What’s Important in the Financial World (2/29/2012) India’s GDP, ECB Borrowing

Ireland to Hold Referendum

Ireland will have a referendum on whether the country should accept EU-mandated budget discipline. This discipline has been the cornerstone of the bailouts of Ireland and Greece, and the possible future bailouts of Portugal and Spain. At the core of the vote is whether Irish citizens want the nation to be part of the EU, which means accepting the alliance’s rules for deficit reduction. EU officials are worried about what will happen if Ireland’s voters reject the nation’s ratification of these powerful budget controls. In return for a revolt against EU rules, Ireland would lose access to the European Stability Mechanism, which it may need if its economy continues to falter. Eoin O’Malley of Dublin City University said, “One of the things that the government will try and do is frame it as economically suicidal not to accept it … I suspect it will come down to who wins that framing debate.”

ECB Lends to European Banks

European area banks got another bite from the European Central Bank’s three-year funds basket. A new facility — the second — offers banks money at extraordinarily low rates. The first day of its availability, banks took 530 billion euros. Some 800 banks borrowed money, according to Reuters. The ECB hopes that the banks will use the capital to buy sovereign paper issued by the region’s nations. This would, in turn, create enough demand to drive down national borrowing rates. The money also might be used to loosen credit, via loans, in the region, the ECB hopes. But the financial firms also could use the capital to bolster their balance sheets, which would do little to help the credit markets.

India Sees Inflation

India’s economy grew at its slowest pace in three years during the fourth quarter of 2011 — only 6.1%. That growth rate is the envy of most nations, but with its huge population, relatively undeveloped infrastructure and low wage workers, India should be enjoying more rapid expansion. The culprit for the growth problems is mostly inflation. The cost of raw materials has risen in the past two years, as commodities prices have surged — although those increases have slowed worldwide recently. But India is a large importer of oil, which may be enough factor to substantially effect inflation on its own. That means India’s GDP improvement in early 2012 may not be any better than last year.

Douglas A. McIntyre