UPDATE 5-Troubled Brazil economy shrinks again in March

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* March IBC-Br activity index down 0.35 percent, below forecast

* Brazilian activity hardly picked up in first quarter

* Weak recovery likely to prompt more interest rate cuts

* Government prepares more stimulus to support activity

By Alonso Soto and Tiago Pariz

BRASILIA, May 18 (Reuters) - Economic activity in Brazil fell in March for the third straight month, data showed on Friday, a surprisingly weak performance that may lead the central bank to slash its benchmark interest rate to all-time lows and prompt further stimulus measures from President Dilma Rousseff.

The central bank's IBC-Br economic activity index , a closely watched proxy for gross domestic product, contracted 0.35 percent in March from February, the bank said on Friday. Most analysts had expected activity to rise 0.5 percent.

The weak reading means Brazil's economy has remained stagnant since nearly falling into recession in the second half of 2011. In the fourth quarter, the economy expanded just 0.30 percent, a figure that could be easily revised downward when fresh GDP data are released on June 1.

In addition to more interest rate cuts from the central bank, Rousseff is likely to announce new stimulus measures next week to offer cheaper credit to buy construction materials as well as tax breaks on consumer loans, senior government officials told Reuters.

Economic activity also contracted in January and February in what is expected to be a very weak quarter for the economy despite a barrage of stimulus measures to revive growth.

Concerned with market sentiment after the weak data, one senior official said the administration forecasts growth of around 0.4 percent in the first quarter from the fourth quarter, in line with many analysts' expectations.

"Growth this year will be low, without a doubt. We will see the effects of the stimulus in the second half of the year and in 2013," said Andre Perfeito, chief economist with Gradual Investimentos in Sao Paulo. "Lower growth will ultimately give the green light for the central bank to be more aggressive."

Brazil's economy is widely seen growing in full-year 2012 slightly above the meager 2.7 percent posted last year as robust domestic demand only partially offsets a sluggish industrial sector. Brazil's GDP grew a staggering 7.5 percent in 2010.

In the first quarter of the year, activity grew only 0.15 percent from the previous quarter, according to Reuters calculations based on the central bank's data. Activity in February versus January was revised down to a drop of 0.38 percent from the previously reported 0.23 percent slide.

The struggling recovery effort in the world's No. 6 economy will likely prompt the central bank to bring its benchmark Selic interest rate to a record low from the current 9 percent. The bank, which has already trimmed 350 basis points off its Selic rate since August, will make its next rate decision on May 30.

Yields on Brazil's interest rates futures fell across the board on Friday as more investors expected the central bank to keep the size of its rate cuts at 75 basis points per meeting.

MORE STIMULUS AHEAD

Earlier this week, Mantega scrapped his initial economic growth forecast of 4.5 percent for the year and senior officials now see expansion closer to 3 percent.

The government is also considering slashing the financial operations tax, or IOF, on consumer credit of over one year to 2 percent from the current 2.5 percent plus a new credit line of up to 20,000 reais ($10,000) for people to buy construction material, government sources said.

The officials, who declined to be named, said the government could also extend tax breaks on some construction materials.

Many of the country's economic woes stem from what is known as the "Brazil cost" - a mix of high taxes, interest rates, labor costs and infrastructure bottlenecks that strangle businesses facing stiff competition abroad.

Even as manufacturers struggle, domestic demand remains surprisingly strong as Brazilians continue to spend on foreign-made clothes and home appliances.

A worsening debt crisis in Europe also poses a challenge for Brazil as international credit lines dry up and global demand for local products falls.

Rousseff, a career economist, is sticking to fiscal austerity to allow the central bank to continue easing monetary policy. She is also pressing private-sector banks to slash rates in tandem with the central bank's falling benchmark rate.

The stimulus will likely pay off in the second half of the year but will not be enough to bring back the high growth rates that made Brazil one of the world's most dynamic economies.

Rousseff, who enjoys record-high popularity since she took office in January 2011, may face years of mediocre growth ahead as the former star of the BRICS group of major emerging economies quickly loses its shine. The grouping also includes China, Russia, India and South Africa.

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Brazil c.bank sells all FX swaps offered at auction

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SAO PAULO | Fri May 18, 2012 3:20pm EDT

The bank said it sold all 13,0000 swaps contracts on offer. The contracts sold all mature on June 1.

Brazil's currency, the real, sharply pared losses just after the auction. It last traded 0.98 percent weaker at 2.0249 reais per U.S. dollar.

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UK's Cameron, France's Hollande clash on Tobin tax

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The remote server returned an unexpected response: (417) Expectation failed.
By Adrian Croft

WASHINGTON | Fri May 18, 2012 6:56pm EDT

WASHINGTON May 18 (Reuters) - British Prime Minister David Cameron and new French President Francois Hollande clashed on Friday over the need for a financial transactions tax to fund growth but played down other differences over how to respond to the euro zone debt crisis.

Both leaders said after a first 35-minute meeting at the British ambassador's residence in Washington that they backed measures to cut deficits and spur growth in Europe, glossing over differences between Hollande's pro-growth stance and Cameron's emphasis on reducing debt.

But Cameron said he would maintain his staunch opposition to a tax on financial transactions that Hollande backs as a way to raise revenue to boost growth.

"On the financial transactions tax, I'm very clear, we are not going to get growth in Europe or Britain by introducing a new tax that would actually hit people as well as financial institutions," Cameron told reporters before his meeting at the elegant ambassador's residence, designed by famous British architect Edwin Lutyens in the 1920s.

"I don't think it is a sensible measure. I will not support it," he said.

Cameron, keen to prevent damage to Europe's leading financial centre in the City of London, has previously threatened to veto a European-wide financial transaction tax unless it was adopted globally, setting him on a collision course with France and Germany which back the idea.

A British government source said Hollande and Cameron agreed they had "different positions" on the financial transaction tax, also known as the Tobin tax.

Hollande also repeated to Cameron that he intended to pull France's combat troops out of Afghanistan this year, two years earlier than a NATO timetable for ending combat operations.

Cameron understood this was an election promise Hollande had made, the British source said.

On the euro zone economic crisis, Cameron said Hollande and he both wanted to see "stability in international markets."

"We both want to see countries deal with their deficits and we both want to see economic growth," Cameron said.

Hollande said the two leaders were "convinced we need to continue improving our public accounts while restoring growth."

On Greece, Hollande said he would like Greece to remain in the euro zone but it would be for the Greek people to "answer the question."

"My position is we should do everything possible so that they say yes to that," he said.

Cameron earlier called for "decisive action" to tackle the euro zone crisis.

"Britain wants to have a successful euro zone, that is where 40 percent of our trade goes. We need decisive action from euro zone countries in terms of strengthening euro zone banks, in terms of a strong euro zone firewall and decisive action over Greece. That has to be done," Cameron told reporters.

"Clearly the Greeks have to make their minds up, they have to make their decision. Decisive action needs to be taken. That's absolutely vital that it is because that will affect the stability not only of the euro zone economies. It affects our economy and it affects the world economy too," Cameron said.

The EU trade commissioner said earlier on Friday that European officials are working on contingency plans in case Greece bombs out of the euro zone

Cameron, a centre-right Conservative who built a close relationship with Hollande's predecessor Nicolas Sarkozy, snubbed Hollande when the Socialist leader visited London during his election campaign, but at Friday's meeting he invited Hollande to visit London soon.

Hollande made ironic reference to the snub, saying that since he had not been able to visit London before the election he would be "all the happier" to meet Cameron afterwards.

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Euro climbs to session high vs US dollar

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The euro rose as high as $1.2741, moving further away from a four-month low of $1.2640 it set earlier on Reuters data. It was last trading at $1.2738, up 0.4 percent on the day.

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GLOBAL MARKETS-World stocks erase year's gain; Brent at 2012 low

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* Euro zone crisis fears intensify flight to safety

* German 2-yr bond yield hits record low, close to zero

* U.S. stocks end down after Facebook messy debut

* Brent crude at lowest level in 2012

By Caroline Valetkevitch

NEW YORK, May 18 (Reuters) - World stocks erased the year's gains o n F riday as investors fled risky investments for safe-haven assets on concerns about the euro zone's deepening debt woes, while U.S. stocks lost ground after the debut of Facebook's failed to ignite optimism.

Brent crude closed at its lowest in 2012 as the euro zone crisis raised fears of a global slowdown that could dent oil demand, while German borrowing costs hit record lows.

World stocks, as measured by the MSCI index, dropped 1.1 percent and gave up all of their gains for the year to date fueled by the European Central Bank's injection of more than 1 trillion euros. It was a sixth day of losses for the index, which is now down 0.4 percent for the year.

Riskier assets were all heading for big weekly losses.

Investors were unnerved by a ratings downgrade of 16 Spanish banks by Moody's Investors Service, which deepened worries about the euro zone contagion. But market speculation that regulators could reinstate a ban on short selling of financial stocks sparked a rally in banking shares, with Spain's Banco Santander up 3 percent. U.S.-listed shares of Banco Santander rose 3.6 percent to end at $5.76.

Spain's banks, saddled with bad loans after a property boom collapsed, may need a bailout that would strain Madrid's already stretched finances and possibly require an international bailout regardless of any contagion threat from Greece.

"Sentiments are still pretty negative," said Francis Rodilosso, portfolio manager with Market Vectors in New York. "People are definitely seeing the glass half-empty."

Ongoing political and financial turmoil in Greece has kept investors worried about its ability to remain in the euro zone.

A G8 meeting of leaders of major industrial economies this weekend is expected to tackle the crisis in Europe and look for ways to promote growth.

FACEBOOK'S LACKLUSTER DEBUT

On Wall Street, U.S. stocks fell after a sloppy debut by Facebook spoiled hopes that a spectacular open for the most-anticipated stock sale in years would brighten investors' mood. The benchmark S&P 500 posted a weekly loss of 4.3 percent.

Facebook's debut was hit with glitches, including a delay in initial trading. The stock closed at $38.23, barely above its $38 offering price.

For the day, the Dow Jones industrial average ended down 73.11 points, or 0.59 percent, at 12,369.38. The Standard & Poor's 500 Index was down 9.64 points, or 0.74 percent, at 1,295.22. The Nasdaq Composite Index was down 34.90 points, or 1.24 percent, at 2,778.79.

The FTSEurofirst 300 of leading European shares slid 1.1 percent, falling for a fifth day.

In the foreign exchange market, the euro rose from a four-month low against the dollar. It tumbled to $1.2640, not far from its trough of 2012, before recovering to trade slightly higher.

Europe's woes kept pressure on oil prices.

ICE July Brent crude settled at $107.14 a barrel, down 35 cents, the lowest close for front-month Brent since the Dec. 20, 2011 settlement. Brent is down 3.7 percent for the week.

NYMEX crude for June delivery settled at $91.48 a barrel, falling $1.08, or 1.17 percent. For the week, it slid 4.84 percent.

"The problems in Europe, highlighted by the political instability in Greece, remain as the primary factor for today's slide in oil prices," said Kyle Cooper, managing partner at IAF Advisors in Houston.

GERMAN BOND YIELDS HIT RECORD LOW, GOLD GAINS

Benchmark 10-year German bond yields hit a record low of 1.396 percent and two-year yields also fell to their lowest-ever level at just 0.028 percent.

Safe-haven gold prices rose more than 1 percent, with spot gold at $1,588.96 an ounce.

In the U.S. Treasury market, however, prices slipped as investors took profits a day after benchmark yields flirted with their lowest level in at least 60 years. Benchmark 10-year Treasury notes last traded down 5/32 at 100-12/32 in price to yield 1.71 percent, up 2 basis points from Thursday.

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UK's Cameron urges action on euro, opposes Tobin tax

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WASHINGTON | Fri May 18, 2012 4:10pm EDT

WASHINGTON May 18 (Reuters) - British Prime Minister David Cameron called on euro zone countries on Friday to take decisive action to stem a debt crisis and said Greeks must decide if they want to stay in the euro.

He also said that he maintained his opposition to a financial transactions tax, backed by new French President Francois Hollande as a way to raise revenues.

"We need decisive action from euro zone countries in terms of strengthening euro zone banks, in terms of a strong euro zone firewall and decisive action over Greece. That has to be done," he said, speaking in Washington before a G8 summit. "Clearly the Greeks have to make their minds up, they have to make their decision."

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FOREX-Euro rallies from 4-month low versus dollar

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WRAPUP 1-Europe's economic woes dominate G8 gathering

By Jeff Mason and Laura MacInnis

CAMP DAVID, Md. | Sat May 19, 2012 5:12am EDT

CAMP DAVID, Md. May 19 (Reuters) - U.S. President Barack Obama will press European leaders to ease up on fiscal austerity and focus on economic growth at a summit on Saturday that will discuss ways to stem turmoil in the euro zone and head off the risk of global contagion.

At the wooded Camp David retreat in Maryland's Catoctin Mountains, Obama and leaders from other large economic powers will try to forge a common approach to tackling a crisis that threatens the future of Europe's 17-nation single currency.

Though no major policy decisions are expected from the Group of Eight summit, leaders hope they can bridge enough of their differences to soothe rattled financial markets after worries about the risk of a Greek exit from the euro zone sent European stock prices to their lowest level since December.

"Hopefully we'll get some stuff done," Obama told Italian Prime Minister Mario Monti as he and other summit participants arrived for Friday evening dinner at a lodge at the secluded presidential retreat.

Obama earlier in the day aligned himself with Monti and new French President Francois Hollande by urging a solution to the euro zone crisis that combines fiscal belt-tightening measures with a "strong growth agenda."

On the other side of the debate is German Chancellor Angela Merkel, who has pushed fiscal austerity as a means of bringing down huge debt levels that are burdening European economies.

Voters in euro zone countries have shown frustration with that approach, ejecting governments such as that of Nicolas Sarkozy, who was defeated by Hollande, a socialist, in the May 6 French presidential election.

A draft of the summit communiqué shown to Reuters will stress an "imperative to create growth and jobs."

Also on the summit agenda are concerns about oil and food prices as well as Afghanistan, Iran, Syria and North Korea.

Speculation has grown that Obama will use an energy session at the G8 to seek support to tap emergency oil reserves before a European Union embargo of Iranian crude takes effect in July.

But with oil prices already sliding, a move by Obama to tap the Strategic Petroleum Reserve - alone or along with other countries - could expose him to criticism that the emergency supply should only be touched in a supply crisis.

The Camp David summit kicked off four days of intensive diplomacy that will test leaders' ability to quell unease over the threat of another financial meltdown as well as plans to wind down the unpopular war in Afghanistan.

After the Camp David talks wrap up late on Saturday afternoon, Obama will fly to his home town of Chicago where he will host a two-day NATO meeting at which the Afghanistan war will be the central topic.

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UPDATE 4-Troubled Brazil economy shrinks again in March

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The remote server returned an unexpected response: (417) Expectation failed.

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* March IBC-Br activity index down 0.35 percent, below forecast

* Brazilian activity hardly picked up in first quarter

* Weak recovery likely to prompt more interest rate cuts

* Government prepares more stimulus to support activity

By Alonso Soto

BRASILIA, May 18 (Reuters) - Economic activity in Brazil fell for the third straight month in March, a surprisingly weak performance that may lead the central bank to slash its benchmark interest rate to all-time lows and prompt further stimulus measures from President Dilma Rousseff.

The central bank's IBC-Br economic activity index , a closely watched proxy for gross domestic product, contracted 0.35 percent in March from February, the bank said on Friday. Most analysts had expected activity to rise 0.5 percent.

The weak reading means Brazil's economy has remained stagnant since almost falling into recession in the second half of 2011. In the fourth quarter, the economy expanded just 0.30 percent, a figure that could be easily revised down once fresh GDP data are released on June 1.

In addition to more interest rate cuts, Rousseff is ready to take further measures to cheapen consumer credit and breathe new life into struggling industries.

Finance Minister Guido Mantega told Brazilian newspaper Valor Economico on Friday that the government is studying measures to bolster credit, without elaborating. The new measures could be announced next week, Mantega told Valor.

Economic activity also contracted in January and February in what is expected to be a very weak quarter for the economy despite a barrage of stimulus measures to revive growth.

Concerned with market sentiment after the weak data, a senior government official said the administration forecasts growth of around 0.4 percent in the first quarter versus the fourth quarter, in line with many analysts' expectations.

"Growth this year will be low, without a doubt. We will see the effects of the stimulus in the second half of the year and in 2013," said Andre Perfeito, chief economist with Gradual Investimentos in Sao Paulo. "Lower growth will ultimately give the green light for the central bank to be more aggressive."

The Brazilian economy is widely seen growing slightly above the meager 2.7 percent posted last year as robust domestic demand only partially offsets a sluggish industry. Brazil's GDP grew a staggering 7.5 percent in 2010.

In the first quarter of the year, activity rose only 0.15 percent from the previous quarter, according to Reuters calculations based on the central bank's data. Activity in February versus January was revised down to a drop of 0.38 percent from the previously reported 0.23 percent slide.

The struggling recovery effort in the world's No. 6 economy will likely prompt the central bank to bring its benchmark Selic interest rate to a record low from the current 9 percent. The bank, which has already trimmed 350 basis points off its Selic rate since August, will make its next rate decision on May 30.

Yields on Brazil's interest rates futures fell across the board on Friday as more investors expected the bank to keep the pace of rate cuts at 75 basis points per meeting.

MORE STIMULUS AHEAD

Earlier this week, Mantega scrapped his initial economic growth forecast of 4.5 percent for the year and senior officials now see expansion closer to 3 percent.

The government is considering slashing the financial operations tax, or IOF, on car loans to help automakers unwind inventories, which in April climbed to their highest since the 2008 global financial meltdown, a local newspaper reported on Friday.

Many of the country's economic woes stem from the so-called "Brazil cost" - a mix of high taxes, interest rates, labor costs and infrastructure bottlenecks that strangle businesses facing stiff competition abroad.

Even as manufacturers struggle, domestic demand remains surprisingly strong as Brazilians continue to spend on foreign-made clothes and home appliances.

A worsening debt crisis in Europe also poses a challenge for Brazil as international credit lines dry up and global demand for local products falls.

Rousseff, a career economist, is sticking to fiscal austerity to allow the central bank to continue easing monetary policy. She is also pressing private-sector banks to slash rates in tandem with the central bank's falling benchmark rate.

The stimulus will likely pay off in the second half of the year but will not be enough to bring back the high growth rates that made Brazil one of the world's most dynamic economies.

Rousseff, who enjoys record-high popularity since she took office in January 2011, may face years of mediocre growth ahead as the former star of the BRICS group of major emerging economies quickly loses its shine. The grouping also includes Russia, India, China and South Africa.

In contrast, the economy of regional peer Mexico grew at its fastest pace in 18 months in the first quarter.

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GLOBAL MARKETS-World stocks fall into negative territory for year

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The remote server returned an unexpected response: (417) Expectation failed.

* Euro zone crisis fears intensify flight to safety

* German 2-yr bond yield hits record low, close to zero

* U.S. stock market focus on Facebook debut

* Brent crude at lowest level in 2012

By Caroline Valetkevitch

NEW YORK, May 18 (Reuters) - World stocks erased the year's gains o n F riday as investors fled risky investments for safe-haven assets on concerns about the euro zone's deepening debt woes, while U.S. stocks lost ground after the market debut of social network Facebook failed to lift optimism.

Brent crude briefly slipped below $107 per barrel to its lowest in 2012 as the euro zone crisis raised fears of a global slowdown that could dent oil demand, while German borrowing costs hit record lows.

World stocks, as measured by the MSCI index, dropped 1.1 percent and to a level below where they began the year, having given up all the first-quarter gains fueled by the European Central Bank's injection of more than 1 trillion euros. The index was on track for a sixth day of losses.

Riskier assets were all heading for big weekly losses.

Investors were unnerved by a ratings downgrade of 16 Spanish banks by Moody's Investors Service, which deepened worries about the euro zone contagion. U.S.-listed shares of Spain's Banco Santander, however, were up 3.1 percent at $5.73.

Spain's banks, saddled with bad loans after a property boom collapsed, may need a bailout that would strain Madrid's already stretched finances and possibly require an international bailout regardless of any contagion threat from Greece.

Ongoing political and financial turmoil in Greece has kept investors worried about its ability to remain in the euro zone.

In addition, a G8 meeting of leaders of major industrial economies takes place over the weekend, possibly making some investors wary of holding positions until Monday.

On Wall Street, the Dow Jones industrial average was down 65.35 points, or 0.53 percent, at 12,377.14. The Standard & Poor's 500 Index was down 8.91 points, or 0.68 percent, at 1,295.95. The Nasdaq Composite Index was down 19.50 points, or 0.69 percent, at 2,794.19.

U.S. stocks were higher in early trading, but lost ground after midday. Facebook's debut was hit with glitches. Initial trading was delayed, and the stock is struggling to hold above its $38 offering price. It traded as high as $45 and was last up 1.5 percent at $38.57.

The S&P has fallen 6.7 percent so far in May, and while volatility is expected to continue, some analysts were forecasting a near-term rebound as valuations become more attractive.

The FTSEurofirst 300 of leading European shares slid 1.1 percent, falling for a fifth day.

In the foreign exchange market, the euro rose from a four-month low against the dollar o n F riday as investors pared bets against the single currency after a 4 percent drop this month.

NYMEX crude for June delivery settled at $91.48 a barrel, falling $1.08, or 1.17 percent. For the week, it slid 4.84 percent. Brent crude was down 45 cents at $107.04 a barrel.

GERMAN BOND YIELDS HIT RECORD LOW

Benchmark 10-year German bond yields hit a record low of 1.396 percent and two-year yields also fell to their lowest-ever level at just 0.028 percent.

U.S. Treasury prices were lower. The benchmark 10-year U.S. Treasury note was down 7/32 in price, the yield at 1.71 percent. Gold prices rose more than 1 percent, with spot gold at $1,591.10 an ounce.

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CANADA FX DEBT-C$ hits 4-month low on euro zone fears

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