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Cee money czech cbank struggles to coax wary public to spend


The biggest challenge for the Czech central bank these days is to make people like Milada Malkova, a 65 year-old teacher, spend more. She is one of the four-fifths of Czechs who, according to a recent survey, have been forced to cut back on spending because of the country's longest recession on record. The central bank believes that weakening the crown against the euro can boost exports and - so it hopes - end expectations of falling prices and so encourage people to spend. But with a pro-austerity government that has hiked taxes on everyday goods, falling demand from the Czechs' biggest export market, the euro zone, and record high unemployment, Czechs like Malkova are not buying."I will not start spending more, even if there is a threat that prices will go up, because I simply cannot afford it," said Malkova who continues to work while tapping her regular retirement pension, to improve her finances. With interest rates already near zero and excess liquidity on the interbank market, the bank is now trying to talk the crown currency weaker, pushing it down about 4 percent since September, without direct interventions. The idea is that consumers who fear higher prices in the future will spend more, but that theory does not reflect the mindset of Czechs who are thrifty by reputation. And it is this paradox that may eventually stay the bank's hand."In the present situation when real consumption is falling, foreign exchange interventions could have, at least in the short term, a negative impact," researchers from Ceska Sporitelna wrote. "The fastest effect of interventions could be, de facto, a weakening of real household consumption."EMPTY THREAT

The central bank has tried for months to encourage Czechs to spend, either by telling them that there is nothing wrong with the economy or that they should not expect a more benign price outlook."People should not get the feeling that prices will fall each year," central bank Governor Miroslav Singer said in an interview for weekly Euro on March 4. He also said in a presentation released on March 1 that the government's fiscal consolidation was one of the causes of the economic recession. But the bank's efforts have not so far had a tangible effect. Instead of spending, Czechs have increased their bank deposits at double the pace of new loans for more than a year, despite the fact that interest rates on deposit bank accounts have sunk to zero. The result is household consumption that fell 3.5 percent in 2012, deepening the country's year-and-a-half long recession. Real estate prices have been sliding since early 2009."Whenever anyone up there (policy makers) says now is a good time to spend, it's never true. It's just a headline. I don't believe them," said Jan, a middle-aged worker in Prague, who did not want to give his surname. "I will spend when I have money."

Data on Monday showed inflation relevant to the central bank's monetary policy - price growth adjusted to exclude the first-round effect of changes to indirect taxes - was 0.9 percent in February, below the central bank's tolerance band of 1-3 percent. Inflation has been slowing since a peak of 3.8 percent in March 2012 following an increase in value added tax as of January. The bank aims to keep price growth close to its 2 percent target. With that backdrop, some economists say that interventions would have the opposite effect from that desired by the central bank desires."Our analysis shows that in the first several quarters interventions would have either zero or slightly negative impact on GDP and household consumption ... because households' real disposable incomes would fall," said Marek Drimal, an economist at Komercni Banka.

"It is not a solution that would help the Czech economy in the short term. We need growth. The crown on its own, if it is weaker, will not help households."HANDS TIED? Following what many economists have criticised as a communications mis-step in February, when the central bank said the need to intervene had become "less urgent", Singer and his rate-setting colleagues have again been talking down the crown. The bank's forecast implies it would have to intervene in the second half of the year, later than seen in an earlier outlook. But some economists say the bank, loath to trigger a consumer backlash, will show extreme caution."A concern that there can be a negative impact on demand may make some on the central bank's board reluctant to support interventions," said Ceska Sporitelna analyst Martin Lobotka. An accentuation of the already evident reluctance to spend would further depress consumption, which could further extend the longest recession since records started in 1996. The bank has also argued a weaker crown should increase manufacturing by cheapening the exports which account for about 75 percent of economic output, creating more jobs and investment. But economists point to data showing the link between the crown exchange rate and export activity has weakened in past years as exporters use "natural hedging" with activities like using imports for further production or paying bills in euros."It is apparent that weakening of the crown is not linked with falling export prices abroad ... which diminishes the positive impact of the weaker crown on competitiveness," said Jaromir Sindel, chief economist at Citibank in Prague.

Germany needs green energy master plan study


* Shif in power systems to cost 335 billion euros* Difficult cash calculations deter investors* If doesn't act fast, Germany might turn net importerFRANKFURT, June 25 Germany needs a master plan that brings together central and local government policy and provides certainty for investors and project firms if it is to find the $420 billion needed to fund a radical shift towards green power, a study said on Monday. HypoVereinsbank (HVB), a unit of Italy's UniCredit , put the cost of what Germans call the "energy U-turn" - its move to switch off nuclear plants, increase wind and solar power generation and improve power grids - at 335 billion euros ($420 billion). Europe's biggest economy needs substantial investment to build up renewable capacity and connect it with the nine countries on its borders, it said. Investments in plant and infrastructure would amount to 85 billion, while 250 billion would be needed for support payments to renewable energies, the study estimated.

"In core areas of the energy U-turn, project financing is currently only possible to a limited extent, because revenue and expenditure cannot be sufficiently gauged," HVB board member Lutz Diederichs said in a statement."This makes the calculation of cash for the projects difficult," he added. By 2020, 35 percent of all Germany's electricity is meant to come from renewable resources, compared with 20 percent now. Germany also has decided to phase out of nuclear power completely by 2022, faster than originally planned, in the wake of the Fukushima nuclear disaster. The reactors had provided 23 percent of its power supply in 2010.

The HVB study, done jointly with the HWWI economic research institute in Hamburg, said a master plan was needed to bring together central government and state strategies, to ensure the integration of new power sources and to clarify the jobs to be undertaken by private versus public partners. One obstacle to obtaining financing for renewable projects is that income from wind and solar can be unpredictable because it relies on weather. For offshore wind farms in particular, questions also remain over liabilities for technical problems and maintenance as well as the lack of cable connections to onshore grids.

HVB recommended that some mechanism be found to stabilise cash flows from projects that account for at least half of the overall investment volume. HVB said new international banking rules, dubbed Basel III, would make lending to renewable energy and grid projects, which tend to be for the long term and involve high risk, even more difficult and expensive. Basel III requires banks to improve their risk-management systems and hold more capital as a safety buffer in case of economic or financial downturn, raising the bar for outlays on uncertain risks. HVB recommended that banks, as well as making loans, should act as intermediaries to help raise funding from investors for projects."A successful implementation also hinges on acceptance by the population. So far, there are big discrepancies between the public perception and the realities of the energy shift," Michael Braeuninger, lead author at the HWWI, said. The authors were also concerned about the need for speed in creating storage for power and in building up transmission networks in time to prevent Germany from having to import more power.

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