FOREX NEW YORK COMPANIES

Despite the sanctions inflicted on Syria, the country's economy will not "collapse,'' outgoing Finance Minister Mohammed Al Jleilati said in an interview with Arabian Business today.

Jleilati, speaking from Damascus, claimed that GDP growth this year will be between 0 and 2 percent while the fiscal deficit "remains within normal estimates" and on target of 6 to 7 percent of GDP.

The minister also said that Syria is close to finalising an agreement within the coming month that will allow it to export crude, while also partially offsetting diesel and gas shortages brought on by international sanctions.

"There is a serious attempt to secure the export of our surplus and we might be able to export oil after 20 days or a month," Jleilati said.

The output of Syrian refineries used to account for about 70 percent of crude consumed in the country, while cooking gas, diesel and other derivatives were imported. The US and European Union (EU) imposed sanctions on Syria last year after President Bashar Al Assad's government began to crack down on a popular rebellion.

"Sanctions have negatively impacted the Syrian economy by forbidding it to export oil and not allowing ships to transport or for insurance companies to cover ships transporting to and from the country." Jleilati said. "When they sanctioned our ability to import we had to use the state's money to secure imports to meet local demand. We have a shortage of gas and we're trying to secure the 40 percent shortfall from various sources and we will have enough shortly."

The oil industry accounted for 20 percent of gross domestic product before the uprising began and the EU used to buy 95 percent of Syria’s oil exports. The country's economy has lost US$4 billion in revenue as a result of the oil sanctions, Jleilati said.

International sanctions have slowed the pace of economic growth, while fifteen months of political unrest in the country has so far claimed more than 10,000 lives, according to United Nations estimates. European and US sanctions have increased pressure on Assad's administration as fuel shortages and a depreciating currency further threaten the stability of the country.

The Syrian pound is trading at about 70 to the dollar in the black market compared with 47 before the rebellion began in March of last year. Inflation rose to 31.5 percent in April compared with the same month a year ago, as the cost of food products increased, the government's Central Bureau of Statistics reported last week.  Syria’s economy contracted 3.4 percent in 2011 largely due to the unrest, while GDP is expected to shrink by 8.1 percent in 2012, according to the Economist Intelligence Unit.

"There's a slowdown in the implementation of projects," he said. "Tourism projects have slowed down. I can't tell you that there are foreign investors coming, of course no foreign investor is coming now and putting their money in a project amid the current conditions," he added. 

In a letter to the United Nations General Assembly last month Syria’s UN permanent representative Bashar Al Ja’afari said hotel occupancy had dropped from an average of 90 percent before the crisis began in March 2011 to less than 15 percent, adding that 40 percent of those employed in the tourism industry have lost their jobs.

Total unemployment has increased from about 12 percent to 25 percent, Jleilati said, adding this was "natural" given the current conditions and the fact that about 200,000 people enter the workforce each year.

"We have been impacted in general and by the sanctions but that doesn't mean that our economy will collapse and it won't because we in Syria depend on our own resources," Jleilati said. "We have enough to cover our agriculture, grain and wheat demands."

The sanctions and inflation haven't "really affected the state per se but the lives of citizens," he added.

Figures to be published today are expected to show that the Government failed to meet its statutory target to halve the problem by 2010 – despite the huge amount of taxpayers’ money spent on tackling it.

Mr Duncan Smith will unveil a new analysis which will show that hundreds of thousands of children will be lifted out of poverty if at least one of their parents works 35 hours a week earning the minimum wage.

The introduction of the universal credit, under the Government’s welfare reforms, will mean that people returning to work from benefits will continue to receive some state support.

Any child living in a household which earns less than 60 per cent of the typical income is defined as living in poverty. This is likely to be changed so that children living in workless households or those with drug-dependent parents are highlighted.

Mr Duncan Smith will also set out plans to change the definition of child poverty so that a more sophisticated analysis is used.

Speaking ahead of his speech at the Abbey Community Centre in London, Mr Duncan Smith told BBC Radio 4's Today programme: "What I'm talking about is getting away from a system that got so trapped in the idea of meeting a relative income target so narrowly that more and more money was spent on welfare but keeping people out of the work process.

"What we need to do is make sure we tackle poverty but tackle it in the process of trying to move them on (to work).

"If you just measure relative income levels you know nothing about what's happening to the family."

In his speech, he will accuse Labour of “pouring vast amounts of money” into increased benefit payments to tackle poverty. He is expected to say that the strategy has failed and parents need to be helped back to work rather than simply subsidised by the state.

He will say: “Getting a family into work, supporting strong relationships, getting parents off drugs and out of debt — all this can do more for a child’s wellbeing than any amount of money in out-of-work benefits.

“With the right support, a child growing up in a dysfunctional household, who was destined for a lifetime on benefits could be put on an entirely different track — one which sees them move into fulfilling and sustainable work. In doing so, they will pull themselves out of poverty.”

He will add: “Our latest analysis suggests that universal credit will ensure the vast majority of children will be lifted out of poverty if at least one parent works 35 hours a week at the minimum wage — or 24 hours if they are a lone parent.

“For those who are able to work, work has to be seen as the best route out of poverty. For work is not just about more money — it is transformative. It’s about taking responsibility for yourself and your family.”

Mr Duncan Smith will indicate that Labour wasted large amounts of public funds as it failed to halve child poverty. “The last Government spoke about the need to tackle poverty, and poured vast amounts of money into the pursuit of this ambition — £150 billion was spent on tax credits alone between 2004 and 2010.

“Overall, the welfare bill increased by some 40 per cent in real terms, even in a decade of rising growth and rising employment,” he will say.

Ministers are drawing up plans to introduce a series of measures to gauge whether families are living in poverty, such as whether parents have drug or alcohol problems or whether they are working.

In today’s speech, the Work and Pensions Secretary is expected to defend the need to change the definition of child poverty. “If a family has less than 60 per cent of the median income it is said to be poor, if it has 60 per cent or more it is not,” he will say.

“By this narrow measure, if you have a family who sits one pound below the poverty line you can do a magical thing. Give them one pound more, say through increased benefit payments, and you can apparently change everything — you are said to have pulled them out of poverty. But increased income from welfare transfers is temporary if nothing changes.”

Mr Duncan Smith’s call for disadvantaged families to return to work may come at an inopportune time with unemployment rising as the double-dip recession has led to a lack of jobs.

William Hague, the Foreign Secretary, caused controversy recently by telling Britons they had to work harder to help the UK escape from recession.

As HiFX’s Chris Towner says: “Germany is being forced into a corner where it is they who will need to start to give up if they would like Europe to become more unified. The Spanish finance minister is right to say that the battle for the euro will be waged in Spain, but it will be decided in Germany.”

Eurosceptics suspect Germany will use the crisis to usher in a United States of Europe.

“Is there a hidden German agenda? Probably not,” answers Charles Purdy of Smart Currency Exchange. “They have always thought and made clear that greater fiscal unity is a must for the euro – ensuring that each country adopts their fiscal discipline. Up to now the political will has been lacking but if the euro is to survive and the 'weaker’ countries are to benefit from Germany’s strong credit rating then fiscal union will be what Germany expects.”

World First’s chief economist Jeremy Cook believes greater unification will take decades, saying: “Fiscal union is the endgame for the eurozone – a United States of Europe that has centralised fiscal and monetary policy and leadership based from one location. This will take years to set up and will only follow a huge upheaval of the European political landscape.”

However, while the consensus view is that the eurozone will bind closer together, this doesn’t mean that all 17 members will remain in the club.

“It is becoming increasingly clear that some nations can’t remain in the eurozone,” says Richard Driver of Caxton FX. “A stronger eurozone with a fiscal union is the only way the eurozone can survive but this won’t come soon enough for Greece.”

Stephen Hughes of Currencies.co.uk is sceptical, saying, “As a growing number of voices call for greater fiscal union across the eurozone, it’s still by no means a given that this is an achievable path – don’t forget that even the German people have yet to ratify the fiscal compact.

“But, given the depth of the current euro crisis, we are likely to see a more accommodating stance from policymakers in the coming months. What is clear is that any move to greater unity will take time to implement, something Greece certainly doesn’t have. As for Spain, Portugal and Ireland, the jury’s out for them...”

Spain is caught in a vicious downward spiral as the property crash accelerates, further undermining the banks and state finances. This in turn is drawing Italy into the fire and threatens to overwhelm the EU's rescue machinery.

"We must have a real circuit breaker," said Sondergaard. "The question is whether the ECB will now blink and go down the route of quantitative easing (QE)".

He said the ECB should slash interest rates by half a point to 0.5pc and "pre-commit" to half a trillion euros of QE over coming months, blanketing the Spanish and Italian bond markets.

Nomura said the ECB must act with overwhelming force rather than engaging in piecemeal bond purchases that fail to restore confidence and have the toxic side-effects of pushing existing bondholders down the credit ladder -- the dreaded effect of "subordination".

"The eurozone has the wrong policy mix across the board. Fiscal policy is too tight; monetary policy is too tight; and the tough regulation of the banks is coming at the wrong time. Together it is all pushing the eurozone to breaking point," he said.

Spanish premier Mariano Rajoy said in a private letter to EU leaders last week that the ECB is the only body with firepower and nimbleness able to contain the crisis at this point.

The pleas have so far fallen on deaf ears in Frankfurt where ECB hawks insist that any such intervention to help EMU's struggling debtors would reduce the pressure for root-and-branch reforms.

The bank said in its June report on Thursday that Spain must make further draconian cuts to meet its deficit target of 3pc of GDP next year. It enraged monetarists by denying yet again that the eurozone faces a serious monetary slowdown or "an abrupt and disorderly adjustment" for banks -- or a credit crunch in layman's language.

"It shows fantastic complacency. They are not complying with their own mandate," said Professor Tim Congdon from International Monetary Research. Critics say that all key measures of the eurozone money supply are now contracting, pushing the whole region into deeper slump. The ECB has missed its 4.5pc growth target for M3 `broad money" by a wide margin.

Mr Spiro said the fast-escalating crisis in Italy may force the ECB to act. Foreigners own half Italy's €2 trillion public debt and they are increasingly shocked by the failure of the EU authorities to halt contagion. "Foreigners haven't been buying Italian bonds, but most have not been selling either. The risk is that they will now start selling en masse," he said.

"Italian banks are under massive financial repression to buy the debt but they are running out of money. The ECB will have to act but it has lost so much credbility already that it will have to buy on a massive scale to make a scrap of difference."

The ECB has already bought over €200bn of Italian, Spanish, Greek, Irish, and Portuguese bonds, justifying it as necessary to ensure the proper "transmission" of monetary policy. The move caused a storm in Germany, prompting the resignation to both German members of the ECB board last year. A chorus of economists have exhorted the ECB to cap Spanish and Italian yields at 5pc or so by pledging unlimited intervention. Yet such a naked rescue of insolvent states would trigger legal challenges in the courts for breach of the EU's no-bailout clause.

Professor Paul De Graue from the London School of Economics said the bank should go ahead anyway and "let the lawyers argue about it for the next ten years."

There are no such constraints on outright QE or money printing by the ECB, in extremis. Monetarists say the bank should buy the bonds of all EMU states to lift the entire region and prevent debt-deflation taking hold in the South.

Fresh data yesterday shows how desperate the crisis is becoming in Spain. The property crash is accelerating. House prices fell at a 12.6pc rate in the first quarter of this year, compared to 11.2pc the quarter before, and 7.4pc in the quarter before that. Prices have fallen 26pc from their peak.

"Fundamentals point to a further 25pc decline," said Standard & Poor's in a report on Thursday. It may take another four years to clear a glut of one million homes left from the building boom.

Mrs Merkel chided the country gently yesterday for letting a "property bubble" spin out of control in the boom years. Her words prompted a furious reaction from Madrid.

Foreign minister Jose Manuel Garcia-Margallo said Spain itself was the victim, flooded with cheap capital from northern European banks. "It is true that Spain and some other countries lived beyond their means but that was because banks from the core made lots of money investing here," he said.

He added: “We are rolling up our sleeves and doing everything possible to protect British families and firms.”

The bank funding scheme will allow high-street banks to temporarily “swap” their assets, such as their mortgage books, with the Bank of England in return for money they can loan to customers.

It is the latest attempt – following the cut in interest rates to record lows and the £325 billion quantitative easing scheme – to kick-start the British economy following the start of the financial crisis four years ago.

The scheme should also help British banks shield themselves from the impact of the eurozone crisis – as they will not have to rely on international finance markets to raise money, which is currently difficult.

Sir Mervyn said that the “euro area crisis” has created a “large black cloud of uncertainty hanging over our economy”.

He added that the “ugly picture” had created “formidable challenges” and that despite trillions of pounds being pumped globally into the economy over the past two years “we are back to where we were”.

Speculation mounted that the Spanish government will require a full-blown government bailout after the country’s borrowing rates rose above the psychologically-important rate of seven percent.

The country has already been offered a 100 billion euro “line of credit” to help Spanish banks by their European counterparts – but international investors do not believe this is sufficient.

This weekend, Greece will again hold elections and there are fears that parties refusing to support austerity plans will win the balance of power – which could lead to the country being forced out of the euro.

World leaders will meet for the G20 summit in Mexico next week when Angela Merkel, the German Chancellor, and other European leaders will be under intense pressure to solve the ongoing crisis in the single currency.

Mr Osborne reiterated warnings that Greece may have to leave the euro before the economic chaos can end.

“The political paradox Europe faces right now is this: some or all of these things are needed for the existing countries in the eurozone to make their currency work, but it may take Greek exit to make it happen,” the Chancellor said. “That is a decision for the eurozone and the Greek people. One thing is for sure: if exit is the chosen route then the eurozone must have a very good plan in place to prevent contagion.

“The worst case for everyone would be exit without a sufficiently ambitious response. But carrying on with the current uncertainty and instability is not much better. A time for decisions has come.”

Also appearing at the Lord Mayor’s banquet for bankers, Sir Mervyn also set out the damaging impact of the ongoing crisis.

“The euro-area crisis has had more dramatic moments, in which the ultimate resolution seems to be at hand only to be confounded by subsequent events, than there are episodes in The Killing,” the Bank Governor said, referring to the Danish crime drama.

“The effect of the euro-area crisis has been to create a large black cloud of uncertainty hanging over not only the euro area but our economy too, and indeed the world economy as a whole…The black cloud has dampened animal spirits so that businesses and households are battening down the hatches to prepare for the storms ahead. The result is that lower spending leads to lower incomes and a self-reinforcing weaker picture for growth.”

However, Sir Mervyn echoed assurances from the Chancellor that the situation would improve with Government action.

He added: “Leaders of the G20 will next week confront formidable challenges. In the United Kingdom, we can and will get through this. But it would be naïve to pretend that any of us can know when the storms from overseas will have passed over our shores and the economic skies begin to brighten.”

The Treasury and Bank of England unveiled plans for two different schemes to help provide funding for banks.

The “funding for lending scheme” will “provide funding for an extended period of several years, at rates below current market rates and linked to the performance of banks in sustaining or expanding their lending”. Although backed by the Treasury, the scheme will be run by the Bank of England and will not therefore add to Government borrowing.

Ministers hope that the scheme will lead to a cut in the cost of mortgage borrowing. Over the past six months, two-year fixed mortgage rates have risen from 3.22 percent to 3.66 percent. Many banks have also increased their standard mortgage rates.

It is understood that the bank funding scheme will be introduced rather than increasing again the size of the quantitative easing programme, as some economists have recommended.

The scheme was first discussed at the quad of senior ministers – David Cameron, Nick Clegg, Danny Alexander and Mr Osborne – about a month ago. The decision to only announce the programme may spark allegations that the Government was seeking to overshadow the Prime Minister’s appearance at the Leveson Inquiry.