Florida's Freedom Bank Is 17th in U.S. to Be Closed This Year

By Alison Vekshin and David Mildenberg

Nov. 1 (Bloomberg) -- Freedom Bank of Bradenton, Florida, became the 17th U.S. bank seized by regulators this year as the deepest housing slump since the Great Depression triggers record foreclosures and mounting losses.

Freedom, with $287 million in assets and $254 million in deposits, was shut yesterday by the Florida Office of Financial Regulation and the Federal Deposit Insurance Corp. was named receiver. Fifth Third Bancorp of Cincinnati will assume the deposits and buy $36 million of assets, the FIDC said. Freedom's four offices will open Nov. 3 as Fifth Third branches.

Regulators have closed the most banks this year since 1993, and the collapses of Washington Mutual Inc. and IndyMac Bancorp Inc. were among the biggest in history. The housing slump and tight credit led to enactment of a $700 billion bank-rescue plan and the U.S. Treasury is using the fund to buy $250 billion in preferred shares in banks.

Fifth Third will pay a premium of 1.16 percent, or about $2.9 million, to assume the deposits, the FDIC said. The deposit insurance fund, supported by fees on insured banks, will pay an estimated $80 million to $104 million, the agency said.

State regulators in August closed First Priority Bank, also based in Bradenton, which is south of Tampa on Florida's Gulf Coast.

Fifth Third on Oct. 28 said it will sell $3.45 billion in preferred shares and warrants as part of the Treasury Department's plan to boost bank capital ratios and promote lending.

First Third Share

The bank has lost $258 million in the past two quarters on rising losses on real-estate loans. Buying Freedom will raise Fifth Third's market share in the Bradenton-Sarasota market to fourth from eighth, according to recent FDIC data.

Fifth Third is struggling with rising delinquencies in Florida, which has reported among the sharpest declines in home price. The bank said 38 percent of $462 million in loans deemed uncollectible in the third quarter were in Florida, compared with 27 percent in Michigan and 16 percent in Ohio.

The FDIC oversees 8,451 institutions with $13.3 trillion in assets, and insures deposits of up to $250,000 per depositor per bank and the same amount for some retirement accounts. The agency has proposed doubling premiums charged to banks for coverage to replenish its reserves amid agency forecasts that bank failures through 2013 will cost almost $40 billion.

Washington Mutual, the biggest savings and loan, sold its assets to JPMorgan Chase & Co. Sept. 25 after customers drained $16.7 billion in deposits in less than two weeks. Wachovia Corp., the sixth-biggest bank, is being bought by Wells Fargo & Co. for $11.7 billion.

PNC

PNC Financial Services Group Inc., the biggest bank in Pennsylvania, on Oct. 24 agreed to buy National City Corp. of Cleveland for about $5.2 billion, with $7.7 billion from the Treasury bailout fund.

The Treasury is buying preferred shares in nine banks: Wells Fargo, JPMorgan, Citigroup Inc., Bank of America Corp., Merrill Lynch & Co. Morgan Stanley, Goldman Sachs Group Inc., Bank of New York Mellon Corp. and State Street Corp.

The FDIC is running a successor to California lender IndyMac, closed in July, and as of Oct. 24 said it had eased mortgage terms for more than 3,500 borrowers. The failure drained more than 10 percent from the U.S. insurance fund that had $45.2 billion at the end of the second quarter.

The agency in August said 117 banks were classified as ``problem'' in the second quarter, a 30 percent jump from the first quarter. The agency, which doesn't name ``problem'' lenders, will update its assessment in November.

``Banks overall are very well capitalized,'' FDIC Chairman Sheila Bair told the Senate Banking Committee on Oct. 23. ``We have some banks with some challenges, but the vast majority are well capitalized.''

The U.S. closed 27 banks from October 2000 through the end of last year, according to a list at fdic.gov.

To contact the reporters on this story: Alison Vekshin in Washington at avekshin@bloomberg.net; David Mildenberg in Charlotte at dmildenberg@bloomberg.net

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U.S. Stocks Post Biggest Weekly Gain Since 1974 on Valuations

By Elizabeth Stanton

Nov. 1 (Bloomberg) -- U.S. stocks staged their steepest weekly surge in 34 years after the Federal Reserve's interest- rate cut and signs the credit crisis is ebbing boosted equities trading at the lowest valuations in two decades.

The Standard & Poor's 500 Index still finished October with its worst monthly drop since 1987. Home Depot Inc., Walt Disney Co. and Target Corp. increased more than 15 percent, leading gains by companies that depend on discretionary spending by consumers. Verizon Communications Inc. rose the most in six years after sales beat estimates. PNC Financial Services Group Inc. and BB&T Corp. advanced after the Treasury agreed to infuse capital in at least 23 regional banks.

The S&P 500 climbed 10 percent to 968.75 this week, while the Dow Jones Industrial Average rose 11 percent to 9,325.01. Both rallied the most since October 1974 after closing at five- year lows on Oct. 27. The MSCI World Index of 23 developed markets jumped 9.8 percent to 957.25.

``There's a lot of inexpensive merchandise out there,'' said Warren Koontz, who oversees $2.5 billion as chief investment officer for large, value stocks at Loomis Sayles & Co. in Boston. ``The most I've seen in 25 years.''

The S&P 500 still sank 17 percent in October. The retreat drove its price-to-earnings ratio based on estimated 2008 profit to 10.7 on Oct. 27, the cheapest compared with the multiple using reported results since 1985.

$9.5 Trillion Lost

The October sell-off erased more than $9.5 trillion from the value of stocks worldwide, almost one-third of the total value wiped out this year, as credit-related losses and writedowns by financial firms approached $700 billion. The S&P 500 has slumped 34 percent in 2008.

Benchmark indexes for 67 of 68 markets tracked by MSCI Inc. declined in October, with 37 losing at least 20 percent. Bulgaria, Peru and Argentina did the worst, plunging more than 36 percent. Pakistan gained less than 0.1 percent.

All 10 industries in the S&P 500 advanced this week, led by consumer discretionary companies, after the Fed cut its target rate for overnight loans between banks to 1 percent, matching a half-century low. The companies gained even after Commerce Department data released Oct. 30 showed consumer spending dropped at a 3.1 percent annual rate in the third quarter, the most since 1980. The economy as a whole contracted at a 0.3 percent pace, its worst performance since 2001.

Home Depot, Disney

Home Depot, the world's largest home-improvement retailer, rose 27 percent to $23.59 for the steepest rally since it began trading in 1981. Disney, the No. 2 U.S. media company, advanced 15 percent to $25.91, the most since February 2004.

Target added 22 percent, the most in at least 28 years, to $40.12. William Ackman, whose hedge fund owns 10 percent of the discount retailer, said it should form a separate company to manage its $25 billion in real estate.

Staples Inc. climbed 35 percent, the most in its 19 years as a public company, to $19.43. The biggest U.S. office-supplies retailer forecast third-quarter profit exceeding some analysts' estimates and reiterated its long-term earnings projections.

Office Depot Inc., the second-largest office-supplies retailer, more than doubled to $3.60 for the biggest gain in the S&P 500. The 22 percent advance by retailers was the biggest among the 24 industry groups in the S&P 500, followed by real- estate companies. Homebuilders surged 34 percent.

Starbucks Corp. jumped 36 percent, the most in its 16-year history. The world's largest coffee-shop chain said October same- store sales in the U.S. suggest declines have ``bottomed out.''

Verizon added 18 percent to $29.67. The second-largest U.S. phone company added more subscribers than analysts estimated, driving profit up 31 percent.

PNC, BB&T Gain

PNC, whose pending acquisition of National City Corp. will make it the fifth-largest U.S. bank by deposits, gained 13 percent to $66.67. BB&T, the North Carolina-based lender, added 11 percent to $35.85.

The two regional banks are among at least 23 financial institutions invited to accept capital infusions as the Treasury rolls out the second half of its $250 billion package to shore up lenders and thaw frozen credit markets.

Stocks ``overshot to the downside given almost $5 trillion stimulus into the marketplace in terms of liquidity and capitalization done by governments around the world,'' said David Goerz, chief investment officer at Highmark Capital Management in San Francisco, which oversees $20 billion. ``I wouldn't want to be betting against them at this point.''

The cost of using options to insure against declines in stock prices fell for the first time in 10 weeks. The VIX, as the Chicago Board Options Exchange Volatility Index is known, slid 24 percent to 59.89, the biggest weekly drop since August 2007.

Yields on Treasury securities climbed as stock-market gains curbed demand for fixed-rate investments. The benchmark 10-year note's yield rose to 3.96 percent from 3.69 percent.

`Significant' Buyback

Apple Inc., the maker of Macintosh computers and the iPhone, rose 12 percent to $107.59. Sanford C. Bernstein & Co. said a ``significant'' share repurchase may boost earnings.

Insurance companies were the biggest decliners among the 43 S&P 500 stocks that slumped this week as investment losses threatened profits and credit ratings.

Hartford Financial Services Group Inc., the insurer that got an investment from Germany's Allianz SE this month, fell 58 percent to $10.32 after reporting its first unprofitable quarter in five years.

Cigna Corp., the Philadelphia-based health insurer, fell 32 percent to $16.30 after reporting a 53 percent profit decline because of shrinking health-plan membership and falling stock prices in its annuities business. Assurant Inc., the home insurer, retreated 31 percent to $25.48 after posting a third- quarter loss on investments and costs for two U.S. hurricanes.

$684 Billion Lost

S&P 500 companies are headed for their fifth straight quarter of declining profits. For the 360 that have reported third-quarter results, earnings fell 11 percent. Excluding financial institutions, profit rose 16 percent.

Industry and government reports next week are forecast to show manufacturing contracted at the fastest pace since 2001 while employers cut the most jobs since March 2003 in October, according to the median forecasts of economists in a Bloomberg survey. Americans go to the polls Nov. 4 to elect either Democrat Barack Obama or Republican John McCain to succeed President George W. Bush, a Republican.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net.

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Boeing Machinists to Vote on Ending Production-Crippling Strike

By Susanna Ray

Nov. 1 (Bloomberg) -- Boeing Co. machinists will cast ballots today on whether to end the third-longest walkout in the planemaker's history as they pick up their $150 weekly union strike stipends in Washington, Oregon and Kansas.

The 27,000 workers are voting on a sweetened contract that offers a 15 percent raise over four years along with bonuses totaling at least $8,000 and higher pension payments. Concerns the International Association of Machinists and Aerospace Workers had about job security were also addressed in the new proposal, which union leaders unanimously endorsed this week.

The 57-day strike has idled Boeing's Seattle-area manufacturing hub, cutting profit by $10.3 million and revenue by $100 million each day and further delaying the new 787 Dreamliner. Even if employees accept the new contract and start going back to work tomorrow night as planned, the company may need until December to get assembly lines back up to speed, said Joseph Campbell, an analyst at Barclays Capital in New York.

``Boeing doesn't want to budge in anything that would affect its competitive position in a downturn, so this is probably the best deal the machinists are going to get given the economy and the way the market is headed,'' said Richard Aboulafia, an analyst with aviation consulting firm Teal Group in Fairfax, Virginia, who has been a Boeing watcher for more than 20 years. ``Still, there is a lot of anger toward management'' that could prompt some workers to reject the new offer, he said.

To pass, the contract needs support from 50 percent of the voters, plus one. The voting takes place today from 8 a.m. to 6 p.m. local time and the results will be announced when all the ballots have been counted, the union said. The voting in the Puget Sound area is taking place at the union hall, fairground and community college were workers have been picking up weekly strike-pay checks in person on Saturdays since Sept. 27.

Record Profits

The machinists, who build planes and parts and maintain the factories, walked out Sept. 6 after an 80 percent ``no'' vote against Chicago-based Boeing's first offer. The union maintains that Boeing's record profits since the last contract and unprecedented orders have made it an ``island of success'' in the slumping economy and that its members deserve a greater share of the work and the earnings.

Boeing had a record order backlog for 3,725 planes worth $276 billion at the end of September, boosted by airlines eager to save on fuel by using newer models.

The company has said it needs to make sure any contract improvements still would be affordable if there's a slowdown and that it needs to continue its outsourcing policy to remain competitive as new aviation companies are founded and its only larger rival, Toulouse, France-based Airbus SAS, builds plants in China.

To contact the reporter on this story: Susanna Ray in Seattle at sray7@bloomberg.net.

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London Luxury-Home Values Declined Most Since 1976 in October

By Simon Packard

Nov. 1 (Bloomberg) -- Luxury-home values in central London, the world's most expensive location for prime real estate after Monaco, fell the most in 32 years in October because of the crisis in financial markets.

The estimated average value of a house or apartment in the city's nine most expensive neighborhoods fell 3.9 percent from September, according to an index compiled by Knight Frank LLP. It was the biggest drop since the index was started in 1976. Property values declined 10.8 percent from October 2007, the property broker said. The index covers homes mostly valued at about 1 million pounds ($1.62 million) or more.

The stalemate over price between buyers and sellers may be easing, the adviser said, as the worst banking crisis since World War I drives the U.K. economy into a recession. Demand has collapsed as bankers and others employed in financial services face job cuts, lower bonuses and higher borrowing costs.

``An increasing number of vendors have decided to cut prices to achieve a sale,'' said Liam Bailey, Knight Frank's head of residential research, in a statement. ``Until the summer many were holding to their pre-crunch asking prices.''

The decline showed central London's luxury residential market caught in sliding values affecting the rest of the U.K.

Prices for British homes declined 14.6 percent in October, the fastest annual rate in at least 17 years, Nationwide Building Society said two days ago. Prices of houses and apartments fell 1.4 percent from September, the 12th consecutive drop, Nationwide said.

London and southeastern England accounted for more than three quarters of sales of million-pound homes last year, according to an index compiled from government data by HBOS Plc. Million-pound homes represented 0.6 percent of the 1.38 million U.K. property transactions last year.

Knight Frank compiles its monthly index from appraised values of properties in the Mayfair, St John's Wood, Regent's Park, Kensington, Notting Hill, Chelsea, Knightsbridge, Belgravia and the South Bank neighborhoods of London.

To contact the reporter on this story: Simon Packard in London at packard@bloomberg.net.

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Pound Posts Biggest Monthly Drop Since 1992 as Recession Looms

By Agnes Lovasz and Lukanyo Mnyanda

Nov. 1 (Bloomberg) -- The pound fell against the dollar, logging the biggest monthly decline in 16 years last month, after U.K. consumer confidence slumped in October, adding to signs Europe's second-largest economy is sliding into a recession.

The U.K. currency snapped a three-day gain against the dollar and the difference between two- and 10-year government bond yields widened to the most in 12 years after a GfK NOP index of sentiment slid to near the weakest level since at least 1974. Policy makers will probably lower the benchmark interest rate by a half point to 4 percent next week, according to a Bloomberg survey.

``The U.K. is in the epicenter of the crisis,'' said Lee Hardman, a currency strategist in London at Bank of Tokyo- Mitsubishi Ltd. ``The Bank of England's now in a position to aggressively ease monetary policy going forward. The removal of the interest-rate support will further undermine the pound from already depressed levels.''

The pound fell to $1.6198 by late yesterday in London, from $1.6451 the day before and $1.5897 a week earlier. The U.K. currency dropped about 9.2 percent in October, the steepest monthly decline since 1992. Against the euro, the pound was at 78.78 pence, from 79.30 pence on Oct. 24. It rose against the common currency for a second month.

The pound will fall to $1.40 in the next six months and to between 81 pence and 82 pence versus the euro, Hardman forecast.

Shrinking Economy

Britain's economy is shrinking amid the fallout from the global credit crisis. A government report Oct. 24 showed a greater-than-forecast 0.5 percent contraction in the third quarter. A gauge of consumer willingness to make major purchases dropped to minus 42 last month, the lowest level since the series began, GfK NOP said yesterday. House prices fell in October by the most since at least 1991, Nationwide Building Society reported two days ago.

U.K. policy makers lowered the main interest rate by a half point on Oct. 8 in concert with other major central banks to stave off a collapse of the financial system. The implied yield on the short-sterling futures contract due in December declined 20 basis points yesterday to 4.19 percent, signaling a further cut is expected. It was at 4.64 percent a week earlier.

The Bank of England, together with the European Central Bank, must loosen monetary policy more to give the economy a further boost, the Wall Street Journal reported in its ``Heard on the Street'' column yesterday.

Yield Spread

Two-year gilts rose yesterday, with the yield down 3 basis point to 2.92 percent. The 4.75 percent security maturing in June 2010 gained 0.03, or 30 pence per 1,000-pound ($1,615) face amount, to 102.83. The 10-year yield rose 9 basis points to 4.53 percent. Bond yields move inversely to prices.

The difference in yield, or spread, between two- and 10-year government notes widened 12 basis points to 161 basis points, the most since September 1996, as investors favored shorter-dated securities on expectations of rate cuts as early as next week.

Prime Minister Gordon Brown's spending plans are likely to hurt demand for gilts in coming years and saddle future generations with higher taxes, according to George Osborne, a Conservative Party politician who shadows Chancellor of the Exchequer Alistair Darling in Parliament.

``Everyone assumes the only question is how much more does the British government want to borrow from the markets,'' Osborne said in a speech in London yesterday. ``Talk to former chancellors and they will tell you that at some point the question becomes how much more are the markets prepared to lend.''

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

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Canada May Act Further to Aid Banks, Pensions, Flaherty Says

By David Scanlan and Theophilos Argitis

Nov. 1 (Bloomberg) -- Canada's government may double its purchases of distressed loans among steps being considered to aid banks and private pension funds amid the worst financial crisis since the Great Depression, Finance Minister Jim Flaherty said.

The government is willing to buy more mortgages from commercial banks, after agreeing this month to purchase as much as C$25 billion ($21 billion) in real estate loans.

``We can do more dollar value if necessary,'' Flaherty said in an interview late yesterday in New York. ``We can go another C$25 billion; if we have to do more we will do more.''

The government is shoring up banks after interest rates on credits between lenders soared to the highest since 1990 last month. In addition to the mortgage purchases, the government agreed to provide guarantees on more than C$200 billion of bank debt to match bailouts by other governments.

Canada Mortgage and Housing Corp., a government-run agency, has already bought C$12 billion in mortgages from the nation's banks, giving them more money to lend to consumers and businesses. Canada's stock of residential mortgages is about C$773 billion, according to the finance department.

The government may also help company-run pension funds meet capital requirements, Flaherty said. The benchmark Canadian stock index had its worst monthly drop in a decade last month, eroding the value of pension fund assets and creating a potential funding gap. Prime Minister Stephen Harper's government also may relax pension fund rules to give them more time to make up any funding shortfall, as was done in 2006.

Capital Infusions

``I had more discussions with the private sector about what they might have to do in terms of the capital requirements for their funds,'' Flaherty said, after an interview with Bloomberg Television. ``We took steps in 2006 to allow more time for capital infusion, so that is something we could possibly do again.''

Flaherty said he plans to raise the issue with his provincial counterparts when they meet in Toronto on Nov. 3.

He also plans to renew his push for a single securities regulator, replacing 13 provincial and territorial agencies. Provinces including Quebec and British Columbia oppose a national regulator.

``The circumstances emphasize the importance of doing this,'' he said. ``I sense some softening'' from the provinces because of the global financial crisis.

Canada's financial system remains ``the soundest in the world'' and has weathered the global crisis better than many of its trading partners, Flaherty said. The government remains on track for a budget surplus this fiscal year, though next year will be ``challenging,'' he said.

He reiterated that he thinks the economy can avoid a recession, even as three of the country's biggest banks forecast a contraction.

``Our growth is small, but it's positive growth,'' Flaherty said.

To contact the reporter on this story: David Scanlan in New York at dscanlan@bloomberg.net.

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Bayswater Generator Protesters Arrested, Australian Police Say

By Gavin Evans

Nov. 1 (Bloomberg) -- Four climate change protesters were arrested after attempting to stop coal deliveries to Macquarie Generation's Bayswater power station, one of Australia's two largest generators.

Police were called to the power plant, about 240 kilometers (150 miles) north of Sydney, about 8 a.m. local time today after protesters attached themselves to parts of the facility, senior constable Sara Burgess said today by telephone from Sydney.

Australia, reliant on coal for about 80 percent of its power generation, plans to start limiting industrial emissions in 2010. More than 30 demonstrators occupied coal conveyers and stockpiles at the 2,640 megawatt power station today to protest the lack of action against coal-fired generation, environmental group Rising Tide Newcastle said an e-mailed statement earlier.

``Power production wasn't affected,'' Macquarie Generation spokesman Rob Cooper said in a telephone interview. ``There was sufficient coal in the bunkers'' to keep the plant running, he said.

A decision on whether to press charges will be made later today, Burgess said.

Bayswater, near Muswellbrook in New South Wales, uses about 8 million tons of coal a year, according to the Web site of state government-owned Macquarie Generation. It and the nearby 2,000 megawatt Liddell power station produce about 40 percent of the state's power.

Prime Minister Kevin Rudd wants to reduce greenhouse gas emissions by 60 percent from 2000 levels by 2050 and is expected to detail nearer-term targets and penalties by the end of the year.

He has offered government support for coal-fired generators to keep them operating while cleaner technologies are developed. They account about a third of all the nation's emissions.

To contact the reporter on this story: Gavin Evans in Wellington at gavinevans@bloomberg.net.

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Canada Rejects Global Financial Overhaul, Currency Intervention

By Theophilos Argitis and Kathleen Hays

Nov. 1 (Bloomberg) -- Canadian Finance Minister Jim Flaherty warned that the world's largest economies shouldn't re-engineer the global financial system, and said the Group of Seven nations hasn't considered intervening in currency markets.

Flaherty, in an interview with Bloomberg Television yesterday in New York, said the best approach is for the G-7 governments to focus first on shoring up their own regulatory frameworks.

``We don't need to recreate the world right now,'' Flaherty said. ``What people expect of us, quite frankly, in our countries is to get our own houses in order.''

The U.S. will host a global economic summit of 20 world leaders in Washington beginning Nov. 14. The agenda will include discussion of the causes of the financial crisis and a review of progress in addressing them.

European leaders have said the crisis justifies major changes in the way financial institutions are regulated. French President Nicolas Sarkozy has said the crisis demands a response like the Bretton Woods conference in New Hampshire in 1944 that fixed exchange rates, hitched the world to the gold standard and created the International Monetary Fund and World Bank.

``In terms of creating a brand new institution at this stage in the middle of a crisis, I think we can spend our efforts more profitably'' strengthening domestic regulations, Flaherty said. ``I don't think it's realistic at this time to expect there will be some grand resolution, some grand scheme.''

Stricter Regulation

The Washington talks, Sarkozy says, should aim to impose stricter regulation on financial institutions, curb bonus packages for bankers and overhaul international accounting rules. U.K. Prime Minister Gordon Brown has said he wants greater cross- border oversight of banks and other financial firms.

Flaherty heads to Brazil next week for a meeting of finance ministers from the Group of 20 nations to set the stage for the Washington meeting. U.S. and European leaders probably won't reach any consensus on what steps to take at this month's meetings, Flaherty said.

The industrialized nations also haven't discussed intervening in foreign exchange markets and there is no ``extraordinary'' reason that would justify buying up his country's falling dollar, Flaherty said.

``We haven't had that discussion, and we don't intervene in our currency, quite frankly,'' Flaherty, 58, said. ``We believe in letting our own currency float.''

`Excessive Volatility'

The Group of Seven countries, which includes Canada and Japan, said in an unscheduled statement this week they were concerned ``about the recent excessive volatility'' in the yen, fueling speculation of interventions in global currency markets. Japanese Finance Minister Shoichi Nakagawa said his country is ready to act in currency markets if necessary.

French Finance Minister Christine Lagarde told Bloomberg Oct. 27 that the statement was aimed at showing G-7 support for a ``purely Japanese intervention.''

Japan's currency appreciated 19 percent against the euro in October on speculation the global economic slump will encourage investors to sell higher-yielding assets and pay back low-cost loans in yen. It was the currency's biggest monthly gain since the euro's introduction in 1999.

The Canadian dollar weakened 11 percent last month, the most since at least 1950, as oil prices fell and concerns mounted that the economy will sink into recession as predicted by three of Canada's five biggest banks.

To contact the reporter on this story: Theophilos Argitis in New York at targitis@bloomberg.net; Kathleen Hays in New York at khays4@bloomberg.net.

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N.Z. to Guarantee Global Funds' Wholesale Deposits (Update1)

By Gavin Evans

Nov. 1 (Bloomberg) -- New Zealand will guarantee overseas debt sales by the nation's banks to help maintain access to international wholesale funding, Finance Minister Michael Cullen said.

The guarantee will be available for investment-grade institutions seeking funds in all the major currencies, according to the nation's Treasury. Institutions opting into the program will be charged a fee based on their credit rating and the term of the issue. It won't be available for corporate borrowers.

New Zealand last month said it would guarantee retail deposits to bolster confidence in financial institutions. It was forced to widen the support to include wholesale investments after similar programs in nations including Australia and South Korea risked disadvantaging New Zealand-based lenders seeking funds in global markets.

``While the New Zealand banking system is very sound, we are in an environment where international investors remain risk- averse and where many other governments have guaranteed their banks' debt,'' Cullen said in an e-mailed statement. It is ``in the public interest to offer a wholesale funding guarantee that can help maintain the economy's access to foreign credit.''

Guarantee Costs

Banks and lenders rated AA minus and above will pay 85 basis points for the guarantee on terms of less than a year and 140 points for longer maturities. A BBB minus rated issuer will pay 195 basis points and 250 basis points respectively, Treasury said on its Web Site. A basis point is 0.01 percentage point.

New Zealand's program is more expensive than those offered by the U.S. and Australia and similar to the pricing of the U.K. facility, the country's Treasury Secretary John Whitehead said. It is designed to encourage issuers to opt out of the program as soon as market conditions improve, he said.

Guarantees will cover securities for a maximum of five years and the facility will be withdrawn for new issues as soon as conditions ``normalize'' he said.

New Zealand has 18 registered banks, all rated BBB or better. Locally incorporated units of Australia's biggest banks handle about 90 percent of all New Zealand deposits and can use the guarantee for funds raised in any currency.

Branches of foreign banks, including Deutsche Bank AG and Rabobank Groep NV, will be eligible only for New Zealand dollar issues. About 20 institutions are likely to qualify for the guarantee, Treasury spokeswoman Chris Major said.

To contact the reporter on this story: Gavin Evans in Wellington at gavinevans@bloomberg.net.

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Indonesia Supreme Court Overturns Asia Pulp & Paper Debt Ruling

By Arijit Ghosh and Bambang Dwi Djanuarto

Nov. 1 (Bloomberg) -- Indonesia's Supreme Court validated $500 million of bonds sold by a unit of Asia Pulp & Paper Co., reversing its decision of two years ago and ruling in favor of creditor banks including Morgan Stanley.

There was ``something wrong with that verdict,'' Djoko Sarwoko, vice head of supervision at the court, said in a mobile- phone text message yesterday, disclosing that the Supreme Court overturned its earlier ruling Oct. 19 in a so-called Civil Review.

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The decision may attract overseas investors to the nation's corporate debt as it ratifies sales of foreign-currency bonds by overseas units set up by Indonesian companies such as Asia Pulp's PT Indah Kiat Pulp & Paper Corp.

Indah Kiat had won previous rulings that invalidated the bonds, absolving the company of having to pay the debt.

The ruling ``is positive for all Indonesian companies looking to access capital markets,'' Robert Rauch, a director at Gramercy Advisors LLC, one of Asia Pulp's creditors, said in an e-mailed response to questions. ``We are hopeful that this definitive ruling clears the way for there to be a reasonable and appropriate resolution with secured bondholders.''

Indah Kiat had claimed in 2004 the sale of $500 million in bonds was a ``deceptive scheme'' by Morgan Stanley, the underwriter, and others to generate fees, according to a statement at the time from Gramercy and Oaktree Capital Management LLC, another creditor.

Gandi Sulistiyanto Soeherman, vice chairman of Asia Pulp's debt-revamp panel, didn't immediately respond to a text message sent to his mobile phones. Agustian Partawijaya, a spokesman for Asia Pulp's parent, Sinar Mas Group, hadn't seen the ruling and couldn't comment.

Payments Frozen

Asia Pulp's controlling Widjaja family has been wrangling with creditors since freezing payments on a record $14 billion of debt in 2001.

Creditors including Gramercy had appealed the June 2006 Supreme Court ruling that upheld a lower court's decision to invalidate the $500 million of Indah Kiat bonds.

Indonesian companies such as state power producer PT Perusahaan Listrik have used overseas companies similar to the one set up by Indah Kiat to sell bonds overseas. Companies from the Southeast Asian nation raised about $2.5 billion of debt overseas last year, according to Bloomberg data, as credit rating upgrades reduced borrowing costs.

Legal Uncertainty

Overseas companies have complained about the lack of legal certainty and creditor rights in Indonesia. A Jakarta court declared Prudential Plc's Indonesian unit, PT Prudential Life Assurance, bankrupt in April 2004, with the Supreme Court overturning the verdict in June. In 2002, Manulife Financial Corp.'s Indonesian unit was declared bankrupt by a court, a decision that was also later overturned.

Companies can file a Civil Review after the discovery of new evidence or if it can be proved that a judge made an error.

A group of creditors that provided unsecured loans to Indah Kiat and two other Indonesian units of Asia Pulp agreed to restructure the debt in 2004. Several others, secured creditors including U.S. Export-Import Bank and hedge funds Gramercy and Oaktree, sued.

Asia Pulp resumed payments to overseas creditors, including JPMorgan Chase & Co. and Goldman Sachs Group Inc., in April 2005. Oaktree agreed to be part of the deal earlier this year.

Under the agreement, Asia Pulp will repay creditors about $4.2 billion over 13 years and a further $2.5 billion in 18 to 22 years. About $6 billion of the debt is effectively included in the agreement because creditors holding only 93 percent of debt endorsed the final plan.

To contact the reporters on this story: Arijit Ghosh in Jakarta at aghosh@bloomberg.net; Bambang Dwi Djanuarto in Jakarta at bbjakarta@bloomberg.net.

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N.Z. to Guarantee Global Funds' Wholesale Deposits

By Gavin Evans

Nov. 1 (Bloomberg) -- New Zealand will guarantee overseas debt sales by the nation's banks to help maintain access to international wholesale funding, Finance Minister Michael Cullen said.

The guarantee will be available for investment-grade institutions seeking funds in all the major currencies, according to the nation's Treasury. Institutions opting into the program will be charged a fee based on their credit rating and the term of the issue. It won't be available for corporate borrowers.

New Zealand last month said it would guarantee retail deposits to bolster confidence in financial institutions. It was forced to widen the support to include wholesale investments after similar programs in nations including Australia and South Korea risked disadvantaging New Zealand-based lenders seeking funds in global markets.

``While the New Zealand banking system is very sound, we are in an environment where international investors remain risk- averse and where many other governments have guaranteed their banks' debt,'' Cullen said in an e-mailed statement. It is ``in the public interest to offer a wholesale funding guarantee that can help maintain the economy's access to foreign credit.''

Guarantee Costs

Banks and lenders rated AA minus and above will pay 85 basis points for the guarantee on terms of less than a year and 140 points for longer maturities. A BBB minus rated issuer will pay 195 basis points and 250 basis points respectively, Treasury said on its Web Site. A basis point is 0.01 percentage point.

New Zealand's program is more expensive than those offered by the U.S. and Australia and similar to the pricing of the U.K. facility, the country's Treasury Secretary John Whitehead said. It is designed to encourage issuers to opt out of the program as soon as market conditions improve, he said.

Guarantees will cover securities for a maximum of five years and the facility will be withdrawn for new issues as soon as conditions ``normalize'' he said.

New Zealand has 18 registered banks, all rated BBB or better. Locally incorporated units of Australia's biggest banks handle about 90 percent of all New Zealand deposits and can use the guarantee for funds raised in any currency.

Branches of foreign banks, including Deutsche Bank AG and Rabobank Groep NV, will be eligible only for New Zealand dollar issues. About 20 institutions are likely to qualify for the guarantee, Treasury spokeswoman Chris Major said.

To contact the reporter on this story: Gavin Evans in Wellington at gavinevans@bloomberg.net.

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Unitech's 2nd-Quarter Net Falls 12% on Slowing Demand

By Sumit Sharma and Debarati Roy

Nov. 1 (Bloomberg) -- Unitech Ltd., India's second-biggest developer, said second-quarter profit fell 12 percent as rising borrowing costs and faltering economic growth curtailed demand for homes and offices.

Net income declined to 3.59 billion rupees ($73 million) in the three months ended Sept. 30, from 4.1 billion rupees a year earlier, the Gurgaon-based company said in a statement e-mailed late last night. The profit was lower than the 4.12 billion rupee median estimate in a Bloomberg survey of five analysts.

The faltering profit growth may undermine Managing Director Sanjay Chandra's ability to boost investor confidence in Unitech, the third-worst-performing Indian realty stock this year. Investors have shunned the developer and its rivals on concern that a five-year rally in property prices and borrowing costs that had climbed to a seven-year high may curb demand.

``This sector is out of favor and in the short term it's unlikely that we can expect earnings to improve,'' said Sanjay Makhija, zonal head, institution sales at Fortune Financial Services India Ltd. in Mumbai.

Revenue fell to 10 billion rupees in the quarter to Sept. 30, from 10.64 billion rupees a year earlier, Unitech said.

``In an increasingly challenging business environment, the company has been reorienting its product portfolio toward mid- income housing to boost sales,'' Chandra said in the statement. ``Keeping in view the tight liquidity conditions, the company is allocating a higher share of its financial resources to pre- committed projects.''

Home Prices

India's central bank cut its benchmark interest rate on Oct. 20 for the first time since 2004 to ease borrowing costs. It has also pumped 1 trillion rupees into the financial system since Oct. 11 by reducing lenders' reserve requirements by 2.5 percentage points.

Unitech gets about 70 percent of its earnings from selling homes, according to Chandra, in a nation that faces a shortage of 25 million housing units. Home prices in smaller towns such as Agra, Ludhiana and Kochi dropped an average 15 percent to 20 percent, according to Jones Lang LaSalle Meghraj Property Consultants (India) Pvt.

Rental prices for offices and malls also fell by as much as 20 percent across India in the quarter, the firm estimated. Developers in bigger cities such as Mumbai and New Delhi are holding prices steady, Jones Lang LaSalle said.

Unitech, which had more than doubled last year, after climbing more than 2,900 percent in 2006, is down 90 percent from its record closing price of 538.25 rupees on Jan. 2. The Realty Index of the Bombay Stock Exchange has shed 84 percent this year.

Criminal Speculators

Unitech plunged by a record 50 percent on Oct. 24 on concerns that real estate companies face a shortage of funds. The developer hasn't defaulted on any loan payments, and malicious rumors spread by criminal speculators led to the plunge, Chandra said on Oct. 26. His comments helped the stock recover almost 38 percent on Oct. 27.

Still, the current cost of borrowing for the company has risen to between 15.5 percent and 16.5 percent, compared with 12.1 percent for the year ended March 31, Chandra said.

The company this week sold a 60 percent stake in its new mobile-phone unit to Telenor ASA, the largest Nordic phone company, for $1.07 billion. That values Unitech Wireless, which has licenses in all of India's 22 designated telecommunications zones, at about $1.8 billion, or more than the $1.6 billion market-capitalization of the parent company.

To contact the reporters on this story: Sumit Sharma in Mumbai at sumitsharma@bloomberg.net; Debarati Roy in Mumbai at droy5@bloomberg.net.

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Bank of Japan May Be Heading Back to `Zero Interest-Rate World'

By Jason Clenfield

Nov. 1 (Bloomberg) -- The Bank of Japan's interest rates may be headed back to zero.

Governor Masaaki Shirakawa and his board yesterday cut the key overnight lending rate by 20 basis points to 0.3 percent, abandoning a two-year struggle to raise the lowest borrowing costs among major economies. Three of the eight members argued for a deeper cut of 25 basis points and one wanted no change.

``We are headed back to a zero interest-rate world,'' said Tomoko Fujii, head of economics and strategy at Bank of America Corp. in Tokyo.

Should interest rates return to zero, the Bank of Japan may not be alone. Federal Reserve Bank of San Francisco President Janet Yellen said this week that the U.S. central bank may cut the benchmark rate close to zero from the current 1 percent level if the economy remains weak.

Shirakawa, 59, cast the deciding vote yesterday after the board was evenly split for the first time since the central bank gained its independence from the government 10 years ago.

The Bank of Japan will do its utmost to get the economy growing again ``through maintaining accommodative financial conditions,'' it said in a statement accompanying the reduction.

Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group in Tokyo, said this language suggests the bank will keep rates low until the global economy picks up. He's not related to the central bank governor.

``It'll be very difficult for the Bank of Japan to avoid reintroducing the zero-rate policy,'' said Credit Suisse's Shirakawa, who used to work at the central bank. ``The question is only when.''

Back to Deflation

The bank's twice-yearly outlook issued yesterday may partly explain the reason for the reduction in lending rates.

Inflation may fall back to zero percent next fiscal year, the bank predicted. It also slashed its growth forecast for the year ending March to 0.1 percent from 1.2 percent in July.

``The BOJ thinks we're going to go back into deflation,'' said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. ``You shouldn't have been raising rates until you were confident that you weren't going to go back into deflation.''

A zero-rate policy prevailed in Japan for five years until July 2006 as the bank tried to end the deflation that followed the bursting of the bubble economy in the early 1990s.

From March 2001 until March 2006, the bank combined zero rates with a so-called quantitative-easing policy of increasing money in the accounts held by commercial banks. That measure isn't likely to be repeated.

Quantitative Easing

Shirakawa said in a May interview that he'd be reluctant to return to the policy which ``had limited impact'' in resolving the problem of stagnant economic growth. ``There have been a variety of evaluations, but I personally consider it so.''

If the economy deteriorates and the central bank needs to provide extra funds, it may consider alternative means to those used under quantitative easing, said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo.

The bank may need to expand the range of collateral it accepts from lenders in exchange for loans, step up government bond purchases from banks from the current 1.2 trillion yen ($12 billion) a month, and purchase commercial paper and corporate debt to improve companies' access to cash, Sato said.

Shirakawa said yesterday that the central bank is considering measures to help commercial banks reduce share holdings, including resuming buying stocks.

The Bank of Japan bought about 2 trillion yen in shares held by banks between 2002 and 2004 to protect lenders' capital from being depleted by slumping stock prices. The central bank started selling its stake two years ago, though it halted the sales this month as the stock market tumbled.

May Be Reluctant

The bank may be reluctant to go back to zero rates, warning in its policy outlook yesterday that ``from a longer-term perspective,'' keeping borrowing costs low for too long ``may lead to larger swings in economic and financial activity as well as in prices.''

Still, the global financial crisis will ``weigh on economic activity for some time to come,'' the bank said.

``This is an understatement -- the world economy is heading for the biggest recession since World War II,'' said Julian Jessop, chief international economist at Capital Economics in London. ``We expect the bank to cut rates all the way to zero percent again, most likely in January, and keep them there until 2010.''

To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net.

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Bakrie Sells Bumi Stake to Northstar for $1.3 Billion

By Naila Firdausi and Arijit Ghosh

Nov. 1 (Bloomberg) -- PT Bakrie & Brothers, the investment arm of Indonesia's richest family, agreed to sell its stake in Asia's biggest coal exporter to an affiliate of U.S. buyout firm TPG Inc. to help raise $1.3 billion to pay debt.

The Jakarta-based company, controlled by the family of Welfare Minister Aburizal Bakrie, will sell its 35 percent stake in PT Bumi Resources to Northstar Pacific, Director Ari Hudaya said today in Jakarta.

Bakrie & Brothers is selling the Bumi shares at a 61 percent discount to the price it paid to buy them from the Bakrie family, after the value of the coal mining company, which is pledged as security for the debt, plunged in a global rout last month. The sell-off drove Bumi down 32 percent on Oct. 6, before trading was halted, prompting concern Bakrie might fail to meet loan obligations. The company is paying $1.2 billion of debt early.

``This can be interpreted as a positive development for shareholders of Bumi,'' said Agus Yanuar, chief investment officer at Jakarta-based PT Samuel Aset Manajemen, which manages about $152 million. ``It removes the uncertainty.''

Bakrie doesn't have an option to buy back the shares, Hudaya said. The company is also in talks to sell stakes in other units, he added. Bakrie & Brothers last month raised $56 million selling stakes in PT Bakrieland Development and PT Bakrie Sumatera Plantations.

`No Speculation'

``Even though the debt hasn't matured we don't want to speculate with the current uncertain condition'' and the sooner debt is repaid the better, Hudaya said adding that the deal was signed last night. ``Northstar is quite a huge company with good reputation and is familiar with Indonesian business.''

Northstar controls PT Bank Tabungan Pensiunan Nasional, Indonesia's biggest lender to pensioners, in a venture with TPG, founded by David Bonderman.

Bakrie & Brothers' filings show borrowings -- backed by shares in affiliates including Bumi, PT Energi Mega Persada and PT Bakrie Sumatera Plantations -- from at least seven financial companies including JPMorgan Chase & Co. and ICICI Bank Ltd., India's second-largest lender.

Bumi rose to a record 8,550 rupiah on June 12 in Jakarta trading, making it Indonesia's most valuable company at the time. Shareholders have since lost $13 billion as the stock plummeted.

Bakrie & Brothers bought Bumi shares from the family for 36.9 trillion rupiah ($3.4 billion) or 5,432 rupiah apiece. On Oct. 6 the stake was valued at 14.8 trillion rupiah, 60 percent less than the purchase price.

Companies in India, Malaysia, Australia and the Philippines, including San Miguel Corp., that nation's biggest food and beverage company, bid to buy Bumi, Bakrie said on Oct. 23.

Tata Power Co., India's biggest electricity generator outside state control, owns a 30 percent stake in PT Kaltim Prima Coal and PT Arutmin Indonesia, the two coal mines owned by Bumi.

To contact the reporters on this story: Arijit Ghosh in Jakarta at aghosh@bloomberg.net; Naila Firdausi in Jakarta at nfirdausi@bloomberg.net

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China Manufacturing Contracts as Crisis Trims Exports

By Li Yanping and Wang Ying

Nov. 1 (Bloomberg) -- China's manufacturing contracted as the worst financial crisis since the Great Depression eroded export demand.

The Purchasing Managers' Index fell to a seasonally adjusted 44.6 last month from 51.2 in September, the China Federation of Logistics and Purchasing said today in an e-mailed statement. That was the lowest since the gauge was launched in July 2005. A reading below 50 reflects a contraction, above 50 an expansion.

China's cabinet has pledged extra infrastructure spending to stimulate the world's fourth-biggest economy amid the global slowdown. The government has already lowered rates three times in the past two months, increased export rebates and cut property transaction taxes.

``The government needs effective stimulus measures to spur growth,'' said Wang Qian, a Hong Kong-based economist at JPMorgan Chase & Co. ``The external economic outlook is worsening rapidly.''

Manufacturing contracted in July for the first time since the survey began in 2005. It also shrank in August. The October index was a record low.

China's economy grew at the slowest pace in five years in the three months through September as export orders shrank and industrial production waned. The expansion cooled for a fifth straight quarter, to a 9 percent gain from a year earlier.

Global Slowdown

Chinalco Luoyang Copper Co., a Chinese processor of the metal, said orders fell 20 percent in the third quarter as domestic and international demand weakened.

The global slowdown is curbing demand for the nation's goods. The International Monetary Fund estimates that advanced economies will expand 0.5 percent next year, the slowest pace since 1982.

Falling property sales and prices in major cities are another drag on China's growth.

The index is based on a survey of more than 700 companies in 20 industries, including energy, metallurgy, textile, automobiles and electronics.

The output index fell to 44.3 in October from 54.6 in September, while the index of new orders dropped to 41.7 percent from 51.3. The index of export orders declined to 41.4 percent from 48.8, the statement said.

The inventory index climbed to 51.4 from 50.5, it said.

To contact the reporters on this story: Li Yanping in Beijing at yli16@bloomberg.net; Wang Ying in Beijing at ywang30@bloomberg.net

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Panasonic Seeks to Buy Control of Sanyo, Company Official Says

By Patrick Rial and Yoshinori Eki

Nov. 1 (Bloomberg) -- Panasonic Corp., the world's largest maker of consumer electronics, will seek to buy control of Sanyo Electric Co. from its biggest shareholders, a company official familiar with the negotiations said.

Panasonic will make a formal acquisition proposal soon to Goldman Sachs Group Inc., Sumitomo Mitsui Banking Corp. and Daiwa Securities SMBC Co., the official said, declining to be identified because the plan has not been publicly disclosed.

``It's not surprising to start to see some consolidation,'' said Ed Rogers, chief executive officer at Tokyo-based hedge-fund adviser Rogers Investment Advisors Y.K.

Goldman and the two Japanese banks hold preferred shares equivalent to 70 percent of Sanyo, the world's biggest maker of rechargeable batteries, received when they bailed out the company in February 2006. They agreed to hold the securities until March 2009, and need Sanyo's approval to sell before then.

The preferred shares would be worth more than $6 billion if converted to common stock at yesterday's closing price of 145 yen.

Panasonic will begin talks to buy a majority stake in Sanyo to expand into the solar power business, the Nikkei newspaper reported earlier today. Hiroyuki Okamoto, a spokesman for Sanyo, said he isn't aware of any such negotiations. Spokeswomen at Goldman and Sumitomo Mitsui declined to comment, and calls to Daiwa's Tokyo office went unanswered.

Sanyo, the world's leading maker of lithium ion batteries and the third-biggest solar panel producer in Japan, spent years losing money as competition prevented it from profiting on digital cameras and other consumer goods. The company refocused on rechargeable batteries and solar panels after the bailout, scaling back unprofitable businesses such as computer chips.

Solar Business

Panasonic is looking to expand into the fast-growing solar market, while batteries hold growth potential as carmakers move to develop electric vehicles, according to the report.

``There are certain industries that are more efficient than others and therefore the less efficient ones are going to be facing consolidation,'' Rogers said. ``A lot of guys have cash as Japan's had five of the healthiest years since World War II.''

U.S. solar power installations grew by 45 percent last year, according to the Solar Energy Industries Association. Sanyo plans to expand solar cell production capacity by 60 percent at a Japanese plant, Kyodo News said yesterday.

Sanyo, whose name means ``three oceans,'' also teamed up with Volkswagen AG, Europe's largest carmaker, to develop a lithium-ion battery system for use in hybrid cars.

Panasonic has fared relatively better than Japan's other electronics makers during the current global economic slump. Less reliance on overseas demand compared with rivals including Sony Corp., coupled with strong demand for appliances such as washing machines in China and other markets, helped support profitability. The company beat its second-quarter profit estimates on Oct. 28.

Combined projected sales of Panasonic and Sanyo for the year ending March 31 are about 11.2 trillion yen, according to company forecasts. That would surpass Hitachi Ltd. as the nation's biggest maker of electrical equipment, and catapult Panasonic to the No. 3 spot in revenue among listed Japanese companies.

To contact the reporter on this story: Patrick Rial in Tokyo at prial@bloomberg.net; Yoshinori Eki in Tokyo at yeki@bloomberg.net

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India Unexpectedly Cut Interest Rates to Spur Growth

By Debarati Roy and Cherian Thomas

Nov. 1 (Bloomberg) -- India's central bank unexpectedly cut interest rates for the second time in two weeks and reduced the amount of money lenders need to keep in government bonds and as cash reserves to boost growth amid a global slowdown.

The Reserve Bank of India lowered its repurchase rate to 7.5 percent from 8 percent, reduced the amount of deposits that lenders need to set aside as reserves to 5.5 percent from 6.5 percent, and cut the amount of money lenders are required to keep in government bonds to 24 percent from 25 percent.

The steps signal a U-turn from the Reserve Bank's policy stance just a week ago, when Governor Duvvuri Subbarao said a ``heightened vigil'' was needed to fight inflation. The U.S. Federal Reserve, the Bank of Japan and other central banks also slashed borrowing costs this week in an attempt to prevent a global credit crunch from pushing the world into recession.

``This is a strong message that growth has become the central bank's priority,'' said Sujan Hajra, chief economist at Anand Rathi Securities Ltd. in Mumbai. ``He has room to cut rates because global interest rates are coming down as well, and so the risk of a further weakening of the rupee is limited.''

Subbarao, who until last week placed equal emphasis on growth and inflation, said Oct. 25 he is concerned a weaker rupee may raise import costs and stoke inflation.

India's currency, which has fallen 20 percent since January, climbed 0.4 percent to 49.4575 per dollar from 49.675 on Oct. 29.

Growth `Moderation'

The Bank of Japan yesterday cut its key overnight lending rate by 20 basis points to 0.3 percent after the Fed three days ago lowered its target rate for overnight loans to 1 percent, matching a half-century low. Norway, China, Taiwan and Hong Kong also trimmed their benchmark rates this week.

India's decision to lower borrowing costs was taken ``in view of the ebbing of upside inflation risks and also to address concerns relating to the moderation in the growth momentum,'' the central bank said today.

Lower inflation has given Governor Subbarao, in the job for less than two months, more room to lower borrowing costs to stimulate growth. Inflation in India has dropped below 11 percent for the first time since May.

Wholesale prices rose 10.68 percent in the week to Oct. 18 from a year earlier after gaining 11.07 percent in the previous week. Economists had expected a 10.80 percent increase.

The central bank last week reduced its forecast for growth in Asia's third-largest economy to as low as 7.5 percent from 8 percent in the year to March 31.

Credit Squeeze

``It's a good set of measures that addresses the most pressing need of the hour, which is to ease liquidity constraints in the system'' and support growth, said Arvind Sampath, head of interest-rate trading at Standard Chartered Plc in Mumbai.

India's money-market rates have more than tripled in the past week, in contrast to the rest of Asia where the rates at which banks lend to each other has been declining.

The overnight call rate in India touched 21 percent yesterday. India's 10-year bonds gained, heading for their best month in almost a decade, on speculation policy makers will be forced to step up efforts to boost cash with banks and ease a credit squeeze.

Today's cut in the cash reserve ratio, the fourth in the past month, will infuse 400 billion rupees ($8 billion) into the financial system, the central bank said. Before today, the bank lowered the ratio by 2.5 percentage points in the past month.

The Reserve Bank also reduced for the first time in 11 years the statutory liquidity ratio, the amount of deposits that lenders need to invest in government debt or bonds of state-run companies, by one percentage point.

``This kind of fund injection is required to bring in stability in the financial market,'' said Jayesh Shroff, who helps manage about $6 billion at SBI Asset Management Co. ``The system has been under stress because of liquidity shortfall.''

Cash dried up in India's banking system as overseas investors pulled out $12.7 billion from India's stock markets.

To contact the reporter on this story: Debarati Roy in Mumbai at droy5@bloomberg.net. Cherian Thomas in New Delhi at Cthomas1@bloomberg.net

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Seychelles Floats Rupee in Move to Avoid Bankruptcy, AFP Says

By Heather Smith

Nov. 1 (Bloomberg) -- The Seychelles floated its dollar- tied currency, the rupee, in an effort to avert bankruptcy, Agence France-Presse said today, citing the islands' President James Michel's speech on national radio and television yesterday.

The currency float is part of a package of economic measures approved by the International Monetary Fund, which yesterday granted The Seychelles an emergency loan to cope with an $800 million external debt equal to 175 percent of its gross domestic product, the news service said, without citing a source.

To contact the reporter on this story: Heather Smith in Paris at hsmith26@bloomberg.net

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South Africa's Rand Posts Biggest Monthly Decline Since 1985

By Garth Theunissen

Nov. 1 (Bloomberg) -- South Africa's rand posted its biggest monthly loss against the dollar in almost a quarter-century as investors sold emerging-market assets amid the world's worst financial crisis since the Great Depression.

The rand weakened the most last month since August 1985, when the apartheid government suspended debt payments, as concern the credit-market squeeze would tip the global economy into a recession curbed investment in countries from Korea to Turkey. South Africa's currency also slumped as gold, the nation's biggest export earner, headed for its biggest four-week loss in more than 25 years.

``The extreme sell-off we've seen in emerging markets isn't simply a case of irrational fear but a consequence of the re- pricing of credit and risk taking,'' said Shahin Vallee, an emerging-markets currency strategist in London at BNP Paribas SA, France's largest bank. ``The global credit crunch means there's less money circulating in the world, which makes investors more discriminating when it comes to where they put it.''

The rand fell almost 20 percent last month to 9.9200 per dollar by 6 p.m. in Johannesburg yesterday. It weakened versus all 16 major currencies monitored by Bloomberg, falling the most in October versus the yen. The Australian and New Zealand dollars had their steepest losses this month versus the U.S. currency since the mid-1980s.

Emerging-market currencies including Hungary's forint and Brazil's real declined in October as investors cut holdings of higher-yielding assets in favor of safer holdings such as U.S. Treasuries. The rand was the second-weakest emerging-market currency monitored by Bloomberg this month after Turkey's lira.

`Striking Weakness'

``The weakness in the rand isn't really surprising but the extent of the weakness against its emerging-market peers is quite striking,'' said Vallee. ``It's come under a lot of selling pressure.''

BNP Paribas is advising clients to keep ``buying dollars and selling rand,'' for at least the next week, Vallee said.

The currency of Africa's biggest economy slid versus the dollar and yen as interest-rate reductions in Asia, Europe and the U.S. were unable to prevent a global equities sell-off that erased more than $10 trillion of market value.

Stocks slipped around the world, with the MSCI World Index posting its biggest monthly slump on record. South Africa's FTSE/JSE Africa All Share Index fell for a fifth month, losing 12 percent.

Capital Outflows

Foreigners turned net sellers of almost 67 billion rand of South African stocks and bonds this year, data from its exchanges show. The nation relies on the inflows to finance its current- account deficit which is expected to reach 7.6 percent of gross domestic product this year, Finance Minister Trevor Manuel said Oct. 21.

``South Africa has a gaping current-account hole, which is a severe fundamental imbalance in the economy,'' said Bhanu Baweja, an emerging-markets currency strategist at UBS AG in London. ``It needs large flows of capital to finance its deficit and that's not going to happen when the world wants to hold capital rather than invest it.''

UBS recommends clients continue ``hedging for downside risk'' in the rand against the dollar, euro and yen. ``I think the rand will weaken further,'' said Baweja. The currency may trade at 10.50 per dollar by year-end ``with the risk of further weakness,'' he added.

The rand also weakened this month as commodity prices fell, eroding prospects for earnings from exports. Commodities make up about half of South Africa's income from abroad, data from the Department of Minerals and Energy show.

Gold slid more than 15 percent last month, its biggest plunge since February 1983. Platinum, which rivals gold as the country's biggest export, fell 20 percent, its fourth monthly loss.

South Africa produces almost 80 percent of the world's platinum and about 10 percent of its gold, typically causing the rand to move in tandem with the metals' prices.

`Panic Selling'

Government bonds fell in October, with the yield on the benchmark 13.5 percent security due September 2015 adding 24 basis points to 9.09 percent. Yields move inversely to bond prices.

The rand slumped more than 28 percent in August 1985 after the government declared a ``debt standstill,'' signaling its inability to repay foreign lenders. ``Panic selling'' of the rand forced the central bank to close its foreign-exchange market, according to the nation's treasury. It later re-negotiated the terms of its debt repayment.

``It was an absolute disaster for the rand,'' according to Ian Cruickshanks, head of research at Nedbank Treasury in Johannesburg. ``Those were really dark times.''

To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net

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