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Asia Stocks Fall, Chinese Swap Rate Rises on Concern China to Slow Economy

January 20, 2010

By Patrick Chu Jan. 21 (Bloomberg) — Asian stocks slid and the Chinese one-year swap rate rose after China said its economic growth rate accelerated to 10.7 percent in the fourth quarter, the fastest pace since 2007. The MSCI Asia Pacific Index fell 0.4 percent to 123.77 at 12 p.m. in Tokyo. The Hang Seng Index dropped 1.2 percent to 21,037.10 and the Shanghai Composite Index lost 0.3 percent to 3,140.39. China’s one-year swap rate, the fixed cost for receiving a floating interest rate, climbed 3 basis points to 2.32 percent. The euro weakened to $1.4068 per dollar from $1.4113 before the China economic figures were released. China has been leading the world out of recession and the faster pace of growth may force policy makers to restrain the economy to stem inflation. The gross domestic product beat the median forecast of 10.5 percent in a Bloomberg News survey . Developing Asian economies face the risk of asset bubbles as the region’s growth outpaces the rest of the world this year, the World Bank said in its economic forecast today. “The economic data may strong but that will only lead investors to believe the government will impose additional tightening measures, such as interest rate increases,” said Zhang Kun , a strategist at Guotai Junan Securities Co. in Shanghai. “We may be at the start of a market correction.” Five stocks declined for every three that rose on the MSCI Asia index. Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. sank at least 1.4 percent in Hong Kong. Santos Ltd. , Australia’s third-largest oil and gas producer, declined 2.1 percent after fourth-quarter sales dropped. BHP Billiton, the world’s largest mining company, fell 1.4 percent after commodities prices fell in New York yesterday. Korean Shippers STX Pan Ocean Co. and Korea Line Corp. , South Korea’s biggest bulk carriers, fell at least 1.2 percent after the Baltic Dry Index declined for a third day. LG Display Co. and Hynix Semiconductor Inc. both rose more than 2 percent after reporting a fourth-quarter profit compared to losses a year earlier. The Taiwan dollar climbed 0.3 percent, the most in two weeks, to NT$31.89, after a government report showed export orders rose 52.6 percent from a year earlier, accelerating from 37.1 percent gain in November. Greek bonds tumbled yesterday, pushing the two-year yield up by the most since before the country adopted the euro, on mounting concern the country won’t be able to fund the European union’s biggest deficit . The euro sank to a five-month low against the dollar and the weakest in one month versus the yen on concern Greece’s fiscal problems will weigh on the currency’s 16-nation economy. Treasuries Gain Benchmark 10-year Treasuries rose, sending yields to near the lowest in a month, after disappointing corporate earnings in the U.S. boosted demand for the relative safety of government debt. The Dollar Index , used by IntercontinentalExchange Inc. to track the greenback against the six major counterparts, increased 1.1 percent, the most since Dec. 4, as investors sought dollar-based assets as a refuge. Gold futures tumbled the most in a month yesterday as the dollar’s advance reduced demand for the precious metal as a store of value. Copper futures slid the most in three months on speculation that economic growth may ease in China. Oil traded below $78 a barrel after dropping 2 percent to a four-week low on the stronger dollar and on speculation oil inventories increased in the U.S. The UBS Bloomberg Constant Maturity Commodity Index fell 1.4 percent to 1,304.85. Gold Falls Gold futures for February delivery fell $27.40, or 2.4 percent, to $1,112.60 an ounce on the Comex division of the New York Mercantile Exchange, the biggest decline for a most-active contract since Dec. 17. Copper futures for March delivery fell 9.2 cents, or 2.7 percent, to $3.355 a pound on the Comex, the biggest loss since Oct. 1. Crude-oil futures for February delivery fell $1.40 to $77.62 a barrel on the Nymex, the lowest settlement since Dec. 23. The contract expired yesterday. The cost of protecting Asia-Pacific bonds from default rose. The Markit iTraxx Asia credit swap index of 50 investment-grade borrowers outside Japan climbed 3 basis points to 101 basis points, Royal Bank of Scotland Group Plc prices show. That’s the highest since Dec. 18, according to CMA DataVision. Columbia University professor Joseph Stiglitz , a Nobel Prize-winning economist, said the U.S. should inject a second round of stimulus spending into the economy to avert a “double- dip” recession. Bearish Outlook It will be “2012 or 2013 at the earliest that we will be back to normality,” Stiglitz said in an interview yesterday on Bloomberg Television. “This is a scenario that is putting us a little better but not much better than the Japanese malaise.” Stiglitz said state governments face a shortfall of $200 billion per year in tax revenue that stimulus spending should fill. Other priorities should be writing down principal on underwater mortgages and passing new financial regulation legislation, which Stiglitz said would be difficult to accomplish. Stiglitz’s concern contrasts with Warren Buffett’s outlook. Buffett said today on Bloomberg Television, “I do not know when things will get better. I have never been more optimistic about the future of the United States and the world.” The finance industry “did not allocate financial capital well, but boy did they use their political capital well,” Stiglitz said. “They bought deregulation, they got bailouts that were on very favorable terms and now they’re being quite successful in fighting the restructuring of the regulatory framework.” The World Bank raised its forecast for global growth in 2010 and warned that the recovery may lose momentum in the second half of the year as government stimulus programs wind down and unemployment persists. Global Forecast The world economy will expand 2.7 percent this year after the worst recession since the end of World War II, compared with an estimate in June of a 2 percent expansion, the Washington- based poverty-reduction agency said. Growth may reach 3.2 percent in 2011, the bank said. East Asia developing countries, which excludes Japan, Hong Kong, Taiwan, South Korea and Singapore, will expand 8.1 percent this year, faster than a November estimate of 7.8 percent, the Washington-based lender said its Global Economic Prospects report today. South Asia will grow 7 percent in 2010, it said. In East Asia, “downside risks facing the region have diminished owing to improvements in the global financial environment and positive growth developments,” the World Bank said. Capital inflows may spur the “risk of yet another round of asset bubbles, this time in emerging markets, the bursting of which could carry adverse effects over the short and medium term.” The cost of borrowing money in China’s interbank market rose on speculation China’s government will tighten curbs on loan growth. The central bank this week pushed its one-year bill yield higher at open-market auctions for a second week and last week it ordered banks to set aside more cash as reserves. — With assistance from Rocky Swift in Tokyo, Darren Boey, Sandy Hendry, Bob Chen and Tom Kohn in Hong Kong, Linus Chua, Jim Poole and Ann Koh in Singapore. Editors: Patrick Chu , Clyde Russell . To contact the reporter responsible for this story: Patrick Chu in Tokyo at pachu@bloomberg.net .

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Sumitomo Mitsui Rises in Tokyo as Stronger Capital Trumps Dilution Concern

January 20, 2010

By Finbarr Flynn Jan. 21 (Bloomberg) — Sumitomo Mitsui Financial Group Inc. , Japan’s second-largest bank by market value, rose in Tokyo trading as investors bet stronger capital from its sale of common stock will outweigh the negative impact of share dilution. Sumitomo Mitsui shares rose 1 percent to 2,918 yen at 10:03 a.m. in Tokyo, extending their gain to 10 percent this month after a 30 percent slump in 2009. The Tokyo-based lender will sell as many as 360 million shares at a 3 percent discount to yesterday’s closing price. “We were worried about dilution but now we know it, and we can move on,” said Kristine Li , a Singapore-based credit analyst at Royal Bank of Scotland Plc. “The big concern for Japanese banks has been their weak capital base.” The bank will raise as much as 968 billion yen ($10.6 billion), based on the sale price of 2,804 yen per share announced yesterday, taking share sales by Japan’s three-largest banks to 3.8 trillion yen since December 2008. Sumitomo Mitsui’s core Tier 1 capital ratio, an indicator of a bank’s ability to absorb losses, should rise to about 6.5 percent, after deducting hybrid securities and tax assets from capital, said Ismael Pili , a Tokyo-based analyst at Macquarie Group Ltd. Mitsubishi UFJ Financial Group Inc., Japan’s biggest bank by market value, has a core Tier 1 capital ratio is 7.3 percent and third-ranked Mizuho Financial Group Inc. ’s ratio is 3.5 percent, Pili said. Sumitomo Mitsui , which raised 861 billion yen in an equity offering in June and July, is tapping investors a second time in less than a year after the Zurich-based Basel Committee on Banking Supervision said last month banks must increase the amount of equity they hold to cope with losses better. Banks should increase the quality of the capital they hold by the end of 2012, the committee said in a report. The group won’t make final decisions until the end of 2010, as to how much and what kind of capital banks should hold, the report said. To contact the reporter on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.net

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Chinese Shares Fall on Concern Stimulus Being Wound Back; Dollar Advances

January 19, 2010

By Rocky Swift and Yoshiaki Nohara Jan. 20 (Bloomberg) — Chinese stocks slid, dragging the region’s benchmark to its third straight decline, after regulators told some of the nation’s banks to limit lending. The dollar gained against all 16 of the most-traded currencies. The Shanghai Composite Index dived 1.2 percent and Hang Seng Index plunged 1.3 percent, leading declines in Asia. The Morgan Stanley Asia Pacific Index fell 0.4 percent to 124.83 at 2:25 p.m. in Tokyo. The New Zealand dollar weakened 0.8 percent to 72.96 U.S. cents and the euro tumbled to a four-month low against the dollar. U.S. stock futures were negative. While China will probably report that fourth-quarter gross domestic product rose 10.5 percent from the same period a year ago, investors are growing concerned that the government will take steps to limit growth in what has been the main engine of recovery from the recession. The nation’s chief banking regulator, Liu Mingkang, said in an interview today that some banks were asked to reduce lending after a record 9.59 trillion yuan ($1.4 trillion) in new loans were made last year. “In terms of monetary policy, China’s overall trend is heading for tightening this year to keep economic bubbles from bursting, but officials are also trying to sustain and expand the economic growth with budgetary tools,” said Kyohei Morita , chief economist at Barclays Capital in Tokyo. “That’s a difficult and narrow path to walk through.” Energy, Bank Stocks Fall Five issues fell for every four that rose on the MSCI Asia index as energy and finance stocks led the declines. Shares of healthcare companies gained. Futures on the Standard & Poor’s 500 Index slipped 0.1 percent following IBM Corp.’s earnings results after the U.S. benchmark climbed 1.3 percent yesterday. Energy shares declined as oil futures in New York dropped 0.4 percent to $78.73 a barrel. PetroChina Co., China’s No. 1 oil producer, China Construction Bank sank 1.9 percent to HK$6.30 in Hong Kong, while Bank of China Ltd. lost 2 percent to HK$4.01. Nomura Holdings Inc., Japan’s largest brokerage, lost 2.8 percent to 718 yen. Credit Suisse Group AG cut its investment rating on the Japanese securities industry to “market weight” from “overweight.” The Hang Seng was the worst-performing Asia index as Shanghai’s government said a Caijing magazine report that the city may allow individuals to invest abroad is “pure fabrication.” The report drove the Hang Seng up by 1 percent yesterday. A gauge of healthcare stocks on the MSCI Asia Pacific Index climbed 1.5 percent, the most of any industry group . Scott Brown won a U.S. Senate seat in Massachusetts, giving Republicans enough members to block votes on an overhaul of the U.S. health- care system, President Barack Obama’s top legislative goal. Japanese Drug Makers “The healthcare bill has a negative impact on healthcare stocks as it basically limits the price of drugs,” said Takeru Ogihara, who helps oversee $27 billion as chief strategist at Mizuho Trust & Banking Co. in Tokyo. “If the healthcare bill is put aside, it’ll help the U.S. health stocks and the big Japanese health companies that are doing business there too.” Astellas, which derives 27 percent of its revenue from North America, climbed 4.3 percent to 3,620 yen. Takeda Pharmaceutical Co. , Asia’s biggest drugmaker, added 1.9 percent to 4,010 yen. The company gets 41 percent of sales in North America. China is trying to restrain economic growth, citing the risk of asset bubbles. Regulators asked some of the nation’s banks to limit lending after they failed to meet requirements including those for capital, said Liu, chairman of the China Banking Regulatory Commission. The CBRC hasn’t asked all Chinese banks to halt lending, Liu said in an interview in Hong Kong today. He didn’t identify which banks were told to limit loans. ‘Emergency Mode’ Over China’s gross domestic product is forecast to have accelerated for the third straight quarter, according to the median of 41 forecasts in a Bloomberg survey before the data’s release tomorrow. In further signs of credit tightening yesterday, the People’s Bank of China pushed the government’s one-year bill yield to a 14-month high and Chinese Premier Wen Jiabao gave a speech that marked the “official” end of the nation’s emergency stance to combat the recession, Bank of America- Merrill Lynch said. Wen dropped the phrase of a proactive fiscal policy and relatively loose monetary policy in comments published yesterday, Hong Kong-based economist Lu Ting said in an e-mailed note last night. The draft may mark “a significant change in China’s policy stance and officially draws an end to the emergency mode of government policies” since the fourth quarter of 2008, Lu said. Greece Concern The 16-nation euro weakened on speculation European Central Bank Executive Board member Juergen Stark will reiterate his bearish outlook for the region’s economy and the budget deficit in Greece when he speaks today. Stark said Jan. 15 the currency union mustn’t lead to financial aid for individual member countries and it is not liable for their debt. The euro declined against 13 of its 16 most-traded counterparts, and fell to as weak as $1.4188, the lowest since Sept. 1. The retreat also hit emerging-market currencies. South Korea’s won slid for a fourth day, the longest losing streak in six weeks, on concern Greece’s worsening finances and China’s lending curbs will damp appetite for emerging-market assets. The won fell 0.5 percent to 1,132.75 per dollar, while the Malaysian ringgit dropped 0.4 percent to 3.3537. “Investors are concerned that China may have to act more aggressively than they anticipated and are worried it may trigger a correction,” said Sebastien Barbe , a Hong Kong-based strategist at Calyon. Oil Slides Crude oil for February delivery fell as much as 31 cents, or 0.4 percent, to $78.71 a barrel on the New York Mercantile Exchange as the dollar advanced. Crude stockpiles climbed for a third week through Jan. 15, according to a Bloomberg News survey before an Energy Department report tomorrow. The cost of protecting Asia-Pacific bonds from default fell today, as measured by credit-default swaps. The prices fall when perceptions of creditworthiness improve, and vice versa. The benchmark Markit iTraxx Asia index of 50 investment- grade borrowers outside Japan fell 4 basis points to 95 basis points, Royal Bank of Scotland Group Plc prices show. The Markit iTraxx Japan index declined 0.5 of a basis point to 129.5 basis points, according to Morgan Stanley prices. To contact the reporters on this story: Rocky Swift in Tokyo at rswift5@bloomberg.net . Yoshiaki Nohara in Tokyo at Ynohara1@bloomberg.net

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`Massively’ Cheap Mexican Peso Spurs Aberdeen, Pimco to Forecast Increases

January 19, 2010

By Ye Xie and Tal Barak Harif Jan. 19 (Bloomberg) — Mexico’s peso is winning over the world’s largest foreign-exchange traders as the economic recovery in the neighboring U.S. boosts the value of one of the cheapest currencies in emerging markets. The peso will be the best performer in Latin America this year, according to 19 analysts surveyed by Bloomberg, with Deutsche Bank AG and Royal Bank of Scotland Group Plc forecasting an 8 percent advance against the dollar. Pacific Investment Management Co., the world’s biggest bond fund, said this month the peso offers “compelling” value . Bank of America Merrill Lynch estimates the peso is underpriced by 12 percent. The Mexican currency is forecast to at least double last year’s 4 percent gain after exports rose to a 13-month high and industrial output fell the least since July 2008. The U.S, which buys 80 percent of Mexican overseas sales, will post 2.7 percent economic growth this year, double the pace of the 16-nation euro area and Japan, forecasts compiled by Bloomberg show. “The Mexican peso offers the most potential upside in Latin America,” said Brett Diment , who manages $4.6 billion at Aberdeen Asset Management Ltd. in London. “It’s massively undervalued. The U.S. economy recovery prospect clearly remains positive, which means Mexico’s exports to the U.S. will increase in value.” The peso fell 0.1 percent against the dollar at 10:35 a.m. New York time to 12.67, leaving it up 3.1 percent this year, the second-best performance after the Korean won among the 16 most- traded currencies. U.S. Recession The peso lost 19 percent since August 2008, the fourth- biggest decline among 26 emerging-market currencies, as the U.S. recession throttled demand for Mexico’s exports. Standard & Poor’s cut Mexico’s credit rating one level to BBB, the second-lowest investment-grade rating, on Dec. 14, three weeks after Fitch Ratings did the same. The ratings companies cited concern the budget deficit in Latin America’s second-largest economy will swell amid tumbling oil output. Rogelio Ramirez de la O, the economist who predicted the 1994 peso devaluation, expects the peso to keep weakening. He foresees the currency falling to 15 per dollar by the end of the year as the U.S. recovery falters and central banks begin to withdraw stimulus. “The bounce that the Mexican economy saw in the second half of 2009 is because of the expected rebound in the U.S. economy,” said Ramirez, the sole partner at Mexico City-based economic research firm Ecanal. “Once that wanes Mexico lacks a domestic demand engine.” The U.S. economy expanded at an annual rate of 2.2 percent in the third quarter, while Mexico shrank 6.2 percent. Less Bearish Option traders are taking a different view, turning the least bearish on the peso since September after the U.S. unexpectedly added jobs in November. The premium on option contracts granting the right to sell the peso in one month over those to buy the currency dropped to 1.52 percentage points on Jan. 15, from 2.66 on Dec. 31. “The surge in U.S. growth can continue for a while,” said David Tien , who helps oversee $19 billion at Fischer Francis in New York. “The Mexican peso is a leveraged play on the U.S. recovery story.” Frankfurt-based Deutsche Bank, the world’s largest currency trader, recommends its clients buy the peso on forecasts it will rise to 12 this year. Edinburgh, Scotland-based RBS and Aberdeen’s Diment have the same target. Economic Growth The peso will strengthen to 12.38 per dollar, according to the median forecast of 17 analysts in a Bloomberg survey. Bank of Tokyo Mitsubishi recommends buying the peso versus the yen as one of the top trades for 2010, predicting it will rise 14 percent to 8.2 yen by year-end. Latin America’s second-largest economy will expand 2.95 percent this year, after contracting 7 percent in 2009, the worst recession since the 1930s, according to the median forecast of 19 economists in a Bloomberg survey. That will be the biggest rebound behind Russia’s among developing countries. The peso’s slump in the last two years left it 18 percent lower than its average price of 10.8 per dollar in the last decade. It is cheaper than its “fair value” of 11.3, according to Charlotte, North Carolina-based Bank of America Merrill Lynch. The country’s stocks also are inexpensive when compared with shares in Brazil, Latin America’s largest economy. Companies in Mexico’s benchmark stock index trade at an 8 percent discount to Brazil’s Bovespa, after fetching an average premium of 15 percent in the last five years, according to weekly trailing price-to-earnings ratios compiled by Bloomberg. Default Swaps Mexico’s benchmark measure is up 1.1 percent this year compared with a 1 percent rise in the Bovespa. In the credit-default swaps market, it costs 1.33 percentage points to protect Mexican debt against non-payment for five years, compared with 1.33 points for lower-rated Brazil and Peru, data compiled by CMA Datavision show. The Mexican rate is down from a record 6.1 percentage points in October 2008. Credit-default swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point is 0.01 percentage point and is equivalent to $1,000 a year on a contract protecting $10 million of debt. Bullish Bets “The peso is probably the cheapest currency in the liquid emerging market,” said Kieran Curtis , who helps manage $1.2 billion in emerging-market debt in London at Aviva Investors, a unit of the U.K.’s largest insurer. “All the negative news is in the price and you’ve got the U.S. economy starting to turn upwards. You’ve also got oil stabilizing, which means a much better outlook for the budget in 12 months.” Curtis said his funds added bullish bets on the peso last month after a Dec. 4 government report showed the U.S. unemployment rate unexpectedly fell. Crude oil, which is Mexico’s largest export and funds 38 percent of its budget, has more than doubled in the past 12 months to $77.45 a barrel. It will rise to $82 by year-end, according to a Bloomberg survey. Central bank Governor Agustin Carstens will keep inflation in check, adding to the allure of holding the peso, said Michael Gomez , co-head of emerging markets at Newport Beach, California- based Pimco, in a Jan. 7 interview. Gomez manages six funds, including the $2.7 billion Emerging Markets Bond Fund that returned 30.5 percent in 2009, its best year since 2003, Bloomberg data show. Interest Rates Mexico’s central bank will begin raising its benchmark interest rate from 4.5 percent in July, Bank of America Merrill Lynch analysts Alberto Boquin and Edgar Camargo wrote in a Jan. 13 note. They recommend investors buy the peso versus Brazil’s real and the euro. Policy makers will boost the benchmark rate 1 percentage point by year-end to 5.5 percent, four percentage points higher than the U.S. Federal Reserve’s rate, according to Bloomberg surveys. “We expect recuperation this year in Mexico with the prospects of improvements in the U.S. economy,” said Gerardo Roman , the head of trading at Mexico City-based Actinver SA. To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net ; Tal Barak Harif in New York at tbarak@bloomberg.net

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Mortgage-Bond Leverage Runs as High as 10-to-1 as Markets Heal, RBS Says

January 19, 2010

By Jody Shenn Jan. 19 (Bloomberg) — Wall Street firms are loosening the terms of their lending to mortgage-bond investors as markets heal, an RBS Securities Inc. executive said. Repurchase agreement, or repo, lending against the debt has expanded so much since freezing in late 2008 that some banks now offer as much as 10-to-1 leverage and terms as long as one year on certain securities backed by prime-jumbo home loans, said Scott Eichel , the Royal Bank of Scotland unit’s global co-head of asset- and mortgage-backed securities. “It’s getting very competitive,” Eichel said in a Jan. 14 interview at Bloomberg headquarters in New York. “We’re at the point where I don’t think we would feel comfortable if things go too much further.” An increasing availability of leverage for mortgage-bond buyers was among the reasons that JPMorgan Chase & Co. and Barclays Plc each said in analyst reports this month that a record rally in U.S. home-loan securities without government- backed guarantees may continue even amid record foreclosures and further declines in home prices. Stamford, Connecticut-based RBS Securities was the second- largest underwriter of structured-finance securities worldwide last year, according to newsletter Asset-Backed Alert . In a repo, one party provides securities to another in exchange for cash, with an agreement to reverse the exchange at the end of a pre-set time period. The difference between the market value of the collateral and size of the loan is known as a haircut, and it determines the amount of leverage. Repo Data Federal Reserve data show the 18 primary dealers required to bid at Treasury auctions held $32.7 billion of securities aside from Treasuries, agency debt and agency mortgage bonds as collateral for financings lasting more than one day as of Jan. 6, up from $15.8 billion on May 6. That’s down from $113.9 billion in 2007 and reflects so-called reverse repo, securities- lending agreements and other arrangements. Using borrowed money allows debt buyers such as hedge funds to potentially earn greater returns even as they buy at higher prices, though also increases their risks. As asset values dropped during 2007 and 2008, leverage boosted losses, wiping out hedge funds run by London-based Peloton Partners LLP and New York-based Bears Stearns Cos., and damaged markets by leading to forced sales by firms including Santa Fe, New Mexico-based Thornburg Mortgage Inc., which filed for bankruptcy. “I’ve got to be honest, leverage coming back this quickly is a little frightening,” said Jim Shallcross , who oversees about $12 billion of bonds as director of portfolio management at Declaration Management & Research LLC in McLean, Virginia. “You can’t assume everybody is going to do stuff rationally.” To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net .

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Corporate-Government Spread Widens as Barclays, Lloyds Lead Record Sales

January 18, 2010

By Bryan Keogh and Caroline Hyde Jan. 18 (Bloomberg) — The cost to borrow in the corporate bond market is rising for the first time since November as Barclays Plc, Lloyds Banking Group Plc and more than a dozen other European banks sell record amounts of fixed-income securities to refinance $2 trillion of debt due this year. The extra yield investors demand to own corporate debt instead of government securities widened on Jan. 15, expanding 1 basis point to 161 basis points, based on the Bank of America Merrill Lynch Global Broad Market Corporate Index. The last time the so-called spread expanded was Nov. 27, when it grew to 193 basis points from 191, or 1.91 percentage points. Banks have sold $96 billion of securities this month, and the increase in spreads may be a sign the supply is crowding other borrowers out of the market. Investors say banks will face increasing competition from industrial companies and governments that may push up yields from a four-year low. Fortis Bank Nederland NV, controlled by the Dutch government, is among banks preparing to offer notes in coming days, according to data compiled by Bloomberg. “We’re seeing a glut of senior bonds from European financial issuers,” said Philip Gisdakis , Munich-based head of credit strategy at UniCredit SpA, Italy’s biggest bank. The decline in yields on financial bonds slowed last week, narrowing 4 basis points to 205 basis points more than benchmark rates, after a drop of 24 basis points the week before, based on Bank of America Merrill Lynch’s Global Broad Market Financial Index. The two weeks marked the best performance since Aug. 7. Vietnam Prepares Sale Elsewhere in credit markets, the rally in developing nation debt is slowing. Vietnam will start marketing $1 billion of dollar-denominated 10-year bonds this week amid the busiest start to a year for sovereign emerging-market debt in at least a decade. Moody’s Investors Service said Jan. 13 that Greece and Portugal face a “slow death” from deteriorating public finances. The derivatives market is signaling that the 1.62 percent return on corporate bonds this year as measured by Bank of America Merrill Lynch indexes may be overdone. The cost to protect against defaults on U.S. corporate bonds rose last week by the most in more than two months. Investor Confidence Credit-default swaps on the Markit CDX North America Investment-Grade Index Series 13, which is linked to 125 companies and used to speculate on creditworthiness or to hedge against losses, increased to a mid-price of 83.5 basis points, according to CMA DataVision. A rise in the index signals a decline in investor confidence. The measure is the highest since Dec. 31, when it was 85.61 basis points. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan advanced 4 basis points to 97 basis points as of 10:40 a.m. in Singapore today, Royal Bank of Scotland Group Plc prices show. That would be its highest close since Dec. 21, according to CMA prices. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company or country fail to adhere to its debt agreements. Financial institutions are raising debt amid the biggest drop in their absolute borrowing costs since August. Yields on their bonds fell to 4.33 percent last week, from 4.66 percent at the end of last year and 8.88 percent in March, the Bank of America Merrill Lynch indexes show. Lloyds , the bank 43-percent owned by the U.K. government, sold $5 billion of five- and 10-year bonds in the U.S. last week and has about $39 billion of debt coming due this year, data compiled by Bloomberg show. London-based Barclays also raised $5 billion in euros and dollars this year, the data show. ‘Bit of Indigestion’ “Financials seem very keen indeed to raise money,” said Benjamin Bennett , a credit strategist at Legal & General Group Plc in London. There might “be a bit of indigestion next week,” he said. Companies in Europe have sold 56 billion euros ($80.4 billion) of bonds in the region in 2010, compared with 73.9 billion euros a year earlier, Bloomberg data show. Nations in the region may issue a record 1 trillion euros this year, according to HSBC Holdings Plc estimates. Sales globally total about $178 billion, down from $196 billion in 2009. European Central Bank President Jean-Claude Trichet ’s warning Jan. 14 that no euro-region member can expect special treatment on funding rules fueled speculation that Greece’s funding costs will increase, sending the cost of insuring against a loss on the country’s bonds to a record. Greek Debt Credit-default swaps on Greek debt rose to an all-time high of 344.5 basis points, according to CMA prices. The country’s 10-year notes yield 5.98 percent, compared with 3.26 percent on similar-maturity German bunds. The spread between the two doubled since November to 277 basis points Jan. 14, the widest since March. The Markit iTraxx SovX Western Europe Index of default swaps on 15 European countries rose 0.5 basis point Jan. 15 to a record 77.5 from 46 when it started trading in September, CMA prices show. That means it costs $77,500 a year to protect $10 million of debt from default for five years. The extra yield investors demand on bonds in emerging markets instead of U.S. Treasuries rose last week by the most since the period ended Oct. 30. The premium widened to 284 basis points from 265 on Jan. 8, according to the JPMorgan Emerging Markets Bond Index Plus. Indonesia, Philippines Vietnam Deputy Finance Minister Tran Xuan Ha will meet investors in Hong Kong today, in London tomorrow, Boston on Jan. 20 and New York the following day, said a person who declined to be identified before a public announcement. Indonesia sold $2 billion of 10-year bonds last week at a higher yield than a Jan. 6 sale by similar-rated Philippines, after scaling back the offering by canceling plans to sell 30-year debt. In the U.S., the record level of cash in the banking system, a consequence of the $1 trillion pumped in by the Federal Reserve to unlock credit markets, is pushing rates in the overnight lending markets closer to zero. The rate on general collateral repurchase agreements for government debt and the effective federal funds rate have fallen further below the top of the Fed’s target range of zero to 0.25 percent for overnight loans between banks. The effective rate is a volume-weighted average of rates on trades by major brokers published daily by the New York Fed. The repo rate is from ICAP Plc, the world’s largest inter-dealer broker. ‘Cash Glut’ “There remains a cash glut in the system,” said Scott Skyrm , senior vice president and head of repo and money markets for NewEdge USA LLC in New York. “This will all change when the Fed starts the reverse-repo operations, but it’s a mystery when they will begin. When they do, the whole psychology of the market will change.” U.S. interest-rate swap spreads mostly narrowed Jan. 15, with the two-year decreasing to the least since 2003, amid a continued rise in corporate debt sales and as implied yields on Eurodollar futures declined. The difference between the two-year swap rate and the similar-maturity Treasury note yield, known as the swap spread, contracted as much as 1 basis point to 25.13 basis points, before trading at 26.19 basis points. The spread is partly based on expectations for the London interbank offered rate, or Libor , and is used as a measure of investor perceptions of credit risk. To contact the reporters on this story: Bryan Keogh in London at bkeogh4@bloomberg.net ; Caroline Hyde in London chyde3@bloomberg.net

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Yen Carry Trade Shows Japan Losing Mojo With Collapsing Market Volatility

January 18, 2010

By Matthew Brown Jan. 18 (Bloomberg) — Currency strategists are more in sync than any time since the depths of the financial crisis, increasing incentives to bet against the yen after the carry trade lost money in December for the first time in 10 months. Forecasts for the euro, yen and Swiss franc from 61 Bloomberg survey contributors are within 9 cents of the mean on average, down from 11 cents a year ago. They haven’t been so unified since Lehman Brothers Holdings Inc.’s 2008 bankruptcy. The predictions’ so-called standard deviation fell 16 percent last quarter, the biggest drop in at least two years, after jumping 48 percent in the three months after Lehman’s demise. The growing consensus signals that foreign-exchange swings will decline, luring investors to sell currencies from countries with lower interest rates to buy higher-yielding ones. That may weaken the yen and franc, and rein in the resurgent dollar. Japan’s currency, which fell 6.6 percent since its 14-year high of 84.83 per dollar on Nov. 27, may be the biggest loser as Prime Minister Yukio Hatoyama fights deflation and a recession. Declining volatility and the rising U.S. currency means “people are thinking about alternatives to the dollar as a funding vehicle, and the yen is the obvious candidate,” said Richard Franulovich , a strategist in New York at Westpac Banking Corp., Australia’s second biggest bank. “Not only do they already have low rates, the authorities are talking about a new quantitative-easing program. There’s a big fiscal expansion playing out under the new government, and the currency had a big rally last year.” Carry Returns Westpac was one of 2009’s 10 best yen forecasters, data compiled by Bloomberg show. Selling yen to buy Australian and New Zealand dollars, Norwegian krone and Brazilian reais returned 33 percent last year. Using the dollar earned 31 percent. Funding the carry trade with the greenback lost money in December for the first time since February as the U.S. currency gained 4.8 percent against the euro amid growing confidence in the U.S. economy and expectations that the Federal Reserve will raise borrowing costs by June. Futures trading on Dec. 31 suggested a 62 percent chance the Fed would increase its benchmark to at least 0.5 percent by mid-year from a range of zero to 0.25 percent, up from 30 percent in November, Bloomberg data show. The Bank of Japan’s target rate is 0.1 percent. Buying and selling high- and low-yielding currencies to take maximum advantage of global rate moves gained 19 percent from February to November, the carry trade’s best nine months since 2003, a Royal Bank of Scotland Plc index shows. The index fell 0.9 percent in December. ‘U-Turn’ “The U-turn in the dollar led to a reverse carry trade in December where people were selling the commodity currencies,” said Theodore Chen , a quantitative analyst at RBS in London who oversees the index. Rapid exchange-rates swings tend to erode the carry trade’s profits. Greater certainty about the direction of currencies this year may help damp volatility, reducing the chances of a repeat of December’s turnabout. Risk returns have shifted in favor of the yen since late last year, as measured by the Sharpe ratio, a gauge of gains that takes volatility into account. In the year ending Nov. 30, selling the dollar versus the currencies of Australia, New Zealand, Norway and Brazil had a risk-premium ratio of 2.31, compared with 1.24 for the yen. Since then, the ratios are 2.71 for the yen and less than zero for the dollar. ‘Faster Pace’ “Yen volatility can come down at a faster pace than dollar or Swiss crosses, making it more useful as a funding source going forward,” said Paul Mackel , the director of currency strategy at HSBC Holdings Plc in London. “There’s going to be a reflating of the yen carry trade.” Analyst forecasts on the yen against the dollar varied from the mean by 9 cents at the end of last week, compared with 10 cents at the end of 2008, Bloomberg data show. Dollar forecasts against the euro also had a standard deviation of 9 cents last week, down from 12 cents. For the Swiss franc, the figure fell to 8 cents, from 11 cents. The Swiss National Bank’s key rate is 0.25 percent. JPMorgan Chase & Co.’s index of volatility in the Group of Seven currencies has fallen 12 percent this year, the most since the two weeks beginning March 27, 2009. Yen Forecasts Carry-trade returns will benefit this year from the yen dropping 7.3 percent to 98 per dollar from 90.84 today, according to the median forecasts in Bloomberg surveys. The franc is predicted to weaken 4.8 percent to 1.08 per dollar. The dollar has the least bearish outlook — a 1 percent decline to $1.45 per euro, from $1.4362. Bets on gains for the IntercontinentalExchange Inc.’s Dollar Index — a gauge against the euro, yen, pound, Canadian dollar, franc and Swedish krona – - outnumber bearish wagers by 6 to 1, the most since March. Even assuming stable currencies, buying 12-month bills in reais, kronor, Australian and New Zealand dollars with Japanese yen will return 5.2 percent more than holding equivalent- maturity Japanese bills, compared with 5 percent for the same trade with the dollars. ‘Disastrous Strategy’ Selling the yen against that basket of currencies lost investors 34 percent in 2008 as volatility on the Japanese currency against the dollar rose to 26 percent in December, the most since at least 1991. Using the dollar as the funding currency lost 17 percent. “The carry trade works under conditions of low volatility, which is why it was the most disastrous strategy in 2008,” said Stuart Thomson , a Glasgow-based fund manager at Ignis Asset Management, which oversees $100 billion. Yen volatility is likely to decline as the Bank of Japan keeps its benchmark rate on hold through next year as it battles deflation, according to median forecast of 28 economists. Japanese consumer prices are forecast to fall 1.3 percent in 2009, by the same amount in 2010 and a further 0.3 percent in 2011, according to median economist forecasts in Bloomberg surveys. The country’s economy will expand 1.4 percent in 2010, after contracting 5.3 percent last year, the estimates show. In Switzerland, inflation will hold at 0.6 percent through 2010, the Bloomberg survey shows. In the U.S., there is an 80 percent chance the Fed will raise its key rate to at least 0.5 percent by the end of the year, futures trading shows. The U.S. economy will grow 2.7 percent this year, according to the median of 57 economists’ forecasts compiled by Bloomberg. Brazil, Norway In Brazil, the central bank will increase its rate to 10.5 percent from 8.75 percent as growth accelerates to 4.75 percent from 0.2 percent in 2009, according to Bloomberg surveys. Norway will lift its rate to 3 percent from 1.75 percent, and Australia’s will rise to 5 percent from 3.75, the polls show. Japanese Finance Minister Naoto Kan said Jan. 14 there are “still various policy measures that can be taken,” signaling the Bank of Japan will take further action to aid the economy. Morgan Stanley, Goldman Sachs Group Inc. and Pacific Investment Management Co. analysts said this month the central bank may increase the amount of money it adds into the economy through purchases of government bonds to combat deflation. The Democratic Party of Japan’s popularity has slid since it came to power for the first time four months ago promising to end 20 years of economic stagnation. Prime Minister Hatoyama’s approval rating was at 56 percent this month, compared with 75 percent when he took office, the Yomiuri newspaper said Jan. 11, without giving a margin of error. Japanese Exporters A weaker yen will benefit Japanese exporters, including Toyota Motor Corp. , the world’s largest manufacturer of automobiles, and Sony Corp., which is forecasting a second annual loss. Japan exports more than it imports, giving it a current-account surplus every year since at least 1986, when Bloomberg began collecting the data. Exports accounted for 14 percent of Japanese gross domestic product in the third quarter, compared with 11 percent in the U.S. The policies of the government and central bank are “a signal to the market, saying ‘Hey, use the yen as a carry trade because we’ll be back into the market printing lots of yen to push the currency lower,” said Axel Merk , president of Merk Investments LLC in Palo Alto, California, and manager of the $477 million Merk Hard Currency Fund. Some analysts predict the yen will rise against the dollar as the U.S. currency suffers more from a global slowdown. Eisuke Sakakibara , formerly Japan’s top currency official, said the global recovery may slow in the second quarter, pushing Japan into a double-dip recession and weakening the dollar to 85 yen from 90.85 today. “Should the U.S. experience a relatively weak rebound from spring to summer there’s a high possibility the dollar will drop,” said Sakakibara in a Jan. 15 interview in Tokyo. To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net .

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Asian Stocks, Higher-Yielding Currencies Advance After Australia Adds Jobs

January 13, 2010

By Will McSheehy Jan. 14 (Bloomberg) — Asian stocks and higher-yielding currencies rose after Australian employment increased three times more than economists forecast and a Federal Reserve survey showed a broadening of the U.S. recovery. The MSCI Asia Pacific Index advanced 0.9 percent to 125.83 as of 12:10 p.m. in Tokyo, led by mining and finance companies. Copper for three month-delivery advanced as much as 0.7 percent to $7,540 a metric ton, gaining for a second day, and the Australian dollar rose against all 16 most-active currencies. Futures on the Standard & Poor’s 500 index added 0.3 percent. “Risk sentiment is likely to benefit from the good jobs report in Australia,” said Akane Vallery Uchida , a currency strategist at Royal Bank of Scotland Group Plc in Tokyo. Australian employers added 35,200 workers in December as the economy expanded, the government said, compared to a median estimate of 10,000 jobs from a Bloomberg survey of 19 economists. Confidence in the world economy rose as an acceleration in manufacturing and service industries signaled a sustained recovery from last year’s recession, according to a Bloomberg survey of 5,427 users on six continents. U.S. economic conditions changed “modestly” for the better last month, the Fed said its Beige Book assessment yesterday, which showed improvement in 10 of its 12 districts. The dollar declined toward a four-week low against the euro after New York Fed President William Dudley said U.S. interest rates may remain low, encouraging investors to borrow in dollars and buy assets with higher returns elsewhere. He wants to see job growth before rate increases, Dudley told PBS Television’s Nightly Business Report. Financial Companies Finance and material stocks accounted for 47 percent of the MSCI Asia Pacific Index’s advance today, the gauge’s fourth in five days. The gauge has surged 45 percent in the past year amid signs of recovery in the region’s economies, led by China. Australia’s S&P/ASX 200 Index advanced 0.8 percent, extending gains after the jobless rate fell to 5.5 percent from a revised 5.6 percent. Australia’s dollar rose 0.6 percent to 92.96 U.S. cents, and gained 0.6 percent to 84.93 yen. The currency climbed to 93.26 cents on Jan. 11, the strongest since Nov. 18. Japan’s Nikkei 225 Stock Average rose 1 percent, even as the government reported a decline in machinery orders. China’s Shanghai Composite Index gained 0.3 percent, while South Korea’s Kospi Index added 1 percent. Mizuho Capital Mizuho Financial Group Inc. climbed 5.1 percent to 185 yen. Japan’s third-largest lender is considering options to boost its capital, including what would be Japan’s first rights offering, three people with knowledge of the matter said. Rio Tinto Group , the world’s third-biggest mining company, surged 2.3 percent to A$78.87 as copper and gold advanced. BHP Billiton Ltd., Rio’s largest competitor, rose 1.6 percent to A$43.82. Gold for immediate delivery climbed 0.4 percent to $1,142.32 an ounce. “The trend in the economy is gradually getting better,” said Mitsushige Akino , who oversees $450 million in Tokyo at Ichiyoshi Investment Management Co. The South Korean won climbed 0.3 percent to 1,121.65 per dollar, approaching a 16-month high. The Malaysian ringgit gained 0.4 percent to 3.337 per dollar. Spreads Narrow The difference in yield to own bonds in developing countries instead of Treasuries narrowed to 2.67 percentage points from 2.70 percentage points yesterday, according to the JPMorgan Emerging Markets Bond Index Plus. That’s approaching the 19-month low of 2.64 percentage points reached on Jan. 11. The yen weakened against higher-yielding currencies on the Australian jobs report and after data from Japan’s Cabinet Office showed machinery orders unexpectedly fell the most in a year in November. Orders slid 11.3 percent from October, worse than all the estimates of 30 economists surveyed by Bloomberg whose median prediction was for a 0.2 percent increase. The Markit iTraxx Japan index of credit-default swaps climbed 3.5 basis points to 123.5 basis points, according to Morgan Stanley, while bond risk benchmarks for Australia and the rest of Asia were little changed. Oil rose for the first time in four days, gaining as much as 0.4 percent to $79.98 a barrel in electronic trading on the New York Mercantile Exchange. It was boosted by a storm in the Gulf of Mexico that may cause offshore drilling platforms in the region to close this week. The gulf produced 1.5 million barrels a day of crude in August. Crude for February delivery declined 1.4 percent yesterday as the Energy Department said U.S. crude inventories rose last week by more than twice as much as the median of analyst forecasts in a Bloomberg survey. Supplies of distillates, including heating oil and diesel, gained in contrast with estimates that they would drop. To contact the reporter for this story: Will McSheehy in Singapore at wmcsheehy@bloomberg.net

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U.K. Bankers Surrender on Darling Bonus Levy as Income Tax Increase Looms

January 13, 2010

By Andrew MacAskill, Ambereen Choudhury and Ben Martin Jan. 13 (Bloomberg) — Banks in the U.K. will pay the one- time, 50 percent tax on bonuses levied by the Treasury rather than reduce compensation, according to accountants and lawyers who advise financial institutions. Bankers who face increased income taxes on those payouts may not be so accommodating. Attention is shifting to how to minimize the effects of a personal income tax rise for high earners to 50 percent from 40 percent, which goes into effect in April, the accountants and lawyers said. One key strategy: Seeking more compensation in deferred stock, a form of pay classified as a capital gain and taxed at 18 percent in the U.K. “Inevitably, people are going to be pressed toward capital gains tax schemes, there’s no doubt about that,” said Nicholas Stretch, a tax lawyer at London-based law firm CMS Cameron McKenna. “We’re seeing greater interest from clients.” The levy on bonuses of more than 25,000 pounds ($40,300) and the increase in taxes on individuals earning more than 150,000 pounds a year mark efforts by the ruling Labour Party, facing an election to be held by June, to tap into popular anger over the 1 trillion-pound cost of bailing out U.K. banks during the financial crisis. Chancellor of the Exchequer Alistair Darling announced the tax on bankers’ bonuses last month. He said he introduced the measure, which covers payouts in cash and deferred stock, to encourage banks to build up capital, not raise revenue. Dimon’s Protest It may do the opposite. The Treasury, which initially said the tax would raise 550 million pounds, now estimates it may net as much as 2 billion pounds as banks opt to pay the tax rather than reduce bonuses, according to a government official who declined to be identified. U.K. banks are going to pay up because the legislation is tightly drawn and Treasury has been unwilling to negotiate, the accountants and lawyers said. An appeal to Darling last month from Jamie Dimon , JPMorgan Chase & Co.’s chief executive officer, made no difference. “People will be looking at the bonus tax and turning around and saying is there anything that we can do?” said Dominic Stuttaford, a partner at law firm Norton Rose LLP in London, which specializes in advising financial firms. “A lot of them will just say, with a very loud expletive: ‘Sorry, we’ve got to pay it.’” Representatives of Bank of America Corp. , Morgan Stanley and Citigroup Inc. said the banks hadn’t made a decision on how to deal with the tax. Barclays Plc, Royal Bank of Scotland Group Plc , HSBC Holdings Plc, JPMorgan , Credit Suisse Group AG and UBS AG declined to comment. ‘On The Chin’ There’s little appetite among the banks to circumvent the bonus tax because the legislation is rigorously drafted, said Sylvie Watts , a compensation lawyer at London-based Allen & Overy LLP. Banks also run the risk of negative publicity if they are caught trying to evade it, she said. “There aren’t many ways around it,” she said. Bankers “are just taking it on the chin.” That leaves banks such as Barclays and RBS, whose compensation committees are preparing to meet this month, with a choice if they pay the bonuses and the tax. They either risk the wrath of shareholders, who will receive a smaller slice of profits, or anger staff outside the U.K. by reducing the global bonus pool, or both, if they split the cost. “In principle, we can’t support the idea that the shareholders should pick up the bill,” said Peter Montagnon , director of investment affairs at the Association of British Insurers, whose members control about a fifth of the U.K. stock market, including banking stocks . Investors will have to consider whether to support the bank’s decision to add the cost of the tax to the wage bill on a case-by-case basis, he said. George Osborne Darling’s bonus tax, backed by Prime Minister Gordon Brown , has helped the Labour Party narrow the lead over the opposition Conservative Party in opinion polls. George Osborne, the lawmaker in line to become chancellor if the Conservatives win the election, has supported limits on cash bonuses and hasn’t ruled out extending the tax. London Mayor Boris Johnson warned this week that as many of 9,000 bankers may leave the U.K. as a result of the bonus tax. Ian Fleming, a managing director at Alvarez & Marsal Taxand LLC in London, disagreed, saying banks are unlikely to move to low- tax regimes because the Darling plan is a one-time levy. “Any extension of the bonus tax might tip the balance,” Fleming said. April Increase In addition to the charge on bonuses, U.K. bankers face an income tax increase in April. Any British banker making more than 150,000 pounds will have to pay half his income to the government for the first time since Prime Minister Margaret Thatcher cut the top rate of income tax to 40 percent in 1988. The top federal tax rate is 35 percent in New York, 45 percent in Frankfurt and 44 percent in Geneva. “You’ve got a generation of people who have not experienced paying half their income to the government,” said Chris Maddock, tax director of the London-based Vantis Group Ltd. “It’s a psychological barrier.” Bankers who try to dodge income tax by reclassifying their earnings as a capital gain may struggle to evade British tax authorities, accountants said. “The government isn’t stupid,” said John Whiting , tax policy director at the London-based Chartered Institute of Taxation, a professional body that promotes the study and practice of taxation. “They are on the lookout.” To contact the reporters on this story: Andrew MacAskill in London at amacaskill@bloomberg.net ; Ambereen Choudhury in London at achoudhury@bloomberg.net ; Ben Martin in London bmartin38@bloomberg.net .

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Stephen Hester, RBS CEO: ‘My Parents Think I’m Overpaid’

January 12, 2010

Stephen Hester, the chief executive of Royal Bank of Scotland (RBS), admitted to a parliamentary hearing today that even his parents believed that he was overpaid, although he insisted that, at the moment, his package was worthless.

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Scottish Widows Purchases `Unloved’ Japanese Stocks, Depressed Greek Bonds

January 12, 2010

By Rodney Jefferson Jan. 12 (Bloomberg) — Scottish Widows Investment Partnership, manager of about 140 billion pounds ($226 billion), is buying up some of the world’s least popular assets. The Edinburgh-based company purchased Greek bonds last month after yields soared because of concern the country may struggle to pay back its debts. Scottish Widows also increased holdings of stocks in the “unloved” Japanese market, according to Ken Adams , head of strategy at the fund manager. “You don’t wait for things to improve, you buy when the news is hitting the screens and everyone is depressed,” Adams said in an interview at his office in the Scottish capital. “You’re being paid to take the risk and I think Greece will have no choice but to take action and I think they will.” After rallies in stock and corporate bond markets, fund managers are struggling to find underperforming assets where prices may rebound. U.S. stocks posted their biggest annual gain since 2003 last year while yields on U.S. and European government bonds are still at least a percentage point lower than before the financial crisis. The biggest change to Scottish Widows’ strategy during the past year was to use money previously held in cash to buy commercial property in the U.K., Adams said. Standard Life Investments and Aberdeen Asset Management Plc, also based in Scotland, said in November they had started increasing investments in commercial property to take advantage of returns that are harder to come by in other markets. ‘Quite Relaxed’ Prime malls in Britain currently yield an annual 6.25 percent, while offices in the City of London financial district have a rental yield of 6 percent, according to property adviser CB Richard Ellis Group Inc. U.K. 10-year gilts yielded 3.93 percent as of 10:30 a.m. in London today. “Because there’s valuation there, we can afford to be quite relaxed about things and take a long-term view and if there is volatility down the road, so be it,” said Adams, 44. “It’s to be expected over the next 12 to 18 months as interest rates start to rise.” Scottish Widows is part of Lloyds Banking Group Plc and is one of Scotland’s three biggest money managers. Standard Life Investments managed 137 billion pounds as of Sept. 30, while Aberdeen Asset Management, based in the city of the same name, oversaw 144 billion pounds at the end of 2009. Scottish Widows bought five-year Greek notes, Adams said. The yield on the 5.5 percent Greek government security maturing in August 2014 soared almost two percentage points to 5.22 percent between Oct. 4, when Greece held elections, and Dec. 21. Bad Numbers Since then, they have declined 54 basis points to 4.68 percent, including a jump in yields today after the European Commission said there have been “severe irregularities” and a “lack of accountability” in Greece’s budget deficit figures. “There is long-term value and I think it’s worth putting a bit of capital to work,” Adams said. “I wouldn’t characterize it as a maximum bullish position.” Bond yields rise as prices fall, while a basis point is 0.01 percentage point. Standard & Poor’s, Fitch Ratings and Moody’s Investors Service cut Greece’s credit rating last month, citing its deteriorating government finances. Finance Minister George Papaconstantinou has said the country won’t need a bailout as the new government tackles the budget deficit. Greece pledged to reduce the spending gap to 8.7 percent of economic output this year from 12.7 percent in 2009 and below the 3 percent limit for euro members by 2012. ‘Cheap Side’ The extra yield, or spread, investors demand for holding 10-year Greek bonds instead of benchmark German bunds was at 227 basis points today, up 10 points from yesterday. It widened to 277 basis points on Dec 21, the most since March. Robeco Groep NV, which oversees $186 billion in assets, increased its holdings of Greek bonds, moving to a “neutral” position from “underweight,” Kommer van Trigt , head of interest rates at the Rotterdam-based company, said last week. Japanese stocks were the worst performers among the world’s biggest markets during the past six months. The benchmark Nikkei 225 Index is up 16 percent in dollar terms compared with 30 percent for the Standard & Poor’s 500 Index and 34 percent for Britain’s FTSE 100 Index . “Japan is now on the cheap side on the relative ranking and people dislike it,” he said. “And if we think the yen is going to weaken, that should provide something of a tailwind.” The dollar has lost a quarter of its value against the yen since the end of June 2007, according to Bloomberg data. While it may have become more difficult to find “unloved” markets to make money, Adams said assets worldwide have more gains in them based on current valuations. “I’m more relaxed than I’ve been for many years,” said Adams. “Things are not as cheap as they were, but they’re still cheap. Over time the world will mend itself and the world is cheap. So I’m relaxed because there’s long-term value there.” To contact the reporter on this story: Rodney Jefferson in Edinburgh at r.jefferson@bloomberg.net

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Federal Reserve Seeks to Protect U.S. Bailout Secrets Against Court Ruling

January 11, 2010

By David Glovin and Thom Weidlich Jan. 11 (Bloomberg) — The Federal Reserve asked a U.S. appeals court to block a ruling that for the first time would force the central bank to reveal secret identities of financial firms that might have collapsed without the largest government bailout in U.S. history. The U.S. Court of Appeals in Manhattan will decide whether the Fed must release records of the unprecedented $2 trillion U.S. loan program launched after the 2008 collapse of Lehman Brothers Holdings Inc. In August, a federal judge ordered that the information be released, responding to a request by Bloomberg LP, the parent of Bloomberg News. “This case is about the identity of the borrower,” said Matthew Collette, a lawyer for the government, in oral arguments today. “This is the equivalent of saying ‘I want all the loan applications that were submitted.’” Bloomberg argues that the public has the right to know basic information about the “unprecedented and highly controversial use” of public money. Banks and the Fed warn that bailed-out lenders may be hurt if the documents are made public, causing a run or a sell-off by investors. Disclosure may hamstring the Fed’s ability to deal with another crisis, they also argued. The lower court agreed with Bloomberg. ‘Right to Know’ “The question is at what point does the government get so involved in the life of the institution that the public has a right to know?” said Charles Davis, executive director of the National Freedom of Information Coalition at the University of Missouri in Columbia. Davis isn’t involved in the lawsuit. The ruling by the three-judge appeals panel may not come for months and is unlikely to be the final word. The loser may seek a rehearing or appeal to the full appeals court and eventually petition the U.S. Supreme Court, said Anne Weismann, chief lawyer for Citizens for Responsibility and Ethics, a Washington advocacy group that supports Bloomberg’s lawsuit. New York-based Bloomberg, majority-owned by Mayor Michael Bloomberg , sued in November 2008 after the Fed refused to name the firms it lent to or disclose the amounts or assets used as collateral under its lending programs. Most were put in place in response to the deepest financial crisis since the Great Depression. ‘Almost Two Years’ “Bloomberg has been trying for almost two years to break down a brick wall of secrecy in order to vindicate the public’s right to learn basic information,” Thomas Golden , an attorney for the company with Willkie Farr & Gallagher LLP, wrote in court filings. He said the Fed may be trying “to draw out the proceedings long enough so that the information Bloomberg seeks is no longer of interest.” The Fed’s balance sheet debt doubled after lending standards were relaxed following Lehman’s failure on Sept. 15, 2008. That year, the Fed began extending credit directly to companies that weren’t banks for the first time since the 1930s. Total central bank lending exceeded $2 trillion for the first time on Nov. 6, 2008, reaching $2.14 trillion on Sept. 23, 2009. The lawsuit, brought under the U.S. Freedom of Information Act , or FOIA, came as President Barack Obama criticized the previous administration’s handling of the $700 billion Troubled Asset Relief Program passed by Congress in October 2008. Obama has said funds were spent by the administration of former President George W. Bush with little accountability or transparency. Press and Public FOIA requires federal agencies to make government documents available to the press and public. In her Aug. 24 ruling, U.S. District Judge Loretta Preska in New York said loan records are covered by FOIA and rejected the Fed’s claim that their disclosure might harm banks and shareholders. An exception to the statute that protects trade secrets and privileged or confidential financial data didn’t apply because there’s no proof banks would suffer, she said. The central bank “speculates on how a borrower might enter a downward spiral of financial instability if its participation in the Federal Reserve lending programs were to be disclosed,” Preska, the chief judge of the Manhattan federal court, said in her 47-page ruling. “Conjecture, without evidence of imminent harm, simply fails to meet the board’s burden” of proof. In its appeal, the Board of Governors of the Federal Reserve System argued that disclosure of “highly sensitive” documents, including 231 pages of daily lending reports, threatens to stigmatize lenders and cause them “severe and irreparable competitive injury.” ‘Confidentiality is Essential’ “Confidentiality is essential to the success of the board’s statutory mission to maintain the health of the nation’s financial system and conduct monetary policy,” Assistant U.S. Attorney General Tony West and Fed lawyer Richard Ashton wrote in a legal brief to the appeals court. “The board’s ability to administer lending programs crucial to maintaining national financial and economic stability will be severely undermined” if lenders won’t come to the regional Federal Reserve Banks “for their funding needs, particularly in time of economic crisis,” they said. Historically, the type of government documents sought in the case has been protected from public disclosure because they might reveal competitive trade secrets, Davis said. Laws governing such disclosures may be due for a change, he said, following the far-reaching U.S. bailout. “If you are in need of a bailout and turn to the federal government and say, ‘help,’ with that comes some requirements in terms of transparency,” Davis said. Joined in Bid The Fed is joined in its bid to overturn Preska’s order by the Clearing House Association LLC, an industry-owned group in New York that processes payments between banks. The group assailed the judge’s decision for what it said were legal errors, such as applying the wrong standard in weighing the exception to FOIA. The group includes ABN Amro Bank NV, a unit of Royal Bank of Scotland Plc, Bank of America Corp., The Bank of New York Mellon Corp., Citigroup Inc. , Deutsche Bank AG, HSBC Holdings Plc, JPMorgan Chase & Co ., US Bancorp and Wells Fargo & Co. Preska allowed the association to join the case so that it could directly participate in the appeal. More than a dozen other groups or companies filed amicus, or friend-of-the-court, briefs, including the American Society of News Editors and individual news organizations. The judge postponed the application of her ruling to allow the appeals court to consider the case. Also today, the same appeals court was to hear arguments in a lawsuit brought by News Corp. unit Fox News Network seeking similar documents. U.S. District Judge Alvin Hellerstein in New York sided with the Fed in that case and refused to order the agency to release the documents. The case is Bloomberg LP v. Board of Governors of the Federal Reserve System, 09-04083, U.S. Court of Appeals for the Second Circuit (New York). To contact the reporters on this story: Thom Weidlich in the U.S. Court of Appeals for the Second Circuit in Manhattan at tweidlich@bloomberg.net and; David Glovin in U.S. District Court for the Southern District of New York at dglovin@bloomberg.net .

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Dollar No Match for Aussie, Loonie Approaching Parity as Commodities Rally

January 11, 2010

By Oliver Biggadike and Candice Zachariahs Jan. 11 (Bloomberg) — The biggest monthly rebound in the Dollar Index since January means faster gains for Australia’s and Canada’s currencies as the recovering U.S. economy boosts demand for their commodities. The Canadian and Australian dollars will strengthen to trade at parity with the greenback or better together in 2010 for the first time in 34 years, appreciating at least 2.6 percent and 7.4 percent, three of last year’s four best forecasters for both currencies say. Traders are favoring the so-called loonie and Aussie over the dollar on the Chicago Mercantile Exchange even while betting more than ever on the Dollar Index advancing. Accelerating U.S. growth will spur demand for Canadian oil and natural gas as China’s expansion boosts purchases of Australian iron ore and coal, pushing both currencies higher, said Sacha Tihanyi , a foreign-exchange strategist in Toronto at Bank of Nova Scotia. The loonie and Aussie both rose last week even as the People’s Bank of China took steps to curb lending. “The global economy is going to strengthen, and the recovery is going to broaden out from what has so far been a China-, Asia-led global recovery,” said John Kyriakopoulos , head of currency strategy in Sydney at National Australia Bank Ltd., the most accurate predictor for both currencies last year. “We’re forecasting parity for the Aussie dollar, and we actually think the Canadian dollar will go through parity” by March, he said. The bank is the most bullish of last year’s most accurate forecasters on the two currencies, predicting gains of about 11 percent for each by Sept. 30. Most Since 2007 The Australian dollar rose 0.7 percent to 93.16 U.S. cents as of 2:15 p.m. in Sydney and was 2009’s third-best performer among the 16 most-traded currencies. Canada’s loonie, nicknamed for the aquatic bird on its dollar coin, advanced 0.4 percent to C$1.0260, after gaining the most since 2007 last year. IntercontinentalExchange Inc.’s Dollar Index — a gauge against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona — has rallied 3.7 percent since Nov. 25 after a 16.7 percent slide from 2009’s March 5 closing high. Three of the four best loonie forecasters in 2009 — National Australia, Royal Bank of Scotland Group Plc, JPMorgan Chase & Co. — predict parity by June 30; the other, Canadian Imperial Bank of Commerce, sees it there by Dec. 31. As for the best Aussie predictors, National Australia says that currency will equal the greenback by March 31; CIBC sees it there by year-end; JPMorgan estimates it will be stronger than parity in the second quarter and Commonwealth Bank of Australia is calling for it to stop 2 cents short of one U.S. dollar. Biggest Gains Of the most active currencies, the Aussie, loonie, Brazilian real, Norwegian Krone, South African rand and New Zealand dollar, known as commodity currencies, posted 2009’s biggest gains against the dollar. The Reuters/Jefferies CRB Index of raw material prices had its best performance since 1979, gaining 23.5 percent. History shows that a U.S. recovery coincides with increases in commodities, the Aussie and loonie. After the U.S. came out of the 2001 recession, the currencies rose 48 percent and 23 percent, respectively, in the two years ending with 2003 as the world’s biggest economy expanded almost 6 percent. After falling 31 percent in 2001, the Standard & Poor’s GSCI Index of 24 commodities rose 39 percent and 11 percent in the next two years. The Australian and Canadian dollars have rallied about 49 percent and 27 percent from last year’s lows as U.S. growth rebounded to 2.2 percent in the third quarter after shrinking 6.4 percent in the first. Economic Forecasts The U.S. economy’s expansion will accelerate to 2.6 percent in 2010, compared to 3.1 percent for Australia and 2.55 percent for Canada, according to the median estimates in Bloomberg economist surveys. Goldman Sachs Group Inc. predicts the S&P GSCI Enhanced Total Return Index of commodities will gain 17.5 percent this year. “A lot of the Canadian dollar gains up to now have been happening in the absence of strong growth in the U.S.,” said Tihanyi of Bank of Nova Scotia. “Through this year, you’re going to see growth come back to what you might see in a normal year, and along with that you’re going to see a pickup in trade and demand for Canadian products.” Canada’s third-largest lender forecasts parity by June 30. The Canadian dollar rose versus the greenback for a fourth day on Jan. 5, when the U.S. Commerce Department reported that automakers increased sales in December. The loonie climbed again the next day for its longest winning streak in two months. Record Lending The Canadian and Australian dollars are gaining support from the global recovery as China’s central bank tries to curb record lending. The nation may have exceeded its 8 percent growth target for 2009 by 0.5 percentage point, said Zhang Xiaoqiang , deputy head of the National Development and Reform Commission, in a Jan. 5 statement. Commonwealth Bank of Australia , among the five most- accurate forecasters for the Aussie and loonie, expects both currencies to end 2010 short of parity after peaking in the second quarter as Federal Reserve interest-rate increases add to the greenback’s appeal. Median Bloomberg survey forecasts see the Australian dollar falling 3.4 percent by Dec. 31 as the Canadian currency drops 5 percent. “The U.S. dollar will strengthen in anticipation of rate hikes,” said Richard Grace , chief currency strategist in Sydney at Commonwealth Bank. Canadian policy makers will warn traders against pushing the loonie higher to prevent damage to the economy, said Sebastien Galy , a foreign-exchange strategist at BNP Paribas SA in New York. ‘Pretty Vociferous’ “The problem with the Canadian dollar is the reaction function of the central bank; they’ve been pretty vociferous about talking down the currency,” Galy said. Seven days after the loonie reached C$1.0207 on Oct. 15, its closest brush with parity since July 2008, Bank of Canada Governor Mark Carney said action to weaken the currency “is always an option.” Within two weeks, it fell 6.1 percent to a one-month low of C$1.0870. Measured in U.S. cents, Canada’s dollar hit 97.97 before falling to 92. For the Aussie, the risk is a pause in rate increases. Reserve Bank of Australia Deputy Governor Ric Battellino described its monetary policy on Dec. 16 as “back in the normal range” because lenders had raised rates more than the policy makers had. Weighing on Aussies “Any paring back of those interest-rate hike expectations will weigh on the Aussie,” said Sue Trinh , a senior currency strategist at RBC Capital Markets in Sydney, who sees the currency peaking at 93 U.S. cents. “A sooner and stronger-than- expected recovery in the U.S. is going to benefit Canada more than the likes of Aussie.” Currency strategists have pushed up first-quarter forecasts for the Australian dollar, with the median prediction now at 93 U.S. cents, from 65 cents in March, more than estimates for the New Zealand dollar, real, krone, ruble and Canadian dollar. Futures traders are becoming more bullish about the loonie and Aussie even as they increase bets on the U.S. dollar, data from the U.S. Commodity Futures Trading Commission show. Contracts profiting from gains against the greenback outnumbered bearish wagers by more than 40,000 on each currency last week, the most in five weeks for the Aussie and 10 for the loonie . Investors had an unprecedented 51,050 bets that the Dollar Index would rise as of Dec. 29, according to the CFTC data. Even after such wagers fell to 48,623 last week, bullish contracts outnumbered bearish ones by more than 5 to 1, the most since March, when the dollar started last year’s slide. Major Exports Canada sits on the largest pool of oil reserves outside the Middle East. The nation is also the world’s third-largest exporter of natural gas after Russia and the U.S., according to the Energy Information Administration. Australia is the biggest shipper of iron ore and coal . Merchandise exports to China, the nation’s largest trading partner, grew 29 percent in 2009’s first 11 months from the same period in 2008. Australia also sells gold, crude oil and liquefied natural gas. The Aussie and the loonie last traded at parity together in 1976, before the November election of a secessionist Parti Quebecois government in Quebec helped trigger “a protracted selloff” in the Canadian dollar, according to James Powell’s “A History of the Canadian Dollar” on the Bank of Canada’s Web site. Past Parity The loonie most recently had the same value as an American dollar in July 2008 after rising to that level in September 2007 for the first time in three decades. It hit its strongest level of 90.58 Canadian cents per U.S. dollar two months later. The Aussie last reached parity in 1982, before the government allowed it to float freely the following year. With the U.S. dollar showing renewed strength, Barclays Plc’s wealth management unit is advising investors to maximize returns on bets that the Aussie and loonie will rise along with commodity prices by purchasing the currencies with yen. “If you had to pick a country in the world that’s most short of commodities, it’s Japan,” said Aaron Gurwitz head of global investment strategy at Barclays Wealth in New York. To contact the reporter on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net ; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net .

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Federal Reserve Seeks Court Help to Block Release of U.S. Bailout Secrets

January 11, 2010

By David Glovin Jan. 11 (Bloomberg) — The Federal Reserve will ask a U.S. appeals court to block a ruling that for the first time would force the central bank to reveal secret identities of financial firms that might have collapsed without the largest government bailout in U.S. history. The U.S. Court of Appeals in Manhattan, after hearing arguments in the case today, will decide whether the Fed must release records of the unprecedented $2 trillion U.S. loan program launched after the 2008 collapse of Lehman Brothers Holdings Inc. In August, a federal judge ordered that the information be released, responding to a request by Bloomberg LP, the parent of Bloomberg News. Bloomberg argues that the public has the right to know basic information” about the “unprecedented and highly controversial use” of public money. Banks and the Fed warn that bailed-out lenders may be hurt if the documents are made public, causing a run or a sell-off by investors. Disclosure may hamstring the Fed’s ability to deal with another crisis, they also argued. The lower court agreed with Bloomberg. “The question is at what point does the government get so involved in the life of the institution that the public has a right to know?” said Charles Davis, executive director of the National Freedom of Information Coalition at the University of Missouri in Columbia. Davis isn’t involved in the lawsuit. The ruling by the three-judge appeals panel may not come for months and is unlikely to be the final word. The loser may seek a rehearing or appeal to the full appeals court and eventually petition the U.S. Supreme Court, said Anne Weismann, chief lawyer for Citizens for Responsibility and Ethics, a Washington advocacy group that supports Bloomberg’s lawsuit. Seeking Disclosure New York-based Bloomberg, majority-owned by Mayor Michael Bloomberg , sued in November 2008 after the Fed refused to name the firms it lent to or disclose the amounts or assets used as collateral under its lending programs. Most were put in place in response to the deepest financial crisis since the Great Depression. “Bloomberg has been trying for almost two years to break down a brick wall of secrecy in order to vindicate the public’s right to learn basic information,” Thomas Golden , an attorney for the company with Willkie Farr & Gallagher LLP, wrote in court filings. He said the Fed may be trying “to draw out the proceedings long enough so that the information Bloomberg seeks is no longer of interest.” The Fed’s balance sheet debt doubled after lending standards were relaxed following Lehman’s failure on Sept. 15, 2008. That year, the Fed began extending credit directly to companies that weren’t banks for the first time since the 1930s. Total central bank lending exceeded $2 trillion for the first time on Nov. 6, 2008, reaching $2.14 trillion on Sept. 23, 2009. Freedom of Information The lawsuit, brought under the U.S. Freedom of Information Act , or FOIA, came as President Barack Obama criticized the previous administration’s handling of the $700 billion Troubled Asset Relief Program passed by Congress in October 2008. Obama has said funds were spent by the administration of former President George W. Bush with little accountability or transparency. FOIA requires federal agencies to make government documents available to the press and public. In her Aug. 24 ruling, U.S. District Judge Loretta Preska in New York said loan records are covered by FOIA and rejected the Fed’s claim that their disclosure might harm banks and shareholders. An exception to the statute that protects trade secrets and privileged or confidential financial data didn’t apply because there’s no proof banks would suffer, she said. Burden Not Met The central bank “speculates on how a borrower might enter a downward spiral of financial instability if its participation in the Federal Reserve lending programs were to be disclosed,” Preska, the chief judge of the Manhattan federal court, said in her 47-page ruling. “Conjecture, without evidence of imminent harm, simply fails to meet the board’s burden” of proof. In its appeal, the Board of Governors of the Federal Reserve System argued that disclosure of “highly sensitive” documents, including 231 pages of daily lending reports, threatens to stigmatize lenders and cause them “severe and irreparable competitive injury.” “Confidentiality is essential to the success of the board’s statutory mission to maintain the health of the nation’s financial system and conduct monetary policy,” Assistant U.S. Attorney General Tony West and Fed lawyer Richard Ashton wrote in a legal brief to the appeals court. “The board’s ability to administer lending programs crucial to maintaining national financial and economic stability will be severely undermined” if lenders won’t come to the regional Federal Reserve Banks “for their funding needs, particularly in time of economic crisis,” they said. Protected From Disclosure Historically, the type of government documents sought in the case has been protected from public disclosure because they might reveal competitive trade secrets, Davis said. Laws governing such disclosures may be due for a change, he said, following the far-reaching U.S. bailout. “If you are in need of a bailout and turn to the federal government and say, ‘help,’ with that comes some requirements in terms of transparency,” Davis said. The Fed is joined in its bid to overturn Preska’s order by the Clearing House Association LLC, an industry-owned group in New York that processes payments between banks. The group assailed the judge’s decision for what it said were legal errors, such as applying the wrong standard in weighing the exception to FOIA. The group includes ABN Amro Bank NV, a unit of Royal Bank of Scotland Plc, Bank of America Corp., The Bank of New York Mellon Corp., Citigroup Inc. , Deutsche Bank AG, HSBC Holdings Plc, JPMorgan Chase & Co ., US Bancorp and Wells Fargo & Co. Directly Participate Preska allowed the association to join the case so that it could directly participate in the appeal. More than a dozen other groups or companies filed amicus, or friend-of-the-court, briefs, including the American Society of News Editors and individual news organizations. The judge postponed the application of her ruling to allow the appeals court to consider the case. Also today, the same appeals court will hear arguments in a lawsuit brought by News Corp. unit Fox News Network seeking similar documents. U.S. District Judge Alvin Hellerstein in New York sided with the Fed in that case and refused to order the agency to release the documents. The case is Bloomberg LP v. Board of Governors of the Federal Reserve System, 09-04083, U.S. Court of Appeals for the Second Circuit (New York). To contact the reporter on this story: David Glovin in the U.S. Court of Appeals for the Second Circuit in Manhattan at dglovin@bloomberg.net .

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Chavez Cuts Bolivar by Half in Its First Devaluation Since 2005, Adds Rate

January 9, 2010

By Daniel Cancel Jan. 9 (Bloomberg) — Venezuela devalued its currency by half yesterday, the first such action since March 2005, as President Hugo Chavez seeks to pull the economy from recession amid falling oil revenue. Chavez said the bolivar will be devalued to 4.3 per dollar from 2.15 per dollar for most imports. A second, subsidized peg of 2.60 bolivars per dollar will be used for importing food, medicine and machinery intended to boost the economy’s competitiveness. The Central Bank , which agreed yesterday to transfer $7 billion in reserves to the government, will “intervene” to prop up the bolivar in the unregulated parallel market , Chavez said without providing details. “This is to boost the productive economy, to reduce imports that aren’t strictly necessary and to stimulate exports,” Chavez, 55, said in comments on state television. “We need to stop being a country that only exports oil.” Chavez is trying to maintain spending for his 21st century socialist revolution as South America’s largest oil exporter fails to emerge from its first recession in six years. The government is trying to stem its falling popularity and the highest inflation rate among 78 economies tracked by Bloomberg ahead of parliamentary elections scheduled for September. Venezuela’s benchmark dollar bonds rose to the highest in more than two months yesterday on speculation a devaluation was imminent. The yield on Venezuela’s 9.25 percent bonds due in 2027 fell 12 basis points, or 0.12 percentage point, to 12.13 percent. The price on the securities climbed 0.70 cent on the dollar to 79.20 cents, the highest since Oct. 29. The bolivar dropped 1.6 percent in unregulated trading to 6.25 per dollar from 6.15 yesterday, traders said . Dual Rate The new dual exchange rate system will allow the government to receive more bolivars per dollar from oil exports while taking the pressure off the preferential exchange rate in a bid to protect $35 billion in international currency reserves. Starting on Jan. 11, food, medicine and machinery imports will be priced at the subsidized rate of 2.6 per dollar while non-essential imports will be paid with at what Chavez called the “oil dollar,” pegged at 4.3 bolivars per dollar. Finance Minister Ali Rodriguez said the devaluation may add between 3 percent and 5 percent to the annual inflation rate in 2010. The government said before the announcement inflation will likely be between 20 percent and 22 percent this year. Inflation ended 2009 at almost 27 percent, the highest annual rate of 78 economies tracked by Bloomberg. The government, which restricted foreign currency trading in January 2003 following a two-month general strike intended to oust Chavez from power, last devalued the currency by about 11 percent in March 2005. The bolivar was also devalued in 2004. Stimulating Exports A government official told Bloomberg News in October that the bank will increase the sale of dollar securities to the parallel market to strengthen the rate. Together with devaluation, Chavez said yesterday the government will create a special fund to stimulate exports and other strategies to replace imports. The central bank also said it will transfer $7 billion of reserves to an off-budget fund, known as Fonden, to finance infrastructure projects. Planning and Development Minister Jorge Giordani said the cacao and coffee industries will be the main beneficiaries from the government-led campaign to make Venezuelan products more competitive. Venezuela established a dual exchange rate system in the early 1980s following a devaluation of the bolivar known as “Black Friday,” when collapsing oil revenue forced banks to temporarily shutter and sent the economy into a tailspin. Jose Guerra , a former central bank director, said that the government this time has enough reserves to withstand the devaluation, though it will likely use the higher inflow of bolivars to increase spending, stoking inflation. International Reserves “This gives them bolivars to keep spending, but inflation will continue to accelerate and another devaluation will be inevitable,” he said in a phone interview in Caracas. Venezuelans buy dollars in the so-called parallel market when they can’t get government authorization to purchase the U.S. currency at the official exchange rate. Royal Bank of Scotland Plc and HSBC Holdings Plc both forecasted a devaluation in the first quarter of the year, while BNP Paribas, JPMorgan Chase & Co. and Goldman Sachs Group expected the currency to remain unchanged, according to a Bloomberg survey. State-run food companies and third party contractors are the main recipients of dollars at the official exchange rate so they can import processed items and sell them at subsidized state markets called Mercal. Looming Elections Chavez, who won re-election in 2006 with more than 60 percent of the vote, saw his approval rate dip below 50 percent last year over electricity and water rationing and a slumping economy that has failed to recover from the global crisis as quickly as regional neighbors such as Brazil and Chile. The country, a founding member of the Organization of Petroleum Exporting Countries, fell into recession in 2009 after oil revenue and manufacturing plunged. Gross domestic product sunk 4.5 percent in the third quarter. Chavez’s United Socialist Party faces elections in September for all 167 lawmakers in the country’s National Assembly. Absolute Majority The government holds almost every seat in the legislature after the opposition abstained from elections in 2005 in a bid to isolate Chavez internationally. “Given key congressional elections in September, authorities need to devalue as soon as possible, if they hope this issue to die down by then,” Boris Segura , an economist at RBS Securities Inc. in Stamford, Connecticut, said in a research note published yesterday. The former army paratrooper had previously resisted calls to devalue, saying such “neo-liberal policies” were more akin to the International Monetary Fund and the World Bank than a socialist economy and state. To contact the reporter on this story: Daniel Cancel in Caracas at dcancel@bloomberg.net

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Emerging Funds Lured Record 2009 Inflows, Amid Global Recovery, EPFR Says

January 4, 2010

By Shiyin Chen and David Yong Jan. 5 (Bloomberg) — Emerging-market stocks and bond funds closed 2009 with record annual inflows as a recovery from the global financial crisis boosted demand for riskier assets, according to U.S.-based research company EPFR Global. Emerging-market equity funds received $64.5 billion, while those investing in developing-nation fixed-income securities drew more than $8 billion, EPFR in Cambridge, Massachussetts, said in an e-mailed statement, citing initial figures from funds reporting daily and weekly. Gains last year followed outflows of about $67 billion in 2008, when the failure of Lehman Brothers Holdings Inc. froze world credit markets. The MSCI Emerging-Markets Index of stocks rallied 75 percent in 2009, the most since the gauge was introduced in 1987. Emerging-market debt produced a 28 percent return, the best since 1996, according to JPMorgan Chase & Co.’s EMBI Global Index . “Liquidity will still be an important factor driving markets,” Vasu Menon , vice president of Oversea-Chinese Banking Corp.’s wealth-management unit, said in a Bloomberg Television interview. “But for 2010, fundamentals will play a bigger role.” Shares in developing nations may rally more than 20 percent this year as the U.S. economic recovery strengthens, Credit Suisse Group AG said yesterday. The brokerage joined JPMorgan and Morgan Stanley in predicting further gains in emerging markets. Stock Valuations Emerging markets are attracting more money to initial public offerings than developed nations for the first time, a warning sign that the record rally may turn into a 20 percent decline, according to Mark Mobius , who oversees $34 billion of developing-nation assets at Templeton Asset Management Ltd. Companies in the MSCI Emerging-Markets Index are trading at the highest levels relative to earnings since 2000. IPOs in developing economies raised $77 billion last year, exceeding industrialized nations by 160 percent, annual Bloomberg data starting in 2000 show. Stock funds investing in Asia excluding Japan, and diversified global emerging markets both attracted record inflows last year, along with those buying in Brazil, Russia, India and China, according to EPFR, which tracks funds with more than $12 trillion of assets. Final weekly and monthly data will be available from Jan. 16, it said. Dollar Bond Sales The 28 percent return in emerging-market debt in 2009 was the best in 14 years, according to JPMorgan’s EMBI Global Index. Indonesia’s sovereign bonds rallied 47 percent, the Philippines rose 24 percent and Vietnam’s gained 33 percent . “Investors are getting more comfortable with Asian growth stories,” said Irene Cheung , a Singapore-based director of Asian emerging-market trading at Royal Bank of Scotland Group Plc. “Credit qualities are good and not over-rated and that’s true for Indonesia and the Philippines.” Indonesia, the Philippines and Vietnam are lining up to sell foreign-currency bonds from this month, as a global economic recovery buoys investor appetite for higher-yielding assets in the region. Indonesia plans to sell as much as $4 billion of U.S. dollar debt with 10- and 30-year maturities, while the Philippines is offering as much as $1.5 billion of notes denominated in dollars or euros, according to people aware of the plans. Vietnam is seeking to raise as much as $1 billion. To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net ; To contact the reporter on this story: David Yong in Singapore at dyong@bloomberg.net .

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Commodities Back to Economic Euphoria as Top Gurus Eschew Financial Assets

January 4, 2010

By Claudia Carpenter, Anna Stablum and Yi Tian Jan. 4 (Bloomberg) — Raw materials may return more than financial assets for the first time in three years as the global economy rebounds, according to Bloomberg surveys and 2009’s most accurate commodity forecasters. Oil, corn, gold and palladium will advance as much as 17 percent this year, the analysts said. The S&P GSCI Enhanced Total Return Index of 24 commodities will gain 17.5 percent, Goldman Sachs Group Inc. estimates. That’ll beat the 11 percent jump in the Standard & Poor’s 500 Index and the 2.8 percent return on the benchmark U.S. 10-year note, forecasts compiled by Bloomberg show. “Demand is growing on a global basis,” said Peter Sorrentino , who helps manage $13.8 billion at Huntington Asset Advisors in Cincinnati and predicted the collapse in prices in 2008. “Commodities are a great place to be to gain exposure to the growth that’s coming out of emerging markets.” Sorrentino’s largest commodity holdings are in coal and natural gas. Commodities will keep rising after the Reuters/Jefferies CRB Index’s best year since 1979 because China is leading the world out of the first global recession since World War II. Peoples’ Bank of China Governor Zhou Xiaochuan said Dec. 31 the central bank will keep its monetary policy “moderately loose” after the government’s $586 billion stimulus increased demand for Australia’s coal, Brazil’s iron ore and Chile’s copper. The 3.1 percent global expansion forecast by the International Monetary Fund in October also means demand for food will rise. A United Nations index of 55 food commodities advanced for four consecutive months through November. Shortages sparked riots from Haiti to Egypt in 2008. Curbing Inflation Commodities are forecast to beat bonds and stocks this year as faster growth and higher prices stoke expectations that central banks will raise interest rates to curb inflation. Goldman forecast on Dec. 3 that the S&P GSCI Enhanced Total Return Index would gain 17.5 percent in 12 months, led by advances of 25 percent in energy and 15 percent in metals. The 10-year note will yield 3.97 percent in the fourth quarter, according to the Bloomberg weighted average of 61 analyst estimates. That means a 2.8 percent return through the end of the year, Bloomberg data show. The note lost 9.7 percent last year, based on indexes from Bank of America Merrill Lynch. The S&P 500 Index will end 2010 at 1,238 points, after gaining 23 percent last year, according to the median estimate of 13 strategists compiled by Bloomberg. Equity investors may have already anticipated this year’s economic expansion, with the S&P 500 at 1,115.10, or 24.3 times earnings, the most since 2002 , according to Bloomberg data. ‘Add Clout’ “The U.S. recovery will add clout to commodity demand,” said Uday Narang , managing partner at Chichester Capital Management LP in London, whose fund returned 51 percent in the first 11 months of 2009 investing in metals, oil and agriculture. “The worst in the U.S. is over and the Asian emerging markets will take us higher.” Crude oil will rise 17 percent to $92.50 a barrel by the fourth quarter, according to Societe Generale SA’s Mike Wittner , whose estimates last year were within 7.7 percent of market levels. Global consumption will increase and the Organization of Petroleum Exporting Countries is holding output flat, draining stockpiles, said Wittner, the bank’s London-based head of oil- market research. Corn will average $4.60 a bushel this year, 11 percent more than the closing price on Dec. 31, said Emmanuel Jayet , head of agricultural research at Societe Generale in Paris and the most accurate forecaster based on estimates compiled by Bloomberg at the end of 2008. He expects the biggest shortfall in corn supply since the 2006-07 season after delays in the U.S. harvest. Platinum, Palladium Markets Palladium will average $425 an ounce, for a 4 percent gain, according to Robin Bhar , an analyst at Calyon in London and the winner of the London Bullion Market Association’s 2009 price survey. Platinum will average $1,550, or 6 percent more, according to Rene Hochreiter , an analyst at Johannesburg-based Allan Hochreiter (Pty) Ltd. and the best forecaster in the LBMA’s survey. Faster economic growth will mean more sales of cars, which use the metals in their autocatalysts, they said. Not all commodities may repeat the gains of 2009. Copper, which rose 140 percent, will average $6,800 a metric ton in 2010, said Jochen Hitzfeld , an analyst at UniCredit SpA in Munich and the best forecaster for the metal in a January 2009 survey by Bloomberg. While that’s 31 percent more than last year’s average, it’s 8 percent below the Dec. 31 closing price. Record Investment Lead was the best industrial metal last year, gaining 143 percent. The metal will average $2,285 a ton this year, 31 percent above the 2009 average and 6 percent below last year’s closing price, according to Leon Westgate , an analyst at Standard Bank Group Ltd. in London and the best forecaster for lead in Bloomberg’s 2009 metals survey. Investors poured about $60 billion into commodities through index-tracking and exchanged-traded funds and medium-term notes last year, and should add at least that much in 2010, according to a December survey of 250 investors by Barclays Capital. Commodities were the top choice of fund managers in a November poll by Royal Bank of Scotland Plc. Assets under management at commodity hedge funds expanded 5.7 percent to $64.3 billion in November, according to New York-based HedgeFund.net. Those inflows are a warning to Michael Aronstein , the Oscar Gruss & Son Inc. strategist who predicted the 2008 collapse in commodities. The firm’s $320 million Marketfield Fund allocated as much as 45 percent of its assets to commodities and related equities last year and liquidated all those holdings by November. It’s now allocating more to U.S. equities. ‘Gathering More Risks’ “We began to feel the dollar is poised to get stronger and we just felt like the overall commodities trade was gathering more risks than we’re willing to undertake,” Aronstein said from New York. “The big unknown here is to what extent investors will remain enthusiastic.” Barton Biggs , the 77-year-old manager of Traxis Partners LP, said he’s buying household-product manufacturers, drugmakers and computer companies. The hedge fund, which gained three times the industry average in 2009, is shorting raw materials. The U.S. Dollar Index, which rose 4 percent last month, will be little changed this year, based on analyst estimates for the euro, yen, British pound, Canadian dollar, Swedish krona and Swiss franc, adjusted to reflect the weightings in the index. The gauge fell 4.2 percent last year as the Federal Reserve more than doubled its balance sheet to $2.24 trillion in 15 months. Gold Forecaster Helen Henton , head of commodity research at Standard Chartered Plc in London, and the most accurate gold forecaster in a Bloomberg precious metals survey published a year ago, expects the metal to average $1,150 this year, or 5 percent more than the Dec. 31 closing price. Investors bought precious metals as a hedge against the falling dollar last year, sending gold up 24 percent in London. “Those commodities with the best fundamentals will stand out in 2010,” said David Sutcliffe , a partner at Ebullio Capital Management LLP in Southend-On-Sea, England, which manages $150 million. Last year “was special because the rising tide lifted everything. Now that’s out of the way and we’ll enter an environment that separates the wheat from the chaff.” To contact the reporters on this story: Claudia Carpenter in London at ccarpenter2@bloomberg.net ; Anna Stablum in London at astablum@bloomberg.net ; Yi Tian in New York at ytian8@bloomberg.net .

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Obama Receives Initial Assessments on Attempted Bombing of U.S. Airliner

December 31, 2009

By Nicholas Johnston and Jonathan Salant Dec. 31 (Bloomberg) — President Barack Obama said he will review later today initial assessments of the attempted bombing of a U.S. airliner on Christmas Day and will meet with agency heads Jan. 5 to discuss the investigation. In a statement released in Hawaii where he is vacationing with his family, Obama said he spoke today with Homeland Security Secretary Janet Napolitano and John Brennan , his adviser for homeland security and counterterrorism. “I anticipate receiving assessments from several agencies this evening and will review those tonight and over the course of the weekend,” Obama said in the statement. “I will meet personally with relevant agency heads to discuss our ongoing reviews as well as security enhancements and intelligence- sharing improvements.” Obama ordered reviews of anti-terrorism and aviation- security policies after the Dec. 25 attempted bombing of a Northwest Airlines flight preparing to land in Detroit. Obama has said a “systemic failure” allowed Umar Farouk Abdulmutallab to carry explosives onto a U.S. airliner leaving Amsterdam. Although Abdulmutallab was on a list of potential terrorists, he wasn’t subject to special screening at the airport. The 23-year-old Nigerian is charged with trying to blow up the Northwest Airlines flight. Watch List Senate Intelligence Committee Chairwoman Dianne Feinstein asked the president in a letter yesterday to change a 2008 policy that limits the government’s ability to place people on a watch list requiring extra screening or banning them from flying. “The U.S. government should watch-list, and deny visas to, anyone who is reasonably believed to be affiliated with, part of, or acting on behalf of a terrorist organization,” Feinstein, a California Democrat, said in the letter. Obama has requested the criteria used for placing people on watch lists as part of the examination of anti-terror policies. The Netherlands and Nigeria announced yesterday they will start using full-body scanners to detect explosives being carried by passengers. Representative Ike Skelton , a Missouri Democrat who heads the House Armed Services Committee, also sent Obama a letter saying a briefing on the incident yesterday “left me with more questions than answers.” ‘Should Not Have Happened’ “I understand that there were failures across the government and the international community that quite frankly, eight years after the attacks on 9/11, should not have happened,” Skelton wrote. Airline security and intelligence were overhauled after the Sept. 11 attacks, including creation of the Department of Homeland Security to improve intelligence-gathering and the Transportation Security Administration to take over passenger screening at airports. Eight years later, “the same kind of failures that were there in 9/11 were present in this one,” former New Jersey Governor Tom Kean , a Republican who was chairman of the commission that examined the Sept. 11 attacks, said in an interview yesterday. “No one is connecting the dots. It’s the same thing all over again, and that’s what is frustrating.” Obama said Dec. 29 that U.S. intelligence agencies missed “red flags” that could have put Abdulmutallab on a watch list requiring extra screening or banning him from flying. Conventional metal detectors don’t detect the explosives Abdulmutallab was carrying. Congressional Committees Three congressional committees plan to hold hearings next month on the incident. “We have to fully investigate this incident to find accountability for the breakdown in security procedures,” said Byron Dorgan of North Dakota, a member of the Senate Commerce Committee. U.S. Representative John Mica of Florida, the top Republican on the House Transportation and Infrastructure Committee , said more is needed. “Unfortunately, it’s turned into sort of a reactionary system and not enough initiatives to handle situations like we’ve got,” Mica said. The TSA “has been sort of floundering” in the past year, he said. The TSA is without a top administrator because Senator Jim DeMint , a South Carolina Republican, is blocking the Senate from confirming Obama nominee Erroll Southers , an antiterrorism expert. DeMint opposes efforts to allow TSA employees to form a union; public-employee unions have given Democrats 91 percent of their $4.5 million in campaign donations since Jan. 1. Richard Reid Abdulmutallab and would-be shoe-bomber Richard Reid boarded U.S. airlines overseas, and that’s where security officials need to focus, Mica said. “There’s no reason you can’t adopt an Israeli model and do a better examination of the passengers before they depart” from overseas airports to deny people with suspected terrorist connections from entering the U.S., Mica said. TSA will take the lead on increasing security in response to the attempted bombing, said Hasbrouck Miller, a vice president of London-based Smiths Group Plc’s Smiths Detection unit, which makes explosive-detection equipment. “TSA is given a lot of latitude to shift around where they see needs and requirements,” Miller said in an interview. The agency is responding with such measures as bomb- sniffing dogs and additional screening, spokesman Greg Soule said. Pan Am Bombing A number of government commissions since the 1988 bombing of Pan Am Flight 103 over Lockerbie, Scotland, have called for increased passenger screening for explosives. Two decades later, machines that can detect explosives under clothing are in use at 19 U.S. airports , most of the time only as a secondary check on selected passengers, according to the TSA. In 2007, the Government Accountability Office said its investigators smuggled liquid explosives and detonators past airport-security screeners. “It’s just incredible that this is still going on,” said Kathleen Flynn of Montville, New Jersey, who lost a son in the Pan Am 103 bombing. She was a member of the White House Commission on Aviation Safety during President Bill Clinton’s administration. “With our technology and our wherewithal, we should be able to conquer this,” she said. To contact the reporters on this story: Nicholas Johnston in Honolulu at njohnston3@bloomberg.net Jonathan D. Salant in Washington at jsalant@bloomberg.net ;

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Obama Urged to Boost Anti-Terror Efforts as Bomb Attempt Shows Safety Gap

December 31, 2009

By Jonathan D. Salant and Angela Greiling Keane Dec. 31 (Bloomberg) — President Barack Obama is being urged to strengthen anti-terrorism efforts as he awaits initial results of an investigation into the Dec. 25 attempted bombing of a U.S. airliner. Senate Intelligence Committee Chairwoman Dianne Feinstein asked the president in a letter yesterday to change a 2008 policy that limits the government’s ability to place people on a watch list requiring extra screening or banning them from flying. “The U.S. government should watch-list, and deny visas to, anyone who is reasonably believed to be affiliated with, part of, or acting on behalf of a terrorist organization,” Feinstein, a California Democrat, said in the letter. Obama has requested the criteria used for placing people on watch lists as part of the examination of anti-terror policies. Obama, on vacation in Hawaii, is to receive preliminary results today from a probe of what he called the “systemic failure” that let Umar Farouk Abdulmutallab carry explosives onto a U.S. airliner leaving Amsterdam on Dec. 25. Although Abdulmutallab was on a list of potential terrorists, he wasn’t subject to special screening at the airport. He is charged with trying to blow up the Northwest Airlines flight as it prepared to land in Detroit. The Netherlands and Nigeria announced yesterday they will start using full-body scanners to detect explosives being carried by passengers. Airline security and intelligence were overhauled after the Sept. 11 attacks, including creation of the Department of Homeland Security to improve intelligence-gathering and the Transportation Security Administration to take over passenger screening at airports. ‘Same Kind of Failures’ Eight years later, “the same kind of failures that were there in 9/11 were present in this one,” former New Jersey Governor Tom Kean , a Republican who was chairman of the commission that examined the Sept. 11 attacks, said in an interview yesterday. “No one is connecting the dots. It’s the same thing all over again, and that’s what is frustrating.” Obama said Dec. 29 that U.S. intelligence agencies missed “red flags” that could have put Abdulmutallab, a 23-year-old Nigerian, on a watch list requiring extra screening or banning him from flying. Conventional metal detectors don’t detect the explosives Abdulmutallab was carrying. Three congressional committees plan to hold hearings next month on the incident. Breakdown in Procedures “We have to fully investigate this incident to find accountability for the breakdown in security procedures,” said Byron Dorgan of North Dakota, a member of the Senate Commerce Committee. U.S. Representative John Mica of Florida, the top Republican on the House Transportation and Infrastructure Committee , said more is needed. “Unfortunately, it’s turned into sort of a reactionary system and not enough initiatives to handle situations like we’ve got,” Mica said. The TSA “has been sort of floundering” in the past year, he said. The TSA is without a top administrator because Senator Jim DeMint , a South Carolina Republican, is blocking the Senate from confirming Obama nominee Erroll Southers, an antiterrorism expert. DeMint opposes efforts to allow TSA employees to form a union; public employee unions have given Democrats 91 percent of their $4.5 million in campaign donations since Jan. 1. Abdulmutallab and would-be shoe-bomber Richard Reid boarded U.S. airlines overseas, and that’s where security officials need to target, Mica said. Israeli Model “There’s no reason you can’t adopt an Israeli model and do a better examination of the passengers before they depart” from overseas airports to deny people with suspected terrorist connections from entering the U.S., Mica said. TSA will take the lead on increasing security in response to the attempted bombing, said Hasbrouck Miller, a vice president of London-based Smiths Group Plc’s Smiths Detection unit, which makes explosive-detection equipment. “TSA is given a lot of latitude to shift around where they see needs and requirements,” Miller said in an interview. The agency is responding with such things as bomb-sniffing dogs and additional screening, spokesman Greg Soule said. “TSA has a layered approach to security that allows us to surge resources as needed on a daily basis,” Soule said. A number of government commissions since the 1988 bombing of Pan Am Flight 103 over Lockerbie, Scotland, have called for increased passenger screening for explosives. Liquid Explosives Two decades later, machines that can detect explosives under passengers’ clothes are in use at 19 U.S. airports , most of the time only as a secondary check on selected passengers, according to the TSA. In 2007, the Government Accountability Office said its investigators smuggled liquid explosives and detonators past airport security screeners. “It’s just incredible that this is still going on,” said Kathleen Flynn of Montville, New Jersey, who lost a son in the Pan Am 103 bombing. She was a member of the White House Commission on Aviation Safety during President Bill Clinton’s administration. “With our technology and our wherewithal, we should be able to conquer this,” she said. To contact the reporters on this story: Jonathan D. Salant in Washington at jsalant@bloomberg.net ; Angela Greiling Keane in Washington at agreilingkea@bloomberg.net .

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Asia Consumer Spending Spurs Retailer Dollar Bonds to Region’s Top Returns

December 30, 2009

By Katrina Nicholas Dec. 31 (Bloomberg) — Parkson Retail Group Ltd . and Shinsegae Co. led Asian retailers whose dollar bonds delivered the best returns of any industry group in the region this year as consumer spending rose. Asia consumer company bonds returned 56 percent on average, according to an index compiled by JPMorgan Chase & Co., beating those of financial companies at 36 percent, industrial companies at 32 percent and utilities at 22 percent. The extra yield spread investors demand to own the retailers’ dollar notes instead of U.S. Treasuries narrowed 19.02 percentage points to 4.76 percentage points since Jan. 2, JPMorgan data show. “One of the big stories of 2009 has been the rebalancing of growth towards domestic demand in Asia,” Sebastien Barbe , head of emerging-market research for Calyon, said in a phone interview from Hong Kong. “Consumer demand, particularly in India, China and Indonesia, has been more resilient than people expected at the beginning of the year. That’s contributed to the narrowing of spreads.” Chinese retail sales may rise by more than 15 percent to exceed 12.5 trillion yuan ($1.83 trillion) this year, Trade Minister Chen Deming said on Dec. 24, as government stimulus measures and record bank lending spurred the fastest-growing major economy. Sales at South Korea’s major department stores rose for a ninth month in November, the Ministry of Knowledge Economy said Dec. 18. Spending at the three biggest chains climbed 6.4 percent from a year earlier. Credit Recovery PT Matahari Putra Prima , Indonesia’s second-biggest retailer by market value, and Shinsegae , which runs Korea’s biggest discount-store chain, sold dollar bonds this year as credit markets recovered from the worst global recession since the Great Depression and the 2008 collapse of Lehman Brothers Holdings Inc. Shinsegae, based in Seoul, sold $200 million of three-year, 6.125 percent bonds in June 2008 that yielded 3 percent yesterday, according to Royal Bank of Scotland Group Plc. They were yielding 10.6 percent on Jan. 1, the Edinburgh-based lender’s prices show. Beijing-based Parkson Retail , which owns department stores in 29 cities in China according to its Web site , sold $125 million of 7.125 percent notes due 2012 in May 2007 that yielded 6.099 percent yesterday, according to Nomura Holdings Inc. The notes yielded 20.8 percent on Jan. 9, Nomura prices show. Rare Bonds “If Parkson came out with another bond people would snap it up because retail dollar bonds are rare in Asia and there’s always a lot of interest from investors in this sector,” said Anthony Shum , a Hong Kong-based director of Asia-Pacific debt capital markets for Barclays Capital. “Parkson, with its stores in China, has been influenced by the government stimulus and Chinese New Year should also have a positive effect.” Asian retail dollar bonds last outperformed their peers in 2006, when they delivered a 13 percent return compared with 6 percent for financials, utilities and industrials, JPMorgan data show. The notes handed investors a loss of 29 percent last year, almost double the 15 percent loss on bonds of the region’s financial companies. “Employment in many east Asian economies has shown surprising resilience while real estate prices in a number of key markets have held up well, or even risen, despite large declines in the U.S. and parts of Europe,” said Tan Kim Eng , a Singapore-based credit analyst at Standard & Poor’s. “These factors have supported consumption, and with an expected recovery next year they must have led many to expect companies in the consumer sector will do well.” To contact the reporter on this story: Katrina Nicholas in Singapore at knicholas2@bloomberg.net

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Yen to Fall Versus Dollar in ’10 as Interest Rates Diverge, Survey Shows

December 26, 2009

By Shigeki Nozawa Dec. 25 (Bloomberg) — The yen may weaken to 95 to the dollar by the end of next year as deflation keeps the Bank of Japan from following interest-rate increases by the Federal Reserve, based on the median estimate of 12 Tokyo-based analysts. Eleven of those surveyed by Bloomberg News expect the yen to decline versus the dollar from the end of March to Dec. 31. Futures prices show the U.S. central bank may start raising rates as soon as June, whereas Bank of Japan Governor Masaaki Shirakawa has pledged to keep rates “persistently” near zero to fight deflation. “The focus for next year will be the rise in yields in the U.S. amid speculation the Fed will hike rates,” said Yuji Kameoka , senior economist in Tokyo at the Daiwa Institute of Research Ltd. The Federal Open Market Committee will change its language on policy by March and start raising its benchmark interest rate between July and September, he said. The yen may decline to 100 per dollar in August-September after rising to 85 around January, Kameoka said. The 95 yen to the dollar median forecast among the Tokyo- based analysts compares with a 98 yen median prediction from 44 analysts globally polled by Bloomberg. The local average estimate for 2010 was 92.13 yen. The Dollar Index, which gauges the currency against six major trading partners, rose to a three-month high on Dec. 22. The dollar advanced to an intraday high of 91.87 yen on the same day, the highest since Oct. 27. Before a Dec. 4 payrolls report showed an unexpected drop in the unemployment rate, the Dollar Index had fallen 17 percent from its 2009 peak reached in March as investors bought higher- yielding assets with borrowed dollars in so-called carry trades. Rate Increases The dollar has strengthened this month on optimism the U.S. recovery will outpace that of other nations, increasing demand for dollar-denominated assets. Futures trading in Chicago indicated a 48 percent chance that policy makers will increase the zero to 0.25 percent target rate for overnight lending between banks by at least a quarter- percentage point by the June meeting, down from a 52 percent likelihood a week ago. Seven of the 12 Tokyo-based analysts forecast the Fed will begin increasing borrowing costs in the second half of 2010, and three said the central bank will begin tightening in the first half of 2011. Benchmark U.S. rates may rise above 1 percent by the end of next year, said Koji Fukaya , senior currency strategist in Tokyo at Deutsche Bank AG. That could spur investors to shift away from borrowing in dollars for carry trades in favor of lower- cost yen loans, he said. The Bank of Japan will keep its benchmark interest rate unchanged through 2010, according to the median estimate of 21 analysts in a Bloomberg News survey. “With Japan’s economy continuing to suffer from deflation, the Bank of Japan isn’t likely to raise interest rates for the time being,” according to Akane Vallery Uchida , a currency strategist at Royal Bank of Scotland Group Plc in Tokyo. Japan’s widening deficit will also weaken the yen, she said. To contact the reporter on this story: Shigeki Nozawa in Tokyo at snozawa1@bloomberg.net .

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National Express Sought U.K. Compromise on Rail Line That Was Nationalized

December 24, 2009

By Jonathan Browning and Howard Mustoe Dec. 24 (Bloomberg) — National Express Group Plc offered to pay the U.K. government 100 million pounds ($160 million) in return for a staged withdrawal from the unprofitable East Coast railroad franchise, according to official documents obtained by Bloomberg News. The plan was rejected and the line nationalized. National Express sought a management contract as an alternative to defaulting on the franchise as it ran out of cash to fund the route between London and Scotland, minutes of meetings requested by Bloomberg News under the Freedom of Information Act show. After Transport Minister Andrew Adonis turned down the proposal, National Express said July 1 it would hand back the franchise before the end of the year. The statement sent the company’s stock down 13 percent in four days and prompted a series of takeover bids that the London-based rail and bus operator fended off before raising cash in a rights offer. “It was a game of poker and I think Adonis played a reasonable hand,” said Christian Wolmar , author of “Broken Rails,” a history of Britain’s railways. “Default was extremely damaging for National Express because it sent their share price plummeting and made them vulnerable to takeover, so to them it would have been worth offering money to avoid that.” A National Express spokeswoman, who declined to be identified, said last night that the company had no comment beyond remarks from executives to Adonis recorded in the government minutes. National Express was trading little changed as of 9:03 a.m. in London today after earlier slipping 1 percent. The stock has declined 26 percent this year, giving the company a market value of 970 million pounds. No Commitment Department for Transport spokesman Simon Horsborough said that at no time in the talks with National Express had the government given a commitment to a management contract, an arrangement under which the East Coast route would still have been run by the company, but with the state bearing the costs. “We have been consistent in saying that we will not renegotiate franchise agreements,” the spokesman said in an e- mailed statement yesterday. “These documents make that quite clear. We have a duty to explore all options to protect passengers and taxpayers and the option of a management contract was only discussed on that basis.” The opposition Conservative party said the documents cast doubt on Adonis’s actions in the months leading up to the nationalization of the East Coast line and that the government had passed up on millions of pounds being offered by an operator wishing to exit a franchise on good terms. ‘Extreme Outcome’ “Adonis needs to explain exactly why he sought the most extreme outcome and the upheaval of a default on one of the country’s most important rail lines,” Theresa Villiers , who speaks on transport matters for the party, said in an e-mail. Richard Bowker , chief executive officer at National Express at the time of the discussions, told Adonis that the company “had no viable alternative but to withdraw from the franchise from 1 July and that the best way to proceed was for East Coast to continue on a management contract until the franchise was re- tendered,” the minutes reveal. Bowker, who left National Express on Aug. 31 to run a train company in the United Arab Emirates, told Adonis that the U.K. rail industry was “fundamentally broke,” according to the minutes. The East Coast service was taken into public ownership on Nov. 13 and no other companies have defaulted. Public Interest The transport minister argued that the proposal from National Express, which also runs two other rail companies and local and long-distance buses, wasn’t in the public interest because it might have encouraged rival operators to follow a similar course, according to the documents. The U.K. government held almost six months of discussions with National Express about the matter before Adonis informed Chairman John Devaney of his decision at a meeting on June 26, the papers show. Adonis said in talks with Devaney that a default would “dent the reputation of the business,” while arguing that a compromise would prompt other operators to seek similar terms. Stagecoach Group Plc , operator of Britain’s biggest rail franchise, and buyout firm CVC Capital Partners Ltd. submitted bids for National Express in the months following its default on the East Coast line. The company, which also runs school buses in North America, rejected the approaches before raising 360 million pounds in a share sale on Dec. 15, allowing it to cut debt and avoid pushing up interest payments by breaching loan terms. To contact the reporters on this story: Jonathan Browning in London jbrowning9@bloomberg.net . Howard Mustoe in London at hmustoe@bloomberg.net

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Bear Stearns Alumni Stage Holiday Parties as Goldman Sachs Cancels Again

December 24, 2009

By Matt Townsend and Courtney Dentch Dec. 24 (Bloomberg) — While Goldman Sachs Group Inc. scrapped its holiday party for a second straight year and some JPMorgan Chase & Co. bankers had their yuletide gathering in a cafeteria, staffers of Bear Stearns Cos. reunited at a velvet- roped bar that sells bottles of Cristal champagne for $450. About 100 alumni from the defunct securities firm that JPMorgan acquired in March 2008 assembled Dec. 18 at the Dream Hotel’s Rm. Fifty5 on West 55th Street, described on its Web site as neo-Gothic “surreal luxury.” Courtney Dickson, a 25-year-old former Bear Stearns employee who organized the event, said the mood was “nostalgic.” Dozens more former Bear Stearns employees met a few weeks earlier in the upstairs bar at Connolly’s Pub , the watering hole on East 47th Street a few blocks from Bear Stearns’ old headquarters on Madison Avenue, said Justin Brannan, who worked in the firm’s wealth management unit for three years. The affair brought together about 100 people who paid for their own drinks at the Irish pub’s long, wooden bars. “That’s where we went after we got sold, so it was a pretty fitting place to get together,” said Brannan, 31, who now raises money for the Bnai Zion Foundation, a charity that funds humanitarian projects in Israel and the U.S. “It was cool. It was like a high-school reunion.” By contrast, “holiday trimmings” took on new meaning at banks that survived the credit crunch as they cut back or eliminated parties. Goldman Sachs, Citigroup Inc., Morgan Stanley and Bank of America Corp. , didn’t host official events this year, after a public outcry over perks and bonuses awarded to bankers whose firms accepted taxpayer bailouts. No ‘Lavish Parties’ At JPMorgan, which didn’t host a companywide party at its New York headquarters, about 200 people from the investment banking unit shared wine and beer for a few hours after work last week in the cafeteria at the JPMorgan Chase Tower on Park Avenue, said two bank employees. They spoke anonymously because they weren’t authorized to speak about the matter. Spokesman Joseph Evangelisti declined to comment. The bank bought Bear Stearns last year as the securities firm collapsed amid the global credit crisis. “They should not be trying to broadcast to America how successful they are right now by having lavish parties,” said Richard Dukas , president and founder of New York-based Dukas Public Relations Inc., whose clients include Mario Gabelli’s Gamco Investors Inc. “It’s absolutely the right thing to do.” Two-thirds of Americans say they have an unfavorable view of financial firm executives, making them less popular than Congress and lawyers, according to a Bloomberg National Poll conducted Dec. 3-7. Obama’s Opinion President Barack Obama recently joined the criticism, saying in a Dec. 13 interview with CBS’s “60 Minutes” program that he was frustrated that “fat-cat bankers” continue to take large bonuses and fight his effort to revamp financial regulation. “Given the environment, the firm does not believe it’s appropriate to host or sponsor holiday parties,” Goldman Sachs spokeswoman Gia Moron said. Two years ago, Morgan Stanley held a holiday party at Lotus, a three-level nightclub in New York’s Meatpacking District and Goldman Sachs hosted one at BLVD, an 18,000-square- foot venue on the Bowery in downtown Manhattan, according to The Business Insider, a Web site started by former Merrill Lynch equity analyst Henry Blodget who follows the business and social happenings of Wall Street. Charity Drives Citigroup didn’t sponsor any events this year, said Stephen Cohen , a spokesman for the New York-based company, whose biggest stakeholder is the U.S. Treasury. Kelly Sapp , a spokeswoman for Charlotte, North Carolina-based Bank of America, said the lender doesn’t host or fund holiday parties on the corporate or regional level. Individual lines of business might organize initiatives to benefit a local charity, such as a clothing drive, she said. The Royal Bank of Scotland Group Plc, recipient of the world’s biggest banking bailout, is among British lenders limiting entertainment budgets this year to avoid fueling public anger after taxpayers provided more than 1 trillion pounds ($1.6 trillion) to bail out lenders including RBS and Lloyds Banking Group Plc. RBS is contributing $16 a head toward employee Christmas parties this year, enough to buy two pints of lager and a packet of potato chips. In New York, 65 percent of companies were likely to either cancel or significantly scale back holiday events, according to a survey by online grocery store Fresh Direct Holdings Inc. and event industry tracker BizBash Media. Plastic Substitutes Russ Sonnier, president of Sonnier & Castle, a Manhattan event planner, said his clients, which include financial firms, cut back on food, flowers and entertainment. One law firm removed desserts from the menu and switched to plastic cups from glass stemware, Sonnier said. Across the U.S., companies also planned smaller holiday celebrations than they’ve held in the past, even as the number of parties is about the same, said Dale Winston , chairwoman and chief executive officer of Battalia Winston Amrop, a New York- based executive search firm. The firm’s annual survey found that 81 percent of companies planned to hold parties, the same number as last year, and 43 percent of those celebrations were expected to be less lavish, Winston said in a Dec. 18 interview. “The country isn’t in a big celebratory mood,” Winston said. To contact the reporters on this story: Matt Townsend in New York at mtownsend9@bloomberg.net ; Courtney Dentch in New York at cdentch1@bloomberg.net ;

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RBS Reviews Its $24 Million Collection of Artwork to Decide What to Sell

December 24, 2009

By Farah Nayeri Dec. 24 (Bloomberg) — Royal Bank of Scotland Group Plc , the U.K. bank majority-owned by the government, said it may sell works from its in-house art collection that is worth as much as 15 million pounds ($24 million). The lender, which has received 45.5 billion pounds in state aid in the world’s most expensive bank bailout, is reviewing its collection to determine initially whether UK national museums wish to acquire any of the items. The bank won European Union approval Dec. 14 for a restructuring plan. Under the plan, it has to get rid of 300 branches and insurance divisions over the next four years, spokeswoman Linda Harper said yesterday. “We’ll have less buildings, and less of a need for art that we’ve acquired,” Harper said in a telephone interview. She said the bank was identifying works that national museums and galleries might want, “and if there’s a surplus of art, we may look at disposals.” “No decisions have been taken yet, but we will not sell any pieces of art that are of heritage or of historical importance,” said Harper. The works will be sold when a good price can be fetched for them on the art market, she said. The bank says it has some 2,200 works of art worth more than 1,000 pounds, and another 1,500 or so limited-edition prints. The art collection grew in 2000 when RBS acquired National Westminster Bank Plc and incorporated the pieces in that collection. One of the paintings that had been part of the NatWest collection, a work by Frank Auerbach , was sold two or three years ago, Harper said. According to the Scotsman newspaper, it sold for 780,000 pounds; Harper wouldn’t confirm the figure. The oldest work currently in the RBS collection dates from around 1750, and is Johann Zoffany’s “Portrait of Andrew Drummond,” founder of Drummonds, the Scottish lender, RBS said. Other pieces include Jack Vettriano ’s “Fish Teas” and L.S. Lowry’s “At the Factory Gates,” according to RBS. The collection is valued between 10 million pounds and 15 million pounds. To contact the writer on the story: Farah Nayeri on farahn@bloomberg.net

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Injecting Cells Into Brains of Stroke Victims Tests ReNeuron’s Viability

December 23, 2009

By Andrea Gerlin Dec. 23 (Bloomberg) — A neurosurgeon at Southern General Hospital in Glasgow, Scotland, plans to drill a hole in a patient’s skull, insert a needle and inject 2 million stem cells from ReNeuron Group Plc into his brain early next year. The patient is the first of 12 men disabled by strokes who expect to receive from 2 million to 20 million stem cells grown from the brain of an aborted 12-week-old fetus. The men would be studied for two years to see if the cells help the brain repair damage, without causing further harm. ReNeuron won U.K. government approval in January to test its ReN001 stem-cell line after three failures get permission from U.S. regulators. Preliminary analysis of the study next year will determine whether Guildford, England-based ReNeuron can continue developing the treatment and may also determine the viability of the company, whose market value is 19.9 million pounds ($32 million). “The facts are it certainly may fail,” said Michael D. West , who founded Geron Corp., the first company to use human embryonic stem cells after they were discovered in 1996, and now is chief executive officer of BioTime Inc. , a biotechnology company in Alameda, California. “The risks of this and other cell-based therapies are currently unknown.” ReNeuron faces financial pressure as well: The company has access to 7.1 million pounds ($11.5 million) in cash, enough to keep running until mid-2011, which isn’t long enough to see final data from the trial. The company says it aims to begin the study early next year, and is awaiting government signoff on trial details. Potential Market ReNeuron closed unchanged at 5.83 pence in London trading yesterday. The shares have more than doubled in 12 months. There aren’t any treatments to reverse the disability caused by strokes, which occur when there is a sudden loss of blood to the brain. Every year, about 5 million people worldwide are disabled by strokes, according to the World Health Organization in Geneva. The price of an effective stem-cell treatment may be $20,000 and the potential market $3 billion, assuming it is suitable for 1 million people and that 15 percent of them can afford it, said Vadim Alexandre , an analyst at London-based Daniel Stewart & Co., which helped ReNeuron raise money this year. Halving the Odds The odds that any treatment in an early-stage safety trial will eventually progress to the market are about 10 percent, according to Alexandre. He said he halved that probability to 5 percent for ReN001 because of the novelty of cell-based treatments. After the U.K. regulator authorized the trial in January, Alexandre recommended that investors buy shares of ReNeuron, citing the “large potential market” if the product is one day approved. The stock may more than double to 13 pence in the next year, he wrote on Nov. 26. Stem cells are the building blocks of life and researchers around the world are studying them to see whether they can cure disease. Those derived from embryos have the ability to become any of the roughly 210 types of cells in the human body. Fetal stem cells are grown from tissue taken from a fetus, which an embryo becomes eight weeks after conception. The biotechnology company’s trial will be the first to use fetal stem cells for treating stroke in humans, after successful tests in rodents. Other trials have used stem cells derived from a patient’s bone marrow, fetal pig brain cells or tumors grown from germ cells, the precursors to eggs and sperm. None has proceeded to mid-stage trials after encountering safety or financing problems. Biocompatibles Study Biocompatibles International Plc , of Farnham in the U.K., is delivering stem cells from other patients’ bone marrow to stroke patients through a removable inch-square “tea bag” device in a safety trial in Germany. Stem Cell Therapeutics Corp. of Calgary was ordered by North American regulators last year to halt human tests of its stroke treatment, which uses patients’ stem cells to stimulate growth of new brain cells, for safety reasons. ReNeuron has accumulated losses of 26.6 million pounds since its founding 12 years ago. It generated revenue of 93,000 pounds last year from sales of non-therapeutic stem cell products for use in research. The company raised 3 million pounds through a stock sale in the first half. The company will be spending cash and require additional funding, posing “a material uncertainty which may cast significant doubt over the ability of the group to continue as a going concern,” wrote PricewaterhouseCoopers LLP in an auditing opinion dated July 23. Matrix Corporate Capital LLP agreed in November to provide ReNeuron as much as 5 million pounds over two years. War Chest “We’ve never had a huge war chest,” CEO Michael Hunt said in an interview on Oct. 28. The company had 2.15 million pounds in cash at Sept. 30. ReNeuron plans to test the same fetal stem cell line for peripheral artery disease, Hunt said. The condition occurs when vessels in the extremities harden, blocking arteries and reducing blood flow to limbs. The company will begin discussions with regulators, probably in the U.S. or Europe, Hunt said. If ReNeuron obtains approval next year, the trial may start in 2011, he said. ReNeuron researchers and the Bristol Heart Institute in England found that the company’s stem cells improved blood flow to the legs of mice 21 days after their femoral arteries were blocked. The results of the study were presented at the American Heart Association conference in Orlando, Florida, on Nov. 15. Three-Year Quest The procedures in the stroke patients will complete ReNeuron’s three-year quest to begin testing its therapy, which comes from a stem-cell line grown from a tissue sample taken in 2003 from the brain of an aborted fetus. ReNeuron can grow all the cells needed for treatment from the single tissue sample, averting the need to collect more. The company has slowed or stopped work on the eye disease retinitis pigmentosa, Parkinson’s disease and diabetes to save money and focus on the stroke trial, Hunt said. It has cut staff to 15 from 45 since 2007 and reduced research and development spending by 39 percent last year, saving about 2 million pounds. The U.S. Food and Drug Administration in 2008 placed the stroke trial on clinical hold, citing safety issues associated with putting cells from a human fetus into a person’s brain for a nonfatal condition, Hunt said. Safety Test The company has been negotiating safety aspects of the trial with the U.K. government’s Gene Therapy Advisory Committee since February. The panel gave the company a favorable opinion, subject to the provision of more data and compliance with clinical protocols, Hunt said. Once ReNeuron satisfies the committee, Keith Muir , a neurologist at the University of Glasgow , will recruit patients, a process Muir said will take at least two months. No more than one patient can be treated in a month, he said. Complications such as bleeding or injury to the brain are Muir’s biggest concern, he said. Introducing foreign cells into a patient’s body also could lead to immune rejection or swelling. Muir said those risks didn’t appear in rodents or in Parkinson’s disease patients who have undergone fetal brain tissue transplants. “We’ve had a long discussion with people who are experts in immunology and transplant rejection and it seems highly improbable that there’s going to be any clinically important reaction,” Muir said. Another potential risk is cancer. Stem cells may work because they are capable of multiplying, much as cancer cells do. The key to their use is controlling their growth, a process that researchers don’t understand completely. ‘Chemical Switch’ ReNeuron has modified the ReN001 stem cell line with a gene called c-myc to provide a “chemical switch” that enables doctors to control the cells’ growth by adding or removing the drug tamoxifen. That gene is associated with cancer, said Sean Savitz , a neurologist at the University of Houston. Whether it will produce tumors in patients won’t be known until years after the trial. The company is enrolling only men in the trial because the drug needed to activate or inactivate the gene may have risks for certain women, said Hunt and John Sinden , ReNeuron’s chief scientific officer. Women may be added at a later stage of testing. If ReNeuron does show promise in either trial, the company may attract attention from bigger drugmakers. In the past year, Pfizer Inc. , based in New York, said it would invest $100 million in the field over five years and GlaxoSmithKline Plc , based in London, said it would fund $25 million of research at the Harvard Stem Cell Institute in Cambridge, Massachusetts. “The big deals will occur when they have substantial data,” said Navid Malik , an analyst at Matrix. “Two years out, that could be a possibility.” To contact the reporter responsible for this story: Andrea Gerlin at agerlin@bloomberg.net

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Energy, Financials May Lead Rebound in Takeovers, Bloomberg Survey Shows

December 23, 2009

By Zachary R. Mider Dec. 23 (Bloomberg) — Energy and financial-services companies may lead a rebound in takeovers in 2010 after the value of acquisitions worldwide dropped 34 percent this year, according to a Bloomberg survey. Ninety-two percent of those surveyed expect mergers and acquisitions to increase next year, the Global M&A Outlook found. Bloomberg’s survey of about 250 investment bankers, lawyers and investors was released today. About 21 percent of those surveyed expected energy companies to lead in M&A next year, while 17 percent chose financial firms. The value of takeovers dropped this year to $1.6 trillion through Dec. 15, the lowest in six years, Bloomberg data show. Gyrating financial markets and a global economic slump cut M&A by more than half since a record $4 trillion in deals in 2007. The biggest transaction of the year was drugmaker Pfizer Inc.’s $68 billion purchase of Wyeth. Exxon Mobil Corp .’s $30 billion deal for XTO Energy Inc., reached this month, may augur more takeovers by oil and gas producers to win access to shale formations. The energy industry was the third-most active in 2009 among the 10 groups tracked by Bloomberg, with 14 percent of activity. Financial companies were the most common targets this year, with 22 percent, the data show. The biggest takeovers included the U.K. government’s bailout of Royal Bank of Scotland Group Plc and fund manager BlackRock Inc.’s purchase of Barclays Plc’s investment management unit. Non-cyclical consumer companies, a category that includes health care, were the second-busiest, with 19 percent. After the Wyeth deal, the biggest transaction was Merck & Co.’s $47 billion purchase of pharmaceutical company Schering-Plough Corp. Kraft Foods Inc. has offered $16 billion for Cadbury Plc, the London-based confectioner. To contact the reporter on this story: Zachary R. Mider in New York at zmider1@bloomberg.net

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Asia Stocks, Dollar Gain on Signs Economies Are Improving; Bond Risk Falls

December 22, 2009

By Shani Raja and Nicolas Johnson Dec. 23 (Bloomberg) — Asian stocks rose for a second day and the dollar traded near a three-month high against the euro on signs economies around the world are improving. Oil traded above $74 a barrel after climbing in New York. The MSCI Asia Pacific excluding Japan Index of equities climbed 0.3 percent as of 1:05 p.m. in Tokyo, where markets are closed for a national holiday. The dollar was at $1.4253 per euro versus yesterday’s close of $1.4249 in New York. A measure of risk in emerging-market bonds narrowed to the lowest level in 16 months as confidence in a global recovery increased. Reports yesterday showed sales of existing U.S. homes rose more than forecast in November and the U.K. economy shrank less than initially estimated in the third quarter, while European Central Bank policy maker Juergen Stark said euro-area growth reached a trough. “The recent data indicate the global economy is recovering faster than originally expected,” said Prasad Patkar , who helps manage about $1.6 billion at Platypus Asset Management in Sydney. “It’s too early to say whether the recovery is self- sustaining, but we should know towards the end of first quarter 2010.” Crude oil for February delivery was at $74.35, down 5 cents, in electronic trading on the New York Mercantile Exchange. Prices closed at $74.40 yesterday, the highest settlement since Dec. 4. Gold gained as much as 0.4 percent to $1,088.72 per ounce, after falling the past two days as a rebounding dollar reduced demand for the precious metal. U.S. Futures Climb Futures on the Standard & Poor’s 500 Index added 0.1 percent. The benchmark U.S. stock index climbed 0.4 percent yesterday to its highest close since October 2008, after the report on November home sales and as a profit forecast by Jabil Circuit Inc. triggered gains in technology shares. U.S. 10-year government bond yields traded near the highest level in four months. U.S. debt yesterday completed the steepest back-to-back decline since July following the housing report. “The more stable data trend is supporting a turnaround in the dollar; increasing the odds that the Fed will be thinking about edging policy rates out of their emergency setting at some stage next year,” Greg Gibbs , a strategist at Royal Bank of Scotland Group Plc in Sydney, wrote in a note to clients. South Korea’s won led declines among Asia-Pacific emerging- market currencies, approaching a seven-week low. The Thai baht fell to its low for the month and Malaysia’s ringgit traded near its weakest level since October. The Dollar Index , which tracks the greenback against the currencies of six major U.S. trading partners, yesterday climbed to a three-month high. ‘Downward Pressure’ “Asian currencies continue to be under some downward pressure because of the strength of the dollar in global markets,” said Dariusz Kowalczyk , chief investment strategist at SJS Markets Ltd. in Hong Kong. Almost all major stock markets in the Asia-Pacific region climbed, led by a 0.8 percent advance in New Zealand and a 0.5 percent increase in Australia. Macarthur Coal Ltd. , the world’s biggest exporter of pulverized coal used by steelmakers, climbed 4 percent in Sydney after Macquarie Group Ltd. said Hong Kong’s Noble Group Ltd. may be planning a bid. Gloucester Coal Ltd. jumped 26 percent after receiving a takeover offer from Macarthur and Noble climbed 5.3 percent, leading gains in Singapore’s benchmark stock index. Hong Kong’s Hang Seng Index was one of only two benchmark indexes in the Asia Pacific region that declined. Developers led the drop, with Hang Lung Properties Ltd. losing 3.1 percent and China Overseas Land & Investment Ltd. falling 1.3 percent. Asian Rally The MSCI Asia Pacific ex-Japan index has risen 61 percent this year, on course for its steepest annual increase since 1993, as central banks worldwide reduced borrowing costs and governments boosted spending to shore up their economies. Confidence in a recovery also buoyed emerging-market bonds. The so-called yield spread on developing-nation debt fell five basis points to 2.88 percentage points, the lowest level since August 2008, according to JPMorgan & Chase Co.’s EMBI+ Index. Bond risk fell in Australia and in Asia outside Japan, as measured by credit-default swaps. The Markit iTraxx Asia ex- Japan investment grade index fell 1 basis point to 96 in Hong Kong, according to BNP Paribas prices. “We’re seeing a fairly broad-based improvement in most economic measures,” said Cameron Peacock , an analyst at IG Markets in Melbourne. “Heading into next year, most people are fairly optimistic we’ll see a continued recovery across the global economy.” To contact the reporter on this story: Shani Raja in Sydney at sraja4@bloomberg.net ; Nicolas Johnson in Tokyo at nicojohnson@bloomberg.net .

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Dollar Trades Near Three-Month Versus Euro High Amid U.S. Recovery Signs

December 22, 2009

By Yoshiaki Nohara Dec. 23 (Bloomberg) — The dollar traded near the highest in more than three months versus the euro before a report forecast to show new home sales rose in the U.S., adding to signs of recovery in the world’s largest economy. The dollar was near an eight-week high against the yen as the yield on U.S. 10-year notes rose, boosting the advantage of holding Treasuries instead of Japanese debt to the widest margin in more than a year. The yen rebounded against major counterparts amid speculation Japanese exporters are bringing home overseas earnings before the year-end. “The U.S. dollar continues to benefit from stronger data,” said Robert Rennie , head of currency research in Sydney at Westpac Banking Corp. “That is a trend we generally expect to continue.” The dollar traded at $1.4266 versus the euro as of 11:18 a.m. in Tokyo from $1.4249 in New York yesterday, when it touched $1.4218, the highest since Sept. 4. The dollar fetched 91.63 yen from 91.83 yen. It earlier reached 91.87 yen, the strongest since Oct. 27. The yen was at 130.73 per euro from 130.86. Japan’s markets are closed today for a public holiday. The Dollar Index , which IntercontinentalExchange Inc. uses to track the greenback against currencies including the euro and yen, rose yesterday to as high as 78.449, the most since Sept. 4. The index was at 78.192 today. Sales of new homes in the U.S. probably rose to a 438,000 annual pace in November from 430,000 in October, according to the median estimate of economists in a Bloomberg News survey. The Commerce Department will release the data today. U.S. Data Purchases of U.S. existing homes increased 7.4 percent in November to a 6.54 million annual rate, the highest since February 2007, the National Association of Realtors said yesterday. The median estimate of 69 economists in a Bloomberg survey was for a 2.5 percent advance. “The U.S. economy is chugging along in its recovery mode, punching out some decent figures,” said Greg Gibbs , a strategist at Royal Bank of Scotland Group Plc in Sydney. “Markets are re-rating some of the major currencies, particularly the euro and yen. The dollar has more to offer from these levels than those currencies do, considering the problems surrounding the periphery in Europe.” Greece’s government debt rating was cut yesterday one step to A2 from A1 by Moody’s Investors Service, less than some strategists expected. Moody’s kept a negative outlook on the rating. Bank of Japan The yen pared losses against the dollar today on speculation investors are closing long positions on the dollar- yen before the Christmas holiday and Japan’s exporters are repatriating profits. A long position is a bet that the price of an asset will rise. “All we hear is some intra-day profit taking” on dollar- yen long positions, said Phil Burke , chief dealer for global foreign exchange and rates at JPMorgan Chase & Co. in Sydney. “Liquidity is not there, so you are actually getting a lot more moves than you normally should get.” The difference between 10-year Treasury yields and the same maturity Japanese government bonds widened to 2.49 percentage points yesterday, the highest level since October 2008. Bank of Japan Governor Masaaki Shirakawa said in an interview with TV Tokyo on Dec. 21 in Tokyo that the central bank will “persistently” keep interest rates at “virtually zero” to fight deflation. Shirakawa Pledge “The yen gains at times as exporters take advantage of higher levels of the dollar-yen to bring home profits,” said Takashi Yamamoto , chief trader in Singapore at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s biggest bank. “Shirakawa’s reiteration to keep rates low seems to be helping the yen weaken, as solid U.S. data boost demand for the dollar.” Gains in the dollar were limited as the euro-dollar’s 14- day relative strength index, or RSI, has remained below 30 since Dec. 17, a sign that the dollar is likely to fall after rising too fast. The index was at 25.43 today. “Technical indicators show the dollar’s rise has been rapid, as investors unwind numerous dollar-short positions before Christmas,” said Norifumi Yoshida , vice president of the trading section at Mizuho Corporate Bank Ltd. in Singapore. “I’m guessing the market will switch back to a dollar-weakening trend early next year.” To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net .

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Decade’s Biggest Gain for Stoxx 600 May Last on Profits, Strategists Say

December 22, 2009

By Adam Haigh and Adria Cimino Dec. 22 (Bloomberg) — European equity strategists say earnings growth can push stocks 11 percent higher in 2010 following the steepest annual rally in a decade. 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. A rally next year would extend the biggest advance since 1999 for the Dow Jones Stoxx 600 Index, the measure most commonly used by the strategists surveyed, by restoring more of the 5.5 trillion euros ($7.9 trillion) in market value that was erased after the gauge climbed to a more than six-year high in June 2007. The most bullish forecast, by Gary Baker at Bank of America, sees a 26 percent surge for the index. “Everything is in place for a great year,” said Patrick Moonen , an equity strategist at ING Investment Management, which has about $610 billion in client assets. If governments reduce stimulus, “it’s a sign that the economic crisis is behind us, which is positive for earnings growth going forward.” Profits 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. Basic-material and financial stocks are forecast to lead the earnings growth, with gains of 62 percent and 61 percent next year, respectively, the data show. Interest Rates The Stoxx 600 has rallied 26 percent this year and is up 58 percent from a 12-year low on March 9 as governments pledged more than $12 trillion and central banks cut interest rates to record lows to end the global recession and fix credit markets. Global economic growth that exceeds the historical average rate next year will allow for an expansion of corporate sales, said Peter Oppenheimer of Goldman Sachs. Morgan Stanley’s head of European equity strategy, Teun Draaisma , says this growth will trigger the start of a “tightening” phase, as governments raise interest rates, reversing the rally in stock markets. Draaisma, who was top ranked by Europe-based investors in the most recent Thomson Extel survey, estimates the MSCI Europe Local Index will fall back to 1,030 by the end of the year, having rallied as high as 1,200. In January, Goldman Sachs’ Oppenheimer said benchmark indexes would climb 20 percent by the end of 2009 if credit markets recover and the pace of economic deterioration slows. Baker’s team at Merrill Lynch & Co., which was rebranded after the takeover by Bank of America, had estimated a 9.1 percent gain for this year, while Draaisma had predicted shares would make little headway in 2009. Economic Recovery Government reports from the U.S. to Europe and China now show economies are recovering from the first synchronized global recession since World War II. China’s purchasing managers’ index grew at the fastest pace in five years in November, while Europe’s manufacturing industry expanded for a second month after the euro-region economy emerged from a recession. U.S. payrolls fell by 11,000 workers last month, fewer than the most optimistic forecast among economists surveyed by Bloomberg News, Labor Department figures showed on Dec. 4. “All of the stars are aligned on the macro settings,” said Franz Wenzel , deputy director of investment strategy at Axa Investment Managers in Paris, which oversees about $600 billion. “This year-end rally can take us further.” Wenzel forecasts European earnings will gain 25 to 30 percent next year, and he predicts a 15 to 20 percent increase in stocks globally. Profit Growth Profit growth may help lift European stocks as much as 19 percent by the end of 2010, according to the London-based head of European equity strategy at JPMorgan Chase & Co., Mislav Matejka. He estimates the MSCI Europe Index may reach 1,300 by the end of next year. “The near-term catalysts are a strong earnings reporting season, positive payrolls, rebound in leading indicators and increasing risk allocation into the new year,” Matejka wrote in a report dated Dec. 8. Morgan Stanley’s Draaisma says the withdrawal of government stimulus measures will spark a “very dangerous period” and equities will suffer. He said the MSCI Europe Local Index would rise 1.5 percent to 925 in 2009, data compiled by Bloomberg show. The European Central Bank said financial markets have improved sufficiently to allow it to rein in some of its emergency liquidity measures as the euro region recovers gradually from the recession, according to its monthly editorial bulletin on Dec. 10. Economists expect the Frankfurt-based central bank to increase borrowing costs in the third quarter of 2010, according to a Bloomberg News survey. ‘More Difficult’ “The major event next year will be the moment when an increase in interest rates takes place,” said Christian Dargnat , chief investment officer at BNP Paribas Investment Partners in Paris. “The second quarter will be more difficult, more volatile as investors anticipate the increase.” Including assets from BNP Paribas SA’s purchase of Fortis, BNP Paribas Investment Partners oversees about $769 billion. Basic-resource shares have led gains in Europe this year, rebounding from the worst performance among the 19 industry groups in the Stoxx 600 in 2008. Dargnat is keeping an “overweight” stance on the industry, which means he’s holding a greater proportion of the stocks than are represented in his benchmark, as he believes the companies are benefiting from improvements in the economy. Bank of America’s Baker says investors will miss out buying so-called defensive shares, such as health-care and utilities companies, whose earnings are less tied to economic growth, and recommends “underweight” positions in these sectors. Utilities in the Stoxx 600 have been the worst performers of 19 industries this year. Banks and basic-resources have surged 45 percent and 93 percent this year, respectively, beating all other sectors, as money managers favored buying some of the most beaten-down industries after the 2007 peak. Below 2007 Peak An 11 percent gain in the Stoxx 600 forecast by the strategists would leave the index at 277, from yesterday’s close of 249.57, compared with its 2007 peak of 400.31. The index plunged 61 percent from the high through March this year amid subprime mortgage-related losses at banks that now total $1.71 trillion and the credit crisis that followed the September 2008 collapse of New York-based Lehman Brothers Holdings Inc. The money spent or lent by government and central banks to revive financial markets that has contributed to gains in equity markets this year will remain a “powerful driver” for stocks in 2010, according to strategists Graham Bishop and Ian Richards at Royal Bank of Scotland Group Plc in London. Morgan Stanley’s Draaisma says the withdrawal of stimulus funding in the second half of 2010 will drag equities lower. “A lot of scenarios depend on the macro environment and how policy makers react,” said Gerhard Schwarz , strategist at UniCredit SpA’s German unit in Munich. “Our message is stay with the market now. We haven’t seen the peak yet.” To contact the reporters on this story: Adam Haigh in London at ahaigh1@bloomberg.net ; Adria Cimino in Paris at acimino1@bloomberg.net .

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RBS Christmas Party Cash Buys `Two Pints of Beer and a Packet of Crisps’

December 18, 2009

By Gavin Finch Dec. 18 (Bloomberg) — Royal Bank of Scotland Group Plc , recipient of the world’s biggest banking bailout, is contributing 10 pounds ($16) a head toward employee Christmas parties this year, enough to buy two pints of lager and a packet of potato chips. “The banks just aren’t doing anything in terms of Christmas parties this year because they’re worried about how they will be perceived,” said Mike Kershaw, chairman of Concerto Group and an events planner for more than 25 years. The Edinburgh-based bank is among firms limiting entertainment budgets this year to avoid inflaming public anger after taxpayers provided more than 1 trillion pounds to bail out lenders including RBS and Lloyds Banking Group Plc . British companies have traditionally offered employees a party or gift at Christmas. Ebenezer Scrooge epitomized the ideal in Charles Dickens ’ 1843 novel “A Christmas Carol,” by belatedly sending a prize turkey to his chief clerk. Di Bailey, managing director at Planit Events Ltd. , whose clients include HSBC Holdings Plc and Morgan Stanley, recommends employers spend about 80 pounds-a-head to ensure a “decent” party. Bailey said she couldn’t organize an event at a cost of 10 pounds-per-employee and recommended staff use the money to go ice-skating instead. RBS is making as much as 10 pounds available per employee this year, a person familiar with the situation said. Two pints of Kronenbourg 1664 lager and a packet of salt and pepper- flavored crisps cost 8.21 pounds in the Master Gunner pub in London’s Broadgate district. An hour’s skating at the Tower of London Ice Rink costs 10 pounds an hour off-peak. ‘Won’t Waste Money’ “Our staff have worked very hard over the last 12 months,” said Piers Townsend , an RBS spokesman. “We won’t waste bank money, but the longstanding tradition of paying a small contribution towards staff parties has been judged appropriate.” RBS Chief Executive Officer Stephen Hester complained Dec. 15 that the bank was being “politicized” by the British government and the European Union . The percentage of high achievers leaving the bank has doubled this year, he said, without specifying the number. HSBC , Europe’s biggest bank, will contribute 20 pounds a head, according to spokesman Brendan McNamara. At Lloyds, which received 22.8 billion pounds of state aid, employees can spend as much as 35 pounds of company money a head, said a person familiar with the matter who declined to be identified. Barclays Plc spokesman Jon Laycock declined to comment. The banks did not give a figure for previous end-of-year entertainment spending. ‘Prudent Approach’ “We very much appreciate the financial difficulties many households face because of the current financial climate,” said Heather Scott , a spokeswoman for Lloyds. “Like many other major organizations, we continue to take a sensible and prudent approach to colleague-related activity.” Standard Chartered Plc spokesman Jon Tracey said the bank was planning a “small” party. Commerzbank AG’s Claire Tappenden in London said the lender had held a “small” event, but declined to elaborate on the details. Events organizers say banks spent more on parties last year, even as the global financial system experienced the worst financial crisis since the Great Depression. “This time last year we had a lot of the banks booked in with big numbers and decent budgets,” said Concerto’s Kershaw. “This year doesn’t even remotely compare with previous years. 10 pounds will only buy you a couple of pints of beer and a packet of crisps.” ‘Extravagances Gone’ In the U.S., Goldman Sachs Group Inc. canceled its holiday party for a second year, the Wall Street Journal said, citing a spokesperson. Bank of America Corp. isn’t holding any seasonal staff celebrations and nor is Citigroup Inc., which has also banned its employees from funding their own parties, the newspaper said. London’s restaurants are also feeling the squeeze as spending is cut. “The budgets are much more constrained than in previous years,” said Soren Jessen, owner of No. 1 Lombard Street , a restaurant within sight of the Bank of England where a fillet of veal with caramelised foie gras costs 26.50 pounds. “The Christmas parties we’ve got booked are very different to how they were two years ago,” the former Goldman Sachs banker said. “The banks are back and spending money, it’s just that they’re spending much less of it.” RBS also had a 10 pound entertainment allowance last year, when it recorded a 24.1 billion-pound net loss, the biggest in British corporate history. The bank lost a further 2.84 billion pounds in the first nine months of this year. “It’s good news that the banks have cut back,” said Mathew Sinclair, research director at the Taxpayers Alliance , a London-based lobby group. “Taxpayers don’t want to see business-as-usual at the banks that have taken huge amounts of public money. I don’t think we’d ever go as far as saying that they should have no Christmas party whatsoever,” he said. “The extravagances of the past are gone, perhaps forever,” restaurateur Jessen said. To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

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Lloyd’s of London, the `RBS of 15 Years Ago,’ Has Lessons for U.K.’s Banks

December 15, 2009

By Simon Clark and Kevin Crowley Dec. 15 (Bloomberg) — Lloyd’s of London, the 321-year-old insurance market almost destroyed by a speculative boom and bust two decades ago, is thriving, offering lessons to lenders such as Royal Bank of Scotland Group Plc in how to survive a crisis. Just as traders repackaged risky assets into opaque securities that proved impossible to value during the credit crisis, Lloyds’s underwriters reinsured the same policies over and over to generate commissions. Claims triggered by asbestos- related sicknesses and the Piper Alpha oil platform fire cost the mutual society of investors 8 billion pounds ($13 billion) between 1988 and 1992. Lloyd’s revival, garnering a cumulative profit of 14.7 billion pounds in the past seven and a half years, shows how the banking industry might repair itself, according to Lloyd’s Chairman Peter Levene — by improving transparency about where risk is accumulating, centralizing oversight of the activities of those risk-takers, and bundling old, impaired assets into a separate unit to free up capital. “Lloyd’s, fifteen years ago, was the RBS of today,” Levene, 68, said in an interview. The road to recovery is “very long, hard; you haven’t got a quick-fit solution,” he said. Banks are starting to reform, though government ownership may make it easier for them to avoid some of the changes that Lloyd’s proved will work, said Philip Booth , a professor at London’s Cass Business School . RBS Changes “RBS needs to make the same changes and has started,” Booth said. “Unless the government makes credible a threat to not bail out banks such as RBS in the future, then financial institutions will not have an incentive to develop long-term solutions to their problems, as happened at Lloyd’s.” RBS said in May that it had started new credit approval rules and policies on how much risk the bank can take on with any company or country. The lender also put 282 billion pounds of its riskiest assets into a government-backed insurance program, similar to Lloyd’s decision to hive off all its liabilities from before 1993 into Equitas , a separate company. That spinoff helped Lloyd’s raise new capital from investors. U.K. Chancellor of the Exchequer Alistair Darling wants banks to write “living wills” to show how their operations would be wound down without government help. The reinsurance bubble, or LMX spiral, that imperiled Lloyd’s is comparable to the subprime crisis, said Michael Wade, who helped restructure Lloyd’s in the 1990s and is now chairman of Optex Group Ltd. , a reinsurance consultant. When mortgage borrowers defaulted, losses on collateralized debt obligations and credit-default swaps similarly triggered more losses among firms, he said. Lloyd’s Mistakes Lenders failed to learn from Lloyd’s mistakes in the credit boom, said Morgan Stanley Senior Adviser David Walker , who reviewed Lloyd’s in the 1990s and is now advising the government on the banks. Lenders sold securities exposed to one risk, and bought exposure to the same risk “without adequate central risk oversight,” he said. “The risk capability of these risk-takers wasn’t up to standard,” Walker said of Lloyd’s. “The risk oversight ability of some of these banks was, in exactly the same way, just not up to standard.” Today, Lloyd’s approves every insurer’s business plan each year, so the buildup of risk across the whole market can be monitored, Finance Director Luke Savage said. Lloyd’s market practice has changed so that a policy can now typically only be reinsured twice, said Dane Douetil , 49, chief executive officer of Lloyd’s insurer Brit Insurance Holdings Plc . ‘Aggregation of Risk’ “We’ve learned about aggregation of risk,” said Douetil, whose ancestor Edward Mountain refused to insure the Titanic before it sank in 1912. “The banking industry didn’t seem to have in place the same mindset that looked at causality, and underlying causality — if this went, that could go.” Instead of tapping the government, Lloyd’s turned to its so-called Names, individual investors who had unlimited personal liability on losses. In the credit crisis, the U.K. government provided more than 1 trillion pounds to support lenders, because there was no existing legislation to close banks without taxpayer support, Booth said. Lloyd’s was once so unpopular with investors that Robert Hiscox , chairman of Hiscox Ltd. , the third-largest Lloyd’s insurer, had to curb his passion for shooting pheasants with them. Hiscox helped save Lloyd’s, where he was deputy chairman from 1993 to 1995. “Shooting was always dangerous when they had guns in their hands,” Hiscox, 66, said in an interview. “Lloyd’s has made immoderate amounts of money for people now.” Lloyd’s Names Lloyd’s, where brokers still negotiate face-to-face, still hasn’t redeemed itself to Christopher Stockwell , a former Name who said he lost more than 3 million pounds and was made bankrupt in 1994. Today, most Lloyd’s investors are companies with limited liability. “The market was allowed to carry on to the benefit of the agents and brokers who operated it but not to the benefit of any of the former Names,” Stockwell said. In 2000, Lloyd’s was cleared of defrauding investors who alleged Lloyd’s knew the asbestosis losses were looming. The market’s change of fortune isn’t recognized enough, Hiscox said. “We get lumped in with financial services: ‘oh, you’re all bad guys,’” he said. To contact the reporters on this story: Simon Clark in London at sclark4@bloomberg.net ; Kevin Crowley in London at kcrowley1@bloomberg.net

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RBS Chairman Says Board Didn’t Threaten to Quit Over Bankers’ Bonus Limits

December 15, 2009

By Jon Menon and Andrew MacAskill Dec. 15 (Bloomberg) — Royal Bank of Scotland Group Plc Chairman Philip Hampton denied reports that the lender’s board threatened to quit over government limits on bankers’ bonuses. “Contrary to a number of media reports, there have been no threatened mass resignations of the board, at any time,” Hampton told a shareholder meeting in Edinburgh today, according to excerpts issued by the bank. While the RBS board understood the need to address “public concerns” on pay, it was obliged under British law to act for “shareholders as a whole,” Hampton said. On Dec. 2, the British Broadcasting Corp. reported that the RBS board was advised that it would have to resign if the government blocked bonuses they regarded as essential for the bank’s competitiveness. The bank was attacked at the time by politicians including Vince Cable, Liberal Democrat economics spokesman, who said the government should “welcome their resignations.” RBS is 70 percent owned by the U.K. government. The bank’s shareholders are meeting today to vote on the bank’s plan to insure about 282 billion pounds ($459 billion) of toxic assets including corporate loans and real estate mortgages, with the government’s Asset Protection Scheme. The U.K. is injecting 25.5 billion pounds under the APS, in addition to 20 billion pounds ploughed in last year, to enable the bank to avoid full nationalization. Impairments Weigh “Shareholders have suffered in recent years,” Hampton told the meeting. “It is extremely regrettable. We are expecting in 2010 that credit impairments will weigh heavily on the company’s performance.” It’s impossible to say when they will pay dividends again, he said. Hester this month said the bank is walking a “tightrope” as it attempts to retain and hire bankers while under government ownership. The bank handed control of 2009 bonuses to the government as part of the bailout. RBS’s directors are seeking to increase the amount the lender allocates for bonuses by at least 50 percent to 1.5 billion pounds to encourage workers to stay, the Sunday Times reported Dec. 5. To contact the reporter on this story: Jon Menon in London at jmenon1@bloomberg.net

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Woods’s `Indefinite Leave’ Announcement Raises Question of How Long Gone

December 13, 2009

By Michael Buteau Dec. 13 (Bloomberg) — Tiger Woods is leaving golf to tend to a marriage battered by his extramarital affairs, and the sport wonders how long he’ll be away and how it will fare in the meantime. Woods said in a statement on his Web site that his “infidelity” has hurt his family, and he needed to focus on being a “better husband, father and person.” He said he was leaving competitive golf “indefinitely.” Woods, No. 1 in the world in the Official Golf Rankings and the first athlete to make a billion dollars according to Forbes magazine, has won 14 major tournaments, more than any current golfer and second all-time. His popularity shows up in television ratings and sponsorship — the tour’s prize money has almost tripled to $275 million since he turned pro in 1997. “Watching golf without Tiger is like watching the Three Stooges without Curly,” said Scott Becher , president of Coral Gables, Florida-based Sports & Sponsorship Inc. “He’s the spark, the catalyst, he’s a good guy and bad guy all in one.” Woods, 33, is four wins shy of tying Jack Nicklaus’s mark of 18 titles in the four majors: the Masters Tournament, U.S. and British opens and PGA Championship. He hasn’t missed the Masters, scheduled for April 8-11 in Augusta, Georgia, since he was an amateur in 1995. Broken Leg In 12 years on the tour, he has brought fans moments to remember. He won the 2008 U.S. Open in Torrey Pines in a playoff over Rocco Mediate while playing with a broken leg. In 2005, he won the Masters in a sudden-death playoff over Chris DiMarco after his chip shot on the 16th hole sat on the lip of the cup for an instant before rolling in. The 2010 U.S. Open in June will return to California’s Pebble Beach course, where he won by a tournament-record 15 shots in 2000. The British Open will be staged the following month at St. Andrews in Scotland, where Woods won in 2000 at 19- under par, the lowest score ever for the tournament when it was held at the 400-year-old course. “They always say that there’s nobody bigger than the game of golf itself, but right now in these times there is, and it’s him,” John Daly , a two-time major tournament winner, said at a press conference at the Australian PGA Championship . “I hope we get him back soon. Golf needs him.” Daly, who was suspended by the U.S. Tour after repeated problems with alcohol and personal relationships, said he “just could never imagine” what Woods is going through. He said it also cast Woods in a new light. “He definitely screwed up,” Daly said. “I think a lot of people are in shock. Everybody has to realize that Tiger Woods is a human and he was put on a pedestal of being non-human.” Car Crash Woods had been the subject of reports of extramarital affairs following a Nov. 27 car accident outside his home near Orlando, Florida. He and his Swedish-born wife, Elin, have been married for five years and have a 2-year-old daughter and 10- month-old son. His statement on Dec. 11 was the first time he used the word infidelity. He hasn’t appeared in public since the crash. “It may not be possible to repair the damage I’ve done, but I want to do my best to try,” Woods said. Accenture Plc , the Dublin, Ireland-based consulting company that built its marketing around Woods, removed him from its Web site two days ago. Procter & Gamble Co . said yesterday that it will begin phasing Woods out of print and TV ads for its Gillette division. Other companies with marketing ties to Woods, including sportswear maker Nike Inc ., and video-game publisher Electronic Arts Inc ., have said they aren’t changing their media plans or advertising schedules. PGA Tour Response U.S. PGA Tour Commissioner Tim Finchem said in a statement that the tour supports its top draw’s decision and that Woods’s “priorities are where they need to be.” “We look forward to Tiger’s return to the PGA Tour when he determines the time is right for him,” Finchem said. Ticket sales often increase by as much as 20 percent when Woods commits to play in an event, according to tournament organizers. When Woods is in contention to win during weekend play, network viewership rises as much as 50 percent, according to AC Nielsen Corp. “The tour has more to lose than Tiger does in the short term,” Paul Swangard , managing director of the University of Oregon’s sports marketing center, said in a telephone interview. “Any advertiser looking at a media buy in golf would have to take a pause.” The U.S. golf season will begin in Hawaii in the first week of January. Based on his schedule from previous seasons, Woods likely would have played in three tournaments before the Masters in April. Woods plays an average of 18 of the 41 U.S. PGA Tour events each season. CBS, Masters CBS Corp. has broadcast the Masters every year in the U.S. in 1956 on one-year contracts. The event typically draws the highest ratings of any golf tournament. “We’ve obviously done golf tournaments without Tiger before,” Sean McManus , president of CBS Sports and News, told the New York Times. “We’ll adjust, but I guess a lot of it depends on what the definition of the word ‘indefinite’ is.” Geoff Ogilvy , the 2006 U.S. Open champion, said at the Australian PGA Championship that all golfers had a stake in Woods’s story. “If Tiger Woods indefinitely doesn’t play golf,” Ogilvy said, “that’s not good for us.” To contact the reporter on this story: Michael Buteau in Atlanta at mbuteau@bloomberg.net

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Woods’s `Indefinite Leave’ Announcement Raises Question of How Long Gone

December 13, 2009

By Michael Buteau Dec. 13 (Bloomberg) — Tiger Woods is leaving golf to tend to a marriage battered by his extramarital affairs, and the sport wonders how long he’ll be away and how it will fare in the meantime. Woods said in a statement on his Web site that his “infidelity” has hurt his family, and he needed to focus on being a “better husband, father and person.” He said he was leaving competitive golf “indefinitely.” Woods, No. 1 in the world in the Official Golf Rankings and the first athlete to make a billion dollars according to Forbes magazine, has won 14 major tournaments, more than any current golfer and second all-time. His popularity shows up in television ratings and sponsorship — the tour’s prize money has almost tripled to $275 million since he turned pro in 1997. “Watching golf without Tiger is like watching the Three Stooges without Curly,” said Scott Becher , president of Coral Gables, Florida-based Sports & Sponsorship Inc. “He’s the spark, the catalyst, he’s a good guy and bad guy all in one.” Woods, 33, is four wins shy of tying Jack Nicklaus’s mark of 18 titles in the four majors: the Masters Tournament, U.S. and British opens and PGA Championship. He hasn’t missed the Masters, scheduled for April 8-11 in Augusta, Georgia, since he was an amateur in 1995. Broken Leg In 12 years on the tour, he has brought fans moments to remember. He won the 2008 U.S. Open in Torrey Pines in a playoff over Rocco Mediate while playing with a broken leg. In 2005, he won the Masters in a sudden-death playoff over Chris DiMarco after his chip shot on the 16th hole sat on the lip of the cup for an instant before rolling in. The 2010 U.S. Open in June will return to California’s Pebble Beach course, where he won by a tournament-record 15 shots in 2000. The British Open will be staged the following month at St. Andrews in Scotland, where Woods won in 2000 at 19- under par, the lowest score ever for the tournament when it was held at the 400-year-old course. “They always say that there’s nobody bigger than the game of golf itself, but right now in these times there is, and it’s him,” John Daly , a two-time major tournament winner, said at a press conference at the Australian PGA Championship . “I hope we get him back soon. Golf needs him.” Daly, who was suspended by the U.S. Tour after repeated problems with alcohol and personal relationships, said he “just could never imagine” what Woods is going through. He said it also cast Woods in a new light. “He definitely screwed up,” Daly said. “I think a lot of people are in shock. Everybody has to realize that Tiger Woods is a human and he was put on a pedestal of being non-human.” Car Crash Woods had been the subject of reports of extramarital affairs following a Nov. 27 car accident outside his home near Orlando, Florida. He and his Swedish-born wife, Elin, have been married for five years and have a 2-year-old daughter and 10- month-old son. His statement on Dec. 11 was the first time he used the word infidelity. He hasn’t appeared in public since the crash. “It may not be possible to repair the damage I’ve done, but I want to do my best to try,” Woods said. Accenture Plc , the Dublin, Ireland-based consulting company that built its marketing around Woods, removed him from its Web site two days ago. Procter & Gamble Co . said yesterday that it will begin phasing Woods out of print and TV ads for its Gillette division. Other companies with marketing ties to Woods, including sportswear maker Nike Inc ., and video-game publisher Electronic Arts Inc ., have said they aren’t changing their media plans or advertising schedules. PGA Tour Response U.S. PGA Tour Commissioner Tim Finchem said in a statement that the tour supports its top draw’s decision and that Woods’s “priorities are where they need to be.” “We look forward to Tiger’s return to the PGA Tour when he determines the time is right for him,” Finchem said. Ticket sales often increase by as much as 20 percent when Woods commits to play in an event, according to tournament organizers. When Woods is in contention to win during weekend play, network viewership rises as much as 50 percent, according to AC Nielsen Corp. “The tour has more to lose than Tiger does in the short term,” Paul Swangard , managing director of the University of Oregon’s sports marketing center, said in a telephone interview. “Any advertiser looking at a media buy in golf would have to take a pause.” The U.S. golf season will begin in Hawaii in the first week of January. Based on his schedule from previous seasons, Woods likely would have played in three tournaments before the Masters in April. Woods plays an average of 18 of the 41 U.S. PGA Tour events each season. CBS, Masters CBS Corp. has broadcast the Masters every year in the U.S. in 1956 on one-year contracts. The event typically draws the highest ratings of any golf tournament. “We’ve obviously done golf tournaments without Tiger before,” Sean McManus , president of CBS Sports and News, told the New York Times. “We’ll adjust, but I guess a lot of it depends on what the definition of the word ‘indefinite’ is.” Geoff Ogilvy , the 2006 U.S. Open champion, said at the Australian PGA Championship that all golfers had a stake in Woods’s story. “If Tiger Woods indefinitely doesn’t play golf,” Ogilvy said, “that’s not good for us.” To contact the reporter on this story: Michael Buteau in Atlanta at mbuteau@bloomberg.net

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Gordon Ramsay Flees the Kitchen as TV Fame Helps Rescue Restaurant Empire

December 11, 2009

By William Green Dec. 11 (Bloomberg) — On a gray morning in October, Gordon Ramsay bursts into the kitchen of his south London house, pop music blaring from the radio. At the heart of the room stands a 67,000-pound ($109,000) French cooking range that weighs 2.5 tons and had to be lowered by crane into the celebrity chef’s home. Ramsay, who is 6 feet 2 inches (1.88 meters) tall and weighs 215 pounds (98 kilograms), is wearing jeans, a tight black T-shirt that accentuates his muscles and a Bell & Ross watch — a Swiss brand marketed to soldiers, bomb-disposal experts and other “men facing extreme situations.” The 43-year-old Scot pours himself a juice, sits at the kitchen table and looks back on his own extreme situation: a year in which his global restaurant empire almost went bankrupt. In the fall of 2008, his London-based Gordon Ramsay Holdings Ltd . breached the covenants on a 10.5 million-pound loan and overdraft facility from Royal Bank of Scotland Group Plc . The bank hired KPMG to perform an independent review of the firm, 69 percent of which is owned by Ramsay and 31 percent by his father-in-law, Chris Hutcheson. In late December, Ramsay says, KPMG recommended that the company declare bankruptcy, fire hundreds of people and close all but its best-performing restaurants. ‘On the Line’ “Everything was on the line,” Ramsay says. “December, January, February and March were the most highly pressurized, s- To contact the reporter on this story: William Green in London at wgreen6@bloomberg.net .

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Asia Stocks Rise as China Production Beats Estimates; Yen, Swaps Decline

December 10, 2009

By Yasuhiko Seki and Ian Sayson Dec. 11 (Bloomberg) — Asia stocks climbed after Chinese industrial production rose more than economists forecast and U.S. jobless claims fell to a one-year low. The yen and credit- default swaps for bonds in Asia fell. The MSCI Asia Pacific Index rose 1 percent to 120.28 at 3 p.m. in Tokyo. The Nikkei Stock Average 225 leaped 2.4 percent. Standard & Poor’s 500 futures climbed after the index rose 0.6 percent in New York. The yen weakened against all 16 of the most-traded currencies. The Markit iTraxx Asia index of 50 investment-grade companies outside Japan fell 1.9 percent as investors grew less concerned about defaults. China’s factory output surged 19.2 percent last month from a year earlier, exceeding the 18.2 percent median estimate in a Bloomberg News survey of 25 economists and boosting optimism that the first global recession since World War II is receding. The average number of Americans filing first-time claims for unemployment benefits over the past four weeks fell to 473,750 last week. Investors resumed pumping funds into emerging markets. “Strong headline figures from China, which now holds the key to assessing the health of the global economy, enhance risk trades,” said Koichi Kurose , chief strategist in Tokyo at Resona Bank Ltd. “This may then support capital inflow into countries like Australia that benefit from a recovery in the Chinese economy.” Asian Stocks Japan’s Nikkei surged 2.3 percent, and gains widened after China reported industrial production figures. JTekt Corp. and NTN Corp. climbed after the autoparts makers were raised to “outperform” from “underperform” by Credit Suisse Group analyst Shinji Kuroda . JTekt surged 7.1 percent to 1,103 yen, on course for its highest close since Sept. 25, and had the biggest gain on the Nikkei. NTN rose 2.9 percent to 395 yen. Foreign investors bought a net 608 billion yen ($6.9 billion) in Japanese shares in the week from Nov. 30 to Dec. 4, according to data released yesterday by the Tokyo Stock Exchange. It was the highest level since the period ended Aug. 12, 2005. Hong Kong’s Hang Seng Index advanced 1.7 percent, led by a 5 percent gain at Cathay Pacific Airways Ltd. Baoshan Iron & Steel Co., China’s largest producer, added 1 percent after raising prices for the first time in four months. Australia’s S&P/ASX 200 Index gained 0.7 percent to 4,637.10. Karoon Gas Australia Ltd. surged 7.3 percent to A$8.24 as analysts expressed confidence its latest well would find gas. Investment in emerging economies resumed as markets recovered from concerns over Dubai’s efforts to restructure debt of state-controlled companies. Dubai World is seeking a standstill agreement with lenders and its property unit, Nakheel PJSC, has $3.52 billion of Islamic bonds maturing Dec. 14. Emerging Markets Emerging markets equity funds received $2.3 billion more than was withdrawn in the week to Dec. 9, bringing 2009 inflows to $75.4 billion, Cambridge, Massachusetts-based research firm EPFR Global said in a statement. Emerging-market bond funds took in $317 million. “Emerging markets will continue to lead growth in the world economy next year, and companies that can make money in those markets will remain in the spotlight,” said Yoshinori Nagano , a senior strategist in Tokyo at Daiwa Asset Management Co., which oversees $96 billion. “There isn’t much concern about the sustainability of the global economic recovery.” S&P 500 futures climbed 0.33 percent after the index rose to 1,102.35 in New York. Europe’s Dow Jones Stoxx 600 Index gained 1 percent to 243.89 yesterday. Yen Drops The yen declined as much as 0.6 percent against the euro to 130.73, and traded as weak as 88.78 to the dollar. Japan’s currency dropped the most against South Africa’s rand and the Taiwanese dollar, losing more than 0.4 percent against the higher-yielding currencies. Taiwan’s dollar gained 0.2 percent to NT$32.22 per dollar on optimism China’s recovery will boost the island’s exports. “The markets are seeing pockets of recovery and that is alleviating concerns of a prolonged global slump,” said Olan Caperina , who helps manage $9.7 billion at Bank of the Philippine Islands. The Markit iTraxx Japan index fell 4 basis points to 144.5 basis points, according to BNP Paribas. The Markit iTraxx Asia index of investment-grade companies outside Japan declined 2 basis points to 103.5, Royal Bank of Scotland Group Plc prices show. The Australia index retreated 3.5 basis points to 87 basis points in Sydney, according to Citigroup Inc. Treasuries were little changed after the difference between two-year and 30-year yields widened yesterday to the most since at least 1980, as $74 billion in debt sales this week drove long-term rates higher. The difference in yield to own bonds in developing countries instead of Treasuries narrowed four basis points to 3.04 percentage points, acording to an index compiled by JPMorgan Chase & Co. That compared with 3.30 percentage points on Nov. 30, five days after Dubai World said it was looking to restructure $26 billion of its debt. Copper, Oil Gain Copper advanced for the first time in seven days. Futures for three-month delivery on the London Metal Exchange rose as much as 0.87 percent to $6,869 a metric ton. Gold added as much as 0.45 percent to $1,136.14 in Singapore. It reached a record $1,226.56 an ounce on Dec. 3. Crude oil for January delivery rose 41 cents to $70.95 a barrel in electronic trading on the New York Mercantile Exchange. It traded below $71 a barrel after falling for a seventh day yesterday and is headed for the largest weekly drop in 11 weeks, after gasoline supplies rose to the highest level since April. Stockpiles of distillate fuel increased last week. “There’s plenty of crude, there’s more crude than you can jump over,” said Peter McGuire , a managing director at CWA Global Markets Pty in Sydney. To contact the reporters on this story: Yasuhiko Seki in Tokyo at Yseki5@bloomberg.net ; Ian Sayson in Manila at isayson@bloomberg.net

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China’s Exports Fall at Slower Pace as Global Demand Recovers From Crisis

December 10, 2009

By Bloomberg News Dec. 11 (Bloomberg) — China’s exports fell at a slower pace in November as global demand began to recover from the financial crisis. Shipments slid 1.2 percent from a year earlier, the customs bureau said on its Web site today, after falling 13.8 percent in October. The median forecast in a Bloomberg News survey of 26 economists was for a 1.4 percent increase. The trade surplus was $19.09 billion, today’s data showed, compared with $23.99 billion in October. China has held the yuan at about 6.83 to the dollar for the past 17 months to shield exporters of toys, textiles and electronics from the world economic slump. Yuan forwards indicated yesterday that the currency will appreciate about 2.6 percent in the next 12 months even after Premier Wen Jiabao last month rebuffed calls by European leaders for gains. “Global political pressure for currency gains will continue to intensify,” Ma Jun , chief China economist at Deutsche Bank AG in Hong Kong, said before today’s announcement. “China may begin to increase the flexibility of its currency in March or April.” Imports rose 26.7 percent from a year earlier, compared with a 6.4 percent decline in October. The latest export and import numbers benefited from the comparison with November 2008, the first month that China reported year-on-year declines in trade because of the global financial crisis. Bracing for Gains Exporters are bracing themselves for renewed gains by the yuan as policy makers become more confident in the economy’s recovery. “My top concern for next year is the renminbi’s exchange rate; it cannot and must not move,” Bobby Wu, managing director of Zhejiang Jino Textiles Co., said last month at the Canton Fair, China’s biggest trade show, using another word for the yuan. “Any change means trouble for us.” China’s exports may jump 20 percent in the first quarter of 2010 because of the global recovery and comparisons with this year’s low base, according to Macquarie Securities Ltd. and Royal Bank of Scotland Group Plc. The trade surplus, export gains and the peg to the dollar may exacerbate trade tensions. China faces U.S. tariffs on tires and European Union duties on screws and bolts and is investigating imports of U.S. autos and poultry. China also said yesterday that it was imposing provisional duties on some U.S. and Russian steel imports. Trade Friction China was the second-biggest exporter of goods in 2008 and is poised to overtake Germany. The nation is at the center of world trade friction, facing 101 trade-remedy investigations in 19 countries and regions involving more than $11 billion of goods, the state-run Xinhua News Agency reported Dec. 3, citing the commerce ministry. Morgan Stanley’s Asia chairman Stephen Roach said that high unemployment in the U.S. and the need to win votes in congressional elections in November next year may push President Barack Obama to take tougher trade action against China. “This is not a recipe for tranquility on trade,” Roach said in an interview in Beijing on Dec. 3. Wen told European leaders Nov. 30 that calls for the yuan to appreciate are “unfair” as the country faces rising protectionism and a stable yuan aids the world’s recovery. China had “good reason” to depreciate its currency during the global financial crisis as exports fell and chose instead to keep the yuan stable, central bank Deputy Governor Zhu Min said at a forum in Beijing on Dec. 9. He echoed Wen’s comments to European leaders, saying a stable yuan aids a world recovery. The International Monetary Fund says the yuan is “substantially” undervalued and Pacific Investment Management Co., which runs the world’s biggest bond fund, describes bets that China will ease controls on its currency as among the best in emerging markets. To contact the reporter on this story: Paul Panckhurst in Beijing at ppanckhurst@bloomberg.net

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Piper Jaffray Plans to Hire About 60 Bankers in Next Year, CEO Duff Says

December 10, 2009

By Ambereen Choudhury and Gavin Finch Dec. 10 (Bloomberg) — Piper Jaffray Cos. plans to hire about 60 investment bankers across its advisory and capital- raising businesses as the Minneapolis-based brokerage seeks to capitalize on better market conditions in 2010. The global hirings will take place over the next 12 months, Chief Executive Officer Andrew Duff said in an interview in London yesterday. Piper Jaffray has added about 90 “senior- client facing bankers” in the past 18 months. “Business activity is building up,” Duff said. “2010 is going to be more robust after a virtual shutdown in capital markets.” Merger and acquisitions “advice has lagged substantially” this year, he said. There has been a 33 percent fall in global M&A to $1.6 trillion this year as the two-year credit-market and buyout Freeze continues to damp deal-making, according to data compiled by Bloomberg. Still, a 49 percent rise in the Standard & Poor’s 500 Index since March 1 has fueled demand for new shares, spurring stock sales. Initial public offerings have raised about $66 billion in the second half, almost six times the amount raised in the first half, the data show. Piper Jaffray, which has offices across the U.S., Hong Kong, London and Shanghai, runs an investment banking, securities and asset-management business. It has about 1,100 employees and was founded in 1895. Duff said the firm’s global equities business will be run out of London from next year, saying the City is “very attractive” as a place to do business. His remarks came before U.K. Chancellor of the Exchequer Alistair Darling said yesterday the U.K. will force banks awarding bonuses above 25,000 pounds ($40,800) to pay a one-time levy of 50 percent after the government provided more than 1 trillion pounds ($1.63 trillion) to prop up lenders including Royal Bank of Scotland Group Plc during the credit crisis. Bankers at U.K.’s second-largest lender including Barclays Plc President Robert Diamond have said the U.K. risks regulatory missteps that would put London at a competitive disadvantage. To contact the reporters on this story: Ambereen Choudhury in London achoudhury@bloomberg.net ; Gavin Finch at gfinch@bloomberg.net

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Piper Jaffray to Hire About 60 Investment Bankers Worldwide, CEO Duff Says

December 10, 2009

By Ambereen Choudhury and Gavin Finch Dec. 10 (Bloomberg) — Piper Jaffray Cos. plans to hire about 60 investment bankers across its advisory and capital- raising businesses as the Minneapolis-based brokerage seeks to capitalize on better market conditions in 2010. The global hirings will take place over the next 12 months, Chief Executive Officer Andrew Duff said in an interview in London yesterday. Piper Jaffray has added about 90 “senior- client facing bankers” in the past 18 months. “Business activity is building up,” Duff said. “2010 is going to be more robust after a virtual shutdown in capital markets.” Merger and acquisitions “advice has lagged substantially” this year, he said. There has been a 33 percent fall in global M&A to $1.6 trillion this year as the two-year credit-market and buyout Freeze continues to damp deal-making, according to data compiled by Bloomberg. Still, a 49 percent rise in the Standard & Poor’s 500 Index since March 1 has fueled demand for new shares, spurring stock sales. Initial public offerings have raised about $66 billion in the second half, almost six times the amount raised in the first half, the data show. Piper Jaffray, which has offices across the U.S., Hong Kong, London and Shanghai, runs an investment banking, securities and asset-management business. It has about 1,100 employees and was founded in 1895. Duff said the firm’s global equities business will be run out of London from next year, saying the City is “very attractive” as a place to do business. His remarks came before U.K. Chancellor of the Exchequer Alistair Darling said yesterday the U.K. will force banks awarding bonuses above 25,000 pounds ($40,800) to pay a one-time levy of 50 percent after the government provided more than 1 trillion pounds ($1.63 trillion) to prop up lenders including Royal Bank of Scotland Group Plc during the credit crisis. Bankers at U.K.’s second-largest lender including Barclays Plc President Robert Diamond have said the U.K. risks regulatory missteps that would put London at a competitive disadvantage. To contact the reporters on this story: Ambereen Choudhury in London achoudhury@bloomberg.net ; Gavin Finch at gfinch@bloomberg.net

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Brown Takes Aim at Bonuses, Delays Budget Cuts Until After 2010 U.K. Vote

December 10, 2009

By Gonzalo Vina and Robert Hutton Dec. 10 (Bloomberg) — U.K. Prime Minister Gordon Brown has delivered his economic manifesto for re-election: punish bankers and tax the rich while protecting the poor and services. Speaking to lawmakers yesterday in London, Chancellor of the Exchequer Alistair Darling left investors in the dark over how a Labour government would cut the worst budget deficit since World War II, saying the top 2 percent of earners would bear the immediate cost and delaying a broad-based tax increase until 2011 — after the vote that must be held by June. With vows to sustain spending for schools, hospitals and the police and promises to keep spending until after the economy starts growing, Brown’s proposal will sharpen divisions with David Cameron’s Conservatives. The strategy has already eroded an opinion poll lead Cameron has held for two years. “This has the potential to bring back waverers and former supporters,” said Justin Fisher, professor of politics at Brunel University in London. “It will appease a lot of their angst about Labour. They don’t have to think about the tax rises until later.” Darling’s presentation generated criticism from bankers and business groups. The British Bankers’ Association chief executive officer, Angela Knight , said foreign banks may look at London as “a significantly less attractive place.” Richard Lambert , director general of the Confederation of British Industry, said Darling’s “jobs tax” was a “serious mistake.” Brown’s Tax Finance-industry criticism was directed at a one-time levy of 50 percent on discretionary bonuses of more than 25,000 pounds ($40,800). The tax will be paid by all banks that operate in the U.K., including units of U.S. firms such as Goldman Sachs Group Inc. and JPMorgan Chase & Co. Darling is trying to mollify voter anger after committing more than 1 trillion pounds to prop up lenders including Royal Bank of Scotland Group Plc. “Those who did most to cause the crash and did best from the boom make their proper contribution through a fair-tax system,” said Brendan Barber , general secretary of the Trades Union Congress, whose members fund two-thirds of the annual budget of Brown’s Labour Party. Darling failed to spell out how much government departments will have their budgets cut to narrow the shortfall. In April, he promised to halve the gap within four years. The Conservatives estimated he’d have to make average cuts of about 10 percent in all but the three core spending areas. Darling’s ‘Choice’ “The choice facing the country is between securing recovery or wrecking it,” Darling said in Parliament. “Between investment to build a fair society where all prosper and a divided society that favors a wealthy few.” The finance minister estimated the deficit will total 611 billion pounds in the four years through March 2013, more than the 606 billion pounds he expected in April. The Treasury’s shortfall of about 12 percent of gross domestic product this year is the most in the Group of 20 nations. Darling said he plans to get a third of the money to cut the deficit from higher taxes and two-thirds from lower spending, a shift from previous plans for taxes to make up a quarter of the reduction and lower spending three-quarters. Brown has narrowed the gap with the Conservatives among voters since September by stepping up attacks on bankers, who his Labour Party blames for the credit crisis that began in 2007. Five polls since the beginning of November have signaled the Conservative lead over Labour is narrow enough to deny the opposition an outright victory in the election. ‘Win/Win’ Darling also is pressing banks to step up lending and repair their balance sheets after taking 117 billion pounds of government aid. “Attacking bankers is win/win for Labour — they can clobber bankers with impunity and most of the public will support them,” said Andrew Hawkins , chief executive of ComRes Ltd., a London-based polling company. “Up to 80 percent of people say they want more spending on schools and hospital, but voters think Labour is tired and running out of ideas.” Not all the measures were designed to please voters. Darling confirmed he’d return value-added tax to 17.5 percent at the end of this year from 15 percent, reversing a year-old measure. From 2011, Darling said he’d raise National Insurance contributions, an income tax, hitting about 10 million workers earning more than 20,000 pounds a year. Public-sector workers will see their pay rises capped at 1 percent, also from 2011. ‘Tax on Jobs’ George Osborne , Treasury spokesman for the opposition Conservatives, attacked the decision to raise national insurance, paid by both employers and staff as a “tax on jobs.” He said Darling should have revealed more about deficit- cutting plans. “The chancellor is prepared to tell us what he will spend money on, but stays almost totally silent on where the real axe will fall,” Osborne said. “He is achieving the previously impossible trick of ring-fencing a black hole.” Darling said Osborne was ignoring the Treasury’s growth projections. These see the British economy, forecast to shrink 4.75 percent this year, growing by as much as 1.25 percent next year and 3.5 percent in 2011. The chancellor said borrowing will rise by 4.6 billion pounds to 611 billion pounds in the four years through March 2013. U.K. government bonds rose after the Treasury increased planned gilt issuance in the year through March by less than some analysts estimated. The government will issue a record 225.1 billion pounds of bonds in the year ending March 31, the London-based Debt Management Office said. That’s a 5.1 billion- pound increase from the 220 billion pounds announced in April. Gilts Rise The yield on the two-year gilt yesterday fell 3 basis points to 1.09 percent in London trading. The 10-year yield declined 3 basis points to 3.66 percent. “Labour is still in the game, but it’s a rank outsider,” said Mark Wickham-Jones , professor of politics at the University of Bristol. “‘They have identified a figure of hate in the bankers, taxed the rich a bit more and been vague on how to deal with the deficit, but they are still very much in the game.” To contact the reporters on this story: Gonzalo Vina in London at gvina@bloomberg.net or Robert Hutton in London at rhutton1@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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Darling Forces U.K. Banks to Swallow `Poison Pill’ of 50% Tax on Bonuses

December 9, 2009

By Andrew MacAskill and Gavin Finch Dec. 10 (Bloomberg) — British Chancellor of the Exchequer Alistair Darling’s plan to levy a 50 percent tax on bonuses will make banks choose between punishing shareholders or employees. Darling yesterday imposed the tax, to be paid by all banks operating in the U.K., on bonuses they pay employees until April 5. The measure, which the Treasury says will raise more than 550 million pounds ($890 million), will affect about 20,000 people. Banks will have to decide whether to maintain payments to employees, allowing the additional tax expense to boost the cost of compensation and reduce profits for shareholders, or to protect profits by slashing bonuses. In some cases, firms may have to honor contractual agreements with employees, said Jo Keddie , an employment lawyer at London-based Dawsons LLP. “It’s a poison pill,” Keddie said in a telephone interview. “Either shareholders are going to take home less, or banks are going to have to punish their employees who have done very well,” she said. “It’s potentially shareholders that are going to lose out because many of the bonuses have already been agreed.” Goldman Sachs Group Inc ., the most profitable securities firm in Wall Street history, and U.K. banks including Barclays Plc and Royal Bank of Scotland Group Plc are most affected by the levy because they have the largest bonus pools, said Shaun Springer , chief executive officer of Square Mile Services Ltd., which advises London financial firms on pay. ‘Most to Lose’ Goldman Sachs, based in New York, set aside $16.7 billion to pay employees in the first nine months of the year. RBS’s directors are seeking to increase the amount the Edinburgh-based lender allocates for bonuses by at least 50 percent to 1.5 billion pounds, the Sunday Times reported Dec. 5, without saying where it got the information. “Goldman has the most to lose,” said Springer. “Banks that employ the most U.K. citizens will be next in line.” Barclays Capital , Barclays’s securities unit, employs about 20,000 people, and RBS employs about the same amount at its investment-banking division worldwide. Officials at Goldman Sachs, Barclays and RBS declined to comment. International securities firms such as Goldman Sachs and JPMorgan Chase & Co. both base their European headquarters in the square mile, as London’s principal financial district is known. Goldman Sachs International Ltd., one of the firm’s more than 25 U.K. divisions, employed 5,831 people and allocated a total of 81 million pounds in gross wages and salaries in the year through November 2008, according to filings at the Cardiff, Wales-based registrar Companies House. ‘Bankers’ Folly’ U.K. financial firms were preparing to set aside as much as 6 billion pounds in bonuses for 2009, 50 percent more than 2008, according to an October report by the Centre for Economics & Business Research Ltd., a London-based research firm. Rising bonus payments sparked anger among politicians and labor unions after the government provided more than 1 trillion pounds to prop up lenders including Royal Bank of Scotland during the credit crisis. “It’s just not on to make nurses, social workers, dinner ladies, cleaners and hospital porters pay the price for the folly of the bankers,” said Dave Prentis , general secretary of Unison, the U.K.’s largest public employees’ union. “The people who earn most should pay the most.” The U.K. will force banks awarding discretionary bonuses of more than 25,000 pounds to pay the one-time levy. Employees will still have to pay income tax on bonuses, the Treasury said. The top tax rate on earnings of more than 150,000 pounds will rise to 50 percent in April, a measure announced earlier this year. The bonus measure may be extended beyond April if the Treasury finds banks are deferring payments. Thatcher, Blair “On a bonus of 1 million pounds, the new tax will be 500,000 pounds, National Insurance will be 130,000 pounds, and personal income tax is 400,000 pounds,” said Chris Maddock, tax director of Vantis Group Ltd. “This makes a total of 1.03 million pounds for the Treasury.” Bankers aren’t the first to be subject to an industry- specific tax. In 1981, the Conservative Party under Margaret Thatcher imposed a 2.5 percent levy on bank deposits, saying that rising interest rates were generating unearned profit. Almost two decades later, Tony Blair later put a windfall levy on utility companies. “It’s something that the banks are probably going to have to pay up on this year and hope it doesn’t happen again,” said Daniel Naftalin , a partner at Mishcon de Reya in London. “This is not really a tax on individual bankers, so the government is a lot less open to legal challenges than it could have been.” To contact the reporters on this story: Andrew MacAskill in London at amacaskill@bloomberg.net ; Gavin Finch in London at gfinch@bloomberg.net .

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Chinese Exports May Rebound, Spurring Deutsche Bank Bet on Stronger Yuan

December 9, 2009

By Bloomberg News Dec. 10 (Bloomberg) — China is likely to report its first gain in overseas shipments in 13 months, beginning a rebound that may encourage the world’s second-biggest exporting nation to let the yuan strengthen next year. Exports rose 1.4 percent in November from a year earlier, according to the median estimate of 26 economists surveyed by Bloomberg News. The trade surplus swelled to $24.3 billion, the largest this year excluding seasonal distortions, tomorrow’s report in Beijing may show. China’s exports may jump 20 percent in the first quarter of 2010 because of the global recovery and comparisons with this year’s low base, according to Macquarie Securities Ltd. and Royal Bank of Scotland Group Plc. Yuan forwards suggest that the currency will appreciate about 2.6 percent against the dollar in the next 12 months even after Premier Wen Jiabao last month rebuffed Europe’s calls for gains. “Global political pressure for currency gains will continue to intensify,” said Ma Jun , chief China economist at Deutsche Bank AG in Hong Kong. “China may begin to increase the flexibility of its currency in March or April.” Ma forecasts a gain of as much as 5 percent against the dollar in the next year. China had “good reason” to depreciate its currency during the global financial crisis as exports fell and chose instead to keep the yuan stable, central bank Deputy Governor Zhu Min said at a forum in Beijing yesterday. He echoed Wen’s comments to European leaders, saying a stable yuan aids a world recovery. Return to Inflation “We took the same policy as we did in the Asian financial crisis; we decided to stabilize the renminbi exchange rate,” the central banker said, using another word for the yuan. November’s data may show a return to inflation as China’s economy rebounds from the slowest growth in almost a decade and food prices climb. Consumer prices rose 0.4 percent from a year earlier, the survey of economists showed. Industrial output gained 18.2 percent, the most in more than two years, and retail sales climbed 16.5 percent, economists estimated. Banks may have extended 250 billion yuan ($36.6 billion) of local-currency loans, compared with 253 billion yuan in October. Urban fixed-asset investment may have increased 33 percent in the first 11 months of 2009 from a year earlier as stimulus spending and unprecedented bank lending drove a recovery. Citic Securities Co. said Dec. 8 that China’s textile and apparel companies may “outperform” as domestic sales are sustained and exports recover, recommending companies including Fujian Septwolves Industry Co. , Luthai Textile Co. and Youngor Group Co. ‘Toughest Time’ “The toughest time is behind us and we expect overseas demand to continue to recover next year,” Kelly Wen, the overseas sales manager of shoe company Yaqite Industrial Co. said at the Canton Fair, China’s biggest trade show, last month. China’s trade surplus, export gains and a currency effectively pegged to the dollar may exacerbate trade tensions. China faces U.S. tariffs on tires and European Union duties on screws and bolts and is investigating imports of U.S. autos and poultry. China was the second-biggest exporter of goods in 2008 and is poised to overtake Germany. The Asian nation’s trade surplus was $24 billion in October. The nation already sees itself as being at the center of world trade friction, facing 101 trade-remedy investigations in 19 countries and regions involving more than $11 billion of goods, the state-run Xinhua News Agency reported Dec. 3, citing the commerce ministry. Trade ‘Tranquility’ Morgan Stanley’s Asia chairman Stephen Roach said that high unemployment in the U.S. and the need to win votes in congressional elections in November next year may push President Barack Obama to take tougher trade action against China. “This is not a recipe for tranquility on trade,” Roach said in an interview in Beijing on Dec. 3. Wen told European leaders Nov. 30 that calls for the yuan to appreciate are “unfair” as the country faces rising protectionism and a stable yuan aids the world’s recovery. Authorities in Beijing have held the currency steady at about 6.83 against the U.S. dollar since July 2008. The yuan rose 21 percent in the three years after a fixed exchange rate was scrapped in 2005. The International Monetary Fund says the yuan is “substantially” undervalued and Pacific Investment Management Co., which runs the world’s biggest bond fund, describes bets that China will ease controls on its currency as among the best in emerging markets. ‘Gradual’ Gains Societe Generale SA said Dec. 8 that investors should use call options to benefit from China allowing “gradual” gains in the yuan next year as the economy recovers. Policy makers are more likely to allow yuan appreciation for domestic economic reasons than in response to pressure from foreign governments, said Kevin Lai , an economist with Daiwa Institute of Research in Hong Kong. Inflation pressures are building as import prices rise and “if you don’t allow the yuan to appreciate you are shooting yourself in the foot,” Lai said. — Kevin Hamlin , Li Yanping. Editors: Paul Panckhurst , Leon Mangasarian . To contact the Bloomberg News staff on this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net

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Chinese Exports May Rebound, Spurring Deutsche Bank Bet on Stronger Yuan

December 9, 2009

By Bloomberg News Dec. 10 (Bloomberg) — China is likely to report its first gain in overseas shipments in 13 months, beginning a rebound that may encourage the world’s second-biggest exporting nation to let the yuan strengthen next year. Exports rose 1.4 percent in November from a year earlier, according to the median estimate of 26 economists surveyed by Bloomberg News. The trade surplus swelled to $24.3 billion, the largest this year excluding seasonal distortions, tomorrow’s report in Beijing may show. China’s exports may jump 20 percent in the first quarter of 2010 because of the global recovery and comparisons with this year’s low base, according to Macquarie Securities Ltd. and Royal Bank of Scotland Group Plc. Yuan forwards suggest that the currency will appreciate about 2.6 percent against the dollar in the next 12 months even after Premier Wen Jiabao last month rebuffed Europe’s calls for gains. “Global political pressure for currency gains will continue to intensify,” said Ma Jun , chief China economist at Deutsche Bank AG in Hong Kong. “China may begin to increase the flexibility of its currency in March or April.” Ma forecasts a gain of as much as 5 percent against the dollar in the next year. China had “good reason” to depreciate its currency during the global financial crisis as exports fell and chose instead to keep the yuan stable, central bank Deputy Governor Zhu Min said at a forum in Beijing yesterday. He echoed Wen’s comments to European leaders, saying a stable yuan aids a world recovery. Return to Inflation “We took the same policy as we did in the Asian financial crisis; we decided to stabilize the renminbi exchange rate,” the central banker said, using another word for the yuan. November’s data may show a return to inflation as China’s economy rebounds from the slowest growth in almost a decade and food prices climb. Consumer prices rose 0.4 percent from a year earlier, the survey of economists showed. Industrial output gained 18.2 percent, the most in more than two years, and retail sales climbed 16.5 percent, economists estimated. Banks may have extended 250 billion yuan ($36.6 billion) of local-currency loans, compared with 253 billion yuan in October. Urban fixed-asset investment may have increased 33 percent in the first 11 months of 2009 from a year earlier as stimulus spending and unprecedented bank lending drove a recovery. Citic Securities Co. said Dec. 8 that China’s textile and apparel companies may “outperform” as domestic sales are sustained and exports recover, recommending companies including Fujian Septwolves Industry Co. , Luthai Textile Co. and Youngor Group Co. ‘Toughest Time’ “The toughest time is behind us and we expect overseas demand to continue to recover next year,” Kelly Wen, the overseas sales manager of shoe company Yaqite Industrial Co. said at the Canton Fair, China’s biggest trade show, last month. China’s trade surplus, export gains and a currency effectively pegged to the dollar may exacerbate trade tensions. China faces U.S. tariffs on tires and European Union duties on screws and bolts and is investigating imports of U.S. autos and poultry. China was the second-biggest exporter of goods in 2008 and is poised to overtake Germany. The Asian nation’s trade surplus was $24 billion in October. The nation already sees itself as being at the center of world trade friction, facing 101 trade-remedy investigations in 19 countries and regions involving more than $11 billion of goods, the state-run Xinhua News Agency reported Dec. 3, citing the commerce ministry. Trade ‘Tranquility’ Morgan Stanley’s Asia chairman Stephen Roach said that high unemployment in the U.S. and the need to win votes in congressional elections in November next year may push President Barack Obama to take tougher trade action against China. “This is not a recipe for tranquility on trade,” Roach said in an interview in Beijing on Dec. 3. Wen told European leaders Nov. 30 that calls for the yuan to appreciate are “unfair” as the country faces rising protectionism and a stable yuan aids the world’s recovery. Authorities in Beijing have held the currency steady at about 6.83 against the U.S. dollar since July 2008. The yuan rose 21 percent in the three years after a fixed exchange rate was scrapped in 2005. The International Monetary Fund says the yuan is “substantially” undervalued and Pacific Investment Management Co., which runs the world’s biggest bond fund, describes bets that China will ease controls on its currency as among the best in emerging markets. ‘Gradual’ Gains Societe Generale SA said Dec. 8 that investors should use call options to benefit from China allowing “gradual” gains in the yuan next year as the economy recovers. Policy makers are more likely to allow yuan appreciation for domestic economic reasons than in response to pressure from foreign governments, said Kevin Lai , an economist with Daiwa Institute of Research in Hong Kong. Inflation pressures are building as import prices rise and “if you don’t allow the yuan to appreciate you are shooting yourself in the foot,” Lai said. — Kevin Hamlin , Li Yanping. Editors: Paul Panckhurst , Leon Mangasarian . To contact the Bloomberg News staff on this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net

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Standard Chartered Says Banks Backed by U.K. Are Luring Employees With Pay

December 9, 2009

By Jon Menon Dec. 9 (Bloomberg) — Standard Chartered Plc Finance Director Richard Meddings said he is irritated that banks owned by the U.K. government are trying to lure away his employees with the promise of better compensation. “On number of occasions, it’s essentially government-owned or very significantly government-owned banks that are competing with, or taking our staff, or competing with us for staff, on the basis of remuneration structure, which if you believe the regulations isn’t allowed,” Meddings said on a conference call with analysts today. “There is some irritation about that.” Standard Chartered, a bank that makes most of its profit in Asia, didn’t require a bailout from the British taxpayer, unlike Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc. RBS Chief Executive Officer Stephen Hester said last week the Edinburgh-based lender is walking a “tightrope” as it tries to recruit and retain top bankers while under government ownership so it can return the money it received from taxpayers. The bank handed control of its 2009 bonuses over to the government as part of its bailout. RBS directors are seeking to increase the amount the lender allocates for bonuses by at least 50 percent to 1.5 billion pounds ($2.4 billion) to encourage workers to stay, the Sunday Times reported on Dec. 5. RBS received 45.5 billion pounds of taxpayer money, giving the U.K. an 84 percent stake in the bank. Chancellor of the Exchequer Alistair Darling may raise taxes on bankers’ bonuses today in an effort to claw back money from an industry that has been offered more than 1 trillion pounds of government support since the credit crisis began. To contact the reporter on this story: Jon Menon in London at jmenon1@bloomberg.net

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Greece Credit Downgrades May Pose Problem for Banks Getting Loans From ECB

December 9, 2009

By Jana Randow and Frances Robinson Dec. 9 (Bloomberg) — Greek government bonds may not be eligible as collateral at the European Central Bank if the ECB reverts to pre-crisis rules in 2011, making it more difficult for Greece to borrow money. The credit rating on Greece’s government bonds was yesterday cut by Fitch Ratings to BBB+ and the two other major ratings companies are threatening to follow suit. The ECB currently accepts bonds rated BBB- as collateral for loans after relaxing its rules in response to the financial crisis last year. At the end of 2010, it is due to revert to the old rules, under which A- is the minimum required rating. “The banks are currently able to pledge bonds issued by their government as collateral at the ECB,” said Ben May , an economist at Capital Economics Ltd. in London. “This will no longer be an option come the end of next year if the other rating agencies follow Fitch’s lead.” Standard & Poor’s on Dec. 7 put its A- rating on watch for a possible downgrade, signaling it may be reduced within two months. Moody’s Investors Service lowered its outlook on Greece’s A1 rating to “negative” on Oct. 29. Greek stocks and government bonds tumbled yesterday on mounting concern the nation may struggle to meet its debt commitments as public finances deteriorate. The government raised its 2009 budget-deficit estimate to 12.7 percent of gross domestic product after Oct. 4 elections, three times higher than an earlier forecast and more than four times the 3 percent allowed under the European Union’s Stability and Growth Pact. ‘Stronger Commitment’ “The Greek government will need to demonstrate a stronger commitment to consolidating the fiscal position,” said Laurent Bilke , an economist at Nomura in London. “The Greek economy is already paying a high price given that spreads have widened leading to a high cost of borrowing, and this would get worse.” The spread between the Greek and German 10-year benchmark bonds widened to 221 basis points yesterday from 130 basis points on Oct. 5. That compares to 23 basis points for Finnish 10-year bonds. Credit-default swaps on five-year government bonds rose to 191 basis points on Dec. 7 from 124 on Oct. 5. That’s the highest in the euro region, followed by Ireland at 153 basis points. “There’s certainly an element of panic and hysteria,” said Peter Dixon , an economist at Commerzbank AG in London. “The ECB will bend over backwards to ensure that one of the countries within its orbit doesn’t default. There will be a lot of arm-twisting and deals done behind the scenes should it come to it.” ECB Meeting ECB Vice President Lucas Papademos met with Greek Prime Minister George Papandreou and Finance Minister George Papaconstantinou last month to discuss the risks facing the Greek economy. Greece, the lowest-rated country in the euro region, is struggling to shore up its finances amid a year-long recession. The European Commission expects the economy to contract 1.1 percent this year and 0.3 percent next year, before growing 0.7 percent in 2011. “The government is proceeding with a plan,” Papaconstantinou told reporters in Athens yesterday. “We will do all that’s needed to bring the deficit down in the medium- term. We will submit a supplementary budget if needed.” Greece is committed to a “fair” fiscal consolidation, he said. Greece has about 700 billion euros of debt outstanding, of which 47 billion is currently used as collateral at the ECB, according to Royal Bank of Scotland Group Plc. If banks were no longer able to use their country’s bonds to refinance at the ECB, demand for them would wane and the government’s borrowing costs would increase further. “Greece is very unlikely to lose eligibility at the ECB next year as it would need to be downgraded below investment grade over that period,” Jacques Cailloux at RBS in London said in a research note. “In the more medium term, and perhaps from January 2011, the situation could become much more difficult if the ECB was to revert to its pre-crisis collateral policy.” To contact the reporters on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net ; Frances Robinson in Frankfurt at frobinson6@bloomberg.net

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Stocks, Gold, Oil Retreat on Dubai World’s Loss, Greece’s Credit Downgrade

December 8, 2009

By Nick Baker Dec. 8 (Bloomberg) — Stocks, gold and oil fell while the dollar rallied after Dubai World’s Nakheel PJSC lost $3.65 billion, Fitch Ratings downgraded Greece’s credit and German industrial production unexpectedly dropped. The MSCI Emerging Markets Index declined 1.4 percent at 4:22 p.m. in New York, and the Standard & Poor’s 500 Index slumped 1 percent. Gold dropped for a third day in New York. Crude posted a fifth consecutive retreat. The yield on Greece’s two-year notes rose the most since 1998. The dollar appreciated against 14 of the 16 most-active currencies. Concern that Dubai World would default on $59 billion in debt roiled markets last month, spurring speculation that the recovery in the global financial system would stall. Moody’s Investors Service said deteriorating public finances in the U.S. and U.K. may test their Aaa ratings. Federal Reserve Chairman Ben S. Bernanke told the Washington Economic Club yesterday that the economy faces “formidable headwinds.” “Greece is a whole lot more important than Dubai,” said Uri Landesman, New York-based fund manager at ING Investment Management. “There are a lot of banks, in Europe especially, that have exposure to Greece, so if there’s a major problem in Greece, that would be more important than a problem in Dubai.” Equities and commodities dropped from their highs of the day, while the yen and dollar gained against the euro, after German industrial output fell 1.8 percent in October, led by a drop in production of energy and investment goods such as machinery, the Economy Ministry in Berlin said today. Economists forecast a 1 percent gain, according to the median of 38 estimates in a Bloomberg survey. Property Writedowns The MSCI World Index of equities in 23 developed nations and futures on the S&P 500 extended their decline after Bloomberg News reported that Nakheel, the Dubai World-owned property developer seeking to renegotiate debt, had a first-half loss of 13.4 billion dirhams ($3.65 billion) as revenue fell and it wrote down the value of land and property. A spokesman for Dubai World, Nakheel’s parent, wouldn’t comment. Royal Bank of Scotland Group Plc, the biggest underwriter of loans to Dubai World, fell 7.7 percent in London trading following Nakheel’s loss. Greek stocks and government bonds tumbled on mounting concern the nation may struggle to meet its debt commitments as public finances deteriorate. The Athens Stock Exchange General Index dropped 6 percent, its biggest decline since Nov. 26. The yield on the government two-year note jumped 66 basis points, the most since August 1998. Another Cut? Fitch Ratings cut Greece one step to BBB+ today, the third- lowest investment grade. S&P put Greece’s A- rating on watch for a possible downgrade yesterday, signaling it may be reduced within two months. MSCI’s gauge of emerging-market stocks slumped for a third day, the longest losing streak in five weeks. Dubai shares fell the most among benchmark indexes tracked by Bloomberg, tumbling 6.1 percent. The DFM General Index has lost 25 percent since Nov. 16. On Nov. 25, the government said it was seeking a “standstill” agreement on Dubai World’s debt. Gold futures for February delivery decreased 1.8 percent to $1,143.40 an ounce in New York as the dollar’s 0.9 percent advance to $1.4702 per euro curbed the metal’s appeal as an alternative investment. The Bank of Korea, diversifying foreign-exchange reserves away from a falling dollar, said additional gold holdings aren’t attractive as most other central banks aren’t buying and the metal offers no cash returns. ‘Illusion in Gold’ “There’s an illusion in gold,” Lee Eung-Baek, head of the bank’s reserve-management department, said in an interview. “We follow the big trend. Gold isn’t the trend.” Barrick Gold Corp., the world’s largest producer of the precious metal, dropped 4.6 percent in U.S. trading. Crude oil for January delivery lost 1.8 percent to $72.62 a barrel in New York. U.S. supplies of crude oil climbed 500,000 barrels in the week ended Dec. 4, the third straight increase, a Bloomberg News survey showed before tomorrow’s Energy Department report in Washington. PetroChina Co., the nation’s largest oil company, declined 1.4 percent in Hong Kong. Exxon Mobil Corp. slumped 1.1 percent. Treasuries rose for a second day as the Fitch Ratings downgrade of Greece spurred demand for the relative safety of U.S. government securities. Ten-year note yields fell four basis points to 3.39 percent, according to BGCantor Market Data. The rate on two-year notes touched 0.69 percent, the lowest level since Dec. 2. The securities gained the most in five weeks yesterday after Bernanke said the job market “remains weak” and inflation “could move lower.” “There is some nervousness with investors about how things are going to evolve,” said Thomas Schudel, a fund manager at Zurich-based Clariden Leu Ltd., which oversees about $100 billion. “The economic recovery might not be so quick as people thought.” To contact the reporter on this story: Nick Baker in New York at nbaker7@bloomberg.net .

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Stocks, Gold Fall as Rating Companies Highlight Deficit Risk; Yen Advances

December 8, 2009

By Nick Baker Dec. 8 (Bloomberg) — Stocks, gold and oil fell while Treasuries and the dollar rallied after Dubai World’s Nakheel PJSC lost $3.65 billion, Fitch Ratings downgraded Greece’s credit and German industrial production unexpectedly dropped. The MSCI Emerging Markets Index declined 1 percent, and the Standard & Poor’s 500 Index slumped 0.5 percent at 11:44 a.m. in New York. Gold dropped for a third day in New York. Crude posted a fifth consecutive retreat. Yields on 10-year U.S. Treasuries fell six basis points to 3.37 percent, while the rate on Greece’s two-year notes rose the most since 1998. The dollar appreciated against 14 of the 16 most-active currencies. Concern that Dubai World would default on $59 billion in debt roiled markets last month, spurring speculation that the recovery in the global financial system would stall. Moody’s Investors Service said deteriorating public finances in the U.S. and U.K. may test their Aaa ratings. Federal Reserve Chairman Ben S. Bernanke told the Washington Economic Club yesterday that the economy faces “formidable headwinds.” “There is some nervousness with investors about how things are going to evolve,” said Thomas Schudel, a fund manager at Zurich-based Clariden Leu Ltd., which oversees about $100 billion. “The economic recovery might not be so quick as people thought.” Equities and commodities dropped from their highs of the day, while the yen and dollar gained against the euro, after German industrial output fell 1.8 percent in October, led by a drop in production of energy and investment goods such as machinery, the Economy Ministry in Berlin said today. Economists forecast a 1 percent gain, according to the median of 38 estimates in a Bloomberg survey. Extending Losses The MSCI World Index of equities in 23 developed nations and futures on the S&P 500 extended their decline after Bloomberg News reported that Nakheel, the Dubai World-owned property developer seeking to renegotiate debt, had a first-half loss of 13.4 billion dirhams ($3.65 billion) as revenue fell and it wrote down the value of land and property. A spokesman for Dubai World, Nakheel’s parent, wouldn’t comment. Royal Bank of Scotland Group Plc , the biggest underwriter of loans to Dubai World, fell as much as 9.7 percent in London trading following Nakheel’s loss. Greek stocks and government bonds tumbled on mounting concern the nation may struggle to meet its debt commitments as public finances deteriorate. The Athens Stock Exchange General Index dropped 6 percent, its biggest intraday decline since Nov. 26. The yield on the government two-year note jumped 58 basis points, the most since August 1998. Within Two Months Fitch Ratings cut Greece one step to BBB+ today, the third- lowest investment grade. S&P put Greece’s A- rating on watch for a possible downgrade yesterday, signaling it may be reduced within two months. MSCI’s gauge of emerging-market stocks slumped for a third day, the longest losing streak in five weeks. Dubai shares fell the most among benchmark indexes tracked by Bloomberg, tumbling 6.1 percent. The DFM General Index has lost 25 percent since Nov. 16. On Nov. 25, the government said it was seeking a “standstill” agreement on Dubai World’s debt. Gold futures for February delivery decreased 1 percent to $1,152 an ounce in New York as the dollar’s 0.5 percent advance to $1.4760 per euro curbed the metal’s appeal as an alternative investment. ‘Illusion in Gold’ The Bank of Korea , diversifying foreign-exchange reserves away from a falling dollar, said additional gold holdings aren’t attractive as most other central banks aren’t buying and the metal offers no cash returns. “There’s an illusion in gold,” Lee Eung Baek , head of the bank’s reserve-management department, said in an interview. “We follow the big trend. Gold isn’t the trend.” Barrick Gold Corp. , the world’s largest producer of the precious metal, dropped 2.3 percent in U.S. trading. It fell to $40.69, the lowest intraday price since Nov. 6. Crude oil for January delivery lost 1.5 percent to $72.79 a barrel in New York. U.S. supplies of crude oil climbed 500,000 barrels in the week ended Dec. 4, the third straight increase, a Bloomberg News survey showed before tomorrow’s Energy Department report in Washington. PetroChina Co., the nation’s largest oil company, declined 1.4 percent in Hong Kong. Exxon Mobil Corp. slumped 1.2 percent. Treasuries rose for a second day as the Fitch Ratings downgrade of Greece spurred demand for the relative safety of U.S. government securities. Two-year note yields fell two basis points to 0.73 percent, according to BGCantor Market Data. The yield touched 0.69 percent, the lowest level since Dec. 2. The securities gained the most in five weeks yesterday after Bernanke said the job market “remains weak” and inflation “could move lower.” To contact the reporter on this story: Nick Baker in New York at nbaker7@bloomberg.net .

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Rusal $3 Billion Offering Said to Be Postponed by Hong Kong Stock Exchange

December 8, 2009

By Yuriy Humber and Bei Hu Dec. 8 (Bloomberg) — United Co. Rusal, the world’s biggest aluminum company, failed to get approval for an initial public offering of as much as $3 billion in Hong Kong, three people familiar with the matter said. The stock exchange’s listing committee needed more time to study the $16.8 billion debt restructuring accord Rusal completed last week, one of the people said, declining to be identified because the matter is private. Yesterday’s decision will delay the IPO until next year, the people said. Rusal, controlled by billionaire Oleg Deripaska , wanted to capitalize on a 55 percent jump in Hong Kong’s benchmark stock index in 2009 to become the first Russian company to list in the city. The IPO would have helped Deripaska expand in China, where a government stimulus has revived economic growth, helping boost demand for aluminum. “This is a really big smack in the face for Rusal,” John Meyer , head of natural resources at investment bank Fairfax I.S. Plc in London, said by phone. “It also means it may be halfway through next year before the IPO is conducted, and unfortunately for them, the outlook is anything but certain.” Moscow-based Rusal was seeking to sell a 10 percent stake to help repay debt incurred after buying OAO GMK Norilsk Nickel , Russia’s biggest mining company. More than 70 Russian and foreign banks reached the debt accord with Rusal in Russia’s largest corporate restructuring. More Time Lorraine Chan , a spokeswoman for Hong Kong Exchanges and Clearing Ltd., declined to comment or confirm whether the listing committee has met for a Rusal IPO plan. “The stock exchange is prepared to work with challenging companies and they have a lot of confidence in their system,” Anthony Root , head of Asian corporate practice at New York-based law firm Milbank, Tweed, Hadley & McCloy LLP, said. The exchange won’t grant approval for a share sale “until they are confident it’s one that’s fit for listing.” Rusal may seek a listing in the first quarter as it expects aluminum prices to rise to $2,500 a metric ton, one of the people said. Aluminum for delivery in three months on the London Metal Exchange traded at $2,154 as of 9:17 a.m. Hong Kong time. Aluminum futures have risen 40 percent in London this year as investors bet China’s $586 billion stimulus spending will spur demand from builders and automakers. Alcoa Inc., the largest U.S. producer, said in September that Chinese demand will climb 4 percent this year, compared with a previous prediction of zero growth. Rusal plans to win seven to eight major customers in China to secure long-term deliveries, head of strategy Artem Volynets said in November. It won a six-year contract last month to supply China North Industries Corp. with 1.7 million tons. Debt Doubles Rusal’s debt almost doubled after it bought 25 percent of Norilsk Nickel for $7 billion in cash and a 14 percent Rusal stake. Commodity prices subsequently collapsed, and Rusal had a net loss of $6 billion last year, Vedomosti reported in October. The company’s lenders include Royal Bank of Scotland Group Plc, Deutsche Bank AG, Sumitomo Mitsui Financial Group Inc., Barclays Plc, BNP Paribas SA, and Natixis. Vnesheconombank, or VEB, is the biggest creditor. Deripaska was rated by Forbes magazine as the richest Russian last year. His ranking declined to 10th in 2009 after commodities, stocks and the ruble collapsed. The Russian aluminum producer is in talks with potential investors including China Investment Corp. , the nation’s sovereign wealth fund, and Singapore’s Temasek Holdings Pte, the Hong Kong Economic Journal wrote in October. The Hong Kong exchange has already delayed Rusal’s listing twice in the past month. The city ranked as No. 2 globally for funds raised through initial public offerings in the first half of this year, after Brazil, according to data released by the city’s bourse. To contact the reporters on this story: Yuriy Humber in Moscow at yhumber@bloomberg.net ; Bei Hu in Hong Kong at bhu5@bloomberg.net

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Yen’s Biggest Decline in Decade No Anomaly as Options Trades Fade on Bulls

December 6, 2009

By Yasuhiko Seki and Ron Harui Dec. 7 (Bloomberg) — Options traders are growing less bullish on the yen after efforts by Japanese officials to boost the world’s second-biggest economy and a U.S. jobs report led to the currency’s biggest weekly decline in a decade. Japan’s currency plunged 2.5 percent against the dollar and 1.3 percent versus the euro on Dec. 4 after America’s Labor Department said employers cut the fewest jobs since the recession began. The yen sank 4.5 percent versus the greenback for the week, the most since February 1999 and retreating from a 14-year high. Traders sold yen and bought dollars on speculation interest rates in the U.S. will increase before June. “The improving U.S. jobs market suggests the Federal Reserve won’t stand pat on interest rates longer than the Bank of Japan,” said Kazutoshi Yasuda , general manager of the markets department in Tokyo at FX Prime Corp., a unit of Itochu Corp. Increased U.S. borrowing costs would lead traders to favor using yen to finance higher-yielding investments, leading to more losses for the Japanese currency, he said. Options showed declining bets that the yen will rise. The odds for a gain to 84.5 yen per dollar by the end of March from 90.56 last week fell to 38 percent from 80 percent on Nov. 30, data compiled by Bloomberg show. Chances of a decline to 92 versus the dollar by Dec. 31 reached 63 percent. Options grant buyers the right to purchase or sell an asset at a predetermined price. Weekly Tumble The yen tumbled 3.6 percent versus the euro to 134.54 last week, the sharpest slide since the week ended April 3. The yen’s biggest drop during the week came after the U.S. Labor Department said payrolls dropped by 11,000 last month, the smallest decrease since the recession began in December 2007. “What the job numbers do is firm up expectations that the Fed interest-rate hike is coming,” said Camilla Sutton , a strategist in Toronto at Bank of Nova Scotia, the nation’s third-largest lender. “That should be a strong-dollar story.” Federal-funds futures contracts on the Chicago Board of Trade show a 43.3 percent probability that the U.S. central bank will lift its target rate for overnight bank borrowing to 0.5 percent by June from a range of zero to 0.25 percent now, up from 12.6 percent a month ago. UBS AG expects the Fed to set its key rate at the top end of its 0.25 percent range in April and follow with a quarter- point increase in June. The jobs report and last week’s gains “suggest the greenback is finally turning,” Mansoor Mohi-uddin , the Zurich-based bank’s global head of currency strategy, wrote in a note to clients. Best Performer The yen was the best performer against the dollar among the 16 most-traded currencies the past four years, Bloomberg data show. It surged to 84.83 on Nov. 27, the strongest since July 1995, from 124.13 in June 2007. The yen tends to advance amid financial turmoil because Japan’s trade surplus reduces reliance on foreign capital. Record low U.S. interest rates have kept the dollar under pressure at the expense of the yen, making the greenback the favorite for so-called carry trades, where investors raise funds in countries with low borrowing costs and use the proceeds to invest in countries with higher returns. Benchmark rates of as low as zero in the U.S. and 0.1 percent in Japan compare with 3.75 in Australia and 2.5 percent in New Zealand. The London interbank offered rate, or Libor, for three- month loans in the U.S. currency has been below the equivalent yen rate since Aug. 24. In the decade before then, the dollar rate averaged 2.94 percentage points more than the yen rate. ‘Extreme’ Positioning Contracts betting the yen would climb against the dollar rose to 51,710 on Nov. 27, the most since May 2008, according to data from the Commodities Futures Trading Commission in Washington based on contracts at the Chicago Mercantile Exchange. As recently as June, there more contracts betting on a decline in the yen than a gain. Such “extreme” positioning may suggest that the decline in the yen represents traders unwinding “long” positions rather than an outright bet on the currency’s depreciation, Marc Chandler , the global head of currency strategy at Brown Brothers Harriman & Co. in New York, said in a note to clients on Dec. 4. The median estimate of more than 30 strategists surveyed by Bloomberg is for the yen to end March at 92 to the dollar and 136 to the euro. ‘Urgent Steps’ Fujio Mitarai , head of Japan’s largest business lobby, called on the government to take “urgent steps” on Nov. 27 to curb gains in the yen, which make Japanese exports less competitive and threaten corporate profits. The same day, Finance Minister Hirohisa Fujii said in Tokyo the nation will “do what is necessary” and he may contact U.S. and European officials to act. Exports make up about 12 percent of Japan’s economy, compared with 6 percent in the U.S. The nation’s gross domestic product is forecast to shrink 5.7 percent this year, according to the median estimate of 14 economists surveyed by Bloomberg. That compares with a contraction of 2.4 percent in the U.S. The Bank of Japan announced an emergency 10 trillion yen ($113 billion) credit program on Dec. 1 to combat falling prices and the stronger yen. The spread between dollar- and yen-based Libor narrowed to 2.72 basis points on Dec. 4 from as much as 7.25 basis points on Sept. 8. Stimulus Plan “The BOJ’s action worked,” said Masato Mori , senior manager of the business and marketing department at NTT SmartTrade Inc. a unit of Nippon Telegraph & Telephone Corp. “Stopping the yen’s advance will require additional spending from the government.” A stimulus plan worth as much as 4 trillion yen ($45.4 billion) may be agreed upon today, Chief Cabinet Secretary Hirofumi Hirano said last week. The government planned to announce the measures on Dec. 4 before disagreements between Prime Minister Yukio Hatoyama’s ruling Democratic Party of Japan and coalition partners, who want a larger package, caused a delay. Bonds to be issued in the fiscal year starting April 1 may reach 146.2 trillion yen compared with a revised 132.3 trillion yen this year, according to Citigroup Global Markets Japan Inc. “There is probably enough in the policy action in Japan by the government and the BOJ to argue for further upside on cross- yen currencies near term,” said Greg Gibbs , a foreign-exchange strategist at Royal Bank of Scotland Group Plc in Sydney. To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net ; Ron Harui in Singapore at rharui@bloomberg.net .

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