By Yoruk Bahceli

(Reuters) - Savers across the euro zone are dashing for government debt to secure returns on their cash as banks struggle to keep up with surging interest rates.

Leading the way is Italy, which sold a record 18.2 billion euro retail bond this month to increase domestic holdings of its debt.

But that's just the tip of the iceberg.

Portugal has shifted half of this year's funding to savers, Belgium expects a ninefold increase in retail bond sales, and Spanish savers are piling into Treasury bills.

The scale of demand is a surprise to debt managers and underscores the rapid return of savers to dedicated debt programmes that they have shown little interest in for a decade.

Their return marks the latest structural shift since high inflation drove the European Central Bank to pull out of negative rates and hike borrowing costs steadily over the last year.

For issuers, it's a sign of confidence that new buyers are moving in as the ECB winds down its bond holdings.

"We thought that these movements somehow would lose steam, because savings are limited," said Rui Amaral, board member at Portugal's debt agency.

"Portugal is growing fast... but savings are not growing as fast as for us to (have foreseen) a continuing surge in these retail investments."

Having planned 3.5 billion euros for the whole year, Portugal has already sold around 10 billion euros of new savings certificates to retail investors, Amaral said, up from 4.6 billion euros in 2022 when demand started returning and a mere 500 million euros in 2021.

It has slashed this year's bond and treasury bill sales by 8.9 billion euros in favour of savings certificates, of which it expects to have sold 12 billion euros by year-end -- half its 24.8 billion euro 2023 funding programme.

"Banks like everywhere else in Europe are not very fast in increasing remuneration of deposits. So what you see is just an influx from a lot of bank deposits being transferred to (savings) certificates," Amaral said.

This means around 15% of outstanding Portuguese government debt now sits with retail investors, versus 10% in recent years.

Belgium meanwhile has issued 390 million euros of state notes to retail investors this year, the highest since 2011.

Debt agency director Maric Post expects issuance of up to 1 billion euros by year-end, four times the 250 million euros pencilled in for 2023 and up from 109 million euros in 2022.

This would take demand for retail bonds back to levels seen in the early 2000s, Post said.

WHY NOT?

In Spain, individuals held 15% of all outstanding Treasury bills as of March, up from almost zero since 2015 and the highest level on record according to Treasury data going back to 2002.

But individuals still only hold 1% of its 1.3 trillion euro public debt overall, a spokesperson said. Scope Ratings says Spain should tap these investors to diversify its refinancing risk and contain borrowing costs.

Spanish banks pay the lowest rate on deposits among big euro zone economies. One-year deposits return 1.3%, compared with 3.7% on 12-month bills.

"Suddenly you realize your money parked in deposits is paying you peanuts, when it could pay you something much more juicy in government bonds," said Societe Generale (OTC:SCGLY) rates strategist Jorge Garayo.

Dedicated retail debt such as that sold by Portugal and Belgium helps non-professional investors avoid losses from market fluctuations, provide tax advantages and are easier to buy.

In France, where millions of savers deposit money in special accounts paying a regulated rate, demand comes from banks themselves, said debt agency head Cyril Rousseau.

The institutions holding the deposits are buying French inflation-linked bonds to generate the 3% rate they pay savers, which is partly indexed to inflation, he said.

Domestic investors bought 63% of a 3 billion euro bond linked to French inflation sold this month, and banks' asset and liability management divisions took 37%, signalling most of the debt sale was "driven by the need of investing the regulated retail deposits," Rousseau said.

BUFFER

Euro zone household ownership of government debt varies, from practically zero in places like Germany to the high share in Portugal, ECB research shows.

Savers are not expected to replace the trillion-dollar funds that buy the lion's share of government debt, but they can be a powerful buffer during a crisis.

Italy first launched retail bonds in 2012 amid the euro zone debt crisis, reducing reliance on international investors as borrowing costs surged.

Savers also bought a record 5.7 billion of Belgian debt in December 2011.

"We saw a very strong recovery of spreads after that issuance," Post recalled, referring to the additional borrowing cost Belgium pays over Germany.

"So that was always also one of the reasons why we kept the product on the shelf, even when the levels were very low and the interest from the public was very low."

By Kantaro Komiya

TOKYO (Reuters) - Japan's factory sentiment likely improved in the second quarter for the first time since mid-2021, thanks to an eased chip supply crunch for automakers, a Reuters poll of economists showed on Friday.

While slowing global demand has dragged on manufacturers' recovery, the service-sector mood is expected to have extended gains above pre-pandemic levels led by a tourism boom, helping to underpin the world's third-largest economy.

The Bank of Japan's (BOJ) closely-followed "tankan" business survey is set to show the big manufacturers' confidence index rebounded to 3 in June from 1 in March, according to the median estimate of 16 economists in the poll.

It would mark the index's first increase in seven quarters.

"Although sentiment deteriorated among sectors like chemicals and production machinery on global economic slowdown, car makers' mood greatly improved thanks to mitigated semiconductor shortage," said Shumpei Fujita, economist at Mitsubishi UFJ (NYSE:MUFG) Research and Consulting.

Staying on a solid course, the big non-manufacturers' mood index likely rose for a fifth quarter to 22, the highest since June 2019, from 20, the poll showed, with analysts citing strong inbound tourist demand and the government's May decision to downgrade COVID-19's disease classification.

Looking ahead, manufacturers would see further improvement in their sentiment three months ahead, while service-sector companies' confidence would worsen slightly due to consumer inflation running at over four decade highs.

The tankan will also show large firms plan to ramp up capital expenditure by 10.1% in the current fiscal year, according to the poll, well above the 3.2% increase projected in the March survey.

The BOJ will release the latest tankan results on July 3 at 8:50 a.m. local time (July 2 at 2350 GMT).

Separate industrial output data due on June 30 at 8:50 a.m. (June 29, 2350 GMT) will likely show a 1.0% month-on-month decrease in May, the first contraction in four months, hurt by the slackening in global demand.

For May, jobless and job availability indicators were seen unchanged, while retail sales likely rose 5.4% from a year earlier for their 15th month of expansion, the poll also found.

WASHINGTON (Reuters) - The U.S. and India have agreed to terminate six outstanding disputes at the World Trade Organization, the U.S. Trade Representative's office said in a statement on Thursday after a meeting between President Joe Biden and Prime Minister Narendra Modi.

India also agreed to remove retaliatory tariffs on certain U.S. products including chickpeas, lentils, and other goods, the statement said.

By Leigh Thomas

PARIS (Reuters) -Zambia has clinched a deal to restructure more than $6 billion in debts owed to other governments, a French official said on Thursday, in a long-awaited breakthrough to ease pressure on the southern African country's strained public finances.

Zambia in 2020 became the first African country to default on its sovereign debt during the COVID-19 pandemic and has struggled since in protracted negotiations to agree a deal on the $12.8 billion of external debt it was trying to restructure.

"We have reached an agreement on the outline of a debt treatment, we've reached the end of the negotiation," the French official, who did not wish to be identified, told journalists.

Zambia's public sector creditors agreed to reschedule $6.3 billion, including $1.3 billion in arrears, and private sector creditors are expected to do the same on the $6.8 billion owed to them, the official said.

"We've already spoken to representatives of the private sector and they know what to expect, that they will have to restructure and make a comparable effort," the official added.

The agreement calls for Zambia's debt to be rescheduled over more than 20 years with a three-year grace period during which only payments on interest are due.

The restructuring agreement with official creditors paves the way for Zambia to receive another $188 million tranche of money from the International Monetary Fund, part of a $1.3 billion package approved in August 2022.

“This agreement paves the way for the completion of the first review of Zambia’s three-year Extended Credit Facility Arrangement, which is helping put Zambia on a path toward sustainable economic growth and poverty reduction," Kristalina Georgieva, managing director of the International Monetary Fund, said in a written statement.

The scale of the debt relief Zambia requires has been a concern for some of the country's main creditors.

Some Western officials have accused China - Zambia's largest bilateral creditor - of dragging its feet in restructuring talks, something Beijing denies.

Of the $6.3 billion in debt owed to government bodies, $4.1 billion was owed specifically to Export-Import Bank of China, the French official said.

"I am pleased that the international community has come together to support Zambia in its time of need," U.S. Treasury Secretary Janet Yellen said in a statement.

"I urge all official bilateral and private sector creditors to quickly finalize the debt restructuring process that will provide relief to Zambian families and encourage the private investment that is needed to jump start the economy."

Zambian President Hakainde Hichilema was one of about 40 leaders attending a summit in France on Thursday and Friday aimed at easing the debt burden on some of the world's most vulnerable countries while freeing up billions of dollars in new funds for climate finance.

Beijing was keen not to be seen further holding up debt relief for Zambia at the summit, the official said, adding that French President Emmanuel Macron's talks with Chinese authorities in Beijing in April also helped unblock the situation.

Zambia is viewed as a test case for a debt restructuring framework backed by the Group of 20 wealthy nations intended to streamline relief for countries caught in a developing world debt crisis sparked in part by the coronavirus pandemic.

However, the process has been achingly slow for Zambia, a fact that has discouraged all but a handful of other struggling governments from seeking help under the mechanism.

PARIS (Reuters) -U.S. Treasury Secretary Janet Yellen said on Thursday the World Bank should add disaster clauses to debt agreements with poorer countries, speaking ahead of a summit in Paris that will discuss how to boost crisis financing for low-income nations.

Such clauses could be part of a broader reform of the World Bank to free up more funds, Yellen told journalists in the French capital.

"We would also like to see the World Bank offer borrowers the option to add climate resilient debt clauses to their loan agreements. These clauses would help ease pressures on countries if a natural disaster strikes," she said.

Yellen, whose country is the World Bank's biggest shareholder, added multilateral development banks should be reformed to become more efficient before shareholders think of injecting more money into them.

"Even with the capital that the World Bank and the MDBs have there is clearly potential ...to increase financing capacity," she said, adding an additional 200 billion dollars could be unlocked over a decade.

"We are certainly not ruling out at some later stage a capital increase. But I think that these banks need to function better individually and as a system first, expand their mission to address global challenges, better utilize the capital they have."

BERLIN (Reuters) - Brexit has been an "economic disaster" for trade and investment ties between the United Kingdom and Germany, leading to a fall in German direct investment and seeing the UK decline in importance as a trading partner, German economists said.

Britain voted on June 23, 2016, to exit the European Union and it left the EU's single market at the start of 2021.

"Brexit is an economic disaster for both sides of the channel," Volker Treier, head of foreign trade at the German Chamber of Industry and Commerce (DIHK), told Reuters on Thursday.

Last year, Germany exported goods worth 73.8 billion euros ($80.57 billion) to the UK, 14.1% less than in 2016. The year of the referendum, the UK was Germany's third most important export market, but by 2022 the country had slipped to eighth place, Treier said.

As a trading partner - measuring combined exports and imports - the UK has lost even more importance since then, dropping from fifth to eleventh place, he added.

The volume of German direct investment in the UK has also declined. In 2021, it was around 140 billion euros, a decline of 16.1% compared with 2016.

According to the DIHK, some 2,163 German companies are now active in the UK, 5.2% fewer than in 2016.

Many British companies meanwhile have settled in Germany in recent years. Germany Trade and Invest (GTAI), an organisation that helps international companies set up business in Germany, has counted more than 1,000 new businesses from the UK since the Brexit vote.

Last year alone, there were 170 new businesses, a number surpassed only by companies from the U.S. and Germany's neighbour Switzerland.

"We expect inquiries from the UK to remain at a high level," said GTAI Managing Director Robert Hermann. "It is important for British companies to have a foothold in the EU."

Germany's size and central location are an advantage when it comes to attracting UK companies, he added.

"The UK's exit from the EU has made our close trade relations more difficult and there is still considerable planning and legal uncertainty in the UK business of German companies," said Treier.

($1 = 0.9160 euros)

By Wayne Cole

SYDNEY (Reuters) -The head of Australia's central bank will find out in July whether he will be reappointed to a second term, as customary, or be passed over for a new leader as part of the biggest shake-up of the institution in decades.

Treasurer Jim Chalmers told reporters on Thursday he would announce his decision on Reserve Bank of Australia (RBA) Governor Philip Lowe's (NYSE:LOW) future in coming weeks, but would not be drawn on whether Lowe would keep his job.

Lowe, a four-decade veteran at the bank, has been under a cloud since repeatedly saying in 2021 that interest rates would not rise until 2024, only to reverse course and hike in mid-2022 when inflation unexpectedly surged.

The RBA has since lifted rates by an eye-watering 400 basis points to an 11-year high of 4.1%, causing financial pain for mortgage holders who feel they were enticed into borrowing by Lowe's sanguine outlook.

In a testy appearance before lawmakers last November, Lowe took the unusual step of apologising for any harm done. "I’m certainly sorry if people listened to what we'd said and then acted on that," Lowe conceded at the time.

The clamour of criticism, particularly in the media, led Chalmers to launch an independent review of the central bank which recommended sweeping changes in its operation and the way policy was formed.

It has also led for calls for Lowe to be ousted when his current term ends in September, and perhaps be replaced by someone from outside the bank.

The previous two governors, both insiders, were reappointed to another seven-year term and chose to step down after serving three years.

Lowe has stated publicly that he would accept reappointment if offered, but Chalmers has been non-committal.

Speaking on Thursday, Chalmers said he held Lowe in high regard but stopped short of endorsing him.

"Obviously, the Reserve Bank Governor needs to be well placed to implement the recommendations of the review and to take the Reserve Bank into the future," said Chalmers.

"It's a key institution and obviously makes decisions which matter a great deal to the living standards of the Australian people."

Possible replacements being touted are the current deputy governor Michele Bullock, Treasury official Jenny Wilkinson and former Bank of Canada official Carolyn Wilkins, who also led the review into the RBA.

BUENOS AIRES (Reuters) - Argentina will make scheduled payments totaling some $1.9 billion to the International Monetary Fund (IMF) on Wednesday, an economy ministry source said.

The South American country is in talks with the IMF to revamp its $44 billion loan program with the lender as it battles with dwindling foreign currency reserves, a weak peso currency and annual inflation over 100%.

Argentina has $2.7 billion due to the fund this month alone.

The government hopes to bring forward over $10 billion in IMF disbursements this year, though has been reluctant to agree to tough austerity measures as the next general elections scheduled for October approach.

Economy Minister Sergio Massa is set to travel to Washington once an agreement to ease economic targets is drafted with IMF officials.

By David Milliken

LONDON (Reuters) - The Bank of England is set to raise interest rates for a 13th time in a row on Thursday, a day after inflation data came in higher than expected again, with investors split on just how big the new hike will be.

Economists polled by Reuters last week were unanimous that the BoE would raise rates to 4.75%, their highest since 2008, from 4.5%.

But after inflation held at 8.7% in May, financial markets priced in a nearly 50% chance that the BoE would opt for a bigger move and raise rates by half a percentage point.

"I think it's a very finely balanced decision," said Tomasz Wieladek, chief European economist at U.S investment firm T. Rowe Price, who predicts at least three of the Monetary Policy Committee's nine members will vote for a half-point hike.

Britain's economy, which has been hit by the shock of Brexit as well as the COVID-19 pandemic and the surge in gas prices caused by Russia's invasion of Ukraine, has dodged a widely expected recession so far in 2023 though growth looks set to be a minimal 0.25% this year, according to the BoE's forecasts.

Unlike most other big rich economies, output has barely recovered to pre-pandemic levels. However, two inflation readings since the BoE's last rate hike in May have both been higher than expected, raising fears that Britain faces a more persistent price growth problem than the United States or the euro zone.

Households are now also seeing their mortgage bills rise, with average new two-year fixed-rates rising to 6.15% on Wednesday in anticipation of further rate hikes.

Financial markets were estimating that the BoE would keep raising rates until they hit 6% - their highest since 2001 - more than the U.S. Federal Reserve which is seen tightening by just a quarter point more and the European Central Bank which investors expect may move twice more.

"The UK has a uniquely bad inflation problem," Krishna Guha, a vice chairman at U.S. investment banking advisory firm Evercore, said.

Prime Minister Rishi Sunak - who has pledged to halve inflation this year in an attempt to win back voter support ahead of a national election expected in 2024 - has said he fully backs the BoE's efforts to tame prices.

However, Sky News said on Wednesday that unnamed members of the government thought Governor Andrew Bailey was failing at his job.

FALLING FASTER?

The central bank last month forecast that consumer price inflation, which peaked at a 41-year high of 11.1% in October 2022, would fall to just over 5% by the end of this year and be below its 2% target in early 2025.

A significant inflation drop is almost inevitable as energy prices come down from last year's peaks.

But incoming BoE policymaker Megan Greene - who will join the MPC next month - said last week that getting inflation from 5% to 2% may prove a tougher task than the initial fall.

Core inflation - which strips out more volatile prices to show an underlying trend - rose to a 31-year high in May.

Wieladek, who worked at the BoE from 2008 to 2015, said wages looked set to keep on growing at an annual rate of around 6%, almost twice the level consistent with 2% inflation, given the shortage of workers available to many employers.

In previous decades, British wage growth has only slowed after a large rise in unemployment, and Wieladek estimated the BoE would need to engineer a recession that pushed unemployment up to 6.0%-6.5% from its current 3.8% to achieve this now.

"Unfortunately, the Bank of England is in a situation where they will have to hike until something breaks," he said.

Most economists are less gloomy and think rates are more likely to peak near 5% as recent falls in energy and raw material costs affect the price of other goods and services.

"Market pricing for a lot more rate hikes could reverse quite quickly - especially if weaker inflation is ultimately allied with easing wage pressures," strategists at Nomura wrote.

By John Irish

PARIS (Reuters) -Leaders meeting this week at a summit in Paris are set to back a push for multilateral development banks like the World Bank to put more capital at risk to boost lending, according to a draft summit statement seen by Reuters.

Multilateral development banks are expected to be at the centre of talks on Thursday and Friday in the French capital when nearly 40 heads of state and government meet to nail down a roadmap for easing the debt burdens on low-income countries and making more funds available for climate financing.

An expert panel review for G20 nations last year found that multilateral lenders' management, government shareholders and their credit rating agencies were too timid about their financial risks.

The panel suggested a greater risk tolerance could free up several hundreds of billions dollars over the medium term.

A summit statement on multilateral development banks, which as a draft is subject to change, calls for a new push to be made "to optimise the use of capital by MDBs and encourage them to pursue innovative measures".

"This should include exploring incorporating a prudent share of callable capital into MDB capital adequacy frameworks (and) diversifying their sources of funding (including by exploring issuance of hybrid capital)," the summit statement said.

Callable capital is the funds government shareholders would be expected to stump up if ever a major development bank suffered big losses depleting paid-in capital, which has so far never happened.

Hybrid capital is financial instruments that development banks could issue to investors to raise additional funds.

The statement said that capital hikes for some unspecified development banks could be considered, but left it up to the board of each one to determine if and when one was needed.

The leaders are also set to support plans for rich countries to re-channel some of their unused special drawing rights at the International Monetary Fund - a global reserve currency - to development banks, including the African Development Bank and the Inter-American Development Bank.