Treasury Two-Year Yields Touch Five-Year Low as Economy Worsens

By Dakin Campbell and Cordell Eddings

Nov. 15 (Bloomberg) -- Treasuries rose for a second straight week, with two-year note yields touching the lowest in five years, as economic growth worsened and Treasury Secretary Henry Paulson changed the terms of the financial-rescue plan.

The yield difference between two- and 10-year notes widened to a five-year high as traders increased bets the Federal Reserve will cut interest rates and focused on short-maturity debt as the Treasury sold the most longer-term securities since 1990. Paulson said the government would no longer buy troubled mortgage assets and would instead focus on relieving pressures in consumer-credit markets.

``There will be a short-term mentality in the Treasury market,'' said Paul Horrmann, a strategist in Jersey City, New Jersey, at ICAP Plc, the world's largest inter-dealer broker. ``The atmosphere is still risk averse and will probably stay this way until the negative news gets better.''

The two-year note yield fell 12 basis points, or 0.12 percentage point, on the week to 1.22 percent, according to BGCantor Market Data. It touched a five-year low of 1.14 percent on Nov. 13. The 1.5 percent security due in October 2010 rose 7/32, or $2.19 per $1,000 face amount, to 100 17/32. The 10-year note's yield dropped 6 basis points to 3.74 percent. It touched 3.63 percent, the lowest in more than two weeks.

Rates on one-month Treasury bills, viewed as a haven in times of turmoil, fell 4 basis points to 0.05 percent on the week. They touched a record low of 0.04 percent Nov. 13.

Rescue Package

The government sold $55 billion of three-, 10- and 30-year securities at its so-called quarterly refunding during the week to pay for the $700 billion financial-rescue plan and fund a widening budget deficit.

Treasuries will fall over the next six months as the U.S. increases borrowing to bail out its financial system, while government debt in Europe, Asia and Latin America rallies, a monthly survey of Bloomberg users showed.

Paulson said on Nov. 12 that buying ``illiquid'' mortgage- related assets under the rescue plan conceived for that purpose ``is not the most effective'' use of funds. Instead, he proposed shifting the focus to relieving pressures on automobile, credit card, and consumer loans.

The Group of 20 heads of state are meeting in Washington this weekend amid Europe's first recession in 15 years. The region's gross domestic product shrank 0.2 percent last quarter from the previous three months, when it also contracted 0.2 percent, the European Union's statistics office said Nov. 14.

`Flight-to-Quality Bid'

The U.S., Japan, the U.K. and the euro region are headed for their first simultaneous recessions since World War II, according to the International Monetary Fund.

Sales at U.S. retailers dropped 2.8 percent last month, the Commerce Department said yesterday. It was the fourth consecutive drop and the biggest since records began in 1992. Initial claims for unemployment insurance rose last week to the highest level since September 2001, when the economy was last in a recession.

``We are not getting a lot of warm and fuzzy numbers about the economy,'' said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. ``The weaker-than-expected retail sales number and another equity sell-off are supporting the flight-to- quality bid into the Treasuries.''

U.S. stocks retreated for a second straight week, with the Standard & Poor's 500 Index falling 6.2 percent.

Futures on the Chicago Board of Trade showed an 84 percent chance the Fed will lower its 1 percent target rate for overnight bank lending by 50 basis points at its Dec. 16 meeting. The odds were 64 percent a week ago.

Week's Theme

Two-year notes, more sensitive to monetary policy than longer-maturity securities, outperformed 10-year notes and pushed the gap between the two to 2.62 percent on Nov. 13.

``The essential steepening of the yield curve has been the theme of the week, led by two-year notes,'' said Carl Lantz, an interest-rate strategist in New York at Credit Suisse Securities USA LLC, one of the 17 primary dealers that trade with the Fed. ``The market is still expecting weak data to continue and more from the Fed in terms of liquidity.''

Yields indicate banks are less willing to make loans to each other even as Paulson said it was ``very important'' for banks to lend. The difference between what they and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 2.10 percentage points, from 2.01 percentage points Nov. 7.

Banks' borrowing costs for dollars rose in the past two days after falling for 23 straight days. The London interbank offered rate for three-month funding increased 9 basis points to 2.24 percent, the British Bankers' Association said.

Uncompleted Transactions

An industry group that advises the Treasury on trading in government debt recommended measures to reduce the record level of uncompleted transactions that have plagued the bond market in the past two months as the credit crunch worsened. The Treasury Market Practices Group urged changes in market practices ranging from financial penalties on failed trades to margining and bilateral cash settlement of failing transactions.

To contact the reporter on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net.

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GM Collapse at $200 Billion Would Exceed Bailout Tab, Firm Says

By Alex Ortolani and Mike Ramsey

Nov. 15 (Bloomberg) -- General Motors Corp., burning through cash as sales slump, would cost the government as much as $200 billion should the biggest U.S. automaker be forced to liquidate, a forecasting firm estimated.

A GM collapse would mean ``more aid to specific states like Michigan, Ohio, and Indiana, and more money into unemployment and extended benefits,'' Nariman Behravesh, chief economist at IHS Global Insight Inc. in Lexington, Massachusetts, said yesterday in an interview.

Behravesh's projection of $100 billion to $200 billion in costs dwarfs the $25 billion industry bailout plan that will be debated in Congress next week to prop up Detroit-based GM, Ford Motor Co. and Chrysler LLC. The drain on taxpayers from a rescue or a GM failure is a central issue for U.S. lawmakers.

Included in the Global Insight estimate, which Behravesh supplied to Bloomberg News, are the anticipated costs for existing programs, such as unemployment insurance, and new measures that the economist said would be needed to revive economic growth after millions of auto-related job losses.

A GM shutdown would wipe out jobs among suppliers as well as at the automaker itself, pushing the U.S. unemployment rate next year to 9.5 percent, compared with current projections of as high as 8.5 percent, Behravesh said.

`Significantly Short'

GM said Nov. 7 it may not have enough operating cash by year's end, and would be ``significantly short'' of its needs by June unless it adds capital or the U.S. auto market recovers from its worst sales year since 1991. GM had $16.2 billion on hand as of Sept. 30, down from $21 billion at the end of June, and needs $11 billion to pay its monthly bills.

While some investors including Wilbur Ross say a GM bankruptcy would be a ``real mess'' that would end in liquidation, others such as hedge-fund manager William Ackman say there is no need for taxpayer funds and that GM should reorganize in court.

``A bankruptcy wouldn't address our immediate liquidity concerns,'' said Renee Rashid-Merem, a GM spokeswoman. ``It's not an option for GM because it creates more problems than it solves.''

The Center for Automotive Research projects that federal, state and local governments would lose $108.1 billion in taxes over three years in the event of a 50 percent reduction in U.S. automaker operations.

Job losses would total 2.5 million from an automaker failure in 2009, including 1.4 million people in industries not directly tied to manufacturing, the Ann Arbor, Michigan-based group said in a report on Nov. 4, three days before GM disclosed its cash drain.

`Real Costs'

``The government has real costs it would have to foot'' in a liquidation, said Bob Brusca, president of Fact & Opinion Economics in New York and a former chief of international markets at the New York Federal Reserve.

``They don't get those income taxes any more from the workers, they don't get the taxes from the corporation, they don't get local loss of taxes,'' Brusca said in an interview.

States pay an average of $279 a week for unemployment benefits for 26 weeks, according to Jennifer Kaplan, a U.S. Labor Department economist. The payments can last as long as 39 weeks in some states including Ohio, where the jobless rate was 7.2 percent in September.

`On the Hook'

The federal government also might ``be on the hook for the pension benefits and health benefits'' for workers thrown out of their jobs in an automaker collapse, said Dana Johnson, chief economist with Comerica Inc. in Dallas.

GM climbed 6 cents to $3.01 yesterday on the New York Stock Exchange. The shares have tumbled 88 percent this year.

The 15 percent slump in U.S. auto sales this year through October is overwhelming years of cost-cutting efforts at GM. The company has eliminated 46,000 U.S. jobs since 2004, when it last posted an annual profit.

Payroll cuts and plant closures at Ford and Chrysler have added to the erosion of auto jobs in states such as Ohio, home to assembly plants for all three companies and behind only Michigan in auto-industry employment.

The state may exhaust its unemployment trust fund by the end of December and is seeking a $500 million line of credit from the U.S. Department of Labor, said Brian Harter, spokesman for the Ohio Department of Job and Family Services.

``The health of the heartland of America would be devastated'' should GM stop operations along with many suppliers, former Michigan Governor Jim Buchanan, a Democrat, said yesterday in an interview. ``The loss of revenue to the federal government and the states would be horrendous.''

The fallout wouldn't be that dire should GM manage to keep operating while in bankruptcy protection, said George Eads, a senior consultant at economic business and consulting firm CRA International Inc.

``It would be a big tragedy, but not like some estimates,'' he said.

To contact the reporters on this story: Alex Ortolani in Southfield, Michigan, at aortolani1@1bloomberg.net or Mike Ramsey in Southfield, Michigan, at mramsey6@bloomberg.net

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Pound Logs Record Weekly Drop Against Euro as Economy Slumps

By Andrew MacAskill

Nov. 15 (Bloomberg) -- The pound had its biggest weekly against the euro since the common currency's 1999 debut as evidence mounted Europe's second-biggest economy is gripped by a recession.

The pound was near an all-time low against the euro and traded below $1.50 yesterday for a third day. The Bank of England indicated on Nov. 12 it will keep cutting interest rates as the economy slumps.

``It is going to be a while before we see a turnaround in the fortunes of the pound,'' said Kamal Sharma, a currency strategist in London at JPMorgan Chase & Co. ``The economic data out of the U.K. continues to deteriorate and against that backdrop we are going to see sterling weakness.''

The pound rose to 85.76 pence per euro late yesterday in London, from 86.06 pence on Nov. 13, when it dropped to a record 86.63 pence. The weekly loss was 5.3 percent.

Against the dollar, the pound was little changed at $1.4844, down 5.1 percent from Nov. 7.

Europe's economy fell into its first recession in 15 years in the third quarter, the European Union said yesterday. Gross domestic product in the 15 euro nations shrank 0.2 percent from the previous three months, when it also contracted 0.2 percent.

Investors should sell the pound until it reaches $1.40 as the weakness of the economy means the Bank of England may have to keep cutting interest rates, according to Jeremy Stretch, senior strategist in London at Rabobank International, the third-largest Dutch banker.

`Play Short'

``With the pound you have to continue playing it short, particularly against the dollar,'' Stretch said. ``The pound is going to take a thumping. At the moment it is perceived to be one of the currencies with the greatest underlying problems.'' A short position is a bet the value of an asset will decline.

The British currency's trade-weighted index dropped 5.2 percent this week to 77.62, near the lowest level in at least eight years, according to indexes compiled by Deutsche Bank AG, the world's biggest currency trader. It fell to a record 76.95 yesterday, the weakest since at least January 2000.

The U.K. economy will contract by an annual 1.8 percent in the first three months of the year, according to forecasts from the central bank released on Nov. 12. ``We are certainly prepared to cut the bank rate if that proves to be necessary,'' Bank of England Governor Mervyn King said that day.

``King basically endorsed the pound's decline as a way to revive the economy,'' said Lee Hardman, a currency strategist in London at Bank of Tokyo-Mitsubishi Ltd. ``Investors have seen this like a red flag to a bull and are selling it.''

Currency Forecasts

The pound may decline to $1.40 and 88 pence against the euro by year-end, Hardman said. That compares with $1.60 and 80 pence a euro, the median analyst estimates in a Bloomberg News survey.

U.K. policy maker Andrew Sentance said Nov. 13 the pound's slide against the dollar and the euro will make it easier for manufacturers to cope with a recession. BT Group Plc, the U.K.'s largest phone company, said the same day it aims to cut about 6 percent of its workforce in the year through March.

The pound's 14-day relative-strength index versus the euro, a technical indicator some traders use to forecast changes in price direction, was at 24.5 yesterday, below the 30 threshold that signals a rebound for a third day.

The U.K. currency rose for eight days when it last fell below 30 on Sept. 3. The pound advanced to as much as 85.25 pence a euro earlier yesterday.

Bond Yields

The yield on the U.K. two-year note, more sensitive to interest rates, fell 33 basis points in the week to 2.15 percent. The 4.75 percent security due June 2010 rose 0.47, or 4.7 pounds per 1,000-pound ($1,484) face amount, to 103.94.

The yield on the U.K. 10-year gilt declined 13 basis points to 4.06 percent. Yields move inversely to bond prices.

The yield on the German two-year note rose above that of the comparable gilt for the first time since December 1993. The yield on the benchmark German note was at 2.21 percent yesterday.

Investors should favor two-year gilts over the German equivalent as the worsening economic outlook in the U.K. prompts the Bank of England to lower interest rates more rapidly than the European Central Bank, according to Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets.

``It certainly doesn't look like the ECB is going to cut rates as aggressively as in the U.K.,'' he said. ``The Bank of England is pulling out all the stops to prevent a prolonged slump and that makes the two-year note attractive.'' The U.K. two-year gilt may fall to 2 percent by year-end, he said.

The yield, or spread, between two- and 10-year U.K. government bonds increased to the most in 15 years as investors bought shorter-dated notes, betting the central bank will reduce borrowing costs to bolster the economy.

The spread was 190 basis points, near the widest since March 1993, from 170 basis points a week ago. The so-called steeper yield curve suggests investors have become more pessimistic about the outlook for economic growth.

To contact the reporter on this story: Andrew MacAskill in London at amacaskill@bloomberg.net

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Yen Advances as Drop in Stocks Reduces Appeal of Carry Trade

By Daniel Kruger and Michael J. Moore

Nov. 15 (Bloomberg) -- The yen rose against the euro and the dollar for a second week as falling stock market prices prompted speculation investors will sell higher-yielding assets and pay back low-cost loans in Japan's currency.

The greenback appreciated versus an index of the currencies of six major U.S. trading partners as investors sought the safety of dollar-denominated assets. The pound recorded its biggest loss against the euro since the 15-nation currency's 1999 debut on mounting evidence Britain's economy has fallen into a recession.

``Euro-dollar and euro-yen were highly leveraged plays over the last several years,'' said John McCarthy, director of currency trading at ING Financial Markets LLC in New York. ``We continue to see unwinding of that.''

The yen advanced 1.1 percent to 97.14 per dollar, from 98.24 on Nov. 7. It appreciated 2 percent to 122.39 per euro from 124.90. The dollar traded $1.2605 per euro, compared with $1.2718. The pound fell by a record 5 percent against the euro to 85.41 pence and dropped 5.8 percent to $1.4740, decreasing below $1.50 for the first time since June 2002.

The ICE's Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and the Swedish krona, increased 0.5 percent this week and reached 88.15 on Nov. 13, the highest level since April 2006.

Russia's ruble had its biggest weekly drop since early September against a basket of dollars and euros that the central bank uses to manage its fluctuation after policy makers let the currency weaken to slow an exodus of foreign capital. The ruble decreased 1.2 percent to 30.6994 against the basket, which is made up of 55 percent dollars and 45 percent euros.

Canadian Dollar

The Canadian dollar fell 4 percent to C$1.2372 against the dollar and the Norwegian krone declined 0.7 percent to 6.9539 as the price of crude oil for December delivery plunged 7.4 percent this week. Oil accounted for one-tenth of Canada's export revenue last year, while Norway is the world's fifth-largest oil supplier.

Japan's currency advanced 4.9 percent to 62.95 against the Australian dollar and 7.4 percent to 53.79 versus the New Zealand dollar this week on bets investors will unwind carry trades, in which they get funds in countries with low borrowing costs and buy assets where returns are higher. Japan's 0.3 percent target lending rate compares with 1 percent in the U.S., 5.25 percent in Australia and 6.5 percent in New Zealand.

Stock markets in the U.S., Europe and Asia fell this week as reports showed the global economic slowdown deepened. The Standard & Poor's 500 Index fell 6.2 percent, the Dow Jones Stoxx Index of European equities retreated 6.3 percent and the MSCI Asia Pacific Index lost 5.7 percent.

U.S. Retail

Sales at U.S. retailers fell 2.8 percent in October, the biggest drop since records began in 1992, the Commerce Department reported in Washington. The Reuters/University of Michigan preliminary index of consumer sentiment unexpectedly rose to 57.9 this month from 57.6 in October.

Europe's economy fell into its first recession in 15 years in the third quarter. Gross domestic product in the euro nations shrank 0.2 percent from the previous three months, when it also contracted 0.2 percent, the European Union's Luxembourg-based statistics office said.

U.K. unemployment rose the most in 16 years last month, and Bank of England Governor Mervyn King said policy makers are ``certainly prepared'' to cut the 3 percent target lending rate.

Volatility implied by dollar-yen options expiring in one month rose to 28.55 percent on Nov. 13, the highest in almost two weeks. Heightened fluctuations in currencies can discourage carry trades by making profits harder to predict.

`Choppy' Markets

``The markets are extremely choppy, illiquid and subject to extremely wide swings on virtual air,'' said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto. ``I wouldn't suggest the markets are trading on economics as much as on equity flows at this moment.''

Leaders of G-20 countries convened in Washington to debate proposals ranging from curbing executive pay and restraining hedge funds to raising capital requirements for banks after financial institutions worldwide lost $958 billion on securities tied to U.S. mortgages.

``The continuing volatility of markets and recent indicators of economic performance confirm that challenges remain,'' Federal Reserve Chairman Ben S. Bernanke said yesterday at a panel discussion hosted by the ECB in Frankfurt. ``For this reason, policy makers will remain in close contact, monitor developments closely and stand ready to take additional steps should conditions warrant.''

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net

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Eisai, Toyota, Aozora, Sumitomo Mitsui: Japan Equity Preview

By Norie Kuboyama

Nov. 15 (Bloomberg) -- The following companies may have unusual price changes in Japanese trading on Nov. 17. Stock symbols are in parentheses, and share prices are from the previous close. The information in each item was released after markets shut, unless stated otherwise.

Aozora Bank Ltd. (8304 JT): The Japanese lender controlled by Cerberus Capital Management LP (137482Z US) scrapped its full- year profit estimate and forecast a loss, citing writedowns on overseas investments. The lender expects a net loss of 27 billion yen ($278 million) in the 12 months ending March 31, it said in a statement, abandoning a 15 billion yen profit target set in September. The stock slipped 4 yen, or 4.8 percent, to 79.

Asics Corp. (7936 JT): The sporting goods maker cut its full-year net income projection 11 percent to 13.5 billion yen. Overseas units may be hurt by the stronger yen, and sales in Europe may be below expectations, the company said in a release. Asics gained 29 yen, or 5 percent, to 615.

Central Glass Co. (4044 JT): The maker of glass products about halved its full-year net income outlook to 3 billion yen, citing devaluation of stockholdings. Central Glass rallied 20 yen, or 6.5 percent, to 329.

Chiba Bank Ltd. (8331 JT): The regional bank said first-half net income plunged 73 percent to 7.64 billion yen, with a 2.9 percent slip in revenue. The stock added 1 yen, or 0.2 percent, to 473.

Dai Nippon Printing Co. (7912 JT): The printing company reduced its full-year net income forecast 30 percent to 32 billion yen, citing price competition and higher prices for raw materials. The stock climbed 72 yen, or 7 percent, to 1,108.

Eisai Co. (4523 JT): The U.S. unit of Eisai, maker of world's best-selling drug for Alzheimer's disease, has won the approval of the U.S. Food and Drug Administration to sell its Banzel drug for the treatment of epilepsy. The stock rose 20 yen, or 0.61 percent, to 3,290.

GS Yuasa Corp. (6674 JT): The maker of batteries and lighting equipment said it had first-half net income of 2.51 billion yen, compared with a 1.84 billion yen loss a year earlier, citing benefits from lower lead prices, streamlining and reduced administration costs. The stock dropped 1 yen, or 0.2 percent, to 340.

Heiwa Corp. (6412 JT): The pachinko machine maker said it had a first-half net loss of 3.42 billion yen, compared with 389 million yen in profit a year earlier, dragged down by inventory devaluation. Heiwa slid 21 yen, or 3.2 percent, to 643.

Japan Airlines Corp. (9205 JT): Japan Airlines and All Nippon Airways Co. will probably cut fuel surcharges for overseas travel, starting in January, NHK reported, without citing anyone. Japan Airlines rose 2 yen, or 0.93 percent, to 217. All Nippon gained 6 yen, or 1.71 percent, to 357.

Joyfull Co. (9942 JT): The family restaurant chain reversed its full-year forecast to a net loss of 190 million yen from 477 million yen in profit, citing increased personnel and utility costs. The company cut its second-half dividend to 10 yen from 15 yen. Joyfull was unchanged at 630 yen.

Kitz Corp. (6498 JT): The valve maker said it will buy back as much as 4.4 percent of its total outstanding shares for up to 1 billion yen through March 23. Kitz sagged 6 yen, or 1.9 percent, to 315.

Marui Group Co. (8252 JT): The department store chain and consumer lender said first-half net income climbed 77 percent to 1.44 billion yen, buoyed stock sales. Operating profit in the six months ended Sept. 30 about halved to 4 billion yen, with a 7.6 percent drop in sales. Marui advanced 30 yen, to 5.3 percent, to 597.

Misumi Group Inc. (9962 JT): The distributor of precision machinery parts lowered its full-year net income outlook 17 percent to 8.3 billion yen and its sales forecast 13 percent to 119 billion yen. The stock fell 8 yen, or 0.5 percent, to 1,476.

Mitsubishi UFJ Financial Group Inc. (8306 JT): Japan's biggest listed bank will sell 390 billion yen in preferred shares to seven investors, according to a statement from the bank. The stock added 3 yen, or 0.5 percent, to 595.

Rakuten Inc. (4755 JQ): The operator of Japan's largest online shopping mall said it will cancel a business alliance with Tokyo Tomin Bank Ltd. (8339 JT), as the online retailer signed with eBank Corp., an electronic banking service company, to integrate their consumer loan operations under an alliance. Rakuten fell 500 yen, or 0.9 percent, to 57,000. Tokyo Tomin declined 46 yen, or 4.4 percent, to 991.

Resona Holdings Inc. (8308 JT): Japan's fourth-biggest bank said first-half net income fell 28 percent to 86.4 billion yen, with a 6.7 percent drop in revenue. Resona lost 1,700 yen, or 1.5 percent, to 109,500.

Rhythm Watch Co. (7769 JT): The clockmaker said it expects net loss of 700 million yen in the fiscal year ending March 31, after canceling a plan to sell some stock it holds. The company had forecast 520 million yen in profit. Rhythm Watch won't pay a planned 2 yen dividend for the year. The stock added 2 yen, or 2.1 percent, to 99.

Sapporo Hokuyo Holdings Inc. (8328 JT): The lender reversed its full-year forecast to net loss of 27.5 billion yen from a 20 billion yen profit and canceled its first-half dividend of 5,000 yen. Sapporo Hokuyo is now determining if it will pay a planned second-half dividend of 7,000 yen, the bank said in a release. The stock declined 19,000 yen, or 4.6 percent, to 398,000.

Sharp Corp. (6753 JT): Sharp will reduce production at its Kameyama plant by more than 10 percent due to decreasing demand, Nikkei English News reported, without saying where it got the information. The stock rose 3 yen, or 0.45 percent, to 670.

Sodick Hightech Co. (6160 JX): Sodick Co. (6143 JT), a machinery maker, offered to pay 40,200 yen for each Sodick Hightech share to buy out the maker of peripherals for electrical discharge equipment, the companies said in separate statements. Sodick Hightech advanced 500 yen, or 3.2 percent, to 16,200. Sodick was unchanged at 234 yen.

Sumitomo Mitsui Financial Group Inc. (8316 JT): Japan's third-biggest bank by revenue said first-half net income fell 51 percent to 83.3 billion yen as bad-loan costs more than doubled. The lender cut its second-half dividend to 5,000 yen from 7,000 yen. The stock slipped 6,000 yen, or 1.6 percent, to 362,000.

Taihei Dengyo Kaisha Ltd. (1968 JT): the plant engineering company lifted its full-year net income forecast 29 percent to 3.36 billion yen and its sales forecast 8 percent to 71.4 billion yen. The company also said it will spend as much as 1 billion yen to buy back as many as 1 million shares through March 31. The stock lost 43 yen, or 5.6 percent, to 729.

TonenGeneral Sekiyu K.K. (5012 JT): The Japanese unit of Exxon Mobil Corp. (XOM US) increased its full-year net income outlook 90 percent to 36 billion yen as margins for processing oil into petroleum improved. Nine-month profit fell 3.8 percent to 34.2 billion yen, TonenGeneral said in a separate statement. The stock gained 25 yen, or 2.9 percent, to 880.

Toyota Motor Corp. (7203 JT): Japan's biggest automaker may cut production of Lexus luxury vehicles at one of its domestic factories, the Tokyo newspaper reported. The stock rose 60 yen, or 1.95 percent, to 3,140.

To contact the reporter on this story: Norie Kuboyama in Tokyo at nkuboyama@bloomberg.net.

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G-20 Statement to Back Stimulus, Call for More Market Oversight

By Michael McKee and Simon Kennedy

Nov. 15 (Bloomberg) -- World leaders meeting in Washington are moving to shore up the deteriorating world economy, while papering over differences on additional regulation of financial markets.

In a draft of the statement to be issued after their meeting today, members of the Group of 20 endorse steps already underway to fight a global recession by pursuing active monetary and fiscal policies, French officials told reporters on condition they not be named. There are also proposals to bolster the role of the International Monetary Fund.

The leaders hide disagreements between the U.S. and European governments over the future shape of the international financial system by agreeing each should pursue more effective regulation of financial markets and institutions in their own countries. They will commit to meet again by the end of April, after U.S. President-elect Barack Obama takes office, the French officials said.

``I'm pleased that we're discussing a way forward to make sure that such a crisis is unlikely to occur again,'' President George W. Bush told reporters before today's meeting. ``There's some progress being made, but there's still a lot of work to be done.''

Tumbling stock markets and forecasts for global recession are putting pressure on the G-20 leaders, who met last night for a dinner of quail, roast lamb and pear torte at the White House.

Fiscal Stimulus

Figures released yesterday showed the euro area entered a recession in the third quarter for the first time since the single currency was introduced a decade ago, and retail sales in the U.S. fell by the most on record in October. The Standard & Poor's 500 index fell 38 points yesterday to close at 873, a loss of 6 percent for the week and 41 percent for the year so far.

The first step in countering those developments is raising government spending to boost growth where necessary, the leaders will say. G-20 countries including the U.K., Japan, China and Germany are rolling out stimulus packages, and lawmakers in the U.S. are signaling they will pass a second round of stimulus legislation.

Some countries do disagree on the need for fiscal stimulus, U.K. Prime Minister Gordon Brown told reporters today. ``These are tough talks,'' he said. ``Countries are coming from very different positions.''

The communique will also offer a long list of measures for countries to pursue in improving oversight of financial institutions whose operations, and problems, cross national borders.

Ratings Companies

The list includes improving regulation of credit ratings agencies, extending surveillance to hedge funds, and greater exchange of information, the French officials said. Finessing a disagreement between Bush and European leaders, almost all of the measures are national in scope.

European Union nations, led by Brown and French President Nicolas Sarkozy, want the world's top banks to be subject to international regulation, an idea Bush has rejected. At a Nov. 7 meeting in Brussels, EU leaders called for the creation of regulatory ``colleges'' that would bring together bank regulators from various nations to coordinate oversight.

Bush argued against greater government intervention in his weekly radio address today. ``The surest path to that growth is free markets and free people,'' he said.

Europeans also disagree on how far and how fast to go. German Chancellor Angela Merkel favors a more gradual strengthening of regulation than the sweeping revamp of controls favored by Sarkozy, according to a German government document obtained by Bloomberg News.

Swaps Clearinghouse

Still, Merkel said yesterday that she'll do ``everything to ensure that there are more rules to prevent us from ever having to face such a situation again.''

Several other initiatives, in the works for some time, were announced on the eve of the summit.

The first central clearinghouse for the $33 trillion credit- default swap market should be in operation by year-end in the U.S., under an agreement signed yesterday by three U.S. financial regulators.

The clearinghouse would back trades and absorb losses in case of a dealer failure. Some in Europe have been pushing for a clearinghouse under government control, or within the IMF. Investors, supported by the Fed, want it to be independent. The New York Fed has been meeting with groups including CME Group Inc., Intercontinental Exchange Inc. and NYSE Euronext on plans to create a privately run organization.

Bolstering the IMF

The IMF will have a role, along with the Financial Stability Forum in conducting ``early warning exercises'' and issuing joint risk assessments of financial markets, the two organizations said yesterday. The FSF includes officials from the Group of Seven nations along with Australia, Singapore, Switzerland and the Netherlands.

Separately, Japanese Prime Minister Taro Aso's office said his government will offer up to $100 billion in lending to the IMF at the summit and ask other nations to give further resources. Some emerging market nations with large reserves have been reluctant to increase contributions to the IMF unless they are given more of a say in how the organization is run. Today's discussion will include ways to widen the role of emerging markets in the Fund.

The G-20 statement will set a deadline of March 31 for authorities to implement the measures in their statement. And they pledge to meet again before the end of April, when a new American administration is in office.

Obama's Call

The U.S. president-elect isn't attending the meeting, sending former Secretary of State Madeleine Albright and former Republican Representative Jim Leach to meet delegations instead.

Giving the Democratic response to the President's radio address today, Obama called the crisis ``the greatest economic challenge of our times.''

He urged Congress, returning for a lame-duck session this week, to immediately pass a ``down payment'' on a larger stimulus program that would include extending unemployment benefits for fired workers. Longer-term, he said he would push for increased spending on infrastructure, renewable energy, health care, and education.

G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union.

The Netherlands and Spain are also represented, as are the IMF, World Bank, and United Nations.

To contact the reporter on this story: Michael McKee in Washington at mmckee@bloomberg.netSimon Kennedy in Washington at Skennedy4@bloomberg.net;

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Pakistan Agrees to $7.6 Billion IMF Bailout Program

By Khalid Qayum

Nov. 15 (Bloomberg) -- Pakistan agreed to a $7.6 billion bailout loan plan with the International Monetary Fund, to help the south Asian country avert defaulting on its debt with the first such program in four years.

The loan ``will be used for the balance of payments and to build our foreign reserves,'' Shaukat Tarin, the finance adviser to the prime minister, said today at a televised news conference in Karachi. The IMF will give the loan in installments over 23 months at interest rate of 3.5 percent to 4.5 percent, he said.

Pakistan was forced to seek funds from the IMF after its foreign-exchange reserves shrank 75 percent in the past year to $3.5 billion last week, the equivalent of one month's imports, and a group of donor nations declined to provide funds.

``The IMF did not give us any condition different from our economic stabilization program,'' Tarin said. ``The IMF counseled us to increase the key interest rate to curb inflation,'' he said.

The State Bank of Pakistan, the nation's central bank, increased its benchmark interest rate by 2 percentage points, the most in more than a decade, to 15 percent on Nov. 12, citing inflation that reached a 30-year high in October.

To contact the reporter on this story: Khalid Qayum in Islamabad at kqayum@bloomberg.net.

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India Increases Rate on Foreign-Currency Deposits

By Kartik Goyal

Nov. 15 (Bloomberg) -- The Reserve Bank of India today announced more measures to boost cash in the financial system after cutting interest rates twice in less than a month to shield the economy from the global slowdown.

The central bank today raised the interest rate on foreign- currency deposits by 75 basis points with immediate effect, the bank said in a statement. The interest rate ceiling on the so- called foreign currency non-resident (B) deposit is now pegged at the Libor rate plus 100 basis points from an earlier cap of 25 basis points.

The central bank said it is extending until March special money auctions to meet liquidity requirements of mutual funds and non-banking finance companies.

The measures are being taken because of the current turmoil in the global financial markets that has put pressure on India's money and foreign-exchange markets, threatening to hurt the pace of economic growth, forecast by the central bank to expand at the slowest pace in four years.

``There are indications the global slowdown is deepening with a larger than originally expected impact on the domestic economy,'' the central bank said. ``In the context of developments, further augmenting the rupee and forex liquidity, strengthening credit delivery mechanisms and improving credit delivery are imperative for sustaining the growth momentum.''

Non-Resident Accounts

The central bank also raised interest rate cap on non- resident rupee accounts by 75 basis points to the Libor rate plus 175 basis points, the statement said.

Today's announcement comes after the central bank cut its benchmark lending rate twice since Oct. 20, lowering it to 7.5 percent from a seven-year high of 9 percent. It also pared the amount lenders must set aside as reserves to cover deposits by 3.5 percentage points in a month, freeing up as much as 1.4 trillion rupees ($29.5 billion) in cash to ease lending.

The bank also allowed housing-finance companies to raise short-term foreign-currency loans and said it will consider proposals from Indian companies to buy back foreign-currency bonds they issued.

To help exporters fighting the slowdown in demand from the U.S., the central bank agreed to extend the period for rupee loans to 270 days from 180 days.

Export Growth Eases

India's exports grew 15 percent in September, the slowest pace in 18 months, as the weakening global economy damped demand. Overseas shipments, which account for about 15 percent of the economy, rose 10.4 percent to $13.7 billion from a year earlier, after gaining 27 percent in August.

To meet the credit demand of small and micro industries and the housing industry, the central bank said Small Industries Development Bank of India and National Housing Bank will get 20 billion rupees and 10 billion rupees, respectively.

The bank also reduced the risk provisioning for the commercial real-estate industry to 100 percent from 150 percent earlier.

``The Reserve Bank will continue to closely monitor the developments in the global and domestic financial markets and will take swift and effective action as appropriate,'' the statement said.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net

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Euro Area Suffers First Recession; Downturn May Turn `Deep'

By Fergal O'Brien and Simon Kennedy

Nov. 15 (Bloomberg) -- The European economy is down and may be out for some time.

After falling into its first recession since the introduction of the single currency almost a decade ago, economists at Bank of America Corp., Deutsche Bank AG and Citigroup Inc. say the euro-area economy will worsen in the current quarter and growth won't return until late 2009.

``The third quarter looks like a walk in the park compared to what lies ahead,'' said Thomas Mayer, chief European economist at Deutsche Bank in London. ``This will be a deep recession.''

The downturn leaves policy makers scrambling to limit its depth. The European Central Bank is set to cut interest rates again next month, having raised them as recently as July, while governments are lining up fiscal stimulus programs. Their efforts may come too late to prevent the recovery from lagging behind that of the U.S.

Gross domestic product in the 15 euro nations shrank 0.2 percent for the second straight quarter in the three months through September, the European Union's Luxembourg-based statistics office said yesterday. Germany, Ireland and Italy are now suffering a recession, while Spain's economy contracted for the first time in 15 years and the Netherlands and Portugal stagnated. The French economy unexpectedly expanded.

Multiple Shocks

Europe's economy is suffering from multiple shocks, including the euro's rise to a record $1.60 in mid-summer and oil's jump to an unprecedented $147 a barrel in July. The cost of credit then surged globally after the September collapse of Lehman Brothers Holdings Inc., forcing banks to cut lending to businesses and households and shattering demand for euro-area exports from the U.S. to Hungary.

The ECB last week lowered its benchmark rate by a half- point to 3.25 percent, the second such reduction in a month. As inflation ebbs, policy makers are now signaling further cuts when they meet in Frankfurt on Dec. 4.

Economists at Citigroup expect a reduction of at least 75 basis points next month, while those at JPMorgan Chase & Co. yesterday revised their forecast to show the main rate reaching 1 percent next year, the lowest since the ECB took the reins of monetary policy a decade ago.

The ECB is still moving too slowly and the recession proves the bank was wrong to raise rates in July, even though inflation was at its strongest in almost 16 years at the time, said Marco Annunziata, chief economist at Unicredit MIB in Milan.

`Painful Proof'

``We now have painful proof that there has been an excessive degree of complacency, which implies that the policy response in Europe is well behind the curve,'' he said.

ECB President Jean-Claude Trichet said in an interview with Bloomberg Television in Frankfurt yesterday that the central bank's ``considerable'' policy action, which extends to lending cash to banks, would help restore sentiment in the economy. ``Confidence will grow back,'' he said.

Governments that once bet their economy would avoid a recession are also looking to act although their ability to do so is limited by EU budget-deficit limits with Italy and France among those already running shortfalls. German Chancellor Angela Merkel said this week that she is considering boosting her 50 billion-euro ($63.3 billion) stimulus program.

Merkel and other leaders from the world's largest nations are meeting in Washington this weekend to discuss increased government spending and other ways to stop the rot. Retail sales in the U.S. dropped in October by the most on record as the economy headed for its worst slump in decades, data showed yesterday.

Sluggish Reaction

The sluggish reaction of European policy makers means growth won't return to the euro region until the final three months of next year, said Mayer at Deutsche Bank. That is two quarters later than what he expects in the U.S. where the Federal Reserve has already cut its benchmark interest rate to 1 percent.

``Policy in the euro area has been less flexible than in the U.S.,'' said Mayer. ``Things aren't going to get much better next year in Europe.''

Europe's downturn surprised even economists who in July saw just a 35 percent chance of a recession occurring in 2008, according to the median of 26 forecasts. Policy makers expressed confidence earlier in the year that the economy would dodge a recession even as the U.S. faltered. The European Commission began the year predicting growth of 1.5 percent in 2009, only to cut its forecast to just 0.1 percent as the financial crisis escalated.

The recession is the first in 15 years for the countries that use the euro and the fifth since the early 1970s, said Ben May, an economist at Capital Economics Ltd. The downturn of the early 1990s lasted four quarters, while the two of the 1980s lasted six months.

The broad decline across the region, its weaker potential growth rate in recent years and recessions elsewhere in the world mean ``it may be optimistic to expect a rapid pick-up in growth next year,'' May said.

To contact the reporters on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net; Simon Kennedy in Paris at Skennedy4@bloomberg.net.

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European Notes Post Eighth Weekly Gain; Region Enters Recession

By Gavin Finch

Nov. 15 (Bloomberg) -- European two-year notes posted an eighth weekly gain after a government report showed the region's economy slipped into its first recession in 15 years amid the worst financial crisis since the Great Depression.

The advance this past week drove the difference in yield between two- and 10-year German bonds to the widest in more than four years as shorter-dated notes, more sensitive to interest rates, outperformed. European Central Bank council member Athanasios Orphanides said yesterday he expects the bank to issue ``much more pessimistic'' growth forecasts next month.

``The vibrancy of the bond market has again been demonstrated by the short end,'' said Sean Maloney, a fixed- income strategist at Nomura International Plc in London. ``Central-bank speak continues to portray a heightened sense of urgency, with the language of late amongst the most blunt seen in recent memory.''

The yield on the German two-year note fell 5 basis points to 2.21 percent by 4 p.m. in London yesterday, taking its decline this week to 20 basis points. That's its lowest level since September 2005. The 4 percent security due September 2010 was at 103.13.

The yield on the 10-year German bund, Europe's benchmark government security, was at 3.66 percent. Yields move inversely to bond prices.

Gross domestic product in the 15 euro nations shrank 0.2 percent from the previous three months, when it also contracted 0.2 percent, the European Union's statistics office said yesterday. The two quarters of contraction mark the first recession since the euro's debut in 1999.

`In Recession'

Two-year notes led gains this week as traders bet the ECB will lower its main refinancing rate after government data showed Germany entered its worst recession in at least 12 years. The economies of Ireland and Italy shrank for two consecutive quarters, while Spain's economy contracted in the third quarter for the first time in 15 years. Growth in the Netherlands and Portugal stagnated.

The difference between two- and 10-year yields widened to 145 basis points, the most since October 2004, steepening the so-called yield curve, a chart of bonds of different maturities. The spread was 10 basis points on Sept. 1. Demand for shorter- dated debt outstripped that for longer-term securities as traders bet the ECB will cut its main rate to spur growth.

Returns on European bonds exceeded those on Treasuries since September, handing investors a 2.7 percent return, compared with 1.4 percent for their U.S. counterparts, according to Merrill Lynch & Co.'s EMU Direct and Treasury Master indexes.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net

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European Stocks Fall for 2nd Week on Economy, Led by Metro, BP

By Michael Patterson

Nov. 15 (Bloomberg) -- European stocks retreated for a second week as Germany's economy contracted more than forecast, the U.S. scrapped plans to buy mortgage assets from banks and declining oil sent energy shares lower.

Metro AG, Germany's largest retailer, dropped 14 percent as the nation's gross domestic product decreased the most in 12 years. An index of European banks tumbled 14 percent after the U.S. Treasury abandoned part of a rescue plan unveiled eight weeks ago. Intesa Sanpaolo SpA lost 20 percent after canceling its dividend. Swiss Life Holding fell 31 percent as it halted a share buyback. BP Plc dropped 5.2 percent on oil's retreat.

``There's absolutely no reason to take any risk right now,'' Steen Jakobsen, who manages about $140 million as chief investment officer at Saxo Bank AS, said in a Bloomberg Television interview from Copenhagen. ``We need the world economy to reignite.''

Europe's Dow Jones Stoxx 600 Index sank 6.3 percent in the past week to 205.61, bringing its two-week retreat to 7.4 percent and its loss for the year so far to 44 percent.

Gross domestic product in the 15 euro nations shrank 0.2 percent for the second straight quarter in the three months through September, the European Union's statistic office said. Economists at Bank of America Corp., Deutsche Bank AG and Citigroup Inc. predicted the slump will worsen.

The Organization for Economic Cooperation and Development said this week its 30 members will contract 0.3 percent in 2009, compared with a June forecast of 1.7 percent growth.

`Potential For Disaster'

``There is a potential for disaster'' in the economy, Roger Nightingale, the global strategist at Pointon York Ltd., which manages about $1.1 billion, said in an interview on Bloomberg Television. Nightingale said he prefers long-term government bonds over equities.

National benchmark indexes fell this week in all 18 western European markets except Iceland. Germany's DAX dropped 4.6 percent. France's CAC 40 lost 5.1 percent, while the U.K.'s FTSE 100 decreased 3 percent.

Metro, which owns the Media Markt consumer-electronics shops and gets about 41 percent of its revenue in Germany, dropped 14 percent.

Europe's largest economy shrank a seasonally adjusted 0.5 percent from the second quarter, when it fell 0.4 percent, the Federal Statistics Office in Wiesbaden said. Economists expected a 0.2 percent decline. Gross domestic product last slid this much over two consecutive quarters -- the technical definition of a recession -- in 1996.

Paulson's Plan

Separately, Handelsblatt said this week German sales of audio gear and televisions will fall in the second half.

Bank stocks fell more than those of any of the Stoxx 600's 19 industry groups this week.

U.S. Treasury Secretary Henry Paulson said he plans to use the second half of the $700 billion financial rescue program to help relieve pressures on consumer credit.

``Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards,'' Paulson said. ``This is creating a heavy burden on the American people and reducing the number of jobs in our economy.'

His remarks are an acknowledgement that the pitch he made to Congress for the bailout hasn't delivered what was promised. Paulson sold the Troubled Asset Relief Program as a way to rid bank balance sheets of illiquid mortgage assets.

Intesa declined 20 percent. Italy's second-largest bank cut the dividend to conserve cash after the global financial crisis made borrowing more expensive. The lender said net income fell to 673 million euros ($850 million) from a restated 1.46 billion euros a year earlier, missing the 723 million-euro average estimate of seven analysts surveyed by Bloomberg.

BP, Shell

Swiss Life fell 31 percent after scrapping its profit target, halting a share buyback and saying it can no longer guarantee a 600 million Swiss franc ($505 million) dividend as market turmoil eroded investments.

Irish Life & Permanent Plc, Ireland's biggest mortgage lender, sank 37 percent after it said full-year operating profit will fall 30 percent as it writes down investments in Icelandic banks and because of higher loan-loss charges.

BP, Europe's second-largest oil company, declined 5.2 percent. Crude oil slipped 7.4 percent in New York this week as the global economic slowdown cut demand in the largest energy-consuming countries.

Nokia Oyj lost 17 percent. The world's largest maker of mobile phones said industry-wide handset sales will be lower this year than previously anticipated, forcing the company to deepen cost cuts as consumers hesitate to buy new models.

Taylor Wimpey Plc plunged 34 percent. The homebuilder said U.K. orders have fallen 40 percent and talks to renegotiate its debt have been slightly ``disappointing.''

DSG, Cookson

DSG International Plc, the U.K.'s largest consumer electronics retailer, declined 41 percent after credit insurer Atradius reduced cover to the company's suppliers.

Cookson Group Plc, the world's biggest maker of molds for steelmakers, plunged 36 percent this week after saying it will miss targets as metal makers cut production to counter slowing demand.

Vodafone Group Plc climbed 15 percent. The world's largest mobile-phone company said it will cut 1 billion pounds ($1.6 billion) of costs to make up for slowing growth in some markets and kept its profit forecast.

To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net.

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U.K. Conservatives Say Brown Risks `Run on Pound' With Deficit

By Mark Deen

Nov. 15 (Bloomberg) -- Britain's opposition Conservative Party said Prime Minister Gordon Brown is running the risk of a ``collapse'' of the pound by allowing the U.K. government deficit to swell.

``We are in danger, if the government is not careful, of having a proper sterling collapse, a run on the pound,'' George Osborne, who's responsible for the Conservatives' economic, said in an interview with The Times newspaper.

The comments are the first from a senior U.K. politician to raise the specter of a currency crisis comparable to those suffered by Britain in the 1970s or early 1990s, or to indicate that the British currency may suffer a fate similar to that of Iceland's in recent weeks.

The pound has already shed more than a quarter of its value in four months, declining to less than $1.50 this week from more than $2 in July. It has dropped 20 percent this month alone against the euro, currently buying about 1.16 of the European currency, down from almost 1.27 at the end of October.

In 1992, when the currency broke its peg to others in the European Union, the pound fell from $2 on Sept. 8 to less than $1.50 in the final week of December. In September that year, it fell 10 percent against the Deutsche mark, the largest European currency before the creation of the euro.

With Britain's budget deficit already the largest since the end of World War II in the six months through September, Brown is preparing to announce a further increase in borrowing in the government's pre-budget report on Nov. 24.

Keynes Parallel

Speaking at the Council of Foreign Relations in New York yesterday, Brown mocked skeptics, noting that economist John Maynard Keynes was criticized by U.K. Treasury officials in 1929 for proposing increased government spending to help fight what became an economic depression that lasted until the 1930s.

Brown said that when he was directly in charge of Britain's finances as chancellor of the exchequer, he went into the Treasury's library and found a copy of Keynes's 1929 proposal marked ``inflation, extravagance, bankruptcy'' by the civil servant in charge of the department at the time. The reference drew laughter from the crowd and Brown suggested that avoiding Keynesian policies now could also lead to depression.

The anecdote was meant to bolster Brown's case to world leaders for fiscal stimulus to ward off a global downturn. Brown is pressing the Group of 20 nations to slash taxes and raise spending at a summit in Washington today.

Such an agreement would give him political cover to take such actions in the U.K., where the government's shortfall was already 37.6 billion pounds in the six months through September, the largest since 1946. Osborne told the Times that expanding the deficit further carries risks.

Long-Term Rates

``The danger'' is that borrowing ``pushes up long-term interest rates, which is a huge burden on the economy,'' Osborne told the Times. ``The more you borrow as a government, the more you have to sell that debt, and the less attractive your currency seems.''

Bank of England Governor Mervyn King said this week that the government's plans were correct, as long as they were ``temporary.'' The stimulus is justified because of the ``extraordinary'' economic circumstances the U.K. and the world are facing, he told journalists three days ago.

``I've been pressing for immediate fiscal stimulus,'' Brown told journalists in Washington late yesterday. Governments ``need to move on fiscal policy'' to reassure people about their jobs and homes, he said.

Osborne criticized Brown, saying his plans to pump up the economy were aimed more at winning the next election, which must be held by mid-2010 at the latest.

`Scorched Earth'

Brown ``doesn't care'' how much he borrows,'' Osborne told The Times. ``His view is he probably won't win the next election. `The Tories can clear this mess up after I've gone.' That is deeply irresponsible. It's a scorched-earth policy, which I think the history books will write up as a total disaster,'' he said, according to the newspaper.

Politically, Brown has benefited from the financial crisis of recent months, with some polls showing his popularity increasing after he devised a bank bailout plan that was copied by other countries.

Osborne, in contrast, has suffered, with newspapers reporting yesterday that Conservative leader David Cameron may strip him of some of his responsibilities within the party.

Now, by raising the issue of a falling pound, Osborne is seeking to damage Brown in the way that the Conservative government of John Major was damaged in 1992 by the sterling crisis of the time. The episode helped rob the party of its reputation for competence on the economy, contributing to its ejection from office after 18 years in the 1997 election.

To contact the reporters on this story: Mark Deen in Washington at markdeen@bloomberg.net

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Latvian Lawmakers Approve Budget With Deficit of 1.5% of GDP

By Aaron Eglitis

Nov. 15 (Bloomberg) -- Latvia's parliament approved next year's budget, which anticipates a deficit of 1.5 percent of gross domestic product and an economic contraction of 1 percent.

The 100-seat parliament voted 53-43 to accept the budget late last night in its second reading. The parliament cut about 227 million lati ($407 million) in spending after the first reading.

Latvia's economy contracted a preliminary 4.2 percent in the third quarter, after expanding 10.3 percent last year, as real-estate prices fell and consumer spending dipped. The budget deficit may expand further than estimated as the economy contracts more than expected, Central Bank Governor Ilmars Rimsevics said on Nov. 13.

The budget's estimate of an economic contraction of 1 percent next year is ``too optimistic,'' he said. The economy may contract as much as 3.9 percent next year, boosting the budget deficit to as much as 3.9 percent of GDP, he said.

Standard & Poor's cut Latvia's credit rating to BBB- on Nov. 10, saying it may lower the country's credit rating to junk in the next 90 days, after the Baltic country took control of Parex Banka AS, its second-biggest bank, when the lender had liquidity problems and depositors withdrew money.

To contact the reporters on this story: Aaron Eglitis in Riga, Lia, at aeglitis@bloomberg.net



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Chinese Housing Sales, Development Slump in First 10 Months

By Zhang Shidong

Nov. 15 (Bloomberg) -- Home sales in China dropped in the first 10 months of the year and property developers bought less land, the government said, adding to evidence of a slowdown in the nation's real-estate market.

The area of housing sold, measured by floor space, fell 16.5 percent through October to 450 million square meters (4.8 billion square feet) from a year earlier, the National Bureau of Statistics said in a statement on its Web site yesterday. The value of housing sales dropped 17.4 percent to 1.76 trillion yuan ($258 billion).

Demand for property is falling due to government policies introduced earlier this year to curb surging prices and because of concerns the world's fourth-biggest economy is slowing. House prices increased 1.6 percent in October from a year earlier, the slowest pace in more than three years, the country's top economic planning agency said on Nov. 11.

Builders purchased 300 million square meters of land from January to October, down 5.6 percent from a year earlier, the bureau said in a on its Web site yesterday.

The amount of land they developed fell 2.5 percent to 190 million square meters, it said, without giving growth rates for the same period last year.

Investment in real estate increased 24.6 percent to 2.39 trillion yuan, down 1.9 percentage points from the January- September period, the bureau said.

To contact the reporter on this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net.

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Canada's Dollar Declines on Growth Outlook, Falling Commodities

By Chris Fournier

Nov. 15 (Bloomberg) -- Canada's currency depreciated as commodity prices dropped in the face of renewed pessimism over global economic growth.

The Canadian dollar weakened 3.9 percent this week as overall new orders for the country's factory goods fell, U.S. retail sales dropped the most on record and Europe's economy sank into recession. Crude oil reached the lowest in almost two years.

``It really boils down to global growth and the commodity story,'' said Samarjit Shankar, director of strategy for the global markets group in Boston at Bank of New York Mellon, the world's largest custodial bank with over $23 trillion in assets under administration. ``There's a lot of negative momentum right now for energy prices. If things remain the way they are, the Canadian dollar is likely to drift down.''

Canada's dollar dropped to C$1.2372 per U.S. dollar, from C$1.1893 on Nov. 7. One Canadian dollar buys 80.83 U.S. cents. The currency has lost 19 percent this year.

Crude oil touched $54.67 a barrel on Nov. 13, the lowest since Jan. 30, 2007. Natural gas for December delivery fell 6.3 percent this week. The two raw materials generated 17 percent of Canada's 2007 export revenue.

The Bank of Canada's index of 23 commodity prices has slumped more than 40 percent since reaching a record in July. Canada is the biggest supplier of crude to the U.S., according to U.S. government data.

`Growth Is Fading'

``Every indicator is pushing in the direction of further Canadian dollar weakness,'' said Sebastien Galy, a currency strategist at BNP Paribas Securities SA in New York. ``Global growth is fading. Commodities are fading.''

Galy predicts the loonie, as Canada's dollar is known for the aquatic bird on the one-dollar coin, will ``easily'' weaken to C$1.30 by year-end. Shankar ``wouldn't rule that out.''

``Downward pressures on the loonie are still alive and kicking,'' Yanick Desnoyers, senior economist with National Bank Financial in Montreal, wrote in a report. He predicts the Canadian dollar will depreciate to C$1.28 by the end of the first quarter on ``further deterioration in the world economy.''

Europe fell into its first recession in 15 years as gross domestic product in the 15 euro nations shrank for two straight quarters. The Organization for Economic Cooperation and Development cut its 2009 global-growth forecast for the second time this year.

Overall new orders for factory goods fell 3.6 percent in September, the second straight decline, Statistics Canada said yesterday. Sales at U.S. retailers fell 2.8 percent in October, the Commerce Department reported.

Canadian home sales fell 14 percent in October from the month before.

`Buying U.S. Dollars'

``We continue to advocate buying U.S. dollars on dips, targeting a return to the C$1.25 to C$1.30 at a minimum,'' according to CIBC World Markets analysts Shane Enright in Toronto and Adam Fazio in New York. ``The immediate technical call is for further U.S. dollar strength.''

The yield on the two-year government bond fell 1 basis point, or 0.01 percentage point, to 1.90 percent this week. The price of the 2.75 percent security due in December 2010 was unchanged at C$101.69.

The 10-year note's yield dropped 9 basis points in the period to 3.63 percent. The price of the 4.25 percent security maturing in June 2018 rose 70 cents to C$104.94.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

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