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A Greek flag flies east of Athens (Yiorgos Karahalis/Reuters)
A Greek flag flies east of Athens (Yiorgos Karahalis/Reuters)

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Greece says no, but fears of debt default are mounting Add to ...

These are stories Report on Business is following Monday, April 18. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

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Euro zone woes deepen Some economists believe it's fast becoming a question of when, not if, Greece will have to take some sort of default measure such as a debt restructuring.

"The Greek government's 'road map' has done nothing to settle the markets' nerves," says Ben May of Capital Economics.

"The government fleshed out its privatization plans and announced it will implement fiscal measures worth €26-billion in an attempt to reduce the budget deficit to 1 per cent of GDP by 2015. However, the economy is looking ever more fragile and we expect public debt to balloon to around 170 per cent of GDP by 2013," he said in a recent research note.

"Accordingly, we see only two ways to restore the state's finances to a more sustainable path. One would be for other euro-zone governments to provide Greece with some kind of fiscal transfer - effectively, giving Greece the money. But the core countries are as reluctant as ever to contemplate this. The second would be for Greece to restructure its debts. We therefore continue to think that it is only a matter of when, rather than if, Greece is forced to default."

Greece, stumbling under debt of some €325-billion, took a €110-billion bailout from the EU and International Monetary Fund about a year ago, but Europe's debt crisis by no means ended there. Ireland, too, has succumbed to a bailout, and officials in Portugal begin negotiating terms of a rescue today.

Greece says it is not looking at a debt restructuring. And it's clear that fears over Europe's debt crisis aren't easing.

"In response to the rumours that Greece has asked IMF/EU for a debt restructuring - denied by Greek, German and French officials - Irish Prime Minister Enda Kenny said in an interview with Bloomberg that 'we [Ireland] have no intention of defaulting. We've made that perfectly clear. We want to continue to pay our way,'" Scotia Capital economists said in a research note today.

"Greek 10-year bond yield has jumped to 14.549 per cent from 13.826 per cent at Friday's close. Irish equivalent has moved up more modestly, and currently sits at 9.757 per cent, its highest since April 4th."

Separately, gains in Finnish elections by an anti-euro party added to fears over Europe's debt crisis today. The True Finns party, which is bent on killing the proposed bailout for Portugal, made huge strides in yesterday's election. While observers don't believe they'll actually be able to derail the rescue, they're certainly adding a new element to the overall concerns.

"The four-way split in the vote, and the True Finns demand for renegotiation of the Portuguese bailout, is likely to result in some noisy horse trading in the coming days," said Adam Cole, chief of foreign exchange strategy at RBC.

"Ultimately, it is unlikely that Finland will derail the Portuguese bailout process and there is in any case a fairly large 'window' before Portugal faces heavy redemption pressure in mid-June."

Fears spread again to Spain today, as well, noted BMO Nesbitt Burns economist Benjamin Reitzes.

"Following Portugal's request for aid two weeks ago, the market didn't appear concerned about the potential for Spain to follow suit," Mr. Reitzes said. "Indeed, many (not us) were calling Spain safe from contagion risks. However, Spanish bond yields have shot up over the past few days as worries about the stability of the euro area re-emerge. Spain still faces many hurdles including: June's European bank stress tests, €15.5-billion in debt to roll over this month, and continued fiscal consolidation."

S&P hits U.S. Standard & Poor`s dropped a bombshell into the U.S. budget debate today, downgrading the outlook for America`s debt to "negative" from "stable" and raising the stakes markedly.

``There have been rumblings about the U.S. credit rating for the past two years, and Moody`s warned earlier this year that the rating could be downgraded if progress is not soon made on the $1.5-trillion budget deficit,`` said Douglas Porter, deputy chief economist at BMO Nesbitt Burns.

`Still, the S&P move serves as a stark warning for policy makers to take stronger, concerted action to address the shortfall,`` Mr. Porter said in a research note after the move by the U.S. credit rating agency.

``The clock is now ticking loudly on a meaningful plan to reduce the budget deficit, with S&P looking for implementation by 2013. That looks to be an exceptionally tall order, given the current climate in Washington. The lacklustre nature of the economic recovery now under way, especially the still-high jobless rate, makes the task of deficit reduction that much more difficult."

Here are the views of several observers:

``Today's S&P downgrade of the U.S. government debt outlook from stable to negative is a good thing if it provides a call to action to Washington and the American people that the need for deficit reduction is essential and goes well beyond political wrangling ... Just as Canada redressed its budget excesses in the 1990s in the face of IMF warnings and rating-agency downgrades to become an example of fiscal strength, so too can the U.S. The S&P warning will be a blessing if it is heeded. Hopefully, there is enough goodwill in Washington and enough common sense among the populace for a compromise plan to be implemented - the sooner the better.`` Sherry Cooper, chief economist, Bank of Montreal

``The S&P negative watch (which will perhaps be followed by other rating agencies) means that we may now see more punitive market reactions to deadlock in Washington. This would take the form of a weaker (U.S. dollar), equity volatility and higher bond yields ...With the U.S. economy still experiencing a gradual recovery, there are limits as to how much fiscal austerity can be applied in the near term. The real message is that there needs to be consensus among political leaders towards a clear and credible plan, with a specified time frame.`` Beata Caranci, deputy chief economist, Toronto-Dominion Bank

``The prospect of an actual default by the U.S. on debt issued in its own currency isn't a realistic worry in a financial market that has a lot more real worries to deal with (including genuine euro zone default risks). We are less concerned over a downgrade to the outlook than we are about the growth implications of turning to fiscal belt tightening before the economy has self-sustaining momentum.`` Avery Shenfeld, chief economist, CIBC World Markets

``Given the size of the U.S. federal deficit, which will be close to 10 per cent of GDP this year, and the daunting medium-term fiscal challenges, it is hard to argue with S&P's decision to put a negative outlook on the country's AAA credit rating. Nevertheless, at a time when the politicians on both sides have finally started to talk seriously about a meaningful deficit reduction, we find the particular timing of this move a little strange. If the rising risk of a downgrade gives the fiscal austerity debate a greater sense of urgency, however, then it might even turn out to be a positive development.`` Paul Ashworth, chief U.S. economist, Capital Economics

Inflation reading expected to rise Expect Statistics Canada to tell us tomorrow what we already know, that rising gasoline and food costs continue to push up inflation.

Economists believe the agency will report that the overall inflation rate, the so-called headline rate, hit 2.7 per cent or 2.8 per cent in March, and that prices climbed by about 0.5 per cent on a monthly basis from February. Core inflation, which strips out volatile measures, is expected to rise to about 1.2 per cent.

If overall annual inflation does come in at 2.8 per cent, that would mark the fastest pace in 2 1/2 years, and up from 2.2 per cent in February. Economists note that the harmonized sales tax has added fuel to that, and the impact of the HST will begin to drop out around the middle of the year. That doesn't mean we're not paying it, though.

The Bank of Canada said just last week that it expects the annual inflation to reach as high as about 3 per cent this quarter.

"Infl ation in March likely hit the highest level seen in over two years, as Canadian households felt the pinch of soaring pump prices," said CIBC World Markets.

"Some airlines also hiked base ticket prices and added fuel surcharges, hitting travellers' wallets ... Going forward, consumers won't get much relief, with headline inflation set to stay this lofty in [the second quarter] although softer energy prices could reduce the bill for consumers later in the year."

UBS raises oil price forecast There are mixed messages on the state of the oil market.

UBS AG strategists said late last week they were raising their three-month trading range for crude prices, to $100 to $130 (U.S.) a barrel from their previous call of $85 to $120. They also boosted their 12-month forecast by $5 a barrel to $110.

"The crude oil market is facing challenging times," strategists Dominic Schnider and Giovanni Staunovo said in a new report.

"On the supply side, the geopolitical uncertainty in Libya remains unsolved. Given the latest oil supply data, we think more than 1 million barrels per day has been taken off the global oil market. Given OPEC's initial spare capacity of slightly more than 5.25 million barrels per day, on paper this should not have led to such a strong price increase. However, one cannot increase supply overnight by more than 1 million barrels per day.

"News flow suggests Saudi Arabia plans to increase its oil rig count during [the second half of]2011 and 2012 and to accelerate activity at Manifa, a major oil field in the country, in order to create additional spare oil production capacity. For the short term, this is not enough. To calm the market, more supply is needed or a reduction in buoyant demand growth. Unfortunately, political risks are mounting with elections in Nigeria (producing 2.2 million barrels per day). With crude oil consumption growing by more than 3 per cent year on year, crude oil prices must stay high to balance demand and supply."

Today in Kuwait, OPEC Secretary-General Abdalla Salem El Badri told reporters there is sufficient supply of crude, and thus no need to boost production.

And yesterday, the Saudi oil minister, Ali al-Naimi, said his country, the biggest exporter in the world, had recently cut production, and that the market was oversupplied.

"The market is overbalanced," he said, according to Reuters

"... Our production in February was 9.125 million barrels per day, in March it was 8.292 million barrels per day. In April we don't know yet, probably a little higher than March. The reason I gave you these numbers is to show you that the market is oversupplied."

Vancouver looking frothy? While observers believe Canada's housing market is tame, they're keeping a wary eye on Vancouver, where some of the more expensive neighbourhoods are skewing the national picture.

"With the rush to buy ahead of the mortgage rule change concentrated in the Vancouver area, and that region also leading the price increase at the national level, the area remains a key wild card to watch in the coming months," said economic analyst Leslie Preston of Toronto-Dominion Bank, referring to data Friday that showed home sales in March little changed from February.

"But apart from that region, the housing market remains in a well-balanced position on the whole, and with activity likely to ebb as interest rates start rising in July, we don't see home prices outpacing inflation over the next couple of years."

As Globe and Mail real estate writer Steve Ladurantaye has reported, price gains in Canada's housing market should begin to moderate this month, following a rush to beat changes to mortgage rules that came into effect in mid-March.

On Friday, the Canadian Real Estate Association reported that sales of existing homes inched up by just 0.1 per cent in March from February, though first-quarter sales, which included the rush, climbed 4.5 per cent from the fourth quarter of last year.

Seasonally adjusted, average prices rose 0.7 per cent last month. Unadjusted and compared to last year, prices are up almost 9 per cent. In the first quarter of the year, economists noted, prices were skewed by the expensive neighbourhoods of Greater Vancouver. Strip those out, and first-quarter prices are up by 4.3 per cent.

CREA's chief economist, Gregory Klump, said record sales of multimillion-dollar homes in Richmond and Vancouver West, largely condos, pushed up the averages for the city, province and country.

"Aside from the city with tiger blood, average prices rose a much more modest 4.3 per cent year-over-year last month, though that was up from 3.4 per cent in February," said Douglas Porter, deputy chief economist at BMO Nesbitt Burns, noting that prices in Vancouver are now up by almost 30 per cent from a year ago.

"Fully 22 of the 25 cities managed to post increases from a year ago (Calgary, Edmonton and Victoria are the exceptions) despite soft sales," Mr. Porter added in a research note after the CREA numbers were reported.

"Prices are supported by moderate new listings nationally - down 10.3 per cent year-over-year last month. The market remains largely balanced, and the months' supply of unsold homes held steady at a non-threatening 5.6 in March. The average Canadian house price rose to an all-time high of $366,000 last month. But, again, note how Vancouver dominates these figures - ex-Vancouver, the average national price would be 11 per cent lower than the reported figure ($327,000). While there is plenty of chatter about the possibility of a severe correction in Canadian housing, the risk looks highly concentrated in geographic terms."

In God - and returns - they trust Where finances are concerned, the Church of England is certainly doing something right.

The Church Commissioners fund, a closed fund that takes in no new money, says it posted a 15.2-per-cent return on its investments last year, adding it has now outperformed others in its group over the past 10- and 15-year periods.

"Despite challenging economic times for both the Church and wider society, the Commissioners - who contributed more than £200-million in 2010 towards the cost of maintaining the mission of the Church of England - grew their fund to £5.3-billion (from £4.8-billion at December 31, 2009)," the group said in a statement Friday.

"Today's results show that the Commissioners are able to distribute £26-million more each year to the Church than if their investments had performed only at the industry average over the last 10 years, while pursuing their policy of maintaining the real value of the fund."

The Church Commissioners group was formed by the 1948 marriage of the Ecclesiastical Commissioners and the Queen Anne's Bounty charity. The group invests in a range of assets, along ethical guidelines, and pays for clergy pensions (to the end of 1997), support for poorer dioceses, and some mission work.

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