Obama weighs major tax move

[Mrs. Sharon B. Hodge]

Obama weighs major tax move
By Mark Trevelyan and Lincoln Feast

LONDON (Reuters) – Cautious New Year optimism rippled through Asian and European stock markets on Monday as investors waited for news of tax cutting plans in Germany and the United States.

The upbeat mood was undented by war in the Middle East and further disruption of Russian gas supplies to Europe in a pricing dispute between Moscow and Ukraine.



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U.S. President-elect Barack Obama speaks at a news conference in Chicago, where he introduced his economic photo

U.S. President-elect Barack Obama is seeking as much as $310 billion in tax cuts as part of a massive stimulus plan to counter what senior policymakers warned could be a prolonged period of economic stagnation and deflation.

In Germany, conservative Chancellor Angela Merkel meets her Social Democrat coalition partners at 1300 GMT (8 a.m. EST) after bowing to pressure from her Bavarian sister party and reversing her previous stance on tax relief.

At talks on Sunday, she agreed to a tax easing she had previously ruled out until September's federal election.

The plans by the world's no. 1 and no. 3 economies mark the latest attempts to tackle a financial crisis that began with U.S. mortgage defaults in 2007 and now threatens much of the world with a deep and vicious recession.

Along the way, it has reshaped the banking landscape and taken entire countries to the brink of bankruptcy.

Over the weekend, both Janet Yellen, president of the San Francisco Federal Reserve Bank, and Lucas Papademos, vice president of the European Central Bank, highlighted the risks of deflation -- an economically damaging spiral of falling prices and demand.

Investors have, however, begun to make tentative bets that the worst of the turmoil, which took a sharp turn for the worse in September with the collapse of investment bank Lehman Brothers, is over.

Kicking off the first full week of 2009, they pushed up stocks, the dollar and commodities while selling safe-haven plays such as government bonds and the Japanese yen.

Asian stocks hit a two-month high and the FTSEurofirst 300 was up more than 1.3 percent in morning trade.

Oil prices rose nearly 3 percent after a reported Iranian call for an oil boycott over Israel's offensive in the Gaza Strip. They later eased, but were still firm.

In the latest fallout from the Russian-Ukrainian gas dispute, Bulgaria reported deliveries of Russian gas were down 10-15 percent, and Croatia said its supplies had fallen by 7 percent. Several other nations have also reported falls which, if prolonged, could drive up demand for oil products.

JAPANESE GLOOM

With Japan already in recession, the Yomiuri newspaper reported that the country's central bank was likely to tear up its October forecast of 0.6 percent growth for the fiscal year beginning in April, replacing it with a likely contraction of around 1 percent, the biggest for a decade.

Auto sales in Japan, excluding 660 cc minivehicles, plunged 22 percent in December from a year earlier, hitting their worst level on record for the month.
"This is a bleak situation," said Takeshi Fushimi, director of the Japan Automobile Dealers Association.

Carmakers are far from alone in suffering a brutal hit from the downturn, which is forcing hard-pressed consumers to cut back on expensive and non-essential items.
Irish fine china and glassware group Waterford Wedgwood said on Monday a receiver had been appointed for the company, and some of its subsidiaries would shortly be placed into administration.

Elsewhere there were signs of greater stability. South Korea, one of those countries that appeared to be on the brink of financial collapse, said its foreign exchange reserves rose in December for the first time in nine months.

Helping increase the appetite for riskier assets, senior Democratic aides said Obama planned to discuss his tax cut and stimulus package plans with Democratic and Republican leaders of the Senate and House of Representatives on Monday.

The tax relief proposals are designed to attract support from fiscal conservatives in Congress, who prefer cutting taxes to increasing federal spending.

Under Obama's proposal, about 40 percent of an economic package worth as much as $775 billion would be in the form of tax breaks for businesses and the middle class, one aide said.

The U.S. economy is in need of drastic measures. U.S. jobs data at the end of the week are expected to show half a million jobs were lost in December alone, pushing the unemployment rate to 7 percent.

"The financial and economic firestorm we face today poses a serious risk of an extended period of stagnation," said Yellen, a voting member of the Federal Open Market Committee in 2009.

"I'm strongly supportive of a substantial fiscal stimulus package," she said at the annual meeting of the American Economics Association on Sunday.

The ECB's Papademos, meanwhile, said more interest rate cuts may be needed to support the euro zone economy and he vowed to keep deflation at bay.


(Reporting by Reuters bureaux worldwide; Writing by Mark Trevelyan, editing by Mike Peacock)