Heracles FX

Olympus Wealth Management has just launched its newest Managed FX Account, Heracles FX.

To learn more and to download the Executive Summary and Trade Breakdown, use the link below

Heracles FX

This account has been running since July 2011 for corporate investors only, but thanks to the success Olympus Wealth Management has had with it, it is now open to private investors

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The Week Ahead - Week of March 18, 2012

Shift in FX drivers may provide support for the USD

This week U.S. Treasury yields broke out of their ranges and rocketed higher. 10-year yields rose nearly 28bps since Monday and advanced above the 200-day sma for the first time since July to reach current levels of around 2.31%. U.S. equity markets rallied significantly as well this week with the S&P 500 closing above 1400 for the first time since 2008 while the Dow Jones Industrial Average traded at levels that have not been seen since 2007. At the same time, the USD gained against its major counterparts most notably against the Japanese yen. This may be the start of a significant shift in FX drivers as a risk rally has typically coincided with USD weakness and a sell-off in US Treasuries (yields higher). What we are seeing now is that the USD and its relationship to the risk-on/risk-off environment is deteriorating as markets revert back to fundamental drivers and interest rate differentials. The correlation between the Dollar Index and the S&P 500 has diminished with the 30-day rolling correlation (based on % change) now at -0.42 from -0.59 late last week. This underscores the breakdown in the inverse relationship between risk and the greenback. On a shorter term basis (5-day), the correlation has actually turned positive for the first time since July of last year which indicates a positive relationship between the USD and risk (i.e. risk-on, dollar strength).

U.S. economic data and what it implies for Fed policy moving forward is increasingly impacting exchange rate fluctuations while risk sentiment has taken a backseat. Positive data surprises have been constructive for the greenback as traders price out the likelihood of QE3 as the economy improves. Likewise, softer data weighs on the buck as seen with Friday’s weak Feb. industrial production, softer core CPI, and unexpected decline in consumer confidence. While the Fed has not completely taken the option of more asset purchases off the table, it has backed off from the prospect of additional stimulus for now and acknowledged positive developments in labor markets and expects “moderate” (upgraded from “modest”) economic growth. The pledge to keep rates low until late 2014 remains unchanged, however if more members join Lacker in his dissent with regards to the time commitment, yields could move higher and the dollar may follow suit. The week ahead sees a number of Fed speakers scheduled which include FOMC voting members Dudley, Lockhart, and Chairman Bernanke. There is relatively light data flow in the U.S. with key February housing reports (new and existing home sales, housing starts) and leading indicators of note. We will also be monitoring weekly jobless claims which hit multi-year lows of 351k.

We expect that the USD will continue to be the beneficiary of safe haven flows as the CHF and JPY are expected to remain weak as a result of SNB and BOJ policy stance. This past week, the Swiss National Bank reiterated its commitment to maintain a ceiling on the franc while the Bank of Japan seeks to achieve its 1% inflation target which may require further easing of monetary policy as Japan currently faces deflation. The removal of a significant tail risk in Europe and easing of financial conditions after extraordinary liquidity operations provided by the ECB have resulted in a rise in European bourses and reduction in sovereign yield spreads. We would not downplay the severity of the Euro zone crisis however as the situation remains fragile. Political disruptions may intensify heading into key elections and structural imbalances as well as a pending recession continue to be a major concern. Euro zone PMI’s are scheduled for release in the week ahead and this will provide insight into the economic growth of key nations in the region.

Budget D-day for Osborne

The highlight event in the UK next week is the Chancellor presenting his Budget to Parliament on Wednesday 21 March at 1230GMT.  This comes at a difficult time for the exchequer, growth faltered in the fourth quarter of this year, and although it is expected to recover later this year it is likely to remain fairly lackluster this year and next.

However, as much as the Chancellor may want to try and boost growth he needs to balance this with preserving the UK’s prized triple A credit rating. Thus, don’t expect a deviation from the government’s austerity program, as it has become even more pressing since rating agency Fitch joined Moody’s and put the UK on ratings watch negative last week.

Osborne could have some good news on this front. There are signs the UK’s finances are better than expected. The Office for Budget Responsibility’s borrowing estimate for 2011-2012 was GBP127 billion, however the actual figure is likely to come in below this at the GBP122 billion mark after tax receipts were extremely strong in January and public spending has been slower than anticipated.

The UK still has a mountain to climb when it comes to fiscal consolidation, so don’t expect any un-funded giveaways from Osborne this year. Instead we expect a few changes that may cause some volatility in sterling-based markets in the middle of next week.

The markets are likely to react positively to anything that is pro-business, for obvious reasons. But this budget could be more muted than usual since a corporation tax cut is due to come into effect in April 2012 as part of the Finance Bill.  We don’t believe the Chancellor will cut the new 25% rate any further this year, although a small cut like 1% could surprise the market and might be considered affordable by the Chancellor especially if it could help boost jobs in the UK economy.

Any reduction in red tape for business is also likely to be warmly welcomed by the markets including the outcome of the Office for Tax Simplification’s review of the taxation program for small businesses and a reduction in the compliance burden for firms with foreign subsidiaries.

Added to that any cut to the top 50% rate of tax, which could be reduced to 45% and maybe even back to its original 40%, may not be popular with the overall electorate but could help boost consumption among high earners. The Chancellor may admit that the tax increase for those earning GBP150K or more failed to bring in the GBP 2 billion revenue expected, so is not worth keeping in place.

We believe a pro-business budget could have a temporary upward impact on the pound only. However, a budget that either 1, constrains growth or 2, threatens the UK credit rating could have a longer-term negative impact on sterling. The pound had a storming end to last week’s trading session as the dollar gave back recent gains. It closed the week on Friday approaching its 200-day sma resistance at 1.5870. This could thwart further gains as we start the week as markets get nervous about the prospect of Osborne’s Budget and take profits.

We also get MPC minutes and inflation out next week. Any sign that inflation is not falling as fast as the MPC predicts could see expectations of QE get taken off the table. This could limit future declines in the pound especially versus the euro, the CHF, the yen and the dollar. These currency crosses are all being driven by relative monetary policy. The US-UK interest rate differential has been widening since October 2011 helping to keep GBPUSD fairly weak, thus if movement in this spread slows then further losses in GBPUSD could be muted going forward.

The ECB's tough talk

There were two developments in the Eurozone last week that could impact the value of the euro. The first was the Bundesbank’s annual meeting last week where President Jens Weidmann said that the ECB needs to start thinking about how to unwind its crisis measures like LTRO loans to Europe’s banking sector.

Added to this the head of the Austrian Central Bank Nowotny said that further rate cuts from the ECB are not on the table right now. Weidmann was careful not to say that all emergency measures to help support the banks should be removed, however, he did say that the consequence of the LTRO auctions clearly raised the risks that the ECB now has to burden in the form of low quality collateral that banks from the currency bloc can use to get hold of ECB cash.

So the ECB isn’t exactly hawkish, but it is unlikely to add any new stimulative measures to its policy mix any time soon.  But what does this mean for the euro? We have noted in previous reports that the interest rate differential between the US and Germany (as benchmark for the currency bloc) has widened for the last five months. This has contributed to the bout of euro weakness we have seen since the late summer and the failure of EURUSD to crack 1.35 in recent weeks. Thus, now that the ECB is talking tougher than it has in the past about inflation risks the spread may not widen at such a fast clip.

This doesn’t mean that we will see a rebound in EURUSD any time soon, even though the single currency had a storming finish to the European session on Friday. Instead it suggests that further declines could be muted and we are back to range trading. As we start a new week the range to note in EURUSD is 1.3050 – 1.3250.

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The Week Ahead - Week of February 19, 2012

Greece’s day of reckoning is only the start

Another week and another Greek deadline has come and gone. But EU leaders have vowed yet again that a final decision will come on Monday, and this time they really, really mean it. Except that they’re still working over the weekend on the final details of the accord, so yet another impasse or breakdown could materialize. But we’ll give them the benefit of the doubt and expect that EU finance ministers will approve the second bailout, likely requiring some form of escrow account. Such an arrangement will set the stage for further showdowns in the months ahead, as Greece will repeatedly need to meet deficit reduction targets to obtain subsequent aid disbursements, and their track record there is not good.

While we think the Eurogroup will approve the next Greek bailout on Monday, we can’t rule out last minute hang-ups on key issues, potentially pushing the decision into the March 1-2 EU Summit. Eurogroup officials will meet informally on Sunday night and begin the formal session around 1430GMT on Monday. If they do approve the bailout, we would look for risk assets (stocks and commodities) and EUR to make yet another minor relief rally. Clearly, if they don’t approve of the aid, we would expect risk markets and EUR to come off relatively hard, as the risk of a disorderly default would be intensified. The ultimate deadline to keep in mind is the March 20 maturity of EUR 14.5 bio in Greek government debt.

While much attention has been focused on the question of whether Greece will or won’t receive the second bailout package and avoid a default, we think the bigger risks are from the fallout over the Greek debt swap deal with private sector investors (PSI). In this situation, we are looking at many so-called ‘known unknowns.’ This stems from the credit default swaps on Greek government debt and whether they will be triggered, which financial firms are on the hook for them, and for how much.

The current terms of the PSI negotiations strongly suggest that a ‘credit event’ will be declared, but ultimately that’s up to a committee of ISDA (International Swaps Dealers Association, the CDS and derivatives industry self-regulatory body) to determine. However, reports circulating on Friday indicated that some private creditors were already preparing legal action against the Greek government over the amount of losses they’re being forced to swallow. Friday also saw the Greek government announce that it’s preparing a ‘collective action clause’ law (CAC) for outstanding Greek government debt. CAC’s permit a super-majority of bond holders to alter the terms of existing bonds, making the debt swap deal a non-voluntary affair. Various credit rating agencies have indicated imposition of CAC’s would constitute a ‘credit event’, likely triggering CDS payouts. This brings us back to the known unknowns of which financial firms are liable and for how much, potentially sparking global financial sector upheaval as investors retreat to safe havens. And then there are the ‘unknown unknowns,’ where we don’t know what we don’t know. For many, this is the bigger risk out there, potentially making the fallout from the Greek debt deal make Lehman look like a walk in the park.

Overall, we think a resolution to the Greek rescue drama next week may simply be the start of a larger, messier drama involving previously unentangled financial institutions globally. At the minimum, we would expect a deal on Greece to offer only a short-lived respite, before markets begin to question anew the sustainability of Greece over the longer haul.

Further JPY-weakness may be in store

The JPY has undergone a distinct adjustment lower versus other major currencies over the past week following the BOJ’s decision to initiate another round of QE and establish an inflation target of +1.0% (latest CPI was -0.3%), suggesting more QE will be needed in the future. Together with Japan’s trade surplus evaporating into a deficit (January trade data due out on Monday morning in Tokyo; adjusted trade deficit of –JPY 850 bio expected), we think there is scope for further JPY weakness in the weeks ahead. Anecdotal reports also suggest Japanese investors started to actively reduce their portfolio hedges, leading them to buy foreign FX and sell JPY, adding yet another flow to JPY-selling pressure.

USD/JPY and many of the JPY-crosses have reached 3-month highs and are testing key resistance levels, such as USD/JPY 79.50/80.00 and EUR/JPY 104.50/105.00. While we think there is further upside in store, we would avoid getting long at these levels and prefer to wait for a pullback to pursue long entries (selling JPY), ideally around 78.00/50 in USD/JPY and 102.70/103.20 in EUR/JPY. Breaks above the resistance zones mentioned above may see JPY-pairs move directly higher in this adjustment. Potential turmoil emanating from Europe next week could provide the desired pullback, if investors turn back to the JPY and the USD on safe haven demand.

Light US data may see risk rally stall

Next week sees the US President’s Day holiday on Monday where US stock and futures markets will be closed. The rest of the week sees relatively minor US economic data (existing/new home sales; weekly jobless claims) only late in the week. We note this because the risk rally currently underway has been extremely tentative and seems to require frequent injections of better-than-expected news and data to keep going. More positive US data reports of late have been a primary source of that optimism, but with minimal data out of the US next week, that medicine may be in short supply. Together with potential disappointment or outright disarray out of Europe, we would not be surprised to see a more negative correction to risk assets and a further bounce for the USD.

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ROI for January 2011

Its been another good month all round for Olympus Wealth Management with all our Managed Accounts ended up in the black. Below is a breakdown the monthly return for January



The Athena Futures Managed Account returned 7.54% in January
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The Ares Soft Commodities Managed Account returned 9.91% in January
read more: Ares Soft Commodities

The Hades Energy Managed Account returned 4.18% in January
read more: Hades Energy

The Apollo Metals Managed Account returned 6.23% in January
read more: Apollo Metals

The Poseidon FOREX Managed Account returned 6.05% in January
read more: Poseidon FOREX


Olympus Wealth Management are also near to launching its new FOREX Managed account concentrating on Night Scalping on the Canadian Dollar. For more information about this please click here

For more information on how to open an account, please use the link below

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Yen Slumps After Japan Expands Bond Buying

The yen plunged to its lowest level in more than three months against the dollar after the Bank of Japan unexpectedly expanded its asset-purchase program.

Japan's central bank caught markets off guard by ramping up its bond buying by an additional ¥10 trillion ($128.92 billion), and set a de facto inflation target in an effort to pull the country out of its deflationary spiral. The asset purchases undermine the yen by increasing the money supply, much like the bond buying undertaken in 2010 by the Federal Reserve weakened the dollar.

With the yen already under pressure because of Japan's grim economic fundamentals, the news encouraged traders to snap up dollars. The greenback shot up by more than 1%, with its session high of ¥78.54 marking the yen's weakest point since Nov. 1, the day after the Bank of Japan launched an intervention to knock the yen back from post-World War II highs.

Late Tuesday in New York, the dollar was at ¥78.44, down from ¥77.57 late Monday. The euro was at $1.3131 from $1.3187. The pound was at $1.5694 from $1.5766, while the dollar bought 0.9195 Swiss franc from 0.9164 franc late Monday.

Analysts, however, predicted the yen soon would begin to edge higher again, especially because the world's largest economies are embarking on what Deutsche Bank on Tuesday called "competitive quantitative easing," or bond buying. There is speculation that the Federal Reserve may launch a third round of bond buying.

"I don't think in the long run [a weak yen is] going to be sustainable, with the prospect of QE3 still on the table," said Chris Fernandes, vice president and FX adviser at Bank of the West in San Francisco.

Because worries about Greece's debt still are sending traders in search of haven currencies, "I foresee risk aversion rearing its ugly head again," Mr. Fernandes said, which will drive investors back to the yen.

The Bank of Japan's decision was the latest in a series of moves demonstrating Japan's resolve to combat a strong yen, which is undercutting the country's efforts to engineer an economic recovery. In the final quarter of 2011, the world's third-largest economy shrank at an annualized 2.3%, which coincided with exports tumbling to their weakest level in more than 30 years.

In August, Japan set up a $100 billion facility to encourage companies to exchange yen for foreign currencies. Meanwhile, the central bank disclosed this month that it had secretly sold yen during the first week of November, in the immediate wake of its Oct. 31 yen-selling spree.

At least for one day, the news out of Japan momentarily diverted traders' attention away from Greece. Fears that the Hellenic republic may default are festering, despite parliamentary backing of austerity measures designed to secure another round of international assistance.

Meanwhile, the euro came under renewed pressure after euro-zone finance ministers scrapped a planned meeting in Brussels Wednesday that had been called to approve Greece's bailout and debt restructuring. Athens's warring political factions have failed to give European leaders clear pledges on how to implement new belt-tightening moves the country's Parliament approved on Sunday.

"After the weekend's vote, people are realizing there's more stuff to be done, and the stuff that needs to be done is being postponed," said Brian Kim, FX strategist at RBS Securities. The single currency is suffering from "a post-Greek vote hangover."

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UK unemployment continues to climb

UK unemployment rose by 48,000 to 2.67 million in the three months to December, official figures have shown.

The unemployment rate was 8.4%, the Office for National Statistics said, the highest for 16 years.

The number of young people without a job rose 22,000 to 1.04m, taking the unemployment rate for 16- to 24-year-olds to 22.2%.

The number of people claiming Jobseeker's Allowance in January increased by 6,900 to 1.6 million.

While the unemployment rate is now at its highest since 1995, the number of job vacancies rose to 476,000 in the three months to January.

Lord Freud, a work and pensions minister, told BBC News: "This clearly shows we are by no means out of the woods yet."

"But it is quite a mixed picture. There are signs of stability. The inactivity level is coming down," he said.

Labour's shadow work and pensions secretary, Liam Byrne, said it was clear government policy was not working.

"Today's figures make for grim reading for the millions of squeezed families desperate for good news on the economy.

"With unemployment at its highest rate since 1995 and long term youth unemployment doubling in the last year, ministers must now get a grip," he said.

Contradictory trends

Despite the continued rise in unemployment, the proportion of the workforce in paid work also rose.

The number of people in jobs went up by 60,000 in the last three months the year to 29,130,000.

This meant the employment rate rose by 0.1 percentage points in the three months to December to 70.3%, although this rate was still 0.2 percentage points lower than a year ago.

The apparent contradiction is explained by the fact that the number of people classified as economically inactive has dropped.

Their number fell by 78,000 to 9.29 million.

This included a drop in the number of people categorised as long term sick or retired, who went back into the workforce.

Howard Archer of IHS Global Insight said overall the figures indicated that worsening employment outlook had eased recently.

"[This] supports hopes that the economy will return to modest growth in the first quarter and avoid recession," he said.

"Admittedly claimant count unemployment rose at a modestly increased rate of 6,900 in January to a two-year high of 1.605m but this is well down on the increases seen a few months ago."

Earnings squeezed

The ONS data also showed that average earnings increased by 2% in the year to December, unchanged from the previous month.

That figure lags well below the rate of inflation and indicates a continued squeeze on spending power.

Earlier this week, official figures showed the Consumer Prices Index (CPI) measure of inflation fell to 3.6% in January, from 4.2% in December.

Vicky Redwood, economist at Capital Economics, said: "We continue to expect unemployment to rise much further in response to the weakness in the wider economy.

"At least with inflation falling, the squeeze on real pay is easing. But it won't be for a few months yet until real pay actually starts to rise again."

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Apple, Suppliers Test Tablet With Smaller Screen

Apple Inc. is working with component suppliers in Asia to test a new tablet computer with a smaller screen, people familiar with the situation said, as it looks to broaden its product pipeline amid intensifying competition and maintain its dominant market share.

Officials at some of Apple's suppliers, who declined to be named, said the Cupertino, Calif., company has shown them screen designs for a new device with a screen size of around eight inches and said the company is qualifying suppliers for it. Apple's latest tablet, the iPad 2, comes with a 9.7-inch screen. It was launched last year.

One person said the smaller device will have a similar-resolution screen as the iPad 2. Apple is working with screen makers including Taiwan-based AU Optronics Co. and LG Display Co. of South Korea to supply the test panels, the person said.

Apple, which works with suppliers to test new designs all the time, could opt not to proceed with the device.

An Apple spokeswoman in California declined to comment.

The move comes as Apple is preparing to announce a new iPad in early March, according to people familiar with the matter. That device is expected to have a higher-resolution screen than the iPad 2 with a similar screen size, according to people familiar with the matter. A version will run on fourth-generation wireless networks from Verizon Wireless and AT&T Inc.

A smaller tablet device would broaden Apple's portfolio and could help it compete with rivals such as Samsung Electronics Co. and Amazon.com Inc. It would also begin to emulate the strategy it took for its iPod music player, which it released in a number of shapes and sizes over time. The company has taken a different tack with its iPhone, releasing one design at a time.

Analysts said a tablet with a smaller screen would help Apple expand its market share in the increasingly competitive market.

Diana Wu, an analyst at Capital Securities in Taipei, says that consumer demand for Samsung's 5.3-inch Galaxy Note and Amazon's 7-inch Kindle mean "consumers want a tablet that is smaller than the existing 9.7-inch iPad." "IPad's features are good enough, but pricing would be an important factor in the mass market, especially in big emerging markets like China and India," she said.

The iPad represented more than 61.5% of world-wide tablet shipments in the third quarter, down from 63.3% in the second quarter, according to market researcher IDC.

Samsung, which supplies Apple with key components such as memory chips and processors used in iPads, sells its Galaxy Tab iPad competitor in three screen sizes: a seven-inch, an 8.9-inch and a 10.1-inch.

Amazon.com's Kindle Fire has a seven-inch screen size and is priced at $199, well below the iPad's entry-level price of $499.

Apple has long contemplated different tablet designs, according to people familiar with the matter. But it had indicated it was wedded to the iPad's current size.

In October 2010, Steve Jobs, Apple's late co-founder and chief executive, criticized smaller tablets, saying the iPad's 9.7-inch form was "the minimum size required to create great tablet apps."

Apple, like many other big personal-computer and consumer-electronics brands, doesn't actually make most of its products. It hires manufacturing specialists—many of which are from Taiwan and have extensive operations in China—to assemble its gadgets based on Apple's designs.

They use parts from other outside suppliers, many of which also are from Asia. The arrangement frees Apple and its fellow vendors from running complicated, labor-intensive production lines, while the ability of Taiwanese companies to slash manufacturing costs helps cut product prices over time.

Apple, facing growing scrutiny about working conditions in its supply chain, Tuesday continued to combat the criticism.

Apple CEO Tim Cook , appearing at a Goldman Sachs technology conference in San Francisco, said the company takes working conditions very seriously. "The supply chain is complex. We believe every worker has the right to a safe working environment. Apple's suppliers must live up to this to do business with Apple," he said.

Mr. Cook said Apple is constantly auditing facilities. At the beginning of the year, he said, Apple collected weekly data on over a half a million workers in its supply chain. Apple will now be reporting its audits on a monthly basis on its website, which Cook said is unprecedented in the industry.

In the quarter ended in December, Apple hit new sales and profit records based on runaway holiday demand for the iPhone and iPad.

The company's share price has climbed in the wake of those results, closing above $500 a share for the first time Monday.

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China Bolsters Rhetorical Support for Europe

China's central bank on Wednesday pledged to increase its holdings of euro-denominated assets, bolstering Beijing's recent rhetorical support for Europe but stopping short of a specific investment plan.

People's Bank of China Gov. Zhou Xiaochuan told visiting European Union leaders in Beijing that the central bank has "full confidence in the euro's role and its prospects," and that it will increase the proportion of its foreign-exchange reserves that is invested in the euro.

A day earlier, Chinese Premier Wen Jiabao said China views Europe as a main destination for investment as it diversifies its foreign-exchange reserves.

Despite the pledges of support, Chinese officials have stopped short of offering specific proposals for investing in Europe or buying European assets.

"China will continue to invest in EU countries' government bonds" and be involved in resolving the euro-zone crisis, possibly via channels such as the International Monetary Fund, the European Financial Stability Facility and the European Stability Mechanism, Mr. Zhou said.

But Mr. Zhou hopes Europe can offer "more attractive investment products," he said without elaborating.

China has been a regular buyer of bonds issued by the EFSF and also the sovereign debt of various euro-zone nations, but the level of its investment remains unknown.

China holds European assets through various channels, Mr. Zhou said, including its foreign-exchange reserves and its sovereign wealth fund, China Investment Corp.

Speaking at the same event Wednesday, European Council President Herman Van Rompuy warned against underestimating the political will to preserve the euro zone. Europe's leaders are "determined to keep euro zone alive," he said.

Mr. Van Rompuy said Europe greatly appreciates China's response to the European debt crisis.

"We highly value China's confidence," he said, adding that expressions of support were the key outcome of the EU-China summit held in the Chinese capital on Tuesday.

Also at Wednesday's event, European Commission President Jose Manuel Barroso praised the trend of European integration, saying it is "inseparable" from the future of the euro.

Europe is moving toward a fiscal union, while the European Central Bank is ensuring that banks have liquidity, he said. At the same time, it is essential not to forget the importance of expanding the economy and creating jobs, he added.

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Late Snags Push Back Greek Deal

Greek bailout talks entered a new round of brinkmanship on Tuesday, as euro-zone finance ministers delayed a meeting to approve a new bailout and debt restructuring for Athens, which worked to assure them it is committed to new austerity measures as a debt-redemption deadline looms.

The ministers put off the talks in Brussels, which they had scheduled for Wednesday, and replaced them with a teleconference, saying Greek political leaders haven't given clear pledges on the implementation of fresh austerity measures.

Late Tuesday, an official in Prime Minister Lucas Papademos's office said those issues had been resolved. Socialist party leader George Papandreou signed a written pledge demanded by Europe, while Antonis Samaras, who leads the opposition New Democracy party and who polls show is most likely to become the country's next prime minister, is expected to do so on Wednesday.

Mr. Samaras has been an unbending critic of the austerity program, saying it has sent the economy into a deep recessionary spiral.

Tuesday's delay added tension to efforts to seal the bailout, for at least €130 billion ($172 billion), and a linked debt-restructuring deal Athens has been negotiating with private creditors. Germany and other creditor euro-zone governments have voiced growing distrust in Greece's political leaders in recent weeks.

Greece needs to complete the debt restructuring and lock in further bailout aid by late March to avoid defaulting on a €14.5 billion debt redemption.

A Greek government official on Tuesday acknowledged that a delay in approving the aid package would force the country to push back the launch of its public offer for the proposed debt-exchange plan. That public offer was tentatively penciled in for Friday.

The swap will need several weeks to close, given the need for banks and other creditors to sign off at senior levels on the complicated legal documentation. Last week, EU officials said Greece had already passed deadlines set to comfortably complete all of the technical work in time.

Hours after European Economics Commissioner Olli Rehn on Tuesday said he expected the meeting to go ahead on Wednesday and that it was "essential" it should do so, Jean-Claude Juncker, the head of the Eurogroup of finance ministers, said there would be no meeting.

"I have decided to convene ministers to a conference call [on Wednesday] in order to discuss the outstanding issues and prepare the ordinary meeting of the Eurogroup on Monday, 20 February, 2012," he said.

A senior European official had said earlier Tuesday that major decisions were unlikely at Wednesday's teleconference, adding that some governments were determined that Greece's leaders shouldn't be given any leeway to escape the tough conditions associated with the package. The finance ministers have an already scheduled meeting in Brussels on Monday and Tuesday.

Euro-zone leaders have ratcheted up the pressure on Greece even as the country's political leaders pushed deep new austerity measures through Parliament over the weekend to the backdrop of large-scale protests.

Mr. Juncker on Tuesday said additional time is needed for Greece and its troika of official lenders—the European Commission, the International Monetary Fund and the European Central Bank—to complete "technical work…in a number of areas.…Furthermore, I did not yet receive the required political assurances from the leaders of the Greek coalition parties on the implementation of the program."

None of the unresolved issues Mr. Juncker listed as unresolved were new. He said the troika and Greece needed to agree on the closure of a €325 million fiscal gap that Athens had promised to fulfill. He also said further work was needed on the debt-sustainability analysis, a report the troika is drawing up that is supposed to identify how much assistance Greece will need to cut its ratio of government debt to gross domestic product to 120% by 2020.

Earlier Tuesday, Greece's cabinet approved new measures to plug the €325 million gap, with one official saying the new measures were much more "concrete" than what Greece had proposed at last week's Eurogroup meeting. "The savings will come from further cuts in the public investment budget, defense spending and health care," a second Greek official said.

On Monday, Luxembourg Finance Minister Luc Frieden said he couldn't rule out Greece exiting the euro zone. Mr. Frieden said if Athens fails to fully comply with the terms of its bailout programs, it would exclude itself from the currency union.

"The key lies with Greece. Therefore, if the Greek people and the Greek political elite don't apply all the conditions…they exclude themselves from the euro zone," Mr. Frieden said, speaking at an Atlantic Council event in Washington after talks with senior U.S. Treasury officials.

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Euro-Zone Economy Shrinks

The euro-zone economy contracted in the fourth quarter of 2011 as nine member states posted a fall—five of which entered a recession—increasing concerns the wider region will follow in the first three months of 2012.

Data from European statistical bureau Eurostat on Wednesday showed that gross domestic product across the 17 regions that share the euro contracted 0.3% in the final quarter of 2011 compared with the third, and grew 0.7% compared with a year earlier. That is the first quarterly contraction since a 0.2% drop in the second quarter of 2009, while the year-to-year gain is the smallest since the fourth quarter of 2009 when GDP shrank 2.1%.

Five euro-zone member economies are now confirmed as being in recession. Data from the Netherlands and Italy earlier Wednesday and Portugal and Greece Tuesday reported sharp quarterly contractions in the fourth quarter of 2011 and confirmed all regions are now in recession. And, the Eurostat release also reported that Belgium GDP fell 0.2% on the quarter in the fourth quarter of last year, following a 0.1% drop in the third quarter. The technical definition of recession is two consecutive quarters of contracting gross domestic product.

Germany was among the remaining four economies which posted contraction in the fourth quarter of last year, but that followed growth in the third quarter, and economists aren't expecting a recession in Germany this year.

The French economy expanded in the last quarter of 2011, countering expectations for a moderate contraction, and suggesting that the country was more resilient than expected to the effects of the sovereign-debt crisis.

Meanwhile the German economy, the largest in Europe, contracted in the fourth quarter of last year slightly less than expected, mainly as a result of higher fixed investment in construction, official data released Wednesday showed.

Gloomier news emerged from Italy, where data indicated the economy contracted sharply in the fourth quarter, shrinking 0.7% from the previous three months. As expected, Italy is now in a technical recession.

France's gross domestic product grew 0.2% on the quarter and 1.7% from a year earlier, Insee said. The statistics office said late last year that the French economy had slipped into a recession.

Despite signs that industrial output and consumer spending both contracted in December, Insee said an increase in production and investment over the last three months of the year boosted the economy in the fourth quarter.

"The figure backs our growth forecast for 2012," Finance Minister François Baroin said in a radio interview.

Last month, the French government cut its growth forecast for 2012 to 0.5%, from 1% previously. The lower growth has large implications on public finances: with the revised forecast the government had to factor in a shortfall of about €5 billion ($6.57 billion) in tax receipts.

French voters are closely watching the economy for hints of how to cast their ballots in the two-round presidential elections in April and May. Voters have watched unemployment rise steadily toward the 10% threshold, reaching levels last seen 11 years ago, and are punishing President Nicolas Sarkozy in the polls.

Mr. Sarkozy, who trails Socialist leader François Hollande by a wide margin, is facing increased scrutiny on his management of the economy since Standard & Poor's Ratings Services stripped France of its cherished triple-A rating last month. Tuesday, Moody's added to the bad news for the government, slapping a negative outlook on France's top credit note.

Mr. Sarkozy has announced a tax overhaul to make French production more competitive. The plan calls for cutting payroll taxes and raising the value-added tax, a measure sure to displease consumers.

Meanwhile, earnings reported Wednesday by some French companies confirmed that the sovereign-debt crisis hit France less than expected in the last part of 2011.

Write-downs on Greek debt and restructuring costs halved the net profit of BNP Paribas in the fourth quarter, but the bank, France's largest by market value, beat analyst forecasts for the period.

The German data confirms expectations that the country isn't heading into a recession this year.

"Of course, a quick rebound is not a certainty and the big unknown for the German economy remains the sovereign-debt crisis. One thing, however, is obvious: today's numbers are no reason at all to start singing swan songs on the German economy," said Carsten Brzeski, economist at ING Bank in Brussels.

Analysts and institutional investors expect economic conditions to improve in Germany over the next six months, the ZEW research center said Tuesday, after it said German economic expectations improved in February to a level last seen in April 2011, before the decision was made in May last year for Greek debt restructuring.

In their view, the likelihood that Europe's biggest economy contracts in the first quarter of 2012 is "very low," ZEW said.

Germany's gross domestic product fell 0.2% in the fourth quarter from the third quarter, according to price, seasonally and calendar-adjusted figures, but rose 2% from the corresponding period last year in price- and calendar-adjusted terms, data released Wednesday by the Federal Statistics Office, or Destatis, showed.

Fixed investment, in construction in particular, was the main driver of growth quarter-to-quarter, Destatis said. Domestic consumption, a driver of growth in previous quarters, declined slightly, as did net exports, the statistics office added.

The data do "not herald another negative quarter or even a deeper recession," said Alexander Koch, economist at UniCredit in Munich.

A recovery in the German labor market and also in consumer confidence bode well for a resumption of the upward trend while export expectations have rebounded considerably of late, Mr. Koch added.

Destatis raised its GDP estimates for the third quarter of 2011, to a 0.6% rise compared with the second quarter, from a 0.5% growth rate forecast earlier, and to a rise of 2.7% on an annual basis, from an increase of 2.6% forecast earlier.

In 2011, the German economy grew by a price- and calendar-adjusted 3.1%, compared with 3.6% growth in 2010. Under data unadjusted for calendar effects, real GDP growth was 3.0% in 2011, compared with a 3.7% increase in 2010. Germany's GDP expansion in 2010 was the strongest since the country's reunification. Destatis will provide a detailed breakdown of the data Feb. 24.

Italian third-quarter GDP declined 0.2% from the second quarter, Istat said, revising the figure down from a preliminary estimate of a 0.1% drop. Italy's economy grew 0.4% for the whole of 2011. Fourth-quarter GDP marked a 0.5% drop from the same period a year earlier.

All indicators signal that Italian GDP will shrink further in early 2012 as fiscal austerity crimps domestic demand and a slowing global economy reduces the opportunity for export-led growth.

The International Monetary Fund said last month it expected the euro-zone's third-largest economy to contract 2.2% this year. The government has forecast a drop of around 0.4% or 0.5%. Italy's sharp slide in late 2011 matches similarly weak performance from other peripheral euro-area countries.

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Euro Stalls After Greece Approves Austerity Plan

The euro fell slightly despite the Greek Parliament's passage of a new round of austerity measures aimed at resolving the country's sovereign-debt crisis.

The common currency got an early boost just after the Parliament approved new austerity measures and a bond swap to help reduce its debt burden. Both steps are crucial for the country to receive another round of bailout funds from the European Union, European Central Bank and International Monetary Fund. However, the euro steadily lost steam throughout the day as it became clear that Greece has more hurdles to jump before receiving its bailout.

Late Monday in New York, the euro fell to $1.3187 from $1.3199 late Friday. It was at ¥102.28 from ¥102.44. The dollar was at ¥77.57 from ¥77.61. The pound traded at $1.5766 compared with $1.5755, while the dollar bought 0.9164 Swiss franc from 0.9166 franc late Friday.

"It is a step in the right direction," said Robert Lynch, a currency strategist at HSBC in New York, of the Greek vote. "But obviously it's not done. A number of things that have to be completed haven't been yet."

That includes approval from euro-zone finance ministers, which could come at a scheduled meeting Wednesday. Traders are also waiting to see how the European Central Bank might participate in any debt exchange.

As part of a debt exchange, private bondholders are expected to take a steep loss as Greece swaps out existing debt for new longer term bonds with lower interest rates. The ECB is unlikely to take any losses on Greek debt it holds, but it might also forgo profit from the bonds it purchased in the secondary market.

Negotiators are discussing potential sweeteners, either cash or short-term bonds issued by the European Financial Stability Facility, that would entice more private bondholders to participate in the debt swap.

Greece must repay €14.4 billion in maturing government bonds March 20, which is considered the hard deadline for when a debt-restructuring and bailout agreement must be completed.

Negotiators also must hammer out details such as target debt levels for Greece to adhere to in order to receive the bailout. Greece's debt is at about 160% of its gross domestic product. Officials have said a 2020 target of 120% may be raised to 125% as part of the agreement.

With so many questions unanswered, market participants said the euro could remain range-bound for the foreseeable future.

Win Thin, global head of emerging-markets strategy at Brown Brothers Harriman in New York, said the euro is likely to remain stuck between $1.31 and $1.33 because of the uncertainty.

"I don't think you want to be short the euro," Mr. Thin said. On the other hand, "the corrections in the euro have been pretty shallow. We're still in a wait and see."

Elsewhere, the yen was able to trade nearly flat against the dollar as well even though the country announced its economy contracted at a much faster rate in the fourth quarter than expected. Japan's economy shrank an annualized 2.3% in the October-December period, the fourth contraction in the past five quarters. Economists had expected a decline of 1.6%. Slowing manufacturing and a strong yen contributed to the weak reading.

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Obama Seeks New Taxes on Rich

President Barack Obama called on Congress Monday to enact new taxes on the wealthy, restructure the tax code and approve short-term spending measures as part of an election-year budget plan aimed at boosting job growth and helping the middle class.

Mr. Obama's $3.8 trillion budget for the fiscal year starting Oct. 1 was quickly dismissed by congressional Republicans and GOP presidential candidates as a political document that fails to seriously tackle the nation's growing debt.

The proposal "isn't really a budget at all; it's a campaign document," Senate Minority Leader Mitch McConnell (R., Ky.) said. "Once again, the president is shirking his responsibility to lead and using this budget to divide."

The budget underscores the White House's bet that it can convince voters in November that increased spending in the short term is needed to jolt the economy before steps are taken to shrink the federal deficit in the long term. "At a time when our economy is growing and creating jobs at a faster clip, we've got to do everything in our power to keep this recovery on track," Mr. Obama said at a community college in northern Virginia.

The budget projects the deficit will exceed $1 trillion in 2012 for the fourth straight year, meaning Mr. Obama won't meet his promise to cut the deficit in half by the end of his first term.

Mr. Obama proposed generating $1.7 trillion in new revenue over 10 years largely by ending Bush-era tax cuts for families who earn more than $250,000, restoring the estate tax to its 2009 level and limiting subsidies for oil and gas companies.

He also for the first time proposed raising the tax rate households making more than $250,000 a year pay on dividends, from 15% to as much as 39.6%. The White House said the measure would generate $206 billion in revenue over 10 years.

Mr. Obama's budget also offered "principles" for future tax reform that included replacing the alternative-minimum tax, a rule adopted to ensure that high-income Americans didn't escape paying taxes. Because it wasn't indexed for inflation, it began ensnaring increasing numbers of middle-class taxpayers, leading Congress to enact a series of temporary fixes.

Mr. Obama, suggested eventually replacing the AMT with a long-term plan named after billionaire investor Warren Buffett. The so-called Buffett Rule would require those who earn more than $1 million to pay a tax rate of at least 30% and prevent them from claiming deductions to push their tax rates down.

Mr. Obama offered no details on his preferred path for corporate tax law changes. He is expected to put forward a proposal later this month that would lower tax rates but eliminate or curb many tax deductions, particularly for firms with investments overseas, administration officials said.

The new dividend measure, as well as the overall focus on raising taxes on the wealthy, appeared to take aim at Republican presidential candidate Mitt Romney, whose tax returns show he paid a roughly 14% effective tax rate in 2010. The White House said the plan wasn't targeted at any individual.

Mr. Romney issued a statement Monday criticizing the president's budget for not taking "any meaningful steps toward solving our entitlement crisis."

Congressional Republicans also criticized Mr. Obama for offering no new proposals to reform Medicare, Medicaid or Social Security, which are expanding rapidly as Americans age and health costs climb.

While Mr. Obama's 2013 budget has little chance of becoming law, the priorities it sets out amount to the latest installment of a re-election campaign platform he laid the groundwork for in a December speech in Kansas that called for restoring economic "fairness." Mr. Obama expanded on those themes in his State of the Union address last month and doubled down Monday with policy details in a budget proposal that included pointed attacks on Republicans.

In a shift from his past budgets, and from the one put forward by George W. Bush the year he was up for re-election, Mr. Obama repeatedly criticized Republicans. He blamed Congress's failure to pass the jobs measures he proposed last September and his deficit-reduction plan on the "unwillingness by Republicans in Congress to ask the wealthiest among us to pay their fair share through any revenue increases."

Although Republicans attacked Mr. Obama's budget, there were signs Monday that the White House is gaining some ground on the president's agenda. House Republican leaders signaled they were prepared to allow an extension of the payroll tax cut—a top White House priority—without demanding spending cuts in return. The move marks a second retreat by Republicans on the payroll-tax issue in recent months.

Mr. Obama's budget fills in the details of how he prefers to meet 2013 caps in "discretionary" spending—the spending that is approved annually by Congress—that were set in an agreement the White House and congressional Republicans reached last summer.

At the same time, he proposed a number of new programs that the White House describes as "mandatory" spending, which wouldn't be subject to the caps. These included $2.7 billion for a new community college program, $1.8 billion to make homes more energy efficient and $6 billion to modernize schools.

White House officials said the president's budget would reduce the deficit by $3 trillion over 10 years through a combination of the new taxes, modest changes to health-care programs such as Medicare and Medicaid and other spending cuts.

That would be in addition to a $1 trillion deficit-reduction agreement they reached with Republicans last year, which capped future spending on a range of annually appropriated programs.

Mr. Obama's proposed spending cuts touch agencies across the federal government. They include reducing mail delivery by the U.S. Post Office to five days a week, giving the Treasury Department the authority to rethink the way pennies and nickels are coined to save costs and new restraints on military veteran benefits.

Still, the proposal projects Mr. Obama will miss his initial deficit-reduction targets. Instead of bringing the deficit under control by 2014, as the White House had planned, the administration now says significant reductions won't take place until 2018.

In addition to cuts, the budget includes $137 billion in spending proposals designed to spur economic growth by funding education and transportation projects. It also proposes continuing through December a tax break for businesses to encourage investment.

The budget would boost spending in some areas that fit with Mr. Obama's political agenda. He proposes increases for the Securities and Exchange Commission and the Commodity Futures Trading Commission, two financial regulators that have come under fire after recent Wall Street mishaps. Mr. Obama also proposed $26 million for a new Interagency Trade Enforcement Center, which he created to challenge unfair trade practices around the world but is mainly targeted at China.

"The budget that we're releasing today is a reflection of shared responsibility," Mr. Obama said in his remarks in Virginia on Monday. "And some people go around; they say, 'Well, the president is engaging in class warfare.' That's not class warfare; that's common sense."

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Further Hurdles Ahead for Greece

After an epic political effort to pass another harsh austerity program into law, Greece faces still more tests to secure a new financial bailout as its euro-zone partners press for swift implementation of the new budget cuts in the face of intense popular opposition.

European financial markets responded with modest gains early Monday after Greece got a step closer to receiving a second rescue package to avoid defaulting on its debts next month.

A next big step in the cluttered approval process for the aid package is a meeting of euro-zone finance ministers, tentatively set for Wednesday, to sign off on cuts contained in Greece's austerity legislation to clear the way for the €130 billion ($171.59 billion) aid deal. A final decision on the new bailout isn't expected until March.

The euro rose against most of its major trading currencies. European stocks opened broadly higher and the cost of insuring euro-zone government debt against default eased. But market watchers remained cautious.

"There is no cause for major relief: In effect parliament only decided not to denounce further aid payments at this stage," Commerzbank foreign-exchange analysts said in a note Monday. In particular, the analysts worried whether there would still be the political will to follow through on reforms when Greece gets a new government after fresh elections, which could come as early as April.

As thousands of protesters clashed with riot police outside, the Greek parliament overnight approved a deeply unpopular package of spending and wage cuts to fill demands set by the European Union and the International Monetary Fund for more aid.

The package passed by a 199-74 vote, despite defections from the government ranks in the days leading up to vote. The two largest Greek parties—the socialist Pasok and conservative New Democracy—backed the measures, which include cuts in the budget, pensions and the minimum wage.

The Wednesday meeting of euro-zone finance ministers could coincide with the release of a revised assessment of Greece's debt sustainability, followed by the resumption of talks between Greece and its private-sector creditors to write 50% off the face value of their Greek bondholdings. A number of euro-zone parliaments, including Germany's, would then have to sign off on further aid before it can be paid out.

Germany's parliament will only vote on a second Greek bailout package after Athens' official lenders—the EU, the IMF and the European Central Bank, known as the troika—have presented their report on Greece's debt sustainability.

"We expressly welcome the decision of the Greek parliament," Chancellor Angela Merkel's spokesman said, adding the vote shows how Greece is able to take difficult measures.

Yet despite Sunday's vote, euro-zone finance ministers are expected to make a final decision on the €130 billion second rescue program only in early March, finance ministry spokeswoman Marianne Kothe said.

Furthermore, a written statement from the leading Greek political parties to support reform pledges after coming elections remains another prerequisite for the approval of further aid, she added, with ministers Wednesday evaluating the significance of the exit of the small, separatist Laos party from the government.

German Economics Minister Philipp Rösler Monday kept up the pressure on Greece to follow through with budget reforms in the face of social unrest.

"We took a step in the right direction, but are still far from the goal," Mr. Rösler told Germany's ARD television channel. "The implementation of structural reforms is crucial."

he vote by Greece's parliament wa a "crucial step" toward winning a second bailout program from its European partners, European economics affairs Commissioner Olli Rehn said Monday. However, Mr. Rehn said there is still further work to do for the new bailout package to be agreed.

"Yesterday's vote is a crucial step…toward the adoption of the second program," he told reporters. "I am confident that the other conditions, including…the identification of the concrete measures of the €325 million will be completed by the next meeting of the Eurogroup, which will then decide on the adoption of the program."

Greek political leaders last week refused to sign up to pension cuts, but identified measures to find alternative savings. However there was a €325 million shortfall they must still fill.

Mr. Rehn warned against Greece leaving the common currency: "[A] Disorderly fault of Greece would be a much worse outcome, with devastating consequences for society," he said, "especially [for] the weakest members."

In the aftermath of the angry clashes in Athens before the vote Mr. Rehn said: "I also wish to join my voice to the Greek government in condemning the violence that took place yesterday in Athens," which is in no way representative of the Greek population as a whole, he added.

Speaking shortly afterward, Mr. Rehn's spokesman said Greece's political party leaders still needed to give clear commitments that they will stick to the austerity measures agreed after an coming election.

"We expect to receive clear assurances from political party leaders before they embark on the political campaign for next election," spokesman Amadeu Altafaj Tardio said.

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Europe Relaxes Borrowing Rules

As struggling European lenders seek lifelines by borrowing from the European Central Bank, individual central banks in the euro zone are expanding the types of assets that can be pledged to tap the loans. But not all collateral is created equal.

Seven of the 17 euro-zone central banks are crafting rules that will increase the diversity of assets that banks are permitted to pledge, enabling the firms to borrow an estimated €200 billion ($264 billion) more than under the old rules.

In an aspect of the plan that is drawing scrutiny, each central bank is able to tailor its requirements to the needs of the banks it oversees.

The result is a hodgepodge of collateral standards across the common-currency area. The rules differ from country to country; banks in Spain might be able to pledge foreign loans as collateral, while French banks will be able to pledge residential mortgages, for example.

ECB President Mario Draghi said the looser rules were designed to help collateral-squeezed banks to continue lending to businesses.

But by making it easier for banks to borrow, European central banks are assuming greater risks with their lending, analysts say. In addition, they say, the changes mean weak lenders are more likely to become addicted to the central banks' cash.

The new policy also will leave individual central banks on the hook for potential losses stemming from some ECB loans. That is a break from the tradition of applying such rules uniformly and sharing any losses across the euro-zone system.

"This latest decision represents a significant step backward from a common monetary, credit and liquidity policy in the euro area and from an integrated financial market," said Willem Buiter, Citigroup's chief economist.

The new rules come as the ECB already has assumed the role of lender of last resort to hundreds of European banks. Last December, the ECB doled out €489 billion of low-interest, three-year loans to more than 500 banks. The central bank will offer another batch of the loans at the end of February.

Until now, the ECB has only allowed banks to put up a narrow range of assets to serve as collateral for those loans. Eligible assets included large government-issued or -guaranteed loans and securities. But banks in some countries were exhausting their pools of eligible collateral. To ease the strains, the ECB announced late last year that it would relax some of the criteria by permitting individual national central banks to change the collateral rules.

Late last week, seven national central banks—in Austria, Cyprus, France, Ireland, Italy, Portugal and Spain—said they had decided to loosen their collateral requirements, after receiving the blessings of the ECB's governing council. The other 10 euro-zone central banks kept the previous rules intact.

To guard against risks associated with some types of collateral, the ECB traditionally imposes "haircuts" on the assets. With the new collateral, the average haircuts will be 60% to 70%. If a bank pledges $1 million of one type of loans as collateral, for example, it might only be worth $400,000 in ECB loans. National central banks haven't disclosed specific haircuts.

Analysts said they had expected a uniform set of collateral rules across the euro zone and were surprised by the divergent types of collateral that national central banks will accept now. "It's a mess," said Robert Noble, a banking analyst in London with RBC Capital Markets. The European central banks are taking "a lot more risk in collateral terms. There's now eight different monetary policies depending on what suits your banking system best."

ECB officials acknowledge the new risks, but play them down.

"Yes, it means that we take more risk," Mr. Draghi said. "Does it mean this risk has not been managed? No, it has been managed, and it is going to be managed very well because there will be a strong over-collateralization for these additional credit claims."

In a break from the traditional euro-zone policy of sharing losses across the euro zone, the ECB has said that any losses arising from the looser collateral will be borne by individual national central banks, which are essentially branches of the ECB, rather than by the ECB itself. The goal, analysts and some central bank officials say, is to shield countries from having to swallow losses arising from other countries easing their rules.

The moves by individual central banks were crafted to accommodate the peculiarities of their countries' domestic banking industries, according to central-bank officials.

France, for example, now will accept certain residential mortgages as collateral, enabling the country's lenders to tap into their deep pool of real-estate loans. The Bank of France also will permit assets denominated in U.S. dollars—a win for French banks sitting on hundreds of billions of dollars of such assets thanks to their lending to the shipping and aircraft industries.

France's biggest bank, BNP Paribas SA, was holding $305 billion of U.S. dollar assets as of Sept. 30, representing nearly 30% of its balance sheet. A BNP spokeswoman declined to comment.

Ireland and Portugal won't only accept residential mortgages as collateral but also other unsecured consumer loans, which could include assets like credit-card debt.The Portuguese central bank said that the loans "shall not be subject to minimum credit quality requirements." Italy will let its banks post as collateral leasing contracts it has with businesses.

Spain said it might start accepting foreign loans that aren't subject to Spanish law. Analysts said that could open the door for Spanish banks with big operations in Latin America and the U.S. to pledge assets from there.As of November, more than 11% of the assets in the Spanish banking sector were to non-Spanish borrowers, although not all of those assets would qualify as collateral, according to the Bank of Spain.

German Economic Expectations Beat Forecasts

German economic expectations improved far more than predicted in February, the Center for European Economic Research, or ZEW, said Tuesday.

The widely watched ZEW index rose in February for the third consecutive month after declining for nine straight months, during which Europe's debt crisis deepened.

The economic expectations index rose to 5.4 points in February, the first positive reading since May 2011, from January's unrevised -21.6.

Experts polled by Dow Jones Newswires had expected a rise to -11.6 for February. The last time the reading was this high was in April 2011.

The current conditions index rose to +40.3 from January's unrevised +28.4. Experts had forecast a reading of +30.0 for February.

Portugal's economy contracted slightly less than expected last year, but a sharp 2.7% in the fourth quarter from a year ago, signaling the country is in for a bigger recession in 2012.

Gross domestic product fell 2.7% in the fourth quarter on an annual basis, and 1.3% from the third quarter, according to a flash estimate from the National Statistics Institute.

For the year, the contraction was 1.5%, slightly better than the 1.6% estimated by the government and swinging from a 1.4% expansion in 2010. In 2012 the government is expecting a 3% contraction.

Also Tuesday, industrial production in the 17 countries that use the euro slumped in December, adding to fears the economy contracted in the final quarter of last year, and weighed down by monthly declines in Germany, France, Portugal and Greece, data showed.

According to figures released by the European Union's statistics agency Eurostat, industrial production fell 1.1% on the month in December and by 2.0% on the year, with the latter drop the first since December 2009.

The data were mixed when compared with expectations. Economists had forecast a 1.2% monthly decline and a 1.0% year-on-year fall, according to a Dow Jones Newswires survey last week.

Eurostat also revised its monthly estimate for November to show monthly production was flat, and an increase of 0.1% on the year.

Eurostat originally estimated that industrial production fell 0.1% on the month and was 0.3% lower on the year in November.

An 11.9% year-on-year slump in energy production weighed on total output. That was the biggest drop since a 12.5% fall in April 2009, Eurostat said.

By region, declines in Germany, France, Portugal and Greece where industrial production fell 2.7%, 1.3%, 1.6% and 2.4% respectively, when compared with November, led the monthly drop.

Spain and Ireland, two other economies experiencing fiscal problems, meanwhile, posted monthly gains of 0.9% and 2.5%.

The European Central Bank is widely expected to cut interest rates below the current record low of 1%, and this is likely to happen sooner rather than later if Wednesday's first look at euro-zone fourth quarter gross domestic product posts the expected contraction of around 0.4% compared with the third quarter.

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Europe Struggles Over Greek Details

European Union negotiators have yet to settle key elements of a complex bailout and debt-restructuring package for Greece—including how euro-zone governments will contribute to a desired cut in the country's debt burden—ahead of a pivotal meeting this week.

The Greek Parliament's backing for a deeply unpopular package of spending, wage and pension cuts, which sent European stocks and the euro higher on Monday, has shifted the focus of negotiations back to Brussels, ahead of a meeting of finance ministers due to start here Wednesday afternoon.

Central to the negotiations is resolving the thorny issue of how Greece's official creditors in Europe—other euro-zone governments and the European Central Bank—should participate in the debt restructuring. Euro-zone leaders are expected to make the final decision on the new bailout at their summit in March.

That would be one of the final pieces of the puzzle to fall into place to allow approval of at least €130 billion ($171.5 billion) in bailout loans from the euro zone and the International Monetary Fund that should avert a potentially chaotic Greek debt default next month.

Olli Rehn, the EU economics commissioner, described the Greek vote as a "crucial step" toward winning the bailout.

But he said other conditions needed to be fulfilled. They included identifying €325 million of extra budget cuts this year and, his spokesman said, "clear assurances from [Greek] political party leaders before they embark on the campaign for the next election."

Even after Wednesday's meeting, legislators in some countries, including Germany, will be required to have their say before the bailout aid will be released.

Germany and Greece's other official creditors have sought to tie the hands of Greek politicians after elections expected in April, seeking assurances they will back the unpopular package after then.

But in his public statements, the man opinion polls suggest will be the likely next prime minister, Antonis Samaras of the New Democracy party, has delivered less than wholehearted backing for the program.

"I want to avoid the jump over the cliff today, to buy time, to restore normality and to go to elections tomorrow," he told Parliament on Sunday. "This is why I ask you to vote in favor of the new loan agreement today and to have the ability tomorrow to negotiate and to change the current policy which has been forced on us."

German Chancellor Angela Merkel explicitly opposed that on Monday. "An amendment to the program can't and won't happen," she told a news conference.

A crucial question confronting negotiators in Brussels is whether to stick to a target set by euro-zone leaders in October for reducing Greece's debt burden, now about 160% of gross domestic product, to "around" 120% of GDP in 2020.

Officials said the target may be lifted to no more than 125% of GDP as part of a final deal.

Both the governments and the euro zone's central banking system are expected to give Greece some debt relief to ensure its debt falls below the 125% target in 2020, European officials said. But it remains to be seen exactly how.

On the table is a trade-off: The governments would agree to lower the interest rate on the loans made to Greece under the bailout it received in May 2010, and in exchange the ECB or the national central banks would agree to have their holdings of Greek bonds repaid at below their full face value.

"Nobody is going to put their cards on the table until Wednesday at midnight," said one official involved in the talks.

The interest rate on loans from the first bailout, which has already been lowered once, now stands at 3% for the first three years of a loan and then 4% after that.

Also under discussion is a move that could complicate a bond exchange intended to reduce the debt Greece owes its private-sector creditors by around €100 billion.

Investors participating in the exchange will receive new Greek bonds with decadeslong maturities and €30 billion of "sweeteners"—either cash or short-term bonds issued by the European Financial Stability Facility, the euro zone's temporary bailout fund.

The governments are now considering whether the sweeteners can be reduced and the extra money used to help close a financing gap expected for the Greek government over the next eight years, officials said.

But that step might discourage investors from participating in the exchange, undermining Europe's goal of having the debt exchange described as "voluntary."

The bloc's central banking system might participate in two ways.

First, the ECB bought Greek bonds with an estimated face value of about €50 billion on the secondary market over the previous two years in a futile effort to drive down Greek bond yields.

The central bank bought those bonds at sharp discount; the idea is that the ECB could forgo profit it would earn if the bonds were repaid in full and instead distribute the profit back to the national governments, which would then hand the money over to Greece.

Second, the national central banks of the euro zone hold an estimated €12 billion of Greek bonds on their investment portfolios. The national banks might simply accept losses on these bonds, officials said.

"They're both equally likely, but legally speaking, a loss on the portfolio bonds is easier," said one official.

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Moody's Warns U.K. on Outlook

Moody's Investors Service downgraded six European nations and became the first ratings firm to warn the U.K.'s rating could be at risk, citing the area's weakening ability to implement measures aimed at reducing debt.

The ratings firm's actions follow similar moves by Standard & Poor's and Fitch Ratings last month where multiple downgrades were made all at once. Like S&P and Fitch before it, Moody's said concerns with the debt crisis, how it is being handled and the impact on the region's various economies were at the heart of the downgrades.

Moody's also noted the fragility of financial markets in Europe and the possibilities of future shocks to the system because of the crisis. The company previously said late last year it would review ratings broadly on European Union members, including those in the union that don't use the common currency.

Where Moody's did deviate from recent actions by other ratings firms was in changing the outlook for the U.K. There had been no indication the U.K.'s outlook was necessarily in danger based on how other ratings firms view U.K.'s debt. Both S&P and Fitch have a stable outlook on their U.K. rating.

U.K. Chancellor of the Exchequer George Osborne said the negative outlook is proof that Britain can't waver from its plans to deal with the country's debt. He said the rating firm was explicit that only thing stopping an immediate downgrade of the U.K. was the government's fiscal-consolidation plan.

"This is a reality check for anyone who thinks Britain can duck confronting its debt," Mr. Osborne said.

Since coming to office 18 months ago, the U.K.'s coalition government has embarked on an ambitious austerity plan in which it will instigate an additional £107 billion ($168.7 billion) of spending cuts and tax increases by 2015.

Mr. Osborne has steadfastly stuck to the plan—despite repeated calls from opposition lawmakers, unions and some economists to soften the pace of the spending cuts—saying changing course would cause the U.K. to lose credibility with investors. Mr. Osborne on Monday highlighted the fact that Moody's said any reduction in the political commitment to fiscal consolidation could lead to a rating downgrade.

Moody's said the main driver for placing the U.K. on negative outlook was the weaker macroeconomic environment, which it said will challenge the government's efforts to place its debt burden on a downward trajectory over the coming years.

"A combination of a rising medium-term debt trajectory and lower-than-expected trend economic growth would put into question the government's ability to retain its AAA rating," Moody's said. "The U.K.'s outstanding debt places it amongst the most heavily indebted of its AAA-rated peers, alongside the United States and France whose AAA ratings also carry a negative outlook."

The U.K.'s borrowing costs have fallen to historic lows in recent months—a factor the government cites as validation for its austerity measures. However, Moody's said while the U.K. currently enjoys "haven" status, there was also a growing risk that the weaker macroeconomic outlook could damage market confidence in the government's fiscal consolidation program and cause funding costs to rise.

Moody's decision to place the U.K. on negative outlook was largely unexpected, as there had been no indication the U.K.'s outlook was necessarily in danger based on how other ratings firms view U.K.'s debt. Moody's also changed to negative the outlook for the Bank of England's triple-A credit, in line with the change of outlook on the U.K.'s sovereign rating.

The ratings firm downgraded Italy a notch to A3, which is four rungs above speculative-grade territory, and maintained a negative outlook on the euro-zone's third-biggest economy. Malta, Portugal, Slovenia and Slovakia also received one-notch downgrades and still have negative outlooks, Moody's said. Spain was downgraded two notches. Each of those six countries was downgraded by S&P last month. Fitch downgraded Italy, Slovenia and Spain last month.

While Moody's might have been the last to act, it was the most severe on Portugal and Spain. Among the three biggest ratings firms, Moody's now has the lowest rating on each of those countries.

Concerns over Portugal's debt problems have mushroomed in recent weeks, sending its bond yields to record highs. Moody's downgrade of Portugal sends the country's rating further into junk territory at Ba3, which is three notches below investment grade.

Moody's didn't go as far as S&P when it came to two top-rated euro-zone members, France and Austria. Moody's simply lowered their outlooks to negative, while S&P downgraded each of those countries.

An outlook indicates a longer time horizon, of about two years, in which a ratings action could take place. The maintenance of triple-A ratings from both Fitch and Moody's should alleviate some of the potential pressure on those two countries. Typically investors tied to minimum ratings requirements to hold debt will look to see where the majority of the big three rate debt, so France and Austria maintaining triple-A ratings at Moody's means two of three ratings firms still see them as top-notch investments.

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In Japan, Comments Stir Currency Cauldron

Japanese Finance Minister Jun Azumi made comments that were interpreted by some as disclosing rarely provided details about currency intervention.

Grilled in Parliament on Friday about the effectiveness of Japan's yen-selling operation in October, meant to tame the currency's rise, Mr. Azumi touched on specific yen-sale levels. Later, though, he said he was merely repeating figures put forth by an opposition lawmaker.

"It was a complete slip of the tongue, and it was shocking that the finance minister mentioned a specific intervention level, which he never should," said Yuzo Sakai, senior trader at Tokyo Forex and Ueda Harlow.

In response to the question by Yasutoshi Nishimura, Mr. Azumi said he instructed that intervention be carried out when the dollar fell to ¥75.63, referring to a number shown on a table Mr. Nishimura was using to illustrate the yen's movement at the time.

"I instructed that intervention be carried out at ¥75.63, as shown at the very top of lawmaker Nishimura's table," Mr. Azumi said. The table listed the dollar's closing rate against the yen in the days before and after the Oct. 31 intervention. The ¥75.63 figure was at the top of the list as the closing rate for Oct. 30.

Mr. Nishimura asked Mr. Azumi whether he was satisfied with the intervention, noting that the dollar had risen to ¥78.20, referring to the closing rate on Nov. 5, the day after the yen-selling campaign ended after six days and more than ¥9 trillion (about $116 billion).

The finance minister answered, "Regarding the question whether I am satisfied after we stopped at ¥78.20…I believe that it was effective to a certain extent."

The yen reacted little to the comments, with the dollar remaining largely in a narrow band between ¥77.50 and ¥77.70. Late in New York trading, the dollar was at ¥77.61 from ¥77.66 late Thursday.

Mr. Azumi tried to clarify his comments later at the ministry, saying he was merely reading what was shown on Mr. Nishimura's table and not referring to a particular level at which intervention was carried out. "Haven't you seen the parliamentary session?" he told reporters. "I said those things just because I was shown the board with exchange rates on the day of intervention and the day it ended. Let me make this clear to you. I didn't talk about any levels at all. Period," he said.

Earlier, Mr. Azumi did tell Parliament that Japan remained prepared to take action to curb the yen's rise. "If speculators are moving exchange rates through their speculative actions, I will not hesitate to intervene. That means that I will not at all hesitate to intervene unilaterally," Mr. Azumi said, using some of his strongest language to date to counter speculation that U.S. and European opposition might tie Tokyo's hands over currency policy.

European Central Bank President Mario Draghi on Thursday joined the U.S. in signaling an objection to Japan's unilateral yen sales, telling a news conference that intervention should be multilateral. The U.S. Treasury made it clear in a report last year that it didn't back Tokyo's unilateral actions in August and October.

Elsewhere, the dollar rose against most rivals, reversing losses in recent days, after euro-zone finance ministers delayed approval of a bailout package for Greece. Late Friday in New York, the euro was at $1.3199 compared with $1.3286 late Thursday. The pound traded at $1.5755 compared with $1.5818, while the dollar bought 0.9166 Swiss franc from 0.9118 franc.

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Greece-Watching on Tap for Euro

Concerns about a Greek default could hobble the euro this week, as the country struggles to implement belt-tightening measures while forging an agreement with its private bondholders.

After weeks of uncertainty, Greece's interim government brokered a provisional deal to implement more than €3 billion ($4 billion) in unpopular austerity measures to secure a €130 billion bailout. That helped vault the euro to an eight-week high at $1.3322 Thursday.

But the common currency's rally faltered Friday as rioting in Athens streets accompanied protracted political haggling over the deal's provisions. That raised questions about whether Greece can reach a final, default-averting agreement with its financial rescuers in the European Union and International Monetary Fund before it faces a series of bond-payment deadlines next month.

As Greece fights to stay afloat, a small but vocal number of analysts wonder whether Greece can remain in the euro zone. Late Thursday, Greek Finance Minister Evangelos Venizelos warned that his country faced a choice of acceding to international austerity demands or withdrawing altogether from the 17-nation currency bloc.

"Even a near-term resolution in Greece is certainly not a resolution of the broader crisis, for Greece or the rest of the euro zone," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. Traders were encouraged to scale back on bets against the euro as high-yielding assets surged earlier in the week, but Mr. Esiner says some investors might now be feeling buyer's remorse.

"We're back to a scenario where investors are looking more skeptically at the big picture, and that scenario favors the dollar again," Mr. Esiner said, noting the greenback's unchallenged status as a safe harbor during times of global turmoil.

The Greek parliament was to vote on the plan late Sunday amid political divisions and street protests. Euro-zone finance ministers are expected to convene Tuesday to review the deal, which should lead to a final approval by Greece's international lenders.

An agreed path toward slashing public spending and cutting wages would pave the way for a bond swap between the government and private-sector creditors that has been stalled for weeks. Amid rising pressure on the European Central Bank to take part in a Greek debt restructuring, the country faces a €14.5 billion bond repayment on March 20 that will be defaulted upon unless Greece obtains its bailout.

As a result of Europe's debt turmoil, economic indicators have largely taken a back seat to headlines out of the euro zone. On Wednesday, the 17-nation currency bloc will report gross-domestic-product figures from the final quarter of last year. Most economists expect to see a decline, which could mark the beginning of what many believe will be a recession this year.

Greece is faring the worst among the nations of Europe that have accepted bailout funds. The Hellenic republic's economy is contracting sharply and joblessness has risen above 20%. Some market watchers say the economic demands being placed on Greece may be taking too big of a toll on the population, and might not be worth the pain.

"We're at the point where austerity measures are putting the people of Greece into a depression," said Mark Grant, managing director of Southwest Securities, who believes the country should default on its debts and withdraw from monetary union.

"In my mind, the economics are unsustainable," he added.

On Friday, the dollar rose against most rivals, reversing losses in recent days, after euro-zone finance ministers delayed approval of the bailout package for Greece.

Late Friday in New York, the euro was at $1.3199 compared with $1.3286 late Thursday. The pound traded at $1.5755 compared with $1.5818, while the dollar bought 0.9166 Swiss franc from 0.9118 franc.

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