Economic Calendar

Monday, December 12, 2011

Pincus Faceoff With Zuckerberg Shows Fearsome Prelude to Zynga’s IPO: Tech

By Douglas MacMillan - Dec 12, 2011 12:00 AM GMT+0700

Enlarge image Zynga CEO Mark Pincus

Zynga Chief Executive Officer Mark Pincus. Photographer: Scott Eells/Bloomberg

When Zynga Inc. reached an impasse while negotiating a five-year partnership with Facebook Inc. in August 2010, Chief Executive Officer Mark Pincus demanded a one- on-one meeting with Mark Zuckerberg.

The two CEOs ate dinner at the Facebook cafeteria and held a freewheeling discussion until 2 a.m. Over the course of the meeting and two other marathon sessions that followed, Pincus convinced Zuckerberg that Zynga’s games would help Facebook add users and revenue. They forged a deal that threw Facebook’s support behind Zynga, in exchange for a cut of sales.

Pincus’s negotiating prowess -- Google Inc. Chairman Eric Schmidt calls it “fearsome” -- helped put his company on course for a $1 billion initial public offering this month. The challenge now is keeping up that intensity at a publicly held company, where Pincus will contend with more scrutiny and less control over the business he started more than four years ago.

“One of the big questions for anybody going public is, ‘Can they maintain their long-term focus?’” Zuckerberg, whose own company is slated to hold its IPO next year, said in an interview. “I just don’t think that’s a big issue with Mark because he can deal with the pain of any short-term hit to power through and get to where he wants to go. I hope I’m the same way. That’s definitely something I’ve learned from him.”

Persuading investors to bet long-term on Zynga is the next hurdle for Pincus, a veteran entrepreneur and former investment- banking analyst who is attempting to pull off the biggest IPO for an Internet company since Google’s debut (GOOG) in 2004.

Elder Statesman

At 45, Pincus is 18 years older than Zuckerberg and twice the age of some startup founders in Silicon Valley. He has started five companies and invested in many more over the past two decades, helping him hone his negotiating skills and attention to analytical detail.

Zynga, founded in 2007, is the culmination of a career’s worth of lessons learned, said Marc Andreessen, a venture capitalist and co-founder of Netscape Communications Corp., who has invested in the startup.

“He has built a machine,” Andreessen said. “Google is a tightly wired business machine. Microsoft (MSFT) is a tightly wired business machine. Apple (AAPL) is too. Zynga is very much in the mold of those other companies.”

Bloomberg LP, the owner of Bloomberg News, is an investor in Andreessen Horowitz.

Virtual Goods

Zynga makes money by offering games for free and then charging for virtual items, such as a puppy in “FarmVille” or an assault rifle in “Mafia Wars.” About 6.7 million of Zynga users were paying customers in the first nine months of the year, up from 5.1 million a year earlier. Revenue more than doubled to $828.9 million in the period. Unlike Groupon Inc. and some other recent IPOs, Zynga is profitable, though its net income has decreased this year as Pincus steps up spending on overhead, marketing and product development.

Pincus also has clashed with board members and employees over his career. He has alienated some Zynga staffers by pushing them to work long hours. A few employees were asked to return unvested equity because their potential rewards didn’t match what they were contributing to the business, said Roger Dickey, one of the first 30 workers at Zynga and the creator of “Mafia Wars.”

“Mark didn’t get where he is by being a softie,” said Dickey, who left the company earlier this year and now works as a startup investor.

‘Every Horrible Thing’

Pincus has said himself that he went too far at times, especially in Zynga’s early days.

“I did every horrible thing in the book just to get revenues,” including giving users virtual credits in exchange for downloading software that was later difficult to delete, he said during a talk in 2009 in Berkeley, California.

“He has a reputation for being an a--hole,” said Alex St. John, president and chief technology officer at Hi5 Networks, a social-gaming site. St. John adds that he hasn’t met Pincus and doesn’t share this view.

Dani Dudeck, a spokeswoman for San Francisco-based Zynga, declined to make Pincus available for comment on this story, citing the pre-IPO quiet period mandated by the U.S. Securities and Exchange Commission.

Pincus grew up in Chicago’s affluent Lincoln Park neighborhood, the son of an architect mother and a father who worked as a public-relations adviser to CEOs and politicians. After studying economics at the University of Pennsylvania, he took jobs in banking, working at Lazard Freres & Co. and Asian Capital Partners, an investment bank based in Hong Kong. He then went on to get an MBA at Harvard University with the idea of going back into the business world on his own.

Dot-Com Era

Pincus moved to San Francisco in 1995 to capitalize on the beginnings of the dot-com boom. He persuaded venture capitalist Fred Wilson to invest $250,000 in FreeLoader Inc., an Internet service for personalized news that Pincus founded with his friend, Sunil Paul. Wilson gave Pincus a few months to make back his money. After seven months, FreeLoader was sold for $38 million to Individual Inc., a company that delivered news online.

Pincus’s next startup was Inc., which helped businesses diagnose and fix problems with computers from remote locations. Founded in 1997, it went public in 2000.

Pincus left his CEO post -- and, eventually, the company -- amid tension with the board, according to two people with knowledge of the situation. Zynga’s Dudeck declined to comment on the matter.

Unauthorized Projects

When the board brought in former Hewlett- Packard Co. (HPQ) executive Radha Basu as the new CEO, Pincus asked engineers to work on weekends so he could give them projects not authorized by Basu, said one of the people familiar with the matter, who asked not to be named.

After, Pincus focused on investing in new startups, including Brightmail Inc., Napster Inc. and Friendster Inc. In 2000, he bought Eric Schmidt’s airplane, a single-engine Beechcraft Bonanza, and devoted more time to his hobby of flying. He also invested in a movie, 2001’s “Kissing Jessica Stein,” which grossed more than $7 million on a $1 million budget, according to the Internet Movie Database.

Pincus made an early bet on the social-networking craze when he started Tribe Networks Inc. in 2003. Though the company was sold to Cisco Systems Inc. in 2007 before gaining wide popularity, it helped established Pincus as a predictor of technology trends, said Marc Benioff, founder and CEO of Inc.

Social Experience

“He has been doing social for almost a decade,” said Benioff, whose company now provides software to Zynga. “He was doing social when Mark Zuckerberg was still in high school.”

Pincus first met Zuckerberg in 2004, after Peter Thiel put out a call asking if any of his friends wanted to invest in Facebook. Aside from Reid Hoffman, the founder and chairman of LinkedIn Corp., the only person to go along with Thiel was Pincus.

“He had a pretty good intuition early on that this would grow into something,” Zuckerberg said.

After investing in Facebook, Pincus used Zynga to double- down on that bet. Facebook had just opened its site to outside developers, letting Zynga offer its “Texas HoldEm Poker” game to the social network’s burgeoning ranks of users.

Pincus staffed his company with managers skilled at analyzing data. Unlike traditional game developers, which spend millions of dollars producing a game and then ship it out, Pincus continually tinkers. The idea is to get users to play for longer periods and spend more money on virtual items.

Voting Power

This year, in a move that might help Pincus avoid a reprise of the board tension at, Zynga revamped its stock structure to give him 70 times more voting power than shares sold in the IPO. The change grants him more influence than other Silicon Valley founders, including Google’s Larry Page and Sergey Brin, who hold 10 times the voting power of investors.

Pincus often gets his way outside the boardroom as well, said Google’s Schmidt. In the summer of 2009, Pincus was seeking a partnership that led to Google buying a 3 percent stake in Zynga. When Pincus came to the negotiating table, he personally knew more about the proposed deal than everyone on the Google side of the table combined, according to Schmidt.

“He is a we’re-going-to-make-this-happen-or-else type of person,” Schmidt, who was Google’s CEO at the time, said in an interview. “He is a fearsome, strong negotiator.”

‘What About Us?’

In January of this year, when Twitter Inc. was negotiating with San Francisco to get a tax exception, Pincus sought the same terms.

“He said, ‘That’s good for Twitter, but what about us?’” Ed Lee, mayor of San Francisco, said in an interview.

Pincus helped organize a meeting at city hall with other technology executives, including Yelp Inc. CEO Jeremy Stoppelman, Riverbed Technology Inc. CEO Jerry Kennelly and prominent angel investor Ron Conway, along with representatives from about 30 other companies based in the city. Pincus led the group in pushing Mayor Lee to repeal the citywide tax, all but threatening to move Zynga out of the city if the tax remained, according to Lee.

“He said he would make it really hard for us to continue with the plans we would like to have here about expansion and about permanency,” Lee said. “I understood what he meant.”

To contact the reporters on this story: Douglas MacMillan in San Francisco at

To contact the editor responsible for this story: Tom Giles at


Google, Motorola Mobility Merger Review Temporarily Halted by EU Regulator

By Aoife White - Dec 12, 2011 7:35 PM GMT+0700

European Union regulators suspended their antitrust review of plans by Google Inc. (GOOG), the biggest maker of smartphone software, to buy Motorola Mobility Holdings Inc. to seek more information about the deal.

The antitrust authority will continue the review after it has obtained “certain documents that are essential to its evaluation of the transaction,” said Amelia Torres, a spokeswoman for the Brussels-based European Commission. The commission temporarily stopped the review on Dec. 6, according to a filing on the regulator’s website today.

Regulatory reviews mean the purchase by Google is likely to close in 2012, Motorola said last month. Google plans to use Motorola Mobility’s more than 17,000 patents to protect supporters of its Android software in licensing and legal disputes with rivals such as Apple Inc. (AAPL) -- and also move into the hardware business.

Al Verney, a spokesman for Google in Brussels, wasn’t immediately available to comment.

To contact the reporter on this story: Aoife White in Brussels at

To contact the editor responsible for this story: Anthony Aarons at


Ericsson Moves Chief Technology Officer to Australia; No Replacement Named

By Diana ben-Aaron - Dec 12, 2011 3:06 PM GMT+0700

Ericsson AB (ERICB), the world’s largest maker of wireless equipment, said it will name a new chief technology officer early next year to replace Haakan Eriksson, who is moving to run Australian and New Zealand operations.

“The process is ongoing and we expect it to be closed before Feb. 1,” when Eriksson takes his new post, Ola Rembe, a spokesman at the Stockholm-based manufacturer, said in an interview. He declined to comment further on the announcement.

Chief Executive Officer Hans Vestberg aims to get more revenue from the company’s 27,000 patents built up during Eriksson’s period as technology chief. Eriksson became CTO in 2003 and added the job of president of Ericsson Silicon Valley in 2009 to succeed Bert Nordberg, who became CEO of the company’s Sony Ericsson joint venture.

“I have had a desire to move into a more commercial role and for personal reasons to come closer to Australia,” Eriksson, whose wife is from that country, said in today’s statement.

To contact the reporter on this story: Diana ben-Aaron in Helsinki at

To contact the editor responsible for this story: Kenneth Wong at


Zynga IPO May Cap Busy Week for U.S. Offerings

By Lee Spears - Dec 12, 2011 8:24 PM GMT+0700

Zynga Inc. and Michael Kors Holdings Ltd. are leading the biggest week for U.S. initial public offerings in nine months, betting their surging sales will attract investors.

Zynga, the largest maker of games on Facebook, luxury- clothing designer Kors Holdings and nine other companies are seeking as much as $3.8 billion in IPOs this week, data compiled by Bloomberg show. That’s the most since the five days starting March 7, when HCA Holdings Inc. raised $4.4 billion.

Zynga’s management team, led by Chief Executive Officer Mark Pincus, has been telling investors in roadshow presentations that the company is working on its biggest-ever pipeline of online games. Zynga’s sales more than doubled in the nine months through Sept. 30, while Kors Holdings’ revenue jumped more than 60 percent in its first half, even as consumer confidence sank to the lowest level since the recession.

“These are companies that are experiencing very robust secular growth,” said Paul Bard, director of research at Greenwich, Connecticut-based IPO research and investment firm Renaissance Capital LLC. “These are the types of deals that are less impacted by what we’ve seen in the broader macro environment.”

Offerings began to dry up in August as the sovereign-debt crisis engulfed Europe and the U.S. received its first-ever credit downgrade. Even with companies from Groupon Inc. to Angie’s List Inc. completing share sales since November, more than 200 IPOs are still on file with U.S. regulators to raise a total of about $49 billion, according to Renaissance, the most in more than a decade.

Asia Deals

While deals in Asia have also rebounded, with offerings raising at least $5.7 billion in Hong Kong last week, some of the biggest IPOs priced at or near the low end of their proposed ranges. Chow Tai Fook Jewellery Group Ltd. raised HK$15.8 billion ($2 billion) on Dec. 9 selling its shares at the low end of a HK$15 to HK$21 range, people with knowledge of the matter said. New China Life Insurance Co. raised HK$10.2 billion selling shares at HK$28.50 each after offering them for HK$28.20 to HK$34.33.

Nexon Co., the Tokyo-based maker of online social games, set its IPO price of 1,300 yen ($16.74) per share on Dec. 5 and will begin trading on the Tokyo Stock Exchange on Dec. 14, according to Bloomberg data.

Hong Kong Offerings

At least four companies, including Guodian Technology & Environment Group Co. and Beijing Jingneng Clean Energy Co., are seeking to sell $1 billion of stock in IPOs scheduled to price in Hong Kong this week, Bloomberg data show. That contrasts with Europe, where the amount raised in offerings since August has slumped more than 85 percent from the same period a year earlier.

Zynga plans to offer as much as $1 billion of stock selling 100 million shares for $8.50 to $10 apiece on Dec. 15, according to a regulatory filing and Bloomberg data. The $7 billion valuation Zynga seeks at the high end of that range is 6.8 times sales in the year through Sept. 30, or more than triple game maker Electronic Arts Inc.’s (ERTS) price relative to sales in the same period, data compiled by Bloomberg show.

“They have a good revenue stream and are diversifying their revenue streams,” Akram Yosri, managing partner of Dubai- based 3i Capital Group, said after leaving Zynga’s roadshow in New York last week. His firm oversees about $1.4 billion.

Zynga’s Prospects

Zynga, which has 54 million daily active users that play games for 2 billion minutes per day, is working to keep its lead over Electronic Arts, which bolstered its own online services by purchasing PopCap Games this year. Redwood City, California- based Electronic Arts had a market value of $7.3 billion, or 1.9 times trailing 12-month sales, as of Dec. 9, according to Bloomberg data.

Zynga’s games, featured on Facebook Inc.’s social- networking site, include “Mafia Wars” and “FarmVille.” Its offering is being managed by Morgan Stanley and Goldman Sachs Group Inc. (GS) The stock will list on the Nasdaq Stock Market under the symbol ZNGA. Facebook is also weighing an IPO that may value the company at more than $100 billion, a person with knowledge of the matter said last month.

Kors Holdings, whose products include clothes, fragrances and beauty items, is seeking as much as $792 million Dec. 14, offering 41.7 million shares at $17 to $19 apiece on behalf of existing stockholders. The Hong Kong-based company, founded 30 years ago by designer Michael Kors, will receive no proceeds. Kors himself, the largest individual investor, plans to trim his stake to 8.6 percent from 12 percent.

Michael Kors

The midpoint of the offering range would value Kors Holdings at $3.4 billion, or 3.4 times sales of $1 billion in the 12 months through Oct. 1, its filing shows. Coach Inc. (COH) trades at about 4.3 times sales over the same period, and Ralph Lauren Corp. is at about 2.1 times sales.

Kors Holdings plans to more than double stores over the “long term,” according to its regulatory filing. Sales amounted to $548.7 million in the six months through Oct. 1, compared with $340.9 million a year earlier.

“There is, as there should be, upside to the investor, provided the company executes on a plethora of growth opportunities with continued improvement to operating margins,” said Jeffry Aronsson, chairman of New York-based Aronsson Group LLC, which helps develop fashion brands.

Kors Holdings’ operating margin widened in the year ended April 2 to about 18 percent, according to Bloomberg data. Rivals Coach and Ralph Lauren held steady from year-ago levels at 32 percent and 15 percent, respectively.

Morgan Stanley, JPMorgan Chase & Co. (JPM) and Goldman Sachs are leading the offering for the clothing designer, whose shares will trade on the New York Stock Exchange under the ticker KORS.

Jive’s Offering

Jive Software Inc., the maker of social-networking software for businesses, aims to raise as much as $117 million in its IPO. The planned sale of 11.7 million shares for $8 to $10 apiece is scheduled for today, Bloomberg data show.

The top end of the offer range would value Jive at $573 million, or 8.3 times sales in the year through Sept. 30. That’s more than double the ratio of 3 for Microsoft Corp. (MSFT) and 2.2 for International Business Machines Corp., both named as competitors in Jive’s IPO filing.

Jive, whose software lets employees collaborate on projects, may benefit as larger technology companies snap up purchases in cloud-computing to spur growth. SuccessFactors Inc., whose programs manage employee performance, is fetching $3.4 billion, 52 percent more than its public market value, in an acquisition by SAP AG announced Dec. 3. Oracle Corp. agreed to buy RightNow Technologies Inc. for $1.5 billion in October.

‘Strategic Interest’

“It shows there is strategic interest in these types of companies,” Renaissance’s Bard said.

Morgan Stanley (MS) and Goldman Sachs are leading the offering for Jive, which will trade on the Nasdaq under the symbol JIVE.

Stocks that have made public debuts in the U.S. this year have declined an average of 8.6 percent from their IPO levels through Dec. 9, according to Bloomberg data. The monthly amount raised in U.S. initial offerings this year peaked in May at $6.3 billion before bottoming at $34 million in September. The Standard & Poor’s 500 Index has recovered 14 percent, helped by improved U.S. economic data, after falling to a one-year low Oct. 3.

“It’s been a slow second half,” said Bard. “Underwriters and bankers are incentivized and motivated to do as much deal flow as they can.”

To contact the reporter on this story: Lee Spears in New York at

To contact the editor responsible for this story: Jennifer Sondag at


RBS Report Blames Bank Managers for Collapse

By Ben Moshinsky and Gavin Finch - Dec 12, 2011 5:38 PM GMT+0700

U.K. regulators pushed for new powers to automatically sanction senior bank executives as well as increased oversight of financial mergers as part of a report on the near collapse of Royal Bank of Scotland Group Plc. (RBS)

Automatic sanctions for poor decisions that lead to a bank failure “have the advantage of not requiring expensive and contentious legal processes,” the Financial Services Authority said on its website. Takeovers should be more forcefully regulated, according to the study, which detailed how RBS’s purchase of ABN Amro Holding NV in 2007 almost brought the lender to the brink of collapse.

Bank mergers should be supervised to “reflect the fact that major acquisitions by banks pose potential social risks which are not present in the case of contested takeovers by non- banks,” according to the report.

RBS reported a 24.1 billion-pound ($37 billion) loss for 2008, the largest in U.K. corporate history, and required a 45.5 billion-pound taxpayer rescue, the world’s biggest banking bailout, after the acquisition. The FSA, which will be split up next year, came under pressure from lawmakers to publish the probe into RBS finances after it cleared former RBS Chief Executive Officer Fred Goodwin and others of wrongdoing.

“Regulation is in the throes of being handed back to the Bank of England,” said Simon Willis, an analyst at Daniel Stewart Securities Plc. “One of the biggest ironies of all is that it’s the FSA that’s done the report. Perhaps it should have been an independent report.”

The report, which has been more than a year in the making, meted out equal criticism of bank managers and FSA regulators.

Short-Term Funding

RBS relied too much on short-term wholesale funding, a weakness that was missed by the U.K. banking regulator, the bank regulators said in the report. The watchdog listed seven reasons for the bank’s failure, including uncertainties over the quality of the lender’s assets and lack of capital.

Goodwin pushed through the world’s biggest bank takeover, the 72 billion-euro ($96 billion) purchase of Amsterdam-based ABN Amro with partners Banco Santander SA (SAN) of Spain and Belgium’s Fortis even after global money markets froze in 2007. The acquisition saddled RBS with bad debt and depleted its cash reserves.

‘Perceived Dominance of’ Goodwin

The FSA “identified a risk created by the perceived dominance of” Goodwin as CEO as early as 2003, the report said, adding that the bank’s chief had developed a “challenging management culture.”

“Taxpayers should never have had to rescue RBS,” Philip Hampton, the Edinburgh-based bank’s chairman, said in an e- mailed statement. “The FSA’s views are an important contribution to the debate on how banks should be managed and regulated in the future.”

The FSA said its initial probe into the bank’s bailout found that there were no codes or standards that would allow prosecutors to show at a tribunal hearing that bank managers breached their duties of due diligence in the ABN Amro takeover.

“The crucial issue that this raises, however, is whether the rules are appropriate: whether the decisions and actions which led to failure should ideally have been sanctionable, and whether we should put in place different rules and standards for the future,” FSA Chairman Adair Turner said in the report.

The experience in the U.S. of bringing criminal cases against directors shows it’s “very, very difficult,” said Matthew Czepliewicz, a banking analyst at Collins Stewart in London.

‘Judgment Call’

“If we’re talking about Fred Goodwin paying a certain amount for this acquisition, that’s a judgment call and the market and regulators knew what he was doing,” he said.

The report blamed RBS’s collapse on a liquidity run, where lenders to the bank became increasingly unwilling to roll over their funding commitments. That, in turn, had its roots in uncertainty about whether the bank had sufficient capital to absorb losses.

“There was insufficient focus on the core prudential issues of capital and liquidity, and inadequate attention given to key business risks and asset quality issues,” according to the report.

The lack of confidence saw the bank lose a total of 19 billion pounds in deposits between August and October in 2008.

RBS’s capital ratio in 2007 would have equated to 1.97 percent, under more rigorous capital rules now in force, the study estimates. That figure is less than a quarter of the amount required now.

Deal Financing

The FSA criticized RBS’s decision to finance the ABN Amro purchase primarily though debt rather than equity. RBS paid 4.3 billion euros in stock and 22.6 billion euros in cash to ABN Amro shareholders, with the majority of the cash funded by debt, 12.3 billion euros of which matured in under a year, the FSA said.

RBS had one of the “greatest dependencies” on short-term wholesale markets, and in particular overnight funds, the FSA said. That left it more vulnerable than its peers to even short periods of market stress.

This weakness was exacerbated following the bank’s purchase of ABN Amro, as it became even more reliant on the short-term funding as a consequence, the report said.

The report said the FSA moved too late in April 2008 to force RBS to raise 12 billion pounds in capital, saying the regulator’s supervision of reserves was mainly reactive. The bank needed as much as 166 billion pounds in additional “high- quality unencumbered liquid assets,” the FSA said.

‘Too Late’

“From late 2007 onwards, the FSA was increasingly developing and applying a more rigorous capital regime, and it pushed RBS to make a large rights issue in April 2008,” the FSA report said. “In retrospect, however, the changes in the FSA’s capital regime came too late to prevent the developing crisis.”

The FSA operated a flawed supervisory approach which failed adequately to challenge the judgment and risk assessments of the management of RBS, the FSA’s Turner said.

“This approach reflected widely held, but mistaken assumptions about the stability of financial systems and existed against a backdrop of political pressures for a ‘light touch’ regulatory regime,” Turner said in the report.

The U.K. Treasury called the report an “important part of learning lessons from the financial crisis and gaining further understanding of its causes,” in an e-mailed statement.

The government said in 2010 that it would abolish the regulator, handing its bank supervision powers to the Bank of England.

Since the crisis, RBS has cut more than 27,000 jobs and shrunk RBS’s balance sheet by almost a trillion pounds since Stephen Hester replaced Goodwin in 2008.

To contact the reporters on this story: Gavin Finch in London at Ben Moshinsky in London at;

To contact the editor responsible for this story: Anthony Aarons at Edward Evans at


Bundesbank Cools ECB Bond-Buying Talk as EU Leaders Promote Fiscal Accord

By Patrick Donahue - Dec 12, 2011 7:31 PM GMT+0700

Dec. 12 (Bloomberg) -- Russell Jones, global head of fixed-income strategy at Westpac Banking Corp., talks about Europe's sovereign debt crisis. Germany’s top central banker cooled speculation that the European Central Bank will extend its role as European leaders pressed their case that a new fiscal accord will deliver the region from its two-year-old debt crisis. Jones speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Dec. 12 (Bloomberg) -- Don Hanna, managing director at New York-based hedge fund Fortress Investment Group LLC, talks about European Central Bank monetary policy, the region's debt crisis and its implications for Asian markets. Investors are fleeing assets denominated in the 17-nation currency as European Union leaders fail to end concern that Italy and Spain would succumb to a sovereign debt crisis that forced Greece, Ireland and Portugal to seek bailouts. Hanna speaks with John Dawson on Bloomberg Television's "First Up." (Source: Bloomberg)

Germany’s top central banker cooled speculation that the European Central Bank will extend its role as European leaders pressed their case that a new fiscal accord will deliver the region from its two-year-old debt crisis.

Bundesbank President Jens Weidmann told the Frankfurter Allgemeine Sonntagszeitung yesterday that while the new accord represents “progress,” the onus is on governments rather than the Frankfurt-based ECB to resolve the crisis with financial backing. German Finance Minister Wolfgang Schaeuble said euro- area policy makers will now focus on implementing the Dec. 9 pact to strengthen budget rules as quickly as possible.

The Franco-German-led agreement, which provides tighter budget rules and an additional 200 billion euros ($267 billion) to the euro war chest, is part of an effort to reassure investors that Europe can master the crisis. ECB President Mario Draghi lauded the accord, stoking hopes among investors that the central bank might step up bond purchases.

“We’re baying for the ECB to do all the things it keeps telling us it can’t do,” George Magnus, senior economic adviser at UBS AG, said in an interview with Maryam Nemazee on Bloomberg Television in London today. “Maybe if the crisis worsens materially, which I suspect it will, the ECB can be a bit more flexible. But I don’t think that Draghi will do the kinds of infinite and open-ended bond purchasing which the industry actually thinks it should do.”

Ratings Warning

European stocks and the euro dropped today, with the single currency down 0.96 percent at $1.3258 as of 12:55 p.m. in Berlin, after Moody’s Investors Service said it will review the ratings of all European Union countries after the Brussels summit failed to produce “decisive policy measures” to end the crisis. Standard & Poor’s placed the ratings of 15 euro nations, including AAA rated France and Germany, on review for possible downgrade on Dec. 6 pending an assessment of the summit outcome.

Italy and Spain led a decline in peripheral euro-area bonds even as the ECB was said to buy Italian securities. Italian 10- year yields climbed 40 basis points, or 0.40 percentage point, to 6.73 percent, while Spanish 10-year rates increased 31 basis points to 6.02 percent. German 10-year bunds rose and two-year yields approached a euro-era record low.

Merkel’s ‘Breakthrough’

After the summit, Chancellor Angela Merkel said the accord set the region on a path to a “lastingly stable euro,” and “the breakthrough to a stable union has been achieved.” Merkel will address German lower-house lawmakers in Berlin on Dec. 14 on the summit’s outcome, her chief spokesman, Steffen Seibert, told reporters today.

The accord opens the way for the ECB to intensify its role in the crisis, Irish Deputy Prime Minister Eamon Gilmore said in an interview with Dublin-based broadcaster RTE yesterday. The ECB has signaled “that it would strengthen its role and enhance its role following the conclusion of an agreement,” he said.

“The ECB will have to gear up its purchases should market tension increase, there is simply no other option available,” Thomas Costerg, an economist at Standard Chartered Bank in London, wrote in e-mailed response to a Bloomberg News query.

European leaders have given themselves until March to complete the language for the new rulebook and plan to set up the region’s permanent rescue fund, the European Stability Mechanism, a year earlier than planned in 2012. They also aim to reassess plans to cap the overall lending of the ESM at 500 billion euros.

‘Can’t Lean Back’

“We need to work on making this happen quickly, because we have to regain the lost trust of the financial markets and investors across the globe,” Schaeuble said in an interview on Germany’s ARD television late yesterday. “We can’t lean back.”

Retiring ECB Executive Board member Juergen Stark said EU and euro-area institutions needed to take a “quantum leap” forward to overcome the crisis. In an interview with Germany’s Sueddeutsche Zeitung published yesterday, Stark called for a panel of experts to review budgets in the euro area, which could form the “nucleus for a future European finance ministry.”

The accord forged in Brussels came at the cost of marginalizing the U.K. after Prime Minister David Cameron refused to back the effort. The rift left leaders of the single- currency union with the prospect of fashioning an accord among themselves rather than amending the EU treaties. All nine of the 10 other non-euro members signaled they’ll go along with the pact after consulting their parliaments.

Clegg’s Disappointment

U.K. Deputy Prime Minister Nick Clegg, speaking on British Broadcasting Corp.’s “Andrew Marr” program yesterday, said he was “bitterly disappointed” by the summit result, which left the U.K. “isolated and marginalized” in the EU.

Leaders for the first time extracted a contribution from euro central banks of 150 billion euros toward the International Monetary Fund’s general resources. Another 50 billion euros will come from non-euro EU states. The accord’s signatories will confirm within 10 days how they will channel funds to the IMF, which could then be used to aid troubled European states. The hope is that other countries will join the IMF effort, Merkel’s government said today.

Chinese Vice Foreign Minister Fu Ying said that China will be part of international efforts to assist Europe.

“Europe needs a partner, they come to sell their bonds, that’s a partnership,” Fu, whose portfolio is European affairs, told reporters in Vienna two days ago. “They have to work out the terms, it should be a kind of relationship of cooperation.”

‘Forbidden by Treaty’

Draghi praised a “very good outcome” in Brussels, a day after he damped expectations that a deal would prompt the ECB to step up its bond-buying activities. “The mandate for redistributing taxpayer money among member states clearly does not lie in monetary policy,” Weidmann at the Bundesbank said in the newspaper interview published yesterday. “Financing of sovereign debt through central banks is and remains forbidden by treaty.”

Austrian Chancellor Werner Faymann cast doubt on the arrangement, telling the Salzburger Nachrichten newspaper that the accord struck in Brussels lacked “enough firepower to have a sustainable effect.” While the measures on budget discipline are a “big step forward,” rules on regulating financial markets, a European rating company and “European income via a financial transaction tax” are still missing, he said.

“Basically the principles are right but the details are missing,” Wolfgang Franz, who heads Merkel’s council of economic advisers, said in an interview with Bloomberg Television. “I am convinced the specialists on this area will work out details that will convince financial markets and they will get at least less nervous.”

To contact the reporter on this story: Patrick Donahue in Berlin at at

To contact the editor responsible for this story: James Hertling at


China’s Shrinking Trade Surplus May Push Wen to Stimulus at Work Meeting

By Bloomberg News - Dec 12, 2011 1:52 PM GMT+0700

Dec. 12 (Bloomberg) -- Ronald Wan, a Hong Kong-based managing director at China Merchants Securities Co., talks about the outlook for China's monetary and currency policy, and the nation's economy. China’s shrinking trade surplus and the weakest export growth since 2009 may encourage Premier Wen Jiabao to keep cutting banks’ reserve requirements to sustain expansion in the world’s second-biggest economy. Wan speaks with John Dawson on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

Dec. 12 (Bloomberg) -- Nicholas Kwan, Hong Kong-based head of East Asia research at Standard Chartered Plc, talks about China's economy and central bank monetary policy. He speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Chinese Premier Wen Jiabao and officials meeting to map out economic policies for 2012 may be encouraged to add more stimulus as a shrinking trade surplus shows Europe’s debt crisis hitting exports.

Overseas shipments rose 13.8 percent in November from a year earlier, the weakest growth since 2009, according to customs data released Dec. 10 in Beijing. The excess of exports over imports fell by 35 percent.

The decline in the surplus and signs that capital has started to flow out of the country may prompt the government to keep cutting banks’ reserve requirements to sustain growth. Sliding exports to Germany and Italy weighed on gains in shipments to emerging nations, and President Hu Jintao yesterday marked 10 years in the World Trade Organization by warning that the global economy faces “severe” challenges.

China’s capital outflows will continue and the trade surplus may shrink further, forcing the central bank to cut reserve ratios” and use bill sales to inject liquidity and bolster growth, said Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd. “It’s very likely China will see a trade deficit in the next quarter,” said Shen, who previously worked at the International Monetary Fund and the European Central Bank.

Shares Drop

Stocks in China fell for a third day on concern a slowdown in growth is deepening and after the government said it will maintain property curbs next year. The benchmark Shanghai Composite Index (SHCOMP) dropped 0.5 percent to 2,304.80 at the 11:30 a.m. local-time break, set for the lowest close since March 2009.

The yuan was trading 0.08 percent higher at 6.3594 per dollar at 12:07 p.m. in Shanghai after the central bank set the strongest reference rate in a month. Investors have pared expectations for gains in the currency, with 12-month non- deliverable forwards dropping 0.5 percent last week.

Last month’s rise in overseas shipments compared with the 10.9 percent median estimate in a Bloomberg News survey and a 15.9 percent increase in October. Excluding distortions in January and February each year, the advance was the smallest since export growth resumed in December 2009. The expansion in imports slowed to 22.1 percent and the trade surplus narrowed more than estimated to $14.5 billion.

Europe Slows

Shipments to the European Union, China’s biggest market, rose 5 percent from a year earlier, a quarter of the pace reported in July and August. Sales to Germany, Europe’s biggest economy, fell 1.6 percent and those to Italy dropped for a third month. In contrast, exports to Malaysia rose 34.9 percent and those to Brazil gained 26.4 percent.

China Cosco Holdings Co. (601919), the nation’s largest operator of dry-bulk and container vessels, warned on Oct. 27 it will report a full-year loss as rates for carrying commodities and containers have plunged.

China’s economic expansion could decline to 7.5 percent in the three months through March from 9.1 percent in this year’s third quarter, as export growth slows and the government’s campaign to curb property prices damps investment, according to Nomura Holdings Inc. The country may post a $28.8 billion trade deficit next quarter, according to Zhang Zhiwei, the bank’s chief China economist in Hong Kong. That would be a record quarterly shortfall, according to data compiled by Bloomberg that goes back to January 1994.

Adding Liquidity

The central bank announced the first cut in lenders’ reserve requirements since 2008 on Nov. 30. Zhang estimates the ratio, now 21 percent of deposits for the biggest banks, will be lowered by 150 basis points in the first half of next year. Standard Chartered Plc last week raised its projection for the number of cuts by the end of 2012 to six from four, with the first coming by the end of this year, providing an extra 2.4 trillion yuan ($378 billion) of liquidity for banks.

Foreign-exchange reserves dropped in September for the first time in 16 months and continued to decline through early this month, Li Yang, a former central bank adviser, said Dec. 7, without specifying the source of his information.

A People’s Bank of China report last month showed financial institutions’ purchases of foreign exchange dropped in October, the first decline since December 2007, according to China International Capital Corp. Analysts watch the number for signs of so-called hot money flows.

Policy Fine Tuning

Purchases may remain low or even turn negative next year, reflecting further declines in the trade surplus, a slowdown in property investment and a worsening euro-area economy, Peng Wensheng, a Hong Kong-based economist with CICC, said in a Dec. 8 note.

Countries should strengthen monitoring of systemic risks, central bank Governor Zhou Xiaochuan said at a conference in Shanghai last week, according to a copy of his speech posted on the PBOC’s website yesterday.

The Communist Party’s Politburo, the 25-member body that oversees policy-making, said Dec. 9 it will “fine tune” economic policies next year “as conditions change,” and will make them more “targeted, flexible and forward-looking.” The nation will maintain a “prudent” monetary policy and a “proactive” fiscal policy, it said after a meeting chaired by President Hu Jintao, the official Xinhua News Agency reported.

Inflation Cools

The announcement preceded the annual economic work conference that maps out plans for development next year. It started today, the official Xinhua News Agency reported.

“The government is leaving its boilerplate language on policy unchanged,” London-based Capital Economics Ltd. said in a note. “In practice, easing has begun.”

Inflation cooled to 4.2 percent last month from a year earlier and industrial output growth weakened, according to statistics bureau data released Dec. 9, giving the government more room to loosen policies.

China’s trade surplus, a source of friction with nations including the U.S., has fallen from a peak of almost $300 billion in 2008. The commerce ministry said last month that it may be as small as $150 billion this year.

In a speech yesterday, President Hu pledged to “actively” expand imports to resolve imbalances with nations that have “substantial” deficits with China.

The excess may disappear within two years as domestic demand rises, making the yuan’s value less of an issue with trading partners, Li Daokui, an academic adviser to the central bank, said last month. The currency may even face depreciation pressure, he said in an interview.

--Li Yanping. With assistance from Victoria Ruan in Beijing. Editors: Nerys Avery, Steve Bailey

To contact Bloomberg News staff for this story: Li Yanping in Beijing at

To contact the editor responsible for this story: Paul Panckhurst at


Italy Sells EU7 Billion in Bills as Costs Decline

By Jeffrey Donovan - Dec 12, 2011 5:14 PM GMT+0700

Italy sold 7 billion euros ($9.3 billion) of one-year bills, the maximum for the auction, and borrowing costs declined after Prime Minister Mario Monti’s government approved a 30 billion-euro emergency economic plan.

The Rome-based Treasury sold the bills to yield 5.952 percent, down from 6.087 percent at the last auction on Nov. 10, which was the highest in 14 years. Demand was 1.92 times the amount on offer, compared with 1.99 times last month.

Italy’s borrowing costs surged at the previous auction after former Prime Minister Silvio Berlusconi offered to resign and LCH Clearnet SA demanded more collateral on the country’s debt. The yield on the nation’s 10-year bond yield closed five times last month above the 7 percent level that led Greece, Portugal and Ireland to seek bailouts.

The yield on the benchmark bond was 6.57 percent after the auction at 11:07 a.m. in Rome. That pushed the difference with German bonds to 4.5 percentage points, up from 4.21 percentage points on Dec. 9. Italy’s next market test is Dec. 14, when it auctions as much as 3 billion euros of five-year bonds.

Monti’s Cabinet approved a sweeping budget plan on Dec. 4 aimed at raising revenue and boosting Italy’s anemic growth to persuade investors Italy can tame the region’s second-biggest debt and avoid a bailout. Parliament is due to vote on the plan by Christmas and Monti has warned that the failure to approve it could lead to Italy’s “collapse” and threaten the survival of the single currency.

Initial Backing

Investors initially gave their backing to the plan, with Italian bonds gaining the most in almost four months and the yield difference with German bunds falling below 400 basis points for the first time since Oct. 31. Yields rose again last week after European leaders failed to come up with a definitive solution to end the sovereign-debt crisis at a Dec. 8-9 summit in Brussels.

Moody’s Investors Service said today that it will review the ratings of all European Union countries in the first quarter because the summit failed to produce “decisive policy measures” to end the crisis. At the summit, euro-region leaders agreed to a fiscal accord to create more oversight of budget policies and automatic penalties for countries violating deficit rules.

Negative Outlook

The move by Moody’s came after Standard & Poor’s last week put the EU’s AAA long-term rating on “creditwatch negative” and placed 15 euro-area countries including AAA rated France and Germany on a negative outlook. S&P said on Dec. 9 that it would study the summit’s outlook before deciding whether to proceed with the ratings cut.

Italy’s debt of 1.9 trillion euros is more than that of Spain, Greece, Portugal and Ireland combined. Its jump in bond yields is already raising borrowing costs for a country that faces 200 billion euros of bond redemptions in 2012. Italy’s Treasury had to offer a yield of 6.29 percent, the highest since 1997, on five-year debt at an auction on Nov. 14.

Italy will be able to withstand an increase in borrowing costs for at least a few years because its relatively long debt maturity helps offset the effects of higher bond yields, the Bank for International Settlements said in its Quarterly Report.

The cost of servicing its debt would rise by just 0.95 percent of gross domestic product next year if 10-year yields stayed at the record 7.48 percent reached last month, the BIS said, citing its own calculations. The “worst-case scenario” would have to persist for three years for the additional costs to exceed 2 percent of output, the bank said.

To contact the reporter on this story: Jeffrey Donovan at

To contact the editors responsible for this story: Craig Stirling at


Stocks Drop in Europe as Euro Weakens on Moody’s Review; U.S. Futures Fall

By Stephen Kirkland and Lynn Thomasson - Dec 12, 2011 7:08 PM GMT+0700

Dec. 12 (Bloomberg) -- Eyal Dabby, head of equity research at Bank Leumi Le-Israel Ltd., discusses the outlook for Israeli equity markets in 2012. He speaks from Tel Aviv with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)

Dec. 12 (Bloomberg) -- Nigel Tupper, Asia Pacific strategist and chief global quantitative strategist at Bank of America Merrill Lynch, talks about the outlook for Asian financial markets and his investment strategy. Tupper speaks in Hong Kong with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

European stocks and U.S. equity futures fell and the euro weakened as Moody’s Investors Service said it will review ratings for countries in the region. Italian bonds stayed lower after a debt sale, while commodities retreated.

The Stoxx Europe 600 Index dropped 0.5 percent at 7:05 a.m. in New York, after declining as much as 1.3 percent. Standard & Poor’s 500 Index futures lost 0.7 percent. The euro depreciated 1 percent to $1.3253. The 10-year Italian bond yield jumped 42 basis points as the government sold 7 billion euros ($9.3 billion) of bills. The cost of insuring against default on European government debt approached a record high. Silver and natural gas declined.

Last week’s European Union summit offered few new measures and doesn’t diminish the risk of credit-ranking revisions, Moody’s said today. While a European accord to limit budget deficits represents “progress,” the onus is on governments rather than the European Central Bank to resolve the crisis with financial backing, Bundesbank President Jens Weidmann told Frankfurter Allgemeine Sonntagszeitung, according to a report published yesterday.

“The European situation will continue to bother us into next year as policy initiatives seem insufficient,” said Mark Matthews, the Singapore-based head of research for Asia at Bank Julius Baer & Co., which oversees about $180 billion globally.

LSE Rating Review

Three shares fell for every one that advanced in the Stoxx 600, extending last week’s 0.1 percent drop. Xstrata Plc and Eurasian Natural Resources Corp. led mining companies lower. London Stock Exchange Group Plc (LSE) slipped 4.2 percent as S&P placed its credit rating on review for a downgrade and the company agreed to buy the 50 percent of FTSE International Ltd. it doesn’t already own from Pearson Plc.

The decline in S&P 500 futures signaled the U.S. equity benchmark may trim its 1.7 percent gain on Dec. 9. The measure has climbed for two straight weeks, its first back-to-back weekly advance since October.

The two-year Italian note yield climbed 29 basis points. The government sold 365-day bills at an average yield of 5.952 percent, compared with 6.087 percent at the previous auction.

The extra yield investors demand to hold 10-year French bonds instead of benchmark German bunds climbed 11 basis points as the government prepared to offer as much as 6.5 billion euros of 91-, 182- and 308-day instruments.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments climbed for a fifth day, jumping seven basis points to 370, the highest since Nov. 28, close to its all-time high of 385. The Markit iTraxx Financial Index of contracts linked to the senior bonds of 25 banks and insurers increased five basis points to 301.

U.S. Debt Sales

The yield on the 30-year Treasury bond fell four basis points to 3.07 percent, with 10-year yields also slipping four basis points.

U.S. debt auctions over the next two weeks will probably total $177 billion, the largest concentration of so-called duration supply ever, JPMorgan Chase & Co., one of the 21 primary dealers that underwrite America’s borrowings, said in a report Dec. 9. This week’s sales will consist of $78 billion in notes, bonds and inflation-linked securities in four auctions starting today with $32 billion of three-year debt. The Treasury will announce on Dec. 15 how much it plans to raise in three offerings starting Dec. 19.

The dollar appreciated against most of its major peers monitored by Bloomberg, strengthening 0.2 percent versus the yen and 0.4 percent against the pound.

The Swedish krona weakened against 15 of its 16 most- actively traded counterparts, tumbling 1.4 percent versus the dollar and 0.4 percent against the euro.

European carbon prices rose from record lows after the world’s largest polluters backed away from positions that stymied global climate talks for more than a decade. EU permits for delivery this month rose as much 6.2 percent and traded at 8.10 euros on the ICE Futures Europe exchange in London.

Commodities Fall

Silver dropped 3 percent to $31.48 an ounce and natural gas fell 2.4 percent to $3.236 for a million British thermal units. Copper declined 2.1 percent and Brent crude was 1 percent lower at $107.54 a barrel.

The MSCI Emerging Markets Index (MXEF) slipped 0.3 percent, erasing earlier gains of as much as 0.9 percent. India’s Sensex Index fell 2.1 percent after industrial production fell for the first time since June 2009. The Shanghai Composite Index (SHCOMP) lost 1 percent after data showed overseas shipments rose by the least in two years. Benchmark gauges in Turkey, Poland and the Czech Republic lost more than 1 percent.

To contact the reporter on this story: Stephen Kirkland in London at Lynn Thomasson in Hong Kong at;

To contact the editor responsible for this story: Stuart Wallace at


European Stocks Retreat on Moody’s Review

By Sarah Jones - Dec 12, 2011 5:55 PM GMT+0700

European stocks retreated as Moody’s Investors Service said it will review the credit ratings of all countries in the region following last week’s debt summit. U.S. index futures fell, while Asian shares rose.

Eurasian Natural Resources Corp. dropped 5.2 percent even after denying a report it is being formally investigated by U.K. regulators over corruption allegations. Xstrata Plc (XTA) led copper producers lower as the base metal retreated. London Stock Exchange Group Plc (LSE) lost 4.5 percent as Standard & Poor’s placed its credit rating on review for a downgrade.

The benchmark Stoxx Europe 600 Index retreated 0.7 percent to 238.8 at 10:52 a.m. in London, having earlier fallen as much as 1.3 percent. The gauge slipped 0.1 percent last week as the European Central Bank damped speculation it would boost bond purchases, overshadowing an agreement by European Union leaders to step up measures to fight the debt crisis.

“A lot and nothing has changed following the most recent EU summit,” Dan Morris, a strategist at JPMorgan Chase & Co. in London, wrote in a report today. “It will be a combination of ECB support for banks and sovereigns, plus individual country progress on reform and austerity packages, which will determine how markets move over the next several months.”

Futures on the Standard & Poor’s 500 Index (SPX) expiring in March slid 0.9 percent today, while the MSCI Asia Pacific Index gained 0.5 percent.

Moody’s Review

Moody’s said it will review the ratings of all EU countries in the first quarter, saying the summit failed to deliver “decisive policy measures” to end the debt crisis. The review will be completed in the first quarter of next year.

Germany’s top central banker yesterday cooled speculation that the ECB will extend its role after European leaders agreed a new fiscal accord last week.

Bundesbank President Jens Weidmann told the Frankfurter Allgemeine Sonntagszeitung that while the new accord represents “progress,” the onus is on governments rather than the ECB to resolve the crisis. German Finance Minister Wolfgang Schaeuble said euro-area policy makers will now focus on implementing last week’s pact.

Stocks pared losses after Italy sold 7 billion euros ($9.3 billion) of one-year bills, the maximum for the auction, with a reduced yield. Borrowing costs fell to 5.952 percent today from 6.087 percent at the last sale on Nov. 10 after Prime Minister Mario Monti’s government approved a 30 billion-euro emergency economic plan.

France is also scheduled to auction 6.5 billion euros of debt of three different maturities today.


ENRC sank 5.2 percent to 649.5 pence even after denying a report in the Sunday Times that Britain’s Serious Fraud Office started an inquiry into allegations of corruption at a Kazakh iron ore unit.

“There is no formal SFO investigation into the company,” said an ENRC spokesperson. “There was nothing new in the Sunday Times story. The internal audit committee investigations and liaison with appropriate regulators, including the SFO, is entirely normal practice for a major company that is serious about investigating all allegations properly and striving to meet corporate governance best practice.”

Xstrata dropped 2.9 percent to 981.9 pence, Kazakhmys Plc slid 2.2 percent to 922.5 pence and BHP Billiton Ltd. (BHP) slipped 1.8 percent to 1,926 pence. Copper fell as much as 2.5 percent in London trading as China’s exports cooled.

China Exports

China’s export growth slowed in November to the weakest pace since 2009, making the government more likely to further ease policies to sustain the expansion of the world’s second- largest economy. Overseas shipments rose 13.8 percent from a year earlier, the customs bureau said on Dec. 10. Excluding distortions in January and February each year, that was the least since export growth resumed in December 2009.

LSE declined 4.5 percent to 783 pence. The equity-market operator that also owns a clearinghouse in Italy, may have its credit rating cut by S&P because Italian banks’ finances are deteriorating.

Separately, the exchange agreed to buy the 50 percent of FTSE International Ltd. that it doesn’t already own from Pearson Plc (PSON) for 450 million pounds ($702 million). Pearson shares gained 0.4 percent to 1,148 pence.

Swedbank AB (SWEDA) declined 3 percent to 86.4 kronor as Latvians withdrew at least $19 million from the Swedish bank’s automatic teller machines amid concern the lender may close its Estonian business and speculation the ATMs were malfunctioning.

Maris Mancinskis, the head of Swedbank’s Latvian unit, said the speculation was “not only false, but also completely absurd.”

To contact the reporter on this story: Sarah Jones in London at

To contact the editor responsible for this story: Andrew Rummer at


No One Telling Who Took $586B in Fed Swaps

By Scott Lanman and Bradley Keoun - Dec 12, 2011 6:01 AM GMT+0700

Dec. 12 (Bloomberg) -- For all the transparency forced on the Federal Reserve by Congress and the courts, the U.S. government and public remain in the dark on the beneficiaries and potential risks from one of the Fed’s largest crisis-loan programs. As part of a currency-swap plan revived to fight the European debt crisis, the Fed lends dollars to other central banks, which auction them to local commercial banks. While the transactions with other central banks are disclosed, the Fed doesn’t track where the dollars end up. Bradley Keoun reports on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

Ben S. Bernanke, chairman of the U.S. Federal Reserve. Photographer: Andrew Harrer/Bloomberg

For all the transparency forced on the Federal Reserve by Congress and the courts, one of the central bank’s emergency-lending programs remains so secretive that names of borrowers may be hidden from the Fed itself.

As part of a currency-swap plan active from 2007 to 2010 and revived to fight the European debt crisis, the Fed lends dollars to other central banks, which auction them to local commercial banks. Lending peaked at $586 billion in December 2008. While the transactions with other central banks are all disclosed, the Fed doesn’t track where the dollars ultimately end up, and European officials don’t share borrowers’ identities outside the continent.

The lack of openness may leave the U.S. government and public in the dark on the beneficiaries and potential risks from one of the Fed’s largest crisis-loan programs. The European Central Bank’s three-month dollar lending through the swap lines surged last week to $50.7 billion from $400 million after the Nov. 30 announcement that the Fed, in concert with the ECB and four other central banks, lowered the interest rate by a half percentage point.

“Increased transparency is warranted here,” given the size of the Fed’s aid and current pressures on European banks, said Representative Randy Neugebauer, a Texas Republican who heads the House Financial Services Subcommittee on Oversight and Investigations.

Whether the U.S. should make disclosure of the recipients a condition of the swap lines is “probably a discussion we need to have,” possibly in a hearing that includes Fed Chairman Ben S. Bernanke, Neugebauer said.

Unprecedented Transparency

The secrecy surrounding foreign central banks’ emergency lending contrasts with unprecedented transparency at the Fed, which was compelled by the 2010 Dodd-Frank Act and court-upheld Freedom of Information Act requests to release details on more than a dozen programs used to combat the U.S. financial crisis from 2007 through 2010. Bernanke this year began holding regular press conferences and has said he is considering ways to make the Fed’s objectives more clear to the public.

Michelle Smith, a Fed spokeswoman, said there is “no formal reporting channel” for the identities of borrowers from other central banks, which are the Fed’s only counterparties on the swap lines and assume any credit risk.

“U.S. taxpayers have never lost a penny” on the program, she said. “Decisions about disclosure by foreign central banks of their financial arrangements with financial institutions in their jurisdictions is an issue for the foreign central banks.”

Turmoil Overseas

Americans may have to accept nondisclosure as a condition of protecting the U.S. economy from turmoil overseas, said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

“As much as we might like to say they should have at least as much transparency as the Fed, I don’t know if we want to say, ‘Well, if you don’t, you’re not going to get the money,’” Baker said. U.S. policy makers should encourage international standards for disclosure through talks at forums such as meetings of the Group of 20 nations, he added.

The swaps are separate from Fed emergency loans to banks and other businesses that peaked at $1.2 trillion in December 2008, including about $538 billion that European financial companies borrowed directly, according to a Bloomberg News examination of available data.

The Fed last week released a letter from Bernanke and a staff memo criticizing recent news articles for portraying its crisis-lending efforts as secret, saying that it made aggregate amounts of the loans public. Bloomberg, which published a Nov. 28 article on the topic, said in a point-by-point response that it considered the data secret because the terms of the loans and names of borrowers were withheld. The Fed had resisted disclosing them for more than two years.

Century-Old Program

The Dodd-Frank Act overhauling U.S. financial law included legislation proposed by Senator Bernard Sanders, a Vermont independent, that required the Fed in December 2010 to disclose recipients of aid it provided during the crisis, except for banks that used the liquidity-swap lines or the discount window -- a century-old emergency-lending program. Under Dodd-Frank, new Fed borrowers from the discount window are subject to identification with a two-year delay.

Bloomberg LP and News Corp.’s Fox News Network LLC won a court case forcing the Fed last March to name the crisis discount-window borrowers. There hasn’t been any case or law requiring disclosure of banks that borrowed via the swap lines.

“That is certainly a legitimate piece of information for the American people,” and “we’re going to be vigilant in increasing transparency,” said Warren Gunnels, Sanders’ senior policy adviser.

Borrowing Dollars

Foreign central banks borrowed dollars from the Fed for terms as long as three months in return for euros, pounds and yen. The ECB accounted for 80 percent of total swap-line loans during the mortgage-induced financial crisis, according to the U.S. Government Accountability Office, the congressional auditor. The ECB won’t publicly disclose names of borrowers under any circumstances and doesn’t share the identities outside the 17 euro-area central banks, a spokesman wrote in an e-mail.

“These banks have a right to enjoy the standard confidentiality attached to banking transactions,” the spokesman wrote.

European officials may be concerned that future lending might be inhibited by a “stigma phenomenon” if past borrowers are made public, said Ralph Bryant, former director of the Fed’s international-finance division and now a senior fellow at the Brookings Institution in Washington. The concept is “usually overplayed by people, but it’s not something that’s trivial.”

‘Matter of Principle’

The Bank of Japan, which tapped 3.9 percent of the aggregate swap dollars according to the GAO, has no plans to publicize borrowers’ identities and declined to comment on whether it shares the names with the Fed, a spokesman said. The Swiss National Bank, which accounted for 4.6 percent, “as a matter of principle” doesn’t publish counterparties, said Walter Meier, a spokesman.

The Bank of England doesn’t publish details of individual financial institutions’ use of its facilities. Confidence in banks “can best be sustained” if support is disclosed “only when conditions giving rise to potentially systemic disturbance have improved,” it said in its annual report.

Fed policy makers let the program expire in February 2010 then revived it after three months to try to contain Europe’s debt crisis. Nineteen months later, European officials still struggle to contain the market turmoil, which has spread to sovereign bonds in France and Italy as investors increasingly question governments’ ability to repay debt.

Expanding Crisis

The expanding crisis spurred the Fed and other central banks in November to extend the program by six months to Feb. 1, 2013, and lower borrowing costs by half a percentage point to make them more attractive. Last week, European leaders agreed to make loans of as much as 200 billion euros ($267.7 billion) to the International Monetary Fund and tightened rules to curb future debts.

The Fed swap program had a combined balance of $2.3 billion in loans outstanding as of Dec. 7 for all five participating central banks. That doesn’t account for the ECB’s latest dollar auction because the loans hadn’t settled yet.

The GAO, which released its emergency-lending report in July, wasn’t required to delve into the final destinations of the swap dollars, said Orice Williams Brown, the agency’s lead official on Fed audits. As a result of the study, the GAO learned that UBS AG (UBSN)’s October 2008 bailout from the Swiss government included an “atypical use” of swap-line dollars “generally not exceeding about $13 billion,” the report said.

Didn’t Know

Bernanke didn’t know which financial institutions got dollar loans, he said during a July 2009 House Financial Services Committee hearing.

Not having the identities would restrict the Fed’s ability to understand the “overall risk exposure of the institutions it’s supervising,” said Robert Eisenbeis, a former research director at the Federal Reserve Bank of Atlanta who’s now chief monetary economist for Sarasota, Florida-based Cumberland Advisors Inc.

The Fed may not need all the details, said Al Broaddus, former president of the Federal Reserve Bank of Richmond. The ECB and other central banks “are obliged to pay the Fed back. They’re the ones that are taking the credit risk with the institutions that are actually being lent to.”

In 2008, the dollar-based money markets that many foreign banks used to finance their holdings of U.S. mortgage-backed securities froze, forcing them to turn to the Fed to fill the funding gap. Much of the borrowing was done through U.S. branches that are legally eligible to draw emergency loans from the Fed’s lender-of-last-resort programs, according to the Bloomberg examination.

Biggest Foreign Borrower

The U.K.’s Royal Bank of Scotland Group Plc (RBS) was the biggest foreign borrower, drawing $84.5 billion in October 2008. UBS, based in Zurich, got $77.2 billion, while Frankfurt-based Deutsche Bank AG (DBK) took $66 billion and London-based Barclays Plc (BARC) borrowed $64.9 billion, according to the Bloomberg data.

One of the borrowers, Dexia SA (DEXB), is being broken up after running out of short-term funding. The French-Belgian lender had 120.6 billion euros of central-bank liabilities on Dec. 31, 2008, according to a company report; $58.5 billion came directly from the Fed, the Bloomberg examination showed.

Fed officials, including Governor Daniel Tarullo, have emphasized the need for improved monitoring and control of risks throughout the banking system, as well as global coordination among financial-policy makers. Regulators “must not lose sight of the importance of supervisory cooperation in pursuit of the shared goal of a stable international financial system,” he said in a Nov. 4 speech.

Full Disclosure

Ohio Senator Sherrod Brown, a Democrat who heads the Banking Subcommittee on Financial Institutions and Consumer Protection, said he isn’t sure swap-line borrowers should be made public. Still, the Fed “should follow the money in terms of disclosure, period,” he said. “Full disclosure from start to finish is the goal.”

Massachusetts Representative Barney Frank, the senior Democrat on the House Financial Services Committee, said he saw no need for the disclosure because the Fed has no role in approving the ultimate borrowers.

“What the Fed is doing with regard to the ECB is very important for the American economy,” Frank said. “Our interest is to make sure we get paid back. I think the ECB is a pretty good debtor and a pretty reliable one.”

‘Fundamental Problem’

Joseph Stiglitz, a Nobel Prize-winning economist who led President Bill Clinton’s Council of Economic Advisers, said the “fundamental problem” is that capital markets need information to work properly, yet the Fed is saying, “we believe in capital-market discipline without information.”

“It would be very useful to see” those names, said Stiglitz, a professor at Columbia University in New York. With the dollar auctions of foreign central banks shielded from disclosure, “what we have now is a very partial picture.”

To contact the reporters on this story: Scott Lanman in Washington at; Bradley Keoun in New York at

To contact the editors responsible for this story: Chris Wellisz at; David Scheer at


Euro Undermined as Draghi Undoes Trichet Rates

By Lukanyo Mnyanda and Catarina Saraiva - Dec 12, 2011 5:30 PM GMT+0700

Dec. 12 (Bloomberg) -- Russell Jones, global head of fixed-income strategy at Westpac Banking Corp., talks about Europe's sovereign debt crisis. Germany’s top central banker cooled speculation that the European Central Bank will extend its role as European leaders pressed their case that a new fiscal accord will deliver the region from its two-year-old debt crisis. Jones speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Dec. 12 (Bloomberg) -- Don Hanna, managing director at New York-based hedge fund Fortress Investment Group LLC, talks about European Central Bank monetary policy, the region's debt crisis and its implications for Asian markets. Investors are fleeing assets denominated in the 17-nation currency as European Union leaders fail to end concern that Italy and Spain would succumb to a sovereign debt crisis that forced Greece, Ireland and Portugal to seek bailouts. Hanna speaks with John Dawson on Bloomberg Television's "First Up." (Source: Bloomberg)

Dec. 12 (Bloomberg) -- Peter Garnry, an equity strategist at Saxo Bank A/S, discusses the outlook for a fiscal union in Europe and his recommendation of Hennes & Mauritz AB. He speaks from Hellerup, Denmark, with Owen Thomas and Linzie Janis on Bloomberg Television's "Countdown." (Source: Bloomberg)

Foreign-exchange strategists are reducing their forecasts for the euro at the fastest pace this year as European Central Bank President Mario Draghi’s interest- rate cuts remove one of the currency’s pillars of support.

Since Nov. 3, when Draghi began to undo the rate increases implemented earlier this year by his predecessor, Jean-Claude Trichet, analysts have cut end-of-2012 estimates for the euro to $1.32 from $1.40, based on the median of 40 forecasts in a Bloomberg survey as of last week. It has weakened versus every major currency except the Swiss franc since then, after gaining against 12 of the 16 this year prior to that.

Investors are fleeing assets denominated in the 17-nation currency as European Union leaders fail to end concern that Italy and Spain will succumb to a sovereign-debt crisis that forced Greece, Ireland and Portugal to seek bailouts. While euro bulls say sentiment is so negative that the currency has nowhere to go but up, bears point to surveys showing the euro zone’s economy will expand 0.5 percent next year, compared with 2.19 percent for the U.S.

“There still has to be further monetary easing by the ECB to support growth in the euro area for 2012 and beyond,” Ken Dickson, investment director of currencies at Standard Life Investments in Edinburgh, which manages about $235 billion, said in a Dec. 9 telephone interview. “There’ll be further weakness, particularly in the first half of next year,” which may push the currency to as low as $1.20 from $1.3386 last week, he said.

Relative Rates

For much of this year, relatively high interest rates gave international investors an incentive to hold European fixed- income assets even as the threat of more bailouts rose.

Trichet’s increases in April and July pushed the ECB’s main refinancing rate to 1.5 percent from 1 percent, helping drive yields on two-year German bunds to 1.31 percentage points more than U.S. Treasuries of similar maturity on May 4 from 0.2 percentage point in January. The euro appreciated as much as 16 percent in that period. Since then, the gap has shrunk to 0.09 percentage point, and the euro has depreciated about 10 percent.

The two-year Treasury-German note spread has “been the most statistically significant” driver of the euro-dollar exchange rate “over time,” strategists at New York-based Citigroup Inc. said in a Dec. 9 report to clients.

Europe’s common currency fell 0.9 percent to $1.3272 at 10:25 a.m. London time. It dropped 0.6 percent to 103.25 yen and weakened 0.2 percent against the pound to 85.25 pence.

Europe Blueprint

European leaders unveiled a blueprint last week for a closer fiscal accord to save the currency, adding 200 billion euros ($268 billion) to their bailout fund and tightening rules to curb future debts. They also will start a 500 billion-euro rescue fund next year and diluted a demand that bondholders shoulder losses in rescues.

The measures failed to spur the ECB, which has bought 207 billion euros of sovereign bonds since May 2010 to curb a rise in borrowing costs, to commit to purchasing more securities. Yields on Italian five-year securities jumped as much as 65 basis points, or 0.65 percentage point on the day of the Dec. 8 ECB meeting, rising above 7 percent the next day.

“There’s an element of disappointment in that much more could have been done,” Samarjit Shankar, a managing director for the foreign-exchange group at Bank of New York Mellon Corp. in Boston, said in a Dec. 9 telephone interview. “The tolerance of investors has been severely tested and there’s a general expectation that a lot more needs to be done.”

Euro Flows

Cumulative outflows from the euro last week were twice the average in the same period last year, according to BNY Mellon, the world’s largest custodial bank, with more than $26 trillion in assets under administration. The firm doesn’t provide specific figures.

Bets against the euro are at about a record high, suggesting that any positive news may cause traders to unwind those trades, sending the currency higher, according to Pierre Lequeux, head of currency management at Aviva Investors.

“The market is already positioned for a collapse of the euro and therefore there’s not much room for them to add to the existing position,” Lequeux, whose firm manages about $420 billion, said in an interview at his office in London on Dec. 9. The single currency may rebound to as high as $1.50 next year, which would be “driven by a credible solution,” he said.

Hedge funds and other large speculators held a net 95,814 contracts at the Chicago Mercantile Exchange as of Dec. 6 anticipating a drop in the euro, from 104,302 a week earlier, according to the Washington-based Commodity Futures Trading Commission. In May, there were 99,516 contracts wagering on a gain.

Historical Levels

The last time there were about as many contracts betting on a decline was in 2010, just before the euro began a rise from $1.1877 in June to as high as $1.4282 that November.

For all the concern that the euro may break up, the currency is about 11 percent above its average since being created in 1999. That’s a sign that traders see little chance of a collapse. The currency will end March at $1.30, the weakest quarter-end level next year, based on median quarterly estimates of strategists surveyed by Bloomberg News.

Last week’s EU summit sets Europe on the path to a “lastingly stable euro,” German Chancellor Angela Merkel told reporters. “The breakthrough to a stability union has been achieved.”

Slower Growth

Growth in the euro area’s economy next year will probably slow from a projected 1.6 percent in 2011, while U.S. expansion may accelerate in 2012 from 1.8 percent this year, according to Bloomberg surveys of economists.

Stress in Europe’s financial system, coupled with slower growth, prompted Standard & Poor’s on Dec. 5 to say Germany and France may be stripped of their AAA credit ratings as it put 15 euro nations on review for possible downgrade.

A slumping economy may prompt the Frankfurt-based ECB to cut its main refinancing rate a further 0.25 percentage point to 0.75 percent by March, shrinking the difference between the Federal Reserve’s target rate to 0.50 percentage point, separate surveys show. The gap would be the smallest since 2008.

Bets that the euro will drop against the dollar increased in the options market. Traders paid 3.6 percentage points more on Dec. 9 for the right to sell the euro against the dollar than to buy it, up from about 1.2 percentage points in January. The so-called three-month 25-delta risk reversal rate rose 0.17 percentage point on Dec. 9 after EU leaders agreed at the summit to enforce stricter debt and deficit limits.

Dollar Funding Costs

Dollar funding costs for European banks increased after the summit amid concern the measures won’t be enough to stem the crisis. The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, ended last week at 122 basis points below the euro interbank offered rate, from 117 basis points the day before. The measure reached 163 basis points on Nov. 30.

Looser policy from the ECB “may accentuate the process and continue to force the euro lower in due course,” Geoffrey Yu, a currency strategist at UBS AG in London, said in a telephone interview on Dec. 8. “The market is reaching a consensus that there aren’t going to be many upside factors for the euro at this stage and if Draghi is thinking of further rate cuts, it just adds to pressure on the euro.”

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at; Catarina Saraiva in New York at

To contact the editors responsible for this story: Daniel Tilles at; Dave Liedtka at