Japan’s debt keel: country could run out of money in October

JAPAN – The impasse in Japan’s parliament has raised fears among investors that the world’s third largest economy is being driven towards a “fiscal cliff,” Reuters reported. “The government running out of money is not a story made up. It’s a real threat,” Finance Minister Jun Azumi told a news conference, making a last-ditch appeal for cooperation by opposition parties to pass the bill. “Failing to pass the bill will give markets the impression that Japan’s fiscal management rests on shaky ground,” he said. Unless the bill clears the current parliamentary session that ends next week, the government will start suspending or reducing some state spending to avoid running out of money for as long as possible, the finance ministry said. Noda’s ruling Democratic Party passed the deficit-financing bill through the lower house on Tuesday. But the opposition boycotted the vote, signaling the bill has little chance of clearing the opposition-controlled upper house. Under the proposed contingency for suspending some spending, the finance ministry said government bond redemptions and interest payments on outstanding debt would not be affected as they will be made in full using reserves set aside for this purpose. All state spending will be targeted, except for those that will severely affect public livelihood such as police, national security and disaster relief, Reuters reported. Subsidies to local governments and state-run universities will be cut by half from the originally planned amount until the bill passes parliament, the finance ministry said. The upper house has also passed a censure motion against Noda, piling more pressure on him to make good on his promise earlier this month to call an election to parliament’s lower house. Several ruling party and opposition lawmakers have suggested that Noda would probably wait out the stalemate until the current parliament session ends on September 8 and call a snap vote during an extra session in October to secure the deficit financing bill’s passage. The term “fiscal cliff” is commonly associated with around $500bn (£316bn) in expiring US tax cuts and spending cuts that could kick in automatically next year, triggering a “significant recession,” according to the Congressional Budget Office. –Telegraph

Japan’s fiscal death fast approaching: Key indicators are deteriorating on almost every front, raising concerns that the world’s third largest economy is running aground after two “Lost Decades.” Japan’s debt has jumped by 61 percentage points of GDP since 2008, compared to eight points for the AAA bloc. Public debt is expected to reach 239% of GDP this year, uncharted levels for a major economy in peace-time. Net debt – subtracting Japan’s vast holdings of foreign bonds – is nearer 137% but this is rising at an even steeper trajectory. “Japan’s addiction to public sector spending is way beyond the boundaries or remedial austerity,” said Dylan Grice from Societe Generale. –Telegraph

Spain’s banking crisis worsening: The Spanish government will immediately inject financial aid into Bankia after the troubled lender announced losses of (EURO)4.4 billion ($5.6 billion) in the first half of the year, authorities said Friday. The money will come from the fund for the orderly restructuring of banks, or FROB, a bank rescue fund set up to help Spain’s deeply troubled financial sector. The fund said in a statement late Friday that it planned to transfer capital into Bankia SA and its parent group Banco Financiero y de Ahorros SA with immediate effect after “the accounts declared significant losses.” The fund did not specify how much it would inject into Bankia. But it said the money was an advance loan prior to Spain receiving a package of up to (EURO)100 billion ($126.1 billion) from other eurozone countries so that it can bail out all of its troubled banks. Bankia was nationalized in May and has called for (EURO)24 billion ($30.3 billion) in public aid. At its Friday cabinet meeting, Spain’s government approved a new package of measures to create a “bad bank” to handle the country’s toxic property investments and give the central bank more powers to shut down troubled lenders. The reform is the fifth such package Spain has introduced since its financial difficulties began in 2008. Economy Minister Luis de Guindos said the new “bad bank” would be up and running by the end of November and will be controlled by the central bank but would also involve the private sector. –HP

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