LNG Price Boom Seen as Japan Vies With China While Exxon’s Shipments Grow

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A liquefied natural gas (LNG) tanker is moored in Sodegaura City, Chiba Prefecture, Japan. Liquefied gas costs surged about 33 percent after Japan’s March 11 earthquake and tsunami and have since climbed toward $16 per million Btu. Photographer: Tomohiro Ohsumi/Bloomberg

Liquefied natural gas prices are surging to a three-year high as demand from Japan, China and India outpaces supply increases, boosting sales for producers from BG Group Plc (BG/) to Exxon Mobil Corp. (XOM)

Record Japanese imports to replace nuclear power after the Fukushima Dai-Ichi disaster, plus a 27-percent jump in China’s first-half purchases, may send prices to about $20 per million British thermal units this winter, up 71 percent from 2010 and the highest since 2008, according to data compiled by Bloomberg. The world’s spare production capacity shrank about 50 percent this year as consumption grew, and will continue to decline through 2014, Sanford C. Bernstein & Co. says.

Rising LNG prices are encouraging Exxon and BG, which got 27 percent of its operating profit from the fuel in the first half, to develop and transport more. That may spur North American exports by 2016 and help the world’s fastest-growing economies contain inflation from rising oil and coal costs.

“LNG demand will go up, there’s no other alternative,” said P.K. Jain, the New Delhi-based director of finance at GAIL India Ltd. (GAIL), the nation’s biggest gas distributor and a co-owner of Petronet LNG Ltd., the largest buyer. “Demand will rise in Asia as Japan increases LNG use after Fukushima and even in Europe, with countries moving away from nuclear, long-term demand for LNG may rise.”

More Optimistic

Demand for gas cooled to liquid and transported by ships may be making U.S. forecasters more optimistic about natural gas. Bulls outnumber bears by about six to one, a reversal from the one-to-two ratio a month ago, according to Bloomberg data. While gas futures on the New York Mercantile Exchange have slumped 14 percent this year to $3.801 per million British thermal units, LNG, which is not exchange-traded, has gained.

Liquefied gas costs surged about 33 percent after Japan’s March 11 earthquake and tsunami caused reactor meltdowns at Tokyo Electric Power Co.’s Fukushima plant, and have since climbed toward $16 per million Btu, according to Mark Greenwood, an analyst at Citigroup Inc. in Sydney. They may rise to $20 this winter, according to the median forecast in a Bloomberg News survey of eight analysts.

The country bought spot shipments at $15 per million Btu in July, according to Ministry of Finance data. Spot deliveries, typically from utilities facing emergency and weather-related needs, reached a 33-month high in June and July. The 10 regional power suppliers bought and consumed record amounts for a second month in August amid all-time low utilization rates at nuclear plants, the Federation of Electric Power Companies said.

Price Forecasts

“We see prices going to $20,” said Peter Buchanan, an economist at CIBC World Markets Inc. in Toronto. His forecasts for natural gas at Henry Hub in Erath, Louisiana, the benchmark for futures traded on the Nymex, were the second-most accurate after Bank of America Corp. for the eight quarters ended June 30, according to data compiled by Bloomberg.

Sixty percent of the 19 analyst forecasts compiled by Bloomberg on Sept. 9 were bullish on U.S. gas, while 13 percent were negative. That compares with 29 percent that were optimistic and 57 percent bearish a month earlier.

Global LNG demand grew 9 percent in the first half and 13 percent over the past 12 months, Bernstein Research said in an Aug. 29 report. Spare production capacity is likely to shrink to 26 million metric tons a year in 2011 and to 2 million by 2014, stoking prices and benefiting BG, Royal Dutch Shell Plc (RDSA), Total SA (FP) and PetroChina Co., according to the report.

‘Insufficient Supply’

“Given the underlying strength in demand from emerging markets and Japan, there is insufficient supply coming onto the market over the next three years which will lead to tighter spare capacity and higher prices,” Neil Beveridge, the Hong Kong-based senior analyst at Bernstein, said in an e-mail. “Asian customers will increasingly be competing with European customers, which will lead to higher gas prices outside of North America.”

Atomic power provided about 30 percent of the electricity in Japan, the world’s third-biggest economy, before March 11. About 76 percent of Japan’s 54 reactors are offline, with more scheduled to shut for maintenance. Demand is unlikely to ease anytime soon as Prime Minister Yoshihiko Noda, who replaced Naoto Kan as premier on Sept. 2, struggles to win public support for restarting reactors.

The Japanese government and Tokyo Electric Power Co. are expected to say tomorrow they plan to finish cooling reactor pressure vessels at the crippled Fukushima Dai-Ichi nuclear power plant by the end of this year, Tokyo Broadcasting System reported on its website.

German Decision

“The Japanese tsunami certainly did increase the demand quite dramatically for LNG imports into the region, which effectively tightened the global LNG market more quickly than most people had anticipated,” said Allison Nathan, a senior commodities economist at Goldman Sachs Group Inc. in New York. “We now see the global market as tight.”

Supplies have become scarcer partly because Germany decided on March 15 to close eight of its 17 atomic stations following Fukushima. Qatar, the world’s biggest LNG producer, said Sept. 5 it will shut three of seven production lines for maintenance through October.

Japan’s senior vice minister of trade and industry, Seishu Makino, asked U.S. Energy Secretary Steven Chu at a meeting in San Francisco last week to increase exports.

Cheniere Energy, the Houston-based Blackstone Group LP- backed owner of the Sabine Pass terminal in Louisiana, got approval to ship fuel to Japan in May. The Freeport terminal in Freeport, Texas, and the Lake Charles facility in Lake Charles, Louisiana, are also seeking clearance for exports, according to Akinobu Yoshikawa, deputy manager for Japan’s Petroleum and Natural Gas Division.

“The impact for our imports will be big,” Yoshikawa told reporters in Tokyo Sept. 14.

North American Exports

Before the tsunami, Japan used about 70 million tons of LNG a year. The demand will rise as much as 15 million tons, or 21 percent, in the 2011 fiscal year and as much as 20 million tons in 2012, the Institute of Energy Economics said in August.

North America may export about 5 billion cubic feet a day of LNG, or roughly the combined LNG export capacity of Nigeria and Algeria, globally by 2017 from projects that turn surplus gas from shale-rock formations to LNG for shipment to customers in Asia and Europe, according to the Eurasia Group, a New York- based consultant. That’s about half of the six proposed developments by companies including Cheniere in the U.S. Gulf Coast and British Columbia.

The U.S. may produce more than 12 trillion cubic feet of shale gas a year by 2020 in a “high-case scenario,” about a three-fold jump from last year’s level, as it boosts output by hydraulic fracturing, or fracking, of gas trapped in shale deposits, Gaffney, Cline & Associates, a unit of Baker Hughes Inc., the world’s third-largest oilfield-services provider, said in a presentation in Singapore on Sept. 12.

2020 Surplus

“In the high-case scenario, U.S. shale gas could provide an exportable surplus by 2020,” Stuart Traver, a consultant for the company in Singapore, said in the presentation. Shale gas accounted for approximately 20 percent of total U.S. production in 2010.

In fracking, producers force chemically treated water into underground shale wells to break up rock and let gas flow. About 84 trillion cubic feet of undiscovered, technically recoverable gas lie in the Marcellus Shale under New York and seven other states, the U.S. Geological Survey said Aug. 23. The U.S. Environmental Protection Agency is studying the effects of fracking because opponents say it’s a threat to drinking water.

Qatar and producers such as Australia, Malaysia and Indonesia are competing to satisfy demand for LNG from China and India, the world’s fastest-growing major economies. China’s imports rose 27 percent to 5.2 million tons in the first half of 2011 from a year earlier and reached a record in July, according to customs data.

PetroChina Terminal

PetroChina started trial operations at its 3.5 million ton- a-year Jiangsu LNG terminal in May and is buying two spot cargoes a month. It may boost purchases in coming months, Liu Wenfei, a director at the terminal, said Sept. 16. China National Offshore Oil Corp., operator of three terminals, may increase imports by 16 percent via its Guangdong facility this year, a company official said the same day.

India’s LNG imports increased 26 percent in the first half, according to Bernstein estimates. The country’s gas use may double to as much as 400 million cubic meters a day by 2016, while domestic supply may be about 200 million cubic meters, A.K. Balyan, managing director of New Delhi-based Petronet LNG, said last month. The company is planning a 50 percent expansion of capacity to convert LNG back into gas and has held talks with Cheniere on supply contracts, Balyan said in June.

While their LNG needs increase, the economies of Asia are struggling to damp rising prices, including the costs of coal and oil. China has raised interest rates five times since October to contain inflation, which has been above the government’s 2011 target of 4 percent every month this year. Indian inflation has held above 9 percent throughout 2011 even after six rate increases.

Higher Costs

Newcastle coal from Australia, an Asian pricing benchmark, surged 29 percent since Sept. 24, 2010, to $122.90 a ton. Brent crude oil futures rose 41 percent in the past year to $111.54 a barrel.

The U.S. may export enough LNG within five years to push down global gas prices if the cost disparity between domestic supplies and those in Europe and Asia remains about the same, Gerard Mestrallet, the chairman and chief executive officer of Courbevoie, Paris-based GDF Suez, Europe’s largest LNG importer, said in a Sept. 9 interview in New York.

Asia’s purchases of term LNG, or contractual supplies, are typically priced off a basket of imported Japanese crude oil, known as the Japan Crude Cocktail. Spot LNG is usually linked to the U.K.’s National Balancing Point, with Asia paying a premium to divert cargoes away from Europe.

U.S. Prices

Natural gas in the U.S. trades at about $4 per million Btu, while Asia pays at least $14, Traver said in the presentation. North American LNG could be delivered at about $9 per million Btu, encouraging utilities in Asia to seek a new pricing regime linked to the U.S. benchmark, he said. Term supplies of LNG to Asia have been linked to oil prices since Japan first started buying the fuel more than four decades ago.

Australia may produce an additional 60 million tons of LNG from projects in western Australia and coal seam gas ventures in Queensland by 2016, according to Bernstein Research. That includes the Gorgon project, developed by Chevron Corp. (CVX), Exxon and Shell.

Short-term demand will be affected by temperatures in the coming Northern Hemisphere winter, when heating requirements increase.

“If Japan gets terribly cold weather, they’ll be out buying in the spot market, driving up prices,” said Zach Allen, president of Pan Eurasian Enterprises Inc., a Raleigh, North Carolina-based tracker of LNG shipments who predicts prices may rise 26 percent this winter. “Prices can always spike much higher than that over very short periods.”

To contact the reporter on this story: Dinakar Sethuraman in Singapore at dinakar@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net

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Hedge Fund Heavyweight Says Gold Bet Not Over

Gold, platinum and Brent oil will lead gains in commodities as investors seek to protect their assets and shortages emerge, according to Tony Hall, the hedge- fund manager who earned 33 percent for his clients this year.

Gold may climb 21 percent to a record $2,200 an ounce by the end of 2011, platinum may gain 10 percent and Brent could rise 25 percent to $140 a barrel in six months, said the London- based chief investment officer of Duet Commodities Fund Ltd., which manages more than $100 million of assets. Its eight-month gain compares with a mean return of 0.6 percent across commodity hedge funds tracked by HedgeFund.net and beat larger rivals such as Clive Capital LLP and Fortress Commodities Offshore Fund Ltd.

“The fear of recession, the fear of worse economic numbers is weighing on commodities and stopping gains from fundamentals from coming through,” said Hall, 31, who spars as a heavyweight boxer. “We still believe in the gold story. If you believe the world is in trouble or in further economic growth disruption, then gold is a good safe haven. If you believe that the world is going to come out okay, then it’s a good inflation hedge.”

At a time when the MSCI All-Country World Index of global equities declined 10 percent this year, the Standard & Poor’s GSCI measure of 24 commodities advanced 2.7 percent, led by silver, gold and energy.

Investors held about $431 billion in raw materials by July, an almost fivefold gain in six years, Barclays Capital says. As equity holders contend with losses of $8.5 trillion since May, speculators made their biggest wagers on higher commodity prices in almost three months in the week to Sept. 6 as they anticipated that even weaker economic growth will mean shortages.

Winning Run

Gold advanced 28 percent to $1,819.88 this year, heading for an 11th consecutive annual gain, the longest winning streak in at least nine decades. It’s the second-best performer in the S&P GSCI behind silver, which rose 31 percent. Gold is trading at 45 times the price of silver, down from a multiple of 84 in 2008. Silver, the precious metal most used in industry, rose more than threefold to $40.4338 since the end of that year.

The gold price of $2,200 predicted by Hall would be 15 percent more than the all-time high of $1,921.15 reached Sept. 6. It would still be below the then-record $850 reached in 1980, equal to $2,337 now in inflation-adjusted terms. Bullion had tumbled 5.7 percent from its all-time high by Sept. 16.

Central banks are expanding their gold reserves for the first time in a generation. Euro-area nations added 0.8 metric ton to their holdings this year, the first increase since 2001, International Monetary Fund data show. Central banks and government institutions worldwide bought 192.3 tons in the first half, according to the World Gold Council.

Arno Pilz

“I’d say gold will have a very good run higher, and a very good retracement would be justified,” Hall said. “If we see a retracement back to $1,700, I think at that point would be a good opportunity to get in.”

Gold and platinum-group metals, used mostly in jewelry and catalytic converters for cars, were the best performers for Duet in the past two months, said Hall, who has traded commodities for about a decade. The fund also profited from betting against silver in May and June, he said. Silver futures traded on the Comex exchange in New York fell from $49.845 an ounce on April 25 to as low as $32.30 on May 12.

That trading idea came from Arno Pilz, 42, who founded the fund with Hall in July 2010. The former head of metals trading at Lehman Brothers Holdings Inc. oversees the fund’s investments in precious and industrial metals while Hall runs the energy trades. They plan to add an agricultural specialist in second- half 2012 at the earliest and cap total assets at $1 billion.

Clive Capital

Pilz, who has traded metals since 1999, has a Master of Philosophy degree in management studies from Oxford University’s Templeton College. He makes his own cider and salami and is building a 1:2 scale Land Rover for his two daughters.

Hall and Pilz beat larger rivals including Clive Capital, which oversees $4.8 billion and fell 11 percent this year, and the $1.1 billion Fortress Commodities Offshore Fund, which returned about 1.8 percent, according to people with direct knowledge of the funds’ performance.

Duet’s best trade was on Brent crude in the second quarter, Hall said. The contract, traded on ICE Futures Europe in London, gained as much as 34 percent this year as fighting erupted in Libya, which has Africa’s largest oil reserves. The disruption to supplies of light crudes, which yield a higher proportion of more profitable products including gasoline, increased demand for similar grades such as Brent.

‘New Highs’

Brent costs about $24.59 a barrel more than the West Texas Intermediate grade traded on the New York Mercantile Exchange, a global benchmark, up from about parity in 2009. The premium dropped from $25.93 on Sept. 6 after a 600,000-barrel cargo of Libyan crude was offered for shipment, a sign exports may resume, said three people with direct knowledge of the transaction.

Brent slumped 12 percent to $111.81 a barrel since early April because of concern that slower economic growth will curb demand for energy. The Paris-based International Energy Agency cut global oil demand forecasts for this year by 200,000 barrels a day and 400,000 a day for 2012 on Sept. 13, and said stockpiles in developed nations fell to below the five-year average for the first time since the global recession in 2008.

“Eventually the crude fundamentals will come through and become the dominant factor,” said Hall, who holds an economics degree from University of Bath. “We are going to see new highs in Brent over the next six months.”

More than half Duet’s commodity book is expressed through options, with crude and precious metals positions concentrated in periods three to six months ahead, said Hall, who previously worked for Credit Suisse Group AG and Deutsche Bank AG.

Gasoil Cracks

Fuel was also the fund’s worst trade, on a view concerning price differentials of gasoil and other products.

“Energy relative value has been the most disappointing part of the portfolio this year, with our view that middle distillates would outperform other products,” he said.

The so-called cracks, reflecting the spread between the price of the refined product and crude, slumped 29 percent since peaking at $24.17 a barrel on March 16, according to data from PVM Oil Associates, a London-based brokerage. Gasoil is typically used as a heating fuel.

Speculators held 1.275 million net-long futures and options across 18 commodities tracked by the U.S. Commodity Futures Trading Commission in the week ended Sept. 6, the most since the week ended June 14, data compiled by Bloomberg show. They had raised that combined position for four consecutive weeks. They cut their bullish bets by 5.2 percent in the latest week.

Platinum Bull

Duet is also bullish on platinum, which gained 2.3 percent to $1,810.38 an ounce this year. The metal, mined mostly in South Africa, will trade as high as $2,000 to $2,200 this year, Hall said. Holdings in exchange-traded products backed by the commodity are at a near-record 44.3 tons, valued at about $2.6 billion, data compiled by Bloomberg show.

Platinum is trading at a ratio of 2.5 times the price of palladium, compared with a 10-year average of 3.5. The metals are mined together and both are used in autocatalysts.

Platinum supply will fall 21,000 ounces short of demand this year, widening to a deficit of 54,000 ounces in 2012, Barclays Capital estimates. Mining companies are going as deep as 1.4 miles underground to maintain output, pumping chilled air down mine shafts to cool seams as hot as 160 degrees Fahrenheit.

“Platinum looks like great value in the precious metals complex,” Hall said. “Platinum is a store of value, a precious metal and an industrial metal. If the economy picks up we’re going to see bigger demand in catalytic converters.”

To contact the reporter on this story: Chanyaporn Chanjaroen in Singapore at cchanjaroen@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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Crude Drops to One-Week Low on Signals Oil-Demand Growth Slowing

By Christian Schmollinger and Lananh Nguyen - Sep 19, 2011 6:40 PM GMT+0700

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Sept. 19 (Bloomberg) -- Samuel Ciszuk, a senior Middle East energy analyst at IHS Energy, discusses Abdalla el-Badri's leadership of the Organization of Petroleum Exporting Countries. He speaks with Owen Thomas on Bloomberg Television's "Countdown." (Source: Bloomberg)

Oil fell to a one-week low in New York on speculation fuel demand will falter as economic growth in the U.S. weakens and the debt crisis in Europe worsens. Brent oil’s premium to U.S. futures widened.

Crude dropped as much as 1.8 percent after European finance ministers ruled out using stimulus measures to spur the economy. OPEC Secretary-General Abdalla El-Badri said today that global demand for oil is rising less than expected. Reports this week may show U.S. home sales held near the lowest this year and construction fell. Government data last week showed U.S. fuel use shrank.

“The increasingly gloomy economic situation might stop crude’s recent upward trend,” analysts led by David Wech at Vienna-based researcher JBC Energy GmbH said in a note today.

Oil for October delivery on the New York Mercantile Exchange fell as much as $1.61 to $86.35 a barrel, the lowest price since Sept. 12, and was at $87.15 at 12:36 p.m. London time. The more actively traded November contract slid 87 cents, or 1 percent, to $87.31. Front-month futures have lost 4.6 percent this year.

Brent crude for November settlement dropped 29 cents to $111.93 a barrel on the London-based ICE Futures Europe Exchange. The European benchmark future was at a premium of $24.62 to the November price of West Texas Intermediate, compared with a record settlement of $26.87 on Sept. 6.

OPEC Outlook

El-Badri said fiscal woes in Europe and high unemployment in the U.S. are curbing global oil-demand growth. Crude supply from the Organization of Petroleum Exporting Countries may be boosted by 500,000 to 600,000 barrels a day from Libya’s eastern and western fields “soon,” he said at a conference in Dubai.

Fighting in Libya since February has reduced the availability of light, sweet crude, or oil with low density and sulfur content. The country’s output fell to 45,000 barrels a day last month, according to Bloomberg estimates, compared with the 1.6 million barrels a day the nation pumped in January.

European finance leaders meeting with U.S. Treasury Secretary Timothy Geithner last week in Poland said their 18- month debt crisis leaves no room for tax cuts or extra spending to spur an economy that will barely grow in the second half of 2011. The 17 euro nations accounted for about 12 percent of global oil demand in 2010, according to Bloomberg calculations based on BP Plc’s annual Statistical Review of World Energy.

“If the markets were looking for a positive, meaningful surprise from the two days of talks going on in Europe, they did not get it,” Edward Meir, a New York-based analyst at MF Global Holdings Ltd. said in a note today. “As a result of the looming deadlock with Greece and the rather inconclusive negotiations, we could see a negative turn for commodity markets.”

Technical Analysis

U.S. housing starts dropped 2.3 percent in August from July, according to the median estimate of 64 economists surveyed by Bloomberg News before a Commerce Department report tomorrow. Existing-home sales probably rose 1.7 percent from an eight- month low, a separate poll showed.

Oil in New York also declined after front-month futures failed to breach the 50-day moving average for a fourth day on Sept. 16, according to data compiled by Bloomberg. This indicator is at $90.16 a barrel today. Investors tend to sell contracts when a price advance stalls below a technical- resistance level.

Hedge funds raised bullish bets on oil by the most since March in the week ended Sept. 13 as a storm curtailed production in the Gulf of Mexico, according to the U.S. Commodity Futures Trading Commission’s Commitments of Traders report. West Texas futures gained 4.9 percent in the period of the report and have dropped 3.7 percent since then.

No named storms or tropical cyclones are active in the Atlantic or Pacific, the U.S. National Hurricane Center’s website shows. Tropical Storm Maria was downgraded to a post- tropical cyclone on Sept. 16 after crossing Newfoundland, according to the center.

To contact the reporters on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net Lananh Nguyen in London at lnguyen35@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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Berlin Election Deals Blow to Merkel Coalition

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Germany's chancellor and leader of the Christian Democratic Union party (CDU) Angela Merkel. Photographer: Michele Tantussi/Bloomberg

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An election campaign poster picturing German Chancellor and Christian Democrats (CDU) Chairwoman Angela Merkel. Photographer: Sean Gallup/Getty Images

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Angela Merkel, Germany's chancellor. Photographer: Jock Fistick/Bloomberg

German Chancellor Angela Merkel’s party was defeated in a Berlin state election and her coalition ally lost all its seats after turning skepticism over euro-area bailouts into a campaign theme, stoking government infighting over the debt crisis.

The Social Democrats, the main opposition party nationally, extended their 10-year rule in the German capital after beating Merkel’s Christian Democrats into second place in yesterday’s election. Merkel’s Free Democratic coalition partner, known as the liberals, crashed out of a regional assembly for the fifth time this year, while the Pirate Party won its first-ever seats.

The results in Berlin cap a year in which voters punished Merkel’s coalition over its handling of the debt crisis and adds to her pressure as she struggles to balance domestic fatigue over shouldering euro-region rescues with international calls that she do more to stem the contagion. That’s widening fissures in her government as the three-way coalition descends into open conflict over the euro’s future and financial aid for Greece.

“The issue now is how long the liberals hold onto the coalition, whether they break it off ahead of time,” Nils Diederich, a politics professor at Berlin’s Free University, said by phone. “The FDP are being pushed into the corner more and more, so you can’t rule out that they could pull off something like that to gain from it politically.”

Preliminary Results

The Social Democrats took 28.3 percent in Berlin to secure a third term for SPD Mayor Klaus Wowereit, while the Christian Democrats had 23.4 percent, preliminary results showed. The Greens had 17.6 percent, their best-ever result in the city, and the Left 11.7 percent. That means the current SPD-Left coalition cannot resume power and the SPD can choose to govern with either the Greens or the CDU as junior coalition partner.

The result is an acknowledgement of the Merkel government’s woes, said Sigmar Gabriel, SPD leader. His party, which supports euro bonds and a bigger euro rescue fund, has now entered the state government in each of the eight state elections held this year and last.

“The SPD is back,” Gabriel said.

The Pirate Party, which campaigned on open access to technology and Internet freedom, took 8.9 percent to win its first seats in any legislature in Germany’s 16 states. The FDP had 1.8 percent, its worst result in Berlin since World War II.

The “dramatic” loss of support for the FDP shows “euro- skeptic populism has no place” in the political landscape, Cem Oezdemir, the Greens co-leader, said on ZDF.

Euro ‘Duty’

Economy Minister Philipp Roesler, who leads the FDP nationally, put an “orderly default” for Greece on the table last week, further roiling financial markets and earning him rebukes from Merkel’s party. Merkel responded by sharpening her arguments in defense of the euro, saying Germany has a “duty” to preserve the joint currency because it helps exports, makes the country richer and underpins Europe.

“Angela Merkel made clear that the CDU stands true to its pro-European ideals,” Peter Altmaier, the CDU’s chief whip in the federal parliament, said on ZDF. “Some euro-skeptic posters went up in the last days of the campaign and they didn’t make any impact,” he said, without saying to which party he was referring.

The Free Democrats made critical remarks over Germany’s participation in rescues for fellow euro members Greece, Ireland and Portugal in their Berlin campaign. In a radio ad posted on the FDP website, the party said that “as a taxpayer, you shouldn’t pay other countries’ debts. Vote for the FDP.”

Not ‘Posturing’

“Our position on the future of Europe wasn’t posturing for this or any other election,” Christian Lindner, FDP general secretary, told reporters in Berlin in comments broadcast live. “It was about taking on our responsibility for Europe and for our currency, and we will hold firm to that.”

The Free Democrats have struck a more skeptical tone on bailouts as the lower house of parliament, the Bundestag, prepares for a Sept. 29 vote on an overhauled European Financial Stability Facility that includes sovereign bond-buying powers.

The party is likely to hold a members’ vote on their attitude toward the EFSF’s successor from 2013, the European Stability Mechanism, which is due to go the Bundestag later this year or early next year, the Hamburger Abendblatt newspaper cited Lindner as saying in an interview on Sept. 17.

A governing coalition between the Christian Democrats and a “fundamentally euro-skeptic” party would be unthinkable, CDU Finance Minister Wolfgang Schaeuble told Bild am Sonntag in an interview the same day.

‘Credibility Problem’

The euro is a “core issue” for the Free Democrats and the party isn’t about to back down from its stance “because it didn’t hit the right notes with Berlin voters,” Bjoern Saenger, a federal FDP lawmaker and member of the lower house of parliament’s finance committee, said in a telephone interview.

“Markets seek clarity and it must be clear to anyone that the Greek patient is being kept alive artificially,” Saenger said. “The FDP has a credibility problem but giving ground on our position on the crisis would worsen matters. The days when Germany would just reach for the check book to solve a problem in Europe are coming to a close. Somebody needs to say it.”

To contact the reporters on this story: Patrick Donahue in Berlin at at pdonahue1@bloomberg.net; Brian Parkin in Berlin at bparkin@bloomberg.net.

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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STX Scraps Plan to Buy Stake in Hynix, Leaving SK Telecom as Sole Bidder

STX Group scrapped plans to buy a stake in Hynix Semiconductor Inc. (000660), leaving mobile-phone operator SK Telecom Co. as the only suitor left to bid for 20 percent of the world’s second-largest computer-memory chipmaker.

The South Korean shipbuilding and shipping group dropped its interest because of concerns over the level of investments needed to keep the chipmaker competitive and global economic uncertainties, STX Corp., which was planning to lead the group’s bid, said in a statement today in Seoul. The 146.1 million shares up for sale are valued at 3.1 trillion won ($2.7 billion) based on Hynix's latest stock price.

STX Chairman Kang Duk Soo’s withdrawal removes the only competition SK Chairman Chey Tae Won faced in making a bid in defiance of analysts at brokerages including Morgan Stanley and Daiwa Securities Group Inc., who oppose the idea of a phone operator buying control of a chipmaker. Hynix’s main shareholders, who have failed to sell their stake three times since 2009, said they will discuss how to proceed with the sale.

“SK Telecom and shareholders are now going to have to have one-on-one talks,” Shin Hyun Joon, a Seoul-based analyst at Dongbu Securities Co. said by telephone. Because of reduced competition, “you can’t rule out the possibility that the sale could fall through,” Shin said.

Hynix fell 4.1 percent to close at 21,000 won in Seoul trading. STX Corp., which was teaming up with Aabar -- a state- run United Arab Emirates investment company -- for its bid, rose 3.8 percent. SK Telecom declined 3.5 percent.

‘Reasonable’ Decision

SK Telecom hopes Hynix shareholders will proceed with the sale, Lauren Kim, a Seoul-based spokeswoman for the carrier said by telephone. The company will review the results of its due diligence, the outlook of the chip industry and details of sale conditions to make a “reasonable” decision,’’ she said.

Hynix’s main shareholders will discuss whether they will proceed with their current plan, said Lee Sun Hwan, Seoul-based spokesman for Korea Exchange Bank. (004940) Park Seong Ae, a Seoul-based spokeswoman for Hynix, declined to comment on STX’s decision.

STX said delays in reaching an agreement with its Middle Eastern bidding partner was also a factor that contributed to its decision.

Hynix shareholders, led by Korea Exchange Bank, said this month they plan to sell a 20 percent stake that includes 101.85 million new shares and 44.25 million existing ones held by shareholders.

The shareholders, a group of financial institutes that spent $4.6 billion to bail out the chipmaker in the past decade, had planned to receive bids for Hynix by Oct. 24 and select a preferred bidder by the end of October.

Hyosung Corp. (004800), the sole bidder in a sale attempt two years ago, walked away from negotiations in November that year, saying speculation that it received political favors to pursue the takeover made it difficult to negotiate a fair acquisition.

To contact the reporter on this story: Jun Yang in Seoul at jyang180@bloomberg.net; Seonjin Cha in Seoul at scha2@bloomberg.net;

To contact the editors responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net; Young-Sam Cho at ycho2@bloomberg.net

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Apple Orders Processor Chips from Taiwan Semiconductor, Apple Daily Says

By Chinmei Sung - Sep 19, 2011 6:15 AM GMT+0700

Apple Inc. (AAPL) placed order at Taiwan Semiconductor Manufacturing Co. to make the so-called A6 processor chips, the Apple Daily reported today, without citing where it got the information. The Taiwanese chipmaker will start shipment at the end of the first quarter, according to the report.

To contact the reporter on this story: Chinmei Sung in Taipei at csung4@bloomberg.net

To contact the editor responsible for this story: Rebecca Evans at revans6@bloomberg.net

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Bernanke Joins King Tolerating Inflation

By Scott Lanman and Simon Kennedy - Sep 19, 2011 4:18 PM GMT+0700

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U.S. Federal Reserve Chairman Ben S. Bernanke and Bank of England governor Mervyn King. Dimier/Bloomberg

Inflation flashing red may be less of a green light for higher interest rates as global growth falters.

Some Federal Reserve policy makers favor keeping their benchmark rate close to zero until price increases reach a level Vincent Reinhart, a former top official, says could be 3 percent. The Bank of England has held its key rate at a record low even as U.K. inflation breached its 2 percent target for 21 months. Brazil executed a surprise cut Aug. 31 to safeguard its economy even after inflation quickened to a six-year high.

Policy makers such as Fed Chairman Ben S. Bernanke and Bank of England Governor Mervyn King may be challenging central-bank orthodoxy to replenish depleted toolkits and support recoveries at risk of sliding back into recession. Tolerating higher inflation may make long-term Treasuries less attractive while supporting stocks and commodity prices, said Jim Kochan, chief fixed-income strategist at Wells Fargo Advantage Funds.

“There’s a hint of desperation here,” said Kochan, who helps manage $216 billion in Menomonee Falls, Wisconsin. “They’re clearly concerned that monetary policy to date hasn’t really accomplished what they expected it to. So they ask themselves, why? And what could we do about it?”

If adopted, the strategy might be called “Generate Inflation Now,” or GIN, Reinhart said, a reversal of the Ford Administration’s “Whip Inflation Now,” or WIN, program in the 1970s.

‘Cutoff’ Question

“Everybody knows high inflation is bad,” said Reinhart, the Fed’s director of monetary affairs from 2001 to 2007 who will become Morgan Stanley’s chief U.S. economist in October. “Nobody is sure of where the cutoff is.”

Bernanke and his Federal Open Market Committee gather tomorrow in Washington for a two-day meeting and will issue a statement Sept. 21 at 2:15 p.m. New York time. Some economists anticipate additional stimulus aimed at reducing long-term borrowing costs and boosting growth. The Fed cut the target for its benchmark federal funds rate almost to zero in December 2008 and has since purchased $2.3 trillion of bonds.

The FOMC at its Aug. 9 meeting considered conditioning its pledge to keep interest rates at record lows “on explicit numerical values for the unemployment rate or the inflation rate,” according to minutes released Aug. 30. The commitment should be contingent on joblessness falling to around 7 percent or 7.5 percent as long as inflation stays below 3 percent in the medium term, Charles Evans, president of the Federal Reserve Bank of Chicago, said in a Sept. 7 speech.

Focus on Core

Unemployment was 9.1 percent in August, and the Fed’s preferred inflation gauge, which excludes volatile energy and food prices, rose 1.6 percent in July. Policy makers should focus on core inflation to better reflect trends that are “likely to be sustained over the medium term,” the International Monetary Fund said in a chapter of its World Economic Outlook released Sept. 14, ahead of its annual meeting of central bankers and finance ministers this week.

Columbia University’s Michael Woodford and Harvard University’s Kenneth Rogoff are among proponents of faster price increases, which should result in lower interest rates adjusted for inflation. This might stimulate spending, along with a side- effect of helping pare record debt loads.

While computer simulations imply this strategy will work, it’s untested in the real world, said Woodford, a professor who co-taught economics with Bernanke at Princeton University. There has been “nervousness” among central bankers about saying “you would allow inflation,” he said. Now “there’s at least more willingness to discuss the issue.”

Faltering Growth

Consumer prices worldwide may rise at a slower pace after jumping earlier this year as faltering economic growth drags down food and energy costs. JPMorgan Chase & Co. (JPM) economists estimate inflation in developed markets will average 1.3 percent in the second quarter of 2012, down from 2.7 percent in the same period this year.

The Fed should get U.S. prices back to the path they were on before the September 2008 collapse of Lehman Brothers Holdings Inc., Nobel laureate Roger Myerson at the University of Chicago said Aug. 23 on Bloomberg Television.

According to Bloomberg calculations, the central bank would need to generate annual inflation of 3.3 percent in the two years through July 2013 to return to a hypothetical 2 percent path since July 2008, under the Commerce Department’s personal- consumption-expenditures price index. This gauge rose 2.8 percent in July from a year ago.

Weaker Currencies

Changing policy to tolerate higher inflation means lower bond prices in the long run and weaker developed-market currencies, including the dollar and pound, against emerging markets, said Stephen Jen, managing partner at SLJ Macro Partners LLP in London.

Wells Fargo’s Kochan and Pacific Investment Management Co.’s Anthony Crescenzi agree bond prices would suffer. If the Fed successfully implemented this strategy and European officials managed to contain the continent’s sovereign-debt crisis, two-year yields, which traded at a record low of 0.1512 percent today, might be little changed, while 10-year rates increased to a range between 3 percent and 4 percent within two or three years, said Crescenzi, who helps manage $1.3 trillion as executive vice president at Pimco in Newport Beach, California.

Yields on 10-year Treasuries were at 1.99 percent at 9:56 a.m. in London today. U.S. debt was the best-performing asset class in August as bond investors ignored Standard & Poor’s Aug. 5 decision to strip the U.S. of its AAA rating. Treasuries returned 2.8 percent, while the global bond market gained 1.99 percent, Bank of America Merrill Lynch index data show.

Economic Benefits

Crescenzi cautions that faster inflation may not produce the economic benefits proponents project, instead reducing the amount of goods and services households and businesses could buy. That would cut production -- and eventually incomes.

“It would turn a virtuous cycle into vicious,” he said. “I see it as quite negative.”

Central banks with a target also may have to squelch price increases later, risking harm to growth and “a serious disinflation,” said Raghuram Rajan, former IMF chief economist and a professor at the University of Chicago’s Booth School of Business.

More than 20 central banks have adopted some type of inflation target since the Reserve Bank of New Zealand pioneered the strategy two decades ago. Such targets help control expectations of future price pressures and provide clarity about the direction of interest rates.

Failed to Prevent

The strategy nonetheless took a hit for failing to anticipate or prevent the worst economic crisis since the Great Depression. In the future, inflation targets should be coupled with a tool that helps deliver financial stability, a report sponsored by the Brookings Institution said last week.

The Bank of England has left its benchmark rate at 0.5 percent since March 2009. While inflation may reach 5 percent in the next few months, it might have been below the bank’s 2 percent target without temporary shocks such as this year’s oil- price spike, King said in an Aug. 15 letter to Chancellor of the Exchequer George Osborne.

The U.K. eventually may want to adopt a goal that accounts for stronger global price pressures, said Simon Hayes, chief U.S. economist at Barclays Capital.

Any change at the Fed would face opposition at the U.S. central bank, where policy makers favor a long-run inflation goal of 1.7 percent to 2 percent, according to their most recent economic projections in June.

‘Meager Savings’

Richard Fisher, president of the Federal Reserve Bank of Dallas, told reporters Sept. 12 he couldn’t imagine trying to explain the shift to unemployed workers and others “who don’t want their income or meager savings eroded by price increases.” He was one of three officials to dissent from the August decision to keep rates near zero through at least mid-2013.

Of 27 central banks Morgan Stanley monitors with formal or informal targets, 15 now face inflation running above their aim. Some emerging-market officials may be sacrificing their goal to support economic growth or financial stability, Peter Attard Montalto, an economist at Nomura International Plc in London, said in a Sept. 12 report that identified Turkey and Hungary.

Brazil cut its benchmark rate to 12 percent on Aug. 31 as consumer prices rose 7.23 percent from a year earlier. While the increase exceeded the 6.5 percent upper limit of the bank’s target range for a fifth straight month, officials remain committed to the policy and price increases will start to ease, President Alexandre Tombini, said Sept. 8.

German Legacy

Among developed countries, the European Central Bank has proved less tolerant of faster price increases -- a legacy of Germany’s hatred of the inflation often blamed for weakening democracy in the 1920s and aiding Adolf Hitler’s rise to power.

The Frankfurt-based central bank, which aims to keep inflation just below 2 percent, raised its benchmark rate twice this year, to 1.5 percent, even as the Greek-led debt crisis threatened expansion. With economies slowing, President Jean- Claude Trichet said Sept. 8 that price risks are “broadly balanced” in the medium term, despite inflation at 2.5 percent in August.

More central banks may make similar efforts to “explain away” the temporary nature of inflation as a reason to ignore it, said Jen, a former IMF economist. Policy makers “will put more emphasis on growth,” he said.

To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net; Simon Kennedy in London at skennedy4@bloomberg.net.

To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net; John Fraher at jfraher@bloomberg.net.

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China Will Likely Limit Stimulus in Any Global Slump, Deutsche Bank Says

By Paul Panckhurst and Sophie Leung - Sep 19, 2011 3:17 PM GMT+0700

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China’s government is wrestling with elevated inflation and the threat of a deeper economic slowdown because of the debt crisis in Europe, the nation’s biggest export market, and weakness in the U.S. economy. Photographer: Stefen Chow/Bloomberg

China’s stimulus in any world economic slump is unlikely to be more than half the nation’s estimated 9.3 trillion yuan ($1.46 trillion) fiscal and monetary expansion from November 2008 through 2010, Deutsche Bank AG said.

While highly speculative, a sketch of the government’s possible response is emerging from “our discussions in China,” Hong Kong-based economist Ma Jun said in a note dated Sept. 16. The government would limit any measures because of the costs associated with the previous package, including asset bubbles, inflation and non-performing loans, Ma said.

China’s government is wrestling with elevated inflation and the threat of a deeper economic slowdown because of the debt crisis in Europe, the nation’s biggest export market, and weakness in the U.S. economy. Deutsche forecasts that China’s growth may cool to 7.3 percent in the first quarter of next year compared with 9.5 percent in the second quarter of 2011.

The Shanghai Composite Index fell 1.4 percent as of the 11:30 a.m. local-time break in trading, set for the lowest close in 14 months.

Stimulus measures would mostly be fiscal rather than monetary, Ma added. Efforts to boost consumption could include consumer vouchers, subsidies for consumer goods, temporary cuts in fees for electricity and water, and temporary tax breaks for small businesses.

Housing, Agriculture

The government could allocate more investment to public housing and “long neglected” agricultural infrastructure, Ma said. He said that 40,000 dams, or about 45 percent of the total, are in need of repair. The labor-intensive services sector could be used to absorb workers from export industries, he said.

Wu Xiaoling, a former deputy central bank governor, said that the government shouldn’t expand monetary or fiscal stimulus because of price pressures and central and local- government debt. Her comments were published today by the Financial News, the central bank’s newspaper.

Wu said China’s economy is highly likely to slow next year.

To contact the reporters on this story: Paul Panckhurst in Beijing at ppanckhurst@bloomberg.net; Sophie Leung in Hong Kong at sleung59@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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Greece Under Scrutiny for Next Aid Payment

By Maria Petrakis and Natalie Weeks - Sep 19, 2011 6:25 PM GMT+0700
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Taxi drivers opposed to new licensing rules burn a poster of George Papandreou, Greece's prime minister, during a protest outside the parliament building in central Athens, Greece. Photographer: Angelos Tzortzinis/Bloomberg

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Sept. 16 (Bloomberg) -- Thanos Papasavvas, head of currency management at Investec Asset Management Ltd., talks about the likelihood of default by Greece on its sovereign debt and preparations by the euro area for such an event. He speaks with Scarlet Fu on Bloomberg Television's "InBusiness with Margaret Brennan." (Source: Bloomberg)

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Sept. 19 (Bloomberg) -- Gary Jenkins, head of fixed-income credit research at Evolution Securities, discusses the likelihood of the European Central Bank buying more Italian and Spanish bonds. He talks with Francine Lacqua on Bloomberg Television's "On the Move." (Source: Bloomberg)

Greece’s ability to avoid default hangs in the balance as international monitors prepare to assess whether Prime Minister George Papandreou can meet the conditions of rescue loans.

European Union and International Monetary Fund inspectors hold a teleconference today at 7 p.m. Athens time with Finance Minister Evangelos Venizelos, to judge whether the government is eligible for an aid payment due next month and on track for a second rescue package approved by EU leaders July 21.

“We can’t move along without real implementation of fiscal reforms and we are late,” Venizelos said at a conference in Athens today. “We must reach the end of December with a cash balance result that’s within fiscal targets.”

Greece is struggling to prove to its partners it is doing enough to receive a sixth tranche of loans to prevent default. As Papandreou fights investor doubts and domestic protests, European leaders are squabbling over the terms of the July agreement and the prospect that they will be forced to channel more money to keep Greece in the currency union. IMF and EU monitors suspended their review earlier this month after discovering an unexpected hole in the budget.

Venizelos said yesterday some measures in the five-year 78 billion-euro ($107 billion) medium-term budget plan adopted in June may need to be brought forward to meet targets, a week after announcing a property levy to help raise 2 billion euros.

‘Smaller, Smarter State’

The European Commission isn’t demanding more of Greece than was agreed to the international aid program for the country, economics spokesman Amadeu Altafaj told reporters in Brussels. “The only thing that is on the table is full compliance with the agreed targets. No more, no less,” he said, adding that only after today’s conference call will the commission “be in a position to communicate further on the next steps.”

Venizelos said state has to become “smaller and smarter” and the focus on the 2012 budget will be on spending cuts. New taxes can’t be “incessantly” imposed because of the inefficiency of the tax collection system, he said.

Yesterday, German Chancellor Angela Merkel’s party lost a regional election in Berlin, the last of seven state ballots this year that have seen the coalition parties punished amid voter anger over her handling of the debt crisis.

Yields Rise

Greece’s 10-year yield rose 163 basis points to 22.82 percent while two-year notes added 513 basis points to 60.0 percent. The notes rose for the first week in two months last week as traders trimmed bets for a pending default after the leaders of Germany and France signaled a commitment to keeping Greece in the euro area. They had climbed above 80 percent for the first time on Sept. 14 amid speculation the country wouldn’t be able to meet its obligations to investors.

Stocks and U.S. futures fell, sending the MSCI All-Country World Index lower for the first time in five days, as the euro weakened amid concern about Greece’s debt. The MSCI All-Country World Index declined 1 percent at 12:11 p.m. in London. The Stoxx Europe 600 Index dropped 1.8 percent and futures on the Standard & Poor’s 500 Index sank 1.5 percent. The euro fell 0.9 percent and the Dollar Index rose for a second day.

Papandreou will convene his Cabinet again after Venizelos’s call today with the EU and IMF monitors. The finance minister will set out plans announced Sept. 6 to accelerate state asset sales and cut spending by placing civil servants in a “reserve” system and shutting down dozens of government agencies.

Main Goals

Greece’s three main aims are to meet targets for 2011 and 2012, create a primary surplus as soon as possible and pursue structural reforms with vigor to shield the country, he said yesterday. The economy will shrink 5.5 percent this year and also contract next year, he said today. The goal is still to achieve a primary surplus of 3 billion euros next year, he said.

Venizelos is blaming a third year of a deepening recession for failing to meet budget targets. The announcements this month including the property levy are a bid to show Greece is serious about addressing its benefactors’ concerns, key to getting the 159 billion-euro package agreed to in July. That would supplement last year’s 110 billion-euro package.

Impressive Consolidation

Additional measures are needed to reduce the budget deficit to a sustainable level, Bob Traa, the IMF’s resident representative in Greece, said today. He added that it was “appropriate and important” to underline that the IMF disagreed with the view that the program carried out by the government has been unsuccessful to date. “Impressive fiscal consolidation has happened,” he said.

Greece won’t return to growth until 2013, with economic output declining 2.5 percent next year, Traa said.

Venizelos on Sept. 17 dismissed talk of the country declaring bankruptcy and said Papandreou canceled his planned week-long U.S. visit to be prepared to take quick decisions this week, when Parliament votes on the July 21 package, which also gave Europe’s rescue-fund expanded authority.

Papandreou had planned to meet officials including IMF Managing Director Christine Lagarde and U.S. Treasury Secretary Timothy F. Geithner on his trip to New York and Washington. His first meeting was scheduled for New York yesterday. A separate meeting this month between Lagarde and Venizelos is still planned, a Finance Ministry official said.

‘Can’t Pay’

Papandreou last week promised a “decisive battle” for budget cuts to persuade European governments and the IMF to release the 8 billion-euro loan installment.

Greece is now looking to the next meeting of euro-area finance ministers, on Oct. 3, for a decision on the release of the installment. The loan would be disbursed by mid-October, enabling the government to pay its bills through the end of the year.

Former IMF head Dominique Strauss-Kahn said that forcing Greece to pay back its debts would unacceptably impoverish the country, and that everyone must be willing to accept losses on Greek debt.

“They can’t pay,” Strauss-Kahn said in interview yesterday with France’s TF1 television. “The efforts of European leaders have been too little, or too late, or often both too little and too late.”

Greece has the cash reserves to cover its needs for October, Deputy Finance Minister Filippos Sachinidis said on Sept. 12.

Cuts in Wages

Higher taxes and cuts in wages and pensions in return for a 110 billion-euro package of loans from the EU and IMF in May 2010 have weighed on Papandreou’s standing with Greeks, with his Pasok party now trailing the opposition in polls.

People with disabilities gathered outside the Finance Ministry in central Athens today to protest plans for the special property tax and government plans to include them in the reserve plan for civil servants. “The measures announced don’t protect the weaker groups in society,” Yiannis Limdaios, a protester, told state-run NET TV.

Nine in 10 Greeks are dissatisfied with the government and opposition’s handling of the crisis, according to a poll of 1,216 Greeks by Public Issue for Kathimerini newspaper on Sept 11.

Opposition Leads

Opposition New Democracy’s lead over Pasok is now four percentage points, with the poll showing neither party would win an outright majority in parliament. The poll was conducted Sept. 2 to Sept. 7 and the margin of error is 2.9 percentage points.

New Democracy leader Antonis Samaras yesterday repeated a call for elections, promising Greeks he would renegotiate the terms of the financing package if his party wins a majority in parliament.

“The biggest weapon the country has right now is elections and clear solutions,” he said. New Democracy needs “the clear mandate of the people to renegotiate” the agreements.

To contact the reporter on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net

To contact the editor responsible for this story: Angela Cullen at acullen8@bloomberg.net

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Obama Deficit Plan to Call for $1.5 Trillion in Taxes

By Mike Dorning - Sep 19, 2011 11:01 AM GMT+0700
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U.S. President Barack Obama. Photographer: Kevin Lamarque/Pool via Bloomberg

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Sept. 19 (Bloomberg) -- David Walker, chief executive officer of Comeback America Initiative and a former U.S. comptroller general, talks about President Barack Obama's plan to call for $1.5 trillion in tax increases mostly targeting the wealthy over the next decade as part of a proposal to cut the U.S. federal deficit by $3 trillion. Walker speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." Lakshman Achuthan, chief operations officer at the Economic Cycle Research Institute, also speaks. (Source: Bloomberg)

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Sept. 19 (Bloomberg) -- Martin Feldstein, a professor of economics at Harvard University, talks about President Barack Obama's plan to call for $1.5 trillion in tax increases mostly targeting the wealthy over the next decade as part of a proposal to cut the U.S. federal deficit by $3 trillion. Feldstein speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (This is an excerpt of the full interview. Source: Bloomberg)

President Barack Obama will call for $1.5 trillion in tax increases mostly targeting the wealthy over the next decade as part of a plan to cut the U.S federal deficit by $3 trillion, administration officials said.

Obama’s plan, which he is scheduled to unveil at 10:30 a.m. Washington time today at the White House, will form his recommendations to the 12-member congressional committee charged with finding ways to trim at least $1.5 trillion from the deficit. The panel has a Nov. 23 deadline to reach a deal.

The proposal puts Obama in direct conflict with Republican congressional leaders such as House Speaker John Boehner, who last week said his party wouldn’t accept tax increases and urged the bipartisan supercommittee to focus on scaling back entitlement programs such as the Medicare health-insurance plan for the elderly.

Obama will threaten to veto any deficit plan that reduces Medicare benefits unless wealthy Americans also are asked to pay more in taxes, according to the officials, who briefed reporters on condition of anonymity. While Obama will include Medicare-benefit cuts in his proposal, the administration will insist on tax increases as a condition, they said.

The administration and congressional Republicans are at odds over how to re-ignite the economy, drive down unemployment and grapple with the nation’s long-term deficit. Administration forecasters project the U.S. economy will grow at a sluggish 1.7 percent rate this year and the jobless rate will average 9.1 percent in 2011 and show little change in 2012, when the presidential election takes place.

Medicare Eligibility

To deal with the deficit, Obama won’t support any increase in the eligibility age for Medicare, as he did while trying to negotiate a broad deficit-reduction package with Boehner in July, said one of the administration officials. The officials said Obama only accepted the measure as a concession to Republicans to assure speedy passage of an increase in federal borrowing authority to avert a U.S. debt default.

The administration officials declined to specify what Medicare-benefit cuts Obama will propose, though one said the administration has previously supported a sliding scale of premiums based on income level.

Obama will seek $248 billion in Medicare cuts, including reductions in payments to health-care providers and $72 billion in savings from the Medicaid state-federal health program for the poor, the officials said.

Social Security Untouched

The president won’t propose changes to Social Security, White House officials said. Before negotiations with Boehner fell apart during the summer, Obama accepted altering Social Security’s cost-of-living adjustment formula, which would have lowered annual benefit increases.

Obama also plans to adopt billionaire investor Warren Buffett’s suggestion that the nation’s “mega-wealthy” pay more taxes, prompting one leading Republican to accuse the president of engaging in “class warfare.”

The provision, which the White House is calling the Buffett rule after the 81-year-old chairman and chief executive officer of Berkshire Hathaway Inc., would require taxpayers with incomes of $1 million or more pay at least the same percentage in taxes as middle-income Americans, according to an administration official.

“Class warfare will simply divide this country more,” Republican Representative Paul Ryan, chairman of the House Budget Committee, said on the “Fox News Sunday” program. “It will attack job creators, divide people, and it doesn’t grow the economy.”

Priorities

By proposing to put more of a tax burden on the wealthiest taxpayers and on corporations by ending some tax preferences, Obama is seeking to put pressure on Republicans and frame the argument he is making to voters about the nation’s priorities.

“Should we keep tax breaks for millionaires and billionaires -- or should we invest in education and technology and infrastructure, all the things that are going to help us out-innovate and out-educate and out-build other countries in the future?” Obama said Sept. 12 as he released the legislative text of his jobs plan.

During his bus tour last month through rural areas of Minnesota, Iowa and Illinois, Obama quoted from a New York Times opinion article in which Buffett wrote that the nation’s richest individuals have been “coddled long enough by a billionaire-friendly Congress.” Buffett argued for raising taxes for the “mega-rich” in the U.S.

Buffett as Adviser

Buffett has served as an informal adviser to the president since Obama’s 2008 election campaign. He plans to hold a Sept. 30 fundraiser in New York for Obama’s re-election bid.

While Obama hasn’t set a minimum tax for those with $1 million-plus in income, his prime target is the differential between the tax rates on capital gains and ordinary income. Today’s 20-percentage-point difference gives taxpayers an incentive to find ways to reclassify wage income as investment income.

In addition to the cuts in Medicare and Medicaid, Obama also will seek $260 billion in savings from other so-called mandatory programs not subject to annual appropriations, the officials said. While the officials wouldn’t specify which ones, farm subsidies and contributions to retirement programs for federal workers are among those programs.

Another $1.1 trillion would come from savings from winding down the wars in Afghanistan and Iraq, the officials said.

Jobs Plan

The jobs plan the president has proposed is a $447 billion package of tax cuts and spending. He proposes to pay for it largely by capping itemized deductions and some exclusions for individuals earning more than $200,000 a year and married couples earning more than $250,000.

He also would tax the carried interest, or profits-based compensation, of private equity managers, real estate investors and venture capitalists as ordinary income, instead of more lightly taxed capital gains, and limit the oil and gas industry’s ability to claim domestic manufacturing deductions for drilling.

Obama will incorporate all those tax proposals in his deficit plan, along with the expiration of the tax cuts passed under the administration of President George W. Bush for individuals making more than $200,000 and couples making more the $250,000, an official said.

The officials said Obama will frame specific changes as only suggestions to the panel and focus on a call for a tax overhaul that meets the revenue target, complies with his Buffett rule and lowers rates.

The tax increases and spending cuts Obama will propose would come on top of the more than $1 trillion in cuts to discretionary spending that he and Congress agreed to when they raised the national debt limit in August, for a total of more than $4 trillion over 10 years.

To contact the reporter on this story: Mike Dorning in Washington at mdorning@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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Stocks, Euro Slump on Concerns About Greek Debt

Stocks and U.S. futures fell, sending the MSCI All-Country World Index lower for the first time in five days, as the euro weakened amid concern about Greece’s debt. Treasuries gained and copper retreated.

The MSCI All-Country World Index declined 1.1 percent at 1:03 p.m. in London. The Stoxx Europe 600 Index dropped 1.7 percent and futures on the Standard & Poor’s 500 Index sank 1.5 percent. The euro depreciated 1 percent and the Dollar Index rose for a second day. The yield on the 10-year Treasury fell five basis points and the similar-maturity Greek yield jumped 167 basis points. Copper reached a nine-month low and gold added 0.3 percent. Japan’s markets were shut for a public holiday.

“The Greek situation could be coming to a head,” said Khiem Do, the Hong Kong-based head of multi-asset strategy at Baring Asset Management, which oversees about $10 billion. “Some hair cut might be needed for Greece if they don’t receive additional funding. That could create a domino effect in countries like Spain, Italy and Portugal. That’s what the market is fearing.”

Greece’s ability to avoid default hangs in the balance this week as international monitors will assess whether Prime Minister George Papandreou can meet the conditions of rescue loans. German Chancellor Angela Merkel’s party lost a regional election in Berlin yesterday amid voter anger over her handling of the debt crisis. OPEC Secretary-General Abdalla El-Badri said today that global demand for oil is rising less than expected.

Banks Tumble

More than 11 stocks declined for each that advanced in the Stoxx 600, as all 19 industry groups fell. BHP Billiton Ltd. and Rio Tinto Group led mining companies lower, losing more than 4 percent. Barclays Plc, the U.K.’s second-biggest bank by assets, and France’s Societe Generale SA tumbled more than 5 percent.

The drop in S&P 500 futures indicated the U.S. equity benchmark will fall after posting the third-biggest weekly gain since 2009. President Barack Obama will propose a new levy on U.S. taxpayers making more than $1 million, adopting a suggestion from billionaire investor Warren Buffett, according to an administration official.1

Tyco International Ltd., the world’s largest publicly traded maker of security systems, said it will break up into three publicly traded companies to drive growth. Shares of the company rose $2.10, or 4.6 percent, to $45.80 before U.S. trading opened.

The euro slid 1.1 percent against the yen, depreciating against a majority of its 16 most-traded peers. The Dollar Index, which tracks the U.S. currency versus those of six trading partners, advanced 0.7 percent. The yen appreciated against all of its 16 major counterparts.

Fed Meeting

Finance chiefs from the euro region said last week that the 18-month debt crisis leaves no room for tax cuts or extra spending to spur an economy on the brink of stagnation. Federal Reserve policy makers will gather in Washington tomorrow for a two-day meeting to discuss whether additional measures are needed to help revive the economic recovery.

The yield on the German 10-year bund dropped six basis points, while the Italian yield climbed eight basis points. That drove the difference in yield between the two securities 14 basis points higher to 380 basis points. The Greek two-year note yield surged 613 basis points, or 6.13 percentage points, snapping a three-day decline. The Greek-German 10-year spread widened 177 basis points to 21.10 percentage points.

The yield on the 10-year Treasury note fell four basis points to 2.005 percent. The two-year yield dropped to a record 0.1512 percent, according to data compiled by Bloomberg. Wall Street’s biggest bond traders are stockpiling Treasuries at the fastest pace since 2007 on speculation the Federal Reserve will announce a plan this week to buy longer-term debt to spur the faltering economy.

Primary Dealers

The 20 primary dealers held $15.1 billion of Treasury securities due in more than one year as of Sept. 7, the most since December and up from a $75 billion bet against the debt on May 6, Fed data show.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments rose 12.5 basis points to 337.5.

The S&P GSCI index of 24 commodities fell 0.6 percent, led by industrial metals and energy. Copper declined 3 percent to $8,433.25 a metric ton. Gold jumped to $1,818.18 an ounce.

Oil dropped 0.8 percent to $87.30 a barrel, after earlier reaching the lowest in a week in New York on concern weaker economic growth in the U.S., the world’s largest consumer of crude, and Europe will hurt demand.

The MSCI Emerging Markets Index declined 2.2 percent. Poland’s WIG20 Index sank 2.6 percent, led by a 3.9 percent drop in PKO Bank Polski SA, the country’s biggest bank. Benchmark indexes in Hungary and the Czech Republic slid by more than 2 percent. The Hang Seng China Enterprises Index of Chinese companies listed in Hong Kong sank 3.7 percent to the lowest close since May 2009.

To contact the reporters on this story: Lynn Thomasson in Hong Kong at lthomasson@bloomberg.net; Rob Verdonck in London at rverdonck@bloomberg.net

To contact the editor responsible for this story: Stuart Wallace in London at swallace6@bloomberg.net

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AT&T Approaches Rivals to Save T-Mobile Bid

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AT&T is seeking ways to salvage its agreement to acquire T-Mobile USA from Bonn-based Deutsche Telekom AG after the Justice Department sued on Aug. 31 to stop the deal. Photographer: Stephen Yang/Bloomberg

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Sept. 14 (Bloomberg) -- Technology and telecommunications analyst Afzal Bari says the next big hurdle for AT&T Inc.'s $39 billion bid for T-Mobile USA is resolving the Aug. 31 lawsuit filed by the U.S. Justice Department. In a Bloomberg Government Briefing, Bari outlines what might result from the lawsuit and a separate regulatory review from the Federal Communication Commission. (Source: Bloomberg)

AT&T Inc. (T) is approaching smaller rivals including MetroPCS Communications Inc. (PCS) and Leap Wireless International Inc. (LEAP) to sell spectrum and subscribers as part of an attempt to save its $39 billion takeover of T-Mobile USA Inc., said two people with direct knowledge of the situation.

AT&T has also reached out to CenturyLink Inc. (CTL), Dish Network Corp. (DISH) and Sprint Nextel Corp. (S) to gauge their interest in buying assets, said the people, who declined to be identified because the talks are private.

AT&T, based in Dallas, is seeking ways to salvage its agreement to acquire T-Mobile USA from Bonn-based Deutsche Telekom AG (DTE) after the Justice Department sued on Aug. 31 to stop the deal. The talks with competitors are preliminary and may not lead to a deal, and the Justice Department may also deem the remedies insufficient, the people said.

AT&T, which would become the largest U.S. wireless operator with the purchase, has said it will fight the Justice Department in court and has asked for an expedited hearing for the case. The company and the DOJ are scheduled to meet in court Sept. 21 to explore whether a settlement may be reached.

Bank of America Corp. is advising AT&T on potential asset sales, according to the people. JPMorgan Chase & Co., Greenhill & Co. and Evercore Partners Inc. were AT&T’s original advisers on the deal.

Sprint, the third-biggest U.S. mobile operator, filed a Sept. 6 antitrust lawsuit against the T-Mobile deal.

Spokesmen for AT&T, MetroPCS, Leap, CenturyLink, Dish, Sprint and Bank of America declined to comment.

AT&T has agreed to compensate Deutsche Telekom with $3 billion in cash, as well as wireless spectrum and roaming agreements, if the deal isn’t completed. Deutsche Telekom has also said it will work to close the deal. In addition to the DOJ, the companies need approval from the Federal Communications Commission to complete the transaction.

To contact the reporters on this story: Serena Saitto in New York at ssaitto@bloomberg.net; Jeffrey McCracken in New York at jmccracken3@bloomberg.net.

To contact the editors responsible for this story: Jennifer Sondag at jsondag@bloomberg.net; Peter Elstrom at pelstrom@bloomberg.net.

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Infineon Sits on $3 Billion Acquisition Cash as Biggest Rivals Don’t Tempt

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Peter Bauer, chief executive officer of Infineon Technologies AG, has said he’s most interested in purchases that would boost the power, power-conversion and power management operations of Mittal’s division. Photographer: Guenter Schiffmann

Infineon Technologies AG (IFX), flush with as much as $3 billion in cash for acquisitions, is struggling to find an attractive target that would boost its most profitable business, power semiconductors.

“We want technology and intellectual property that is complementary to our own and these companies aren’t very exciting investments,” Arunjai Mittal, head of Infineon’s Industrial & Multimarkets division, said in an interview at the headquarters of Europe’s second-largest maker of semiconductors in Neubiberg, Germany.

Mittal was referring to the nine other companies in IMS Research Data’s top 10 ranking of global power semiconductor makers, including Toshiba Corp. (6502), STMicroelectronics NV (STM), Vishay Intertechnology Inc. (VSH), International Rectifier Corp. (IRF), Fairchild Semiconductor International Inc. (FCS) and Renesas Electronics Corp. (6723)

Infineon, which in July raised its full-year sales forecast, has benefited from surging demand for chips used in energy and consumer-electronics products as well as in cars. Chief Executive Officer Peter Bauer has said he’s most interested in purchases that would boost the power, power- conversion and power-management operations of Mittal’s division. Such chips are used in trains, windmills, lighting, mobile phones and games consoles.

The company also completed the sale of its mobile chip unit to Intel Corp. (INTC) this year for $1.4 billion, helping to boost net cash at the end of June to 2.2 billion euros ($3 billion).

Market Share

“Experts tell us that 85 percent of M&A deals, particularly when a public company buys a public company, fail,” Mittal said. “These companies often don’t offer the uniqueness that would make it worth it,” unless the target’s share price is “wrong” and Infineon’s share price is “right,” Mittal said, explaining why Infineon has been “on the fence” until now.

Infineon shares are currently trading at 10.36 times earnings, compared with a median of 9.49 for the publicly listed companies in IMS Research’s ranking of the 10 largest power-chip companies, according to Bloomberg data.

“It’s difficult for them to find attractive technology or additional complementary technology as they already have a very broad product portfolio and also for the next generation of products they are well positioned,” Guenther Hollfelder, an analyst at UniCredit in London, said via phone. “They’ll probably become more active in share buybacks.”

Infineon shares have fallen 11 percent this year, compared with a 14 percent decline in the Stoxx 600 Technology Index of 24 companies. The German company has a market value of 6.8 billion euros.

Doubts

Mittal said he would need to be “very sure” about the strategic benefits to pay as much as the 78 percent premium that U.S. rival Texas Instruments Inc. (TXN)’s agreed for National Semiconductor Corp. (NSM)

Texas Instruments, the second-largest U.S. chipmaker, agreed in April to buy National Semiconductor for about $6.5 billion to add higher margin analog semiconductors.

The part of the power semiconductor market in which Infineon competes was worth $15.8 billion in 2010, according to IMS Research. Last year, Infineon had the biggest piece of that total at 11.2 percent, ahead of Toshiba’s 6.8 percent.

“The gap to number two is so large now that they would have to invest so much it would be nearly impossible for them to catch up quickly,” Mittal said. “We have at least two years’ lead.”

Growth Forecast

Researcher IHS iSuppli predicts that semiconductors specifically made for power management will grow 13.4 percent this year for revenue of $35.3 billion, on rising demand for energy-efficient consumer devices and industrial equipment. Over the next five years, the power chips market will grow 10.2 percent, the researcher said.

Infineon predicts Mittal’s IMM unit, which contributes about 45 percent of total revenue, will grow by more than 10 percent annually, compared with about 10 percent for the automotive unit and about 5 percent to 7 percent for chip card and security.

Mittal also said he’s not concerned about the impact of the current economic woes as the sovereign debt crisis battered Europe and global markets. Researcher Gartner Inc. slashed its forecast for worldwide semiconductor sales Sept. 15, predicting they will drop 0.1 percent this year, citing excess inventory and slowing demand and a worsening economic outlook. It previously forecast a 5.1 percent rise.

“We’re on the right path and there is nothing to be concerned about, unless another Lehman Brothers type of event happens,” Mittal said. Capacity utilization at Infineon is still “very high” and if a customer didn’t place an order in the last three months, it would be impossible for the company to deliver within three months, he said.

“In any case I would expect my division’s business to grow twice as much as the GDP.”

To contact the reporter on this story: Ragnhild Kjetland in Frankfurt at rkjetland@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong in Berlin at kwong11@bloomberg.net

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