U.S. Stocks Post Second Straight Weekly Gain After Fed Rate Cut

By Lynn Thomasson

Dec. 20 (Bloomberg) -- U.S. stocks posted the first back-to- back weekly gains in three months as the Federal Reserve reduced interest rates to a record low and President George W. Bush granted emergency loans to General Motors Corp.

XL Capital Ltd. and Macy’s Inc. surged more than 24 percent as the central bank cut the main U.S. rate to as low as zero and pledged to “employ all available tools” to end the yearlong recession. GM jumped 23 percent yesterday as Bush gave the automaker and Chrysler LLC up to $17.4 billion and said the companies must restructure.

The Standard & Poor’s 500 Index rose 0.9 percent to 887.88. The measure, which has increased 18 percent since its 11-year low on Nov. 20, is still down 40 percent in 2008. The Dow Jones Industrial Average slipped 0.6 percent to 8,579.11 this week.

“We’re still in a bear market, but right now it should be a good period of time for the market,” said David James of Xenia, Ohio-based James Investment Research, which manages $2 billion. “The market is ready to rally.”

The S&P 500 climbed 5.1 percent to a five-week high on Dec. 16 after the Fed said that it will target a federal funds rate of between zero and 0.25 percent, a reduction from 1 percent. The Fed may also increase asset purchases and lend against lower- quality debt should Treasury provide funding, a senior central bank official said.

“Weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time,” the Federal Open Market Committee said in a statement.

Decline Protection

The VIX, as the Chicago Board Options Exchange Volatility Index is known, tumbled 17 percent to 44.93, the lowest level since Oct. 1. The index gauges how much investors are paying for insurance against declines in the S&P 500.

The S&P 500 Financials Index climbed 2.7 percent, the most in three weeks. XL Capital, the Bermuda-based insurer seeking a buyer, soared 49 percent to $4, on speculation that billionaire investor Warren Buffett was considering a bid for the company.

Macy’s increased 25 percent to $10.62 after it negotiated a more flexible bank-credit agreement to remove doubts about its ability to pay off $950 million in debt maturing next year.

Goldman Sachs Group Inc. gained 19 percent to $80.73. The New York bank reported a fourth-quarter loss of $4.97 a share, smaller than analysts’ most pessimistic estimates.

Morgan Stanley increased 12 percent to $15.45. The stock rose even after the company posted $2.2 billion fourth-quarter loss, wider than analysts estimated, as investment-banking fees slid and the value of fixed-income securities declined.

‘Bottoming Process’

“I don’t expect that we’re going to be off to the races, but we are in a bottoming process,” Dean Gulis, part of a group that manages about $2.5 billion for Loomis Sayles & Co. in Bloomfield Hills, Michigan, said of the stock market.

The rally spurred by the Fed’s rate cut pushed the S&P 500 above its average level during the prior 50 days, a signal to some traders that the advance will continue. The index exceeded its so-called 50-day moving average for the first time since Sept. 3, breaking the longest stretch below since August 2002, according to data from Bespoke Investment Group LLC.

GM, the biggest U.S. automaker, rallied 14 percent to $4.49 for the week. Under the terms of the rescue plan, the government’s debt would have priority over any other creditors. The automaker also must provide warrants for non-voting stock, accept limits on executive pay, and give the government access to financial records.

1.1 Million Workers

The cost of letting automakers fail would lead to a 1 percent reduction in U.S. economic growth and mean about 1.1 million workers would lose their jobs, including those in the auto-supply business and among dealers, the White House said.

Darden Restaurants Inc. surged 30 percent to $28.55 for the biggest weekly gain since it began trading 13 years ago. The owner of the Olive Garden and Red Lobster chains reported second- quarter profit that exceeded analysts’ estimates after cutting commodity and labor costs.

The biggest weekly decline by oil since 1991 led energy stocks lower and limited the S&P 500’s advance. Exxon Mobil Corp., Chevron Corp. and National Oilwell Varco Inc. dropped more than 5 percent.

Crude tumbled 27 percent to $33.87 a barrel, the lowest price since February 2004. The fuel has lost three-quarters of its value since July.

Newell Rubbermaid Inc. sank 25 percent to $9.50, the biggest loss in at least 28 years, after the maker of Calphalon cookware said 2008 profit would be less than previously forecast because of the weakening economy.

Spending by American consumers fell in November for a record fifth month, while home sales and orders for durable goods also declined as the recession deepened, economists said before reports next week. Walgreen Co. and Micron Technology Inc. are among companies reporting quarterly results.

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.

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Congress Will Set Conditions for $350 Billion in Rescue Funds

By Alison Vekshin

Dec. 20 (Bloomberg) -- Congress will use the remaining $350 billion in a U.S. bank-rescue package to force the Bush administration and President-elect Barack Obama into providing foreclosure aid as the pace of people losing their homes soars.

Lawmakers will agree to release the funds in exchange for Treasury Secretary Henry Paulson and Obama agreeing to programs that cut interest rates and forgive a portion of a mortgage’s principal, House Financial Services Committee Chairman Barney Frank said in a telephone interview yesterday.

Frank said legislation is being drafted that will set the conditions on spending the cash after Paulson used almost half the $700 billion Troubled Asset Relief Program to boost bank capital. Paulson resisted calls to support foreclosure relief.

“The Democrats are finally getting it, that this administration is not going to do anything to help homeowners, and they are getting more proactive,” John Taylor, president of the National Community Reinvestment Coalition, said in a telephone interview. “Paulson has had the chance to do something like this all along, but has chosen not to. I think he’ll do it if a quid pro quo is held over him.”

Frank, a Massachusetts Democrat, said in the interview he’s drafting legislation with Senate Banking Committee Chairman Christopher Dodd that would release the remaining $350 billion in exchange for foreclosure help, aid for General Motors Corp. and Chrysler LLC and provisions to hold banks accountable for stepped up lending to consumers.

The measure would adopt a Federal Deposit Insurance Corp. foreclosure plan, revamp the Hope for Homeowners loan-relief program that has attracted few lenders and support a Treasury program to cut rates on some fixed-rate home-loans.

Agreement Sought

“We should have an agreement among Obama, Paulson and the congressional leadership to release the $350 billion with conditions on how it’s spent,” Frank said. “We need the second $350 billion, but it can only be done if there’s an agreement as to how to do it.”

Paulson urged Congress yesterday to release the second half of the rescue funds after the government exhausted $350 billion in less than three months.

“Congress will need to release the remainder of the TARP to support financial market stability,” Paulson said in a statement released in Washington. “I will discuss that process with the congressional leadership and the president-elect’s transition team in the near future.”

Frank said the legislation will include FDIC Chairman Sheila Bair’s foreclosure-prevention plan, which provides a U.S. guarantee for troubled mortgages to spur loan modifications.

FDIC Program

Paulson has declined to adopt the proposal, while Bair has said the law enacted in October gives the Treasury authority to fund a plan she said might prevent 1.5 million foreclosures through next year at a cost of $24 billion. U.S. foreclosure filings climbed 28 percent in November from a year earlier, data provider RealtyTrac Inc. said Dec. 11.

Frank also plans to revise Hope for Homeowners passed by Congress in July. The program, run by the Federal Housing Administration, is aimed at helping about 400,000 homeowners by insuring as much as $300 billion in refinanced loans after servicers forgive part of the loan balance. Few lenders have signed up because banks must cut a large portion of the loan and pay high fees.

Frank said he wants to include a proposal Paulson is considering that would use Fannie Mae and Freddie Mac, the federally chartered mortgage financers the U.S. seized in September, to reduce 30-year, fixed home-loan rates to about 4.5 percent from an average of about 5.54 percent.

Feldstein’s Proposal

He also plans to adapt a plan from Harvard University economist Martin Feldstein to let the government substitute a new loan with a lower interest rate for a portion of an existing troubled mortgage.

“I just view this as Barney with a cattle prod, saying ‘put more emphasis on foreclosure relief,’” Gilbert Schwartz, a former Federal Reserve counsel and now a partner at law firm Schwartz & Ballen in Washington, said in an interview.

Frank said he’s ready to act on the legislation during the final month of the Bush administration, without waiting until Obama’s Jan. 20 inauguration.

“Why wait three weeks? Let’s do it,” Frank said. “We’re in a crisis now. How many people’s homes will be foreclosed?”

Lawmakers will have a chance to vote for a bill to reject Paulson’s request for the funds, “but I think they should also have a chance to vote for a bill that allows it to go forward with these conditions,” Frank said.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.

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Ireland to Take Majority Stake in Anglo Irish Bank, Times Says

By Louisa Nesbitt

Dec. 20 (Bloomberg) -- The Irish government plans to inject 3 billion euros ($4.2 billion) into Anglo Irish Bank Corp., becoming the lender’s majority shareholder, the Irish Times reported, without citing anyone.

The state wants to reach an agreement on the recapitalization of Dublin-based Anglo this weekend and is also looking at the possibility of injecting cash into Allied Irish Banks and Bank of Ireland, the newspaper said.

Officials want to make a statement on Anglo and a wider recapitalization before the stock market opens on Monday, the Times said. The government plans to offer existing shareholders the chance to take part in the Anglo investment, the paper said.

Irish Finance Department spokesman Eoin Dorgan didn’t immediately return calls from Bloomberg News to his mobile phone seeking comment on the article.

To contact the reporter on this story: Louisa Nesbitt in Dublin at lnesbitt@bloomberg.net.

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Gilts Post Biggest Weekly Gain Since 1992 on BOE Rate-Cut Bets

By Gavin Finch

Dec. 20 (Bloomberg) -- U.K. 10-year government bonds posted their biggest weekly advance since October 1992 on speculation the deepening recession will force the Bank of England to cut its benchmark rate to near zero.

The gains pushed two- and 10-year yields to record lows and the pound plunged to the weakest ever against the euro as reports showed an unprecedented U.K. budget deficit last month, jobless claims rose at the fastest pace since 1991 and house prices extended declines. The Bank of Japan and the Federal Reserve cut their main interest rates to near zero this past week.

“Investors are increasingly betting the BOE will follow the Fed in cutting rates to zero and that’s driving the rally in shorter-dated gilts,” said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets, a securities broker for banks, wealth managers and institutional investors. “The data is also uniformly gloomy and points toward a worsening recession. The downward trend in yields remains intact.”

The yield on the two-year gilt slid 46 basis points in the week to 1.27 percent by 3 p.m. in London. It slipped to 1.23 percent on Dec. 18, the lowest level since at least January 1992, when Bloomberg began collating the data. The price of the 4.75 percent security due June 2010 gained 0.58, or 5.8 pounds per 1,000-pound ($1,496) face amount, to 105.01.

The yield on the 10-year security dropped 44 basis points this week to 3.16 percent, its biggest five-day decline in 16 years. Bond yields move inversely to prices.

Stamenkovic favors longer-dated gilts, predicting the yield on the 10-year security will fall to 3 percent in coming weeks.

Rate Futures

Interest-rate futures showed traders raised bets policy makers will reduce borrowing costs, with the implied yield on the March short-sterling three-month contract slipping 25 basis points in the week to 1.93 percent yesterday.

The Bank of England reduced the base rate to 2 percent on Dec. 4, down from 5.5 percent at the start of the year. The European Central Bank pared its benchmark to 2.50 percent on the same day.

Policy makers in Japan lowered the benchmark rate to 0.1 percent today after the Fed cut interest rates on Dec. 16 to a range of zero to 0.25 percent, and said it “will employ all available tools” and keep borrowing costs low for “some time.”

The pound slipped for a third week against the euro, after dropping to 95.57 pence on Dec. 18, the weakest since the common currency’s debut in 1999. It was at 93.34 pence yesterday, from 89.48 pence a week ago. It was also at $1.4910, from $1.4944.

With Britain’s economy in recession for the first time in 17 years and institutions reluctant to lend because of the global financial crisis, the Bank of England pared its benchmark rate to the lowest level in more than five decades.

ECB President Jean-Claude Trichet said there is a limit to how far the bank can cut rates and signaled it may pause in January, according to comments published on Dec. 16.

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

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France Telecom Sends Ship to Fix Severed Mediterranean Cables

By Heather Smith

Dec. 20 (Bloomberg) -- France Telecom SA, Europe’s third- largest telephone company, sent a maintenance ship to repair three severed undersea cables connecting Middle East, Europe and America under the Mediterranean Sea.

“The Raymond Croze ship left early this morning, between 2:00 and 3:00 a.m.,” France Telecom spokesman Louis-Michel Aymard said in a telephone interview today.

The cables, which run from Alexandria in northern Egypt to Sicily in southern Italy, carry more than 75 percent of traffic between the three regions. France Telecom is using secondary routes for data traffic from Europe to the Middle East and Asia, reducing the impact for customers, Aymard said.

The maintenance ship, carrying 20 kilometers (12.4 miles) of cable, is expected to arrive at the site of the damage on the morning of Dec. 22, and should be able to begin work immediately, Aymard said.

The SMW4 cable, also known as SEA-ME-WE 4, or South East Asia-Middle East-Western Europe 4 cable network, connects 12 countries: Pakistan, Indonesia, Singapore, Malaysia, Bangladesh, India, Sri Lanka, United Arab Emirates, Saudi Arabia, Egypt, Italy and France.

That cable is expected to be operational by Dec. 25, France Telecom said in a statement on its Web site. A second cable, SEA-ME-WE3, should be repaired by Dec. 31, and service should return to normal by the New Year.

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

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Mexico’s Crime Fight Key to Fueling Recovery, Messmacher Says

By Andres R. Martinez

Dec. 20 (Bloomberg) -- Mexico’s success in battling heavily armed crime syndicates will define the pace and strength of the country’s recovery from the global economic crisis, the finance ministry’s chief economist said.

Unless Mexico gets its organized crime violence under control, the country will continue to lose 1 percentage point from its annual growth rate, said the ministry’s Miguel Messmacher. Should the offensive against crime succeed, Mexico will attract new foreign investors and be better positioned than competitors to benefit from any U.S. stimulus spending.

“Once we have a turnaround in the global economic cycle, we should actually end up with higher levels of foreign direct investment,” Messmacher said in an interview yesterday in Washington, where he and Mexico’s attorney general and foreign minister met with U.S. counterparts on crime-fighting strategy.

Mexico is betting its beefed-up efforts to combat organized crime with U.S. assistance will yield its first results about the same time the worst financial crisis since the Great Depression comes to an end, said Attorney General Eduardo Medina Mora. More than 5,100 drug-related killings this year, double from a year earlier, signals that crime groups are intensifying combat over a shrinking drug market and weakening, Medina Mora said.

The government has confiscated more than 29,000 weapons this year, about 16,000 of them assault rifles brought in from the U.S., arms more powerful than anything the police carry, Medina Mora said.

Not Peaked

“We have not reached a peak yet,” Medina Mora said.

Investment by foreign companies in Mexico may fall 22 percent to $18 billion this year from $23.2 billion last year, the government said this month.

While most of the decline stems from the financial crisis, an organized crime spree of mass killings and beheadings across the country has taken a toll on investment in the 10.5-trillion peso ($783.9 billion) economy, Messmacher said.

The Economy Ministry forecast growth of 1.5 to 1.8 percent next year, while a central bank survey of analysts reported a median estimate of 0.38 percent. Citigroup Inc. revised its forecast to say Mexico’s economy will shrink 0.2 percent next year.

Obama’s Stimulus

Messmacher said the government is waiting to see the size of President-elect Barack Obama’s stimulus plan before making new estimates for next year’s growth. A “substantial” plan could put Mexico, which sells 80 percent of its exports to the U.S., ahead of its emerging market competitors in recovering from a slowdown, he said. Success in the crime war would allow Mexico to bounce back faster and more robustly, Messmacher said.

So far, the U.S. has released $197 million of the $1.4 billion it pledged as part of the Merida Initiative to help fight drug trafficking violence in Mexico and Central America. The aid has come in the form of new equipment, drug-sniffing dogs and helping set up programs to root out corruption. The U.S. Defense Department will provide helicopters and other aircraft as part of the initiative.

“It is more significant because of what it represents politically: the concept of assumed responsibility,” said Foreign Minister Patricia Espinosa during the interview in Washington.

Mexican cartels make more than $14.8 billion a year from selling marijuana, cocaine, heroine and amphetamines to U.S. drug users, according to White House figures. The country supplies about 90 percent of the cocaine used in the U.S.

The next meeting to discuss the Merida Initiative may take place in Mexico next year, according to a joint statement issued by the U.S. State Department yesterday.

To contact the reporter on this story: Andres R. Martinez in Mexico City at amartinez28@bloomberg.net

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Reliance Raises 290 Billion Rupees in Third Quarter, Mint Says

By Subramaniam Sharma

Dec. 20 (Bloomberg) -- Reliance Industries Ltd. raised about 290 billion rupees ($6 billion) in the quarter ending Dec. 31, the Mint reported, without saying where it got the information.

The funds include contributions by the company’s main founder and money raised through debt, the newspaper said. Reliance may use the cash for projects, acquisitions or to make up for treasury losses incurred from trading in crude oil futures, the report said, citing six analysts it didn’t identify.

Paresh Chaudhry, a spokesman at Reliance Industries, didn’t immediately respond to an e-mail and messages left on his mobile phone.

Reliance, which runs the world’s sixth-biggest oil refinery, said last month it’s about to start the new refinery that will almost double its capacity. The company had reported profit growth in the three months to Sept. 30 at the slowest pace in at least 10 quarters after earnings from processing crude oil fell.

Shares of Reliance Industries have declined 53 percent this year, compared with the 50 percent drop in the benchmark Sensitive index of the Bombay Stock Exchange.

In October, Mukesh Ambani paid 168.2 billion rupees to buy shares in Reliance, converting 120 million warrants he was allotted in February 2007.

Edelweiss Capital Ltd. and JPMorgan Chase & Co. have said they arranged about 30 billion rupees for Reliance this month, Mint reported. And ICICI Bank Ltd. and Axis Bank Ltd. separately raised 10 billion rupees each for Reliance, the newspaper reported, citing analysts it didn’t name.

Refinery Expansion

Ambani’s Reliance Petroleum Ltd. unit is building an export-oriented 580,000 barrel-a-day refinery adjacent to the existing 660,000-barrrel-a-day plant owned by Reliance Industries. The units will form the world’s largest refining complex, according to Reliance.

Reliance Industries in September said it aims to supply more than 40 percent of India’s oil and gas requirements in about 18 months.

Ambani is investing $5.2 billion to develop the Krishna- Godavari basin, the field that’s expected to more than double India’s gas output. Asia’s third-biggest economy imports 70 percent of its energy needs and doesn’t produce enough natural gas to meet demand from power and fertilizer makers.

The company will use the money to pay for exploration and production and future projects, the newspaper said, citing two company executives it didn’t identify. It cited one of them confirming the amount of money raised during the quarter.

To contact the reporter on this story: Subramaniam Sharma in New Delhi at ssharma@bloomberg.net.

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State Bank of India Lowers Interest Rates on Loans, Deposits

By Sumit Sharma and Subramaniam Sharma

Dec. 20 (Bloomberg) -- State Bank of India, the nation’s biggest, announced a cut in interest rates on loans and deposits, following previous reductions after the central bank lowered its benchmark measure to boost sagging economic growth.

The bank, 59 percent government-owned, cut the prime lending rate, or that at which it gives money to top customers, by 75 basis points to 12.25 percent from 13 percent starting Jan. 1, it said in an e-mailed release today. It lowered deposit rates by 25 to 100 basis points across various maturities effective Jan. 1.

State Bank of India and other banks have cut rates after the central bank lowered a key interest rate three times since October to 6.5 percent. Interest rates are headed down and the cost of borrowing bulk deposits has fallen by 200 basis points over the past two weeks, Chanda Kochhar, chief executive-designate of ICICI Bank Ltd., said yesterday.

Housing Development Finance Corp., India’s biggest home mortgage provider, yesterday lowered the rate it charges for all loans and deposits by 50 basis points. The Mumbai-based finance company will charge 10.25 percent for loans of up to 2 million rupees ($42,328) effective Dec. 22. The rate on loans of more than 2 million rupees was reduced to 11.25 percent.

The reduction is for loans under the floating-rate plan and is applicable for both existing and new customers, Housing Development said. Under the floating plan, rates are raised or lowered during the term of a loan as costs rise or fall.

“The recent cuts in policy rates by the RBI have created adequate liquidity in the banking system, which had a positive impact on the cost of funds,” Housing Development said. “Further, the sharp fall in inflation is an indication that interest rates are likely to have a downward bias.”

Inflation Slows

India’s inflation rate has dropped to the lowest since early March as demand slowed amid the global economic meltdown and a drop in crude oil costs led the government to cut retail fuel prices. Wholesale prices increased 6.84 percent in the week to Dec. 6 from a year earlier after gaining 8 percent the previous week, the commerce ministry said in New Delhi Dec. 18.

State-run banks said earlier this week that they plan to offer home loans of up to 500,000 rupees at 8.5 percent. The rate will be limited to 9.25 percent for borrowers seeking loans of 500,000 rupees to 2 million rupees for a five-year term.

Slowing inflation is prompting central banks from the U.S. to Malaysia to cut interest rates as global economies slump amid the worst financial crisis since the Great Depression.

Growth in Asia’s third-largest economy may slow to 7 percent in the year ending March 31 from 9 percent or more annually in the previous three years as the global slump hurts exports, according to the government. India’s industrial production fell 0.4 percent in October, the first decline in 15 years, and exports plunged 12 percent.

To contact the reporter on this story: Sumit Sharma in Mumbai at sumitsharma@bloomberg.net; Subramaniam Sharma in New Delhi at ssharma@bloomberg.net.

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India Central Bank May Extend Rate Cuts Amid Slowing Inflation

By Kartik Goyal

Dec. 20 (Bloomberg) -- India's central bank has scope to extend the steepest set of interest-rate cuts since 2000 after inflation slowed to a nine-month low, economists said.

The country's benchmark 10-year bonds yesterday completed the biggest weekly gain in at least a decade as investors speculated the central bank will add to the three interest-rate cuts of the past two months. A report this week showed inflation slowed more than economists expected, to 6.84 percent in the first week of December.

Easing inflation may alleviate the central bank's concern earlier this week that faster than ``acceptable'' price gains have made monetary-policy management more complex amid slowing growth. The Reserve Bank of India's actions should have been ``more aggressive'' to counter the global recession, according to Arvind Virmani, the finance ministry's chief economic adviser.

``Inflation is no longer a concern now and that gives the central bank huge leeway to cut borrowing costs,'' said Sonal Varma, an economist at Nomura International Plc in Mumbai. ``Inflation has gone below the central bank's year-end target for the first time this year, softening its worries over prices.''

Bonds rallied after the Dec. 18 inflation report. The yield on the 8.24 percent note due April 2018 dropped 66 basis points this week to 5.56 percent in Mumbai, according to the central bank's trading system. The Reserve Bank hasn't commented on the latest inflation data.

`Aggressive Cuts'

Slowing inflation is prompting central banks from the U.S. to Malaysia to cut interest rates as global economies slump amid the worst financial crisis since the Great Depression.

The Philippine central bank on Dec. 18 cut its benchmark interest rate to 5.5 percent. The U.S. Federal Reserve lowered its main rate to as low as zero on Dec. 16, and the Bank of Japan reduced its benchmark to 0.1 percent yesterday.

``The key meaningful policy response to the worsening economic situation will be aggressive policy rate cuts,'' said Rajeev Malik, regional economist at Macquarie Group Ltd. in Singapore. ``The mother of all monetary easing will continue to play on in India.''

Growth in Asia's third-largest economy may slow to 7 percent in the year ending March 31 from 9 percent or more annually in the previous three years as the global slump hurts exports, according to the government. India's industrial production fell 0.4 percent in October, the first decline in 15 years, and exports plunged 12 percent.

'Difficult Year'

``This year is difficult,'' Palaniappan Chidambaram, who was India's finance minister until Dec. 1, said this week. The economy expanded at the slowest pace since 2004 in the three months to Sept. 30. Chidambaram is currently the home minister.

To revive consumer demand and lending, the Reserve Bank on Dec. 6 cut its benchmark repurchase rate to 6.5 percent from 7.5 percent, the third reduction since Oct. 20. The following day, the government announced a $4 billion stimulus package to bolster spending, including lower taxes on consumer goods like cars, television screens and motorbikes.

India is working on more measures to boost economic growth and may announce a second installment of the stimulus package soon, Trade Minister Kamal Nath said last week.

``The central bank is likely to continue with further monetary easing on an ongoing basis,'' said Siddhartha Sanyal, an economist with Edelweiss Capital Ltd. in Mumbai, who expects prices in India to fall next year on cheaper commodities.

Inflation eased in the week to Dec. 6 after a drop in crude oil costs led the government to cut retail fuel prices, helping cool price-gains further from a 16-year high of 12.91 percent in August. Crude oil has tumbled more than 70 percent from a record $147.27 on July 11.

The central bank will review its inflation forecast in the Jan. 27 monetary-policy meeting, Governor Subbarao said Dec. 11, signaling he may lower an earlier estimate of 7 percent for the current fiscal year.

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

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Volkswagen Wants EU10 Billion in State Guarantees, Spiegel Says

By Jeremy van Loon

Dec. 20 (Bloomberg) -- Volkswagen AG has applied for 10 billion euros ($14 billion) in credit guarantees from the German government to ensure the carmaker has access to cheap financing, Der Spiegel said, without saying where it got the information.

The guarantees would allow Volkswagen to offer customers cheap purchasing and leasing conditions, the magazine reported. Volkswagen’s move may prompt Daimler AG and Bayerische Motoren Werke AG to also apply for the funds, according to Der Spiegel.

To contact the reporter on this story: Jeremy van Loon in Berlin at jvanloon@bloomberg.net

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Eutelsat Sees ‘Frightening’ Cost as Delays Slow Rocket Launches

By Rudy Ruitenberg

Dec. 20 (Bloomberg) -- Eutelsat Communications Chief Executive Officer Giuliano Berretta will watch a $600 million investment blast into space tonight while sipping champagne.

Eutelsat plans to send two broadcast satellites into orbit on the same rocket for the first time, as a dearth of launches confronts satellite operators with price increases and delays.

The cost increase for a launch “is frightening, you would faint,” Berretta said at an industry conference in Paris in September. “There is a problem of access to space.”

SES SA, Intelsat Ltd. and Paris-based Eutelsat, the top commercial satellite operators, mainly rely on three rocket operators to lift equipment into geostationary orbits. Rocket mishaps in past years have caused a backlog of launches, resulting in rising costs and lost sales for operators, as well as delays for broadcasters including Dish Network Corp.

“They’re justified in complaining of the lack of access to space,” said Marco Caceres, director of space studies at Teal Group Corp. “A lot of the major companies are waiting in line. It delays the satellites by months if not years.”

Eutelsat needs additional capacity to satisfy demand from customers including News Corp.’s Sky Italia SpA. Eutelsat’s Hot Bird 9 broadcast satellite has was completed July and been grounded since then amid a shortage of available launches. The delay means Eutelsat is using 96 percent of its capacity, according to deputy Managing Director Jean-Paul Brillaud.

Pricey Rockets

Prices for a Proton launch from U.S.-Russian partnership International Launch Services Inc., or ILS, have risen to about $120 million from $50 million four years ago, according to Eutelsat.

Fees for Arianespace’s Ariane 5 rocket have also risen, Brillaud said in an interview. Arianespace needs to generate sales of about $220 million per launch, or $110 million per satellite, CEO Jean-Yves le Gall said.

“It was inevitable that launch prices would rise, as compared with the below-cost pricing of the 2003-2004 timeframe,” ILS President Frank McKenna said in an e-mailed reply to questions. “Those prices just weren’t sustainable.”

McKenna said prices have increased because of currency exchange moves and rising commodity prices.

Berretta has said fiscal second-quarter growth “will not be particularly good” because Eutelsat can’t add customers as a result of the Hot Bird 9 delay. Eutelsat forecasts annual average sales growth of 6 percent until 2011, which hinges on seven satellites being sent up by the end of 2010.

“That Hot Bird 9 should have been launched in October,” said Kristof Lybaert, a Dexia Securities analyst. “The launch is the largest risk factor. If you lose a satellite you’re stuck with an enormous issue of opportunity costs, missed revenue.”

Dual Launch

Hot Bird 9 and the W2M satellite are lifting off on the same Ariane 5 rocket today from the Arianespace center in French Guiana, the first dual launch by one of the big three operators.

“If you launch the two Eutelsats on separate missions, you balance the risk,” Caceres said. “But if you have to wait an additional six months to get the second satellite in space, it’s probably worth the little extra risk.”

The explosion of a Sea Launch LP rocket on its offshore launch platform in January 2007 and mishaps with Proton rockets in Kazakhstan in September 2007 and March 2008 led to a backlog of satellite launches. Sea Launch’s first mission following the explosion took place in January 2008.

Dish, the second-largest U.S. satellite-TV provider, had to delay high-definition TV services after a botched Proton launch in March left an SES satellite in a lower orbit than planned.

“There is not enough spare capacity to make up for a failed launch,” said Antonio Abad, the chief technology officer of Spanish satellite operator Hispasat.

Military Priority

The U.S. Department of Defense is the largest operator of geostationary satellites, competing with commercial orbiters for launch spots, said Rachel Villain, a consultant at Euroconsult.

“The most privileged client is the U.S. government, so efforts are made to first serve that government,” Villain said.

The U.S. Atlas V and Delta IV rockets, operated by a joint venture between Boeing Co. and Lockheed Martin Corp., have been mostly unavailable to commercial clients because of U.S. military and government needs for launches, according to Berretta.

SES, whose satellite blew up with the Sea Launch rocket in January last year, signed a multilaunch agreement with Ariane and ILS in June 2007.

“We have got some security now over pricing,” said Mark Roberts, head of investor relations at SES. “Those people who haven’t taken the step to secure launches in advance, they clearly have a problem.”

Eutelsat’s Brillaud said the company has booked launches with Arianespace, ILS and Sea Launch, and doesn’t plan to sign a multilaunch deal.

Chinese Challenger

The operators can’t use China’s Long March rockets because most of their satellites contain U.S.-manufactured components subject to export restrictions.

Thales Alenia Space has been building satellites that contain no U.S. components.

“It’s only a matter of time before the Chinese start launching some commercial satellites for the West,” Caceres said. “If prices keep going up in the West, Long March satellites may start looking attractive.”

Intelsat CEO David McGlade said in September he considered buying launches with Chinese rockets.

McKenna at ILS said there will be “limited availability” in 2009 and 2010. There is enough capacity for the next five years, he said.

“They’ll make a ton of money once a satellite is in orbit, so they’ll earn back the launch price quickly,” Teal’s Caceres said. “Their primary goal is to get the satellite up there.”

Eutelsat will toast a successful blastoff with champagne at its launch party in Paris tonight, spokeswoman Vanessa O’Connor said.

To contact the reporter on this story: Rudy Ruitenberg in Paris at rruitenberg@bloomberg.net.

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European Bonds Post Biggest Weekly Advance Since 1992 on Growth

By Anchalee Worrachate

Dec. 20 (Bloomberg) -- European bonds posted their biggest weekly gain in 16 years after a government report showed German producer prices fell last month by the most since records began in 1949 as the economy slipped into a recession.

Gains sent the yield on German two-year notes to a record low. The 10-year bund closed below 3 percent for the first time since Bloomberg records began in 1989 on speculation the European Central Bank will cut borrowing costs to spur growth and head off deflation. ECB policy makers lowered their main rate by 75 basis points to 2.50 percent on Dec. 4.

“It’s definitely not paying investors much to fight the bond rally that we’ve seen over the past three-four months,” said Laurent Fransolet, head of European fixed-income strategy at Barclays Capital in London. “Central banks have been cutting interest rates and will continue to cut them aggressively.”

The two-year yield fell three basis points to 1.825 percent by 6 p.m. in London yesterday, the lowest level since at least 1990, when Bloomberg records began. The 2.25 percent security due December 2010 rose 0.04, or 40 euro cents per 1,000-euro ($1,392) face amount, to 100.81. Yields are down 42 basis points from last week, the most since September 1992.

The yield on the 10-year bund, Europe’s benchmark government security, climbed three basis points to 3 percent, leaving it 29 basis points lower in the week, also the most since September 1992. Yields move inversely to bond prices. Fransolet recommended that investors go long 10-year German bonds, or bet that they will rise in price.

Producer prices in Europe’s largest economy slipped 1.5 percent from October when they were unchanged, the Federal Statistics Office said yesterday.

This Year’s Returns

German bonds returned almost 12 percent this year, compared with 11 percent for gilts and 15 percent for U.S. Treasuries, according to Merrill Lynch & Co.’s German Federal Government, U.K. Gilts and U.S. Treasury Master indexes. By comparison, the Dow Jones Stoxx 600 Index slid 46 percent. Oil fell 63 percent.

The decline in producer prices added to signs inflation in Europe’s largest economy is waning, giving the ECB more scope to reduce interest rates. German consumer-price growth slowed to 1.4 percent in November, from 2.5 percent, falling below the ECB’s price stability threshold for the first time since February 2007, a government report Dec. 17 showed.

Falling prices “will put upward pressure on real interest rates,” said Frederik Ducrozet, an economist in Paris at Credit Agricole SA. “In order to keep real interest rates close to zero and monetary conditions accommodative, the ECB could bring its rate down to 1.50 percent in the second quarter.” Real interest rates subtract the effect of inflation.

Bank of Japan

The world’s biggest central banks are lowering borrowing costs to combat the worst economic slump since the Great Depression. The Bank of Japan cut its benchmark rate to 0.1 percent today and said it would buy corporate debt as a deepening recession chokes off funding for businesses. The Federal Reserve lowered its target rate as low as zero on Dec. 16 and pledged to buy unlimited quantities of securities.

Japanese government bonds outperformed their European counterparts. The yield difference, or spread, between 10-year Japanese bonds and German bunds widened to 174 basis points yesterday, from 170 basis points on Dec. 18.

Demand for the safest assets was also fueled by declines in stocks. The Dow Jones Euro Stoxx 50 Index, a benchmark for the region, fell for a second week in three.

Risk Appetite

Gains in bonds may be limited as the VIX, an indicator of market volatility, fell to the lowest level in 2 1/2 months after the Fed’s rate cut helped calm equity-market swings, according to BNP Paribas SA. The VIX, as the Chicago Board Options Exchange Volatility Index is known, fell to 47.34, from 49.84 yesterday and 54.28 a week ago. The index measures the cost of using options as insurance against declines in the S&P 500 and typically falls as stocks rise.

“The rebound of risk appetite could prevent government bonds from rallying further near term,” BNP wrote in a note to clients today. “The VIX is back to the bottom of past 2 months’ range. A lasting break through the 50 area would be positive sign for normalization trades in early 2009.”

Some technical indicators also signaled gains in bonds this week may be overdone. The German bund’s 14-day relative strength index, a comparison of the magnitude of gains and losses, was at 71.2, above the 70 level that signals a change in direction may be imminent.

Governments around the world are raising borrowing to fund bailouts and revive their economies. France said yesterday it plans to sell 145 billion euros of medium- and long-dated bonds next year. Germany said Dec. 18 it will issue 323 billion euros of debt next year, the most since the end of World War II. The issuance will comprise 147 billion euros in bonds and 174 billion euros of shorter-dated securities.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

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European Stocks Fall This Week; BNP Paribas, RBS, Xstrata Drop

By Daniela Silberstein

Dec. 20 (Bloomberg) -- European stocks fell this past week, led by financial companies and commodity producers on concern corporate earnings may deteriorate further as the global economic slowdown deepens.

BNP Paribas SA tumbled 31 percent after saying losses at its investment bank since October more than wiped out the division’s profit this year. Royal Bank of Scotland Group Plc lost 23 percent after disclosing investments with Bernard Madoff, the investment adviser who was arrested in a potential $50 billion fraud. BG Group Plc and Xstrata Plc both sank more than 3 percent as crude oil plunged below $36 a barrel and metal prices fell.

The Dow Jones Stoxx 600 Index retreated 0.9 percent this week to 196.43, bringing its decline this year to 46 percent as credit losses and writedowns at the world’s largest banks surpassed $1 trillion and the U.S., Europe and Japan entered the first simultaneous recessions since World War II.

“The economic slowdown is reflected in the price of oil,” said Chicuong Dang, an analyst at KBL Richelieu Gestion in Paris, which has about $5.6 billion under management. “It shows that the market context is very difficult. We have to expect further downgrades of ratings and profit warnings. There’s a lot of volatility to come.”

The Stoxx 600 dropped every day this week except Dec. 16. The U.S. Federal Reserve this week cut its benchmark interest rate to as low as zero for the first time and pledged to use “all available tools” to spur economic growth. President-elect Barack Obama may ask Congress to approve a stimulus plan of around $850 billion.

National Benchmarks

The European Central Bank also cut the rate it pays institutions to deposit money with it overnight in an effort to jolt banks into lending more to each other.

National benchmark indexes rose in 10 out of 18 western European markets. Germany’s DAX gained 0.7 percent as Daimler AG advanced 8.3 percent. The U.K.’s FTSE 100 increased 0.2 percent. France’s CAC 40 added 0.4 percent.

The Dow Jones Europe Stoxx Banks Index fell 6.5 percent in the week, the sharpest retreat among 19 industry groups.

BNP, France’s largest bank, plunged 31 percent. The corporate and investment division had a 710 million-euro ($981 million) pretax loss in the first 11 months of 2008, and may cut about 800 jobs, or 5 percent of the unit’s staff.

Separately, a Belgian court froze the lender’s plans to buy Fortis assets and the bank said it has as much as 350 million euros at risk from investments with Madoff.

Fortis

Fortis, the insurer that was once Belgium’s largest financial services company, rallied 22 percent in Brussels.

HSBC Holdings Plc slipped 16 percent. CLSA Asia-Pacific Markets said Europe’s largest bank may seek to raise about $14 billion as increasing bad-loan provisions erode profits. HSBC also has $1 billion at risk after providing financing to funds that invested with Madoff.

Royal Bank of Scotland declined 23 percent as the U.K.’s second-largest bank said it may lose as much as 400 million pounds ($601 million) on Madoff investments.

HSBC and RBS were also among 12 U.S. and European financial firms whose ratings or outlooks were cut by Standard & Poor’s, which cited increased risks for the whole banking industry.

Basic-resources companies and oil and gas companies were the second and third-worst performers in the Stoxx 600 this week, losing 3.9 percent and 3.6 percent respectively.

Crude oil fell 24 percent this week as a deepening global recession saps demand, countering efforts by OPEC to boost prices.

BG Group

BG Group, the third-biggest U.K. oil and gas producer, lost 3.4 percent. Galp Energia SGPS SA, Portugal’s largest oil and gas company, tumbled 5.5 percent.

Copper, lead, nickel and tin fell in London. Copper may decline next week as demand from the housing industry slumps in the U.S., the second-biggest buyer of the metal used in wires and pipes, a Bloomberg News survey showed.

Xstrata, Europe’s largest zinc producer, slid 8.6 percent. Antofagasta Plc, the copper producer controlled by Chile’s Luksic family, retreated 7.6 percent. Anglo American Plc, the world’s fourth-largest diversified mining company, lost 3.2 percent.

UBS AG cut its recommendation for the three companies to “neutral” from “buy.”

Carrefour SA sank 4.1 percent. The retailer reduced its full-year sales and profit projections for a second time this year. Kesa Electricals Plc, the owner of Darty electronics stores in France and Comet outlets in the U.K., slipped 6.4 percent after reporting a first-half loss as sales stagnated.

Inchcape

Inchcape Plc, a global operator of car dealerships, plunged 35 percent after predicting that earnings next year will be “significantly” lower than previously forecast as economies slow and customers have difficulty obtaining loans.

Celesio AG, Europe’s biggest drug wholesaler, dropped 13 percent after an adviser to the European Union’s highest court cast doubt on the company’s plans to build a pharmacy chain in Germany.

Daimler, the world’s largest truckmaker, added 8.3 percent. U.S. President George W. Bush announced $13.4 billion in initial government loans for General Motors Corp. and Chrysler LLC.

Siemens AG rose 9.8 percent. Europe’s largest engineering company made more than 20 percent of its sales in the U.S. last year. Unilever Plc increased 8.6 percent in London. The world’s second-largest consumer products company relied on the Americas for about a third of its sales last year.

To contact the reporter on this story: Daniela Silberstein in Zurich at dsilberstei2@bloomberg.net.

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Zloty Declines Against Euro for Third Week as Economy Slows

By Yon Pulkrabek

Dec. 20 (Bloomberg) -- The Polish zloty dropped for a third week against the euro as investors bet the central bank will cut interest rates further to cushion the economy from the biggest slowdown in almost a decade.

The currency snapped five days of losses yesterday after dropping to a more-than 3 1/2-year low on Dec. 18, when a report showed industrial output shrank 13.1 percent in November, the biggest contraction in more than 16 years. The zloty gained as its relative strength index against the euro signaled traders judged its decline excessive.

The zloty was at 4.0861 per euro late yesterday in Warsaw, from 4.1104 the previous day, paring the weekly drop to 3.5 percent. The currency, which slid to 4.1887 on Dec. 18, its lowest level since May 2005, has weakened 12 percent this year.

“The Polish currency weakened in expectation of a rate decrease,” analysts including Jan Bures and Jan Cermak at Ceskoslovenska Obchodni Banka AS, the largest Czech lender, wrote in a note today.

Policy makers will cut the main interest rate by 50 basis points to 5.25 percent when they meet Dec. 23, according to a median forecast of 15 economists in a Bloomberg News survey.

The Monetary Policy Council lowered the rate by 25 basis points last month as inflation pressure eased and economic growth slowed. That was the first interest rate cut since February 2006, and policy makers including Jan Czekaj, Stanislaw Owsiak and Marian Noga have said further easing is in the cards.

Polish central bank Governor Slawomir Skrzypek said yesterday he may have to lower his forecast for economic growth next year.

Relative-Strength Index

The RSI for the zloty against the euro fell below 30 on Dec. 18, indicating an imminent rebound by the currency. “A lot of negativity has been priced into the zloty over the past weeks,” analysts led by Elisabeth Gruie and Shahin Vallee at BNP Paribas SA in London wrote in a note today. “The current level has been deemed misaligned with fundamentals.”

Elsewhere, the Czech koruna fell 0.5 percent to 26.401 per euro, dropping this week to 1.2 percent. The country’s central bank reduced its two-week repurchase rate by half a percentage point to 2.25 percent on Dec. 17.

The Turkish lira declined 1.3 percent to 1.5284 per dollar, paring a weekly gain to 2 percent, after the nation’s central bank lowered its benchmark rate by 1.25 percent to 15 percent, the biggest cut since December 2004.

Hungary’s forint rose 0.7 percent to 264.50 per euro, gaining 0.8 percent in the past five days. The Romanian leu advanced 0.6 percent to 3.9297 per euro, climbing 0.3 percent since Dec. 12.

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

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China Picks 10 Firms for Overseas Acquisitions, Herald Reports

By Tian Ying

Dec. 20 (Bloomberg) -- China’s government has selected 10 centrally owned companies to merge and acquire foreign commodity companies to help keep commodity prices stable, the 21st Century Business Herald reported, citing a state asset management official.

The government should also roll out policies to support state-owned companies’ efforts in acquiring commodity-related assets and relax limits on taking over overseas companies, the newspaper said, citing Wang Xiaoqi, head of the Bureau of Planning and Development of the state-owned Assets Supervision and Administration Commission of the State Council, which overseas 142 centrally owned companies.

The government can also consider capital injections into major companies and provide subsidies for loan interest for overseas acquisition of key mineral resources, the report cited Wang as saying.

To contact the reporter on this story: Tian Ying in Beijing on ytian@bloomberg.net

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Thousands of Guangdong Companies Close as China’s Exports Stall

By Tian Ying

Dec. 20 (Bloomberg) -- Slowing exports forced closure of 8,513 companies in China’s southern Guangdong province in October, more than in the first three quarters of 2008, state-owned Xinhua News Agency reported.

A total 15,661 companies closed in the first 10 months of the year as exports by privately owned firms declined 35 percent from a year earlier, Xinhua said. Growth slowed at 29 of 37 industries tracked, with electric machinery, textiles and automobiles leading declines, the report said.

China’s November exports fell 2.2 percent from a year earlier, the first decline in seven years, as a world recession slashed demand. Guangdong is one of the nation’s largest export bases.

To contact the reporter on this story: Tian Ying in Beijing on ytian@bloomberg.net

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Aboitiz, Glomac, Posco, Rio Tinto: Asia Ex-Japan Equity Preview

By Berni Moestafa

Dec. 20 (Bloomberg) -- The following companies may have unusual price changes in Asia trading, excluding Japan. Stock symbols are in parentheses, and share prices are from the previous close, unless noted otherwise.

Aboitiz Power Corp. (AP PM): The Philippine power producer and distributor said it raised funds for acquisitions, borrowing 3.89 billion pesos or 9.3 percent more than initially planned. Aboitiz Power was unchanged at 3.80 pesos.

Benguet Corp. (BC PM): The fifth-largest Philippine mining company by market value said it won a bidding contest to reopen a Philippine copper and gold mine that’s been shut for more than two decades. The stock fell 15 centavos, or 3 percent, to 4.85 pesos on Dec. 17.

PT Bumi Resources (BUMI IJ): Valco Corp., an Indonesian energy company, plans to make a rival bid to buy PT Bakrie & Brothers’ debt and take shares of Bumi that were pledged as collateral. Bumi, Asia’s biggest exporter of power-station coal, declined 20 rupiah, or 2.3 percent, to 870.

Glomac Bhd. (GLMC MK): The Malaysian developer and builder said profit for the fiscal second quarter, which ended Oct. 31, fell 25 percent to 7.7 million ringgit ($2.2 million) from a year earlier. Glomac was unchanged at 49 sen.

Guangdong Nan Yue Logistics Co. (3399 HK): The logistics company will buy a real estate company from its parent for 92.96 million yuan ($14 million) in cash. Guangdong added 14 cents, or 9.6 percent, to HK$1.60.

Hon Hai Precision Industry Co. (2317 TT): The world’s largest contract electronics maker is cutting some jobs globally amid the global recession, founder and Chairman Terry Gou said today, without saying how many workers will be fired. Hon Hai gained 50 cents, or 0.7 percent, to NT$68.5.

Incitec Pivot Ltd. (IPL AU): Australia’s largest fertilizer maker said it won’t reduce output as its global peers are doing. Incitec slid 10 cents, or 3.9 percent, to A$2.45.

Megaworld Corp. (MEG PM): The third-largest Philippine developer said it expects 1.4 billion pesos ($30 million) in sales from a 31-story apartment tower it’s building in the nation’s main financial district. The stock gained 1 centavo, or 1.4 percent, to 72 centavos.

Posco (005490 KS): Asia’s third-largest steelmaker will exchange 300 billion won ($232 million) of its shares for a stake in KB Financial Group Inc. Posco will swap about 770,000 shares for stock that Kookmin Bank, South Korea’s largest, holds in parent KB Financial, the Pohang, South Korea-based company said. Posco fell 4,500 won, or 1.2 percent, to 388,000.

Rio Tinto Group (RIO AU): The world’s third-biggest mining company said it may delay the development of its $1.5 billion nickel project in Indonesia. Rio will wait for new mining regulations to be implemented in about six months, said Omar Anwar, president director of Rio’s Indonesian unit. The parliament on Dec. 16 endorsed the new mining bill. Rio lost 99 cents, or 2.5 percent, to A$39.01.

SK Telecom Co.(017670 KS): South Korea’s biggest mobile- phone company named Jung Man Won, head of affiliate SK Networks Co., as its new chief executive officer. Jung, 56, will replace Kim Shin Bae, who will move to SK C&C Co. as vice-chairman as part of a management reshuffle, Seoul-based SK Telecom said. SK Telecom added 4,000 won, or 1.9 percent, to 218,000.

United Food Holdings Ltd. (UFH SP): The Linyi, Shandong- based meat-processing company, said it’s reducing losses by temporarily shutting its the processed-meats and fresh, chilled and frozen pork divisions. United Food was unchanged at 5 Singapore cents.

To contact the reporter on this story: Berni Moestafa in Jakarta at bmoestafa@bloomberg.net

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China Offers Taiwan Crisis Help, More Financial Ties

By James Peng and Richard Dobson

Dec. 20 (Bloomberg) -- China offered to help Taiwan cope with the deepening global financial crisis and proposed broader financial links at a forum that will set the stage for further government-level talks after a nine-year suspension.

China is ready to help Taiwan and the two sides should discuss a financial supervisory mechanism for banks, securities and insurance firms as well as a currency-clearance mechanism, Jia Qinglin, a Politburo member, said at a forum in Shanghai.

Officials of Taiwan’s ruling Kuomintang and their Chinese counterparts are meeting to hammer out a consensus on broadening financial ties as their economies face a worsening global recession. Taiwanese businessmen have already invested an estimated $150 billion in China and have been clamoring for Taiwan financial companies to be permitted to offer services to ease access to financing and capital.

“An agreement could enable us to upgrade our four securities representative offices in China to branches,” said, Lin Shau-dai, chairman of Polaris Securities Co., Taiwan’s largest online brokerage. “It might allow us to enter China’s futures and asset management businesses, which are still banned for the moment.”

Taiwanese banks and securities firms can only operate representative offices, which aren’t permitted to offer any financial services. A consensus reached at the two-day meeting will likely form the basis for the governments of both sides to sign a memorandum of understanding on financial ties in the first half of next year.

Direct Investment

“Signing an MOU will mean we can directly invest in mainland banks without needing to do so via a third location,” said Daniel Tsai, chairman of Taiwan’s second-largest financial services company Fubon Financial Holding Co. “We will actively seek acquisition targets in China.”

Fubon Bank (Hong Kong) Ltd., Fubon’s Hong Kong unit, rose the most in seven weeks yesterday as the party officials met in Shanghai. Fubon shares advanced 20 percent, the most since Nov. 3, to close at HK$2.44, while the benchmark Hang Seng index fell 2.4 percent.

In June, Fubon Bank agreed to buy a 20 percent stake in Xiamen City Commercial Bank for 230 million yuan ($34 million). It was the first such purchase since the island started letting lenders buy into mainland banks through third-country subsidiaries in March.

Thawing Relations

The forum comes amid a thaw in ties after Taiwan and China on Dec. 15 ended a six decade-ban on direct transport and postal links. The resumption of links may boost the island’s $380 billion economy, which is headed for its first recession in seven years.

Ties between Taipei and Beijing improved significantly since the KMT’s Ma Ying-jeou took office in May and dropped the pro-independence stance of his predecessor Chen Shui-bian.

“We should jointly cooperate in seeking a practical model for dealing with the financial tsunami,” KMT chairman Wu Poh- hsiung told the forum. “We have a concrete plan to support Taiwanese businessmen, who are facing increasing difficulties in access to financing.”

Both sides should also give access to participation in public construction projects to bring in capital and experience in management and technology, Wu said.

Complementary Ties

“We can now expect Taiwan and China to complement each other,” said Jason Chang, chairman of Taiwan-listed Advanced Semiconductor Engineering Inc., the world’s largest chip packaging and testing company. “We can unify China’s huge funds and market and Taiwan’s experience in liberalization and management talents.”

The forum is the fourth annual summit since Chinese President and Communist Party leader Hu Jintao in 2005 met former Kuomintang Chairman Lien Chan, ending more than 60 years of hostility between the two political parties.

The KMT’s Wu and Honorary Chairman Lien are leading a delegation of about 150 KMT officials, business executives and academics.

Beijing and Taipei held their first official talks since 1999 in June, when they reached a consensus on opening direct weekend charter flights and allowing mainland tourists to the island. Resumption of exchanges had been slow as both sides of the Taiwan Strait regarded each other with suspicion, even as almost 1 million Taiwanese already live and work in China.

Direct links had been banned since the end of a civil war in 1949, when Mao Zedong’s victorious communist forces took control of China’s government and drove Chiang Kai-shek’s Nationalist army to Taiwan. The Chinese government still regards Taiwan part of its territory and aims hundreds of missiles at the island to prevent it from declaring independence.

To contact the reporter on this story: James Peng in Hong Kong at jpeng7@bloomberg.net

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IMF Approves $76 Million Aid for Senegal to Combat High Prices

By Madelene Pearson

Dec. 20 (Bloomberg) -- The International Monetary Fund approved a one-year $75.6 million aid deal for Senegal to help the African nation offset higher food and energy prices.

The approval will allow Senegal to draw about $37.8 million from the IMF immediately, and an equal amount upon completion of the first review under an arrangement to help nations deal with external events that affect their budgets, the IMF said in a statement.

“The Senegalese economy is facing a difficult period,” Murilo Portugal, deputy managing director of the IMF’s executive board, said in the statement. “Economic growth has slowed significantly, as a result of government payment delays to the private sector and the effect on consumption of high food and energy prices.”

Senegal has clamped down on spending after it overspent its budget this year by an amount that may run into hundreds of millions of dollars, the IMF said in September after a visit to the country. Commodities from oil to wheat, rice and corn rose to records this year before later easing.

To contact the reporter on this story: Madelene Pearson in Melbourne on mpearson1@bloomberg.net

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