Markets drop, borrowing costs up after Italy's election stalemate

ROME (Reuters) - The Italian stock market fell and state borrowing costs rose on Tuesday as investors took fright at political deadlock after a stunning election that saw a comedian's protest party lead the poll and no group secure a clear majority in parliament.

"The winner is: Ingovernability" ran the headline in Rome newspaper Il Messaggero, reflecting the stalemate the country would have to confront in the next few weeks as sworn enemies would be forced to work together to form a government.

In a sign of where that might lead, former prime minister Silvio Berlusconi indicated his center-right might be open to a grand coalition with the center-left bloc of Pier Luigi Bersani, which will have a majority in the lower house thanks to a premium of seats given to the largest bloc in the chamber.

Results in the upper house, the Senate, where seats are awarded on a region-by-region basis, indicated the center-left would end up with about 119 seats, compared with 117 for the center-right. But 158 are needed for a majority to govern.

Any coalition administration that may be formed must have a working majority in both houses in order to pass legislation.

Comedian Beppe Grillo's anti-establishment 5-Star Movement won the most votes of any single party, taking 25 percent. He shows no immediate inclination to cooperate with other groups.

Despite talk of a new election, the main established parties seem likely to try to avoid that, fearing even more humiliation.

World financial markets reacted nervously to the prospect of a stalemate in the euro zone's third largest economy with memories still fresh of the crisis that took the 17-member currency bloc to the brink of collapse in 2011.

In a clear sign of worry at the top over what effect the elections could have on the economy, Prime Minister Mario Monti, whose austerity policies were repudiated by voters, called a meeting with the governor of the central bank, the economy minister and the European affairs minister for later on Tuesday.

Other governments in the euro zone sounded uneasy. Allies of German Chancellor Angela Merkel made no secret of disappointment at Monti's debacle and urged Rome to continue with economic reforms Berlin sees as vital to stabilizing the common currency.

France's Socialist finance minister also expressed "worry" at the prospect of legislative deadlock in Italy but said that Italians had rejected austerity and hoped Bersani's center-left could form a stable government to help foster growth in Europe.

INSTABILITY

Fabio Fois, an economist at Barclays bank, said: "Political instability is likely to prevail in the near term and slow the implementation of much needed structural reforms unless a grand coalition among center-left, center-right and center is formed."

Berlusconi, a media magnate whose campaigning all but wiped out Bersani's once commanding opinion poll lead, hinted in a telephone call to a morning television show that he would be open to a deal with the center-left - but not with Monti, the technocrat summoned to replace him in a crisis 15 months ago.

"Italy must be governed," Berlusconi said, adding that he "must reflect" on a possible deal with the center-left. "Everyone must be prepared to make sacrifices," he said of the groups which now have a share of the legislature.

The Milan bourse was down more than four percent and the premium Italy pays over Germany to borrow on 10-year widened to a yield spread of 338.7 basis points, the highest since December 10.

At an auction of six-month Treasury bills, the government's borrowing costs shot up by more than two thirds. Investors demanded a yield of 1.237 percent, the highest since October and compared to just 0.730 percent in a similar sale a month ago.

Berlusconi, who was forced from office in November 2011 as borrowing costs approached levels investors feared would become unsustainable, said he was "not worried" about market reaction to the election and played down the significance of the spread.

The poor showing by Monti's centrist bloc reflected a weariness with austerity that was exploited by both Berlusconi and Grillo; only with the help of center-left allies did Bersani beat 5-Star, by just 125,000 votes, to control the lower house.

The worries immediately went beyond Italy's borders.

"What is crucial now is that a stable functioning government can be built as swiftly as possible," said German Foreign Minister Guido Westerwelle. "This is not only in the interests of Italy but in the interests of all Europe."

The euro skidded to an almost seven-week low against the dollar in Asia on fears about the euro zone's debt crisis. It fell as far as $1.3042, its lowest since January 10.

"NON-PARTY" SURGES TO THE TOP

Commentators said all Grillo's adversaries underestimated the appeal of a grassroots movement that called itself a "non-party", particularly its allure among young Italians who find themselves without jobs and the prospect of a decent future.

The 5-star Movement's score of 25.5 percent in the lower house was just ahead of the 25.4 percent for Bersani's Democratic Party, which ran in a coalition with the leftist SEL party, and it won almost 8.7 million votes overall - more than any other single party.

"The 'non-party' has become the largest party in the country," said Massimo Giannini, commentator for Rome newspaper La Repubblica, of Grillo, who mixes fierce attacks on corruption with policies ranging from clean energy to free Internet.

Grillo's surge in the final weeks of the campaign threw the race open, with hundreds of thousands turning up at his rallies to hear him lay into targets ranging from corrupt politicians and bankers to German Chancellor Angela Merkel.

In just three years, his 5-Star Movement, heavily backed by a frustrated generation of young Italians increasingly shut out from permanent full-time jobs, has grown from a marginal group to one of the most talked about political forces in Europe.

RECESSION

"It's a classic result. Typically Italian," said Roberta Federica, a 36-year-old office worker in Rome. "It means the country is not united. It is an expression of a country that does not work. I knew this would happen."

Italy's borrowing costs have come down in recent months, helped by the promise of European Central Bank support but the election result confirmed fears of many European countries that it would not produce a government strong enough to implement effective reforms.

A long recession and growing disillusionment with mainstream parties fed a bitter public mood that saw more than half of Italian voters back parties that rejected the austerity policies pursued by Monti with the backing of Italy's European partners.

Monti suffered a major setback. His centrist grouping won only 10.6 percent and two of his key centrist allies, Pier Ferdinando Casini and lower house speaker Gianfranco Fini, both of parliamentarians for decades, were booted out.

"It's not that surprising if you consider how much people were let down by politics in its traditional forms," Monti said.

Berlusconi's campaign, mixing sweeping tax cut pledges with relentless attacks on Monti and Merkel, echoed many of the themes pushed by Grillo and underlined the increasingly angry mood of the Italian electorate.

Even if the next government turns away from the tax hikes and spending cuts brought in by Monti, it will struggle to revive an economy that has scarcely grown in two decades.

Monti was widely credited with tightening Italy's public finances and restoring its international credibility after the scandal-plagued Berlusconi, who is currently on trial for having sex with an under-age prostitute.

But Monti struggled to pass the kind of structural reforms needed to improve competitiveness and lay the foundations for a return to economic growth, and a weak center-left government may not find it any easier.

(Additional reporting by Barry Moody, Gavin Jones, Catherine Hornby, Lisa Jucca, Steven Jewkes, Steve Scherer and Naomi O'Leary; Writing by Philip Pullella; Editing by Alastair Macdonald)

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Consumer borrowing surges as economy improves (AP)

By MARTIN CRUTSINGER, AP Economics Writer Martin Crutsinger, Ap Economics Writer – Mon Jan 9, 6:56 pm ET

WASHINGTON – Americans are feeling confident enough in the economy to go back to a time-honored tradition — taking on a little extra debt.

Consumer borrowing surged in November by $20.4 billion, the Federal Reserve said Monday. It was the third straight increase and the largest monthly gain in a decade.

The jump in borrowing was largely because people took out more loans to buy cars and swiped their credit cards frequently to purchase holiday gifts.

In November, total consumer borrowing rose to seasonally adjusted $2.48 trillion. That's nearly at pre-recession levels and up from a post-recession low point of $2.39 trillion reached in September 2010. Borrowing had tumbled for more than two years during and immediately after the recession.

Since then, consumers have increased their borrowing in 13 of the past 14 months. Americans are taking on more debt after seeing the unemployment rate drop and the economy improve, albeit modestly. Many are also leaning on their credit cards and loans to make up for wages that haven't kept pace with inflation this year.

Holiday sales were solid in November, and the U.S. auto industry had its two best sales months for the year in November and December. The Fed's credit report appeared to reflect those sales.

The category that measures credit card debt rose in November by $5.6 billion, the most since March 2008. The gauge that tracks auto loans and student loans increased $14.8 billion, nearly matching July's gain that was the biggest since February 2005.

Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University, said many consumers were likely persuaded by incentives that retailers and auto dealers offered to boost sales.

Still, Paul Edelstein, director of financial economics at IHS Global Insight, expressed concern that consumers may have relied on their credit cards to finance holiday purchases.

The rise in borrowing comes as many consumers are seeing little to no growth in their paychecks. Inflation-adjusted, after-tax incomes shrank by nearly 2 percent in the July-September period.

To make up the difference, many consumers have reduced the amount they save. The savings rate fell in November to 3.5 percent — the lowest level since the recession began. The savings rate jumped in 2008 to 5 percent and stayed above that level until early last year.

Sohn said he expects the savings rate to level off near November's level. He also said the increase in consumer demand should prompt businesses to hire more workers. Those gains would allow consumers to finance their spending with rising incomes.

In December, employers added 200,000 jobs and the unemployment rate fell to 8.5 percent, the government said Friday. It was the sixth month in a row that the economy had added at least 100,000 jobs, the longest streak since 2006. And the unemployment rate dropped to its lowest level in nearly three years.

With more jobs and better pay, consumers could step up spending even further. That could lead more companies to add workers, which ultimately drives more spending and more hiring. Economists call that a virtuous cycle.

Still, a recession in Europe could dampen demand for U.S. exports and weaken financial markets.

The Federal Reserve's borrowing report covers auto loans, student loans and credit cards. It excludes mortgages, home equity loans and other loans tied to real estate.

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Consumer borrowing surges as economy improves (AP)

By MARTIN CRUTSINGER, AP Economics Writer Martin Crutsinger, Ap Economics Writer – Mon Jan 9, 6:56 pm ET

WASHINGTON – Americans are feeling confident enough in the economy to go back to a time-honored tradition — taking on a little extra debt.

Consumer borrowing surged in November by $20.4 billion, the Federal Reserve said Monday. It was the third straight increase and the largest monthly gain in a decade.

The jump in borrowing was largely because people took out more loans to buy cars and swiped their credit cards frequently to purchase holiday gifts.

In November, total consumer borrowing rose to seasonally adjusted $2.48 trillion. That's nearly at pre-recession levels and up from a post-recession low point of $2.39 trillion reached in September 2010. Borrowing had tumbled for more than two years during and immediately after the recession.

Since then, consumers have increased their borrowing in 13 of the past 14 months. Americans are taking on more debt after seeing the unemployment rate drop and the economy improve, albeit modestly. Many are also leaning on their credit cards and loans to make up for wages that haven't kept pace with inflation this year.

Holiday sales were solid in November, and the U.S. auto industry had its two best sales months for the year in November and December. The Fed's credit report appeared to reflect those sales.

The category that measures credit card debt rose in November by $5.6 billion, the most since March 2008. The gauge that tracks auto loans and student loans increased $14.8 billion, nearly matching July's gain that was the biggest since February 2005.

Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University, said many consumers were likely persuaded by incentives that retailers and auto dealers offered to boost sales.

Still, Paul Edelstein, director of financial economics at IHS Global Insight, expressed concern that consumers may have relied on their credit cards to finance holiday purchases.

The rise in borrowing comes as many consumers are seeing little to no growth in their paychecks. Inflation-adjusted, after-tax incomes shrank by nearly 2 percent in the July-September period.

To make up the difference, many consumers have reduced the amount they save. The savings rate fell in November to 3.5 percent — the lowest level since the recession began. The savings rate jumped in 2008 to 5 percent and stayed above that level until early last year.

Sohn said he expects the savings rate to level off near November's level. He also said the increase in consumer demand should prompt businesses to hire more workers. Those gains would allow consumers to finance their spending with rising incomes.

In December, employers added 200,000 jobs and the unemployment rate fell to 8.5 percent, the government said Friday. It was the sixth month in a row that the economy had added at least 100,000 jobs, the longest streak since 2006. And the unemployment rate dropped to its lowest level in nearly three years.

With more jobs and better pay, consumers could step up spending even further. That could lead more companies to add workers, which ultimately drives more spending and more hiring. Economists call that a virtuous cycle.

Still, a recession in Europe could dampen demand for U.S. exports and weaken financial markets.

The Federal Reserve's borrowing report covers auto loans, student loans and credit cards. It excludes mortgages, home equity loans and other loans tied to real estate.

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Consumer borrowing up, but credit card use falls (AP)

By MARTIN CRUTSINGER, AP Economics Writer Martin Crutsinger, Ap Economics Writer – Mon Nov 7, 4:50 pm ET

WASHINGTON – Americans borrowed more in September to buy cars and attend college, but they charged less to their credit cards for a third straight month. The figures suggest that consumers are growing more cautious about taking on high-interest debt in a weak economy.

Total consumer borrowing rose by $7.4 billion in September, the Federal Reserve said Monday. In August, it had fallen by the most in 16 months.

The September increase reflected a 5.8 percent increase in borrowing in the category that includes car and student loans. But the category that covers credit card purchases dropped 1 percent after larger declines in July and August.

Credit card use has sunk nearly 19 percent since September 2008, the height of the financial crisis. For many consumers, adding debt with high interest rates is too risky when jobs are scarce, pay raises are few and unemployment has been stuck near 9 percent for more than two years.

"Households continue to prefer cash over credit as employment, income and wealth prospects remain feeble," said Gregory Daco, principal U.S. economist at IHS Global Insight.

The average annual percentage rate, or APR, on credit cards ticked up for variable-rate credit cards to 14.46 percent and was unchanged at 13.71 percent for fixed-rate credit cards, according Bankrate.com.

Auto loans are far cheaper. The average rate for a 48-month new-car loan was 5.31 percent last week.

The average rate for subsidized student loans was 4.5 percent last year, according to Student Loan Consolidator.com. Loans not subsidized by the federal government are capped at 6.8 percent through 2012.

Earlier this year, many economists worried the economy was at risk of slipping back into another recession. In August, the government said the economy grew at an annual rate of just 0.9 percent in the first half of the year, and Europe's debt crisis jolted financial markets.

Those fears have since eased. The economy grew at an annual rate of 2.5 percent in the July-September period, the government said, the best quarterly growth in a year. Consumer spending grew three times as fast as it had in the spring.

Still, growth would have to be nearly twice as high — consistently — to make a major dent in the unemployment rate, which has been stuck near 9 percent for more than two years.

And economists worry that the summer spending gains can't be sustained. Americans spent more in the July-September quarter even though they earned less. And they used their savings to make up the gap.

Troy Davig, an economist at Barclays Capital, said he expects consumers to borrow more in the coming months as the economy improves.

"Barring any major shocks, I think we will see gradual improvement," Davig said. "But we are not expecting anything dramatic in terms of credit growth."

Without more jobs and higher pay, consumers may be forced to cut back on spending. That would slow growth. Consumer spending accounts for 70 percent of economic activity.

On Friday, the government said the unemployment rate dipped to 9 percent in October from 9.1 percent, where it had been stuck for three months. The nation added 80,000 jobs, barely enough to keep pace with population growth.

Households began borrowing less and saving more when the country fell into a recession and unemployment surged. While economists believe Americans will gradually increase borrowing in coming months, they do not expect consumers to load up on debt the way they did during the housing boom.

Americans felt wealthier then and were more willing to take on added debt because of the soaring value of their homes.

The Federal Reserve's borrowing report covers auto loans, student loans and credit cards. It excludes mortgages, home equity loans and other loans tied to real estate.

___

AP Economics Writer Derek Kravitz contributed to this report.

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Consumer borrowing dropped $9.5 billion in August (AP)

By MARTIN CRUTSINGER, AP Economics Writer Martin Crutsinger, Ap Economics Writer – Fri Oct 7, 5:24 pm ET

WASHINGTON – Consumers slashed their borrowing in August by the most in 16 months. The drop suggests many worried about taking on new debt while the economy slumped and the stock market fluctuated wildly.

Fewer people used their credit cards. And a measure of demand for auto and student loans fell.

Total borrowing dropped $9.5 billion in August, the Federal Reserve said Friday. In July, borrowing increase $11.9 billion.

Americans have been struggling all year with high unemployment, meager pay raises and pricier goods and gas. That has depressed consumer spending, which fuels 70 percent of economic growth.

In August, consumer confidence tumbled to a two-year low, and retail sales were flat. The weak economy, along with gridlock in Washington and heightened concerns over Europe's debt crisis, rattled financial markets.

The August drop in borrowing was the largest since April 2010. Prior to that, consumers had increased their borrowing for 10 straight months.

Borrowing for auto and student loans plunged $7.2 billion in August. A category that includes credit cards fell $2.3 billion.

The overall decline lowered total borrowing to a seasonally adjusted $2.44 trillion. Borrowing is just 2.1 percent higher than the recent low hit in September of last year.

The August decline came as a surprise to economists who had been expecting a solid increase for the month. Some analysts said they believed the figure overstated the weakness in borrowing and reflected trouble the government has with seasonally adjusting the borrowing figures.

Troy Davig, an economist at Barclays Capital, said he expected borrowing to continue rising at a modest pace in coming months, reflecting his expectation that consumers will keep borrowing cautiously.

"We are looking for consumer borrowing to keep rising slowly at a pace that will not get ahead of income growth," Davig said.

Households began borrowing less and saving more when the country fell into recession and unemployment surged.

While economists believe borrowing will gradually increase in coming months, they don't expect consumers to load up on debt the way they did during the housing boom. Americans felt wealthier then and were more willing to take on added debt because of the soaring value of their homes.

The Federal Reserve's borrowing report covers auto loans, student loans and credit cards. It excludes mortgages, home equity loans and other loans tied to real estate.

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Summary Box: Consumer borrowing up for 8th month (AP)

CONSUMER CREDIT: Americans took on more debt in May for the eighth straight month. The increase pushed total consumer credit to a seasonally adjusted annual level of $2.43 trillion. That's 1.7 percent higher than the four-year low reached in September.

CREDIT CARDS: Borrowing on credit cards rose for only the second time in nearly three years. The category that includes auto and student loans also increased.

OUTLOOK: Borrowing is a sign of confidence in the economy. But economists do not expect sizable gains in coming months. High unemployment, slow wage growth and the weak housing market are making people more frugal.

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Car-buying fuels increase in consumer borrowing (AP)

WASHINGTON – Consumers borrowed more in January to purchase new cars but were once again frugal with their credit cards, offering a mixed sign of their confidence in the economy.

Borrowing rose 2.5 percent, or by $5 billion, the Federal Reserve said Monday. It was the fourth consecutive monthly gain and it increased total consumer debt to $2.41 trillion.

Strong car sales drove the increase. The category that includes auto loans rose 6.9 percent.

But credit card debt fell 6.4 percent in January — the 28th decline in 29 months — to lowest level since September 2004. Americans had increased their use of plastic in December for the first time since the financial crisis. But they cut back the following month, even though a Social Security tax cut is giving most households an extra $1,000 to 2,000 this year.

"People are still pretty cautious about using their credit cards," said David Wyss, chief economist at Standard & Poor's in New York. "We are coming out of a deep recession in which a lot of people got caught with too much debt."

Consumer debt is 0.7 percent above a three-year low hit in September. It is 6.6 percent below the peak hit in July 2008.

Analysts are predicting that consumers will borrow more in the months ahead, responding to the strengthening economy, a brighter outlook for jobs and the tax cut. But they said the increases will likely be gradual.

Michael Gapen, senior U.S. economist at Barclays Capital, said he expects consumer spending to grow as much as 3.5 percent in 2011, about double last year's gain.

"The passage of the tax package in December and the on-going improvement in labor market conditions will mean households will have more disposable income, which will help consumption," Gapen said.

The government reported Friday that the unemployment rate fell to 8.9 percent in February, the first time it has been below 9 percent in nearly two years.

Households began borrowing less and saving more as they struggled to cope with the deep 2007-2009 recession. People trimmed their spending when the unemployment rate began to rise.

The rise in auto loans marked the sixth consecutive month that this category has increased, reflecting a rebound in auto sales.

Even if economists' forecasts are accurate and borrowing does increase this year, analysts are not predicting that consumers will increase debt the way they had during the housing boom.

During that time, households felt wealthier because of soaring home values. But when home prices fell, they cut back on borrowing. And the trend accelerated after job losses mounted and many people struggled to get their debt under control.

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