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Yuan Gain Limited to 1.9% This Year on Euro Drop, Survey Shows

by on June 20, 2010

By Bloomberg News June 20 (Bloomberg) — The yuan’s appreciation may be limited to 1.9 percent against the dollar this year as the euro’s slump hurts exporters, a survey of economists showed after China signaled an end to a two-year peg. The currency will probably climb to 6.7 per dollar by Dec. 31, according to the median estimate of 14 analysts interviewed after the People’s Bank of China said yesterday it will allow greater “flexibility.” The central bank ruled out “large- scale appreciation” and said it will prevent “excessive” moves. Gains may be limited because the yuan already strengthened 16.5 percent against the euro this year, eroding earnings for Chinese exporters in the European Union, the nation’s largest market. U.S. Senator Charles Schumer said lawmakers will push ahead with proposals for trade sanctions until they are convinced the advance is fast enough to allow fair competition. “The yuan’s appreciation against the dollar may be limited over the next six months after the Chinese currency gained significantly against the euro,” said Ma Jun , a Hong Kong-based economist for Deutsche Bank AG, who predicts a gain of 1.9 percent. U.S. politicians can only “declare this a partial victory,” he added. The outlook for appreciation in the survey is stronger than that indicated by forwards. The six-month non-deliverable contract jumped 0.5 percent on June 18 to 6.7596 per dollar, reflecting bets the yuan will rise 1 percent from the spot rate of 6.8262. Day One Chinese authorities have prevented the currency from strengthening against the dollar since July 2008 to help exporters cope during the global financial crisis. The currency appreciated 21 percent in the three years after a peg to the dollar was scrapped in July 2005 and replaced by a managed float against a basket of currencies including the euro. The yuan may advance 0.2 percent to 6.815 tomorrow and 0.4 percent this week, according to the median estimate of six analysts who gave forecasts. The central bank sets the reference rate for yuan trading at around 9:15 a.m. every day and allows the currency to fluctuate up to 0.5 percent from the fixing. “The PBOC will probably keep the reference rate stable on Monday,” said Lu Zhengwei , an economist at Industrial Bank Co. in Shanghai, who predicts a 0.1 percent gain this year. “It needs to watch the market’s responses to the flexibility statement. Market participants won’t make bold moves either. They are waiting for more signals from the PBOC.” The central bank, which has accumulated $2.4 trillion in currency reserves intervening in currency markets, said it will maintain the trading band and curb inflows of short-term speculative capital. Depreciation Possible Authorities will “ensure the exchange rate’s fluctuation is controllable and prevent the possibility of market forces causing excessive adjustment in the rate,” the central bank said in a statement today. “We can’t exclude the possibility of yuan depreciation,” said Shen Jianguang , Mizuho Securities Asia Ltd.’s chief economist for Greater China, who said a 2.5 percent drop is possible this year if the dollar-euro rate is unchanged. Even so, he added, China needs to show flexibility in its currency before the Group of 20 summit in Toronto on June 26-27. Textiles makers stand to lose the most from appreciation and some would “face bankruptcy” with profit margins as low as 3 percent, Zhang Wei , vice chairman of the China Council for the Promotion of International Trade, said in March. Europe’s debt crisis has added to pressure on their earnings. Swift Umbrella Co., based in the southern Chinese province of Fujian, was forced by European buyers to cut prices 6 percent this year, Xu Youchuan, sales manager, said in a June 2 interview. Balance of Payments China’s narrowing balance-of-payments gap indicates that there’s no basis for “large-scale appreciation” in the yuan, the central bank said yesterday. The current-account surplus, for trade in goods and services, narrowed 32 percent to $297.1 billion in 2009, government data show. Exports have been rebounding, exceeding imports by $19.5 billion in May, from a $1.68 billion surplus in April and a deficit of $7.24 billion in March. Overseas sales jumped 48.5 percent in May from a year earlier, customs bureau data show. Benefits From Gains The World Bank said last week that a stronger currency would help China cool inflation , which accelerated to a 19-month high of 3.1 percent in May, higher than the government’s full- year target of 3 percent. Yuan gains would also give more room for Asian currencies to strengthen after the euro’s record depreciation prompted exporters from Taiwan to South Korea to call for currency controls to protect their earnings. Companies focused on the Chinese market, including Beijing- based computer maker Lenovo Group Ltd. and Shanghai-based China Eastern Airlines Corp. , said in March that they would gain from lower import costs and stronger consumer purchasing power. “A 3 percent gain against the dollar won’t have any major impact on exports this year,” said Chen Chao, ICBC Credit Suisse Asset Management Co.’s chief economist. “Whether the yuan will rise or fall against the dollar will depend on the dollar’s movement against other currencies.” — Judy Chen , Belinda Cao, Bob Chen, Frances Yoon, Yanping Li. Editors: Sandy Hendry , Paul Panckhurst To contact the reporters on this story: Judy Chen in Shanghai at Xchen45@bloomberg.net .

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Yuan Gain Limited to 1.9% This Year on Euro Drop, Survey Shows

China’s Hu Buys Time on Yuan Valuation by Announcement Before G-20 Summit

by on June 20, 2010

By Bloomberg News June 21 (Bloomberg) — Chinese President Hu Jintao may have succeeded in removing the yuan’s valuation from debate at this week’s Group of 20 leaders’ summit, economists and political analysts say. How much time he’s bought depends on how flexible the currency will become. Days before China’s central bank announced on June 19 that the yuan’s “flexibility” would increase, officials said the currency’s value was not a suitable item for discussion at the G-20 meeting in Toronto. Hu will meet with President Barack Obama and other world leaders at the June 26-27 summit to discuss items ranging from the global response to the European sovereign-debt crisis to increasing the influence of developing countries in the International Monetary Fund. U.S. lawmakers threatened to thwart China’s wish to keep the yuan off the meeting’s agenda. House Ways & Means Chairman Sander Levin , a Michigan Democrat, said on June 16 that China needed to act by the end of the summit or risk U.S. legislation which could levy penalties on Chinese imports. “I think the announcement is in a sense preemptive and will probably keep currency off the agenda at the G-20 meeting, a well advertised Chinese goal,” said Nicholas Lardy , a senior fellow at the Peterson Institute for International Economics in Washington. “My view is that they have at a minimum bought some time.” Constructive Step Obama, in a statement, called China’s decision a “constructive step.” U.S. lawmakers said China’s move was insufficient. Senator Charles Schumer , the New York Democrat who is co- sponsor of legislation that would allow for duties on Chinese imports, said he was dissatisfied with a statement that didn’t indicate the timing or amount of adjustment. “We hope the Chinese will get more specific in the next few days,” Schumer said on June 19. “If not, then for the sake of American jobs and wealth, which are hurt every day by China’s practices, we will have no choice but to move forward with our legislation.” Senator Charles Grassley of Iowa, the Finance Committee’s ranking Republican, said the Obama administration and Congress “need to keep the pressure on until China takes concrete actions to appreciate its currency exchange rate in a meaningful way.” China’s central bank yesterday reaffirmed it would maintain the yuan’s 0.5 percent daily trading band and said greater yuan flexibility would help cut the trade surplus and reduce the reliance on exports as a driver of growth. Lawmakers’ Ire The yuan has been held at about 6.83 to the dollar since mid-2008. The currency appreciated 21 percent in the three years after a peg to the dollar was scrapped in July 2005 and replaced by a managed float against a basket of currencies including the euro and the Japanese yen. The persistent surplus has been a driving force of Washington lawmakers’ ire. China is the second-biggest trading partner of the U.S. after Canada and the U.S. is China’s biggest single-country export market. Two-way trade last year amounted to $366 billion, with China recording a $226.8 billion surplus, according to U.S. Commerce Department data. Should the yuan resume its appreciation against the U.S. dollar, which was suspended in July 2008 as world economic growth slowed, then China can “avoid becoming a target in the spotlight” at the G-20, said Li Cheng , head of research at the John L. Thornton China Center at the Brookings Institution in Washington. China’s Agenda That will allow China to focus on its own agenda at the meeting. Vice Foreign Minister Cui Tiankai told reporters on June 18 that China wanted to discuss new quotas for the IMF that would boost the power of developing countries, promote the overhaul of global financial regulations, speak out against trade protectionism and pay more attention to economic development in poorer countries. Zhang Tao , head of the central bank’s international department, said at the same briefing that Europe’s sovereign debt crisis was also a high priority for discussion. China, by moving on its currency ahead of the Toronto summit, has shifted attention to the budget deficits of developed nations, said Eswar Prasad , a senior fellow at the Brookings Institution and a former head of the China division at the International Monetary Fund. Vice Finance Minister Zhu Guangyao said June 18 that China’s fiscal debt was about 20 percent of gross domestic product. That compares with almost 100 percent in the U.S. Trade Surplus Still, Hu’s respite may be cut short if China’s trade surplus rises and the yuan only makes a small appreciation of about 2-3 percent against the dollar in the coming months, Lardy said. Reports this month from the U.S. and China highlighted concern that trade imbalances, which reached record levels before the global financial crisis, may be reemerging. Chinese exports climbed 48.5 percent in May from a year earlier. In the first four months of the year the U.S. posted a $71.0 billion trade deficit with China, up 5.7 percent from the year-ago period. “China could come under renewed pressure,” Lardy said. — Michael Forsythe in Beijing, with assistance from Rebecca Christie and Ian Katz in Washington and Li Yanping in Beijing. Editors: John n Brinsley , Paul Panckhurst . To contact the reporter on this story: Michael Forsythe in Beijing at mforsythe@bloomberg.net ;

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China’s Hu Buys Time on Yuan Valuation by Announcement Before G-20 Summit

Macarthur Coal Founder Talbot, Sundance Resources CEO Missing in Cameroon

June 20, 2010

By Elisabeth Behrmann June 20 (Bloomberg) — Sundance Resources Ltd ., an Australian-based iron ore explorer, today confirmed Ken Talbot , former chief executive officer of Australian mining company Macarthur Coal Ltd ., is missing in West Africa after an aircraft carrying nine mining executives was lost. Talbot was on board a plane chartered by Sundance on a flight to the company’s Mbalam iron ore project in Cameroon from the capital, Yaounde, yesterday, according to an e-mailed statement from Don Nissen, chairman of Talbot Group Management. Also missing are Sundance Chairman Geoff Wedlock , Chief Executive Officer Don Lewis , Company Secretary John Carr-Gregg and non-executive directors John Jones, Craig Oliver and Talbot, Sundance said in an e-mailed statement today. “Between them, without exaggeration, there are two centuries of mining experience,” said Gavin Wendt , an analyst at Sydney-based Mine Life Resources, by phone. “The families of the missing have been notified and are being supported during this deeply distressing time,” the company’s statement said. Emergency response procedures have been activated, with efforts focused on coordinating with the government authorities in the Republic of Cameroon, Republic of Gabon and Republic of Congo as well as with the Department of Foreign Affairs and Trade and Australia’s diplomatic representatives to locate the aircraft, the Perth-based iron-ore developer’s statement said. Well Known Talbot owns 16.1 percent of Sundance, according to Bloomberg data. A well-known Australian mining figure, he founded Macarthur Coal and built the company into the largest producer of pulverized coal used in steelmaking, with a current market capitalization of A$3.18 billion ($2.76 billion). His current investments span iron ore, uranium, liquefied natural gas and copper. Talbot Group spokesman Shane Edwards and Sundance spokeswoman Felicity Nuttal declined to comment further. “The Australian High Commissioner-designate to Abuja — currently in Cameroon — is managing the government’s response on the ground,” said spokeswoman Ranya Alkadamanini of the Australian Department of Foreign Affairs and Trade by e-mail. Sundance shares rose 4 percent on June 18 to 13 cents, giving it a market capitalization of A$352.3 million. To contact the reporter on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net

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Yuan Policy Move May Boost China&rsquos Stocks, CICC, SocGen Say

June 20, 2010

By Bloomberg News June 20 (Bloomberg) — China’s pledge to make the yuan more flexible may boost shares denominated in the currency when markets open tomorrow, China International Capital Corp. and Societe Generale SA said. “If it leads to appreciation for the yuan, it’s good news for the market,” Hao Hong , global equity strategist for CICC in Beijing, said in a report today. “Investors will want to get into Chinese assets because they will be worth more. It will also deflect political criticism and help stem inflation.” The People’s Bank of China said yesterday that it will “increase the renminbi’s exchange-rate flexibility” after the economy improved. Officials have kept the yuan, also known as the renminbi, at about 6.83 per dollar since July 2008, aiding the nation’s exporters and fueling tensions with trade partners. A stronger yuan would aid Chinese companies by boosting their purchasing power, while the likelihood of the currency appreciating is an incentive for foreign investors to buy yuan- denominated stock, Glenn Maguire , a Hong Kong-based economist for the French bank, said in a phone interview today. “It’s probably going to be a positive for the A-share market,” Maguire said. “It makes A-share valuations look more attractive,” he said, declining to estimate how much shares may gain. The local-currency A-shares rose in 2005 when China revalued its currency, he added. The Shanghai Composite Index has tumbled 23 percent this year as the government pares stimulus measures and Europe’s sovereign-debt crisis adds to the risk of a renewed global slump. In 2005, the benchmark, which covers both A shares and foreign- currency B shares, rose 2.5 percent on July 22, the day after the government revalued the currency. China Petroleum & Chemical Corp. , Asia’s largest refiner, said today that it would benefit from yuan gains. ‘Obvious’ Result “Almost all of our sales are on the domestic Chinese market and we purchase a great deal of raw oil for processing from overseas,” spokesman Huang Wensheng said by phone. “If the ability of domestic consumers to take on higher costs increases and the cost of our overseas purchases decreases, then the result for us is an obvious one.” CICC’s Hao expects airlines and paper producers to benefit most from possible yuan appreciation, saying it will reduce the cost of raw materials such as fuel oil and pulp. CICC was the top-ranked brokerage for China research in the annual survey by Asiamoney magazine. Shares of raw-material importers such as Sinopec , and companies with dollar-denominated debt, such as China Southern Airlines Co. , gained in trading after the revaluation in 2005. The situation this year isn’t entirely the same. The central bank’s announcement yesterday that it will scrap an effective peg to the dollar didn’t include a one-off gain for the currency. In 2005, the yuan immediately rose 2.1 percent as part of a policy shift. The latest policy shift may support the currencies of Taiwan, South Korea and Australia, economies closely linked to China, over the rest of this year, Maguire said. A stronger currency because of “gradual” appreciation will boost the country’s purchasing power, he said. — Paul Panckhurst , Allen Wan . Editors: John Liu , Allen Wan To contact Bloomberg News staff for this story: Paul Panckhurst at +86-10-6649-7574 or ppanckhurst@bloomberg.net

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China Signals End to Yuan&rsquos Peg to Dollar Before G-20 Summit

June 20, 2010

By Bloomberg News June 20 (Bloomberg) — China said it will allow a more flexible yuan, signaling an end to the currency’s two-year-old peg to the dollar a week before a Group of 20 summit. The decision was made after the world’s third-largest economy improved, the central bank said in a statement on its website yesterday, without indicating a timeframe for the change. It ruled out a one-time revaluation, saying there is no basis for “large-scale appreciation,” and kept the yuan’s 0.5 percent daily trading band unchanged. “The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability,” the People’s Bank of China said. “It is desirable to proceed further with reform of the renminbi exchange-rate regime and increase the renminbi exchange-rate flexibility.” The move may help deflect criticism from President Barack Obama and other G-20 leaders, who have blamed China for relying on an undervalued currency to promote exports. It also affirms Treasury Secretary Timothy F. Geithner ’s policy of encouraging China to loosen restrictions on the yuan while resisting calls in Congress for trade sanctions. Geithner in April delayed a report to lawmakers assessing whether China or any other country is unfairly manipulating its exchange rate. ‘Very Cautious’ A question-and-answer document published by the central bank on its website today said Chinese companies will have time to adapt to yuan changes and reaffirmed a government policy of “gradualism” in exchange-rate reform. Increased yuan flexibility and “two-way movements” by the currency will aid management of the economy, it said. Liu Li-Gang , a Hong Kong-based economist at Australia and New Zealand Banking Group Ltd., said today’s statement acknowledges that the yuan will appreciate and suggests daily volatility may increase, while highlighting that the government remains “very cautious” and will control the pace of gains. “This is another small victory for Tim Geithner ,” Goldman Sachs Group Inc. Chief Global Economist Jim O’Neill told Bloomberg Television in St. Petersburg, Russia. “It makes it a lot more difficult for Washington and Congress to do China bashing,” O’Neill said. “The Chinese are increasingly confident they can make this adjustment to a domestic-driven economy rather than the one relying on exporting low-value-added stuff to the rest of the world.” Geithner’s Praise Geithner, in a statement, praised China’s decision and added that “vigorous implementation would make a positive contribution to strong and balanced global growth.” The Obama administration received advance notice of the announcement, U.S. officials said. China, by moving on its currency ahead of the G-20 meeting June 26-27 in Toronto, has shifted attention to the budget deficits of developed nations, said Eswar Prasad , a senior fellow at the Brookings Institution in Washington. “It can now argue that the G-20 leaders should focus on the major determinants of global imbalances, especially the buildup of debt in advanced economies,” said Prasad, a former head of the China division at the International Monetary Fund. Chinese authorities have prevented the currency from strengthening since July 2008 to help exporters cope with sliding demand triggered by the global financial crisis. The currency appreciated 21 percent in the three years after a peg to the dollar was scrapped in July 2005 and replaced by a managed float against a basket of currencies including the euro and the Japanese yen. The yuan is a denomination of China’s currency, the renminbi. ‘Vote of Confidence’ “This move is a vote of confidence in the global recovery and a reaffirmation of Beijing’s longstanding commitment to a flexible currency regime,” Stephen Roach , chairman of Morgan Stanley Asia Ltd., said in an e-mail. “This shift, however, is not a panacea for an unbalanced global economy. Surplus savers like China still need to take additional actions to stimulate internal private consumption.” Chinese companies focused on the domestic market, including Beijing-based computer maker Lenovo Group Ltd. , said in March that they would gain from lower import costs and stronger consumer purchasing power should the yuan appreciate. Textiles makers would stand to lose the most and some would “face bankruptcy,” Zhang Wei , vice chairman of the China Council for the Promotion of International Trade, said then. Freedom to Move A more flexible currency would give China more freedom to decide on monetary policy and reduce inflationary pressures by lowering import costs, the World Bank said last week. The central bank agreed today, saying benefits could include curbing price gains, asset bubbles and dependence on exports for growth. China’s inflation rate jumped to a 19-month high of 3.1 percent in May. Central-bank dollar buying has left the nation with $2.4 trillion in currency reserves , the world’s largest holding. Global stocks may rise on the potential benefits of the policy shift for trading partners including the U.S., David Cohen , an economist at Action Economics in Singapore, said today. Societe Generale SA said yuan-denominated A-shares may advance tomorrow on the likelihood of currency gains boosting Chinese companies’ purchasing power. BHP Billiton Ltd. and Rio Tinto Group, the world’s largest and third-largest mining companies, may benefit from increased Chinese demand, fund manager Saxon Nicholls , of Herschel Asset Management Ltd. in Melbourne, said today. ‘Crisis’ Policy “China has ended its crisis-mode exchange-rate policy as the economy recovers strongly and inflationary pressure continues to build,” Li Daokui , an adviser on the People’s Bank of China’s policy board, said in an interview yesterday. “The yuan’s future trend depends on the euro’s movement, and the trends of other major currencies.” Yuan 12-month forwards rose the most this year two days ago, gaining 0.5 percent to 6.7125 per dollar. The contracts reflect bets the currency will appreciate 1.7 percent from the spot rate of 6.8262. They had been pricing in appreciation of 3.2 percent on April 30 before a slump in the euro and a worsening of Europe’s debt crisis eased pressure for appreciation. Geithner postponed an April 15 deadline for a semiannual review of the currency policies of major U.S. trading partners, which might have resulted in China being labeled a currency manipulator. China owned $900 billion of U.S. Treasuries as of April, the largest foreign holdings. Export Rebound China’s overseas sales jumped 48.5 percent in May from a year earlier, the biggest gain in more than six years. A narrowing balance-of-payments gap indicates that there’s no basis for “large-scale appreciation” by the yuan, the central bank said in the English version of yesterday’s statement. The Chinese version said no “large-scale volatility.” Twelve of 19 respondents surveyed by Bloomberg in April predicted the central bank would allow the currency to float more freely this quarter, while the rest saw a move by year-end. Eleven ruled out a one-time revaluation, while 15 predicted a wider daily trading range. “Continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies,” yesterday’s statement said. That suggests a looser link to the dollar, said Ben Simpfendorfer , chief China economist at Royal Bank of Scotland Group Plc, in Hong Kong. To contact the reporters on this story: Judy Chen in Shanghai at Xchen45@bloomberg.net .

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Australia, Telstra May Agree on $9.5 Billion National Broadband Network

June 20, 2010

By Gemma Daley June 20 (Bloomberg) — Australia’s Prime Minister Kevin Rudd announced an A$11 billion ($9.5 billion) deal with Telstra Corp. on a national broadband network. State-owned NBN Co., which is building the network to provide a high-speed fiber Internet network, will get access to Telstra’s infrastructure. Telstra’s voice and broadband customers will switch to NBN Co.’s network if an agreement signed today is completed, Rudd said. “This paves the way for a faster, cheaper and more efficient rollout of the network,” Rudd told reporters in Canberra. “This also means the network will be cheaper.” The agreement, which needs to be approved by shareholders, will be worth A$11 billion, Telstra said in a statement released in Canberra. That pays for the decommissioning of Telstra’s copper network and cable broadband service, use of its infrastructure and the value of the phone company avoiding some costs. Telstra Chairman Catherine Livingstone said the company needs to forge a “definitive agreement” with the government. Its 1.4 million direct shareholders will get to vote on the agreement in the first half of calendar 2011, before new laws can be drafted and approval is sought from the Australian Competition and Consumer Commission. “Telstra has negotiated very hard,” Livingstone said in Canberra. “We will take the final proposal through an independent experts review.” Existing Network Telstra’s copper-wire platform is Australia’s only network. Telstra receives fees from rivals including Singapore Telecommunications Ltd.’s Optus unit when they want to offer voice and Internet services in Australia. Rudd announced the NBN plan in April last year, touting the network as the biggest change to the market dominated by Telstra. NBN plans to deliver coverage to 90 percent of the country at data-transfer speeds of 100 megabits per second, faster than services available to many homes and businesses. Telstra will not get a stake in NBN Co., but will be the network’s biggest customer, Communications Minister Stephen Conroy said. To contact the reporter on this story: Gemma Daley in Canberra at gdaley@bloomberg.net

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Yuan Gain May Be Limited to 1.9% by Year-End as Euro Slump Cools Exports

June 20, 2010

By Bloomberg News June 20 (Bloomberg) — The yuan’s appreciation may be limited to 1.9 percent against the dollar this year as the euro’s slump hurts exporters, a survey of economists showed after China signaled an end to a two-year peg. The currency will probably climb to 6.7 per dollar by Dec. 31, according to the median estimate of 14 analysts interviewed after the People’s Bank of China said yesterday it will allow greater “flexibility.” The central bank ruled out “large- scale appreciation” and said it will prevent “excessive” moves. Gains may be limited because the yuan already strengthened 16.5 percent against the euro this year, eroding earnings for Chinese exporters in the European Union, the nation’s largest market. U.S. Senator Charles Schumer said lawmakers will push ahead with proposals for trade sanctions until they are convinced the advance is fast enough to allow fair competition. “The yuan’s appreciation against the dollar may be limited over the next six months after the Chinese currency gained significantly against the euro,” said Ma Jun , a Hong Kong-based economist for Deutsche Bank AG, who predicts a gain of 1.9 percent. U.S. politicians can only “declare this a partial victory,” he added. The outlook for appreciation in the survey is stronger than that indicated by forwards. The six-month non-deliverable contract jumped 0.5 percent on June 18 to 6.7596 per dollar, reflecting bets the yuan will rise 1 percent from the spot rate of 6.8262. Day One Chinese authorities have prevented the currency from strengthening against the dollar since July 2008 to help exporters cope during the global financial crisis. The currency appreciated 21 percent in the three years after a peg to the dollar was scrapped in July 2005 and replaced by a managed float against a basket of currencies including the euro. The yuan may advance 0.2 percent to 6.815 tomorrow and 0.4 percent this week, according to the median estimate of six analysts who gave forecasts. The central bank sets the reference rate for yuan trading at around 9:15 a.m. every day and allows the currency to fluctuate up to 0.5 percent from the fixing. “The PBOC will probably keep the reference rate stable on Monday,” said Lu Zhengwei , an economist at Industrial Bank Co. in Shanghai, who predicts a 0.1 percent gain this year. “It needs to watch the market’s responses to the flexibility statement. Market participants won’t make bold moves either. They are waiting for more signals from the PBOC.” The central bank, which has accumulated $2.4 trillion in currency reserves intervening in currency markets, said it will maintain the trading band and curb inflows of short-term speculative capital. Depreciation Possible Authorities will “ensure the exchange rate’s fluctuation is controllable and prevent the possibility of market forces causing excessive adjustment in the rate,” the central bank said in a statement today. “We can’t exclude the possibility of yuan depreciation,” said Shen Jianguang , Mizuho Securities Asia Ltd.’s chief economist for Greater China, who said a 2.5 percent drop is possible this year if the dollar-euro rate is unchanged. Even so, he added, China needs to show flexibility in its currency before the Group of 20 summit in Toronto on June 26-27. Textiles makers stand to lose the most from appreciation and some would “face bankruptcy” with profit margins as low as 3 percent, Zhang Wei , vice chairman of the China Council for the Promotion of International Trade, said in March. Europe’s debt crisis has added to pressure on their earnings. Swift Umbrella Co., based in the southern Chinese province of Fujian, was forced by European buyers to cut prices 6 percent this year, Xu Youchuan, sales manager, said in a June 2 interview. Balance of Payments China’s narrowing balance-of-payments gap indicates that there’s no basis for “large-scale appreciation” in the yuan, the central bank said yesterday. The current-account surplus, for trade in goods and services, narrowed 32 percent to $297.1 billion in 2009, government data show. Exports have been rebounding, exceeding imports by $19.5 billion in May, from a $1.68 billion surplus in April and a deficit of $7.24 billion in March. Overseas sales jumped 48.5 percent in May from a year earlier, customs bureau data show. Benefits From Gains The World Bank said last week that a stronger currency would help China cool inflation , which accelerated to a 19-month high of 3.1 percent in May, higher than the government’s full- year target of 3 percent. Yuan gains would also give more room for Asian currencies to strengthen after the euro’s record depreciation prompted exporters from Taiwan to South Korea to call for currency controls to protect their earnings. Companies focused on the Chinese market, including Beijing- based computer maker Lenovo Group Ltd. and Shanghai-based China Eastern Airlines Corp. , said in March that they would gain from lower import costs and stronger consumer purchasing power. “A 3 percent gain against the dollar won’t have any major impact on exports this year,” said Chen Chao, ICBC Credit Suisse Asset Management Co.’s chief economist. “Whether the yuan will rise or fall against the dollar will depend on the dollar’s movement against other currencies.” — Judy Chen , Belinda Cao, Bob Chen, Frances Yoon, Yanping Li. Editors: Sandy Hendry , Paul Panckhurst To contact the reporters on this story: Judy Chen in Shanghai at Xchen45@bloomberg.net .

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Roach, O&rsquoNeill Say China Yuan Move Shows Confidence in Recovery

June 20, 2010

By Gopal Ratnam and Timothy R. Homan June 20 (Bloomberg) — China’s decision to allow a more flexible yuan shows the country’s leaders are convinced the world economic rebound is durable, said economists Stephen Roach and Jim O’Neill . “This move is a vote of confidence in the global recovery,” Roach , Chairman of Morgan Stanley Asia Ltd. said in an e-mail. “Markets are going to like” the decision, said Jim O’Neill, chief global economist for Goldman Sachs Group Inc. China’s central bank said the decision to “increase the renminbi’s exchange-rate flexibility” was made after the world’s third-largest economy improved. Chinese authorities had prevented the currency from strengthening since July 2008 to help exporters cope with sliding demand triggered by the global financial crisis. The announcement yesterday may help restore investor confidence shaken by the European debt crisis, O’Neill said in an interview in St. Petersburg, Russia. “It could be that China is doing its bit to rescue the world markets,” he said. “It may allow for attention to be diverted from the obsession with the European monetary union and the sovereign currencies in Europe.” China’s decision, a week before Group of 20 leaders meet in Toronto to consider ways to safeguard the economic recovery, may deflect criticism that its undervalued currency has added to lopsided global flows of trade and investment. The announcement signals an end to the currency’s two-year-old peg to the dollar. ‘Not a Panacea’ Even so, Roach said the shift “is not a panacea for an unbalanced global economy.” Countries such as China with trade surpluses will have to take steps to stimulate private demand, he said, while countries such as the U.S. “need to show a credible commitment to fiscal consolidation and take actions that would boost personal saving.” The People’s Bank of China ruled out a one-time revaluation, saying there is no basis for “large-scale appreciation,” and kept the yuan’s 0.5 percent daily trading band unchanged. The yuan is a denomination of China’s currency, the renminbi. The currency appreciated 21 percent in the three years after a peg to the dollar was scrapped in July 2005 and replaced by a managed float against a basket of currencies including the euro and the Japanese yen. China’s announcement could be seen as a signal that the “worst of the financial crisis is over, China is growing very strongly, that this is an auspicious time to go back to the policy that had initially been announced,” Nicholas Lardy , a senior fellow at the Peterson Institute for International Economics in Washington, said in a telephone interview yesterday with Bloomberg News. Gains Unclear Lardy said it’s unclear how much the currency will be allowed to strengthen. “I think if they had in mind some indication of a specific amount, they might have announced that today. I would not anticipate a second announcement; the markets are just going to see.” O’Neill predicted the yuan will appreciate 1 percent when markets open June 21 and predicts a 5 percent appreciation by year’s end. Chinese exports have helped drive growth in the world’s third-largest economy. China’s overseas sales jumped 48.5 percent in May from a year earlier, the biggest gain in more than six years. Exports exceeded imports by $19.5 billion, from $1.68 billion in April and a deficit of $7.24 billion in March that was the first in six years. Increasingly Confident “The Chinese are increasingly confident they can make this adjustment to a domestic-driven economy rather than the one relying on exporting low-value-added stuff to the rest of the world,” O’Neill said. It remains to be seen if China’s decision is a “symbolic move or a true shift in China’s currency policy that will result in significant currency appreciation,” Eswar Prasad , a senior fellow at the Brookings Institution in Washington and a former IMF economist, said in an e-mail. Still, “this move signifies recognition by Chinese officials that a more flexible exchange rate is in China’s own interest,” Prasad said. Changes in China’s exchange rate may not have an impact on the bilateral trade balance, John Frisbie , president of the U.S. China Business Council said in an e-mail. “Much of what we import from China is stuff that we imported from elsewhere before,” Frisbie said. “If we didn’t import it from China, we’d likely just import it from somewhere else.” To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net Gopal Ratnam in Washington at gratnam1@bloomberg.net .

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Roach, O&rsquoNeill Say China Yuan Move Shows Confidence in Recovery

June 20, 2010

By Gopal Ratnam and Timothy R. Homan June 20 (Bloomberg) — China’s decision to allow a more flexible yuan shows the country’s leaders are convinced the world economic rebound is durable, said economists Stephen Roach and Jim O’Neill . “This move is a vote of confidence in the global recovery,” Roach , Chairman of Morgan Stanley Asia Ltd. said in an e-mail. “Markets are going to like” the decision, said Jim O’Neill, chief global economist for Goldman Sachs Group Inc. China’s central bank said the decision to “increase the renminbi’s exchange-rate flexibility” was made after the world’s third-largest economy improved. Chinese authorities had prevented the currency from strengthening since July 2008 to help exporters cope with sliding demand triggered by the global financial crisis. The announcement yesterday may help restore investor confidence shaken by the European debt crisis, O’Neill said in an interview in St. Petersburg, Russia. “It could be that China is doing its bit to rescue the world markets,” he said. “It may allow for attention to be diverted from the obsession with the European monetary union and the sovereign currencies in Europe.” China’s decision, a week before Group of 20 leaders meet in Toronto to consider ways to safeguard the economic recovery, may deflect criticism that its undervalued currency has added to lopsided global flows of trade and investment. The announcement signals an end to the currency’s two-year-old peg to the dollar. ‘Not a Panacea’ Even so, Roach said the shift “is not a panacea for an unbalanced global economy.” Countries such as China with trade surpluses will have to take steps to stimulate private demand, he said, while countries such as the U.S. “need to show a credible commitment to fiscal consolidation and take actions that would boost personal saving.” The People’s Bank of China ruled out a one-time revaluation, saying there is no basis for “large-scale appreciation,” and kept the yuan’s 0.5 percent daily trading band unchanged. The yuan is a denomination of China’s currency, the renminbi. The currency appreciated 21 percent in the three years after a peg to the dollar was scrapped in July 2005 and replaced by a managed float against a basket of currencies including the euro and the Japanese yen. China’s announcement could be seen as a signal that the “worst of the financial crisis is over, China is growing very strongly, that this is an auspicious time to go back to the policy that had initially been announced,” Nicholas Lardy , a senior fellow at the Peterson Institute for International Economics in Washington, said in a telephone interview yesterday with Bloomberg News. Gains Unclear Lardy said it’s unclear how much the currency will be allowed to strengthen. “I think if they had in mind some indication of a specific amount, they might have announced that today. I would not anticipate a second announcement; the markets are just going to see.” O’Neill predicted the yuan will appreciate 1 percent when markets open June 21 and predicts a 5 percent appreciation by year’s end. Chinese exports have helped drive growth in the world’s third-largest economy. China’s overseas sales jumped 48.5 percent in May from a year earlier, the biggest gain in more than six years. Exports exceeded imports by $19.5 billion, from $1.68 billion in April and a deficit of $7.24 billion in March that was the first in six years. Increasingly Confident “The Chinese are increasingly confident they can make this adjustment to a domestic-driven economy rather than the one relying on exporting low-value-added stuff to the rest of the world,” O’Neill said. It remains to be seen if China’s decision is a “symbolic move or a true shift in China’s currency policy that will result in significant currency appreciation,” Eswar Prasad , a senior fellow at the Brookings Institution in Washington and a former IMF economist, said in an e-mail. Still, “this move signifies recognition by Chinese officials that a more flexible exchange rate is in China’s own interest,” Prasad said. Changes in China’s exchange rate may not have an impact on the bilateral trade balance, John Frisbie , president of the U.S. China Business Council said in an e-mail. “Much of what we import from China is stuff that we imported from elsewhere before,” Frisbie said. “If we didn’t import it from China, we’d likely just import it from somewhere else.” To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net Gopal Ratnam in Washington at gratnam1@bloomberg.net .

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China’s Stocks May Rally Tomorrow After Yuan Policy Move, CICC, SocGen Say

June 20, 2010

By Bloomberg News June 20 (Bloomberg) — China’s pledge to make the yuan more flexible may boost shares denominated in the currency when markets open tomorrow, China International Capital Corp. and Societe Generale SA said. “If it leads to appreciation for the yuan, it’s good news for the market,” Hao Hong , global equity strategist for CICC in Beijing, said in a report today. “Investors will want to get into Chinese assets because they will be worth more. It will also deflect political criticism and help stem inflation.” The People’s Bank of China said yesterday that it will “increase the renminbi’s exchange-rate flexibility” after the economy improved. Officials have kept the yuan, also known as the renminbi, at about 6.83 per dollar since July 2008, aiding the nation’s exporters and fueling tensions with trade partners. A stronger yuan would aid Chinese companies by boosting their purchasing power, while the likelihood of the currency appreciating is an incentive for foreign investors to buy yuan- denominated stock, Glenn Maguire , a Hong Kong-based economist for the French bank, said in a phone interview today. “It’s probably going to be a positive for the A-share market,” Maguire said. “It makes A-share valuations look more attractive,” he said, declining to estimate how much shares may gain. The local-currency A-shares rose in 2005 when China revalued its currency, he added. The Shanghai Composite Index has tumbled 23 percent this year as the government pares stimulus measures and Europe’s sovereign-debt crisis adds to the risk of a renewed global slump. In 2005, the benchmark, which covers both A shares and foreign- currency B shares, rose 2.5 percent on July 22, the day after the government revalued the currency. China Petroleum & Chemical Corp. , Asia’s largest refiner, said today that it would benefit from yuan gains. ‘Obvious’ Result “Almost all of our sales are on the domestic Chinese market and we purchase a great deal of raw oil for processing from overseas,” spokesman Huang Wensheng said by phone. “If the ability of domestic consumers to take on higher costs increases and the cost of our overseas purchases decreases, then the result for us is an obvious one.” CICC’s Hao expects airlines and paper producers to benefit most from possible yuan appreciation, saying it will reduce the cost of raw materials such as fuel oil and pulp. CICC was the top-ranked brokerage for China research in the annual survey by Asiamoney magazine. Shares of raw-material importers such as Sinopec , and companies with dollar-denominated debt, such as China Southern Airlines Co. , gained in trading after the revaluation in 2005. The situation this year isn’t entirely the same. The central bank’s announcement yesterday that it will scrap an effective peg to the dollar didn’t include a one-off gain for the currency. In 2005, the yuan immediately rose 2.1 percent as part of a policy shift. The latest policy shift may support the currencies of Taiwan, South Korea and Australia, economies closely linked to China, over the rest of this year, Maguire said. A stronger currency because of “gradual” appreciation will boost the country’s purchasing power, he said. — Paul Panckhurst , Allen Wan . Editors: John Liu , Allen Wan To contact Bloomberg News staff for this story: Paul Panckhurst at +86-10-6649-7574 or ppanckhurst@bloomberg.net

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U.S. Stocks Have Biggest Two-Week Gain Since November on Economic Recovery

June 19, 2010

By Rita Nazareth June 19 (Bloomberg) — U.S. stocks rose, capping the market’s biggest two-week rally since November, after New York- area manufacturing expanded and Europe’s efforts to contain its debt crisis bolstered confidence in the global economy. Caterpillar Inc. and United Technologies Corp. each advanced at least 4.4 percent this week. Apple Inc. jumped 8.1 percent on optimism over the new version of its iPhone. Intel Corp. climbed 3.7 percent to pace gains in semiconductor stocks after Taiwan Semiconductor Manufacturing Co., the world’s largest contract maker of chips, boosted its market forecast. The S&P 500 rose 2.4 percent over the past five days to 1,117.51, adding to the previous week’s 2.5 percent advance. The Dow Jones Industrial Average advanced 239.57 points, or 2.4 percent, to 10,450.64. Both measures erased losses for the year. “The recovery is on track,” said Philip Orlando , the New York-based chief equity market strategist at Federated Investors, which manages about $400 billion. “Investors are now thinking that the global pressures will not be sufficient to derail the economic rebound. The stock market was significantly undervalued. The trend is higher.” The S&P 500, the U.S. equity benchmark , fell as much as 14 percent from a 19-month high in April on concern that widening budget deficits in Europe would curtail global growth. The decline drove the S&P 500’s price-to-earnings ratio to about 15.2 earlier this month, the cheapest valuation since June 2009. The index rebounded 6.4 percent from a seven-month low on June 7 amid speculation the economic rebound will continue. ‘Relief Rally’ Gains in U.S. equities came as the euro rallied 2.3 percent to almost $1.24, its biggest weekly advance against the dollar in more than a year. Increased demand at a Spanish bond sale and an agreement by European Union leaders to disclose how banks perform on stress tests bolstered confidence that European debt crisis is contained “You’ve got a relief rally,” said Kevin Rendino , who manages about $11 billion in Plainsboro, New Jersey, for BlackRock Inc. , the world’s largest asset manager. “Valuations are incredibly attractive, companies are doing well. We applied the right medicine. The economy continues to recover.” All but four of 57 stocks in the S&P 500 Industrials Index gained after the Federal Reserve Bank of New York’s general economic index increased to 19.6, an 11th-straight month of growth. The report helped trigger a 2.4 percent rally on June 15, the biggest gain of the week, which took the S&P 500 above its 200-day moving average for the first time in more than a month. The index remained above the trend line for the rest of the week, a bullish sign to investors who make trading decisions based on chart patterns. Caterpillar, Boeing Caterpillar, the world’s largest maker of bulldozers, surged 9.3 percent to $65.85, leading the gains in the Dow average. United Technologies , the maker of Pratt & Whitney jet engines and Otis elevators, rose 4.5 percent to $69.18. Boeing Co. gained 4 percent to $67.96. The maker of world’s most widely flown jetliner plans to boost production of its best-selling 737 jet by an additional 3 percent, the second increase in as many months as airlines recover from the recession and add to the plane’s $138 billion order backlog. Semiconductor companies had the biggest gain in the S&P 500 among 24 industries, climbing 4.8 percent as a group. Chipmaker Demand Taiwan Semiconductor Manufacturing said global sales will increase almost 30 percent in 2010, up from its April forecast of 22 percent growth. Intel , the world’s largest chipmaker, advanced 3.7 percent to $21.40. Teradyne Inc. rose 12 percent to $11.80. Micron Technology Inc. jumped 12 percent to $10. Apple rallied 8.1 percent to $274.07. Piper Jaffray Cos. analyst Gene Munster raised his 2010 earnings estimate to $13.07 a share from $12.90, citing sales of the company’s new iPhone. He also boosted his forecasts for iPhone sales in the quarters ending in June and September to 9.5 million each. His previous estimates were for sales of 8.5 million and 9 million, respectively. Apple’s share-price estimate was also increased to $348 from $330 at Piper Jaffray. “Technology companies have great business models and they generate a lot of cash,” said Michael Levine , a money manager at New York-based OppenheimerFunds Inc., which oversees about $165 billion. “The replacement cycle in conjunction with better corporate profits will drive higher spending.” M&A Talks M&T Bank Corp. rose the most in the S&P 500, jumping 16 percent to $90.71, on takeover speculation. Banco Santander SA said it has made no decision on whether to combine its business with of the U.S. bank. Matias Inciarte , the Spanish lender’s third vice-chairman, said “it’s been said” that there have been conversations between the two banks. GameStop Corp. and Best Buy Co. had the two biggest declines in the S&P 500, each dropping at least 8.1 percent. Best Buy, the world’s largest consumer-electronics retailer, reported first-quarter profit excluding some items of 36 cents a share, missing the average analyst estimate in a Bloomberg survey by 28 percent. The company said it plans to let customers trade in their used video games at more than 1,000 U.S. stores to grab sales from competitors. A gauge of 12 homebuilders in S&P indexes declined 3.1 percent. Toll Brothers Inc. , the largest U.S. luxury homebuilder, said deposits have been running 20 percent behind the year-earlier period in the past three weeks as the Gulf of Mexico oil spill and European debt crisis hurt buyer confidence. Toll Brothers fell 4.7 percent to $17.95, a third-straight weekly loss. KB Home declined 5.2 percent to $12.30. D.R. Horton Inc. slid 4.5 percent to $10.75. FedEx Slips FedEx Corp. dropped 2.4 percent to $78.70. The world’s largest air-cargo carrier forecast annual profit that trailed analysts’ estimates, citing rising health-care and pension costs in a “moderate” economic recovery. Quarterly reports scheduled for next week include Adobe Systems Inc. , the world’s biggest maker of graphic-design programs, and Oracle Corp. , the world’s second-largest software maker. Walgreen Co., Carnival Corp., Nike Inc., Bed Bath & Beyond Inc., Lennar Corp. , ConAgra Foods Inc. and H&R Block Inc. will also report. Sales of previously-owned homes rose in May while those of new houses fell, reflecting the timing of a tax credit, and a rise in business spending signaled factories are leading the rebound, economists said before reports next week. To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

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U.S. Stocks Have Biggest Two-Week Gain Since November on Economic Recovery

June 19, 2010

By Rita Nazareth June 19 (Bloomberg) — U.S. stocks rose, capping the market’s biggest two-week rally since November, after New York- area manufacturing expanded and Europe’s efforts to contain its debt crisis bolstered confidence in the global economy. Caterpillar Inc. and United Technologies Corp. each advanced at least 4.4 percent this week. Apple Inc. jumped 8.1 percent on optimism over the new version of its iPhone. Intel Corp. climbed 3.7 percent to pace gains in semiconductor stocks after Taiwan Semiconductor Manufacturing Co., the world’s largest contract maker of chips, boosted its market forecast. The S&P 500 rose 2.4 percent over the past five days to 1,117.51, adding to the previous week’s 2.5 percent advance. The Dow Jones Industrial Average advanced 239.57 points, or 2.4 percent, to 10,450.64. Both measures erased losses for the year. “The recovery is on track,” said Philip Orlando , the New York-based chief equity market strategist at Federated Investors, which manages about $400 billion. “Investors are now thinking that the global pressures will not be sufficient to derail the economic rebound. The stock market was significantly undervalued. The trend is higher.” The S&P 500, the U.S. equity benchmark , fell as much as 14 percent from a 19-month high in April on concern that widening budget deficits in Europe would curtail global growth. The decline drove the S&P 500’s price-to-earnings ratio to about 15.2 earlier this month, the cheapest valuation since June 2009. The index rebounded 6.4 percent from a seven-month low on June 7 amid speculation the economic rebound will continue. ‘Relief Rally’ Gains in U.S. equities came as the euro rallied 2.3 percent to almost $1.24, its biggest weekly advance against the dollar in more than a year. Increased demand at a Spanish bond sale and an agreement by European Union leaders to disclose how banks perform on stress tests bolstered confidence that European debt crisis is contained “You’ve got a relief rally,” said Kevin Rendino , who manages about $11 billion in Plainsboro, New Jersey, for BlackRock Inc. , the world’s largest asset manager. “Valuations are incredibly attractive, companies are doing well. We applied the right medicine. The economy continues to recover.” All but four of 57 stocks in the S&P 500 Industrials Index gained after the Federal Reserve Bank of New York’s general economic index increased to 19.6, an 11th-straight month of growth. The report helped trigger a 2.4 percent rally on June 15, the biggest gain of the week, which took the S&P 500 above its 200-day moving average for the first time in more than a month. The index remained above the trend line for the rest of the week, a bullish sign to investors who make trading decisions based on chart patterns. Caterpillar, Boeing Caterpillar, the world’s largest maker of bulldozers, surged 9.3 percent to $65.85, leading the gains in the Dow average. United Technologies , the maker of Pratt & Whitney jet engines and Otis elevators, rose 4.5 percent to $69.18. Boeing Co. gained 4 percent to $67.96. The maker of world’s most widely flown jetliner plans to boost production of its best-selling 737 jet by an additional 3 percent, the second increase in as many months as airlines recover from the recession and add to the plane’s $138 billion order backlog. Semiconductor companies had the biggest gain in the S&P 500 among 24 industries, climbing 4.8 percent as a group. Chipmaker Demand Taiwan Semiconductor Manufacturing said global sales will increase almost 30 percent in 2010, up from its April forecast of 22 percent growth. Intel , the world’s largest chipmaker, advanced 3.7 percent to $21.40. Teradyne Inc. rose 12 percent to $11.80. Micron Technology Inc. jumped 12 percent to $10. Apple rallied 8.1 percent to $274.07. Piper Jaffray Cos. analyst Gene Munster raised his 2010 earnings estimate to $13.07 a share from $12.90, citing sales of the company’s new iPhone. He also boosted his forecasts for iPhone sales in the quarters ending in June and September to 9.5 million each. His previous estimates were for sales of 8.5 million and 9 million, respectively. Apple’s share-price estimate was also increased to $348 from $330 at Piper Jaffray. “Technology companies have great business models and they generate a lot of cash,” said Michael Levine , a money manager at New York-based OppenheimerFunds Inc., which oversees about $165 billion. “The replacement cycle in conjunction with better corporate profits will drive higher spending.” M&A Talks M&T Bank Corp. rose the most in the S&P 500, jumping 16 percent to $90.71, on takeover speculation. Banco Santander SA said it has made no decision on whether to combine its business with of the U.S. bank. Matias Inciarte , the Spanish lender’s third vice-chairman, said “it’s been said” that there have been conversations between the two banks. GameStop Corp. and Best Buy Co. had the two biggest declines in the S&P 500, each dropping at least 8.1 percent. Best Buy, the world’s largest consumer-electronics retailer, reported first-quarter profit excluding some items of 36 cents a share, missing the average analyst estimate in a Bloomberg survey by 28 percent. The company said it plans to let customers trade in their used video games at more than 1,000 U.S. stores to grab sales from competitors. A gauge of 12 homebuilders in S&P indexes declined 3.1 percent. Toll Brothers Inc. , the largest U.S. luxury homebuilder, said deposits have been running 20 percent behind the year-earlier period in the past three weeks as the Gulf of Mexico oil spill and European debt crisis hurt buyer confidence. Toll Brothers fell 4.7 percent to $17.95, a third-straight weekly loss. KB Home declined 5.2 percent to $12.30. D.R. Horton Inc. slid 4.5 percent to $10.75. FedEx Slips FedEx Corp. dropped 2.4 percent to $78.70. The world’s largest air-cargo carrier forecast annual profit that trailed analysts’ estimates, citing rising health-care and pension costs in a “moderate” economic recovery. Quarterly reports scheduled for next week include Adobe Systems Inc. , the world’s biggest maker of graphic-design programs, and Oracle Corp. , the world’s second-largest software maker. Walgreen Co., Carnival Corp., Nike Inc., Bed Bath & Beyond Inc., Lennar Corp. , ConAgra Foods Inc. and H&R Block Inc. will also report. Sales of previously-owned homes rose in May while those of new houses fell, reflecting the timing of a tax credit, and a rise in business spending signaled factories are leading the rebound, economists said before reports next week. To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

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Roach, O’Neill Say China Shows Confidence in Recovery With Yuan Decision

June 19, 2010

By Gopal Ratnam and Timothy R. Homan June 19 (Bloomberg) — China’s decision to allow a more flexible yuan shows the country’s leaders are convinced the world economic rebound is durable, said economists Stephen Roach and Jim O’Neill . “This move is a vote of confidence in the global recovery,” Roach , Chairman of Morgan Stanley Asia Ltd. said in a e-mail. “Markets are going to like” the decision, said Jim O’Neill, chief global economist for Goldman Sachs Group Inc. China’s central bank said the decision to “increase the renminbi’s exchange-rate flexibility” was made after the world’s third-largest economy improved. Chinese authorities had prevented the currency from strengthening since July 2008 to help exporters cope with sliding demand triggered by the global financial crisis. The announcement may help restore investor confidence shaken by the European debt crisis, O’Neill said in an interview in St. Petersburg, Russia. “It could be that China is doing its bit to rescue the world markets,” he said. “It may allow for attention to be diverted from the obsession with the European monetary union and the sovereign currencies in Europe.” China’s decision, a week before Group of 20 leaders meet in Toronto to consider ways to safeguard the economic recovery, may deflect criticism that its undervalued currency has added to lopsided global flows of trade and investment. The announcement signals an end to the currency’s two-year-old peg to the dollar. ‘Not a Panacea’ Even so, Roach said the shift “is not a panacea for an unbalanced global economy.” Countries such as China with trade surpluses will have to take steps to stimulate private demand, he said, while countries such as the U.S. “need to show a credible commitment to fiscal consolidation and take actions that would boost personal saving.” The People’s Bank of China ruled out a one-time revaluation, saying there is no basis for “large-scale appreciation,” and kept the yuan’s 0.5 percent daily trading band unchanged. The yuan is a denomination of China’s currency, the renminbi. The currency appreciated 21 percent in the three years after a peg to the dollar was scrapped in July 2005 and replaced by a managed float against a basket of currencies including the euro and the Japanese yen. China’s announcement could be seen as a signal that the “worst of the financial crisis is over, China is growing very strongly, that this is an auspicious time to go back to the policy that had initially been announced,” Nicholas Lardy , a senior fellow at the Peterson Institute for International Economics in Washington, said in a telephone interview with Bloomberg News. Gains Unclear Lardy said it’s unclear how much the currency will be allowed to strengthen. “I think if they had in mind some indication of a specific amount, they might have announced that today. I would not anticipate a second announcement; the markets are just going to see.” O’Neill predicted the yuan will appreciate 1 percent when markets open June 21 and predicts a 5 percent appreciation by year’s end. Chinese exports have helped drive growth in the world’s third-largest economy. China’s overseas sales jumped 48.5 percent in May from a year earlier, the biggest gain in more than six years. Exports exceeded imports by $19.5 billion, from $1.68 billion in April and a deficit of $7.24 billion in March that was the first in six years. Increasingly Confident “The Chinese are increasingly confident they can make this adjustment to a domestic-driven economy rather than the one relying on exporting low-value-added stuff to the rest of the world,” O’Neill said. It remains to be seen if China’s decision is a “symbolic move or a true shift in China’s currency policy that will result in significant currency appreciation,” Eswar Prasad , a senior fellow at the Brookings Institution in Washington and a former IMF economist, said in an e-mail. Still, “this move signifies recognition by Chinese officials that a more flexible exchange rate is in China’s own interest,” Prasad said. Changes in China’s exchange rate may not have an impact on the bilateral trade balance, John Frisbie , president of the U.S. China Business Council said in an e-mail. “Much of what we import from China is stuff that we imported from elsewhere before,” Frisbie said. “If we didn’t import it from China, we’d likely just import it from somewhere else.” To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net Gopal Ratnam in Washington at gratnam1@bloomberg.net .

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China Signals End to Yuan&rsquos Two-Year Peg to Dollar Before G-20

June 19, 2010

By Bloomberg News June 20 (Bloomberg) — China said it will allow a more flexible yuan, signaling an end to the currency’s two-year-old peg to the dollar a week before a Group of 20 summit. The decision to “increase the renminbi’s exchange-rate flexibility” was made after the economy improved, the central bank said in a statement on its website, without indicating a timeframe for the change. It ruled out a one-off revaluation, saying there is no basis for “large-scale appreciation,” and kept the yuan’s 0.5 percent daily trading band unchanged. “The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability,” the People’s Bank of China said in the statement. “It is desirable to proceed further with reform of the renminbi exchange-rate regime and increase the renminbi exchange-rate flexibility.” The move may help deflect criticism of China when G-20 leaders meet on June 26-27 in Toronto and ease pressure from U.S. lawmakers, who have urged President Barack Obama to use the threat of trade sanctions to force policy change. U.S. Treasury Secretary Timothy F. Geithner has said China’s currency policy contributes to lopsided global flows of trade and investment and has urged it to move toward a more market-driven exchange rate to reduce reliance on exports. “China has effectively shifted the debate right before the G-20 meeting and it can now argue that the G-20 leaders should focus on the major determinants of global imbalances, especially the buildup of debt in advanced economies,” said Eswar Prasad , a senior fellow at the Brookings Institution in Washington and former head of the China division at the International Monetary Fund. “It also serves to acknowledge that they have an important responsibility to the international community.” ‘Vigorous Implementation’ The Obama administration received advance notice of the announcement, U.S. officials said. Geithner praised China’s decision and added that “vigorous implementation would make a positive contribution to strong and balanced global growth.” China’s announcement supports Geithner’s view that China would allow its currency to rise in due course to help its own economy, Prasad said. Chinese authorities have prevented the currency from strengthening since July 2008 to help exporters cope with sliding demand triggered by the global financial crisis. The currency appreciated 21 percent in the three years after a peg to the dollar was scrapped in July 2005 and replaced by a managed float against a basket of currencies including the euro and the Japanese yen. The yuan is a denomination of China’s currency, the renminbi. Global Recovery “This move is a vote of confidence in the global recovery and a reaffirmation of Beijing’s longstanding commitment to a flexible currency regime,” said Stephen Roach , chairman of Morgan Stanley Asia Ltd., in an e-mail. “This shift, however, is not a panacea for an unbalanced global economy. Surplus savers like China still need to take additional actions to stimulate internal private consumption.” Companies focused on the Chinese market, including Beijing- based computer maker Lenovo Group Ltd. and Shanghai-based China Eastern Airlines Corp. , said in March that they would gain from lower import costs and stronger consumer-purchasing power should the yuan appreciate. Textiles makers would stand to lose the most and some would “face bankruptcy” as their profit margins are as low as 3 percent, Zhang Wei, vice chairman of the China Council for the Promotion of International Trade, said in March. China’s inflation rate jumped to a 19-month high of 3.1 percent in May, higher than the government’s full-year target of 3 percent. Central bank dollar buying has left the nation with $2.4 trillion in currency reserves , the world’s largest holding. ‘Crisis Mode’ “China has ended its crisis-mode exchange-rate policy as the economy recovers strongly and inflationary pressure continues to build,” Li Daokui , an adviser on the People’s Bank of China’s policy board, said in an interview. “The yuan’s future trend depends on the euro’s movement, and the trends of other major currencies.” Yuan 12-month forwards rose the most this year two days ago, gaining 0.5 percent to 6.7125 per dollar. The contracts reflect bets the currency will appreciate 1.7 percent from the spot rate of 6.8262. They had been pricing in appreciation of 3.2 percent on April 30 before a slump in the euro and a worsening of Europe’s debt crisis eased pressure for appreciation. “The central bank’s statement means China’s exit from the dollar peg,” said Zhao Qingming , an analyst in Beijing at China Construction Bank, the nation’s second-biggest bank by market value. “If the euro continues to remain weak, it could also mean that the yuan may depreciate against the dollar.” Deadline Postponed Geithner postponed an April 15 deadline for a semiannual review of the currency policies of major U.S. trading partners, which may have resulted in China being labeled a currency manipulator. China owned $900 billion of U.S. Treasuries as of April, the largest foreign holdings. Yesterday’s announcement is “a gesture to the U.S., but without a specific timetable,” said Tao Dong , a Hong Kong-based economist at Credit Suisse Group AG. “The pressure is on China now to move its exchange rate ahead of the G-20 summit.” China’s overseas sales jumped 48.5 percent in May from a year earlier, the biggest gain in more than six years, according to customs bureau data June 10. Exports exceeded imports by $19.5 billion, from $1.68 billion in April and a deficit of $7.24 billion in March that was the first in six years. China’s Statement China’s narrowing balance-of-payments gap indicates that there’s no basis for “large-scale appreciation” by the yuan, the central bank said in the English version of its statement. The Chinese version said no “large-scale volatility.” Twelve of 19 respondents surveyed by Bloomberg in April predicted the central bank would allow the currency to float more freely this quarter, while the rest saw a move by year-end. Eleven ruled out a one-off revaluation, while fifteen predicted a wider daily trading range. “Continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies,” the statement said. That suggests a looser link to the dollar, said Ben Simpfendorfer , chief China economist at Royal Bank of Scotland Group Plc, in Hong Kong. “China has to offer something ahead of the G-20,” he said. “Greater flexibility allows them the option to appreciate against the dollar, perhaps during periods of dollar weakness.” To contact the reporters on this story: Judy Chen in Shanghai at Xchen45@bloomberg.net .

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China Signals End to Yuan&rsquos Two-Year Peg to Dollar Before G-20

June 19, 2010

By Bloomberg News June 20 (Bloomberg) — China said it will allow a more flexible yuan, signaling an end to the currency’s two-year-old peg to the dollar a week before a Group of 20 summit. The decision to “increase the renminbi’s exchange-rate flexibility” was made after the economy improved, the central bank said in a statement on its website, without indicating a timeframe for the change. It ruled out a one-off revaluation, saying there is no basis for “large-scale appreciation,” and kept the yuan’s 0.5 percent daily trading band unchanged. “The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability,” the People’s Bank of China said in the statement. “It is desirable to proceed further with reform of the renminbi exchange-rate regime and increase the renminbi exchange-rate flexibility.” The move may help deflect criticism of China when G-20 leaders meet on June 26-27 in Toronto and ease pressure from U.S. lawmakers, who have urged President Barack Obama to use the threat of trade sanctions to force policy change. U.S. Treasury Secretary Timothy F. Geithner has said China’s currency policy contributes to lopsided global flows of trade and investment and has urged it to move toward a more market-driven exchange rate to reduce reliance on exports. “China has effectively shifted the debate right before the G-20 meeting and it can now argue that the G-20 leaders should focus on the major determinants of global imbalances, especially the buildup of debt in advanced economies,” said Eswar Prasad , a senior fellow at the Brookings Institution in Washington and former head of the China division at the International Monetary Fund. “It also serves to acknowledge that they have an important responsibility to the international community.” ‘Vigorous Implementation’ The Obama administration received advance notice of the announcement, U.S. officials said. Geithner praised China’s decision and added that “vigorous implementation would make a positive contribution to strong and balanced global growth.” China’s announcement supports Geithner’s view that China would allow its currency to rise in due course to help its own economy, Prasad said. Chinese authorities have prevented the currency from strengthening since July 2008 to help exporters cope with sliding demand triggered by the global financial crisis. The currency appreciated 21 percent in the three years after a peg to the dollar was scrapped in July 2005 and replaced by a managed float against a basket of currencies including the euro and the Japanese yen. The yuan is a denomination of China’s currency, the renminbi. Global Recovery “This move is a vote of confidence in the global recovery and a reaffirmation of Beijing’s longstanding commitment to a flexible currency regime,” said Stephen Roach , chairman of Morgan Stanley Asia Ltd., in an e-mail. “This shift, however, is not a panacea for an unbalanced global economy. Surplus savers like China still need to take additional actions to stimulate internal private consumption.” Companies focused on the Chinese market, including Beijing- based computer maker Lenovo Group Ltd. and Shanghai-based China Eastern Airlines Corp. , said in March that they would gain from lower import costs and stronger consumer-purchasing power should the yuan appreciate. Textiles makers would stand to lose the most and some would “face bankruptcy” as their profit margins are as low as 3 percent, Zhang Wei, vice chairman of the China Council for the Promotion of International Trade, said in March. China’s inflation rate jumped to a 19-month high of 3.1 percent in May, higher than the government’s full-year target of 3 percent. Central bank dollar buying has left the nation with $2.4 trillion in currency reserves , the world’s largest holding. ‘Crisis Mode’ “China has ended its crisis-mode exchange-rate policy as the economy recovers strongly and inflationary pressure continues to build,” Li Daokui , an adviser on the People’s Bank of China’s policy board, said in an interview. “The yuan’s future trend depends on the euro’s movement, and the trends of other major currencies.” Yuan 12-month forwards rose the most this year two days ago, gaining 0.5 percent to 6.7125 per dollar. The contracts reflect bets the currency will appreciate 1.7 percent from the spot rate of 6.8262. They had been pricing in appreciation of 3.2 percent on April 30 before a slump in the euro and a worsening of Europe’s debt crisis eased pressure for appreciation. “The central bank’s statement means China’s exit from the dollar peg,” said Zhao Qingming , an analyst in Beijing at China Construction Bank, the nation’s second-biggest bank by market value. “If the euro continues to remain weak, it could also mean that the yuan may depreciate against the dollar.” Deadline Postponed Geithner postponed an April 15 deadline for a semiannual review of the currency policies of major U.S. trading partners, which may have resulted in China being labeled a currency manipulator. China owned $900 billion of U.S. Treasuries as of April, the largest foreign holdings. Yesterday’s announcement is “a gesture to the U.S., but without a specific timetable,” said Tao Dong , a Hong Kong-based economist at Credit Suisse Group AG. “The pressure is on China now to move its exchange rate ahead of the G-20 summit.” China’s overseas sales jumped 48.5 percent in May from a year earlier, the biggest gain in more than six years, according to customs bureau data June 10. Exports exceeded imports by $19.5 billion, from $1.68 billion in April and a deficit of $7.24 billion in March that was the first in six years. China’s Statement China’s narrowing balance-of-payments gap indicates that there’s no basis for “large-scale appreciation” by the yuan, the central bank said in the English version of its statement. The Chinese version said no “large-scale volatility.” Twelve of 19 respondents surveyed by Bloomberg in April predicted the central bank would allow the currency to float more freely this quarter, while the rest saw a move by year-end. Eleven ruled out a one-off revaluation, while fifteen predicted a wider daily trading range. “Continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies,” the statement said. That suggests a looser link to the dollar, said Ben Simpfendorfer , chief China economist at Royal Bank of Scotland Group Plc, in Hong Kong. “China has to offer something ahead of the G-20,” he said. “Greater flexibility allows them the option to appreciate against the dollar, perhaps during periods of dollar weakness.” To contact the reporters on this story: Judy Chen in Shanghai at Xchen45@bloomberg.net .

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China Signals End to Yuan&rsquos Two-Year Peg to Dollar

June 19, 2010

By Bloomberg News June 19 (Bloomberg) — China said it will allow a more flexible yuan, signaling an end to the currency’s two-year-old peg to the dollar a week before a Group of 20 summit. The decision to “increase the renminbi’s exchange-rate flexibility” was made after the economy improved, the central bank said in a statement on its website, without indicating a time-frame for the change. It ruled out a one-off revaluation, saying there is no basis for “large-scale appreciation,” and kept the yuan’s 0.5 percent daily trading band unchanged. “The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability,” the People’s Bank of China said in the statement. “It is desirable to proceed further with reform of the renminbi exchange-rate regime and increase the renminbi exchange-rate flexibility.” The decision may help deflect criticism of China when G-20 leaders meet on June 26-27 in Toronto and ease pressure from U.S. lawmakers, who have urged President Barack Obama to use the threat of trade sanctions to force policy change. A more flexible currency would give China more freedom to decide on monetary policy and reduce inflationary pressures by lowering import costs, the World Bank said in a report last week. U.S. politicians “can declare this a partial victory,” said Ma Jun , a Hong Kong-based economist for Deutsche Bank AG. “The impact of this reform on the real economy over the short-term will be limited, because the yuan is unlikely to move significantly against the currency basket.” Winners and Losers Chinese authorities have prevented the currency from strengthening since July 2008 to help exporters cope with sliding demand triggered by the global financial crisis. The currency appreciated 21 percent in the three years after a peg to the dollar was scrapped in July 2005 and replaced by a managed float against a basket of currencies including the euro and the Japanese yen. The yuan is a denomination of China’s currency, the renminbi. Companies focused on the Chinese market, including Beijing- based computer maker Lenovo Group Ltd. and Shanghai-based China Eastern Airlines Corp. , said in March that they would gain from lower import costs and stronger consumer-purchasing power should the yuan appreciate. Textiles makers would stand to lose the most and some would “face bankruptcy” as their profit margins are as low as 3 percent, Zhang Wei, vice chairman of the China Council for the Promotion of International Trade, said in March. China’s inflation rate jumped to a 19-month high of 3.1 percent in May, higher than the government’s full-year target of 3 percent. Central bank dollar buying has left the nation with $2.4 trillion in currency reserves , the world’s largest holding. Crisis Policies “China has ended its crisis-mode exchange-rate policy as the economy recovers strongly and inflationary pressure continues to build,” Li Daokui , an adviser on the People’s Bank of China’s policy board, said in an interview. “The yuan’s future trend depends on the euro’s movement, and the trends of other major currencies.” Yuan 12-month forwards rose the most this year yesterday, gaining 0.5 percent to 6.7125 per dollar. The contracts reflect bets the currency will appreciate 1.7 percent from the spot rate of 6.8262. They had been pricing in appreciation of 3.2 percent on April 30 before a slump in the euro and a worsening of Europe’s debt crisis eased pressure for appreciation. “The central bank’s statement means China’s exit from the dollar peg,” said Zhao Qingming , an analyst in Beijing at China Construction Bank, the nation’s second-biggest bank by market value. “If the euro continues to remain weak, it could also mean that the yuan may depreciate against the dollar.” Treasury Response U.S. Treasury Secretary Timothy F. Geithner praised China’s decision today to allow more currency flexibility and said the pledge needs to be followed by “vigorous” action to help strengthen the global economy. “We welcome China’s decision to increase the flexibility of its exchange rate,” he said in a statement released today in Washington. “Vigorous implementation would make a positive contribution to strong and balanced global growth.” Geithner on April 3 postponed an April 15 deadline for a semiannual review of the currency policies of major U.S. trading partners, which may have resulted in China being labeled a currency manipulator. China owned $895.2 billion of U.S. Treasuries as of the end of March, the largest holdings. Today’s announcement is “a gesture to the U.S., but without a specific timetable,” said Tao Dong , a Hong Kong-based economist at Credit Suisse Group AG. “The pressure is on China now to move its exchange rate ahead of the G-20 summit.” Currency Basket China’s overseas sales jumped 48.5 percent in May from a year earlier, the biggest gain in more than six years, according to customs bureau data June 10. Exports exceeded imports by $19.5 billion, from $1.68 billion in April and a deficit of $7.24 billion in March that was the first in six years. China’s narrowing balance of payments gap indicates that there’s no basis for “large-scale appreciation” by the yuan, the central bank said in the English version of its statement. The Chinese version said no “large-scale volatility” Twelve of 19 respondents surveyed by Bloomberg in April predicted the central bank would allow the currency to float more freely this quarter, while the rest saw a move by year-end. Eleven ruled out a one-off revaluation, while fifteen predicted a wider daily trading range. “Continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies,” the statement said. That suggests a looser link to the dollar, said Ben Simpfendorfer , chief China economist at Royal Bank of Scotland Group Plc, in Hong Kong. “China has to offer something ahead of the G-20,” he said. “Greater flexibility allows them the option to appreciate against the dollar, perhaps during periods of dollar weakness.” To contact the reporters on this story: Judy Chen in Shanghai at Xchen45@bloomberg.net .

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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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China Signals End to Yuan’s Two-Year Dollar Peg as Its Economy Recovers

June 19, 2010

By Bloomberg News June 19 (Bloomberg) — China said it will allow a more flexible yuan, signaling an end to the currency’s two-year-old peg to the dollar a week before a Group of 20 summit. The decision to “increase the renminbi’s exchange-rate flexibility” was made after the economy improved, the central bank said in a statement on its website, without indicating a time-frame for the change. It ruled out a one-off revaluation, saying there is no basis for “large-scale appreciation,” and kept the yuan’s 0.5 percent daily trading band unchanged. “The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability,” the People’s Bank of China said in the statement. “It is desirable to proceed further with reform of the renminbi exchange-rate regime and increase the renminbi exchange-rate flexibility.” The decision may help deflect criticism of China when G-20 leaders meet on June 26-27 in Toronto and ease pressure from U.S. lawmakers, who have urged President Barack Obama to use the threat of trade sanctions to force policy change. A more flexible currency would give China more freedom to decide on monetary policy and reduce inflationary pressures by lowering import costs, the World Bank said in a report last week. U.S. politicians “can declare this a partial victory,” said Ma Jun , a Hong Kong-based economist for Deutsche Bank AG. “The impact of this reform on the real economy over the short-term will be limited, because the yuan is unlikely to move significantly against the currency basket.” Winners and Losers Chinese authorities have prevented the currency from strengthening since July 2008 to help exporters cope with sliding demand triggered by the global financial crisis. The currency appreciated 21 percent in the three years after a peg to the dollar was scrapped in July 2005 and replaced by a managed float against a basket of currencies including the euro and the Japanese yen. The yuan is a denomination of China’s currency, the renminbi. Companies focused on the Chinese market, including Beijing- based computer maker Lenovo Group Ltd. and Shanghai-based China Eastern Airlines Corp. , said in March that they would gain from lower import costs and stronger consumer-purchasing power should the yuan appreciate. Textiles makers would stand to lose the most and some would “face bankruptcy” as their profit margins are as low as 3 percent, Zhang Wei, vice chairman of the China Council for the Promotion of International Trade, said in March. China’s inflation rate jumped to a 19-month high of 3.1 percent in May, higher than the government’s full-year target of 3 percent. Central bank dollar buying has left the nation with $2.4 trillion in currency reserves , the world’s largest holding. Crisis Policies “China has ended its crisis-mode exchange-rate policy as the economy recovers strongly and inflationary pressure continues to build,” Li Daokui , an adviser on the People’s Bank of China’s policy board, said in an interview. “The yuan’s future trend depends on the euro’s movement, and the trends of other major currencies.” Yuan 12-month forwards rose the most this year yesterday, gaining 0.5 percent to 6.7125 per dollar. The contracts reflect bets the currency will appreciate 1.7 percent from the spot rate of 6.8262. They had been pricing in appreciation of 3.2 percent on April 30 before a slump in the euro and a worsening of Europe’s debt crisis eased pressure for appreciation. “The central bank’s statement means China’s exit from the dollar peg,” said Zhao Qingming , an analyst in Beijing at China Construction Bank, the nation’s second-biggest bank by market value. “If the euro continues to remain weak, it could also mean that the yuan may depreciate against the dollar.” Treasury Response U.S. Treasury Secretary Timothy F. Geithner praised China’s decision today to allow more currency flexibility and said the pledge needs to be followed by “vigorous” action to help strengthen the global economy. “We welcome China’s decision to increase the flexibility of its exchange rate,” he said in a statement released today in Washington. “Vigorous implementation would make a positive contribution to strong and balanced global growth.” Geithner on April 3 postponed an April 15 deadline for a semiannual review of the currency policies of major U.S. trading partners, which may have resulted in China being labeled a currency manipulator. China owned $895.2 billion of U.S. Treasuries as of the end of March, the largest holdings. Today’s announcement is “a gesture to the U.S., but without a specific timetable,” said Tao Dong , a Hong Kong-based economist at Credit Suisse Group AG. “The pressure is on China now to move its exchange rate ahead of the G-20 summit.” Currency Basket China’s overseas sales jumped 48.5 percent in May from a year earlier, the biggest gain in more than six years, according to customs bureau data June 10. Exports exceeded imports by $19.5 billion, from $1.68 billion in April and a deficit of $7.24 billion in March that was the first in six years. China’s narrowing balance of payments gap indicates that there’s no basis for “large-scale appreciation” by the yuan, the central bank said in the English version of its statement. The Chinese version said no “large-scale volatility” Twelve of 19 respondents surveyed by Bloomberg in April predicted the central bank would allow the currency to float more freely this quarter, while the rest saw a move by year-end. Eleven ruled out a one-off revaluation, while fifteen predicted a wider daily trading range. “Continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies,” the statement said. That suggests a looser link to the dollar, said Ben Simpfendorfer , chief China economist at Royal Bank of Scotland Group Plc, in Hong Kong. “China has to offer something ahead of the G-20,” he said. “Greater flexibility allows them the option to appreciate against the dollar, perhaps during periods of dollar weakness.” To contact the reporters on this story: Judy Chen in Shanghai at Xchen45@bloomberg.net .

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Hedge Fund Marble Bar Is Said to Cut Jobs After Regaining Control From EFG

June 19, 2010

By Tom Cahill and Alexis Xydias June 19 (Bloomberg) — Marble Bar Asset Management LLP , a London-based hedge-fund firm, fired portfolio managers and traders this week after executives regained control from EFG International AG, people with knowledge of the cuts said. The firm trimmed staff to 33 from as many as 65 when owned by EFG, the Swiss bank controlled by Greek billionaire Spiro Latsis and his family, said the people, who asked not to be identified because the firings weren’t publicly disclosed. Marble Bar management including founder Hilton Nathanson last month bought back the firm from Zurich-based EFG in exchange for a portion of its future fees. The firm’s assets declined to about $1 billion from a peak of $6 billion in the first half of 2008 and from $4.4 billion when EFG bought the stake in December 2007, according to EFG statements. Marble Bar’s main hedge fund will focus on European stocks, dropping strategies that had been added since EFG’s purchase, the people said. Nathanson, a 40-year-old Australian, started the firm to trade European equities in 2002. Keith Gapp , a spokesman for EFG, and Andrew Hood, a spokesman for Marble Bar, didn’t return phone calls seeking comment. Marble Bar posted a pretax profit of $9.1 million in 2009, according to EFG’s annual report. To contact the reporter on this story: Tom Cahill in London at tcahill@bloomberg.net ; Alexis Xydias in London at axydias@bloomberg.net

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Hedge Fund Marble Bar Is Said to Cut Jobs After Regaining Control From EFG

June 19, 2010

By Tom Cahill and Alexis Xydias June 19 (Bloomberg) — Marble Bar Asset Management LLP , a London-based hedge-fund firm, fired portfolio managers and traders this week after executives regained control from EFG International AG, people with knowledge of the cuts said. The firm trimmed staff to 33 from as many as 65 when owned by EFG, the Swiss bank controlled by Greek billionaire Spiro Latsis and his family, said the people, who asked not to be identified because the firings weren’t publicly disclosed. Marble Bar management including founder Hilton Nathanson last month bought back the firm from Zurich-based EFG in exchange for a portion of its future fees. The firm’s assets declined to about $1 billion from a peak of $6 billion in the first half of 2008 and from $4.4 billion when EFG bought the stake in December 2007, according to EFG statements. Marble Bar’s main hedge fund will focus on European stocks, dropping strategies that had been added since EFG’s purchase, the people said. Nathanson, a 40-year-old Australian, started the firm to trade European equities in 2002. Keith Gapp , a spokesman for EFG, and Andrew Hood, a spokesman for Marble Bar, didn’t return phone calls seeking comment. Marble Bar posted a pretax profit of $9.1 million in 2009, according to EFG’s annual report. To contact the reporter on this story: Tom Cahill in London at tcahill@bloomberg.net ; Alexis Xydias in London at axydias@bloomberg.net

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Medvedev Pushes Ruble Reserve Currency to Cut Dollar Dominance

June 19, 2010

By Paul Abelsky June 19 (Bloomberg) — Russia wants the ruble to be one of the world’s reserve currencies as President Dmitry Medvedev renews his push to reduce the dollar’s dominance and make Moscow a global financial hub. “Only three, five years ago it seemed like a fantasy” to create a new reserve currency, Medvedev said yesterday in a speech in St. Petersburg, Russia. “Now we are seriously discussing it.” Medvedev, who has repeatedly called for a supranational currency to match the dollar, said discussions with China are continuing on broadening the global options. Russia sold U.S. Treasuries for a fifth consecutive month in April, the U.S. Treasury Department said June 15. The world may need as many as six reserve currencies, Medvedev said. “It’s something that’s obviously needed,” he said at the St. Petersburg International Economic Forum. “Developing a financial center in Moscow will considerably help to strengthen the ruble’s position as one of the reserve currencies.” Medvedev’s comments underline Russia’s ambition to reassert its global power following the financial crisis. Gross domestic product shrank 7.9 percent last year, the worst contraction since the fall of communism in 1991, after the credit crunch sent commodity prices plunging. If a country wants to alter the world economic order, including the number of reserve currencies, it must become an international financial center, Bank of Israel Governor Stanley Fischer said in an interview yesterday. ‘Don’t Emerge by Fiat’ “For a currency to be a reserve currency, you have to have capital markets in which you can sell it and buy it very easily,” Fischer said. “New reserve currencies don’t emerge by fiat. They emerge as countries change.” Medvedev said he envisages a new economic hierarchy allowing emerging-market giants such as Russia and China to drive the global agenda as the world emerges from the first global recession since the 1930s. “We really live at a unique time, and we should use it to build a modern, prosperous and stron Russia, a Russia that will be a co-founder of the new world economic order,” he said. The BRIC countries — Brazil, Russia, India and China — were net sellers of U.S. assets in April, driven mainly by Russian divestments, Brown Brothers Harriman & Co. Senior Currency Strategist Win Thin said in a June 15 note. Russia may add the Australian and Canadian dollars to its international reserves as the central bank diversifies the world’s third-largest stockpile away from the greenback, central bank First Deputy Chairman Alexei Ulyukayev said in a June 16 interview. Though Russia is “very carefully monitoring what’s happening in the euro zone,” the emergence of the euro as a currency to rival the dollar’s dominance helped soften the impact of the global crisis, Medvedev said. “If the world depended completely on the dollar, the situation would have been more difficult,” Medvedev said. To contact the reporter on this story: Paul Abelsky in Moscow at pabelsky@bloomberg.net

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Medvedev Pushes Ruble Reserve Currency to Cut Dollar Dominance

June 19, 2010

By Paul Abelsky June 19 (Bloomberg) — Russia wants the ruble to be one of the world’s reserve currencies as President Dmitry Medvedev renews his push to reduce the dollar’s dominance and make Moscow a global financial hub. “Only three, five years ago it seemed like a fantasy” to create a new reserve currency, Medvedev said yesterday in a speech in St. Petersburg, Russia. “Now we are seriously discussing it.” Medvedev, who has repeatedly called for a supranational currency to match the dollar, said discussions with China are continuing on broadening the global options. Russia sold U.S. Treasuries for a fifth consecutive month in April, the U.S. Treasury Department said June 15. The world may need as many as six reserve currencies, Medvedev said. “It’s something that’s obviously needed,” he said at the St. Petersburg International Economic Forum. “Developing a financial center in Moscow will considerably help to strengthen the ruble’s position as one of the reserve currencies.” Medvedev’s comments underline Russia’s ambition to reassert its global power following the financial crisis. Gross domestic product shrank 7.9 percent last year, the worst contraction since the fall of communism in 1991, after the credit crunch sent commodity prices plunging. If a country wants to alter the world economic order, including the number of reserve currencies, it must become an international financial center, Bank of Israel Governor Stanley Fischer said in an interview yesterday. ‘Don’t Emerge by Fiat’ “For a currency to be a reserve currency, you have to have capital markets in which you can sell it and buy it very easily,” Fischer said. “New reserve currencies don’t emerge by fiat. They emerge as countries change.” Medvedev said he envisages a new economic hierarchy allowing emerging-market giants such as Russia and China to drive the global agenda as the world emerges from the first global recession since the 1930s. “We really live at a unique time, and we should use it to build a modern, prosperous and stron Russia, a Russia that will be a co-founder of the new world economic order,” he said. The BRIC countries — Brazil, Russia, India and China — were net sellers of U.S. assets in April, driven mainly by Russian divestments, Brown Brothers Harriman & Co. Senior Currency Strategist Win Thin said in a June 15 note. Russia may add the Australian and Canadian dollars to its international reserves as the central bank diversifies the world’s third-largest stockpile away from the greenback, central bank First Deputy Chairman Alexei Ulyukayev said in a June 16 interview. Though Russia is “very carefully monitoring what’s happening in the euro zone,” the emergence of the euro as a currency to rival the dollar’s dominance helped soften the impact of the global crisis, Medvedev said. “If the world depended completely on the dollar, the situation would have been more difficult,” Medvedev said. To contact the reporter on this story: Paul Abelsky in Moscow at pabelsky@bloomberg.net

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Medvedev Pushes Ruble Reserve Currency to Cut Dollar Dominance

June 19, 2010

By Paul Abelsky June 19 (Bloomberg) — Russia wants the ruble to be one of the world’s reserve currencies as President Dmitry Medvedev renews his push to reduce the dollar’s dominance and make Moscow a global financial hub. “Only three, five years ago it seemed like a fantasy” to create a new reserve currency, Medvedev said yesterday in a speech in St. Petersburg, Russia. “Now we are seriously discussing it.” Medvedev, who has repeatedly called for a supranational currency to match the dollar, said discussions with China are continuing on broadening the global options. Russia sold U.S. Treasuries for a fifth consecutive month in April, the U.S. Treasury Department said June 15. The world may need as many as six reserve currencies, Medvedev said. “It’s something that’s obviously needed,” he said at the St. Petersburg International Economic Forum. “Developing a financial center in Moscow will considerably help to strengthen the ruble’s position as one of the reserve currencies.” Medvedev’s comments underline Russia’s ambition to reassert its global power following the financial crisis. Gross domestic product shrank 7.9 percent last year, the worst contraction since the fall of communism in 1991, after the credit crunch sent commodity prices plunging. If a country wants to alter the world economic order, including the number of reserve currencies, it must become an international financial center, Bank of Israel Governor Stanley Fischer said in an interview yesterday. ‘Don’t Emerge by Fiat’ “For a currency to be a reserve currency, you have to have capital markets in which you can sell it and buy it very easily,” Fischer said. “New reserve currencies don’t emerge by fiat. They emerge as countries change.” Medvedev said he envisages a new economic hierarchy allowing emerging-market giants such as Russia and China to drive the global agenda as the world emerges from the first global recession since the 1930s. “We really live at a unique time, and we should use it to build a modern, prosperous and stron Russia, a Russia that will be a co-founder of the new world economic order,” he said. The BRIC countries — Brazil, Russia, India and China — were net sellers of U.S. assets in April, driven mainly by Russian divestments, Brown Brothers Harriman & Co. Senior Currency Strategist Win Thin said in a June 15 note. Russia may add the Australian and Canadian dollars to its international reserves as the central bank diversifies the world’s third-largest stockpile away from the greenback, central bank First Deputy Chairman Alexei Ulyukayev said in a June 16 interview. Though Russia is “very carefully monitoring what’s happening in the euro zone,” the emergence of the euro as a currency to rival the dollar’s dominance helped soften the impact of the global crisis, Medvedev said. “If the world depended completely on the dollar, the situation would have been more difficult,” Medvedev said. To contact the reporter on this story: Paul Abelsky in Moscow at pabelsky@bloomberg.net

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Medvedev Promotes Ruble as World Reserve Currency to Cut Dollar Dominance

June 18, 2010

By Paul Abelsky June 19 (Bloomberg) — Russia wants the ruble to be one of the world’s reserve currencies as President Dmitry Medvedev renews his push to reduce the dollar’s dominance and make Moscow a global financial hub. “Only three, five years ago it seemed like a fantasy” to create a new reserve currency, Medvedev said yesterday in a speech in St. Petersburg, Russia. “Now we are seriously discussing it.” Medvedev, who has repeatedly called for a supranational currency to match the dollar, said discussions with China are continuing on broadening the global options. Russia sold U.S. Treasuries for a fifth consecutive month in April, the U.S. Treasury Department said June 15. The world may need as many as six reserve currencies, Medvedev said. “It’s something that’s obviously needed,” he said at the St. Petersburg International Economic Forum. “Developing a financial center in Moscow will considerably help to strengthen the ruble’s position as one of the reserve currencies.” Medvedev’s comments underline Russia’s ambition to reassert its global power following the financial crisis. Gross domestic product shrank 7.9 percent last year, the worst contraction since the fall of communism in 1991, after the credit crunch sent commodity prices plunging. If a country wants to alter the world economic order, including the number of reserve currencies, it must become an international financial center, Bank of Israel Governor Stanley Fischer said in an interview yesterday. ‘Don’t Emerge by Fiat’ “For a currency to be a reserve currency, you have to have capital markets in which you can sell it and buy it very easily,” Fischer said. “New reserve currencies don’t emerge by fiat. They emerge as countries change.” Medvedev said he envisages a new economic hierarchy allowing emerging-market giants such as Russia and China to drive the global agenda as the world emerges from the first global recession since the 1930s. “We really live at a unique time, and we should use it to build a modern, prosperous and stron Russia, a Russia that will be a co-founder of the new world economic order,” he said. The BRIC countries — Brazil, Russia, India and China — were net sellers of U.S. assets in April, driven mainly by Russian divestments, Brown Brothers Harriman & Co. Senior Currency Strategist Win Thin said in a June 15 note. Russia may add the Australian and Canadian dollars to its international reserves as the central bank diversifies the world’s third-largest stockpile away from the greenback, central bank First Deputy Chairman Alexei Ulyukayev said in a June 16 interview. Though Russia is “very carefully monitoring what’s happening in the euro zone,” the emergence of the euro as a currency to rival the dollar’s dominance helped soften the impact of the global crisis, Medvedev said. “If the world depended completely on the dollar, the situation would have been more difficult,” Medvedev said. To contact the reporter on this story: Paul Abelsky in Moscow at pabelsky@bloomberg.net

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Medvedev Promotes Ruble as World Reserve Currency to Cut Dollar Dominance

June 18, 2010

By Paul Abelsky June 19 (Bloomberg) — Russia wants the ruble to be one of the world’s reserve currencies as President Dmitry Medvedev renews his push to reduce the dollar’s dominance and make Moscow a global financial hub. “Only three, five years ago it seemed like a fantasy” to create a new reserve currency, Medvedev said yesterday in a speech in St. Petersburg, Russia. “Now we are seriously discussing it.” Medvedev, who has repeatedly called for a supranational currency to match the dollar, said discussions with China are continuing on broadening the global options. Russia sold U.S. Treasuries for a fifth consecutive month in April, the U.S. Treasury Department said June 15. The world may need as many as six reserve currencies, Medvedev said. “It’s something that’s obviously needed,” he said at the St. Petersburg International Economic Forum. “Developing a financial center in Moscow will considerably help to strengthen the ruble’s position as one of the reserve currencies.” Medvedev’s comments underline Russia’s ambition to reassert its global power following the financial crisis. Gross domestic product shrank 7.9 percent last year, the worst contraction since the fall of communism in 1991, after the credit crunch sent commodity prices plunging. If a country wants to alter the world economic order, including the number of reserve currencies, it must become an international financial center, Bank of Israel Governor Stanley Fischer said in an interview yesterday. ‘Don’t Emerge by Fiat’ “For a currency to be a reserve currency, you have to have capital markets in which you can sell it and buy it very easily,” Fischer said. “New reserve currencies don’t emerge by fiat. They emerge as countries change.” Medvedev said he envisages a new economic hierarchy allowing emerging-market giants such as Russia and China to drive the global agenda as the world emerges from the first global recession since the 1930s. “We really live at a unique time, and we should use it to build a modern, prosperous and stron Russia, a Russia that will be a co-founder of the new world economic order,” he said. The BRIC countries — Brazil, Russia, India and China — were net sellers of U.S. assets in April, driven mainly by Russian divestments, Brown Brothers Harriman & Co. Senior Currency Strategist Win Thin said in a June 15 note. Russia may add the Australian and Canadian dollars to its international reserves as the central bank diversifies the world’s third-largest stockpile away from the greenback, central bank First Deputy Chairman Alexei Ulyukayev said in a June 16 interview. Though Russia is “very carefully monitoring what’s happening in the euro zone,” the emergence of the euro as a currency to rival the dollar’s dominance helped soften the impact of the global crisis, Medvedev said. “If the world depended completely on the dollar, the situation would have been more difficult,” Medvedev said. To contact the reporter on this story: Paul Abelsky in Moscow at pabelsky@bloomberg.net

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European Stocks Climb for Fourth Week as Crisis Concerns Wane BSkyB Rises

June 18, 2010

By Adam Haigh June 19 (Bloomberg) — European stocks rose for a fourth week as concern about the region’s sovereign debt crisis waned. Royal Bank of Scotland Group Plc and Societe Generale SA led a rally among bank shares. British Sky Broadcasting Plc soared 19 percent after Rupert Murdoch ’s News Corp. offered to buy the rest of the company for 7.8 billion pounds ($11.5 billion). Nokia Oyj slumped 8.6 percent after cutting its forecasts. BP Plc tumbled for a record ninth week. The Stoxx Europe 600 Index gained 2.4 percent to 255.5, the highest closing level since May 13 and the longest streak of weekly gains since April. The benchmark gauge has rebounded 10 percent from its 2010 low on May 25 after concern about levels of government debt in Europe pushed the index to its cheapest level relative to earnings in more than a year. “Global investors are feeling more hopeful about the outlook for Europe’s stocks,” said Gary Baker , an equity strategist at BofA Merrill Lynch Global Research in London. “Bad news is priced in.” He forecasts the Stoxx 600 to reach 300 by the end of 2010, a 17 percent increase from this week’s close. A Spanish bond auction June 17 eased concern that the nation will struggle to finance looming debt maturities. Spain sold 3.5 billion euros ($4.3 billion) of 10-year and 30-year bonds, the maximum set for the auction. Stress Tests Britain posted a smaller fiscal deficit in May than economists forecast as growth lifted tax receipts, providing a boost for finance minister George Osborne before his June 22 budget. European Union leaders agreed June 17 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.” Still, the number of investors forecasting the global economy to strengthen in the next 12 months fell, according to a BofA Merrill Lynch survey of portfolio managers who together manage about $606 billion. Money managers increased their reserves of cash in June to the highest level in more than a year and continued to reduce their holdings in global equities to levels not seen since early 2009, the survey showed. Stimulus Dose “The markets are really worried about economic growth,” said Trevor Greetham , the head of asset allocation at Fidelity International in London. By the end of the year “central banks will be back peddling. We’ll need another dosing” of stimulus, he said at a press briefing to reporters in London June 15. Banks posted the biggest gains among the 19 industry groups in the Stoxx 600, climbing 6 percent. Royal Bank of Scotland, Britain’s biggest government-owned bank, advanced 11 percent. Societe Generale, France’s second-largest bank by market value, rose 13 percent. BSkyB soared 19 percent. The company rejected News Corp.’s offer of 700 pence a share and said it would be prepared to support a bid of more than 800 pence a share. News Corp., owner of the Fox television network, already holds a 39 percent stake. Weir Group Plc surged 22 percent as the world’s biggest maker of pumps for the mining industry forecast second-half profit to be “significantly” greater than last year. Eiffage, Nokia Eiffage SA rose 13 percent after a unit it jointly controls said it’s buying out minority shareholders of a French toll-road operator, shoring up the unit’s finances. This is “a highly accretive transaction” for Eiffage, said Natixis analysts Gregoire Thibault and Rafic El Haddad , who lifted their earnings-per-share estimates for 2010 to 2012 by 16 percent per year on average and raised their rating on the stock to “neutral” from “reduce.” Nokia slumped 8.6 percent. The world’s biggest maker of mobile phones cuts its forecasts for sales and margins, hurt by competition in high-end phones from Apple Inc. ’s iPhone and devices based on Google Inc.’s Android software. Goldman Sachs slashed its price estimate for the shares by 27 percent to 7.70 euros and cut its 2010 earnings estimate by 25 percent to 47 cents per share. BP declined for a ninth week, losing 8.8 percent for the longest streak of weekly losses on record. The London-based oil producer battling with the worst oil spill in U.S. history abandoned a $10 billion-a-year dividend and created a $20 billion escrow fund to compensate victims. To contact the reporter on this story: Adam Haigh in London at ahaigh1@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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Citigroup Seeks $3 Billion for Hedge Fund, Buyouts as Volcker’s Ban Looms

June 18, 2010

By Bradley Keoun June 18 (Bloomberg) — Citigroup Inc. plans to raise more than $3 billion for its private-equity and hedge funds, even as U.S. lawmakers consider banning banks from owning and investing in so-called alternative funds, people with direct knowledge of the plan said. Citi Capital Advisors , which oversees about $14 billion, may seek $1.5 billion for private equity this year and $750 million for hedge funds, said the people, who declined to be identified because the plans aren’t public. An additional $1 billion is targeted next year for hedge funds, the people said. “Citi must be comfortable enough that whatever happens, even in the extreme version, they’ll be able to move ahead with these businesses,” said Steven Kaplan , a professor at the University of Chicago Booth School of Business who studies the private-equity industry. “I don’t think any of these bills envisioned not being able to manage someone else’s money. It’s the bank capital that’s still an open question.” The Volcker rule, named for former Federal Reserve Chairman Paul Volcker , seeks to avoid future bailouts by curbing risk-taking. The Securities Industry and Financial Markets Association , Wall Street’s biggest lobbying group, and the Financial Services Roundtable , a Washington-based trade group, have expressed concerns that the measure restricts banks from businesses that didn’t cause the financial crisis. Lawmakers are reconciling House and Senate bills this month to overhaul regulation of Wall Street. Citigroup’s rivals aren’t waiting for final legislation to move forward with growth plans for their in-house money-management funds. ‘Regardless’ of Reform Last week, Morgan Stanley announced it had raised $4.7 billion for a new global real estate fund, including $400 million of the New York-based securities firm’s own money. Citigroup has about $5 billion of its own money in Citi Capital Advisors funds. “Regardless of the ultimate outcome of financial reform, our priority will always be protecting the interests of our clients, who have selected us to be the fiduciary manager of their assets, and ensuring the soundness of the CCA platform moving forward,” spokeswoman Danielle Romero-Apsilos said. The proposed legislation would restrict banks’ ability to trade financial instruments such as stocks, bonds and commodities on their own account, and bar them from owning or sponsoring hedge funds or private-equity firms. Federal banking agencies would have the power to exempt institutions who do such trading on behalf of a customer or to hedge risk. Seeding New Funds Even if the Volcker rule becomes law, full implementation may take as many as six years. Under the Senate bill , a study would have to be completed within six months of passage. Then, a council of regulators would then have to issue recommendations within nine months. That would be followed by a two-year phase- in periods and three potential one-year extensions on a firm-by- firm basis. Citigroup’s primary reason for investing in the funds is to “seed” new ones, essentially floating them long enough to build a track record that can then be marketed to investors, the people said. Putting in its own money also helps attract investors by signaling the bank has confidence in the management teams , they said. Chief Executive Officer Vikram Pandit , 53, told a Congressional panel in March that the bank is taking steps to scale back its funds business. This year he sold off a $12.5 billion real-estate fund and a $4.2 billion fund of hedge funds. Still, he considers Citi Capital Advisors to be a “core” operation alongside trading, investment-banking, corporate cash- management and branch banking. ‘New Thrust’ Citi Capital Advisors is the former Citi Alternative Investments unit, renamed last year after more than a dozen of its funds with almost $80 billion of assets were shuttered or frozen amid the global financial crisis, causing more than $3 billion of losses for Citigroup. In April 2009, John Havens , 53, head of Citigroup’s trading and investment-banking division, tapped a pair of former Morgan Stanley colleagues, James O’Brien , 50, and Jonathan Dorfman , 48, to rebuild the alternative-investing unit. Of the 16 funds listed in a March 2008 Citi Alternative Investments brochure, 11 have been closed, sold, renamed or merged into other funds. “They basically are presenting a new thrust to the market since the challenges of ‘07 and ‘08,” said Colin Blaydon , director of the Center for Private Equity and Entrepreneurship at Dartmouth College’s Tuck School of Business in Hanover, New Hampshire. “Gathering capital at this point is something they want to do.” Funds Marketed Among six funds now being marketed is the $700 million Emerging Markets Special Opportunities Fund . It was started in 2000 and is led by former Salomon Smith Barney emerging-markets co-head Mark Franklin, returning an average 12 percent a year over the past decade, according to a Citi Capital Advisors marketing brochure dated April. Another fund is the Mortgage/Credit Opportunity Fund , led by Rajesh Kumar. Citigroup lured Kumar and his team from hedge fund Halcyon Asset Management LLC in 2008 and agreed to seed them with $200 million of the bank’s capital, people with direct knowledge of the move said. The fund has gained 24 percent annualized since its May 2008 debut, according to the April brochure. It now stands at about $300 million, the people said. To contact the reporter on this story: Bradley Keoun in New York at bkeoun@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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Goldman Sachs Is Said to Request More Time to Respond to SEC’s Fraud Suit

June 18, 2010

By Joshua Gallu and Christine Harper June 18 (Bloomberg) — Goldman Sachs Group Inc. asked for more time to respond to the U.S. Securities and Exchange Commission’s April 16 lawsuit accusing the firm of defrauding investors while selling mortgage-linked securities, said two people with direct knowledge of the matter. The company submitted the request today to the judge overseeing the case, asking for an extension until July 19, the people said. The original deadline was June 21, court documents show. The SEC consented to the New York-based firm’s proposed extension, according to one of the people. The SEC said New York-based Goldman Sachs and one of its employees, Fabrice Tourre , didn’t disclose to investors the role played by hedge fund Paulson & Co. in devising and betting against the securities. Tourre also has until July 19 to respond, according to court documents. Goldman Sachs, the most profitable firm in Wall Street history, has denied the SEC’s allegations and said it will fight the case. Company spokesman Lucas van Praag said he couldn’t comment today. “It’s no great surprise because it just gives them some more breathing room,” said Peter Henning , a former SEC enforcement attorney who teaches at Wayne State University Law School in Detroit. “It keeps them from having to deny the allegations and gives them more time to either negotiate a settlement or prepare their case.” To contact the reporters on this story: Joshua Gallu in Washington at jgallu@bloomberg.net ; Christine Harper in New York at charper@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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Citigroup Looking Past Volcker May Seek $3 Billion for Funds

June 18, 2010

By Bradley Keoun June 18 (Bloomberg) — Citigroup Inc. plans to raise more than $3 billion for its private-equity and hedge funds, even as U.S. lawmakers consider banning banks from owning and investing in so-called alternative funds, people with direct knowledge of the plan said. Citi Capital Advisors , which oversees about $14 billion, may seek $1.5 billion for private equity this year and $750 million for hedge funds, said the people, who declined to be identified because the plans aren’t public. An additional $1 billion is targeted next year for hedge funds, the people said. “Citi must be comfortable enough that whatever happens, even in the extreme version, they’ll be able to move ahead with these businesses,” said Steven Kaplan , a professor at the University of Chicago Booth School of Business who studies the private-equity industry. “I don’t think any of these bills envisioned not being able to manage someone else’s money. It’s the bank capital that’s still an open question.” The Volcker rule, named for former Federal Reserve Chairman Paul Volcker , seeks to avoid future bailouts by curbing risk-taking. The Securities Industry and Financial Markets Association , Wall Street’s biggest lobbying group, and the Financial Services Roundtable , a Washington-based trade group, have expressed concerns that the measure restricts banks from businesses that didn’t cause the financial crisis. Lawmakers are reconciling House and Senate bills this month to overhaul regulation of Wall Street. Citigroup’s rivals aren’t waiting for final legislation to move forward with growth plans for their in-house money-management funds. ‘Regardless’ of Reform Last week, Morgan Stanley announced it had raised $4.7 billion for a new global real estate fund, including $400 million of the New York-based securities firm’s own money. Citigroup has about $5 billion of its own money in Citi Capital Advisors funds. “Regardless of the ultimate outcome of financial reform, our priority will always be protecting the interests of our clients, who have selected us to be the fiduciary manager of their assets, and ensuring the soundness of the CCA platform moving forward,” spokeswoman Danielle Romero-Apsilos said. The proposed legislation would restrict banks’ ability to trade financial instruments such as stocks, bonds and commodities on their own account, and bar them from owning or sponsoring hedge funds or private-equity firms. Federal banking agencies would have the power to exempt institutions who do such trading on behalf of a customer or to hedge risk. Seeding New Funds Even if the Volcker rule becomes law, full implementation may take as many as six years. Under the Senate bill , a study would have to be completed within six months of passage. Then, a council of regulators would then have to issue recommendations within nine months. That would be followed by a two-year phase- in period and three potential one-year extensions on a firm-by- firm basis. Citigroup’s primary reason for investing in the funds is to “seed” new ones, essentially floating them long enough to build a track record that can then be marketed to investors, the people said. Putting in its own money also helps attract investors by signaling the bank has confidence in the management teams , they said. Chief Executive Officer Vikram Pandit , 53, told a Congressional panel in March that the bank is taking steps to scale back its funds business. This year he sold off a $12.5 billion real-estate fund and a $4.2 billion fund of hedge funds. Still, he considers Citi Capital Advisors to be a “core” operation alongside trading, investment-banking, corporate cash- management and branch banking. ‘New Thrust’ Citi Capital Advisors is the former Citi Alternative Investments unit, renamed last year after more than a dozen of its funds with almost $80 billion of assets were shuttered or frozen amid the global financial crisis, causing more than $3 billion of losses for Citigroup. In April 2009, John Havens , 53, head of Citigroup’s trading and investment-banking division, tapped a pair of former Morgan Stanley colleagues, James O’Brien , 50, and Jonathan Dorfman , 48, to rebuild the alternative-investing unit. Of the 16 funds listed in a March 2008 Citi Alternative Investments brochure, 11 have been closed, sold, renamed or merged into other funds. “They basically are presenting a new thrust to the market since the challenges of ‘07 and ‘08,’’ said Colin Blaydon , director of the Center for Private Equity and Entrepreneurship at Dartmouth College’s Tuck School of Business in Hanover, New Hampshire. ‘‘Gathering capital at this point is something they want to do.’’ Funds Marketed Among six funds now being marketed is the $700 million Emerging Markets Special Opportunities Fund . It was started in 2000 and is led by former Salomon Smith Barney emerging-markets co-head Mark Franklin, returning an average 12 percent a year over the past decade, according to a Citi Capital Advisors marketing brochure dated April. Another fund is the Mortgage/Credit Opportunity Fund , led by Rajesh Kumar. Citigroup lured Kumar and his team from hedge fund Halcyon Asset Management LLC in 2008 and agreed to seed them with $200 million of the bank’s capital, people with direct knowledge of the move said. The fund has gained 24 percent annualized since its May 2008 debut, according to the April brochure. It now stands at about $300 million, the people said. To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net .

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BP&rsquos U.S. Future Teeters as CEO, Lawmakers Clash

June 18, 2010

By Joe Carroll and Jessica Resnick-Ault June 18 (Bloomberg) — BP Plc Chief Executive Officer Tony Hayward ’s failure to set safety standards to prevent the Gulf of Mexico oil spill may cost the company control over U.S. oil fields, refineries and pipelines that account for more than one- third of its sales, lawmakers and analysts said. Less than 24 hours after Hayward met President Barack Obama ’s demand to set aside $20 billion to clean up and compensate victims of the worst oil spill in U.S. history, lawmakers yesterday accused the BP CEO of “stonewalling.” Hayward appeared before a House committee probing the cause of the April 20 offshore rig explosion that killed 11 workers. Citing a five-year string of accidents and deadly disasters at BP-operated facilities, Representative Bart Stupak suggested the poor safety record could justify banning the London-based company from doing business in the U.S. “Setting up the fund was a nice pro-active approach by BP, but in reality it’s going to take a decade for them to recover and regain public trust in this country,” said Jonathan Dison of Bender Consulting, a risk management and strategy firm that has advised BP, Chevron Corp. and Royal Dutch Shell Plc. At risk is BP’s standing as the biggest producer in the U.S., built up after spending $100 billion buying Amoco Corp. and Atlantic Richfield Co. Shares Gain BP rose as much as 5.5 percent in London trading before paring gains to trade 2.1 percent higher at 356.40 pence as of 12:50 p.m. local time. The shares have lost 44 percent of their value since the April 20 explosion and fire aboard the Deepwater Horizon rig. BP’s senior unsecured ratings were cut three levels to A2, the sixth-highest investment grade, from Aa2 by Moody’s Investors Service today, which warned that further downgrades are possible. The cost of credit-default swaps protecting BP’s debt against default for one year fell 7 basis points to 624 basis points, prices from CMA DataVision in London show. Congressman Stupak didn’t elaborate on how BP could be banned from operating in the U.S. and whether such authority rests with Congress, the administration, or regulatory agencies. Scrutiny of BP’s operations in the U.S. intensified after a fire killed 15 workers at its Texas refinery in 2005, and will increase further following the rig disaster, said John Bresland , chairman of the U.S. Chemical Safety and Hazard Investigation Board. The board added an investigation into the cause of the rig disaster to a list of federal probes into BP, Bresland said in an interview yesterday. The probe was requested by Representative Henry Waxman , a California Democrat. New Investigation “Our investigation will look at 2 years before the incident, a year before it, the day before, what happened on that day, up to the time the explosion took place,” Bresland said. BP was cited for 760 safety violations in the past half decade by the U.S. Occupational Safety and Health Administration, compared with eight each for ConocoPhillips and Sunoco Inc., two for Citgo Petroleum Corp. and one for Exxon Mobil Corp., Representative John Sullivan , an Oklahoma Republican, said during yesterday’s hearing. Inspections of the company’s five U.S. plants after the Texas refinery fire resulted in a fine of $21 million by the Occupational Safety and Health Administration for safety violations. Last year, discovery of more violations resulted in BP being slapped with a record fine of $87.4 million. ‘Extremely Frustrated’ In his testimony yesterday, Hayward not only failed to convince lawmakers he was committed to making BP safer, he may have deepened suspicion of the company by repeatedly pleading ignorance to events that took place under his command, said Matt Eventoff, a partner at New Jersey communications firm, Princeton Public Speaking. “Mr. Hayward’s comments today, saying ‘I don’t know’ 66 times, evaporated any feeling of responsibility,” Eventoff said. “Any goodwill that the company bought back yesterday eroded today with his testimony.” Questioned by the panel about BP practices that may have led to the disaster, Hayward said it was too early in the investigation to know the cause. Stupak, a Michigan Democrat, told Hayward he and other committee members were “extremely frustrated with your lack of candor and inability to answer questions.” Waxman described the CEO’s responses as “stonewalling.” “I’m not stonewalling,” Hayward responded. According to a transcript of his testimony, Hayward said at least 23 times he was not involved in decisions. ‘Laser-like Focus’ After taking over from John Browne in May 2007, Hayward, now 53, pledged to apply a “laser-like focus” to improving safety at the company, declaring it one of his three top priorities along with people and performance. In Nov. 2007 he said that BP already was making “great progress” on safety. He simplified BP’s corporate structure and cut several thousand jobs. This year, at a March 2 presentation to analysts, Hayward focused on financial performance. “Our direction is clear: the unrelenting pursuit of competitive leadership in respect of cash costs, capital efficiency and margin quality,” he said. BP is the biggest crude and gas producer in the Gulf of Mexico. The company has amassed about 500 deep-water exploration leases in the Gulf. BP has spent about $1.6 billion on containing and cleaning up the spill so far. The company’s spending for cleanup and liabilities may reach $40 billion, Standard Chartered Plc estimated last week. The yield premium investors demand to hold BP’s 500 million pounds of 4 percent bonds due 2014 decreased 1 basis point to 359 basis points, according to HSBC Holdings Plc prices on Bloomberg. The spread on the company’s 1 billion euros of 2016 notes tightened 6 basis points to 531 basis points. To contact the reporters on this story: Joe Carroll in Washington at jcarroll8@bloomberg.net , Jessica Resnick-Ault in New York at jresnickault@bloomberg.net

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Bank of America, JPMorgan Debt Sales Show Contagion Ebbing 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. Spread to Treasuries 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 1/2 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. Corporate Spreads 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. U.S. commercial paper outstanding rose the most in seven weeks. The market for short-term IOUs climbed $18.8 billion to $1.08 trillion in the week ended June 16, the Federal Reserve said yesterday on its website . That’s the biggest increase since the week ended April 28, when commercial paper outstanding gained $32 billion. Foreign financial commercial paper rose for the second week, adding $3.3 billion to $166.8 billion. General Electric Co. ’s finance unit sold $850 million of bonds backed by credit-card payments after boosting the offering’s size from $500 million. The top-rated securities maturing in about three years yield 75 basis points more than the benchmark swap rate, according to a person familiar with the offering, who declined to be identified because the terms aren’t public. Top-Rated Securities Securities rated AAA and backed by credit-card payments yield about 72 basis points more than similar-maturity Treasuries, compared with a low for the year of 53 basis points over benchmarks on April 21, according to a Bank of America Merrill Lynch index. The Federal Home Loan Bank system, the government-chartered cooperatives owned by U.S. financial companies, sold $3 billion of two-year global notes. The securities yield 0.935 percent, or 22.5 basis points more than similar-maturity Treasuries, according to an e-mailed statement yesterday from the system’s finance office in Reston, Virginia. It sold two-year bonds at a spread of 21 basis points in March. Leveraged-loan prices rose for a fourth day, with the S&P/LSTA US Leveraged Loan 100 Index gaining 0.17 cent to 88.67 cents on the dollar, the biggest rise since May 26. The index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, is poised for its first weekly gain since the period ended May 14. ‘Serious’ Losses’ Financial institutions in the U.S. won’t face “serious” losses if speculative-grade borrowers fail to refinance maturing loans, Standard & Poor’s said. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P. Banks reduced the amount of leveraged loans they held beginning in 2007 by selling them to institutional investors and asset management firms, analysts led by David Tesher in New York said yesterday in a report. About $973 billion of high-yield debt will mature between 2011 and 2014, including $521 billion of loans, they said. BP Plc , the target of more than 220 lawsuits over the Gulf of Mexico oil spill, is seeking to borrow at least $5 billion to meet compensation payments, according to two bankers approached by the company. BP Credit Lines BP has asked banks for one-year credit lines, one of the people said. It’s arranging the transactions individually with lenders, said the people, who declined to be identified because the talks are private. The financing is in addition to London- based BP’s $10.5 billion of undrawn lines, they said. BP spokeswoman Sheila Williams declined to comment. The cost of protecting BP debt from default fell for a second day after the company slashed the $10 billion-a-year dividend, agreed to create an escrow fund to pay damages and had Chief Executive Officer Tony Haywood appear before U.S. lawmakers to account for the biggest oil spill in the nation’s history. Swaps insuring BP debt for a year dropped 13 basis points to 618 after climbing to over 1,000 this week, a level considered distressed, according to CMA DataVision. Five-year contracts were little changed at 466.5 basis points. An index that investors use to hedge against losses on corporate debt or to speculate on creditworthiness fell today and in the week. Credit-default swaps on the Markit iTraxx Crossover Index of 50 mostly junk-rated European companies dropped 1.6 basis points to 541.8, according to Markit Group Ltd. That’s the lowest level in a month and down from 597.5 basis points on June 11, JPMorgan prices show. Credit Swaps The index typically falls as investor confidence improves and rises 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. In emerging markets, the extra yield investors demand to own bonds relative to government debt rose for the first time this week. Spreads widened 3 basis points to 317 basis points, according to JPMorgan’s Emerging Market Bond index. 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. ‘Couple Good Days’ “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. Bank Regulation 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. “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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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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Greek Pension `Time Bomb’ May Be Difficult to Defuse for Unwed Daughters

June 18, 2010

By Maria Petrakis June 18 (Bloomberg) — Sophia Constantinidou works as a teacher in a private school in Athens. She also has a more lucrative job: remaining unmarried. The 52-year-old gets 400 euros ($496) a month from the Greek government, part of her late mother’s state pension. Under the current system, Constantinidou qualifies to receive the payment for life as the only surviving child of a deceased civil servant, provided she doesn’t tie the knot. “It’s not that I didn’t want to get married,” Constantinidou, whose mother died 20 years ago, said in an interview. “But after I turned 40, I realized I wouldn’t be getting married and that thankfully I had this.” As the European Union, International Monetary Fund and bond investors scrutinize debt-ridden Greece, they need look no further than the pension system for a prime example of how the country is living beyond its means. Greek pensioners on average live on 96 percent of the salary they had when they worked, more than twice the proportion of earnings as Germans, according to the Organization for Economic Cooperation and Development . Greece “is a classic case of entitlements granted by short-sighted governments that didn’t bother to secure financing sources,” said Miranda Xafa , a former director at the IMF and now a senior investment strategist at Geneva-based IJPartners. “The political benefit of pension entitlements granted is immediate, but the cost will be incurred later.” Arduous Jobs The OECD as long as three years ago described Greece’s state pension system as a “fiscal time bomb.” Led by Prime Minister George Papandreou , lawmakers will begin passing legislation this month to overhaul the system, which the EU and IMF say contributed to the country’s debt crisis. Under terms of last month’s 110 billion-euro ($123 billion) bailout agreement, Greece will increase the retirement age to 65 from as early as 58, curtail early retirement and calculate payments over a longer period of employment. The aim is to bring uniformity to a system riddled with exemptions granted over decades by governments yielding to pressure from trade unions and other groups. The bill will be the first enacted by Papandreou’s government since the May 6 package that pledged 30 billion euros of wage and pension cuts and tax increases over the next three years. There’s one pensioner in Greece for every 1.7 workers, compared with one for every four in 1950, according to a government study published on May 12. There are 637 occupations the Greek state deems to be arduous in nature and qualify to stop work earlier. They include hairdressers, car washers, steam-bath attendants and radio technicians. ‘Paramount Reform’ Constantinidou isn’t included because she’s paid by the hour and doesn’t have enough of a private pension to live on when she’s older. She’s reliant upon the stipend she inherited from her mother, who worked at a state hospital. Should the country keep its generous benefits, Greek pension spending will rise to 24 percent of gross domestic product in 2060, double the proportion of 2007, the European Commission estimated last year. Pensions are “going to be the paramount reform in terms of medium-term budgetary perspectives,” EU Monetary and Monetary Commissioner Olli Rehn said on June 11. With unions promising a “storm” of protests, the government is trying to push through the bill before the September deadline set by the EU and IMF and ahead of Greek municipal elections, tentatively scheduled for October. Extending Work Dina Karahali, 47, is waiting to see the final form of the bill to know whether she will be penalized by the new system or manage to escape with the early pension she expected when she began working as a childcare worker 25 years ago. With a 16-year-old son, Karahali said she could take early retirement now on less than a full payment. What she fears is the new law will make her work an extra 13 years. “It’s difficult,” she said by telephone in Athens. “Do I get a pension now and not receive any money until I am 50? Or, will I have to work till I am 60?” About 5,000 state workers, mostly women, have submitted applications for early retirement this year, said Despina Spanou, an official at the civil servants’ labor union, ADEDY . That’s almost double the number filed at the same time last year, she said. Concerns about Greece’s long-term pension finances have long played a part in the wider spread in Greek bonds over those of Germany or Italy, the OECD said in its July 2009 report. That was before the 58-year-old Papandreou revealed the country’s budget shortfall was more than twice the previous government’s estimate, stoking concern about Greece’s ability to avert default and prompting the bailout package. Bonds Collapse Greek 10-year government bond yields were about 1.4 percentage points, or 140 basis points, higher than benchmark German bunds at the beginning of October as Papandreou came to power. The so-called yield spread widened to as much as 965 points on May 7 and yesterday was at 665 points. Generous Greek pensions played prominently in Germany, where public opinion has been largely opposed to the bailout. Germany lifted the retirement age to 67 from 65 in 2007, affecting about half of the nation’s 82 million residents. While Greece has a statutory retirement age of 65, and 60 for women, exemptions and special rules can allow a full pension at 58. Former European Central Bank Chief Economist Otmar Issing said in February that German taxpayers can hardly be expected to support Greek pensions. Bild Zeitung , Germany’s biggest-selling tabloid, ran a front-page headline in April asking: “Why do we have to pay Greece’s luxury pensions?” Best Years Greeks get a pension calculated on the last five years of their working life, which tend to be the highest-paid. German, Italian and Portuguese pensions are based on wages worked over a lifetime. Spain bases them on the best 15 years of work. In the Greek civil service, the so-called replacement rate can be as much as 149 percent, according to a report by the European Commission in October. The rate is a measure of how effectively a pension system provides income during retirement. The EU-IMF agreement states that Greece should move to a system basing earnings on the entire lifetime and introduce a price-based indexation system, used by most OECD countries. Such a system, according to the Paris-based OECD , would allow Greece’s biggest retirement fund to scale back spending by some 20 percent by 2050 to 2055, equal to about 1 percent of GDP. Governments since the end of the military junta in 1974 have struggled to force through reforms the EU has long demanded to the pension system or opening up product and labor markets to make Greece more competitive. ‘Dramatic Worsening’ “The reasons for the dramatic worsening of the pension systems finances are demographic developments, the exhaustion of the abilities of the pay-as-you-go system and decisions of the political system of our country for the past 35 years,” Labor Minister Andreas Loverdos told the International Labor Organization in a June 14 speech. Civil servants didn’t pay anything towards their pensions until 1992. Female civil servants with children under 18 can get early retirement. Unmarried daughters of state workers say the payment became a factor in staying single. Unions argue that going after employers who don’t pay mandatory contributions to pension funds is preferable to cutting benefits and raising the retirement age. Non-payment of contributions to state pension funds, prevalent among the self-employed, is estimated by the OECD at between 20 percent and 30 percent of revenue collected. Constantinidou is one such worker. She never managed to secure a permanent post and doesn’t get state benefits in her job supplementing the studies of high-school students at a central Athens college. “I work in the private sector and would need to work till I’m 65 to get a pension but it’s not going to happen,” she said. “No-one is going to hire a 60- or 65-year-old woman. Thankfully I have this.” To contact the reporter on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net .

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Bank Stress Tests in EU Face Questions Over Toughness, Government Backing

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. “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. ‘Markets Asking’ 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. 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.” ‘Could be Misinterpreted’ 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. 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. 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. ‘More Confidence’ “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.” “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.” ‘Eroded Confidence’ “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.” 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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BP’s Future in U.S. Teeters as Hayward Clashes With Lawmakers on Oil Spill

June 18, 2010

By Joe Carroll and Jessica Resnick-Ault June 18 (Bloomberg) — BP Plc Chief Executive Officer Tony Hayward ’s failure to set safety standards to prevent the Gulf of Mexico oil spill may cost the company control over U.S. oil fields, refineries and pipelines that account for more than one-third of its sales, lawmakers and analysts said. Less than 24 hours after Hayward met President Barack Obama ’s demand to set aside $20 billion to clean up and compensate victims of the worst oil spill in U.S. history, lawmakers yesterday accused the BP CEO of “stonewalling.” Hayward appeared before a House committee probing the cause of the April 20 offshore rig explosion that killed 11 workers. Citing a five-year string of accidents and deadly disasters at BP-operated facilities, Representative Bart Stupak suggested the poor safety record could justify banning the London-based company from doing business in the U.S. “Setting up the fund was a nice pro-active approach by BP, but in reality it’s going to take a decade for them to recover and regain public trust in this country,” said Jonathan Dison of Bender Consulting, a risk management and strategy firm that has advised BP, Chevron Corp. and Royal Dutch Shell Plc. Congressman Stupak didn’t elaborate on how BP could be banned from operating in the U.S. and whether such authority rests with Congress, the administration, or regulatory agencies. New Investigation Scrutiny of BP’s operations in the U.S. intensified after a fire killed 15 workers at its Texas refinery in 2005, and will increase further following the rig disaster, said John Bresland , chairman of the U.S. Chemical Safety and Hazard Investigation Board. The board added an investigation into the cause of the rig disaster to a list of federal probes into BP, Bresland said in an interview yesterday. The probe was requested by Representative Henry Waxman , a California Democrat. “Our investigation will look at 2 years before the incident, a year before it, the day before, what happened on that day, up to the time the explosion took place,” Bresland said. BP was cited for 760 safety violations in the past half decade by the U.S. Occupational Safety and Health Administration, compared with eight each for ConocoPhillips and Sunoco Inc., two for Citgo Petroleum Corp. and one for Exxon Mobil Corp., Representative John Sullivan , an Oklahoma Republican, said during yesterday’s hearing. ‘Extremely Frustrated’ Inspections of the company’s five U.S. plants after the Texas refinery fire resulted in a fine of $21 million by the Occupational Safety and Health Administration for safety violations. Last year, discovery of more violations resulted in BP being slapped with a record fine of $87.4 million. In his testimony yesterday, Hayward not only failed to convince lawmakers he was committed to making BP safer, he may have deepened suspicion of the company by repeatedly pleading ignorance to events that took place under his command, said Matt Eventoff, a partner at New Jersey communications firm, Princeton Public Speaking. “Mr. Hayward’s comments today, saying ‘I don’t know’ 66 times, evaporated any feeling of responsibility,” Eventoff said. “Any goodwill that the company bought back yesterday eroded today with his testimony.” Questioned by the panel about BP practices that may have led to the disaster, Hayward said it was too early in the investigation to know the cause. Stupak, a Michigan Democrat, told Hayward he and other committee members were “extremely frustrated with your lack of candor and inability to answer questions.” Waxman described the CEO’s responses as “stonewalling.” “I’m not stonewalling,” Hayward responded. According to a transcript of his testimony, Hayward said at least 23 times he was not involved in decisions. ‘Laser-like Focus’ After taking over from John Browne in May 2007, Hayward, now 53, pledged to apply a “laser-like focus” to improving safety at the company, declaring it one of his three top priorities along with people and performance. In Nov. 2007 he said that BP already was making “great progress” on safety. He simplified BP’s corporate structure and cut several thousand jobs. This year, at a March 2 presentation to analysts, Hayward focused on financial performance. “Our direction is clear: the unrelenting pursuit of competitive leadership in respect of cash costs, capital efficiency and margin quality,” he said. BP relied on the U.S. for the equivalent of 450,000 barrels of oil a day and is the biggest crude and gas producer in the Gulf of Mexico. The company has amassed about 500 deep-water exploration leases in the Gulf. Financial Cost BP’s American depository receipts dropped as much as 1.8 percent during the first 40 minutes of Hayward’s testimony, later closing down 14 cents at $31.71. The units have shed 48 percent of their value since the April 20 explosion and fire aboard the Deepwater Horizon rig. In earlier trading yesterday in London, BP shares rebounded 6.7 percent to 359.70 pence and the cost of insuring the company against default tumbled as investors viewed the $20 billion claim fund and suspension of dividends as bringing some clarity to the company’s financial position. Through yesterday, the shares had slumped 45 percent since the rig explosion, wiping about 55 billion pounds ($81 billion) off the company’s value. BP has spent about $1.6 billion on containing and cleaning up the spill so far. The company’s spending for cleanup and liabilities may reach $40 billion, Standard Chartered Plc estimated last week. Bond Prices BP’s bonds rose yesterday, with the spread on its 1 billion euros of 4.5 percent notes due November 2012 narrowing to 472 basis points from 664 basis points on June 16, according to Royal Bank of Scotland Group Plc prices on Bloomberg. The yield premium on its 500 million pounds of 4 percent bonds due December 2014 fell to 360 basis points from 411 basis points, HSBC Holdings Plc prices show. The company’s debt also climbed in U.S. trading. BP’s $2 billion of 3.875 percent notes maturing in 2015 gained 1/2 cent to 86.5 cents, yielding 7.308 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The cost of credit-default swaps protecting BP’s debt against default for one year plunged 361 basis points to 636 basis points, prices from CMA DataVision in New York show. The contracts cost 22 basis points on April 1, CMA data show. To contact the reporters on this story: Joe Carroll in Washington at jcarroll8@bloomberg.net , Jessica Resnick-Ault in New York at jresnickault@bloomberg.net

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Citigroup Looking Past Volcker Seeks $3 Billion for Hedge Fund, LBO Unit

June 18, 2010

By Bradley Keoun June 18 (Bloomberg) — Citigroup Inc. plans to raise more than $3 billion for its private-equity and hedge funds, even as U.S. lawmakers consider banning banks from owning and investing in so-called alternative funds, people with direct knowledge of the plan said. Citi Capital Advisors , which oversees about $14 billion, may seek $1.5 billion for private equity this year and $750 million for hedge funds, said the people, who declined to be identified because the plans aren’t public. An additional $1 billion is targeted next year for hedge funds, the people said. “Citi must be comfortable enough that whatever happens, even in the extreme version, they’ll be able to move ahead with these businesses,” said Steven Kaplan , a professor at the University of Chicago Booth School of Business who studies the private-equity industry. “I don’t think any of these bills envisioned not being able to manage someone else’s money. It’s the bank capital that’s still an open question.” The Volcker rule, named for former Federal Reserve Chairman Paul Volcker , seeks to avoid future bailouts by curbing risk-taking. The Securities Industry and Financial Markets Association , Wall Street’s biggest lobbying group, and the Financial Services Roundtable , a Washington-based trade group, have expressed concerns that the measure restricts banks from businesses that didn’t cause the financial crisis. Lawmakers are reconciling House and Senate bills this month to overhaul regulation of Wall Street. Citigroup’s rivals aren’t waiting for final legislation to move forward with growth plans for their in-house money-management funds. ‘Regardless’ of Reform Last week, Morgan Stanley announced it had raised $4.7 billion for a new global real estate fund, including $400 million of the New York-based securities firm’s own money. Citigroup has about $5 billion of its own money in Citi Capital Advisors funds. “Regardless of the ultimate outcome of financial reform, our priority will always be protecting the interests of our clients, who have selected us to be the fiduciary manager of their assets, and ensuring the soundness of the CCA platform moving forward,” spokeswoman Danielle Romero-Apsilos said. The proposed legislation would restrict banks’ ability to trade financial instruments such as stocks, bonds and commodities on their own account, and bar them from owning or sponsoring hedge funds or private-equity firms. Federal banking agencies would have the power to exempt institutions who do such trading on behalf of a customer or to hedge risk. Seeding New Funds Even if the Volcker rule becomes law, full implementation may take as many as six years. Under the Senate bill , a study would have to be completed within six months of passage. Then, a council of regulators would then have to issue recommendations within nine months. That would be followed by a two-year phase- in periods and three potential one-year extensions on a firm-by- firm basis. Citigroup’s primary reason for investing in the funds is to “seed” new ones, essentially floating them long enough to build a track record that can then be marketed to investors, the people said. Putting in its own money also helps attract investors by signaling the bank has confidence in the management teams , they said. Chief Executive Officer Vikram Pandit , 53, told a Congressional panel in March that the bank is taking steps to scale back its funds business. This year he sold off a $12.5 billion real-estate fund and a $4.2 billion fund of hedge funds. Still, he considers Citi Capital Advisors to be a “core” operation alongside trading, investment-banking, corporate cash- management and branch banking. ‘New Thrust’ Citi Capital Advisors is the former Citi Alternative Investments unit, renamed last year after more than a dozen of its funds with almost $80 billion of assets were shuttered or frozen amid the global financial crisis, causing more than $3 billion of losses for Citigroup. In April 2009, John Havens , 53, head of Citigroup’s trading and investment-banking division, tapped a pair of former Morgan Stanley colleagues, James O’Brien , 50, and Jonathan Dorfman , 48, to rebuild the alternative-investing unit. Of the 16 funds listed in a March 2008 Citi Alternative Investments brochure, 11 have been closed, sold, renamed or merged into other funds. “They basically are presenting a new thrust to the market since the challenges of ‘07 and ‘08,” said Colin Blaydon , director of the Center for Private Equity and Entrepreneurship at Dartmouth College’s Tuck School of Business in Hanover, New Hampshire. “Gathering capital at this point is something they want to do.” Funds Marketed Among six funds now being marketed is the $700 million Emerging Markets Special Opportunities Fund . It was started in 2000 and is led by former Salomon Smith Barney emerging-markets co-head Mark Franklin, returning an average 12 percent a year over the past decade, according to a Citi Capital Advisors marketing brochure dated April. Another fund is the Mortgage/Credit Opportunity Fund , led by Rajesh Kumar. Citigroup lured Kumar and his team from hedge fund Halcyon Asset Management LLC in 2008 and agreed to seed them with $200 million of the bank’s capital, people with direct knowledge of the move said. The fund has gained 24 percent annualized since its May 2008 debut, according to the April brochure. It now stands at about $300 million, the people said. To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net .

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Kan Aims to Cut Company Tax Toward 25% in Strategy to Stoke Japan’s Growth

June 17, 2010

By Keiko Ujikane June 18 (Bloomberg) — Japan’s government pledged to cut the nation’s tax on businesses and nurture the environment and health care industries as part of a plan to defeat deflation and end two decades of economic stagnation. 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. That rate is “about 25 percent,” Yosuke Kondo, parliamentary secretary for the Trade Ministry, said in an embargoed briefing yesterday. Firms in Tokyo pay a levy, including local taxes, of 40.7 percent. Prime Minister Naoto Kan is seeking to restore Japan to 2 percent growth, end deflation and at the same time shrink the budget deficit to contain the world’s biggest public debt . Kan’s ruling Democratic Party of Japan yesterday signaled in its midterm election manifesto that sales taxes will be raised to strengthen the finances of the world’s No. 2 economy. “The most important thing is to ensure fiscal reconstruction,” Shogo Ishii , director of the International Monetary Fund’s Asia-Pacific office, said in an interview in Tokyo yesterday. “Without it, a cut in corporate taxes won’t improve public finances, sparking concerns about market confidence.” The government released the 2 percent economic growth target in December, and today’s plan aims to provide a road-map for achieving it. Kan is scheduled to unveil a separate fiscal rehabilitation strategy next week. Growth Ambition Attaining the growth goal may be challenging for a country with an aging population and deflation that has discouraged domestic demand. A 2 percent pace of expansion is four times the Bank of Japan’s estimate of the nation’s speed limit and almost double the 1.1 percent average rate recorded since an asset- price bubble burst in 1990. The strategy aims to halt the slide in consumer prices by the fiscal year ending March 2012. It seeks to avoid a surging yen and urges the Bank of Japan to “make utmost efforts” to end deflation. “Given that Japan is the only nation in the world that’s struggling with deflation, we need an appropriate response from both fiscal and monetary sides,” the document said. “With these steps, we will try to avoid excessive yen gains and achieve economic growth that supports both domestic as well as external demand.” Target for Inflation Kan also aims for “stable gains” in prices, targeting an average 1 percent increase in the gross domestic product deflator through fiscal 2020. The gauge of price trends fell 1.7 percent in the year ended March 31, the most in seven years. The strategy focuses on stimulating growth in seven areas including the environment and energy, health, technology and tourism. The Bank of Japan released a 3 trillion yen ($33 billion) plan this week that aims to encourage lending in similar areas, an effort that Governor Masaaki Shirakawa has said will complement the government’s growth effort. Reducing company taxes would make businesses more competitive and is the “right move for Japan over the longer term,” said Hiroaki Muto , a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. The current rate for Tokyo is higher than China’s 25 percent, Seoul’s 24.2 percent and France’s 33.3 percent, Finance Ministry data show. A 10 percentage-point cut could add 1.1 percent to GDP in 10 years, Dai-Ichi Life Research Institute wrote on June 16. Still, the gain in growth would only make up for 64 percent of the decline in revenue otherwise obtained from companies, meaning the government would need to find alternative income sources, the Tokyo-based researcher said. Cross-Party Talks Kan’s ruling Democratic Party of Japan wants cross-party talks on raising the country’s 5 percent sales tax, according to its platform for a July 11 upper house election released yesterday. The DPJ also said it intends to lower company taxes, without saying when or by how much. The government also wants to lay the ground work to create a unified exchange that trades bonds, stocks, financial futures and commodities by fiscal 2013, the document said. “In order to bring back Japan as Asian hub,” the government will consider mapping out incentives, including tax breaks to invite headquarters and research and development centers, aimed at starting in fiscal 2011, the document said. The government will seek to double foreign direct investment and increase employment by foreign companies to 2 million from 750,000 by 2020, the statement said. Japan also pledged to bring down the unemployment rate to the 3 percent range “as early as possible,” the statement said. To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net

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Hong Kong’s Tsang Lost TV Debate on Democracy With Audrey Eu, Polls Show

June 17, 2010

By Mark Lee and Frederik Balfour June 18 (Bloomberg) — Hong Kong Chief Executive Donald Tsang lost a televised debate with barrister and opposition leader Audrey Eu on plans to change the city’s electoral system, polls showed. Tsang said the proposal to change the way Hong Kong elects lawmakers and the chief executive in 2012 would move the city along the path to full democracy, and accused Eu’s side of trying to stall the plan. “We’d rather stand still than take a step backward,” Eu replied. Seventy-one percent of respondents in two university surveys said Eu won the debate, according to reports in the South China Mornings Post and Standard newspapers. Forty-five percent of people polled by University of Hong Kong said they were “more opposed” to the government’s proposals after the debate, while 20 percent said they were more supportive, said the Post, which co-sponsored one survey. No margin of error was given. Eu’s pro-democracy group argues the package on offer from the central government in Beijing doesn’t go far enough to deliver full democracy and is stacked in favor of business groups dominating the so-called functional constituencies that make up half the 60 seats in the Legislative Council . Tsang says opposition demands should be addressed after his proposal goes through. “It’s obvious Audrey was the better performer,” said Joseph Cheng , professor of political science at the City University of Hong Kong. Still, the debate probably won’t make the government deliver changes to the proposal demanded by pro- democracy groups, he said. Public Protest The event is also unlikely to win over any of the 23 legislators who vowed to block the proposals, and may have been aimed more at salvaging Tsang’s reputation with the central government in Beijing, Alan Leong , a lawmaker in Eu’s party said before the debate. The package needs a two-thirds majority to pass, unless China makes concessions. LegCo is to vote June 23 on the proposal, which would see the number of lawmakers increased by 10. Five would be directly elected and five would represent functional constituencies. The number of Beijing appointees who elect the chief executive would be increased from 800 to 1,200. Tsang wanted “to let the people have a chance to hear the arguments on both sides and come to an informed decision,” his spokesman Andy Ho said in an e-mail earlier. Tsang’s predecessor Tung Chee-hwa stepped down from his post in 2005, more than two years early, after a botched attempt to push through separate China-sponsored constitutional changes sparked street protests and a deadly virus harmed tourism. Tsang’s Popularity Tsang’s own popularity has been slipping amid the wrangle over elections, polls show. On June 4, about 113,000 people attended a candlelight vigil to mark the 21st anniversary of China’s crackdown on pro- democracy demonstrators in Tiananmen Square, the largest number since 1989 according to police estimates. Several hundred people gathered in a park near yesterday’s debate, cheering for Eu and booing Tsang. Police had set up a visible security presence around nearby streets as a precaution. Chinese President Hu Jintao in December told Tsang to “handle constitutional development issues properly to ensure social harmony.” Premier Wen Jiabao urged him to resolve “deep-rooted contradictions in Hong Kong.” One of those contradictions is the “one country, two systems” formula struck when Britain handed the territory back to China in 1997. While Hong Kong has multiple political parties and more civil liberties than in mainland China, the timetable for greater democracy was set by the National People’s Congress Standing Committee in Beijing. Eu is calling for universal suffrage in 2012, five years earlier than China’s plans for letting the public vote for the chief executive and eight years before planned direct elections of all LegCo members. To contact the reporter on this story: Frederik Balfour in Hong Kong at fbalfour@bloomberg.net

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EU Stress Tests Face Questions Over Toughness of Terms, Government Backing

June 17, 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. “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. ‘Markets Asking’ 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. 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.” ‘Could be Misinterpreted’ 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. 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. 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. ‘More Confidence’ “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.” “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.” ‘Eroded Confidence’ “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.” 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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Gazans Say Israeli Blockade Keeps Homes in Decay, Fails to Undermine Hamas

June 17, 2010

By Jonathan Ferziger and Saud Abu Ramadan June 18 (Bloomberg) — Half of Mohammed Abed Rabbo’s extended family of 23 lives in a tent next to the rubble of his two-story house in Gaza’s Jabalia refugee camp, while the rest is crowded into a small rented home nearby. Abed Rabbo says his house was destroyed 17 months ago by Israeli bulldozers after Palestinian militants hid nearby and fired at soldiers. The 55-year-old potato farmer says he can’t get material needed to rebuild because Israel restricts most construction supplies from entering Hamas-ruled Gaza. His is one of more than 3,000 homes that the United Nations reported were destroyed during the 22-day military offensive Israel says it initiated in December 2008 to stop Hamas and other groups from firing rockets at its southern towns. Israel clamped restrictions on goods entering Gaza after Hamas seized control there in 2007 and has begun relaxing them after facing international pressure in the wake of its May 31 raid on an aid flotilla that left nine pro-Palestinian activists dead. “The siege has affected everything in Gaza,” Abed Rabbo, whose farm is near Gaza’s northern border, said in an interview before yesterday’s Israeli decision to loosen the blockade. “It’s destroyed our lives.” The lives of Abed Rabbo and the 1.5 million other residents of Gaza have become hostage to a three-cornered political struggle pitting Hamas — which Israel, the U.S. and the European Union have branded as terrorist — against both the Jewish state and the Palestinian Authority government that controls the West Bank. ‘Pressuring the Population’ While Israel saw the blockade as a way to undermine Hamas’s hold on Gaza by turning the population against it, the strategy hasn’t worked, said Mohsen Adnan, director of the Arab Center for Agricultural Development in Gaza City. “Israel hoped that by pressuring the population in Gaza, Hamas would be uprooted, but Hamas is still strong and the people have been exhausted by the siege,” Adnan said in a telephone interview. Human rights groups, including Amnesty International, say restrictions on food imports and building materials have created a humanitarian crisis. Israeli Prime Minister Benjamin Netanyahu said June 2 that each week “an average of ten thousand tons of goods enter Gaza” and that “there’s no shortage of food. There’s no shortage of medicine.” Israel says it restricts imports of construction materials to Gaza because they can be used to build rockets, bunkers or bombs. Officials said they were also concerned about weapons being hidden in food packaging. Job Losses More than 1,100 Palestinians and 13 Israelis were killed in the Gaza conflict. Since then, more than 400 rockets and mortars have been fired into Israel, killing one foreign worker last March, the Israeli army said. Israel’s top ministers decided yesterday to loosen the blockade, changing the system in which goods enter Gaza and expanding the import of “material for civilian projects under international supervision,” the prime minister’s office said in a statement. German Foreign Minister Guido Westerwelle said the decision was a “first step” that must be followed by “swift, concrete and noticeable improvements in access to the Gaza Strip.” Egypt has also largely kept its Gaza border closed since Hamas took over because it says it doesn’t recognize the Islamic movement’s administration. After the flotilla raid, it opened the Rafah crossing, which is used mainly by people. Hamas, which won parliamentary elections in 2006, ousted troops loyal to Palestinian Authority President Mahmoud Abbas the following year and took full control of Gaza. ‘Food Insecure’ At least 3,540 homes in Gaza were destroyed in the conflict with Israel and 2,870 were severely damaged, the UN Office for the Coordination of Humanitarian Affairs said in an August 2009 report . Restrictions on imports and exports resulted in the loss of some 120,000 jobs, the report said. Haytham Khudeir, 30, who runs an import business out of an office in downtown Gaza City, estimates he’s lost some $500,000 in sales since Israel cut off most shipments into the territory. He buys coffee, mineral water and cooking oil at increased prices that come through smuggling tunnels from Egypt, built to circumvent the blockade, and can’t get the quantities once available through Israel. “It’s very difficult to get quality products and people don’t have money to buy them,” Khudeir said. “Running a business in Gaza these days is almost impossible.” The UN classifies 75 percent of Gaza’s population as “food insecure,” meaning they lack access to sufficient safe and nutritious food. It cited a shift in the diet of Gazans from more expensive foods, such as fruit, vegetables and animal products, to cheap and high-carbohydrate foods such as cereals, sugar and oil. ‘Vegetables and Bread’ “My children see fruit in the grocery stores, but we can’t afford it,” Walid Mushtaha, a 45-year-old unemployed father of nine, said in an interview. His family depends on food supplies from the United Nations Relief and Works Agency that include flour, olive oil, rice, sugar and canned beef. His family’s diet consists largely of “vegetables and bread,” he said. “On weekends we open the cans of processed beef. Fresh meat, maybe once a month.” Restricted goods ranging from computers to live cattle and motorcycles have been available at twice to four times their market price through the tunnels, which are licensed and taxed by Hamas. Weapons are also smuggled in via the tunnels. Full-Fledged War Israel says its blockade is legal because it is in “a state of armed conflict” with Hamas. Legal scholars such as Robin Churchill , a professor of international law at the University of Dundee in Scotland, say the legality turns on whether the conflict is a full-fledged war and whether the military benefit is proportionate to civilian suffering. Sitting in his tent and offering tea, Abed Rabbo said he rushed his family from their house when Israel started bombing and headed south, away from the area where fighting was most intense. After the war ended with a cease-fire on Jan. 18, 2009, Abed Rabbo said, he and his family returned to find their home destroyed. “I thought we might be able to get some cement from the flotilla, but look what happened,” he said. To contact the reporters on this story: Jonathan Ferziger in Tel Aviv at jferziger@bloomberg.net ; Saud Abu Ramadan in Gaza City at sramadan@bloomberg.net

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UAW President King Says Union Will Focus on Organizing U.S. Toyota Workers

June 17, 2010

By Keith Naughton June 17 (Bloomberg) — Bob King , elected yesterday as the 10th president of the United Auto Workers union, said organizing the U.S. factory workers of foreign companies such as Toyota Motor Corp. is his “No. 1 priority.” “If we don’t support Toyota, Honda, Nissan, Hyundai, Kia and all the non-union plants by supporting the right to organize, we cannot win back the concessions we have given up,” King said in his first address today to delegates at the UAW’s constitutional convention in Detroit. King, 63, succeeded Ron Gettelfinger , 65, who helped persuade President Barack Obama to organize rescues of General Motors Co. and Chrysler Group LLC last year. King takes over amid calls from workers to restore the wages and benefits they gave up to bolster the industry, and as membership in the union has fallen to 355,000 from 1.5 million in 1979. UAW members who work for U.S. automakers have each given $7,000 to $30,000 in concessions in the past five years, King said last month. The union surrendered raises, bonuses and cost- of-living adjustments at GM, Ford Motor Co. and Chrysler. It agreed to a two-tier wage system, in which new hires earn about $14 an hour, half the amount paid to hourly production workers. “The only way we can get back what we’ve sacrificed is by coming up with a comprehensive strategy to rebuild the power of the UAW,” King said. Toyota’s Mississippi Plant King also criticized Toyota President Akio Toyoda for moving forward with plans to open a non-union factory in Mississippi after closing the assembly plant it had operated in Fremont, California. The Japanese automaker’s joint venture with pre-bankruptcy GM was its only U.S. plant where workers were represented by the UAW. “The only reason they closed that plant is because it was a UAW plant,” King said. “Mr. Toyoda if you care about safety and quality in America, you’ll go back to Fremont and build Corollas there and not in Mississippi.” Toyota, the world’s largest automaker, will begin installing assembly equipment at the facility in Blue Springs, Mississippi, with a goal of starting production of Corolla compact cars by late 2011, the company said today in a statement. The decision reverses earlier plans to use the plant to build Highlander sport-utility vehicles and Prius hybrids. King said the UAW will conduct protests at Toyota dealerships. ‘Crazy’ Decision “We’re going to show these corporations that if they do something unjust to our members, they’ll pay a price,” King said after his speech, calling the California plant closing “a crazy business decision.” After the convention adjourned, King led the 1,200 delegates along with Teamsters President James P. Hoffa on a march on Detroit’s banking district to protest against Wall Street lending practices. The demonstration was part of a new social activism the union will undertake, King said. “We’ve been under attack for eight years and we hunched down and protected the union,” King told the crowd from the back of a flatbed truck. “We will never have the justice we deserve if we’re not part of a much broader social movement.” The recession triggered by the financial crisis that began in 2008 led to a 35 percent industrywide plunge in U.S. auto sales from 2007 to 2009. Sales this year through May rose 17 percent. As auto sales recovered in the first quarter, GM posted net income of $865 million, Chrysler had an operating profit of $143 million and Ford reported earnings of $2.1 billion. The automakers are boosting production, expanding plants and hiring workers. GM said today it will operate 9 of 11 U.S. assembly plants through the customary summer shutdown because flexibility allowed under the new UAW contract allows the automaker to respond to customer demand. The move will boost GM’s output by 56,000 vehicles. To contact the reporter on this story: Keith Naughton in Detroit at Knaughton3@bloomberg.net .

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Deutsche Bank’s Peter Babej Said to Leave German Firm to Join Citigroup

June 17, 2010

By Serena Saitto June 17 (Bloomberg) — Citigroup Inc. hired Deutsche Bank AG ’s co-head of financial institutions, Peter Babej , marking at least the seventh departure this year of a senior investment banker from the German firm, a person briefed on the move said. Babej will work in New York, the person said, declining to be identified because the move is not public. He joined the Frankfurt-based bank in 2007 and was a key member of a team that prepared an initial public offering, which was later put on hold, for American International Group Inc. ’s biggest Asian life insurance unit. He previously worked 11 years at Lazard Ltd, where he was a managing director for insurance-industry clients. Deutsche Bank spokesman John Gallagher and Citigroup spokeswoman Danielle Romero-Apsilos said they couldn’t comment. Babej didn’t return a phone call seeking comment. Nomura Holdings Inc., Japan’s largest brokerage, said this week it hired Deutsche Bank’s Mark Epley as co-head of a unit that advises buyout firms. Nomura also recruited Michael Hill and James DeNaut as co-heads of global natural resources, two people familiar with the situation said June 2. Morgan Stanley hired Jonathan Cox and Michael Johnson from Deutsche Bank’s energy group, people briefed on the moves said this month. The departures come amid a shift in leadership at Deutsche Bank’s corporate and investment bank, the company’s biggest money maker . Anshu Jain , co-head of that business since 2004, was appointed this week to be its sole leader, assuming responsibilities for the corporate finance and transaction- banking units on July 1 from Michael Cohrs , who plans to retire. Last year, New York-based AIG picked Deutsche Bank to be co-global coordinator of an IPO for AIA Group Ltd. The offering was put on hold earlier this year in favor of a $35.5 billion sale of the business to Prudential Plc. That deal collapsed, leaving AIG to develop a new plan for divesting the business. To contact the reporter on this story: Serena Saitto in New York at ssaitto@bloomberg.net .

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Uzbeks Holed Up in Kyrgyz City of Osh as Violence Leaves at Least 189 Dead

June 17, 2010

By Joanna Lillis and Ilya Arkhipov June 17 (Bloomberg) — Uzbeks are barricaded in their neighborhoods in the Kyrgyz city of Osh, which was at the center of rioting and ethnic violence that left at least 189 dead and displaced about 300,000 in the south of the country. Fearing sniper fire and mob attacks, ethnic Uzbeks have blocked off entrances to their neighborhoods with trees, benches, paving stones and tables. In one area with about 1,000 homes, 75 percent were damaged by fires and some destroyed. People are surviving on what food they had in their homes before the bloodshed began on June 10. In Jalalabad, also hard hit by violence, about a fifth of the city was hit by fires and rioting, the 24.kg news service reported , citing Kamchybek Tashiyev, a former emergency situations minister. “I went to a village a kilometer from Jalalabad yesterday, where 40 Uzbeks died last Sunday,” said an Uzbek woman from the city who declined to be named, fearing retribution. “My brother-in-law’s sister and her children were burnt alive in their basement. Only the cats survived. A pregnant neighbor was also killed.” The most recent violence in Kyrgyzstan erupted when supporters of ousted President Kurmanbek Bakiyev clashed with those loyal to the interim government. Ethnic Uzbeks welcomed Bakiyev’s overthrow in April, blaming him for impeding growth of the minority group’s businesses and ignoring its political leaders. Many Kyrgyz in the south supported Bakiyev, who comes from the region. Uzbek Refugees The United Nations said about 300,000 people have been forced from their homes in Kyrgyzstan, and at least 40,000 of them have no shelter. Neighboring Uzbekistan is providing assistance to about 100,000 refugees who have fled Kyrgyzstan, mostly to the Andijan province. The United Nations High Commissioner for Refugees said it had delivered 160 metric tons of emergency supplies to Uzbekistan, where most refugees are being housed in schools, warehouses and sports centers. The U.S., which relies on an air base in Kyrgyzstan to support operations in Afghanistan, has dedicated $10.3 million for aid to the country, the Embassy in Bishkek said yesterday on its website . Robert Blake , assistant secretary for South and Central Asian affairs, will travel to Bishkek on June 18 for talks with the government. ‘Fratricidal War’ Secretary of State Hillary Clinton spoke to interim President Roza Otunbayeva yesterday and discussed the current situation as well as aid requirements, State Department spokesman Philip Crowley said. Russia and its allies in Central Asia should send peacekeeping troops to stop a “fratricidal war” in Kyrgyzstan, former Kyrgyz President Askar Akayev said. Akayev, 65, was himself overthrown in the so-called Tulip Revolution of 2005, after ruling Kyrgyzstan since 1990. He was succeeded by Bakiyev. “The interim government knows that it can’t stop this process on its own,” Akayev said by telephone from Moscow on June 15. “Peacekeeping troops from the Collective Security Treaty Organization are needed, but its charter allows their use only in cases of external aggression. A mechanism must be found to deploy troops. Time is short.” Nikolai Bordyuzha , the organization’s general secretary, said it doesn’t plan to send peacekeepers to Kyrgyzstan, Interfax reported today. The organization, founded in 1992, unites Russia and six other former Soviet republics: Armenia, Belarus, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. ‘Iron Fist’ The interim government claims that the violence was aimed at disrupting a June 27 referendum on a new constitution and was funded by people close to Bakiyev. “We’re not going to vote because of what the Kyrgyz have done to us,” said Saidulla Tokhtasinov, a 20-year-old ethnic Uzbek in Osh. “How can we?” he said, pointing at a courtyard filled with rubble. The Uzbek woman in Jalalabad said she will vote if the referendum is held. “We don’t need anything but peace and order,” she said. “We need a good president who’ll take care of us. Bakiyev was good, but his relatives did many things wrong. Otunbayeva is a good person, but she’s a woman. We need an iron fist.” Landlocked Kyrgyzstan depends on remittances from migrant workers in Russia for about 40 percent of national income, and also relies on rent paid by the U.S. and Russia for their bases. Kyrgyzstan’s average monthly wage was $132 in January, according to the country’s National Statistical Committee. About a third of the population lives below the poverty level, making the country eligible for aid from the International Development Association, the World Bank’s support arm for the poorest economies. To contact the reporters on this story: Joanna Lillis in Osh through the London newsroom at 2254 or joannalillis123@gmail.com Ilya Arkhipov in Moscow at iarkhipov@bloomberg.net ;

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Deutsche Bank’s Peter Babej Said to Join Citigroup Amid Banker Departures

June 17, 2010

By Serena Saitto June 17 (Bloomberg) — Citigroup Inc. hired Deutsche Bank AG ’s co-head of financial institutions, Peter Babej , marking at least the seventh departure this year of a senior investment banker from the German firm, a person briefed on the move said. Babej will work in New York, the person said, declining to be identified because the move is not public. He joined the Frankfurt-based bank in 2007 and was a key member of a team that prepared an initial public offering, which was later put on hold, for American International Group Inc. ’s biggest Asian life insurance unit. He previously worked 11 years at Lazard Ltd, where he was a managing director for insurance-industry clients. Deutsche Bank spokesman John Gallagher and Citigroup spokeswoman Danielle Romero-Apsilos said they couldn’t comment. Babej didn’t return a phone call seeking comment. Nomura Holdings Inc., Japan’s largest brokerage, said this week it hired Deutsche Bank’s Mark Epley as co-head of a unit that advises buyout firms. Nomura also recruited Michael Hill and James DeNaut as co-heads of global natural resources, two people familiar with the situation said June 2. Morgan Stanley hired Jonathan Cox and Michael Johnson from Deutsche Bank’s energy group, people briefed on the moves said this month. The departures come amid a shift in leadership at Deutsche Bank’s corporate and investment bank, the company’s biggest money maker . Anshu Jain , co-head of that business since 2004, was appointed this week to be its sole leader, assuming responsibilities for the corporate finance and transaction- banking units on July 1 from Michael Cohrs , who plans to retire. Last year, New York-based AIG picked Deutsche Bank to be co-global coordinator of an IPO for AIA Group Ltd. The offering was put on hold earlier this year in favor of a $35.5 billion sale of the business to Prudential Plc. That deal collapsed, leaving AIG to develop a new plan for divesting the business. To contact the reporter on this story: Serena Saitto in New York at ssaitto@bloomberg.net .

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Stocks in U.S. Trim Losses as Technology Shares, Industrial Companies Rise

June 17, 2010

By Nikolaj Gammeltoft June 17 (Bloomberg) — U.S. stocks fell, sending the Standard & Poor’s 500 Index lower for a second day, as a jump in jobless claims and slower growth in Philadelphia manufacturing called into question the strength of the economy. Pfizer Inc., Home Depot Inc. and Merck & Co. led declines in the Dow Jones Industrial Average. Homebuilders fell after Toll Brothers Inc . said low consumer confidence is hurting home sales. Bed Bath & Beyond Inc. fell 6.6 percent as consumer stocks dropped the most in the Standard & Poor’s 500 Index . M&T Bank Corp. jumped 9.7 percent on merger speculation. The S&P 500 slipped 0.4 percent to 1,110.18 as of 1:34 p.m. in New York after climbing as much as 0.3 percent. The Dow Jones Industrial Average lost 40.29 points, or 0.4 percent, to 10,369.17. “Economic surprises, which had been very positive, are now becoming negative,” said Michael Mullaney , who manages $9 billion at Fiduciary Trust Co. in Boston. “If we continue to see economic deceleration happen, including what looks like a double dip in housing, maybe we have to look at those earnings with much more questioning eyes.” Stocks erased an early gain after the Federal Reserve Bank of Philadelphia’s general economic index slumped to 8 in June from 21.4 the previous month. That was below the economist forecast of 20, according to the median of 58 projections in a Bloomberg News survey. Futures of the major indexes had already retreated from their highs in the morning after a jobs report showed an increase in first-time unemployment claims. Jobless Claims Consumer-discretionary stocks fell the most of 10 industry groups in the S&P 500 as initial jobless claims rose by 12,000 to 472,000 last week, figures from the Labor Department showed today in Washington. The median expectation of a Bloomberg survey of economists was for a decline to 450,000. Consumer- staples shares advanced the most among the 10 categories. Bed Bath & Beyond decreased the most in the S&P 500, erasing 6.6 percent to $42.13. Home Depot Inc. , the world’s largest home improvement retailer, retreated 2.1 percent to $31.47 for the biggest drop in the Dow. The Philly Fed number “is another indicator that the economy may not be recovering as quickly as many had hoped,” said James W. Gaul , a money manager at Boston Advisors LLC in Boston, which oversees about $1.9 billion. “It’s a volatile trading period as the market is trying to figure out if the recent rally was enough or if investors want to keep push higher.” Materials Producers Materials producers had the second-biggest drop as a group in the S&P 500. Steel Dynamics Inc. , the fourth-largest U.S.- based steelmaker, fell 2.3 percent to $13.89 after forecasting second-quarter earnings that trailed analysts’ estimates amid decreased profit margins on recycled metals and lower sales of flat-rolled steel. Alcoa Inc. , the largest U.S. aluminum maker, fell 1.5 percent to $11.24. American Express Co. , the biggest U.S. credit-card issuer by purchases, declined 1.5 percent to $41.71. Most U.S. stocks fell yesterday after housing starts dropped and FedEx Corp.’s profit forecast trailed estimates. The S&P 500 tumbled 14 percent from a 19-month high on April 23 through June 7 as concern grew that Europe’s debt crisis will derail the economic recovery and BP Plc’s leaking well triggered the worst oil spill in U.S. history. The index has since rebounded 6.1 percent through yesterday as concern over European budget deficits eased and investors speculated growth in China and the U.S. will bolster the global recovery. Spain sold 3.5 billion euros ($4.3 billion) of 10-year and 30-year bonds today, the maximum set for the auction, as a decline in prices enticed buyers and concern eased that the nation will struggle to finance looming debt maturities. Homebuilders Toll Brothers fell 3.9 percent to $18.05. The largest U.S. luxury homebuilder said deposits have been running 20 percent behind the year-earlier period in the past three weeks as the Gulf oil spill and European debt crisis hurt buyer confidence. Other homebuilders also declined. Pulte Group Inc. , the largest U.S. homebuilder by revenue, slipped 2.6 percent to $9.50. D.R. Horton Inc. , the second-largest U.S. homebuilder by revenue, erased 3.1 percent to $10.89. The consumer price index declined 0.2 percent in May, the Labor Department said, matching the median estimate of economists surveyed by Bloomberg. Pfizer, the world’s largest drugmaker, fell 1.4 percent to $15.27. Merck , the second-largest U.S. drugmaker, lost 1.3 percent to $35.54. Chanos Jim Chanos , the hedge-fund manager who made money betting against Enron Corp., said on Bloomberg Television that he is short-selling shares of large oil companies because investment in drilling and exploration is eating up their cash flows. Exxon Mobil Corp. dropped 0.6 percent to $62.13. Energy companies fell 0.6 percent as a group among 10 industries in the S&P 500. BP declined 0.6 percent to $31.67 as Chief Executive Officer Tony Hayward said at a hearing of a U.S. House Energy Committee panel that he didn’t take part in decisions on drilling the well in the Gulf of Mexico that blew out, triggering the worst U.S. oil spill. First Solar Inc. , the world’s largest manufacturer of thin- film solar power modules, climbed 4.3 percent to $123.91. Credit Suisse Group AG raised its recommendation on the stock to “outperform” from “neutral.” M&T Bank, DirecTV M&T Bank rose the most in the S&P 500, jumping 9.7 percent to $89.85. Banco Santander SA said it has taken no decision on any possible decision to combine its business with of the U.S. bank. Matias Inciarte , the Spanish lender’s third vice-chairman said “it’s been said” that there have been conversations between the two banks. DirecTV slid 3.9 percent to $37.81. The largest U.S. satellite-TV provider was cut to “market perform” from “outperform” by Wells Fargo & Co. To contact the reporter on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net .

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BP’s Hayward to Apologize for `Complex Accident’ in Testimony to Lawmaker

June 17, 2010

By Jeff Plungis and Jim Snyder June 17 (Bloomberg) — BP Plc Chief Executive Officer Tony Hayward , making his first appearance before Congress to face questions about the worst U.S. oil spill, will say multiple breakdowns led to the explosion at a Gulf of Mexico well. “This is a complex accident, caused by an unprecedented combination of failures,” Hayward says in testimony prepared for a hearing today of a House Energy Committee panel. “A number of companies are involved, including BP, and it is simply too early to understand the cause.” Hayward, 53, who will tell the lawmakers he is “deeply sorry” about the spill, was warned through a list of advance questions to expect a rough reception from lawmakers. Congress has a tradition of summoning CEOs of companies, from banks to automakers, for public tongue-lashings, said former Democratic Representative Gerry Sikorski of Minnesota. “You don’t succeed in these hearings, you survive,” said Sikorski, now a partner in Washington for Holland and Knight LLP who advises clients facing congressional investigations. Committee Chairman Henry Waxman , a California Democrat, and Representative Bart Stupak , head of the panel’s Oversight and Investigations Subcommittee, told Hayward in a June 15 letter to be prepared to discuss five questionable decisions they say BP made in the days before the disaster. “Time after time, it appears that BP made decisions that increased the risk of a blowout to save the company time or expense,” the lawmakers said in the letter. Number of Failures Hayward, who doesn’t respond directly to the lawmakers’ written questions in his prepared testimony, will say BP’s internal investigation so far “suggests that this accident was brought about by the apparent failure of a number of processes, systems and equipment.” Among CEOs who have faced a grilling from Congress are Akio Toyoda , CEO of Toyota Motor Corp. , who testified Feb. 24 on his company’s vehicle recalls. CEOs of Exxon Mobil Corp. , Chevron Corp. and ConocoPhillips were told by lawmakers at a June 15 hearing that they were as ill-prepared as BP to halt and clean up an offshore spill because all of the oil companies used “carbon copy” disaster plans. BP canceled three quarters of dividends yesterday and agreed in talks with President Barack Obama to put aside $20 billion for claims. The company also will contribute $100 million to help unemployed oil-rig workers. The government estimates the well is spewing as much as 60,000 barrels of oil a day into the Gulf. ‘Personally Devastated’ In Hayward’s written testimony, he says the explosion and spill “never should have happened, and I am deeply sorry that they did.” He says he was “personally devastated” to learn of the deaths of 11 workers on the Deepwater Horizon rig the company leased. “My sadness has only grown as the disaster continues,” Hayward says. “We will not rest until the well is under control, and we will meet all our obligations to clean up the spill and address its environmental and economic impacts.” London-based BP has paid more than $90 million for more than 56,000 claims submitted since the spill, Hayward said. Among the lessons BP has learned since the disaster, Hayward says, is that the industry needs to be better prepared for a spill beneath the sea and needs to improve safety technology such as blowout preventers. The device failed in the BP explosion. ‘My Life Back’ Hayward, BP’s chief since 2007, has been criticized for remarks such as a comment that he wishes the spill was ended because “I’d like my life back.” Obama said June 8 that someone making such a comment “wouldn’t be working for me.” Hayward apologized to the families of the workers who died. Executives put themselves in legal jeopardy by testifying before Congress when their company faces a potential criminal investigation, said Stanley Brand , a former congressional aide whose Brand Law Group has also represented companies under congressional investigation. The Justice Department has opened criminal and civil investigations into the BP spill. “It’s not a judicially constrained exercise,” Brand said of hearings such as today’s. “Questions that would never be permitted in a judicial forum are allowed. You are really at their mercy.” To contact the reporters on this story: Jeff Plungis in Washington at jplungis@bloomberg.net ; Jim Snyder in Washington at jsnyder24@bloomberg.net .

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