Iran Regime Profiting From Sanctions: U.S.

By Indira A.R. Lakshmanan and Ladane Nasseri - Dec 27, 2011 11:00 AM GMT+0700

The Obama administration is accusing the elite of Iran’s regime and the Islamic Revolutionary Guard Corps of profiting “on the back of the average Iranian” as the nation’s currency plunges under pressure from international sanctions.

The new allegation coincides with the decline in the market value of the Iranian rial, which has dropped about 15 percent against the dollar in the past five weeks and 35 percent since March, according to Tehran’s independent Donya-e-Eqtesad newspaper. The 39 percent difference between the central bank’s official rate and market rates on Dec. 21 was the largest in almost two decades, economists in Tehran and Washington said in interviews.

U.S. Treasury Undersecretary David Cohen said the gap between the two rates has provided an arbitrage opportunity exploited by officials and businesses affiliated with the IRGC, the elite military arm that’s under international sanctions for suspected nuclear weapons work and terrorism. They are among regime elements able to obtain foreign currency at the favorable official exchange rate and sell it for a profit in exchange bureaus at the market rate, he told the Senate Foreign Relations Committee in written testimony Dec. 1.

“Ordinary Iranians are urgently seeking out foreign currency such as dollars or euros for safety, yet they are having trouble accessing hard currency, and when they can, they have to pay the unofficial market rate,” said Cohen, the Treasury undersecretary for terrorism and financial intelligence.

‘Profitable Arbitrage’

“At the same time, senior government officials and preferred businesses, including IRGC-owned and controlled operations, are able to access foreign exchange at the official rate, essentially engaging in profitable arbitrage on the back of the average Iranian,” according to Cohen.

The market value of the rial has been dropping for months. Iranians are reacting to the prospect that their government may be incapable of slowing the 19.8 percent inflation rate or improving the domestic economy, as the U.S. and Europe approved new sanctions on the banking system and discuss a possible European embargo of Iranian oil, Hossein Raghfar, an economist at Al Zahra University in Tehran, said in a telephone interview.

The official rial-to-dollar rate was 11,030 on Dec. 21, while the market rate at currency bureaus soared to 15,300 the same day. That gap narrowed yesterday to 11,100 and 15,150, a 36 percent difference, according to Donya-e-Eqtesad. The 39 percent gap last week was the widest in about 20 years and it underscores that Iranians don’t trust politicians and finance officials to stabilize the economy, said Raghfar.

Iranian Media

U.S. Treasury officials declined to provide Bloomberg News with documentation backing up Cohen’s allegation. Treasury spokesman John Sullivan did point to reports in the Iranian media citing central bank of Iran officials and a prominent researcher with Iran’s parliament warning about currency profiteering. Those reports do not explicitly refer to regime officials and the IRGC benefiting as Cohen did.

The Alef news website linked to Ahmad Tavakoli, an economist who runs the Iranian parliament’s research center, cited him as saying that the gap between the rates “will lead to massive undue incomes at the expense of the nation’s assets.”

That will result in the “emergence of a new class of people who will have reached a certain structure through the economy’s muddy waters and the blessings of the CBI,” the central bank of Iran, said Tavakoli, who has frequently criticized President Mahmoud Ahmadinejad’s economic policies.

‘Domestic Discontent’

Cohen told Congress that for a decade, until September 2010, Iran successfully supported a single, official exchange rate using hard currency earned from oil sales. He credited United Nations sanctions imposed in June, 2010, with making it hard for the central bank to access foreign currency to defend the rial. The plunging currency was “fueling serious inflation, high unemployment and domestic discontent,” he said.

Iranian Foreign Ministry spokesman Ramin Mehmanparast was not immediately available to comment when called at his office in Tehran yesterday.

The assertion that the IRGC and senior regime members are profiting from the rial’s fall raises questions about whether sanctions are having the unintended effect of enriching entities involved in nuclear and missile proliferation, said Ken Katzman of the non-partisan Congressional Research Service in Washington and author of a book on the IRGC.

“Clearly sanctions are hurting the economy, but are the sanctions putting pressure on the key institutions they are intended to pressure, or could it be making the government more powerful relative to the population than it was before?” Katzman said in an interview.

Current Sanctions

Iran is under sanctions targeting the IRGC, finance, shipping, transport, missile and nuclear procurement and energy, in a concerted effort by the United Nations, the U.S., Europe and other nations to press Iran to abandon its suspected nuclear weapons program. Iran insists its nuclear program is for peaceful use.

The UN’s International Atomic Energy Agency on Nov. 8 detailed nuclear work that inspectors said could only be for military purposes. The latest report prompted additional sanctions last month in Washington, London and Ottawa, and is driving discussions in Europe on imposing an oil embargo.

Oil is Iran’s main source of income, earning the country $73 billion in 2010 and supplying more than 50 percent of the national budget, according to the U.S. Energy Department and the International Monetary Fund.

Oil Revenue

The second-largest producer in the Organization of Petroleum Exporting Countries after Saudi Arabia, Iran exported an average of 2.58 million barrels a day in 2010, according to OPEC. Iran expects to earn $110 billion from crude oil production in the Iranian calendar year that ends March 19, the state-run Mehr news agency said, citing a member of the parliament’s economic committee, Gholamreza Mesbahi-Moghadam.

Ali Alfoneh, an Iran researcher and IRGC specialist at the American Enterprise Institute in Washington, said government institutions, including the IRGC, benefited from a similar currency situation during the Iran-Iraq War in the 1980s. They were given preferential access to foreign currency at an official rate, which they used both to buy weapons overseas and to sell currency on the black market, he said.

‘More Corrupt’

It would “make sense” that the IRGC now is trying to do what it did in the 1980s, Alfoneh said in an interview. “In every single profitable industry in Iran, you see the IRGC. They are becoming more and more corrupt every day.”

“The wrong people are benefiting,” while ordinary Iranians suffer inflation, feeble economic growth and a decline in the rial brought on by sanctions, he said.

Growing public anger over the falling rial and growing opportunities for corruption are also feeding divisions within Iran’s leadership. President Mahmoud Ahmadinejad’s political rivals accuse him and his loyalists of economic mismanagement. The president and the central bank governor have disavowed blame for the fall of the rial.

As state television last week showed lines of people camped out with blankets overnight in front of state banks waiting to buy gold, Ahmadinejad accused unnamed culprits of seeking to drive down the rial and portray Iran “in a state of crisis,” the business paper Donya-e-Eqtesad reported.

Losing Defense

Ahmadinejad pledged the government would bring currency and gold markets under control, and asserted on Dec. 21 that Iran has huge reserves of both and could use them “for 15 years and still have gold” to defend the rial.

A few months ago, the central bank of Iran tried to stabilize the price of gold by auctioning gold reserves, Alfoneh said. “After two weeks, they abandoned the strategy because they could no longer defend the currency. The price of gold was still going up, because there’s no public confidence in the CBI.”

Central bank Governor Mahmoud Bahmani has acknowledged the bank is struggling to restore stability to the currency, and had limited ability to defend the rial. Iran’s economy needs to be managed as if it were under siege by western countries, Bahmani said Dec. 11, according to the Mehr news agency.

Anyone with preferential access to cheaper dollars “will try to make profit out of this,” Scott Lucas, an Iran specialist at the University of Birmingham in England, said in an interview. “Whether it’s Ahmadinejad or the Guards, we’re talking about people making short term gains to the detriment of the long term.”

To contact the reporters on this story: Indira A.R. Lakshmanan in Washington at ilakshmanan@bloomberg.net; Ladane Nasseri in Tehran at lnasseri@bloomberg.net

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

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Paterno Put Money Above Child Abuse Disclosure

By Scott Soshnick and Eben Novy-Williams - Dec 27, 2011 12:00 PM GMT+0700

Joe Paterno sat in his kitchen one morning in March 2002 as a graduate assistant described a locker-room shower encounter he saw between a boy and a longtime friend and colleague of Penn State University’s football coach. Paterno slumped in his chair, “shocked and saddened,” according to court testimony.

Mike McQueary’s words couldn’t have come at a worse time. Paterno was trying to fix the Nittany Lions’ money-making football program he built on a motto of “success with honor,” after the low point of his coaching career. The State College, Pennsylvania, university was near the end of a $1.4 billion fundraising campaign, six years removed from the opening of a $55 million basketball arena and had just expanded the football stadium to the nation’s second-biggest.

Paterno, in his 37th year as coach, told McQueary he had done the right thing describing what he saw involving Jerry Sandusky, a former Nittany Lions defensive coach. The biggest man on campus then sent the case to his immediate bosses and did nothing else. That set the stage for his firing nine years later, 11 days after his record 409th win, amid a scandal over alleged child-sex abuse and coverup that has echoed far beyond the Central Pennsylvania region known as Happy Valley.

“The revenue opportunities are so substantial that the pressure placed upon the athletic department and coach, specifically, make it ever more difficult to pursue a school’s mission,” Warren Zola, 44, assistant dean of graduate programs at the Carroll School of Management at Boston College, said in a telephone interview from his Chestnut Hill, Massachusetts, office.

Health Issues

Paterno, who turned 85 on Dec. 21, was unable to comment for this story because of health issues, said Dan McGinn, a spokesman. Paterno is being treated for lung cancer found after his firing and broke his pelvis in a fall at his home this month.

The dependence by U.S. universities on sports to help fund everything from money-losing gymnastics teams to general scholarships has created a system where the needs of coaches and their programs supersede the educational values of their institutions, said Robin Harris, executive director of the Ivy League, whose schools don’t give athletic scholarships.

It also creates an environment where a coach like Paterno, a Brooklyn, New York, native known as “JoePa” whose bronze statue stands outside 107,000-seat Beaver Stadium, had the power to tell the university’s president that he wouldn’t help raise another penny if the school’s top disciplinarian wasn’t fired for being too strict with his players.

‘So Much Money’

“There is so much money tied into big-time college athletics that it forces some people to make bad decisions,” Harris said in a telephone interview. “They may be people affiliated with a program, or coaches and administrators who do things purposely wrong, or turn a blind eye, because they are focused on generating revenue and not necessarily the integrity of the enterprise.”

Paterno and Graham B. Spanier, 63, Penn State’s president, were fired by the school’s trustees on Nov. 9, four days after Sandusky, 67, was charged with sexually assaulting eight boys from 1994 to 2009. While neither Paterno nor Spanier was charged in the case, the trustees said the two leaders should have done more.

Athletic Director Tim Curley, 57, was placed on administrative leave and Gary Schultz, 62, a vice president in charge of finance and the campus police, retired after they were accused of lying to a grand jury about what McQueary told them about Sandusky’s actions. Sandusky, Curley and Schultz all have denied wrongdoing.

McQueary Testimony

McQueary, 36, testified at a Dec. 16 preliminary hearing for Curley and Schultz that he went to Paterno’s house the day after the shower incident and told the coach what he had seen, although he didn’t offer explicit details. About 10 days later, McQueary met with Curley and Schultz and told them he had seen Sandusky and a boy, both naked, in the shower.

“I conveyed to them that I saw Jerry with a boy in the showers and that it was severe sexual acts going on and that it was wrong and over the line,” McQueary testified.

Educators said they see plenty wrong with big-time college sports.

Winning generates money from television, ticket sales, sponsors and alumni, according to a 2010 report by the Knight Commission on Intercollegiate Athletics, an independent, non- profit group dedicated to reforming college sports.

Networks including Walt Disney Co. (DIS)’s ESPN and News Corp. (NWSA)’s Fox will combine to pay the top five conferences and the Bowl Championship Series that determines the national football title about $14 billion in rights fees through 2032.

Bowl Money

Football teams received a collective $281 million in bowl payouts last season, the National Collegiate Athletic Association said. Of that, $182 million, or 65 percent, came from the five BCS games, including the national championship.

CBS Corp. (CBS) and Time Warner Inc. (TWX)’s Turner Sports signed a 14- year deal worth almost $11 billion to televise the NCAA men’s basketball tournament.

ESPN is an investor in the Longhorn Network, which guarantees the University of Texas an average $15 million annually for 20 years. Texas had a nation-leading operating profit of $70.1 million last year, according to data compiled by Bloomberg. Penn State football generated $63.3 million in fiscal 2010, about 60 percent of the athletic department’s revenue.

Campus Power

Coaches like Paterno are the most powerful people at their universities, including the presidents, said Lewis Katz, a former owner of the National Basketball Association’s New Jersey Nets who donated $15 million to Penn State and whose name appears on a campus law building.

“Football trumps everything at Penn State,” Katz said. “There’s nothing that comes close to second.”

Winning requires universities to build facilities that lure top high-school recruits, and hire marquee coaches whose salaries often dwarf that of university presidents, says Jason Lanter, assistant professor of psychology at Pennsylvania’s Kutztown University and president of the Drake Group, a professors’ alliance to defend academic integrity from the sports industry.

“We’re talking big, big money here,” Lanter, 38, said in a telephone interview. “You need to have it to build the facility, to recruit, to get more money. It’s a vicious cycle.”

JD Reive is in his second season as the men’s gymnastics coach at the University of Iowa, where the football team accounted for 52.6 percent of athletic department revenue last year. The gymnastics team lost almost $600,000 in fiscal year 2010, according to university figures obtained through open- records laws. Reive said his program might disappear if the football team falters.

Coaches’ Concerns

“There isn’t a gymnastics coach in the country that doesn’t worry about what happens if the football team doesn’t make a bowl game,” Reive, 35, said in a telephone interview. The Hawkeyes play in the Insight Bowl on Dec. 30 against Oklahoma.

Ohio State University’s football program had an operating profit of about $18.2 million last year. It hired Urban Meyer, a two-time national title winner at the University of Florida, as coach last month at $4 million a year, more than triple the $1.3 million paid in the fiscal year ending June 2010 to Gordon Gee, the Columbus, Ohio, university’s president.

Meyer, 47, succeeded Jim Tressel, who quit in May in a memorabilia-selling scandal involving top players. Tressel produced a national championship at Ohio State before the NCAA said he kept information about rule-breaking from school administrators for more than nine months. Asked early in the case if he was going to fire Tressel, Gee, 67, responded, “I hope he doesn’t fire me.”

Buckeye Ban

Gee, through a university spokeswoman, declined to comment for this article. The NCAA on Dec. 20 banned the Buckeye football team from postseason play next year.

Zola, the Boston College assistant dean, said coaches have become “preposterously powerful,” and chancellors and trustees must “realign their mission along with athletic priority.”

Behind Paterno’s Coke-bottle eyeglasses and grandfatherly exterior was a bully, said Vicky Triponey, Penn State’s former standards and conduct officer who clashed with the coach over players who broke laws or school rules.

Triponey said in a 2005 e-mail to Spanier that Paterno believed she should have no interest in holding players accountable to general student standards.

“I do not support the way this man is running our football program,” Triponey, 54, said in e-mails first reported by the Wall Street Journal last month. “We certainly would not tolerate this behavior in our students, so I struggle with how we tolerate it in our coach.”

Funds Cutoff

Triponey also said she was told by Spanier that the coach had given the president an ultimatum: Fire her or Paterno would stop raising funds for the university. Spanier told Triponey that he would pick her, though he didn’t want to have to make that decision.

The content of the e-mails was confirmed to Bloomberg News by Triponey’s husband, Michael Meacham, a former Penn State professor. Triponey, through her husband, declined to comment further.

Raymond Marsh, a spokesman for Penn State’s Office of University Development, wouldn’t say how much total money Paterno had helped to bring in.

“Penn State clearly raised more funds because he was involved,” Marsh wrote in an e-mail response to questions.

Spanier declined to comment through Bill Mahon, a university spokesman. The former president remains a tenured professor in the College of Health and Human Development and the College of the Liberal Arts.

Triponey Resigns

Triponey quit in September 2007, a month before the university limited the ability of its judicial-review process to end a student’s participation in activities, including sports.

Walter DeShields, a 2004 graduate of Penn State and head of the Philadelphia chapter of the African American Alumni Organization, said in a telephone interview it was clear during his time at the university that football and basketball players were given more leeway when it came to behavior and punishment.

“But playing on Saturday in a multimillion-dollar business is the only thing that matters,” he said in a telephone interview.

On Saturday, Oct. 29, Penn State beat Illinois 10-7 at Beaver Stadium, lifting Paterno above Eddie Robinson for the most wins by a coach at college football’s top level.

The Nittany Lions were off the next Saturday, Nov. 5, when State Attorney General Linda Kelly announced the grand jury presentation against Sandusky, Schultz and Curley.

Paterno’s Role

According to the grand jury report, Paterno, after being informed by McQueary of what he saw, told Curley the next day. Paterno didn’t contact police. In a Nov. 9 statement, the coach said in hindsight he wished he had done more.

By the time Penn State played again, against Nebraska on Saturday, Nov. 12, Paterno was gone after 46 years in charge.

The NCAA said on Nov. 18 it would investigate the Sandusky case, hours before Paterno’s cancer was disclosed by his family.

Penn State said this month it would no longer assist in the management of licensing for Paterno’s name and likeness. Licensing for Paterno-related merchandise will now be coordinated by his daughter, Mary Kay Hort, the school said, and Paterno is barred from using university trademarks. Hort didn’t return an e-mail seeking comment on the move.

The scandal is costing the football team, which is searching for a permanent successor to Paterno. It has lost at least three top high-school recruits, including Noah Spence, a 6-foot-4, 245-pound defensive end from Harrisburg and the No. 1- rated player in Pennsylvania. Spence hinted via Twitter two days after Sandusky was charged that he might not choose the university that’s about 85 miles from his hometown.

No to PSU

“Um psu might be a no no for me ewwww,” Spence wrote. Spence’s father declined to comment and his son didn’t return repeated messages at their home. On Dec. 18, Spence said he would join Meyer at Ohio State.

Tommy Schutt, a 301-pound defensive tackle rated the leading recruit in Illinois, verbally committed to Penn State in June only to balk and pick the Buckeyes after the scandal. Chad Hetlet, Schutt’s coach at Glenbard West High School in Glen Ellyn, Illinois, said the player “wasn’t comfortable” with the situation at Penn State.

“He’s concerned about the future and what’s hanging over their head,” Hetlet said in a telephone interview.

Recruiting Low

Scout.com, a college recruiting website, said Penn State has its fewest commitments from the two highest levels of players since 2002, the same year McQueary said he saw Sandusky and the boy in the shower and the year after the Nittany Lions had their first back-to-back losing seasons under Paterno, who became head coach in 1966.

“There’s blood in the water,” said Mike Farrell of Rivals.com, another recruiting service.

John L. Lahey, president of Quinnipiac University in Hamden, Connecticut, said the biggest headaches in college sports seem to come from the more visible and valuable teams.

“When any part of the university, in this case athletics, becomes so important to the university, to the university’s brand, image, resources, as certainly is the case with the Penn State football program, it can cloud the better judgment of people with high intelligence and integrity,” Lahey said at the IMG Intercollegiate Athletics Forum in New York this month.

The college football chase for bigger, better and richer goes on.

The Board of Regents at Washington State last month approved $80 million to add premium seating and a new press box to Martin Stadium.

New Revenue

“It allows for new revenue streams which I believe are necessary to reinvest in scholarships and additional facility enhancement projects which are essential to attract top talent to our campus,” Athletic Director Bill Moos said.

The Cougars, who finished with two Pac-12 Conference wins last season, picked Mike Leach as football coach this month, giving him $2.25 million annually. The Pac-12 this year announced a 12-year, $2.7 billion TV contract with ESPN.

Washington State football generated $12.8 million in revenue in fiscal year 2010, almost a third of conference rival Washington. Leach’s contract includes a $25,000 bonus for beating the Huskies in the annual game known as the Apple Cup.

Of 53 universities surveyed by Bloomberg this year, 46 diverted money to sports in their fiscal years ended in 2010, based on financial reports to the NCAA obtained from state schools under open-records laws.

Rutgers Budget

Rutgers University, the 245-year-old state university of New Jersey, spent more money on athletics than any other public institution in the six biggest football conferences. More than 40 percent of sports revenue at Rutgers came from student fees and the university’s general fund, while budget cuts froze professors’ salaries, cut the use of photocopies for exams and increased tuition, housing and other fees.

“There are a lot of people chasing the Holy Grail,” Stanford University Athletic Director Bob Bowlsby said in a telephone interview. “Chasing leads to some bad decisions. Sometimes it’s doing things that you think you have to do to compete on the playing field.”

Stanford, based in Palo Alto, California, is among four schools in college football’s six largest conferences without a major NCAA infraction. Penn State is another, along with Northwestern and Boston College. The NCAA is investigating whether Penn State broke the governing body’s rules about institutional control of sports in the scandal.

Smaller Stanford

John Etchemendy, Stanford’s provost, said the relatively small size of the Cardinal’s football and basketball venues keeps officials from becoming too reliant on those programs for revenue. No. 4 Stanford -- which is playing No. 3 Oklahoma State in the Fiesta Bowl on Jan. 2 -- completed a $100 million renovation of the football stadium in 2006 that removed 35,000 seats, to a capacity of 50,000. The basketball arena, Maples Pavilion, seats about 7,000. The University of Oregon’s $227 million Matthew Knight Arena, which opened last season, holds about 12,000.

“If you have a large stadium, you feel the need to fill it,” Etchemendy said. “Somehow the priorities have gotten distorted, if the football or basketball coach ends up having more influence or power than that president.”

Paterno’s teams had losing records in 2000 and 2001, going a combined 10-13. Penn State went 9-4 in 2002, setting a Beaver Stadium attendance record for a game against Nebraska, before losing records the following two seasons, including a Paterno career-low 3-9 in 2003. After a 4-7 record in 2004, university administrators asked Paterno to consider stepping down, according to the Centre Daily Times in State College. Paterno said no, and the Nittany Lions went 11-1 in 2005.

Bowden’s Comedown

Bobby Bowden took Florida State to 31 bowls in 34 years and won 76 percent of his games. Toward the end of his tenure, Bowden, who went 33 years without a losing season, said he began receiving office visits from university administrators voicing concerns about empty seats on game day. He left under pressure after the 2009 season with a total of 377 victories.

“At the end, I didn’t win enough,” Bowden, 82, said in a telephone interview from his home in Tallahassee, Florida, where the university is based. “You can bet your life if you’re not winning and filling the stadium, got to sell those seats. Football pays 90 percent of our bills. Got to win to get those TV contracts.”

Whether the Sandusky case will affect wins, losses and revenue is the next question at Penn State. Since Sandusky’s arrest, sales of licensed T-shirts, caps and other merchandise have plunged by almost 40 percent from previous years, Brian Swallow, vice president of sales and marketing for Fanatics LLC, which runs the school’s online store, said in an e-mail.

Applicants Up

Applications for admission are up more than 3.4 percent over last year, and alumni giving is up an undisclosed amount, Rodney Erickson, who succeeded Spanier as Penn State president, said in a Dec. 6 e-mail to alumni.

Students rioted the night Paterno was fired. The former coach and his wife, Sue, donated $4 million to the university and helped raise almost $14 million for an addition to the library, which was dedicated in 2000 and named in their honor. The football team this year was ranked No. 1 in academics among the top 25 by the New America Foundation, which compared graduation rates and the NCAA’s academic progress rate.

Tom Bradley has replaced Paterno on an interim basis as the Nittany Lions prepare to face the University of Houston in the TicketCity Bowl on Jan. 2 in Dallas. The game paid its participants $2.2 million last season, according to the NCAA.

“Football Saturdays are a ton of fun,” said Lanter, the Drake Group president. “But when you peel back the layers, people are becoming more ready to acknowledge that if we look at the money, as to where it’s going, control should go back to the universities.”

To contact the reporters on this story: Scott Soshnick in New York at ssoshnick@bloomberg.net; Eben Novy-Williams in New York at enovywilliam@bloomberg.net.

To contact the editor responsible for this story: Michael Sillup at msillup@bloomberg.net

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Japan Set to Unveil $10 Billion India Currency Swap Deal During Noda Visit

By Kyoko Shimodoi and Unni Krishnan - Dec 27, 2011 12:33 PM GMT+0700

Japan is poised to unveil a currency-swap line with India in its second international financial agreement with top Asian powers this week.

Finance Minister Jun Azumi told reporters today in Tokyo that Japan is negotiating an agreement with India, the third- largest economy in Asia behind China and Japan. The deal is likely to be unveiled during a trip by Prime Minister Yoshihiko Noda to India that starts today, with the amount of the swap line about $10 billion, a Japanese government official said on condition of anonymity.

Japan agreed with China two days ago to promote direct trading of the yen and yuan without using dollars and start purchases of Chinese bonds for its foreign-exchange reserves. The deal with India would expand the ability to respond to financial shocks as Prime Minister Manmohan Singh’s administration contends with a slump in the rupee that risks stoking inflation.

“It’s like an insurance cover or padding to the foreign- exchange reserves in a crisis,” said Dharmakirti Joshi, a Mumbai-based economist at Crisil Ltd., the local unit of Standard & Poor’s. “It will help in times of dollar shortage.”

The rupee has plunged about 15 percent against the dollar this year, the worst performance in Asia, after foreign investors sold shares worth $561 million as growth slows and Europe’s protracted sovereign-debt crisis roiled global financial markets. A weakening currency adds to the cost of imported goods in a nation that has the fastest inflation among so-called BRIC nations, with the benchmark wholesale-price index rising more than 9 percent in each of the past 12 months.

Previous Arrangement

While India’s foreign-exchange reserves have risen $4.8 billion in the past year to $302 billion, the country’s holdings are smaller than those of China, Japan, Taiwan, South Korea and Hong Kong.

India and Japan have previously supported each other with similar arrangements. In 2007, the two nations agreed to support each other in the event of a run on their currencies in the first such foreign-exchange accord for the South Asian nation. Under the plan, Japan would lend dollars and other currencies should India find its foreign-exchange reserves insufficient to stem a fall in the rupee.

Japan has also deployed some of its reserves, the world’s second biggest behind China’s, for aiding Japanese companies in making overseas acquisitions.

Direct Trading

Earlier this week, the Japanese government said Asia’s two largest economies will promote direct trading of the yen and yuan without using dollars and will encourage the development of a market for companies involved in the exchanges.

Japan will also apply to buy Chinese bonds next year, allowing the investment of renminbi that leaves China during the transactions, the Japanese government said in a statement after a meeting between Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao in Beijing Dec. 25. Encouraging direct yen- yuan settlement should reduce currency risks and trading costs, the two governments said.

China is Japan’s biggest trading partner with 26.5 trillion yen ($340 billion) in two-way transactions last year, from 9.2 trillion yen a decade earlier. The pacts between the world’s second- and third-largest economies mirror attempts by fund managers to diversify as the two-year-old European debt crisis keeps global financial markets volatile.

To contact the reporters on this story: Kyoko Shimodoi in Tokyo at kshimodoi@bloomberg.net; Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net.

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net

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Firms Give U.S. Plans to Rent Seized Homes

By John Gittelsohn - Dec 27, 2011 12:01 PM GMT+0700

Fortress Investment Group LLC (FIG) and Deutsche Bank AG (DB), whose executives played roles in the housing bubble, are among the hundreds of firms that responded to a U.S. government request for proposals to rent out foreclosed homes.

The Federal Housing Finance Agency asked for ideas as Fannie Mae and Freddie Mac, the mortgage companies seized by the government in 2008, seek to reduce losses, stabilize neighborhoods and support housing values by turning into rentals a portion of the more than 180,000 repossessed homes in their inventory. The submissions were due by Sept. 15.

Carrington Holding Co., Barclays Capital Inc., Neuberger Berman Group LLC, Ranieri Partners LLC and UBS AG (UBSN) also were among the financial and investment companies that responded to the FHFA, according to a list of 439 proposals. The agency released the names in response to a Freedom of Information Act request filed by Bloomberg News.

“We’re obviously big proponents of this program,” Rick Sharga, executive vice president of Carrington, said in a telephone interview from his office in Santa Ana, California. “We think it meets a market need.”

Demand for rentals is rising as more homeowners lose their properties to foreclosure and fewer buyers qualify for mortgages. About 6 million homes with a current market value of $750 billion will be repossessed by banks or sold at distressed prices by 2016, according to Oliver Chang, a San Francisco-based analyst at Morgan Stanley. FHFA’s plans for a foreclosure-to- rental program are significant because Fannie Mae and Freddie Mac (FMCC) service more than half of U.S. home mortgages, he said.

‘Most Important’ Program

“In our opinion, this is the most important housing- related program under consideration,” Chang wrote in a Dec. 6 note to investors. “The hope is that a larger unified program is established that could move the needle a year or two down the road.”

The FHFA won’t discuss specific submissions or give a firm timeline for structuring its program, said Corinne Russell, a spokeswoman for the Washington-based regulatory agency.

“FHFA is proceeding prudently but with a sense of urgency to lay the groundwork for the development of good initial transactions in early 2012,” she said in an e-mail.

Home values are down 31 percent from their 2006 peak, according to an S&P/Case-Shiller index of 20 cities. They probably will continue falling next year, with a recovery unlikely before 2013, according to property-data provider Zillow Inc.

Maintaining Foreclosed Homes

Fannie Mae (FNMA), based in Washington, had 122,616 foreclosed homes on its books with a carrying value of $11 billion as of Sept. 30, costing $733 million to maintain in the third quarter, according to a Securities and Exchange Commission filing. Freddie Mac controlled 59,616 foreclosed homes that cost the McLean, Virginia-based company $221 million to operate and manage in the third quarter.

Carrington, a real estate and mortgage services company founded by hedge-fund manager Bruce Rose, is “actively raising” about $1 billion to purchase foreclosed homes that will be renovated and held as rentals, with or without the government program, said Sharga, who worked at foreclosure- tracking firm RealtyTrac Inc. before joining Carrington in September.

He said that Carrington’s submission outlined three options for turning foreclosures to rentals in bulk: selling directly to investors who agree to repair and hold the properties as rentals, hiring managers to oversee rentals to be sold at a later date, or structuring transactions so the government and investors share revenue from seized properties.

‘Split the Proceeds’

“At the end of a period, you’d sell the property and split the proceeds,” said Sharga, whose company collects mortgage payments and manages about 4,000 rental homes, including properties repossessed by Fannie Mae.

The FHFA received more than 4,000 submissions, about 10 percent of which were considered valid, according to a Nov. 30 agency statement. Among the proposals were joint-venture partnerships, sales, auctions and asset-disposition strategies similar to those used by the Federal Deposit Insurance Corp. as well as by the Resolution Trust Corp. after the savings-and-loan collapse of the early 1990s, the agency said.

Executives from some of the companies that submitted proposals to the FHFA held influential positions when the housing bubble burst.

Daniel Mudd, chief executive officer of Fortress, took a leave of absence from the New York-based asset management company after being sued Dec. 16 by the SEC over his role as CEO of Fannie Mae from 2005 to 2008. Fannie Mae and Freddie Mac have drawn more than $170 billion in aid from the Treasury Department since they were seized by the federal government in 2008.

Subprime Loans

Mudd and Richard Syron, Freddie Mac’s former CEO, were accused by the SEC of understating the subprime loans held by the firms by hundreds of billions of dollars. Mudd has said that the government and investors were aware of “every piece of material data about loans held by Fannie Mae.” Tom Green, Syron’s attorney at Sidley Austin LLP, said there “was no shortage of meaningful disclosures” by Freddie Mac.

Gordon Runte, a Fortress spokesman, didn’t respond to a request for comment on the firm’s FHFA submission. The company said in a Dec. 16 statement that the complaint against Mudd “does not relate to Fortress.”

Greg Lippmann, a Deutsche Bank trader, hosted the first meeting of investors and lawyers who devised contracts and financial instruments used to bet against the housing market. During the financial crisis of 2007 and 2008, Lippmann helped Deutsche Bank offset losses on mortgage investments with wagers against subprime debt that made $1.5 billion, according to an April report by a Senate panel.

Five Submission Examples

Renee Calabro, a Deutsche Bank spokeswoman, declined to comment. LibreMax Capital LLC, a New York-based hedge fund where Lippmann is now chief investment officer, wasn’t on the FHFA’s list of submissions.

Representatives for Ranieri Partners, Neuberger Berman, Barclays and UBS all declined to comment on their FHFA proposals.

The agency provided five examples of submissions with the content, names and contact information redacted. That information was withheld to protect trade secrets and the privacy of people who submitted proposals, the agency said.

“Our program, when fully implemented, has the potential of having a significant impact on the stabilization of real estate values across the country,” according to one of the proposals. The plan has been endorsed “by financial institutions, staffers of U.S. Senators and Congressmen, and real estate related people across the country,” according to the letter.

Harvard Professor’s Recommendation

“My former Harvard Business School finance professor recommended I contact you,” wrote a self-described “former banker” in another proposal. “Officials from the Federal Reserve and HUD have favorably evaluated the following asset/loan disposition functionality & proposal for my client’s real-time, forward-looking analytics real estate asset/note transaction platform.”

No contracts will be awarded based on the submissions, which “will be used for planning and market research purposes only,” the FHFA said in its solicitation for proposals.

Amherst Securities Group LP, a New York-based mortgage broker-dealer, opted not to submit ideas to the FHFA because “we did not feel we would be adequately protected” from Freedom of Information Act requests, Laurie Goodman, senior managing director in charge of research for the firm, said in an e-mail.

To contact the reporter on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net

To contact the editor responsible for this story: Daniel Taub at dtaub@bloomberg.net

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Italy Retailers in Worst Christmas in 10 Years

By Chiara Vasarri - Dec 27, 2011 5:16 PM GMT+0700

Italian retailers had the worst Christmas in 10 years, consumer group Codacons said, as austerity measures to combat the sovereign debt crisis prompted households to cut spending.

Italians spent 48 euros ($62.75) less per person this holiday season than the average of the past five years, Rome- based Codacons said in a statement on its website. The shoe and clothing sector was hit the most, with sales dropping 30 percent from previous years, it said, adding retailers won’t recover the decline during seasonal promotions that start in January.

The discount period “will be a flop,” with sales declining as much as 40 percent compared with 2010, Carlo Rienzi, the head of Codacons, said in the statement.

Prime Minister Mario Monti secured final passage last week for 30 billion euros of austerity and growth measures as he seeks to cut the euro region’s second-biggest debt. The measures, including a tax on luxury goods, a levy on primary residences and higher gasoline prices, may further sap consumer spending and push the euro area’s third-biggest economy deeper into recession.

The austerity plan will cost every Italian family 1,129 euros, according to consumer group Federconsumatori. Italians spent 4.4 billion euros in the holiday season, 400 million euros less than Federconsumatori’s forecast, the group said.

Stocks Gain

While the euro area’s debt crisis is threatening to tip the 17-nation economy into recession, European stocks gained for a third day before data forecast to show the U.S. economic recovery is strengthening. The Stoxx Europe 600 Index rose 0.2 percent at 10 a.m. in London. The MSCI Asia Pacific Index lost 0.3 percent after the Bank of Japan said risks to the economy have increased.

A “few” Bank of Japan board members “pointed to the possibility that downside risks to the economy had increased somewhat since the previous meeting” held in October, according to minutes of the bank’s Nov. 15-16 gathering published today.

In the U.S., the Conference Board’s consumer confidence index may increase to 58.6 in December, according to the median of 61 estimates ahead of a release today.

Elsewhere in Europe, consumer confidence fell to the lowest in almost three years in Finland. The consumer confidence index sank to 0.4 in December, the lowest since March 2009, from 1.5 in November, Statistics Finland said in Helsinki. Business confidence was unchanged at minus 10, the Confederation of Finnish Industries said in a separate report.

Consumer Confidence

Dutch producer confidence improved to minus 1.3 in December from minus 4.8 the previous month, national statistics bureau CBS said in The Hague.

In South Korea, consumer confidence fell to a three-month low in December as concern the political outlook in the North will worsen in the wake of Kim Jong Il ’s death compounds the risk from Europe’s debt crisis.

Italian consumer confidence this month fell to the lowest in 16 years and the economy shrank in the third quarter. The government forecasts a further contraction in the current three- month period, meaning Italy is in its fourth recession since 2001.

Italy won’t return to growth until the second half of next year, employers’ lobby Confindustria said in a Dec. 15 report. The $2.3 trillion economy will contract 1.6 percent in 2012 after growing 0.5 percent this year, the lobby said.

To contact the reporter on this story: Chiara Vasarri in Rome at cvasarri@bloomberg.net

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

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European Stocks Are Little Changed as Banco Comercial, UniCredit Advance

By Julie Cruz - Dec 27, 2011 7:59 PM GMT+0700

European stocks were little changed before reports that may show house prices in U.S. cities fell at a slower pace and consumer confidence climbed. Asian shares and U.S. index futures declined.

Banco Comercial Portugues SA and Banco Espirito Santo SA (BES) rallied more than 6 percent as Jornal de Negocios said Portugal may recapitalize its banks without taking an equity stake. Chemical makers also advanced. Italian lenders UniCredit SpA (UCG) and Mediobanca SpA retreated more than 2.5 percent.

The benchmark Stoxx Europe 600 Index dropped less than 0.1 percent to 241.82 at 12:58 p.m. in London. The MSCI Asia Pacific Index declined 0.2 percent as the Bank of Japan warned of risks to the economy and South Korean consumer confidence slid. Futures on the Standard & Poor’s 500 Index expiring in March also slipped 0.2 percent.

“After the Christmas holidays, market participants are focused on the consumer-confidence index and Case-Shiller,” said Andreas Lipkow, an equity trader at MWB Fairtrade Wertpapierhandelsbank AG in Frankfurt. “The unemployment data in the next days are more important for the market because it shows how strong the U.S. economy really is.”

The Stoxx 600 rallied 3.5 percent last week as reports showing a decline in U.S. jobless claims and increases in consumer confidence and durable-goods orders spurred optimism that the world’s biggest economy is strengthening. The gauge has still retreated 12 percent this year as Europe’ debt crisis spread from Greece to Italy and Spain.

Reduced Volume

The volume of share trading across Europe is reduced today as U.K. and Irish markets remain closed for a second day following the Christmas holiday. The number of Euro Stoxx 50 Index futures that have changed hands is less than 20 percent of the average over the past 20 days, according to data compiled by Bloomberg.

The S&P/Case-Shiller index of property values in 20 U.S. cities dropped 3.2 percent in October from the same month in 2010, the smallest year-over-year decrease since January, according to the median forecast of 20 economists surveyed by Bloomberg News. The Conference Board’s consumer-confidence gauge rose to a five-month high of 58.6 in December from 56 the previous month, separate figures may show.

The S&P/Case-Shiller index is due at 9 a.m. New York time and the confidence measure is scheduled for 10 a.m. The Labor Department will release data on initial claims for jobless benefits on Dec. 29.

Price Swings

Stock swings that reached twice the five-decade average left the S&P 500 with the smallest price change in 41 years and utilities, soapmakers and health-care providers at the highest valuations since 2008. The S&P 500 rose 3.7 percent last week, sending the measure to a gain of 0.6 percent for the year. The last time it moved less on an annual basis was in 1970, when it fell 0.1 percent.

Germany’s economy is robust enough to withstand a more difficult European and global business environment, Handelsblatt cited Economy Minister Philipp Roesler as saying in an interview. Private consumption is sustaining growth and businesses are strong enough to be optimistic about the future, the German newspaper cited Roesler as saying.

Portuguese Banks

Banco Comercial Portugues (BCP) advanced 6.8 percent to 12.5 euro cents and Banco Espirito Santo climbed 6.7 percent to 1.25 euros. Portugal may recapitalize its banks without becoming a shareholder, Jornal de Negocios reported, without saying where it got the information.

The government may subscribe contingent convertible bonds sold by the banks, the newspaper said. So-called CoCos are bonds that convert into equity if a bank’s capital drops below a set level.

Wacker Chemie AG (WCH) and Symrise AG led chemical makers higher. The German companies added 1.3 percent to 61.62 euros and 1.5 percent to 20.11 euros, respectively. Chemical shares were the best performers in Europe today, rising 0.5 percent as a group.

UniCredit and Mediobanca (MB) lost 4 percent to 6.63 euros and 2.9 percent to 4.62 euros, respectively, in Milan trading. Intesa Sanpaolo SpA tumbled 2.4 percent to 1.28 euros.

Italy plans to sell almost 450 billion euros of debt next year to pay for maturing bonds and bills and cover the government’s budget deficit, Il Sole 24-Ore said, citing an interview with Maria Cannata, director of public debt.

Sky Deutschland AG declined 2.5 percent to 1.38 euros. The company won’t show Paramount Pictures Corp.’s movies in 2012, and the change will damp enthusiasm for its movie channel, according to Financial Times Deutschland. Paramount’s films include “Mission Impossible,” “TinTin” and “Titanic.”

To contact the reporter on this story: Julie Cruz in Frankfurt at jcruz6@bloomberg.net

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

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Obama Wins Most Demand for Debt Since 1995

By Daniel Kruger - Dec 27, 2011 4:27 PM GMT+0700

The U.S. government received record demand for its bonds in 2011, pushing longer-maturity Treasuries to their best performance since 1995 in a sign that President Barack Obama may have little difficulty financing a fourth consecutive year of $1 trillion budget deficits.

The Treasury Department attracted $3.04 for each dollar of the $2.135 trillion in notes and bonds sold, the most since the government began releasing the data in 1992 during the George H. W. Bush administration. The U.S. drew an all-time high bid-to- cover ratio of 9.07 for $30 billion of four-week bills it auctioned on Dec. 20 even though they pay zero percent interest.

While Standard & Poor’s stripped the U.S. of its AAA credit rating on Aug. 5, Treasuries due in 10 years or more returned 25.6 percent this year. The spreading sovereign debt crisis in Europe and slower global growth are driving investors to the safety of U.S. assets, helping to contain borrowing costs and making it cheaper as a percentage of gross domestic product to finance deficits than when the nation last had budget surpluses.

“If the last two weeks are any indication of how next year will start, there’s near-insatiable demand,” Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that are required to bid at the auctions, said in a Dec. 21 telephone interview. “We have a significantly shrinking supply of risk-free assets in the world and U.S. Treasuries are one of the few left.”

Beating Commodities, Stocks

The last time longer-maturity Treasuries returned as much as this year was in 1995, when they rallied 30.7 percent.

Treasuries were some of the best assets to own this year, returning 8.9 percent, compared with a decline of 8 percent for the Thomson Reuters/Jefferies CRB Index of raw materials and a 0.6 percent gain in the Standard & Poor’s 500 Index of stocks. Global sovereign debt and mortgage-backed securities rose 5.8 percent, and corporate bonds climbed 4.3 percent, according to Bank of America Merrill Lynch bond indexes.

The dollar is poised to strengthen for a second straight year against its major trading partners, appreciating 1.2 percent as measured by IntercontinentalExchange Inc.’s Dollar Index. The gauge rose 1.5 percent in 2010.

“The U.S. is benefiting from a very unstable global environment,” Scott Graham, the head of government bond trading at the Bank of Montreal’s BMO Capital Markets unit in Chicago, a primary dealer, said in a Dec. 21 telephone interview. “At some point you’d think demand would wane if Europe gets settled.”

Falling Yields

While yields on 10-year notes rose 18 basis points, or 0.18 percentage point, last week to 2.02 percent, they are down from 3.3 percent at the end of 2010, Bloomberg Bond Trader prices show. The rates fell one basis point to 2.01 percent at 9:17 a.m. London time, and the 2 percent security due November 2021 added 1/8, or $1.25 cents per $1,000 face amount, to 99 28/32.

Low yields mean that interest expense accounted for 3 percent of the economy in fiscal 2011 ended Sept. 30, down from 4 percent in 1999. When the U.S. ran budget surpluses between 1998 and 2001 the bid-to-cover ratio was 2.26.

“Some of the trades that appeared obvious have been wrong,” John Fath, a principal at the investment firm BTG Pactual in New York who manages $2.5 billion of bonds, said in a Dec. 21 telephone interview. “Most people thought if the U.S. was downgraded it would lead to higher rates. Most people argued that increasing deficits would be more difficult to finance.”

Caught Off Guard

Among those caught off guard by the strong demand for Treasuries was Bill Gross, who runs the world’s biggest bond mutual fund at Pacific Investment Management Co. In February, Gross had a net bet against Treasuries in the firm’s flagship Total Return Fund, which has gained 3.3 percent this year, ranking in the 28th percentile of similar funds, according to data compiled by Bloomberg.

“This no-Treasury thing is simply a demonstration of vigilance on the part of Pimco that says these bonds aren’t worth what others appear to think they’re worth, and we prefer another menu, that’s all,” Gross said in an April 20 telephone interview.

Government and Treasury debt now make up 23 percent of the $241 billion Total Return Fund (PTTRX), according to data posted on Newport Beach, California-based Pimco’s website Dec. 9.

Gross wasn’t the only one surprised by the performance of Treasuries. The median estimate of 70 economists and strategists surveyed by Bloomberg in early January was for 10-year yields to end this year at 3.75 percent. FTN Financial had the lowest estimate, at 2 percent. For the end of 2012, the median forecast is 2.6 percent.

Steady Decline

Ten-year yields, which are a benchmark for everything from corporate bonds to mortgages, have been on a steady decline since 1981, when they exceeded 15 percent.

They were at 6.57 percent in January 1993 at the end of the elder Bush’s presidency, down from 9.54 percent in early 1989 when he took office as the Fed cut its target rate for overnight loans between banks to 3 percent from a high of 9.75 percent in February 1989 as growth slowed. Yields have averaged 4.92 percent since Bill Clinton was sworn in as President in 1993.

The worst financial crisis since the Great Depression boosted the allure of Treasuries, as investors sought a haven amid a plunge in the value of higher risk assets such as stocks and corporate bonds. The Fed has kept its target rate in a range of zero to 0.25 percent since December 2008, and has pledged to keep there until mid-2013.

Bid-to-cover ratios at Treasury auctions averaged $2.99 in 2010, up from $2.50 in 2009 and $2.23 the prior year.

Accelerating Demand

Demand accelerated toward the end of the year, with investors bidding $3.20 per dollar of securities sold in November and December amid concern that the health of the European economy was deteriorating and that Italy may need a bailout.

The Treasury market has benefited from being one of the only refuges left for investors even as the amount of U.S. government borrowing surpassed $15 trillion. The yen is the only major currency to have outperformed the dollar (DXY), rising 4.1 percent.

“You have a lot of risk-free, high-quality assets globally that are no longer risk-free, in terms of the other global sovereigns,” Christopher Bury, co-head of fixed-income rates at Jefferies & Co., a primary dealer, said in a Dec. 16 telephone interview. “You have more people chasing fewer risk-free assets. Everything points right now in the same direction.”

Rolling Returns

U.S. government debt will post its best five-year performance, gaining 39 percent from the start of 2007, since they returned 45 percent from 1998 through 2002, a period that included the failure of Long-Term Capital Management LP, the collapse in internet stocks and the Sept. 11 terror attacks.

That’s even as budget deficits have totaled $4 trillion in the three fiscal years from October 2008 through September 2011. The shortfall may narrow to $1.1 trillion in fiscal 2012 from $1.3 trillion in 2011, according to a survey of bond dealers in the minutes of the Treasury Borrowing Advisory Committee’s Nov. 2 meeting.

About 45 percent of the $7.76 trillion in Treasury notes and bonds will need to be refinanced by the end of 2014, highlighting the importance of continued demand.

“I’m not as concerned” about the ability of the Treasury to attract borrowers “as I am about the economy being self- sustaining,” David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors, said in a Dec. 21 telephone interview.

Economic Outlook

The economy will probably expand 2.1 percent in 2012 and 2.5 percent in 2013, according to median forecasts in a Bloomberg News survey. The Fed’s forecast is for 2.7 percent growth in 2012 and 3.25 percent in 2013.

In addition to keeping its benchmark rate at a record low, policy makers moved on Sept. 21 to contain yields, saying the central bank would buy $400 billion of longer-term government securities and sell $400 billion of short-term debt.

The Fed “still believes that lower rates are good, and it’s going to do all that it can to keep rates down and have them stay there,” Eric Pellicciaro, head of global rates investment at New York-based BlackRock Inc., which manages $1.14 trillion in fixed-income assets, said in a Dec. 16 telephone interview. “They’re not going to settle for trend growth. They want more.”

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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Japan Intervention Failing as Yen Poised to Gain

By Masaki Kondo - Dec 27, 2011 4:10 PM GMT+0700

There’s been no better currency in 2011 than the yen and strategists forecast more gains, even as Japan promises to intervene again in foreign-exchange markets and expands the world’s biggest debt burden.

The yen’s advance against every major currency, including a 4.1 percent climb against the dollar, illustrates the anxiety in global markets as Europe’s debt crisis stretched into a second year on the heels of the collapse of Lehman Brothers Holdings Inc. and the U.S. housing market crash. Though bond yields in Japan are the second-lowest in the world and government borrowings are double the size of the economy, foreign ownership of its debt is the highest since 2008.

Japanese officials sold at least 14.3 trillion yen ($183 billion) this year to stem gains that cut profits for exporters from Toyota Motor Corp. to Nintendo Co., and Finance Minister Jun Azumi has pledged more action. Intervention in 2012 may fail again as financial turmoil attracts investors to the world’s third-most traded currency for its low volatility.

“When avoiding losses trumps profits during a period of risk aversion, low-volatility assets are very appealing,” Masashi Murata, a currency strategist in Tokyo at Brown Brothers Harriman & Co., said in an interview on Dec. 19. “When the U.S. and Europe moved in a bad direction and people wanted to avoid risk, the yen stood as the only currency that had enough liquidity to absorb demand.”

Risk-Adjusted Returns

Besides its gains against the dollar, the world’s primary reserve currency, the yen is also the best performer among major peers after filtering out price swings, strengthening 0.5 percent, according to risk-adjusted return data compiled by Bloomberg. Japan’s is the only Group-of-10 currency seen rising versus the greenback next quarter, strengthening to 77 per dollar by March 31, analyst forecasts show.

The U.K. pound and Swiss franc were the second- and third- best performers against the dollar in 2011, finishing unchanged and down by 0.1 percent on a risk-adjusted basis. South Africa’s rand fared the worst, weakening 1 percent after taking into account price swings, followed by the Mexican peso’s 0.7 percent loss.

Gains in Japan’s currency underscore the retreat from risk and losses in carry trades, whereby investors borrow in low- interest regimes to invest in higher-risk, higher-return assets elsewhere. Carry trades involving borrowing yen to invest in the currencies of Australia, South Africa, Mexico and Brazil have lost 9.1 percent this year, according to Bloomberg data, reversing a 1 percent gain in 2010.

Yen Bets

The Japanese currency traded at 77.90 per dollar and 101.82 versus the euro as of 9:02 a.m. London time. For the year, the yen advanced 4.1 percent against the greenback and 6.6 percent against the 17-nation currency.

The difference in the number of wagers by hedge funds and other large speculators on a rise in the yen compared with those on a drop was 24,476 on Dec. 20, data from the Washington-based Commodity Futures Trading Commission show. As recently as April there was a net 52,983 contracts betting on a decline.

Japan’s nominal gross domestic product is about the same as it was in 1992, following the collapse of the nation’s asset and real estate bubble. The Bank of Japan on Oct. 27 lowered its forecast for the country’s economic growth in 2012 to 2.2 percent from the 2.9 percent projected in July, citing effects from the strong yen.

Job Losses

Toyota cut its earnings forecast for this fiscal year and Nintendo predicted its first annual loss in three decades as currency gains eroded the value of their overseas sales.

Japan may lose 600,000 jobs if the yen stays at current levels, pushing carmakers to shift production overseas, according to a Nov. 21 report compiled by Trade and Industry Minister Yukio Edano and posted on the website of the National Policy Unit that reports to Prime Minister Yoshihiko Noda.

“The environment will remain harsh for exporters because they have to make a business plan taking account of the stronger yen,” said Hiroshi Morikawa, a lead economist at the Institute for International Monetary Affairs in Tokyo, which conducts research projects commissioned by the government. “Japan’s economy is still reliant on exports, so the yen’s appreciation has direct impact over employment, too.”

The yen’s surge to a postwar high of 75.35 to the dollar on Oct. 31 prompted Azumi to order the nation’s third intervention of the year that day. He said on Dec. 20 he wants the ability to take “decisive” action in explaining a ministry plan to raise its intervention war chest to more than 65 trillion yen.

More Interventions

A previous yen record of 79.75 reached in April 1995 stood until March of this year, when a magnitude-9.0 earthquake struck Japan’s northeast, stoking speculation companies would repatriate overseas assets to pay for rebuilding. The currency jumped to 76.25 on March 17, prompting coordinated action by Group-of-Seven nations the next day.

Total currency sales in the year through Nov. 28 were seven times bigger than the 2.1 trillion yen sold in one shot in 2010, according to data from the Ministry of Finance. The currency erased most losses in as short as five days after each intervention and stood about 12 percent stronger on Dec. 23 than the three-year average against the dollar.

The Swiss National Bank has had more success controlling its currency by imposing a ceiling on the franc at 1.20 per euro in September. The SNB promised unlimited intervention, and said the overvaluation poses an “acute threat” to the nation’s economy. The franc has since stayed under the ceiling.

‘Limited’ Effect

Unlike Switzerland, Japanese officials would “have to issue unlimited quantities of government bonds if they want to conduct unlimited intervention,” said Junya Tanase, chief currency strategist at JPMorgan Chase & Co. in Tokyo. “There’s likely to be a unilateral intervention if the yen breaks a record, but history has already proven that its effect is limited.”

Lack of alternative havens is causing investors to buy and hold. Three-month historical volatility in the dollar-yen rate was at 9 percent today, the least since July and compared with a three-year average of 12 percent. The 10.18-yen gap between the Japanese currency’s weakest and highest points of 2011 is the narrowest since at least 1973 when it started to trade freely.

“Once investors bought yen they had no problem holding on to it, and that led to low volatility,” said Daisuke Uno, the Tokyo-based chief strategist at Sumitomo Mitsui Banking Corp., which manages $934 billion in customer deposits. “Lots of their purchases appear to be for long-term holdings.”

Ballooning Debt

A worsening fiscal climate hasn’t been a deterrent. The country lost its AAA grade from a domestic ratings company for the first time, as Tokyo-based Ratings & Investment Information Inc. downgraded Japan by one step on Dec. 21. Takahira Ogawa, the Singapore-based director of sovereign ratings at Standard & Poor’s, said on Nov. 24 that the nation’s finances are “getting worse and worse,” bringing it closer to a reduction.

Japan projects its public debt will exceed 1 quadrillion yen in the current fiscal year, more than double the size of its economy and compared with about $10 trillion for the U.S.

Countering debt concerns and supporting demand for the yen is the fact that Japan has a surplus in its current account, the broadest measure of trade. The surplus shields Japan from reliance on foreign capital and is the world’s second largest after China’s, according to International Monetary Fund data.

More than a decade of deflation has encouraged Japanese lenders to buy government bonds rather than make loans, helping to contain yields. Domestic banks are the biggest holders of Japan’s debt, owning 44 percent of the total at June 30, according to a Ministry of Finance report.

Monetary Policy

The BOJ has maintained its benchmark interest rate at or below 0.5 percent since 1995, also helping to prevent bond yields from rising. Rates on Japan’s 10-year debt were at 0.97 percent yesterday in Tokyo, the second lowest after Switzerland among developed nations.

Overseas money managers have boosted holdings of Japan’s government bonds by 17.2 trillion yen this year through October, poised for the biggest annual increase in four years. Non- Japanese residents accounted for 8.2 percent of the total ownership of sovereign debt at the end of September, the most since 2008, central bank data showed this month.

The extra yield investors demand to hold 10-year U.S. debt instead of Japan’s securities narrowed to 73 basis points in October, the smallest gap since 1990. The yield spread between Japan and Germany dropped in September to the narrowest in more than 20 years. Japanese investors have bought 5.4 trillion yen of foreign bonds and stocks this year through November, poised for the smallest net purchase in four years, data from the Ministry of Finance show.

Because of the narrowing yield spreads, “there isn’t much incentive for Japanese money managers to take currency risk and invest in dollar or euro assets,” said Takuji Okubo, chief Japan economist at Societe Generale SA in Tokyo. “Money isn’t flowing out of the country.”

To contact the reporter on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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U.S. Index Futures Drop as Dollar Weakens Before Data; Italian Bonds Fall

By Rob Verdonck - Dec 27, 2011 7:31 PM GMT+0700

U.S. equity index futures fell, the dollar weakened and European stocks erased gains before reports that may show house prices in U.S. cities dropped at a slower pace and consumer confidence climbed. Italian government bonds declined as the nation prepares to sell debt this week.

U.S. equity futures fell 0.2 percent at 12:26 p.m. in London. The Dollar Index declined 0.1 percent. The Stoxx Europe 600 Index was little changed after gaining as much as 0.3 percent. Italian 10-year bond yields climbed six basis points to 7.04 percent. Copper futures retreated 1 percent.

Data today may show home prices in 20 U.S. cities fell at a slower pace and consumer sentiment improved. The world economy is in danger because of Europe’s debt crisis, said International Monetary Fund Managing Director Christine Lagarde. Italy will sell 9 billion euros ($12 billion) of 179-day bills and as much as 2.5 billion euros of zero-coupon 2013 bonds tomorrow.

“After the Christmas holidays, market participants are focused on the consumer confidence index and Case-Shiller,” said Andreas Lipkow, an equity trader at MWB Fairtrade Wertpapierhandelsbank AG in Frankfurt. “The unemployment data in the next days are more important for the market because it shows how strong the U.S. economy really is.”

The Stoxx 600 fell less than 0.1 percent, taking this year’s drop to 12 percent. Banco Comercial Portugues SA and Banco Espirito Santo SA, Portugal’s biggest lenders, rallied more than 3 percent as Jornal de Negocios said the government may recapitalize the country’s banks without becoming a shareholder.

DAX, CAC

Germany’s DAX Index climbed 0.2 percent and France’s CAC 40 gained 0.2 percent. U.K. markets remain shut today.

The declines in European shares this year compare with an 18 percent drop in the MSCI Asia Pacific and a 0.6 percent gain on the Standard & Poor’s 500 Index. The U.S. equity gauge added 0.9 percent on Dec. 23 after data last week on durable goods, jobless claims and the housing market added to signs the world’s largest economy is recovering.

Property values probably declined 3.2 percent in October from the same month in 2010, the smallest year-over-year drop since January, according to the median forecast of 20 economists before a report from S&P/Case-Shiller today. Consumer confidence may have climbed to a five-month high of 58.6 in December from 56 last month, a separate survey showed before the New York- based Conference Board’s report. The Labor Department will release data on initial claims for jobless benefits on Dec. 29.

Treasury 10-year yields were unchanged at 2.03 percent. German 10-year yields fell three basis point to 1.93 percent. A basis point is 0.01 percentage point.

Europe Debt Crisis

Europe has made progress in tackling the crisis but needs to speed up the implementation of measures to fight it, Lagarde said in the Journal de Dimanche on Dec. 25. The U.S. is already being affected and growth forecasts for China, Brazil and Russia are also being lowered, she said, according to the report.

The euro traded at $1.3063 from $1.3061. In addition to tomorrow’s sales, Italy will also auction debt due in 2014, 2018, 2021 and 2022 later this week. The nation’s 10-year yields rose today beyond the 7 percent level that spurred Greece, Ireland and Portugal to seek bailouts.

Copper for March delivery fell as much as 3 percent to $3.365 a pound before trading at $3.434 on the Comex in New York. Futures gained 4.2 percent last week. Gold for immediate delivery dropped 0.8 percent to $1,593.68 an ounce and oil advanced 0.1 percent to $99.81 a barrel on the New York Mercantile Exchange.

To contact the reporters on this story: Rob Verdonck in London at rverdonck@bloomberg.net

To contact the editors responsible for this story: Stuart Wallace at swallace6@bloomberg.net; Nick Gentle at ngentle2@bloomberg.net

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Sony Sells LCD Venture Stake to Samsung After Losses

By Mariko Yasu and Saeromi Shin - Dec 27, 2011 1:26 PM GMT+0700

Sony Corp. (6758) sold its stake in the venture with Samsung Electronics Co. (005930) to make liquid-crystal displays to the South Korean company after predicting an eighth consecutive year of losses from TVs amid sluggish demand.

Samsung will pay 1.08 trillion won ($935 million) in cash for Sony’s stake in S-LCD Corp., a venture formed in 2004, the Suwon, South Korea-based company said in a statement today. Sony, which invested 1.65 trillion won in the venture, will take a charge of about 66 billion yen ($846 million) in the quarter ending Dec. 31 after the deal, Japan’s biggest consumer- electronics exporter said in its statement.

The stake sale enables Sony Chief Executive Officer Howard Stringer, 69, to shed the responsibility of panel manufacturing amid losses in the TV business, where Samsung is the world’s biggest. To turn around Sony, which has forecast a fourth consecutive annual loss this year, Stringer has teamed up with partners to announce acquisitions worth a combined $8.4 billion in 2011. The purchases are designed to bolster the profitable phones and music divisions and introduced tablet computers to challenge Apple Inc. (AAPL)’s iPad.

“It’s a step forward for Sony,” said Shiro Mikoshiba, an analyst at Nomura Holdings Inc. in Tokyo. “Canceling out the venture enables Sony to become more flexible in procuring panels. Still, Sony continues to face falling prices and heavy fixed costs.”

Sony shares gained 1.6 percent to 1,394 yen at the close of trading in Tokyo today, while Samsung fell 0.2 percent to 1.07 million won. The deal was announced after the stock market closed for trading. The Nikkei reported the news earlier today.

‘Substantial Savings’

The maker of Walkman music players and PlayStation consoles has declined 52 percent this year, valuing the company at $18 billion, down from more than $100 billion in September 2000. Samsung has risen 12 percent in Seoul this year and Apple has jumped 25 percent.

Samsung had 50 percent of the venture plus one share, while Sony held the remainder, according to the statement. The two companies have also entered into an agreement for supply and purchase of LCD panels, Samsung said in the statement.

The transaction and the subsequent agreement will enable Sony to secure a flexible and steady supply of LCD panels from Samsung, based on market prices, and without the responsibility and costs of operating a manufacturing facility, Japan’s biggest consumer-electronics exporter said in its statement.

“Despite this one-time loss, Sony estimates that the transaction will result in substantial savings,” starting January, Sony said in the statement.

Downgrading Sony

Earlier this month, Fitch Ratings downgraded Sony’s long- term ratings to “BBB-,” one level above junk, from “BBB,” citing difficulties in reviving the money-losing TV business and deals that won’t improve profit.

Sony, the world’s No. 3 TV maker, is streamlining its main TV operation, which is estimated to lose 175 billion yen in the year to March. Last month, Sony predicted it will post a loss in the year to March 31 after the company slashed its TV sales target and the yen reached a postwar high.

The Japanese company lagged behind Samsung and Seoul-based LG Electronics Inc. (066570) in the global TV market last year, with 12 percent of sales, according to DisplaySearch. In the U.S., Samsung and Vizio, founded in 2002, had the biggest share for flat-panel televisions, based on research from IHS iSuppli.

Last March, Sony agreed to sell 90 percent of a TV factory in Nitra, Slovakia, to Hon Hai Precision Industry Co., after disposing of 90 percent of its largest North American TV-making site to Taipei-based Hon Hai. Sony also agreed to sell a TV facility in Barcelona in September.

‘Unflagging Resolve’

Earlier this year, Sony agreed to divest its money-losing smaller-sized LCD business to a government-backed fund, which also bought a similar unit from Toshiba Corp. (6502) and Hitachi Ltd. expenses at its marketing units.

“I have unflagging resolve” to turn the TV business around, Executive Deputy President Kazuo Hirai said Nov. 2. Sony’s management “feels a sense of crisis” about the unit’s losses, he said.

TV makers also face what Credit Suisse called a “generational culture shift surrounding video consumption.” Teens live in an Internet-based video culture that doesn’t depend on cable and satellite broadcasts, and they are satisfied with “small-screen experiences” and lower picture quality, the analysts led by New York-based Stefan Anninger said in the Nov. 28 report.

For Samsung, finding another buyer for Sony’s stake would have been “difficult,” said Jeff Kang, an analyst at Daishin Securities Co.

Separately, Samsung today said it will merge with Samsung LED on April 1.

To contact the reporter on this story: Mariko Yasu in Tokyo at myasu@bloomberg.net.

To contact the editor responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net

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South Korea Stocks Drop on Wrong Order, North Speculation, Exchange Says

By Saeromi Shin - Dec 27, 2011 2:04 PM GMT+0700

South Korea’s stocks (KOSPI) fell, with losses triggered by what exchange officials said was possibly an “erroneous” trading order and concern North Korea’s leadership transition may heighten tensions on the peninsula.

The benchmark Kospi stock gauge dropped 0.8 percent to 1,842.02 at the close in Seoul, paring losses from a 2.3 percent plunge earlier. LG Electronics Inc. (066570) and Samsung Electro- Mechanics Co. (009150) paced declines, sliding more than 2 percent. The Korean won slumped to a one-week low against the dollar.

“An investor, which we can’t verify yet, appears to have placed an erroneous order,” La Sung Chae, an official at the market trading analysis team at Korea Exchange Inc., said by phone today. “That, combined with unconfirmed rumors about the health of the new leader of North Korea and that China may send troops to the communist nation, drove the index sharply lower. I think it seems a one-time occurrence.”

South Korean equities have fallen 10 percent this year on concern slowing global economic growth and Europe’s debt crisis will curb exports. A central bank report today showed consumer confidence slumping to a three-month low this month.

The Kospi slid 3.4 percent on Dec. 19 when the death of North Korean leader Kim Jong Il was announced, dragging the gauge’s valuation to 1.1 times net assets, the cheapest level since Nov. 27. The index rallied 4 percent the next two trading days as the government pledged to take action to soothe markets and maintain growth in Asia’s fourth-largest economy. Trading was below average across Asian markets, with Hong Kong shut today and the U.S. closed yesterday for the Christmas holiday.

‘Supreme Commander’

North Korean state media began addressing Kim Jong Un by the “Supreme Commander” title held by his late father, signaling the regime’s new leader is tightening his control over the nation’s military. Kim Jong Un got his first chance to play the role of North Korean statesman as a former first lady from the South and the chairwoman of Hyundai Group visited to pay their condolences over the death of Kim Jong Il.

South Korea and China share a common interest in peace and stability on the Korean peninsula and need to be in close communication, said Park Suk Hwan, South Korea’s Vice Foreign Minister. Park made the comments to his Chinese counterpart Zhang Zhijun during a meeting in Seoul today that was partly open to the media.

LG Electronics, the world’s third-largest mobile-phone maker, slid 2.4 percent to 72,500 won. Samsung Electro- Mechanics, a maker of electronic parts, slipped 6.8 percent to 80,700 won after Woori Investment & Securities Co. said its sale of a stake in Samsung LED Co. for 283 billion won ($245 million) was lower than estimated.

Defense equipment manufacturer Speco Co. led gains among South Korean defense-related companies in Seoul, climbing 4.9 percent to 2,670 won. Huneed Technologies (005870), a military communication equipment manufacturer, added 2.1 percent to 3,470 won.

The won fell 0.3 percent to 1,158.68 per dollar, after touching 1,160.09, the weakest since Dec. 20.

To contact the reporter on this story: Saeromi Shin in Seoul at sshin15@bloomberg.net

To contact the editor responsible for this story: Allen Wan at awan3@bloomberg.net

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India Telecom Panel Approves Plan to Ease Mergers Between Wireless Rivals

By Ketaki Gokhale and Santosh Kumar - Dec 27, 2011 1:02 PM GMT+0700

India’s telecommunications commission approved increases in available wireless spectrum, sharing and trading of airwaves and steps to make it easier for mobile phone companies to buy rivals.

The National Telecom Policy would increase the maximum market share for a merged phone company to 60 percent from 40 percent, R. Chandrashekhar, telecommunications commission chairman, told reporters in New Delhi yesterday. The commission will submit its draft to Communications Minister Kapil Sibal for review within a week, he said.

The new regulations may lead to consolidation in a market where competition among 15 carriers including Bharti Airtel Ltd. (BHARTI) and local ventures of Vodafone Group Plc (VOD), Telenor ASA (TEL) and NTT DoCoMo Inc. pushed the lowest call charges to less than one penny a minute, eroding profitability. Carriers need more spectrum to offer broadband services that enable wireless video streaming and data downloads.

The proposals would allow spectrum auctions and would limit a merged company to holding 25 percent of the available airwaves, Chandrashekhar said. The country has 22 telecommunications zones.

Mergers between carriers that would have a combined market share of 35 percent or less would no longer need anti-monopoly approval under the proposed rules. Combined companies that would control between 35 percent and 60 percent of a zone’s wireless phone market would be subject to such approval, according to the policy draft approved today.

The National Telecom Policy, initially introduced in October, would also require cabinet clearance and some portions may need parliamentary approval.

India’s wireless market will surpass 872 million active users by the end of 2015, research firm Gartner Inc. forecasts, compared with 626 million in October.

The proposals may win final approval by June, according to a Dec. 23 review by the Department of Telecommunications.

To contact the reporter on this story: Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net

To contact the editor responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net.

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