Economic Calendar

Wednesday, November 9, 2011

Computer Sciences Declines After Cutting Fiscal Full-Year Profit Forecast

By Xu Wang - Nov 9, 2011 10:25 PM GMT+0700

Computer Sciences Corp. (CSC), a contractor for U.S. government agencies and companies, fell the most in almost three months after reducing its fiscal 2012 profit forecast amid “federal budget uncertainty.”

The shares declined 12 percent to $28.89 at 10:24 a.m. in New York, after dropping 13 percent for the biggest intraday slide since Aug. 10. Computer Sciences, based in Falls Church, Virginia, was down 34 percent this year before today.

“North American public sector business continues to be impacted by the federal budget uncertainty,” Chief Executive Officer Michael Laphen said in a statement today.

Earnings for the year ending March 31 will be $4.05 to $4.10 a share, excluding some items, the company said in the statement. In August, Computer Sciences forecast per-share profit of $4.70 to $4.80.

Computer Sciences also reported a second-quarter net loss of $2.88 billion, or $18.56 a share, including a goodwill impairment and a previously disclosed claims settlement. Excluding those items and costs related to the acquisition of health-care software maker ISoft, Computer Sciences had profit of 94 cents a share in the quarter ended Sept. 30, according to the statement. That beat the 68-cent average of 11 analyst estimates compiled by Bloomberg.

Revenue rose less than 1 percent from a year earlier to $3.97 billion. The company had net income of $184 million, or $1.18 a share, in the previous year’s second quarter.

To contact the reporter on this story: Xu Wang in New York at xwang206@bloomberg.net

To contact the editor responsible for this story: Ville Heiskanen at vheiskanen@bloomberg.net




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Adobe Shares Fall as Software Maker Cuts Jobs

By Aaron Ricadela - Nov 9, 2011 9:44 PM GMT+0700

Adobe Systems Inc. (ADBE) shares fell the most in 13 months after the company said it will cut 750 jobs as it lessens its focus on older products and shifts investment to programs for digital publishing and Web advertising.

The job cuts, mostly in North America and Europe, will cost $87 million to $94 million before taxes, the company said in a statement yesterday. That includes $73 million to $78 million of charges in the fiscal fourth quarter, which ends Dec. 2. After the costs, net income will be 30 cents to 38 cents a share, compared with a previous forecast of 41 cents to 50 cents.

Adobe, the largest maker of graphic-design software, is facing competition from Apple Inc. and Microsoft Corp. and an industry shift away from its Flash technology for Internet programming. To cope with the changes, the San Jose, California- based company is adapting its products for the increasingly popular HTML5 programming language and software for cloud computing, which is delivered over the Internet.

The company said it is channeling research, sales and marketing investments into digital media and marketing in its next fiscal year, and expects less licensing revenue from software for corporate servers. As a result, Adobe said sales will increase 4 percent to 6 percent next year. Analysts surveyed by Bloomberg had expected sales to increase 9 percent to $4.53 billion next year.

Adobe’s shares fell 12 percent to $26.72 at 9:32 a.m. New York time, the most since Sept. 22, 2010. The company was the worst performer in the Standard & Poor’s 500 index. The stock has declined 1.2 percent this year before today.

Analyst Meeting

Adobe Chief Executive Officer Shantanu Narayen and other executives are scheduled to hold presentations for financial analysts today in New York, where they will discuss the company’s business strategy.

The company is overhauling the way it sells its most popular software, called Creative Suite, to spur more frequent purchases of programs like Photoshop and Dreamweaver. As more customers seek to buy and use software over the Internet, Adobe plans to release a software package called Creative Cloud early next year.

Adobe also reiterated its fourth-quarter forecast for sales and profit yesterday. Revenue will be $1.08 billion to $1.13 billion, and profit excluding certain costs will be 57 cents to 64 cents a share, Adobe said in September when it reported third-quarter results.

To contact the reporters on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net





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Olympus Shares Extend Slump as Investor Demands Wider Purge of Management

By Mariko Yasu and Naoko Fujimura - Nov 9, 2011 4:43 PM GMT+0700

Olympus Corp. (7733)’s admission that three of its top executives colluded to hide losses from investors fails to address the roles played by other officials, according to the company’s biggest overseas shareholder.

The Japanese camera maker’s shares slumped by their daily limit for a second day after it yesterday reversed weeks of denials that there was any wrongdoing in its past acquisitions. The company fired Executive Vice President Hisashi Mori over his role in covering up the losses with former Chairman Tsuyoshi Kikukawa, who resigned last week, and said auditor Hideo Yamada would step down.

Olympus’ biggest overseas shareholder is now demanding investor relations head Akihiro Nambu go too, because of his role as a director of Gyrus Group Plc, the U.K. takeover target used to funnel more than $600 million in inflated advisory fees to a Cayman Islands fund. After Nambu, the rest of the board must follow, said Josh Shores, a London-based principal for Southeastern Asset Management Inc.

“Even if they didn’t know the specific details around where payments were going and exactly why, they knew that cash was going out the door and they also failed to raise their hands to ask questions,” Shores said. “I don’t know who else is involved, but somebody else is. There is a third party somewhere who received this money.”

Cayman Links

Olympus plunged by 20 percent, or 150 yen, to close at 584 yen on the Tokyo Stock Exchange today. The stock tumbled 29 percent yesterday, as exchange rules limited it to a drop of 300 yen. A stock priced at less than 1,000 yen in the previous trading day are limited to a decline of 150 yen.

Olympus President Shuichi Takayama yesterday said the company was looking into the role played by special purpose funds in hiding the losses, which date back to the 1990s. The mechanism for hiding the losses is still under investigation, he said.

At least eight Cayman Islands entities have been linked to Olympus acquisitions that are suspected of playing a role in the accounting scandal. Five of those no longer exist, according to a search of the Caymans registry, which doesn’t give details on the individuals behind the companies.

Kikukawa, Mori and Nambu became the three directors of Gyrus in June 2008 following the $2 billion acquisition of the U.K. medical equipment maker in February that year. They were also directors of three companies set up to handle the takeover, including the decision to pay out advisory fees that amounted to more than a third of the acquisition’s value, filings show.

Allegations

Olympus declined a request to interview Kikukawa and Mori. In six attempts to talk to Kikukawa at his home, the former chairman didn’t appear. Mori’s home address given in U.K. filings leads to a house under renovation in Kawasaki city, about an hour from central Tokyo. Nobody answered the doorbell on a recent visit to Nambu’s home in a seven-story condominium about 27 kilometers (17 miles) from the city center.

Japanese and U.S. regulators are probing allegations by former chief executive officer Michael C. Woodford that more than $1.5 billion was siphoned through offshore funds. That money may have been used to cancel out non-performing securities that Olympus was keeping off its books, according to a report in the Shukan Asahi magazine, which cited people familiar with the process.

More Cockroaches

Yesterday’s plunge in Olympus shares pulled other Japanese equities lower on concerns the country hasn’t escaped corporate governance weaknesses that have dogged it since the stock market bubble burst at the end of 1989. Olympus shares have lost 76 percent of their value since Woodford took his accusations public after he was axed on Oct. 14.

“Institutional investors will stay away from Japan’s market until they confirm this is an isolated case,” said Koichi Kurose, chief economist in Tokyo at Resona Bank Ltd. Some “investors probably think that if there’s one cockroach, there may be 10 more,” he said.

Olympus’ revelations echo the practice of hiding losses known as “tobashi” that became widespread in Japan in the late 1980s and led to the failure of Yamaichi Securities Co., according to Yasuhiko Hattori, a professor at Ritsumeikan University in Kyoto. Yamaichi used overseas paper companies to hide problematic securities until it failed in 1997 with 260 billion yen ($3.3 billion) in hidden impairments.

Brokerage Involvement

Takayama declined to comment on the involvement of any securities firms in Olympus’ cover-up.

“There is speculation in the market that Nomura may somehow be involved in this Olympus case,” said Shoichi Arisawa, an Osaka-based manager at IwaiCosmo Holdings Inc. “Individual investors in particular probably sold after seeing a high volume of Nomura’s shares being traded.”

Nomura didn’t participate in Olympus’s concealment of losses, said Hajime Ikeda, managing director of corporate communications for the securities firm.

“We are not aware of any involvement by Nomura in Olympus’s hiding of losses in the 1990s, and we weren’t involved when Olympus wrote off the losses” between 2006 and 2008, Ikeda said in a telephone interview in Tokyo yesterday.

Considering Delisting

The Tokyo Stock Exchange said it’s considering moving the shares in Olympus, the world’s biggest maker of endoscopes, to a watchlist for possible delisting. Takayama pledged to continue with the investigation into the losses, which he said were probably inherited by Kikukawa.

Former President Toshiro Shimoyama has “never heard” of the hidden losses, the 87-year old retiree, said in an interview in Tokyo today. It’s “impossible” such losses were passed on through management changes over the years, said Shimoyama, who was Olympus’s president until 1993.

“The investigation must continue to determine how much rot there is,” said David Herro, chief investment officer of Harris Associates LP. “All responsible must, at a minimum, leave. Also, since the management’s credibility is nearly nonexistent, all of what they say must be verified.”

Harris held 10.9 million Olympus shares as of June 30, a 4 percent stake that makes it the company’s second-biggest overseas investor. Southeastern had a 5 percent stake as of Aug. 16, according to data compiled by Bloomberg.

Bowed in Apology

Olympus President Takayama yesterday said he was unaware of the hidden losses until he was told by Mori and Kikukawa the previous evening. At the press conference, he bowed three times in seven minutes to apologize.

In the weeks running up to his dismissal, Woodford was engaged in an exchange of letters with Kikukawa and Mori in which he detailed the allegations and which were copied to all member of the board.

After he was fired, Woodford went public with his concerns over the advisory fees and writedowns on three other transactions. All involved payments to Cayman Islands companies or special purpose vehicles whose beneficiaries are not known.

Olympus paid 73.4 billion yen to increase stakes in Altis Co., News Chef Co. and Humalabo Co. between 2006 and 2008, which was also used to hide losses, it said yesterday. Olympus wrote down 55.7 billion yen, or 76 percent of the acquisition value, in March 2009, the company said in a statement Oct. 19.

“It’s beyond belief that Mr. Takayama claims he only found out about it last night,” Woodford said in a telephone interview yesterday. “If he didn’t know before I started writing my letters then he should have known after.”

To contact the reporters on this story: Mariko Yasu in Tokyo at myasu@bloomberg.net; Naoko Fujimura in Tokyo at nfujimura@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net





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Papandreou to Meet Papoulias as Criticism Grows on Unity Government Delays

By Maria Petrakis, Natalie Weeks and Marcus Bensasson - Nov 9, 2011 9:38 PM GMT+0700

Prime Minister George Papandreou will meet President Karolos Papoulias in Athens today as criticism grows over delays in naming a new prime minister to lead an interim Greek government to avert the economy’s collapse.

Papandreou will have talks with Papoulias at the presidential palace at 5 p.m. Greek time, according to an e- mailed statement from the presidency. There, he will tender his resignation and announce the formation of a new national unity government, state-run NET TV said, without saying how it got the information.

Negotiations on a unity government between Papandreou and Antonis Samaras, leader of the opposition New Democracy party, have dragged on for nearly three days as the two sides disagreed on a prime minister and the opposition balked at European Union demands for written commitments. The new government must implement budget measures and decisions related to an Oct. 26 bailout package, including a debt swap, before holding elections.

It is “imperative that a new government is formed immediately,” Greek Central Bank Governor George Provopoulos, a member of the European Central Bank’s Governing Council, said in an e-mailed statement from the Athens-based bank. “Political uncertainty has added to the stress facing the economy and the banking system.”

Banker, Judge

Former central banker Lucas Papademos was poised to lead the new government as of late yesterday, according to reports from NET TV and To Vima newspaper. To Vima said today, without citing anyone, that Vassilios Skouris, president of the European Court of Justice, may be given the post of prime minister in place of Papademos.

“The bottom line is that the clock is ticking for Greece as it will soon run out of cash without European help,” said Thomas Costerg, an economist at Standard Chartered Bank in London. “Greek leaders seem still not to have appreciated the urgency of the situation.”

Papandreou promised to step down and raced to put together a new government to bridge differences with EU leaders and officials after his proposal of a referendum on the second Greek financing package of 130 billion euros ($177 billion) roiled markets.

At Stake

Immediately at stake is the fate of an 8 billion-euro loan installment under the first aid package, a 110 billion-euro EU- led bailout agreed in May 2010. The tranche must be paid before the middle of December to prevent a collapse of the country’s financial system.

“If no prime minister has been appointed by 5 p.m., the responsibility will be in the hands of those who brought us here whether by design or by accident,” opposition lawmaker Dora Bakoyannis, a former foreign minister, said in comments shown on NET TV. “This is shameful for the political system of the country.”

“Greek politicians don’t seem to be willing to give the new premier enough power to choose his Cabinet or enough time in office to solve the problems,” Spyros Economides, senior lecturer at the London School of Economics, said in a telephone interview.

The uncertainty hurt global markets as Italian Prime Minister Silvio Berlusconi agreed to step down and LCH Clearnet SA raised the deposit it demands for trading the nation’s securities.

Euro, Stocks Fall

The euro fell 1.5 percent to $1.3627, while the MSCI Asia Pacific Index added 0.8 percent. Standard & Poor’s 500 futures expiring in December fell 2.3 percent to 1244.20.

The yield on the 10-year Greek bond dropped 2 basis points to 27.73 percent, after seven straight days of increases.

European stocks fell with the benchmark Stoxx Europe 600 Index dropping 2.1 percent. Greece’s benchmark general index fell 2.2 percent to 762.34 at 2:48 p.m. in Athens, after two days of advances.

European finance ministers expect a written commitment from any government after Papandreou’s proposal for a referendum on the Greek bailout package created a “breach of confidence” with the EU, the bloc’s Economic and Monetary Affairs Commissioner Olli Rehn said yesterday. The proposal was later withdrawn.

“Now this confidence needs to be mended,” he said.

The letter will need to be signed by Papandreou, Samaras, the new prime minister and finance minister as well as the head of the Greek central bank.

Lost Credibility

The fact that Papandreou’s government lost all credibility in Europe doesn’t mean the country’s dignity can be insulted, New Democracy party spokesman Yannis Michelakis said in an e- mailed statement, referring to the EU demand for a written pledge.

The stand-off extended the uncertainty over Greece’s banks and economy. National Bank of Greece SA, the country’s largest, lost 2.8 percent to 2.11 euros at 3 p.m. in Athens. EFG Eurobank Ergasias SA, the second-biggest, fell 6.6 percent to 77 cents.

Greek bank deposits in September fell 2.9 percent from the previous month to 183.2 billion euros, according to Bank of Greece data released yesterday. The 5.4 billion-euro drop is the biggest one-month decline since data started being recorded after the country’s entrance to the euro region in January 2001.

Greece plans to pay lenders 50 cents for each euro the government borrowed under the terms of the bailout plan agreed to at the Oct. 26 summit. Its 4 percent notes due in August 2013 now trade at about 35 cents. Fitch Ratings says the agreement with creditors would amount to a “default event” if implemented, while the International Swaps and Derivatives Association says it won’t trigger credit-default swaps.

To contact the reporters on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net; Natalie Weeks in Athens at nweeks2@bloomberg.net; Marcus Bensasson in Athens at mbensasson@bloomberg.net.

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net





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Iran Sought Miniaturized Nuclear-Weapon Design to Fit Missiles, IAEA Says

By Jonathan Tirone and Margaret Talev - Nov 9, 2011 4:51 PM GMT+0700

Iran continued working on nuclear weapons at least until last year, including efforts to shrink a Pakistani warhead design to fit atop its ballistic missiles, a report from United Nations inspectors said.

The International Atomic Energy Agency, drawing on evidence collected over eight years, reported yesterday that Iran carried out “work on the development of an indigenous design of a nuclear weapon including the testing of components.”

The document shows that Iran worked to redesign and miniaturize a Pakistani nuclear-weapon design by using a web of front companies and overseas experts, according to the report and an international official familiar with the IAEA’s probe. Such a warhead could be mounted on Iran’s Shahab-3 missile, which has the range to reach Israel, according to the IAEA.

The report adds to international pressure on Iran to answer questions about its program. It was released amid reports in Israeli media that Prime Minister Benjamin Netanyahu is pressing his Cabinet to support possible military action to halt Iran’s nuclear program.

The U.S. and European nations may pursue additional sanctions against Iran following the report’s release and are waiting to see how Iran responds, according to two U.S. officials who briefed reporters on condition of anonymity. Iran already is under UN sanctions and the U.S. has imposed sanctions on Iranian government agencies, financial institutions and government officials.

‘Political Dishonesty’

France and its allies are ready to impose “unprecedented sanctions” on Iran if it doesn’t fully cooperate with the IAEA, French Foreign Minister Alain Juppe said in a statement today.

China and Russia, two veto-wielding UN Security Council members, questioned the timing and outcome of the IAEA report. Russia suspects the authors of some comments in document of “political dishonesty,” according to a statement by Moscow’s Foreign Ministry. The report should trigger “dialogue and cooperation” without triggering “new instability,” China’s Foreign Ministry said.

The administration officials said the IAEA’s conclusions don’t conflict with U.S. intelligence estimates that Tehran’s government scaled back nuclear-weapons development in 2003 while maintaining the capability to resume. The officials said Iran’s nuclear weapons efforts have proceeded sporadically since 2003 and that the U.S. believes advancement since then hasn’t been dramatic.

Ongoing Work

In its report, the Vienna-based IAEA said, “some activities relevant to the development of a nuclear explosive device continued after 2003” and “some may still be ongoing.”

Until now, atomic inspectors had only voiced concerns publicly about the “possible existence” of weapons work in Iran.

State-run PressTV said Iran “has rejected” the IAEA report as “unbalanced and politically motivated.” Iran has told IAEA inspectors that evidence used against the Persian Gulf country was forged.

The agency’s report brought calls in the U.S. for tougher action against Iran.

It’s “further proof that the U.S. and other responsible nations must take decisive action to stop the regime from acquiring a nuclear capability,” said U.S. Representative Ileana Ros-Lehtinen, a Florida Republican who is chairwoman of the House Foreign Affairs Committee.

Risk Premium

The IAEA report also “could increase the risk of a military attack on Iran’s nuclear facilities” and therefore “justified a certain risk premium on the price of oil,” Commerzbank wrote yesterday in a research note. Crude oil for December delivery rose $1.28 to $96.80 a barrel on the New York Mercantile Exchange, the highest settlement since July 28. Futures are up 5.9 percent this year.

Iran worked on high-explosives design and the development of a neutron generator, the part of an atomic bomb that starts a nuclear chain reaction, according to the senior international official.

“Iran embarked on a four-year program, from around 2006 onward, on the further validation of the design of this neutron source,” the IAEA said in the report, citing one member state that shared information with inspectors.

Experiments

The agency revealed details of “large-scale high- explosives” experiments conducted near Marivan in 2003. The experiments would have helped Iran calibrate the explosive impact of a bomb’s uranium core, according to the report.

“The information comes from a wide variety of independent sources, including from a number of member states, from the agency’s own efforts and from information provided by Iran itself,” the IAEA said in the document.

It is the first time that the IAEA has published a comprehensive analysis of Iran’s nuclear-weapons work. Data before 2003 are more complete than information seen afterward, according to the senior official. The agency shared a copy of the information with Iranian authorities before the report was published, the official said.

Iran increased its supply of 20 percent-enriched uranium to 73.7 kilograms (162.5 pounds) from 70.8 kilograms reported in September at a pilot nuclear facility in Natanz about 300 kilometers (186 miles) south of Tehran, the IAEA said. Iran has produced 4,922 kilograms of uranium enriched to less than 5 percent compared with 4,543 kilograms in the last IAEA report.

About 630 kilograms of low-enriched uranium, if further purified, could yield the 15 kilograms to 22 kilograms of weapons-grade uranium needed by an expert bomb maker to craft a weapon, according to the London-based Verification Research, Training and Information Center, a non-governmental observer to the IAEA that is funded by European governments.

To contact the reporters on this story: Jonathan Tirone in Vienna at jtirone@bloomberg.net; Margaret Talev in Washington at mtalev@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net; Mark Silva at msilva34@bloomberg.net





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Stocks in U.S. Tumble as Italian Bond Yields Increase to Euro-Era Records

By Rita Nazareth - Nov 9, 2011 10:10 PM GMT+0700

Nov. 9 (Bloomberg) -- Eric Jackson, founder of Ironfire Capital LLC, talks about the outlook for Yahoo! Inc. Alibaba Group Holding Ltd. and Softbank Corp. are talking with private-equity funds about making a bid for all of Yahoo without the company’s blessing, people with knowledge of the matter said. Jackson speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)


U.S. stocks slumped, following a two- day advance in the Standard & Poor’s 500 Index, as a surge in Italian bond yields to euro-era records bolstered concern that Europe’s sovereign debt crisis is worsening.

Bank of America Corp. (BAC) and Morgan Stanley tumbled at least 3.1 percent, following losses in European lenders, after LCH Clearnet SA raised the extra charge it levies on clients for trading Italian government bonds and index-linked securities. General Motors Co. (GM) slumped 8.4 percent after abandoning its target for European results. Adobe Systems Inc. (ADBE) sank 12 percent on plans to cut jobs as it lessens its focus on older products.

The S&P 500 sank 2.5 percent to 1,243.88 as of 10:10 a.m. New York time, after rising 1.8 percent over the previous two days. The Dow Jones Industrial Average lost 272.50 points, or 2.2 percent, to 11,897.68. The Stoxx Europe 600 Index decreased 2 percent, erasing an earlier advance, as the 10-year Italian note yield topped 7 percent for the first time in the euro era.

“It’s just like a scary movie as it never ends,” Keith Wirtz, who oversees $16.7 billion as chief investment officer at Fifth Third Asset Management in Cincinnati, said in a telephone interview. “The overarching problem is that most of the economies in Europe can’t sustain the size of their governments. We’re going to have this headache for a long time to come. That’s what’s causing angst.”

The so-called deposit factor for Italian bonds due in seven-to-10 years will be raised to 11.65 percent, the French unit of LCH Clearnet said in a document dated yesterday. That compares with a charge of 6.65 percent announced on Oct. 7.

Protect Against Losses

Clearing houses guarantee that investors’ trades are completed by standing in the middle of two counterparties, and raise margin requirements to protect themselves against losses should one side of the trade fail.

Stocks rose yesterday as Prime Minister Silvio Berlusconi’s offer to resign boosted optimism Italy would appoint a new leader who can tame the debt crisis. Greek Prime Minister George Papandreou’s talks on forming an interim government dragged into a third day as a near-agreement with the biggest opposition party stalled on European demands for written commitments.

“The Greek flu is hitting Italy,” James McDonald, chief investment strategist at Northern Trust Corp. in Chicago, which manages $643 billion, said in a telephone interview. “The pressures on the political system have led to Berlusconi’s resignation, and now the market says -- this is fine and dandy, but who’s going to be the new leadership? Until they know that and the new leadership’s willingness to implement reforms, they are going to require higher compensation through higher yields on Italian bonds. The risk is that this feeds on itself.”

Banks Tumble

American banks tumbled as a gauge of European lenders sank 4.2 percent. The KBW Bank Index sank 3.5 percent as all 24 stocks retreated. Bank of America lost 3.1 percent to $6.33. Morgan Stanley (MS) retreated 6.4 percent to $16.22.

General Motors slumped 8.4 percent to $22.93. The automaker, which hasn’t turned an annual profit in Europe in more than a decade, fell after rescinding its target for break- even results in the region. Europe operations lost $292 million before interest and taxes in the quarter.

GM said it no longer expects to break even on an EBIT basis before restructuring costs in Europe, citing “deteriorating economic conditions.”

Adobe slumped 12 percent to $26.88. The reduction of 750 jobs, mostly in North America and Europe, will cost $87 million to $94 million before taxes, the company said. After the costs, net income will be 30 cents to 38 cents a share, compared with a previous forecast of 41 cents to 50 cents.

Thwart Recovery

Concern that Europe’s debt crisis may thwart a global economic recovery sent the Morgan Stanley Cyclical Index down 3.3 percent. The Dow Jones Transportation Average of 20 stocks slumped 2.7 percent. FedEx Corp. (FDX), operator of the world’s biggest cargo airline, slipped 3.2 percent to $80.35. Apple Inc. (AAPL), the biggest technology company, lost 2.1 percent to $397.68.

Energy and raw material producers dropped as the dollar rose, reducing the appeal of commodities. Alcoa Inc. (AA), the largest U.S. aluminum producer, slid 3.7 percent to $10.39. Chevron Corp. (CVX) fell 3.1 percent to $105.52.

The S&P 500 may halt its biggest gain in 20 years, according to two indicators studied by technical analysts at UBS AG. October’s 11 percent rally, which was the biggest monthly advance since 1991, failed to leave the S&P 500 above its 200- day average, limiting the potential for a rally, the Zurich- based analysts wrote in a report yesterday.

The team also said their model for moving average convergence-divergence, or MACD, is heading into “bear mode.”

“We see the risk of more near-term weakness into next week,” Marc Muller and Michael Riesner wrote in the report. “Given the high volatility, we would see a pullback into next week still as a trading opportunity for aggressive traders, whereas, on the upside, we wouldn’t chase the market.”

In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security.

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net




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HSBC Raises U.S. Bad Loan Provisions

By Howard Mustoe and Gavin Finch - Nov 9, 2011 7:38 PM GMT+0700

HSBC Holdings Plc (HSBA), Europe’s largest bank by market value, said investment banking profit fell in the third quarter amid Europe’s sovereign debt crisis and posted higher bad loan provisions for its U.S. unit.

Pretax profit at the investment bank, led by Samir Assaf, fell 53 percent to about $1 billion in the third quarter from a year-earlier, London-based HSBC said in a statement today. Bad loan provisions increased to $3.89 billion from $3.15 billion, a rise attributed to its U.S. unit, the bank said. The shares fell.

HSBC has so far set aside more than $65 billion for souring loans in North America following its purchase of U.S. subprime lender Household International in 2003. This quarter’s increase in loan impairment charges is a consequence of foreclosure moratoriums in some U.S. states, Finance Director Iain Mackay told journalists today. HSBC, like Barclays Plc and Royal Bank of Scotland Group Plc, also recorded a slowdown in revenue from investment banking amid volatile European markets.

“The big humdinger, which has caught everybody on the hop, is the bad debt charge,” said Christopher Wheeler, a London- based analyst with Mediobanca SpA. HSBC made provisions against its Household business at the onset of the financial crisis in 2006, Wheeler said. “Here we are again, doing the same thing.”

HSBC fell 6 percent to 505.1 pence at 12:25 p.m. in London, the fifth-worst performer in the Bloomberg Europe Banks and Financial Services index, valuing the bank at 90.2 billion pounds ($144 billion).

‘Significant Headwinds’

Bad loan provisions in the U.S. rose 21 percent to $2.39 billion, as HSBC today warned of “pressure on future credit performance” in the U.S. and “further house price weakness” as more properties come onto the market.

“We are unable to foreclose on a broad base of customers who are delinquent,” Mackay said. “If they stop paying there’s very little we can do in terms of foreclosure. People are taking payment holidays” because “their bank cannot foreclose on them.”

The banking industry also faces “significant headwinds” because of continuing political, regulatory and macroeconomic uncertainty, especially in Europe, Chief Executive Officer Stuart Gulliver said.

Investment banking revenue declined 19 percent to $3.5 billion because of its credit and rates business in Europe.

“Our fixed income business was very directly impacted by the uncertainty in the euro zone and to a lesser extent some of the events in the U.S. in the third quarter relating to the debt ceiling,” Mackay said. These lines of the business “will continue to be stressed for some period of time,” he said.

Revenue Slips

RBS, the U.K.’s biggest government-controlled bank, last week said third-quarter investment-banking revenue slipped 29 percent to 1.1 billion pounds ($1.8 billion) from a year- earlier. Barclays said revenue at its Barclays Capital investment banking unit fell 15 percent to 2.25 billion pounds in the period when it reported earnings on Oct. 31.

HSBC’s net trading income fell to $106 million from $1.39 billion, the company said. The lender’s cost-efficiency ratio for the nine-month period, minus a gain from it own debt, worsened to 59.1 percent from 54.4 percent a year-earlier.

The bank is seeking to meet the “soft end” of its targets for cost-efficiency and return on equity of 12 percent to 15 percent, Gulliver told analysts on a conference call today.

The anticipated $2.4 billion joint cost of the U.K. bank levy on their foreign operations and the Independent Commission on Banking’s proposals is “too high,” Mackay said.

Shield Taxpayers

Britain’s Chancellor of the Exchequer George Osborne has pledged to implement the ICB’s proposals by 2019. The plans, aimed at shielding customers and taxpayers from another financial crisis, may cost the industry as much 7 billion pounds, according to the ICB.

The bank’s net investments in the sovereign debt of Greece, Ireland, Italy, Portugal and Spain fell 33 percent to $5.5 billion, from $8.2 billion in June.

“The outlook for the global economy is very challenging as problems in developed markets begin to affect growth rates around the world,” the company said. “Faster-growing markets clearly possess significant potential for growth, however, and continue to offer attractive business opportunities.”

Bad loan provisions in Hong Kong rose to $112 million from $35 million, the company said.

The pick-up in Asian loan impairments could have a “negative read across” for Standard Chartered Plc, Credit Suisse Group AG analysts including London-based Amit Goel wrote in a note to clients today. Standard Chartered, which earns most of its profit in Asia, fell 3.3 percent to 1368 pence in London.

Net income increased 66 percent to $5.22 billion from $3.15 billion a year-earlier, lifted by $4.1 billion gain on the value of its own debt, the lender said. That beat the $3.84 billion median estimate of eight analysts surveyed by Bloomberg.

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

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net





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Lagarde Sees ’Dark Clouds’; ”Warns of ‘Lost Decade’

By Bloomberg News - Nov 9, 2011 9:25 PM GMT+0700

International Monetary Fund Managing Director Christine Lagarde warned of the risk of a “lost decade” for the global economy unless nations act together to counter threats to growth.

“In our increasingly interconnected world, no country or region can go it alone,” Lagarde said in a speech to a forum in Beijing today. “There are dark clouds gathering in the global economy.” China and India echoed the call for cooperation in a separate statement.

Advanced economies have a “special responsibility” to restore confidence and lift growth, while China should boost consumption and allow its currency to rise, the IMF leader said. European leaders are looking to China as a potential source of funds as a sovereign-debt crisis threatens to engulf Italy, the third-biggest economy in the euro area.

Asian stocks rose for the first day in three today as easing inflation in China left more room for officials to support economic growth. A 5.5 percent gain in consumer prices in October was the least in five months, a government report showed.

China and India said that the global economy is in a “critical phase,” in a statement after the fifth meeting in a so-called financial dialogue between the two nations, usually held each year. The comments were dated yesterday and posted on a Chinese government website today.

International Cooperation

“In emerging markets, where growth is relatively stronger, there are clear signs of a slowing as developments in advanced economies begin to weigh on these countries,” the two nations said. “In the face of these challenges, both sides recognized that strengthening of international policy cooperation is needed at this juncture.”

The MSCI Asia Pacific Index rose 1.1 percent as of 5:13 p.m. in Tokyo.

“We are all caught in a higher debt trap,” Former Federal Reserve Chairman Paul Volcker said at an event in Singapore today, in response to a question on whether the U.S. has fallen into a liquidity trap like Japan. “That’s the problem with Greece, Spain, Italy, Portugal and Ireland. It’s not a very happy situation.”

In Italy, Prime Minister Silvio Berlusconi has offered to resign as his nation struggles with taming its debt burden and borrowing costs climb. Hong Kong Chief Executive Donald Tsang said this week that the world economy faces a 50 percent chance of a recession.

Asia’s Response

In Asia, policy makers need to respond nimbly should conditions worsen, Lagarde said today. They “can ease off the fiscal brakes, draw on reserves or regional reserve pooling arrangements, and reactivate central-bank swap lines,” she said. Lagarde cited high unemployment in advanced economies and economic and financial market declines that reinforce each other as concerns.

“If we do not act, and act together, we could enter a downward spiral of uncertainty, financial instability, and a collapse in global demand,” Lagarde said in her prepared text. “Ultimately, we could face a lost decade of low growth and high unemployment.”

Japan’s so-called lost decade during the 1990s saw the economy slip in and out of recession and grow at an average rate of about 1 percent a year after the collapse of a real-estate bubble.

In Asia, “countries need to prepare for any storm that might reach their shores,” Lagarde said. At the same time, a balancing act is required, because “some face continued overheating pressures and risks to financial stability from prolonged easy financial conditions.”

‘Right Direction’

Lagarde said plans by leaders of the euro-area economies and Group of 20 nations over the past month to increase a rescue package for Greece were a “step in the right direction” to resolving Europe’s debt crisis.

The enlarged European Financial Stability Facility should be able to start raising funds in December, she said.

European finance ministers meeting in Brussels this week pledged to roll out the bulked-up rescue fund next month after consulting investors and credit-rating companies over two options for translating the fund’s 440 billion euros ($607 billion) in guarantees into as much as 1 trillion euros of spending power.

--Li Yanping, with assistance from Lilian Karunungan in Singapore and Cherian Thomas in Bangalore. Editors: Paul Panckhurst, Patrick Henry

To contact the reporter on this story: Li Yanping in Beijing at yli16@bloomberg.net

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




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European Stocks Slide as Italy Bond Yields Climb to Record; HSBC Retreats

By Adria Cimino - Nov 9, 2011 10:11 PM GMT+0700

European stocks dropped for the third day in four after the spread between Italian and German bond yields widened to the most since the introduction of the euro and Italy’s credit-default swaps jumped to a record.

HSBC Holdings Plc (HSBA), Europe’s largest bank, retreated 6 percent. Dexia SA (DEXB) slumped 12 percent as the lender said its shareholder equity shrank because the Belgian government nationalized its unit in the country. Deutsche Post AG (DPW), Europe’s biggest postal service, jumped 4.6 percent after raising its full-year forecast.

The Stoxx Europe 600 Index fell 2 percent to 235.63 at 3:10 p.m. in London. Stocks earlier climbed as much as 1 percent after Italian Prime Minister Silvio Berlusconi offered to resign. The benchmark measure has still rallied 9.7 percent from this year’s low on Sept. 22 as investors speculated that the euro area would protect the economies of Italy and Spain from the sovereign-debt crisis.

“This is a negative spiral in terms of Italian debt,” said Yves Maillot, head of investments at Robeco Gestions SA in Paris, which oversees $6.8 billion. “We already were in a perilous situation. The level of debt in Italy is a very, very big problem. In spite of the good news of changes in Italian leadership, the problem is deeper.”

National benchmark indexes fell in all of the 18 western European markets. France’s CAC 40 Index sank 2.5 percent. Germany’s DAX Index retreated 2.4 percent. The U.K.’s FTSE 100 Index lost 2.2 percent.

Italian Bond Yields

Italian bonds tumbled, pushing two-, five-, 10- and 30-year yields to euro-era records. The 10-year notes underperformed similar-maturity benchmark German bunds, driving the difference in yield between the securities to 500 basis points for the first time since before the euro was introduced in 1999. The spread widened to 501 basis points, or 5.01 percentage points.

Italy’s two-year notes slid, pushing the yield on the securities above the rate on 10-year bonds. The 10-year note yield climbed to 7.35 percent, a euro-era record.

The cost of insuring against default on the country’s sovereign bonds jumped 38 basis points to a record 562, according to CMA. That exceeded the previous record of 534 set on Sept. 22.

The cost to protect against losses in European stocks compared with U.S. stocks rose to the highest level since July. Implied volatility for Euro Stoxx 50 Index options expiring in three months rose to 1.36 times the measure for S&P 500 Index options. That was the highest ratio since July 20, according to data compiled by Bloomberg.

Austerity Measures

Berlusconi last night said he will step down as soon as parliament passes austerity measures. He had pledged to cut spending in a bid to convince investors that Italy can manage the euro area’s second-largest debt. The government has yet to write the austerity bill, said Mario Baldassarri, head of the Senate Finance Committee.

LCH.Clearnet Ltd. increased the extra deposit it demands from clients to trade all Italian government bonds and index- linked securities.

In Greece, Prime Minister George Papandreou’s talks on forming an interim government to avert the economy’s collapse dragged into a third day as a near-agreement with the biggest opposition party stalled on European Union demands for written commitments. The makeup of Greece’s new government is to be announced today, the Associated Press reported, citing a government official who it did not name.

Chinese Inflation Slows

China’s inflation slowed by the most in almost three years, giving officials more room to support growth as industrial production cools, a report today showed. Consumer prices rose 5.5 percent in October from a year earlier, the statistics bureau said. The measure declined 0.6 percentage points from September, its biggest slide since February 2009.

A German panel said it sees growth slowing to 0.9 percent next year because of the debt crisis.

HSBC dropped 6 percent to 505.4 pence, contributing the most to the Stoxx 600’s slide. The bank said pretax profit at its investment bank led by Samir Assaf fell to about $1 billion in the third quarter from a year-earlier. Bad-loan provisions increased to $3.89 billion from $3.15 billion, mainly related to its U.S. unit, the bank said.

Bank shares fell 4.4 percent, among the biggest drops of the 19 industry groups in the Stoxx 600, as Greek and Italian lenders slid. Piraeus Bank SA (TPEIR) retreated 7.4 percent to 25 euro cents, while Banca Popolare dell’Emilia Romagna Scrl (BPE) lost 5.6 percent to 5.52 euros. Alpha Bank AE (ALPHA) sank 9 percent to 1.11 euros.

Dexia, Mediaset Slide

Dexia, the lender being broken up after running out of short-term funding, plunged 12 percent to 36.7 euro cents. The bank said shareholder equity shrank 84 percent after the nationalization of its Belgian bank unit and declines in the value of government bond holdings.

Mediaset SpA (MS), the broadcaster controlled by Berlusconi, tumbled 9.7 percent to 2.27 euros after the premier offered to resign once parliament approves stability measures.

Admiral Group sank 26 percent to 887 pence for the biggest decline on the Stoxx 600 and the shares’ largest retreat since 2004. The U.K. car insurer that owns the confused.com website said full-year pretax profit will be toward the lower end of analysts’ estimates.

Legrand SA (LR) sank 4.5 percent to 24.05 euros. KKR & Co. and Wendel SA completed the sale of 24.3 million shares in the world’s largest maker of wiring devices at 24 euros apiece, the companies said.

Deutsche Post, CGGVeritas

Deutsche Post rallied 4.6 percent to 11.19 euros. The company lifted its full-year forecast as increasing express shipments in Asia and parcel volume from Internet retailing boosted third-quarter earnings. Earnings before interest and taxes in 2011 will exceed 2.4 billion euros, the company said. That compared with an earlier prediction for Ebit at the upper end of a 2.2 billion-euro to 2.4 billion-euro range.

CGGVeritas added 4.7 percent to 17.02 euros. The company reported third-quarter net income of $41 million and said it remains “confident” of achieving its full-year objectives. The seismic surveyor made a loss of $33 million in the year-earlier period.

To contact the reporter on this story: Adria Cimino in Paris at acimino1@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net





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Italian Yields Top 7% as LCH Raises Margin, Berlusconi Offers to Resign

By Paul Dobson - Nov 9, 2011 7:08 PM GMT+0700

Italian bonds slumped, driving two- five-, 10- and 30-year yields to euro-era records, after LCH Clearnet SA raised the deposit it demands for trading the nation’s securities.

Two-year note yields rose above 10-year rates, with five- year debt climbing above 7.5 percent as Prime Minister Silvio Berlusconi’s offer to resign left his weakened government struggling to implement austerity measures to reduce borrowing costs. German 10-year bunds outperformed all their regional peers as the drop in Italian bonds boosted demand for the safest fixed-income assets. The euro sank and U.S. Treasuries jumped.

The LCH change for Italy “is a big deal in that it highlights the deterioration of its credit quality,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “The more pressing issue still remains the political backdrop. The market would love a technocrat government to get the reforms through. If we go down the election route we’ve probably got three months of inaction.”

The yield on Italy’s five-year notes jumped 82 basis points, or 0.82 percentage point, to 7.70 percent at 11:56 a.m. London time. The 4.75 percent securities due in September 2016 dropped 2.995, or 29.95 euros per 1,000-euro ($1,363) face amount, to 88.81.

Germany’s 10-year bund yield dropped six basis points to 1.74 percent, with the two-year note yield one basis point lower at 0.39 percent. The extra yield investors demand to hold 10- year Italian debt instead of bunds reached 5.75 percentage points, also a euro-lifetime high.

Euro-Region Bailouts

The increase in rates risks making it too expensive for Italy to borrow in the market. Ireland began talks to receive aid on Nov. 18 last year, three weeks after its 10-year yield breached 7 percent. Portugal asked for help on April 6, three months after its borrowing costs jumped past that level. Greek yields also breached 7 percent before winning aid in April 2010.

The European Commission sought “concrete answers” on how Italy will cut its budget deficit as surging Italian bond yields triggered a global market slide. European Union Economic and Monetary Commissioner Olli Rehn “was worried yesterday and continues to be worried today,” commission spokesman Amadeu Altafaj told reporters in Brussels today.

The so-called deposit factor for Italian bonds due in seven-to-10 years will be raised to 11.65 percent, LCH Clearnet said in a document on its website dated yesterday. That compares with a charge of 6.65 percent announced on Oct. 7. Additional costs on all securities maturing through 30 years and including inflation-linked bonds will be applied from today’s close, LCH said.

‘More Expensive’

“It becomes more expensive to fund a position in Italian bonds with higher clearing margins,” said Norbert Aul, a European interest-rate strategist at RBC Capital Markets in London. “This is in particular important for banks. Who is affected and to what extent is difficult to assess.” The revisions are weighing on Italian government bond prices, he said.

The two-year note yield climbed 90 basis points to 7.28 percent. The European Central Bank was said by four people with knowledge of the transactions to have bought Italian securities today. An ECB spokesman in Frankfurt declined to comment.

Credit-default swaps protecting Italy’s government bonds rose 12 basis points to a record 536, according to CMA prices, with the euro weakening 1.4 percent to $1.3642. The yield on the 10-year U.S. Treasury note fell 10 basis points to 1.98 percent. The Stoxx Europe 600 Index slid 2.1 percent.

Bond Auctions

Berlusconi said last night he’d step down as soon as parliament passed cost-cutting steps pledged to EU allies. He favors early elections, he said today, and Angelino Alfano, head of his People of Liberty party, might be the candidate. The government is yet to finish writing the austerity legislation, Mario Baldassarri, head of the Senate Finance Committee, said today.

Germany sold 1.5 billion euros of inflation-linked bonds maturing in April 2018 at an average yield of minus 0.4 percent. The auction drew bids for 1.8 billion euros of the securities, less than the maximum target of 2 billion euros, according to a Bundesbank statement.

Finland auctioned 1.5 billion euros of April 2017 and April 2021 securities.

The yield spread between German and French 10-year bonds jumped 15 basis points to 144 basis points, the most since before the start of the European common currency.

German bunds have handed investors a profit of 8.6 percent this year, matching U.S. Treasuries, which have also returned 8.6 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds lost 8.9 percent.

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

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net




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Italy’s Woes Spell ‘Nightmare’ for BNP, Agricole

By Fabio Benedetti-Valentini - Nov 9, 2011 6:20 PM GMT+0700

BNP Paribas SA and Credit Agricole SA (ACA), France’s largest banks by assets, are finding that their pursuit of growth in neighboring Italy in the past decade has a downside: political risk.

As the world’s biggest foreign holders of Italian public and private borrowings -- with $416.4 billion of such debt at the end of June -- French lenders face collateral damage from the political turmoil that sent Italy’s bond yields to euro-era records. Austerity measures to balance Italy’s budget are also threatening growth in an economy that has lagged behind the European average for more than a decade, and may hurt the French banks’ consumer businesses.

“Italy was a dream investment for French banks,” said Christophe Nijdam, a bank analyst at AlphaValue in Paris. “Nobody could have imagined a sovereign crisis touching a G-7 economy at that time. But the political deadlock is turning the dream into a nightmare.”

Prime Minister Silvio Berlusconi, who failed to muster an absolute majority in a routine ballot in Rome yesterday, agreed to resign after parliament approves the country’s austerity plans next week. Berlusconi’s move forces Italy to seek a new regime stable enough to convince investors the country can fund itself and implement painful budget-cutting measures.

‘Gorilla in the Room’

Italy’s ability to refinance is critical to French financial institutions, which held $106.8 billion of government borrowings and $309.6 billion of private debt at the end of June, according to data from the Bank for International Settlements.

Italy’s 1.9 trillion euros ($2.6 trillion) of debt is the world’s fourth-largest, behind the U.S., Japan and Germany, and more than that of Greece, Spain, Portugal and Ireland combined. Relative to gross domestic product, it is the highest in Europe after Greece, standing at about 120 percent.

“Italy has always been the gorilla in the room for French banks,” said Julian Chillingworth, who helps manage 15 billion pounds ($24 billion) at London’s Rathbone Brothers Plc (RAT) and holds BNP shares. “Sovereign-debt investments in the euro zone are turning out to be like George Orwell’s Animal Farm: ‘All animals are equal but some are more equal than others.’ Italy is not as low risk as Germany or France. The immediate issue for Italy is refinancing.”

French AAA Rating

Italy has to refinance about 308 billion euros of bonds and bills maturing next year, according to Bloomberg data. The country’s bonds tumbled today, driving the five-year note yield to more than 7 percent for the first time since the euro’s creation in 1999. The extra yield investors demand to hold 10- year Italian debt instead of similar-maturity benchmark German bunds reached 5 percentage points.

Concern about French banks’ debt holdings in Europe’s troubled countries -- Greece, Portugal, Ireland, Spain and Italy -- has weighed on their stocks. Before today, the shares of BNP Paribas (BNP) had fallen 41 percent since early July. Credit Agricole tumbled 50 percent, more than the 27 percent drop in the 46- member Bloomberg Europe Banks and Financial Services Index. BNP Paribas slid as much as 3.6 percent today to 30.20 euros, while Credit Agricole fell as much as 2.6 percent to 5.02 euros.

A BNP spokeswoman declined to comment on the impact of the political turmoil in Italy as did a Credit Agricole spokeswoman.

French banks carried about 50 percent of the total private and public claims at European banks related to Italy at the end of June, according to BIS data. The French lenders’ holdings threaten to channel risk toward France, whose own AAA rating is threatened as the European crisis deepens.

Umbilical Cord

Between the French and Italian financial systems “there’s a kind of umbilical cord,” said Jacques-Pascal Porta, who helps manage 500 million euros at Ofi Gestion Privee in Paris, and holds shares in BNP Paribas and Credit Agricole. “If things turn sour in Italy, clearly it’s going to be a problem for the two banks. And given that these are two big French banks, it’s going to weigh on France’s rating too.”

BNP Paribas, based in Paris, held more Italian than French sovereign debt at the end of 2010. It has since cut back on its Italian sovereign holdings. France’s two biggest banks hold about 20 billion euros of Italian government debt.

“French banks’ Italian sovereign exposure in itself isn’t very systemic,” said Pierre Flabbee, a Paris-based analyst at Kepler Capital Markets. “Even in the unrealistic case of an Italian default, their level of exposure per se isn’t systemic for France. Italy is too big to fail because the consequences of a sovereign default on private debt would be incalculable.”

Disengagement Effort

French banks, like their European counterparts, are cutting Italian sovereign holdings. The banks’ participation in the government-debt flight is lowering the value of their remaining holdings and threatens to exacerbate the region’s crisis.

BNP Paribas last week said it cut those holdings by 40 percent, to 12.2 billion euros between July and the end of October. The move was part of an attempt to shrink its total sovereign debt holdings by 23 percent to 81.5 billion euros.

“We incurred losses” from the sales, BNP Paribas Chief Executive Officer Baudouin Prot said in a Bloomberg Television interview last week.

Credit Agricole’s net banking-book Italian debt holdings at the end of June were at 7.8 billion euros, it said Aug. 25.

Meanwhile, Italy’s austerity plan threatens to dampen economic activity and hurt the banks’ main business there. Over the last decade, BNP Paribas and Credit Agricole bought two of Italy’s 10 largest lenders.

Consumer Banking

“Italy has a strong economy; it just needs to be well managed,” BNP Paribas’s Prot said.

Berlusconi’s government has announced austerity measures amounting to more than 100 billion euros since July in an attempt to stem contagion from the euro-area debt crisis.

Italy’s government cut its growth forecast to 0.7 percent this year and 0.6 percent in 2012, from the 1.1 percent and 1.3 percent estimated in April. The unemployment rate rose to 8.3 percent in September from 8 percent in the previous month.

Drawn by one of Europe’s most lucrative consumer banking markets, French financial companies spent at least 20 billion euros since 2006 buying Italian banking and insurance assets.

“The pure retail banking exposure of the French banks in Italy is fully legitimate,” said AlphaValue’s Nijdam. “It was difficult to penetrate, no country really wants its neighbor to buy its domestic banks.”

‘Image Liability’

BNP Paribas, which acquired Rome-based Banca Nazionale del Lavoro SpA in 2006 for 9 billion euros, has about 950 outlets in Italy. Credit Agricole operates about 960 branches in the country. BNP’s 19,100 and Credit Agricole’s 12,000 employees in Italy are the most outside their home market.

“If there was a slow growth or a recession in Italy, maybe the profitability would be impacted, but I do believe that BNL would remain profitable,” Prot said.

In the third quarter, pretax profit at BNL, which was founded in 1913, rose 18 percent from a year earlier to 135 million euros.

BNP Paribas had 73.3 billion euros of loans at its BNL unit at the end of September, compared with BNL’s 32.2 billion euros of deposits, according to its website. The Italian retail- banking unit of Credit Agricole, which will report third-quarter results tomorrow, had 33.2 billion euros of loans and 32.8 billion euros of deposits at the end of June, company data show.

For now, the best option for French banks may be to hunker down and ride out the storm, said AlphaValue’s Nijdam.

“Italy is suffering from some political image liability,” he said. “It’s a solid economy and it makes sense for banks that have taken strategic industrial positions to remain there.”

To contact the reporter on this story: Fabio Benedetti-Valentini in Paris at fabiobv@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Edward Evans at eevans3@bloomberg.net





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Stocks, Euro Sink as Italy Yields Reach Record

By Stephen Kirkland - Nov 9, 2011 9:31 PM GMT+0700

Stocks and the euro plunged as Italian bond yields surged to euro-era records after a clearing firm increased the deposits it demands for trading the nation’s securities, intensifying the European credit crisis. The dollar strengthened and Treasuries surged.

The Standard & Poor’s 500 Index lost 1.3 percent to 1,259.73 at 9:31 a.m. in New York and the Stoxx Europe 600 Index slid 1.8 percent. The yield on Italy’s five-year note jumped 62 basis points to 7.50 percent. The euro weakened 1.7 percent to $1.3605, driving the Dollar Index up 1.4 percent. The yield on 10-year Treasuries sank 11 basis points to 1.97 percent. Oil fell from a three-month high to help lead commodities lower.

LCH Clearnet SA, a clearing house that guarantees investors’ trades are completed, raised the deposit it demands for trading Italian government bonds and index-linked securities. Italian Prime Minister Silvio Berlusconi agreed to step down after the approval of an austerity plan to tame the euro-region’s second-biggest debt, while Greek Prime Minister George Papandreou’s talks on forming an interim government dragged into a third day.

“There’s so much uncertainty, who’s going to take over, when are they going to take over, we just don’t know.” Gary Jenkins, the head of fixed income at Evolution Securities Ltd. in London, told Maryam Nemazee on Bloomberg Television’s “The Pulse” today. The market wants “a government in place as soon as possible to get the austerity measures passed. But they might not get what they want.”

Rally Halted

The S&P 500 snapped a two-day advance. Berlusconi’s offer to resign yesterday triggered an afternoon rally that sent the index up 1.2 percent amid optimism a new Italian leader would be more successful in taming the debt crisis.

General Motors Co. fell after rescinding its target for break-even results in Europe, a region where it hasn’t turned an annual profit in more than a decade. Adobe Systems Inc. tumbled after the largest maker of graphic-design software cut its earnings forecast.

More than 10 shares fell for every one that gained in the Stoxx 600 and all 19 industry groups retreated. Admiral Group Plc plunged 27 percent, the most since its initial public offering in 2004, as the U.K. car insurer said a period of higher-than-expected personal injury claims would lower reserves. Mediaset SpA, the broadcaster controlled by Berlusconi, fell 8.5 percent.

The yield on Italy’s 10-year bond rose 48 basis points to 7.25 percent, and the two-year yield surged 73 basis points to 7.11 percent. Credit-default swaps on Italy’s government bonds jumped 38 basis points to a record 562, according to CMA prices.

Deposit Factor

LCH Clearnet increased the so-called deposit factor for Italian bonds due in seven-to-10 years to 11.65 percent, the French unit of the clearinghouse said in a document on its website dated yesterday. That compares with a charge of 6.65 percent announced on Oct. 7. The additional costs will be applied from close-of-day positions today, LCH said.

New York oil dropped 1.4 percent to $95.49 a barrel, the first decline in six sessions. Zinc slumped for the first day this week, and copper declined for a fourth day, losing 1.3 percent. All 24 commodities tracked by the S&P GSCI Index declined, sending the gauge down 0.9 percent.

The MSCI Emerging Markets Index fell for the first time in four days, losing 0.8 percent. Benchmark gauges in Brazil, Russia, Poland and Hungary declined more than 2 percent. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong climbed 2.2 percent.

To contact the reporter on this story: Stephen Kirkland in London at skirkland@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net





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Italy’s Focus Shifts to Forming New Government

By Chiara Vasarri and Lorenzo Totaro - Nov 9, 2011 7:08 PM GMT+0700

Nov. 9 (Bloomberg) -- Italian Senate Finance Committee Chairman Mario Baldassarri discusses Prime Minister Silvio Berlusconi's resignation offer and the European Central Bank's backing of Italian bonds. He talks with Francine Lacqua on Bloomberg Television's "On the Move." (Source: Bloomberg)

Nov. 9 (Bloomberg) -- Salvatore Zecchini, a professor of economic policy at Rome's Tor Vergata University, discusses the fiscal challenges facing a potential caretaker government in Italy amid Silvio Berlusconi's offer to resign. He talks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)


Prime Minister Silvio Berlusconi’s offer to resign leaves Italy struggling to produce a new regime stable enough to implement painful austerity measures in a country that has averaged almost a government a year since World War II.

Berlusconi said today that he favored early elections and that Angelino Alfano, head of his People of Liberty party, might be the candidate. Berlusconi last night said he’d step down as soon as parliament passed cost-cutting steps pledged to European Union allies in a bid to convince investors Italy can curb record borrowing costs. Parliament is due to vote on the measures in the coming weeks.

Italian stocks and bonds fell today on concern that a change in leadership won’t be enough to contain the turmoil in a nation with the euro-region’s second-biggest debt. European officials’ inability to tackle the sovereign crisis led to a surge in Italian bond yields in recent weeks that further frayed Berlusconi’s fractious coalition as top ministers bickered over how to protect the country from the contagion.

“Whoever is in charge, the numbers remain the same and this morning they are even worse,” Simon Smith, chief economist at foreign-exchange broker FXPro Group Ltd., said in a research note. “This Roman road is currently leading to a cliff. Events have moved far faster than the labored political process of the EU can deal with.”

Bonds Decline

The yield on Italy’s 10-year bond surged 70 basis points to 7.47 percent as of 11:51 a.m. in London, and the five-year yield reached 7.7 percent; those levels drove Greece, Ireland and Portugal to seek international bailouts. LCH Clearnet SA, the French arm of Europe’s largest clearing house, said yesterday it would increase the extra deposit it demands from clients to trade all Italian government bonds and index-linked securities.

Credit-default swaps on Italy’s government bonds jumped 12 basis points to a record 536, according to CMA prices, while the euro dropped 1.4 percent. Italy’s FTSE MIB fell 4 percent and futures on the S&P 500 lost 2.5 percent. Contracts on the Dow Jones Industrial Average fell 1.9 percent.

Berlusconi’s pledge to resign came after he failed to muster an absolute majority on a routine parliamentary ballot, obtaining only 308 votes in the 630-seat Chamber of Deputies yesterday, after key lawmakers defected from his party this week to join the opposition.

EU Pressure

“Italy is now in a dance of death,” Fredrik Erixon, head of the European Centre for International Political Economy in Brussels, said in a telephone interview. “What we need is a strong reaction from other euro-zone leaders to calm markets. But we don’t have it.”

The EU stepped up pressure on Italy to deliver its debt- reduction measures even as Berlusconi’s government was unraveling. Italy’s 1.9 trillion euro-debt ($2.6 trillion) is bigger than that of Greece, Spain, Portugal and Ireland combined.

“The economic and financial situation in Italy is very worrying,” EU Economic and Monetary Commissioner Olli Rehn told reporters yesterday after a meeting of euro-area finance ministers in Brussels. Rehn said he sent Finance Minister Giulio Tremonti about 40 “very specific questions” on Italy’s economic pledges and expects answers by the end of the week.

New Elections

Once parliament passes the plan to implement the austerity measures and Berlusconi resigns, President Giorgio Napolitano will consult political leaders to see if there is to form another government with a broader majority.

Napolitano could also try to build support for a so-called technical government led by a prominent non-politician charged with implementing the economic overhaul and eventually preparing new elections. Former EU Competition Commissioner Mario Monti would be a candidate to lead such a government, Nomura International economist Lavinia Santovetti wrote in a note on Nov. 7.

Berlusconi and his allies insist that Italian voters and not political leaders should choose the next government. “I don’t think there are other feasible solutions,” Berlusconi told state-run RAI television last night. “It’s unfathomable that those who lost the elections can govern.”

Elections could further delay Italy implementing the measures pledged to the EU that also helped convince the European Central Bank to backstop its debt. The ECB has spent more than 100 billion euros on sovereign debt since starting its purchase of Italian and Spanish bonds on Aug. 8.

By law, elections must be held between 45 days and 75 days after the president has dissolved Parliament and the act has been published in the government’s Official Gazette.

Unstable

Most of the opposition parties have signaled they would support a broader coalition or a technical government in a country where election rules and party politics often produce unstable governments that rarely endure a full five-year term, even in the best of times. Any new government not chosen through elections would serve out the current legislative term until April 2013.

Berlusconi, 75, is Italy’s longest-serving prime minister, and has won three elections, governing for half the 17 years since he entered politics in 1994. His resignation doesn’t necessarily signal the end of his political career. He could lead his party in new elections, or run again in 2013.

Technical Government

Italy does have a track record of reaching outside the political spectrum for leaders of technical government, who are generally given a limited term and charged with carrying out specific reforms. Bank of Italy Governor Carlo Azeglio Ciampi was called in to run a technical government in 1993 that oversaw a broad labor market agreement between employers and unions. Treasury Minister Lamberto Dini pushed through a sweeping pension reform as head of another technical government starting in 1994.

Before Berlusconi resigns and Napolitano begins the consultations, both houses of parliament must approve the budget plan. The bill includes an amendment that codifies the implementation of the government’s 45.5 billion-euro austerity plan first announced in August and subsequent measures to trim debt and spur growth in an economy that has trailed the European average for more than a decade.

Berlusconi’s Cabinet agreed to attach some of Italy’s promised austerity and growth measures as an amendment to an existing spending bill. The amendment will include a plan to accelerate asset sales of as much as 60 billion euros, liberalize closed professions and local services and boost infrastructure investment, newspapers including Il Sole reported on Nov. 3.

“The key political point for Italy is now answering the following question: which government, with what wide majority, will be able to implement in a few days the structural reforms that we haven’t been able to implement in the last 10 years?” Mario Baldassarri, chairman of the Senate Finance Committee, said in an interview yesterday.

To contact the reporters on this story: Chiara Vasarri in Milan at cvasarri@bloomberg.net; Lorenzo Totaro in Rome at ltotaro@bloomberg.net

To contact the editors responsible for this story: Angela Cullen at acullen8@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net




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Financial Alchemy Foils Capital Rules in Europe

By Liam Vaughan - Nov 9, 2011 7:29 PM GMT+0700

Banks in Europe are undercutting regulators’ demands that they boost capital by declaring assets they hold less risky today than they were yesterday.

Banco Santander SA (SAN), Spain’s largest lender, and Banco Bilbao Vizcaya Argentaria SA (BBVA), the second-biggest, say they can go halfway to adding 13.6 billion euros ($18.8 billion) of capital by changing how they calculate risk-weightings, the probability of default lenders assign to loans, mortgages and derivatives. The practice, known as “risk-weighted asset optimization,” allows banks to boost capital ratios without cutting lending, selling assets or tapping shareholders.

Regulators in Europe, seeking to stem the region’s sovereign-debt crisis, ordered banks last month to increase core capital to 9 percent of risk-weighted assets by the end of June. Lenders, facing a 106 billion-euro shortfall, are reluctant to plug the gap by cutting dividends or bonuses and are struggling to sell assets or raise cash in rights offerings. Politicians are trying to stop banks from the alternative, cutting back lending, because it could trigger a recession.

“By allowing sophisticated banks to do their own modeling, we are allowing the poacher to participate in being the game- keeper,” said Adrian Blundell-Wignall, deputy director of the Organization for Economic Cooperation and Development’s financial and enterprise affairs division in Paris. “That risks making core capital ratios useless.”

Commerzbank, Lloyds

Spanish banks aren’t alone in using the practice. Unione di Banche Italiane SCPA (UBI), Italy’s fourth-biggest bank, said it will change its risk-weighting model instead of turning to investors for the 1.5 billion euros regulators say it needs. Commerzbank AG (CBK), Germany’s second-biggest lender, said it will do the same. Lloyds Banking Group Plc (LLOY), Britain’s biggest mortgage lender, and HSBC Holdings Plc (HSBA), Europe’s largest bank, both said they cut risk-weighted assets by changing the model.

“It’s probably not the highest-quality way to move to the 9 percent ratio,” said Neil Smith, a bank analyst at West LB in Dusseldorf, Germany. “Maybe a more convincing way would be to use the same models and reduce the risk of your assets.”

European firms, governed by Basel II rules, use their own models to decide how much capital to hold based on an assessment of how likely assets are to default and the riskiness of counterparties. The riskier the asset, the heavier weighting it is assigned and the more capital a bank is required to allocate. The weighting affects the profitability of trading and investing in those assets for the bank.

‘Gray Area’

While firms submit their models to national regulators once a year, they don’t have to disclose them publicly, and risk- weightings for the same assets vary among banks, regulators and analysts say.

“There are potentially significant differences in how different banks calculate RWA,” Daragh Quinn, an analyst at Nomura Holdings Inc. in London, said in a telephone interview. “It’s a very gray area.”

The Basel Committee on Banking Supervision, which has set its own capital standards for banks worldwide independent of those laid out by the European Banking Authority, said in September it planned to review how lenders apply weightings to make sure “the outcomes of the new rules are consistent in practice across banks and jurisdictions.”

That may mean publicly identifying lenders that game the rules, said a person with knowledge of the committee’s talks who declined to be identified because the discussions are private. A spokesman for the Basel committee declined to comment.

‘Anti-American’

Most U.S. banks are governed by Basel I rules, which assign standardized weightings to broad classes of assets, since the U.S. never adopted the second round of regulations.

The proportion of risk-weighted assets to total assets at European banks is half that of American banks, according to an April 6 Barclays Capital report written by analysts Simon Samuels and Mike Harrison. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon in September described the Basel III rules, which give banks until 2019 to increase their core capital ratio to 9.5 percent of risk-weighted assets, as “anti-American.”

Vikram Pandit, chief executive officer of Citigroup Inc. has called for banks to publish details of their risk-weightings on a quarterly basis. At a speech to the Bretton Woods Committee in Washington in September, he said weightings should also be “benchmarked” to ensure consistency across the industry.

Under Basel III, which maintains the same risk-weighting methodology as Basel II, all lenders will be required to use their own models to assess the riskiness of assets and therefore how much capital they need to hold.

“As you move to Basel III, these issues will become more ubiquitous, not less,” the OECD’s Blundell-Wignall said. “The core Tier 1 ratio is a ratio of two meaningless numbers, which itself is a meaningless number because banks can alter the ratio themselves. Basel III does absolutely nothing to address that.”

‘Na├»ve’ Methodology

Sheila Bair, who stepped down as chairman of the Federal Deposit Insurance Corp. in June, has called Europe’s adoption of risk-weighting “naive.” The Washington-based regulator guarantees most consumers’ deposits in U.S. banks.

“It is in a bank manager’s interest to say his assets have low risk, because it enables the bank to maximize leverage and return on equity, which in turn can lead to bigger pay and bonuses,” Bair wrote in Fortune magazine on Nov. 2. “Indeed, even during the Great Recession, as delinquencies and defaults increased, most European banks were saying their assets were becoming safer.”

Some regulators, including Bair, have pushed for a leverage ratio that would require lenders to hold a fixed amount of capital against total assets.

One reason there’s a difference between risk-weighted assets and total assets is that some securities, such as certain sovereign bonds, carry a zero risk-weighting, requiring banks to hold no capital.

‘Gaming the System’

“A basic leverage ratio would be rougher, but it takes away the risk of gaming the system,” said Stephany Griffith- Jones, an economist and lecturer in financial markets at Columbia University in New York. “We need to move away from outsourcing regulation of the banks to the banks.”

European bank stocks have tumbled 31 percent this year, valuing firms at 62 percent of tangible book value. By contrast, U.S. lenders, measured by the 24-company KBW Bank Index (BKX), have fallen 22 percent, valuing banks at 73 percent of book value.

Banco Santander, based in Madrid, and BBVA in Bilbao said they’re justified in adjusting risk-weightings because Spanish regulators have held them to higher standards than elsewhere.

Spanish banks have an average ratio of risk-weighted assets to total assets of 52 percent compared with 32 percent for U.K. banks, 31 percent for French and Benelux banks and 35 percent for German banks, analysts at Keefe, Bruyette & Woods Inc., wrote in an Oct. 26 report. A higher figure suggests a riskier balance sheet or a more conservative approach to risk-weighting.

‘Relative Discrimination’

“There’s a bias that penalizes the Spanish banks -- it’s a situation of relative discrimination,” Luis de Guindos, a former deputy finance minister, said at a Nov. 4 conference. “If it’s fair and suitable, investors won’t see it badly.”

Santander said it planned to increase capital by 4 billion euros by optimizing risk-weighted assets and internal models. BBVA said the total effect of revising its model was expected to be 2.1 billion euros of additional capital.

“Santander’s core capital exceeds that of any of its continental banking competitors,” a spokesman for the bank, who asked not to be identified by name in line with company policy, said in a phone interview.

Paul Tobin, a Madrid-based spokesman at BBVA, said the bank is “catching up with practices that are common elsewhere in Europe.” After making the changes, he said, “BBVA will still be one of the banks with the highest, if not the one with the highest, density of RWAs among large European banks.”

‘Less Faith’

Commerzbank Chief Financial Officer Eric Strutz said that adjusting the risk model was only one of four options being considered by the bank.

The lender needs “to look at models where our RWAs are higher than others because of market conditions,” Strutz said on a conference call with reporters Nov. 3. “Commerzbank is more at the upper end compared with other banks.”

UBI, based in Bergamo, Italy, said on Oct. 27 it’s confident of meeting the 9 percent target by converting debt, shedding assets and “the progressive changeover” to an “advanced” risk model.

Spokesmen for UBI and Commerzbank declined to comment, as did a representative of the EBA.

Investors are unlikely be satisfied by banks adjusting risk models to avoid raising capital, said Harrison, the Barclays analyst, who is based in London.

“Gaming RWAs isn’t helpful, particularly if the objective is to convince the market to invest in banks again,” Harrison said. “The risk is that it’s counterproductive, because there is even less faith in what the banks are telling you.”

To contact the reporter on this story: Liam Vaughan in London at lvaughan6@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net





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