Economic Calendar

Wednesday, January 11, 2012

Brocade Poised to Rise 40% in Takeover Seen for Oracle: Real M&A

By Charles Mead - Jan 11, 2012 10:19 PM GMT+0700

Brocade Communications Systems Inc. (BRCD) is throwing off so much cash it may be worth 40 percent more in a sale to Oracle Corp. or private equity firms.

The maker of switches for data-storage networks, which had been trying to find a buyer with the help of Frank Quattrone for two years, was valued yesterday at 7.7 times its free cash flow, according to data compiled by Bloomberg. That was the cheapest among its closest competitors and less than half the median of 17 times for comparable companies -- even after surging almost 80 percent from its low in August to $5.77 a share.

While Brocade was passed over when Dell Inc. agreed to buy Force10 Networks Inc. in July, the company could give Oracle (ORCL) a networking product it currently doesn’t offer to businesses and enable it to better compete with Cisco Systems Inc., according to ThinkEquity LLC and Avian Securities LLC. Brocade, which has more than doubled its free cash flow in the past five years, also makes sense for buyout firms and could command about $8 a share in a takeover, ThinkEquity said.

“The cash flow is pretty healthy,” Rajesh Ghai, a San Francisco-based analyst at ThinkEquity, said in a telephone interview. “It could be private equity or a large strategic buyer. It fills a hole that Oracle has.”

Pavel Radda, a spokesman for San Jose, California-based Brocade, declined to comment on whether it is currently seeking to sell the company. Deborah Hellinger, a spokeswoman at Oracle, declined to comment on whether the Redwood City, California- based company is interested in buying Brocade.

Today’s Trading

Brocade climbed 3.6 percent to $5.98 at 10:15 a.m. in New York today, the second-biggest gain among 147 companies in the Nasdaq Telecommunications Index.

Founded in 1995, Brocade sells the hardware that connects information stored in servers. It controls 38 percent of the market for switches used in so-called storage area networks, a larger proportion than any of its competitors, according to Redwood City-based research company Dell’Oro Group.

Brocade also acquired Foundry Networks Inc. in December 2008 to enter the market for so-called ethernet switches that are gaining popularity in data centers.

The company has thus far been unsuccessful in selling itself, even after hiring Quattrone’s Qatalyst Partners to drum up interest, a person with knowledge of the matter, who wasn’t authorized to speak publicly, said in July. First-round bids in the latest auction for Brocade were due last month, according to people with knowledge of the situation, who declined to be identified because the process was private.

Relative Value

Sally Palmer at San Francisco-based Qatalyst didn’t return telephone or e-mail messages seeking comment.

At yesterday’s price, Brocade traded at 7.7 times its cash from operations of about 75 cents a share after deducting capital expenses, according to data compiled by Bloomberg.

QLogic Corp. and NetApp Inc. (NTAP), the two cheapest competitors among comparable companies cited by JMP Securities and Mizuho Securities USA Inc., were valued at 9 times and 11.2 times.

Less than a year ago, Brocade sold for 27.8 times its free cash flow, more than three times its current value.

Oracle could acquire Brocade to bolster its enterprise software and server businesses by adding networking products, which it currently lacks, according to Matt Bryson, a Boston- based analyst at Avian Securities.

Brocade may also make sense for Armonk, New York-based International Business Machines Corp. as it competes with Hewlett-Packard Co. (HPQ) and Dell for customers that want services from a single provider, according to Jitendra Waral, a technology hardware analyst for Bloomberg Industries.

‘Missing Networking Plugs’

Doug Fraim, a spokesman for IBM (IBM), didn’t return telephone and e-mail messages seeking comment.

“Everybody’s trying to stick to one vendor that can provide everything, rather than disparate systems,” Waral said in a telephone interview from Las Vegas. “IBM and Oracle both have these missing networking plugs.”

Brocade’s client partnerships could make a takeover less attractive, said Brian Marshall, a San Francisco-based analyst at ISI Group. One reason is that 60 percent of Brocade’s data- storage products, which account for more than half of its sales, are sold through agreements with Oracle, IBM and Hewlett- Packard, he said. If Oracle or IBM bought Brocade, the deals with the other two would probably end.

“They’d be selling products to a competitor, which could create problems,” he said in a telephone interview.

Aging Technology

The technology that Brocade uses for most of its data- storage products is also aging, which may also deter some potential buyers, according to Erik Suppiger, a San Francisco- based analyst at JMP Securities.

Brocade could still attract interest from private equity buyers, according to Joanna Makris, an analyst at Mizuho Securities USA in New York. The amount of free cash it generated last fiscal year climbed to a record $352 million, versus $136 million five years ago, data compiled by Bloomberg show.

The company’s operating margin of 8.9 percent was a third less than the median for comparable companies.

“Brocade is not getting a lot of love from investors,” she said in a telephone interview. “Private equity is usually the type of place where they take on stories like this.”

Based on ThinkEquity’s projected takeover price of $8 a share, Brocade would be worth $3.64 billion. That’s a windfall of about a billion dollars, data compiled by Bloomberg show. The price could rise even more if Brocade attracts multiple bidders, Penn Capital Management’s Eric Green said.

Traders in the options market are also getting more bullish on Brocade. The ratio of calls to buy Brocade shares versus puts to sell rose 46 percent to 1.11-to-1 on Jan. 9, the highest level since June, data compiled by Bloomberg show.

“This is one where you could have a bidding war,” Green, a Philadelphia-based manager at Penn Capital, which oversees $6 billion and owned shares of Brocade as of Sept. 30, said in a telephone interview. “It’s a stock that makes sense as an acquisition candidate and a lot of people would be interested.”

To contact the reporter on this story: Charles Mead in New York at

To contact the editors responsible for this story: Daniel Hauck at; Katherine Snyder at


Google Wins Biggest Enterprise Deal as Spain’s Banco Bilbao Reduces Costs

By Manuel Baigorri - Jan 11, 2012 6:14 PM GMT+0700

Google Inc. (GOOG) won its largest enterprise contract ever from Spanish bank Banco Bilbao Vizcaya Argentaria SA (BBVA) as the owner of the world’s most popular Web search-engine tries to win business clients from Microsoft Corp. (MSFT)

About 110,000 employees in more than 26 countries at Spain’s second-largest lender will start using the Google Apps offering which includes e-mail service Gmail, time-management tool Calendar, data-storage service Docs and Website-creation program Sites, the companies said.

“We are confident we can have more and more larger companies from all over the world because of the benefits we are bringing,” Sebastien Marotte, Google Enterprise vice president for Europe, said in an interview in Madrid. BBVA picked Google over other systems because of a better price, security and experience in the market, said Carmen Lopez, director for BBVA’s Innovation Observatory.

Google, grappling with slowing growth from its traditional online advertising business, is stepping up competition with Microsoft by selling business software as an alternative to Office programs. Google’s programs are accessed through the Web, just as its search engine is. Spanish companies such as BBVA, based in the northern city of Bilbao, need to cut costs and improve productivity amid a weakening economy with the highest unemployment rate in the European Union.

‘Big Name’

“This is a very important deal for Google because BBVA is a big name and it’s a first step to get other contracts from the financial sector,” said Marco Guenther, a Hamburg-based analyst at Hamburger Sparkasse. “As advertising faces more competition, Enterprise is becoming more and more important as it widens prospects for the company.”

Customers at average often save about 50 to 70 percent compared to their previous software solutions as Mountain View, California-based Google only charges for the specific programs used by a client, Marotte said.

BBVA rose as much as 1 percent in Madrid trading and was up 0.8 percent at 6.34 euros as of 11:40 a.m. Google gained 0.5 percent to the equivalent of $624.84 in Frankfurt after rising 0.1 percent in New York yesterday.

Google said the agreement is its biggest enterprise contract win so far based on the number of users. A BBVA spokesman said the contract initially runs for one year and will be automatically renewed until one of the partners wants to end it. Both companies declined to give a value for the deal.

Daimler Mapping Deal

Google Enterprise, which was created seven years ago to deliver Google products to the enterprise world, has now 4 million companies as customers and 5,000 new clients adopt the technology every day, according to Marotte.

Carmaker Daimler AG (DAI) said today it signed a strategic partnership with Google to work on automotive applications. The Stuttgart, Germany-based company will get access to Google’s technology to offer drivers mapping and cloud-computing services.

Other existing Google Enterprise clients include carmaker Jaguar Land Rover, the University of Washington and the City of Los Angeles.

“Our main goal is to promote innovation and improve our employees’ efficiency and productivity,” Lopez said. “We live in a very competitive and fast-changing environment and we want to operate in a faster and more collaborative way.”

Spanish Prime Minister Mariano Rajoy announced last month 14.9 billion euros ($19 billion) of spending cuts and tax increases as public finances were in worse shape than the previous government and the EU had expected.

BBVA’s operating costs rose 9.9 percent in the first nine months of 2011 from the same period a year earlier. Technology is important to tap growth opportunities, BBVA Chief Financial Officer Manuel Gonzalez Cid said today in Madrid, according to a presentation on the company’s website.

To contact the reporter on this story: Manuel Baigorri in Madrid at

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


IBM Keeps Top Patent Spot for 19th Year as Asian Rivals Gain

By Sarah Frier - Jan 11, 2012 9:31 PM GMT+0700

International Business Machines Corp. (IBM) won a record number of U.S. patents in 2011, its 19th straight year on top, as some Asian competitors advanced in the rankings at the expense of Microsoft Corp. (MSFT) and Intel Corp. (INTC)

IBM, the world’s biggest computer-services provider, gained 6,180 patents last year, researcher IFI Claims Patent Services said in a statement. Samsung Electronics Co. (005930) was second, its growth outpacing IBM, and Canon Inc. replaced Microsoft as third. Panasonic Corp. (6752) moved up to No. 4 and Toshiba Corp. (6502) advanced to fifth spot.

A patent portfolio spanning from computer memory to online shopping provides Armonk, New York-based IBM with licensing revenue and protection against intellectual-property infringement lawsuits. That means IBM is spending less time in courts than competitors, Manny Schecter, IBM’s chief patent counsel, said in an interview before the numbers were released.

“Everyone knows that if they attempt to bring their patent portfolio against us that they will be met with an equal and opposite force -- and it will be formidable,” Schecter said.

IBM also uses its patents to affect trends in technology: If it wishes to promote certain standards, it may tell other companies it won’t sue anyone innovating in that area even if its patents are infringed. So far, the strategy has attracted clients for consulting on intellectual property management and requests to testify before Congress, Schecter said.

Asian Surge

Still, IBM’s reign may be threatened in coming years by Asian rivals, IFI said. Samsung’s 8 percent growth in patents outpaced IBM’s 5 percent, and in the number of patent applications Samsung has eclipsed IBM for two years, the researcher said. Patent applications are an indication of future patent grants, IFI said.

“Global companies, and especially Asian ones, are collecting U.S. patents at a dizzying pace, and now Asian firms hold eight of the top 10 slots in the 2011 ranking,” Mike Baycroft, IFI chief executive officer, in the statement. “This isn’t to say that U.S. companies have lost their verve for patent production, as their patent portfolios are also growing. It seems that Asian companies have apparently made it a higher priority.”

Samsung, based in Suwon, South Korea, gained 4,894 patents last year, while Canon won 2,821. Microsoft dropped to sixth place in the rankings, while Intel fell to 16th from eighth.

In all, the U.S. issued a record 224,505 patents in 2011, up 2 percent from 2010, Madison, Connecticut-based IFI said.

Perforating Machine

Patents are part of IBM Chief Executive Officer Virginia “Ginni” Rometty’s strategy as the company seeks to expand in areas such as emerging markets, cloud computing and analytics. Rometty, the first woman at the helm in IBM’s 100-year history, took over from Sam Palmisano Jan. 1 and tries to meet a goal of adding $20 billion in new revenue between 2010 and 2015. Analysts on average estimate IBM will report $107.2 billion in sales for 2011.

The company invests about $6 billion in research and development each year, and makes about $1 billion in licensing revenue, said Chris Andrews, a spokesman. IBM has a 250-person team managing its patents, and it provides training for more than 8,000 inventors. They record about 20,000 breakthroughs annually, and only some are submitted for patents.

IBM fell 0.3 percent to $180.86 at 9:30 a.m. New York time. The stock reached a record in 2011 and advanced 25 percent for the year.

IBM won its first patent for a perforating machine on July 25, 1911. Since then, the company’s inventors have received more than 70,000 patents, 34,000 of which are active, Andrews said. The company patented DRAM cells, which became the standard for computer memory, in 1968. There are also non-computer inventions, like a laser technique that went on to become the foundation for LASIK eye surgery.

* The Top 10 U.S. Patent Winners of 2011: 1) IBM 6,180 2) Samsung 4,894 3) Canon Inc. (7751) 2,821 4) Panasonic Corp. 2,559 5) Toshiba Corp. 2,483 6) Microsoft Corp. 2,311 7) Sony Corp. (6758) 2,286 8) Seiko Epson Corp. 1,533 9) Hon Hai Precision 1,514 10) Hitachi Ltd. (6501) 1,465 *

To contact the reporter on this story: Sarah Frier in New York at

To contact the editor responsible for this story: Peter Elstrom at


Amazon Backs Hollywood Film Streaming Format

By Cliff Edwards and Michael White - Jan 11, 2012 2:15 PM GMT+0700

Hollywood’s effort to sell digital copies of movies got a boost when Inc. (AMZN), the largest online vendor, agreed to use the industry’s common system for storing and streaming films.

Amazon is working with an unnamed studio to offer movies in the UltraViolet format, Bill Carr, the Seattle-based company’s executive vice president for digital media, said yesterday at the Consumer Electronics Show in Las Vegas. Amazon is the first major retailer to commit to using the platform.

Amazon’s participation may speed adoption of Ultraviolet, the Hollywood-led initiative to allow consumers to purchase a title from any retailer, store it in a central online account and stream it to a variety of gadgets, from televisions to Blu- ray players to mobile devices like Amazon’s Kindle Fire.

“The best movie and TV service for consumers is the one that provides them with the broadest choice possible,” Carr said.

UltraViolet aims to promote home-video sales, which are more profitable to studios than rentals. The system has struggled to attract users since its debut in October because no major retailers were promoting it and consumers have been confused about how to register and access movies they purchased.

Courting Amazon

Studios have been courting Amazon since October, people with knowledge of the matter said last month. Best Buy Co. (BBY), owner the CinemaNow website, and Wal-Mart Stores Inc. (WMT), owner of, are members of the UltraViolet consortium, although neither website has begun using the system.

During a panel discussion with studio executives yesterday, Amazon’s Carr touted UltraViolet’s potential to reach a range of devices.

“We’re very excited about the additional possibilities from a customer’s point of view that UV enables,” Carr said.

Samsung Electronics Co. (005930) said it will make Blu-ray players equipped with an application that will load digital copies of older DVDs and Blu-ray discs into the UltraViolet system for a “nominal” fee. The stored movies would be accessed through Time Warner Inc. (TWX)’s Flixster movie site.

Warner Bros., Comcast Corp. (CMCSA)’s Universal Pictures and Sony Corp. (6758)’s Sony Pictures have released DVDs and Blu-ray discs that can be registered for viewing through UltraViolet. Viacom Inc. (VIA/B)’s Paramount Pictures has said it plans to release titles. Walt Disney Co. (DIS) isn’t an UltraViolet member.

The service has attracted 750,000 households since it was introduced in October, the Digital Entertainment Content Ecosystem LLC, the consortium backing the platform, said yesterday in a statement.

Consumer electronics companies including Samsung, Panasonic Corp. (6752) and Toshiba Corp. (6502) also are members of the group.

To contact the reporters on this story: Cliff Edwards in San Francisco at; Michael White in Los Angeles at

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


Stocks Drop as Euro Weakens; Bonds Rise in Spain, Italy Before Debt Sales

By Stephen Kirkland and Lynn Thomasson - Jan 11, 2012 9:31 PM GMT+0700

Jan. 11 (Bloomberg) -- Boaz Weinstein, founder of Saba Capital Management LP, says 2012 may be a "confusing year" for markets. Stephanie Ruhle reports on Bloomberg Television's "In the Loop." (Source: Bloomberg)

Stocks fell, pulling U.S. benchmark indexes down from five-month highs, and the euro weakened as concern deepened that Europe's debt crisis will stifle economic growth and Microsoft (MSFT) Corp. damped expectations for computer sales. Commodities slid, while Spanish and Italian bonds rose.

The Standard & Poor’s 500 Index slipped 0.2 percent at 9:30 a.m. in New York, retreating from the highest level since July 29, and the Stoxx Europe 600 Index lost 0.5 percent. The euro depreciated 0.6 percent to $1.2702. The yield on the Spanish 10- year bond dropped 20 basis points, declining for the third day, while the extra yield investors demand to own similar-maturity Italian debt instead of benchmark German bunds slid 17 basis points to 3.43 percentage points. Natural gas sank.

Germany’s Federal Statistics Office said the economy probably shrank in the fourth quarter from the third, and the European Union cut euro-area growth to 0.1 percent in the third quarter, from 0.2 percent estimated earlier. The U.S. Federal Reserve is scheduled to release its Beige Book survey of economic conditions today. Spain and Italy will sell as much as 17 billion euros ($22 billion) in debt tomorrow.

“We see Europe deteriorating this year with the economy moving formally into recession,” said Imre Speizer, a strategist in Auckland at Westpac Banking Corp., Australia’s second-largest lender. The euro-area economy will probably contract 0.2 percent this year, according to the median of 21 estimates in a Bloomberg survey of economists.

Microsoft slid after the world’s largest software maker said industry-wide sales of personal computers will probably be lower than analysts projected in the fourth quarter because supply was hurt by flooding in Thailand.

Weak Demand

European stocks pared declines after German Chancellor Angela Merkel said her nation is prepared to contribute more upfront capital to the the permanent European rescue effort and the region’s central bank will help advise the temporary bailout fund. Royal Dutch Shell Plc dropped 2.9 percent, leading energy producers lower, as oil declined. Pirelli & C. SpA fell 3.8 percent after Goodyear Tire & Rubber Co. said it’s experiencing weakness in global demand.

Chr. Hansen Holding A/S climbed 12 percent after Novo A/S agreed to buy a 26 percent stake in the Danish maker of food ingredients.

Oil dropped 0.8 percent to $101.41 a barrel in New York. The S&P GSCI index of 24 commodities lost 0.4 percent. Natural gas futures in New York dropped as much as 4.8 percent to $2.801 per million British thermal units, the lowest price since September 2009.

Hungary Funding

The MSCI Emerging Markets Index slipped 0.1 percent, reversing earlier gains. Benchmark gauges in Hungary and the Czech Republic lost more than 1 percent. Hungary’s forint slipped 0.5 percent as the European Commission said the nation faces suspension of some of its funding and possible sanctions for breaching deficit targets and for laws that may contravene European Union rules.

The euro weakened against all but two of its 16 major counterparts, declining 0.4 percent versus the yen. The Dollar Index rose 0.6 percent.

The ECB should ramp up euro area bond purchases to support Italy and prevent “cataclysmic” collapse of euro, Fitch Ratings head of sovereign ratings David Riley said, Reuters reported.

The yield on the German five-year note fell five basis points to 0.78 percent. The country sold 3.153 billion euros of five-year debt after receiving 8.97 billion euros of bids. Its maximum sales target was 4 billion euros.

Debt Sales

Spain auctions as much as 5 billion euros of 2015 and 2016 securities tomorrow, with Italy selling as much as 12 billion euros of bills tomorrow and as much as 4.75 billion euros of bonds in two days. The yield on the Greek two-year note tumbled 19.5 percentage points to 165.09 percent.

The U.K. sold 3 billion pounds ($4.6 billion) of September 2021 bonds today, while the U.S. auctions $21 billion of 10-year notes.

Ireland could be the first of three bailed-out euro area countries to return to the sovereign bond market in six to 12 months, Reiner Back, head of fixed income and currency portfolio management at Munich Re’s MEAG asset-management unit, said in Frankfurt today.

Borrowers from Indonesia to South Africa and Brazil tapped the debt markets for more than $30.6 billion so far this year, a record start for dollar-denominated bond sales by developing- nation issuers.

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

To contact the editor responsible for this story: Nick Baker at


Germany May Be on Brink of Recession

By Jeff Black and Jana Randow - Jan 11, 2012 6:11 PM GMT+0700

Germany may be on the brink of recession after the sovereign debt crisis caused the economy to contract in the final quarter of 2011.

Europe’s largest economy shrank “roughly” 0.25 percent in the fourth quarter from the third, the Federal Statistics Office in Wiesbaden said today in an unofficial estimate. Economists such as Christian Schulz at Berenberg Bank expect gross domestic product to contract again in the current quarter. A recession is defined as two consecutive quarters of declining GDP.

“If the euro crisis does not get worse or is finally brought under control after another wave in early 2012, the German economy can rebound nicely from the summer onwards,” said Schulz, a senior economist with Berenberg in London. “However, we see a 25 percent chance of the euro crisis remaining out of control longer, or completely spiraling out of control with a series of sovereign and bank defaults. In such a scenario, Germany would enter a major recession.”

Growth slowed to 3 percent in 2011 from 3.7 percent in 2010, which was the most since German reunification two decades earlier, the statistics office said. The economy last contracted in 2009, when it was in the throes of the global financial crisis. Unemployment at a two-decade low may bolster growth this year by supporting consumer spending.

Domestic Demand

Domestic demand was the main contributor to GDP growth last year, adding 2.1 percentage points, today’s report showed. Private consumption increased 1.5 percent in the year, while government spending rose 1.2 percent. Investment in plant and machinery gained 8.3 percent.

The euro rose after the 2011 GDP report before giving up its gains to trade at $1.2755 at 11:50 a.m. in Frankfurt. European stocks fluctuated, with the Stoxx Europe 600 Index little changed. The MSCI Asia Pacific Index added 0.3 percent today, while Standard & Poor’s 500 Index futures gained less than 0.1 percent.

The weaker global economy and waning demand from debt- stricken euro-area neighbors have eroded German foreign sales, the main pillar of its economic expansion. Net trade contributed 0.8 percentage point to growth last year, with exports up 8.2 percent and imports gaining 7.2 percent. In 2010, exports increased 13.7 percent.

“All in all, the German economy has remained relatively resilient,” said Annalisa Piazza, an economist at Newedge Group in London. “Signs of moderation have recently emerged but we expect the German economy to remain afloat in the coming quarters, maintaining its role as the major engine of growth for the euro area.”

2012 Forecast

German growth will slow to 0.6 percent this year before recovering to 1.8 percent in 2013, the Bundesbank predicted on Dec. 19. The European Central Bank, which has cut interest rates to a record low and flooded the banking system with cash during the debt crisis, last month reduced its 2012 growth forecast for the 17-nation euro region to just 0.3 percent.

Spanish industrial production fell the most in two years in November reflecting a contraction in the euro area’s fourth- largest economy as the government prepares to implement a new wave of austerity. Output at factories, refineries and mines adjusted for the number of working days declined 7 percent from a year earlier, the most since October 2009, the National Statistics Institute in Madrid said today.

In the U.K., the goods-trade deficit widened more than economists forecast in November as exports dropped, the Office for National Statistics said. The trade gap widened to 8.64 billion pounds ($13.6 billion) from 7.87 billion pounds in October. Exports fell 1.5 percent on the month while imports rose 1.1 percent.

Beige Book

The effects of Europe’s debt crisis may cost the U.S. as much as half a percentage point in economic growth this year, Goldman Sachs Chief Economist Jan Hatzius said at an event in Frankfurt today.

The U.S. Federal Reserve will release its Beige Book survey later today, and the Mortgage Bankers Association will give data on mortgage applications for the week ended Jan. 6.

“The debt crisis is unprecedented and economic forecasts in this environment are very difficult,” said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt, who expects the German economy to contract “a little” in the first three months of this year. “For 2012 as a whole, we expect stagnation,” he said.

There are signs Germany’s economic downturn will be shallow. Business confidence unexpectedly rose for a second month in December and service industries expanded.

The statistics office said today it may revise its fourth- quarter GDP assessment by the time official data are published on Feb. 15.

“Minus 0.25 percent is a too-pessimistic call both on the basis of hard and soft data,” said Andreas Rees, chief German economist at UniCredit in Munich. “Our bottom line: Don’t worry too much about 2012, and let’s be grateful about last year.”

To contact the reporters on this story: Jeff Black in Frankfurt at; Jana Randow in Frankfurt at

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


U.S. Stocks Fall as Europe Threatens Growth

By Rita Nazareth - Jan 11, 2012 10:11 PM GMT+0700


Supervalu sank 10 percent to $7.52. Chief Executive Officer Craig Herkert said the company was working to keep prices low amid the “difficult economic environment and pressured consumer.” Supervalu said sales in its fiscal 2012 may be $36.1 billion. The average estimate of 13 analysts was $36.4 billion.

Investors may be about to turn toward government bonds and away from stocks and other riskier assets, according to Bob Janjuah, global head of tactical asset allocation at Nomura International Plc. This shift may begin by the end of the week, Janjuah wrote yesterday in a report. Yields on 10-year U.S., U.K. and German notes will be closer to 1.5 percent than 2 percent during the first quarter, he predicted.

The first quarter “is going to be extremely bearish for risk,” according to Janjuah, based in London. He cited the possibility that Greece may default on its debt before the quarter ends, along with other concerns.

Janjuah, who predicted last year’s second-half retreat in U.S. stocks, estimated that the S&P 500 may fall to 1,000 or lower this quarter. That would be a drop of at least 20 percent from last year’s close. Appetite for risk may return next quarter as the Federal Reserve and the Bank of England buy bonds in a so-called quantitative easing and the European Central Bank possibly does the same. After that, he expects a second-half slump that sends the S&P 500 tumbling to 800.

To contact the reporter on this story: Rita Nazareth in New York at

To contact the editor responsible for this story: Nick Baker at


Iranian Nuclear Scientist Killed in New Attack

By Ladane Nasseri and Calev Ben-David - Jan 11, 2012 8:15 PM GMT+0700

Jan. 11 (Bloomberg) -- U.S. Treasury Secretary Timothy F. Geithner is visiting China and Japan as he seeks support for sanctions against Iran's nuclear program. Lara Setrakian and Mark Barton report on Bloomberg Television's "On the Move." (Source: Bloomberg)

An Iranian nuclear scientist was killed in a Tehran bomb blast, state media reported, in at least the third assassination targeting the nation’s atomic program that the U.S. and Israel have vowed to halt.

Mostafa Ahmadi Roshan, a director at the Natanz uranium enrichment facility in Isfahan province, and another person died, Fars said. Tehran Deputy-Governor Safar-Ali Bratlou told the state-run agency that a magnetic device was placed under Roshan’s car by a person on a motorcycle. He said the method was similar to previous attacks on Iranian nuclear scientists and blamed Israel for the killing.

“This terrorist action was undertaken by elements of the Zionist regime and those who claim to fight against terrorism,” the official Islamic Republic News Agency cited Iranian Vice President Mohammad-Reza Rahimi as saying.

Iranian officials have accused the U.S. and Israel of targeting Iranian nuclear scientists in an effort to halt the nuclear program, which western nations say is aimed at producing atomic weapons. European Union ministers plan to meet on Jan. 23 to discuss imposing an oil embargo on Iran. Iranian officials have threatened to shut the Strait of Hormuz, a transit route for a fifth of the world’s oil, if crude exports are sanctioned.

Oil Markets

Oil pared losses after the report on Roshan’s death, before falling from near the highest settlement in almost a week on concern over the German economy. Crude for February delivery was at $101.40 a barrel at 12:13 p.m. London time. Prices are up 2.6 percent this year.

Today’s attack “comes in the middle of heightened tensions and it helps Iran to play on a sense of threat that it is under a lot of pressure,” Gala Riani, a Middle East analyst at London-based forecaster IHS Global Insight, said by telephone. “It can also be beneficial to more extremist elements in the government who are supporting further military drills in the Strait of Hormuz.”

Iran conducted naval exercises near the Strait of Hormuz for 10 days that ended early this month. Iran also announced on Jan. 6 plans for the “greatest naval war games” to be conducted by the Iranian Revolutionary Guard Corps next month.

Previous attacks against Iranian nuclear scientists include the assassination of Massoud Ali-Mohammadi, killed by a bomb outside his Tehran home in January 2010, and an explosion in November of that year that took the life of Majid Shahriari and wounded Fereydoun Abbasi-Davani, who is now the head of Iran’s Atomic Energy Organization.

Human Resources

“While it is difficult to gauge the impact of the scientists’ deaths on the country’s nuclear development, Iranian officials have already acknowledged they have a human-resources problem in the program, largely because of the sharp political differences within the country,” Meir Javedanfar, lecturer on Iranian politics at the Herzliya Interdisciplinary Center in Israel, said in a telephone interview.

A series of accidents in Iran in recent months have raised suspicions of sabotage against the country’s nuclear program.

A November explosion at a military base west of Tehran killed at least 17 people including a Revolutionary Guards’ director, state media reported at the time. Last year, malicious software known as Stuxnet affected some of the country’s computer systems and several centrifuges used in its uranium- enrichment program, Iranian officials have said.

Spying Accusations

The latest bomb blast follows an Iranian court’s Jan. 9 decision to sentence an American of Iranian descent, Amir Mirzaei Hekmati, to death for spying. U.S. State Department spokesperson Victoria Nuland said allegations that Hekmati worked for the CIA were “simply untrue.”

U.S. Treasury Secretary Timothy F. Geithner will hold talks in Beijing today with Chinese Premier Wen Jiabao and visit Japan tomorrow as he seeks to urge the nations to cut petroleum purchases from Iran.

“Our enemies are seeing that sanctions and pressure are not sufficient, so they are seeking to create an atmosphere that is driven by a need for security,” Fars quoted Bratlou as saying after the blast.

To contact the reporters on this story: Calev Ben-David at; Ladane Nasseri in Tehran at

To contact the editor responsible for this story: Andrew J. Barden at


Bernanke Doubles Down on Fed Mortgage Bet

By Jody Shenn - Jan 11, 2012 12:00 PM GMT+0700

Ben S. Bernanke is signaling his willingness to double down on a three-year bet that’s failed to revive housing, showing the extent of the Federal Reserve chairman’s effort to wrest a recovery from the deepest recession.

Since the Fed started buying $1.25 trillion of mortgage bonds in January 2009, the value of U.S. housing has fallen 4.1 percent, and is down 32 percent from its 2006 peak, according to an S&P/Case-Shiller index. The central bank is poised to buy about $200 billion this year, or more than 20 percent of new loans, as it reinvests debt that’s being paid off. Some Fed officials have said they may support additional purchases that Barclays Capital estimates could total as much as $750 billion.

Even as Bernanke and fellow U.S. central bankers consider expanding their efforts, they are acknowledging their inability to turn around the housing market without help from the rest of the government. Bernanke underscored the importance of residential real estate, which represents 15 percent of the economy, in a study he sent to Congress last week that said ending the slump is necessary for a broader recovery.

“They’re definitely frustrated and disappointed,” said Stephen Stanley, chief economist at Pierpont Securities LLC and a former Federal Reserve Bank of Richmond researcher. “I’m sure they would have anticipated they would have gotten more bang for their buck.”

While the Fed has helped push mortgage rates to record lows of less than 4 percent, home-loan borrowing in 2012 is forecast to decline to the least in 15 years. Americans who might refinance and buy properties are getting shut out by stricter lending standards or avoiding transactions as values tumble amid mounting foreclosures, according to the Fed study.

Eventual Losses

Bernanke’s report urged Congress and President Barack Obama’s administration to consider steps with short-term costs for taxpayers, such as widening the role of Fannie Mae (FNMA) and Freddie Mac (FRE), the government-supported mortgage guarantors.

At the same time, the central bank’s purchases of mortgage bonds with yields at record lows is increasing the risk of eventual losses for the Fed, said Anthony B. Sanders, a professor of real-estate finance at George Mason University in Fairfax, Virginia.

So far, the Fed is reporting record profits. It said yesterday it will pay $76.9 billion to the U.S. Treasury as part of an annual dividend bolstered by its holdings. Brian Sack, the New York Fed’s markets group chief, said in October 2010 its goal in buying bonds would be to stimulate the economy not to generate profits and acknowledged it’s taking on some risk.

David Skidmore, a Fed spokesman in Washington, declined to comment on potential losses.

Remove Obstacles

Federal Reserve Bank of New York President William Dudley, Eric Rosengren, president of the Boston Fed, and Fed Governor Elizabeth Duke followed Bernanke in highlighting the need to fix housing to speed the recovery.

Dudley called on the government to remove obstacles to refinancing, saying in a Jan. 6 speech to the New Jersey Bankers Association that the Fed is no “substitute” for government measures. Rosengren said that day in Connecticut he supports buying more mortgage-backed securities. San Francisco Fed President John Williams sees a “strong case” for the move, he said yesterday.

The Fed has taken unprecedented steps to lower borrowing costs as it held short-term interest rates near zero since 2008. It acquired $1.25 trillion of government-backed mortgage securities and $172 billion of federal agency bonds from December 2008 through March 2010, as part of a process known as quantitative easing, or QE. It embarked on a second stage involving $600 billion of Treasuries through last June.

QE3 Likelihood

In October, it began recycling proceeds from the mortgage and agency debt into home-loan securities, buying $80.2 billion through Jan. 4. Reinvestment will probably total about $200 billion this year, according to Barclays, JPMorgan Chase & Co. and Credit Suisse Group AG.

Dudley’s comments and the Fed study signal a greater likelihood of QE3, according to Ajay Rajadhyaksha, a Barclays analyst in New York, who has estimated it could involve $500 billion to $750 billion of mortgage-bond purchases over a year.

“The investment community is almost regarding quantitative easing as a free good and if it’s a free good, why not just do QE10,000,” said Sanders, a former head of mortgage-bond research at Deutsche Bank AG. “If rates start going up, somebody’s going to have to pay the tab, and you know who that is: John Q. Public.”

Unemployment Easing

While central bankers are frustrated with the results of their record monetary stimulus, Sandra Pianalto, president of the Cleveland Fed, said yesterday after a speech in Wooster, Ohio that “on the margin” it’s affecting mortgage refinancing.

Last year, refinancings totaled $858 billion, according to a Mortgage Bankers Association estimate. Average rates on typical 30-year mortgages between 3.9 percent and 4 percent since early December, based on Freddie Mac data, bolster home prices by allowing property buyers to pay more. A monthly bill of about $1,430 covers a $300,000 loan at a 4 percent rate, versus $267,500 at 5 percent.

Unemployment is also easing. A Labor Department report showed that the jobless rate fell to 8.5 percent in December, the lowest since February 2009. Unemployment peaked at 10 percent that year as the financial crisis triggered the biggest economic contraction since the Great Depression in the 1930s.

Property Slump

Monetary policy hasn’t been enough to prevent house prices from continuing their more than five-year long slide, with Pacific Investment Management Co.’s Scott Simon, the bond manager’s mortgage head, forecasting further declines of 6 percent to 8 percent.

An S&P/Case-Shiller index of property values in 20 cities dropped 3.4 percent in the year through October. Existing home sales remain 18 percent below their 10-year average and Dudley estimated properties seized by lenders may rise to 1.8 million this year, and the same number next year, from about 1.1 million last year and 600,000 in 2010.

Housing’s share of gross domestic product, including household spending on related services like utilities and rent, declined to 15 percent in the third quarter from 18.6 percent in 2005, according to the National Association of Home Builders.

The Mortgage Bankers Association, based in Washington, estimates that home-loan originations declined last year to an 11-year low of $1.3 trillion and will fall to $968 billion this year, the least since 1997.

Protecting Taxpayers

Potential first-time buyers are particularly hurt by tightened credit, Bernanke’s paper said. Lenders are avoiding making risky loans for government programs on concerns that Fannie Mae and Freddie Mac may force them to repurchase the debt if there’s an underwriting error or delinquencies will prove costly for servicing departments.

Only about 85 percent of lenders are offering loans eligible for guarantees by Fannie Mae and Freddie Mac, which were seized by the government in 2008, to borrowers with 680 credit scores and 10 percent down payments, according to LoanSifter Inc. data cited by the study. Fewer than 50 percent are making loans in the companies’ lowest credit tier, the Fed’s Duke said last week.

Although Fannie Mae and Freddie Mac’s ability “to put back loans to lenders helps protect the taxpayers from losses, an open question is whether the costs of the associated contraction in credit availability outweigh the benefits” of lower losses, she said.

Borrowers Locked Out

Most troubling is that creditworthy borrowers are being locked out for minor blemishes or documentation challenges as lenders look to protect themselves, said Willie Newman, head of residential mortgage originations at Cole Taylor Bank (TAYC) in Chicago.

“There are people where everything about them looks good except this one little thing,” he said. “But you do precisely what they tell you to do, you don’t deviate, because the price of getting it wrong is too large.”

Refinancing has also slowed because lower prices have left about a quarter of homeowners with mortgages owing more than their properties’ values. Almost half of the more than $3.7 trillion of 30-year fixed-rate home loans in government-backed bonds have rates of about 5.5 percent or more, according to data compiled by Bloomberg.

In December, prepayments on Fannie Mae’s 5.5 percent securities, containing loans with 6 percent rates, averaged a pace that would erase 27 percent of the debt in a year. That compares with a peak of 45 percent in 2003, when loan rates reached as low as 5.21 percent, and fewer mortgages were being retired by foreclosures.

Eliminating Loan Fees

Obama’s three-year-old Home Affordable Refinance Program for Fannie Mae and Freddie Mac loans with little or no home equity is being expanded to help homeowners by cutting lender risks, lowering fees and allowing borrowers to refinance no matter how much their home’s value has dropped. The changes, which started in December, followed the program reaching less than a quarter of its 4 million to 5 million target.

Bernanke’s Fed study said “more might be done,” including eliminating entirely the reduced fees for risky loans, “more comprehensively” cutting lenders’ put-back risks; and further streamlining refinancing for other Fannie Mae and Freddie Mac borrowers. The U.S. also should consider having Fannie Mae and Freddie Mac refinance loans not already backed by the government, which would add credit risk for the companies, according to the report.

Corinne Russell, a spokeswoman at the Federal Housing Finance Agency, which oversees the mortgage firms, declined to comment on the paper.

Government Limitations

The limitations of the government’s Home Affordable Refinance Program meant that Karthik Narayanan, who bought a house in Gilbert, Arizona in 2007 for $300,000 that he estimates has lost $100,000 in value, gained only minimal benefits.

The software engineer refinanced under HARP in October 2009 into a 5.3 percent rate, using cash to pay off a $30,000 home equity loan that he had used to fund half of his down payment, because he was told he couldn’t otherwise qualify for the program. Then he heard that HARP was being expanded and looked to cut his costs further, only to discover that loans made after May 2009 still don’t qualify.

“Help the people who are responsible, who are trying to stay in their home, that’s what I would say to” Bernanke and policy makers reading the Fed chief’s report, Narayanan said in a telephone interview. He might pay down his mortgage faster or buy a second home to rent out with the savings, he added.

Bernanke Repercussions

Though the bigger ideas in Bernanke’s report may sound good, “repercussions” would include further entangling banks and the government in housing, said Jim Vogel, a debt analyst at FTN Financial in Memphis, Tennessee. That could limit financial companies’ access to capital and make it impossible for the U.S. to unwind its involvement in mortgages for decades, he said. The study said it avoided discussions of “longer-term restructuring of the housing finance market.”

“They say they’re not going to think about the future of the system, but that leaves such a large, empty spot in the white paper,” Vogel said.

Some actions taken thus far by Congress and Obama’s administration have recently added to challenges for housing.

To pay for a payroll-tax cut extension last month, Congress directed Fannie Mae and Freddie Mac to boost their annual fees for guaranteeing mortgages bonds by at least 0.10 percentage point. The FHFA said it must further raise the charges, which lenders tack on to borrowers’ rates, to better reflect the companies’ risks.

‘Very Low Pay-Off’

The Fed is getting “a very low pay-off for the amount of risk they’re generating,” said Sanders of George Mason.

The central bank is funding its portfolio mainly with cash borrowed from banks at 0.25 percent, a financing cost that will rise when it raises its benchmark for short-term rates. The central bank may lose money on the investments if it sells the securities after increases in long-term rates, or pays more on its borrowings than the yields on its holdings. The central bank would take those steps to stem inflation.

Yields (MTGEFNCL) on Fannie Mae 30-year mortgage bonds trading closest to face value -- the focus of the Fed’s buying because they most affect loan rates -- have averaged 3.1 percent since the central bank started reinvesting in October, data compiled by Bloomberg show. That compares with 4.3 percent during its initial buying.

They’ll probably “make out like bandits” for several years as interest rates that guide the Fed’s funding costs remain close to zero, Sanders said.

Prints Money

While the Fed has pledged to hold short-term rates near zero through mid-2013, George Goncalves, head of interest-rate strategy at Nomura Holdings Inc. in New York, says he can envision its target rate reaching 3 percent by 2017.

“The good news” is that the Fed pays zero percent on about 40 percent of its liabilities because it can print money, said Doug Dachille, chief executive officer of First Principles Capital Management LLC in New York, which oversees $8 billion.

The projected average lives of Fannie Mae-guaranteed securities with 3.5 percent coupons, which accounted for the largest portion of the Fed’s purchases last week, would extend from 5.2 years to 10.8 years if rates rose 3 percentage points, according to data compiled by Bloomberg. That means the central bank could be stuck with them for longer and their value would drop more with further increases in interest rates.

‘No Confusion’

“Rates go up, and you’re going to see a pretty significant level of extension in terms of the duration and meaningful book losses residing on the Fed’s balance sheet,” said Jason Callan, head of structured products at Columbia Management Investment Advisers LLC, a Minneapolis-based firm overseeing $170 billion in fixed-income. “That’s kind of the name of the game in mortgages.”

A report by the New York Fed in March discussed how the central bank’s net income can remain “sizable” even if it sells some bonds at losses, while Sack said in July that the central bank’s bond portfolio will earn about $500 billion from 2009 to 2018.

“There should be no confusion, no mistake, that we’ve put duration risk onto the Fed’s balance sheet,” Sack said in 2010. “These decisions are being made to produce economic outcomes” rather than “to produce a certain return on the portfolio.”

To contact the reporter on this story: Jody Shenn in New York at

To contact the editor responsible for this story: Rob Urban at


Europe Banks Hoarding Cash Resist Draghi

By Anne-Sylvaine Chassany and Gabi Thesing - Jan 11, 2012 9:44 PM GMT+0700

Jan. 11 (Bloomberg) -- Stephen Isaacs, chairman of the investment committee at Alvine Capital, talks about the sovereign-debt crisis and the role of European Central Bank President Mario Draghi. He speaks with Mark Barton and Linzie Janis on Bloomberg Television's "Countdown." (Source: Bloomberg)

Jan. 11 (Bloomberg) -- Keith Pogson, a Hong Kong-based managing partner for financial services at Ernst & Young LLP, talks about Europe's debt crisis, its impact on the region's banking industry, and its implications for Asia. Pogson also discusses the U.S. banking industry. He speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

Banks account for about 80 percent of lending to the euro area, making them “crucial to the supply of credit,” according to Mario Draghi, president of the European Central Bank. Photographer: Balint Porneczi/Bloomberg

Banks are hoarding the European Central Bank’s record 489 billion-euro ($625 billion) injection into the banking system, thwarting attempts by policy makers to avert a credit crunch in the region.

Almost all of the money loaned to 523 euro-area lenders last month wound up back on deposit at the Frankfurt-based central bank instead of pouring into the financial system, ECB data show. Banks will use most of the three-year loans to meet their refinancing needs for this year and next, analysts at Morgan Stanley and Royal Bank of Scotland Group Plc estimate.

“It’s illusory to think that the measure will translate into credit generation,” Philippe Waechter, chief economist at Natixis Asset Management in Paris, said in an interview. “It will assuage some of the anxiety banks have regarding their liquidity needs. But they’ve engaged into a massive overhaul of their strategy and shrinkage of their balance sheets, which is, coupled with the deteriorating economy, not compatible with increasing credit.”

Governments are urging European banks to keep lending to companies and individuals while requiring them to raise an additional 114.7 billion euros of core capital by June to weather a deepening sovereign-debt crisis. Instead of raising equity, most lenders across Europe have vowed to meet capital rules by trimming at least 950 billion euros from their balance sheets over the next two years, either by selling assets or not renewing credit lines, according to data compiled by Bloomberg.

ECB Deposits

That has stirred concern among policy makers that banks will cut lending and throttle growth in the euro region.

Banks have been parking almost all extra liquidity from the ECB loans back at the central bank. Barclays Capital estimates firms used 296 billion euros of the Dec. 21 three-year loans to replace maturing shorter-term ECB borrowings. That left only 193 billion euros of additional money for the financial system. Overnight deposits with the ECB have jumped by about 223 billion euros since the loans to a record 486 billion euros, suggesting the central bank funds haven’t so far reached customers.

Banks account for about 80 percent of lending to the euro area, making them “crucial to the supply of credit,” according to recently installed ECB President Mario Draghi. By contrast, U.S. companies rely more on capital markets for financing, selling bonds to investors.

Refinancing Needs

The ECB lending, and a follow-up loan offering on Feb. 28, won’t ease the pressure on banks to shrink, say analysts including Huw van Steenis at Morgan Stanley in London.

“The ECB loans will largely be used to pre-fund 2012 and some of 2013’s bank refinancing needs, but it will not stimulate lending,” Van Steenis said. They will “just stop it falling off precipitously.”

Euro-area banks have more than 600 billion euros of debt maturing this year, the Bank of England said in its financial stability report last month. The first ECB loan offering should help cover about two-thirds of that amount, Goldman Sachs Group Inc. analysts say. Morgan Stanley’s Van Steenis estimates banks may reduce assets by as much as 2.5 trillion euros in two years, a process known as deleveraging.

The volume of loans to households and companies in the 17- nation euro area shrank in November for the second consecutive month, the ECB said on Dec. 29. Loans were still up 1.7 percent over the year-earlier period, slowing from a 2.7 percent increase in the 12 months through October.

Merkel, Sarkozy

When granted, loans are getting costlier for borrowers. Since July, interest margins have increased, with investment- grade borrowers in Europe paying an average of 91.6 basis points more than benchmark rates, up from 84.4 basis points during the first half of 2011, according to data compiled by Bloomberg. A basis point is one-hundredth of a percentage point.

“We must avoid a credit crunch for our economies,” European Union President Herman Van Rompuy said on Jan. 9. “The recent measures by the European Central Bank on a long-term lending facility for the banks are welcome in this context.”

The European Banking Authority, which oversees the region’s regulators, asked banks on Dec. 8 to retain earnings, curb bonuses and raise equity to boost core capital before resorting to cuts in lending.

The EBA followed both French President Nicolas Sarkozy and German Chancellor Angela Merkel in urging banks to keep lending. Sarkozy said on Oct. 27 that he had asked firms to shift “almost all” of their dividends into strengthening balance sheets and to make bonus practices “normal.” Merkel said on Oct. 9 she was “determined to do whatever necessary to recapitalize the banks to ensure credit to the economy.”

‘No Credit Crunch’

Bankers have said they haven’t restricted lending and that demand for credit is slowing as growth slows.

“All banks I talk to keep lending to small- and medium- size enterprises and households,” Christian Clausen, president of the European Banking Federation, an industry association, said on Dec. 9. “That part of the bank will keep rolling.”

There is “no credit crunch,” Frederic Oudea, chief executive officer of Societe Generale (GLE) SA, France’s second- biggest lender, and chairman of the French Banking Federation, said last month. “The reality is that credit is available,” he said in an interview on BFM radio on Dec. 16.

Even so, companies across Europe say credit is tightening.

‘Double Punch’

In France, where credit to the private sector increased by 3.7 percent in November compared with a year earlier, the majority of the country’s company treasurers said they encountered “very strong tensions” in negotiating bank loans, with more than 50 percent of respondents saying the process led to more expensive terms, according to a December survey by the French Association of Corporate Treasurers.

The majority of those polled said obtaining bank financing was “as difficult as at the end of 2008,” after Lehman Brothers Holdings Inc. collapsed.

U.K. banks expect to toughen their criteria on loans to companies and households in the first quarter because of strains in the wholesale funding market, the Bank of England said Jan. 5in its fourth-quarter Credit Conditions Survey.

Belgian credit growth slowed to 3.1 percent in the 12 months to the end of October, from 3.6 percent at the end of September, the country’s central bank said on Dec. 12.

In Italy, some companies with annual sales of 30 million euros to 40 million euros are charged as much as 10 percent interest on loans, Emma Marcegaglia, chief of the country’s Confindustria lobby group, said in an interview on Dec. 20. Lending to businesses and consumers grew at the weakest pace in a year, the Bank of Italy said today.

Draghi’s Priority

With the ECB’s injection, “deleveraging may happen in a more orderly way, but it doesn’t mean it will be painless,” said Alberto Gallo, head of European credit strategy at RBS. Banks are faced with high long-term financing costs, a deteriorating economy and difficulties raising capital, he said. “It’s what I call the double punch: A combination of negative growth and banks’ deleveraging will affect lending activity.”

Even the ECB’s Draghi, who has made it one of his priorities is to keep credit flowing into the economy, said the central bank’s loan offerings may fail to achieve that goal.

“Monetary policy cannot do everything, but we’re trying to do our best to avoid a credit crunch that might come from a lack of funding,” Draghi said Dec. 19 at the European Parliament in Brussels. “We have to be extremely careful here, because there may be other reasons that create a credit crunch.”

Draghi may be wary of the U.S. experience with multiple rounds of bond purchases. That so-called quantitative easing hasn’t stimulated lending, Natixis’s Waechter said.

‘Kick the Can’

“Lending really picked up when the economy got better,” he said.

The ECB cut its forecast for euro-area economic growth in 2012 to 0.3 percent on Dec. 8 from a September prediction of 1.3 percent. The central bank expects the economy to expand 1.3 percent next year.

In the U.S., almost all categories of bank lending fell in 2009 and 2010 and didn’t start improving until last year, when the Federal Reserve stopped its second wave of quantitative easing, according to data by the U.S. institution. Banks increased their holdings of Treasury and agency securities in 2009 and 2010, showing they were using the Fed’s cheap money to own safe government paper.

Because quantitative easing tends to improve capital markets first, the healing will be even slower in Europe given its reliance on banks for borrowing, according to Gallo.

“The ECB loans are a kick-the-can measure that doesn’t fix the banks’ structural problems,” Gallo said. “Deleveraging needs to happen.”

To contact the reporters on this story: Anne-Sylvaine Chassany in London at; Gabi Thesing in London at

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


Europe’s $39T Pension Threat Grows

By Rebecca Christie and Peter Woodifield - Jan 11, 2012 5:04 PM GMT+0700
Enlarge image Europe’s $39 Trillion Pension Threat Grows

Elderly people take a rest on a bench in Jardin du Luxembourg park in Paris, France. Photographer: Antoine Antoniol/Bloomberg News

Jan. 11 (Bloomberg) -- Keith Pogson, a Hong Kong-based managing partner for financial services at Ernst & Young LLP, talks about Europe's debt crisis, its impact on the region's banking industry, and its implications for Asia. Pogson also discusses the U.S. banking industry. He speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

State pension obligations in France and Germany are three times the size of their economies, according to data compiled by Mercer. Photographer: Antoine Antoniol/Bloomberg

Even before the euro crisis, people were worried about Europe’s pension bomb.

State-funded pension obligations in 19 of the European Union nations were about five times higher than their combined gross debt, according to a study commissioned by the European Central Bank. The countries in the report compiled by the Research Center for Generational Contracts at Freiburg University in 2009 had almost 30 trillion euros ($39.3 trillion) of projected obligations to their existing populations.

Germany accounted for 7.6 trillion euros and France 6.7 trillion euros of the liabilities, authors Christoph Mueller, Bernd Raffelhueschen and Olaf Weddige said in the report.

“This is a totally unsustainable situation that quite clearly has to be reversed,” Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, said in a telephone interview.

A recession threatening the world’s second-biggest economic bloc, along with efforts to reduce debt across Europe, is exacerbating the financial risks. Stable or falling birthrates, plus rising life expectancies, are adding to pressures, with the proportion of economic output devoted to spending on retirement benefits projected to rise by a quarter to 14 percent by 2060, according to the ECB report.

Ageing Populations

Increased retirement ages and lower benefits must be part of any package to hold the 17-nation euro area together, according to analysts, including Fergal McGuinness, the Zurich- based head of Marsh & McLennan Cos.’s Mercer’s pensions consulting unit for central and eastern Europe.

Europe has the highest proportion of people aged over 60 of any region in the world, and that is forecast to rise to almost 35 percent by 2050 from 22 percent in 2009, according to a report from the United Nations. That compares with a global estimate of 22 percent by 2050, up from 11 percent in 2009.

The number of people aged over 65 in the 34 countries in the Organization for Economic Cooperation and Development is forecast to more than quadruple to 350 million in 2050 from 85 million in 1970. Life expectancy in Europe is increasing at the rate of five hours a day, according to Charles Cowling, managing director of JLT Pension Capital Strategies Ltd. in London.

In so-called developed countries, the average lifespan will reach almost 83 by 2050, up from about 75 in 2009, the UN said.

Cutting Costs

Governments and companies have taken steps to reduce future costs with policy makers having increased retirement ages in countries, including France, Germany, Greece, Italy and the U.K.

“Irrespective of whether you’re inside or outside the euro or anything else, raising retirement ages is one of the structural reforms that all of Europe has to do,” Kirkegaard said. “The crisis has forced them to address this. This is actually a positive thing in many ways.”

By 2060, the average French pension benefit will be 48 percent of the national average wage, compared with 63 percent now, said Stefan Moog, a researcher at Freiburg University in Freiburg, Germany.

Pension managers and governments are relying on economic growth to safeguard the promises they make. If the euro zone grows too slowly to bolster public and private coffers, the retirement plans may become unaffordable, according to Mercer’s McGuinness.

Benefits’ Squeeze

“The amount of money countries are going to spend on social security and long-term care is going to go up,” McGuinness said in an interview. “Governments with more generous social-security systems will have difficulty affording them. They will have to recognize these costs will impact their ability to reduce borrowings.”

State pension obligations in France and Germany are three times the size of their economies, according to data compiled by Mercer. It’s more sustainable in France than Germany because of France’s higher birthrate.

Last year, there were 4.2 people of working age for every pensioner in France. The ratio will fall to 1.9 by 2050, according to a report by Economist magazine in March. In Germany, the proportion will decline to 1.6 from 4.1 in the same period.

“That is going to put a lot of pressure on Germany’s ability to meet their promises,” McGuinness said. “What they are more likely to do is cut back benefits. Governments face a lot of longevity risks.”

Add to Risks

Private pension funds are under pressure too with benchmark euro-area interest rates at the lowest level since the 13-year- old currency was introduced. Low rates mean pension plans have to hold more assets to back their long-term payout projections.

Unless growth returns, fund managers will effectively be forced to take on more risk, said Phil Suttle, chief economist of the Washington-based Institute of International Finance.

“That creates problems because they all head into sectors that seem a great idea now, and then they blow up, whether it’s commodities or equities or whatever,” Suttle said. “You’re going to intensify the boom-bust cycle.”

The growing doubts facing the euro area is another planning hurdle as companies reconsider investment strategies amid concerns that Greece may default on its debt and spark a broader euro breakup.

The implied probability of one country leaving the euro by the end of 2013 fell to 49 percent on Jan. 10 from 51 percent a week earlier, based on wagers at, an Internet betting market. The probability of one country departing by the end of 2014 is 59 percent.

Rates Benefit

Pension plans in countries such as Greece or Portugal may benefit from exiting the euro as higher interest rates that would likely accompany a return to their national currencies would cut the cost of liabilities, while assets invested abroad would almost certainly gain in value, according to Mercer, a unit of Marsh & McLennan Cos.

PensionDanmark, Denmark’s seventh-largest pension fund by assets, sold all its German government bonds last year, Chief Executive Officer Torben Mogen Pedersen told reporters in Copenhagen yesterday.

“Our government debt investments are all in Scandinavian non-euro countries,” Pedersen said. “We think 2012 will be a very hard year for European investors.”

In Britain, which has refused to join the euro, occupational pension funds have moved the risk of ensuring adequate retirement income to the employee from the employer in the past decade to curb pension-fund shortfalls.

Funding Gap

Unfunded public-sector U.K. pension obligations across 1,500 public bodies totaled 1 trillion pounds ($1.57 trillion) in March 2010, the Treasury said Nov. 29 in the first set of audited Whole of Government Accounts. That compares with a total of 808 billion pounds of outstanding U.K. government bonds and accounts for 90 percent of all public-sector pension liabilities.

Royal Dutch Shell Plc (RDSA), Europe’s largest oil company, was the last member of the benchmark FTSE 100 Index to close its defined-benefit pension plan to new entrants when it made the decision last month to do so. The company plans to introduce a fund for new employees next year that makes them responsible for ensuring they have enough to live on in old age.

Governments may have to follow the same path for their own employees as well as increasing the retirement age to at least 70 and possibly 75 to make the pensions affordable, Cowling wrote in an article published in July by Public Service Europe.

To contact the reporters on this story: Rebecca Christie in Brussels at; Peter Woodifield in Edinburgh at

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


Kodak Pushes Patent Value With Apple, HTC Lawsuits as It Seeks Turnaround

By Susan Decker - Jan 11, 2012 12:00 PM GMT+0700

Eastman Kodak Co. (EK), seeking to sell or license a portfolio of more than 1,100 patents, sued Apple Inc. and HTC Corp. (2498) in an expansion of a legal strategy that may help boost the value of its inventions to fund a turnaround.

Two infringement lawsuits filed yesterday in federal court in Rochester, New York, accuse the smartphone makers of using without permission Kodak technology for image transmission, including a way for users to share images directly from cameras. Kodak also claims HTC is infringing an additional patent for a preview feature, which is at the center of a U.S. International Trade Commission case against Apple and Research In Motion Ltd. (RIM)

“They’re trying to generate value for their patent portfolio,” said Ron Epstein, chief executive officer of patent brokerage Epicenter IP Group LLC in Redwood City, California.

Kodak, which is predicted by analysts to report its fourth straight annual net loss, has put the Rochester-based company’s digital-imaging patents up for sale to help fund changes to its business. CEO Antonio Perez, who is now betting on digital printers for publishers, packagers, advertisers and households to lift Kodak, has said that the Apple-RIM trade commission case could generate $1 billion in new revenue from settlements.

Kodak, which didn’t say how much the new Apple and HTC cases could be worth, also filed companion complaints at the trade commission yesterday in Washington, seeking to block imports of products including Apple’s iPad and iPhone, and HTC’s Flyer tablet and Wildfire S phone.

Bankruptcy Risk

“This is an important part of ongoing operations to get them through the transition,” said Erin-Michael Gill, chief intellectual property officer for MDB Capital Group LLC, a Santa Monica, California-based investment bank. “A bad sign would be them sitting on their hands and waiting for these to sell.”

Kodak said last year it hired Lazard Ltd. to help it sell the patents and retained Jones Day among advisers helping on strategic options.

The Apple-RIM trade commission case filed in 2010, involving the single image-preview patent, has met with delays including the retirement of the judge handling the case, and a final decision isn’t scheduled until September.

Moody’s Investors Service on Jan. 5 cut ratings on about $1 billion of Kodak debt with a negative outlook, citing “a heightened probability of a bankruptcy over the near-term” as liquidity deteriorates, making a patent sale more challenging.

Portfolio Perceptions

Adding four new patents into the mix “helps, even without litigating any of the issues, to counteract the impression that there’s only one good patent” in the portfolio, said Ron Laurie, managing director of Inflexion Point Strategy LLC in Palo Alto, California, which counsels companies on intellectual property purchases. Kodak “wanted to defuse that impression.”

The four patents asserted against Apple and HTC have as co- inventor Kodak researcher Kenneth Parulski, who has more than 190 patents and is “recognized as a pioneer in numerous digital camera technologies,” according to the complaints.

Kodak claims infringement by Apple’s iPad 2, iPhone and iPod Touch, and by HTC’s tablets and phones, including the Flyer, EVO View 4G, Jetstream, Vivid, Amaze 4g, Desire, Hero S, Rezound, Rhyme, Sensation 4G and Wildfire S.

“We’ve had numerous discussions with both companies in an attempt to resolve this issue, and we have not been able to reach a satisfactory agreement,” Laura Quatela, Kodak’s chief operating officer, said in a statement. “Our primary interest is not to disrupt the availability of any product but to obtain fair compensation for the unauthorized use of our technology.”

HTC, based in Taoyuan, Taiwan, had no comment on the complaints. Officials with Cupertino, California-based Apple didn’t reply to a request for comment.

Stock Market Value

Selling patents and debt will help determine “the company’s ability to continue its operations” in the next 12 months, Kodak said in a quarterly regulatory filing in November. Kodak said then it would pursue licensing opportunities for the patents if unable to sell them at “an appropriate price.”

Kodak, which lost 88 percent of its stock market value last year, has struggled since demand for photographic film began evaporating as the world embraced digital cameras. Kodak’s cash and equivalents fell to $862 million at the end of its third quarter from $1.4 billion a year earlier. The company is scheduled to report fourth-quarter results Jan. 26.

Management Changes

Kodak rose 50 percent yesterday, to 60 cents, after saying it was adjusting its management structure and creating a chief operating office to reduce costs as its sales decline and cash reserves dwindle. The chief operating office will be led by Quatela and Philip Faraci, both presidents at Kodak. Faraci will focus on the commercial segment and sales and regional operations, and Quatela will lead the consumer segment and certain corporate functions, Kodak said.

The company’s $162 million market value “is lower than the potential damages” the company could generate from litigation, Epstein said.

“They’re looking at the mobile device companies and saying, ‘The brilliance of your user interface and product integration does not detract from the fact that you have integrated my innovation into your product and you owe me something for it,’” Epstein said.

The new case against Apple is Eastman Kodak Co. v. Apple Inc. (AAPL), 12cv6020, and the case against HTC is Eastman Kodak Co. v. HTC, 12cv6021, both U.S. District Court for the Western District of New York (Rochester).

To contact the reporter on this story: Susan Decker in Washington at

To contact the editors responsible for this story: Michael Shepard at