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Video: Curnutt Discusses Spain’s Potential Credit Rating Cut: Video

July 1, 2010

July 1 (Bloomberg) — Dean Curnutt, president of Macro Risk Advisors, talks with Bloomberg’s Erik Schatzker about the prospects of Moody’s Investors Service downgrading Spain’s top credit rating and his investment strategy for European sovereign debt. (Source: Bloomberg)

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State Budget Crisis: 46 States Facing ‘Greek-Style Deficits’

June 25, 2010

Even as the U.S. appears to be on the mend — gross domestic product has climbed three straight quarters — finances in Arizona, Illinois, New Jersey, New York and other states show few signs of improvement. Forty-six states face budget shortfalls that add up to $112 billion for the fiscal year ending next June, according to the Center on Budget and Policy Priorities, a Washington research institution. State spending is 12 percent of U.S. GDP. “States are going to have to cut back spending and raise taxes the same way Greece and Spain are,” says Dean Baker, co- director of the Center for Economic and Policy Research in Washington. “That runs counter to stimulating the economy and will put a big damper on the recovery in the latter half of this year.”

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Euro Has Biggest Weekly Gain Since May 2009 on European Debt Concern Ease

June 19, 2010

By Catarina Saraiva and Ben Levisohn June 19 (Bloomberg) — The euro rose the most this week against the greenback in more than year as an easing in concern over Europe’s debt crisis spurred traders to end bets the shared shared currency would decline. The euro appreciated for a second week versus the yen, the first back-to-back weekly gains since March, as increased demand at a Spanish bond sale and an agreement by European Union leaders to disclose how banks perform on stress tests damped investor worries about the region’s financial system. The dollar fell versus the yen as Japan’s ruling party announced a deficit- cutting plan and disappointing U.S. data increased speculation the Federal Reserve would keep interest rates at a record low. “The recent news out of Europe is reassuring,” said Camilla Sutton , a Bank of Nova Scotia currency strategist in Toronto. “Europe will release the results of stress tests and give the market the clarity it looked for. The U.S. will be on hold for longer. That helped equities and boosted risk appetite.” The euro rose 2.3 percent to $1.2388 this week, the biggest gain since the five days ended May 22, 2009, from $1.2112 on June 11. It touched $1.2417 yesterday, the highest level since May 28. Europe’s common currency rose 1.3 percent to 112.40 yen, from 111 on June 11. The dollar fell 1 percent to 90.71 yen, from 91.65 a week ago. The common currency gained as futures traders decreased their bets that the currency will decline against the U.S. dollar to the lowest level since April, figures from the Washington-based Commodity Futures Trading Commission show. Short Covering The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain — so-called net shorts — was 62,360 on June 15, after dropping 44 percent from 111,945 a week earlier. “Seventy percent of the euro’s gain was short covering,” said Brian Dolan , chief strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. “The downside had become extreme, and sentiment was extreme. It’s slow going on the way up. I think we’ll see losses developing faster than recoveries.” Spain sold 3 billion euros ($3.7 billion) of 10-year debt on June 17 at an average yield of 4.864 percent, less than the 5.04 percent that the bonds traded at before the sale. Demand was 1.89 times the amount on offer. It also sold 479.2 million euros of 30-year debt at 5.908 percent, and the bid-to-cover ratio was 2.45, higher than the 1.38 at the previous sale on March 18. ‘Cloud of Suspicion’ “We had the credit markets more or less stabilize,” said Boris Schlossberg , director of research at online currency trader GFT Forex in New York. “That’s why the euro continues to perform well.” European Union leaders this week agreed to disclose how banks perform on stress tests, seeking to show investors the financial system can withstand financial shocks. French Finance Minister Christine Lagarde yesterday said a European Union decision to publish the results of stress tests will “clear a cloud of suspicion that’s out there.” She made the comments while attending the St. Petersburg Forum in Russia. The pound gained this week the most versus the greenback since the week of April 2 before of the U.K.’s announcement of budget cuts on June 22, which may help it avoid the rising bond yields afflicting Spain and Portugal. ‘Investor Enthusiasm’ Chancellor of the Exchequer George Osborne is set to outline the deepest spending cuts since at least the 1970s to tame a budget deficit of 11 percent of gross domestic product last fiscal year. U.K. government bond yields have fallen 0.339 percentage point since Prime Minister David Cameron took office six weeks ago on expectations his coalition government will step up the pace of deficit reduction. The pound climbed 1.9 percent to $1.4824 this week from $1.4552 on June 11. It fell 0.4 percent to 83.59 pence per euro. The yen posted a second weekly gain versus the dollar after Japanese Prime Minister Naoto Kan pledged to cut the world’s largest public debt. Kan said he’d consider an opposition party proposal to raise the consumption tax. BNY Mellon is “seeing net buying of the Japanese yen, not so much as a risk aversion play, but because of investor enthusiasm about Japan’s ruling party announcing a new plan to combat deflation, reduce the budget deficit and restore growth,” Samarjit Shankar , a managing director for the foreign- exchange group in Boston, wrote in a note to clients. BNY Mellon is the world’s largest custodial bank, with more than $20 trillion in assets under administration. ‘Likely to Decelerate’ The greenback fell against all 16 major currencies this week after the number of American’s filing for jobless benefits for the first time rose, increasing speculation that economic growth in the U.S. remains fragile. Initial jobless claims in the U.S. increased by 12,000 to 472,000 in the week ended June 12, according to Labor Department figures. Economists surveyed by Bloomberg News projected 450,000 claims, according to the median forecast. Futures trading on the CME Group Inc. exchange showed a 36 percent chance that the Fed will raise its target rate for overnight bank lending by at least a quarter-percentage point by its January meeting, down from 55 percent odds one month ago. The U.S. economy will stagnate in the second half of the year as households, businesses and state and local governments trim debt, according to John Herrmann of State Street Global Markets in Boston. “There is an incredible amount of deleveraging going on in the economy,” Herrmann, a senior fixed-income strategy, said in an interview June 17 on Bloomberg Radio with Tom Keene . “Organic growth in the economy is likely to decelerate” as government stimulus fades and temporary census workers complete their contracts, he said. To contact the reporter on this story: Ben Levisohn in New York at blevisohn@bloomberg.net ; Catarina Saraiva in New York at asaraiva5@bloomberg.net .

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Bank of America Debt Sale Shows Contagion Ebbs Credit Markets

June 18, 2010

By Tim Catts June 18 (Bloomberg) — Bank of America Corp. , JPMorgan Chase & Co. and HSBC Holdings Plc raised $7.65 billion in the bond market as investors grow more confident Europe’s debt crisis will be contained, averting another credit freeze for lenders. Bank of America’s $3 billion offering was its first benchmark issue of dollar-denominated 10-year notes in a year, according to data compiled by Bloomberg. New York-based JPMorgan boosted its sale by 25 percent to $1.25 billion as relative yields on U.S. bank debt fell for a fourth day, the longest streak since March, while HSBC raised $3.4 billion in the biggest global issue of undated dollar notes since October 2008. The banks’ offerings come as Spain sold 3.5 billion euros ($4.3 billion) of bonds yesterday and announced a plan today to issue new 10-year notes via banks, easing concern the nation will struggle to finance looming debt maturities. Even as potential regulations loom, U.S. banks are taking advantage of “very attractive financing rates and a receptive marketplace,” said Wells Fargo Funds Management’s James Kochan . “There’s a lot less fear among investors than was true a week ago or a month ago,” said Kochan, who helps oversee $179 billion as chief fixed-income strategist for the firm in Menomonee Falls, Wisconsin. “Things are calming down a bit in world markets.” Deutsche Bank AG , Germany’s biggest bank, issued 1 billion euros of so-called lower Tier 2 bonds that were priced to yield 210 basis points, or 2.1 percentage points, over swaps, according to a banker involved in the deal. Credit Suisse Group AG added 550 million euros to its existing 4.75 percent bonds due August 2019, according to data compiled by Bloomberg. The additional notes yield 180 basis points more than similar- maturity German debt. HSBC Sale The 5.625 percent, 10-year issue from Charlotte, North Carolina-based Bank of America priced to yield 248 basis points more than Treasuries, Bloomberg data show. A benchmark offering is typically at least $500 million. JPMorgan’s 3.4 percent, five-year notes pay a spread of 145 basis points. HSBC, Europe’s largest bank, sold the perpetual securities that are callable after 5.5 years with a coupon of 8 percent today, at the lower end of the marketing range of 8 percent to 8.125 percent, according to a person with knowledge of the deal. The issue was the largest of its type since Credit Suisse sold $3.5 billion of 11 percent notes in October 2008, according to data compiled by Bloomberg. Ally Bank Elsewhere in credit markets, the extra yield investors demand to own corporate bonds instead of government debt fell 1 basis point to 197 basis points, Bank of America Merrill Lynch’s Global Broad Market Corporate Index shows. Yields averaged 4.068 percent. GMAC Inc.’s Ally Bank boosted the size of its offering of bonds backed by auto loans to $1.2 billion from $792.3 million, according to a person familiar with the transaction. The largest top-rated portion, a $448 million slice maturing in about 2.2 years, will yield 25 basis points more than the benchmark swap rate, said the person, who declined to be identified because the terms aren’t public. Benchmark indexes of corporate credit risk in the U.S. and Europe fell. The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 3.3 basis points to a mid-price of 110.25 basis points as of 12:06 p.m. in New York, the lowest since May 31, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings decreased 4.7 basis points to 117.4, Markit prices show, the lowest since May 18. Bondholder Protection The indexes typically fall as investor confidence improves and rise as it deteriorates. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt. Bank of America and JPMorgan’s offerings led $7.35 billion of U.S. corporate bond issuance, the busiest day since April 21, when $12.3 billion was sold, Bloomberg data show. That tally of straight bond sales doesn’t include HSBC’s perpetual notes issue. The offerings from the two largest U.S. banks by assets and Europe’s No. 1 lender follow a $750 million sale by Radnor, Pennsylvania-based Lincoln National Corp. on June 15 and a $1 billion offering June 16 from Prudential Financial Inc. of Newark, New Jersey. ‘Positive Tone’ “Both JPMorgan and Bank of America are coming on the back of a couple good days of a positive tone in the market,” said Brian Machan , a money manager at Aviva Investors North America in Des Moines, Iowa. “Seeing Prudential do well and Lincoln National come earlier this week set the precedent.” Spreads on financial company bonds fell to 277 basis points, the lowest in two weeks, according to Bank of America Merrill Lynch’s U.S. Corporates, Banks index. Relative yields reached 286 basis points on June 11, the highest since October. Banks are making the most of investor demand before regulatory changes that could reduce profitability, said Scott MacDonald , head of credit and economics research at Aladdin Capital Holdings LLC in Stamford, Connecticut, which oversees $12.5 billion. Congress is debating sweeping changes to financial regulations that may hamper bank profits after the collapse of the housing market caused the worst recession since the 1930s and the loss of more than 8 million U.S. jobs. ‘Floodgates Have Opened’ “The floodgates have opened and banks are taking advantage,” MacDonald said. “From a strategic standpoint, they’d rather come in ahead of the curve than play catch up.” Spain sold its debt at an average yield of 4.864 percent, less than the 5.04 percent its 10-year bonds traded at yesterday before the sale. Demand was 1.89 times the amount on offer. It also sold 479.2 million euros of 30-year debt at 5.908 percent, and the bid -to-cover ratio was 2.45, higher than the 1.38 at the previous sale on March 18. Spain’s finance ministry said today the government will sell bonds in the third quarter through a group of banks, without naming the managers of the issue. It also announced auctions of debt with maturities ranging from 2015 to 2041. “The strong demand for Spanish bonds should help restore confidence,” said Ciaran O’Hagan , fixed income strategist at Societe Generale in Paris. “The good demand was only possible after considerable cheapening of Spanish bonds over the past days.” To contact the reporter on this story: Tim Catts in New York at tcatts1@bloomberg.net

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Global Stocks Cap Nine-Day Gain Gold Rises, Treasuries Fall

June 18, 2010

By Rita Nazareth and Stephen Kirkland June 18 (Bloomberg) — The MSCI World Index of stocks rose for the ninth day, the longest rally in 11 months, and Spanish bonds jumped on speculation efforts to contain Europe’s debt crisis will succeed. Treasuries fell, while gold climbed to a record. Oil reversed losses to rebound above $77 a barrel. The global index increased 0.2 percent and extended its rally since June 7 to 7.1 percent. The Standard & Poor’s 500 Index rose 0.1 percent to 1,117.51, capping its biggest back-to- back weekly gain since November. The Stoxx Europe 600 Index climbed to a five-week high, while the euro traded near $1.24 after its biggest weekly gain since May 2009. Gold for August delivery rose 0.8 percent to $1,258.30 an ounce. Spain’s 10-year bond yield lost 18 basis points. Spanish banks rallied as European leaders pledged to publish stress tests to boost transparency in the financial industry. Emerging-market equity and bond funds received net inflows in the week to June 16 as concerns over European deficits eased, boosting appetite for higher-yielding assets, EPFR Global data showed. “The stock gains are very comforting,” said David Kelly , who helps oversee $445 billion as chief market strategist for JPMorgan Funds in New York. “They suggest this is still a bull market. There’s a realization that the measures put in place by European governments and the IMF to deal with the debt issues are sufficient to do the job. It’s likely that the global economic recovery will be able to overcome the speed of the European crisis.” One-Month High Shares of commodity producers and financial firms led gains in the S&P 500 among 10 groups, while health-care and telephone companies had the biggest declines. JPMorgan Chase & Co., DuPont Co., Caterpillar Inc. and Cisco Systems Inc. climbed more than 1.3 percent for the top advances in the Dow Jones Industrial Average. Both gauges are trading near their highest levels in a month. U.S. equities closed higher after drifting between gains and losses for most of the day as the expiration of futures and options, coupled with the quarterly rebalancing of the S&P 500, triggered price swings. The S&P 500 rose 2.4 percent this week, building on last week’s 2.5 percent rally. About three stocks rose for every two that fell on Europe’s benchmark Stoxx Europe 600 . Banco Santander SA , Spain’s largest lender, rallied 3.5 percent in Madrid while smaller rival Banco Bilbao Vizcaya Argentaria SA climbed 5.6 percent. Spain’s IBEX 35 Index and Portugal’s PSI-20 increased at least 2.2 percent, the most among western European benchmark gauges. ‘Sentiment Has Changed’ “Sentiment has changed to the positive after investors saw that the European debt crisis hasn’t spiralled out of control,” said Daphne Roth , Singapore-based head of Asian equity research at ABN Amro Private Banking. Spain’s 10-year bond yield dropped to 4.59 percent and the premium investors demand to own the debt instead of benchmark German bunds narrowed by 25 basis points to 186 basis points. European Union leaders agreed yesterday to disclose how banks perform on stress tests, seeking to show investors that the financial system can withstand shocks. The decision came after Spanish officials unexpectedly pledged to publish results on individual banks, the first European government to do so. European Central Bank President Jean-Claude Trichet said broader regional stress tests will be published in the second half of July “at the latest.” Emerging Markets Developing-nation stocks rose for a ninth day, the longest stretch of gains in two months. Emerging-equity funds took in $2.5 billion in the past week, the second-largest inflow this year, while emerging-bond funds received $659 million, EPFR said in a statement. The MSCI Asia Pacific Index gained 0.3 percent. Softbank Corp., the exclusive seller of the iPhone in Japan, climbed 2.7 percent in Tokyo as orders for a new model outstripped supply. Newcrest Mining Ltd., Australia’s biggest gold producer gained 1.7 percent in Sydney. The yen gained for a fifth day to 90.74 per dollar, and appreciated 0.4 percent against the euro after the nation’s leaders pledged to reduce public debt. Japanese Prime Minister Naoto Kan said he would consider an opposition party proposal to raise the consumption tax. Credit-default swaps on the Markit iTraxx Crossover Index of 50 mostly junk-rated European companies dropped 21.5 basis points to a one-month low of 521, according to Markit Group Ltd. Copper fell to a one-week low on concern the U.S. recovery may be weaker than forecast. The metal dropped 0.8 percent to $2.9015 a pound in New York. The Reuters/Jefferies CRB Index of commodities slipped 0.1 percent, paring its five-day advance to 2.7 percent. —-With assistance from Paul Armstrong , Matthew Brown , Claudia Carpenter , David Merritt and Michael Patterson in London. Editor: Michael P. Regan . To contact the reporters on this story: Rita Nazareth at rnazareth@bloomberg.net ; Stephen Kirkland in London at skirkland@bloomberg.net ;

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Stocks Worldwide Post Longest Rally in 11 Months Gold Climbs to a Record

June 18, 2010

By Rita Nazareth and Stephen Kirkland June 18 (Bloomberg) — The MSCI World Index of stocks rose for the ninth day, the longest rally in 11 months, and Spanish bonds jumped on speculation efforts to contain Europe’s debt crisis will succeed. Treasuries fell, while gold climbed to a record. Oil reversed losses to rebound above $77 a barrel. The global index increased 0.2 percent and extended its rally since June 7 to 7.1 percent. The Standard & Poor’s 500 Index rose 0.1 percent to 1,117.51, capping its biggest back-to- back weekly gain since November. The Stoxx Europe 600 Index climbed to a five-week high, while the euro traded near $1.24 after its biggest weekly gain since May 2009. Gold for August delivery rose 0.8 percent to $1,258.30 an ounce. Spain’s 10-year bond yield lost 18 basis points. Spanish banks rallied as European leaders pledged to publish stress tests to boost transparency in the financial industry. Emerging-market equity and bond funds received net inflows in the week to June 16 as concerns over European deficits eased, boosting appetite for higher-yielding assets, EPFR Global data showed. “The stock gains are very comforting,” said David Kelly , who helps oversee $445 billion as chief market strategist for JPMorgan Funds in New York. “They suggest this is still a bull market. There’s a realization that the measures put in place by European governments and the IMF to deal with the debt issues are sufficient to do the job. It’s likely that the global economic recovery will be able to overcome the speed of the European crisis.” One-Month High Shares of commodity producers and financial firms led gains in the S&P 500 among 10 groups, while health-care and telephone companies had the biggest declines. JPMorgan Chase & Co., DuPont Co., Caterpillar Inc. and Cisco Systems Inc. climbed more than 1.3 percent for the top advances in the Dow Jones Industrial Average. Both gauges are trading near their highest levels in a month. U.S. equities closed higher after drifting between gains and losses for most of the day as the expiration of futures and options, coupled with the quarterly rebalancing of the S&P 500, triggered price swings. The S&P 500 rose 2.4 percent this week, building on last week’s 2.5 percent rally. About three stocks rose for every two that fell on Europe’s benchmark Stoxx Europe 600 . Banco Santander SA , Spain’s largest lender, rallied 3.5 percent in Madrid while smaller rival Banco Bilbao Vizcaya Argentaria SA climbed 5.6 percent. Spain’s IBEX 35 Index and Portugal’s PSI-20 increased at least 2.2 percent, the most among western European benchmark gauges. ‘Sentiment Has Changed’ “Sentiment has changed to the positive after investors saw that the European debt crisis hasn’t spiralled out of control,” said Daphne Roth , Singapore-based head of Asian equity research at ABN Amro Private Banking. Spain’s 10-year bond yield dropped to 4.59 percent and the premium investors demand to own the debt instead of benchmark German bunds narrowed by 25 basis points to 186 basis points. European Union leaders agreed yesterday to disclose how banks perform on stress tests, seeking to show investors that the financial system can withstand shocks. The decision came after Spanish officials unexpectedly pledged to publish results on individual banks, the first European government to do so. European Central Bank President Jean-Claude Trichet said broader regional stress tests will be published in the second half of July “at the latest.” Emerging Markets Developing-nation stocks rose for a ninth day, the longest stretch of gains in two months. Emerging-equity funds took in $2.5 billion in the past week, the second-largest inflow this year, while emerging-bond funds received $659 million, EPFR said in a statement. The MSCI Asia Pacific Index gained 0.3 percent. Softbank Corp., the exclusive seller of the iPhone in Japan, climbed 2.7 percent in Tokyo as orders for a new model outstripped supply. Newcrest Mining Ltd., Australia’s biggest gold producer gained 1.7 percent in Sydney. The yen gained for a fifth day to 90.74 per dollar, and appreciated 0.4 percent against the euro after the nation’s leaders pledged to reduce public debt. Japanese Prime Minister Naoto Kan said he would consider an opposition party proposal to raise the consumption tax. Credit-default swaps on the Markit iTraxx Crossover Index of 50 mostly junk-rated European companies dropped 21.5 basis points to a one-month low of 521, according to Markit Group Ltd. Copper fell to a one-week low on concern the U.S. recovery may be weaker than forecast. The metal dropped 0.8 percent to $2.9015 a pound in New York. The Reuters/Jefferies CRB Index of commodities slipped 0.1 percent, paring its five-day advance to 2.7 percent. —-With assistance from Paul Armstrong , Matthew Brown , Claudia Carpenter , David Merritt and Michael Patterson in London. Editor: Michael P. Regan . To contact the reporters on this story: Rita Nazareth at rnazareth@bloomberg.net ; Stephen Kirkland in London at skirkland@bloomberg.net ;

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Global Stocks Rise as S&ampP 500 Fluctuates Gold Reaches Record

June 18, 2010

By Rita Nazareth and Stephen Kirkland June 18 (Bloomberg) — The MSCI World Index of stocks rose for the ninth day, the longest rally in 11 months, and Spanish bonds jumped on speculation efforts to contain Europe’s debt crisis will succeed. Treasuries fell, while gold climbed to a record. Oil reversed losses to rebound above $77 a barrel. The global index increased 0.2 percent at 12:47 p.m. in New York. The Stoxx Europe 600 Index also climbed for a ninth day, rising 0.2 percent to the highest level in five weeks. The Standard & Poor’s 500 Index drifted between gains and losses as the expiration of futures and options triggered price swings. Spot gold rose as high as $1,262.50 an ounce. Spain’s 10-year bond yield lost 19 basis points. Spanish banks rallied as European leaders pledged to publish stress tests to boost transparency in the financial industry. Emerging-market equity and bond funds received net inflows in the week to June 16 as concerns over European deficits eased, boosting appetite for higher-yielding assets, EPFR Global data showed. “The stock gains are very comforting,” said David Kelly , who helps oversee $445 billion as chief market strategist for JPMorgan Funds in New York. “They suggest this is still a bull market. There’s a realization that the measures put in place by European governments and the IMF to deal with the debt issues are sufficient to do the job. It’s likely that the global economic recovery will be able to overcome the speed of the European crisis.” One-Month High Shares of commodity producers and financial firms led gains in the S&P 500 among 10 groups, while health-care and telephone companies had the biggest declines. Cisco Systems Inc., DuPont Co. and Exxon Mobil Corp. climbed more than 1 percent for the top advances in the Dow Jones Industrial Average higher. Both gauges are trading near their highest levels in a month. About three stocks rose for every two that fell on Europe’s benchmark Stoxx Europe 600 . Banco Santander SA , Spain’s largest lender, rallied 3.5 percent in Madrid while smaller rival Banco Bilbao Vizcaya Argentaria SA climbed 5.6 percent. Spain’s IBEX 35 Index and Portugal’s PSI-20 increased 2.2 percent, the most among western European benchmark gauges. “Sentiment has changed to the positive after investors saw that the European debt crisis hasn’t spiralled out of control,” said Daphne Roth , Singapore-based head of Asian equity research at ABN Amro Private Banking. Spain’s 10-year bond yield dropped to 4.58 percent and the premium investors demand to own the debt instead of benchmark German bunds narrowed by 26 basis points to 185 basis points. Stress Tests European Union leaders agreed yesterday to disclose how banks perform on stress tests, seeking to show investors that the financial system can withstand shocks. The decision came after Spanish officials unexpectedly pledged to publish results on individual banks, the first European government to do so. European Central Bank President Jean-Claude Trichet said broader regional stress tests will be published in the second half of July “at the latest.” Developing-nation stocks rose for a ninth day, the longest stretch of gains in two months. Emerging-equity funds took in $2.5 billion in the past week, the second-largest inflow this year, while emerging-bond funds received $659 million, EPFR said in a statement. The MSCI Asia Pacific Index gained 0.3 percent. Softbank Corp., the exclusive seller of the iPhone in Japan, climbed 2.7 percent in Tokyo as orders for a new model outstripped supply. Newcrest Mining Ltd., Australia’s biggest gold producer gained 1.7 percent in Sydney. Yen Gains The yen gained for a fifth day to 90.78 per dollar, and appreciated 0.5 percent against the euro after the nation’s leaders pledged to reduce public debt. Japanese Prime Minister Naoto Kan said he would consider an opposition party proposal to raise the consumption tax. Credit-default swaps on the Markit iTraxx Crossover Index of 50 mostly junk-rated European companies dropped 21.5 basis points to a one-month low of 522, according to Markit Group Ltd. Copper pared earlier losses, slipping 0.3 percent to $2.9155 a pound in New York after earlier sinking as much as 2.1 percent. The Reuters/Jefferies CRB Index of commodities rose 0.3 percent, erasing an early 0.7 percent slump and extending its five-day advance to 3.2 percent, on pace for its best week since the beginning of April. —-With assistance from Paul Armstrong , Matthew Brown , Claudia Carpenter , David Merritt and Michael Patterson in London. Editor: Michael P. Regan . To contact the reporters on this story: Rita Nazareth at rnazareth@bloomberg.net ; Stephen Kirkland in London at skirkland@bloomberg.net ;

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Global Stocks Rise as S&ampP 500 Fluctuates Treasuries Fall, Gold Advances

June 18, 2010

By Rita Nazareth and Stephen Kirkland June 18 (Bloomberg) — The MSCI World Index of stocks rose for the ninth day, the longest rally in 11 months, and Spanish bonds jumped on speculation efforts to contain Europe’s debt crisis will succeed. Treasuries fell, while gold climbed to a record. Oil reversed losses to rebound above $77 a barrel. The global index increased 0.2 percent at 12:47 p.m. in New York. The Stoxx Europe 600 Index also climbed for a ninth day, rising 0.2 percent to the highest level in five weeks. The Standard & Poor’s 500 Index drifted between gains and losses as the expiration of futures and options triggered price swings. Spot gold rose as high as $1,262.50 an ounce. Spain’s 10-year bond yield lost 19 basis points. Spanish banks rallied as European leaders pledged to publish stress tests to boost transparency in the financial industry. Emerging-market equity and bond funds received net inflows in the week to June 16 as concerns over European deficits eased, boosting appetite for higher-yielding assets, EPFR Global data showed. “The stock gains are very comforting,” said David Kelly , who helps oversee $445 billion as chief market strategist for JPMorgan Funds in New York. “They suggest this is still a bull market. There’s a realization that the measures put in place by European governments and the IMF to deal with the debt issues are sufficient to do the job. It’s likely that the global economic recovery will be able to overcome the speed of the European crisis.” One-Month High Shares of commodity producers and financial firms led gains in the S&P 500 among 10 groups, while health-care and telephone companies had the biggest declines. Cisco Systems Inc., DuPont Co. and Exxon Mobil Corp. climbed more than 1 percent for the top advances in the Dow Jones Industrial Average higher. Both gauges are trading near their highest levels in a month. About three stocks rose for every two that fell on Europe’s benchmark Stoxx Europe 600 . Banco Santander SA , Spain’s largest lender, rallied 3.5 percent in Madrid while smaller rival Banco Bilbao Vizcaya Argentaria SA climbed 5.6 percent. Spain’s IBEX 35 Index and Portugal’s PSI-20 increased 2.2 percent, the most among western European benchmark gauges. “Sentiment has changed to the positive after investors saw that the European debt crisis hasn’t spiralled out of control,” said Daphne Roth , Singapore-based head of Asian equity research at ABN Amro Private Banking. Spain’s 10-year bond yield dropped to 4.58 percent and the premium investors demand to own the debt instead of benchmark German bunds narrowed by 26 basis points to 185 basis points. Stress Tests European Union leaders agreed yesterday to disclose how banks perform on stress tests, seeking to show investors that the financial system can withstand shocks. The decision came after Spanish officials unexpectedly pledged to publish results on individual banks, the first European government to do so. European Central Bank President Jean-Claude Trichet said broader regional stress tests will be published in the second half of July “at the latest.” Developing-nation stocks rose for a ninth day, the longest stretch of gains in two months. Emerging-equity funds took in $2.5 billion in the past week, the second-largest inflow this year, while emerging-bond funds received $659 million, EPFR said in a statement. The MSCI Asia Pacific Index gained 0.3 percent. Softbank Corp., the exclusive seller of the iPhone in Japan, climbed 2.7 percent in Tokyo as orders for a new model outstripped supply. Newcrest Mining Ltd., Australia’s biggest gold producer gained 1.7 percent in Sydney. Yen Gains The yen gained for a fifth day to 90.78 per dollar, and appreciated 0.5 percent against the euro after the nation’s leaders pledged to reduce public debt. Japanese Prime Minister Naoto Kan said he would consider an opposition party proposal to raise the consumption tax. Credit-default swaps on the Markit iTraxx Crossover Index of 50 mostly junk-rated European companies dropped 21.5 basis points to a one-month low of 522, according to Markit Group Ltd. Copper pared earlier losses, slipping 0.3 percent to $2.9155 a pound in New York after earlier sinking as much as 2.1 percent. The Reuters/Jefferies CRB Index of commodities rose 0.3 percent, erasing an early 0.7 percent slump and extending its five-day advance to 3.2 percent, on pace for its best week since the beginning of April. —-With assistance from Paul Armstrong , Matthew Brown , Claudia Carpenter , David Merritt and Michael Patterson in London. Editor: Michael P. Regan . To contact the reporters on this story: Rita Nazareth at rnazareth@bloomberg.net ; Stephen Kirkland in London at skirkland@bloomberg.net ;

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EU Stress Tests Face Investor Questions on Stringency

June 18, 2010

By Andrew MacAskill and Simon Clark June 18 (Bloomberg) — The European Union’s decision to publish the results of stress tests on the region’s lenders was welcomed by shareholders seeking more transparency. Investors still want to know how tough the terms of the tests will be. The studies will be done “ institution by institution,” French President Nicolas Sarkozy told reporters at an EU summit in Brussels yesterday. German Chancellor Angela Merkel said it was important to give “maximum transparency.” Asked how the governments would react if the tests revealed shortcomings, she said the EU has “taken precautions,” including a 750 billion- euro ($928 billion) financial backstop. “The results could be very helpful reassuring investors that the European financial system is sound,” said Andrew Milligan , the Edinburgh-based head of global strategy at Standard Life Investments Ltd ., which oversees about $221 billion. “The devil will be in the detail.” Merkel and Sarkozy rebuffed concerns from executives including Deutsche Bank AG Chief Executive Officer Josef Ackermann that publishing the tests could undermine confidence in the banks unless governments promise aid. When the U.S. carried out similar stress tests more than a year ago, it pledged to provide capital to banks that couldn’t raise it. The EU still hasn’t disclosed details of its tests, including whether they include a sovereign debt restructuring, raising concern among money managers they may not be stringent enough. ‘Bit Harsher’ “The problem with the stress testing, in most people’s opinion, is fairly serious: It’s not stringent enough,” said Ralph Silva , an analyst at London-based Silva Research Network, which specializes in financial-services firms. The tests may be “a bit harsher” than similar ones carried out last year, helping to boost market confidence, Morgan Stanley analysts led by Huw van Steenis wrote today. The reviews are “highly likely” to take into account holdings of sovereign bonds, Javier Ariztegui , deputy governor of the Bank of Spain, said in an interview in Santander, Spain, today. The decision came after Spanish government officials unexpectedly pledged to publish results on individual banks, becoming the first European government to do so. International debt markets have been shut to most Spanish companies and banks as investors lost confidence in the country, Banco Bilbao Vizcaya Argentaria SA Chairman Francisco Gonzalez said June 14. “Europe needs this because the markets are asking for it,” Gonzalez said at a seminar in Santander, Spain. ‘Could be Misinterpreted’ The difference in yields of Spanish bonds and their German equivalents narrowed after the EU said it would publish the tests. The so-called spread between the 10-year securities fell to 202 basis points as of 12:17 p.m. in London after hitting a euro-area record of 232 basis points yesterday. Bankers and their lobby groups across Europe had opposed publication. Deutsche Bank’s Ackermann said last week that releasing the stress tests would be “very, very dangerous” if government mechanisms to support European banks weren’t in place beforehand. A spokesman for the bank declined to comment. Germany’s BdB banking association, which had opposed making the findings public, changed its stance yesterday. It now says publication can “contribute to creating confidence and calming the markets” as long as it doesn’t leave “room for misinterpretation.” In London, the British Bankers’ Association said it still opposes publication of data on individual banks. “The results could be misinterpreted and could lead to a run on a sound bank,” Irving Henry , the BBA’s policy director of prudential capital and risk, said in an interview yesterday. ‘More Confidence’ The wider European stress tests will be published in the second half of July “at the latest,” European Central Bank President Jean-Claude Trichet said yesterday. The EU hasn’t so far disclosed the test criteria. The region’s 25 biggest banks will be examined, according to Andrew Lim , an analyst at Matrix Corporate Capital LLP. Failure to include sovereign debt exposure would “impact the credibility” of the tests, said Ian Gordon , a banking analyst at Exane BNP Paribas SA in London. “Every piece of withheld data gives skeptics reason to grumble that the tests are not transparent and therefore not meaningful.” The test criteria should include a possible decline in economic growth, a fall in house prices, the banks’ ability to fund their balance sheets, and a closing of the wholesale money markets, said Jane Coffey who helps manage $51 billion at Royal London Asset Management, including Barclays Plc stock. “It should give the market more confidence that they are not hiding anything, and that the banks are solidly based, and if they are not, that the problem is in a small enough number of banks,” Coffey said. “Transparency is usually good for confidence. They won’t be doing this if it was going to cause a banking collapse, I would guess.” ‘Region-wide Assessment’ “We need to have a region-wide assessment to quantify and compare the banks — that’s what this is all about,” said Guy de Blonay , who helps manage about 19.5 billion pounds ($29 billion) at Jupiter Fund Management Plc in London. “Governments want investors to be able to quantify and appreciate the situation on the back of official findings.” The financial strength of European nations and their banks is closely interconnected, according to Morgan Stanley analysts, who wrote in a June 16 report that countries sharing the euro and their banks are caught in a “vicious circle.” “Sovereign rating downgrades have eroded confidence in the balance sheets of the banks, most of which own government bonds,” analysts Joachim Fels and Elga Bartsch wrote. “This, together with higher borrowing costs for fiscally challenged countries, has raised funding costs for banks in the interbank market and in the capital markets.” ‘Sovereign Risk’ The EU decision comes more than a year after the U.S. released the results of stress tests it carried out on 19 financial institutions. Publication helped trigger a rally that lifted the Standard & Poor’s Financials Index 36 percent from the start of May through the end of last year. The Bloomberg Europe Banks and Financial Services Index is down 7.4 percent this year. The EU tests may have less impact on markets because of concerns about the level of government debt in Europe, Jupiter’s De Blonay said. “It’s probably not going to be as positive a reaction as in the U.S. simply because we have an overlay of sovereign risk on the banks in Europe,” he said. European Central Bank Governing Council member Axel Weber said future stress tests in the banking industry will be more comprehensive than today’s evaluations and may include government bonds. EU states should also provide a backstop “if adverse scenarios materialize,” he said yesterday. The cost of providing that backstop may still fuel concern among investors that already indebted governments were taking on too much additional borrowing, Standard Life’s Milligan said. To contact the reporters on this story: Andrew MacAskill in London at amacaskill@bloomberg.net ; Simon Clark in London at sclark4@bloomberg.net

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Stocks Climb Worldwide as Spanish Banks Rally Gold Strengthens to Record

June 18, 2010

By Stephen Kirkland June 18 (Bloomberg) — The MSCI World Index of stocks rose for the ninth day, the longest rally in 11 months, and Spanish bonds rallied on speculation efforts to contain Europe’s debt crisis will succeed. The yen strengthened against the dollar and gold climbed to a record. The world index increased 0.1 percent at 9:57 a.m. in New York. The Stoxx Europe 600 Index advanced 0.2 percent to its highest level in five weeks. The Standard & Poor’s 500 Index fluctuated as the expiration of U.S. futures and options triggered greater price swings. The MSCI Emerging Markets Index climbed 0.4 percent. The yen strengthened 0.3 percent versus the dollar, and gold rose as high as $1,258.25 an ounce. Oil fell a second day. Spain’s 10-year bond yield lost 17 basis points. Spanish banks rallied as European leaders pledged to publish stress tests to boost transparency in the financial industry. Emerging-market equity and bond funds received net inflows in the week to June 16 as concerns over European deficits eased, boosting appetite for higher-yielding assets, EPFR Global data showed. “Sentiment has changed to the positive after investors saw that the European debt crisis hasn’t spiralled out of control,” said Daphne Roth , Singapore-based head of Asian equity research at ABN Amro Private Banking. European Shares About three stocks rose for every two that fell on Europe’s benchmark Stoxx 600 . Banco Santander SA , Spain’s largest lender, rallied 2.5 percent in Madrid while smaller rival Banco Bilbao Vizcaya Argentaria SA climbed 4.4 percent. Spain’s IBEX 35 Index increased 1.2 percent, the most among 18 western European benchmark gauges. The cost of protecting against a debt default by Banco Santander dropped, with credit-default swaps tumbling 16 basis points to 170, according to CMA DataVision. Spain’s 10-year bond yield dropped 17 basis points to 4.6 percent and the premium investors demand to own the debt instead of benchmark German bunds tumbled by 23 basis points to 188 basis points. European Union leaders agreed yesterday to disclose how banks perform on stress tests, seeking to show investors that the financial system can withstand shocks. The decision came after Spanish officials unexpectedly pledged to publish results on individual banks, the first European government to do so. European Central Bank President Jean-Claude Trichet said broader regional stress tests will be published in the second half of July “at the latest.” Asian Stocks The MSCI Asia Pacific Index gained 0.3 percent. Softbank Corp., the exclusive seller of the iPhone in Japan, climbed 2.7 percent in Tokyo as orders for a new model outstripped supply. Newcrest Mining Ltd., Australia’s biggest gold producer gained 1.7 percent in Sydney. Developing-nation stocks rose for a ninth day, the longest stretch of gains in two months. Hungary’s BUX Index climbed for the first time in four days, rising 0.2 percent, after Templeton Asset Management Ltd.’s Mark Mobius said in his blog that the nation’s stocks are attractive. Emerging-equity funds took in $2.5 billion in the past week, the second-largest inflow this year, while emerging-bond funds received $659 million, EPFR said in a statement. The yen gained for a fifth day to 90.77 per dollar, and appreciated 0.5 percent versus euro after the nation’s leaders pledged to reduce public debt. Japanese Prime Minister Naoto Kan said he would consider an opposition party proposal to raise the consumption tax. The dollar strengthened 0.2 percent to $1.2365 per euro. Default Swaps Credit-default swaps on the Markit iTraxx Crossover Index of 50 mostly junk-rated European companies dropped 6.3 basis points to a one-month low of 537.3, according to Markit Group Ltd. Copper fell 1.1 percent to $6,375 a metric ton on the London Metal Exchange, the third consecutive decline. Crude oil slid for a second day, dropping 0.7 percent to $76.29 in electronic trading on the New York Mercantile Exchange. —-With assistance from Paul Armstrong , Matthew Brown , Claudia Carpenter , David Merritt and Michael Patterson in London. Editors: Stephen Kirkland , Michael P. Regan To contact the reporter on this story: Stephen Kirkland in London at skirkland@bloomberg.net ;

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Asia Stocks, European Futures, Currencies Rise on Growth Gold Near Record

June 18, 2010

By Yumi Teso and Anna Kitanaka June 18 (Bloomberg) — Asian stocks gained, driving the MSCI Asia Pacific Index to its longest winning streak in 11 months, and the won climbed on signs investors are buying assets in the region as an economic recovery gathers pace. The MSCI Asia Pacific Index rose 0.2 percent to 116.02 as of 2:03 p.m. in Tokyo, advancing for a seventh day. South Korea’s won was poised for its biggest weekly jump in 13 months after Finance Minister Yoon Jeung Hyun said growth will likely exceed 5 percent this year. The euro strengthened to a three- week high against the dollar as concerns eased that Europe’s debt crisis will worsen. Gold traded near a record. Emerging-market equity and bond funds received net inflows in the week to June 16 as appetite for higher-yielding assets revived after concerns over European deficits eased, EPFR Global said. A government report showed Thai exports jumped 42.1 percent in May from a year earlier, the most in almost two years, and Japan’s government pledged to cut company tax to spur growth. “There has been optimism that the impact of Europe’s problem on the Asian economy may be limited, supporting the purchase of regional currencies,” said Minori Uchida , a senior analyst in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd. The MSCI Emerging Markets Index rose 0.4 percent, extending an eight-day, 6.5 percent rally. The FTSE Bursa Malaysia KLCI Index added 0.4 percent. The Hang Seng China Enterprises Index , a measure of Chinese shares traded in Hong Kong, rallied 0.9 percent, set for a seventh day of gains that will be its longest winning streak since April, 2007. Currencies Gain South Korea’s won advanced 0.8 percent to 1,203.9 per dollar as foreigners pumped money into the stock market for a sixth day, the longest run of net purchases in two months. The Taiwan dollar gained 0.5 percent to NT$32.15 before a report next week that a Bloomberg survey of economists indicates will show exports increased 34 percent in May from a year earlier. Emerging equities funds took in $2.5 billion in the past week, the second-largest inflow this year, while emerging bond funds received $659 million, EPFR said in a statement. The MSCI Asia Pacific Index has slumped 10 percent from its high this year on April 15 as swelling budget deficits prompted Standard & Poor’s to cut ratings of Greece, Spain and Portugal. The retreat has driven down the average price of shares in the gauge to 14.7 times estimated earnings . The ratio sank to 13.8 times on May 18, the lowest level since December 2008. “There was a lot of pessimism about what’s happening in Europe that took the market down,” said Tim Leung , who helps manage about $1.5 billion at IG Investment Ltd. in Hong Kong. “Stabilization in the European funding probably made a lot of investors less worried about the situation.” Default Risk HSBC Holdings Plc, Europe’s biggest bank, gained 0.7 percent in Hong Kong after Spain yesterday sold 3.5 billion euros ($4.3 billion) of bonds at yields lower than the prevailing market rates. London-based Standard Chartered Plc jumped 3.3 percent. The cost of protecting Asia-Pacific bonds from non-payment fell, according to traders of credit default swaps. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan declined 3 basis points to 126 basis points, on track for its lowest close in a month, according to Royal Bank of Scotland Group Plc and CMA DataVision in New York. The euro advanced to $1.2403, after earlier touching $1.2414, the highest level since May 28. The yen climbed 0.3 percent to 90.76 after the government pledged in its medium-term economic plan today to bring the corporate tax rate down to a level “commensurate” with other leading nations. Asian technology shares gained after Apple Inc. rallied 1.7 percent to a record yesterday. Morgan Stanley said the customer base for the iPhone may top 100 million users next year on demand for its latest version. Apple Link Softbank Corp., the exclusive supplier of the iPhone in Japan, climbed 0.8 percent to 2,443 yen. Nintendo Co., the world’s largest maker of video-game players, advanced 2.1 percent, its seventh consecutive gain. Wintek Corp. , a component maker for Apple Inc.’s iPad and iPhones, gained 2 percent. Japan’s Nikkei 225 Stock Average fell 0.2 percent and futures on the Standard & Poor’s 500 Index fell 0.1 percent today. Toyota Motor Corp. , which gets 28 percent of its sales in North America, lost 1.8 percent in Tokyo after U.S. jobless claims increased. “The economic climate has to further improve in countries like the U.S. for the stock market to enter a full-fledged recovery phase, though investors are less anxious about Europe,” said Kazuhiro Takahashi , a general manager at Tokyo- based Daiwa Securities Capital Markets Co. Bullish on Gold Gold may advance to a record as investors take refuge in the precious metal to protect their wealth from Europe’s financial turbulence. Bullion for immediate delivery traded at $1,244.9, after jumping as much as 1.8 percent yesterday. The metal touched a record $1,252.11 on June 8. Newcrest Mining Ltd., Australia’s largest gold producer, gained 2.1 percent in Sydney. “We are still very bullish on gold,” said Hwang Il Doo , a senior trader with KEB Futures Co. in Seoul. “Gold will remain the main beneficiary of what’s happening in Europe unless the picture takes a turn for the better.” Crude oil fell for a second day in New York, dropping 0.3 percent to $76.56 a barrel, amid doubts about the pace of the economic recovery in the U.S., the world’s largest energy consumer. U.S. fuel consumption fell 0.9 percent to the lowest level in five weeks in the seven days ended June 11, the Energy Department reported June 16. “The U.S. economy is facing a major structural adjustment in the wake of the financial crisis and subsequent economic slump,” said Toby Hassall , a research analyst at CWA Global Markets Ltd. — Kim Kyoungwha and Christian Schmollinger in Singapore, Yusuke Miyazawa in Tokyo, Weiyi Lim in Taipei, Ronnie Koo in Hong Kong and Toshiro Hasegawa in Tokyo. Editors: Sandy Hendry , Patrick Chu To contact the reporters on this story: Yumi Teso in Bangkok at yteso1@bloomberg.net .

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Nomura’s Schiffman Plans Hiring Push for `Full Scale’ U.S. Investment Bank

June 17, 2010

By Serena Saitto June 17 (Bloomberg) — Nomura Holdings Inc. , Japan’s largest brokerage, may hire as many as 35 bankers in the U.S. this year, part of a push to become a global securities firm rivaling Goldman Sachs Group Inc. and Credit Suisse Group AG. The firm plans to have about 100 bankers in the U.S. by the end of 2010, from about 65 currently, Glenn Schiffman , Nomura’s head of Americas investment banking, said in an interview this week at the firm’s New York headquarters at the World Financial Center. It has already recruited 50 bankers, he said. Nomura is investing 250 billion yen ($2.74 billion) to expand in the U.S. after it bought Lehman Brothers Holdings Inc.’s Asian and European units in 2008. Chief Executive Officer Kenichi Watanabe said in April that he aims to transform Nomura, which generates most of its revenue in Japan, into a global financial firm. “We are in the early stages of creating a full scale investment bank in the U.S.,” said Schiffman, 40, a former Lehman banker who helped manage the sale of Lehman’s assets to Nomura and led the integration of the businesses in Asia. Nomura said this week it hired Deutsche Bank AG’s Mark Epley as co-head of a unit that advises on mergers and acquisitions for buyout firms. Earlier this month, it recruited Michael Hill and James DeNaut from Deutsche Bank as co-heads of global natural resources, based in New York, according to two people close to the situation. The firm in May appointed Bank of America Corp.’s Simon Western as a managing director in the financial services institutions group. Competing for Talent “Nomura faces market competition for similar talent, but their advantage is that they are willing to pay attractively,” said Robert Sloan , head of U.S. financial-services recruiting at Egon Zehnder International, an executive search firm. Schiffman started his career in 1991 at Lehman, where he oversaw financings and mergers and acquisitions worth more than $100 billion. He was responsible for Lehman’s cable business from 1996 to 1999 and later ran the global media group. He relocated to Hong Kong in 2007. That experience may help Schiffman win business in the U.S. “Natural resources, financial institutions and industrials are our priority sectors because they represent 65 percent of fees,” said Schiffman. “Consumer, media and technology are the other sectors in which we want to expand.” Cross-Border M&A Nomura ranks 15th among global takeover advisers this year, with $37 billion of deals, up from 19th in the same period a year ago, according to data compiled by Bloomberg. New York- based Goldman Sachs is first, with $156 billion of deals, followed by JPMorgan Chase & Co. and Zurich-based Credit Suisse. Nomura helped advise Spain’s Grifols SA on its $3 billion agreement last week to buy Talecris Biotherapeutics Holdings Corp., together with Deutsche Bank and Banco Bilbao Vizcaya Argentaria SA. It also advised Jupiter Telecommunications Co. on the company’s $1.3 billion joint venture with Sumitomo Corp. As head of investment banking, Schiffman is overseeing Nomura’s U.S. mergers and acquisitions business and predicts that cross-border deals will increase in volume. “Tapping this trend is part of Nomura’s growth strategy,” he said. To contact the reporter on this story: Serena Saitto in New York at ssaitto@bloomberg.net .

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Spanish Bond Yields Drop as Demand at Auction Allays Refinancing Concerns

June 17, 2010

By Emma Ross-Thomas June 17 (Bloomberg) — Spain sold 3.5 billion euros ($4.3 billion) of bonds, the maximum set for the auction, easing concern that Spain will struggle to finance looming debt maturities. Spanish stocks abd bonds, and the euro rallied. Spain sold 3 billion euros of 10-year debt at an average yield of 4.864 percent, less than the 5.04 percent that the bonds traded at today before the sale. Demand was 1.89 times the amount on offer. It also sold 479.2 million euros of 30-year debt at 5.908 percent, and the bid-to-cover ratio was 2.45, higher than the 1.38 at the previous sale on March 18. Spain, which faces debt redemptions of 24.7 billion euros in July, is trying to convince investors it can cut the third- largest deficit in the euro region, while propping up the country’s savings banks and lifting the economy out of a two- year slump . Spanish bonds rose after the sale and the yield premium investors demand to buy the debt over German bunds narrowed from a euro-era high yesterday. “The strong demand for Spanish bonds should help restore confidence,” said Ciaran O’Hagan , fixed income strategist at Societe Generale in Paris. “The good demand was only possible after considerable cheapening of Spanish bonds over the past days.” Yield Premium Declines The extra interest investors demand to hold Spanish debt rather than equivalent German bonds narrowed to 206 basis point. That spread surged to 221 yesterday, the highest since before the start of the euro, on speculation in the press that Spain would need to tap a European Union financial lifeline. The gap compared with 160 basis points at the end of May. The yield on the Spanish 10-year bond fell 11 basis points to 4.761 percent at 10:45 a.m. in London. Credit-default swaps on Spanish government debt fell 5 basis points to 254, according to CMA DataVision prices. Spain’s Ibex share index rose 1.4 percent to 9,818, increasing twice as much as European shares. The euro, which has fallen almost 14 percent this year, on concern that swelling budget deficits could leave countries such as Spain struggling to finance their debts, rose to $1.2378 from $1.2311. Banking stocks also rose after Bank of Spain Governor Miguel Angel Fernandez Ordonez said yesterday the central bank will publish stress tests on lenders to “provide the markets with a perfectly clear idea of the situation of the Spanish banking system.” International capital markets are “closed” for most Spanish companies and lenders, Francisco Gonzalez, chairman of Spain’s second-largest lender Banco Bilbao Vizcaya Argentaria SA said June 14. Stress Tests “A very strong set of results,” Sean Maloney , a fixed income strategist at Nomura International Plc in London, said about the auction. “A big concession in the lead-up and news that Bank of Spain is keen to publish stress test results on banks probably shored up confidence.” Today’s auction comes as European Union leaders meet in Brussels to advance their plan to establish a 750 billion-euro financial backstop to support high-deficit nations such as Spain and defend the euro. Spain has said it doesn’t need help, and that it will have no problem facing the July redemptions, which are the heaviest for the rest of the year. Spain’s debt burden is lower as a proportion of gross domestic product than in Germany or France. Public debt amounted to 53 percent of GDP last year, compared with a euro-region average of 79 percent. The July bond redemption of 16.2 billion euros is the last until April 2011, leaving 32 billion euros of maturing treasury bills spread out over the rest of the year. To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

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Spain Faces Higher Borrowing Costs at Auction as Deficit Concerns Deepen

June 17, 2010

By Emma Ross-Thomas June 17 (Bloomberg) — Spain faces a jump in borrowing costs at bond auctions today as growing investor concern the country may need external help to ease a credit crunch forces the government to pay more to finance its budget deficit. Spain plans to sell as much as 3.5 billion euros ($4.3 billion) of 10- and 30-year bonds, the Treasury said. The yield on the country’s benchmark 10-year bond rose to 4.939 percent, the highest in almost eight years and 89 basis points more than the 4.045 percent it paid at the last 10-year auction on May 20. Spain is trying to convince investors it can cut the third- largest deficit in the euro region, while propping up the country’s savings banks and lifting the economy out of a two- year slump. Spain, which faces 24.7 billion euros of maturing debt in July, has seen the risk premium on its 10-year bonds rise to a decade high on concern it may need to tap a European Union financial lifeline. “One has to assume that a big enough concession has been made for this auction to be taken down,” said Stuart Thomson , who helps manage the equivalent of $100 billion for Ignis Asset Management in Glasgow. “There is considerable political risk with Spain with the consolidation of the savings banks and the forthcoming budget still to be passed. Investors are right to be wary.” The auction comes as EU leaders meet in Brussels to advance their plan to establish a 750 billion-euro financial backstop to support high-deficit nations such as Spain and defend the euro. The single currency has fallen 14 percent this year as Greece’s near-default fueled concern about rising debt in the region. Credit Ratings Fitch Ratings cut Spain to AA+ on May 28, citing concerns about the economy’s ability to grow. Standard & Poor’s Ratings Services ranks Spain AA while Moody’s Investors Service has kept its top Aaa rating on the nation’s credit. The Spanish sale “is a litmus test for the market,” said Sean Maloney , a fixed-income strategist at Nomura International Plc in London. “But some cheapening in the lead-up is probably a healthy development for the digestion. Spanish auctions throughout the year have generally exceeded expectations.” Investor demand rose at Spain’s most recent auction, a three-year bond sale this month, snapping a year-long decline. The bid-to-cover ratio was 2.1, meaning investors bid for 2.1 times the amount of securities offered. That’s more than the range of 1.38 to 1.85 in the four previous auctions of similar maturity debt. A 10-year auction on May 20 attracted bids for 2.03 times the amount offered, compared with 1.55 times in March. Yield Premium The extra yield investors demand to hold Spanish 10-year bonds rather than benchmark German bunds rose to a euro-era high of 222 basis points yesterday after a report in El Economista said that the EU and the International Monetary Fund were preparing a 250 billion-euro credit line for Spain. The EU, the IMF and the Spanish government denied the report. Concern is also mounting that Spain will need funds to pump liquidity into its banking system. Spanish lenders have been hit by a surge in bad loans stemming from the collapse of its real- estate market, and the Bank of Spain has had to seize two savings banks. Short-term lending has dried up as confidence in the banks wanes. “The issue for Spain isn’t sovereign paper, it’s much more related to financial-sector stability,” said Harvinder Sian , a senior bond strategist at Royal Bank of Scotland Group Plc in London. Markets ‘Closed’ Francisco Gonzalez, chairman of Spain’s second-largest bank, Banco Bilbao Vizcaya Argentaria SA , said on June 14 that international capital markets are “closed” to most Spanish companies and banks. That has left Spanish lenders more dependent on financing from the European Central Bank. They borrowed 85.6 billion euros from the ECB last month, twice the amount they needed when credit markets seized up in 2008 after the collapse of Lehman Brothers Holdings Inc., UniCredit SpA said in a note to investors yesterday. Deputy Finance Minister Carlos Ocana acknowledged that Spanish borrowers need “the markets to open.” Still, he said the Treasury had “no problem of any kind” paying its debt, which is lower as a proportion of gross domestic product than in Germany or France. Spain’s debt amounted to 53 percent of GDP last year, compared with a euro-region average of 79 percent. The July bond redemption of 16.2 billion euros is the last until April 2011, leaving 32 billion euros of maturing treasury bills spread out over the rest of the year. “The July redemption is not a threat in my view,” said Gianluca Salford , a fixed-income strategist at JPMorgan Chase & Co. in London. To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

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Asian Stocks, Metals Drop on U.S. Housing Data Yen Strengthens on Spain

June 16, 2010

By James Poole and Masaki Kondo June 17 (Bloomberg) — Asian stocks dropped for the first time in six days and metals fell after U.S. housing starts plunged the most in more than a year. The yen gained as Spain’s plan to publish bank stress tests renewed European debt concern. The MSCI Asia Pacific Index declined 0.2 percent to 115.55 at 11:30 a.m. in Tokyo after five consecutive gains that pushed the gauge to a four-week high. Copper decreased 1.4 percent, sliding for a second day. The yen rose 0.5 percent against the euro, and strengthened against all 16 major counterparts. Futures on the Standard & Poor’s 500 Index fell 0.4 percent. Housing starts slumped 10 percent, the biggest decline since March 2009, according to figures from the Commerce Department. European Union leaders may agree on ways to tighten financial-market regulation at a summit meeting today and Spain’s central bank said yesterday it plans to publish the results of stress tests carried out on the nation’s lenders to counter speculation it needs international aid. “Investors are inclined to book profit,” said Mitsushige Akino , who oversees $450 million at Tokyo-based Ichiyoshi Investment Management Co. Uncertainty “and a loss of confidence have driven down the market even though the global economy remains resilient.” The MSCI Asia Pacific Index has lost 4.1 percent this year on concern that Greece and other European countries will struggle to curb their budget deficits. The Hong Kong and Taiwan markets reopened after a holiday and Chinese stocks resumed trading after a three-day break. Japan, Australia Japan’s Nikkei 225 Stock Average declined 0.4 percent, the biggest drop among equity benchmarks in the Asia-Pacific region. South Korea’s Kospi Index gained 0.1 percent. Australia’s S&P/ASX 200 Index lost 0.3 percent. Toyota Motor Corp. , which gets 28 percent of sales from North America, declined 0.8 percent in Tokyo. James Hardie Industries SE , the biggest seller of home siding in the U.S., lost 3.1 percent in Sydney. BHP Billiton Ltd. , the world’s biggest mining company, slipped 1.1 percent in Australia after oil and metal prices slumped. Mitsubishi Estate Co. led Japanese real-estate developers higher after Goldman Sachs Group Inc. raised their investment ratings. The yen strengthened on speculation European Union leaders will agree on ways to tighten financial-market regulation. The euro weakened for a second day versus the dollar after Spain’s central bank said yesterday it plans to publish stress tests. ‘More Rules’ “The EU heads may call for more rules, which may weigh on growth,” said Tsutomu Soma , a bond and currency dealer at Okasan Securities Co. in Tokyo. “Risk aversion may persist, so the yen and the dollar could be bought.” The yen climbed to 111.98 per euro in Tokyo from 112.56 in New York yesterday, when it fell to 113.32, the lowest level since June 4. The currency rose to 91.32 versus the greenback from 91.44, and gained 0.5 percent to 78.61 per Australian dollar. The euro declined to $1.2284 from $1.2311. The EU summit today will discuss the region’s economic growth and the so-called stability and growth pact. The Bank of Spain plans to make the stress tests public so markets have full knowledge of the state of the banking system, Miguel Angel Fernandez Ordonez , the governor, said yesterday in a speech. South Korea’s won slid 0.6 percent to 1,218.40 per dollar and Malaysia’s ringgit retreated 0.3 percent to 3.2680 on concern Europe’s debt crisis will bolster demand for dollars. Copper, Oil “Should the European debt crisis worsen, you will see the flight to quality for the dollar and that will weigh on the Asian currencies,” said Yeo Chin Tiong , head of treasury at OSK Investment Bank Bhd. in Kuala Lumpur. Copper for three-month delivery on the London Metal Exchange fell as much as 1.8 percent to $6,530 a metric ton, and traded at $6,554. Futures in Shanghai resumed trading after a three-day holiday, gaining as much as 2.5 percent to 52,680 yuan ($7,713) a ton. Oil fell from a six-week high after a government report showed U.S. crude supplies increased last week as refiners cut processing rates. Crude oil for July delivery dropped as much as 64 cents, or 0.8 percent, to $77.03 a barrel in electronic trading on the New York Mercantile Exchange, and was at $77.10. The cost of protecting Asia-Pacific corporate and sovereign bonds from non-payment fell, according to traders of credit- default swaps. The Markit iTraxx Japan index declined 2 basis points to 135 basis points in Tokyo, according to Morgan Stanley. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan fell 2 basis points to 131 basis points in Singapore, Royal Bank of Scotland Group Plc prices show. To contact the reporters for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net . James Poole at jpoole4@bloomberg.net

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Google Wi-Fi Data Collection Discussed by Law Enforcement in 30 States

June 16, 2010

By Karen Freifeld and Joel Rosenblatt June 16 (Bloomberg) — Google Inc. ’s collection of data via Wi-Fi networks was the subject of a conference call among law enforcement officials from 30 U.S. states, according to Connecticut Attorney General Richard Blumenthal . “We’re looking to establish where, when, why, for how long and for what purpose there was this collection of information on wireless networks,” Blumenthal said yesterday in an interview. The call included representatives of the states’ attorneys general. The discussion reflects widening concern among law enforcement over the way Google handles user information. The company said last month it mistakenly gathered data from open wireless networks while it was capturing images of streets and houses for its Street View service, a product that lets users view photographs of an area online. Blumenthal has demanded that Mountain View, California- based Google inform his office of any data gathered from his state’s residents and businesses without permission, the attorney general said this month. Google owns the world’s largest search engine . “This was a mistake, but we don’t believe we did anything illegal,” Google said in an e-mailed statement. “We’re working with the relevant authorities to answer their questions and concerns.” Illinois was among the states that joined in last week’s call led by Blumenthal. Illinois in Talks “We did participate in a conference call with other attorneys general regarding Google,” said Robyn Ziegler, a spokeswoman for Illinois Attorney General Lisa Madigan . Additional information wasn’t immediately available, she said. The U.S. Federal Trade Commission said last month that it is reviewing Google’s data gathering. An Oregon judge has ordered the company turn over similar data collected in that state, including any e-mails, files or digital phone records, according to court documents. Also this month, Google said it was turning over to regulators in Germany, France and Spain data it mistakenly collected from unsecured Wi-Fi networks. Those countries are investigating Google’s data-gathering practices after the company said in May that its cars used to photograph roadsides for its Street View mapping service inadvertently recorded information. Prosecutors in the German city of Hamburg opened a criminal investigation. Authorities in Italy, Canada and the Czech Republic also have begun inquiries. The Oregon case is Vicki Van Valin v. Google, 10-00557, U.S. District Court, District of Oregon (Portland). To contact the reporters on this story: Karen Freifeld in New York at kfreifeld@bloomberg.net ; Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net .

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Spain, Portugal Must Specify Steps for `Ambitious’ Budget Targets, EU Says

June 15, 2010

By Meera Louis June 15 (Bloomberg) — The European Union told Spain and Portugal their governments must spell out the budget-cutting measures they plan to implement to reach their “ambitious” deficit targets for next year. “The targets are appropriately ambitious and imply substantial fiscal consolidation,” the EU said in a report released today in Brussels. “Spain and Portugal are expected to specify measures in their 2011 budgets amounting to 1.75 percent and 1.5 percent of GDP, respectively, in order to attain the new targets.” European governments are struggling to cut their budget gaps and prevent the Greek debt crisis from spreading to other countries such as Spain and Portugal. EU officials last month agreed on an unprecedented 750 billion-euro ($922 billion) rescue package for distressed nations after a separate 110 billion-euro lifeline for Greece failed to contain the turmoil and shore up the euro. Spain is trying to cut the EU’s third-largest deficit in half over two years while at the same time restructuring the savings-bank industry, implementing wage cuts and freezing pensions. The government’s borrowing costs rose at an auction of 12- and 18-month bills in Madrid today amid investor concern the fiscal crisis may be spreading. Austerity Measures Governments across Europe are implementing austerity measures as the debt crisis undermines investor confidence and clouds the economic outlook. German investor sentiment plunged in June on concern the turmoil will undermine exports and crimp growth in the region’s biggest economy. Spain has pledged to cut its deficit to 9.3 percent of gross domestic product this year and 6 percent in 2011. Portugal said it would reduce its budget shortfall to 7.3 percent of GDP in 2010 and 4.6 percent in 2011. The two countries “need to substantiate” their deficit- cutting plans to meet the revised deficit targets for next year, EU Economic and Monetary Affairs Commissioner Olli Rehn told a press conference today in Strasbourg, France. “It is essential to substantiate these new measures.” Spanish Finance Minister Elena Salgado said on June 8 that her government will take “any measures necessary” to meet next year’s deficit target. Portugal’s Finance Ministry said in a statement today that the 2011 budget “will adopt all the necessary measures” to meet its deficit goal. Debt Ratio In today’s report, the EU told both countries that the new deficit targets “will not be enough to reverse the increasing trend in the debt ratio by next year.” Citing the “urgency of reversing debt developments,” the EU said additional budget cuts by the two governments should “be focused on expenditure cuts.” The yield premium investors demand to buy 10-year Spanish bonds over comparable German debt rose to a euro-era high of 215.6 basis points on June 8 on speculation Spain may follow Greece in needing an EU bailout to finance its debt. The spread between 10-year Portuguese securities and bunds widened 19 basis points today to 278 basis points, the most in a week, according to Bloomberg generic data. Under the EU’s Stability and Growth Pact, countries with deficits above the 3 percent limit face fines of as much as 0.5 percent of GDP unless they get the budgets back into compliance. To date, no country has been fined for flouting the rules of the pact. To contact the reporter on this story: Meera Louis in Brussels at mlouis1@bloomberg.net

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Stocks, Oil Advance on Manufacturing Growth Greek Bonds Drop

June 15, 2010

By Rita Nazareth and Esme E. Deprez June 15 (Bloomberg) — Stocks rose, sending the MSCI World Index to a sixth straight gain, and oil climbed as growth in New York manufacturing added to signs the global economy is weathering Europe’s debt crisis. Greek bonds sank after Moody’s Investors Service cut the nation’s credit rating to junk. The Standard & Poor’s 500 Index climbed 1.2 percent to 1,102.56 at 11:01 a.m. in New York after the Federal Reserve Bank of New York’s general economic index showed an 11th consecutive month of growth. The MSCI World increased 1.1 percent to extend its longest rally since October. Greek 10-year bond yields jumped 74 basis points to 9.08 percent. Oil rallied above $76 a barrel and the euro strengthened topped $1.23. Stocks in Europe rebounded from early losses as News Corp.’s offer for British Sky Broadcasting Plc offset concern Greece’s downgrade will worsen the region’s debt crisis. U.S. equities also gained after a government report showed prices of imported goods fell in May, led by the biggest drop in petroleum costs since December 2008. “We’ve moved from recession to recovery and now we’re moving into expansion,” said Mike Ryan , New York-based head of wealth management research for the Americas at UBS Financial Services Inc., which oversees about $663 billion. “Inflation remains subdued, suggesting the Fed will remain on the sidelines. The risk-off trade is starting to ebb a little bit.” 200-Day Average The S&P 500 erased yesterday’s 0.2 percent drop and climbed above its highest closing level since June 3. The index rallied as much as 1.3 percent yesterday, approaching its 200-day average of 1,108, before erasing gains after Greece’s credit downgrade. The S&P 500 is down 9.5 percent from its 19-month high in April amid concern European government spending cuts will slow the economic recovery and as BP Plc’s leaky well in the Gulf of Mexico pollutes the Louisiana coast in the worst oil spill in U.S. history. Almost $6 trillion has been erased from the value of global equities since the MSCI World Index reached its 2010 peak in April. “The market stopped at resistance yesterday right around 1,105 on the S&P,” said Bruce Bittles , chief investment strategist at Milwaukee-based Robert W. Baird & Co., which oversees more than $75 billion in client assets. “The most important thing would be to close above 1,105 on much stronger volume. That would indicate the correction has run its course.” Industrials Rally General Electric Co. and Boeing Co. paced gains in all 57 industrial companies in the S&P 500. The Fed’s so-called Empire State Index rose to 19.6, in line with the median forecast of economists surveyed by Bloomberg News. Readings greater than zero signal expansion in the gauge that covers New York, northern New Jersey and southern Connecticut. CBOE Holdings Inc., the last major U.S. securities exchange owned by its members, rose on its first day of trading. CBOE raised $339 million selling 11.7 million shares at $29 each yesterday. The shares rallied 15 percent to $33.42. Treasuries were little changed, with the 10-year yield at 3.26 percent. Net buying of long-term U.S. equities, notes and bonds totaled $83 billion in April, compared with net purchases of a record $140.5 billion in March, Treasury Department data released today showed. Economists in a Bloomberg News survey projected long-term U.S. financial assets would show a net increase of $70 billion in April. Asian, Europe Stocks The MSCI Asia Pacific Index increased 0.2 percent and more than three stocks advanced for every one that declined in Europe’s Stoxx 600, led by media companies. BSkyB, the U.K.’s biggest pay-TV provider, surged 17 percent after the company rejected News Corp.’s offer of 700 pence a share, signalling BSkyB may have to improve its bid. The MSCI Emerging Markets Index of 21 countries gained 0.6 percent, rebounding from a 0.4 percent drop earlier today. Russia’s Micex index advanced 2.6 percent as oil, the country’s main export, rose 1.7 percent to $76.36 a barrel in New York amid forecasts that a government report will show U.S. supplies fell for a third week. The Dubai Financial Market General Index dropped 1.3 percent to the lowest closing level since March 2009, after Tristan Cooper , a Moody’s analyst, said in an interview in Abu Dhabi that the emirate’s state-owned companies may have to restructure more debt. The euro strengthened against nine of 16 major currencies, while the dollar weakened against 14. Greek, German Yield Spreads The extra yield, or spread , investors demanded to hold Greek 10-year bonds instead of German bunds, Europe’s benchmark government debt securities, widened to 641 basis points, the highest since May 7, according to Bloomberg generic data. The bund yield was three basis points higher at 2.67 percent. Greek credit swaps signal a 48 percent probability the nation will default within five years. The cost of insuring $10 million of Greece’s bonds for five years jumped $43,500 to $799,000 a year, making the nation’s debt the third most expensive to protect after Venezuela and Argentina, according to CMA DataVision. Standard & Poor’s already cut Greece to below investment grade on April 27. Greece, Spain and Portugal are cutting spending to tackle their budget deficits, which swelled as the recession crimped government tax revenue. Greek Prime Minister George Papandreou pledged to bring the deficit, which increased to 13.6 percent of gross domestic product last year, to 8.1 percent of GDP this year and to under the 3 percent European Union limit in 2014. Spain, Portugal Cuts Spain and Portugal need additional budget cuts to meet deficit targets even as their shortfalls threaten to choke growth and produce a “snowball” effect on their debt levels, according to a draft European Commission document obtained by Bloomberg News. The draft report is dated May 26. Germany’s DAX Index of stocks climbed 0.6 percent even as investor confidence fell to 28.7 this month from 45.8 in May, lower than economists forecast, the ZEW Center for European Economic Research said today. The Reuters/Jefferies CRB Index of commodities climbed 1.1 percent to the highest level since May 13. “I think it’s important that commodity prices firm up here,” said Robert W. Baird’s Bittles. “The firming trend would be helpful in calming fears about a double dip. If they continue to drop that would suggest that the global economy is really losing steam.” To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net ; Esme E. Deprez in New York at edeprez@bloomberg.net .

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Stocks, Oil Advance on New York Manufacturing Growth Greek Bonds Decline

June 15, 2010

By Rita Nazareth and Esme E. Deprez June 15 (Bloomberg) — Stocks rose, sending the MSCI World Index to a sixth straight gain, and oil climbed as growth in New York manufacturing added to signs the global economy is weathering Europe’s debt crisis. Greek bonds sank after Moody’s Investors Service cut the nation’s credit rating to junk. The Standard & Poor’s 500 Index climbed 1.2 percent to 1,102.56 at 11:01 a.m. in New York after the Federal Reserve Bank of New York’s general economic index showed an 11th consecutive month of growth. The MSCI World increased 1.1 percent to extend its longest rally since October. Greek 10-year bond yields jumped 74 basis points to 9.08 percent. Oil rallied above $76 a barrel and the euro strengthened topped $1.23. Stocks in Europe rebounded from early losses as News Corp.’s offer for British Sky Broadcasting Plc offset concern Greece’s downgrade will worsen the region’s debt crisis. U.S. equities also gained after a government report showed prices of imported goods fell in May, led by the biggest drop in petroleum costs since December 2008. “We’ve moved from recession to recovery and now we’re moving into expansion,” said Mike Ryan , New York-based head of wealth management research for the Americas at UBS Financial Services Inc., which oversees about $663 billion. “Inflation remains subdued, suggesting the Fed will remain on the sidelines. The risk-off trade is starting to ebb a little bit.” 200-Day Average The S&P 500 erased yesterday’s 0.2 percent drop and climbed above its highest closing level since June 3. The index rallied as much as 1.3 percent yesterday, approaching its 200-day average of 1,108, before erasing gains after Greece’s credit downgrade. The S&P 500 is down 9.5 percent from its 19-month high in April amid concern European government spending cuts will slow the economic recovery and as BP Plc’s leaky well in the Gulf of Mexico pollutes the Louisiana coast in the worst oil spill in U.S. history. Almost $6 trillion has been erased from the value of global equities since the MSCI World Index reached its 2010 peak in April. “The market stopped at resistance yesterday right around 1,105 on the S&P,” said Bruce Bittles , chief investment strategist at Milwaukee-based Robert W. Baird & Co., which oversees more than $75 billion in client assets. “The most important thing would be to close above 1,105 on much stronger volume. That would indicate the correction has run its course.” Industrials Rally General Electric Co. and Boeing Co. paced gains in all 57 industrial companies in the S&P 500. The Fed’s so-called Empire State Index rose to 19.6, in line with the median forecast of economists surveyed by Bloomberg News. Readings greater than zero signal expansion in the gauge that covers New York, northern New Jersey and southern Connecticut. CBOE Holdings Inc., the last major U.S. securities exchange owned by its members, rose on its first day of trading. CBOE raised $339 million selling 11.7 million shares at $29 each yesterday. The shares rallied 15 percent to $33.42. Treasuries were little changed, with the 10-year yield at 3.26 percent. Net buying of long-term U.S. equities, notes and bonds totaled $83 billion in April, compared with net purchases of a record $140.5 billion in March, Treasury Department data released today showed. Economists in a Bloomberg News survey projected long-term U.S. financial assets would show a net increase of $70 billion in April. Asian, Europe Stocks The MSCI Asia Pacific Index increased 0.2 percent and more than three stocks advanced for every one that declined in Europe’s Stoxx 600, led by media companies. BSkyB, the U.K.’s biggest pay-TV provider, surged 17 percent after the company rejected News Corp.’s offer of 700 pence a share, signalling BSkyB may have to improve its bid. The MSCI Emerging Markets Index of 21 countries gained 0.6 percent, rebounding from a 0.4 percent drop earlier today. Russia’s Micex index advanced 2.6 percent as oil, the country’s main export, rose 1.7 percent to $76.36 a barrel in New York amid forecasts that a government report will show U.S. supplies fell for a third week. The Dubai Financial Market General Index dropped 1.3 percent to the lowest closing level since March 2009, after Tristan Cooper , a Moody’s analyst, said in an interview in Abu Dhabi that the emirate’s state-owned companies may have to restructure more debt. The euro strengthened against nine of 16 major currencies, while the dollar weakened against 14. Greek, German Yield Spreads The extra yield, or spread , investors demanded to hold Greek 10-year bonds instead of German bunds, Europe’s benchmark government debt securities, widened to 641 basis points, the highest since May 7, according to Bloomberg generic data. The bund yield was three basis points higher at 2.67 percent. Greek credit swaps signal a 48 percent probability the nation will default within five years. The cost of insuring $10 million of Greece’s bonds for five years jumped $43,500 to $799,000 a year, making the nation’s debt the third most expensive to protect after Venezuela and Argentina, according to CMA DataVision. Standard & Poor’s already cut Greece to below investment grade on April 27. Greece, Spain and Portugal are cutting spending to tackle their budget deficits, which swelled as the recession crimped government tax revenue. Greek Prime Minister George Papandreou pledged to bring the deficit, which increased to 13.6 percent of gross domestic product last year, to 8.1 percent of GDP this year and to under the 3 percent European Union limit in 2014. Spain, Portugal Cuts Spain and Portugal need additional budget cuts to meet deficit targets even as their shortfalls threaten to choke growth and produce a “snowball” effect on their debt levels, according to a draft European Commission document obtained by Bloomberg News. The draft report is dated May 26. Germany’s DAX Index of stocks climbed 0.6 percent even as investor confidence fell to 28.7 this month from 45.8 in May, lower than economists forecast, the ZEW Center for European Economic Research said today. The Reuters/Jefferies CRB Index of commodities climbed 1.1 percent to the highest level since May 13. “I think it’s important that commodity prices firm up here,” said Robert W. Baird’s Bittles. “The firming trend would be helpful in calming fears about a double dip. If they continue to drop that would suggest that the global economy is really losing steam.” To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net ; Esme E. Deprez in New York at edeprez@bloomberg.net .

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Greece Cut Four Steps to Junk by Moody’s on `Risks’ Tied to EU Rescue Plan

June 14, 2010

By Ben Martin and Maria Petrakis June 14 (Bloomberg) — Greece’s credit rating was cut four steps to non-investment grade, or junk, by Moody’s Investors Service, which cited the country’s economic “risks.” The rating was lowered to Ba1 from A3, Moody’s said in a statement today from London. The outlook is stable, it said. Moody’s said the Ba1 rating “incorporates a greater, albeit, low risk of default.” Greece, which already is rated junk by Standard & Poor’s, last month agreed to a package of additional austerity measures to qualify for financial aid from the European Union and the International Monetary Fund. After that 110 billion-euro ($134.5 billion) Greek lifeline failed to contain the fiscal crisis, the EU announced on May 10 a 750 billion-euro backstop to shore up the finances of the region’s weakest economies amid concern governments will struggle to tackle their budget deficits. The turmoil has prompted investors to sell the bonds of Greece, Spain and Portugal and pushed the euro down 15 percent this year. “This doesn’t look good and I expect another round of sell-off,” said Christoph Rieger , co-head of fixed income strategy at Commerzbank AG in Frankfurt, Germany’s second largest bank. “A junk status means it will fall out of some benchmark indices. People who use those benchmarks are likely to sell.” The premium investors demand to hold Greek 10-year government bonds over benchmark German bunds rose eight basis points today to 568 basis points. Tax Increases The government in Athens said the downgrade by Moody’s doesn’t reflect the progress it has made in reining in its deficit. The package announced by Prime Minister George Papandreou includes wage and pension cuts and tax increases that have prompted street protests and strikes, including one in which three people died. “Today’s downgrade of the Greek economy by Moody’s in no way reflects the progress achieved in recent months nor does it reflect the prospects being opened up by fiscal adjustment and the improvement of the country’s competitiveness,” the Greek Finance Ministry said in a statement. “The Greek government remains absolutely committed to the task of fiscal adjustment and improving the country’s growth prospects.” Moody’s said the “macroeconomic and implementation risks” associated with the EU-IMF support program “are substantial and more consistent with a Ba1 rating.” ‘Considerable Uncertainty’ “There is considerable uncertainty surrounding the timing and impact of these measures on the country’s economic growth, particularly in a less supportive global economic environment,” Sarah Carlson , vice president-senior analyst in Moody’s sovereign risk group, said in the statement. “It’s a significant downgrade,” said Kevin Flanagan , a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney. “It’s not a surprise to people, but the timing and magnitude is what has taken Treasuries off the lows and is providing some support.” The yield on the 10-year Treasury note rose three basis points to 3.33 percent. S&P cut Greece’s credit rating to non-investment grade on April 27, the first time a euro member lost its investment-grade since the euro’s 1999 debut. S&P warned that bondholders could recover as little as 30 percent of their initial investment if the country restructures its debt. Moody’s today also downgraded its rating on the city of Athens to Ba1 from A3, citing “the uncertainties arising from current reforms on the city’s finances.” Athens and other Greek municipalities “are unlikely to have enough financial flexibility to permit their credit quality to be stronger than that of the sovereign itself,” it said. To contact the reporter on this story: Ben Martin in London bmartin38@bloomberg.net .

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Euro Volatility Signals Weakness as Confidence Falls

June 14, 2010

By Bo Nielsen June 14 (Bloomberg) — The biggest currency fluctuations since the aftermath of the collapse of Lehman Brothers Holdings Inc. are signaling waning confidence in the economic recovery and prospects for a rebound in the euro. The euro’s 15 percent plunge against the dollar this year sparked a 6 percent loss for bets tied to foreign-exchange price volatility, according to Royal Bank of Scotland Group Plc indexes. That’s the worst performance among four currency strategies tracked by RBS and compares with a 22 percent gain last year, when the global economy rebounded. Europe’s sovereign-debt crisis, the failure of regional leaders to improve sentiment toward the euro and diverging growth rates around the world means elevated volatility for years, according to UBS AG, the world’s second-biggest currency trader. Less predictable foreign-exchange levels may endanger the recovery by driving up short-term rates , even as a weaker euro stimulates exports, the Zurich-based bank said. “The sources of concern won’t go away anytime soon,” said Dale Thomas , head of currencies in London at Insight Investment Management Ltd., which oversees about $144 billion. “We’re defensive and still don’t like the euro.” Thomas said he owns the Swiss franc and the Japanese yen. Goldman Sachs Group Inc. reversed its forecast for the euro last week, saying it will drop to about a seven-year low of $1.15 by year-end as the European debt crisis deepens. The New York-based firm previously predicted $1.35. Royal Bank of Canada said June 7 the euro will depreciate to $1.10 in a year, after earlier forecasting $1.21, on reduced demand for the currency. Market Volatility The euro traded today at $1.2229, down from $1.4321 at the end of 2009. Bloomberg Correlation-Weighted Indexes show it depreciated in seven of the past eight weeks. JPMorgan Chase & Co.’s G7 Volatility Index shows implied volatility for the most-traded currencies, including the dollar and the yen, reached the highest since April 2009 last month. The measure jumped to 16.95, from 10.47 in April, before ending at 13.43 on June 11. Prices swings increased even after the European Union crafted a $1 trillion aid package last month to support the region’s most indebted nations and the European Central Bank began buying bonds of member states to drive down yields. Policy makers in Spain and Portugal now face the risk of labor unrest as they adopt austerity measures to show investors they won’t join Greece in requiring a bailout. ‘Far From Over’ “The collapse of the financial system as we know it is real, and the crisis is far from over,” billionaire George Soros , the founder of Soros Fund Management LLC, said on June 10 at a conference in Vienna. “We have just entered Act II of the drama.” The World Bank in Washington echoed Soros’ concerns, saying some European nations may experience a second economic slowdown if the region fails to manage its debt crisis, threatening countries from Central Asia to Latin America. “We’re expecting that growth in the second quarter is also likely to be disappointing, quite possibly seeing negative growth in several European countries and a double dip in some of these economies,” Andrew Burns , the World Bank’s manager of global macroeconomics, said at a press briefing. Volatility has shaken more than currency markets. The Standard & Poor’s 500 Index fell 8.2 percent last month, the most since a 75 percent surge began in March 2009 through the end of April. ‘Next Phase’ “The first round of currency volatility was driven by concerns about euro-zone sovereign risks,” said Olivier Korber , a currency-derivatives strategist at Societe Generale SA in Paris. “The next phase will come from the divergence in global economic policies and central-bank exits.” While the fiscal crisis will compel the ECB to keep its main interest rate at 1 percent until the second quarter of 2011, the Federal Reserve will raise its key rate in the first three months of the year, according to Bloomberg surveys of economists. Central banks in Australia, Canada, New Zealand and Norway have increased borrowing costs this year to check inflation and prevent asset bubbles. Risks to the global economic outlook have “risen significantly,” International Monetary Fund Deputy Managing Director Naoyuki Shinohara said in Singapore on June 9. “After nearly two years of global economic and financial upheaval, shockwaves are still being felt, as we have seen with recent developments in Europe and the resulting financial market volatility.” Implied Volatility One-month implied volatility for the euro versus the dollar rose to 18.6 percent on May 21, the highest level in 14 months. It also exceeds the 11.4 percent average in the past year. The measure will average closer to 15 percent in the future, said Mansoor Mohi-uddin , the Singapore-based head of currency strategy at UBS. Fifty-nine percent of 275 U.S. companies in a survey by Wayne, Pennsylvania-based SunGard Data Systems Inc. last month said currency fluctuations had a “material” effect on net income, up from 40 percent in the previous study. Volatility resulted in a gain or loss of at least 5 percent in the 12 months ended March 31, the company said. “We now live in a much more uncertain world,” Mohi-uddin said. “The epicenter of the crisis keeps shifting, starting out in the U.S. housing market, then it went to the global financial markets and now it’s in Europe.” Summer Slowdown Volatility will slow this summer as the economic rebound deepens and the funding needs of Greece and Spain abate, easing concern about contagion from the euro-region’s debt crisis, said Henrik Gullberg , a London-based analyst at Deutsche Bank AG, the world’s biggest currency dealer. “If you look at the euro, the price action is becoming increasingly stretched and it’s time for consolidation, which normally entails lower volatility,” he said. “Any renewed rise in volatility by the end of the year will be limited by the continuing economic recovery.” The euro will rebound to $1.30 by year-end as investor concern about sovereign debt shifts to the U.S., he said. Losses from employing a short-volatility strategy , where investors sell options protecting buyers against currency swings, compare with a more than 7 percent gain this year from a trend-following plan, the RBS indexes show. Using a valuation strategy, where investors buy currencies they speculate have fallen too far, would have returned 4.5 percent. Carry Trades Returns from using a carry-trade strategy, where investors sell low-yielding currencies such as the yen to buy higher- yielding counterparts including the Australian dollar, fell 5.7 percent last month, the biggest drop since October 2008, just after Lehman’s collapse, according to the RBS indexes. The yen climbed 5.8 percent against the Aussie and 19 percent versus the euro this year. Foreign-exchange fluctuations are also leading Asian exporters to seek currency controls. Central banks in South Korea, Taiwan and China are selling their own currencies, limiting investment inflows and delaying rate increases. “The sources of volatility are clearly still with us,” said Jerome Booth , who helps oversee about $33 billion as the London-based head of research at Ashmore Investment Management Ltd. “Volatility is likely to go up, not down.” German Exports The 15 percent slide of the euro against the yuan this year makes European goods more competitive in Asia and reduced the need for appreciation of the Chinese currency against the dollar. ING Groep NV said June 10 China won’t end the yuan’s 23- month peg to the dollar for a year. German exports jumped 2.6 percent in the first quarter from the last three months of 2009, the Federal Statistics Office in Wiesbaden said on May 21. While exports declined in April, they surged the most in 18 years in March, the statistics bureau reported on June 8 and May 10. Finance ministers in Europe have indicated they’re in no rush to stem the euro’s slide against the dollar, saying the current level may underpin the recovery. The currency had been “too strong for the economy,” Belgian Finance Minister Didier Reynders said in Luxembourg on June 7. A $1.20 rate “is not so bad for competitiveness.” The euro averaged $1.3576 in March, down from a 2009 high of $1.5144 on Nov. 25. A dollar-based investor who bought the Euro Stoxx 50 Index , which tracks equities in countries sharing the euro, at the start of the year has lost 11 percent on the shares and 25 percent when accounting for currency losses. The S&P 500 dropped 2.1 percent in the period. Goldman Sachs cut its three-month and six-month euro targets to $1.15, from $1.35, saying it was “wrong” in assuming European growth would accelerate, while the U.S. slowed, according to a June 9 report. “European politics remained a major source of uncertainty,” analysts including Thomas Stolper at Goldman Sachs in London wrote. “The likelihood of continued policy mishaps remains very high in the near term and as a result, the euro will likely remain under pressure.” To contact the reporter on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net .

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Euro Volatility Signals Weakness as Confidence Falls

June 14, 2010

By Bo Nielsen June 14 (Bloomberg) — The biggest currency fluctuations since the aftermath of the collapse of Lehman Brothers Holdings Inc. are signaling waning confidence in the economic recovery and prospects for a rebound in the euro. The euro’s 15 percent plunge against the dollar this year sparked a 6 percent loss for bets tied to foreign-exchange price volatility, according to Royal Bank of Scotland Group Plc indexes. That’s the worst performance among four currency strategies tracked by RBS and compares with a 22 percent gain last year, when the global economy rebounded. Europe’s sovereign-debt crisis, the failure of regional leaders to improve sentiment toward the euro and diverging growth rates around the world means elevated volatility for years, according to UBS AG, the world’s second-biggest currency trader. Less predictable foreign-exchange levels may endanger the recovery by driving up short-term rates , even as a weaker euro stimulates exports, the Zurich-based bank said. “The sources of concern won’t go away anytime soon,” said Dale Thomas , head of currencies in London at Insight Investment Management Ltd., which oversees about $144 billion. “We’re defensive and still don’t like the euro.” Thomas said he owns the Swiss franc and the Japanese yen. Goldman Sachs Group Inc. reversed its forecast for the euro last week, saying it will drop to about a seven-year low of $1.15 by year-end as the European debt crisis deepens. The New York-based firm previously predicted $1.35. Royal Bank of Canada said June 7 the euro will depreciate to $1.10 in a year, after earlier forecasting $1.21, on reduced demand for the currency. Market Volatility The euro traded today at $1.2229, down from $1.4321 at the end of 2009. Bloomberg Correlation-Weighted Indexes show it depreciated in seven of the past eight weeks. JPMorgan Chase & Co.’s G7 Volatility Index shows implied volatility for the most-traded currencies, including the dollar and the yen, reached the highest since April 2009 last month. The measure jumped to 16.95, from 10.47 in April, before ending at 13.43 on June 11. Prices swings increased even after the European Union crafted a $1 trillion aid package last month to support the region’s most indebted nations and the European Central Bank began buying bonds of member states to drive down yields. Policy makers in Spain and Portugal now face the risk of labor unrest as they adopt austerity measures to show investors they won’t join Greece in requiring a bailout. ‘Far From Over’ “The collapse of the financial system as we know it is real, and the crisis is far from over,” billionaire George Soros , the founder of Soros Fund Management LLC, said on June 10 at a conference in Vienna. “We have just entered Act II of the drama.” The World Bank in Washington echoed Soros’ concerns, saying some European nations may experience a second economic slowdown if the region fails to manage its debt crisis, threatening countries from Central Asia to Latin America. “We’re expecting that growth in the second quarter is also likely to be disappointing, quite possibly seeing negative growth in several European countries and a double dip in some of these economies,” Andrew Burns , the World Bank’s manager of global macroeconomics, said at a press briefing. Volatility has shaken more than currency markets. The Standard & Poor’s 500 Index fell 8.2 percent last month, the most since a 75 percent surge began in March 2009 through the end of April. ‘Next Phase’ “The first round of currency volatility was driven by concerns about euro-zone sovereign risks,” said Olivier Korber , a currency-derivatives strategist at Societe Generale SA in Paris. “The next phase will come from the divergence in global economic policies and central-bank exits.” While the fiscal crisis will compel the ECB to keep its main interest rate at 1 percent until the second quarter of 2011, the Federal Reserve will raise its key rate in the first three months of the year, according to Bloomberg surveys of economists. Central banks in Australia, Canada, New Zealand and Norway have increased borrowing costs this year to check inflation and prevent asset bubbles. Risks to the global economic outlook have “risen significantly,” International Monetary Fund Deputy Managing Director Naoyuki Shinohara said in Singapore on June 9. “After nearly two years of global economic and financial upheaval, shockwaves are still being felt, as we have seen with recent developments in Europe and the resulting financial market volatility.” Implied Volatility One-month implied volatility for the euro versus the dollar rose to 18.6 percent on May 21, the highest level in 14 months. It also exceeds the 11.4 percent average in the past year. The measure will average closer to 15 percent in the future, said Mansoor Mohi-uddin , the Singapore-based head of currency strategy at UBS. Fifty-nine percent of 275 U.S. companies in a survey by Wayne, Pennsylvania-based SunGard Data Systems Inc. last month said currency fluctuations had a “material” effect on net income, up from 40 percent in the previous study. Volatility resulted in a gain or loss of at least 5 percent in the 12 months ended March 31, the company said. “We now live in a much more uncertain world,” Mohi-uddin said. “The epicenter of the crisis keeps shifting, starting out in the U.S. housing market, then it went to the global financial markets and now it’s in Europe.” Summer Slowdown Volatility will slow this summer as the economic rebound deepens and the funding needs of Greece and Spain abate, easing concern about contagion from the euro-region’s debt crisis, said Henrik Gullberg , a London-based analyst at Deutsche Bank AG, the world’s biggest currency dealer. “If you look at the euro, the price action is becoming increasingly stretched and it’s time for consolidation, which normally entails lower volatility,” he said. “Any renewed rise in volatility by the end of the year will be limited by the continuing economic recovery.” The euro will rebound to $1.30 by year-end as investor concern about sovereign debt shifts to the U.S., he said. Losses from employing a short-volatility strategy , where investors sell options protecting buyers against currency swings, compare with a more than 7 percent gain this year from a trend-following plan, the RBS indexes show. Using a valuation strategy, where investors buy currencies they speculate have fallen too far, would have returned 4.5 percent. Carry Trades Returns from using a carry-trade strategy, where investors sell low-yielding currencies such as the yen to buy higher- yielding counterparts including the Australian dollar, fell 5.7 percent last month, the biggest drop since October 2008, just after Lehman’s collapse, according to the RBS indexes. The yen climbed 5.8 percent against the Aussie and 19 percent versus the euro this year. Foreign-exchange fluctuations are also leading Asian exporters to seek currency controls. Central banks in South Korea, Taiwan and China are selling their own currencies, limiting investment inflows and delaying rate increases. “The sources of volatility are clearly still with us,” said Jerome Booth , who helps oversee about $33 billion as the London-based head of research at Ashmore Investment Management Ltd. “Volatility is likely to go up, not down.” German Exports The 15 percent slide of the euro against the yuan this year makes European goods more competitive in Asia and reduced the need for appreciation of the Chinese currency against the dollar. ING Groep NV said June 10 China won’t end the yuan’s 23- month peg to the dollar for a year. German exports jumped 2.6 percent in the first quarter from the last three months of 2009, the Federal Statistics Office in Wiesbaden said on May 21. While exports declined in April, they surged the most in 18 years in March, the statistics bureau reported on June 8 and May 10. Finance ministers in Europe have indicated they’re in no rush to stem the euro’s slide against the dollar, saying the current level may underpin the recovery. The currency had been “too strong for the economy,” Belgian Finance Minister Didier Reynders said in Luxembourg on June 7. A $1.20 rate “is not so bad for competitiveness.” The euro averaged $1.3576 in March, down from a 2009 high of $1.5144 on Nov. 25. A dollar-based investor who bought the Euro Stoxx 50 Index , which tracks equities in countries sharing the euro, at the start of the year has lost 11 percent on the shares and 25 percent when accounting for currency losses. The S&P 500 dropped 2.1 percent in the period. Goldman Sachs cut its three-month and six-month euro targets to $1.15, from $1.35, saying it was “wrong” in assuming European growth would accelerate, while the U.S. slowed, according to a June 9 report. “European politics remained a major source of uncertainty,” analysts including Thomas Stolper at Goldman Sachs in London wrote. “The likelihood of continued policy mishaps remains very high in the near term and as a result, the euro will likely remain under pressure.” To contact the reporter on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net .

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BP Spill Is `Opportunity in Disguise’ for Rig Makers Keppel, Samsung Heavy

June 14, 2010

By Kyunghee Park June 14 (Bloomberg) — Heightened U.S. scrutiny of offshore drilling after the BP Plc spill, the worst in the nation’s history, may spur oil companies to replace aging rigs with new platforms made in South Korea and Singapore. Rig-makers Samsung Heavy Industries Co. and Keppel Corp. stand to benefit from drillers buying $300 million-plus semi- submersible rigs, which operate in waters as deep as 10,000 feet. About 57 percent of current units are more than 20 years old, according to Merrill Lynch. “The oil spill could be a good opportunity in disguise,” said Cho In Karp , head of research at Heungkuk Securities Co. in Seoul. “Tougher regulations on offshore units could bump up prices and spur demand to replace older ones.” The U.S. has tightened inspections of so-called blowout preventers following the April 20 explosion at the Deepwater Horizon in the Gulf of Mexico that killed 11 people, and President Barack Obama has pledged stronger standards. Tougher rules after the 2002 sinking of the Prestige tanker off Spain forced operators to replace single-hull vessels with costlier double-hull ones, triggering a five-year boom in ship orders. “The BP disaster is going to change the industry like the Spanish spill did,” said Choi Gwang Shik , a Seoul-based Kyobo Securities Co. analyst. “Oil majors will turn to suppliers with good standards of safety and technology to meet new rules.” About 150 countries will ban single-hulled tankers by 2015. Of the 526 very-large crude carriers in service today, 57 are single-hulled, according to Lloyd’s Register-Fairplay data on Bloomberg. Prior to the Exxon Valdez spill in 1989, all supertankers were single-hulled. Catalyze Rig Replacement Stronger drilling safety rules could “catalyze the repair and replacement cycle for older rig fleets,” said Tong Chong Heong , the head of Singapore-based Keppel’s offshore arm. “In the U.S.A., drilling will resume after new safety regulations are adopted and this will also provide opportunities for yards to carry out the needed safety enhancement works.” Keppel, the largest maker of shallow-water rigs, has fallen 12 percent in Singapore trading since the Deepwater Horizon accident, compared with a 6.6 percent decline for the benchmark Straits Times Index. The company was unchanged at S$8.49 as of 11:35 a.m. in Singapore. In Seoul, Samsung Heavy , the world’s biggest builder of deepwater rigs, used in seas more than 10,000 feet deep, rose as much as 0.9 percent to 23,600 won, the highest intraday price in about a month. The rig-maker has dropped 11 percent since April 20, compared with a 1.6 percent retreat for the Kospi Index. Orders Pick-Up Tighter drilling rules may support a revival in offshore orders, which began with the pickup in the global economy and a doubling of oil prices from last year’s low to more than $70 a barrel. About $167 billion may be spent in the deepwater sector through 2015, Douglas-Westwood Ltd., which advises energy companies, said before the BP spill. Singapore-based Keppel has booked contracts worth S$1.7 billion ($1.2 billion) this year, compared with a full-year target of S$2 billion, according to Merrill Lynch. Last year, the company didn’t get any orders for jack-up rigs, which are used in waters less than 500 feet deep and have retractable legs extending to the seafloor. The worldwide fleet of jack-up rigs is an average of about 29 years old, according to Rigzone , a Houston-based company that compiles offshore-industry data. There are 514 jack-up rigs and 222 semi-submersibles worldwide, including ones under construction, according to its website. Keppel Demand Keppel may get orders of as much as S$6 billion a year from 2011 to 2014, helped by replacement demand and contracts in Brazil, Merrill’s Singapore-based analyst Wee Lee Chong said in a June 7 note. The Bank of America Corp. unit restarted coverage of the rig-maker with a “buy” rating . Seoul-based Samsung Heavy is seeking to boost offshore orders almost seven-fold to $4 billion this year. Hyundai Heavy Industries Co. , which built the nine-year-old Deepwater Horizon, expects to increase oil and gas orders 79 percent and may beat its $4.2 billion target, it said in March. Deepwater Horizon was owned by Transocean Ltd. Hyundai Heavy, which is based in Ulsan, South Korea, and Samsung Heavy are both targeting orders in the Gulf of Mexico, the North Sea and Africa. Samsung Heavy also is building floating production and storage facilities for liquefied natural gas projects in Australia and the Timor Sea. Short-Term Demand A six-month U.S. ban on deepwater drilling in the Gulf and curbs on shallow-water operations while the BP spill is investigated may damp demand for platforms in the short term. BP, ConocoPhillips , Petroleo Brasileiro SA , Cobalt International Energy Inc. and Plains Exploration & Production Co. have all put projects in the region or off California on hold. More than 30 deepwater rigs also stopped work because of the ban, and these units could be used in regions such as Brazil, delaying orders there, according to CIMB Group Holdings Bhd. analyst Lim Siew Khee . She downgraded Singapore-listed shipbuilders to “neutral” from “overweight” in a June 9 note. Rig-makers are targeting Brazil as state-owned Petrobras intends to invest $220 billion developing new oilfields, including Franco and Tupi, the largest discovered in the Americas in more than 30 years. The plans include buying 28 locally built drill ships, which are due to enter service by the end of 2018. Hyundai Heavy and Samsung Heavy have bought stakes in Brazilian shipyards because of demand from Petrobras, while Keppel and Singapore-based Sembcorp Marine Ltd. , the No. 2 maker of shallow-water rigs, are adding capacity in the country. Keppel’s Headstart Keppel, which has delivered two floating production platforms to Petrobras and is building a third, may win orders for seven drill ships next quarter, according to Merrill Lynch. “They have a headstart,” said Ashwin Sanketh , an analyst at CLSA Asia Pacific Markets in Singapore. “There’s no point not leveraging on that.” A spokesperson for Rio de Janeiro-based Petrobras declined to comment. Oil companies are developing the Brazilian fields and exploring other sites because world oil demand may rise 2.3 percent by 2015 to 88.4 million barrels a day, according to the International Energy Agency in Paris. “Oil companies still need to find and develop fields because reserves at existing ones are depleting,” said Lee Jae Won , an analyst at Tong Yang Securities Inc. in Seoul. “There’s no way the spill will halt offshore projects.” To contact the reporter on this story: Kyunghee Park in Singapore at kpark3@bloomberg.net .

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Stocks Beating Bonds in Relative Value After S&ampP 500 Earnings Yields Surge

June 14, 2010

By Lynn Thomasson and Alexis Xydias June 14 (Bloomberg) — The biggest decline for global equities in 15 months has left stocks at the cheapest level relative to bonds since the collapse of Lehman Brothers Holdings Inc., a sign that shares in the U.S. and Europe may rally. Standard & Poor’s 500 Index companies yielded 4.4 percentage points more in profit than the average interest rate on investment-grade bonds last week, according to data compiled by Bloomberg and Barclays Plc. The inflation-adjusted spread shows stocks are trading near the lowest prices compared with corporate earnings since November 2008 next to bonds. Cliff Remily at Thornburg Investment Management, which oversees $57 billion, and Barry Knapp of Barclays say the yield gap shows shares are too cheap to pass up with corporate profits forecast to rise the most in 16 years. While bears say the S&P 500 will tumble as Europe’s debt crisis curbs global growth, rising profit yields in stocks over bonds may provide a margin of safety for investors after $6.16 trillion was erased from equity markets worldwide since April 15. “From a valuation perspective, you’ve got a little bit of the best of both worlds,” said Leo Grohowski , who oversees $157 billion as chief investment officer at BNY Mellon Wealth Management in Boston. “Bond yields are still low,” he said. “But earnings estimates are still at levels that are baking in an economic recovery. Something may have to give.” Biggest Drop U.S. stocks are dropping at the fastest rate since the S&P 500 bottomed at a 12-year low in March 2009 as European nations from Spain to Greece struggle to convince investors they can close their budget deficits. Even so, with a market value of $13.3 trillion, American shares exceed the combined worth of Japan, China, the U.K., Canada, France and Switzerland. Analysts have lifted their average 2010 earnings growth forecasts for the S&P 500 to 32 percent from 26 percent at the end of March even as the benchmark measure of U.S. equities retreated 13 percent between April 23 and June 4, according to data compiled by Bloomberg. Futures on the index climbed 0.5 percent today. S&P 500 companies have reported per-share profit during the past year totaling 6.3 percent of the index’s current price, topping the average interest rate of 4.5 percent for investment grade corporate debt in the U.S., data from London-based Barclays show. Profit yields for S&P 500 companies averaged 6 percent since 1954, based on the median compiled by Bloomberg. The spread between the Stoxx Europe 600 Index’s income yield and the payout on 10-year German bunds widened to 4.5 percentage points last week, near the highest since 2008. Lehman Brothers American shares last had an advantage this big two months after New York-based Lehman Brothers collapsed in September 2008, intensifying the worst financial crisis since the Great Depression. Four months later, in March 2009, the S&P 500 began the biggest rally since the 1930s. Equities are also paying out more than government bonds. Ten-year Treasuries yield 5.3 percentage points less than the S&P 500 when adjusted for the annual increase in consumer prices, the most since March 2009. The S&P 500 rose 2.5 percent to 1,091.60 last week, the biggest increase since March, while the Stoxx Europe 600 climbed 2 percent to 249.46 for its third straight gain. Strategists at 13 securities firms say the S&P 500 will rally 16 percent from last week’s close to end the year at 1,268, according to the average estimate in a Bloomberg News survey. A chart pattern known as an inverted head and shoulders, centered around the March 2009 intraday low of 666.79, shows the index may reach about 1,240, data compiled by Bloomberg show. ‘Really Cheap’ “Against other asset classes, equities look really cheap,” said Knapp, head of U.S. equity strategy for Barclays in New York. “It could mean that we’re completely wrong on the inflation outlook, which means it’s going to get much worse, much faster. Or it could mean that stocks are decidedly cheap and people are overly cautious.” Interest rate increases from central banks and faster inflation may erode the yield advantage for equities, proving stock bulls wrong. Policy makers boosted benchmark borrowing costs in Brazil and New Zealand last week. The Federal Reserve’s target interest rate for overnight loans between banks is forecast to rise to 0.5 percent in the first quarter of 2011, from the zero to 0.25 percent range that’s been in place since December 2008, according to the median estimate in a Bloomberg News survey of 65 economists. Fed Chairman Ben S. Bernanke said June 8 that policy makers may have to raise the rate before the economy returns to “full employment.” Greece, Spain While debt investors in Europe punish nations from Greece to Spain for deficit spending by pushing up bond yields, Treasury rates of all maturities have fallen to an average of about 2 percent from 2.75 percent a year ago even as the amount of marketable debt outstanding increased 20 percent to $7.96 trillion. David Macia , a money manager for Credit Andorra’s asset management unit overseeing about $6 billion, says the valuation gap between bonds and stocks will narrow because earnings estimates are too optimistic and benchmark interest rates are at a record low. “If you think profits are going to run at those levels, then the economy will likely be doing much better too, so we should see higher interest rates that will act as a counterbalance,” Macia said in an interview from Andorra La Vella, Andorra. “This is an anomaly created by rates that are too low. It’s a paradox.” Nuclear Power Remily, who manages the $4.86 billion Thornburg Investment Income Builder Fund that’s beaten 98 percent of rivals in the past five years, is finding value in Entergy Corp. , the second- largest operator of U.S. nuclear power plants. Shares of the New Orleans-based company yield 9.4 percent in profit from the past year and 4.5 percent in dividends. That compares with Entergy’s most recently traded corporate bond, its 5 percent note due in 2018 that yielded 4.75 percent on June 10, according to Trace. “It shouldn’t trade at that level of a risk premium because it’s a utility,” Remily said in an interview from Santa Fe, New Mexico. “You’re getting a business that grows slowly, but you’re not paying much for it. In general, we’re finding a lot of good opportunities.” Total SA , Europe’s second-largest oil producer by market value, was the fund’s sixth-biggest holding as of April 30. The shares have fallen 14 percent this year, pushing its earnings yield to 10 percent and dividend payout to 5.9 percent. The 3.125 note from the Paris-based company due in 2015 yields 2.85 percent, Bloomberg data show. Better Odds Fujitsu Ltd. , Japan’s biggest computer-services provider, has an earnings yield of 8.1 percent and pays a dividend of 5 yen a share twice a year. Tokyo-based Fujitsu’s 3 percent notes due in 2018 yield 1.18 percent, according to Bloomberg prices. “If earnings are not going to fall apart, equities are priced very attractively to bonds,” said Tristan Hanson , manager of asset allocation and strategy in Jersey, Channel Islands, at Ashburton Ltd., which oversees $1.7 billion. “The world’s not without risk, but the odds have moved in your favor.” To contact the reporters on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net ; Alexis Xydias in London at axydias@bloomberg.net .

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Stocks Beating Bonds in Relative Value After S&ampP 500 Earnings Yields Surge

June 14, 2010

By Lynn Thomasson and Alexis Xydias June 14 (Bloomberg) — The biggest decline for global equities in 15 months has left stocks at the cheapest level relative to bonds since the collapse of Lehman Brothers Holdings Inc., a sign that shares in the U.S. and Europe may rally. Standard & Poor’s 500 Index companies yielded 4.4 percentage points more in profit than the average interest rate on investment-grade bonds last week, according to data compiled by Bloomberg and Barclays Plc. The inflation-adjusted spread shows stocks are trading near the lowest prices compared with corporate earnings since November 2008 next to bonds. Cliff Remily at Thornburg Investment Management, which oversees $57 billion, and Barry Knapp of Barclays say the yield gap shows shares are too cheap to pass up with corporate profits forecast to rise the most in 16 years. While bears say the S&P 500 will tumble as Europe’s debt crisis curbs global growth, rising profit yields in stocks over bonds may provide a margin of safety for investors after $6.16 trillion was erased from equity markets worldwide since April 15. “From a valuation perspective, you’ve got a little bit of the best of both worlds,” said Leo Grohowski , who oversees $157 billion as chief investment officer at BNY Mellon Wealth Management in Boston. “Bond yields are still low,” he said. “But earnings estimates are still at levels that are baking in an economic recovery. Something may have to give.” Biggest Drop U.S. stocks are dropping at the fastest rate since the S&P 500 bottomed at a 12-year low in March 2009 as European nations from Spain to Greece struggle to convince investors they can close their budget deficits. Even so, with a market value of $13.3 trillion, American shares exceed the combined worth of Japan, China, the U.K., Canada, France and Switzerland. Analysts have lifted their average 2010 earnings growth forecasts for the S&P 500 to 32 percent from 26 percent at the end of March even as the benchmark measure of U.S. equities retreated 13 percent between April 23 and June 4, according to data compiled by Bloomberg. Futures on the index climbed 0.5 percent today. S&P 500 companies have reported per-share profit during the past year totaling 6.3 percent of the index’s current price, topping the average interest rate of 4.5 percent for investment grade corporate debt in the U.S., data from London-based Barclays show. Profit yields for S&P 500 companies averaged 6 percent since 1954, based on the median compiled by Bloomberg. The spread between the Stoxx Europe 600 Index’s income yield and the payout on 10-year German bunds widened to 4.5 percentage points last week, near the highest since 2008. Lehman Brothers American shares last had an advantage this big two months after New York-based Lehman Brothers collapsed in September 2008, intensifying the worst financial crisis since the Great Depression. Four months later, in March 2009, the S&P 500 began the biggest rally since the 1930s. Equities are also paying out more than government bonds. Ten-year Treasuries yield 5.3 percentage points less than the S&P 500 when adjusted for the annual increase in consumer prices, the most since March 2009. The S&P 500 rose 2.5 percent to 1,091.60 last week, the biggest increase since March, while the Stoxx Europe 600 climbed 2 percent to 249.46 for its third straight gain. Strategists at 13 securities firms say the S&P 500 will rally 16 percent from last week’s close to end the year at 1,268, according to the average estimate in a Bloomberg News survey. A chart pattern known as an inverted head and shoulders, centered around the March 2009 intraday low of 666.79, shows the index may reach about 1,240, data compiled by Bloomberg show. ‘Really Cheap’ “Against other asset classes, equities look really cheap,” said Knapp, head of U.S. equity strategy for Barclays in New York. “It could mean that we’re completely wrong on the inflation outlook, which means it’s going to get much worse, much faster. Or it could mean that stocks are decidedly cheap and people are overly cautious.” Interest rate increases from central banks and faster inflation may erode the yield advantage for equities, proving stock bulls wrong. Policy makers boosted benchmark borrowing costs in Brazil and New Zealand last week. The Federal Reserve’s target interest rate for overnight loans between banks is forecast to rise to 0.5 percent in the first quarter of 2011, from the zero to 0.25 percent range that’s been in place since December 2008, according to the median estimate in a Bloomberg News survey of 65 economists. Fed Chairman Ben S. Bernanke said June 8 that policy makers may have to raise the rate before the economy returns to “full employment.” Greece, Spain While debt investors in Europe punish nations from Greece to Spain for deficit spending by pushing up bond yields, Treasury rates of all maturities have fallen to an average of about 2 percent from 2.75 percent a year ago even as the amount of marketable debt outstanding increased 20 percent to $7.96 trillion. David Macia , a money manager for Credit Andorra’s asset management unit overseeing about $6 billion, says the valuation gap between bonds and stocks will narrow because earnings estimates are too optimistic and benchmark interest rates are at a record low. “If you think profits are going to run at those levels, then the economy will likely be doing much better too, so we should see higher interest rates that will act as a counterbalance,” Macia said in an interview from Andorra La Vella, Andorra. “This is an anomaly created by rates that are too low. It’s a paradox.” Nuclear Power Remily, who manages the $4.86 billion Thornburg Investment Income Builder Fund that’s beaten 98 percent of rivals in the past five years, is finding value in Entergy Corp. , the second- largest operator of U.S. nuclear power plants. Shares of the New Orleans-based company yield 9.4 percent in profit from the past year and 4.5 percent in dividends. That compares with Entergy’s most recently traded corporate bond, its 5 percent note due in 2018 that yielded 4.75 percent on June 10, according to Trace. “It shouldn’t trade at that level of a risk premium because it’s a utility,” Remily said in an interview from Santa Fe, New Mexico. “You’re getting a business that grows slowly, but you’re not paying much for it. In general, we’re finding a lot of good opportunities.” Total SA , Europe’s second-largest oil producer by market value, was the fund’s sixth-biggest holding as of April 30. The shares have fallen 14 percent this year, pushing its earnings yield to 10 percent and dividend payout to 5.9 percent. The 3.125 note from the Paris-based company due in 2015 yields 2.85 percent, Bloomberg data show. Better Odds Fujitsu Ltd. , Japan’s biggest computer-services provider, has an earnings yield of 8.1 percent and pays a dividend of 5 yen a share twice a year. Tokyo-based Fujitsu’s 3 percent notes due in 2018 yield 1.18 percent, according to Bloomberg prices. “If earnings are not going to fall apart, equities are priced very attractively to bonds,” said Tristan Hanson , manager of asset allocation and strategy in Jersey, Channel Islands, at Ashburton Ltd., which oversees $1.7 billion. “The world’s not without risk, but the odds have moved in your favor.” To contact the reporters on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net ; Alexis Xydias in London at axydias@bloomberg.net .

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Europe’s Debt Crisis Causing Investors to Ignore Positive News, BIS Says

June 13, 2010

By Emma Ross-Thomas June 14 (Bloomberg) — Europe’s sovereign debt crisis has created an environment in which investors are dwelling on negative developments even when data show economic recovery, the Bank for International Settlements said. “Against this background of heightened uncertainty, market participants focused on the deteriorating financial-market conditions while often ignoring positive macroeconomic news,” the Basel, Switzerland-based BIS said in its quarterly report yesterday. “The April jobs report, for example, saw U.S. non- farm payrolls increase by 100,000 more jobs than expected to 290,000, but the S&P 500 Index fell by 1.5 percent on the day.” The debt crisis sent the euro to a four-year low against the dollar on June 7 and has wiped out more than $4 trillion from global stock markets this year. European leaders unveiled a 750 billion-euro ($910 billion) rescue mechanism last month to stem contagion from Greece, initially reversing a surge in the risk premium on Spanish and Portuguese bonds. “The relief in markets turned out to be temporary, however, as investor confidence soon deteriorated on worries about the possible interactions between public debt and growth,” the BIS said. As investors’ attention turned to growth prospects on the periphery of the euro region and Fitch Ratings stripped Spain of its AAA rating, citing a sluggish growth outlook, the extra yield investors demand to hold Spanish debt rather than German equivalents rose to a euro-era high of 216 basis points on June 8, easing to 188 basis points on June 11. The differential on Portuguese debt stood at 255 basis points on June 11. Investor Concerns “Investors questioned the robustness of global growth due to a number of factors in recent weeks, including the risk that the surge of public debt could derail the economic recovery and growing concerns that the financial system was more fragile than previously thought,” BIS Economic Adviser Stephen Cecchetti , head of the monetary and economic department, told journalists in a June 11 conference call. Some European nations risk a “double dip” economic slowdown if the region fails to manage its debt crisis, the World Bank said June 9. “If markets lost confidence in the credibility of efforts to put policy on a sustainable path, global growth could be significantly impaired and a double-dip recession could not be excluded,” the Washington-based lender said in its report. To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

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Flemish Nationalists’ `Earthquake’ Victory May Reshape Splintered Belgium

June 13, 2010

By John Martens June 14 (Bloomberg) — Flemish nationalists took the lead in Belgium ’s general elections, setting up coalition talks with French-speaking Socialists who face strong demands from Dutch- speaking voters to give more powers to the nation’s regions. Bart De Wever ’s New-Flemish Alliance, or N-VA, won 27 of the 150 parliamentary seats in yesterday’s elections, a projection by the Interior Ministry showed. Elio Di Rupo ’s Socialist Party got 26 seats, advancing from 20 three years ago. The Christian Democrats of outgoing Prime Minister Yves Leterme face a loss of six seats to 17, coming in fourth after the French-speaking Liberals, who are projected to drop to 18 seats from 23. “It’s truly an earthquake,” Mark Eyskens , a Christian Democrat who served in Belgian governments from 1976 to 1992 and was prime minister in 1981-82, said on RTL-TVi television. “The question is whether De Wever will be able to make a compromise acceptable for the rest of his party.” Pulling together a coalition may take months as the N-VA, made up of conservatives who say Belgium will eventually “evaporate,” seeks an accord to give more powers to the regions and hold them fiscally accountable as part of a broader coalition agreement. The country, bearing the third-highest debt relative to gross domestic product in the euro region, needs to cut spending or raise taxes by 8.7 billion euros ($10.5 billion) in the next two years to lower its budget deficit to less than 3 percent of GDP. Talk of Breakup The national elections were held a year earlier than scheduled after Leterme’s government collapsed in April because of an impasse over a voting district encompassing Brussels, the bilingual capital that’s home to the European Union’s main institutions and the North Atlantic Treaty Organization. The deadlock resulted from tensions between Dutch speakers in the north and French speakers in the south that lead to occasional talk of a breakup. De Wever, 39, reached out to Di Rupo, 58, last night, reiterating on RTL-TVi that he’s prepared to “sacrifice” the post of prime minister to help advance an agreement that will give Belgium’s regions the upper hand over the central government. A six-party coalition of N-VA, CD&V, sp.a and PS, cdH, Ecolo, reflecting the ruling regional governments on both sides of the linguistic divide, would have a two-third majority needed to make changes to Belgium’s constitution, according to the projection based on 97 percent of votes counted. Such an accord would mark the sixth major overhaul of Belgium’s governing structure since 1970. The nation has been a federal state since 1993. Money Transfers Wallonia, where 3.46 million people live, receives 6.06 billion euros in transfers annually, with more than 96 percent of those subsidies coming from Flanders, according to a National Bank study , based on 2005 figures. That has led to resentment among the 6.16 million Flemish that their taxes are used to prop up the south’s economy, where GDP per capita averages 71 percent of economic output in Flanders, according to National Bank data . “Our responsibility will be equal to our election result,” Di Rupo told his supporters in Brussels. “We have to interpret the results in the north of the country as a strong signal. To stabilize the country, this message should be heard.” Should Di Rupo, a son of Italian immigrants, become the next prime minister, he would be the first French speaker from Wallonia in the job since Edmond Leburton in 1974. King’s Role After talks with party leaders, King Albert II will appoint a special envoy known as an informateur to investigate possible coalitions. The informateur will report back to the monarch and he will then name a formateur, usually the prospective prime minister, to form a government. Leterme, 49, whose five-party coalition took a record nine months to form and holds office in a caretaker role, may host most of Belgium’s six-month EU presidency, taking over from Spain on July 1. With public debt projected to surpass gross domestic product in 2011 after spending more than 20 billion euros on bank bailouts, Belgium risks becoming “Greece on the North Sea,” Umicore SA Chairman Thomas Leysen , head of the national employers’ association, said in January. The yield premium investors demand to hold Belgian 10-year bonds rather than German debt of similar maturity rose to the highest level since March 2009 last week, reaching 107.6 basis points on June 8 before retreating to 79.4 on June 11. Bond Returns Even as the Belgian treasury paid a premium of almost a full percentage point to sell 10-year debt on June 7, the 3.52 percent yield on the securities was the lowest in more than 4 1/2 years for a 10-year Belgian bond issue. Belgian bonds returned 4.3 percent so far this year, less than a 7 percent return on German debt and a 5.7 percent gain for French government bonds, according to Bloomberg/EFFAS data. Greek sovereign debt has lost 11 percent since the start of the year. The budget deficit will narrow to 4.8 percent of GDP this year from 5.9 percent in 2009, the Leterme-led government forecast. Balancing the budget will require 22 billion euros of spending cuts or tax increases in the five years through 2015, according to May 19 projections from the Federal Planning Bureau . To contact the reporter on this story: John Martens in Brussels at jmartens1@bloomberg.net

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Europe Banks Loan Greece, Ireland, Portugal, Spain $254 Billion, BIS Says

June 13, 2010

By Gavin Finch June 13 (Bloomberg) — European banks had $254 billion of loans to the governments of Greece, Ireland, Portugal and Spain at the end of 2009, according to figures from the Bank for International Settlements . That represents only 16 percent of the banks’ overall exposure to the four countries of $1.58 trillion, which includes loans to individuals and companies, the Basel, Switzerland-based BIS said in its latest quarterly review. French and German banks had $493 billion and $465 billion respectively at risk in the four countries, accounting for 61 percent of all euro area lenders’ exposure, the BIS said. “Government debt accounted for a smaller part of euro area banks’ exposures to the countries facing market pressures than claims on the private sector,” the BIS said in the report. “French and German banks were particularly exposed to the residents of Greece, Ireland, Portugal and Spain.” The Bloomberg European Banks and Financial Services Index of 52 lenders has dropped 10 percent in the past month on concern the government bonds held by the lenders will plunge in value, sparking further writedowns. A $1 trillion loan package from European policy makers last month failed to erase concern that Greece’s debt crisis will spread. Banks in the region had $737 billion at stake in Spain, $402 billion in Ireland, $244 billion in Portugal and $206 billion in Greece, the BIS said. To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

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Middle East Shares Advance, Paced by Israel, Qatar, Buoyed by Global Rally

June 13, 2010

By Zahra Hankir and David Wainer June 13 (Bloomberg) — Israel and Qatar shares led Middle East markets higher after global stocks rallied as concern about Europe’s debt crisis eased and the U.S. Federal Reserve said the American economic recovery is intact. VeriFone Systems Inc. jumped the most in more than nine months after the Israeli provider of electronic payment technology was raised to “strong buy” at Raymond James & Associates Inc. Israel’s TA-25 Index increased 1.2 percent to 1,103.36, the highest level this month. In the Gulf, Doha’s QE Index gained 1 percent to 6,920.48, the highest level since May 24 and in North Africa, Egypt’s EGX 30 Index gained 0.9 percent. “Local markets tend to follow global trends,” said Ziad Dabbas , a financial analyst at National Bank of Abu Dhabi PJSC , the United Arab Emirates’ second-largest lender by assets. “Today’s movements are following positive global closes toward the end of last week, as they improved investor sentiment.” U.S. stocks rose last week, pushing the Standard & Poor’s 500 Index to the biggest weekly advance since March, after Federal Reserve Chairman Ben S. Bernanke said the economic recovery is intact and commodity prices gained. European stocks gained for a third week as economic reports and a successful government bond sale in Spain boosted investors’ confidence. Bonds Advance Dubai’s DFM General Index rose 0.9 percent, the most since June 2, to 1,528.4. Arabtec Holding PJSC , the United Arab Emirates’ biggest builder, climbed 2.1 percent, the most in almost a week, to 1.97 dirhams. Ziad Makhzoumi , the company’s chief financial officer, said in Beirut on June 10 he expects cash flow to improve now that the Dubai government is helping developer Nakheel PJSC pay its bills to contractors. VeriFone rose 7.7 percent to 75.30 shekels. Raymond James & Associates set the 12-month price estimate for the company at $25 per share. The shares closed at $20.06 on June 11 in New York. Abu Dhabi’s ADX General Index advanced 0.6 percent and Oman’s index rose 0.3 percent, gaining for a fourth day. The Kuwait Stock Exchange Index increased less than 0.1 percent while Bahrain’s gauge fell 0.2 percent. Saudi Arabia’s Tadawul All Share index slipped 0.3 percent after gaining 2.7 percent yesterday. Israeli government bonds advanced with the benchmark Mimshal Shiklit note due February 2019 increasing 0.11 shekel to 111.96. The yield fell one basis point to 4.55 percent. The shekel traded at 3.8532 per dollar on June 11. — With assistance from Ronit Goodman in Tel Aviv. Editors: Susan Lerner , Shanthy Nambiar To contact the reporters on this story: Zahra Hankir in Dubai at zhankir@bloomberg.net or David Wainer in Tel Aviv at dwainer1@bloomberg.net

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Mideast Shares Rise, Led by Egypt as Europe Concerns Ease Orascom Climbs

June 13, 2010

By Zahra Hankir and David Wainer June 13 (Bloomberg) — Egypt shares helped lead Middle East markets higher after global stocks rallied as concerns about Europe’s debt crisis eased and the U.S. Federal Reserve said the economic recovery is intact. Orascom Telecom Holding SAE , the largest mobile-phone company in the Middle East by the number of subscribers, gained 2.3 percent on media reports it’s in talks to sell its African units, excluding Algeria. Egypt’s EGX 30 Index gained 1.9 percent, the most since June 3, to 6,360.37 as of 11:15 a.m. in Cairo. Israel’s TA-25 Index increased 1.4 percent and Abu Dhabi’s ADX General Index rose 1.1 percent. “Local markets tend to follow global trends,” said Ziad Dabbas , financial analyst at National Bank of Abu Dhabi PJSC , the United Arab Emirates’ second-largest lender by assets. “Today’s movements are following positive global closes toward the end of last week, as they improved investor sentiment.” U.S. stocks rose last week, pushing the Standard & Poor’s 500 Index to the biggest weekly advance since March, after Federal Reserve Chairman Ben S. Bernanke said the economic recovery is intact and commodity prices gained. European stocks gained for a third week as economic reports and a successful government bond sale in Spain boosted investors’ confidence. The DFM General Index rose 0.9 percent, the most since June 3, to 1,527.06. Arabtec Holding PJSC , the U.A.E.’s biggest builder, climbed 1.6 percent, the most in a week, to 1.96 dirhams. Ziad Makhzoumi , the company’s chief financial officer, said in Beirut on June 10 he expects cash flow to improve now that the Dubai government is helping developer Nakheel PJSC pay its bills to contractors. Oman’s index rose 0.6 percent, gaining for a fourth day. The Kuwait Stock Exchange Index increased less than 0.1 percent while Bahrain’s gauge fell 0.5 percent. Qatar’s QE Index climbed 0.6 percent and Saudi Arabia’s market lost 0.3 percent after gaining 2.7 percent yesterday. Israeli government bonds were little changed with the benchmark Mimshal Shiklit note due February 2019 increasing 0.11 shekel to 111.96. The yield fell one basis point to 4.55 percent. The shekel was little changed on June 11, adding less than 0.1 percent to 3.8532 per dollar. To contact the reporters on this story: Zahra Hankir in Dubai at zhankir@bloomberg.net or David Wainer in Tel Aviv at dwainer1@bloomberg.net

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Resolution Says It’s in Talks to Buy Axa’s U.K. Life Insurance Business

June 11, 2010

By Jason Scott and Mark Rohner June 12 (Bloomberg) — Resolution Ltd. , the U.K. buyout firm founded by Clive Cowdery , said it’s in talks to buy Axa SA’s British operations as part of a plan to build a life insurer worth about 10 billion pounds ($14.6 billion). “This transaction would result in the acquisition by Resolution of the majority of Axa ’s life assurance operations in the U.K.,” Guernsey, Channel Islands-based Resolution said in an e-mailed statement yesterday, without giving a monetary figure on a potential deal. The Telegraph reported yesterday that Cowdery was offering 2.5 billion pounds for the business. The bid is part of Chief Executive Officer John Tiner’s plan to increase Resolution’s British life insurance holdings over 18 months as larger financial institutions, stung by recession, offload assets. Resolution, which completed an initial public offering in December 2008, hasn’t added to the purchase of Friends Provident, which was agreed in August last year. Resolution closed 0.2 pence, or 0.33 percent, lower at 60.7 pence in London trading yesterday, valuing the firm at 1.46 billion pounds. Axa rose 2.3 percent to 13.115 euros in Paris trading, giving the company a market value of 30 billion euros ($36.3 billion). Tiner’s Strategy Tiner , who served as CEO of the Financial Services Authority from 2003 to 2007, said in March he aims to make two or more purchases, adding to the acquisition of Friends Provident. After creating a life insurer worth 10 billion pounds, Tiner intends to sell it by 2013, he said. Resolution intends to consolidate the U.K. businesses of Axa, France’s biggest insurer, with its Friends Provident operations, yesterday’s statement said. There was no certainty of a sale, it said. “The combination of the two businesses would create one of the U.K.’s largest providers of protection products and group pensions services,” Resolution said. A purchase would include Axa’s British businesses in protection and annuities and its group pensions business, it said. Resolution’s 2009 full-year net income was 1.16 billion pounds, compared with a 1 million-pound loss in 2008. Its first-quarter insurance sales rose 19 percent to 178 million pounds, as record low interest rates push British savers, cautious due to the recession , to seek higher returns in pension and savings products rather than hold their assets in cash. Better Days Standard Life Plc , St James’s Place Plc and Legal & General Group Plc, which also sell life insurance in the U.K., all posted higher-than-expected sales in the first quarter. Friends Provident’s so-called embedded value, a measure used by insurers to measure the worth of future payments from policyholders, is about 3.1 billion pounds, Tiner said in March. Friends Provident’s operating profit before tax was 272 million pounds in 2009, compared with a 246 million-pound loss a year earlier. Axa’s first-quarter revenue rose 1.1 percent, with Chief Executive Officer Henri de Castries saying Europe’s second- largest insurer by market value was “focused on further improving the profitability of our operations.” Under de Castries’s tenure as CEO, Axa sold its Donaldson, Lufkin & Jenrette Inc. investment bank to Credit Suisse Group AG in 2000 for $13.4 billion, while the French insurer continued to expand through acquisitions. In 2006, Axa bought Credit Suisse’s Winterthur unit for 7.9 billion euros to gain a leading position in the Swiss insurance market and 13 million clients in 17 countries from Spain to China. Axa’s net income in 2009 rose to 3.61 billion euros from 923 million euros a year earlier. To contact the reporter on this story: Jason Scott in Perth at jscott14@bloomberg.net ; Mark Rohner in Washington at mrohner@bloomberg.net

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Banks With State Debt Ignore Not-If-But-When Default

June 11, 2010

By Niklas Magnusson, Elena Logutenkova and Aaron Kirchfeld June 11 (Bloomberg) — European banking shares indicate a Greek debt default may be just a matter of time. Investors have already pushed down financial stocks enough to imply the “erosion” in book value that may result from losses tied to a sovereign debt restructuring, said Dirk Hoffmann-Becking , an analyst at Sanford C. Bernstein in London. A Bloomberg index of European financial firms dropped as much as 22 percent since April 15 to the lowest level since July. A $1 trillion aid package from the European Union and International Monetary Fund may delay a Greek default and give Spain, Italy and possibly Portugal time to get their finances in shape, averting a wider contagion, analysts said. Greece’s debt burden is likely to prove unsustainable, said Thomas Mayer , Deutsche Bank AG’s London-based chief economist. “Deficit reduction alone doesn’t solve the debt issue,” Mayer said in a telephone interview. He estimates Greece’s debt will rise to 150 percent of gross domestic product following the country’s austerity program, from 120 percent. “Hardly anyone I know believes they can carry it out and still not restructure. This is basically the expectation across all asset classes.” Writedowns stemming from a Greek default would total almost $200 billion, estimates Jon Peace , an analyst at Nomura Holdings Inc. in London. Banks globally could lose as much as $900 billion in a worst-case scenario where Greece, Ireland, Italy, Portugal and Spain all have to restructure their debt, Nomura estimates. ‘Prisoner’s Dilemma’ Banks holding sovereign debt are faced with a “prisoner’s dilemma,” said Hoffmann-Becking, referring to a mathematical theory that seeks to explain the behavior of two parties that can choose to either cooperate or pursue their own interests. “From an individual bank’s perspective, it would be great to get rid of the sovereign debt,” Hoffmann-Becking said by telephone. “However, if everybody did it you’d have a rapid collapse of the government bond market and then you’d have the default. And in the default, the fact that you have no sovereign debt actually doesn’t help you at all.” German financial companies including Deutsche Bank agreed in May to refinance maturing Greek debt and maintain existing credit lines to Greece and its lenders for the next three years. French banks made a similar pledge. A majority of European banks haven’t tendered their Greek sovereign debt to the European Central Bank, according to an informal survey by Morgan Stanley analysts. One reason may be that some banks bought their Greek bonds when they were trading at 20 percent above par, meaning a sale to the ECB would prompt a loss, Morgan Stanley’s London-based analyst Huw van Steenis said in a note to clients on June 9. Most See Default Deutsche Bank Chief Executive Officer Josef Ackermann said May 14 that Greece may not be able to repay its debt in full, adding that Spain and Italy are “strong enough” to service their debt following the EU aid plan, while this may be “slightly more difficult” for Portugal. Global investors have little confidence in Greece’s ability to solve its debt crisis, with 73 percent calling a default by the country likely, according to a quarterly poll of investors and analysts who are Bloomberg subscribers. Some 35 percent of those surveyed said a default by Portugal was likely, while more than a quarter said the same about Spain. A Spanish or Italian cancellation of payments would dwarf a potential Greek default. European banks’ claims on Spain totaled $832 billion at the end of 2009, while those on Italy stood at $1.02 trillion, according to figures from the Bank for International Settlements in Basel, Switzerland. That compares with claims on Greece and Portugal of $193 billion and $240 billion, respectively. No Capital Needed EU banks could absorb losses on government and private debt in Greece, Portugal, Spain and Ireland without having to raise funds, Moody’s Investors Service said in a report today, after surveying more than 30 lenders in 10 nations. The value of private loans such as mortgages and business credit is greater than that tied to government debt, Moody’s said, adding that any losses on private loans would be absorbed over several years. “Based on our stress test, we believe that these banks would be able to absorb the losses that could arise from such exposures without requiring capital increases — even under worse-than-expected conditions,” the credit rating company said. While investors may have priced in the immediate costs of a Greek and possibly even a Portuguese default, they haven’t reckoned on the wider impact of such an event, analysts said. Valuing ‘Armageddon’ “If Greece defaulted in the near future, the ramifications wouldn’t just be banks holding Greek debt, but also Spain and Portugal and Italian bonds — and how do you value Armageddon?” said Gary Jenkins , head of credit research at Evolution Securities Ltd. in London. “The idea is to postpone reality. If it had happened in a disorderly manner in May, it would’ve been such a quick event that it would have been very difficult for authorities to control the reactions on Portugal and Spain.” Some analysts say the recent declines among European banks represent a buying opportunity on the grounds that a Greek default would be manageable and that Spain and Italy won’t have to restructure their debt. Nomura’s Peace said in a June 2 note that European bank shares are “attractive.” ‘Clear Message’ “The stocks are way too deep — I don’t think we’ll see restructuring and sovereign defaults,” said Dirk Becker , a Frankfurt-based analyst at Kepler Capital Markets. “Everything depends on making a bet on whether we’ll see a restructuring or a default or not, but the EU delivered a clear message and the IMF is in the boat and we have austerity measures.” Greece’s public finances began rattling investors late last year, when the country more than tripled its budget deficit forecast for 2009. Stock markets fell, credit default swaps to protect against a sovereign default rose, and borrowing costs climbed for indebted nations such as Greece, Portugal and Spain, as well as European banks. The euro dropped to a four-year low of $1.1876 on June 7. New York University Professor Nouriel Roubini said June 4 that an orderly restructuring of Greece’s public debt in the next 12 months may be necessary to avoid “massive losses” for the financial system. Orderly Plan He recommended stretching the maturities of the country’s debt by five to 10 years, capping the interest rate at a below- market level and maintaining the face value of the bonds at par to limit writedowns for banks. Further declines in the euro would also help sustain Europe’s economies, he said. Roubini, who predicted the global financial crisis, also remained gloomy on equity markets heading into a rally that lifted the Standard & Poor’s 500 Index by 80 percent last year. European financial firms trade at 0.85 times book value, compared with 1.06 times on April 15 and more than two times book value at the end of 2006, based on the 52-company Bloomberg Europe Banks and Insurance Index . Banks in Europe, on average, are pricing in an implied return on equity of 9.5 percent, below a “normalized” ROE of 12.5 percent, Hoffmann-Becking said in a May 26 note. Return on equity is a measure of profitability. The expectation for an erosion of book value is “particularly pronounced” for French lenders, Hoffmann-Becking said. Paris-based Credit Agricole SA and Societe Generale SA trade at an implied return-on-equity of 5.8 percent and 6.9 percent, respectively, he said in the note. Societe Generale published an after-tax ROE of 11.1 percent in the first quarter, while Credit Agricole didn’t report a figure. Priced In Both banks have subsidiaries in Greece. Credit Agricole’s Emporiki Bank of Greece SA had 22 billion euros ($26.6 billion) of loans at the end of March, according to company reports. Societe Generale owns 54 percent of Greece’s Geniki Bank SA, which had 4 billion euros of loans and advances at the end of the quarter, according to the Athens-based lender’s website. “If you look at some of the names like Credit Agricole or Societe Generale, they’re trading well below tangible book and so you’re looking at some 20 percent to 25 percent cuts to equity,” Hoffmann-Becking said in a telephone interview. “I think that certainly covers the primary effects of a potential writedown on Greek, Irish or Portuguese debt. The thing that we may not have priced in, in full, is secondary and tertiary effects.” French banks had claims on Greece of $78.8 billion at the end of 2009, the most of any country, according to BIS figures. In Germany, where banks’ Greek claims totaled $45 billion, the risks probably lie mostly with Landesbanks and government-owned lenders that aren’t publicly traded, Hoffmann-Becking said. To contact the reporters on this story: Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net Elena Logutenkova in Zurich at elogutenkova@bloomberg.net Niklas Magnusson in Stockholm at nmagnusson1@bloomberg.net

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European Stocks Climb on Global Growth BHP, Mining Shares Jump

June 10, 2010

By Sarah Jones June 10 (Bloomberg) — European stocks rose for a second day, led by a rally in mining companies, as economic reports from China to Australia reassured investors the global recovery is intact. Shares of BP Plc pared some losses. BHP Billiton Ltd., the world’s largest mining company, and Rio Tinto Group jumped at least 3.2 percent after a report that Australia will announce “major changes” to its proposed mining tax. Daimler AG led automakers higher after the company forecast Mercedes-Benz sales will advance at twice the rate of the overall market in 2010. BP fell 6.7 percent, paring losses of as much as 12 percent, amid growing pressure over its failure to halt the worst oil spill in U.S. history. The benchmark Stoxx Europe 600 Index climbed 1.6 percent to 248.46. The gauge is still down 8.7 percent from this year’s high on April 15 amid continuing concern that European nations will struggle to fund their budget deficits. “We are still seeing global growth,” said Colin Mclean , who helps manage 650 million pounds ($944 million) at SVM Asset Management Ltd. in Edinburgh. “China has brought down its growth rate and the U.S. is still growing, which are powerful drivers for the global economy. BP has also rallied a bit from the U.S. close and we are seeing some institutions switch from Royal Dutch Shell Plc to BP.” ECB Meeting European Central Bank President Jean-Claude Trichet said interest rates in the 16-nation euro region are “appropriate,” indicating he sees no immediate need to cut borrowing costs any time soon. He made the comments at a press conference in Frankfurt today after the ECB left its benchmark rate at a record low of 1 percent. The ECB will extend its offerings of unlimited cash and keep buying government bonds for now as it tries to ease tensions in money markets and fight the European debt crisis, Trichet said. Germany’s highest constitutional court rejected an attempt by a lawmaker who sought an emergency order blocking the nation from participating in the euro-area rescue fund. The Bank of England kept its bond-stimulus program in place and left its benchmark interest rate at a record low to aid the economy as Prime Minister David Cameron prepares the biggest budget cuts since at least the early 1980s. Stocks climbed today after Australian jobs and Japan’s economic growth beat economist estimates, easing concern that Europe’s debt crisis will curb growth around the world. A separate report showed China’s exports jumped 48.5 percent in May from a year earlier, the biggest gain in more than six years. National benchmark indexes advanced in all of the 18 western European markets except Luxembourg. The U.K.’s FTSE 100 Index rose 0.9 percent. Germany’s DAX Index climbed 1.2 percent and France’s CAC 40 Index increased 2 percent. Spanish Bonds Spain’s IBEX Index surged 3.7 percent as demand for the nation’s government debt rose. Spain sold 3.9 billion euros ($4.7 billion) of a new 2013 note, with demand increasing as yields driven higher by the region’s debt crisis lured buyers. Investors bid to take up 2.1 times the amount of the securities on offer. That compared with a so-called bid-to-cover ratio of 1.8 when three-year notes were sold in April. Banco Santander SA , Spain’s largest lender, rallied 5.2 percent to 8.03 euros, its biggest gain in more than three weeks. Rudd Tax BHP climbed 3.2 percent to 1,875.5 pence after the Herald Sun newspaper reported that Australian Prime Minister Kevin Rudd may announce “major changes” to his proposed resources super profits tax. The Melbourne-based newspaper didn’t say where it got the information. Rio Tinto , the world’s third-largest mining company, climbed 3.7 percent to 3,262 pence. Xstrata Plc, which has shelved spending on A$6.6 billion ($5.6 billion) of Australian projects because of the planned mining tax, climbed 4.3 percent to 1,003 pence. Daimler rallied 3.1 percent to 43.26 euros after the world’s second-biggest luxury carmaker forecast Mercedes-Benz sales to double the rate of the overall market in 2010 on demand from China. “We want to grow at least 7 percent,” sales chief Joachim Schmidt said at a briefing with reporters June 8 at the carmaker’s headquarters in Stuttgart, Germany. “We’re well under way to achieve our goal.” Damaged Well BP slipped 6.7 percent to 365.5 pence. The shares earlier tumbled as much as 12 percent to 345.15 pence, its lowest level since 1997 before adjusting for dividends, following a 16 percent selloff in the company’s American depositary receipts yesterday. The cost to protect against a default on the energy company soared to a record and bond prices plummeted after an estimate its damaged well is leaking more oil than previously calculated. BP said today in a statement that it was not aware of any reason for recent share price movements and added that it is facing the Gulf of Mexico oil spill as a “strong company” that is generating cashflow. Lafarge SA , the world’s biggest cement maker, jumped 5.1 percent to 49.16 euros and Cie. de Saint-Gobain SA climbed 6.3 percent to 32.19 euros. Citigroup Inc. raised its recommendation for both companies to “buy” from “hold,” saying a recent selloff had “presented an opportunity for some shorter-term value trades.” ARM Holdings Plc , the U.K. designer of semiconductors used in Apple Inc.’s iPhone, rallied 5.9 percent to 290.1 pence. The shares earlier rose as much as 32 percent amid speculation that Apple may be looking to buy the company. Spokespeople for ARM and Apple didn’t immediately return calls seeking comment. Denied Speculation ARM , which has four to five chips in each handset of some smartphones, in April denied speculation that Apple may bid for the company. The shares also advanced as Taiwan Semiconductor Manufacturing Co., the world’s largest supplier of made-to-order chips, said sales rose 38 percent in May. Separately, the Semiconductor Industry Association today forecast global sales of microchips will rise 28 percent this year. That compares with a November forecast of 10 percent growth. CSR Plc, a maker of microchips used in Nokia Oyj mobile phones, climbed 1.2 percent to 399.5 pence. Infineon Technologies AG rallied 2.4 percent to 4.68 euros. Home Retail Group Plc lost 4.1 percent to 228.3 pence after the U.K. owner of Argos catalog stores and the Homebase home improvement chain said sales worsened in the first quarter as consumers pared spending on video games and televisions. Revenue at Argos outlets open at least a year declined 8.1 percent in 13 weeks through May 29. That compares with a 2.2 percent drop in last year’s second half. Same-store sales at Homebase fell 1.4 percent, after rising 2.6 percent in the second half. To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net .

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Najib to Cut Subsidies, Costs in Five-Year Plan to Boost Malaysia Economy

June 9, 2010

By Barry Porter June 10 (Bloomberg) — Malaysia aims to almost halve its budget deficit in the next five years as the government cuts subsidies, widens the tax base and reduces expenses under a plan to make the economy more competitive. “We can no longer rely on past strategies and approaches that had previously driven our economic growth,” Prime Minister Najib Razak said in today’s 10th Malaysia Plan report. “Failure to transform the economy puts the nation at risk of relative decline, as many developing nations are fast catching up.” The country plans to cut the budget shortfall to 2.8 percent of gross domestic product in 2015 from a revised estimate of 5.3 percent this year, according to the five-year plan unveiled by Najib in Kuala Lumpur today. It earlier projected a 5.6 percent deficit for 2010. The reduction will come even as the federal government plans 230 billion ringgit ($69 billion) of development spending for 2011-15. Narrowing the budget gap would help Malaysia, which sold debt overseas in May for the first time in eight years, avert the confidence crisis that has engulfed Europe as nations from Greece to Portugal struggle to contain deficits. As the economy rebounds from last year’s recession, Najib has announced plans to trim state subsidies for consumers and roll back policies favoring the country’s biggest ethnic group. “If you keep your deficit fairly high for a long period of time, it’s not sustainable, you run into the kind of problems that you see in Europe,” Alvin Liew , a Singapore-based economist at Standard Chartered Plc, said before the plan was released. “There may be a possibility of bankruptcy within nine years if you maintain the current spending plan.” Ballooning Deficit The nation’s deficit ballooned to a 22-year high of 7 percent of GDP last year as the government unveiled 67 billion ringgit of stimulus measures under two packages in 2008 and 2009 to help resuscitate growth during the global slump. That’s bigger than the Philippines’ 3.9 percent and compares with 13.6 percent for Greece, 11.2 percent for Spain and 9.4 percent for Portugal. Malaysia last month sold a $1.25 billion global Islamic bond, which was assigned ratings of A- by Standard & Poor’s and A3 from Moody’s Investors Service, their fourth-lowest investment grades. The country’s debt rating is the highest in Southeast Asia after Singapore. Southeast Asia’s third-largest economy expanded 10.1 percent last quarter, the most in a decade, allowing Malaysia to join the Group of 20 in shifting focus to deficit reduction. In a statement released after their talks ended June 5, G-20 officials replaced an endorsement of budget stimulus with a pledge to pursue “credible, growth-friendly measures to deliver fiscal sustainability.” Growth Rate Malaysia needs to achieve average annual growth of 6 percent during the next five years if it is to meet its target of becoming a high-income nation by 2020, today’s report showed. The economy grew an average 5.8 percent from 1991 to 2010. Growth momentum has slowed over the last decade due to “lackluster” private investment, which has fallen to an average of about 10 percent of GDP from close to 25 percent in the 1990s, the government said in the report. To spur growth, the government will promote higher value and knowledge-intensive industries, focusing on skills development, venture-capital funding and innovation, and providing incentives for research and development, Najib said in the report. Brain Drain The plans include a Talent Corporation to help reverse a brain drain, a 20 billion-ringgit Facilitation Fund to spur investment on a public-private risk-sharing basis, a review of Malaysia’s bankruptcy law to give entrepreneurs a second chance and ensure more efficient processing of insolvency, and a new Competition Law. There will also be competitive bidding for future toll- roads and power plants, the government said, and a shift from building and operating public services toward buying them from the private sector. Najib reiterated a pledge to make state assistance for the ethnic-Malay majority and other indigenous people more merit- based, and to sell stakes in more state-owned companies. Help for the so-called bumiputeras, which means sons of the land, “will need to be market-friendly, merit-based, transparent and needs-based,” according to the five-year plan. Affirmative Action Under a New Economic Model for Malaysia outlined in March, Najib had said the country will revise its affirmative action policies to target the nation’s poorest across all ethnic groups, moving away from 39-year-old race-based measures that the government now says may impede growth. Implementing the changes won’t be easy. Already, Najib has had to delay a revamp of the country’s fuel subsidy system, which keeps gasoline and diesel prices below market rates for all Malaysian consumers. His government is also still mulling how to introduce a goods and services tax, scheduled for after 2011 according to Second Finance Minister Ahmad Husni Hanadzlah . Malaysia spends about 73 billion ringgit a year on subsidies on essential items ranging from fuel to flour, Najib said in April, calling the amount “not sustainable.” This represents a fiscal burden to the government equivalent to 4.7 percent of GDP, or about 12,900 ringgit per household each year, according to today’s report. Subsidies and price controls will be “gradually” rationalized to reflect market prices, according to today’s report. Najib forecasts a 49 percent increase in state revenue over the next five years, to 183.1 billion ringgit in 2015. That would help cap the budget deficit even as the government boosts development spending by 23 percent to 142.4 billion ringgit in 2015, with investments in roads, ports and railways, including a new mass transit system for Kuala Lumpur. Malaysia aims to lift gross national income by 47 percent to 38,845 ringgit per capita during the period, the report showed. To contact the reporter responsible for this story: Barry Porter in Kuala Lumpur at bporter10@bloomberg.net

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DK Matai: Debt, Deleverage and Default: What Next?

June 9, 2010

The relentless forces of debt, deleverage and default were set in motion by the financial market excesses of the last decade. This is hardly surprising, but the details are sobering. Debt and Leverage Debt grew rapidly after 2000 in most mature economies. The global boom during the decade to 2008 was greatly facilitated by taking on excessive debt via leverage. Enabled by the globalization of banking and a period of unusually low interest rates and risk spreads, this largesse was the catalyst for the following: . Explosion of the financial-services sector; . Massive banking bonuses; . Huge corporate-sector pay packets; and . Rampant appreciation in prices across all asset classes. Although growth in leverage during the 1990s and 2000s was a global phenomenon, by far the most rapid expansion came in the developed world, particularly the Anglo-Saxon countries and some members of the European Union. The phenomenon was also noticeable in a number of emerging market countries in Asia and Latin America. By 2008, several countries had higher levels of debt as a percentage of GDP than the United States. That growth in debt was accompanied by exceptional growth in a variety of economic metrics including: . Executive compensation relative to that of average workers rose significantly; and . Share price to earnings ratios rose dramatically. In the middle of the last decade, it was often frustratingly difficult to get any data on leverage levels, since it was an issue on which precious few government policymakers, financial regulators and central banks focused. That was partly due to misplaced faith that financial innovation, particularly securitization, had made debt less dangerous than before by spreading it around the entire economy and beyond. Leverage Deleveraging The specter of deleveraging has been haunting the global economy since the start of the financial crisis in late 2007, i.e., The Great Unwind, and the subsequent collapse in world trade in late 2008, i.e., The Great Reset. The resultant credit crunch put brakes on the rise in private-sector borrowing. Governments then stepped in by ramping up their deficits, via stimulus spending, in efforts to mitigate the economic slowdown. However, government debt addition is now running up against natural limits via: . Fears that investors will start to balk at yet more issues of government debt without concrete plans to pay it back; . Taxpayer concerns about how hitherto unbelievable levels of public-sector deficits will be paid for; and . Who will do the paying? We may have found ourselves encumbered by unsustainable debt burdens in the private and public sectors which could drag down GDP growth rates for years to come. This may end up being an atypical deleveraging cycle and may take more than double the usual cycle time of half a decade or more. Deleveraging has only just begun. Story Until Q1/Q2 2010 So far, economic growth seems to have recovered sooner than expected in some countries. Even though the financial sector is still cleaning up its balance sheets and consumer demand remains weak, the financial markets are giving the major economies the benefit of the doubt. However, there has been relatively little deleveraging since the peak: . Debt was hardly down in the U.S. last year; . Instead of deleveraging, debt grew again by double digits in Spain last year; and . Debt shrank by double digits in the UK, but that came from a huge financial-sector deleveraging. Alongside the limited rise in broker borrowing in the past decade, there was also a far more startling increase in “real economy” debt, particularly in the household and real estate sector. Since the crisis started, this “real economy” debt has declined a tiny bit, while financial sector leverage has fallen considerably. But since public debt has spiraled, gross leverage levels for most large nations have not fallen. In turn, that suggests if deleveraging is inevitable, most of it is still to come. From a historical perspective, this challenge is not entirely unprecedented. The UK and U.S. have had considerable experience of slashing vast debt burdens before in the last two centuries. As economies are unable to leverage any further by taking on more debt, it is natural that the process will begin to go into reverse. Even if governments manage to make up shortfalls in private-sector debt in the medium term, economies are still in for a rough ride. Story in Q3/Q4 2010 and Beyond Now there are a number of signature signs on our radar which suggest that the deleveraging process may just be getting under way, exerting a significant drag on GDP growth. In a sicklier global economy, players are desperately trying to raise debt and to export their way out of trouble. When every government is struggling to increase borrowing, competition amongst them will drive up the cost of capital, with the weakest economies paying the highest price. The deleveraging process is likely to result in painful global economic contraction. While one cannot say for certain when deleveraging will gain momentum, we do know that deleveraging has followed nearly every major financial crisis in the past half-century. In the past, governments have tried to counter deleveraging by creating rapid growth through fiscal or monetary stimulus; exports via devaluation; or preparation for and participation in war. These alternatives are all extraordinarily challenging particularly when every government is trying to achieve the same result. Engineering an easy escape becomes a competitive sport. Growth is tough to achieve. Nation states face three unpalatable options: outright default; inflation; or severe belt-tightening in which private consumption and public spending are dramatically cut.

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Greek Debt Default Is Seen by 73% in Poll of Investors Doubtful on Trichet

June 9, 2010

By Rich Miller June 9 (Bloomberg) — Global investors have little confidence in Europe’s efforts to contain its debt crisis or in European Central Bank President Jean-Claude Trichet , with 73 percent calling a default by Greece likely. Only 23 percent say they expect the region’s almost $1 trillion rescue package to both keep the European monetary union together and prevent a debt default by a government, according to a quarterly poll of investors and analysts who are Bloomberg subscribers. More than 40 percent say Greece is likely to abandon the euro. “There is clearly a risk of a breakup of the euro,” says Geoff Marson , managing director at a Guernsey subsidiary of London-based Odey Asset Management, which oversees about $6 billion. Trichet, whose ECB supported the rescue package by buying bonds of Greece and other European governments, saw his approval rating tumble from a January Bloomberg poll. A plurality — 48 percent — give the 67-year-old central banker an unfavorable rating in the latest poll, while 41 percent view him favorably. In January, Trichet received a 60 percent approval rating, with 27 percent regarding him negatively. “Trichet has sacrificed the ECB’s independence by helping to rescue Greece,” says Cyril Boudin , a participant in the poll and a derivatives trader at Unicredit Group in London. Market Slump Stock markets worldwide have slumped and the euro has plunged as Europe has struggled to defuse its debt crisis. The Stoxx Europe 600 Index has fallen 12 percent from its 2010 high on April 15, while the euro has lost about 17 percent against the dollar since the start of the year. More than 60 percent of those surveyed say they expect the euro to fall further against the dollar over the next three months. While the European currency may be due for a “corrective bounce” in the short run, “longer term, the market has parity in its sights,” says Marson, who took part in the poll. The euro traded at $1.1973 at 5 p.m. yesterday in New York. European investors are more optimistic about the ability of their region to resolve its problems than were their counterparts elsewhere. Thirty percent of those polled in Europe say they expect the rescue package to succeed. U.S. investors are the most pessimistic, with only 14 percent expecting Europe’s efforts to work. A quarter of investors in Asia are also in that camp. Overall, 40 percent of investors worldwide say European defaults were possible even with the package, while another 35 percent see some countries dropping out of the euro zone. Lacking Fortitude Investors in all three regions agree that Greece is the most likely country to default on its debt. “The Greek government will not have the long-term fortitude to control spending,” says Robert Knox , a poll participant and chief executive officer of Park City, Utah- based broker-dealer RG Knox Co. Thirty-five percent of those surveyed say a default by Portugal was likely, while more than a quarter say the same about Spain. Outside of Europe, the country seen as most likely to miss a debt payment was Argentina, with 31 percent. “I see a lot of similarities between Spain’s situation now and emerging markets in the past 20 years,” says Alvaro Teixeira , the head of Latin American equities at Prebon Canada Ltd. in Toronto. They include “high debt, high unemployment, growing social distress,” and a currency that’s too strong for the Spanish economy. Dumping the Euro Fifteen percent of those polled say it’s likely Spain would be forced to dump the euro as its currency to help ease the pain on its economy. One in five see Portugal making that move. “This crisis could be a significant step that leads to an eventual breakup of the euro zone,” says William Aston-Reese , vice president of money-market sales at New York-based broker Tradition Asiel Securities Inc. and a poll participant. Investors in Europe are about evenly split on Trichet’s performance at the central bank. Forty-eight percent give him an unfavorable rating, while 46 percent see him in a positive light. The rest have no opinion. American investors are the most down on Trichet, with 56 percent seeing him in an unfavorable light. In Asia, 34 percent of poll participants agree with that view. In contrast, more than two-thirds of investors worldwide approve of the job being done by U.S. Federal Reserve Chairman Ben S. Bernanke . U.S. Vulnerable Still, the sovereign debt problems in Europe will hurt the U.S. economy, according to more than 85 percent of global investors surveyed. About two-thirds say the turmoil won’t be enough to send the U.S. back into recession. The quarterly Bloomberg Global Poll of investors, traders and analysts in six continents was conducted June 2-3 by Selzer & Co. , a Des Moines, Iowa-based firm. It is based on interviews with a random sample of 1,001 Bloomberg subscribers, representing decision-makers in markets, finance and economics. The poll has a margin of error of plus or minus 3.1 percentage points. To see the methodology and exact wording of the poll questions, click on the attachment tab at the top of the story. To contact the reporter on this story: Rich Miller in Washington rmiller28@bloomberg.net

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Greek Default Seen by Almost 75% in Poll Doubtful About Trichet

June 9, 2010

By Rich Miller June 9 (Bloomberg) — Global investors have little confidence in Europe’s efforts to contain its debt crisis or in European Central Bank President Jean-Claude Trichet , with 73 percent calling a default by Greece likely. Only 23 percent say they expect the region’s almost $1 trillion rescue package to both keep the European monetary union together and prevent a debt default by a government, according to a quarterly poll of investors and analysts who are Bloomberg subscribers. More than 40 percent say Greece is likely to abandon the euro. “There is clearly a risk of a breakup of the euro,” says Geoff Marson , managing director at a Guernsey subsidiary of London-based Odey Asset Management, which oversees about $6 billion. Trichet, whose ECB supported the rescue package by buying bonds of Greece and other European governments, saw his approval rating tumble from a January Bloomberg poll. A plurality — 48 percent — give the 67-year-old central banker an unfavorable rating in the latest poll, while 41 percent view him favorably. In January, Trichet received a 60 percent approval rating, with 27 percent regarding him negatively. “Trichet has sacrificed the ECB’s independence by helping to rescue Greece,” says Cyril Boudin , a participant in the poll and a derivatives trader at Unicredit Group in London. Market Slump Stock markets worldwide have slumped and the euro has plunged as Europe has struggled to defuse its debt crisis. The Stoxx Europe 600 Index has fallen 12 percent from its 2010 high on April 15, while the euro has lost about 17 percent against the dollar since the start of the year. More than 60 percent of those surveyed say they expect the euro to fall further against the dollar over the next three months. While the European currency may be due for a “corrective bounce” in the short run, “longer term, the market has parity in its sights,” says Marson, who took part in the poll. The euro traded at $1.1973 at 5 p.m. yesterday in New York. European investors are more optimistic about the ability of their region to resolve its problems than were their counterparts elsewhere. Thirty percent of those polled in Europe say they expect the rescue package to succeed. U.S. investors are the most pessimistic, with only 14 percent expecting Europe’s efforts to work. A quarter of investors in Asia are also in that camp. Overall, 40 percent of investors worldwide say European defaults were possible even with the package, while another 35 percent see some countries dropping out of the euro zone. Lacking Fortitude Investors in all three regions agree that Greece is the most likely country to default on its debt. “The Greek government will not have the long-term fortitude to control spending,” says Robert Knox , a poll participant and chief executive officer of Park City, Utah- based broker-dealer RG Knox Co. Thirty-five percent of those surveyed say a default by Portugal was likely, while more than a quarter say the same about Spain. Outside of Europe, the country seen as most likely to miss a debt payment was Argentina, with 31 percent. “I see a lot of similarities between Spain’s situation now and emerging markets in the past 20 years,” says Alvaro Teixeira , the head of Latin American equities at Prebon Canada Ltd. in Toronto. They include “high debt, high unemployment, growing social distress,” and a currency that’s too strong for the Spanish economy. Dumping the Euro Fifteen percent of those polled say it’s likely Spain would be forced to dump the euro as its currency to help ease the pain on its economy. One in five see Portugal making that move. “This crisis could be a significant step that leads to an eventual breakup of the euro zone,” says William Aston-Reese , vice president of money-market sales at New York-based broker Tradition Asiel Securities Inc. and a poll participant. Investors in Europe are about evenly split on Trichet’s performance at the central bank. Forty-eight percent give him an unfavorable rating, while 46 percent see him in a positive light. The rest have no opinion. American investors are the most down on Trichet, with 56 percent seeing him in an unfavorable light. In Asia, 34 percent of poll participants agree with that view. In contrast, more than two-thirds of investors worldwide approve of the job being done by U.S. Federal Reserve Chairman Ben S. Bernanke . U.S. Vulnerable Still, the sovereign debt problems in Europe will hurt the U.S. economy, according to more than 85 percent of global investors surveyed. About two-thirds say the turmoil won’t be enough to send the U.S. back into recession. The quarterly Bloomberg Global Poll of investors, traders and analysts in six continents was conducted June 2-3 by Selzer & Co. , a Des Moines, Iowa-based firm. It is based on interviews with a random sample of 1,001 Bloomberg subscribers, representing decision-makers in markets, finance and economics. The poll has a margin of error of plus or minus 3.1 percentage points. To see the methodology and exact wording of the poll questions, click on the attachment tab at the top of the story. To contact the reporter on this story: Rich Miller in Washington rmiller28@bloomberg.net

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Japanese Stock Futures Drop on Europe Concern Australia’s Gain on Metals

June 8, 2010

By Norie Kuboyama and Kotaro Tsunetomi June 9 (Bloomberg) — Japanese stock futures slid as the euro fell amid concern European’s debt crisis will worsen after Fitch Ratings called the U.K.’s fiscal challenge “formidable.” Australian stock futures advanced after commodity prices gained. American depositary receipts of Mitsubishi UFJ Financial Group Inc., Japan’s largest bank by market value, lost 0.5 percent from the closing share price in Tokyo. Those of Kyocera Corp., an electronic components maker which derives almost 20 percent of its sales from Europe, fell 0.3 percent. ADRs of BHP Billiton Ltd., the world’s largest mining company, gained 0.7 percent after metal prices advanced. “Europe’s fiscal concerns are remaining,” said Hiroichi Nishi , an equities manager in Tokyo at Nikko Cordial Securities Inc. “People may have an appetite for bargain hunting as stocks’ values are becoming reasonable.” Yen-denominated futures on Japan’s Nikkei 225 Stock Average expiring in June closed at 9,510 in Chicago yesterday, lower than 9,515 in Singapore. They were bid in the pre-market at 9,510 as of 8:05 a.m. today in Osaka, Japan. The Nikkei 225 closed at 9,537.94 yesterday, rising for the first time in three days, while the Topix index dropped 0.1 percent. Futures on Australia’s S&P/ASX 200 Index advanced 0.2 percent today. New Zealand’s NZX 50 Index gained 0.6 percent. The MSCI Asia Pacific Index yesterday rose 0.6 percent, climbing for the first time in three days after comments from Ben S. Bernanke, the chairman of the U.S. Federal Reserve, eased investor concerns over the strength of the global economy. Companies in the MSCI Asia index trade at 14.1 times estimated earnings on average, compared with 13.1 times for the Standard & Poor’s 500 Index and 11 times for the Stoxx Europe 600 Index. Metals Gain The Stoxx Europe 600 Index declined for a third day yesterday, falling 1.1 percent. Fitch Ratings yesterday said the scale of the U.K.’s fiscal challenge is “formidable,” fanning concern that the crisis may spread to the region’s largest economies. The benchmark has slumped 12 percent from this year’s high on April 15 as credit rating downgrades for Spain, Portugal and Greece triggered concern some European nations will struggle to fund their deficits. The yen strengthened to as much as 109.36 per euro today from 109.86 at the 3 p.m. close of Tokyo stock trading yesterday. Against the dollar, the Japanese currency appreciated to as much as 91.4 from 91.77. A stronger yen lowers the value of overseas sales at Japanese companies when repatriated. The London Metal Exchange Index of six metals including copper and zinc gained 2 percent yesterday, the most since May 27 and its first advance in seven days. Crude oil for July delivery climbed 0.8 percent in New York. Japan’s New Cabinet Futures on the Standard & Poor’s 500 Index rose 0.1 percent today. The index climbed 1.1 percent yesterday in New York, trimming its loss since June 3 to 3.7 percent. The gauge rose after swinging between gains and losses at least 13 times as a rally in commodity markets boosted oil and metals producers and overshadowed losses in semiconductor companies. Naoto Kan, Japan’s first leader in 15 years with no family connection to politics, yesterday pledged to draw from his common upbringing to help revive an economy hamstrung by persistent deflation and the world’s biggest public debt. Kan is the fifth premier in four years and second since his Democratic Party of Japan overturned five decades of mostly one- party rule last August. He retained 11 Cabinet members from predecessor Yukio Hatoyama ’s administration as he sought to demonstrate stability before mid-term elections in July that are a referendum on the DPJ’s nine months in power. To contact the reporters for this story: Norie Kuboyama in Tokyo at nkuboyama@bloomberg.net ; Kotaro Tsunetomi in Tokyo at ktsunetomi@bloomberg.net

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Greek Default Seen by Almost 75% in Poll of Investors Doubtful on Trichet

June 8, 2010

By Rich Miller June 9 (Bloomberg) — Global investors have little confidence in Europe’s efforts to contain its debt crisis or in European Central Bank President Jean-Claude Trichet , with 73 percent calling a default by Greece likely. Only 23 percent say they expect the region’s almost $1 trillion rescue package to both keep the European monetary union together and prevent a debt default by a government, according to a quarterly poll of investors and analysts who are Bloomberg subscribers. More than 40 percent say Greece is likely to abandon the euro. “There is clearly a risk of a breakup of the euro,” says Geoff Marson , managing director at a Guernsey subsidiary of London-based Odey Asset Management, which oversees about $6 billion. Trichet, whose ECB supported the rescue package by buying bonds of Greece and other European governments, saw his approval rating tumble from a January Bloomberg poll. A plurality — 48 percent — give the 67-year-old central banker an unfavorable rating in the latest poll, while 41 percent view him favorably. In January, Trichet received a 60 percent approval rating, with 27 percent regarding him negatively. “Trichet has sacrificed the ECB’s independence by helping to rescue Greece,” says Cyril Boudin , a participant in the poll and a derivatives trader at Unicredit Group in London. Market Slump Stock markets worldwide have slumped and the euro has plunged as Europe has struggled to defuse its debt crisis. The Stoxx Europe 600 Index has fallen 12 percent from its 2010 high on April 15, while the euro has lost about 17 percent against the dollar since the start of the year. More than 60 percent of those surveyed say they expect the euro to fall further against the dollar over the next three months. While the European currency may be due for a “corrective bounce” in the short run, “longer term, the market has parity in its sights,” says Marson, who took part in the poll. The euro traded at $1.1973 at 5 p.m. yesterday in New York. European investors are more optimistic about the ability of their region to resolve its problems than were their counterparts elsewhere. Thirty percent of those polled in Europe say they expect the rescue package to succeed. U.S. investors are the most pessimistic, with only 14 percent expecting Europe’s efforts to work. A quarter of investors in Asia are also in that camp. Overall, 40 percent of investors worldwide say European defaults were possible even with the package, while another 35 percent see some countries dropping out of the euro zone. Lacking Fortitude Investors in all three regions agree that Greece is the most likely country to default on its debt. “The Greek government will not have the long-term fortitude to control spending,” says Robert Knox , a poll participant and chief executive officer of Park City, Utah- based broker-dealer RG Knox Co. Thirty-five percent of those surveyed say a default by Portugal was likely, while more than a quarter say the same about Spain. Outside of Europe, the country seen as most likely to miss a debt payment was Argentina, with 31 percent. “I see a lot of similarities between Spain’s situation now and emerging markets in the past 20 years,” says Alvaro Teixeira , the head of Latin American equities at Prebon Canada Ltd. in Toronto. They include “high debt, high unemployment, growing social distress,” and a currency that’s too strong for the Spanish economy. Dumping the Euro Fifteen percent of those polled say it’s likely Spain would be forced to dump the euro as its currency to help ease the pain on its economy. One in five see Portugal making that move. “This crisis could be a significant step that leads to an eventual breakup of the euro zone,” says William Aston-Reese , vice president of money-market sales at New York-based broker Tradition Asiel Securities Inc. and a poll participant. Investors in Europe are about evenly split on Trichet’s performance at the central bank. Forty-eight percent give him an unfavorable rating, while 46 percent see him in a positive light. The rest have no opinion. American investors are the most down on Trichet, with 56 percent seeing him in an unfavorable light. In Asia, 34 percent of poll participants agree with that view. In contrast, more than two-thirds of investors worldwide approve of the job being done by U.S. Federal Reserve Chairman Ben S. Bernanke . U.S. Vulnerable Still, the sovereign debt problems in Europe will hurt the U.S. economy, according to more than 85 percent of global investors surveyed. About two-thirds say the turmoil won’t be enough to send the U.S. back into recession. The quarterly Bloomberg Global Poll of investors, traders and analysts in six continents was conducted June 2-3 by Selzer & Co. , a Des Moines, Iowa-based firm. It is based on interviews with a random sample of 1,001 Bloomberg subscribers, representing decision-makers in markets, finance and economics. The poll has a margin of error of plus or minus 3.1 percentage points. To see the methodology and exact wording of the poll questions, click on the attachment tab at the top of the story. To contact the reporter on this story: Rich Miller in Washington rmiller28@bloomberg.net

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Virgin, Qantas Say They’re Open to Bids as Airline Industry Consolidates

June 8, 2010

By Steven Rothwell and Cornelius Rahn June 8 (Bloomberg) — Qantas Airways Ltd. and Virgin Atlantic Airways Ltd. said they’re open to merger proposals as efforts to cut costs and boost traffic push carriers to combine. Qantas, Australia’s biggest airline, favors an inter- continental deal and would be “a great asset for anyone,” Chief Executive Officer Alan Joyce said in an interview. Virgin is exploring options as U.S. and European mergers squeeze its position in the North Atlantic market, CEO Steve Ridgway said. “Consolidation isn’t easy to do and cross-border inter- continental mergers have not occurred yet, but I think they will and Qantas will be at the forefront of that,” Joyce said in Berlin, adding that the process “will take some time.” Joyce didn’t say if he favored a combination with British Airways Plc , which held merger talks with Qantas in 2008 before agreeing to a deal with Iberia Lineas Aereas de Espana SA. Virgin, British Airways’s biggest competitor at London’s Heathrow airport, is reviewing its standalone stance after regulators said they’d approve an expanded alliance between its rival and AMR Corp.’s American Airlines and after United Airlines agreed to combine with Continental Airlines Inc. “We’re a small company still,” Ridgway said in an interview in Berlin where, like Joyce, he was attending the annual meeting of the International Air Transport Association. “We would be looking potentially just to grow ourselves, to become part of a bigger group. We just need to look at what happens in the industry over the next 18 months.” LOT, SAS Polish national carrier LOT said its forecasts of a return to profit this year are attracting interest from other carriers and private-equity firms, while SAS Group AB CEO Mats Jansson said a new wave of consolidation in Europe is likely to begin in earnest next year as prospects improve. Sydney-based Qantas’s previous negotiations with British Airways were called off after the pair failed to agree on how to split ownership, the U.K. carrier has said. A combination would have created a carrier with $24 billion in sales and 500 planes. Talks were complex because the London-based company had more revenue and Qantas a higher market value. That’s still the case. “I don’t think you can ever look back and have any regrets,” Joyce said. “I think you have to look forward, and we do look forward at what other opportunities do exist.” The airline rose as much as 2.4 percent to A$2.52 in Sydney and changed hands at A$2.50 at 11 a.m. The shares have fallen 16 percent this year. Singapore Stake Qantas is already partnered with British Airways in the Oneworld alliance, as are American Airlines and Spain’s Iberia, with which the U.K. company aims to complete a merger this year British billionaire Richard Branson ’s Virgin Atlantic isn’t in a global grouping and specializes in point-to-point travel to business destinations and high-end tourist resorts. Singapore Airlines Ltd. owns a 49 percent stake in the Crawley, England-based company, though CEO Ridgway said it’s possible that the holding could be offered for sale as the Asian carrier modifies its strategy to reflect the expansion of the Indian and Chinese markets in the past 10 years. “Singapore Airlines is a great shareholder, and I don’t think they’re in any hurry to do that,” he said. “At the end of the day it’s down to them, but it could be an opportunity.” Malaysian Airline System Bhd. , which like Virgin stands apart from the Oneworld, Star and SkyTeam alliances, also favors consolidation to boost earnings and cut costs, CEO Tengku Azmil Zahruddin said yesterday at the IATA event. “As an industry we are far too fragmented and that is one of the reasons that we don’t make reasonable returns for shareholders,” the CEO said during a roundtable discussion. ‘Too Early’ SAS, the unprofitable owner of Scandinavian Airlines rescued by share sales that saw the Swedish, Danish and Norwegian governments increase their stakes, has said it’s unlikely to remain independent once earnings are restored. CEO Jansson said yesterday that the level of losses suffered by European carriers during the recession means it’s “too early” to contemplate consolidation this year. “2011 is the time for new steps in the consolidation process,” Jansson said in an interview. “When companies feel they’ve done their homework, they’re in good shape and the market is stable, then boards will start to look at the acquisition list, but not now.” “Good Moment” Poland’s LOT, or Polskie Linie Lotnicze LOT SA, said right now is “a very good moment” to seek a buyer. The company, which aims to post a profit in 2010 after losing money for the past two years, has sent “teasers” that attracted interest from “a few” airlines and investment funds and a transaction could in theory be agreed “very quickly,” CEO Sebastian Mikosz said in an interview. At Qantas, Joyce said an investment-grade debt rating will be a major attraction for a merger partner. The Asia-Pacific market is also now “very healthy,” though demand on routes to Europe is weak and of most strategic concern, he said. Air France’s purchase of KLM Royal Dutch Airlines in 2004 is the airline industry’s biggest deal to date. It would be surpassed by merger of United Airlines parent UAL Corp. and Continental in a $3 billion stock swap announced on May 3. To contact the reporters on this story: Steven Rothwell in Berlin via srothwell@bloomberg.net ; Cornelius Rahn in Berlin via crahn2@bloomberg.net

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EU to Speed Reviews of Budgets, Tighten Penalties for Excessive Deficits

June 7, 2010

By James G. Neuger June 8 (Bloomberg) — European Union governments vowed to police national budgets at an early stage and introduce a wider range of sanctions on excessive deficits to prevent a repeat of the Greece-fueled debt crisis that has undermined the euro. Finance ministers agreed to impose fines on countries that fail to deliver on deficit-cutting pledges even before shortfalls surpass the euro region’s limit of 3 percent of gross domestic product. “Up to now, you only got fined for driving through the red light of the 3 percent,” EU President Herman Van Rompuy told reporters late yesterday after meeting with EU finance ministers in Luxembourg. “From now on, you could also be in trouble for crossing the orange light.” To back up the planned tightening of the rules, the ministers also said they will press ahead with deficit cuts next year, balking at U.S. pleas for looser budget policies to help speed the recovery from the worst recession since World War II. The euro has fallen 17 percent this year as the debt crisis exposed cracks in the monetary union and prompted deficit cuts across Europe that may hobble the economic rebound. The euro slid as low as $1.1877 yesterday, the weakest since 2006, before recovering to $1.1917. Under the German-inspired Stability and Growth Pact, countries with deficits above the euro-area limit face fines of as much as 0.5 percent of GDP unless they get the budget back into compliance. Fiscal Crisis No country has been fined during the euro’s 11-year lifespan. Germany, which authored the rules in the 1990s and led the way in diluting them in 2005, is spearheading the campaign to stiffen them again after euro governments put up as much as 860 billion euros ($1 trillion) to contain Greece’s fiscal crisis. Under the revamped system, each government will present its broader assumptions for growth, inflation, taxing and spending in the spring, about six months before national budgets go through parliaments. “Timing is key,” Van Rompuy said. A government plotting a high deficit “will have to justify itself to its peers” and would come under pressure to change course. Countries with overall debt that exceeds the EU limit of 60 percent of GDP would come under extra scrutiny. Proposals to strip repeat deficit offenders of their rights to vote on EU policies are off the table for now because that would require a change to EU treaties, a process that took eight years for the bloc’s current treaty. In-Depth Discussion “We focused on what we can do in the short term and under the current treaty framework,” Van Rompuy said. The first in-depth discussion of the overhaul of EU fiscal legislation coincided with a renewed pledge to keep cutting deficits in 2011. Budgets will remain “neutral” in 2010, becoming “clearly restrictive as of 2011 when recovery is expected to gain momentum,” Luxembourg Prime Minister Jean-Claude Juncker told reporters after chairing yesterday’s meeting of euro-region finance ministers in Luxembourg. Europe’s determination to press ahead with belt-tightening measures defies a June 5 call by U.S. Treasury Secretary Timothy F. Geithner for “stronger domestic demand growth” in countries like Germany with trade surpluses. The government of Germany, Europe’s largest economy, yesterday announced a four-year, 80 billion-euro package of tax increases and spending cuts, and pressed the rest of Europe to follow suit. “Solid finances are the best form of crisis prevention,” German Chancellor Angela Merkel told reporters in Berlin. Industrialized World European forecasts show the U.S. leading the recovery in the industrialized world, with an expansion of 2.8 percent in 2010 outpacing the euro region’s estimated 0.9 percent. The U.S. will remain ahead in 2011, with growth of 2.5 percent beating Europe’s 1.5 percent, the European Commission says. Europe’s economy expanded 0.2 percent in the first quarter, with exports and government spending pacing the third straight quarterly increase. The economy is strained by unemployment of 10.1 percent, the highest in the euro’s 11 1/2-year history, and spending cuts to prevent a Europe-wide debt shock. Investors concerned about the spread of the European debt crisis poured into German bonds yesterday, pushing the 10-year yield as low as 2.54 percent, the lowest since at least 1989, the year the Berlin Wall fell. European stocks dropped, leaving the benchmark Stoxx Europe 600 Index 11 percent below its year- to-date high on April 15. Austerity Programs Greece, Spain, Italy and Portugal are among euro countries with austerity programs in the works. France plans a three-year spending freeze. In the Netherlands, polls point to a victory in June 9 elections by Mark Rutte’s Liberals, which vow to cut spending by 20 billion euros by 2015. Europe-wide efforts “should not leave any doubt as to our determination to halt and to reverse the increase in the debt ratios,” Juncker said. In Britain, the largest of the 11 European Union countries not using the euro, Prime Minister David Cameron prepared voters for the deepest spending cuts in a generation, saying “the overall scale of the problem is even worse than we thought.” To contact the reporter on this story: James G. Neuger in Luxembourg at jneuger@bloomberg.net

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Trichet Sees Compass of Life Pointing to Euro at Center of European Unity

June 7, 2010

By James G. Neuger and Simon Kennedy June 8 (Bloomberg) — Jean-Claude Trichet used a simple chart to convince European leaders the euro was in grave danger. It was Friday, May 7. Spanish , Greek, Portuguese and Irish government bonds were plunging, sending shudders through world markets and fueling speculation Europe’s 11-year-old monetary union could collapse. The European Central Bank’s president traveled to an emergency Brussels summit of heads of government armed with graphs to dramatize how bad things were. “My main message for the governments was: Some of you have behaved very improperly and have created an element of vulnerability for your own country, and by way of consequence for Europe,” Trichet recalls. “Now the situation calls for taking up responsibilities.” By 3:15 a.m. the following Monday, Europe knew the price of that responsibility: an unprecedented 750 billion-euro ($900 billion) aid package to prevent a debt spiral, backed by a credibility-testing pledge from the ECB to purchase the bonds of distressed governments, all to keep the $11 trillion, 16-nation economic and monetary experiment afloat. Guiding the euro’s fate from the 35th floor of the ECB’s headquarters in downtown Frankfurt, Trichet says he’s never known “calm waters” and is “used to crisis.” Yet the turmoil casting a shadow over the last 17 months of his eight-year term is unlike anything he has faced before. Throughout his career he has battled crises, ranging from the oil-price surge when he was a French presidential aide in the 1970s, to the euro’s birth pangs and his acquittal in 2003 on decade-old charges of helping Credit Lyonnais SA cover up losses. As ECB chief he then had to confront the global credit crunch and recession. Euro Survival Now, investors are questioning the survival of the euro itself, along with the tight-money orthodoxy that Trichet has promoted as a central banker. As the 67-year old Frenchman nears retirement from the ECB in October 2011, he is having to rework parts of the German-inspired policy rulebook underpinning the euro in a bid to save the currency he helped create. “If you cross a typhoon , the manual doesn’t help,” says Tommaso Padoa-Schioppa , 69, who served seven years on the ECB’s Executive Board and now chairs the European unit of Washington- based financial-services consulting firm Promontory Financial Group. “Trichet has had the ability to understand that the decisions during this crisis could not be exclusively based on the manuals written for ordinary times.” One Size Fits All The euro has slumped 19 percent against the dollar in the past six months as the fiscal crisis that started in Greece made money managers wary that some debt-swamped nations might default, or even revert to old currencies to devalue their way to salvation. With investors selling sovereign paper from Athens to Dublin and buying safer German bonds, yield spreads ballooned in the first week of May, rendering the ECB’s one-size-fits-all monetary policy ineffective and threatening to tear the currency union apart. So Trichet made the biggest gamble of his career, agreeing to buy government debt to halt the surge in yields in the hope politicians will respond by fixing their budgets, allowing the ECB to return to fighting inflation. The risk is that profligate nations will renege on the deal, expecting stronger euro-area neighbors such as Germany and France to save them just as they rescued Greece. Critics say the ECB has abandoned a founding principle not to bail out cash-strapped governments and may be left having to buy more debt, which could ultimately undermine its primary price-stability mandate. Worsening Crisis “The last months of Trichet’s presidency are going to be among the most difficult of his time,” says Laurent Bilke , a former ECB economist who is now with Nomura International Plc in London. “The ECB more and more will have to arbitrage between a financial stability role and price stability.” A rare communications misstep by Trichet contributed to the worsening crisis at the start of May. Speaking in Lisbon on May 6, he told reporters that the purchase of government bonds wasn’t even discussed by ECB officials during their meeting that day. His perceived ambivalence shook European markets and briefly helped drive the Dow Jones Industrial Average down almost 1,000 points. Within 24 hours, ECB aides were talking to the region’s primary dealers, and Trichet was at the center of emergency consultations with EU leaders throughout the weekend to get a rescue package in place before Asian markets opened. Vocal Opposition Adding controversy to the bond move is the vocal opposition of Bundesbank President Axel Weber , a leading candidate to succeed Trichet next year, who said the policy creates “significant” risks. Another German dissenter is Helmut Schlesinger , who ran the Bundesbank from 1991 to 1993 and raised its benchmark discount rate to a record high of 8.75 percent in 1992 to choke off the inflationary consequences of German reunification. “Confidence in the system of European central banks is at stake,” says Schlesinger, 85. “The most important thing would be to keep the purchases of government debt to a minimum and stop them as soon as possible.” Trichet defended his actions in four interviews with German print and broadcast media in the space of a week. The ECB is dealing with “the most difficult situation since the Second World War, perhaps even since the First World War,” he told Spiegel magazine in an article published May 15. The ECB prodded governments into acting, not the other way around, and the bond purchases will be offset to ensure they have no inflationary impact, he said. Higher Goal Trichet’s supporters say the program shows his ability to set aside dogma in pursuit of a higher goal. “The ECB was flexible in its approach and willing to act very strongly when a clear crisis was building up,” says Marie Diron , who spent five years in the ECB’s economics department and is now at Oxford Economics Ltd. “What it was trying to do was restore normality in government bond markets and not lose sight of its price stability mandate or bailing out a country.” As of June 4, the ECB had bought 40.5 billion euros of bonds. “He has shown a lot of sang-froid and rigor and pragmatism in managing the crisis,” says Jean Arthuis , a French senator who worked alongside Trichet as finance minister from 1995 to 1997. Inflation Fighters Trichet learned his trade during the 1970s and early 1980s, when the U.S. Federal Reserve, under Paul Volcker , and the Bundesbank led the world in taming price pressures generated by oil shocks. Their success in proving the mettle of independent central banks with a mission to fight inflation led the European Union to insist that all would-be euro users make their monetary authorities free of government control. It also ensured that the blueprint for the euro was the deutsche mark. As head of the French Treasury from 1987 to 1993 and governor of the French central bank from 1993 to 2003, Trichet extolled the German mantra of low inflation and budget discipline to France’s elite, earning him a reputation as the Bundesbank’s representative in Paris. Trichet “was able to resist political pressure coming particularly from his own government,” says Lamberto Dini , 79, a former Italian prime minister who knows Trichet from European exchange-rate negotiations in the 1980s. “When he was criticized because monetary policy was too strict and France wanted to ease up, he did not.” Mining Engineer Political haggling put the French civil servant — trained first as a mining engineer, then in politics and economics before attending the Ecole Nationale d’Administration, the finishing school for the French leadership — in charge of Europe’s money. France acquiesced to the demands of Germany and the central banking community to let Wim Duisenberg of the Netherlands become the ECB’s first president at a summit in 1998, on condition he step down before the end of his term to make way for Trichet. The deal set a precedent for political meddling with a central bank that, under the euro treaty, would not “seek or take instructions” from European or national leaders. From the start, the ECB had to defend its turf, with Duisenberg saying in 2001 that “I hear, but I do not listen” to politicians’ pleas for lower interest rates. Without the Dutchman’s gruffness, the courtly Trichet resisted similar pressure after taking over in 2003, deflecting calls from German Chancellor Gerhard Schroeder among others for easier credit. Track Record The result is a price-stability record that surpasses even the Bundesbank’s. Inflation in the euro region has averaged 1.98 percent since the ECB took control on Jan. 1, 1999, in line with its self-set target of “below but close to 2 percent.” The ECB’s standing is now in jeopardy. Trichet’s detractors argue the decision to buy bonds breaches a rule that the central bank doesn’t rescue governments, undermining the independence it needs to breed confidence in the euro. They also say that the ECB risks stoking inflation by increasing the money supply . To David Mackie , chief European economist at JPMorgan Chase & Co. in London, the danger is that a lack of follow-through from governments will leave the ECB exposed. ECB in Danger “If governments don’t deliver on the fiscal side, will the ECB get sucked into buying more and more amounts of outstanding debt?” asks Mackie, who predicts the central bank won’t raise interest rates on Trichet’s watch again. “The ECB has got itself into a situation where it’s in danger.” It’s also far from certain that the asset purchases will work. By June 2, Spanish and Italian yield premiums over German bonds had exceeded pre-intervention levels. The Spanish spread was at 203 basis points yesterday, 39 basis points above its May 7 level. The Italian spread was 177 basis points and Portugal’s 264 basis points. That may require the ECB to do even more to ease market strains. Policy makers next meet on June 10 in Frankfurt. David Owen , chief European financial economist at Jefferies Group Inc. in London, says he would not be surprised if the ECB stopped sterilizing its bond purchases at some point, meaning it would effectively be printing new money. Deficit Obstacle Trichet’s success will partly be decided by governments’ ability to overcome sluggish economic growth and cut their deficits. Even with the ECB’s record-low interest rate of 1 percent and emergency liquidity measures for banks, the Paris- based Organization for Economic Cooperation and Development forecasts euro-region growth will be 1.2 percent this year, barely a third that of the U.S. The bloc has lagged the U.S. in seven of the euro’s 11 years. The currency’s recent slide leaves it at $1.20, roughly in the middle of its historic trading range. It debuted at $1.17 in January 1999, troughed at 83 cents in October 2000 and peaked at $1.60 in July 2008. Economists at BNP Paribas SA and Capital Economics Ltd. are among those predicting it will return to parity with the dollar. Amid accusations the euro now looks more like the Greek drachma than the German mark, Trichet blames governments for what went wrong. Greece’s budget deficit was 13.6 percent of output last year, Ireland’s shortfall was 14.3 percent and Spain’s 11.2 percent. Germany’s deficit was 3.3 percent. ‘Quantum Leap’ Trichet “had a lot of reasons to consider himself as playing a part in the euro’s story and he has a stake in its success,” says Eric Chaney , a former French Finance Ministry official and now chief economist at AXA Group in Paris. “That’s why he came to take such tough decisions like buying government bonds. It’s a big bet on the political will of the governments and the oppositions who may win elections.” For now, governments are pledging to tighten their belts and the likes of Greece and Spain are introducing austerity packages. Trichet’s demand for a “quantum leap” in economic management may also be heeded, with finance ministers vowing on May 21 to stiffen sanctions on high-deficit countries. Yet the history of the euro is littered with examples of governments casting aside central bankers’ appeals for fiscal prudence, from France raiding France Telecom SA’s pension fund in 1996 to Greece fudging its budget data to qualify for the currency in 2001. “It’s definitely the biggest challenge of Trichet’s professional life,” says Joachim Fels , co-chief economist at Morgan Stanley in London. “This is his chance to save his legacy.” Trichet himself is optimistic, noting that Europe often progresses through crisis. “You must be inflexible on your long-term compass,” he says. “My long-term compass as a central banker is price stability. My life compass has been the deepening of European unity based upon reconciliation and a profound friendship to the service of prosperity and peace. This historical endeavor, which started 60 years ago and was reinforced by the fall of the Soviet Union, goes on.” To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net ; Simon Kennedy in Paris at skennedy4@bloomnerg.net

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EU, IMF Create $1 TRILLION Bailout Fund

June 7, 2010

LUXEMBOURG — Eurozone nations on Monday started setting up a massive bailout fund that could rescue any member of Europe’s currency union from default, aiming to soothe market jitters that have sent the euro to a new four-month low against the dollar. The “shock and awe” financial rescue package from the European Union and the International Monetary Fund will total euro750 billion ($1 trillion) – money that can be lent to any indebted eurozone nation risking default, and intended to counter investor fears that Spain, Portugal or others could follow Greece in requiring a bailout to meet debt repayments. The special purpose vehicle to borrow up to euro440 billion ($526 billion) will be ready this month, when countries formalize debt guarantees for some 90 percent of the package, said Luxembourg Prime Minister Jean-Claude Juncker, who led Monday’s talks between eurozone finance ministers. Another euro60 billion managed by the EU’s executive commission “is available to cover urgent financial needs were it to arise” in the mean time, he said, while the International Monetary Fund will provide another euro250 billion. Germany, which will provide the largest chunk of the EU fund, has pressed other eurozone countries to make big budget cuts to reduce the chances of them needing a bailout. Markets “want to see not only actions but deeds” to shore up the currency, German Finance Minister Wolfgang Schaeuble told reporters. German Chancellor Angela Merkel vowed to “set an example” Monday by laying out plans to save euro80 billion through 2014 by reducing handouts to parents, cutting 15,000 government jobs and delaying projects such as construction of a replica of a Prussian palace in Berlin. Juncker said eurozone finance ministers wanted Spain and Portugal to build on current “significant and courageous” spending cuts with further efforts “needed beyond 2011 together with further progress” on structural reforms, such as changes to pensions, welfare or labor systems. EU Economy Commissioner Olli Rehn warned that they and others may need to prepare more budget reductions. He did not name which other countries should take action. Eurozone nations said in a joint statement that they would draft bigger cuts and tax increases if they have to and would pursue “structural reforms” to slim state running costs – such as raising retirement ages to curb pension costs. The International Monetary Fund called in a Monday report for eurozone countries facing market pressure to shun “delayed or half-hearted” budget cuts and draft more in case they can’t make current targets to reduce budget deficits – the gap between government spending and income. Juncker dismissed market volatility in recent days triggered by concern that Hungary – which does not use the euro – could be the next European government to follow Greece by risking a default. Hungarian officials last week warned that the country’s deficit is growing and the country is close to default, two years after it received a bailout from the EU and the IMF.. Hungary’s government has downplayed those comments, which nevertheless kept the euro trading near the four-year lows it hit Friday, when it went below $1.19 for the first time since March 2006. There is intense pressure on all eurozone countries to make cuts. However, trade unions warn that budget cuts could be going too far and could choke a fragile recovery that so far relies more on exports than domestic demand in European countries where people are still slow to spend and companies are reluctant to hire new workers. Unemployment in the eurozone reached a 10-year high of 10.1 percent in April – adding extra welfare costs to governments struggling with higher outgoings, lower tax revenue and debt that has soared since they paid out hundreds of billions to shore up the region’s banking system. Monday’s talks between eurozone finance ministers will be followed by a meeting of most EU finance ministers and EU officials who will thrash out plans for long-term ways to avoid a new economic crisis, including a proposal for more EU oversight of national budgets. ______ Associated Press writers Emma Vandore in Luxembourg, Geir Moulson in Berlin and Andrea Federer in Budapest contributed to this story.

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Spreading European Fiscal Deficit Crisis Hurts Bank Swaps Credit Markets

June 7, 2010

By John Glover June 7 (Bloomberg) — Signs the global economic recovery is faltering and Europe’s fiscal crisis is spreading added to investor concern that banks will have difficulty in clawing back the $2.4 trillion they’re owed by that region’s most indebted nations. The cost of insuring against a default on financial-company bonds surged, with the Markit iTraxx Financial Index of credit- default swaps linked to the senior debt of 25 European banks and insurers climbing 6 basis points to 189, according to CMA DataVision in London, near the highest level since March 2009. The Markit iTraxx SovX Western Europe Index of contracts on 15 governments fell 1.5 basis points to 167, compared with the record-high 174.4 reached on June 4. Europe’s debt-ridden nations have to raise almost 2 trillion euros ($2.4 trillion) within the next three years to refinance maturing bonds and fund deficits, according to Bank of America Corp. data. A U.S. jobs report at the end of last week fell short of economists’ forecasts, while a spokesman for Hungary’s prime minister said it was “no exaggeration” to suggest the eastern European nation may default. “The market is so volatile right now, it’s ready to blow up on any headline no matter how meaningful it should be,” said Aziz Sunderji , a credit strategist at Barclays Capital in London. “People are extremely risk-averse.” Italy needs 1.07 trillion euros by 2013 to refinance debt coming due, Spain must raise 546 billion euros and Greece needs 152.6 billion euros, according to a Bank of America estimate in May. Portugal and Ireland each have to raise about 80 billion euros, the data show. Risk Indexes Rise Elsewhere in credit markets, JPMorgan Chase & Co. is marketing $716.3 million of bonds backed by commercial mortgages. Triumph Group Inc. plans to sell $350 million of eight-year notes as soon as tomorrow. Freddie Mac, the mortgage- finance company with U.S. government support, plans to sell about $1 billion of securities backed by loans on multifamily properties. Broader credit-default swaps indexes in the U.S. and Europe rose. The Markit CDX North America Investment Grade Index climbed 2.46 basis points to a mid-price of 128 basis points as of 12:31 p.m. in New York, the highest since March 23, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of contracts linked to the debt of 125 companies increased 9.6 basis points to a mid-price of 135.38, Markit data show. Both indexes typically rise as investor confidence deteriorates and fall as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt. Commercial Mortgage Debt The JPMorgan transaction, which is the second of newly issued commercial-mortgage backed bonds to be sold this year, consists of 36 loans on 96 properties, said the person, according to a person familiar with the sale who declined to be identified because terms aren’t public. Sales of commercial-mortgage backed securities halted in 2008 as credit markets froze, choking off funding to property borrowers. Even with government aid, only $3.04 billion of the debt was issued last year, compared with $11.2 billion in 2008 and a record $232.4 billion in 2007, according to data compiled by Bloomberg. Royal Bank of Scotland Group PLC sold $309.7 million of the bonds in April. During the boom, sales grew as large as $7.6 billion, the data show. Debt from Triumph, the Wayne, Pennsylvania-based maker of aircraft components, may yield 8.5 percent to 8.75 percent, according to a person familiar with the offering. Moody’s Investors Service assigns Triumph a Ba2 corporate family rating. Standard & Poor’s rated the proposed offering B+. Freddie Mac The Freddie Mac debt, which will be the third of six such transactions that the McLean, Virginia-based company expects this year, is likely to be sold around June 11, according to an e-mailed statement. Investors will be protected against default on the underlying mortgages by a Freddie Mac guarantee and by credit protection created by the deal’s structure, the company said. Bank of America and Deutsche Bank AG will lead the underwriting, according to the statement. In emerging markets, the extra yield investors demand to own corporate debt instead of government securities widened 2 basis points to 334 basis points, or 3.34 percent, according to JPMorgan’s EMBI+ Index. Spreads have tightened from this year’s high of 346 basis points on May 20. Argentine bonds declined for a second straight day. The yield on Argentina’s 8.28 percent dollar bond due in 2033 rose 5 basis points to 13.01 percent. The price fell 0.25 cents to 64.93 cents on the dollar. To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

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Fidelity’s Funds Only Winners Among Biggest U.S. Stock Pickers

June 7, 2010

By Sree Vidya Bhaktavatsalam and Christopher Condon June 7 (Bloomberg) — Fidelity Investments’ Contrafund and Growth Company Fund are alone among the 10 largest U.S. stock mutual funds in beating their benchmarks this year, as Vanguard Group Inc. and Capital Group Cos. offerings trailed their indexes. The $63 billion Contrafund, managed by Boston-based Will Danoff , gained 0.3 percent this year through June 3, beating the Standard & Poor’s 500 Index by 56 basis points during that period, according to data compiled by Bloomberg. The $32 billion Fidelity Growth Company Fund rose 2.5 percent, beating its benchmark, the Russell 3000 Growth Index , by 2.6 percentage points. The $37 billion Vanguard Windsor II Fund fell 2.2 percent, trailing its benchmark by the widest margin. U.S. stock pickers have struggled to beat their indexes this year as the debt crisis in Europe spurred volatility and triggered a slump in equities after last year’s rebound. The underperformance by the biggest mutual funds undercuts efforts to reverse three years of withdrawals. Investors pulled $239 billion from domestic stock funds between 2007 and 2009, according to the Investment Company Institute. “It doesn’t help if what you’re selling isn’t working,” James Lowell , chief strategist at Adviser Investments in Watertown, Massachusetts, said in an interview. U.S. stock mutual funds have lost $15.3 billion to withdrawals this year through May, according to preliminary numbers from the ICI, a Washington-based trade group. The S&P 500 Index has fallen 13 percent from its 19-month high in April as credit downgrades in Greece, Spain and Portugal fueled concern the European sovereign debt crisis may spread and undermine the economic recovery. ‘Short Period’ The Chicago Board Options Exchange Volatility Index , or VIX, jumped to 45.79 on May 20, its highest level in 14 months. Mutual-fund managers usually make their stock picks based on the long-term prospects of a company and sometimes hold on to shares for years, said Burton Greenwald , an independent fund consultant near Philadelphia. Most managers don’t sell in a volatile market unless their judgment on a company has changed, which is hurting returns this year, he said. “You can’t draw too much from looking at comparisons for a short period in what has been an extremely choppy market,” Greenwald said. “The market turbulence seems to be emotionally driven.” The funds examined for this article were the 10 largest by assets among actively-managed stock funds domiciled in and investing primarily in the U.S. They collectively hold $558.5 billion in assets, about 15 percent of the total assets held by domestic stock mutual funds. Track Record Eight of the funds list the S&P 500 as their primary benchmark. One uses the Russell 3000 Growth Index and one the Russell 1000 Value Index. Nine of the 10 funds beat their corresponding index last year and eight outperformed over the five years ending June 2. Lowell said active managers that invest part of their assets abroad were hurt by their non-U.S. holdings. The MSCI World Index has tumbled 13 percent since April 23, when the S&P reached its high, while the MSCI EAFE Index of developed countries has declined 14 percent. The euro has dropped 16 percent against the dollar this year, eroding the value of euro-denominated assets. The $63 billion Investment Company of America, managed by Los Angeles-based Capital Group, held 11 percent in non-U.S. stocks as of April 30, according to the firm’s website. Contrafund had 19 percent of its portfolio in international stocks, according to Fidelity’s website. ‘Manager’s Job’ “Most growth managers have been transformed by the global marketplace into global growth managers,” Lowell said. “That said, it’s the manager’s job to outperform their specific benchmark, and six months is a meaningful time period.” Over the past five years, an average of 44 percent of all large-company U.S. stock funds have beaten their respective indexes, according to data from Morningstar Inc. That performance has helped lower-cost passive funds and exchange-traded funds, which track market indexes and trade on exchanges like stocks, attract investor money. Passive domestic equity funds saw inflows of $26.2 billion in 2009, according to data from Morningstar Inc. in Chicago. “There are many reasons for investors to have a preference for ETFs, and one of them is that they have lower costs,” said Russel Kinnel , the director of mutual-fund research at Morningstar. Still, “investors need to understand that index funds have costs too, so the returns after costs will be lower.” Contrafund The average expense ratio for ETFs was 0.57 percent of assets in 2009, compared with 0.99 percent for index funds and 1.41 percent for actively managed U.S. stock mutual funds, data from Morningstar show. Contrafund, the largest stock fund managed by Fidelity, invests in companies expected to grow earnings faster than competitors. The fund was helped this year by its biggest holding, Apple Inc. The Cupertino, California-based maker of the Macintosh computers and iPods, climbed 21 percent this year after the introduction of its iPad device. Berkshire Hathaway Inc., the fund’s third-biggest holding, rose 5.8 percent. Google Inc., the fund’s second-biggest holding, has declined 20 percent this year. The fund has risen at an average annual pace of 4.3 percent over the past five years, beating 93 percent of similar funds, Bloomberg data show. Hurt by BP Sophie Launay , a spokeswoman for Fidelity, said the fund was helped by a bigger proportion of investments in consumer discretionary stocks and fewer investments in utilities and telecommunication stocks. Danoff was not available for comment. The Fidelity Growth Company Fund, run by Steven Wymer , was also helped by Apple, its top holding. The fund’s second-biggest holding is Salesforce.com Inc., the world’s largest seller of Internet-based customer-management software, whose shares have advanced 22 percent this year. Over the past five years, the fund has climbed at an average annual rate of 5.1 percent. Vanguard Windsor II, managed by six independent subadvisory groups, targets companies seen as undervalued when measured against earnings and other financial metrics. It has trailed its benchmark, the Russell Value 1000, by 3.5 percentage points this year and underperformed 80 percent of similar funds. The fund lost an annual average 0.03 percent in the past five years. The fund has been hurt this year by its position in London- based British Petroleum, whose shares have dropped 34 percent since an April 20 rig explosion in the Gulf of Mexico triggered the biggest oil spill in U.S. history. The fund held 1.5 percent of its assets in BP as of March 31. ‘Volatile Period’ “It’s been a very volatile period of time and you can be on the right side or the wrong side of that,” Dan Newhall , of Vanguard’s portfolio review team, said in a telephone interview. “And with volatility you can make some of your more compelling investments.” Fidelity, the world’s largest mutual fund company, manages $1.5 trillion in assets. Vanguard, based in Valley Forge, Pennsylvania, manages about $1.3 trillion. To contact the reporters on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net . Christopher Condon in Boston at ccondon4@bloomberg.net

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Spreading European Fiscal Crisis Hurts Banks Credit Markets

June 7, 2010

By John Glover June 7 (Bloomberg) — Signs the global economic recovery is faltering and Europe’s fiscal crisis is spreading added to investor concern that banks will have difficulty in clawing back the $2.4 trillion they’re owed by that region’s most indebted nations. The cost of insuring against a default on financial-company bonds surged, with the Markit iTraxx Financial Index of credit- default swaps linked to the senior debt of 25 European banks and insurers climbing 6 basis points to 189, according to CMA DataVision in London, near the highest level since March 2009. The Markit iTraxx SovX Western Europe Index of contracts on 15 governments rose 0.5 basis point to 169, compared with the record-high 174.4 reached on June 4. Europe’s debt-ridden nations have to raise almost 2 trillion euros ($2.4 trillion) within the next three years to refinance maturing bonds and fund deficits, according to Bank of America Corp. Data. A U.S. jobs report at the end of last week fell short of economists’ forecasts, while a spokesman for Hungary’s prime minister said it was “no exaggeration” to suggest the eastern European nation may default. “The market is so volatile right now, it’s ready to blow up on any headline no matter how meaningful it should be,” said Aziz Sunderji , a credit strategist at Barclays Capital in London. “People are extremely risk-averse.” Italy needs 1.07 trillion euros by 2013 to refinance debt that’s coming due, Spain must raise 546 billion euros and Greece needs 152.6 billion euros, according to a Bank of America estimate in May. Portugal and Ireland each have to raise about 80 billion euros, the data show. Junk Bond Sale Elsewhere in credit markets, Spectrum Brands Inc. of Atlanta, which makes Rayovac batteries, pet food and lawn-care products, completed the biggest sale of junk bonds in more than three weeks on June 4. The company sold $750 million of eight- year debt, according to Bloomberg data. The notes yield 9.75 percent, or 687 basis points more than similar-maturity Treasuries, Bloomberg data show. The sale was the first by a speculative-grade issuer since DriveTime Automotive Group Inc. of Phoenix issued $200 million of securities on May 27. It was the biggest since Canonsburg, Pennsylvania-based Mylan Inc., the largest U.S. maker of generic drugs, sold $1.25 billion of notes on May 12. Spectrum, which is acquiring small-appliances manufacturer Russell Hobbs Inc. , boosted the size of the note sale by $250 million and cut a planned term loan maturing in 2016 by the same amount while increasing its interest rate and widening the discount from face value, a person familiar with the talks said. Bond Rating Moody’s Investors Service rated the notes B2, five steps below investment grade, and Standard & Poor’s graded them an equivalent B. High-yield debt is rated below Baa3 by Moody’s and lower than BBB- by S&P. Before Spectrum’s sale, high-yield borrowers hadn’t issued debt in four consecutive trading sessions, the longest streak since the week ended Feb. 19, when sales halted after Greece revised down its GDP data for the first three quarters of 2009. Some investors are being lured back into the junk market after yield spreads climbed to the highest levels since the end of 2009. The extra yield investors demand to own junk bonds instead of Treasuries climbed 24 basis points last week to 714, Bank of America Merrill Lynch index data show. ‘Constructive’ “We’re constructive on the value proposition of high-yield right now,” said Paul Scanlon , team leader for U.S. high yield at Boston-based Putnam Investments LLC, which manages $53 billion in fixed income. “You’re looking at spreads that are 700 basis points off of Treasuries, defaults that continue to decline, first-quarter earnings that have generally been pretty favorable as we evaluate issuers, and in an economy that continues to be in a moderate recovery.” The extra yield investors demand to own corporate bonds rather than government debt is rising at a slower pace. Spreads added 3 basis points last week to 196 basis points, or 1.96 percentage points, after soaring 44 basis points in May, the most since at least November 2008, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Average yields fell to 4.05 percent from 4.06 percent on May 28. Spectrum’s junk bond sale gave investors some confidence that credit markets will stave off the worst of the financial crisis, as did the stabilization in the rate at which banks say they can borrow from one another in dollars. The three-month Libor rate has been little changed since last week, after more than doubling since February. ‘Mitigates Fears’ “Libor mitigates some of the fears investors have,” said John Hawley, who helps manage $19 billion of investment-grade credit as a senior money manager at Aviva Investors in Des Moines, Iowa. “The fact it has flattened recently indicates that financial markets are functioning normally.” Concern that European leaders won’t be able to prevent a default by Greece or other debt-laden nations pushed three-month Libor to 0.53844 percent on May 27, the highest level since July 6, according to data from the British Bankers’ Association. The rate was little changed at 0.537 percent today. The difference between Libor and the overnight indexed swap rate — a gauge of banks’ reluctance to lend known as the Libor- OIS spread — was little changed at 31.8 basis points today, after last week climbing by the least since the period ending April 23. The spread surged to 364 after the collapse of Lehman Brothers Holdings Inc. in September 2008. Bond Sales Fall Corporate bond sales in the U.S. fell in a holiday- shortened week, prices of leveraged loans were little changed after the biggest monthly drop since November 2008. “Markets remain very nervous and sentiment is fragile, but we believe risky assets are in the process of bottoming out,” Barclays fixed-income strategists led by Ajay Rajadhyaksha in New York wrote in a June 4 note to clients. The firm’s economists boosted their estimates of U.S. gross domestic product growth for 2010 to 3.6 percent from 3.4 percent, citing gains in the labor market, private consumption and investment. U.S. corporate profits rose 31 percent last quarter from a year earlier, the most since 1984, Commerce Department data released in Washington two weeks ago showed. Earnings surged as fast only six times in the past 60 years, according to Barclays Capital. Each of those periods was followed by GDP growth of at least 3 percent the following year. The last time it happened, in 2004, the economy expanded 3.6 percent, from 2.5 percent in 2003, and yield spreads on company bonds narrowed to an average of 138 basis points from 171. Continued Recovery “I’m generally bullish,” said Kevin Mathews , head of high-yield portfolios at F&C Investments in London, who helps manage 1.5 billion euros ($1.8 billion) of assets. “Fundamentals point to continued economic recovery. Eventually new issues will come back. My bet is sooner rather than later.” Corporate bond sales declined to $15.6 billion last week, compared with $18.3 billion in the prior period, according to data compiled by Bloomberg, amid holidays in the U.S. and U.K. Prices of high-yield, high-risk loans were little changed last week at 88.93 cents on the dollar, after tumbling 3.61 cents in May, based on the S&P/LSTA U.S. Leveraged Loan 100 Index. May’s drop was the most since the index plunged 7.6 cents to 63.20 cents in November 2008. Four institutional loan deals were completed last week, bringing this year’s volume to $55.2 billion, compared with $38.2 billion in all of 2009, according to New York-based JPMorgan Chase & Co. In emerging markets, the extra yield investors demand to own corporate debt instead of government securities widened 11 basis points for the week to 332, according to JPMorgan’s EMBI+ Index. Spreads have tightened from this year’s high of 346 basis points on May 20. Payrolls Report The worse-than-forecast U.S. jobs data and news from Hungary continued to roil markets in Europe and Asia today. “Fiscal issues are challenging the central bankers globally and a well thought-out, concrete and coordinated plan is required soon,” BNP Paribas SA credit strategists led by Vivek Tawadey in London wrote in a note to clients. “The market is starting to voice serious anxiety.” The cost of protecting Italy’s government bonds from default rose, with credit-default swaps on the nation climbing 5 basis points to 250, CMA prices show. Contracts on Spain’s debt increased 7 basis points to 275, while Greece advanced 14 basis points to 778. Portugal was up 4.5 basis points to 363 and contracts on Hungary added 4 basis points to 404, according to CMA. An increase signals a deterioration in investor perceptions of a company or country’s creditworthiness. The Markit iTraxx Asia credit-swap index of 50 investment- grade borrowers outside Japan rose 15 basis points to 147 in Singapore, according to Royal Bank of Scotland Group Plc. That’s the biggest jump since May 25. Australia Swaps The Markit iTraxx Australia index climbed 15 basis points to 141 in Sydney, the biggest increase since May 19 and to the highest level since Sept. 3, according to Nomura Holdings Inc. and CMA. The Markit iTraxx Japan index surged 15 basis points to 153 in Tokyo, the largest jump since March 25, according to Deutsche Bank AG and CMA. The Markit iTraxx Crossover Index of swaps linked to 50 European companies with mostly high-yield credit ratings jumped 20 basis points to 609, Markit Group Ltd. prices show. The European Central Bank may need to “support markets by being more aggressive in its debt purchases, or government bond markets could unravel,” said Jim Reid , head of fundamental strategy at Deutsche Bank AG in London. “We really are at a pivotal point.” U.S. Employment U.S. payrolls rose by 431,000 last month, including a 411,000 jump in government hiring of temporary workers for the 2010 census, the Labor Department in Washington said on June 4. Economists projected a 536,000 gain, according to the median forecast in a Bloomberg News survey. Private payrolls rose a less-than-forecast 41,000. The jobless rate fell to 9.7 percent. Peter Szijjarto , a spokesman for the Hungarian Prime Minister, said the nation’s economy is in a “very grave situation” on June 4, increasing concern that Europe’s sovereign debt crisis, which started in Greece, is spreading. State Secretary Mihaly Varga said the next day that comments about a possible default were “unfortunate.” Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt. To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

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U.S. Index Futures Rebound, European Stocks Pare Decline on German Exports

June 7, 2010

By Daniel Tilles June 7 (Bloomberg) — U.S. stock-index futures rebounded and European shares pared declines after a surge in German export orders allayed concerns that the global recovery is faltering. The euro erased losses against the dollar and the yen. Futures on the Standard & Poor’s 500 Index rose 0.3 percent to 1068.70 at 12:33 p.m. in London, recovering from a drop of as much as 1.3 percent, and the Stoxx Europe 600 Index was down 0.2 percent, after sliding as much as 1.7 percent. The euro was little changed at $1.1960, rebounding from $1.1877, the lowest level since March 2006. The common currency also bought 109.95 yen, after depreciating to the weakest level since November 2001. German factory orders unexpectedly jumped for a second month in April after the euro’s 16 percent plunge against the dollar this year made Europe more competitive in world markets. Sentiment improved after Hungarian officials toned down comments about a potential default that rattled investors and sent the S&P 500 to its lowest level in four months on June 4. “There’s some better data out of Germany and there’s an absence of fresh bad news, allowing a bit of a recovery in risk,” said Charles Diebel , head of sovereign strategy at Nomura International Plc in London. “Equities are recovering and fixed-income markets have lost their shine. It’s more of a pause for breath than an outright reversal.” The rebound in U.S. futures indicated the S&P 500 may recover some of its 3.4 percent slump from June 4. Citigroup Inc. advanced 0.8 percent in early New York trading. Talecris Biotherapeutics Holdings Corp. soared 38 percent after Grifols SA agreed to buy the company for $3.4 billion. Asia Pacific Stocks The MSCI Asia Pacific Index slumped 3.3 percent, its biggest daily decline in 14 months. Greek stocks tumbled for a second day, with the ASE Index falling 3.2 percent to its lowest level since 1998. Hellenic Telecommunications Organization SA dropped 7.5 percent in Athens after saying it will cut its dividend. Declines were limited in Europe as BP Plc gained for a third day, rising 2.9 percent in London, after increasing the pace at which it’s capturing oil pouring into the Gulf of Mexico after the oil rig explosion. The region’s banks were also among the best performers, with the Stoxx 600 Banks Index rising 0.4 percent. UBS AG in Zurich rose 2.1 percent, while Banco Santander SA , Spain’s biggest lender, rose for the first time in six days, gaining 1 percent in Madrid. Emerging Markets The MSCI Emerging Markets Index declined 2.3 percent, after earlier dropping as much as 2.7 percent. Hungary’s BUX index slipped 1.6 percent, paring an earlier decline of as much as 5.3 percent. The forint gained 0.7 percent versus the euro, the best performance among 25 emerging-market currencies. It rebounded from the biggest two-day drop since 2008 last week after the government pledged to stick to the budget-deficit goal approved by creditors and distanced itself from comments raising the prospect of a default. Nickel and tin erased declines, and copper pared a drop of as much as 3.3 percent, and was down 1.2 percent at $6,204 a metric ton on the London Metal Exchange. Crude oil rose 4 cents to $71.54 a barrel, after earlier falling as low at $69.51. The yield on the German 10-year bond was little changed at 2.58 percent, after dropping to 2.54 percent, the lowest level since Bloomberg began collating the data in 1989. The 10-year U.S. Treasury yield rose 3 basis points to 3.24 percent, after falling to 3.16 percent. The government will sell $70 billion of notes and bonds this week, down from $78 billion at the last sale of similar securities. The cost of insuring against a default on European sovereign debt rose, with the Markit iTraxx SovX Western Europe Index of credit-default swaps tied to the debt of 15 governments climbing 0.5 basis point to 169, compared with the record-high 174.4 reached on June 4, CMA DataVision prices show. To contact the reporter for this story: Daniel Tilles in London at dtilles@bloomberg.net

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Bear Options at Record as Wien Says Stocks to Rally

June 7, 2010

By Jeff Kearns and Rita Nazareth June 7 (Bloomberg) — Confidence in stocks is sinking to record lows in the options market even with the U.S. economy poised for its fastest growth in six years, a sign to Blackstone Group LP’s Byron Wien that it’s time to buy. Contracts that pay off should the benchmark index for U.S. stocks plunge more than 23 percent from its April high cost 75 percent more than those speculating on gains, the biggest premium ever, according to data compiled by Bloomberg and OptionMetrics LLC. The 10-day average difference exceeded 50 percent 34 times since 1996. In those cases, the Standard & Poor’s 500 Index gained a median 7.2 percent in six months. Wien says the gap shows Europe’s debt crisis caused too much pessimism in the U.S., where S&P 500 companies are forecast to post 38 percent profit growth in two years. Rising demand for insurance shows investors unwilling to sell stocks have hedged against losses, according to New York-based Morgan Stanley. “People are trying to protect themselves and they are willing to overpay for it,” said Wien, 77, the Blackstone adviser who foresaw last year’s gains in stocks and oil and predicts the S&P 500 will rally to 1,300 before ending 2010 little changed. “Bearishness is high. The best time to buy stocks is when the level of bearishness is at a peak.” Bank of America Corp. and the Oil Services Holders Trust are among stocks with bearish options priced highest relative to bullish ones, according to data compiled by Bloomberg. So-called two-month skew for the Charlotte, North Carolina-based lender and the energy exchange-traded fund exceeds 38 percent, data compiled by Bloomberg show. Employment Disappoints U.S. equities fell last week, with the S&P 500 dropping 2.3 percent to 1,064.88, as a Labor Department report showed private employers added 41,000 jobs in May, 77 percent fewer than the median forecasts of economists surveyed by Bloomberg. The stock index extended its 2010 retreat to 4.5 percent. The gauge’s June futures lost 0.5 percent to 1,060.50 as of 7:40 a.m. in London. Profits for S&P 500 companies are projected to rise 17 percent in 2010 and 18 percent next year, estimates from more than 2,000 analysts compiled by Bloomberg show. The index trades at 13.1 times 2010 per-share earnings forecasts, compared with an average 16.4 times reported income since 1954. Economists predict gross domestic product will expand 3.2 percent this year, the most since 3.6 percent in 204, the data show. The 10-day average premium for options that pay off should the S&P 500 decline to 940 jumped to 75.7 percent on May 27 and remains within a percentage point of the record, based on data compiled by Bloomberg and OptionMetrics , a New York-based provider of options market data and analytics. A retreat to that level would represent a 23 percent drop from the April high, exceeding the 20 percent commonly defined as a bear market. ‘Paranoia Premium’ “When you see this much fear in the market, it’s probably the time to get a little more constructive and possibly look to putting money to work,” said Peter Sorrentino , who helps oversee $13.3 billion at Huntington Asset Advisors in Cincinnati. “The skew is too heavy. The paranoia premium has driven it up.” Billionaire Warren Buffett said in a press conference on May 1 that his Berkshire Hathaway Inc. is ready to spend as much as $10 billion on an acquisition as the economy improves. Buffett, chief executive officer of the Omaha, Nebraska-based insurer and investment company made an “all-in wager” on the U.S. by paying $27 billion for Fort Worth, Texas-based railroad Burlington Northern Santa Fe Corp. in February. Rally Signal When bearish puts cost 50 percent more than bullish calls, the S&P 500 rallied 28 times during the next six months and declined 6 times, according to OptionMetrics data going back to 1996 compiled by Bloomberg. The biggest gain started in November 1997, when the index rose 18 percent and the premium increased to 54.1 percent, data show. The S&P 500 plunged 35 percent after the skew reached 50.2 percent in June 2008. More than $1.9 trillion has been erased from American equities since April 23 on concern budget deficits in Greece, Portugal and Spain will spur bank losses and freeze lending. The S&P 500 slid 3.4 percent to a four-month low on June 4 following the jobs report and speculation that Hungary’s budget deficit may force a default. A group of U.S. financial companies posted the third- biggest retreat during the selloff since April, falling 16 percent. Energy and commodity producers both lost 17 percent. “The tail risk of a significant stock market correction is very high now, thus the option prices correctly reflect the cost of hedging against” a decline, Nouriel Roubini , the New York University professor who warned of a financial crisis in 2006, said in an e-mail on June 2. “Macro risks and financial risk are significantly rising.” Loss Protection Rising options costs suggest money managers are suffering smaller losses than are reflected in benchmark indexes after Europe’s crisis sent the S&P 500 down 8.2 percent in May, the biggest monthly slump since February 2009, said Christopher Metli , a derivatives strategist at Morgan Stanley. Hedge funds fell 2.6 percent last month, according to the HFRX Global Hedge Fund Index. That was the largest drop since November 2008, two months after New York-based Lehman Brothers Holdings Inc. filed the biggest-ever bankruptcy. “The market’s telling you that investors are still bullish, and they’re hanging onto their positions, but they’re protecting through options,” Metli said. “Investors are worried about sovereign contagion, and the growth slowdown transmitting globally.” Traders are buying options on Bank of America amid the 1.9 percent rally in its stock this year. The second-biggest U.S. home lender behind San Francisco-based Wells Fargo & Co. said on June 2 that loan charge-offs may have peaked as demand improves. The company posted losses of about $9 billion in its mortgage unit since January 2008, Bloomberg data show. Transocean, Halliburton The Oil Services ETF has plunged 31 percent since April 23. The security is made up of companies such as Vernier, Switzerland-based Transocean Ltd. and Halliburton Co. and Schlumberger Ltd. in Houston that declined after U.S. President Barrack Obama proposed extending a moratorium on deepwater drilling. New York-based Citigroup Inc. was the fund’s biggest holder with 3.55 million shares, or 19 percent of those outstanding, as of March 31, data compiled by Bloomberg show. “It could be a buying opportunity,” said Wayne Lin , a money manager at Baltimore-based Legg Mason Inc., which manages $685 billion. “Stocks are at good value. Earnings are growing fairly strongly. Economic fundamentals are still strong, especially for the U.S., making it possible that the risks are overblown.” To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net ; Jeff Kearns in New York at jkearns3@bloomberg.net .

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Euro Stronger Than Deutsche Mark Proves Trichet Currency Remains Credible

June 7, 2010

By Bo Nielsen and Oliver Biggadike June 7 (Bloomberg) — The euro’s 21 percent tumble from last year’s high has left the currency above the average level since its creation in 1999 and stronger than its predecessor, the deutsche mark. Even as the euro weakened 2.5 percent last week against the dollar and fell below $1.20 for the first time since March 2006, it remains higher than the close of $1.1837 on Jan. 4, 1999, the first Monday of trading after its introduction, and stronger than the $1.1842 monthly average since inception. A Bloomberg composite of the currencies comprising the euro averaged $1.1945 through last week from the end of 1988, when Europe’s foreign- exchange market was dominated by the German mark. While former Federal Reserve Chairman Paul Volcker said last month that Europe’s widening debt crisis may cause the 16- nation currency to dissolve, European Central Bank President Jean-Claude Trichet said May 31 the euro is keeping its value in a “remarkable fashion.” Policy makers may welcome the drop to boost exports, Goldman Sachs Group Inc. and Morgan Stanley said. “Many would say this weaker euro is just what the doctor ordered,” said Alan Ruskin , head of foreign-exchange strategy at Royal Bank of Scotland Group Plc in Stamford, Connecticut. “From a levels standpoint they should have absolutely no complaints and they can live with a euro this low.” A Deutsche Bank measure weighted according to the region’s biggest trading partners shows the euro is 2 percent higher than its average since 2001. Euro Shocks That hasn’t prevented speculation that the EU is in danger of collapse as its leaders unveiled an almost $1 trillion loan package last month to halt the slide in the euro and local bonds after Greece’s budget deficit rose to almost 14 percent of gross domestic product, exceeding the group’s 3 percent limit. The currency received more shocks when Fitch Ratings cut Spain’s AAA credit grade and officials in Hungary, while not part of the euro, said the nation’s economy is in a “very grave situation,” and talk of a default isn’t “an exaggeration.” “You have the great problem of a potential disintegration of the euro,” Volcker said in a May 13 speech in London. “The essential element of discipline in economic policy and in fiscal policy that was hoped for” with the creation of the euro has “so far not been rewarded in some countries,” he said. The weaker euro will boost the EU’s GDP as much as 1 percentage point in 2011, compensating for the brake on growth from lower spending, according to Thomas Stolper , an economist at Goldman Sachs in London. GDP expanded 0.2 percent last quarter from a 2.5 percent contraction a year earlier. The euro and the dollar are the world’s most-traded foreign-exchange pair. ‘Healthy Core’ “Bringing about the end of the euro is something that one cannot plausibly conceive of at the moment,” Helmut Schlesinger , head of the Bundesbank from 1991 to 1993, said in a May 25 telephone interview from his home in suburban Frankfurt. “We’ve gotten into difficulties due to the Greeks and possibly Portugal and Spain will have a relatively strong impact, but this is offset by a healthy core in the center of Europe.” European manufacturers are already starting to reap the benefits of a lower currency. Exports in the 16 euro nations rose 2.5 percent in the first three months of 2010 from the fourth quarter, when they increased 1.7 percent, the EU’s statistics office in Luxembourg said June 4. The gradual weakening of the euro toward parity with the dollar over the next year may save the shared currency by helping countries such as Greece, Italy and Spain regain competitiveness, said Nouriel Roubini , the New York University economist who predicted the financial crisis. ‘Orderly Fall’ “An orderly fall in the value of the euro is the only thing that is going to prevent a breakup of the monetary union,” Roubini said June 5 in Trento, Italy. For STMicroelectronics NV in Geneva, Europe’s largest chipmaker, a 1 percent variation in the exchange rate can add or take away $8 million to $10 million in quarterly gross profit, Chief Financial Officer Carlo Ferro said in an investor presentation on June 3 in London. “I continue to say that I see good news from the current euro-dollar rate,” French Prime Minister Francois Fillon told reporters in Paris on June 4. “The president and I have been saying for years that the euro-dollar rate didn’t reflect reality and was penalizing our exports.” The currency, which dropped to $1.1877 today, the weakest level since March 2006, will bottom at $1.20 against the dollar and 115 yen by the end of the year before appreciating to $1.22 and 123 yen by the close of 2011, based on median estimates of at least 18 analysts in Bloomberg surveys. Goldman Sachs strategists forecast it will probably “bounce” to $1.35. ‘One-Sided Risk’ “Investors are not crediting sufficiently the possibility that neither growth nor fiscal outcomes will be as poor as expected,” Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York, wrote in a June 3 report. “Investors are forgetting that there is no such thing as a one- sided risk over the medium term.” Barclays, one of the top five forecasters for the euro- dollar exchange rate, predicts the currency will strengthen to $1.25 by the end of the year. New York-based Morgan Stanley pegs the currency’s fair value at between $1.15 and $1.20. “The euro is not weak,” said Sophia Drossos , co-head of global foreign-exchange strategy at Morgan Stanley. “It’s hard for me to fathom at this juncture why a central bank would be so concerned about needing to support its currency when arguably it’s not even weak from a longer-term fair value perspective.” Euro Plunge Concern that Hungary may renege on its debt drove the euro down 1.61 percent on June 4, the most since March 27, 2009, on speculation the Europe’s debt crisis is worsening. Credit-default swaps on sovereign bonds in the region climbed to a record high. The Markit iTraxx SovX Western Europe Index of contracts on 15 governments rose to 174.4 basis points. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to meet its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. While the outlook for Hungary “remains poor, it does not quite have the potential to roil markets as much as Greece or the other peripheral euro-zone members,” Win Thin , a senior currency strategist at Brown Brothers Harriman & Co., wrote in a note to clients last week. Data from the Bank for International Settlements in Basel, Switzerland, show that cross-border banking exposure to Hungary was $158.1 billion at the end of the third quarter, compared with $302.6 billion for Greece, $286.7 billion for Portugal, and $1.15 trillion for Spain, according to Thin. ‘Situation Stable’ Hungary’s economic situation is stable and recent comments about a possible default were “unfortunate,” State Secretary Mihaly Varga told reporters two days ago in Budapest, where he also pledged to stick to the budget-deficit goal approved by the country’s creditors. Traders were the most bearish on the euro in at least seven years last week as the ECB shows no signs of intervening to stem the slide. The premium charged for the right to sell the euro in three months over contracts to buy the currency touched minus 3.93 percent on June 2, so-called risk reversals show. It was minus 3.4 percent at the end of last week. As recently as June 2, 2009, the opposite was the case, with the premium charged to purchase the euro at an all-time high of 1.185 percent. Intervention Odds Odds of central bank intervention, where policy makers buy or sell currencies to influence exchange rates, fell to 27 percent on June 2, from 31 percent on May 20, according to a Morgan Stanley model of probability. As recently as the fourth quarter, it peaked at 50 percent without triggering action by the ECB. That suggests reticence among policy makers to intervene has increased, Morgan Stanley’s Drossos said. “The euro is a credible currency,” Trichet told reporters in Vienna on May 31. “I would also say that the euro is keeping its value in a remarkable fashion. It is a very important asset for external and internal investors.” At a meeting of Group of 20 finance chiefs in Busan, South Korea, June 4-5, Trichet said fiscal tightening in “old industrialized economies” would aid the expansion by shoring up investor confidence. The last time the ECB intervened was in 2000. On September 22, it was joined by central banks from the U.S., Japan, the U.K. and Canada in purchasing the euro at about 86 cents, boosting the currency as much as 4 percent against the yen and the dollar within 15 minutes. The ECB bought more two months later after it weakened to a record 82.3 cents, Barclays said in a May 21 note. ‘Weak Economy’ Policy makers only intervened after the euro depreciated 27 percent against the dollar and almost 33 percent versus the yen from its January 1999 inception. The European currency is now 45 percent stronger than its low compared with the dollar and 24 percent versus the yen. “A weak European economy needs a weak currency to provide support to off-set the shortfall in growth,” Stephen Roach , chairman of Morgan Stanley Asia Ltd., said in an interview with Bloomberg Television on June 4. “I would not be surprised to the see the euro depreciate” 5 to 10 percent on a trade- weighted basis, he said. To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net ; Oliver Biggadike in New York at obiggadike@bloomberg.net

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Loan Selloff Forcing Borrowers to Boost Rates Credit Markets

June 4, 2010

By Emre Peker June 4 (Bloomberg) — Calpine Corp. , the largest U.S. generator of natural-gas-fueled electricity, and at least five more borrowers are being forced to boost interest rates on proposed loans after the market’s worst month since 2008. The margin Calpine offered to pay over lending benchmarks for a $1.3 billion loan increased by as much as 2 percentage points to 5.5 percentage points, while the remaining companies had to raise rates from 0.75 percentage point to 4.5 percentage points, according to people familiar with the talks who declined to be identified because the terms weren’t set. For Houston- based Calpine, that’s an extra $26 million a year in interest. Prices of high-yield, high-risk loans fell 3.89 percent during last month as measured by the S&P/LSTA U.S. Leveraged Loan 100 Index as investors fled all but the safest government securities amid growing concern that rising budget deficits in Europe will cause the global economy to slow. The selloff created bargains among existing debt, reducing the attractiveness of new loans. “There’s a lack of desperation to buy new issue, it’s got to be compelling in terms of price and structure,” Jeff Cohen , a managing director of loan capital markets at Credit Suisse Group AG in New York, said in an interview. “Investors are being much more choosy, they’re seeing compelling opportunities in the secondary market that were not available prior to the recent market turbulence.” ‘Opportunity to Re-Price’ Styron Corp., the Dow Chemical Co. unit that Bain Capital LLC is buying, R3 Treatment Inc., Spectrum Brands Inc., Awas Aviation Capital Ltd. and U.S. Gas & Electric Inc. also offered more yield by proposing higher interest on loans, among other things, according to data compiled by Bloomberg. “The loan market is taking the global events and volatility in other risk markets as an opportunity to re-price deals,” Erik Falk , co-head of leveraged credit at KKR & Co.’s asset management unit with more than $13 billion in assets under management, said in an interview. Elsewhere in credit markets, the Federal Reserve said that U.S. commercial paper outstanding fell to the lowest on record, led by overseas financial issuers, bonds of BP Plc rose the most on record and the new issue market in the U.S. and Europe suggested signs of thawing. Derivatives indexes show greater confidence among investors to own corporate bonds, while emerging-market debt rallied. Short-Term IOUs The U.S. market for short-term IOUs, commercial paper, declined $10.2 billion to $1.06 trillion in the week ended June 2, the lowest since at least 1999, data compiled by Bloomberg show. Without seasonal adjustment, debt outstanding fell $5.5 billion, the fifth straight week of declines, to $1.05 trillion, also the lowest on record. In Europe, financial companies’ overnight deposits with the European Central Bank rose to a record yesterday. They’re wary of lending to each other during the continent’s sovereign debt crisis. Banks placed 320.4 billion euros ($389.9 billion) in the ECB’s overnight deposit facility at 0.25 percent, compared with 316.4 billion euros on June 2, the central bank said. That’s the most since the introduction of the euro in 1999. “The news flow over the past few weeks has spooked banks and since nobody knows how exposed individual financial institutions are, it’s deemed safer to park cash with the ECB rather than lend,” said Norbert Aul , an interest-rate strategist at Commerzbank AG in London. BP Rebounds BP’s 4.75 percent notes due in 2019, issued by the company’s finance unit, increased 3.5 cents to 93.68 cents on the dollar in New York, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. The debt fell to 90.1 cents on June 2, its lowest ever, amid concern about liabilities the company may face from the worst oil spill in U.S. history. “Investors are starting to get their hands around the potential exposures the spill companies may have,” said Joel Levington , managing director of corporate credit at Brookfield Investment Management Inc. Analysts expect BP can maintain its dividend, “which should be reassuring to the credit side,” Levington said. Rising investor confidence was reflected in the Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness. The index dropped 0.4 basis point to a mid- price of 117 basis points in New York, according to Markit Group Ltd. The index typically falls as investor confidence improves and rises as it deteriorates. In Asia, bond risk rose today. The Markit iTraxx Asia index increased 2 basis points to 135 basis points, BNP Paribas SA prices show. The Markit iTraxx Japan index rose 1 basis point to 141, according to Morgan Stanley. European Sovereign CDS Credit-default swaps on European sovereign debt rose, with contracts on Spain jumping 9 basis points to 265, Portugal adding 12 basis points to 351 and Greece climbing 28 basis points to 745, according to CMA DataVision prices. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments widened 4 basis points to 157.5, compared with the record-high 167.2 on May 6. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt. The new issue market is starting to open, while company bond sales globally total $9.54 billion this week, compared with $18.2 billion during the period ended May 28, according to data compiled by Bloomberg, Bank of Montreal , the fourth-largest Canadian bank, sold $2 billion of five-year covered bonds to lead $5.1 billion of issuance in the U.S., Bloomberg data show. Air Liquide SA , the world’s biggest producer of industrial gases sold the second European benchmark corporate bond since April, following German railway company Deutsche Bahn AG’s offering on June 2. Narrower Spread Air Liquide sold 500 million euros of 10-year notes yielding 90 basis points more than the benchmark swap rate, narrower than the 100 basis-point spread first offered to investors, said a banker involved in the deal. In emerging markets, bond spreads shrank 6 basis points on average to 308, the narrowest since May 17 and down from last month’s high of 346 on May 20, according to JPMorgan Chase & Co.’s Emerging Market Bond index. Junk bond spreads were at 693 basis points, 151 basis points wider than this year’s low on April 26, according to Bank of America Merrill Lynch’s US High Yield Master II Index . Spreads in the leveraged loan market widened less than the speculative-grade bond market. High-yield debt is rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s. ‘Financial Instability’ The S&P/LSTA 100 Index dropped 3.61 cents, or 3.89 percent, in May to 89.11 cents on the dollar, the most since falling 7.58 cents, or 10.71 percent, in November 2008. The average spread to maturity over the three-month London interbank offered rate for the most actively traded loans climbed 1.02 percentage points to 4.46 percentage points, after reaching the lowest level in almost two years on April 15, according to S&P Leveraged Commentary and Data. Libor, the rate banks charge to lend to each other, was set yesterday at 53.78 basis points, or 0.537 percent, up from its record low of 24.88 basis points in February. Moelven Industrier ASA , a Norwegian forest products supplier, refinanced 1.05 billion kroner ($162 million) of loans with a five-year revolving credit line, extending maturities from July 2011, the company said in a statement . Moelven agreed to pay higher interest for the loan, adding 10 million kroner a year to total financing costs, it said. “Financial instability has contributed to a tightening of credit markets,” Moelven President Hans Rindal said in the statement. “The risk of such unstable market conditions arising is the reason” for the refinancing, he said. Bank Flexibility In the U.S., Styron canceled a $125 million second-lien debt deal and increased the capacity of its $675 million first- lien loan to $800 million. It also boosted the margin over Libor to 5.5 percentage points, from 4.75 percentage points. Deutsche Bank AG is arranging the financing, which may be sold at 98.5 cents to 99 cents on the dollar and backs Styron’s $1.63 billion buyout by Boston-based private equity firm Bain. U.S. Gas & Electric, the North Miami Beach, Florida-based retail energy marketer, offered lenders an all-in rate of 14 percent on the $125 million second-lien term loan it is seeking. The company had previously proposed to pay 7.5 percentage points to 8.5 percentage points more than Libor, with a 2 percent floor on the lending benchmark. “Many of the new issue loans are the syndication of deals banks had underwritten,” KKR’s Falk said. “The banks are using flexibility they have and working with investors to find levels that clear the market so they can move the loans and de-risk their balance sheets.” Leveraged loans fell as low as 88.71 cents on May 25 before climbing above 89 cents last week. The S&P/LSTA 100, which tracks the 100 largest dollar-denominated first-lien leveraged loans, rose June 3 by 0.16 cent to 89.07 cent on the dollar. “Given the broad calming in the credit markets, it seems like cash loans are starting to find a floor,” said Alex Stromberg , head of U.S. par-loan trading at Barclays Capital, said in a telephone interview from New York. “We would like to see some more stabilization in the high yield bond market before more real-money players start to come back into the loan market.” To contact the reporter on this story: Emre Peker in New York at epeker2@bloomberg.net

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