ireland

Zapatero’s Campaign to Avoid Greek Deficit Fate Hobbled by Spanish Regions

by on March 18, 2010

By Emma Ross-Thomas March 18 (Bloomberg) — Prime Minister Jose Luis Rodriguez Zapatero ’s drive to show Spain can avoid Greece’s fate is being held hostage by the country’s regional governments. As Zapatero tries to cut the euro area’s third-highest budget deficit , regional chiefs facing elections over the next year are refusing to trim spending. The European Commission said yesterday Spain may need deeper budget cuts to meet its deficit goals, and the regions’ performance is “an additional risk.” Zapatero’s room to maneuver is limited by the 17 regions that control 37 percent of public spending. Zapatero is being hobbled by a 30-year shift in power to Catalonia, the Basque country and other territories that now control almost twice as much spending as the Madrid government. The risk is that Zapatero won’t be able to move fast enough on a deficit that climbed to 11.4 percent of gross domestic product last year. That may prompt investors to consider dumping Spanish bonds along with their Greek counterparts . “The pressure is on, but I think some regions will resist,” said Angel de la Fuente, an economist at the National Research Council’s Institute of Economic Analysis in Barcelona and the author of several books on regional economics. The Greek crisis is a “useful scare” showing what may happen to Spain if it doesn’t get its finances in order. Additional Measures Spain may need to adopt additional budget cuts to meet its goal of bringing the shortfall back within the EU’s 3 percent limit in 2013 as the government’s economic forecasts are too optimistic, the commission said yesterday in a report. With government forecasts showing the regions will account for more than half of Spain’s 7.5 percent deficit in 2011, Finance Minister Elena Salgado will try to forge a pact with local politicians this month after a push by Zapatero failed in December. Zapatero’s struggle to break the stalemate is shining a spotlight on a country whose economy is four times the size of Greece and has a jobless rate of 18.8 percent, the euro region’s highest. The extra yield investors demand to hold Spanish debt rather than German equivalents is 74 basis points. While that’s about a quarter of Greece’s spread, it’s still almost double what it was two years ago. ‘Next Greece’ “No country wants to be the next Greece,” said Olaf Penninga , a senior portfolio manager at Robeco Group in Rotterdam, which manages 140 billion euros ($192.5 billion). It has sold most of its Spanish government bonds, replacing them with Italian equivalents. The Greek crisis “has clearly put more pressure on Spain to take credible measures to reduce the deficit.” The government will have to contend with opponents such as Madrid President Esperanza Aguirre from the People’s Party, who called on March 10 for a “rebellion” against a proposal to raise sales tax to 18 percent from 16 percent. Even Zapatero’s allies are showing resistance. Angel Agudo , economy chief in the northern Cantabria territory, was quoted by newswire Efe last month as saying the deficit-cutting burden needs to be shared and he won’t “pick up other people’s bill.” Fourteen regions will probably hold elections by the end of 2011. Regional governments, which control health and education spending, are reluctant to join the deficit-cutting drive as the recession reduces the flow of funds they receive from the central government. Taxes tied to property sales, which accounted for as much as 20 percent of some regions’ revenue in the boom, have declined to half of that, Standard & Poor’s estimates. Regional Power “The key problem is that the regions have been given power over spending without the responsibility of having to go to the taxpayer to ask for money,” said Luis Garicano , an economics professor at the London School of Economics. “They don’t have the right incentives to spend in line with their revenue capabilities.” Spain’s atomized structure, which has evolved since the death of General Francisco Franco in 1975, contrasts with the more centralized powers of the Irish government. While Zapatero needs to curry favor with regional rulers to make sure cuts are made, his counterpart in Ireland only needed a majority in the national parliament to pass unprecedented austerity packages. The deficit stalemate may start to weigh further on credit ratings. S&P, which cut Spain one notch to AA+ last year, says regional governments may see downgrades this year. Ratings Concern Spain may be “over-optimistic” on revenues, said Myriam Fernandez de Heredia , head of the company’s European local and regional government team. Catalonia is one of the lowest-rated Spanish regions on AA-, and the Madrid region is rated AA. Fitch Ratings, which has an AAA rating on Spain, is skeptical that regions can cut spending growth to 2.6 percent this year as budgeted, compared with an average of 9 percent in the five years through 2007. Nor can Madrid claw back the power it has ceded and assert its authority. The government’s lack of control was clear on Jan. 29 when it presented a plan to save 50 billion euros by 2013 that left the section on regional finances blank. “Everybody still remembers the initial presentation with the holes,” Penninga said. The one measure of control the government does have is that it has to sign off on regions’ debt issuance. Carlos Ocana , the deputy finance minister responsible for budgets, said on Feb. 24 that the central government would be “rigorous” this year when assessing borrowing needs. For Zapatero, the challenge will be to cajole regions into cutting spending without losing support in the national assembly, where he lacks a majority and needs the backing of parties such as Catalonia’s Republican Left, the National Galician Block or the Nationalist Basque Party. “Politically, it’s difficult because the government also needs the votes of certain parties to govern,” said Alfredo Pastor , a former deputy finance minister and a professor at IESE business school in Madrid. “Cutting expenditure is harder than it looks.” To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

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Intel CEO Candidate Maloney to Take Medical Leave After Suffering Stroke

by on March 2, 2010

By Ian King March 2 (Bloomberg) — Intel Corp. Executive Vice President Sean Maloney , a leading candidate for the top job at the world’s largest chipmaker, suffered a stroke that will keep him away from work for months. Maloney, 53, is one of four executive vice presidents reporting directly to Chief Executive Officer Paul Otellini . He’s expected to resume all of his responsibilities after several months of recuperation, Santa Clara, California-based Intel said late yesterday in a statement. Maloney is a product of the internal executive development program at Intel, which has picked CEOs from within its own ranks since it was founded in 1968. The Englishman has been regarded as the top candidate to succeed Otellini, said Doug Freedman , an analyst at Broadpoint AmTech Inc. in San Francisco. “It definitely looked to me like he was the man to beat for the job,” said Freedman, who recommends buying the shares and doesn’t own them. “They have a very deep bench. Personally, it’s a very sad note to hear of his poor health, but from a corporate standpoint, it has very little impact to their corporate health.” Maloney’s duties will be assumed by Dadi Perlmutter , another executive vice president. Together, the two men run Intel’s architecture business, which designs and sells the company’s chips. Maloney focused on business operations, while Perlmutter is mainly responsible for product development. ‘Determination to Return’ “I visited with Sean and his sense of humor and determination to return to work fill the room,” Otellini, 59, said in the statement. “We wish him a speedy recovery and look forward to his return.” Maloney , who was born in London into a family originally from Ireland, joined Intel in 1982 as a manager of software engineering in the U.K. He turned down an offer from Microsoft Corp. , even after an interview with founder Bill Gates at Heathrow airport. Maloney spent nine years with Intel in Europe, rising to become U.K. country manager and then director of marketing for Europe. Intel brought Maloney to the U.S. in 1992 to serve at the technical assistant to Andy Grove , who was then CEO. Maloney followed Otellini into that position and joined a program that Intel uses to identify future executives . Technical assistants act as secretaries, drivers and even bag carriers for senior executives, who they follow full-time. They are expected to participate in meetings and are allowed a say in decision making. Before taking his current role in September 2009, Maloney was Intel’s head of sales and marketing. Intel rose 34 cents, or 1.7 percent, to $20.87 yesterday in Nasdaq Stock Market trading before the announcement. The shares have gained 2.3 percent this year. To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

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Senate Banking Negotiators Said to Drop Obama’s Consumer Financial Agency

March 1, 2010

By Alison Vekshin and Robert Schmidt March 1 (Bloomberg) — Senate Banking Committee negotiators, working through the weekend, agreed to drop the stand-alone consumer agency sought by the Obama administration and opposed by the banking industry, removing an obstacle that has stalled new U.S. financial rules. Committee Chairman Christopher Dodd , a Connecticut Democrat, joined committee Republicans in seeking an alternative to the Obama proposal. Democrats and Republicans are still seeking a deal to place consumer powers within another regulator, said people with knowledge of the discussions who declined to be identified because the talks are private. “While this presents a new set of issues for regulatory reform, it does resolve a fairly significant and sensitive one for the banking industry: a consumer financial protection agency completely de-linked from the safety-and-soundness regulators,” said Kevin Petrasic , a lawyer at Paul, Hastings, Janofsky & Walker LLP in Washington. The negotiations focused on President Barack Obama’s Consumer Financial Protection Agency, which stalled talks on the overhaul, with Dodd proposing a bureau in the Treasury and Senator Richard Shelby , the committee’s top Republican, suggesting such powers go to the Federal Deposit Insurance Corp. Neither proposal advanced, a Senate aide said. Talks between the two lawmakers on the legislation had collapsed last month. Senator Bob Corker , a Tennessee Republican and an opponent of the independent agency who is working with Dodd on a compromise, has proposed that consumer responsibilities be assigned to the Federal Reserve, said a person familiar with the senator’s discussions. Industry Opposition The financial-services industry opposes the consumer agency more than any other provision in the Obama plan and has lobbied lawmakers to defeat it. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon called the agency “just a whole new bureaucracy” during a December conference call with analysts. Dodd proposed a Bureau of Financial Protection in the Treasury with power to write rules for financial-services companies, funded mainly through industry fees and headed by a director appointed by the White House, according to a two-page summary Dodd circulated over the weekend. “I’m more concerned about what powers it has,” Dodd said in a Feb. 26 interview for Bloomberg Television’s “Political Capital With Al Hunt.” Committee Republicans rejected Dodd’s proposal because it split consumer protection from the safety-and-soundness responsibility of bank regulators, according to a Senate aide who declined to be identified because negotiations are private. Safety-and-Soundness “It is important for the CFPA to be located in an agency with substantial safety-and-soundness responsibilities so that these goals work together rather than at cross purposes,” said Oliver Ireland , former Federal Reserve associate general counsel and now partner at law firm Morrison & Foerster LLP in Washington. “This probably means it should not be at Treasury.” Shelby’s staff on Feb. 26 circulated two proposals to committee Republicans. One calls for a three-member Financial Products Consumer Protection Council with a chairman appointed by the president, the FDIC chairman and the director of a newly created federal bank regulator, according to a one-page summary obtained by Bloomberg News. The other would establish a consumer protection division at the FDIC to be run by a director appointed by the president with a five-member board, according to a two-page summary. Both Republican proposals give the consumer unit the power to write rules, including banning unfair or deceptive practices, a power now held by bank regulators including the Federal Reserve. It would develop plain-English disclosures and lead all federal consumer financial literacy efforts. Dodd Rejects Plan Dodd rejected Shelby’s proposal, according to the Senate aide. Talks continued through the weekend, Corker spokeswoman Laura Herzog said yesterday in an e-mail. The House in December passed a financial overhaul bill that included a stand-alone consumer agency. The agency is needed because regulators consider consumer protections “as a second thought,” House Financial Services Committee Chairman Barney Frank , the architect of the House bill, said in a Feb. 18 Bloomberg Television interview. Separately, Senator James Webb , a Virginia Democrat, plans to advance this week a proposal to tax bonuses for companies that received at least $5 billion in the taxpayer bailout. Webb will offer the measure an amendment to legislation extending business and personal tax provisions that expired in 2009, said Jessica Smith, Webb’s spokeswoman. Webb and Senator Barbara Boxer , a California Democrat, proposed a 50 percent tax on any bonuses exceeding $400,000. The Senate last year retreated from a bill approved by the House that would have put a 90 percent tax on bonuses at firms receiving U.S. aid. The House passed the measure after retention pay for AIG employees sparked a public outcry. To contact the reporters on this story: Alison Vekshin in Washington at avekshin@bloomberg.net ; Robert Schmidt in Washington at rschmidt5@bloomberg.net .

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Emerging-Market Stocks, Won Rally as Fed May Keep U.S. Interest Rates Low

February 22, 2010

By Justin Carrigan Feb. 22 (Bloomberg) — High-yielding currencies rose, led by the South Korean won, and emerging-market stocks rallied on speculation Federal Reserve Chairman Ben S. Bernanke may signal that U.S. interest rates will stay near record lows. The won was the biggest gainer against both the yen and the dollar, increasing 1.1 percent against the U.S. currency at 10:27 a.m. in London, and the New Zealand dollar advanced. The MSCI Emerging-Markets Index advanced for the first time in three days, while Europe’s Dow Jones Stoxx 600 Index was little changed and futures on the Standard & Poor’s 500 Index gained 0.1 percent. Copper fell. Bernanke may tell Congress Feb. 24 that last week’s increase in the discount rate isn’t intended to drive up borrowing costs amid a weak jobs market. Taiwan and Thailand exited recessions in the fourth quarter, expanding 9.2 percent and 5.8 percent respectively, government reports showed today. “There are a few positive things for the market to grab hold of this morning, and that’s resulted in a correction at the expense of the dollar and the yen,” said Ian Stannard , a foreign-exchange strategist at BNP Paribas SA in London. The won rose the most in almost seven weeks, as sales at South Korea’s largest department stores rose in January for an 11th month. Korea’s Kospi stock index rose 2.1 percent and Taiwan’s Taiex Index increased 1.6 percent, helping lift the MSCI Emerging Markets Index 1.3 percent. Hungary’s BUX Index rose 1.2 percent after an economic-sentiment gauge advanced to the highest level in 17 months. Japan, China The MSCI Asia Pacific Index advanced 2.4 percent, its biggest gain since November. Suruga Bank Ltd. rallied 7.4 percent in Tokyo on stock-buyback plans. Hong Kong’s Hang Seng Index jumped 2.4 percent, led by real-estate developers after Sun Hung Kai Properties Ltd. won the city’s first land auction for the year. The Shanghai Composite Index fell 0.5 percent on the first day of trading after a weeklong break. Reliance Industries Ltd. rose 1 percent in Mumbai. The owner of the world’s largest oil-refining complex raised its offer for bankrupt LyondellBasell Industries AF to about $14.5 billion, according to two people with knowledge of the offer. European stocks fluctuated between gains and losses, with retailers and automakers declining. Inditex SA, the world’s biggest owner of clothing stores, fell 1.5 percent in Madrid after Exane BNP Paribas downgraded the shares. Bank of Ireland Plc slumped 7.1 percent in Dublin. The country’s biggest lender by market value said it will give the Irish government a stake of almost 16 percent instead of a dividend. Allied Irish Banks Plc slid 4 percent. U.S. Futures The gain in U.S. futures indicated the S&P 500 may advance for fifth straight day. Bernanke will probably assure Congress that the Fed is mindful of the lack of job growth in the U.S. and an increase in the benchmark interest rate isn’t imminent. The central bank chief will deliver his semi-annual report on the economy to House and Senate panels Feb. 24-25. Smith International Inc. rose as much as 16 percent in German trading after Schlumberger Ltd., the world’s largest oilfield-services provider, agreed to buy the company for $11 billion. Greek stocks and bonds rose on optimism the nation will be able to find funding as it struggles to narrow a budget deficit that is more than four times the European Union limit. The ASE Index advance for a third day, gaining 0.5 percent, and the yield on the government two-year note declined 4 basis points to 5.47 percent. Credit-Default Swaps Credit-default swaps on the Markit iTraxx Crossover Index of 50 European companies with mostly high-yield ratings dropped 12 basis points to a two-week low of 456, according to JPMorgan Chase & Co. prices. The index is a benchmark for the cost of protecting bonds against default and a decline signals improvement in perceptions of credit quality. Treasuries fell, with the yield on the 10-year note rising 2 basis points to 3.80 percent. The U.S. government will sell a record $126 billion of securities this week, starting with $8 billion of 30-year inflation-protected bonds today. Copper for delivery in three months fell 0.8 percent to $7,370.50 a metric ton on the London Metal Exchange, the first decline in three days. Aluminum, nickel and zinc also retreated. Gold for immediate delivery added 0.2 percent to $1,121.80 an ounce, for a third gain. Crude oil for March delivery, which expires later today, was unchanged at $79.81 a barrel on the New York Mercantile Exchange. To contact the reporter on this story: Justin Carrigan in London at jcarrigan@bloomberg.net

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Euro’s Worst to Come as Derivatives Show Greece Hammerlocking ECB on Rates

February 22, 2010

By Liz Capo McCormick and Oliver Biggadike Feb. 22 (Bloomberg) — Derivative traders are signaling that the euro’s slump to a nine-month low will continue even if European Union leaders bail out Greece. Short-term rates for borrowing in euros in the forwards market are the cheapest relative to loans in dollars since September. The 50 percent collapse in that spread this month signals investors are betting the European Central Bank will keep its benchmark at a record low, sacrificing euro strength to prevent deficit-cutting by debt-laden economies in the region from stymieing growth. “Investors have already started to think about the next likely phase of the present crisis, and it appears that they all are finding are new reasons to sell the euro,” said David Woo , global head of foreign-exchange strategy at Barclays Plc in London. “Aggressive fiscal tightening by Greece, Spain and Portugal are likely to plunge their economies back into recession. All else being equal, this calls for a looser monetary policy.” The shift underscores a turnabout in the two most-traded currencies. In the last three quarters of 2009, the euro outperformed the dollar relative to 15 major currencies tracked by Bloomberg, with Deutsche Bank AG’s euro index gaining 1 percent and the IntercontinentalExchange Inc.’s Dollar Index down 9 percent. Since Nov. 25, the dollar is up 8.3 percent and has outdone all but four major currencies as the euro lost ground against all of them. The euro traded at $1.3633 as of 6:01 a.m. in London, from $1.3613 in New York on Feb. 19. The currency is down 4.8 percent this year. ‘Poster Boy’ Futures traders are more bearish than ever on the 16-nation currency, and strategists are slashing forecasts at the fastest clip since December 2008, data compiled by Bloomberg show. Woo cut his 12-month estimate to $1.40 from $1.45 on Feb. 12. Geoffrey Yu , a strategist at UBS AG, the world’s second largest currency trader, says the euro may test $1.30. Gary Shilling of the economic research firm A. Gary Shilling & Co. in Springfield, New Jersey, said it may slide to parity with greenback. The currency has traded above $1 since 2002. “It’s a one-size-fits-all monetary policy” for “different fiscal statuses in the individual countries,” said Shilling on Feb. 18 in a Bloomberg Television interview. Greece is “obviously the so-called poster boy, but you’ve got the rest of the PIIGS — Ireland, Portugal, Italy, Spain — right behind it. It isn’t so much that we’re doing anything right but that Europe has got serious problems,” he said. Ahead of Schedule The euro fell to $1.3444 on Feb. 19, the weakest since May, a day after the Federal Reserve boosted the rate charged to banks for direct loans for the first time in more than three years. The move signaled anew that the Fed is ready to withdraw unprecedented measures employed against the financial crisis amid increased speculation the ECB won’t raise rates this year. The currency is down 6 percent since Jan. 14, when it closed at $1.4499, its fastest decline since early 2009. Of 41 strategists surveyed by Bloomberg, 36 forecast it being weaker than that level at some point this year. Median forecasts predict it will remain below $1.43 through 2012 and beyond. The consensus year-end forecast for 2010 is $1.41. The euro posted its biggest gain since July on Feb. 16 after Greek Finance Minister George Papaconstantinou said the nation is ahead of schedule on its plan to trim the EU’s biggest budget deficit and won’t need “a bailout.” Adrian Foster , head of financial markets research for Asia at Rabobank Groep NV in Hong Kong, said the currency would survive a default by Greece because the country accounts for only about 2.5 percent of the area’s gross domestic product. Forward Contracts “If Greece defaults, I don’t see that that has any particular implications for the euro itself,” Foster said on Bloomberg Television Feb. 18. Forward contracts used to lock in interest costs show traders expect the three-month euro-denominated London interbank offered rate to be 1.45 percent a year from now, or about 0.17 percentage point higher than the dollar Libor forward rate. At the start of this month, investors were betting the difference would be 0.41 percentage point, giving the euro more of an edge. Fixed-income investments denominated in currencies from economies with higher rates yield greater returns, making them more valuable. As recently as July, the gap between the forward rates was virtually zero. The euro appreciated 6.2 percent between July 31 and Nov. 25 as that forward rate spread surged from almost nothing to 0.71 percentage point. Credit Cuts Both the spread and the currency then started tumbling, following a slide in Greece’s stocks and bonds that began in October amid concern that its creditworthiness was deteriorating. Standard & Poor’s, Moody’s Investors Service and Fitch Ratings downgraded the country’s credit in December as its deficit approached 13 percent of GDP. European Union leaders’ Feb. 11 pledge to support Greece’s efforts to control its finances helped fuel the spread’s sharpest three-week drop since July as more investors became convinced that ECB President Jean-Claude Trichet would keep borrowing costs low. The Fed will raise its benchmark from a range of zero to 0.25 percent to 0.75 percent by the end of the year as the ECB increases its 1 percent rate by a quarter percentage point, narrowing the difference to half a percentage point, median economist forecasts show. The consensus predictions see the difference shrinking to zero by mid-2011. “It is fairly clear that not only Greece but several other countries in Southern Europe are probably going to be forced to take fairly severe fiscal contracts,” said Ron Leven , currency strategist at Morgan Stanley in New York. “That combined with already weak growth makes it very unlikely that the ECB is going to be in a position to hike rates.” ‘Big Discrepancy’ The region’s economy grew 0.1 percent in the fourth quarter after expanding 0.4 percent in the previous three months, the European Union said in a Feb. 12 report. Federal fund futures last week showed a 52 percent chance the Fed will raise borrowing costs by the end of September after the U.S. economy surged 5.7 percent last quarter. “You have a big discrepancy between the Fed’s and the ECB’s timetable,” said Stephen Jen , a London-based managing director at BlueGold Capital Management LLP. “This is supportive of the dollar against the euro.” Futures traders increased bets against the euro to a record this month. Hedge funds and other large speculators had 59,422 more wagers that the euro would decline than bets on a gain. As recently as the first week in December, traders were bullish on the euro, as they had been for the previous 30 weeks. ‘Deflationary Force’ “The prospect of sizeable fiscal tightening in many Economic and Monetary Union countries will act as a disinflationary force in many of these countries in coming months, pressuring the euro and keeping the ECB on hold until at least the fourth quarter,” said Nick Stamenkovic , a strategist in Edinburgh at brokerage RIA Capital Markets. The Greek budget crisis is increasing speculation that the euro region will break up. Societe Generale SA strategist Albert Edwards said the country highlights fiscal imbalances that will lead to currency’s downfall. Harvard University Professor Martin Feldstein said on Bloomberg Radio this month that the monetary union “isn’t working.” Economist Robert Mundell , who won the 1999 Nobel Prize for research that helped lay the foundation for the currency, said in a Feb. 17 television interview that Italy, saddled with the region’s second-largest debt , is the “biggest threat” to the bloc’s growth. Europe’s fourth-biggest economy contracted 0.2 percent in the fourth quarter, and its debt will rise this year to 117 percent of GDP, the EU’s second highest after Greece, according to the European Commission. “The Europeans would be silly let this blow up,” said Dominic Konstam , head of interest-rate strategy for Credit Suisse Group AG in New York. “The ECB will have to be relatively dovish and relent a bit on their plan to withdraw liquidity.” To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net ; Oliver Biggadike in New York at obiggadike@bloomberg.net .

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Euro’s Worst to Come as Derivatives Show Greece Hammerlocking ECB on Rates

February 22, 2010

By Liz Capo McCormick and Oliver Biggadike Feb. 22 (Bloomberg) — Derivative traders are signaling that the euro’s slump to a nine-month low will continue even if European Union leaders bail out Greece. Short-term rates for borrowing in euros in the forwards market are the cheapest relative to loans in dollars since September. The 50 percent collapse in that spread this month signals investors are betting the European Central Bank will keep its benchmark at a record low, sacrificing euro strength to prevent deficit-cutting by debt-laden economies in the region from stymieing growth. “Investors have already started to think about the next likely phase of the present crisis, and it appears that they all are finding are new reasons to sell the euro,” said David Woo , global head of foreign-exchange strategy at Barclays Plc in London. “Aggressive fiscal tightening by Greece, Spain and Portugal are likely to plunge their economies back into recession. All else being equal, this calls for a looser monetary policy.” The shift underscores a turnabout in the two most-traded currencies. In the last three quarters of 2009, the euro outperformed the dollar relative to 15 major currencies tracked by Bloomberg, with Deutsche Bank AG’s euro index gaining 1 percent and the IntercontinentalExchange Inc.’s Dollar Index down 9 percent. Since Nov. 25, the dollar is up 8.3 percent and has outdone all but four major currencies as the euro lost ground against all of them. The euro traded at $1.3633 as of 6:01 a.m. in London, from $1.3613 in New York on Feb. 19. The currency is down 4.8 percent this year. ‘Poster Boy’ Futures traders are more bearish than ever on the 16-nation currency, and strategists are slashing forecasts at the fastest clip since December 2008, data compiled by Bloomberg show. Woo cut his 12-month estimate to $1.40 from $1.45 on Feb. 12. Geoffrey Yu , a strategist at UBS AG, the world’s second largest currency trader, says the euro may test $1.30. Gary Shilling of the economic research firm A. Gary Shilling & Co. in Springfield, New Jersey, said it may slide to parity with greenback. The currency has traded above $1 since 2002. “It’s a one-size-fits-all monetary policy” for “different fiscal statuses in the individual countries,” said Shilling on Feb. 18 in a Bloomberg Television interview. Greece is “obviously the so-called poster boy, but you’ve got the rest of the PIIGS — Ireland, Portugal, Italy, Spain — right behind it. It isn’t so much that we’re doing anything right but that Europe has got serious problems,” he said. Ahead of Schedule The euro fell to $1.3444 on Feb. 19, the weakest since May, a day after the Federal Reserve boosted the rate charged to banks for direct loans for the first time in more than three years. The move signaled anew that the Fed is ready to withdraw unprecedented measures employed against the financial crisis amid increased speculation the ECB won’t raise rates this year. The currency is down 6 percent since Jan. 14, when it closed at $1.4499, its fastest decline since early 2009. Of 41 strategists surveyed by Bloomberg, 36 forecast it being weaker than that level at some point this year. Median forecasts predict it will remain below $1.43 through 2012 and beyond. The consensus year-end forecast for 2010 is $1.41. The euro posted its biggest gain since July on Feb. 16 after Greek Finance Minister George Papaconstantinou said the nation is ahead of schedule on its plan to trim the EU’s biggest budget deficit and won’t need “a bailout.” Adrian Foster , head of financial markets research for Asia at Rabobank Groep NV in Hong Kong, said the currency would survive a default by Greece because the country accounts for only about 2.5 percent of the area’s gross domestic product. Forward Contracts “If Greece defaults, I don’t see that that has any particular implications for the euro itself,” Foster said on Bloomberg Television Feb. 18. Forward contracts used to lock in interest costs show traders expect the three-month euro-denominated London interbank offered rate to be 1.45 percent a year from now, or about 0.17 percentage point higher than the dollar Libor forward rate. At the start of this month, investors were betting the difference would be 0.41 percentage point, giving the euro more of an edge. Fixed-income investments denominated in currencies from economies with higher rates yield greater returns, making them more valuable. As recently as July, the gap between the forward rates was virtually zero. The euro appreciated 6.2 percent between July 31 and Nov. 25 as that forward rate spread surged from almost nothing to 0.71 percentage point. Credit Cuts Both the spread and the currency then started tumbling, following a slide in Greece’s stocks and bonds that began in October amid concern that its creditworthiness was deteriorating. Standard & Poor’s, Moody’s Investors Service and Fitch Ratings downgraded the country’s credit in December as its deficit approached 13 percent of GDP. European Union leaders’ Feb. 11 pledge to support Greece’s efforts to control its finances helped fuel the spread’s sharpest three-week drop since July as more investors became convinced that ECB President Jean-Claude Trichet would keep borrowing costs low. The Fed will raise its benchmark from a range of zero to 0.25 percent to 0.75 percent by the end of the year as the ECB increases its 1 percent rate by a quarter percentage point, narrowing the difference to half a percentage point, median economist forecasts show. The consensus predictions see the difference shrinking to zero by mid-2011. “It is fairly clear that not only Greece but several other countries in Southern Europe are probably going to be forced to take fairly severe fiscal contracts,” said Ron Leven , currency strategist at Morgan Stanley in New York. “That combined with already weak growth makes it very unlikely that the ECB is going to be in a position to hike rates.” ‘Big Discrepancy’ The region’s economy grew 0.1 percent in the fourth quarter after expanding 0.4 percent in the previous three months, the European Union said in a Feb. 12 report. Federal fund futures last week showed a 52 percent chance the Fed will raise borrowing costs by the end of September after the U.S. economy surged 5.7 percent last quarter. “You have a big discrepancy between the Fed’s and the ECB’s timetable,” said Stephen Jen , a London-based managing director at BlueGold Capital Management LLP. “This is supportive of the dollar against the euro.” Futures traders increased bets against the euro to a record this month. Hedge funds and other large speculators had 59,422 more wagers that the euro would decline than bets on a gain. As recently as the first week in December, traders were bullish on the euro, as they had been for the previous 30 weeks. ‘Deflationary Force’ “The prospect of sizeable fiscal tightening in many Economic and Monetary Union countries will act as a disinflationary force in many of these countries in coming months, pressuring the euro and keeping the ECB on hold until at least the fourth quarter,” said Nick Stamenkovic , a strategist in Edinburgh at brokerage RIA Capital Markets. The Greek budget crisis is increasing speculation that the euro region will break up. Societe Generale SA strategist Albert Edwards said the country highlights fiscal imbalances that will lead to currency’s downfall. Harvard University Professor Martin Feldstein said on Bloomberg Radio this month that the monetary union “isn’t working.” Economist Robert Mundell , who won the 1999 Nobel Prize for research that helped lay the foundation for the currency, said in a Feb. 17 television interview that Italy, saddled with the region’s second-largest debt , is the “biggest threat” to the bloc’s growth. Europe’s fourth-biggest economy contracted 0.2 percent in the fourth quarter, and its debt will rise this year to 117 percent of GDP, the EU’s second highest after Greece, according to the European Commission. “The Europeans would be silly let this blow up,” said Dominic Konstam , head of interest-rate strategy for Credit Suisse Group AG in New York. “The ECB will have to be relatively dovish and relent a bit on their plan to withdraw liquidity.” To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net ; Oliver Biggadike in New York at obiggadike@bloomberg.net .

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SocGen Says Pare Buying of Won, Rupiah Versus Euro After Five-Month Rally

February 21, 2010

By Bob Chen Feb. 22 (Bloomberg) — A five-month rally in Asian currencies against the euro may be peaking as concern about fiscal deficits in the European Union wanes, according to Societe Generale SA , which correctly predicted the appreciation. All of Asia’s 10 most-active currencies have strengthened versus the euro since the start of October, with Indonesia’s rupiah and the Indian rupee gaining 10 percent, while the Philippine peso and South Korea’s won both climbed 9 percent. SocGen predicted on Oct. 28 that the Korean currency would strengthen 11 percent against the euro. Greek bonds have slumped in the past two months on speculation the government will struggle to narrow a budget deficit that is more than four times the EU’s limit. Concern that the fiscal crisis will spread to Portugal, Spain and Ireland sent the euro to a nine-month low of $1.3444 against the greenback on Feb. 19. “While I don’t think we’ve seen the full extent of the Asian currencies gaining against the euro, we’ve seen a big portion of it,” Robert Reilly , co-head of Asian fixed income and currencies flow business in Hong Kong at SocGen, France’s second-largest bank by market value, said in an interview on Feb. 19. Reilly said his clients have also begun to exit the trade that SocGen recommended. ‘Big Bounce’ Greece’s Finance Minister George Papaconstantinou said on Feb. 16 that the nation won’t need an EU bailout, a day after European finance ministers ordered the nation to come up with new measures to trim its deficit before a March 16 review. The government needs to sell 53 billion euros ($72 billion) of debt this year, the equivalent of 20 percent of gross domestic product. “If you get some resolution on Greece or the rest of the so-called PIGS countries, you’ll see a big bounce in the euro on the back of that,” Reilly said. Portugal, Ireland, Greece and Spain are suffering gaping deficits after the worst recession since World War II. SocGen strategist Patrick Bennett predicted on Oct. 28 that the Korean won would advance 11 percent to 1,590 per euro. It breached that level earlier this month and traded at 1,567.23 as of last week’s close, according to data compiled by Bloomberg. The rupee traded at 62.6278 per euro on Feb. 19, after appreciating for a fifth straight week. The rupiah strengthened to 12,602, a fourth weekly gain. Reilly said he plans to watch how equities perform this week as China reopens after the weeklong Lunar New Year holidays before deciding whether to exit the trade completely. The Shanghai Composite Index of shares rallied 2.7 percent in the five days to Feb. 12, snapping a three-week loss. “Because it’s Chinese New Year it’s unclear where the flows are going to come from because the majority of the markets have been out,” Reilly said. “Asian currencies will be more definitive this week when we see the equity markets open.” To contact the reporters on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net

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Dollar Rally Drives Euro Near to Nine-Month Low; Greek Bonds, Copper Drop

February 18, 2010

By Michael Patterson Feb. 18 (Bloomberg) — The dollar strengthened, driving the euro to near a nine-month low, as European officials wrangled over aid to Greece and the Federal Reserve said it may unwind some economic stimulus measures. Copper fell for a second day. The dollar gained 0.4 percent against the euro at 12 p.m. in London, trading within a quarter-cent of its strongest level since May. Copper slipped 0.2 percent. The MSCI World Index of stocks and futures on the Standard & Poor’s 500 Index both declined 0.2 percent. Greek 10-year government bonds dropped, sending yields up 13 basis points to 6.5 percent. German Chancellor Angela Merkel slammed the “scandal” of banks helping Greece massage its deficit, saying the nation “falsified its statistics for years.” Horst Seehofer , a leader in Merkel’s coalition, said yesterday that “not a single euro” should go to Greece. Minutes of the Fed’s most recent meeting published yesterday showed the central bank is debating how to unload housing debt it purchased to bolster the economy. “The EU wants to show it is behind the peripherals without having to put its money where its mouth is,” wrote Jim Reid , a strategist at Deutsche Bank AG in London, in a research note. “Either the EU has to give more detail, or the risk is that the market forces it out.” As well as Greece, Spain, Portugal and Ireland are struggling to reduce record deficits. Dollar Index The dollar strengthened versus 14 of its 16 major counterparts, while the yen gained against 12 of 16. The Dollar Index , which gauges the currency versus those of six major U.S. trading partners, climbed for a second day, gaining 0.3 percent. Greek bonds retreated this week as EU regulators ordered the country to disclose details of currency swaps after an inquiry uncovered a series of agreements with banks that it may have used to conceal its debts. The pound extended losses and gilt yields climbed after the U.K. posted its first January budget deficit since records began in 1993. Government spending exceeded revenue by 4.3 billion pounds ($6.7 billion), almost double the gap predicted by economists in a Bloomberg News survey. The pound weakened to $1.5589, while the 10-year gilt yield increased by 4 basis points to 4.07 percent. The decline in U.S. futures indicated the S&P 500 may pare yesterday’s 0.4 percent advance. Fed officials unanimously agreed that Fed assets and banks’ excess cash will need to shrink “substantially over time,” policy makers said in minutes of the Jan. 26-27 Federal Open Market Committee meeting. U.S. Expansion The index of U.S. leading indicators probably rose in January for a 10th straight month, pointing to an economy that will keep expanding through the first half of this year, economists said before a report set for 10 a.m. New York time. The Conference Board’s gauge of the outlook for the next three to six months rose 0.5 percent after climbing 1.1 percent in December, according to the median forecast of 53 economists surveyed by Bloomberg News. Other reports, due at 8:30 a.m., may show producer prices increased in January and initial jobless claims fell last week. More than 350 companies in the S&P 500 have reported fourth-quarter earnings since Jan. 11, and about 76 percent have beaten analysts’ estimates on a per-share basis, according to data compiled by Bloomberg. Wal-Mart Stores Inc. and Dell Inc. are among 16 companies on the benchmark gauge for U.S. equities that are scheduled to report today. Emerging Markets The MSCI Emerging Markets Index declined 0.5 percent, the steepest drop in almost two weeks, as benchmark gauges in Russia and Hungary dropped more than 1 percent. Developing-nation currencies weakened against the dollar, led by a 0.9 percent retreat in Poland’s zloty and a 0.7 percent slide in the South Korean won. Europe’s Dow Jones Stoxx 600 Index gained 0.3 percent. ABB Ltd. surged 6.6 percent in Zurich after the world’s biggest builder of power grids said fourth-quarter profit more than doubled. Gains were limited as Daimler AG, the world’s second- biggest maker of luxury cars, plunged 5.1 percent in Frankfurt on a fourth-quarter loss and plans to cancel its dividend. Akzo Nobel, the largest maker of coatings, plummeted 8.1 percent in Amsterdam after reporting a surprise loss. The MSCI Asia Pacific Index fell 0.4 percent. Qantas Airways Ltd., Australia’s biggest airline, plunged 8.1 percent in Sydney after profit dropped. Aluminum Corp. of China Ltd., the nation’s biggest producer of the metal, sank 2.8 percent in Hong Kong. Treasuries, Bunds Treasury 10-year yields were little changed near the highest levels in five weeks before the producer-price report. German 10-year bonds declined, sending the yield up 3 basis points to 3.22 percent. Copper for delivery in three months dropped $15, or 0.2 percent, to $7,115 a metric ton on the London Metal Exchange. The LME Index of industrial metals declined 0.4 percent yesterday, the first drop this week. Gold for immediate delivery decreased 1.2 percent to $1,106.40 an ounce. Crude oil for March delivery fell as much as $1.01, or 1.3 percent, to $76.32 a barrel in electronic trading on the New York Mercantile Exchange, after the dollar strengthened and the American Petroleum Institute yesterday reported a weekly gain in U.S. gasoline inventories. To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net .

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Bond Vigilantes Say EU Needs Better Plan to Control Greece Budget Deficit

February 17, 2010

By Matthew Brown and Anchalee Worrachate Feb. 18 (Bloomberg) — European Union leaders are failing to persuade bond investors that Greece can fix its budget. The yield on Greece two-year notes have remained above 5 percent, the highest in the euro zone, even after officials urged the nation this week to reduce its deficit. The premium investors demand to hold the notes instead of benchmark German securities has held above 4 percentage points, the most since the Mediterranean nation joined the euro and more than 10 times its 35 basis point average the past decade. After driving yields to the highest in 10 years, bond investors are keeping up the pressure on the EU to support Greece. Concern that the nation’s inability to narrow a deficit that is more than four times the EU limit will be replicated in countries such as Portugal and Spain prompted Societe Generale SA’s top-ranked strategist Albert Edwards to predict Feb. 12 that the euro region was poised to break up. “The market has replaced the EU as the chief enforcer of fiscal discipline, and the movement in spreads is testament to that,” said Charles Diebel , senior interest-rate strategist at Nomura International Plc in London. “What the bond markets have done to Greece could be the salvation of Europe.” The euro weakened 0.3 percent to $1.3567 against the dollar, bringing its three-month decline to 9 percent. No Specific Measures Investors who push up debt yields in an effort to alter government policy are known as vigilantes, a term coined in 1984 by economist Edward Yardeni , president of Yardeni Investments Inc. in New York. They were credited with forcing Bill Clinton to cut the U.S. deficit after he came into office in 1993, helping drive 10-year Treasury yields down to about 4 percent by November 1998 from above 8 percent in 1994. “Fiscal rules are only as good as the political will to enforce them, and there hasn’t been much of that, especially during the good times,” said Nick Kounis , chief European economist at Fortis Bank Nederland NV in Amsterdam. Greek two-year yields rose the most in almost three weeks on Feb. 16, when euro-region finance ministers stopped short of announcing specific measures to help the country. EU Economic and Monetary Affairs Commissioner Olli Rehn said after their meeting in Brussels that the bloc has “ways and means” to safeguard stability in the euro area. Greece said last year that the deficit would be 12.7 percent of gross domestic product, compared with the EU ceiling of 3 percent. Prime Minister George Papandreou ’s Dec. 14 pledge to take “radical” action failed to stop Moody’s Investors Service and Standard & Poor’s from cutting the country’s credit ratings. Shrugging of Panandreou Yields rose even after Papandreou announced a plan on Jan. 14 to cut the deficit by 10 billion euros ($13.7 billion), forcing further concessions two weeks later when he promised to boost the retirement age and freeze public sector pay. That reversed a pledge he made in last year’s election. While the vigilantes are punishing fiscal transgressors in Europe today, they were largely silent for much of the past decade as governments flouted the EU’s rules. The spread between Greek and German 10-year yields averaged 19 basis points in 2004 even as the Mediterranean nation’s budget deficit was 7.5 percent of GDP, the biggest in the region. “The experience of the past 10 years shows that markets can be ignoring these issues totally until they suddenly wake up and turn violently against fiscal offenders,” said Jacques Cailloux , chief European economist at Royal Bank of Scotland Group Plc in London. “Market discipline is important and necessary, but sudden shifts in sentiment in the bond market can be equally devastating.” Limits Exceeded Euro-region nations have exceeded the 3 percent limit on their budget deficits 44 times since the currency was introduced in 1999. Greece has been the biggest offender , as its deficit rose above the ceiling in eight of the nine years since it joined the euro in 2001. Italy broke the rule six times. Portugal, France and Germany flouted it five times. All 16 countries that use the euro will post budget deficits above 3 percent for 2009. Ireland will have a 12.5 percent shortfall, and Spain will have an 11.2 percent gap, according to European Commission estimates. Greek “yields seem fair to me,” said Bob Treue , founder of New Jersey-based Barnegat Fund, ranked among the top three hedge-fund performers in fixed income last year with a 132.7 percent return, according to Bloomberg calculations. “We don’t have a position in Greece, long or short.” Rules ‘Appropriate’ Current rules and instruments are “appropriate,” EU Economic and Monetary Affairs spokesman Amadeu Altafaj said in response to questions from Bloomberg News. “The issue at stake is not the rules and the instruments but the non-compliance to these rules.” If the EU fails to convince markets that it can solve Greece’s difficulties, investors may turn their attention to its neighbors, according to Mark Schofield , head of interest-rate strategy at Citigroup Inc. “Spain, Portugal, Italy and Ireland might not be a problem now, but if the market starts pushing their spreads wider, and put them in the situation where they are forced to fund their deficits at much more onerous levels, then you will see a lot more pressure for a pan-European solution to the problem,” he said. Yields on the debt of other peripheral euro-region countries also rose in recent months as investors bet the budget crisis wasn’t limited to Greece. Portuguese two-year yields touched 2.72 percent on Feb. 4, 1.65 percentage points above Germany’s level and an almost 13-year high. To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net ; Anchalee Worrachate in London at aworrachate@bloomberg.net

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Dell, Microsoft Prepare to Fight Offshore Tax Increase in Obama’s Budget

February 17, 2010

By Ryan J. Donmoyer Feb. 17 (Bloomberg) — Software and computer companies such as Microsoft Corp. , Hewlett-Packard Co. and Dell Inc. are gearing up to fight an Obama administration plan to curb offshore tax avoidance. The $15.5 billion proposal in President Barack Obama ’s 2011 budget targets what the Internal Revenue Service calls the growing problem of so-called transfer pricing. The technique allows companies to reduce their tax bills by transferring intangible property such as patents, trademarks and licenses to offshore subsidiaries. The Business Software Alliance , a Washington-based trade group that represents technology companies, said it would “educate policy makers” on how the proposal would hurt U.S. companies, jobs and the economy. “The transfer tax on intangibles, which regulates how expenses and profits from overseas subsidiaries are recognized and taxed, would unfairly punish American firms vis-à-vis their foreign competitors,” BSA Chairman Robert Holleyman said in a statement. “The U.S. software industry and many other U.S. businesses would pay a steep price in terms of global competiveness.” While the proposal represents less than 4 percent of the $400 billion in business-tax increases in the budget plan, the debate signals that companies are likely to resist Obama’s efforts to raise their taxes to help narrow deficits the administration estimates will total $8.5 trillion over 10 years. Fair Market Value In the past, lawmakers have been willing to take on offshore tax-avoidance techniques, though Senate Finance Committee Chairman Max Baucus , a Montana Democrat, has said he would prefer to change such rules in the context of a broader tax-code overhaul. Corporations engage in transfer pricing when they sell goods or services between subsidiaries. A globally accepted set of practices is meant to ensure that goods are priced so companies don’t inflate deductible expenses in high-tax countries and taxable income in low-tax ones. Determining the fair market value of intellectual property is difficult, said John Samuels , the top tax lawyer for Fairfield, Connecticut-based General Electric Co. , which gets more than half its sales from outside the U.S. Transfer pricing “is the soft underbelly of the income tax,” Samuels said last month. “Nobody understands it.” Coca-Cola, Merck The Obama administration said this uncertainty creates opportunities for companies to shift their intangible assets to low-tax countries. The proposal in Obama’s budget may also affect companies such as Coca-Cola Co. , and Merck & Co. Inc., which report tax burdens below the top 35 percent U.S. corporate rate through the use of intangible property and global operations. “Any high-tech company that has international operations, which is almost all of them, they’ll be worried about this,” said Stewart Karlinsky , a professor emeritus at San Jose State University who advises technology companies on tax law. The administration proposal would force companies to immediately pay U.S. tax when they receive “excessive returns” of more than 30 percent that are traced to intangible property owned by offshore subsidiaries operating in countries with effective tax rates of less than 10 percent, according to an administration official. The law allows companies to defer U.S. tax on those foreign profits until they are repatriated to the U.S. parent company. 10% Threshold Karlinsky said the 10 percent threshold may be designed to exempt countries such as Ireland, which has a 12.5 corporate tax rate. Subsidiaries in countries without a corporate tax such as Bermuda or the Cayman Islands and those in countries offering temporary tax holidays such as Malaysia or Indonesia are more likely to be affected, he said. IRS Commissioner Douglas Shulman has said his agency is investigating transactions involving intangible property. In December, he announced the creation of a unit to “strategically and systematically administer transfer-pricing issues.” Christina Pearson , a spokeswoman for Redmond, Washington- based Microsoft , the world’s biggest software maker, Dana Bolden , a spokesman for Atlanta-based Coca-Cola, the world’s largest soft-drink maker, and Pamela Bonney , a spokeswoman for Palo Alto, California-based Hewlett-Packard, the world’s biggest personal-computer maker, declined to comment. Jess Blackburn , a spokeswoman for Round Rock, Texas-based Dell, and Amy Rose , a spokeswoman for Whitehouse Station, New Jersey-based Merck, the second-largest U.S. drugmaker, also wouldn’t comment. $200 Billion Kimberly Clausing , an economist at Reed College in Portland, Oregon, estimated last month that U.S. companies used techniques including transfer pricing to shift almost $200 billion in profits out of the country between 1982 and 2004. The Obama administration proposed the change in place of a provision last year to repeal rules allowing companies to disregard foreign subsidiaries in tax havens on their returns. Douglas Nakajima , managing director of Devon, Pennsylvania-based SMART Business Advisory and Consulting LLC, which advises on transfer pricing, said many of the companies that objected to the initial plan may oppose the new one. “I don’t think it has much of a flash as some of the earlier proposals, but it still has the ability to impact business decisions,” Nakajima said. Restricting the use of transfer pricing by U.S. companies may disrupt widely accepted practices that are “the fundamental bedrock of our international tax system,” said Barbara Angus , a principal at the New York-based accounting firm Ernst & Young LLP and a former U.S. Treasury official. To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net

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Bank Bailout in Ireland Gets Lucky Break From Real Estate Prices in London

February 16, 2010

By Dara Doyle Feb. 16 (Bloomberg) — It was the collapse of Ireland’s real estate market that crippled the country’s banks. It may be the British property market that helps save them. The Irish government plans to start buying 80 billion euros ($109 billion) of real estate loans from banks this month as part of a bailout. About 21 percent of the loans, including one for developing London landmark Battersea Power Station, are across the Irish Sea, according to the National Asset Management Agency , the group in Dublin set up to oversee the debt. “Almost accidentally, the U.K. is helping Ireland,” said Eoin Fahy , an economist at KBC Asset Management, which oversees about 8 billion euros in Dublin. “Significant profits on U.K. assets could offset heavy Irish losses.” As Ireland takes its biggest financial gamble since winning independence from Britain almost nine decades ago, a rebound in the U.K. real estate market has become the unlikely source of a boost to the value of loans included in the rescue package. Prices for commercial properties rose a record 8.1 percent in the U.K. in the fourth quarter from the previous three months, according to Investment Property Databank Ltd, a research company based in London. Irish prices fell 4.9 percent over the same period, it said. About 23 percent of office space in Dublin is vacant, compared with 7 percent in central London, according to CB Richard Ellis Group Inc ., the world’s largest property broker. “It increases the chances that the agency ends up certainly not making a loss but actually making a profit,” said Mike Turner , head of strategy at Aberdeen Asset Management Plc in Edinburgh. “It spells good news for the Irish Treasury.” London Allure Central London, the world’s most expensive office rental market, is the best place in Europe for new property investments, according to a PricewaterhouseCoopers LLP survey dated Feb. 1. For the second straight year, Dublin offered the worst prospects, the accounting firm said. The asset agency, known as NAMA, may have to move quickly. The market’s recovery is “unsustainable,” with banks vulnerable to property companies defaulting on loans and the Bank of England halting its 200 billion-pound ($313 billion) of bond purchases, according to Ernst & Young LLP’s Item Club, an economic forecasting group. “My sense is that, with fiscal tightening coming after the election, the recovery has run its course,” said Peter Sceats, director of real estate at broker Tradition Financial Services in London. “We could see a dip in prices in 2010.” Bank Losses In the meantime, Bank of Ireland Plc will incur a smaller loss on loans transferred to the asset agency than rival Allied Irish Banks Plc, NCB Stockbrokers in Dublin said. The buoyancy in the U.K. means Bank of Ireland will make a 27 percent loss on loans it’s selling to the asset agency compared with a 35 percent discount for Allied Irish, according to Davy, another Dublin-based securities firm. “For Bank of Ireland, the U.K. uplift has a massive benefit,” said Stephen Lyons , an analyst at Davy. Spokesmen at both banks declined to comment. Bank of Ireland shares have more than tripled over the past year, while Allied Irish has doubled in the same period. Over three years, the ISEF Index of Irish financial companies has slumped 95 percent on concern about property loans. Between 2004 and 2006, Irish investors spent 15 billion euros on real estate in the U.K., CB Richard Ellis said. “The similarities between the two countries with regards to legal framework, lease structures and taxation make it a very attractive location for the Irish,” said Patrick Koucheravy, an economist at CB Richard Ellis in Dublin. Half of Economy Ireland’s biggest banks financed many of the deals and, as such, some of the loans are ending up at NAMA. It will buy the loans at a discount of about 30 percent, taking both good and bad debt. Should any of the borrowers default, the agency can seize the buildings on which they are secured. Altogether, the debt amounts to about half of Ireland’s gross domestic product. In addition to the portion in Britain, loans tied to property in Northern Ireland account for about 6 percent of the total, NAMA said. “In Ireland, NAMA will be a price maker,” said John Corrigan , head of the National Treasury Management Agency, which controls NAMA. “In the overseas market, it will be a price taker. The uplift in the U.K. property market is very welcome.” Allied Irish is transferring 24 billion euros worth of loans to NAMA. Of that, 3.3 billion euros is tied to the U.K., the bank said in a letter to shareholders dated Nov. 30. In Bank of Ireland’s case, U.K. loans account for 7 billion euros of 16 billion euros heading to NAMA, the company said the same day. That includes a Bank of Ireland loan to Real Estate Opportunities Plc , the latest company planning to transform Battersea Power Station, Europe’s largest brick building, into new homes and offices. REO, which is looking for a partner for the project, said in November the loan continues to perform. “Bank of Ireland isn’t really getting the credit from investors for the fact that 43 percent of its property-backed assets are in the U.K.,” said Ciaran Callaghan , an NCB analyst. To contact the reporter on this story: Dara Doyle at ddoyle1@bloomberg.net

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Mary Bottari: Congress Needs to Clip Goldman’s Wings

February 15, 2010

The New York Times’ front page expose on the role that Goldman Sachs has played in the Greek tragedy unfolding in Europe right now raises a huge number of concerns both for the U.S. economy and the financial reform proposals now in Congress. To recap, Greece and a number of other European Union (EU) countries are in debt, dangerously in debt. EU rules say member countries cannot have budget deficits that exceed three percent of GDP. Greece’s debt is closer to 12 percent. Other countries including Spain, Ireland, Italy and Portugal are also in trouble. These countries are “too big to fail.” A default by any one of them would put an end to the nascent EU recovery and possibly lead to a “double dip” recession here in the United States. Greece has been hiding the extent of its debt for years with the aid of big U.S. banks. Der Spiegel broke the story that Greece did a billion-dollar currency swap with [[Goldman Sachs]] in 2002 that did not show up on the nation’s books as debt.Without it Greece many not have been accepted into the common currency “Eurozone.” Doing the Work of the Gods? Yesterday, the Times provided more details about these deals. Those chuckleheads at Goldman called one Aeolos, after the god of the winds. “Aeolos, a legal entity created in 2001, helped Greece reduce the debt on its balance sheet that year. As part of the deal, Greece got cash upfront in return for pledging future landing fees at the country’s airports. A similar deal in 2000 called Ariadne devoured the revenue that the government collected from its national lottery. Greece, however, classified those transactions as sales, not loans, despite doubts by many critics,” reports the Times. It walks like a loan and talks like a loan, but because it was actually a complex derivative swap, it was secret, bilateral, and off-book. The people of Greece knew nothing, and at the current moment, no one knows how many of these deals are out there masking EU debt or U.S. debt for that matter. Congress Need’s to Clip Goldman’s Wings What the Times story missed is that right now neither the House financial reform bill nor the Senate proposal cover these types of currency swaps. Why not? Well, this is a bit odd. The U.S. Federal Reserve does not want these deals covered. Although there is no evidence that the Fed is engaging in these types of currency swaps with banks from other nations, their objections to placing these deals on open exchanges should ring some alarm bells. The United States also has substantial debt. Why leave the door open for this type of highly risky accounting? Congress and the Obama administration need to stop listening to Ben Bernanke and start listening to Gary Gensler, the head of the Commodity Future Trading Commission, who has been pushing a reluctant administration and Congress to drag every aspect of the $605 trillion derivative market out of the shadows. Like Icarus, Goldman and other big banks who have engaged in these massive deals are flying a little to close to the sun. To prevent the next meltdown, Senate Banking Chair Chris Dodd must clip Goldman’s wings and make sure that all derivatives, without exception, are cleared by regulators and traded on an open exchange to provide the maximum level of transparency for the United States and the world.

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Dan Dorfman: 3000 Dow In 2010: Is He Mad?

February 12, 2010

In early March of 44 B.C., a soothsayer warned Julius Caesar about the Ides of March. Unfortunately, Caesar ignored the warning, and we all know the rest of the sad tale. Harry Dent Jr., a former consultant to Fortune 100 companies and presently publisher of HS Dent Forecast, a monthly investment newsletter in Tampa, Fla., sees a similar kind of fate for the stock market, although he has expanded the time frame of his Ides of March scenario to somewhere between early March and late April. In brief, Dent sees the stock market–currently benefiting from upward momentum and peppier economic activity–headed for a very brief and pleasant run that could lift the Dow to the 10,700-11,500 range from its current level of about 1,093. But then, he sees the market running into a stone wall, which will be followed by a nasty stock market decline that will drive down the Dow later this year to 3,000-5,000, with his best guess about 3,800. A forecast of a possible 3,000 Dow this year might strike you as crazy. It does me. But Dent is no whack-o. Actually, this interview with Dent, who has written several books, one in 1992 about the boom in the 1990s, and more recently, another about the coming depression, comes on the heels of some remarks he made in a piece I did on January 18. In it, I quoted several market pros, a couple of whom briefly expressed concerns about the economy and the stock market. One was Dent. In response, a HuffPost reader e-mailed me, complaining that I failed to spell out Dent’s bearish case. In reaction to that complaint, I decided to do a follow-up and detail his gloomy reasoning. Basically, Dent sees a series of “ticking time bombs,” both here and abroad that will intensify world-wide financial turmoil. Let’s start with one of the stock market’s biggest current worries, European debt fears, which embrace such countries as Greece, Portugal, Spain, Ireland and Italy. Dent takes these financial concerns a couple of frightening steps further. He not only sees massive debt crises in the U.S., Europe and east Asia, but a series of defaults, as well, in Latin America, the Middle East and Africa due to a commodity bust which he believes will worsen into at least early 2013 and possibly into early 2015. That commodity bust, as he sees it, could knock down the price of gold (now around $1,085 an ounce) to $250 to $500 over the next year. Gold, he says, won’t save investors from this crisis. Correspondingly, he envisions a hefty drop in the price oil, with the per-barrel cost plunging from about $74.15 currently to around $30-$35 by year end. Dent also expects rising geopolitical pressures to ignite growing problems, especially in Iran and the Middle East in general, as well as sharply increasing terrorist strikes in Europe and the U.S. in the spring and summer of 2010. Noting that we have already seen growing terrorist alerts in the United Kingdom and two failed terrorist airline attempts in the U.S., he believes there is very likely more to come. Dent also voices concern about fast growing China, which is tightening credit to slow what a number of observers see as overheated economic growth. His chief worry: China’s excessive overstimulation of its economy, which he predicts will fall hard when the global boom fails in the second half of 2010. He also thinks its excess manufacturing policy will contribute to deflation, as well as to debt deleveraging around the world. Turning to the U.S., Dent sees housing in for another severe hosing. Despite renewed economic strength here, home prices, he contends, are not recovering due to rising defaults and foreclosures. “Consumers are not buying homes, only speculators are,” he says. Dent looks for rising defaults and foreclosures in residential real estate (spurred by mortgage resets) and growing defaults in commercial properties to put the kibosh on any sustained economic recovery. In turn, he expects the resumption of a sagging economy that will boost the unemployment rate (now 9.7%) to 15% to 16% by the first quarter of 2011, spur a banking meltdown, and clobber the market. There is also no doubt in Dent’s mind that the “stimulus recovery,” as he calls it, is not sustainable and will very likely peter out between the summer and fall. But what about growing bullishness and the recent outbursts of investor enthusiasm, as reflected in an expanding number of triple-digit daily gains in the Dow? Isn’t that indicative of expectations of a stronger economy? Dent pooh-poohs these stock gains, noting investors are in “major denial,” which means, he says, “a major crash when reality sets in.” He expects the next stock collapse will likely be as strong as the first one (meaning a decline of at least 50%), but he looks for it occur in a shorter period of time, with the greatest damage likely between late May and late September. Elaborating on the point of “major denial,” he takes note of the latest reading from the American Association of Individual Investors, which is considered a solid contrary indicator. At present, the association reports its membership is 46% bullish. “At 50%, we’re at the top and we’re almost there,” he says. His wrap-up advice to his newsletter subscribers is ominous. In brief: “Get ready for the most extreme two years of your lifetime–the debt crisis of late 2010 to late 2012. If you raise cash by selling assets, cutting costs and focusing on your business (or selling it), you will be highly rewarded.” He never says it in so many words, but Dent’s message is clear: Get ready to run for the hills. What do you think? E-mailme at Dandordan@aol.com.

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Marshall Auerback: Greece Signs Its National Suicide Pact

February 11, 2010

Agreement has been reached in Europe on a “rescue” package for Greece. But it’s no cause for celebration. It’s the kind of “rescue” sensation one experiences after paying out what’s left in one’s wallet when confronted with a robber with a gun. The insanity of self-imposed budgetary constraints will be manifest to all soon enough. Economists and the EU bureaucrats who advocate a slavish adherence to arbitrary compliance numbers fail to comprehend the basis of government spending. In imposing these voluntary financial constraints on government activity, they deny essential government services and the opportunity for full employment to their citizenry. Score another one, then, for the high priests of fiscal rectitude. Harsh cuts, tax increases — this is by no means a recovery policy. The capital markets have got their pound of flesh. But Greece is no more able to reduce its deficit under these circumstances than it is possible to get blood out of a stone. Politically, it means ceding control of EU macro policy to an external consortium dominated by France and Germany. Greece becomes a colony. Nor will the policies work, as the ‘strict enough conditions’ imposed will further weaken demand in Greece and, consequently, the rest of the European Union. Furthermore, the rapidly expanding deficit of Greece has benefited the entire EU because it supported aggregated demand at the margin, and the sudden reversal contemplated by this package will reverse those forces. The requirement that budget deficits should be zero on average and never exceed 3 per cent of GDP or gross national debt levels should not exceed 60 per cent of GDP not only restrict the fiscal powers that governments would ordinarily enjoy in fiat currency regimes, but also violates an understanding of the way fiscal outcomes are effectively endogenous, as Bill Mitchell has noted on several occasions . Meanwhile, Greece and the rest of the Euro zone is being revealed as necessarily caught in a continual state of Ponzi style financing that demands institutional resolution of some sort to be sustainable. The separation of the monetary authorities from the fiscal authorities and the decentralization of the fiscal authorities have inevitably made any co-ordination of fiscal and monetary policy difficult. The ECB is effectively the only “federal” institution within the euro zone. This is particularly problematic during times of financial stress or in periods in which there is marked regional disparity in economic performance. In the short term, a move by the ECB to distribute 1 trillion euro to the national governments on a per capita basis would alleviate the short term problems of the “PIIGS” nations (Portugal, Ireland,. Italy, Greece and Spain). Ultimately, though, the most logical solution is the creation of a supranational entity that can conduct fiscal policy in much the same way as the creation of the European Central Bank can do monetary policy on a supranational level (or the dissolution of the European Monetary Union altogether). Absent that, Greece, Portugal, Italy, yes, even Germany, functionally remain in the same position as American states, unable to create currency and therefore always subject to solvency risks which the markets may question at any time. It’s a recipe for built-in financial and political instability. The Government of the European Union (in reality a bunch of heads of state as there is no “United States of Europe” to think of) has called the Greek government to implement all these measures in a rigorous and determined manner to effectively reduce the budgetary deficit by 4% in 2010, and “invited” the ECOFIN Council to adopt its recommendations at a meeting of the 16th of February. It’s probably not the sort of invitation that any sovereign nation would normally accept, but Greece, like the rest of the Euro zone nations, has voluntarily chosen to enslave itself with a bunch of arbitrary rules which have no basis in economic theory. It is also being denied the use of an independent currency-issuing capacity. This is no way for any country to achieve growth and financial stability. With no capacity to set monetary policy, fiscal policy bound by the Maastricht straitjacket, and its exchange rate fixed, the only way Greece or any of the euro zone nations can change their competitive position within the EMU is to harshly bash workers’ living conditions. That is a recipe for national suicide. And it will not reduce the deficit, because as we noted above deficits are largely determined endogenously, not by legislative fiat. The deficits reflect failing economic activity, particularly when a government is institutional constrained from implementing proactive policy to reduce output gaps left by falling private sector activity. That the measures will be imposed by an entity lacking total democratic legitimacy in Greece is only likely to exacerbate existing strains. Why is a 4 per cent across-the-board cut being demanded of Greece? What’s the significance of that number? There is no particular budget deficit to GDP figure that is desirable or not independent of knowing about other macroeconomic settings. Just as there is no rationale provided for any of the “performance criteria” underlying the European Monetary Union’s Stability and Growth Pact . The treaty stipulated that countries seeking inclusion in the Euro zone had to fulfill amongst other things the following two requirements: (a) a debt to GDP ratio below 60 per cent, or converging towards it; and (b) a budget deficit below 3 per cent of GDP. Why 3%? Why it is 60 per cent rather than 30 or 54 or 71 or 89 or any other number that someone could write on a bit of paper? And yet we have these random numbers being used to gauge whether Greece is conducting its fiscal affairs in a proper and “responsible” manner. This is the kind of thinking which has led to the relatively poor economic performance of many of the EU economies during the 1990s and most of the previous decade. All entrants to EMU strived to meet the stringent criteria embodied in the Stability Pact (whose principles, although largely formalized by the Maastricht Treaty in 1997, were essentially established at the beginning of the 1990s in preparation for monetary union). From 1992 to 1999, the growth of national income averaged 1.7 percent per annum in the euro-zone countries, compared with the 2.5 percent per annum averaged by the United Kingdom over the same time period. Moreover, the unemployment rate fell substantially in the United Kingdom (as well as in the United States and Canada), but tended to rise in the euro-zone countries, most notably in France and Germany. A cavalier refusal by the EU’s technocrats to debate and address the concerns of those who feel threatened by a headlong rush into a more all-encompassing political and monetary union without adequate democratic safeguards has lent legitimacy to the views of populist politicians, such as France’s Jean Marie le Pen, and a corresponding rise of extremist parties all across the EU. This is a phenomenon that tends to arise when voters sense that their concerns are not even being considered by what they would characterize as a corrupt and cozy political class. The EU must eliminate the underlying assumption that fiscal policy, since it can be influenced directly by the political process, should always be completely politically constrained. If anything, the performance of Euroland’s core economies over the past few years has demonstrated the total limitations of technocratic fiscal and monetary policy. And yet this kind of deficit-bashing insanity is spreading like a cancer across the global economy. We all should know when the economy is in trouble. High unemployment; sluggish growth in output, productivity, wages; high inflation etc., these are all things which have meaning to us on an individual and collective basis. A budget deficit, by contrast, is just a number. It’s akin to blaming the thermometer when it registers that someone has a flu bug. Any doctor would legitimately be called a quack if he proposed a cure for influenza by sticking the thermometer in a bucket of ice until we got the right “reading” that was deemed to be acceptable to him. Yet this is exactly what the poor Greeks have now been blackmailed into signing up for. Heaven help the US if it begins to move further down that road, as many are now suggesting. This post originally appeared on New Deal 2.0

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`Shotgun Greek Wedding’ Explained by Banks’ `PIGS’ Exposure: Chart of Day

February 11, 2010

By Jana Randow Feb. 11 (Bloomberg) — German and French banks’ “enormous” exposure to Portugal, Ireland, Greece and Spain explains why Europe’s biggest economies are moving to rescue their southern neighbors, Societe General SA said today in a report titled “Shotgun Greek Wedding.” The CHART OF THE DAY shows how much money German, French, Swiss and U.K. banks have at stake in the so-called PIGS countries. Banks in Germany and France alone have a combined exposure of $119 billion to Greece and $909 billion to the four countries, according to data from the Bank for International Settlements. Overall, European banks have $253 billion in Greece and $2.1 trillion in the so-called PIGS. “The exposure is enormous,” said Klaus Baader , co-chief European economist at Societe Generale in London. “The crisis in Greece isn’t Greece’s problem alone but a concrete problem for Europe’s whole banking sector. That explains the interest of finance ministers in stabilizing the situation.” Leaders from the 16-nation euro area said today they have agreed to act if necessary to help Greece reduce its budget deficit and safeguard financial stability in the region. Debt- stricken Greece is struggling to convince investors it is able to reduce its deficit from 12.7 percent of gross domestic product, sparking turmoil on financial markets. Spain, Portugal and Ireland, also suffering from gaping deficits after the worst recession since World War II, have been sucked into the swirl of widening bond spreads and soaring credit default swaps. The premium investors demand to hold 10- year bonds of the so-called PIGS countries instead of benchmark German bunds, and the cost of insuring against default, have surged this year. “The countries’ situations put the finances of fiscally stronger countries in jeopardy,” Baader said. “That’s one reason why the tone changed.” To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net .

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`PIGS’ in Rescue Lipstick Are Uglier Than Default: Mark Gilbert

February 11, 2010

Commentary by Mark Gilbert Feb. 11 (Bloomberg) — “The worst possible signal which we could send out is one calling for outside help,” Greek Finance Minister George Papaconstantinou told Bloomberg Television this week. He may be the only policy maker in the European Union who understands how disastrous a bailout would be. A rescue would scream to the world that Greece’s financial hole is too deep for it to get out unaided — just as the Federal Reserve’s decision to supply $29 billion of guarantees so that Bear Stearns Cos. could survive by selling itself to JPMorgan Chase & Co. was a red flag about the cannibalism erupting in the credit-crunched banking industry. Let Greece go bust if it can’t pay its own way. Sure, it will be messy and scary. A lot of banks will realize they still don’t focus enough on the credit quality of the firms they do business with. The euro project will suffer a crisis of confidence. The lesson from the credit crisis, though, is that the alternative of helping Greece off a hook of its own making is far, far worse. All of the “PIGS” — Portugal, Ireland, Greece and Spain (and maybe Italy, if you’re feeling particularly uncharitable or skeptical) — have been living beyond their means, much like the investment banks did in the credit boom. A bailout of one will produce the same outcome as the rescue of Bear Stearns did; moral hazard will kick in, and instead of allowing economic Darwinism to cleanse the gene pool, the weaker nations will lose any incentive to cut spending and trim their swollen deficits. Risk Drifts Welcome to “Credit Crunch II.” By stuffing billions of dollars of taxpayers’ money into the balance-sheet holes of the banking industry, governments have transmogrified private risk into public liabilities. The “too-big-to-fail” label just reattaches itself to governments from financial companies. The sequel, if the European Union or its members are suckered into some kind of Greek rescue package by buying, guaranteeing or even repaying its bonds, could end up featuring Portugal as Lehman Brothers Holdings Inc. and Spain as American International Group Inc. As Dennis Gartman , economist and publisher of the Gartman Letter research report, has repeatedly pointed out in recent years, there is never only one cockroach. Debt Rollercoaster European debt markets have been on a rollercoaster as they try to parse the EU smoke signals to judge whether Greece will win financial backing from its neighbors, or just verbal support. So far this month, the 10-year Greek yield has swung between 6.05 percent and about 6.8 percent as hopes for help waxed and waned. The euro, however, didn’t exactly jump for joy at the prospect of an aid package, which tells you that a salvage operation for Greece is no panacea for what ails the common currency’s economies. Whenever the subject of the euro’s conception comes up, European Central Bank President Jean-Claude Trichet can’t hide a glimmer of paternal pride as he explains that one of the project’s finest achievements was yield convergence — the elimination of gaps between the borrowing costs of member nations — at lower, rather than higher, levels. In the absence of a euro-wide fiscal policy that makes spending and revenue decisions, though, there’s really no reason for investors to accept the same return for lending to such economically disparate countries as Germany and Portugal, for example. You are effectively buying a foreign-currency bond because Portugal doesn’t have the individual right to print currency to make its debt payments, and it can’t devalue its way to prosperity. Ceding Sovereignty All of this was recognized and much discussed at the euro’s introduction a decade ago. Yield convergence was driven by the expectation that the rules of the euro club would impose economic discipline on its members. One possible outcome of the current crisis is for common-currency participants to cede more of their fiscal sovereignty; self-regulation hasn’t worked any better in the euro area than it did in investment banking. Some people are talking as if there’s a simple choice facing European policy makers. Abandon Greece to its fate, the story goes, and unleash contagion trashing the creditworthiness of other, financially challenged euro participants. Throw a financial safety net beneath Hellenic debt, on the other hand, and you can eliminate the contagion threat. In reality, if Greece can’t solve its problems alone, the choice is between two different kinds of contagion. Why would an Irish policewoman swallow a pay cut that helps her government curb its spending if an EU handout eases the strictures demanded of Greek public-sector workers? If economic failure goes unpunished, then behavior doesn’t change — another lesson that the finance world should have learned from the credit crisis. Daubing a layer of financial lipstick on the “PIGS” makes them less, not more, attractive. ( Mark Gilbert , author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable,” is the London bureau chief and a columnist for Bloomberg News. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Mark Gilbert in London at magilbert@bloomberg.net

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`PIGS’ in Rescue Lipstick Are Uglier Than Default: Mark Gilbert

February 11, 2010

Commentary by Mark Gilbert Feb. 11 (Bloomberg) — “The worst possible signal which we could send out is one calling for outside help,” Greek Finance Minister George Papaconstantinou told Bloomberg Television this week. He may be the only policy maker in the European Union who understands how disastrous a bailout would be. A rescue would scream to the world that Greece’s financial hole is too deep for it to get out unaided — just as the Federal Reserve’s decision to supply $29 billion of guarantees so that Bear Stearns Cos. could survive by selling itself to JPMorgan Chase & Co. was a red flag about the cannibalism erupting in the credit-crunched banking industry. Let Greece go bust if it can’t pay its own way. Sure, it will be messy and scary. A lot of banks will realize they still don’t focus enough on the credit quality of the firms they do business with. The euro project will suffer a crisis of confidence. The lesson from the credit crisis, though, is that the alternative of helping Greece off a hook of its own making is far, far worse. All of the “PIGS” — Portugal, Ireland, Greece and Spain (and maybe Italy, if you’re feeling particularly uncharitable or skeptical) — have been living beyond their means, much like the investment banks did in the credit boom. A bailout of one will produce the same outcome as the rescue of Bear Stearns did; moral hazard will kick in, and instead of allowing economic Darwinism to cleanse the gene pool, the weaker nations will lose any incentive to cut spending and trim their swollen deficits. Risk Drifts Welcome to “Credit Crunch II.” By stuffing billions of dollars of taxpayers’ money into the balance-sheet holes of the banking industry, governments have transmogrified private risk into public liabilities. The “too-big-to-fail” label just reattaches itself to governments from financial companies. The sequel, if the European Union or its members are suckered into some kind of Greek rescue package by buying, guaranteeing or even repaying its bonds, could end up featuring Portugal as Lehman Brothers Holdings Inc. and Spain as American International Group Inc. As Dennis Gartman , economist and publisher of the Gartman Letter research report, has repeatedly pointed out in recent years, there is never only one cockroach. Debt Rollercoaster European debt markets have been on a rollercoaster as they try to parse the EU smoke signals to judge whether Greece will win financial backing from its neighbors, or just verbal support. So far this month, the 10-year Greek yield has swung between 6.05 percent and about 6.8 percent as hopes for help waxed and waned. The euro, however, didn’t exactly jump for joy at the prospect of an aid package, which tells you that a salvage operation for Greece is no panacea for what ails the common currency’s economies. Whenever the subject of the euro’s conception comes up, European Central Bank President Jean-Claude Trichet can’t hide a glimmer of paternal pride as he explains that one of the project’s finest achievements was yield convergence — the elimination of gaps between the borrowing costs of member nations — at lower, rather than higher, levels. In the absence of a euro-wide fiscal policy that makes spending and revenue decisions, though, there’s really no reason for investors to accept the same return for lending to such economically disparate countries as Germany and Portugal, for example. You are effectively buying a foreign-currency bond because Portugal doesn’t have the individual right to print currency to make its debt payments, and it can’t devalue its way to prosperity. Ceding Sovereignty All of this was recognized and much discussed at the euro’s introduction a decade ago. Yield convergence was driven by the expectation that the rules of the euro club would impose economic discipline on its members. One possible outcome of the current crisis is for common-currency participants to cede more of their fiscal sovereignty; self-regulation hasn’t worked any better in the euro area than it did in investment banking. Some people are talking as if there’s a simple choice facing European policy makers. Abandon Greece to its fate, the story goes, and unleash contagion trashing the creditworthiness of other, financially challenged euro participants. Throw a financial safety net beneath Hellenic debt, on the other hand, and you can eliminate the contagion threat. In reality, if Greece can’t solve its problems alone, the choice is between two different kinds of contagion. Why would an Irish policewoman swallow a pay cut that helps her government curb its spending if an EU handout eases the strictures demanded of Greek public-sector workers? If economic failure goes unpunished, then behavior doesn’t change — another lesson that the finance world should have learned from the credit crisis. Daubing a layer of financial lipstick on the “PIGS” makes them less, not more, attractive. ( Mark Gilbert , author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable,” is the London bureau chief and a columnist for Bloomberg News. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Mark Gilbert in London at magilbert@bloomberg.net

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Greek Aid Package Considered by EU as Deficit Threatens Confidence in Euro

February 9, 2010

By Jonathan Stearns and Brian Parkin Feb. 9 (Bloomberg) — The European Union dropped hints that a summit this week will offer an aid package to financially- stricken Greece as officials seek to prevent its budgetary woes from eroding confidence in the euro. “We are talking about support in the broad sense,” Olli Rehn , the EU’s new economic affairs commissioner, said in an interview in Strasbourg, France today. Michael Meister , financial affairs spokesman for German Chancellor Angela Merkel ’s Christian Democratic Union, said in an interview in Berlin that aid would come “under strict conditions and if the Greek government undertakes far-reaching state reforms.” Greece risked turning into Europe’s first victim of the borrowing binge that governments undertook to arrest the worst recession since World War II. Yields on its two-year bonds surged to the highest in almost a decade as officials struggled to convince investors they could control the European Union’s highest budget deficit. The euro jumped and global stocks rose today as bailout talk eased concern deteriorating government finances would derail the global recovery. Europe’s single currency increased 1.4 percent to $1.3839, the most in more than five months, and the Dow Jones Industrial Average rose the most since July. Earlier, the yield on the Greek 10-year bond slid the most in at least 12 years after news that European Central Bank President Jean-Claude Trichet will attend the Feb. 11 summit in Brussels fanned expectations about a rescue. Moral Hazard? “I’m not surprised it happened, just by the timing of it,” said Julian Callow, chief European economist at Barclays Capital in London. “They would have to structure it in a way that it’s sufficiently penal so as not to create a moral hazard issue and encourage other countries like Portugal, Spain and Ireland to keep on track in terms of getting their own houses in order.” German Finance Minister Wolfgang Schaeuble will brief lawmakers on possible steps tomorrow, Meister said. German government spokesman Ulrich Wilhelm said in a statement that reports that a decision had “virtually been taken” to offer Greek assistance were “unfounded.” Officials are heading to Brussels as Greece braces for a wave of strikes tomorrow that will shut down schools, hospitals and flights to protest Prime Minister George Papandreou ’s deficit-reduction plans. Air-traffic controllers and civil- aviation workers are effectively closing down Greek air space as part of the 24-hour work stoppage by ADEDY, the umbrella group representing about 600,000 civil servants. Agenda Papandreou’s government today floated new steps to bring down the deficit from 12.7 percent of gross domestic product and its efforts were saluted by Fitch Ratings, which called the 2010 deficit-reduction plan “achievable.” The measures include cuts of as much as 5.5 percent in government workers’ wages and a waiver on taxes for Greeks who repatriate funds held in foreign accounts. Aid for Greece isn’t officially on the agenda for the EU summit. Still, EU President Herman Van Rompuy announced yesterday a discussion of “some aspects of the present economic situation” over lunch, a session without notetakers that is traditionally devoted to the most sensitive subjects. In the interview in Strasbourg today, Rehn pointed to this week’s summit and a meeting of European finance ministers next week and indicated that Greece will be held to strict conditions in exchange for any backing. “Solidarity goes both ways,” Rehn said. “I am sure that in the next couple of days we will see discussion and decisions to this effect.” EU law bars the ECB or national central banks from bailing out EU countries through buying their debt or offering loans, according to a report by the German parliament’s research unit published today. Options for Greece include bilateral aid or a package put together by a group of countries using the euro, Meister said. Nobel laureate Joseph Stiglitz said Greece’s budget-deficit reduction plan will prevent a default, and reiterated his call for the European Union to aid the nation against “speculative attacks” in financial markets. “I’ve been very impressed with the comprehensive approach they’ve had,” Stiglitz said in an interview on Bloomberg Television in London today. “There’s clearly no risk of default. I’m very confident about it.” To contact the reporters on this story: Brian Parkin in Berlin at bparkin@bloomberg.net ; Jonathan Stearns in Strasbourg, France at jstearns2@bloomberg.net ;

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Greek Aid Package Considered by EU to Ease Region’s Biggest Budget Deficit

February 9, 2010

By Jonathan Stearns and Brian Parkin Feb. 9 (Bloomberg) — The European Union dropped hints that a summit this week will offer an aid package to financially- stricken Greece as officials seek to prevent its budgetary woes from eroding confidence in the euro. “We are talking about support in the broad sense,” Olli Rehn , the EU’s new economic affairs commissioner, said in an interview in Strasbourg, France today. Michael Meister , financial affairs spokesman for German Chancellor Angela Merkel ’s Christian Democratic Union, said in an interview in Berlin that aid would come “under strict conditions and if the Greek government undertakes far-reaching state reforms.” Greece risked turning into Europe’s first victim of the borrowing binge that governments undertook to arrest the worst recession since World War II. Yields on its two-year bonds surged to the highest in almost a decade as officials struggled to convince investors they could control the European Union’s highest budget deficit. The euro jumped and global stocks rose today as bailout talk eased concern deteriorating government finances would derail the global recovery. Europe’s single currency increased 1.4 percent to $1.3839, the most in more than five months, and the Dow Jones Industrial Average rose the most since July. Earlier, the yield on the Greek 10-year bond slid the most in at least 12 years after news that European Central Bank President Jean-Claude Trichet will attend the Feb. 11 summit in Brussels fanned expectations about a rescue. Moral Hazard? “I’m not surprised it happened, just by the timing of it,” said Julian Callow, chief European economist at Barclays Capital in London. “They would have to structure it in a way that it’s sufficiently penal so as not to create a moral hazard issue and encourage other countries like Portugal, Spain and Ireland to keep on track in terms of getting their own houses in order.” German Finance Minister Wolfgang Schaeuble will brief lawmakers on possible steps tomorrow, Meister said. German government spokesman Ulrich Wilhelm said in a statement that reports that a decision had “virtually been taken” to offer Greek assistance were “unfounded.” Officials are heading to Brussels as Greece braces for a wave of strikes tomorrow that will shut down schools, hospitals and flights to protest Prime Minister George Papandreou ’s deficit-reduction plans. Air-traffic controllers and civil- aviation workers are effectively closing down Greek air space as part of the 24-hour work stoppage by ADEDY, the umbrella group representing about 600,000 civil servants. Agenda Papandreou’s government today floated new steps to bring down the deficit from 12.7 percent of gross domestic product and its efforts were saluted by Fitch Ratings, which called the 2010 deficit-reduction plan “achievable.” The measures include cuts of as much as 5.5 percent in government workers’ wages and a waiver on taxes for Greeks who repatriate funds held in foreign accounts. Aid for Greece isn’t officially on the agenda for the EU summit. Still, EU President Herman Van Rompuy announced yesterday a discussion of “some aspects of the present economic situation” over lunch, a session without notetakers that is traditionally devoted to the most sensitive subjects. In the interview in Strasbourg today, Rehn pointed to this week’s summit and a meeting of European finance ministers next week and indicated that Greece will be held to strict conditions in exchange for any backing. “Solidarity goes both ways,” Rehn said. “I am sure that in the next couple of days we will see discussion and decisions to this effect.” EU law bars the ECB or national central banks from bailing out EU countries through buying their debt or offering loans, according to a report by the German parliament’s research unit published today. Options for Greece include bilateral aid or a package put together by a group of countries using the euro, Meister said. Nobel laureate Joseph Stiglitz said Greece’s budget-deficit reduction plan will prevent a default, and reiterated his call for the European Union to aid the nation against “speculative attacks” in financial markets. “I’ve been very impressed with the comprehensive approach they’ve had,” Stiglitz said in an interview on Bloomberg Television in London today. “There’s clearly no risk of default. I’m very confident about it.” To contact the reporters on this story: Brian Parkin in Berlin at bparkin@bloomberg.net ; Jonathan Stearns in Strasbourg, France at jstearns2@bloomberg.net ;

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U.S. Losing AAA Is Way to Rein in Pelosi, Reid: David Reilly

February 9, 2010

Commentary by David Reilly Feb. 9 (Bloomberg) — When it comes to America’s AAA debt rating, we have to ask whether we would be better off without it. That notion is pure heresy, and Treasury Secretary Timothy Geithner was quick this weekend to try and dispel any thought that the U.S. would ever be in for a downgrade. “That will never happen to this country,” Geithner said during an interview with ABC News. The remark came after Moody’s Investors Service last week said the pristine U.S. rating will come under pressure unless something is done about mounting deficits. Geithner shouldn’t have fought Moody’s report. He should have embraced it. What better way to impress upon Congress that the U.S. is very much in crisis and needs to face up to its problems. That reality has yet to set in on Capitol Hill. Two weeks ago, for example, the Senate shot down a proposal to create a deficit-reduction commission. The measure failed because the Left worries such a committee will cut spending, while the Right is afraid it will call for tax hikes. So no spending cuts or tax hikes, which is what we need — just deficits as far as the eye can see. Let’s break out the fiddles already and watch Rome burn. This is why concerns over the so-called PIGS — Portugal, Ireland, Greece and Spain — or those on the geographic and economic periphery of the European Union are really a sideshow. The real danger to markets lies with the DOLTS, or Dangerously Over-Leveraged Triple-A Superpowers. That club currently consists of the U.S. Let’s Pretend So far, membership has allowed the U.S. and its elected representatives to pretend urgent action isn’t needed. After all, DOLTS have the world’s reserve currency and nukes. This supposedly means we can spend our way out of debt because creditors like China will forever lend us money. Failing that, we can just print more dollars. Yet even these benefits can’t change the fact that the U.S. is on an unsustainable course with deficits rising, the national debt soaring, and Social Security and Medicare preparing to go bust. At 10 percent of gross domestic product, the $1.6 trillion budget deficit for 2010 forecast by the Obama administration ranks as the highest such ratio since World War II. The administration predicts that this ratio will fall to about 4 percent by 2015. For that to happen, though, the economic recovery mustn’t sputter. U.S. Weakening Debt, meanwhile, is set to climb to 77 percent of gross domestic product by 2019, according to Moody’s, while “debt affordability would be weakened by higher interest costs in the next several years.” That compares with government expectations at the end of 2008 of a future debt-to-GDP ratio of about 40 percent by the end of this decade. No wonder investors like Marc Faber , who publishes the Gloom, Boom and Doom report, say the U.S. would carry a below- investment grade, or junk, rating if the country were a company. And starting in 2020, things will get even worse. “It is worth noting that after 2019 is when the most serious pressures resulting from Social Security, Medicare, and Medicaid will develop, so that failure to rein in the deficits would make it even more difficult to deal with such pressures,” Moody’s said in a credit opinion last week. State and local governments are also in crisis, and, like their federal counterparts, are unwilling to face the harsh reality confronting them. California Dwarfs Greece The mire facing California, for example, makes Greece’s woes look somewhat manageable. California, staring at a $20 billion budget gap over the next 17 months, accounts for about 13 percent of the U.S. economy. Greece accounts for just 3 percent of the economy of countries that use the euro. Things are so bad in Nevada, meanwhile, that the state could lay off every worker paid from its general fund and it would still be $300 million in the red, according to state Assembly Speaker Barbara Buckley. Given all this, Geithner should be using Moody’s AAA talk as a cudgel to beat some reality into congressional heads. So far, though, President Barack Obama has preferred to kowtow to House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid , rather than lead them. From the earliest days of his administration, Obama has tried to appease both, or stood by as they hijacked and then wrecked his initiatives. This started with Obama’s acquiescence to a pork-laden stimulus bill and continued as the president gave Congress control over initiatives like the health-care overhaul and financial reform. Getting Worse The result is that the government has accomplished little in the face of the greatest financial crisis since the Great Depression. And things may easily get worse. An emboldened and divided Congress, meanwhile, shows no sense of recognizing the true extent of the meltdown. Unless there is a sense of immediate danger, there’s little chance it will do anything differently. So while the threat of a downgrade might be unsettling, allowing the country to continue along its present course is far worse. ( David Reilly is a Bloomberg News columnist. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: David Reilly at dreilly14@bloomberg.net

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Portugal Said to Hire Banks for Bond Sale as It Struggles to Trim Deficit

February 9, 2010

By Caroline Hyde and Anna Rascouet Feb. 9 (Bloomberg) — Portugal hired banks to help it sell bonds amid concern the nation will be forced to pay more to borrow as it struggles to cut its budget deficit. Portugal plans to issue 10-year notes in euros, according to two bankers involved in the transaction. Barclays Capital, Banco Espirito Santo SA, Credit Agricole CIB, Goldman Sachs Group Inc. and Societe Generale SA are managing the sale, said the bankers, who declined to be identified before the transaction is completed. The nation has pledged to reduce its budget gap of 9.3 percent of gross domestic product by more than half in three years to meet European Union limits. Portugal’s public debt will rise to 91 percent of economic output by 2011, from 77 percent last year, according to European Commission forecasts. “Syndication is a safe way to raise money,” said Giuseppe Maraffino , a fixed-income strategist at UniCredit SpA in Milan. “I expect Portugal to pay a premium, but it has to fund itself. It could be a good deal to launch a new bond.” Portugal will sell the bonds subject to market conditions, said the bankers. It last hired banks to sell bonds through a syndicated deal in August, when it issued debt in dollars, according to data compiled by Bloomberg. Its last 10-year bond sale via banks was in March, when it raised 4 billion euros ($5.5 billion), Bloomberg data show. The notes were priced to yield 135 basis points more than the benchmark mid-swap rate. Alberto Soares , chairman of Portugal’s government debt agency in Lisbon, confirmed the planned bond sale but declined further comment. Bonds Tumble Portugal’s existing bonds have tumbled this year and the cost of insuring against losses on the debt using credit-default swaps has soared to a record. The country has been affected by concern that European nations including Greece, Spain and Ireland will fail to meet EU rules to cut budget deficits to less than 3 percent of GDP. Speculation is growing that a meeting of European leaders on Feb. 11 to lay the groundwork for a 10-year economic program for the region will be dominated by bailout discussions. “When a deficit has to be financed, timing becomes a minor issue,” said Michiel De Bruin , who helps manage $28 billion of assets as head of euro government bonds at F&C Investments in Amsterdam. “Sovereign markets are tremendously volatile. At a certain stage a pragmatic decision has to be made to come to market.” Higher Yield The yield on Portugal’s outstanding 10-year note has soared 63 basis points to 4.69 percent since Jan. 1, increasing the premium investors demand to hold the securities instead of benchmark German bunds to 154 basis points. That’s against an average of 30 basis points in the past 10 years. A basis point is 0.01 percentage point. Credit-default swaps tied to Portugal’s bonds fell to 240 basis points, from an all-time high of 244.5 yesterday, according to CMA DataVision prices. That means it costs $240,000 a year to insure $10 million of debt for five years, up from about $82,000 at the start of the year. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country or company fail to adhere to its debt agreements. Standard & Poor’s lowered the outlook on Portugal’s A+ rating to negative in December and Moody’s Investors Service also has a negative outlook on its Aa2 rating. Fitch reduced the outlook on its AA grade to negative in September. Greece, Spain and Ireland have also done syndicated bond sales this year. Portugal is planning its 10-year issue after it reduced a planned 500 million-euro sale of 12-month bills by 200 million euros on Feb. 3, according to data compiled by Bloomberg. “They think they need to do it, conditions are not likely to improve materially, let’s get it done,” said Gianluca Salford , a fixed-income strategist at JPMorgan Chase & Co. in London. “If you end up having to issue a few billion at very expensive levels it does very, very little to your debt sustainability.” To contact the reporters on this story: Caroline Hyde in London chyde3@bloomberg.net ; Anna Rascouet in London at arascouet@bloomberg.net

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European Stocks Retreat for a Fourth Week on Greek, Spanish Debt Concerns

February 6, 2010

By Francesca Cinelli Feb. 6 (Bloomberg) — European stocks fell for a fourth week, the longest losing streak since July, amid concern that Greece, Spain and Portugal will struggle to curb their budget deficits. Allied Irish Banks Plc and Banco de Valencia SA led bank shares to the biggest decline among 19 industry groups in the Dow Jones Stoxx 600 Index this week. Xstrata Plc and Rautaruukki Oyj both sank more than 7 percent as copper retreated for a fourth week. Neste Oil Oyj slumped 9.8 percent after Finland’s only oil refiner posted a fourth-quarter net loss. Electrolux AB tumbled 13 percent after fourth-quarter earnings missed analysts’ estimates. The Dow Jones Stoxx 600 Index dropped 3.9 percent to 237.46 this week, the lowest level in three months. Stocks in Spain and Portugal slumped the most in 15 months on Feb. 4 on concern they will struggle to shrink their budget shortfalls. Credit-default swaps on the sovereign debt of those countries rose to record high levels yesterday, according to CMA DataVision prices. “European markets are being rocked by the sovereign debt contamination emanating from Greece and arriving in Portugal and Spain,” said Neil Dwane , who helps oversee about $80 billion as chief investment officer at Allianz Global Investors’ RCM unit in Frankfurt. “Country contagion risk now seems real. Governments without a credible economic plan will be punished by higher borrowing costs which may then result in a double dip, or worse, for the economies concerned.” Spain’s Economy The Stoxx 600 has fallen 6.5 percent so far this year, as U.S. President Barack Obama proposed limits on risk-taking at banks and China moved to cool its economy. The gauge, which is still up 50 percent since March, is 3.23 points away from entering a correction, defined as a 10 percent drop from a recent high. The measure reached 260.26 on Jan. 19. The Bank of Spain today estimated the nation’s economy contracted for a seventh quarter in the final three months of 2009, putting further pressure on the deficit. The credibility of Spain’s economy cannot be “in doubt,” Deputy Prime Minister Maria Teresa Fernandez de la Vega said yesterday in Madrid, adding that “we are convinced the stock market will recover and we are convinced that the actions that we have taken will pave the way for a recovery of the economy.” Option Protection The VStoxx Index , which gauges the cost of using options to protect against declines in the Dow Jones Euro Stoxx 50 Index, surged 14 percent to 30.55 this week, the highest level in three months. National benchmark indexes fell in all 18 western European markets except Iceland. The U.K.’s FTSE 100 retreated 2.5 percent, while Germany’s DAX fell 3.1 percent and France’s CAC 40 slid 4.7 percent. Bank shares sank 6.4 percent to the lowest since July. National Bank of Greece SA , Greece’s biggest lender, dropped 12 percent. In Spain, declines were led by Banco de Valencia and Banco Bilbao Vizcaya Argentaria SA , which lost 15 percent and 13 percent respectively, and in Portugal by Banco Espirito Santo SA, which fell 11 percent. In Ireland, Allied Irish Banks and Bank of Ireland Plc plummeted 16 percent and 10 percent respectively as Ireland’s Finance Ministry said it is maintaining its forecast for a so- called bad bank, the National Asset Management Agency, to buy assets from lenders at an average aggregate discount of 30 percent. Mining Stocks Basic-resource stocks this week lost 3.9 percent as copper dropped for a fourth week in London on investor concern that the pace of the global economic recovery is slowing. Crude oil fell the most since July 29 on Jan. 4 after an increase in U.S. jobless claims raised concern fuel consumption may be slow to recover and a stronger dollar reduced demand for commodities. A separate survey of employers showed payrolls declined by 20,000 in January as construction companies and state and local governments cut back. Xstrata Plc, the world’s fourth-largest copper producer, retreated 7.9 percent. Rautaruukki Oyj, Finland’s biggest producer of carbon steel, slid 7.5 percent. Neste Oil fell 9.8 percent as it said that profit from turning oil into fuels such as gasoline and diesel fell 61 percent in the fourth quarter and it sees a “gradual” recovery. ICAP Outlook ICAP Plc plummeted 21 percent, the sharpest drop in the Stoxx 600, after the world’s largest broker of transactions between banks cut its outlook for full-year profit, saying new businesses are taking longer than anticipated to become profitable. Electrolux AB posted the biggest weekly decline since October 2008 after the world’s second-biggest appliance maker said fourth-quarter net income rose to 664 million kronor ($89.1 million), missing analysts’ estimates for profit of 671 million kronor. Northumbrian Water was the best performer, surging 8.1 percent after the Sunday Times reported that the Ontario Teachers’ Pension Plan may bid 1.7 billion pounds ($2.7 billion) for the company. Fiat SpA led automobile stocks lower, tumbling 9.7 percent as concern on incentives this year affected shares of the Italian carmaker. To contact the reporter on this story: Francesca Cinelli in Milan at fcinelli@bloomberg.net .

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`Piigs’ Don’t Fly in Barclays Notes as Portugal, Greece Grapple With Debt

February 5, 2010

By Alexis Xydias, Rita Nazareth and Lynn Thomasson Feb. 5 (Bloomberg) — At Barclays Capital, Piigs won’t fly. The securities unit of London-based Barclays Plc told analysts yesterday not to use the acronym for Portugal, Italy, Ireland, Greece and Spain in notes to clients, according to a memo obtained by Bloomberg News. The mandate from Valerie Monchi was sent to research staff. The Piigs nickname has grown increasingly popular in the last month as investors dumped assets in the euro zone’s smaller economies on concern the countries will struggle to control budget deficits. Stocks in Spain, Portugal and Greece plunged today, with the Athens Stock Exchange Index falling to the lowest level since April. Yields on Greece’s 10-year bonds and Portugal’s 2-year securities have jumped to the highest levels against German bunds since the late 1990s. “By denigrating a nation in the process of trying to describe a financial situation, it sort of puts the people in that country behind the eight ball,” said Peter Sorrentino , a senior money manager at Cincinnati-based Huntington Asset Advisors who is visiting Italy in March. His firm oversees $12.8 billion. “It serves no one’s interest. We’re all in the same boat together.” Investment banks from Citigroup Inc. to JPMorgan Chase & Co., both based in New York, have used the term in research reports. There were no instances of it in Barclays notes obtained by Bloomberg. “The Piigs remain front-and-center,” analysts led by Adam Crisafulli of JPMorgan in New York wrote in a report yesterday. CLSA Asia-Pacific Markets analyst Christopher Wood recommended a “Piigs widening spread trade” in a June 2009 report. Public Debt Mark Lane , a spokesman for Barclays in New York, declined to comment. So did Duncan Smith of Citigroup and Brian Marchiony of JPMorgan. Portugal’s public debt will rise to 91 percent of gross domestic product by 2011 from 77 percent last year, according to European Commission forecasts. More than one in three Italian households that got a mortgage to buy a residential property is struggling to meet the loan repayments, a study from Bologna- based research center Nomisma showed yesterday. Ireland’s economy shrank 7.5 percent in 2009 and the government is cutting spending to reduce a deficit that widened to 11.7 percent of gross domestic product last year, almost four times the European Union limit. Greece’s debt will increase to 135 percent of GDP, from 113 percent, and Spain’s will climb to 74 percent from 54 percent, the European Commission estimates. Greece faces opposition to proposed deficit cuts, with its biggest union set to approve a mass strike, the second scheduled for this month. ‘Highly Intelligent’ The Spanish government had to increase the amount it pays to borrow yesterday after confidence in Portugal was shaken when it cut an issue of 12-month bills to 300 million euros ($412 million) from a planned 500 million euros. Usage of Piigs grew following the rise of the BRICs acronym for Brazil, Russia, India and China, coined by Goldman Sachs Group Inc. Chief Global Economist Jim O’Neill to describe four of the world’s biggest emerging markets. The Web site of the Humane Society of the United States describes pigs as “highly intelligent, curious animals who engage in complex tasks and form elaborate social groups.” “If there’s a cute nickname to use so you don’t have to say five names out loud over and over again, that’s fine with me,” said Julius Ridgway , a financial adviser at Medley & Brown LLC, which oversees about $400 million in Jackson, Mississippi. “It’s just silly.” To contact the reporters on this story: Alexis Xydias in London at axydias@bloomberg.net ; Rita Nazareth in New York at rnazareth@bloomberg.net ; Lynn Thomasson in New York at lthomasson@bloomberg.net .

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Swine Acronym Ordered Kept Out of Research Reports From Barclays Capital

February 5, 2010

By Alexis Xydias, Rita Nazareth and Lynn Thomasson Feb. 5 (Bloomberg) — At Barclays Capital, Piigs won’t fly. The securities unit of London-based Barclays Plc told analysts yesterday not to use the acronym for Portugal, Italy, Ireland, Greece and Spain in notes to clients, according to a memo obtained by Bloomberg News. The mandate from Valerie Monchi was sent to research staff. The Piigs nickname has grown increasingly popular in the last month as investors dumped assets in the euro zone’s smaller economies on concern the countries will struggle to control budget deficits. Stocks in Spain and Portugal slumped the most since 2008 yesterday, while yields on Greece’s 10-year bonds and Portugal’s 2-year securities have jumped to the highest levels against German bunds since the late 1990s. “By denigrating a nation in the process of trying to describe a financial situation, it sort of puts the people in that country behind the eight ball,” said Peter Sorrentino , a senior money manager at Cincinnati-based Huntington Asset Advisors who is visiting Italy in March. His firm oversees $12.8 billion. “It serves no one’s interest. We’re all in the same boat together.” Investment banks from Citigroup Inc. to JPMorgan Chase & Co., both based in New York, have used the term in research reports. There were no instances of it in Barclays notes obtained by Bloomberg. “The Piigs remain front-and-center,” analysts led by Adam Crisafulli of JPMorgan in New York wrote in a report yesterday. CLSA Asia-Pacific Markets analyst Christopher Wood recommended a “Piigs widening spread trade” in a June 2009 report. Public Debt Mark Lane , a spokesman for Barclays in New York, declined to comment. So did Duncan Smith of Citigroup and Brian Marchiony of JPMorgan. Portugal’s public debt will rise to 91 percent of gross domestic product by 2011 from 77 percent last year, according to European Commission forecasts. More than one in three Italian households that got a mortgage to buy a residential property is struggling to meet the loan repayments, a study from Bologna- based research center Nomisma showed yesterday. Ireland’s economy shrank 7.5 percent in 2009 and the government is cutting spending to reduce a deficit that widened to 11.7 percent of gross domestic product last year, almost four times the European Union limit. Greece’s debt will increase to 135 percent of GDP, from 113 percent, and Spain’s will climb to 74 percent from 54 percent, the European Commission estimates. Greece faces opposition to proposed deficit cuts, with its biggest union set to approve a mass strike, the second scheduled for this month. ‘Highly Intelligent’ The Spanish government had to increase the amount it pays to borrow yesterday after confidence in Portugal was shaken when it cut an issue of 12-month bills to 300 million euros ($412 million) from a planned 500 million euros. Usage of Piigs grew following the rise of the BRICs acronym for Brazil, Russia, India and China, coined by Goldman Sachs Group Inc. Chief Global Economist Jim O’Neill to describe four of the world’s biggest emerging markets. The Web site of the Humane Society of the United States describes pigs as “highly intelligent, curious animals who engage in complex tasks and form elaborate social groups.” Wikipedia says they eat any food, including worms and tree bark. “If there’s a cute nickname to use so you don’t have to say five names out loud over and over again, that’s fine with me,” said Julius Ridgway , a financial adviser at Medley & Brown LLC, which oversees about $400 million in Jackson, Mississippi. “It’s just silly.” To contact the reporters on this story: Alexis Xydias in London at axydias@bloomberg.net ; Rita Nazareth in New York at rnazareth@bloomberg.net ; Lynn Thomasson in New York at lthomasson@bloomberg.net .

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Stocks, Metals Plunge as Dollar Gains on Concerns Over Debt, Unemployment

February 4, 2010

By Rita Nazareth and Gavin Serkin Feb. 4 (Bloomberg) — Stocks and bonds fell in Spain, Portugal and eastern Europe on concern governments will struggle to fund their budget deficits as spending cuts in Greece trigger labor strikes. The dollar extended gains and equities slid in New York after U.S. jobless claims unexpectedly increased. Portugal’s PSI-20 Index slumped 4.2 percent, the most in 14 months, at 9:33 a.m. in New York. Spain’s IBEX Index dropped 3.7 percent to the lowest level since July and credit-default swaps on Hungary climbed to a record. The Standard & Poor’s 500 Index slid 0.9 percent. The dollar strengthened against all but one of its 16 most-traded peers. The pound pared declines after the Bank of England announced a pause in its asset-purchase program. The European Union’s pledge yesterday to back Greece’s plan to cut the region’s biggest budget deficit prompted investors to shun securities of countries with the worst shortfalls. Spanish borrowing costs rose at a sale of three-year notes today and Portugal scaled back an auction of Treasury bills yesterday. “The focus is shifting toward Spain and Portugal, where the deficit-reduction plans have been far less ambitious than Greece,” said Kornelius Purps , a fixed-income strategist in Munich at UniCredit Markets & Investment Banking. The MSCI World Index of 23 developed nations’ stocks fell 1.3 percent as Greece’s ASE Index lost 2.7 percent on concern plans for a strike by the country’s biggest union show Prime Minister George Papandreou may not win enough support in parliament for spending reductions. Piraeus Bank SA, Greece’s fourth-biggest lender, dropped 6 percent, while Banco Bilbao Vizcaya Argentaria SA, Spain’s second-biggest bank, declined 5.8 percent. Europe’s Dow Jones Stoxx 600 Index slipped 1.4 percent. ECB On Hold European Central Bank President Jean-Claude Trichet said he is “confident” that Greece is moving in the right direction to cut its deficit. He spoke at a press briefing after the ECB left its benchmark interest rate unchanged at a record 1 percent. U.S. stocks also fell as MasterCard Inc., the world’s second-biggest payments network, posted a fourth-quarter profit that fell short of most analysts’ estimates. A Labor Department report showed productivity of U.S. workers surged in the fourth quarter, while labor costs dropped by 4.4 percent. Initial U.S. jobless applications unexpectedly increased to 480,000 in the week ended Jan. 30, the most in seven weeks, from 472,000 the prior week, Labor Department figures showed. “Look at those initial claims,” said Diane Garnick , a New York-based investment strategist at Invesco Ltd., which manages $400 billion. “We thought we were finally going to have a positive month. It wasn’t in the cards this time. Unemployed people don’t spend money. That means the growth we’ve seen is not sustainable until people get jobs.” Emerging Markets The MSCI Emerging Markets Index dropped 1.6 percent, snapping a three-day rally. Poland’s WIG 20 Index fell 2.5 percent after the European Commission said the government’s budget gap may widen to a 15-year high of 7.5 percent of gross domestic product in 2010, from 6.4 percent last year, without “sizeable” measures. The Budapest Stock Exchange Index lost 2.1 percent after the opposition Fidesz party, the favorite to win general elections in 10 weeks, said the country faces a continuing recession and mounting debt, and has an unrealistic budget deficit target. Hungary Premium The extra yield investors demand to own Hungarian sovereign and quasi-sovereign bonds jumped the most in eight months, rising 29 basis points to a two-month high 2.59 percentage points more than similar-maturity U.S. Treasuries, according to JPMorgan Chase & Co.’s EMBI Global indexes. Portugal led declines in government bonds, with the premium investors demand to hold the securities instead of benchmark German bunds widening 10 basis points to 157 basis points, the biggest difference since March. Spain sold 2.5 billion euros ($3.5 billion) of three-year securities today to yield 2.63 percent, compared with 2.14 percent the last time the notes were issued Dec. 3. Credit-default swaps on Portugal’s government debt soared 15 basis points to a record 211, according to CMA DataVision prices. Contracts on Greece jumped 18 basis points to 415.5, Spain increased 12 basis points to 164, Italy was up 7 at 138 and Ireland climbed 6.5 basis points to 169.5. The dollar gained against high-yielding currencies, adding 1.1 percent versus the New Zealand dollar South African rand. The Dollar Index , which tracks the U.S. currency against those of six major trading partners, climbed 0.4 percent. The New Zealand dollar declined after a government report showed the unemployment rate climbed to a 10-year high. The Australian dollar dropped because retail sales unexpectedly fell in December for the first time in five months. Crude oil for March delivery fell 1.6 percent to $75.73 a barrel in electronic trading on the New York Mercantile Exchange after a U.S. Energy Department report yesterday showed a bigger- than-forecast weekly increase in crude inventories. Lead for delivery in three months fell 1.6 percent to $1,988.50 a metric ton on the London Metal Exchange. Gold for immediate delivery retreated 2 percent to $1,088.30 an ounce. To contact the reporters for this story: Gavin Serkin at gserkin@bloomberg.net

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Portugal, Spain Lead Worldwide Decline in Stocks; Bonds Drop, Dollar Gains

February 4, 2010

By Gavin Serkin Feb. 4 (Bloomberg) — Stocks and bonds fell in Spain, Portugal and Hungary on concern governments will struggle to fund their budget deficits as spending cuts in Greece trigger strikes. The dollar rallied. Spain’s IBEX Index dropped 2.2 percent to the lowest level since August at 10:19 a.m. in London, Portuguese credit-default swaps jumped to a record and the Budapest Stock Exchange Index declined 1.4 percent, the most in two weeks. Greek two-year bonds tumbled, with the yield rising 9 basis points to 6.57 percent. Futures on the Standard & Poor’s 500 Index slipped 0.6 percent. The dollar strengthened against all but one of its 16 most-traded peers. The European Union’s pledge yesterday to back Greece’s plan to cut the region’s biggest budget deficit prompted investors to shun securities of countries with similar shortfalls. Spanish borrowing costs rose at a sale of three-year notes today and Portugal scaled back an auction of Treasury bills yesterday. “The focus is shifting toward Spain and Portugal, where the deficit-reduction plans have been far less ambitious than Greece,” said Kornelius Purps , a fixed-income strategist in Munich at UniCredit Markets & Investment Banking. The MSCI World Index of 23 developed nations’ stocks fell 0.5 percent, as Portugal’s PSI-20 Index slumped 3.5 percent, leaving it 11 percent lower for the year, and Greece’s ASE Index lost 1.9 percent. Europe’s Dow Jones Stoxx 600 Index slipped 0.8 percent. Piraeus Bank SA, Greece’s fourth-biggest lender, dropped 3.1 percent, while Banco Bilbao Vizcaya Argentaria SA, Spain’s second-biggest bank, declined 4.1 percent. Hungary Drops The MSCI Emerging Markets Index dropped 1 percent, snapping a three-day rally. The Budapest Stock Exchange Index led declines as the opposition Fidesz party, the favorite to win general elections in 10 weeks, said the country faces a continuing recession, mounting debt and has an unrealistic budget deficit target. The extra yield investors demand to own Hungarian sovereign and quasi-sovereign bonds jumped the most in eight months, rising 29 basis points to a two-month high 2.59 percentage points more than similar-maturity U.S. Treasuries, according to JPMorgan Chase & Co.’s EMBI Global indexes. OTP Bank Nyrt., Hungary’s largest lender, dropped 1.9 percent to the lowest in almost a month. Moody’s Investors Service said yesterday that the U.S. government’s Aaa bond rating will “come under downward pressure” unless additional measures are taken to reduce budget deficits projected for the next decade. Default Swaps Credit-default swaps on Portugal’s government debt soared 15 basis points to a record 211, according to CMA DataVision prices. Contracts on Greece jumped 18 basis points to 415.5, Spain increased 12 basis points to 164, Italy was up 7 at 138 and Ireland climbed 6.5 basis points to 169.5. The Spanish government sold 2.5 billion euros ($3.5 billion) of three-year securities today to yield 2.63 percent, compared with 2.14 percent the last time the notes were issued on Dec. 3. Portugal led declines in government bonds, with the premium investors demand to hold the securities instead of benchmark German bunds widening 10 basis points to 157 basis points, the biggest difference since March. The dollar gained against high-yielding currencies, adding 1.1 percent versus the New Zealand dollar and 0.6 percent against the South African rand. The Dollar Index , which tracks the U.S. currency against those of six major trading partners, climbed 0.3 percent. Kiwi Retreats The New Zealand dollar declined after a government report showed the unemployment rate climbed to a 10-year high. The Australian dollar dropped because retail sales unexpectedly fell in December for the first time in five months. Crude oil for March delivery fell 80 cents, or 1 percent, to $76.18 a barrel in electronic trading on the New York Mercantile Exchange after a U.S. Energy Department report yesterday showed a bigger-than-forecast weekly increase in crude inventories. Lead for delivery in three months fell 1 percent to $2,000 a metric ton on the London Metal Exchange. Gold for immediate delivery retreated 0.6 percent to $1,103.60 an ounce. To contact the reporters for this story: Gavin Serkin at gserkin@bloomberg.net

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Portugal, Spain Lead Worldwide Decline in Stocks; Bonds Drop, Dollar Gains

February 4, 2010

By Gavin Serkin Feb. 4 (Bloomberg) — Stocks and bonds fell in Spain, Portugal and Hungary on concern governments will struggle to fund their budget deficits as spending cuts in Greece trigger strikes. The dollar rallied. Spain’s IBEX Index dropped 2.2 percent to the lowest level since August at 10:19 a.m. in London, Portuguese credit-default swaps jumped to a record and the Budapest Stock Exchange Index declined 1.4 percent, the most in two weeks. Greek two-year bonds tumbled, with the yield rising 9 basis points to 6.57 percent. Futures on the Standard & Poor’s 500 Index slipped 0.6 percent. The dollar strengthened against all but one of its 16 most-traded peers. The European Union’s pledge yesterday to back Greece’s plan to cut the region’s biggest budget deficit prompted investors to shun securities of countries with similar shortfalls. Spanish borrowing costs rose at a sale of three-year notes today and Portugal scaled back an auction of Treasury bills yesterday. “The focus is shifting toward Spain and Portugal, where the deficit-reduction plans have been far less ambitious than Greece,” said Kornelius Purps , a fixed-income strategist in Munich at UniCredit Markets & Investment Banking. The MSCI World Index of 23 developed nations’ stocks fell 0.5 percent, as Portugal’s PSI-20 Index slumped 3.5 percent, leaving it 11 percent lower for the year, and Greece’s ASE Index lost 1.9 percent. Europe’s Dow Jones Stoxx 600 Index slipped 0.8 percent. Piraeus Bank SA, Greece’s fourth-biggest lender, dropped 3.1 percent, while Banco Bilbao Vizcaya Argentaria SA, Spain’s second-biggest bank, declined 4.1 percent. Hungary Drops The MSCI Emerging Markets Index dropped 1 percent, snapping a three-day rally. The Budapest Stock Exchange Index led declines as the opposition Fidesz party, the favorite to win general elections in 10 weeks, said the country faces a continuing recession, mounting debt and has an unrealistic budget deficit target. The extra yield investors demand to own Hungarian sovereign and quasi-sovereign bonds jumped the most in eight months, rising 29 basis points to a two-month high 2.59 percentage points more than similar-maturity U.S. Treasuries, according to JPMorgan Chase & Co.’s EMBI Global indexes. OTP Bank Nyrt., Hungary’s largest lender, dropped 1.9 percent to the lowest in almost a month. Moody’s Investors Service said yesterday that the U.S. government’s Aaa bond rating will “come under downward pressure” unless additional measures are taken to reduce budget deficits projected for the next decade. Default Swaps Credit-default swaps on Portugal’s government debt soared 15 basis points to a record 211, according to CMA DataVision prices. Contracts on Greece jumped 18 basis points to 415.5, Spain increased 12 basis points to 164, Italy was up 7 at 138 and Ireland climbed 6.5 basis points to 169.5. The Spanish government sold 2.5 billion euros ($3.5 billion) of three-year securities today to yield 2.63 percent, compared with 2.14 percent the last time the notes were issued on Dec. 3. Portugal led declines in government bonds, with the premium investors demand to hold the securities instead of benchmark German bunds widening 10 basis points to 157 basis points, the biggest difference since March. The dollar gained against high-yielding currencies, adding 1.1 percent versus the New Zealand dollar and 0.6 percent against the South African rand. The Dollar Index , which tracks the U.S. currency against those of six major trading partners, climbed 0.3 percent. Kiwi Retreats The New Zealand dollar declined after a government report showed the unemployment rate climbed to a 10-year high. The Australian dollar dropped because retail sales unexpectedly fell in December for the first time in five months. Crude oil for March delivery fell 80 cents, or 1 percent, to $76.18 a barrel in electronic trading on the New York Mercantile Exchange after a U.S. Energy Department report yesterday showed a bigger-than-forecast weekly increase in crude inventories. Lead for delivery in three months fell 1 percent to $2,000 a metric ton on the London Metal Exchange. Gold for immediate delivery retreated 0.6 percent to $1,103.60 an ounce. To contact the reporters for this story: Gavin Serkin at gserkin@bloomberg.net

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Spain to Announce Budget Deficit Cut Plan, Seeking to Avoid Greece’s Fate

January 29, 2010

By Emma Ross-Thomas Jan. 29 (Bloomberg) — Spanish Finance Minister Elena Salgado presents her plan today for slashing the budget deficit by two-thirds, seeking to avoid the punishment investors have meted out to Greece. The Cabinet will discuss spending cuts of as much as 50 billion euros ($70 billion) by 2013 as well as a proposal to tighten pension rules, said an official at the prime minister’s office in Madrid who declined to be named in line with policy. The government aims to raise the retirement age to 67 from 65, Labor Minister Celestino Corbacho said today. Spain, heading for a second year of economic contraction, is under scrutiny amid investor concern that it will struggle to pay its debts, like Greece. The Greek deficit is 12.7 percent of gross domestic product. Though Spain’s national debt is about half of Greece’s, New York University Professor Nouriel Roubini said on Jan. 26 that in some ways the country has “even bigger problems” and poses a larger threat to European monetary union. “We realize that we are the target of people’s focus now, all of us together,” Alfredo Pastor , a professor at IESE business school in Madrid and former deputy finance minister, said in an interview. “We don’t all have the same problems, but we all have one problem or another.” Markets Move The euro declined to a six-month low before recovering to $1.3977 as of 8:59 a.m. in London today. The extra interest investors demand to hold Spanish debt rather than German equivalents was at 95 basis points, five times the level at the start of 2008. The extra yield investors demand to hold Greek 10-year securities widened yesterday to 395 basis points, the most in more than a decade, before easing to 383 basis points. Spain’s budget deficit probably amounted to 11.2 percent of GDP last year, according to the European Commission, which has set a 2013 deadline to cut the shortfall to 3 percent. Its debt is set to double from before the financial crisis. “The Spanish deficit is far too large,” Fitch Ratings Director Christopher Pryce said in an interview in Madrid on Jan. 27. “We would like to see the beginnings of fiscal consolidation, which means either an increase in tax, although I would prefer it to be a reduction in spending.” ‘Clear Reductions’ He’s looking for “clear reductions in current continuing spending” rather than one-off measures, he said. To shore up public finances and convince investors it was serious about its deficit pledges, the government raised taxes on income from savings and announced an increase in value-added tax to take effect July 2010. A budget cut of 50 billion euros amounts to 5 percent of GDP for the euro region’s fourth-largest economy. Portugal disappointed investors and credit-rating companies with the budget it presented to parliament on Jan. 26. Moody’s Investors Service said the “limited deficit reduction this year means that more ambitious cuts will be needed in 2011-2013” and that its current Aa2 credit rating could be at risk. Spain will also struggle to reach the EU deficit ceiling by the 2013 deadline, said Pastor. “We would have to have very high and fast growth, higher than what we can expect,” said Pastor, who as deputy finance minister in 1994 toured world capitals to reassure investors about Spain’s deficit. Surplus to Deficit Government attempts to counter the financial crisis and recession turned a 2007 budget surplus into the third-biggest euro region deficit after Greece and Ireland last year. Spain’s economy will shrink 0.6 percent this year, according to the International Monetary Fund, even as the euro region, U.K. and U.S. return to growth. Spain has one of the heaviest household-debt burdens in the region and greater than average growth in labor costs. Its 19.4 percent jobless rate, the highest in the euro area, is also swelling the deficit and threatening the recovery. Spain’s debt burden, at just 36 percent of GDP before the crisis in 2007, will still be lower than Germany’s in 2011, according to the commission. Still, concern about the debt burden has led the yield difference with Germany to almost double in past month. “With the discussion on the desolate state of Greece’s public finances, public awareness of these problems has at last risen,” Ralph Solveen , head of economic research at Commerzbank AG in Frankfurt, wrote in a note. “Along with Italy and Portugal, Spain is now regarded as another candidate for a serious crisis.” To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

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Congress Curbing Fed Undermining Confidence in U.S. Economy in Global Poll

January 20, 2010

By Rebecca Christie Jan. 21 (Bloomberg) — Investors say Congress would undermine the U.S. economy by clamping down on the Federal Reserve and predict that taxes on bank bonuses would persuade companies to move to friendlier jurisdictions. More than half the respondents in a quarterly poll of investors and analysts who are Bloomberg subscribers said that increased congressional oversight would open the U.S. central bank to political influence and hurt the Fed’s ability to conduct monetary policy. The House of Representatives has approved a proposal to submit the Fed to monetary policy audits, while the Senate is considering legislation that would remove the Fed’s authority to supervise banks. “God forbid further political meddling with one of the few institutions that functioned during the crisis,” said poll respondent Giovanni Conti , a treasury officer for the International Fund for Agricultural Development, a United Nations agency based in Rome. “This crisis has proven the need of a central control over both monetary policy and monitoring of the structure of the financial system.” Investors were critical of new financial industry taxes and regulations. By more than 2 to 1, poll respondents said taxes on bankers’ bonuses, like those imposed in the U.K. and France and being considered in the U.S., would compel at least some companies to move from those countries. Likewise, investors say President Barack Obama ’s plan for new fees on big banks, to cover as much as $117 billion in losses from the Troubled Asset Relief Program, is a bad idea. More than half of investors worldwide opposed such a plan, including more than three-quarters of U.S. respondents. Customers Bear Costs “Rather simple blanket fees on banks will do nothing to deter the excesses of risk or compensation on Wall Street, and such costs will most likely be passed onto customers through higher lending rates,” said Masahide Hoshi , a director at Phalanx Capital Management HK Ltd. in Hong Kong. “This is clearly a politically motivated proposal prior to the midterm congressional elections.” There was a pronounced regional division of opinion about Obama’s fee proposal. Only 18 percent of U.S. respondents favored the plan, which was supported by clear majorities in Europe and Asia. Almost half the investors surveyed said that limits on executive compensation would discourage useful innovation, while 40 percent said restrictions may do more to control excessive risk-taking. Bonus Taxes About four out of 10 investors said their country’s tax on bonuses was “about right,” while 46 percent said it was too high. According to the poll results, 20 percent of respondents got no bonus in 2009; 39 percent received a bonus that was neither the highest nor lowest they’ve ever received. Investors were split on the best way to prevent future taxpayer bailouts. About 42 percent cited stricter regulation of large banks, an approach that was most popular in Europe and Asia. Almost one-third of global investors said governments should allow big banks to fail, an option preferred by 43 percent of U.S. respondents and only about one-quarter of those in other countries. In the U.S. and Europe, about one in four investors said governments should break up big banks, a view shared by only 14 percent of investors in Asia. At the same time, 58 percent of U.S. respondents and 64 percent in Europe said it had been a good idea for governments to intervene with aid for big banks and investment firms. Respondents in Asia were divided on the value of bailouts. Central Banks As Congress debates the role of the Fed, the U.S. should learn from the experience of other countries before charging ahead with changes to its central bank, said John Greene , a pricing specialist at Pioneer Investment Management Ltd. in Dublin. “In Ireland, the political influence on the Central Bank of Ireland has contributed significantly to the decline in our economy,” Greene said. “A similar situation in the U.S. could easily happen. I think it would lead to a dangerous shift of economic control and power, which could lead to a long term weakening of the U.S. economy.” The quarterly Bloomberg Global Poll of investors and analysts on six continents was conducted on Jan. 19. It is based on interviews with a random sample of 873 Bloomberg subscribers, representing decision makers in markets, finance and economics. The poll has a margin of error of plus or minus 3.3 percentage points. To see the methodology and exact wording of the poll questions, click on the attachment tab at the top of the story. To contact the reporter on this story: Rebecca Christie in Washington at rchristie4@bloomberg.net .

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Europe Hits Bond Market With Sales Exceeding Pre-Lehman Levels Until 2017

January 19, 2010

By Anchalee Worrachate Jan. 19 (Bloomberg) — The European government debt deluge that left investors with the lowest relative returns since 1995 will continue for another seven years, say the officials in charge of bond sales from Frankfurt to Dublin to Helsinki. A Bloomberg News survey of 11 euro-area finance officials showed that eight forecast it will take at least until 2015 to bring the region’s debt sales down to the levels before the collapse of Lehman Brothers Holdings Inc. in September 2008. Four said it may require as much as a decade. The average prediction was that bond sales won’t return to those levels until 2017. “Bond issuance in the region might start to come down from 2011, but to drop to pre-crisis levels may take a while,” said Carl Heinz Daube , head of Germany’s Federal Finance Agency in Frankfurt. “There might be some risks of economic dips down the road. Revenue is probably not going to rise substantially, but expenditures will stay high as some governments feel the need to raise spending to cover all risks.” The forecasts suggest European bonds may continue to lag behind corporate securities for at least another year as public debt swells to 85 percent of gross domestic product this year, from 65 percent before the financial crisis began in 2007, according to Citigroup Inc. estimates. Bonds returned less than 2 percent in 2009 as sales increased 36 percent to 870 billion euros ($1.3 trillion). They’ll jump another 15 percent to a record 1 trillion euros this year, according to HSBC Holdings Plc, Europe’s biggest bank by market value. The average in the five years before the crisis was 577 billion euros, HSBC said. Four-Year Minimum Debt officials from Austria, Belgium, Finland, Germany, Greece, Ireland, the Netherlands, Portugal, Spain, Slovakia and Slovenia participated in the survey compiled Dec. 14-18. The executives, who spoke on condition that their responses weren’t attributed individually, account for almost 60 percent of the 3.8 trillion-euro government-bond market, according to Standard & Poor’s. France and Italy declined to take part. Some debt offices gave ranges for how long it will take for bond issuance to return to pre-crisis levels. The average of the longest times given was seven years. The average of the shortest times was four years. German government bonds, Europe’s benchmark debt securities, returned 1.96 percent last year, while company fixed-income securities handed investors a 14.9 percent gain, according to Bank of America Merrill Lynch indexes. The difference was the widest since the firm’s EMU Corporate Index was introduced almost 15 years ago. ‘Heavy Borrowing’ “I wouldn’t rule out further underperformance in the next few years,” said John Stopford , head of fixed income at Investec Asset Management Ltd. in London, who has increased corporate bond holdings at the expense of government debt since December for the $24 billion the company oversees. “The cyclical environment is becoming more and more problematic for government bonds. Their borrowing needs are extraordinarily heavy. There will be a tough competition for funds.” Governments are selling unprecedented amounts of debt to finance economic-stimulus measures following the worst global recession since World War II. Public debt will average more than 118 percent of gross domestic product in the Group of 20 advanced economies by 2014, up 40 percentage points from 2007, the International Monetary Fund said in a Nov. 3 report. The sales come at a time when the region’s economy is showing signs of a recovery, raising the likelihood that the European Central Bank will increase borrowing costs from record lows. Europe’s services and manufacturing industries expanded at the fastest pace in more than two years in December, London- based Markit Economics said on Jan. 6. Rates on Hold “You’ll find that yields are not particularly driven by supply, but much more by the interest-rate environment,” said Anthony Linehan , the deputy director of funding and debt management at Ireland’s National Treasury Management Agency in Dublin. “The biggest risk would be the market over-anticipating monetary tightening.” The ECB set its main refinancing rate at 1 percent for a ninth month on Jan. 14. Policy makers probably won’t raise the benchmark until the fourth quarter, lifting it to 1.50 percent, according to the median of 39 forecasts in a Bloomberg survey. The yield on the benchmark 10-year German bund will end 2010 at 3.85 percent, according to the median of 12 analyst forecasts compiled by Bloomberg. It was 3.25 percent on Jan. 18. An investor buying 1 million euros of German bunds would lose 14,642 euros by year-end, should the forecast prove correct. Crowding Out “Yields will probably rise in the context of greater supply and the early seeds of growth, but I expect the low interest-rate environment to prevail,” said Ari-Pekka Latti , head of funding at Finland’s Helsinki-based Treasury. “It’s difficult to envisage a dramatic change.” While governments are using bond markets to help finance economic stimulus, competition from companies raising funds may also push up borrowing costs, according to Anne Leclercq , head of the Belgian debt agency’s treasury and capital-market division in Brussels. Companies with investment-grade ratings raised at least 31 billion euros from bond sales last week, just 8 percent short of the record issuance in the same period a year earlier, according to data compiled by Bloomberg. At the start of last year “the only markets that existed were the sovereign bond market and bank guarantees,” Leclercq said. “We are now seeing others appearing again. The competition could be high.” Ratings Concern This year may prove “difficult” for European sovereign issuers, and the most-indebted countries may find their ratings tested, Moody’s Investors Service said in a report Jan. 13. “A key factor that has prevented complete economic and financial meltdown has been a collapse in interest rates,” Moody’s said. The cost of the crisis will be shown “if markets were to switch their concerns about weak economic activity to fears of inflation and markets rates were to rise significantly,” the New York-based ratings company said. Greece was lowered last month by Moody’s, Fitch Ratings and S&P as the government struggles to cut the European Union’s largest budget deficit. The deterioration in public finances sparked by the recession also cost Spain and Ireland their top ratings last year. ‘Stronger Doubts’ Market expectations of an increase in yields are “too aggressive,” said Andre de Silva , global deputy head of fixed- income strategy at HSBC in London. The firm forecasts German bund yields will fall to 3.10 percent by the end of this year. “The pace of economic recovery will be more of a driving factor for bonds than supply,” he said. “We have stronger doubts than the market on the expectations for economic growth. Yields may not rise as much as currently priced in.” Europe isn’t alone in raising record debt. Bond issuance in the U.S. may rise to as much as $2.5 trillion this year from $2.1 trillion in 2009, according to Barclays Capital. In the U.K., debt sales will total 225.1 billion pounds ($365.7 billion) for fiscal 2010 ending March 31, compared with an average of 55 billion pounds in the five years through 2008. All but one of the 11 government officials said they may consider selling more longer-dated securities to reduce short- term financing risks. Belgium may offer a new 30-year bond this year, the debt agency said on Nov. 13. Agence France Tresor said in Paris a week earlier that it may issue 50-year securities. Germany is increasing the proportion of its funding through longer-dated securities, agency data showed in November. “We are now focusing heavily on sovereign default risk and a prospective debt trap if these economies don’t recover quickly or aren’t able politically to deliver the fiscal consolidation that is required,” said Robin Marshall , director of fixed income in London at Smith & Williamson Investment Management, which oversees about $20 billion. “Supply is part of that. The borrowing costs and affordability can become a real issue if the economic recovery fails to develop enough momentum and real debt-service costs continue to spiral.” To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

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Hong Kong’s World-Beating Housing Prices Risk Bubble, Knight Frank Says

January 18, 2010

By Simon Packard Jan. 18 (Bloomberg) — Hong Kong home prices rose the most among the world’s major housing markets last year, according to property adviser Knight Frank LLP, adding to signs that the city may face a property bubble. Average prices climbed 33 percent, outstripping increases of 22 percent in Israel and almost 16 percent in Norway, a global index compiled by the London-based broker showed. Prices advanced in 20 of the 37 national markets covered by the index. Low interest rates and government efforts to stimulate economic growth helped halt or slow the slide in property prices across the globe. The surge in Hong Kong values, powered by demand from mainland Chinese, led the International Monetary Fund in November to urge government steps to cool the market. “It’s not just property markets which have succumbed to this exuberance — equities and commodities have seen prices pushed up sharply over the past 12 months,” said Liam Bailey , head of residential research for Knight Frank. “In Asia, new booms are developing in Hong Kong and areas of China’s more go- go eastern seaboard cities.” Hong Kong Chief Executive Donald Tsang said in his annual policy address in October that rising prices have caused concern about a possible property bubble. He told lawmakers last week that there is no “obvious bubble.” While the U.S. has returned to more sustainable levels, prices in Ireland, Spain and the U.K. are still 15 percent to 30 percent above affordability levels based on average incomes, Bailey said. Dubai was the worst-performing market in terms of prices, sliding 42 percent, followed by Bulgaria and Ireland. To contact the reporter on this story: Simon Packard in London at packard@bloomberg.net

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Believing Barclays Means Minimum 8% in Dollar-Yen Trade as Japan Retreats

January 4, 2010

By Matthew Brown Jan. 4 (Bloomberg) — For clues to why the dollar is gaining strength after its worst year since 2007, look no further than Japan. While Fed funds futures show the Federal Reserve may raise interest rates as soon as August, the Bank of Japan is likely to keep borrowing costs near zero percent through 2011 as deflation persists, according to the median estimate of economists surveyed by Bloomberg. Betting the dollar will appreciate versus the yen is the top 2010 recommendation at UBS AG, the second- largest foreign-exchange trader. For the first time since before credit markets began to seize up in 2007, investors are starting to favor selling the yen instead of the dollar to fund higher-yielding investments. The European Central Bank, grappling with debt crises in Greece, Spain and Ireland, may wait until at least October before increasing borrowing costs, a separate survey shows. “We like buying the dollar in 2010 and that’s quite a change in view,” said Adarsh Sinha , a foreign-exchange strategist at Barclays Capital in London. “We are looking for the very loose monetary conditions in the U.S. to end. The dollar will start firming up well ahead of any rate hike.” After falling 7.9 percent in the first 11 months of 2009, the Dollar Index, which measures the greenback’s performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, gained 4 percent in December. That’s the first monthly gain since June, and the biggest since it rose 5.8 percent in January. Currency Forecasts The dollar will strengthen to $1.40 per euro in 2010, from $1.4290 today, and to 100 yen, from 92.78, according to Barclays. An investor selling 12-month yen-denominated bills and buying equivalent-maturity Treasury bills and holding to maturity will earn 7.8 percent if the dollar hits Barclays’ yen target. The U.S. currency will advance 2.3 percent against the euro in 2010, according to Frankfurt-based Deutsche Bank AG, the world’s largest foreign-exchange trader. “A relative rise in U.S. rates would be dollar supportive as long as it is materializing in an environment of reasonably robust growth,” said Henrik Gullberg , a currency strategist at Deutsche Bank in London. U.S. gross domestic product will expand 2.6 percent this year, better than the 1.2 percent for the 16 euro-member nations and 1.35 percent for Japan, according to the median estimate of economists surveyed by Bloomberg. The Fed’s target rate of zero to 0.25 percent compares with 1 percent for the ECB and 0.1 percent for the Bank of Japan. Reversing Bets Slower growth outside the U.S. is turning dollar bears into bulls at a pace not seen since the third quarter of 2008, according to data from the Commodity Futures Trading Commission in Washington. Wagers by hedge funds and other large speculators that the currency will fall against the euro, yen, pound, Swiss franc, Canadian, New Zealand and Australian dollars, and the Mexican peso outnumbered bullish bets by 93,387 contracts on Dec. 22. The difference was 280,855 on Dec. 1. That’s the fastest reversal since so-called net shorts of 241,216 on July 21, 2008, turned into a net long position of 73,049 four weeks later. The Dollar Index rallied 23 percent between July 15 and Nov. 21 that year. The dollar’s December gain was a “relief bounce,” according to Gareth Fielding , who manages $2.2 billion as chief investment officer at Quantum Global Wealth Management in Zurich. Dollar Reserves That doesn’t change the fact that the U.S. is playing a smaller role in the global economy where growth is being led by China. Ultimately, that’ll mean diminishing demand for dollars, he said. “Fundamentally, things haven’t changed,” Fielding said. “The dollar’s pre-eminent role in the global economy will diminish. Central banks are likely to continue to diversify away from the U.S. dollar.” The dollar’s share of global currency reserves fell in the third quarter to the lowest level in a decade while the euro’s rose to a record, according to International Monetary Fund data released on Dec. 30. The U.S. currency’s portion dropped to 61.6 percent in the period ended Sept. 30, from 62.8 percent in the prior quarter and 64.5 percent a year earlier. The euro’s share rose to 27.7 percent from 27.4 percent. Dollar Weakness Record debt sales by the U.S. to fund a $1.4 trillion budget deficit may restrain the dollar, after Congress raised the limit on federal borrowing to $12.39 trillion. Also, the currency may remain relatively weak against the currencies of nations whose economies depend on commodities, such as Australia, New Zealand and emerging markets, according to surveys of strategists by Bloomberg News. The Australian dollar, after surging 27 percent in 2009, may rise as much as another 5.5 percent this year, forecasts show. Korea’s won will gain 7 percent, after strengthening 8.2 percent last year. “Higher-octane currencies, like the Aussie, the kiwi and the emerging-market currencies such as the won, might perform the best, followed by the dollar, and lagging the whole bunch will be the euro and the yen,” said Stephen Jen , a money manager at BlueGold Capital Management LLP in London and the former head of foreign exchange at Morgan Stanley. Signs of an improving U.S. economy are pushing up interest rates, making some dollar assets more attractive than those priced in the euro or the yen. Rate Outlook The premium investors demand to own 10-year U.S. Treasuries against equivalent-maturity Japanese government bonds rose to 2.58 percentage points today, the most since December 2007. U.S. 10-year yields were 0.49 percentage point more than German bunds on Dec. 22, the biggest gap since July 2007. The Fed will increase its target rate for overnight loans between banks as much as 0.75 percentage point by the end of the year, according to the median of 68 forecasts compiled by Bloomberg. The ECB will raise its main rate by half a percentage point, based on the median of 16 forecasts, and the BOJ will leave its target unchanged, according to 21 predictions. As U.S. rates rise, the yen may regain its role as the pre- eminent currency for carry trades, taking over from the dollar. The cost of borrowing dollars for three months between banks in London fell below the equivalent yen rate for the first time in 16 years in August. The three-month London interbank offered rate, or Libor, for such loans in dollars was 2.69 basis points lower than yen Libor on Dec. 31, compared with 7.25 basis points on Sept. 8. A basis point is 0.01 percentage point. Japanese Deflation “We see an intensification of the long-term carry trade where Japanese investors send money abroad,” said Geoffrey Yu , a foreign-exchange strategist at UBS in London. “They’ll get even more interested in sending money overseas as the BOJ keep rates low.” Japanese consumer prices have fallen on an annual basis since February. BOJ Governor Masaaki Shirakawa told TV Tokyo on Dec. 21 that the central bank will “persistently” keep rates at “virtually zero” to fight deflation. UBS expects the dollar will appreciate above 100 yen this year, compared with the median estimate of 98 in a survey of 38 strategists and economists. Strategists are struggling to keep up with the currency’s gain versus the euro. A separate survey shows they expect it to rise every quarter this year, to $1.45 by year-end from $1.51 in the first three months. ‘Catch-22’ In Europe, Greece’s credit was downgraded last month by Standard & Poor’s and Fitch Ratings after the government failed to sufficiently address its growing fiscal deficit in its 2010 budget. The outlook on Spain’s AA+ rating was lowered to “negative” by S&P as it predicted the debt burden will rise to as much as 90 percent of GDP by the middle of this decade. German Chancellor Angela Merkel said on Dec. 10 Europe has a “responsibility” to help Greece. A day later, ECB President Jean-Claude Trichet said the country must take “courageous action” on its own. “The euro-zone is in a Catch-22,” said Yu. “If they bail out the weak countries you rip apart the stability pact and introduce a huge moral hazard. If you don’t, you risk destabilization. It’s a significant risk for the euro and I don’t think there’s a plan.” Dollar bulls are encouraged by trading that shows the currency has started to rally in response to better-than- forecast economic news. For much of the past two years, the greenback weakened on signs of a recovery, which encouraged traders to borrow in dollars and use the proceeds to buy riskier assets outside the nation. Withdrawing Reserves The Dollar Index surged to a three-month high on Dec. 22 after an industry report showed sales of existing homes rose in November more than economists estimated. The Fed is taking steps to begin withdrawing money from the financial system. Policy makers will end most emergency lending programs and debt purchases by March because of “improvements in the functioning of financial markets” and stabilizing labor markets, the Federal Open Market Committee said on Dec. 16. “In the U.S., the political incentive is to keep the fiscal stimulus going, pressuring the Fed to tighten early,” said Jen, who sees the dollar strengthening to $1.35 per euro this year. “The political incentive in Europe is to start to tighten on the fiscal front as fast as possible, putting pressure on the ECB to keep policy loose. That’s more constructive for the dollar than the euro.” To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net

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European Stocks Rise for Second Week; 600 Index Heads for Best Year in 10

December 26, 2009

By Adam Haigh Dec. 25 (Bloomberg) — European stocks rose for a second week, with the benchmark Dow Jones Stoxx 600 Index heading for its largest annual increase in a decade, amid signs the global economy is recovering. Royal Dutch Shell Plc and Total SA led gains among oil producers as crude advanced after stockpiles of the commodity fell more than expected. Allied Irish Banks Plc rallied after saying it is looking at ways to raise capital next year. The Stoxx 600 gained 2.3 percent this past week to 251.9, extending its 27 percent rally this year. Most equity markets across Europe were closed yesterday and all are closed today for Christmas vacation. A 59 percent surge on the regional benchmark gauge from March has been spurred by record-low interest rates in the U.S. and Europe and by governments worldwide that have committed about $12 trillion to revive credit markets and stimulate economic growth. Sales of existing homes in the U.S. topped forecasts Dec. 22, the latest sign the world’s largest economy is emerging from recession. “Markets still look to be reasonably good value and we expect profits are going to grow pretty quickly next year,” said Kevin Gardiner , the London-based head of investment strategy at Barclays Wealth, in a Bloomberg Television interview. Earnings for companies in the Stoxx 600 are expected to climb 29 percent next year, according to data compiled by Bloomberg. That compares with a forecast for a 7.4 percent increase in 2009 profits. Earnings Growth European equity strategists said earnings growth can push stocks 11 percent higher in 2010 following this year’s rally, according to a Dec. 22 survey. Goldman Sachs Group Inc. and Bank of America Corp., which underestimated the strength of this year’s gains, predict shares in the region may climb more than 20 percent over the next 12 months. Morgan Stanley is the only brokerage among 16 surveyed by Bloomberg to estimate a retreat by year-end, saying the withdrawal of government stimulus will weigh on equities. Lower than normal trading volumes this week may continue next week, according to market analyst Cameron Peacock at IG Markets in Melbourne. All western European equity markets will be closed Jan. 1 for a holiday and the U.K. market is closed Dec. 28. The U.K.’s FTSE 100 climbed 4 percent this week, while France’s CAC 40 rose 3.1 percent. Germany’s DAX gained 2.2 percent as Infineon Technologies AG surged on a revised sales estimate. Shell Shell, Europe’s largest oil producer, gained 6.7 percent and Total, the third-biggest, added 5.8 percent. Crude oil climbed as a government report showed a larger-than-expected decline in U.S. stockpiles and amid the latest signs the economy is recovering from its recession. Oil and gas companies rose more than any of the other 19 industry groups on the Stoxx 600. Sales of existing U.S. homes rose more than forecast in November, to the highest level in more than two years, a National Association of Realtors report showed Dec. 22. Allied Irish Banks surged 15 percent and Bank of Ireland soared 19 percent, the two biggest movers on the Stoxx 600 this week. Allied Irish shareholders approved its participation in a so-called bad bank that will buy loans from lenders at an average 30 percent discount, reflecting a fall in land values over the past two years. The bank said it may need to rely on the government after it transfers loans to the bad bank. The government already has a 25 percent stake in each of the two largest Irish banks. Infineon, Debenhams Infineon Technologies climbed 5.9 percent after Europe’s second-largest chipmaker said revenue will grow by a better- than-expected “high single digit” in the quarter ending Dec. 31 on improved sales in the automotive and industrial units. Debenhams lost 1.5 percent, paring its rally this year to 234 percent. UBS AG added the U.K.’s second-largest department-store chain to its “least preferred” list of stocks. UBS said “we see a higher risk to Christmas sales performance given the strong showing last year, a mild autumn and the recent cold snap which we think may have affected footfall,” according to a report sent to clients. To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net .

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Ex-UBS Banker Urges Irish to Exit Euro, Mind Ms. Pencil Skirt: Interview

December 20, 2009

Interview by Dara Doyle Dec. 21 (Bloomberg) — David McWilliams is standing in a kitchen that now lives in Irish infamy. It was here, amid the hills of affluent Killiney near Dublin Bay, that the red-haired former investment banker received Finance Minister Brian Lenihan as the Irish banking system slid to the brink of collapse in September 2008. At the time, Lenihan was telling the public that the banks were fine. Yet here he was going behind the backs of ministry officials, McWilliams says, and seeking advice from an ex- UBS AG banker who was Ireland’s equivalent of Dr. Doom. Over tea, digestive biscuits and garlic bulbs that the “nervous and fidgety” Lenihan ate to keep healthy and alert, McWilliams sketched a plan for the state to guarantee bank deposits and debts, he says. Two weeks later, Lenihan followed that counsel. McWilliams includes that vignette in “Follow the Money,” the third book in a trilogy that tracks the boom and bust of Ireland through composite portraits of real people who’ve lived through a tumultuous decade. We sat down to talk in his sitting room, surrounded by books and locked away from Sasha, the yellow Labrador that slept at Lenihan’s feet during his clandestine visit. Our conversation touched on “Follow the Money,” the future of Irish banks and the republic’s adoption of the euro. Doyle: What’s “Follow the Money” about? McWilliams: The book is the end of the trilogy, so it’s more or less a complete arc. It’s about the generation who could have had everything and did have everything for a while but was betrayed. Breakfast Roll Man Doyle: Tell us about a couple of the main characters. What became of Breakfast Roll Man? In your first book, he was making a fortune working on construction sites and surviving on sausage, rasher, hash brown, black pudding, tomato, egg and mushroom crammed into a baguette. McWilliams: He was representative of the new Ireland –cash in his back pocket, irreverent, clever. He could see what was going on. Doyle: Did he get out of the market in time? McWilliams: He got out. I was in Australia last year, and met a Breakfast Roll Man, and he said, “I’m completely out.” A lot of straightforward, hardworking people got out. A lot of more bourgeois people who looked down their noses at Breakfast Roll Man got nailed . Doyle: What about Ms. Pencil Skirt, who moved back to Dublin from London in 2005 to work in public relations? McWilliams: She gets fired in 2007. Initially, she’s very disheartened and doesn’t know how to gauge the whole thing. But then she figures out that we don’t have to save the banks, we don’t have to have a currency that doesn’t makes sense. Bank Plan Doyle: So the first part of your bank plan is to renegotiate with bondholders? McWilliams: We, the Irish people, didn’t borrow money from Deutsche Bank ; Allied Irish Banks did. It’s nothing to do with us. Doyle: We should try to sell off our banks? McWilliams: BNP Paribas — a French bank, great balance sheet — why wouldn’t it want AIB? Why wouldn’t it want to expand into Ireland? Huge deposit base, great retail base, but it has these debts. So what you do, in normal situations, is you get a buyer. And you say to the buyer, “If you have any problems with the debt on the balance sheet, do a deal with the creditors , and they take 20 cents on the dollar.” Drop the Euro? Doyle: And Ireland should exit the euro? McWilliams: We have the worst combination — a weak country with an overvalued currency. If you were a Martian and came down here, you would conclude Ireland is not an appropriate member of the euro zone. Do we have the courage to admit that? Would the chaos of the transfer overwhelm the long-term positives? That’s a fair argument to have. Doyle: The government has already dismissed the idea of exiting the euro. McWilliams: I’m happy to be a heretic. The history of the last five years says that what is radical becomes mainstream, and what is regarded as outlandish becomes consensus as the economic tectonic plates move. Doyle: Did the central messages in “Follow the Money” get lost amid the controversy over the Lenihan revelations? McWilliams: Yeah, half of it was my fault. Sometimes in Ireland if you stick your head above the parapet, you get shot down. It gets nasty. I was surprised, because I’m naive. I’m a child-like person; I don’t think three steps ahead. I felt like a bold child in school. Doyle: Was it a mistake to disclose the meeting? McWilliams: It was not a mistake. The real betrayal of trust in Ireland has been a government that has broken the economy. That’s a much bigger crime. “Follow the Money” is published by Gill & Macmillan (296 pages, 16.99 euros). ( Dara Doyle writes for Bloomberg News. The opinions expressed are his own. This interview was adapted from a longer conversation.) To contact the reporter on the story: Dara Doyle in Dublin at ddoyle1@bloomberg.net

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Dollar Rises as Greek Downgrade Fans Safety Demand; Stocks, Copper Decline

December 17, 2009

By Justin Carrigan Dec. 17 (Bloomberg) — The dollar rose to the highest level in three months against the euro while stocks and commodities fell as Greece’s downgrade fanned concern that spiraling national debts may hamper the global economic recovery. The U.S. currency also advanced against all but one of its 16 most-traded peers at 10:19 a.m. in London after the Federal Reserve indicated yesterday that it may begin to scale back emergency-lending programs. The MSCI World Index of 23 developed nations’ stocks slipped 0.6 percent. Europe’s Dow Jones Stoxx 600 Index snapped a five-day rally, falling 0.2 percent. Copper declined 0.9 percent and crude oil retreated 0.5 percent. Standard & Poor’s decision yesterday to reduce Greece’s credit rating for the second time this year raised concern among investors that the worst global recession since World War II is still weighing on some economies. At the same time, the Fed said after a two-day meeting that most of its lending programs will expire as scheduled Feb. 1 because of “improvements in the functioning of financial markets.” “All eyes are on Greece, and to a lesser extent Spain and the U.K.,” said Luca Cazzulani , a fixed-income strategist at UniCredit SpA in Milan. “The situation requires a lot of prudence right now” from investors, he said. Retreat From Risk Investors retreated from higher-yielding assets to the safety of dollars, Treasuries and the yen. The dollar climbed as much as 1.2 percent against the euro to its highest level since Sept. 8 and the yen rose against 13 of the 16 most-traded currencies, adding 1 percent compared with the European currency. Government bonds advanced, with the yield on the 10- year Treasury note falling 3 basis points to 3.56 percent. Greek bonds tumbled, sending the 10-year note yield up 27 basis points to 5.78 percent. Credit-default swaps linked to Greek debt rose 13.5 basis points to 252.5, according to CMA DataVision, the highest level since March. Greek stocks led the declines in Europe , with the Athens Stock Exchange General Index falling 1.2 percent. National Bank of Greece SA, the nation’s biggest lender, slipped 2.5 percent in Athens. Bank of Ireland Plc and Allied Irish Banks Plc declined at least 3 percent in Dublin. The MSCI Asia Pacific Index fell 0.9 percent. Westpac Banking Corp. dropped 1.1 percent in Sydney and China Overseas Land & Investment Ltd. lost 2.1 percent in Hong Kong. National Australia Bank Ltd. slid 4.7 percent after saying it will sell stock to fund the purchase of AXA Asia Pacific Holdings Ltd. Emerging Markets The MSCI Emerging Markets Index fell 0.8 percent, the steepest decline in seven days, exceeding the decline in the world index. Developing-nation bonds dropped, sending the extra yield investors demand to own the debt over U.S. Treasuries up 3 basis points to 2.98 percentage points, according to JPMorgan Chase & Co.’s EMBI+ Index. All 19 major emerging-market currencies that traded against the dollar weakened, led by declines of more than 1 percent in Hungary’s forint and the Russian ruble. Futures on the Standard & Poor’s 500 Index slid 0.3 percent, indicating the benchmark gauge for U.S. equities may pare yesterday’s 0.1 percent advance. The index of leading economic indicators probably rose for an eighth month in November, indicating growth will extend through the first half, economists said before a report due at 10 a.m. in New York. Copper for delivery in three months declined 1.6 percent on the London Metal Exchange, leading a retreat in industrial metals. Crude oil for January delivery fell 1.2 percent to $71.80 a barrel in New York trading. Gold for immediate delivery dropped 0.9 percent to $1,125.70 an ounce in London as the stronger dollar diminished the appeal of the metal. To contact the reporter on this story: Justin Carrigan in London at jcarrigan@bloomberg.net

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Dollar Rises as Greek Downgrade Fans Safety Demand; Stocks, Copper Decline

December 17, 2009

By Justin Carrigan Dec. 17 (Bloomberg) — The dollar rose to the highest level in three months against the euro while stocks and commodities fell as Greece’s downgrade fanned concern that spiraling national debts may hamper the global economic recovery. The U.S. currency also advanced against all but one of its 16 most-traded peers at 10:19 a.m. in London after the Federal Reserve indicated yesterday that it may begin to scale back emergency-lending programs. The MSCI World Index of 23 developed nations’ stocks slipped 0.6 percent. Europe’s Dow Jones Stoxx 600 Index snapped a five-day rally, falling 0.2 percent. Copper declined 0.9 percent and crude oil retreated 0.5 percent. Standard & Poor’s decision yesterday to reduce Greece’s credit rating for the second time this year raised concern among investors that the worst global recession since World War II is still weighing on some economies. At the same time, the Fed said after a two-day meeting that most of its lending programs will expire as scheduled Feb. 1 because of “improvements in the functioning of financial markets.” “All eyes are on Greece, and to a lesser extent Spain and the U.K.,” said Luca Cazzulani , a fixed-income strategist at UniCredit SpA in Milan. “The situation requires a lot of prudence right now” from investors, he said. Retreat From Risk Investors retreated from higher-yielding assets to the safety of dollars, Treasuries and the yen. The dollar climbed as much as 1.2 percent against the euro to its highest level since Sept. 8 and the yen rose against 13 of the 16 most-traded currencies, adding 1 percent compared with the European currency. Government bonds advanced, with the yield on the 10- year Treasury note falling 3 basis points to 3.56 percent. Greek bonds tumbled, sending the 10-year note yield up 27 basis points to 5.78 percent. Credit-default swaps linked to Greek debt rose 13.5 basis points to 252.5, according to CMA DataVision, the highest level since March. Greek stocks led the declines in Europe , with the Athens Stock Exchange General Index falling 1.2 percent. National Bank of Greece SA, the nation’s biggest lender, slipped 2.5 percent in Athens. Bank of Ireland Plc and Allied Irish Banks Plc declined at least 3 percent in Dublin. The MSCI Asia Pacific Index fell 0.9 percent. Westpac Banking Corp. dropped 1.1 percent in Sydney and China Overseas Land & Investment Ltd. lost 2.1 percent in Hong Kong. National Australia Bank Ltd. slid 4.7 percent after saying it will sell stock to fund the purchase of AXA Asia Pacific Holdings Ltd. Emerging Markets The MSCI Emerging Markets Index fell 0.8 percent, the steepest decline in seven days, exceeding the decline in the world index. Developing-nation bonds dropped, sending the extra yield investors demand to own the debt over U.S. Treasuries up 3 basis points to 2.98 percentage points, according to JPMorgan Chase & Co.’s EMBI+ Index. All 19 major emerging-market currencies that traded against the dollar weakened, led by declines of more than 1 percent in Hungary’s forint and the Russian ruble. Futures on the Standard & Poor’s 500 Index slid 0.3 percent, indicating the benchmark gauge for U.S. equities may pare yesterday’s 0.1 percent advance. The index of leading economic indicators probably rose for an eighth month in November, indicating growth will extend through the first half, economists said before a report due at 10 a.m. in New York. Copper for delivery in three months declined 1.6 percent on the London Metal Exchange, leading a retreat in industrial metals. Crude oil for January delivery fell 1.2 percent to $71.80 a barrel in New York trading. Gold for immediate delivery dropped 0.9 percent to $1,125.70 an ounce in London as the stronger dollar diminished the appeal of the metal. To contact the reporter on this story: Justin Carrigan in London at jcarrigan@bloomberg.net

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Greece Borrows Privately With Banks as Debt Downgrade Drives Yields Higher

December 16, 2009

By Anna Rascouet and Anchalee Worrachate Dec. 16 (Bloomberg) — Greece sold 2 billion euros ($2.9 billion) of floating-rate notes privately to banks, eight days after Fitch Ratings downgraded the nation’s debt as the government struggles to cut the European Union’s largest budget deficit, two bankers familiar with the transaction said. The securities, which mature in February 2015, will yield 250 basis points, or 2.5 percentage points, more than the six- month euro interbank offered rate, or Euribor , they said. That’s 30 basis points higher than a similar-maturity Greek fixed- rate bond when converted into a floating rate of interest, according to data compiled by Bloomberg. Greek bonds have fallen in the past week, with two-year note yields rising by the most in more than a decade on Dec. 8, when Fitch cut the nation’s credit rating to BBB+, the lowest in the euro region, citing the “vulnerability” of the nation’s finances. Prime Minister George Papandreou has been unable to convince investors he can reduce a deficit the government says will rise to 12.7 percent of gross domestic product this year, after the economy shrank 1.7 percent in the third quarter. “Selling bonds via a private placement can be a double- edged sword at this point,” said Luca Cazzulani , a fixed-income strategist in Milan at UniCredit Markets & Investment Banking. “On the one hand, it shows that Greece can always find buyers for their bonds. But the market might take it as a sign that they only have this channel left.” Widening Spread Greek bonds rose snapped two days of declines today, with the yield on the 10-year note dropping 11 basis points to 5.62 percent as of 10:26 a.m. in London. It rose as much as 29 basis points yesterday to 5.76 percent, the highest since April 3. Concern some countries may struggle to pay their debt was reignited after Dubai’s state-owned Dubai World said on Dec. 1 it wanted to restructure $26 billion of debt. The premium, or spread, investors demand to hold Greek 10-year bonds instead of German bunds, Europe’s benchmark government securities, rose as high as 250 basis points yesterday, the highest closing level since April 2. It narrowed to 239 basis points today. The participating banks in yesterday’s private placement were National Bank of Greece SA , Alpha Bank AE, EFG Eurobank Ergasias SA, Piraeus Bank SA and Banca IMI SpA , the bankers familiar with the transaction said. Italy’s Banca IMI was the only foreign-based in the group. Worst Performers The government paid “generous” terms, said Wilson Chin , a fixed-income strategist in Amsterdam at ING Groep NV. “I guess you have to pay some liquidity premium, given the sale was done at the end of the year,” he said. “I would be very surprised if they continue to use this method into the first quarter of next year. That would probably be taken as a sign the market isn’t working for them.” Greek bonds are the worst performers after Ireland among the debt of so-called peripheral euro-region countries this year, handing investors a 3.5 percent return, according to Bloomberg/EFFAS indexes. In a private placement, issuers offer securities directly to chosen private investors as opposed to selling them through an auction or via a group of banks. Papandreou pledged in a speech two days ago to begin reducing the nation’s debt, set to exceed 100 percent of GDP this year, from 2012. The European Commission estimates the ratio at 112.6 percent of GDP this year, second only to Italy. “In the next three months we will take those decisions which weren’t taken for decades,” Papandreou said in Athens. He said many choices will be “painful,” though he promised to protect poorer and middle-income Greeks. Credit-default swaps on Greece rose 1 basis point to 238.5, according to CMA DataVision, after surging 25.5 basis points yesterday. Such swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should an issuer fail to adhere to its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. To contact the reporters on this story: Anchalee Worrachate in London at Anna Rascouet in London at arascouet@bloomberg.net ;

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Dollar Rises to Two-Month High as Retail, Sentiment Spur Fed Rate Outlook

December 12, 2009

By Ben Levisohn and Ye Xie Dec. 12 (Bloomberg) — The dollar advanced to a two-month high against the euro as a bigger-than-forecast increase in retail sales and consumer sentiment indicated the U.S. economic recovery may be gaining momentum. New Zealand’s dollar posted its biggest weekly gain in a month against the greenback after Reserve Bank Governor Alan Bollard said he expected to begin raising interest rates in the middle of 2010. Federal Reserve Chairman Ben S. Bernanke said this week a “moderate” pace of U.S. expansion is likely. Officials will decide on policy at their Dec. 15-16 meeting. “We are dollar bulls,” said David Forrester , a currency economist at Barclays Plc, in an interview on Bloomberg Television. “Data will continue to surprise on the upside.” The dollar appreciated 1.7 percent to $1.4615 per euro this week, from $1.4858 on Dec. 4. It touched $1.4586 yesterday, the strongest level since October. The dollar decreased 1.6 percent to 89.10 yen, from 90.56. The euro dropped 3.2 percent to 130.24 yen, from 134.54. Sterling fell for a fourth consecutive week, declining 1.3 percent to $1.6259 on concern the U.K. government’s budget deficit will keep growing as the government spends more money to revive the economy. Chancellor of the Exchequer Alistair Darling told lawmakers that Britain’s budget deficit will be 611 billion pounds ($990 billion) in the next four years, 5 billion pounds more than previously forecast. Bank of England The Bank of England left its main rate at a record low 0.5 percent and maintained its asset-buying program at 200 billion pounds. The Dollar Index , which the ICE futures exchange uses to track the greenback versus currencies including the euro, yen and pound, increased 0.9 percent to 76.565 this week, from 75.911 on Dec. 4. It touched 76.726 yesterday, the highest level since Nov. 3. The gauge of the dollar tumbled 5.8 percent this year as signs of global economic recovery led investors to buy higher- yielding assets with amounts borrowed in the greenback. A target lending rate of virtually zero made the dollar popular for funding such transactions. The trading pattern shifted on Dec. 4, when an unexpected drop in the U.S. unemployment rate to 10 percent pushed the Dollar Index up 1.7 percent. The index increased 0.7 percent on yesterday’s retail and consumer sentiment reports. “That the dollar strengthened against the euro changes this risk-on, risk-off scenario,” said Andrew Busch , a global currency and public policy strategist at Bank of Montreal in Chicago. The trade “will morph into something else.” Retail Sales U.S. retail sales rose 1.3 percent in November after climbing a revised 1.1 percent in the prior month, the Commerce Department reported yesterday. The median forecast of 79 economists in a Bloomberg survey was for a 0.6 percent gain. The Reuters/University of Michigan preliminary index of consumer sentiment increased to 73.4 for December, compared with 67.4 in the previous month. The median forecast of 71 economists in a Bloomberg survey was for an advance to 68.8. “I can imagine economic data turning in favor of the U.S. compared with Europe or Japan,” said Sebastien Galy , a currency strategist at BNP Paribas Securities SA in New York. The euro fell this week against the yen on speculation the credit ratings of more European nations will be lowered. Greece and Ireland are in an “intolerable” economic situation that may lead to bailouts and exits from the euro region before the end of 2010, Steve Barrow , head of Group of 10 foreign-exchange strategy in London at Standard Bank, wrote in a research note yesterday. Spain’s Credit Spain saw the outlook on its AA+ debt rating cut to “negative” from “stable” by Standard & Poor’s this week. Greece’s credit was reduced one step to BBB+ by Fitch Ratings. Portugal’s outlook was also revised to “negative” from “stable” by S&P. New Zealand’s dollar advanced 1.2 percent to 72.47 U.S. cents this week after the nation’s Reserve Bank said it will raise borrowing costs sooner than it previously indicated as a stronger housing market helps boost the economy. The official cash rate was held at a record low 2.5 percent. The Fed will hold the target lending rate at zero to 0.25 percent at the conclusion of its meeting next week, according to all of the 91 economists in a Bloomberg survey. The U.S. economy faces “formidable headwinds” including a weak labor market and tight credit, Bernanke said on Dec. 7 in a Washington speech. Mexican Peso Drops Mexico’s peso posted its biggest weekly decline against the dollar since September, weakening 1.7 percent to 12.8843 on concern the appointment of a new finance minister will weigh on Latin America’s second-largest economy. President Felipe Calderon said this week that Social Development Minister Ernesto Cordero will replace Finance Minister Agustin Carstens , who was nominated to be the central bank’s governor. “This is Mexico’s weak spot,” said Win Thin , senior currency strategist at Brown Brothers Harriman & Co. in New York. “It’s another reason to be a bit bearish on the peso.” To contact the reporters on this story: Ben Levisohn in New York at blevisohn@bloomberg.net ; Ye Xie in New York at yxie6@bloomberg.net

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Ireland, Like Wall Street, `Went Too Far’ in Boom, Ambassador Rooney Says

December 11, 2009

By Dara Doyle and Louisa Fahy Dec. 11 (Bloomberg) — Property developers in Ireland “went too far” during the real estate boom, according to Dan Rooney, the U.S. ambassador to the country. “There were many developments all over the place: houses, buildings, different programs,” Rooney, 77, co-owner of the Super Bowl-winning Pittsburgh Steelers, said in an interview in his Dublin office. “We did the same thing on Wall Street. This seems to be human nature. We have to overcome it.” Ireland’s economy, once the most dynamic in Europe, is shrinking at the fastest pace in the euro region, as a decade- long property boom shuddered to a halt. Gross domestic product will shrink about 7.5 percent this year, as companies including Royal Bank of Scotland Group Plc and Dell Inc. cut jobs. Home prices have fallen by about 45 percent from their peak in 2007, and Prime Minister Brian Cowen’s government is setting up a state asset agency to purge lenders led by Allied Irish Banks Plc of souring real-estate loans. “I knew coming here there was a problem with the economy,” said Rooney, whose father started the Pittsburgh team 1933. “But maybe it was a little deeper than I thought.” The agency is a “necessity,” Rooney said, adding the economy still faces “major problems.” “The leadership is doing everything they can. They are capable.” Tough 2010 Rooney said the global economy is in a “tough situation” and will struggle next year before recovering. The so-called Celtic Tiger decade produced enough positive changes to help Ireland emerge from the recession, he said. “The U.S. has made the turn,” said Rooney, who took up his job in July. Ireland has “bottomed out, and is beginning to make a little bit of a turn.” On May 4, President Barack Obama said he planned to raise about $190 billion during the next 10 years partly by curtailing the ability of U.S.-based multinationals to write off the costs of overseas units against domestic tax liabilities. That sparked concern that U.S. companies operating in Ireland including Microsoft Corp. , the world’s largest software maker, and Intel Corp., the largest maker of computer chips, may limit overseas investment. Rooney said Obama doesn’t consider Ireland to be a tax haven and that U.S. companies operating in the country aren’t going to be at a “grave disadvantage.” “Are they going to pay more taxes?” he said. “We’ll have to wait to see.” To contact the reporters on this story: Dara Doyle in Dublin at ddoyle1@bloomberg.net Louisa Fahy at lnesbitt@bloomberg.net

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Video: FT’s Stovin-Bradford Discusses Greece, Spain Debt Woes: Video

December 11, 2009

Dec. 11 (Bloomberg) — Richard Stovin-Bradford of the Financial Times’ Lex commentary team talks with Bloomberg’s Erik Schatzker about how Greece, Spain and Ireland are handling their debt and economic troubles. (Source: Bloomberg)

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Greece’s Papaconstantinou Under Siege as Deficit Woes Hurt Ratings, Bonds

December 11, 2009

By Maria Petrakis Dec. 11 (Bloomberg) — Greek Finance Minister George Papaconstantinou began the week with his office protected by baton-wielding riot police taming student protests. Now, investors have him under siege as the country’s bonds tumble . “Things are difficult, there’s no question about it,” he said in an interview yesterday in his office overlooking Syntagma Square, the hub of downtown Athens. “It’s a very hard fiscal situation. It’s not one that’s not reversible.” Papaconstantinou, 48, has spent much of the past week reassuring investors and European leaders that Greece won’t default on its $350 billion in debt , its banks will keep access to European Central Bank financing and Prime Minister George Papandreou understands the worst fiscal crisis in 15 years. Greek bonds plunged to their lowest in seven months on Dec. 9 and stocks slumped after Fitch Ratings cut Greece one step to BBB+, saying Papandreou’s two-month-old government isn’t doing enough to tame a deficit of 12.7 percent of output, the highest in the European Union. A day earlier, Standard & Poor’s put its A- rating on watch for downgrade. The yield on Greece’s 2-year bond has surged 127 basis points to 3.15 percent this week, driving it above Turkey’s for the first time. “I spent two hours on the phone with the finance minister a couple of days ago, and he understands the position they’re in,” Fitch analyst Christopher Pryce said in an interview on Dec. 9. “I am not convinced that the cabinet, even the prime minister, understand just how severe the situation is.” Courage Needed European officials added to pressure on Greece. ECB President Jean-Claude Trichet said Dec. 9 that “courageous” action to close the budget gap. Economists pointed to Ireland’s decision to cut wages for public servants, compared with Greece’s 1.5 percent pay increase for most workers. The market turmoil coincided with social unrest as Greek police clashed with 5,000 protesters one year after the fatal shooting of a teenager by police, which damaged the former government of Kostas Karamanlis. Papandreou appointed Papaconstantinou, who holds a doctorate from the London School of Economics, after he led the socialists to victory in October elections, winning a 10-seat majority in parliament. While the party won on a platform of higher wages that contrasted with Karamanlis’s pledges for a pay freeze, Papaconstantinou was within weeks forced to publish revised figures that cast doubt over Greece’s fiscal health. Recession Data showed Greece’s deficit this year would be more than twice the previous government’s forecasts and four times the EU limit. Other revisions showed that, rather than being one of the few European economies still growing amid the worst global slump since World War II, Greece had been in a recession for a year. Papaconstantinou’s defends his government’s strategy to reduce the deficit by more than 3 percentage points of GDP to 9.1 percent next year. “What exactly has changed in the last 40 days to justify a downgrade?” he said of the Fitch decision. Greece needs to show that it will do more than rely on optimistic revenue forecasts and one-time measures to achieve those gains, economists say. “Political pressure is mounting for the government to start taking bold action,” Giada Giani , an economist at Citigroup Inc. in London wrote in a note to investors. About 75 percent of the current deficit reduction plan comes from raising revenue rather than cutting spending, Deutsche Bank AG estimates. Much of that will come from a crackdown on tax evasion, a chronic problem in Greece that a series of governments have pledged to combat. New Plan Now after just two months as finance minister and with the rating companies circling, Papaconstantinou must design a new plan due in January to convince EU leaders that Greece is serious about cutting the deficit and deserves an extension of the 2010 deadline to get its shortfall back within the EU limit. “Rating agencies and EU institutions will probably want to see much more structural measures than currently announced to tackle the deficit, aimed at permanently and credibly increasing tax revenues and tackling age-related soaring public spending,” Giani said. Nevertheless, talk of a default may be overblown because the rest of the EU would probably help Greece, says the head of the Organization for Economic Cooperation and Development. “The question of the ratings is perhaps of less consequence than one should think,” said Secretary General Angel Gurria in an interview yesterday. OECD Experience Papaconstantinou, married with two sons aged 14 and 11, says 10 years as an economist at the OECD will help him argue his case in Europe. “You have to be able to have a presence around the Eurogroup table; you need to know what you’re talking about,” he said. “Especially because the issues have become infinitely more complicated than they have been in the past. For now, Papaconstantinou says the force of the bond market isn’t disrupting his life as it might other people. “Actually I sleep quite well,” he said. “I think that’s one of the big advantages I have. I’m fairly level-headed in general and even though I do worry about things they don’t keep me up at night.” To contact the reporter on this story: Maria Petrakis &cle; in Athens at mpetrakis@bloomberg.net

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Ireland Cuts Pay for Nurses, Police as Government Struggles to Lower Debt

December 10, 2009

By Colm Heatley and Ian Guider Dec. 10 (Bloomberg) — Ireland faces “more pain” after the government pledged to continue cuts to help calm investor concern that the country will struggle to pay its bills. Finance Minister Brian Lenihan , who announced pay cuts for teachers, nurses and police in his 2010 budget late yesterday, will reduce current spending by a combined 6 billion euros ($8.8 billion) over the next two years. He’s aiming to narrow the deficit to 2.9 percent of gross domestic product by 2014 from 11.7 percent this year. “The budget distributes an awful lot of pain,” said Simon Barry , an economist at Ulster Bank Ltd. in Dublin, a unit of Royal Bank of Scotland Group Plc. “But the reality is there is more to come.” Ireland is suffering from the worst recession in its modern history as it grapples with the fallout of a property- market crash and the near collapse of its banking system. The budget came amid continued concerns about debt-laden nations after Fitch Ratings cut its rating on Greece’s debt by one step to the third-lowest investment grade and Standard & Poor’s revised Spain’s outlook to negative. “By taking the difficult but necessary measures now, we will rebuild our nation’s self confidence here at home and our reputation abroad,” Lenihan said. “The worst is over.” Spreads Fitch’s decision on Dec. 8 to cut Greece’s rating, combined with the Dubai debt crisis, which pushed up the risk premiums of countries such as Ireland, increased pressure on Lenihan to deliver on his budget savings. The difference in yield , or spread, between 10-year Irish bonds and equivalent German bunds widened 2 basis points to 192 basis points. It’s widened almost 40 basis points in the last two weeks, while the gap between Greece and Germany jumped 68 basis points in that period to the widest since April 3. “2011 is an important year,” Colm McCarthy , an economics at University College Dublin, who headed the government’s spending group, said in an interview with state broadcaster RTE today. “If the government can stick to its plans, by the middle of the year people ought to have at least begun to see the winning post.” Pay Cuts Lenihan’s 2014 deficit target would bring the country into line with European Union rules, which set a shortfall limit of 3 percent of GDP. Ireland will still have a debt-to-GDP ratio of about 80 percent, almost double the level at the end of 2008. About 1 billion euros will be cut from the public services bill, Lenihan said in his budget speech. Prime Minister Brian Cowen will take a 20 percent pay cut and other ministers will have their salaries reduced by 15 percent, so “those at the top lead by example,” he said. Ireland will cut public workers’ pay by as much as 10 percent. It will also reduce welfare payments for some unemployed and cut child benefit by 16 euros a month, leading to a reduction of 760 million euros in the welfare bill next year. Lenihan, who indicated some taxes could rise in 2011, may face a period of industrial unrest. About 250,000 government workers went on strike last month in anticipation of pay cuts, and labor unions yesterday threatened further action. “This is only the beginning,” said Eoin Fahy , an economist at KBC Asset Management in Dublin, which manages the equivalent of 8.3 billion euros. “We are faced with the prospect of another four or more budgets as tough as this one before we get even close to budgetary balance.” To contact the reporter on this story: Colm Heatley in Belfast at cheatley@bloomberg.net ; Ian Guider in Dublin at iguider@bloomberg.net

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Emerging-Market Stocks Decline on Dubai, Greece Concern; Yen, Gold Advance

December 9, 2009

By Michael Patterson Dec. 9 (Bloomberg) — Stocks fell in Asia and Europe, with the benchmark index for emerging markets sinking for a fourth day, as Dubai struggled to restructure debt and Greece’s bonds faced a further downgrade. The yen and gold rose. The MSCI Emerging Markets Index declined 0.6 percent at 10:23 a.m. in London as Dubai’s equity gauge dropped 6.4 percent. The MSCI World Index of stocks in developed nations retreated 0.2 percent, led by a 2.8 percent fall in the Athens Stock Exchange General Index. The yen climbed against all 16 most-traded currencies. Greek Finance Minister George Papaconstantinou said there is “absolutely” no chance of a default as the country’s bonds slumped the most in a decade, while the cost of credit-default swaps on Dubai’s state-controlled DP World implied a 33 percent risk that the port company will renege on debt. Widening budget deficits are hampering government efforts to stimulate economies, with the U.K. and Ireland scheduled to announce spending cuts today. Japan’s economy grew at less than one-third the pace initially reported in the three months ended Sept. 30. “A financial crisis is like a disease, it spreads,” Philip Gisdakis , the head of credit strategy at UniCredit SpA in Munich, wrote in a research note today. “Although Greece is small enough of a problem that it must be bailed out, the risk is that it will not only be Greece that will need support.” Greek Bonds Greek 10-year government bonds slid for a fifth day, their longest-losing streaking since May, driving the yield up 27 basis points to 5.61 percent. Chris Pryce , director of sovereign and international public finance at Fitch Ratings in London, said today in a Bloomberg Television interview he’s not convinced the nation will avoid a debt default as its budget deficit rises. The Dubai Financial Market General Index plunged for a third day, wiping out its 2009 advance, as state-controlled Dubai World planned asset sales and Moody’s Investors Service downgraded six Dubai borrowers. The ADX General Index in Abu Dhabi, the wealthiest of the seven sheikdoms that comprise the United Arab Emirates, lost 2.7 percent. The MSCI Emerging index headed for its longest losing streak in more than two months. Greece’s banks led declines in European shares as the Dow Jones Stoxx 600 Index slipped 0.7 percent. National Bank of Greece SA, the nation’s biggest, slid 4.7 percent in Athens. EFG Eurobank Ergasias SA , the second-largest, tumbled 5.8 percent. Man Group Plc, the biggest publicly traded hedge-fund manager, slid 3.6 percent in London after the value of its flagship fund dropped. Japan Stocks Japanese stocks fell the most in eight days after a government report showed the economy grew at an annual 1.3 percent pace in the third quarter, slower than the 4.8 percent in preliminary figures last month. The Nikkei 225 Stock Average fell 1.3 percent as the MSCI Asia Pacific Index declined 0.6 percent. Mitsubishi UFJ Financial Group Inc. , Japan’s largest bank by market value, tumbled 5.2 percent in Tokyo. Mitsubishi Heavy Industries Ltd., the country’s biggest maker of heavy machinery, sank 2.5 percent. The yen strengthened 0.8 percent versus the dollar as investors sought the Japanese currency as a refuge. Futures on the Standard & Poor’s 500 Index were little changed. The benchmark gauge for U.S. equities tumbled 1 percent yesterday, paring its rally since March 9 to 61 percent. The measure is valued at about 22 times its companies’ reported operating earnings, near the highest since 2002, according to data compiled by Bloomberg. Geithner Plan Treasury Secretary Timothy Geithner plans to tell Congress that the Obama administration will extend the $700 billion financial-rescue program until next October, according to people familiar with the matter. The pound dropped against all but two of the 16 major currencies, losing 0.3 percent against the euro, on speculation Chancellor of the Exchequer Alistair Darling will fail to reassure investors the U.K. can shore up its finances when he presents his pre-budget report to Parliament in London today. U.K. government bonds slipped, with the yield on the 10-year note climbing 1 basis point to 3.70 percent. The cost of hedging against losses on Dubai sovereign debt surged 47.5 basis points to 592, according to CMA DataVision prices for credit-default swaps. Contracts on Greece jumped 12 to 221, the highest since March, and swaps on the U.K. climbed 1 to 78, the highest since July. Creditors of Nakheel PJSC, the property developer owned by Dubai World with $3.52 billion of bonds due Dec. 14, are scheduled to take part in a conference call today with bond trustee Deutsche Bank AG, said two people invited to participate who declined to be identified because the discussion is private. To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net .

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Ireland Tries to Appease Bond Vigilantes as Greece Faces Rating Downgrade

December 9, 2009

By Simon Kennedy Dec. 9 (Bloomberg) — Ireland is poised to show Greece a way to cut ballooning budget deficits. Finance Minister Brian Lenihan will today announce plans to cut spending by 6 percent in the face of the worst recession in Ireland’s modern history. On the other side of Europe, the yield on Greece’s two-year note yesterday rose the most since November 2008 as it struggles to convince investors it will be as bold. Lenihan is trying to shore up confidence in Ireland, once Europe’s most dynamic economy, a day after Fitch Ratings cut Greece by one step to the third-lowest investment grade. A successful strategy may lead investors to reward Ireland and add pressure on Greece to follow. “The bond vigilantes are back and watching,” said Alan McQuaid , chief economist at Bloxham Stockbrokers in Dublin. “Greece is a worst-case scenario, Ireland’s more solid.” Lenihan is scheduled to deliver the budget at 3:45 p.m. to the parliament in Dublin, his fifth attempt since July 2008 to fix the public finances. He’s seeking 4 billion euros ($6 billion) in savings to stop the shortfall climbing above 12 percent of gross domestic product. While Ireland has lost its top credit rating at Moody’s Investors Service and Standard & Poor’s, Greece is being pushed harder to act after Fitch yesterday cut it one step to BBB+, the third-lowest investment grade. The previous day S&P put the country’s A- rating on watch for a possible downgrade, signaling it may be reduced within two months. Skeptical Greek Finance Minister George Papaconstantinou yesterday said he is committed to “fair” fiscal consolidation and will submit an extra budget if needed. Fitch’s downgrade “doesn’t correspond to the government’s initiatives,” he said. “While the situation in Ireland remains severe, the government have shown an impressive resolve,” said Goldman Sachs Group Inc. economist Kevin Daly , who favors Irish assets over those from Greece. “This contrasts with the situation in a number of other European countries where, despite similar budget problems, there appears to be a reluctance to acknowledge the problem.” The difference in yield , or spread, between 10-year Irish bonds and equivalent German bunds was at 172 basis points yesterday. The gap between Greece and Germany reached 225 basis points, the most since April 21. Imploded Ireland’s fiscal problems mounted after a decade-long property boom imploded and the banking system came close to collapse as credit on the international money markets dried up. Greece is suffering after its new government more than doubled the country’s budget deficit forecast to 12.7 percent, exceeding the European Union’s limit more than four times, as revenue fell short of targets and spending increased. Now, Lenihan is planning pay cuts of about 6 percent for government workers, and labor unions are threatening industrial unrest in response. He also has pledged to slash the deficit to 3 percent of output by 2013, meaning Ireland is facing austerity budgets for the next four years. “The overriding concern is to cement the financial viability of the Irish state,” said Rossa White , chief economist at Dublin-based broker Davy. “The budget for 2010 is a watershed.” Greece’s socialist government, elected in October, plans to cut the budget deficit to 9.1 percent of GDP next year from 12.7 percent this year. The plans, including one-off measures and a partial freeze on public-sector pay, “are unlikely by themselves to alter Greece’s medium-term fiscal dynamics” given the prospects of high deficits, debt and sluggish economic growth, S&P said Dec. 7. “The problems in Dubai and Greece have highlighted that smaller countries with banking and severe fiscal problems will be punished,” White said. “Particularly those that fail to deal with them adequately.” To contact the reporters on this story: Colm Heatley in Belfast at cheatley@bloomberg.net ;

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Emerging-Market Stocks Decline on Rating Concern, Led by Dubai; Yen Climbs

December 8, 2009

By Stuart Wallace Dec. 8 (Bloomberg) — Emerging-market stocks fell, with the MSCI’s gauge of developing nations’ equities posting its longest losing streak in five weeks, as rating companies highlighted the risk of government deficits. Dubai led the drop, retreating to the lowest level in almost five months. The yen rose. The MSCI Emerging Markets Index lost 0.4 percent at 11:34 a.m. in London, Dubai’s DFM General Index plunged 6.1 percent and Abu Dhabi’s index slumped 3.4 percent. The yen rose against all 16 most-traded currencies. Futures on the Standard & Poor’s 500 Index fell 0.3 percent. Europe’s Dow Jones Stoxx 600 Index declined 0.8 percent. Moody’s Investors Service said today deteriorating public finances in the U.S. and U.K. may “test the Aaa boundaries.” Standard & Poor’s said it may cut Greece’s rating for a second time this year. U.S. Federal Reserve Chairman Ben Bernanke told the Washington Economic Club yesterday that the U.S. economy faces “formidable headwinds,” while Japan’s government backed a stimulus package worth 7.2 trillion yen ($81 billion). “Central banks and governments around the world are totally right in saying that the recovery is still very weak,” Philippe Gijsels , a senior structured product strategist at Fortis Global Markets in Brussels, said in an interview with Bloomberg Television. “Going into 2010 I would be extremely surprised if we do not see a serious hiccup somewhere.” Greece, Ireland, Portugal The MSCI World Index of 23 developed nations’ stocks was little changed, after earlier losing 0.2 percent. The Dow Jones Stoxx 600 Index fell as benchmark indexes in Greece , Ireland, Portugal and Iceland declined. Tesco Plc retreated 2.2 percent in London after reporting slowing sales growth that missed analysts’ estimates. German industrial output unexpectedly fell for the first time in three months in October, shrinking 1.8 percent, the Economy Ministry said today. The MSCI Asia Pacific Index gained 0.3 percent. Nintendo Co., the world’s biggest game maker, gained 1.4 percent in Tokyo after a market researcher said the company posted record sales of its new Super Mario Bros. title. Canon Inc., which gets 28 percent of its revenue from the Americas, declined 1.1 percent. Tokyo Tatemono Co. tumbled 7 percent after shareholders cut their stakes in the developer. Turkish stocks climbed to a six-week high, with the benchmark ISE National 100 Index added 1.7 percent. U.S. futures slipped 0.2 percent, after earlier advancing as much as 0.3 percent. The S&P 500 yesterday lost 0.3 percent. FedEx Corp. said late yesterday its earnings will be $1.10 a share for the period ended in November. The stock climbed 3.3 percent in German trading. Dubai Slumps The benchmark gauge for U.S. equities has surged 63 percent since March 9, the steepest advance since the Great Depression, spurred by record-low interest rates and $12 trillion committed by governments worldwide. The measure is valued at 22.2 times the reported operating earnings at its companies from the past year, the most expensive level since 2002, according to data compiled by Bloomberg. Dubai shares fell the most among benchmark indexes tracked by Bloomberg, extending a 22 percent slide since the government said on Nov. 25 that it was seeking a “standstill” agreement on Dubai World’s debt. The company last week began talks with banks to restructure $26 billion of debt, including a $3.52 billion Islamic bond of property unit Nakheel PJSC due to be repaid on Dec. 14. Nakheel had a first-half loss of 13.4 billion dirhams ($3.65 billion), compared with year-earlier profit of 2.65 billion dirhams, according to a document obtained by Bloomberg News. Moody’s cut the credit ratings for the six Dubai government related issuers it rates. Ruble Weakens The ruble weakened 1.2 percent against the dollar, extending its steepest three-day slump in five months, after Finance Minister Alexei Kudrin said Russia remained a “weak link” in global finance. South Africa’s rand traded 0.8 percent weaker. The yen strengthened 1.1 percent against the dollar to 88.56 and 1.2 percent to 131.12 per euro. The dollar dropped 0.2 percent against the euro. Japan’s currency gained the most against the pound, adding 1.9 percent to 144.43, after Moody’s said the U.K. faces an “inexorable deterioration of debt affordability.” The pound fell 0.7 percent against the euro and 0.8 percent versus the dollar. Bernanke reaffirmed the Fed’s intention to keep interest rates low for an “extended period.” Japan said its stimulus package will help counter “a deterioration in employment conditions” and “sluggish demand because of deflationary pressure.” Greek Bonds Tumble Greek bonds tumbled, pushing the yield on the 10-year note up 11 basis points to 5.24 percent. The difference in yield with German bunds widened to 206 basis points, the most since May 4. S&P yesterday placed Greece’s A- sovereign credit rating on watch for a possible downgrade, while European Central Bank President Jean-Claude Trichet said Greece is facing a “very difficult” situation and needs to take “courageous” decisions to counter the budget deficit. Copper led gains in industrial metals, advancing 1.1 percent to $7,076.50 a metric ton in London. Aluminum rose 1.1 percent and zinc 1.7 percent. Crude oil fell 0.1 percent to $73.83 a barrel in New York trading. Gold for immediate delivery rose 0.2 percent to $1,160.57 an ounce in London. The Bank of Korea said today that there’s “an illusion in gold,” and that adding to gold holdings isn’t attractive as most other central banks aren’t buying and the metal offers no cash returns. To contact the reporter on this story: Stuart Wallace in London at swallace6@bloomberg.net

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Ireland May Sacrifice Growth for Bonds, Credit Suisse Private Banker Says

December 8, 2009

By Dara Doyle and Ian Guider Dec. 8 (Bloomberg) — Irish government spending cuts aimed at reducing the budget deficit may end up sacrificing long-term economic growth, according to Michael O’Sullivan , head of asset allocation at Credit Suisse Private Banking. “Arguably the Irish bond market is being saved at the expense of Irish society,” O’Sullivan, 38, author of a 2006 book on Ireland’s economy, said in an interview at Bloomberg’s London bureau. “By cutting spending you lower the trend line of growth and store up bigger fiscal problems down the line.” Irish Finance Minister Brian Lenihan has said he will trim about 4 billion euros ($6 billion) from spending next year to stop the deficit widening to beyond 12 percent of gross domestic product, or four times the limit for countries with the euro. Lenihan delivers the budget to parliament tomorrow. Tax receipts will plunge about 20 percent this year as the economy , once Europe’s fastest growing, shrinks at a record pace, the government forecasts. “Cutting deficits is a limited strategy because in the longer term you need growth to kick in,” said O’Sullivan. “The issue is: where is your growth going to come from?” Lenihan plans to reduce the deficit to 3 percent of GDP by 2014 to meet a European Commission deadline, and is seeking 1.3 billion euros in pay cuts from public sector workers, as well as reductions in welfare, health and capital spending. ‘Adolescent Economy’ Ireland’s slump follows a boom that saw the economy double in size in the decade through 2007. Home prices, which quadrupled during that time, have dropped about 40 percent. Irish-born O’Sullivan, author of “ Ireland and the Global Question ,” published by Cork University Press, said that before the boom, it was still an “adolescent economy, given the decades or even centuries of underperformance.” The difference in yield , or spread, between 10-year Irish bonds and equivalent German bunds was at 158 basis points yesterday, compared with 284 basis points in March, the highest in at least a decade. “The boom was a once-in-a-lifetime economic event,” said O’Sullivan, who plans to publish a second book next year. “If you step back and look at other economies where that has happened, it almost invariably gets out of control.” To contact the reporters on this story: Dara Doyle in Dublin at ddoyle1@bloomberg.net Ian Guider in Dublin at iguider@bloomberg.net .

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Tiger Woods Skipping California Tournament He Hosts After Crash injuries

November 30, 2009

By Michael Buteau Nov. 30 (Bloomberg) — Tiger Woods will skip his Chevron World Challenge golf tournament amid questions about a car crash that sent him to a hospital with injuries. Woods said in a statement that he canceled a tournament- preview news conference that was scheduled tomorrow at the Sherwood Country Club in Thousand Oaks, California, and won’t play because of injuries. Woods, 33, has played host to the tournament, an invitation-only exhibition that benefits his charitable foundation, since 1999. “I am extremely disappointed that I will not be at my tournament this week,” Woods said in a statement on his Web site. “I am certain it will be an outstanding event and I’m very sorry that I can’t be there.” Woods said he is unable to attend “due to injuries” sustained in the car accident. He said he won’t participate in any other tournaments in 2009 and will return to action next year. Greg McLaughlin , president of the Tiger Woods Foundation , said “we support Tiger’s decision.” The tournament is scheduled for Dec. 3-6, with early rounds televised on the Golf Channel cable network and weekend play on General Electric Co.’s NBC. It features a field of 18 players competing for $5.75 million, including a winner’s share of $1.35 million. The last- place finisher receives $150,000. The event’s prize money doesn’t count toward official PGA Tour earnings. Competitors receive World Golf Ranking points for the first time this year. ‘Embarrassing’ Woods took the blame yesterday for what he called an “embarrassing” one-car crash outside his Florida home. The world’s No. 1-ranked golfer said the accident created a stressful situation for him and his family. “This is a private matter and I want to keep it that way,” Woods said in a statement on his Web site , his only comments about the accident so far. “Although I understand there is curiosity, the many false, unfounded and malicious rumors that are currently circulating about my family and me are irresponsible.” Woods declined to meet with investigators for the third time yesterday to discuss the Nov. 27 accident in which his Cadillac sport-utility vehicle struck a fire hydrant and a tree as he was leaving his Windermere, Florida, house about 2:20 a.m. local time. Golf Club Police said that Woods’s wife, Elin, told them she heard the crash, ran from the house and used a golf club to smash a window in the vehicle and get her husband out. Woods was released from a local hospital after being treated for facial cuts. “This situation is my fault and it’s obviously embarrassing to my family and me,” said Woods, a 14-time major champion who’s topped golf’s Official World Ranking since 2005. “I’m human and I’m not perfect. I will certainly make sure this doesn’t happen again.” In addition to his cuts, Woods said he has bruising and is “pretty sore,” making his playing status unknown. He last played two weeks ago, winning the Australian Masters in his first appearance in that country since 1998. Those invited to this year’s Chevron tournament at the Jack Nicklaus-designed course include defending champion Vijay Singh , U.S. Open winner Lucas Glover , British Open winner Stewart Cink , PGA Championship winner Y.E. Yang, Ireland’s Padraig Harrington , England’s Lee Westwood and Ian Poulter , and Americans Anthony Kim , Kenny Perry and Jim Furyk . While daily tickets to the four-day event, which also includes a Pro-Am round on Dec. 2, cost $30 for the first two rounds and $40 for weekend rounds, the prices go as high as $4,250 for a 20-pass “Executive Club” package. There are no refunds, according to the tournament’s Web site, whether Woods plays or not. To contact the reporter on this story: Michael Buteau in Atlanta at mbuteau@bloomberg.net .

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Tiger Woods’s Status for Golf Tournament He Hosts Is Uncertain After Crash

November 30, 2009

By Michael Buteau Nov. 30 (Bloomberg) — Tiger Woods made it to a news conference at his Chevron World Challenge last year as he recovered from knee surgery. Whether he shows up for tomorrow’s media session amid questions about a car crash that hospitalized him and has buffeted his privacy isn’t a sure thing. Woods, 33, has played host to the tournament, an invitation-only exhibition that benefits his charitable foundation, since 1999. While Woods is scheduled to speak at a tournament-preview news conference at the Sherwood Country Club in Thousand Oaks, California, his appearance remains in question, a foundation representative said. “I don’t have any updates,” Emily Taylor, a spokeswoman for the Tiger Woods Foundation , said in an e-mail. Glenn Greenspan , Woods’s personal spokesman, didn’t immediately return an e-mail seeking comment. The tournament is scheduled for Dec. 3-6, with early rounds televised on the Golf Channel cable network and weekend play on General Electric Co.’s NBC. It features a field of 18 players competing for $5.75 million, including a winner’s share of $1.35 million. The last- place finisher receives $150,000. Competitors receive World Golf Ranking points for the first time this year. Woods took the blame yesterday for what he called an “embarrassing” one-car crash outside his Florida home. The world’s No. 1-ranked golfer said the accident created a stressful situation for him and his family. ‘Private Matter’ “This is a private matter and I want to keep it that way,” Woods said in a statement on his Web site , his only comments about the accident so far. “Although I understand there is curiosity, the many false, unfounded and malicious rumors that are currently circulating about my family and me are irresponsible.” Woods declined to meet with investigators for the third time yesterday to discuss the Nov. 27 accident in which his Cadillac sport-utility vehicle struck a fire hydrant and a tree as he was leaving his Windermere, Florida, house about 2:20 a.m. local time. Police said that Woods’s wife, Elin, told them she heard the crash, ran from the house and used a golf club to smash a window in the vehicle and get her husband out. Woods was released from a local hospital after being treated for facial cuts. “This situation is my fault and it’s obviously embarrassing to my family and me,” said Woods, a 14-time major champion who’s topped golf’s Official World Ranking since 2005. “I’m human and I’m not perfect. I will certainly make sure this doesn’t happen again.” Last Tournament In addition to his cuts, Woods said he has bruising and is “pretty sore,” making his playing status unknown. He last played two weeks ago, winning the Australian Masters in his first appearance in that country since 1998. Those invited to this year’s Chevron tournament at the Jack Nicklaus-designed course include defending champion Vijay Singh , U.S. Open winner Lucas Glover , British Open winner Stewart Cink , PGA Championship winner Y.E. Yang, Ireland’s Padraig Harrington , England’s Lee Westwood and Ian Poulter , and Americans Anthony Kim , Kenny Perry and Jim Furyk . While daily tickets to the four-day event, which also includes a Pro-Am round on Dec. 2, cost $30 for the first two rounds and $40 for weekend rounds, the prices go as high as $4,250 for a 20-pass “Executive Club” package. There are no refunds, according to the tournament’s Web site, whether Woods plays or not. To contact the reporter on this story: Michael Buteau in Atlanta at mbuteau@bloomberg.net .

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Trichet Putting Money Where Mouth Is Shows Dexia-Like Laggards Among Bank

November 30, 2009

By Simon Kennedy Nov. 30 (Bloomberg) — European Central Bank President Jean-Claude Trichet will shine a light on the weakest European banks when he begins withdrawing the cheap loans that propped up the financial industry this year. Dexia SA and Commerzbank AG got a taste of what may come when their shares sank as much as 3.7 percent on Nov. 20 as Trichet explained the need to slow the unprecedented flow of money and tightened collateral rules. He may go further Dec. 3 in disclosing just how the ECB proposes to wean the euro-area’s lenders off emergency aid. Less liquidity will show “the fundamental quality of different banks,” said Elie Darwish , an analyst at Exane BNP Paribas in Paris, who has an “underperform” rating on bank stocks and recommends clients sell shares of Dexia . “They benefited very much from the favorable environment created by the ECB so may be hampered by the unwinding of this.” Government-backed lenders, including Frankfurt-based Commerzbank and Dexia in Brussels, will have higher funding expenses, according to Simon Maughan , an analyst at MF Global Securities Ltd. in London. He ranks Commerzbank, Germany’s second-biggest lender, as the worst performer next year of the bank shares he follows. The nations with the euro area’s biggest budget deficits, including Ireland and Greece, also face rising borrowing costs after benefiting when banks recycled the ECB’s money into their bonds. The cost of insuring $10 million of government debt against default for five years jumped about 50 percent this month for Greece and 23 percent for Ireland. ‘Swimming Naked’ “As Warren Buffett has observed, it’s when the liquidity dries up that you’ll see who’s swimming naked,” said Erik Nielsen , Goldman Sachs Group Inc.’s chief European economist in London. The ECB may end up “tightening by stealth” if its removal of support pushes up the interest rates charged by banks and in money markets, even as Trichet signals that isn’t his intention, Nielsen said. The threat of side effects demonstrates the difficulties ahead for the ECB as it seeks to cut stimulus programs, especially in an economy whose 16 nations are recovering at different speeds. That’s prompting Trichet to promise a “gradual” withdrawal. “A great theme will be unintended consequences,” said Fred Goodwin , executive director of rates at Nomura International Plc in London, who predicts an increase in banks’ credit risk as measured by the Euribor-OIS spread. “There will be a link between tighter liquidity and bank risk that will show up in stock prices, credit-default swaps and borrowing costs.” Without Stimulus The 64-company Bloomberg Europe Banks and Financial Services Index returned about 40 percent this year. The concern for investors is, “absent stimulus, how much growth is there in the sector?” said Jonathan Tyce , an analyst at FBR Capital Markets in London. Maughan has an average growth target for bank stocks of as much as 25 percent next year and says two-thirds are “out of the woods.” A “quality differentiation” exists, with investors demanding higher borrowing costs when lending to companies that have government aid such as Commerzbank, Dexia and Dublin-based Allied Irish Banks Plc , he said. The reliance of some lenders on the central bank is “probably the issue causing the greatest concern now,” Maughan said in a Bloomberg Television interview on Nov. 25. “What is going to happen to your funding costs when you have to go back to private markets and pay a proper price for your debt?” Selling Commerzbank Seventy percent of analysts recommend selling Commerzbank shares and 41 percent advise selling those of Dexia, according to data compiled by Bloomberg during the past three months. By contrast, 20 percent suggest selling Deutsche Bank AG , Germany’s largest bank. Deutsche Bank , which Maughan lists as the best performer in its group in the euro-zone next year, has an annualized return on equity of 16 percent, compared with Commerzbank’s 0.02 percent and Dexia’s 12.8 percent, Bloomberg data show. BNP Paribas SA and Societe Generale SA , France’s biggest banks by market value, repaid government aid provided during the crisis, giving them an advantage. BNP Paribas said last month investors sought 2.5 times the stock offered in a 4.3 billion- euro share sale to reimburse the state. Societe Generale paid back 3.4 billion euros this month. Just 3 percent of analysts have a “sell” rating on BNP Paribas , and 16 percent have that view of Societe Generale. Both companies are based in Paris. Commerzbank spokesman Reiner Rossmann declined to comment on the implications for the lender of the ECB’s strategy. Officials at Dexia also declined to comment. Bad-Debt Forecast Commerzbank said Nov. 5 it expects a “difficult” fourth quarter, predicting loan-loss provisions will rise to about 4.2 billion euros ($6.3 billion) in 2009 from 3.7 billion euros last year. Allied Irish , Ireland’s second-biggest bank, raised its bad-debt forecast for this year on Nov. 18 by 1 billion euros to about 5.3 billion euros as losses on property loans increase. Lenders’ sensitivity to the ECB’s exit strategy was evident Nov. 20 following Trichet’s remarks at a Frankfurt conference, where he said that as markets recovered from the worst financial crisis since the Great Depression, unchecked funding might spark inflation and leave banks addicted to the aid. Hours later, the ECB toughened the rules for some collateral it accepts against loans. Starting in March, newly issued asset-backed securities must be graded AAA/Aaa from two ratings companies instead of just one. ‘Painkillers’ “Not all our liquidity measures will be needed to the same extent as in the past,” Trichet said. “Eventually, the administration of painkillers must be stopped if patients are to get on their own two feet.” The Dow Jones Stoxx 600 Index fell 0.8 percent, erasing an advance and dropping for a fourth day, the longest decline since July. Dexia dropped 2.6 percent to 5.20 euros and Commerzbank fell 3.7 percent to 6.56 euros. Trichet, 66, is signaling his next step will be to stop lending banks as much money as they want for a year after one last offering in December. While officials have discussed whether to have the interest rate on new loans track the benchmark refinancing rate, they are leaning toward sticking with a fixed 1 percent rate, people familiar with the debate said last week. Banks borrowed a record 442 billion euros in June before taking 75.2 billion euros in September. Unlimited Money The ECB also may reduce the frequency of its three-month and six-month tenders of unlimited money and cut the purchases of so-called covered bonds, said Michael Saunders , chief economist for western Europe at Citigroup Inc. in London. Policy makers won’t raise their key interest rate from 1 percent before 2011 and will keep accepting a wide range of collateral, Saunders said. “The exit plan will be a combination of tough and tender components,” he said. Even if the ECB does become less generous, banks will still have the December offering; and Guillaume Baron , a fixed-income strategist at Societe Generale in Paris, estimates there will remain an excess of liquidity in the market of as much as 135 billion euros until the end of June. That will keep the Euro Overnight Index Average , or Eonia, for loans between European banks at about 0.35 percent, he said. Trichet’s policy shift comes as the Washington-based International Monetary Fund says some banks haven’t done enough to improve their balance sheets. Euro-area lenders have recognized just 40 percent of their expected losses, compared with 60 percent in the U.S., the IMF estimated in a Sept. 30 report. The Bundesbank said Nov. 25 that German banks alone may have to write off another 90 billion euros. Weakest Capital Allied Irish, Milan-based UniCredit SpA , Banco Bilbao Vizcaya Argentaria SA in Bilbao, Spain, and Frankfurt-based Deutsche Bank are among banks with the weakest capital, Standard & Poor’s said in a Nov. 23 study. Each company had a lower risk- adjusted capital ratio as of June 30 than the average of 45 large international banks. The ECB’s strategy also may mean higher interest rates on government debt, limiting room for fiscal policy to continue stimulating growth, said Julian Callow , chief European economist at Barclays Capital in London. Banks have been recycling ECB loans into government bonds, helping reduce their yields even as countries cut taxes and increased spending. Lenders’ net-asset purchases have more than tripled to 150 billion euros, according to UniCredit. The yield on the benchmark 10-year German bund fell to 3.14 percent last week from 3.72 percent on June 5, even as the European Commission downgraded its fiscal outlook. Budget Deficits Ireland, Greece and Spain may be the most vulnerable, said Aurelio Maccario , chief euro-area economist at UniCredit in Milan. The Brussels-based commission predicts their budget deficits will exceed 10 percent of gross domestic product next year, compared with a regional average of 6.9 percent. Greece’s deteriorating finances mean the difference in yield between its 10-year security and benchmark German bunds widened to 204 basis points at the end of last week from 140 basis points on Nov. 13, the most since May. European Union finance ministers will reprimand the government this week for failing to take “credible and sustainable” measures to cut its budget gap, according to a document obtained by Bloomberg News. The extra interest investors want on Irish bonds relative to the German equivalent reached 174.9 basis points on Nov. 27, the highest since July. The Spanish spread is almost five times wider than it was at the start of 2008. Default Protection Investors are paying more to protect themselves against losses on sovereign bonds. It cost $218,000 to insure $10 million of Greek debt against default for five years on Nov. 26, up from $140,000 at the end of October, while in Ireland it cost $170,000, up from $138,000. The comparative price in Germany was $25,000. Greek banks are more dependent than those elsewhere on ECB funding, with 38 billion euros of loans the equivalent of 7.9 percent of total assets, according to Barclays Capital. Ireland ranks second at 5.9 percent. Greece’s central bank said Nov. 16 it had advised a number of financial institutions to be more “‘prudent” when participating in the ECB’s December offering. Some are already taking the initiative. EFG Eurobank Ergasias SA , Greece’s second-biggest lender, cut its use of the liquidity mechanisms by 50 percent, or 6 billion euros, during the past six months, Deputy Chief Executive Officer Nikolaos Karamouzis said Nov. 17. Anthimos Thomopoulos, chief financial officer at National Bank of Greece SA, said Nov. 23 that liquidity constraints were “not an issue.” The ECB is “walking a tightrope,” said Elga Bartsch , Morgan Stanley’s chief European economist in London. The macroeconomic outlook and financial-market dislocations “make an exit a finely calibrated decision,” she said. To contact the reporter on this story: Simon Kennedy at skennedy4@bloomberg.net

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Emerging Markets Rebound, Dollar Drops as Dubai Concern Eases; Oil Climbs

November 30, 2009

By Stuart Wallace Nov. 30 (Bloomberg) — Emerging-market stocks rebounded, sending the MSCI Emerging Markets Index to its biggest gain in two weeks, as Abu Dhabi’s pledge to back Dubai’s banks soothed investors. The dollar retreated, sending commodities higher. The developing-nation index rallied 1.2 percent at 10:18 a.m. in London and the MSCI World Index of equities in 23 developed countries advanced 0.3 percent. Europe’s Dow Jones Stoxx 600 Index fell 1.1 percent as the Dubai statement disappointed some investors and futures on the Standard & Poor’s 500 Index declined 0.2 percent. The dollar weakened against all 16 major currencies tracked by Bloomberg. The S&P GSCI index of 24 commodities rose 0.7 percent. The United Arab Emirates’ central bank said it “stands behind” Dubai’s local and foreign banks after the request by government-controlled Dubai World for a standstill agreement with creditors threw doubt on $59 billion of liabilities. The announcement hit stock markets around the world, reducing global market value by 2.5 percent to $48.1 trillion. Investors “certainly realize that the systemic risks from Dubai are likely to be limited over the long term,” Koon Chow , an emerging-markets strategist at Barclays Capital, said in an interview with Bloomberg Television in London. “People are going to come back and say, ‘I still like Asia and I still like parts of Latin America.’” Europe Declines European stocks fell, trimming the Stoxx 600’s monthly gain to 2 percent. Bank of Ireland Plc slid 1.8 percent in Dublin after saying it may report a loss of 3.4 billion euros ($5.1 billion) on loans it sells to the country’s so-call bad bank. The decline in U.S. stock-index futures indicated that the Standard & Poor’s 500 Index may pare its 5.3 percent monthly gain, after the National Retail Federation indicated that consumers spent less during the Thanksgiving holiday. The benchmark gauge of U.S. equities has rallied 61 percent since reaching a low on March 9. Abu Dhabi’s ADX General Index sank 8.2 percent, the most since May 2006. The Dubai Financial Market General Index tumbled 7.3 percent, the most in a year, on the first trading day since the government said Dubai World may delay debt payments. Markets were closed Nov. 26-29 for the Eid Al Adha holiday. Credit-default swaps tied to Dubai government debt fell 76 basis points to 571 and contracts on DP World dropped 114 to 630, according to CMA DataVision prices. Swaps linked to neighboring Abu Dhabi fell 29 basis points to 146 and Qatar declined 8.5 to 111.5, CMA prices show. China Rallies The Shanghai Composite Index rose 3.2 percent for the biggest gain among indexes in major emerging markets. India’s Bombay Stock Exchange Sensitive Index added 1.8 percent as the government said the economy grew at the fastest pace in 1 1/2 years last quarter, beating economists’ estimates. The South Korean won led gains in developing-nation currencies against the dollar, strengthening 1.1 percent. HSBC Holdings Plc, which said it had more deposits than loans in Dubai, gained 4.3 percent in Hong Kong. Suning Appliance Co. , China’s biggest home appliance retailer, climbed 7 percent in Shenzhen after the government said it will maintain stimulus policies next year. The dollar declined against all 16 most-traded currencies tracked by Bloomberg as waning concern that Dubai World may default fanned demand for higher-yielding assets. The U.S. currency fell 1 percent compared with the Australian dollar. Treasuries slipped, with the yield on the 10-year note rising 2 basis points to 3.22 percent, its first gain in more than a week. Dollar Reversal “The dollar has retraced the final part of last week’s gains related to the Dubai World uncertainty, with equity markets in Asia higher and equity markets in the Middle East not showing signs of contagion,” Derek Halpenny , the European head of global currency research at Bank of Tokyo-Mitsubishi UFJ Ltd., wrote in a report today. Gold for immediate delivery fell 0.6 percent to $1,170.32 an ounce in London, paring four consecutive weekly gains. Copper for delivery in three months advanced 0.7 percent to $6,902 a metric ton, leading advances in industrial metals. Oil for December delivery rose 0.6 percent to $76.53 a barrel in New York. Wheat, corn and soybeans advanced in Chicago. To contact the reporter on this story: Stuart Wallace in London at swallace6@bloomberg.net

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