1/ Currency wars threaten global economic recovery

By Russell Hotten Business reporter, BBC News Currency manipulation is worsening global economic imbalances Manipulating their currencies has become governments' new weapon in the battle for economic recovery. In recent months a string of countries, from Japan to Switzerland, Colombia to Israel, have tried to drive down the value of their currencies. Some experts call it "competitive devaluation". Others, though, argue that it is nothing short of a currency war - and far from boosting global recovery, it threatens to undermine it. So concerned are policymakers that the issue looks set to dominate talks on Friday at a meeting of finance ministers and central bankers. Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), which hosts the meeting in Washington, set out the concerns in the Financial Times on Tuesday. Continue reading the main story Global Economy

What now for Greece? Turmoil and you Factors behind market turmoil Euro crisis origins Watch

"There is clearly the idea beginning to circulate that currencies can be used as a policy weapon. "Translated into action, such an idea would represent a very serious risk to the global recovery," he said. Yen action Last month, the Bank of Japan began a massive sale of yen and bought dollars instead. The aim was to weaken the yen's value against the dollar and so make goods exported by such firms as Honda and Panasonic cheaper. It also helps boost companies' profits when they convert foreign earnings back into yen (although this conversion adds to the upward pressure on the yen's value). Japan's ailing economy is dependent upon an export-led recovery, and when the yen hit a 15-year high against the dollar Tokyo, felt it had to act. But currency intervention does not happen in isolation. (And as the chart below shows, the yen is broadly back to where it was before the intervention). Japan's action led to a rise in the dollar's value - a problem for the US's own export-led recovery. America is in dispute with China, with Washington accusing Beijing of dampening the yuan's value and making US exports more expensive. Any rise in the dollar, caused by Japan's intervention, magnifies US exporters' gripes with Beijing. Tit-for-tat Continue reading the main story Start Quote The irony is that the Federal Reserve created all this liquidity

End Quote Joseph Stiglitz Nobel laureate Unilateral action by one central bank can, therefore, set off or fuel disputes in other parts of the world. In this game of three-dimensional chess, countries are forced into tit-for-tat action. On 27 September, Brazil's finance minister Guido Mantega warned that the "international currency war... threatens us because it takes away our competitiveness". Brazil would not stand idly by, he said. And, so, the cycle of currency intervention threatens to continue. For Charles Dallara, head of the Institute of International Finance, which represents the world's big banks, the issue risks setting off a new round of protectionism. In a letter to the IMF, he urges the world's leading economies to get a grip on the problem. "Addressing exchange rate issues should also be a key priority for multilateral negotiations among a core group of major economies," Mr Dallara wrote. But the major economies seem in no mood for compromise. The US said this week that the IMF "has a very important role to play" in trying to get a multilateral cooperation on currency intervention. Yet US Treasury Secretary Timothy Geithner has vowed to enlist other G20 nations to pressure China to let its currency rise. Continue reading the main story Japanese Yen v US Dollar LAST UPDATED AT 26 SEP 2011, 00:46 GMT He appears to have support in Europe. Jean-Claude Juncker, chairman of the eurozone group of finance ministers, said: "China's real effective exchange rate remains undervalued... The Chinese authorities do not share our view." In return, comments from policymakers in Beijing suggest China is irritated at foreign interference in what it regards as an internal matter. Hot money Although America sees itself as a victim of global currency intervention, many people argue that its own policies are the cause. The governor of Taiwan's central bank, Perng Fai-Nan, said last month: "The US printed a lot of money, so there's a lot of hot money flowing around. We see hot money in Taiwan and elsewhere in Asia. "These short-term capital flows are disturbing emerging economies," he said. Joseph Stiglitz, the Nobel economics laureate, agrees: "The irony is that the [Federal Reserve] created all this liquidity... It's doing nothing for the American economy, but it's causing chaos over the rest of the world." Whether or not the US started the problem, most observers believe it has the lead role in trying to resolve it. Dr Paola Subacchi, research director for international economics at Chatham House, in London, said: "Rather than Chinabashing, the US should lead efforts to co-ordinate exchange rate policies and put the issue on the global agenda... The US sets the pace on currency issues." But a resolution will not happen overnight, and certainly not at this week's IMF meeting. What's more, the problem is likely to get worse before it gets better

2/ Coffee may prevent depression, scientists say

By Michelle Roberts Health reporter, BBC News Coffee must contain caffeine to have the effect, say the researchers

Continue reading the main story Related Stories

Is drinking coffee bad for you? How much is too much coffee?

Women who drink two or more cups of coffee a day are less likely to get depressed, research suggests. It is not clear why it might have this effect, but the authors believe caffeine in coffee may alter the brain's chemistry. Decaffeinated coffee did not have the same effect. The findings, published in Archives of Internal Medicine, come from a study of more than 50,000 US female nurses. The experts are now recommending more work to better understand the link. And they say it is certainly too soon to start recommending that women should drink more coffee to boost mood. Caffeine lift The Harvard Medical School team tracked the health of the women over a decade from 1996 to 2006 and relied on questionnaires to record their coffee consumption. Continue reading the main story Start Quote This fits nicely with a lot of the previous work and what we know about caffeine and the brain End Quote Prof Bertil Fredholm Karolinska Institute Just over 2,600 of the women developed depression over this time period. More of these women tended to be non- or low-coffee drinkers rather than frequent coffee consumers. Compared with women who drank one cup of caffeinated coffee or less per week, those who consumed two to three cups per day had a 15% decreased risk of developing depression. Those who drank four or more cups a day cut their risk by 20%. Regular coffee drinkers were more likely to smoke and drink alcohol and were less likely to be involved in church, volunteer or community groups. They were also less likely to be overweight and have high blood pressure or diabetes. Even after controlling for all of these variables, the trend of increasing coffee consumption and lower depression remained. Mounting evidence The researchers say their findings add weight to the work of others which found lower suicide rates among coffee drinkers. They suspect caffeine is the key player - it is known to enhance feelings of wellbeing and energy. Continue reading the main story How much caffeine?

There is no recommended level a person should consume But pregnant women are advised to consume less than 200mg a day One mug of instant coffee: 100mg One mug of filter coffee: 140mg One mug of tea: 75mg One can of cola: 40mg

One 50g bar of milk chocolate: about 25mg

Source: NHS Choices And it has a physical effect on brain function and transmission by blocking certain chemical receptors, like adenosine. But more research is needed to show if this might mean it is useful for warding off depression. Alternatively, it might be that people with low moods chose not to drink coffee because it contained caffeine, point out the researchers. One of the common symptoms of depression is disturbed sleep, and caffeine can exacerbate this because it is a stimulant. Too much caffeine can also increase feelings of anxiety. Prof Bertil Fredholm, an expert in pharmacology and physiology at Sweden's Karolinska Institute, said the findings were reassuring for coffee-lovers. "This fits nicely with a lot of the previous work and what we know about caffeine and the brain. It blocks adenosine, which produces a similar effect to increasing dopamine production. And it's becoming increasingly clear that the dopamine-rich areas of the brain are much more important in depression that previously thought. "Despite valiant efforts to show how dangerous coffee is for us, it is not proving so. "This removes yet another anxiety regarding caffeine use. Drunk in moderation, the evidence is strong that it is not one of the things we do that is going to damage your health."

3/ Economy enters 'dangerous phase'

Latest UK cut Italy downgrade Flanders Domino effect

By Kabir Chibber Business reporter, BBC News Protests in Rome over the austerity cuts, the latest in a series of protests across Europe The sovereign debt crisis continues to unfold in Europe, with every country appearing to get sucked in one by one. Three nations in the eurozone - the 17 nations that use the euro - have been recipients of bailouts as attempts to solve the crisis keep stalling. Italy became the latest to feel the domino effect of the markets when its debt rating was lowered, the latest in a series of downgrades. Greece, Spain, the Irish Republic and even Cyprus have also had their ratings cut this year. The future of the euro is being questioned in a way it never has since 1999. Which countries have fallen, and which are feared to be next? GREECE The problem: Greece's huge debts, about 340bn euros (297bn; $478bn). In late 2009, after months of speculation and sovereign debt crises in Iceland and the Middle East, Greece finally admitted its debts were the highest in the country's modern history. Continue reading the main story Europe economy essentials

The domino effect in Europe What is a rating agency?

Q&A: Greek debt crisis How recession took shape What is a bond? How euro crisis unfolded What now for euro project? Is euro crumbling? (Video) In graphics: Eurozone crisis

Since then, a 110bn-euro bailout was passed by the eurozone last year and a second bailout of roughly the same size was agreed earlier this year - but not yet passed. Most observers remain highly sceptical of Greece's ability to ever repay its huge mountain of debt. Talk persists of an unprecedented default or of Greece leaving the eurozone. Because of the interconnectedness of the European economy, this would cause huge losses for French and German banks. Thus, though Greece has been bailed out, fears of it running out of money continue to plague investors. International credit markets remain wary of Greece because of its sovereign debt rating. Ratings: Greece is now considered to be "junk" by the ratings agencies, meaning it has a very high chance of defaulting. S&P has cut its debt seven times since 2009, from A to CC, the third-lowest rung on its rating scale. S&P: CC Moody's: Ca ITALY The problem: Italy has the highest total debt in the eurozone, amid stagnant growth. Continue reading the main story CREDIT RATINGS EXPLAINED A ratings agency is a private-sector firm that assigns credit ratings for issuers of debt, ranking its likelihood of paying back the money. This affects the interest rate. Ratings are divided into investment grade and sub-investment grade, and borrowers choose according to the level of risk they are willing to accept. A credit downgrade can make it more expensive for a government to borrow money. Of the agencies, Standard & Poor's is the oldest, started in 1860 to rate the finances of US railroads. What is a ratings agency? In the summer, the country was charged record levels to borrow, which prompted renewed calls to pass spending cuts. The alternative, selling more debt, was unsustainable at rates that reached 6%. Rome laid out 60bn euros of austerity measures and aims to balance its budget by 2013, but markets have been concerned over its growing debt load in relation to GDP - the second-highest behind Greece in the eurozone. If Italy was to be bailed out, few think that the eurozone (or Germany in particular) could actually afford it. But Italy has the advantage of having most of its debt owed to its own people rather than external investors. This buys it more breathing room than, say, Greece. Ratings: Italy was last triple-A in 1995. Since then, its rating has been fairly stable near the top of the investment grade rankings.

S&P: A Moody's: Aa2 SPAIN The problem: The housing boom turned to bust, leaving the country's banks loaded with bad debt and the highest unemployment rate in the eurozone. Spain has also seen record borrowing costs recently, forcing its government to adopt numerous austerity measures to get its finances under control. Spain, like Italy, is considered too expensive a proposition for the eurozone to realistically bail out. This is why the eurozone has tried to help lower its cost of borrowing, rather than give it loans as it did to its neighbour, Portugal. Ratings: Last at the highest rating in 1992, the Iberian nation has been cut twice since 2009. S&P: AA Moody's: Aa2 FRANCE The problem: The country's banks bear a heavy exposure to Greek debt. While France's public finances have not yet been questioned heavily by the market, its banks have seen sharp falls on the stock market. In September, Moody's downgraded Credit Agricole and Societe Generale after reviewing their exposure to Greek debt. Credit Agricole and Societe Generale have seen their share prices fall by about two-thirds since February, while BNP has fallen by more than half. France has also announced plans to cut spending by 45bn euros over the next three years. Ratings: France was given the top rating by Moody's in 1988, and kept it ever since, despite anaemic growth. S&P: AAA Moody's: Aaa GERMANY The problem: Most of its neighbours are broke. Unlike many of its neighbours, Germany enjoyed vigorous economic growth - GDP rose by 3.6% in 2010. Unemployment is lower than before the 2008 crisis. And the government plans to cut the budget deficit by a record 80bn euros by 2014. While that growth has slowed, the main problem is that Europe's largest economy is the biggest contributor to the bailout fund used to help stricken nations. And Germany's banks have a heavy exposure to debt from Greece, Europe's biggest headache. This means in the event of a Greek default, Germany would probably have to bail out its own banks. But having taken the lead in bailing out three nations - Greece twice - how many more can the country afford? Ratings: Following reunification, the country was given the highest possible creditworthiness by S&P in 1992 and Moody's in 1993.

S&P: AAA Moody's: Aaa UK The problem: UK banks have a heavy exposure to Irish debt. Other than that, the UK has been relatively unscathed, while its eurozone neighbours endure turmoil. The coalition government has announced the biggest cuts in state spending since World War II. UK gilts are viewed as one of the safest investments in the world, with the country's borrowing costs falling to recent lows. But the situation remains precarious. The country's budget deficit was 10.3% last year - this is just behind Greece, greater than Spain's and more than triple that of Germany. Ratings: In 2009, S&P lowered its outlook on British debt to "negative" from "stable" for the first time since the agency started rating its public finances in 1978. But the triple-A rating has been affirmed since 1993. S&P: AAA Moody's: Aaa IRISH REPUBLIC The problem: The country's banking system collapsed. The country's biggest banks were taken under government control in the financial crisis and recapitalised. The cost of doing that has been about 70bn euros. The Irish received a bailout worth 85bn euros from the eurozone and IMF, then passed the toughest budget in the nation's history. Since then, the IMF has said the Irish Republic is "showing signs of stabilisation" and there is a sense that the worst has now passed. Ratings: The Irish Republic held the highest triple-A rating as recently as 2001. S&P has cut it five times since 2009. S&P: BBB+ Moody's: Ba1 PORTUGAL The problem: A shrinking economy straining its budget. The country has been the third to get a bailout, worth 78bn euros. The previous government fell after failing to pass austerity measures, which the subsequent government had passed. Investors have since moved on to ongoing worries about Greece, Spain and Italy. Ratings: Portugal has been cut four times since 2009. It was once triple-A, way back in 1993. S&P: BBBMoody's: Ba2

4/ Has the iPod made us anti-social?

By Tom de Castella BBC News Magazine In today's Magazine

Country music and economic woes ID technology marks anonymity end Watch India's call centre growth stalls Should killers on death row get a last meal choice?

It's 10 years since the iPod was unveiled, but has the MP3 player turned us all into headphone-wearing, anti-social people? It sounds like a dystopian vision. Half of humankind wired up to a parallel universe that leaves them oblivious to their surroundings and fellow man. Those used to travelling on public transport will recognise the scene - a carriage full of commuters sprouting white wires that plug into the ear with little white buds. In the car, children listen to their own music on headphones. Once upon a time footballers travelling to away games would bond over a game of cards on the team bus. Now they step off the coach with headphones on, as if their journey has been a solitary exploration of a favourite playlist or movie. Many runners, cyclists and even swimmers train with headphones. The personal stereo has been around for three decades. But the iPod - by far the biggest selling MP3 player - has taken it well beyond the limitations of its bulky earlier equivalents, like the Sony Walkman or Discman. Since Apple unveiled its first iPod in October 2001, promising "1,000 songs in your pocket", the company has sold more than 300 million of them. Continue reading the main story Start Quote It was like a dream... you are putting a soundtrack to life so that it becomes like a film End Quote Andreas Pavel Inventor of personal stereo In 2005 the media greeted the revelation that President George W Bush owned an iPod with surprise. Now that the iPod's tentacles creep through society, such news would be greeted with a shrug. By 2007 over half of Western city dwellers were using an iPod or MP3 player, says Prof Michael Bull, author of Sound Moves: iPod culture and urban experience. It has gone beyond the anti-establishment youth market of the personal stereo to embrace everyone from children to grandparents. And research suggests that when people switch to an MP3 player, they listen to music for twice as long as before, Prof Bull says. Leander Kahney, editor of Cultofmac.com, based in San Francisco, argues the iPod has enriched people's lives, allowing them to escape the daily grind. "It's been a great boon to people on the way to work. There's nothing like music to be a mood lifter. The iPod is a mood drug." And despite attempts by competitors like Microsoft to launch their own versions, Apple's product has not had significant opposition, never slipping below 70% market share, Kahney notes. Here Thierry Henry has his headphones in the "you may talk to me" position German-Brazilian inventor Andreas Pavel can be regarded as the spiritual father of headphone culture, having invented the first personal stereo in the 1970s. Pavel's initial aim was to free recorded music from the yoke of the household music system. But when he first tried out his prototype - "this magic combination of sound source and headphones" - he experienced something transcendental. "It was like a dream. It is the pleasure of the music combined with the vision of your environment. You are putting a soundtrack to life so that it becomes like a film." In those days he was laughed at for wanting to move around while listening to music on headphones, he recalls. And Sony told him his prototype was too expensive and wouldn't find a market. But they later went on to develop the Walkman. In 2003, after 23 years of legal negotiations with Sony's lawyers, the Japanese electronics firm agreed to settle out of court.

So ubiquitous is headphone culture today that it has become a sort of cultural shorthand - often for a spoilt, selfish generation who lack civic values. Continue reading the main story The impact on our ears By Andrew Goodwin, outreach adviser at Deafness Research UK There's no doubt we're sitting on a hearing timebomb. The kind of noise damage that went out with the shutting down of heavy industry in the 1970s, is now coming back. A third of 16 to 34 year-olds listen to their MP3 player for an hour a day, while 14% listen for 28 hours a week. Many of them listen at maximum volume. When we tested MP3 players we found most went up to 100 decibels, 10 decibels higher than a pneumatic drill. Some went as high as 120 decibels. We're going to have tens of thousands of people who'll need hearing aids in their 40s and 50s rather than their 60s and 70s. Part of the problem is that people listen to their music on public transport where there's horrendous background noise. And the ear buds that Apple and other manufacturers provide are cheap, horrible things. If you wear headphones that go over your ears it blocks out the background noise and means you don't need to have the music so loud. When British sailors were taken prisoner by the Iranians in 2007, Able Seaman Arthur Batchelor admitted he had "cried like a baby" after his iPod was confiscated by his captors. He was branded a national embarrassment by newspapers. In the same year, a Muslim juror was discharged from a murder trial after being caught listening to her iPod under the hijab. But the most visceral concern is that the iPod is making people anti-social. It's not just the tinny noise that leaks out of the puny ear buds but the barrier the device erects between people. Telegraph columnist Bryony Gordon says young people have grown up to be "plugged in" to their iPod, rather than relating to their surroundings. "I wouldn't stop someone wearing those white wires to ask for directions. It's like they're putting up a big closed sign," Gordon notes. Prof Bull's interviews with iPod users confirm this perception. Many iPod users told him they resented people interrupting their listening to talk to them. The iPod has thus created a minefield over how to behave. When entering a shop, should the user take off their headphones to talk to a sales assistant? Should they take one out? Or leave them both on and turn the volume down? Debrett's etiquette adviser Liz Wyse says that both of them must come out. "It's very belittling to a shop assistant if you can't be bothered to take your headphones out. And the half on, half off, look is compromised - it's like you're going to put them back in any minute." Many people wear headphones in circumstances where they would not anyway want to be disturbed But in a reflection of what a battlefield public space has become, she defends the iPod as a means of defence against a still worse public nuisance - the mobile phone. "An iPod is a brilliant thing on trains. Otherwise you're forced to listen to people's loud conversations on their mobile phones." Psychologist Oliver James says the reluctance to take one's headphones out shows the "self-absorbed and atomised" state that people have got themselves into. "It's almost like madness. Will I come out of my bubble? How much of a compromise will I make to my external reality?" But the fact is, it fits our modern desires, says Prof Bull. People have never talked much on trains - hence the famous commuters' trick of hiding behind their copy of the Daily Telegraph. The iPod is merely amplifying that trend. "It can be lonely travelling through public space and using music warms it up," he says. The downside is that while the individual feels warmer - and has the perception of being safer despite not being able to hear an approaching assailant the public realm becomes a less social, "chillier" space. The MP3 player dominates the Western world But the iPod hasn't caused this move from public to personal space, it is just reflecting the trend, Prof Bull argues. Nowadays people work out to their own playlists in the gym rather than hearing the same tunes. But that's not to say people are becoming anti-social. "The actual presence of people next to you in the street is not recognised as social any more. We get our intimacy from nearby loved ones or people who are absent over chat sites and social media," he says.

Pavel says he never set out to isolate people from the outside world when he made that first rudimentary personal stereo. Indeed he recalls how his patent suggested a non-recording microphone so that users could hear the world around them during the music. And there were to be up to four inputs so that people could listen in groups. Both were innovations that Sony did not adopt. In the end, it's a trade-off, Pavel believes. Sometimes we want privacy and escapism, other times interaction with our fellow man. "It is somewhat isolating. But when I'm on the bus I don't necessarily want to talk to people. I want the aesthetic involvement of listening to music."

5/ Shares rise on growing hopes for a eurozone rescue plan

Global Economy

What now for Greece? Turmoil and you Factors behind market turmoil Euro crisis origins Watch

Global shares have risen strongly on growing hopes that eurozone leaders and the International Monetary Fund (IMF) will agree a comprehensive package to solve the eurozone debt crisis. The optimism follows after talks at G20 and IMF meetings at the weekend. A number of ideas were reportedly discussed, including boosting the size of the eurozone bailout fund. Led by banks, Germany's Dax index was up 4.9%, France's Cac 4.4%, the UK's FTSE 3.4%, and the US Dow Jones 2%. Earlier, Asian stocks had also risen, with Japan's main Nikkei index ending up 2.8%. Strengthening banks? The increased optimism comes despite European Union officials stressing that no grand plan of action was agreed at the weekend. Investors are instead focusing on what was reportedly proposed at the meetings, which is also said to have included strengthening big European banks that could be hit by any defaults on national debt obligations. Another reported proposal is a possible 50% write-down of Greek government debts. Continue reading the main story Start Quote The optimists have taken the forefront on hopes that we could see European politicians getting to grips with the current situation over the coming weeks. But there are still a lot of concerns End Quote Keith Bowman Hargreaves Lansdown However, late on Monday German Finance Minister Wolfgang Schaeuble cast doubt on the suggestion that the eurozone bailout fund, the European Financial Stability Facility could be increased. He said: "We are giving it the tools so it can work if necessary. Then we will use it effectively, but we do not have the intention of boosting its volume." On Thursday, Germany will vote on whether to approve proposals set out in July to extend the powers of the EFSF that would allow it to buy the bonds of highly-indebted countries, and to make credit available to both governments and under-capitalised banks. Banking stocks were among the biggest risers across Europe. In France, BNP Paribas was up 12.7%, Societe Generale 11.7%, Natixis 9.5% and Credit Agricole 9.3%.

In Germany, Deutsche Bank had risen 11% and Commerzbank by 10.8%. In the UK, Barclays was 6.9% higher. Oil prices also rose, as fears eased about the extent to which the eurozone debt crisis could affect the global economy. US light crude was up $2.25 to $82.49 a barrel, while Brent crude added $1.45 to $105.39. The spot price of gold rose 2.5% to $1,672, but analysts said this was led by the US dollar falling in value, thereby making the previous metal slightly more affordable for holders of other currencies. Meanwhile, the euro strengthened against to dollar, rising to $1.3628 from $1.3523 late on Monday. Keith Bowman, markets analyst at financial services group Hargreaves Lansdown, cautioned that the rise in share prices may prove shortlived. "The optimists have taken the forefront on hopes that we could see European politicians getting to grips with the current situation over the coming weeks," he said. "But there are still a lot of concerns. Investors remain sceptical about the success of the measures being planned to resolve the eurozone credit crisis." Greek discussions Continue reading the main story Eurozone - other views Professor of finance Raghuram Rajan says, in the Financial Times, eurozone banks need to be recapitalised but they need the help of the IMF to do that. But in the Wilder View, Rebecca Wilder says Europe's banking crisis is no longer about liquidity. She argues instead it's caused by there being no credible "lender of last resort". The Washington Post's editorial says that while world is waiting for Germany's parliamentary vote on the Greek bailout, events have made that vote irrelevant. And if the various bail-out solutions seem complex, the Economist's Buttonwood blog explains that's because most plans are "ways to rescue the southern European countries without it seeming like a direct transfer from northern European taxpayers". Greek Prime Minister George Papandreou - whose country is at the epicentre of eurozone debt concerns - will hold talks with German Chancellor Angela Merkel later on Tuesday to discuss his country's progress in cutting its budget deficit. He earlier delivered a speech to German business leaders, urging them to help his country out of its current debt crisis. He said German funding would not be an investment in past failures, but in future successes. Mr Papandreou's meeting with Ms Merkel comes as policymakers decide whether to release the latest tranche of Greek bailout funds. The European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) are due in Athens this week to review Greece's progress in cutting its debt levels. Together, they will decide on whether to release the latest tranche of bailout funds the Greek government needs to pay its bills.

6/ Could China help Europe conquer its debt woes?

By Katie Hunt Business reporter, BBC News, Hong Kong Some in China question why they should bail out richer Europeans Continue reading the main story Global Economy

What now for Greece? Turmoil and you Factors behind market turmoil

Euro crisis origins Watch

As European leaders face another tumultuous week of crisis talks, austerity cuts and bailout decisions, an offer of help will be fresh in their minds. Last week, China suggested that it might be prepared to help Europe by acting as a buyer of last resort by making a major purchase of euro-denominated bonds. Markets are hoping for more details when officials from the Bric countries - Brazil, Russia, India and China - meet in Washington on Thursday to discuss steps to offer support to the debt-ridden euro area. But should and could China come to Europe's rescue in the continent's escalating debt crisis? Cash pile Certainly, China has the means. Its foreign exchange reserves are the world's largest at $3.2 trillion (2tn). China also has a vested interest in ensuring the global economy is stable and that demand for its products in Europe remains strong. A weaker euro would make Chinese exports more expensive for Europeans. But so far, says Dong Tao, Asia economist at Credit Suisse in Hong Kong, there is little evidence that the debt crisis has hurt demand for Chinese exports. "My view is that China can and will buy a little more euro-denominated bonds as a token gesture," Mr Tao says. Continue reading the main story Start Quote A friendly move by China may open the door to other assets coveted by China End Quote Ren Xianfang IHS Global Insight "If there were signs of a slowdown in China, you could see a more sizeable offer of help [for Europe], but at the moment there is clearly not a slowdown." Political price Helping the indebted euro zone would also allow China to achieve other goals - few countries extend financial support without some strings attached. Last week when offering to help Europe, Premier Wen Jiabao said he wanted Europe to treat China as a full-market economy, which could boost exports otherwise hindered by tariffs. An offer of help could also help China in its quest to buy other assets in Europe that have so far been viewed with disquiet. A recent $85.8m deal by a Chinese businessman to buy a remote, 300-sq-km Icelandic farm to build a leisure resort was viewed in some quarters as part of a broader Chinese strategy to build influence in the resource-rich Arctic. China also has port projects in Piraeus, Greece, and Naples in Italy that have raised eyebrows. "A friendly move by China may open the door to other assets coveted by China in Europe, like key infrastructure such as ports and [investments in] advanced manufacturing sectors, which China is building up," says Ren Xianfang, an analyst at IHS Global Insight in Beijing. More broadly, supporting Europe would help boost China's role in financial diplomacy and its push for a new global financial order less dominated by Europe and the United States. Sceptics Within China, many question whether a country where many still struggle to put food on the table and a third of the population still lives on less than $2 a day should help out Europeans with their arguably easier lives.

On web forums some Chinese are sarcastically wondering why "those who eat congee and pickles are being asked to help those who feast on steak and French wine". Even among the country's elite, whose fortunes are perhaps more closely aligned to the global economy, there is a sense that China should not step up. "When the world looks to us for help, we should keep our cool and not feel too flattered," said Liu Changle, the chairman and chief executive of Hong Kong-based Phoenix Television, according to the Wall Street Journal. "Life is much easier for No 2," he added. "When the sky collapses, there will be a No 1 who will hold it up." Others point out that China could be facing a debt crisis of its own making given high levels of local government debt that could turn sour. Not spare cash Mr Tao, at Credit Suisse, says these sentiments are valid given China's still low GDP per head. "Why should China use taxpayers' money to help out the sovereign of Greece when the money could better help Chinese schoolkids?" he said. He also points out that China's vast foreign currency reserves are not the spare cash people might imagine. They have been accumulated by buying foreign exchange mainly to keep its currency weaker and, as such, its foreign assets are matched by domestic liabilities. For each dollar or euro of foreign reserves there is the equivalent amount of yuan debt. "This is not wealth, it is balance sheet expansion," he says. An editorial in the official People's Daily over the weekend urged that the eurozone area should guarantee any investments China makes. It also said that China should not take any rescue steps alone, urging co-operation with the EU, IMF and Bric countries. With all this in mind, it seems unlikely that Beijing is suddenly going to splurge billions on eurozone debt and become the white knight many in Europe might have been hoping for.

7/ Has Western capitalism failed?

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Twenty years ago, the fall of communism in Eastern Europe seemed to prove the triumph of capitalism. But was that an illusion? Constant shocks to the world's financial system over the past few years prompted the BBC World Service's Business Daily programme to ask leading figures whether they thought Western capitalism had failed. Angel Gurria: Secretary General, Organisation for Economic Co-operation and Development (OECD) My answer to this question would be no. But I also wonder whether capitalism should be answering to the prosecution. We failed as regulators, we failed as supervisors, we failed as corporate governance managers, we failed as risk managers, and we also failed in the allocation of roles and responsibilities for international economic organisations. Some international organisations saw the crisis coming. Some even managed to put out some warnings, but they did not co-ordinate their assessments, they did not speak with one strong voice. Continue reading the main story Start Quote It is very important to send clear signals of how we are going to address this debt problem without sacrificing growth and employment

End Quote Thus, they were ignored in an atmosphere of great prosperity where everybody was making a lot of money and everybody thought that innovation was the name of the game - and by warning that something could go wrong, you would look like you were holding progress back. There was also the philosophy that markets needed to function with the least possible government intervention. But that did not mean that they could work without any intervention at all, nor did it necessarily mean that the intervention could be such a light touch that you were not able to identify risks. So the crisis left a dire legacy. A legacy of high unemployment, enormous fiscal deficits which we are still struggling to control, and an accumulated public debt which has already reached 100% of GDP on average in the OECD countries. It is very important to send clear signals of how we are going to address this debt problem without sacrificing growth and employment. Reforms to product and labour markets, education, innovation, green growth, competition, taxes, health - they are the things that should be the object of our primary focus in the context of a long-term strategy to restore sustained growth. This will create jobs and help to tackle debt. We also need to "go social" and focus on innovative policies to protect the most vulnerable. Ken Ofori Atta: Executive chairman and co-founder of Databank Financial Services (Ghana) The 20 years prior to the recent credit crisis could be described as capitalism as its best, with global wealth accelerating at ever increasing rates. Since 1990, when we left Wall Street and founded Databank to offer the first investment banking services in Ghana, we were able to capitalise significantly on the boom years, We have also observed and embraced how some of that capitalism-fuelled wealth has found its way into funding education, innovation and creativity, all in pursuit of a better life and hopefully a better world. Continue reading the main story Start Quote What went awry among the frenzy for growth in more mature markets was people losing sight of the fact that someone somewhere has to work hard End Quote All too recently this notion was challenged. The spark that ignited the crisis led to a conflagration of adverse effects. These spread like a virus across North America, Europe and right down into Asia. While our counterparts dealing on the historically more developed markets were taking increasing amounts of risk, employing complicated financial instruments to make returns from increasingly complex derivatives, Ghana - and Africa as a whole - was focused largely on helping to fund a growth in enterprise. We were not so widely exposed to toxic assets so we weathered the storm well. And we did so employing the techniques the Databank founders learnt on Wall Street: Western capitalism in its truest form. From this Ghanaian's perspective, no talk of capitalism could be made without mentioning Dr JB Danquah, the father of this philosophy in the then Gold Coast. Danquah's vision was to create an environment in which individuals would be able to set up and run enterprises that would in turn create wealth for themselves and their households. Citizens would therefore be in the position to acquire and own properties that could be used as collateral for credit to enhance their businesses and expand wealth to benefit more families. This thesis not only allows many people to create wealth, but stimulates initiatives, making people more independent for their own good and also for the good of the nation. What went awry among the frenzy for growth in more mature markets was people losing sight of the fact that someone somewhere has to work hard to make a market and build a business to create real enduring value that goes beyond the bottom line.

Chandran Nair: Founder of Hong-Kong based think tank Global Institute For Tomorrow (GIFT) The extreme form of capitalism which has permeated the world, particularly in the last 30-40 years, is in deep trouble and we are in denial. It is important to understand that fundamental principles of capitalism - that human beings are rational and markets behave rationally, and that markets will assign prices - are flawed. It is also important to understand the roots of modern capitalism. You could argue that slavery was the first attempt to under-price resources. When slavery came to an end there was colonisation, which was again an attempt by the capitalist model to use resources cheaply. With the end of colonies, we had the globalisation argument of economic growth and then the globalisation of finance. Continue reading the main story Start Quote Capitalism has essentially hit a wall and a very different conversation needs to take place End Quote When I speak about this in Europe, they say there has been 30 years of over-leverage, but I say they should multiply that by 10 and look at 300 years of essentially exploited growth. What we need to recognise now is that the world is a very different place from what it was 100 years ago when we had one billion people. With a current population approaching seven billion, things will have to change. A fundamental issue that the world will have to recognise, and which Western capitalism has conveniently ignored, is that the goods and services which companies and economies seem to thrive on are based on under-pricing resources and externalising costs. That game is over and we need a fundamental restructuring - essentially about how people will live, and we need to move beyond simple notions about growth to more sophisticated, nuanced discussions about human progress. That is not the same as suggesting that economic growth will be able to deliver i-toys and cars to everyone. This is not possible and that is where capitalism has essentially hit a wall and a very different conversation needs to take place. Professor Tim Jackson: Author of Prosperity without Growth - economics for a finite planet Every society clings to a myth by which it lives. Ours is the myth of economic growth. For the last five decades, the pursuit of growth has been the single most important policy goal across the world. The global economy is five times the size it was half a century ago. If it continues to grow at the same rate it will be 80 times that size by the year 2100. This extraordinary ramping up of global economic activity is without historical precedent. It is totally at odds with the finite resource base and the fragile ecology on which we depend for survival. Most of the time, we avoid the stark reality of these numbers. Growth must go on, we insist. Continue reading the main story Start Quote The days of spending money we do not have on things we do not need to impress people we do not care about are over End Quote The reasons for this collective blindness are easy enough to find. Western capitalism is structurally reliant on growth for its stability. When growth falters - as it has done recently politicians panic. Businesses struggle to survive. People lose their jobs and sometimes their homes.

Questioning growth is deemed to be the act of lunatics, idealists and revolutionaries. Yet question it we must. The myth of growth has failed us. It has failed the two billion people who still live on less than $2 a day. It has failed the fragile ecological systems on which we depend for survival. But economic crisis presents us with a unique opportunity to invest in change. To sweep away the short-term thinking that has plagued society for decades. To engage, for instance, in a radical overhaul of dysfunctional capital markets. Untrammelled speculation in commodities and financial derivatives brought the financial world to the brink of collapse just three years ago. It needs to be replaced by a longer, slower sense of capital. Fixing the economy is only part of the battle. We also have to confront the convoluted logic of consumerism. The days of spending money we do not have on things we do not need to impress people we do not care about are over. Living well is about good nutrition, decent homes, access to good quality services, stable communities, satisfying employment. Prosperity, in any meaningful sense of the word, transcends material concerns. It resides in our love for our families, the support of our friends, the strength of our communities, our ability to participate fully in the life of society, a sense of meaning and purpose in our lives. Lord Desai: Member of the House of Lords, emeritus professor at the London School of Economics Capitalism is alive and well, but not in the Western countries - it has migrated eastwards. Russian capitalism is somewhat old and in need of urgent repair, but the spirit of capitalism - risk-taking, saving, investing, hard work - all those virtues have now migrated and are happily ensconced in China, India, Indonesia, Korea and Japan - the countries which we never thought would ever get out of poverty. Western capitalism probably had half a century of over-indulgence - continued prosperity, full employment, almost guaranteed growth - and that in its turn meant that our costs went up and manufacturing industry migrated abroad, while finance has proved to be a fickle friend. Continue reading the main story Start Quote We have to do something to get ourselves out this crisis but that will have to be in the spirit of capitalism, not against it End Quote We will have to rethink our model, our values, we will have to acquire old-fashioned virtues, because capitalism is not going to go any time fast. If Asia has vigorous energetic capitalism and we have tired old capitalism, we will end up paying a huge price and we will trade our prosperity for their prosperity. Socialism died 20 years ago - capitalism lives on. It changes its form, it migrates, it is fully global. Now we at last understand what globalisation means - it means we are just as important as anyone else. If we don't work very hard, we will lose our importance. That is the lesson of the contemporary world. Capitalism lives through crisis. That is how it renews and invigorates itself. For our bad luck, capitalism has renewed itself by migrating eastwards. We are left with the debris and we have to do something to get ourselves out this crisis but that will have to be in the spirit of capitalism, not against it. 18 September 2011 Last updated at 18:08 GMT

8/ Europe's four big dilemmas

By Laurence Knight Business reporter, BBC News Decision time for the euro is fast approaching

Continue reading the main story Related Stories

Could Greece be Europe's Lehman? What's the fuss over eurobonds? Q&A: Greek debt crisis

As Europe's leaders seemingly dance on the edge of disaster, what are the real problems facing the euro? For many onlookers, the issues may seem complicated and interconnected. But essentially they boil down to four big dilemmas. And how these dilemmas are resolved will decide whether the eurozone stays together, or ultimately unravels. Borrowers vs Lenders What the market thinks of Greek government debt Like the US and UK, Europe faces an enormous overhang of accumulated government and private-sector debt, much of which is now unrepayable. So the question is, how much gets written off, and who picks up the tab? For the eurozone as a whole, the debt problem is comparable with that of the US, and potentially manageable. The problem is that some eurozone countries are much more heavily indebted than others. Markets already assume that very soon Greece will have to write down its massive debt by at least half. They also think the Portuguese, Irish, and even the Spanish and Italian governments, may eventually follow suit. But when bad debts get written off, someone has to take a loss. While some of those debts are held in the US, UK or elsewhere overseas, most of it is held by the European banks, and increasingly by the European Central Bank (ECB). Germany may end up footing much of the bill This is the primary reason for the recent loss of confidence in the European banking system. But while Germany can afford to rescue its banks, as the Irish Republic has already demonstrated, other countries may not be able to rescue theirs. So ultimately Germany and other less-indebted countries may have to bear much of the cost of rescuing the eurozone's banks as well as its weaker governments. Austerity vs Growth Like everywhere else, most European governments have seen their borrowing balloon during the recession and anaemic recovery. At the same time, fears over southern European governments' ability to repay their debts mean their borrowing costs have also gone through the roof. Under pressure from Germany and the ECB, all of these countries have been pushing through painful spending cuts and tax rises. Continue reading the main story Diverging fortunes Rate at which markets are willing to lend to governments for 10 years:

Germany: 1.92% France: 2.65% Spain: 5.25% Italy: 5.39% Ireland: 8.24% Portugal: 10.61% Greece: 19.12%

Source: Bloomberg. Data as of 16 September 2011 To set a good example, Germany has even donned the hairshirt itself, promising to eliminate its own modest deficit by 2013. But here's the problem: Austerity is killing growth throughout Europe. And with less profits to tax and more dole cheques to write, weak growth makes it even harder for governments to cut their borrowing and repay their debts. In order to turn the slowing eurozone economy around, the ECB now looks set to slash interest rates from their current 1.5%. The central bank may also buy up more Italian and Spanish debt, pumping cash into the financial system and easing the pressure on those countries to slash their borrowing. But this move has been strongly opposed by German members of the ECB. Another option to stimulate growth is for the few other countries that markets are still willing to lend to to borrow and spend more, offsetting spending cuts in southern Europe. Yet for Germany, who can currently borrow at unprecedentedly cheap interest rates, borrowing is anathema. Discipline vs Solidarity Germany's view on the eurozone crisis is simple. Southern European governments borrowed recklessly at the cheap interest rates available inside the euro. Now they are being punished by markets, and must learn discipline. Germany wants other governments to incorporate strict budget rules into their constitutions to stop such recklessness in future. A 20% unemployment rate helped spark Egyptian-style mass protests in Spain But rules, with penalties attached, may not be credible. Imposing a fine on an overindebted government is rather like kicking someone when they are down. Indeed, just such a "stability pact" of budget rules, insisted on by Germany at the euro's creation, was quickly broken with impunity by Germany itself. Moreover, the focus on discipline misses a bigger point. While Germany's view may be apt for Greece - whose government cheated on its borrowing statistics to qualify for the euro in the first place - it is grossly unfair for Spain. Before the financial crisis, Spain's government had lower debt levels than Germany's, and (unlike Germany) actually spent less than it earned in taxes. But the country experienced a property bubble that then burst spectacularly, leaving its economy high and dry. Wages, inflated during the good years, are now uncompetitive, and unemployment has shot up to 20%. Detroit, in Michigan, has suffered an economic disaster, mitigated by US government money

Yet, inside the euro, Spain cannot devalue to regain a price advantage. Nor can it necessarily expect the ECB to cut interest rates or buy up its debts. Being put a fiscal straitjacket as well just makes things worse. Compare this with the US state of Michigan, where the collapse of the US car industry has spelled disaster. Unlike in Europe, the US has a federal government that can tax other states in order to help out Michigan, by paying for unemployment benefits and rehabilitating the big car companies. If the euro is to function in the future, economists warn, then a similar system of centralised fiscal transfers will be needed there too. And in the current crisis, again it is Germany that would foot much of the bill. Europe vs the Nations On the face of it, the big political standoff in Europe is one of paymaster Germany versus bankrupt southern Europe. For German voters, their country's post-War economic miracle was built on a hard currency, prudent finances, and strong exports. It is hard for German voters to fathom that these very virtues are at the heart of the current crisis. But Germany has everything to lose if it does not help the south out, and the eurozone unravels. If the Greeks, Italians and others default on their debts, German and French lenders would be the biggest losers. As Greece's economy shrinks and shrinks, its people cry out. But can German voters hear them? If they also leave the euro, it would be a legal and financial disaster for all concerned. Moreover, German export success for the past decade has been built on the weaker, more competitive exchange rate that came with sharing a currency with southern Europe. Without the euro, safe haven Germany could expect its currency to shoot up, with devastating consequences for the country's export-driven industry. Southern Europeans meanwhile would see their currencies plummet outside the euro, leading to rises in inflation and their cost of living as painful as the austerity they are protesting against. Yet these stark realities are not widely appreciated in Germany or its neighbours. Because the real problem is that there is nobody who can credibly speak for the common interest of Europe. Since its inception in the 1950s, the European project has been run and controlled by a club of national governments. The political process has been one of haggling behind closed doors, with issues presented to electorates as a matter of competing national interests. But such haggling is dangerous in a financial crisis. Advertisement Jose Manuel Barroso: "The measures have taken too long and they have not been fully delivered" Any solution must be agreed by 17 governments, and ratified by 17 parliaments, an impossibly slow process. And the longer it takes, the more bitter the dispute risks becoming, and the greater the market's loss of confidence in the euro becomes, undermining Europe's fragile economy. The European Commission president, Jose Manuel Barroso, has tried to speak for the common interest, pleading for the Commission to take the lead in solving Europe's problems.

But he is a political appointee, and as such, he is easily ignored by national leaders and scarcely noticed by the wider public. Perhaps, if Mr Barroso were an elected leader, he could guide European public opinion towards a comprehensive solution to the crisis that balanced the interests of the different nations. But as it is, the European public is very far from understanding the issues, or agreeing to the greater economic and political integration that may be needed to save the euro. Sadly, this political dilemma is one that may not have a workable solution

9/ Factors behind market turmoil

Traders are nervous about economic news It's been a volatile summer for global markets, driven by almost un-precedented uncertainty amongst investors about the global economy and fears that politicians are unable to fix economic problems. Recent economic data has suggested the recovery in the West may be petering out, feeding renewed worries about the eurozone debt crisis. This, it is feared, could in turn cause a second banking crisis if governments are unable to pay back their debts. And in the face of these twin concerns some investors say policymakers have done little to provide certainty about how the crisis will be tackled. The fears have seen the market wipe out gains from earlier in the year. Since 22 July, London's FTSE 100 has fallen 14%, the Dow Jones in New York has shed 15% and Germany's Dax has dropped more than 29%. Growth fears The key factor worrying investors is slowing growth in the US and Europe. The International Monetary Fund has warned that the global economy has entered what it calls a "dangerous new phase" of low growth and high public debt. It significantly reduced its growth forecast for the world's advanced economies, predicting GDP growth of just 1.5% this year. The US Federal Reserve has also painted a pessimistic picture of the economic outlook. "There are significant downside risks to the economic outlook, including strains in global financial markets," said the US central bank in a statement. The US economy reported no new jobs in August for the first time since 1945 with unemployment remaining at 9.1%. And the US Commerce Department revised its growth figure for earlier in the year down to an annualised rate of just 1% between April and March, after its first estimate of 1.3%. Growth for the first quarter has also been revised down.

In the eurozone things are little better. A closely watched survey of private sector activity showed it had fallen in September, the first drop in two years. Markit's purchasing managers' index (PMI) of activity dropped to 49.1, from 51.5 last month. A reading below 50 indicates contraction. Factory output in the 17 countries that use the euro also fell and business activity in Germany, the bloc's largest economy, came close to stagnation. Growth in the German economy also slowed sharply between April and June, growing by just 0.1% in the quarter. The French economy was flat during the same period. Debt crisis spreading Continue reading the main story FTSE 100 Index LAST UPDATED AT 27 SEP 2011, 15:30 GMT value change % + + 5280.16 +190.79 +3.75 Top winner Vedanta Resources 1194.00 p + + +124.00 +11.59

The concerns about growth have also fuelled worries about the indebtedness of eurozone states. If economies are not growing tax receipts fall, making it harder for governments to pay off their debts. So far Greece, Portugal and the Irish Republic have received international help to deal with their crippling debt problems. On Monday Italy became the latest eurozone country to have its credit worthiness downgraded by ratings agency Standard and Poor's, reflecting increased concerns about is ability to pay back its debts. Italy follows fellow eurozone countries Spain, the Republic of Ireland, Greece, Portugal and Cyprus in having its credit rating downgraded this year.

In July, eurozone leaders agreed a second bailout deal for Greece, and also agreed more powers for the European Financial Stability Fund to help countries struggling with indebtedness. This would allow the fund to buy government debt (bonds), offer credit to nations in difficulty and would create a special facility for recapitalising banks. It included a move by private banks to swap existing Greek debt with longer term debt paying lower interest. But the measures have yet to pass European parliaments and many already fear they are insufficient to tackle potential problems in larger economies such as Spain and Italy. To prevent borrowing costs rising the European Central Bank has been buying Italian and Spanish government bonds to try to bring down their borrowing costs. The yield on Spanish and Italian 10-year bonds fell shortly after the move. But ECB measures are seen as only a temporary response to the crisis. Vulnerable banks Share falls have often been led by bank shares as investors are worried about what level of eurozone government debt they are holding, and whether this will be repaid.

French banks have come under particular pressure as they hold more than 40bn euros (35bn) of Greek debt, for example, almost four times more than any other country. The Institute of International Finance, a global trade body representing big banks and their major lenders, has said the Greek debt swap deal implies a loss for Greek lenders equivalent to 21% of the market value of their debts. If banks were forced to accept similar or greater losses on the debts of other countries it could trigger a new banking crisis, further de-stabilising the global economy. Meanwhile, there has also been concern about the US's ability to repay its debts, with Congress agreeing on a deficit reduction plan only at the eleventh hour. This delayed deal also led to the credit-rating agency, Standard & Poor's, cutting the long-term US rating by one notch from AAA to AA+ for the first time. Lack of leadership Analysts have also questioned the lack of strong leadership coming out of the US and Europe. On Thursday the G20 group of leading economies issued a statement saying it was ready to "take action" to stabilise global markets. But there is disagreement as to what form that action would take. With deficits already at record highs governments have very limited room to manoeuvre.

US President Barack Obama has unveiled a $450bn (282bn) package of tax cuts and spending plans aimed at creating jobs and bolstering the economy. But the plans may not pass the US Congress. European leaders are under particular pressure to provide long term stability for the single currency. A further expansion of the European Financial Stability Mechanism has been suggested, but that may take some time as changes agreed earlier this year have still not been ratified by national parliaments. The issue of eurobonds, which would allow the debt of each country to be guaranteed by all, has also been mooted. But taking responsibility for other nations' debt may prove politically unpopular in countries like Germany. Alternatively, leaders could insist on larger losses in the private sector. In the meantime the burden has fallen on central banks who are under pressure to announce further quantitative easing printing money to increase the amount of credit in the economy. But the US Federal Reserve statement on Thursday appeared to suggest this was not imminent, putting the onus back on politicians to come up with coordinated action.