Speculation about whether Greece will default on its sovereign debt has raised doubts about the stability of the euro zone, but most European economists said the event is unlikely, or it will be manageable if it does happen. A bigger test awaits the euro zone when the European Central Bank decides to raise interest rates in response to improving conditions, particularly in Germany and France. That could intensify already-serious problems in Portugal, Ireland, Italy, Greece and Spain.
Creditors of Japan's Aiful agreed to a restructuring of the lender's debts, which will allow an auction to settle the company's credit default swaps. The situation is expected to be a significant test for the CDS market. "The Aiful CDS story is critically important for the market. The outcome will affect how and even whether CDS are traded on Japanese credits going forward," one investor said.
In a message for the new year, UK Prime Minister Gordon Brown said the fragile economic recovery must not be jeopardised by aggressive efforts to reduce budget deficits. "The recovery is still fragile, and it needs to be nurtured in the interests of those who were hit hardest by the recession," Brown said.
Lee Seong Tae, governor of the Bank of Korea, said the central bank will watch closely for any side effects from its loose monetary policy, but benchmark interest rates will be managed to support the economy. "There's a need to strengthen the growth engine of the private sector," Lee said in his New Year's speech text. However, the South Korean central bank must be "cautious on the possibility of an imbalance in the economy due to a prolonged accommodative monetary policy".
British Bankers' Association CEO Angela Knight voiced opposition to the 50% tax on bankers' bonuses, which Chancellor Alistair Darling unveiled during his pre-budget report earlier this month. "There are literally tens, if not hundreds, of thousands of British jobs directly and indirectly related to banking -- bringing billions of pounds in tax income," Knight wrote to the association's members. "Some of this is now at risk ... Decision makers increasingly either wish to ignore it or -- even more dangerously -- choose not to believe it."