MADRID—Spain's central bank said a recession in the euro zone's fourth-largest economy deepened slightly in the final quarter of last year, but it said austerity cuts are bringing the country's runaway budget deficit under control. In the first estimate of fourth-quarter economic performance, the Bank of Spain said the economy contracted 1.7% compared with the same period a year earlier and likely contracted 0.6% from the previous quarter. In the third quarter, the economy had shrunk 0.3% from the previous quarter, and 1.6% on an annual basis. The Bank of Spain said gross domestic product fell just 1.3% in the whole of 2012, which was less than the 1.5% contraction anticipated by the government and a sign that strict budget cuts across the board are having a less detrimental effect than some feared. It cautioned that continuing cuts could still weigh on an economy already hurt by efforts to trim debt. "This budget consolidation effort has had a net contracting effect on activity throughout the year, especially in the last few months," the central bank said. This year, meeting even stricter austerity targets "will require an additional, very ambitious fiscal effort by the central and regional governments." Those comments are in line with heightened concerns by local and foreign observers that accelerated austerity measures promoted by the European Union are self-defeating, as a collapse in economic activity makes it harder to boost tax revenue, putting pressure on budget deficits. Earlier this month, the International Monetary Fund said it revising its metrics for how quickly governments should cut their budgets and the IMF's top economist Olivier Blanchard made the case that Europe's fiscal tightening has been too severe. "We do need to reduce the deficit, but the EU should be more flexible about the deadlines," said Josep Comajuncosa, an economics professor at Spain's ESADE business school. "Requiring a fast and drastic reduction of the public deficit could backfire. The deficit target should be pushed back one or two years." The central bank said tax revenue increases in recent months will make it easier for the government to get closer to its target of lowering the 2012 budget deficit to 6.3% of GDP from 9% in 2011. The target for this year is 4.5% of GDP. The latest data available, the central bank said, indicates tax revenue picked up in recent months due to higher value-added and corporate tax receipts, while expenses fell after the government suspended an extra monthly payment for civil servants and decided not to adjust pensions for inflation—two measures which eroded popular support for Prime Minister Mariano Rajoy. Spain's statistics institute is due to release an official preliminary estimate of fourth-quarter GDP Jan. 30. Full data on Spain's 2012 budget deficit, including for regional governments, will likely be released late February.(sursa : WSJ)

Could anyone give or sell us a "Survival kit?"

France is being particularly watched on its commitments to cut high deficits as losing its triple-A rating would undermine the euro zone's bailout facility, the European Financial Stability Facility. In the space of less than three months, President Nicolas Sarkozy has responded by crafting two austerity plans to save €19 billion ($25.7 billion) by the end of next year. The second austerity plan came as the government slashed its 2012 growth forecast to gross-domestic-product expansion of 1% from 1.75% previously. Economists are now concerned that austerity could bite significantly into growth. Deutsche Bank analyst Gilles Moec said in a research note Monday that the two austerity packages and the tightening already programmed could take 1.2% off French GDP next year. Moody's noted in its report Monday that the growth outlook and the European debt crisis are "important risk factors" for the French government's finances. Mr. Baroin defended the government's austerity plans, which are mainly centered on tax increases in the short term, including VAT hikes. "These measures will not have a negative impact on growth of the French economy," he said. On a funny note : How about a list of actions eurozone holders can take to lessen the horror when the euro crashes in a disorderly fashion.
1. Buy non-EU currency. Which ones?
2.Buy gold.
3. Buy property rather than have cash in the bank.
4. Stock up on long life essential food supplies, batteries, paper.
5. Ensure at least 6-9 months of regular medications.
Could anyone give (sell) us a "Survival kit?"... Civil unrest anybody?

The yield on 10-year Spanish bonds popped back above 6% yesterday and Italian 10-year yields stand at 5.66%. Such rates, if sustained for long periods, are simply unaffordable. Unsurprisingly, bank shares across Europe were also whacked yesterday. The problem is twofold. First, the politicians didn't get to grips with the size of Greece's debt problems. After a round of modest haircuts for private-sector creditors and a reduction in the rate on the interest rate charged on the bail-out loans, the country's debt-to-GDP ratio should no longer hit 170% soon. But the revised figure – maybe 130% – still looks too high to allow Greece to recover. Its economy is still too uncompetitive and you have to be an extreme optimist to believe tax receipts will arrive when they are due. So a third Greek bailout looks like only a matter of time. Get ready for more bitter rows over how the pain should be distributed between holders of Greek bonds and the taxpayers of other eurozone countries. That is no way to encourage companies to invest or consumers to spend – but it is the way to try the patience of German taxpayers. The second problem is the design of the European Financial Stability Facility – the rescue fund that is to be the first line of defence against speculative attacks. But how would Italy and Spain be defended in practice? The EFSF has been handed powers to intervene but no new cash. A fighting fund would have to be raised by passing the hat round member states – a challenge that looks a tall order today.

Fears of "currency wars"

Fears of "currency wars" characterized by competitive devaluations and protectionism continue to dominate headlines in the run–up to the G20 summit in November. In our lead article this week, we examine Brazil's latest policy response to the appreciation of its currency. By raising the tax on capital inflows again, however, the government is unlikely to slow the Real's rise for long. China, too, remains central to the global debate over exchange rates. We focus on the record rise in the country's foreign reserves, a development certain to fuel further calls for revaluation, even though abrupt change is neither likely nor desirable.Elsewhere, French strikers are on the warpath over proposed pension reforms. With more austerity on the way, tensions between the government and the public could drag on. Nor is France, of course, the only country grappling with the consequences of belt–tightening. From Risk Briefing we feature a webcast with our UK analyst, Neil Prothero, who expects the cuts announced in the British government's spending review to hit economic growth.Industry Briefing looks at the rise of micro finance in Europe, which suggests that micro loans are not just relevant to borrowers in poor countries. Finally, Executive Briefing examines a refreshingly counter–intuitive social networking strategy, the idea of which is to connect with fewer, not more, people as a means of deepening relationships with customers.How do these issues affect your business? Please let me know at: arbitraj@aol.com