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Euro Leaders Demand Austerity as Italy Nears New Vote

Euro Leaders Demand Austerity as Italy Nears New Vote

European leaders demanded that euro members press on with budget cuts to end the debt crisis as Italy edged closer to a new election after an anti-austerity vote last week resulted in political deadlock. Finance ministers from the 17-member single-currency bloc meet in Brussels today to discuss issues including a bailout for Cyprus. In Rome, a top aide to Democratic Party leader Pier Luigi Bersani said the country may need to hold another election this year after passing new electoral laws. Italian political instability, after last week’s election ended in a four-way split, threatens to reignite concern about the deepening of the debt crisis.

Meanwhile, in the UK, fears of a triple dip recession raises chances of Bank of England to take action. With fiscal policy hamstrung by the government’s austerity drive and banks continuing to shrink their balance sheets, hopes for an economic recovery lie squarely on the central bank’s shoulders. Carney has suggested he will favour a more activist approach to getting Britain’s economy growing again. So far, however, Bank policymakers appear to be comfortable with the currency’s weakness. Indeed, some economists suspect that their willingness to talk about unconventional policy stimulus may be a deliberate attempt to talk the currency lower and gain competitive advantage.

On the FX markets, GBP – which was at times seen as an alternative safe-haven currency last year continues to be loathed by investors who added to their bearish GBP position to a net short of USD 3.4bln last week. A raft of somewhat less than impressive macro economic data caused market participants to question whether the BoE may in fact announce another round of QE as early as this week. Even though there are no immediate signs that the sovereign rating downgrade has had a negative impact on investor sentiment towards UK Gilts, the MPC may feel that a small dose of further easing will do no harm, especially at a time when there is a risk of further distress in the Eurozone.

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