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Price of ECB plan 'surrender of fiscal sovereignty'

These are stories Report on Business is following Friday, Sept. 7, 2012.

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Draghi's plan
Global markets are still basking in the glow of Mario Draghi's plan to save the euro, but the European Central Bank chief's bond-buying scheme is far from a certain winner at this point.

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As our European correspondent Eric Reguly reports, Mr. Draghi has unveiled a plan to buy government bonds of distressed governments in the 17-member euro zone, but tied to that would be conditions on reform and austerity. This would help push down the unbearable borrowing costs of countries such as Spain and Italy.

The plan will certainly buy more time in this long-running crisis, but there's a lot at stake here. First, there's the austerity and growth. And in a country such as Spain, for example, where one in four people can't find a job, that spells more trouble.


"ECB interventions will not remove the threat that the negative feedback loop between fiscal austerity and poor economic growth performances could make the adjustment processes unworkable," said senior economist Martin Schwerdtfeger of Toronto-Dominion Bank.

"This threat is what ultimately feeds the fear of a break-up of the euro area, and therefore is the driving force behind the sovereign yield spreads. Ultimately, decisive action towards more integration by governments is required, but we know by now that that is a slow process."

There's also the issue of how far governments will go, notably Spain.

"In effect the ECB has thrown the ball back to the politicians by saying the help is there if you want it, but there is a price to pay for such help," said senior analyst Michael Hewson of CMC Markets in London.

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"It is now up to the same politicians not to waste it, but given previous experience of European politicians the omens aren't promising," he said in a research note today.

"The price or 'strict and effective conditionality' is surrender of fiscal sovereignty in return for aid, which neatly passes the baton back to Spanish PM Rajoy to ask for aid. Any delay in doing so, or arguing about terms and conditions could well see the recent drop in Spanish yields quickly reverse. As we have seen at various stages of this crisis, doing the right thing doesn't always equate to what politicians think is politically acceptable."

Labour markets hurting
Unemployment remains the scourge of the post-crisis era.

The U.S. economy created just 96,000 jobs in August, The Globe and Mail's Kevin Carmichael reports from Washington,  a disappointing number. The unemployment rate dipped to 8.1 per cent, but many people gave up looking for work.

Today's report could help prompt the Federal Reserve into another round of quantitative easing.

"The modest 96,000 increase in U.S. non-farm payrolls in August only increases the probability that the Fed will launch QE3 next week and it isn't going to help President Obama's re-election chances either," said Paul Ashworth of Capital Economics.

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At home, Statistics Canada said today the economy churned out 34,000 jobs last month, but that's nowhere near as good as it looks.

It was entirely due to a surge in part-time employment, while the number of full-time jobs slipped by more than 12,000, with a poor showing by the building industry. The jobless rate held at 7.3 per cent, The Globe and Mail's Tavia Grant reports, and is expected to remain above 7 per cent at least through the end of next year.

"The report is worse than it looks, with employment propped up by part-time positions, with significant declines in cyclical industries like construction and manufacturing," said senior economist Krishen Rangasamy of National Bank Financial.

"Private sector hiring over the eight-month period this year has also been softer than last year," he added "... All told, the details of the report warrant caution about the real economic picture in Canada."

Glencore sweetens bid
Glencore International PLC today sweetened its offer to acquire Swiss miner Xstrata PLC, bowing to pressure from a key shareholder who said the initial $34-billion was too low, The Globe and Mail's Pav Jordan reports.

Xstrata, already 34-per-cent owned by the global commodities giant, said the new proposal would boost the merger ratio to 3.05 Glencore shares for every Xstrata share, from the previous 2.8 shares. The new bid came just before a scheduled shareholder vote that was expected to see Xstrata investors reject the deal. That vote has now been postponed.

Glencore's offer to acquire Xstrata hit a road block in recent months after one of its top shareholders, Qatar Holdings, a global investment house founded by the Qatar Investment Authority, said the offer was too low.

Entertainment One strikes deal
Entertainment One has struck a deal to  buy Alliance Films, adding 11,000 movies to the Toronto-based company's library and making it one of the largest independent film distributors in the world.

The company said today it would spend $174-million to buy Alliance from Goldman Sachs Group Inc. and Investissement Quebec. It will also take on the company's $51-million debt, The Globe and Mail's Steve Ladurantaye reports.

Distribution companies have been the target of takeovers across the world over the last year, as Internet-based companies such as Netflix create new markets for back catalogues.

Lululemon posts higher profit, revenue
Lululemon Athletica Inc. posted a 33-per-cent jump in second-quarter revenue today and a hefty jump in profit.

The yoga retailer's revenue climbed to $282.6-million (U.S.) from $212.3-million a year earlier as same store sales, a key measure in the industry, jumped by 15 per cent.

Profit rose to $57.2-million or 39 cents a share from $38.4-million or 26 cents.

Lululemon is also now projecting third-quarter revenue of $300-million to $305-million and a percentage gain in same store sales "in the low to mid-teens." Earnings per share are forecast at 34 cents to 36 cents.

And for the year, the Vancouver-based company now expects revenue of up to $1.4 billion, and earnings per share of $1.76 to $1.81.

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More


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