ordinary or abnormal for us to provide the government’s financing needs at this time," Wampah told Reuters.

_6">

Carmen Altenkirch, director of Africa ratings at Fitch, said money printing to fund the deficit would only raise pressure on inflation and a currency that has fallen 28 percent this year.

_7">

The risk is that the government is forced to defend the currency with still higher rates, causing inflation and a spiral that will blunt growth projected to slow to 4.5 percent in 2014. As a result, there are few easy options.

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"The debt situation may now be so grave that the policy priority above almost everything else should be to contain it," said Razia Khan, head of Africa research at Standard Chartered. Mild inflation growth might be a better policy option, she said.

_9">

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POLITICAL PRESSURE

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One impediment to reform is stiff competition between the ruling National Democratic Congress (NDC) and the opposition.

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Governments in Ghana, unlike in many other African states, are regularly ejected by voters at elections. The peaceful transitions are a source of national strength and pride but they also make governments more vulnerable to voter sentiment.

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The next election is not until 2016 but politicians say austerity is unpopular with voters, especially given expectations of a bonanza when oil came onstream in 2010.

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Ironically, each election year also tends to see a weakening of the fiscal position, as it does in many countries, so the window for restoring fiscal balance is closing fast ahead of 2016.

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The opposition New Patriotic Party (NPP) only narrowly lost the last presidential election and this week it stepped up its criticism of what it said was government economic mismanagement. At the same time, party supporters took to the streets in its stronghold city of Kumasi on Tuesday to protest against hardship.

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"I would want to see the government under an IMF program because on their own they haven't shown the commitment to do the right things," said NPP finance spokesman Mark Assibey-Yeboah.

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Some commentators have called for a national consensus over fiscal policy given the situation. But they acknowledge this is unlikely in the political climate.

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(Editing by Jeremy Gaunt)

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Jean-Claude Juncker: Federalist danger man or skilled fixer?

Four months ago, Jean-Claude Juncker would have struggled to have his name recognized in much of Europe. Now he could be forgiven for wishing people would shut up about him.

As the top candidate of Europe's largest center-right political group, which won the European elections last month, the former prime minister of Luxembourg is in pole position to become the next president of the European Commission.

While Britain's David Cameron is adamantly opposed and The Sun tabloid has described him as "The Most Dangerous Man in Europe", Juncker remains on track to secure the powerful post, which has influence over policy from telecommunications to banking and trade affecting 500 million Europeans.

Cameron's opposition is based on a belief that Juncker, 59, is an "old-school federalist" wedded to the concept of "ever closer union", not a modernizer who will shake up and refocus Brussels institutions regarded in London as bloated and opaque.

After an election in which millions of Europeans voted for far-right or protest parties, with resentment widespread over immigration, unemployment and low growth, Cameron is determined to force a rethink about how the Commission works.

German Chancellor Angela Merkel and most EU leaders agree that sharper priorities need to be set for the Commission, whose 25,000 civil servants have seen their responsibilities grow from mostly economics, trade and agriculture into areas such as culture and education, health and foreign affairs.

While Merkel has given resolute backing to Juncker, saying he is the right person to lead the Commission for the next five years and ensure it delivers on jobs, growth and prosperity, Cameron takes the polar opposite view.

The question, then, is whether the heavy smoking deal broker who got his first ministerial job at 29 is the best choice at a time when Europe is battling to keep its economic recovery on track, faces geopolitical tension with Russia and is confronting rising social and political opposition to "more Europe".

And whether, as the 12th president of the Commission since the post was established in 1958, Juncker would represent continuity or a break with the past.

POLITICAL FIXER

Unlike some of the EU's founding fathers, Juncker has never set out his own doctrine of European integration.

The son of a Luxembourg steelworker who often says he would never have been able to study law and get ahead if his father had not had job security, Juncker stands somewhat to the left of the EU's center-right mainstream.

For example, he supports a minimum wage in all EU countries.

But his record is more that of a practical operator, making the EU plumbing work by brokering crucial compromises between Germany and France on economic and monetary union.

He negotiated the bloc's original budget rules in the 1997 Stability and Growth Pact and an amended rulebook in 2005 after Berlin and Paris broke the deficit limits and froze the pact.

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For most of the euro zone debt crisis - perhaps the biggest challenge the EU has faced since its founding in the 1950s - he was at the heart of decision-making.

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As chairman of the euro zone's finance ministers and a prime minister, he lead negotiations or sat in every critical meeting from the first word of Greece's problems in 2009 to the concluding decisions on banking union in 2013.

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It was exhausting work and took a toll on his health. Critics said his chairmanship was at times erratic and decisions sometimes lacked follow-up.

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His Dutch successor criticized his drinking and smoking in meetings. Juncker denied any alcohol problem.

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At the peak of the crisis in 2011, he grew frustrated with the media attention, confessing he preferred "secret, dark debates" to the bright lights of news conferences.

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In an effort to stop leaks at one meeting of finance officials in Luxembourg, a Grand Duchy of just 500,000 people that he governed for 19 years until July 2013, Juncker warned participants that their telephones could be monitored.

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To some critics, his approach suggested a man concerned more to do whatever it takes to get a deal than with the niceties of openness and modern government.

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Former staff members describe him as liking nothing more than locking himself in his study to work the phones, and say he only ever wants one or two trusted people around him.

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"He's old-fashioned and a bit secretive in the way he works," says one former adviser. "He doesn't even like the idea of having a cabinet," he said, using the French term for a private office staff. "It's not something he was to used in Luxembourg."

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By contrast, running the European Commission entails having a team of up to 25 advisers to handle a host of policy portfolios, not a one-man job. The president must also travel widely and make several speeches a week, something Juncker is loath to do unless he has penned them himself.

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"He hates giving speeches he hasn't written," said the former staffer. "There are a lot of things you are forced to do as Commission president that are not really up his street."

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POLICY PLANS

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Then there is the critical question of policy priorities.

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In his manifesto, Juncker pushed all the right buttons, talking about jobs, growth, energy diversification and trade, as well as the need to further reform Europe's monetary union.

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But when he outlined how he sees the relationship between the Commission and the European Central Bank, and how he would handle future financial rescues, he raised some warning flags.

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In the fourth point of his five-point plan, he praised ECB President Mario Draghi for helping save the euro, before adding that the euro zone should be managed by the Commission, which should also have a say in exchange-rate policy.

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"The responsibility of the Eurogroup includes issues related to the exchange rate. We should not forget this in case the euro exchange rate should increase further and become a problem for growth," the manifesto says.

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The EU's governing treaty allows euro zone finance ministers to set exchange rate policy guidelines for the central bank at the Commission's recommendation, but in practice the euro has floated freely since its creation and monetary policy is the sole preserve of the ECB.

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Juncker's position could be seen by some as unhealthy meddling in free markets.

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He also argued that future bailout programs should go through a "social impact assessment" not just a fiscal analysis.

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That may cheer voters in Greece, Portugal and Spain who were angered by austerity conditions attached to their bailouts. But it pits Juncker against Merkel and others who argue it was right to set strict terms for financial help.

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The manifesto also talked of a "targeted fiscal capacity" for the euro zone - a nod to some sort of shared budget or fiscal transfers that Cameron and other north Europeans are concerned would take Europe in the wrong direction.

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"It's just not where we see Europe going," says a British diplomat. "His philosophy is outdated. It's out of touch."

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Juncker has in the past supported the idea of euro zone bonds - the issuance of jointly guaranteed debt by euro zone governments - an idea that Merkel strongly opposes. He backed away from that during the campaign, saying conditions will not be ripe in the next five years.

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His commitment to the EU treaty goal of "ever closer union", especially among the 18 countries that share the euro, worries those outside the currency area as it could cement a two-tier EU, exacerbating tensions between the "ins" and "outs".

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OUT OF STEP?

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While Juncker's principles may put him at odds with Cameron, they are not out of step with past Commission presidents such as France's Jacques Delors or Italy's Romano Prodi, who made the case passionately for more Europe.

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But after the existential crisis of the past four years and last month's vote, Cameron and his allies argue there can be no "business as usual". Another Commission president in the same mould - the third from Luxembourg - is not the way to enact change, they contend.

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Added to that, Juncker clashed bitterly with Britain in 2005 over the EU budget, leaving resentment on both sides.

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As a result, Cameron has made clear he will do what he can to stop Juncker, and he may yet succeed.

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Sweden, Hungary and the Netherlands largely agree that the Luxembourger is not the right person to modernize the Commission. If Italy were to lean Cameron's way, it might convince Merkel that Juncker's candidacy is not going to work.

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EU leaders will meet on June 26-27 to discuss the issue, but it is unlikely to be resolved by then. Instead, it may not be until September or October that the fate of Juncker, and with it the future direction of the EU, is determined.

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(Writing by Luke Baker; Editing by Paul Taylor)

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