U.S. August Housing Starts and Permits: Summary (Table)

By Kristy Scheuble

Sept. 17 (Bloomberg) -- Following is a summary of the Aug. housing starts report from the Commerce Department.

===========================================================================
                   Aug.   July   June    May  April  March   Feb.   Jan.
                   2008   2008   2008   2008   2008   2008   2008   2008
===========================================================================
Housing starts     0.895  0.954  1.089  0.982  1.004  0.988  1.107  1.064
3-mo. average      0.979  1.008  1.025  0.991  1.033  1.053  1.057  1.081
Single family     0.630  0.642  0.663  0.682  0.681  0.711  0.722  0.750
Multi-family      0.265  0.312  0.426  0.300  0.323  0.277  0.385  0.314
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Housing permits    0.854  0.937  1.138  0.978  0.982  0.932  0.981  1.052
3-mo. average      0.976  1.018  1.033  0.964  0.965  0.988  1.048  1.117
Single family     0.554  0.584  0.616  0.635  0.649  0.621  0.646  0.675
Multi-family      0.300  0.353  0.522  0.343  0.333  0.311  0.335  0.377
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Under construction 0.947  0.956  0.977  0.989  1.006  1.013  1.024  1.034
3-mo. average      0.960  0.974  0.991  1.003  1.014  1.024  1.038  1.055
===========================================================================
                   Aug.   July   June    May  April  March   Feb.   Jan.
                   2008   2008   2008   2008   2008   2008   2008   2008
===========================================================================
Single family     0.485  0.492  0.511  0.530  0.550  0.563  0.580  0.590
Multi-family      0.462  0.464  0.466  0.459  0.456  0.450  0.444  0.444
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Housing completed  0.961  1.065  1.131  1.144  1.033  1.192  1.251  1.331
3-mo. average      1.052  1.113  1.103  1.123  1.159  1.258  1.304  1.355
Single family     0.676  0.814  0.844  0.877  0.808  0.909  0.906  0.998
Multi-family      0.285  0.251  0.287  0.267  0.225  0.283  0.345  0.333
                       ----------------------MOM%----------------- -YOY%-
Housing starts     -6.2% -12.4%  10.9%  -2.2%   1.6% -10.7%   4.0% -33.1%
Single family     -1.9%  -3.2%  -2.8%   0.1%  -4.2%  -1.5%  -3.7% -34.9%
Multi-family     -15.1% -26.8%  42.0%  -7.1%  16.6% -28.1%  22.6% -28.2%
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Housing permits    -8.9% -17.7%  16.4%  -0.4%   5.4%  -5.0%  -6.7% -36.4%
Single family     -5.1%  -5.2%  -3.0%  -2.2%   4.5%  -3.9%  -4.3% -40.3%
Multi-family     -15.0% -32.4%  52.2%   3.0%   7.1%  -7.2% -11.1% -27.7%
--------------------------------------------------------------------------
Under construction -0.9%  -2.1%  -1.2%  -1.7%  -0.7%  -1.1%  -1.0% -15.8%
===========================================================================
                   Aug.   July   June    May  April  March   Feb.   Aug.
                   2008   2008   2008   2008   2008   2008   2008  YOY%
===========================================================================
Single family     -1.4%  -3.7%  -3.6%  -3.6%  -2.3%  -2.9%  -1.7% -29.0%
Multi-family      -0.4%  -0.4%   1.5%   0.7%   1.3%   1.4%   0.0%   4.5%
--------------------------------------------------------------------------
Housing completed  -9.8%  -5.8%  -1.1%  10.7% -13.3%  -4.7%  -6.0% -35.8%
Single family    -17.0%  -3.6%  -3.8%   8.5% -11.1%   0.3%  -9.2% -44.8%
Multi-family      13.5% -12.5%   7.5%  18.7% -20.5% -18.0%   3.6%   4.0%
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Ratio M/S Starts   42.1%  48.6%  64.3%  44.0%  47.4%  39.0%  53.3%  41.9%
Ratio M/S Permits  54.2%  60.4%  84.7%  54.0%  51.3%  50.1%  51.9%  55.9%
===========================================================================
NOTE:  All figures in millions of units and seasonally
adjusted at an annual rate. Percent changes are seasonally
adjusted.

SOURCE: U.S. Commerce Department.

To contact the reporter on this story: Kristy Scheuble in Washington at kmckeaney@bloomberg.net

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U.S. Builders Began Work on Fewer Homes Than Forecast

By Bob Willis

Sept. 17 (Bloomberg) -- Builders in the U.S. broke ground on fewer houses than forecast in August, signaling the worst housing recession in a generation will continue to weigh on growth in coming months.

Housing starts fell 6.2 percent in August to an annual rate of 895,000, the fewest since January 1991, from a revised 954,000 pace in July, the Commerce Department said in Washington. Building permits, a sign of future construction, dropped 8.9 percent to an 854,000 pace.

Builders are scaling back as stricter lending and record foreclosures swell the number of properties on the market. The housing and credit meltdowns that led to the collapse of Lehman Brothers Holdings Inc. may continue to subtract from economic growth for the rest of the year and into next.

``The home-construction industry is still in a deep recession and will remain there probably for the rest of the year,'' said Patrick Newport, an economist at Global Insight Inc. in Lexington, Massachusetts, who forecast a decline to 893,000. ``There are just too many houses on the market.''

Treasuries rose after the report, with 10-year notes yielding 3.39 percent at 9:35 a.m. in New York, down from 3.44 percent late yesterday. Stocks dropped after the government took control of American International Group Inc., the nation's largest insurer by assets. The Standard & Poors' 500 index was down 2.2 percent to 1187.27

Starts were projected to fall to a 950,000 annual pace, according to the median forecast of 74 economists polled by Bloomberg News. Estimates ranged from 893,000 to 1.04 million.

Larger Than Expected

The decrease in permits was also larger than anticipated.

Compared with August 2007, work began on 33 percent fewer homes.

Construction of single-family homes declined 1.9 percent to a 630,000 rate, today's report showed. Work on multifamily homes, such as townhouses and apartment buildings, dropped 15 percent from the prior month to an annual rate of 265,000.

Starts decreased in three of four regions, led by a 15 percent slump in the Northeast. Construction was down 14 percent in the Midwest and 7.4 percent in the South. The West showed an 11 percent gain.

Builders completed 961,000 homes at an annual rate last month, the fewest since September 1982.

Combined existing and new-home sales have declined 36 percent from their 2005 peaks. Nationwide, home prices have fallen 19 percent on average from their peak in July 2006, according to the S&P/Case Shiller index of 20 cities.

Credit Crunch

The credit crunch spawned by the subprime mortgage crisis forced Lehman Brothers Holdings Inc. this week to file for bankruptcy, just a week after the government took over Fannie Mae and Freddie Mac, the two biggest buyers of mortgages.

Federal Reserve policy makers yesterday left the benchmark interest rate unchanged at 2 percent for a third consecutive meeting. Chairman Ben S. Bernanke and his colleagues signaled they will continue to address market turmoil with emergency lending.

As banks tighten lending standards and confidence slumps, consumer spending is faltering. Retail sales in August dropped for a second month, Commerce reported last week.

Homebuilders remain gloomy. A report yesterday from the National Association of Home Builders/Wells Fargo showed confidence among U.S. homebuilders this month held near the lowest level since records began in 1985.

Forced Into Foreclosure

As home prices continue to fall, more and more Americans a forced into foreclosure as they owe more than their homes are worth. Stricter lending rules also limit opportunities to refinance out of adjustable-rate mortgages before they reset higher.

Foreclosure filings rose to a record in August, RealtyTrac Inc. said Sept. 12. One in 416 U.S. households got a default notice, was warned of a pending auction or was foreclosed upon.

Toll Brothers Inc., the largest U.S. luxury homebuilder, o Sept. 4 reported a fourth straight quarterly loss.

``Explosive energy price increases, rising unemployment an severe mortgage and credit'' conditions cut demand, Chief Executive Officer Robert Toll said on a conference call. ``Weak consumer confidence has kept many potential buyers from taking advantage of the current buyers' market.''

To contact the reporter on this story: Bob Willis in Washington bwillis@bloomberg.net.

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GM, Domino's, Comcast Say Wall Street Woes Spreading

By Mike Ramsey, Greg Bensinger and Mark Clothier

Sept. 17 (Bloomberg) -- Executives at companies from General Motors Corp. to Domino's Pizza Inc. and Comcast Corp. say Wall Street's upheaval may stunt consumer demand as a credit crunch ripples through the U.S. economy.

The cost of borrowing in U.S. dollars surged to the highest level since 2001 following Lehman Brothers Holdings Inc.'s collapse, Merrill Lynch & Co.'s takeover by Bank of America Corp. and a cash shortage at American International Group Inc. that threatened to plunge the insurer into bankruptcy. The U.S. government agreed late yesterday to lend AIG as much as $85 billion in exchange for a 79.9 percent stake in the company.

``Lending has come to about a screeching halt as the industry itself is trying to sort this out,'' said David Brandon, chief executive officer of Domino's Pizza in Ann Arbor, Michigan. He said his company doesn't currently need access to debt markets.

GM CEO Rick Wagoner said consumer financing is now ``much tighter'' and urged the Federal Reserve to cut interest rates. Fed Chairman Ben S. Bernanke and colleagues left the main rate unchanged at 2 percent yesterday and signaled they will continue to monitor the market turmoil.

``We'll have to see the impact from all the bad news out of Wall Street in terms of the consumer psyche,'' Wagoner said in an interview on Bloomberg Television yesterday. ``But right now we are watching every day and reading the markets. Sales this month are OK. I would say more like August and July.''

GM, the biggest U.S. automaker, is pushing for $25 billion in government loans for the industry to help it convert to more fuel-efficient vehicles in a bid to stem losses.

Ford, Comcast

Ford Motor Co., the second-biggest U.S. automaker, said in a filing yesterday that it's assessing the impact of Lehman's bankruptcy on $1.13 billion in loan agreements with the New York- based investment bank.

Comcast, the largest U.S. cable-television provider, is watching how consumers weather the credit crunch, its chief financial officer told investors today.

Turmoil in the credit markets ``doesn't impact us really dramatically,'' Michael Angelakis said at a conference sponsored by Goldman Sachs Group Inc. in New York. ``We're very concerned about the ripple effect that that may have in the consumer market.''

U.S. stocks tumbled today as bank lending seized up in the wake of the government's takeover of American International Group Inc. and investors fled to the relative safety of Treasuries.

Evaluating Debt

Qwest Communications International Inc., the third-largest local phone company, may pay off more debt instead of refinancing it because of ``shaky'' credit markets, Chief Executive Officer Edward Mueller said today at the Goldman conference in New York.

``The markets today will make us have to evaluate any debt,'' Mueller said. ``We're really comfortable with our cash flow, and being that comfortable gives us a lot of flexibility here to make sure we do what's right for the long term.''

The cost of borrowing in dollars for three months jumped the most since 1999 today as banks hoarded cash amid concern more financial institutions will fail. The London interbank offered rate, or Libor, rose 19 basis points to 3.06 percent, the British Bankers' Association said. The overnight dollar rate soared 3.33 percentage points yesterday, the largest increase in its history. It fell 1.41 to 5.03 percent today.

`Downward Spiral'

By pushing up the price of money, the meltdown may further depress consumer spending that was propped up last quarter by tax rebates.

Tim Manganello, CEO of BorgWarner Inc., said the Lehman bankruptcy and Merrill takeover will have ``a significant global impact.'' BorgWarner, based in Auburn Hills, Michigan, makes automotive turbochargers. Manganello said he expects automotive sales in North America and Europe to be hurt as credit likely will become tougher to obtain and consumer confidence will fall.

``This could be a significant downward spiral caused as much by perception as reality,'' Manganello said. ``Nobody feels comfortable if they think their savings are at risk.''

The fallout on Wall Street will probably have the biggest impact on New York, said Brad Anderson, CEO of Richfield, Minnesota-based Best Buy Co.

``You've got high-income people who have kind of a scary ride right now in terms of what's happening with their careers,'' Anderson said. ``I would expect you would see an effect on the whole community, as has happened historically in New York.''

Borrowing Costs

Banks have already tightened credit for consumers and companies this year after $515 billion of asset writedowns and credit losses since the start of 2007 amid the worst housing slump since the Great Depression.

Lehman's bankruptcy will make it harder for corporations and individuals to borrow money, hurting the economy for ``an extended period,'' said Richard Bove, an analyst at Ladenburg Thalmann & Co.

``We are in uncharted territory,'' Bove, based in Lutz, Florida, wrote in a Sept. 14 note. ``It seems likely that all financial firms that extend credit will be pulling back on their credit lines.''

Film studio Lions Gate Entertainment Corp. shouldn't be adversely affected by Wall Street's crisis after raising money for films last year, Vice Chairman Michael Burns said in an interview. The company also has a $340 million credit facility with JPMorgan Chase & Co. and Wachovia Corp., and more than $250 million in cash and cash equivalents.

Lions Gate, based in Vancouver and run from Santa Monica, California, has become more conservative with how it invests its money and sticks to government securities, Burns said.

``There's too much volatility in the marketplace,'' he said. ``Now we only park money in places that closely resemble Caesar's wife -- beyond reproach.''

To contact the reporters on this story: Mike Ramsey in Southfield, Michigan, at mramsey6bloomberg.net; Greg Bensinger in New York at gbensinger1@bloomberg.net; Mark Clothier in Atlanta at mclothier@bloomberg.net

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Treasury to Sell Bills to Bolster Fed Balance Sheet

By Rebecca Christie and John Brinsley

Sept. 17 (Bloomberg) -- The Treasury will sell more debt to enable the Federal Reserve to expand its balance sheet, a sign of the strains created by the biggest extension of central-bank credit to financial companies since the Great Depression.

The program starts today with a $40 billion auction of 35- day bills, a day after the government agreed to take over American International Group Inc., the Treasury said in a statement in Washington.

The proceeds will ``provide cash for use'' by the Fed as it seeks to boost liquidity in credit markets struggling from $515 billion in writedowns and losses since the start of last year. The announcement illustrates the potential drain on the government's finances in taking over AIG, Fannie Mae and Freddie Mac, and taking on $29 billion in Bear Stearns Cos. assets.

``It is becoming imperative for the Fed to take actions to enlarge its balance sheet,'' said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York.

Yesterday the Fed announced an $85 billion loan to AIG, in exchange for a 79.9 percent government stake in the largest U.S. insurer. The Fed also has set up several other emergency lending programs to provide Wall Street firms with ready access to funding.

``The program will consist of a series of Treasury bills, apart from Treasury's current borrowing program'' and ``will provide cash for use in the Fed initiatives,'' the department's statement said.

Paulson's Role

Treasury Secretary Henry Paulson has worked with the Fed to manage the financial sector's cash crunch. The new bill auctions will help to ensure financial institutions have ready access to Treasury securities, which have been in short supply recently as firms try to maintain liquidity.

Arguing before Congress in July for unlimited authority to help mortgage companies Fannie Mae and Freddie Mac, Paulson said ``if you have a bazooka in your pocket and people know it, you probably won't have to use it.''

``This is Hank Paulson making sure that there are extra bazooka shells sitting at the Fed,'' said Adam Posen, deputy director of the Peterson Institute for International Economics in Washington. Treasury is ``hoping this convinces people that'' the Fed won't have to use them, Posen said.

The Fed will offset the impact of the new bill sales on its balance sheet so as not to affect the stance of monetary policy. The federal funds rate target will remain at 2 percent.

The Treasury said it will sell the new bills using its existing auction procedures, giving ``as much advance notification as possible.'' The bills will not have a uniform fixed term, giving the Treasury the same duration flexibility that it has with cash-management bills.

Fed holdings of Treasury securities have fallen to $478 billion as of Sept. 10, from $741 billion at the beginning of the year, as the central bank has made room on its balance sheet for the new lending facilities.

To contact the reporter on this story: Rebecca Christie in Washington at rchristie4@bloomberg.netJohn Brinsley in Washington at jbrinsley@bloomberg.net



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Sevan Marine Jumps on Report of Financing for Vessels

By Vibeke Laroi

Sept. 17 (Bloomberg) -- Sevan Marine ASA gained in Oslo trading after Dagens Naeringsliv said the builder of offshore floating units for the oil industry is close to securing financing for two vessels.

Sevan Marine jumped 1.4 kroner, or 6.2 percent, to 24.1 kroner, after climbing as much as 20 percent in earlier trading, the most since the shares were first sold in November 2004.

Dagens Naeringsliv said the company had secured commitments from General Electric Co. and BNP Paribas SA to finance two of its vessels, citing Chief Executive Officer Jan Erik Tveteraas. Sevan Marine expects to reach an agreement ``shortly,'' he said, according to the Oslo-based newspaper.

The cost of upgrading Sevan's two vessels for drilling operations would be $1.4 billion to $1.5 billion, of which 70 percent is expected to be financed through borrowing and the remainder through equity, the newspaper reported. The vessels have been hired by India's Oil & Natural Gas Corp. and Brazil's Petroleo Brasileiro SA, Dagens Naeringsliv said.

Tveteraas wasn't immediately available for comment when contacted by Bloomberg News.

Sevan Marine plunged as much as 28 percent yesterday before closing down 18 percent at 22.7 kroner as crude oil slumped to a seven-month low amid the worsening global credit crisis. The shares are down 68 percent this year.

Turnaround

``An announcement of an industrial partner and debt facilities could trigger a turnaround,'' Carnegie ASA analyst Frederik Lunde wrote in a note today.

The shares were also boosted by a report in The Economic Times of India that Jindal Drilling & Industries Ltd. is in talks with Sevan to form a $700 million joint venture to construct a deepwater rig, according to Lunde.

If the deal goes through, Sevan Marine would hold a 75 percent stake in the venture while Jindal would own the remainder, the newspaper reported on its Web site.

``This implies a $50 million equity infusion from Jindal,'' Lunde wrote in the research note. New Delhi-based Jindal drills for oil and gas.

To contact the reporter on this story: Vibeke Laroi in Oslo at vlaroi@bloomberg.net



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Global Confidence Falls as Lehman, AIG Roil Financial Markets

By Ben Sills

Sept. 17 (Bloomberg) -- Confidence in the global economy fell in September as financial turmoil deepened in the U.S., a survey of Bloomberg users on five continents showed.

The Bloomberg Professional Global Confidence Index fell to 11.3, from 14.1 in August. Confidence among U.S. respondents fell to 10.6 from 18.2, while the Western European measure was at 12.6 after 12.9. A reading below 50 indicates pessimism.

A yearlong credit squeeze culminated in the past two weeks with the bankruptcy of Lehman Brothers Holdings Inc. and the bailout out of Fannie Mae, Freddie Mac and American International Group Inc. Overnight borrowing costs soared as banks hoarded cash.

``We moved from Fannie and Freddie to Lehman to AIG, and even today, one question is: who is going to be next?'' said Simon Barry, an economist at Ulster Bank in Dublin, who participated in the survey. ``A lot of these risks haven't gone away.''

The MSCI index of global financial shares has declined 10 percent since early last week. The U.S. Federal Reserve yesterday said it would lend the country's biggest insurer, American International Group Inc., $85 billion to avert the worst financial collapse in history. A day earlier, Lehman Brothers filed for bankruptcy and Merrill Lynch & Co. agreed to be taken over by Bank of America Corp.

About 3,500 Bloomberg users from Tokyo to New York posted responses between Sept. 8 and Sept. 12 as investors absorbed U.S. Treasury Secretary Henry Paulson's decision to bail out Fannie Mae and Freddie Mac, the lenders which own or guarantee $12 trillion of U.S. mortgages.

Credit Losses

Banks worldwide have tallied more than $500 billion in losses and writedowns since credit markets seized up a year ago.

``We haven't experienced anything like this since 1929,'' Former European Central Bank chief economist Otmar Issing, 72, said in a Bloomberg Television interview yesterday. ``Global growth will slow and is already slowing. But overall, the risks have mostly been confined to a few industrialized countries.''

Bloomberg users increased expectations that lower oil prices will allow central bankers to pare interest rates as the economic outlook deteriorates. In Germany, the measure for central bank- rate expectations fell to 34.1 from 42.7, signaling respondents in Europe's biggest economy now anticipate that the European Central Bank may cut its key rate in the coming six months. The gauges also declined in the U.S., Japan, and the rest of the euro region.

The price of oil fell by a third since touching a record $147.27 in July and traded at $93.26 a barrel in New York at 10:42 a.m. Central European Time today.

Timing of Recovery

``For global business confidence to improve two things are needed: the U.S. housing market to bottom out and a sign that the financial turmoil is nearing an end,'' said Masamichi Adachi, a senior economist at JPMorgan Chase & Co. in Tokyo. ``That won't be until around the second quarter in 2009.''

The cost of borrowing in dollars overnight more than doubled yesterday as banks hoarded cash amid speculation more financial institutions will fail. The overnight dollar rate soared 333 basis points to 6.44 percent, its biggest jump, according to the British Bankers' Association.

The euro region and the Japanese economies both contracted in the second quarter, while the European Union says the U.K. will suffer a recession in the second half of the year. In the U.S., unemployment jumped to 6.1 percent in August, the highest in five years.

Respondents in Japan were the most pessimistic about the global outlook. Participants in Spain, which the EU says faces its first recession in 15 years, were the gloomiest about their economy, with a reading of 4.1, followed by the U.K. Participants in Brazil remained the most optimistic about their economy, at 58.2.

To contact the reporter on this story: Ben Sills in Madrid at bsills@bloomberg.net

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Black Swans Become Norm, Instead of Exception: William Pesek

Commentary by William Pesek

Sept. 17 (Bloomberg) -- The cottage industry that Nassim Taleb created with his book ``The Black Swan: The Impact of the Highly Improbable'' has gone beyond global.

The options-trader-turned-author is concerned with rare, major events that humans argue were predictable in hindsight. It's a kind of philosophical Murphy's Law for investors, and one increasingly hears folks from New York to Ulaanbaatar buzzing about black-swan events.

Taleb's 2007 book, named after a bird once thought not to exist, was itself a black swan -- an unexpected hit with great impact. It ranks much higher on Amazon.com's sales charts than Alan Greenspan's 2007 memoirs, ``The Age of Turbulence.''

That, too, gets into black-swan territory. Who would have expected a year ago that Taleb would be outselling the man dubbed ``Maestro'' in a gushing 2000 book by Bob Woodward?

Taleb's insight that we are all blind to rare events and fool ourselves into thinking we can predict risks and rewards proved more prescient. Former Federal Reserve Chairman Greenspan helped fuel the bubbles and set the weak regulatory stage for the U.S. financial crisis. Taleb shed light on why few saw it coming.

It gets you wondering what other unexpected, high-impact events are ahead.

Japan's Lead

Who would have predicted the great Bear Stearns Cos. would collapse? Or that Lehman Brothers Holdings Inc., founded in 1850, would be next? Or that the Fed would follow Japan's lead and shore up a cracking system with ultra-low interest rates? Or that the U.S. financial crisis -- featuring zombies such as Fannie Mae and Freddie Mac -- might be worse than Japan's?

Who would have thought five years ago that Russia would be calling the shots in 2008? Or that the wealth of Singapore, population 4.7 million, would be integral to keeping the $14 trillion U.S. economy afloat?

Would you have believed North Korea experts would be wondering if the son who got caught trying to visit Tokyo Disneyland with a forged Dominican Republic passport might replace Kim Jong Il? Or that South Korea would turn the tables on Wall Street with Lehman going hat-in-hand to Korea Development Bank for capital?

Perhaps the most disorienting change in the global order is the shift in power from West to East.

Black Swans

Black-swan enthusiasts will point out that some of the above examples don't exactly fit Taleb's definition. Yet the power shift to Asia and the Middle East is occurring faster than seemed possible. It has markets considering how countries could use the phenomenon to their advantage.

So what do newly rich, often autocratic countries want and how can they get it?

Just think how surprised we'll all be when the United Arab Emirates, awash in petrodollars, undertakes an emergency takeover of Citigroup Inc., Morgan Stanley and Washington Mutual Inc. Think of how New Yorkers will react when U.A.E. officials announce plans to move Wall Street to a man-made island in the Persian Gulf.

Julian Barnes laid out the plan in his 1998 novel ``England, England.'' It chronicled the creation of a U.K.-themed amusement park that Britons and tourists like better than the country itself. Given the U.S.'s crumbling airports, bridges and dodgy broadband speeds, financiers may like the new Wall Street more than the old one.

Using Power

What else haven't we thought of? Perhaps China will agree to increase purchases of U.S. Treasury bonds and not dump U.S. agency debt in exchange for Taiwan. Maybe China wants to buy Australia, where the stock market is about 30 percent cheaper this year.

Russian tourists love visiting London. Oil-rich Russia may want to buy the city, and with the housing slump, it may get it on the cheap. Perhaps the Middle East will seek to buy every football team in the English Premier League.

Or after Singapore's sovereign wealth fund owns a piece of all major banks, it might be able to get them to shut their Hong Kong operations and relocate to new office buildings in the island-nation's own central business district.

Yes, this all sounds nuts, kind of like a woman running for prime minister in male-dominated Japan, as Yuriko Koike is. It sounds crazy, like China controlling the weather at the Olympics, or some scientists fearing an experiment at a laboratory near Geneva would destroy our planet.

White Is Black

Pure lunacy -- like a politician twice accused of sodomy being on the verge of leading Muslim-majority Malaysia. Or Japanese and American voters thinking old-school politicians Taro Aso, 67, and John McCain, 72, are the agents of change that their sputtering economies need.

I'm getting fanciful here for a reason. The rhythm of this column moves from the serious to the seemingly absurd because that's what has become of global markets.

Lots of bright people tried to call the bottom in markets. The normal goalposts of analysis and financial models have proven useless. The more certainty with which so-called experts tell you what will happen, the faster you should run in the other direction.

These days, up really does seem to be down and white really does seem to be black, at least where swans and prognosticators' eyes are concerned.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net



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Natural Gas Futures Gain as AIG Rescue May Aid U.S. Economy

By Reg Curren

Sept. 17 (Bloomberg) -- Natural gas futures advanced as the Federal Reserve's rescue of American International Group Inc. eased concern of a U.S. economic slowdown.

Gas rose as much as 5.8 percent after the government took control of AIG, the country's biggest insurer. The futures have lost almost half their value since early July on speculation that demand from utilities and factories would drop because of a weakening economy.

``With AIG being supported by the government, there is upside for the entire energy complex,'' said Chris Jarvis, president of Caprock Risk Management in Hampton Falls, New Hampshire. ``It alleviates the need for people to sell at all costs and speculators are back in buying.''

Natural gas for October delivery gained 35.6 cents, or 4.9 percent, to $7.635 per million British thermal units at 10:55 a.m. on the New York Mercantile Exchange. Prices are up 15 percent from a year ago.

``Once people's risk aversion dissipates and the fear factor drops, they'll put money back into commodities,'' Jarvis said. ``Commodities have come off so far that if you want exposure it's a good time to get back in. I expect natural gas to be a leader.''

A decline in gas output from the Gulf of Mexico caused by hurricanes Ike and Gustav has slowed the rebuilding of stockpiles for the cold-weather season, helping lift prices, Jarvis said.

U.S. gas inventories rose 64 billion cubic feet in the week ended Sept. 12, according to the median of 10 analyst estimates compiled by Bloomberg. Supplies in the same week over the past five years advanced an average 88 billion cubic feet, according to the Energy Department.

Supply Estimates

Inventories are probably going to be near the five-year average of 3.4 trillion cubic feet for the coming winter, Jarvis said. Supplies rose to a record 3.545 trillion last Nov. 1.

``The sentiment in the market is maybe we'll fall a little behind on storage, with a gain in the high 50s or low 60s'' last week, said Tom Orr, director of research at Weeden & Co. in Greenwich, Connecticut. ``We might find ourselves 150 billion cubic feet less than where we were last year in the next couple of weeks because of shut-ins.''

Gulf production has been mostly shut this month because of hurricanes Ike and Gustav, boosting expectations that winter inventories will be pinched. Supplies normally gain before November, when demand for the heating fuel begins its rise to a winter peak.

About 84 percent of the Gulf's daily production of 7.4 billion cubic feet was shut in as of yesterday, the U.S. Minerals Management Service said.

`Base at $7'

Technical analysis of the natural gas price chart also suggests a ``more constructive'' outlook for the heating and industrial fuel, Orr said.

``Gas is hanging in there and has been building a base at $7 for close to a month,'' said Orr. ``If you go back and look at the chart last year it ground down in November and December to that $7 level and then started to shoot up. You need time and price to set a bottom.''

Technical traders watch for patterns on daily charts for clues to price direction, and will sell or buy commodities or equities based on those indicators.

To contact the reporter on this story: Reg Curren in Calgary at rcurren@bloomberg.net.



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Petro-Canada Sees Surging Costs at Fort Hills Project

By Stephen Bierman

Sept. 17 (Bloomberg) -- Petro-Canada and partners estimated investments to develop the Fort Hills oil sands project in Alberta may be more than 50 percent higher than forecast last year as labor, materials and construction costs climb.

The estimate has risen to C$23.8 billion ($25.5 billion), excluding some costs such as feed engineering, from C$14.1 billion, Martin Sandell, a vice president at Calgary-based UTS Energy Corp., which holds 20 percent of the project, said on a conference call today. Petro-Canada owns 60 percent and Teck Cominco Ltd. owns the rest.

``The numbers are still a moving target in terms of final dollars,'' Peter Symons, a Petro-Canada spokesman, said by telephone from Calgary. ``The scope of the project, the targets remains the same.''

An investment decision will be made in the fourth quarter after completion of the engineering and design plan. The project targets production of 280,000 barrels of crude a day by 2015. By, comparison, Petro-Canada expects output of 420,000 barrels of oil equivalent a day this year.

Moving Target

The company, in the first stage, has aimed to produce 140,000 barrels a day of synthetic crude from the fields, with initial output from the Sturgeon upgrader in the second quarter of 2012. It estimates associated bitumen production of 160,000 barrels a day with initial production in the fourth quarter of 2011, Petro-Canada said.

The project will also require regulatory permits for mines and the Sturgeon upgrader located near Edmonton, Symons said.

UTS Chief Executive Officer William Roach said the cost increased is ``of great concern,'' according to a statement. ``The partnership is working together constructively to examine all options available to the project, including re-phasing with UTS' specific objective to reduce the capital exposure prior to first oil,'' he said.

UTS shares plunged 38 percent to C$1.48 as of 11:19 a.m. in Toronto. Petro-Canada fell 2.9 percent to C$38.5. Teck Cominco fell 3.3 percent to C$34.25.

``Financing was already a concern in the current credit market,'' UBS AG analyst Andrew Potter wrote in a research report. ``With the mounting cost escalation and a sum of $3 billion of additional financing, UTS faces considerable headwinds moving forwards.''

To contact the reporter on this story: Stephen Bierman in London ext 4139 sbierman1@bloomberg.net.



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Nigerian Militants Step Up `Oil War' With Niger Delta Attacks

By Karl Maier and Dulue Mbachu

Sept. 17 (Bloomberg) -- Nigeria's main militant group in the Niger River delta intensified its ``oil war'' for a fifth day, claiming to have destroyed an oil-pumping station and a pipeline operated by a unit of Royal Dutch Shell Plc.

The Movement for the Emancipation of the Niger Delta, in an e-mailed statement today, said it attacked the Orubiri pumping station in Rivers state at 10 p.m. yesterday. A Nigerian military spokesman confirmed the raid. MEND later said it destroyed an oil pipeline at Rumuekpe, also in Rivers state.

``The political mood in the capital Abuja is shifting away from negotiation and dialogue towards a tough military response,'' Antony Goldman, an independent analyst specializing in Nigeria, said by phone from London. ``If militants can take the violence beyond Rivers, it will represent a setback for what appears to be the military's new strategy.''

Attacks by armed groups in the Niger delta region have cut more than 20 percent of Nigeria's crude exports since 2006. Nigeria was Africa's top oil producer last month.

``MEND seem the most organized they have been for almost two years, yet the Federal Government is lacking leadership on this crucial issue in how to find a resolution in the Delta,'' Thomas Pearmain, a London-based energy analyst at Global Insight, said in an e-mailed response to questions.

Shell is aware of reports of sabotage at Rumuekpe and is investigating, company spokesman Precious Okolobo said in a telephone interview today.

Shell, the biggest international operator in Nigeria's oil industry, has borne the brunt of the attacks. The company runs 6,000 kilometers (3,720 miles) of pipelines, 87 oil pumping stations, 10 gas plants and two main oil export terminals, according to its Web site.

`Oil War'

The latest spate of attacks began on Sept. 13 when Nigerian soldiers and militants clashed in the Elem-Tombia district, south of Port Harcourt, the hub of Nigeria's oil industry. MEND said troops had launched an air and marine offensive against its positions and declared an ``oil war'' targeting installations in the region, which produces almost all of Nigeria's crude.

MEND today threatened to broaden its range of attacks beyond Rivers to other states and deep offshore oilfields such as Shell's Bonga and Chevron Corp.'s Agbami facilities.

``The whole Delta region appears to be under attack as MEND has promised to move across the delta after completing their attacks in Rivers State,'' Pearmain of Global Insight said.

MEND says it's fighting on behalf of the inhabitants of the Niger Delta who have yet to share in the oil wealth of the 70,000-square kilometer region.

Stolen Crude

The government and independent analysts say many of the armed groups in the Niger delta are involved in selling stolen crude and kidnapping.

``Armed groups are well resourced and have a lucrative illicit trade to protect,'' Goldman said.

The attackers of the Orubiri pumping station arrived in eight speed boats and targeted a naval vessel with 10 people on board, said Lieutenant-Colonel Sagir Musa, a spokesman for the region's joint military task force. No naval personnel were killed in the attack, he said.

``Militants detonated dynamite, bombs and lobbed some pieces of hand grenades on the facility,'' Musa said in a mobile-phone text message. ``It is feared that the facility might have caught fire due to intense sporadic gunshots and massive dynamite and bomb explosions.''

MEND said it had teamed up for the Orubiri raid with the Niger Delta People's Volunteer Force, which first took up arms in 2004 before reaching a peace deal with the government a year later.

Volunteer Force

The volunteer force's leader, Mujahid Dokubu Asari, issued a statement with other delta militant leaders yesterday condemning the government's military actions in the oil region.

``It should be a major worry to oil companies and the government that MEND formed an alliance with another militant group to attack and destroy the Orubiri flow station,'' Pearmain said. ``MEND has previously tended to work on its own.''

On Sept. 15, MEND attacked a Shell-run pipeline at Bakana in Rivers state and the company's Alakiri flow station the night before. Militants also clashed with soldiers near a Chevron oil field yesterday.

Chevron spokesman Scott Walker said yesterday that the incident near the Idama oil field had no impact on production, which was already shut-in for pipeline repairs.

Nigeria pumped 1.9 million barrels of oil a day last month, according to Bloomberg estimates, which is 263,000 barrels a day less than its quota from the Organization of Petroleum Exporting Countries.

To contact the reporter on this story: Dulue Mbachu via the Johannesburg bureau at abolleurs@bloomberg.net



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Crude Oil Rises as AIG Rescue Plan Eases Economic Slowdown Risk

By Mark Shenk

Sept. 17 (Bloomberg) -- Crude oil rebounded from the biggest two-day decline in almost four years after the Federal Reserve agreed to rescue American International Group Inc., easing concern of a further economic slowdown in the U.S.

Oil rose as the Fed bailout prevented the bankruptcy of the nation's biggest insurer and Morgan Stanley announced that third- quarter profit fell less than estimated. Prices also advanced after a U.S. government report showed that crude oil and fuel stockpiles dropped because of Hurricane Ike.

``Prices began to rise when it became clear that there would be an AIG rescue and we got word that Morgan had decent earnings,'' said Tom Bentz, senior energy analyst at BNP Paribas in New York.

Crude oil for October delivery rose $1.84, or 2 percent, to $92.99 a barrel at 11:13 a.m. on the New York Mercantile Exchange. Oil in New York has declined 3.2 percent this year and 37 percent from the record $147.27 a barrel reached on July 11.

Oil futures tumbled more than $10 a barrel in the first two days of the week on concern financial-market disruptions may weaken the global economy and cut fuel consumption.

Goldman Sachs Group Inc. cut its three-month forecast for crude oil to $115 a barrel from $149, citing the global credit crisis and demand weakness. Goldman Sachs said oil prices have ``overshot to the downside'' and the securities firm remains ``bullish'' that they will move higher.

Inventories Decline

U.S. crude-oil stockpiles fell 6.33 million barrels to 291.7 million barrels last week, according to the Energy Department. It was the fourth-straight inventory decline. A drop of 3.5 million barrels was forecast, according to the median of responses by 11 analysts surveyed by Bloomberg News.

U.S. fuel demand averaged 19.9 million barrels a day during the past four weeks, down 4.4 percent from a year earlier, the department said. Gasoline consumption averaged 9.21 million barrels a day over the period, down 2.6 percent.

Gasoline supplies declined 3.31 million barrels to 184.6 million barrels, the lowest since at least 1990, according to department figures. Analysts forecast that stockpiles of the fuel would drop 3.5 million barrels last week. Inventories have fallen 15 percent in eight weeks.

Gasoline for October delivery fell 2.48 cents, or 1 percent, to $2.376 a gallon in New York. Futures touched $2.3576, the lowest since Feb. 13.

``People are focused on the fact that demand is off by 2.6 percent rather than on inventories,'' said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. ``The refineries that were shut because of Hurricane Ike will be restarting soon.''

Nigerian Attacks

Nigeria's main militant group in the Niger River delta said it destroyed an oil-pumping station operated by a unit of Royal Dutch Shell Plc and a pipeline as its raids against the oil industry entered a fifth day.

The Movement for the Emancipation of the Niger Delta said it destroyed the Orubiri oil-pumping station operated by a unit of Shell, and an oil pipeline operated by units of Shell and Eni SpA. A Nigerian military spokesman confirmed the raid.

Nigeria, which sits on Africa's largest hydrocarbon reserves, has lost about one-fifth of its output since February 2006 as a result of attacks.

Brent crude oil for November settlement rose $1.33, or 1.5 percent, to $90.55 a barrel on London's ICE Futures Europe exchange. Prices dropped the past 14 days, the longest stretch since the contract was introduced in 1988.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.



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EDF May Overpay for British Energy by Raising Offer

By Paul Dobson
Enlarge Image/Details

Sept. 17 (Bloomberg) -- Electricite de France SA, the world's biggest operator of atomic-power plants, may pay too much for British Energy Group Plc by raising its 12 billion-pound ($21.4 billion) offer.

British Energy, the U.K.'s biggest power producer, is worth no more than 777 pence a share in a takeover, 1.6 percent above the 765-pence offer level, because the French company may face delays in building new plants needed to make the purchase profitable, says Ingo Becker, an analyst at Landsbanki Kepler. Morgan Stanley analyst Bobby Chada values the shares at 665 pence, including 50 pence for new plants.

``Soaring build costs and potential shortages in both equipment and engineers'' would make a higher bid risky, according to Becker, who is based in Frankfurt and has a ``reduce'' recommendation on British Energy. An acquirer ``would not be willing to pay up significantly for optional site value,'' he said in a Sept. 10 investor note.

The biggest risk to British Energy shareholders may be that EDF, whose board meets today, abandons its offer after failing with its July 31 approach. The East Kilbride, Scotland-based company has traded within 9 percent of EDF's offer since Aug. 1, indicating the market is still betting on a deal. EDF has dropped 13 percent since then while energy prices slumped and equities fell. British Energy traded at 724 pence on the London Stock Exchange at 12.24 p.m. today while EDF was at 48.05 euros on Euronext in Paris.

Reactor Sites

The U.K. utility's biggest private shareholders said the bid undervalued its eight nuclear stations and adjacent land where more reactors may be built. Becker said any revised bid for the company, which is 36 percent state-owned, is unlikely to exceed 800 pence.

British Energy's land is attractive to Paris-based EDF, which has plans for at least four new U.K. reactors from 2017. Prime Minister Gordon Brown supports the expansion of nuclear power to replace older plants and cut carbon-dioxide emissions, and the sale of British Energy to EDF to accomplish that goal.

Analysts can't agree on valuation because utilities usually face opposition to nuclear plants from environmentalists and local residents, and planning and construction may take 10 years or more. Deutsche Bank AG analyst Iain Turner says new nuclear may add up to 200 pence to his 775-pence valuation.

Investor Opposition

The sites' ``strategic value is immense and difficult to quantify, but that's what the debate is about,'' said Edward Collins, a London-based fund manager at New Star Asset Management Group Plc who helps manages about $41 billion, including British Energy shares. Evolution Securities Ltd. analyst Lakis Athanasiou says that potential may be worth 160 pence per share.

EDF, which is 85 percent owned by the French government, backed away from a takeover bid because British Energy shareholders, including Invesco Ltd. and M&G Investment Management Ltd., opposed the approach. The French company will need to raise its bid or find a way for investors to profit from new nuclear developments for the deal to succeed, according to Collins.

Kaa Holmes, a spokesman for EDF's U.K. unit, declined to comment on any takeover discussions. The Times said yesterday that EDF may consider offering about 775 pence a share in cash, and boost a possible alternative payout from contingent value rights, which are financial instruments designed to give shareholders a slice of future profits.

'Major Role'

EDF is ``clearly committed to play a major role in nuclear development in Great Britain,'' Chief Executive Officer Pierre Gadonneix told reporters in London yesterday, adding the company wouldn't do a deal ``at any price.'' EDF has a scheduled board meeting today, spokesman Francois Molho said, declining to give details of the agenda.

Athanasiou says new nuclear plants may be worth as much as 245 pence to British Energy, an estimate he lowers by 35 percent to take account of risks. The figures are based on likely costs for Teollisuuden Voima Oyj's 1,600-megawatt Olkiluoto-3 station, being built in Finland.

Athanasiou puts the costs of building the Finnish plant at 5 billion euros ($7 billion), and assumes British Energy's sites will have six new reactors, one completed every 18 months starting in 2019. Running the plants for 85 percent of the time over 50 years, with power prices at 54 pounds a megawatt hour, would produce the profits he forecasts. Sizewell-B, the country's last nuclear plant, was completed on England's east coast in 1995 after taking six years to obtain planning consent.

Site Potential

``All of our sites have the potential for new nuclear plants,'' British Energy spokeswoman Sue Fletcher said Sept. 11. She declined to comment on the takeover speculation.

The country's Nuclear Decommissioning Authority, an agency that cleans up older plants, said Sept. 10 it would auction three pieces of land. EDF already bought property adjacent to sites owned by both British Energy and the authority. E.ON AG, Germany's biggest utility, has a grid agreement for a new plant at one site starting 2020.

To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net



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Buy Exotic, Not Vanilla, Rupee Options, Barclays Says

By Anil Varma

Sept. 17 (Bloomberg) -- Overseas investors should buy so- called exotic rupee options that offer limited protection at a lower price to guard against the Indian currency's steepest slide in 17 years, according to Barclays Plc.

Traders should avoid the costlier and more common ``vanilla'' options because the rupee's rising volatility is raising derivative prices, said Peter Redward, head of research for emerging Asia at the U.K.'s third-biggest bank. Money managers should buy partial defense against rupee weakness as India stems the currency's slide, he said. The currency plunged 1.9 percent yesterday, the most in a decade, and jumped as much as 1.4 percent today.

``The balance of risks tilts toward more rupee losses,'' Singapore-based Redward said in an interview. ``It's much better to use structured options to hedge than simple vanilla contracts, which are too expensive.''

India's rupee is headed for its biggest slide since 1991, when a balance-of-payments crisis forced the nation to pawn its gold with the International Monetary Fund to pay for imports. It is poised for the first annual loss since 2005 as overseas investors pulled out a record $8.1 billion from local stocks this year.

The rupee has slumped 15 percent this year, the second- worst among Asia's 10 most-active currencies outside Japan. It traded at 46.37 at 5 p.m. in Mumbai, after falling to a two-year low of 46.975 yesterday, according to data compiled by Bloomberg.

Reverse Knock-Out

Implied volatility on one-month dollar-rupee options rose today to 16 percent, the most in at least nine years, Bloomberg data show. Traders quote implied volatility, a gauge of expected swings in exchange rates, as part of option prices.

Options are derivative contracts that give the holder the right to buy or sell an asset without the obligation to do so. Exotic options have features that allow investors to cut costs and brace for more probabilities than one. India doesn't allow local trading in exotic options. The strike price is the rate at which an option holder may buy or sell a currency.

Investors should buy so-called reverse knock-out rupee put options due in a month, which grant the right to sell the currency against the dollar as long as its losses don't exceed a set limit, Redward said. The option ceases to exist, or gets ``knocked out,'' should the rupee fall past the limit, or trigger, within a month. An ordinary put option allows sales of the currency without setting any limits.

Barclays recommends a strike price of 47.15, equal to the price of one-month rupee-dollar contracts in the overseas non- deliverable forward market, and a knock-out trigger of 49. The option would cost less than a tenth of a contract that doesn't limit rupee losses, Redward said, using prices before the market opened today.

Reducing Costs

``Vanilla options are extremely costly due to strong demand and high volatility in the rupee,'' he said. ``Paying so much doesn't look viable, particularly because the central bank may curb currency losses. One can express a bearish rupee view more comfortably using structured options.''

Redward also recommends buying a rupee put option with a strike price of 47.15 and selling another one at 49 to partly offset the price of the first contract. The trade, called a rupee put spread, reduces the cost of protection against a rupee slide by a third, compared with an ordinary option, he said.

The Reserve Bank of India said yesterday it will sell dollars and increase interest rates on foreign-currency deposits held by local banks to bolster the rupee. The bank said it will sell dollars through its agent banks or directly to meet the demand-supply gap.

India's foreign-exchange reserves have declined by more than $27 billion from a record high of $316.2 billion reached in May, indicating it sold dollars.

To contact the reporters on this story: Anil Varma in Mumbai at avarma3@bloomberg.net.



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Ruble Trades Near 1 1/2-Week Low as Russia Offers Loan to Banks

By Ewa Krukowska

Sept. 17 (Bloomberg) -- Russia's ruble was little changed, holding near a 1 1/2-week low against the dollar-euro basket, after the Finance Ministry pumped $44 billion into its three largest banks and halted stock trading for a second day.

The ruble fell versus the euro as the Micex Index of stocks sank 3.1 percent when trading was suspended indefinitely, bringing its three-day drop to 25 percent. Investors sold emerging-market assets after the collapse of Lehman Brothers Holdings Inc. and the U.S. government rescued insurer American International Group Inc. The Russian currency gained against the dollar.

``Now the epicenter is global credit markets and in Russia it is the same too,'' said Martin Blum, the head of emerging-markets economics and strategy in Vienna at UniCredit MIB. ``So far there hasn't been a huge change in sentiment, only some stabilization following the morning announcement about the loan to banks.''

The ruble was at 30.3789 versus the basket at 6:37 p.m. in Moscow, from 30.3808 yesterday and near 30.3898 reached two days ago, the lowest since Sept. 4.

The currency declined to 36.2825 per euro, from 36.2048 yesterday. Against the dollar, the ruble rose to 25.5558, from 25.6158, as the Federal Reserve's $85 billion bailout of AIG failed to quell concern credit-market losses will deepen.

The ruble may advance to 29.9 against the basket at the end of this year, according to Blum.

The central bank, Bank Rossii, keeps the currency within a trading band against the basket to limit the effect of its fluctuations on the competitiveness of Russian exports.

Government Loan

The Finance Ministry extended the repayment period on loans available to OAO Sberbank, VTB Group and OAO Gazprombank to three months from one week.

Russia's markets are facing the biggest test since the government defaulted in 1998. The decade-long economic boom is fading, foreign investors have pulled at least $35 billion from the nation's stocks and bonds since the five-day war in Georgia last month, and the collapse this week of Lehman prompted a flight from emerging markets.

The government yesterday injected $20 billion into the interbank lending market via central bank and Finance Ministry auctions in a bid to contain soaring borrowing rates as credit dried up. The one-day MosPrime overnight rate, a gauge for monitoring liquidity demand, leapt 25 basis points to a record 11.08 percent.

To contact the reporter on this story: Ewa Krukowska in Warsaw at ekrukowska@bloomberg.net



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Latin American Currencies: Colombian Peso Drops to One-Year Low

By Andrea Jaramillo

Sept. 17 (Bloomberg) -- Colombia's peso declined to a one- year low as concern credit market losses will deepen depressed demand for higher-yielding, emerging-market assets.

``Latin American currencies are adjusting to the continued uneasiness in the market,'' said Benito Berber, a strategist at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut.

The currency slid 2.1 percent to 2,148 per dollar at 11:45 a.m. in New York, from 2,104 yesterday, according to the Colombian foreign-exchange electronic transactions system, known as SET-FX. It earlier touched 2,149.50, the weakest level since Sept. 18, 2007, the day the Federal Reserve began cutting its target lending rate from 5.25 percent to contain the credit market crisis.

The Colombian peso has plunged 4.5 percent this week following the record bankruptcy filing by Lehman Brothers Holdings Inc. The Fed's $85 billion bailout of insurer American International Group Inc. late yesterday failed to ease risk aversion, according to Berber.

The peso has also weakened as crude oil fell 35 percent from a record $147.27 a barrel reached on July 11. Oil is the biggest source of Colombian export revenue, accounting for about 25 percent of sales abroad. Crude oil for October delivery rose for the first time in three days today, increasing to $92.65 a barrel on the New York Mercantile Exchange.

Peso `Vulnerable'

``The Colombian peso is among the most vulnerable currencies in the region because of its dependence on oil and the fact that it's not investment-grade,'' Berber said.

Colombia's foreign debt is rated BB+, one level below investment grade, by Standard & Poor's and Fitch Ratings. Moody's Investors Service in June raised Colombia to Ba1, also one grade below investment quality.

Earlier this year, S&P and Fitch boosted Brazil's and Peru's long-term foreign currency debt to BBB-, the lowest investment-grade rating.

Oil prices have an impact on demand for Colombian exports to Venezuela, the nation's second-biggest trade partner after the U.S., Berber and colleague Flavia Cattan-Naslausky wrote in an RBS report today.

``When oil prices are low, this decreases Venezuela's ability to buy goods from Colombia,'' the strategists wrote. Oil accounts for about 90 percent of Venezuela's exports.

The yield on Colombia's benchmark 11 percent bonds due in July 2020 rose 23 basis points, or 0.23 percentage point, to 12 percent, according to Colombia's stock exchange. The bond's price plunged 1.367 centavo to 93.763 centavos per peso.

To contact the reporter on this story: Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net



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Ukrainian Hryvnia Rebounds Versus Dollar, Snapping Two-Day Drop

By Yon Pulkrabek

Sept. 17 (Bloomberg) -- Ukraine's hryvnia rebounded against the dollar, snapping a two-day decline.

The hryvnia, which the central bank manages through sales and purchases on the foreign-exchange market, strengthened 0.6 percent to 4.78 per dollar as of 6:34 p.m. in Kiev, from 4.81 yesterday. The currency had fallen as much as 2.9 percent to 4.9506.

To contact the reporter on this story: Yon Pulkrabek in Prague at ypulkrabek@bloomberg.net



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Money-Market Rate Jumps, TED Spread Soars on Squeeze

By Gavin Finch and Kim-Mai Cutler

Sept. 17 (Bloomberg) -- The cost of borrowing in dollars for three months jumped the most since 1999 as banks hoarded cash amid concern more financial institutions will fail.

The London interbank offered rate, or Libor, rose 19 basis points to 3.06 percent, the British Bankers' Association said today. The increase was the biggest since Sept. 29, 1999, during the run-up to the new millennium. The difference between what banks and the Treasury pay to borrow, the so-called TED spread, widened 70 basis points to 289 basis points. That's the biggest spread since Oct. 20, 1987, when stocks collapsed around the world on what became known as Black Monday.

``This is the second leg of the liquidity crisis,'' said Guillaume Baron, a fixed-income strategist who specializes in money markets for Societe Generale SA in Paris. ``We're having another round of problems plus higher bank risk. This is what happened in August 2007 when the crisis started.''

The freeze in credit markets deepened this week as Lehman Brothers Holdings Inc.'s bankruptcy and the U.S. government's bailout of American International Group Inc. spurred concern more financial companies may collapse.

The overnight dollar rate soared 3.33 percentage points yesterday, the largest increase in its history. It fell 1.41 percentage points to 5.03 percent today.

No Trust

HBOS Plc, the U.K.'s biggest mortgage lender, slid as much as 52 percent today on speculation it may not have access to funding. The shares pared declines after the company said it's in ``advanced'' takeover talks with Lloyds TSB Group Plc.

``Everybody is worrying about which bank is going to go bankrupt next,'' said Ronald Tharun, a money-market trader in Stuttgart at Landesbank Baden-Wuerttemberg, Germany's biggest state-owned bank. ``There's almost nothing being traded in the money markets. Nobody trusts anyone else.''

The cost of borrowing in euros for three months rose more than half a basis point today, to 4.97 percent, the BBA said. That's the highest level since Dec. 5, 2000.

The surge in borrowing costs defied efforts by central banks from the U.S. to Japan to revive lending through emergency-cash offerings. Central banks refrained from pumping cash into money markets today after injecting more than $230 billion yesterday.

AIG averted the worst financial collapse in history yesterday by accepting an $85 billion federal rescue and ceding control to the government. The Federal Reserve saved AIG, while refusing aid to Lehman, which filed for bankruptcy two days ago, because financial markets were more prepared for a Lehman failure, a Fed staff official said.

`Break the Buck'

Reserve Primary Fund, the oldest U.S. money-market fund, became the first in 14 years to expose investors to losses after writing off $785 million of debt issued by Lehman. Losses on the securities firm's debt forced the fund to break the buck, meaning its net asset value fell below the $1 a share price paid by investors, New York-based Reserve Management Corp., its closely held owner, said yesterday in a statement.

Since the start of last year, the world's biggest financial institutions posted almost $516 billion in subprime-related losses and writedowns. Eleven U.S. banks collapsed since January. Corporate bond sales in the U.S. and Europe have slumped 42 percent from a year ago, according to data compiled by Bloomberg.

Bear Stearns

Banks began to hoard cash when rising defaults on subprime mortgages led two Bear Stearns Cos. hedge funds to seek bankruptcy protection on July 31, 2007. To avert further money- market dislocations the Fed in March backed JPMorgan Chase & Co.'s takeover of Bear Stearns, which was on the verge of collapse. On Sept. 7, the Treasury seized control of Fannie Mae and Freddie Mac, the two biggest U.S. mortgage-finance companies.

Libor, set by 16 banks including Citigroup Inc. and UBS AG in a daily survey by the BBA, is used to calculate rates on $360 trillion of financial products worldwide, ranging from home loans to credit derivatives.

The last time three-month dollar Libor climbed so much was nine years ago, when the rate surged 57 basis points as banks stockpiled cash before year-end on concern the switchover to the year 2000 would disrupt computer systems.

The difference between the Libor for three-month dollar loans and the overnight indexed swap rate, the Libor-OIS spread that measures the availability of funds in the market, widened 31 basis points to 132 basis points today, the most since at least December 2001. That compares with an average of 8 basis points in the 12 months to July 31, 2007, before the credit squeeze started.

The Fed added $70 billion in temporary reserves yesterday, while the European Central Bank offered 70 billion euros ($100 billion) in a one-day refinancing operation. The Bank of England injected 20 billion pounds ($36 billion), the Bank of Japan added 2.5 trillion yen ($24 billion) and the Reserve Bank of Australia injected A$1.85 billion ($1.5 billion).

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net

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Dollar Falls Versus Yen as AIG Rescue Fails to Quell Concern

By Ye Xie and Bo Nielsen

Sept. 17 (Bloomberg) -- The dollar declined against the yen as the Federal Reserve's $85 billion bailout of insurer American International Group Inc. failed to quell concern credit market losses will deepen.

Japan's currency increased versus the Brazilian real while the Swiss franc gained against the Australian dollar on speculation investors will reduce holdings of higher-yielding assets and pay back loans in Japan and Switzerland. The pound fell versus the euro on concern British home-loan provider HBOS Plc may not have access to funding.

``Currencies reacting well to the volatile environment, namely the yen and Swiss franc, will continue to be favored,'' said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York. ``Despite the government's takeover of AIG, concerns about financial institutions and credit markets are still with us.''

The yen climbed 1 percent to 104.62 per dollar at 11:53 a.m. in New York, from 105.65 yesterday, when it touched 103.54, the strongest level since May 27. It rose 1 percent to 147.89 per euro, from 149.33 yesterday, when it touched 147.04, the strongest since August 2006. The dollar traded at $1.4136 per euro, compared with $1.4129.

Japan's currency increased 4.6 percent to 55.74 versus the real while the franc rose 2.4 percent to 1.1401 Australian dollars as stocks fell, encouraging investors to reduce trades in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Benchmark interest rates of 13.75 percent in Brazil and 7 percent in Australia compare with 0.5 percent in Japan and 2.75 percent in Switzerland.

Lehman Bankruptcy

The yen jumped the most in a decade against the dollar on Sept. 15 as Lehman Brothers Holdings Inc. filed for the biggest bankruptcy in history, sparking a global stock market rout and a surge in bank loan costs.

The Standard & Poor's 500 Index lost 1.5 percent today, and the rate on the three-month U.S. Treasury bill dropped as much as 0.48 percentage point to 0.21 percent, the lowest since at least 1954. The oldest U.S. money-market fund, Reserve Primary Fund, became the first in 14 years to expose investors to losses after writing off $785 million of debt issued by Lehman.

``It's hard to think a bottom is coming around this time,'' said Adam Fazio, a currency strategist at CIBC World Markets Inc. in New York.

The yen will rally in the next six months, a survey of Bloomberg users showed. Investors are the most bullish on the currency since March, according to 3,470 respondents from New York to Paris and Tokyo in the monthly Bloomberg Professional Global Confidence Index.

Weaker Pound

The pound weakened 0.2 percent to 79.43 pence per euro as HBOS, Britain's biggest mortgage bank, fell as much as 52 percent in London trading. Lloyds TSB Group Plc, the U.K.'s biggest provider of checking accounts, is in talks to buy the lender. Sterling stayed lower after a government report showed unemployment claims rose in August by the most since 1992.

The Fed will provide AIG with a two-year loan, take 79.9 percent of the New York-based company's stock and replace its management. The central bank kept its target rate for overnight lending between banks at 2 percent yesterday, rebuffing calls by some investors for an interest-rate cut.

``The Fed is monetizing debt on an unprecedented scale, and I can't see how that can be dollar-positive,'' said Michael Klawitter, a currency strategist at Dresdner Kleinwort in Frankfurt. ``Nothing is solved.''

Dollar's Gains

The dollar has gained 12 percent since touching an all-time low of $1.6038 per euro on July 15, gaining as reports showed the European economy shrank in the second quarter and crude oil dropped more than a third from its peak of $147.27 a barrel.

``We're in this battle between the return to macroeconomic- driven currency markets and the focus on risk reduction and position squaring,'' said Robert Sinche, head of global currency strategy at Bank of America Corp. in New York. ``There are hints that weaker economic news in the U.S. is starting to negatively impact the dollar. The capitulation selling of euros against the dollar and the yen may be over.''

U.S. housing starts fell 6.2 percent in August to an annual rate of 895,000, the lowest since January 1991, the Commerce Department said in Washington. Building permits, a sign of future construction, dropped 8.9 percent to an 854,000 pace.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net



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Yen Bears Capitulate, Dollar May Rally as Investors Flee Risk

By Lester Pimentel

Sept. 17 (Bloomberg) -- The yen will rally in the next six months as a deepening credit crisis prompts investors to shun higher-yielding assets, a survey of Bloomberg users showed.

Investors are the most bullish on Japan's currency since March as the credit losses that led to the collapse of Lehman Brothers Holdings Inc. mount, according to 3,470 respondents from New York to Paris and Tokyo in the monthly Bloomberg Professional Global Confidence Index. Participants became the most optimistic on the outlook for the dollar since the survey began in November as growth slowed in Europe.

``The Japanese yen is the best place to be,'' said Chris Low, chief economist at FTN Financial in New York and a survey participant.

Of the 16 most-widely traded currencies, only the yen appreciated against the dollar in the past month, gaining 4.51 percent to 105.80 yen. The yen typically gains in times of crisis as traders exit so-called carry trades by selling high- risk assets and repaying loans in countries where interest rates are low. Japan's 0.5 percent target rate compares with 4.25 percent in Europe, 7 percent in Australia and in 13.75 percent in Brazil.

The index of expectations on the yen rose to 64.75 for September from 49.19 in August. A reading above 50 indicates participants expect the currency to appreciate.

Wall Street Turmoil

The survey was taken before Lehman filed the largest bankruptcy in history on Sept. 15 and Merrill Lynch & Co. sold itself to Bank of America Corp. for about $50 billion, triggering the biggest decline in U.S. stocks since the September 2001 terrorist attacks. American International Group Inc.'s credit ratings were cut on Sept. 15, prompting the U.S. government yesterday to take control of the world's biggest insurer in an $85 billion bailout. All the firms are based in New York.

Only the outlook for the dollar exceeds that for the yen. The index measuring sentiment toward the greenback rose to 68.86 from 57.48. The currency has gained about 11 percent to $1.4202 per euro since touching an all-time low of $1.6038 on July 15.

The dollar is attracting more investors and traders as the European economy slows. The Euro-zone economy may grow 1.5 percent this year, compared with 1.7 percent in the U.S., according to the median estimate of strategists surveyed by Bloomberg.

The index for the euro declined to 37.85 from 42.88, while U.K. users increased bets against the pound, with that index falling to 28.67 from 37.73. Both levels are the lowest for those currencies recorded by the survey.

`Holds Up'

``The fact that the dollar holds up relatively well amidst the market turmoil in the U.S. speaks for itself,'' said Jack Spitz, a managing director of foreign exchange at National Bank of Canada in Toronto and a survey participant. ``It's not a domestic U.S. problem any more; this is a global growth problem. Risk aversion and repatriation flows currently dominate the currency market.''

The Federal Reserve left its target rate for overnight loans between banks at 2 percent yesterday and said ``downside risks to growth and the upside risk to inflation are both of significant concern.''

Lower short-term deposit rates can make a country's fixed- income holdings less attractive to international investors, eroding demand for the currency. The dollar depreciated 12 percent against the euro between Sept. 18 and April 30 as the Fed cut its target rate for overnight loans between banks to 2 percent from 5.25 percent and the European Central Bank kept its equivalent unchanged at 4 percent.

The outlook for the Brazilian real tumbled to 40.76, the lowest since the survey began, from 56.25 as investors avoided all but the safest securities. The real is the worst performer among the 16 most-traded currencies against the dollar this month, falling 9.4 percent.

Bond Outlook

Users became less certain 10-year Treasury yields will rise as the sentiment index fell to 59.96, the lowest since April, from 65.26. The yield on the benchmark 10-year note touched a seven-year low of 3.27 percent after Lehman filed for bankruptcy.

In Germany, the index measuring bund yields declined to 46.73 from 53.85, meaning users expect the nation's fixed-income securities to rally. Users in Japan expect yields there to fall, as the index dropped to 47.13 to 50.41. U.K. users became more bullish on gilts, with the index falling to 39.33 from 48.93.

Participants in Switzerland forecast the Swiss National Bank will cut its benchmark rate from 2.75 percent for the first time since April. The index that measures expectations for short-term borrowing costs fell to 42.01 in September from 55.42.

To contact the reporter on this story: Lester Pimentel in New York at lpimentel1@bloomberg.net



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Sugar Advances in London as Commodities Rebound on AIG Bailout

By Marianne Stigset

Sept. 17 (Bloomberg) -- White sugar rose by the most in almost four weeks in London as the bailout of American International Group Inc. soothed concern that a widening credit crisis will sap economic growth and demand for raw materials.

Crude oil, gold and corn rebounded on anticipation the Federal Reserve's action will help stem a financial crisis that threatens to derail growth. The UBS Bloomberg CMCI index of 26 raw materials is now little changed this year, after advancing as much as 34 percent.

``There's been a squeeze on liquidity with a lot of investors exiting the market,'' Abah Ofon, a commodities analyst at Standard Chartered Plc in Dubai, said by phone. ``But this money has to go back in somewhere and investors are going to look for assets with good fundamentals, which is the case for sugar.''

White sugar for December delivery rose as much as $11.40, or 3 percent, to $386.40 a metric ton and traded at $383.30 as of 1:11 p.m. on the Liffe exchange in London. It has gained 22 percent this year, outperforming oil and all the main industrial and precious metals.

Raw sugar futures for March delivery climbed 0.38 cent, or 2.8 percent, to 14.08 cents a pound on ICE Futures U.S.

World demand will surpass output by 3.8 million tons next season, ending two years of surplus, market researcher Kingsman SA forecast Sept. 5.

More sugar will also be used to make ethanol. Brazil, the biggest ethanol exporter, will almost triple output by 2020, according to the Center-South Sugar and Ethanol Industry Association, known as Unica.

Ethanol Production

Brazil will produce 65 billion liters (17 billion gallons) in 2020, up from 22.5 billion liters in the current April- November season, Alfred Szwarc, a senior board adviser to Unica, said yesterday. A growing proportion of the country's sugar-cane output will go toward ethanol, Szwarc said.

Cocoa futures for December delivery fell 12 pounds, or 0.8 percent, to 1,484 pounds ($2,654) a ton on Liffe.

Workers at the coffee and cocoa exchange in Ivory Coast, the biggest producer of the chocolate ingredient, are on strike, slowing shipments. Black pod, a fungal disease that rots beans, may also spread because of rain, Angoua Edoukou, interim president of the Bourse du Cafe et du Cacao, said Sept. 3.

``It is still too early for this and the current mishaps including administrative issues, strikes and corruption allegations to have any real impact on the upcoming main crop due to begin at the start of October,'' Stephanie Garner, a cocoa trader at Sucden (U.K.) Ltd. in London, wrote in a report today.

Robusta for November delivery climbed $15, or 0.7 percent, to $2,092 a ton on Liffe.

To contact the reporter on this story: Marianne Stigset in Oslo at mstigset@bloomberg.net

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Brazil Real Has Biggest Drop in 13 Months as U.S. Slump Spreads

By Adriana Brasileiro

Sept. 17 (Bloomberg) -- Brazil's real dropped the most in 13 months on concern the U.S. takeover of insurer American International Group Inc. will fail to stem financial market losses in the world's biggest economy.

The real sank 3.3 percent to 1.8667 per dollar at 11:07 a.m. New York time, from 1.8080 yesterday. It earlier touched 1.8847 per dollar, its weakest since September 2007. The real is the biggest decliner among the 16 major currencies this month, having plunged 12.6 percent against the dollar. It is down 17 percent from a nine-year high of 1.5545 reached Aug. 1.

``The market is in a frenzy,'' said Vanderlei Arruda, who manages the foreign-exchange trading desk at Sao Paulo-based Corretora Souza Barros. ``There is more tension every day and this is making investors, especially foreigners, pull their money from here.''

The real led a tumble in currencies across Latin America as investors piled into the safety of Treasuries after the U.S. took control of American International Group Inc. yesterday following the collapse of Lehman Brothers Holdings Inc. Rates on U.S. Treasury three-month bills dropped to as low as 0.233 percent, the lowest since at least 1954.

Mexico's peso sank 1.3 percent to 10.8581 per dollar and Colombia's peso declined 1.4 percent to 2,133 per dollar.

``After Lehman, we entered a new phase in which the positive effects of good news are very short-lived,'' said Marcelo Voss, chief economist at brokerage Liquidez Corretora in Sao Paulo. ``Investors will stay away from risk as much as possible.''

`Very Small Risk'

The real's decline today is the biggest since July 27, 2007, when concern began to build that subprime mortgage losses would weaken the U.S. financial industry and erode demand for higher- yielding, emerging-market assets. The real's 14 percent loss over the past 30 days is the biggest monthly decline in six years.

Brazilian Finance Minister Guido Mantega sought to shore up confidence in the currency, telling reporters in Brasilia today that there's a ``very small risk'' that the U.S. financial crisis will spread to Latin America's biggest economy.

Mantega called the local financial system ``solid'' and said the government may take steps to encourage lending to fund investments, exports and the agriculture industry if the U.S. crisis doesn't abate.

The yield on Brazil's zero-coupon bonds due in January 2010 jumped 32 basis points, or 0.32 percentage point, to 15.04 percent, according to Banco Votorantim. The yield on the overnight futures contract for January delivery rose 1 basis point to 14.02 percent.

To contact the reporter on this story: Adriana Brasileiro in Rio de Janeiro at abrasileiro@bloomberg.net



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Platinum Demand May Drop This Year, Leading to Supply Surplus

By Claudia Carpenter

Sept. 17 (Bloomberg) -- Platinum demand may decline more than 5 percent this year, falling short of production, according to London-based research company GFMS Ltd.

Usage will drop to 7.3 million ounces from 7.7 million in 2007, GFMS Chief Executive Officer Paul Walker said at a conference in London today. Supply will exceed demand by 120,000 ounces, he said.

Platinum and palladium, sometimes extracted from the same ore, are both used in jewelry and catalytic converters to reduce noxious gases from car and truck exhausts. Palladium will have a supply deficit, Walker said.

To contact the reporter on this story: Claudia Carpenter in London at ccarpenter2@bloomberg.net

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Gold May Rise to $950 an Ounce as Miners Lower Output

By Claudia Carpenter

Sept. 17 (Bloomberg) -- Gold may rise to $950 an ounce by the end of year as central banks and miners hold back sales and investors buy the metal as a haven against falling stock prices, London-based researcher GFMS Ltd. said.

Central bank sales will drop 46 percent in 2008, while mine supply will decline for a third year, a GFMS report showed today. Demand from investors worldwide will soar 38 percent to 778 metric tons, with purchases in east Asia more than doubling.

``We're expecting gold to stage a powerful rally in the fourth quarter,'' GFMS Chairman Philip Klapwijk said at a conference in London today. There will be ``significant declines in stocks, which compete with gold.''

Gold for immediate delivery rose 0.3 percent to $782.25 an ounce as of 2 p.m. in London.

Prices have dropped 6.2 percent this year, heading for the first annual drop in eight as dollar gains erode demand for the metal as an alternative to the U.S. currency and investors sell commodities to raise cash and cover losses in other markets.

``People are liquidating assets and trying to raise cash,'' Klapwijk said. ``Once the dust settles, we will see some allocation back into gold, and gold will benefit.''

The metal rose 5.4 percent on Sept. 12 and Sept. 15 as investors sought a haven from market turmoil after Lehman Brothers Holdings Inc. filed for bankruptcy protection.

Vietnam's net investment demand was 71 tons in the first half, surpassing India as the world's largest market. Investors in Vietnam sought gold to hedge against inflation, falling equities and a drop in the value of their currency, GFMS said.

Mine Output

Global mine production will drop 2.3 percent this year to 2,422 tons, the lowest since 1996. Recycled metal output will rise 9.3 percent, it said. South Africa, the world's second- biggest gold producer, reported a 16 percent decline in production in July from a year earlier.

Gold purchases by jewelers will rebound in the second half this year, rising 6 percent from a year earlier to 1,184 tons and accounting for 64 percent of total demand, GFMS said.

Annual jewelry demand will fall 9.9 percent to 2,164 tons, led by a 16 percent drop in North America and 15 percent decline in the Indian subcontinent, according to the report. The only market to show growth will be in the former Soviet states.

To contact the reporter on this story: Claudia Carpenter in London at ccarpenter2@bloomberg.net

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