Time Is Running Out for Greece, Merkel Says

By Gregory Viscusi and Patrick Donahue - Feb 6, 2012 9:44 PM GMT+0700

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Feb. 6 (Bloomberg) -- Eva Kaili, a Greek member of parliament, talks about efforts to complete terms for a 130 billion-euro ($171 billion) rescue package. She speaks from Athens with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)

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Feb. 6 (Bloomberg) -- Steven Saywell, head of foreign-exchange strategy for Europe at BNP Paribas SA, discusses the outlook for the euro, dollar and Swiss franc. He speaks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)

European leaders stepped up pressure on Greek politicians to meet the conditions of a 130 billion- euro ($171 billion) bailout, saying time was running out.

French President Nicolas Sarkozy met German Chancellor Angela Merkel in Paris today as Greece’s interim prime minister, Lucas Papademos, planned to confer with the so-called troika of international lenders in Athens. A gathering of Greek political leaders was delayed by a day until tomorrow as they struggled for a unified response.

“I can’t quite understand why we need a few more days -- time is running out,” Merkel said today in a joint briefing with Sarkozy.

With the country’s stability at stake, a tentative consensus yesterday among Greek party leaders on an accord framework marked a step forward as Athens played host to parallel domestic and international negotiations while persuading Greece’s private creditors to accept bigger writedowns on their debt holdings.

“An agreement has never been so close, neither for private nor public creditors,” Sarkozy said. “We have to conclude it. We can’t imagine there won’t be an agreement.”

The leaders of Europe’s two biggest economies proposed setting up an account for Greece’s interest payments to guarantee lenders are paid.

‘Make or Break’

Euro-area finance chiefs told Greek Finance Minister Evangelos Venizelos in a Feb. 4 conference call that an increase in the bailout package wasn’t forthcoming, underscoring their frustration at a lack of progress on fixing the economy. The effort to keep Greece from tumbling into default presents what Deutsche Bank AG Chief Executive Officer Josef Ackermann called a “make or break” moment.

The euro fell amid the political wrangling, losing 0.8 percent to $1.3052 as of 4:40 p.m. in Athens.

Papademos will meet the three party leaders tomorrow to hammer out the details of the measures. Antonis Samaras, the head of the second-biggest party, New Democracy, indicated he would oppose some measures that the so-called troika of international creditors have put forward.

“They are asking us for greater recession, which the country can’t take,” Samaras said as he left the meeting with Papademos. “I will fight to avoid that.”

General Strike

Greece’s biggest public-sector and private-sector union groups, ADEDY and GSEE, called a 24-hour general strike for tomorrow to protest austerity measures.

Papademos and the party leaders yesterday agreed in a five- hour meeting to make additional reductions this year equal to 1.5 percent of gross domestic product. They have yet to iron out differences over policy measures demanded by lenders on recapitalizing banks, ensuring the viability of pension funds and reducing wages and non-wage costs to boost competitiveness.

The troika wants the country to detail over 4 billion euros of measures to meet targets for 2011 and 2012 because wage cuts will deepen the recession and cause a shortfall this year, one government official told reporters in Athens.

The troika argues that cutting private-sector holiday allowances is among reforms necessary to boost competitiveness in the country. Those opposed say the cuts would deepen the country’s recession, now in its fifth year.

‘Razor’s Edge’

Greece’s efforts to win a second bailout from the troika -- the European Commission, the European Central Bank and the International Monetary Fund -- have hung in the balance over the past three days as negotiations in Athens failed to clinch an agreement. Venizelos said on Feb. 4 the talks were on a “razor’s edge.”

Facing a 14.5 billion-euro bond payment on March 20 and general elections as soon as April, Papademos must heed international demands for greater austerity to complete the talks on a second aid package in time. Open questions involve how much more aid Greece needs, how much more austerity is required, and how to involve the European Central Bank in the private-sector creditor debt swap.

Guarantees from Greek political leaders such as Samaras, who leads in opinion polls, are key to securing the funds from the EU and IMF. International lenders want assurances that whoever wins the next election will stick to pledges made now to receive financing.

George Papandreou, the former prime minister who still leads the Pasok socialist party, the biggest in the Greek parliament, held talks with members after the meeting to discuss its response.

Extending Mandate

In a letter sent separately to Papademos, he proposed that Papademos’s mandate be extended to boost confidence among lenders the pledges will be implemented. That is an option likely to be opposed by Samaras, who has called for elections as soon as the new financing is agreed.

The rescue blueprint includes a loss of more than 70 percent for bondholders in a voluntary debt exchange and loans that will probably exceed the 130 billion euros now on the table. A formal offer for the debt swap must be made by Feb. 13 to allow all procedures to be completed before the March 20 bond comes due.

“One thing is clear: the Greek drama continues to unfold,” Joachim Fels, chief economist at Morgan Stanley, wrote in a note yesterday. “A really, really bad scenario for the euro area -- a Greek default and departure from the euro area -- simply cannot be excluded.”

Missing Targets

Greece has lagged behind budget targets set when it won an initial, taxpayer-funded rescue of 110 billion euros in May 2010, prompting euro-area threats to cut off aid and hastening a German push to make bondholders contribute. The country’s economy shrank 6 percent last year, according to the most recent IMF estimates, the budget deficit is still close to 10 percent of GDP and unemployment is about 18 percent.

Even after a second bailout, Greece may be saddled with too much debt, too little growth and too large a budget hole to do without even more money, which euro nations led by Germany are increasingly reluctant to offer.

Papademos met yesterday with the lead negotiators on the debt accord with Greece, Charles Dallara, managing director of the International Institute of Finance, and Jean Lemierre, a senior adviser to the chairman of BNP Paribas SA. The debt swap, Venizelos said on Feb. 4 “is now the easiest part of the process.”

Creditors are prepared to accept an average coupon of as low as 3.6 percent on new 30-year bonds in the exchange, said a person familiar with the talks, who declined to be identified because a final deal hasn’t been struck yet.

To contact the reporters on this story: Gregory Viscusi in Paris at gviscusi@bloomberg.net; Patrick Donahue in Paris at pdonahue1@bloomberg.net

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

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Investors Fearful as Stock Rally Best Since 1987

By Nikolaj Gammeltoft, Inyoung Hwang and Whitney Kisling - Feb 6, 2012 7:07 PM GMT+0700

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Feb. 6 (Bloomberg) -- Dennis Stattman, a fund manager at BlackRock Inc., talks about the stock and bond markets and investment strategy. He speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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Feb. 6 (Bloomberg) -- Nicholas Colas, chief market strategist at ConvergEx Group, talks about investment strategy and the outlook for global markets. Colas, speaking with Deirdre Bolton and Dominic Chu on Bloomberg Television's "In the Loop," also discusses Europe's debt crisis. (Source: Bloomberg)

The Standard & Poor’s 500 Index’s best start in 25 years is doing little to restore Americans’ confidence in the stock market.

The benchmark gauge for U.S. shares has climbed 6.9 percent in 2012, the most since it rose 14 percent to begin 1987, data compiled by Bloomberg show. It traded at an average of 14.1 times earnings since the start of 2011, the lowest annual valuation since 1989. More than $469 billion has been pulled from U.S. equity mutual funds over five years and New York Stock Exchange volume slipped to the lowest since 1999.

Pessimism is taking a toll on the securities industry, where more than 200,000 jobs were lost last year, even as U.S. unemployment declines as the economy accelerates. Sentiment is the worst since the early 1980s, when 17 years of equity market stagnation gave way to the biggest rally in history.

“Investors are scared to death,” Philip Orlando, the New York-based chief equity strategist at Federated Investors Inc., which oversees about $370 billion, said in a telephone interview on Feb. 3. “The fears are justified, but from a valuation standpoint the market has overshot, as it typically does. We’ve been pounding the table to put money into equities.”

The Standard & Poor’s 500 Index rose 2.2 percent last week to 1,344.90 after U.S. unemployment fell to the lowest level since February 2009 and manufacturing grew at the fastest rate in seven months. S&P 500 March futures retreated 0.4 percent at 7:05 a.m. in New York today.

Companies whose shares dropped at least 20 percent last year helped lead the gain, with Whirlpool Corp. (WHR) climbing 26 percent, Genworth Financial Inc. (GNW) rallying 17 percent and Cummins Inc. increasing 13 percent.

Three-Year Rally

Sentiment has deteriorated even as the S&P 500 rose 99 percent since March 9, 2009. The 106 percent expansion in U.S. earnings during the last nine quarters, the most since 1987, helped fuel the rally. For the period ended Dec. 31, 67 percent of companies in the S&P 500 beat analyst profit estimates as earnings advanced 3.3 percent.

Investors pulled money from mutual funds that buy U.S. stocks for a fifth year in 2011, the longest streak in data going back to 1984, according to the Investment Company Institute in Washington. Withdrawals were $135 billion last year, the second-highest total after 2008, the ICI said.

Concern European leaders will fail to keep Greece from defaulting, the May 2010 flash crash in which $862 billion was erased from equities in less than 20 minutes and some of the most volatile markets on record last year helped spur the withdrawals. Of the more than $11.1 trillion that was wiped off U.S. shares between 2007 and 2009, $8.1 trillion has been restored.

‘Never Happened’

“The stock market has effectively doubled since the March ’09 low, and we’re still in redemption territory for equity funds,” Liz Ann Sonders, the New York-based chief investment strategist at Charles Schwab Corp., said in a Feb. 2 phone interview. Her firm has $1.7 trillion in client assets. “That’s never happened.”

Money managers haven’t kept up with the S&P 500’s advance. Hedge funds declined 5 percent in 2011, the third year of losses since 1990, according to Chicago-based Hedge Fund Research Inc. A total of 21 percent of 525 global fund categories tracked by Morningstar Inc. topped their benchmark indexes last year, the fewest since at least 1999.

‘Fear and Anxiety’

Valuations have fallen even as the S&P 500 rallied 21 percent since the end of 2009 because profits increased five times as fast. The price-earnings ratio for the benchmark gauge of American equities has fallen to 14 times reported income, down from 24 at the end of 2009. The ratio slipped as low as 10.2 at the end of the 17-month bear market in 2009, when the S&P 500 declined 57 percent.

“It was the severity and the quickness of the fall and how long it’s taking to come out of the trough that’s been adding fear and anxiety,” Warren Koontz, head of U.S. large-cap value stocks at Loomis Sayles & Co. in Boston, which manages about $160 billion, said in a telephone interview on Feb. 3. “Over time, if things continue to progress on a step-by-step basis, people will come back to stocks.”

Trading at the New York Stock Exchange declined to the lowest level since 1999 last month, with the average volume over the 50 days ending Jan. 25 slowing to 838.4 million shares, according to data compiled by Bloomberg. The value of stock changing hands dropped to $24.9 billion, a 50-day average not seen since at least 2005.

That’s contributing to a contraction on Wall Street. The number of securities professionals registered with the Financial Industry Regulatory Authority fell to 629,518 last year, the lowest end-of-year level since at least 2002.

Kaufman, WJB

At least three New York securities firms folded this year. Kaufman Bros. LP, with a staff of about 40, WJB Capital Group Inc., which had more than 100 employees, and Ticonderoga Securities LLC, with about 75, closed as trading slowed and funding evaporated.

“Institutional traders are more cautious, and the long- only investors like mutual funds, which are typically a source of demand, that money’s been coming out for the past four years,” Walter “Bucky” Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama, said in a Feb. 2 phone interview.

While Wall Street retreats, U.S. employers added 243,000 non-farm jobs in January, the most in nine months. Confidence among U.S. homebuilders rose in January to the highest level since 2007, according to an index released Jan. 18 by the National Association of Home Builders and Wells Fargo & Co.

Whirlpool Rally

Among the 20 stocks in the S&P 500 with the largest gains this year, seven were among the 20 worst in 2011. Genworth, the mortgage guarantor and life insurer, has rallied 40 percent after losing 50 percent in 2011 even as earnings increased 65 percent. Analysts project the Richmond, Virginia-based company will almost triple profit in 2012.

Whirlpool in Benton Harbor, Michigan, posted the second- best gain in the S&P 500 this year as its income for the final three months of 2011 beat analyst estimates by 26 percent -- better than 92 percent of the 264 companies in the index that have reported since Jan. 9. The world’s largest maker of household appliances slid 47 percent in 2011, plummeting after July on increased concerns about the economy stalling.

A 36 percent rally in Cummins (CMI) shares this year comes after the Columbus, Indiana-based maker of diesel engines lost 20 percent in 2011. While earnings beat estimates in all but the third quarter last year and no analyst recommends selling the stock, investors pushed its valuation to 9.9 times reported earnings. The price-earnings ratio surged 36 percent in 2012.

Lost Decade

Rallies have faded since 2000, when the dot-com bubble drove the Dow Jones Industrial Average (INDU) to a record high. The gauge peaked at 11,722.98 that year, and has risen above and then fallen below that level seven times since. It ended at 12,862.23 on Feb. 3, up 5.3 percent so far this year.

The past decade parallels the span between Dec. 31, 1964, and the end of 1981, when the Dow added less than 1 point after surging interest rates diminished the appeal of equities. While the 115-year-old stock gauge ended the period at 875, it ranged between 577.60 and 1,051.70.

After stalling for 17 years, the U.S. stock market staged the biggest bull market in history through early 2000, driving the Dow up 15-fold from its low point in 1982. The surge coincided with a decrease in the yield on 10-year Treasuries to 6.68 percent from 13.55 percent. The rate was 4.21 percent at the end of 1964, and it peaked at 15.84 percent in 1981. On Feb. 3, the figure was 1.92 percent.

Lower Rates

Falling interest rates failed to lift stocks in the last decade as the S&P 500 slumped 12 percent from its high in March 2000. Equities slipped as the global economy experienced two financial crises, including the worst recession since the 1930s. Growth in U.S. gross domestic product averaged 2 percent a year between 1999 and 2011, compared with 3.6 percent between 1964 and 1981, and 3.3 percent from 1981 and 1999, according to data compiled by Bloomberg.

The retreat leaves stocks in position to rally because so many bearish investors can be lured back to equities and the market is cheap, according to Scott Minerd, the chief investment officer of Santa Monica, California-based Guggenheim Partners LLC, which oversees more than $125 billion.

“Stocks are poised for a generational bull market, whether it starts this year, or next year, or in five years, is anybody’s call,” he said. “Even if we had a 50 percent increase in multiples, stocks would still be cheap.”

To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Inyoung Hwang in New York at ihwang7@bloomberg.net; Whitney Kisling in New York at wkisling@bloomberg.net

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

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U.S. Stocks Fall Amid Greek Debt Talks

By Rita Nazareth - Feb 6, 2012 10:02 PM GMT+0700

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Feb. 6 (Bloomberg) -- Nicholas Colas, chief market strategist at ConvergEx Group, talks about investment strategy and the outlook for global markets. Colas, speaking with Deirdre Bolton and Dominic Chu on Bloomberg Television's "In the Loop," also discusses Europe's debt crisis. (Source: Bloomberg)

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Feb. 6 (Bloomberg) -- Dennis Stattman, a fund manager at BlackRock Inc., talks about the stock and bond markets and investment strategy. He speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

U.S. stocks declined, snapping a three-day rally for the Standard & Poor’s 500 Index, amid concern about Europe’s debt crisis as Greek leaders wrestled with spending cuts to get aid and avert a default.

Boeing Co. (BA) dropped 1.3 percent as the company ordered inspections of 787 Dreamliners after finding signs of fuselage delamination. Humana Inc. (HUM), the second-largest Medicare provider, slid 3.9 percent after raising its 2012 earnings forecast less than analysts estimated. Micron Technology Inc. slumped 2.7 percent as it named Mark Durcan as its chief executive officer, replacing Steve Appleton, who died on Feb. 3.

The S&P 500 retreated 0.3 percent to 1,341.29 at 10 a.m. New York time. The Dow Jones Industrial Average declined 41.66 points, or 0.3 percent, to 12,820.57 today.

“Markets are not a very patient beast,” Michael A. Gayed, chief investment strategist in New York at Pension Partners LLC, said in a telephone interview. “When you have these talks that the Greece situation is going to be resolved, then, it gets postponed to next week and the week after, markets get impatient.”

European leaders stepped up pressure on Greek politicians to meet the conditions of a 130 billion-euro ($171 billion) bailout, saying time was running out. French President Nicolas Sarkozy met German Chancellor Angela Merkel in Paris today as Greece’s interim prime minister, Lucas Papademos, planned to confer with the so-called troika of international lenders in Athens. A gathering of Greek political leaders was delayed by a day until tomorrow as they struggled for a unified response.

Five Weeks

Equities rose for five straight weeks, extending the best start to a year for the S&P 500 since 1987, after a report showed that employment growth topped estimates and the jobless rate unexpectedly fell to 8.3 percent. The index has recovered after plunging 19 percent between April 29 and Oct. 3 amid better-than estimated economic data and corporate profits.

Boeing dropped 1.3 percent to $75.38. There is no “short- term safety concern” from the fault, which was caused by an incorrect assembly in a support structure within the plane’s aft fuselage, Scott Lefeber, a spokesman, said yesterday in a statement. The new checks add to the challenges in boosting output of the twin-engine 787, which entered service in 2011 after more than three years of delays.

Humana fell 3.9 percent to $86.59. The company says it may add about 40,000 more Medicare Advantage members in 2012 than previously expected. The increase will help overcome an anticipated increase in demand for medical services.

Hand Over

Micron (MU) retreated 2.7 percent to $7.74. The shares fell 3.1 percent to $7.70 in late trading Feb. 3, after having been halted at $7.95. Durcan, who joined Micron in 1984, had been scheduled to hand over his role as chief operating officer to Mark Adams in August. Adams, head of sales, was named company president.

Kroger Co. (KR), the largest U.S. grocery-store chain, is trading at an 86 percent discount to its projected sales this fiscal year, leaving it cheaper than 99 percent of companies in the S&P 500, according to data compiled by Bloomberg. The Cincinnati-based company, which lost $4.7 billion in market capitalization during the last recession, is now valued at 10.8 times estimated earnings, the lowest level for a U.S. food retailer greater than $2 billion, the data show.

Takeover Target

Kroger, which has increased sales in every year since at least 1987 even as Target Corp. and Wal-Mart Stores Inc. grabbed market share from other supermarkets, may now become a target for retailers outside the U.S. or private equity firms, according to Northcoast Research Holdings LLC. Valued at $13.7 billion, Kroger could still attract a takeover offer 30 percent above its current price, Point View Wealth Management Inc. said, making it the largest grocery acquisition on record.

“Of the traditional pure-play grocery stores, Kroger is the crown jewel,” David Dietze, president and chief investment strategist at Summit, New Jersey-based Point View, which owns shares of Kroger, said in a telephone interview. “They have a long consistent record of positive same-store sales performance. It’s timely to acquire Kroger because it’s cheap.”

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

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

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Losses of Japanese Electronic Firms Worsen

By Mariko Yasu and Naoko Fujimura - Feb 6, 2012 4:48 PM GMT+0700

Japan’s biggest makers of phones, televisions and chips say they’ll lose about $17 billion this year, about three-quarters of what Samsung Electronics Co. (005930) will spend on research to lengthen the lead over its competitors.

Sony Corp. (6758) more than doubled its annual loss forecast for the year ending March 31 as it announced a new chief executive officer, while Panasonic Corp. and Sharp Corp. predicted the worst losses in their histories. Their combined losses compare with the $22 billion that Samsung, Asia’s largest consumer- electronics company, said it will invest in capital expenditures.

Japanese companies hurt by a stronger yen, flooding that swamped Thailand factories and weaker demand for their TVs may not be able to regain ground lost to Samsung and Apple Inc. (AAPL) That’s prompting Sony and Panasonic to focus on sectors including medical devices, solar panels and rechargeable batteries in an effort to revive earnings.

“Japan’s consumer-electronics makers are in a total breakdown,” said Masamitsu Ohki, a fund manager at Stats Investment Management Co., a Tokyo-based hedge fund. “They need to compete with ideas, not technology.”

Samsung is the world’s biggest maker of TVs, memory chips and flat-screen panels, and the second-biggest manufacturer of mobile phones. The Suwon, South Korea-based company and its affiliates plan to spend 47.8 trillion won ($43 billion) this year on new product research and upgrading plants.

Harsh Competition

Samsung, which doesn’t forecast annual results, reported a 17 percent increase in fourth-quarter net income.

“The Japanese consumer electronics makers shouldn’t compete with the Koreans in the same market,” said Koji Toda, chief fund manager at Resona Bank Ltd. in Tokyo. “The environment surrounding Japanese manufacturers is very harsh.”

Panasonic (6752), Sony and Nikon Corp. gained in Tokyo trading today as Asia-Pacific markets rose after U.S. jobs data beat estimates, raising expectations that exports will increase.

Panasonic gained 6.3 percent to 637 yen on the Tokyo Stock Exchange, and Sony advanced 4 percent to 1,492 yen. Nikon surged 11 percent after raising its full-year operating profit forecast 7.5 percent on higher-than-expected demand for digital cameras.

The MSCI Asia Pacific Index (MXAP) added 0.4 percent.

Panasonic’s reform of TV and chip operations, cost cuts, buying more parts from Asian producers and a recovery from flood damages may boost profit by about 250 billion yen ($3.3 billion) in the year starting April 1, the company said Feb. 3.

Recovery Measures

President Fumio Ohtsubo “highlighted bold recovery measures,” Shiro Mikoshiba, an analyst at Nomura Holdings Inc. in Tokyo with a “buy” rating on Panasonic shares, said in a report today. “Panasonic continues to be among electronics makers with prospects of large profit increases next fiscal year.”

Sony, Japan’s largest electronics exporter, predicted its loss in the year ending in March will widen to 220 billion yen, the first time since the Tokyo-based company began trading in 1958 that it will have four consecutive annual losses.

Kazuo Hirai, named last week to take over as CEO starting April 1, said he will close less-competitive businesses. Sony, worth more than $100 billion in 2000, is now valued at about $19 billion.

Moody’s Investors Service said today it remained “concerned that Sony’s earnings may remain weak and volatile without effective strategies to deal with the company’s structural challenges.” The company’s credit profiles remain under “strong pressure,” the ratings company said.

Strong Yen, Weak Won

Panasonic, Japan’s biggest appliance maker, forecast a 780 billion-yen loss, the worst since the Osaka-based company was founded in 1918.

Fitch Ratings today downgraded Panasonic’s long-term rating to “BBB-,” the last of its 10 investment grades, from BBB, citing “material deterioration” in the company’s financial results. Fitch also had a “negative” outlook on the company.

Sharp, the maker of Aquos TVs, predicted a loss of 290 billion yen, its worst in a century. Moody’s today changed its outlook for Sharp’s “A3” rating to negative.

“The rating action reflects Moody’s increasing concern that Sharp may not be able to improve its financial profile in a timely manner,” Moody’s said in the statement.

Thailand’s worst floods in 70 years shut factories making cameras and hard-disk drives, disrupting production and causing shortages during the holiday shopping season.

Apple’s Record Profit

Samsung also benefits from the strengthening Japanese currency against the dollar, compared with the weakening won against the greenback.

The yen’s 7.3 percent surge against the dollar and 11 percent gain against the euro in 2011 damped the repatriated value of Japanese companies’ overseas sales. Sony earned 70 percent of its revenue outside Japan and Panasonic 48 percent.

Manufacturers have been forced to both relocate production outside of Japan and to press their suppliers for cost cuts.

By comparison, the won depreciated 1.3 percent against the dollar in the past year, helping Samsung, which earned 85 percent of its revenue in 2010 outside South Korea.

Samsung’s profit in the quarter ended December advanced 17 percent to 4 trillion won, helped by smartphone sales that kept pace with Cupertino, California-based Apple. Sales rose 13 percent to 47.3 trillion won.

‘Marvelous Manufacturer’

“Samsung is a marvelous manufacturer,” said Edwin Merner, president of Atlantis Investment Research in Tokyo, who manages $300 million. “They can make good things at a very low price. Sony can’t do that.”

Apple had a net income of $13.1 billion in the quarter ended Dec. 31, ranking it among the highest quarterly profits on record and putting the company in the same league as Exxon Mobil Corp. and Russia’s Gazprom OAO.

“Apple changed the paradigm of thinking,” Stats Investment’s Ohki said. “It would be very hard for the Japanese companies to recover unless they can get back the de facto standard for products like mobile phones from Apple.”

That’s what Sony wants to do. The company will strengthen mobile devices and expand in new areas such as medical, Hirai said Feb. 2.

In the television business, Sony hasn’t had a profit in the past seven years selling Bravia models, while bigger rivals Samsung and LG Electronics Inc. are profitable in the sector. Last year, Sony exited a joint venture with Samsung that makes panels as part of revamping the business, that’s set for an eighth year of losses in the year to March 31.

Sony’s financial services, music and movies businesses were all profitable in the year to March 2011, according to data compiled by Bloomberg.

“We weren’t able to select areas where we want to concentrate, so we ended up keeping products that became commoditized,” Hirai said. “We want to make our focus clear soon.”

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

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

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China’s Lowest Lunar Sales Growth Since 2009 Seen Dimming Outlook: Retail

By Vinicy Chan - Feb 6, 2012 6:26 PM GMT+0700
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Shoppers look at gold jewelry and ornaments at a gold and silver shop in Shanghai during the Lunar New Year holiday period. Photographer: Qilai Shen/Bloomberg

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Feb. 6 (Bloomberg) -- Ting Lu, a Hong Kong-based economist with Bank of America Corp., talks about China's economy and central bank monetary policy. Lu speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Chinese shoppers on their Lunar New Year holiday were less lavish than expected by Hong Kong jewelers, curbed spending on beauty brands and slowed spending at South Korean stores. They may keep that pace in the coming year of the dragon.

Holiday sales on the mainland grew 16 percent to 470 billion yuan ($75 billion), according to data from the Ministry of Commerce, the slowest pace since the 2009 financial crisis and three percentage points below last year’s increase. China is finding it is not immune to global economic forces and the slowdown is hitting Chinese consumers, who may increase this year’s spending at a slower pace than in 2011.

This may mean trouble for the growing number of foreign companies rushing into China, especially luxury brands, said Jason Yuan, an analyst at UOB Kay Hian in Shanghai.

“This year is going to be tough, probably the toughest year for many foreign luxury brands since they entered into China,” he said.

“Sales of jewelry and valuable watches during Chinese New Year were quite disappointing,” said Caroline Mak, chairman of the Hong Kong Retail Management Association. “Sales growth of over 30 percent last year is unsustainable against a worsening macro-economic backdrop.”

Some member jewelers reported customers buying smaller diamonds than they used to, she said.

Smaller Diamonds

Hong Kong jeweler Chow Sang Sang Holdings International Ltd. (116), whose sales grew as much as 28 percent in the first three days of the holiday, expects quarterly sales growth to slow to 10 percent in the second quarter from 15 percent in the first.

Sales director Dennis Lau declined to make projections for the rest of the year because of worries a further global downturn could hurt consumer sentiment.

“We can’t see how strong the recovery in the U.S. is, and the debt crisis in Europe never seems to end,” Lau said. “If those economies mess things again, it could severely hurt global consumer confidence.”

Twinky Choi, an assistant at a Hong Kong Shiseido Co Ltd. (4911) cosmetics store, is seeing that first-hand.

“People are browsing,” Choi said. “They don’t buy instantly, unlike last year when customers were grabbing everything.”

China’s economic growth, hurt by a property market slump and slower export growth, is poised to weaken to 8.5 percent this year from about 9.2 percent in 2011, according to the median estimate of economists in a Bloomberg survey.

‘Momentum Not Exciting’

“The momentum is not exciting,” noted Macquarie Capital Securities analyst Linda Huang.

The Lunar holiday, like Thanksgiving or Christmas in the U.S., is among the biggest selling periods in China and parts of Asia. Chinese consumers spend more at home and at overseas vacation spots such as Hong Kong and Macau. This year’s holiday extended from Jan. 23 to Jan. 29 and marked the start of the year of the dragon.

“It does give some indications on retail sentiment,” said Phoebe Tse, an analyst at Barclays Capital Asia Ltd. “It is one of the busiest shopping seasons.”

Lipstick and fragrance seller Sa Sa International Holdings Ltd. (178) said Lunar sales were below its forecasts. The retailer’s Hong Kong and Macau sales rose 17 percent during the Lunar holiday from Jan. 23 to Jan. 29, which was “slightly below our expectations,” said Chief Executive Officer Simon Kwok in a statement. “Looking ahead, the group remains cautiously optimistic.”

Mak said her association expects Hong Kong retail sales growth to slow to 15 percent this year from 25 percent in 2011.

China Home Prices

China’s consumers have been hurt by a drop in home prices, which fell for a fifth month in January, according to SouFun Holdings Ltd., the nation’s biggest real-estate website owner. Residential prices slid in 60 of 100 cities tracked by the company in January, according to SouFun. The benchmark Shanghai Stock Exchange Composite Index has also fallen 17 percent over the past year, lowering the value of consumers’ investments.

“Macro-economic uncertainties impact consumer confidence,” Tse said. “They feel more secure when they have money in the pocket.”

Chinese tourists on holiday drove up January casino revenue in the gambling center of Macau 35 percent to 25 billion patacas ($3 billion). Las Vegas Sands Corp. (LVS)’s Sands China Ltd. (1928), Wynn Resorts Ltd. (WYNN)’s Wynn Macau Ltd. (1128) and MGM Resorts International (MGM)’s MGM China Holdings Ltd. (2282) compete in Macau, the world’s largest gambling hub.

Slower Casino Growth

Even so, high-stakes gamblers, who bring in the most revenue and can bet as much as $250,000 a hand, may not have boosted sales as much as previous years because of less available credit, BOC International analyst Edwin Fan said.

Banks have less money to lend because China’s policy makers have raised interest rates and reserve ratio requirements.

Macau casino revenue growth may slow to 22 percent this year from 42 percent a year ago, said Victor Yip, an analyst at UOB Kay Hian Ltd.

At South Korean retailer Shinsegae Co. (004170) sales rose 9 percent between Jan. 6 and Jan. 17, a promotional period just before the new year for tourists. That was slower than last year’s 16 percent, said spokeswoman Lee Jung Ah.

At Korea’s Lotte Shopping Co. (023530) sales growth in a promotional period from Jan. 6 to Jan. 19 was 9.8 percent this year compared with last year’s holiday increase of 16 percent.

Expenditure per customer at Tokyo’s VenusFort mall didn’t rise and wasn’t proportional to the rise in Chinese visitors, probably because of the stronger Japanese yen, said spokesman Yusuke Nishimura. The yen, which has risen because of demand for safer assets amid Europe’s debt crisis, has gained 7.1 percent against the dollar in a year and 2.5 percent against the yuan.

Jewelry Sales

Hong Kong jeweler Luk Fook Holdings International Ltd. (590) said sales at stores open at least a year grew 13 percent in mainland China and 4 percent in Hong Kong and Macau during the week-long holiday. That was below expectations as “a seasonal surge failed to materialize” for the industry, according to Citigroup Global Markets.

“The sales of jewelry and valuable watches are good indicators of how strong the Chinese tourists’ purchasing power is,” Mak from the Hong Kong Retail Management Association said. “We expect some Chinese shoppers to cut back on big-ticket items as the wealth effect fades.”

Sa Sa International shares dropped 5.7 percent to HK$4.84, the biggest drop since Nov. 10, at the close of Hong Kong trading. Luk Fook closed 2.2 percent lower at HK$26.50.

To contact the reporter on this story: Vinicy Chan in Hong Kong at vchan91@bloomberg.net

To contact the editor responsible for this story: Stephanie Wong at swong139@bloomberg.net

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Stocks in Europe Drop as Euro Weakens Before Deadline for Greek Agreement

By Stephen Kirkland and Lynn Thomasson - Feb 6, 2012 6:16 PM GMT+0700

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Feb. 6 (Bloomberg) -- Michael Kurtz, chief Asian equity strategist at Nomura Holdings Inc., talks about the outlook for China's stocks, central bank monetary policy, and his investment strategy for the region. Kurtz speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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Feb. 6 (Bloomberg) -- Steven Saywell, head of foreign-exchange strategy for Europe at BNP Paribas SA, discusses the outlook for the euro, dollar and Swiss franc. He speaks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)

European stocks fell from a six-month high and the euro declined the most in three weeks as Greek leaders wrestled with spending cuts to get aid and avert default. German bonds rose and commodities dropped.

The Stoxx Europe 600 Index lost 0.6 percent at 6:15 a.m. in New York. Standard & Poor’s 500 Index futures slid 0.5 percent, and the Hang Seng China Enterprises Index of mainland companies listed in Hong Kong dropped 0.4 percent. The euro weakened 0.8 percent to $1.3049. Yields on 10-year German bonds declined five basis points. Oil fell 1.1 percent and copper sank 0.9 percent.

Greek Prime Minister Lucas Papademos struck a tentative deal with party leaders to extend spending cuts after euro-area finance chiefs told them an increase in the 130 billion-euro ($170 billion) aid package wasn’t forthcoming. Chiefs of the three parties supporting Papademos’s government meet again today to work on details of an agreement. China’s economic growth would be cut almost in half if Europe’s debt crisis worsens, the International Monetary Fund said.

“We are entering into a fairly critical 24 hours for Greece,” Jim Reid, a strategist at Deutsche Bank AG in London, wrote in a report. “The focus has shifted from the private sector involvement negotiations toward the lack of political consensus and whether the interim coalition government will accept the conditions” for its second bailout package, he said.

Glencore Offer

The Stoxx 600 fell for the first time in five days as mining companies and banks led the retreat. Glencore International Plc (GLEN) slid 4.1 percent as the Financial Times reported that the commodities trader may offer 2.8 shares for each Xstrata Plc share as it attempts to buy the mining company. Vestas Wind Systems A/S, the world’s biggest maker of wind turbines, sank 4.8 percent as ING Groep NV downgraded its price estimate on the shares and Berlingske reported that Chairman Bent Carlsen has no plans to step down or change the management.

The S&P 500 closed at a six-month high on Feb. 3 after three days of gains. The 10-year Treasury yield was little changed at 1.93 percent today.

The euro declined against 13 of 16 major peers tracked by Bloomberg, weakening the most against the dollar since Jan. 13 on a closing basis. The euro depreciated 0.8 percent against the yen to 100. The Dollar Index (DXY), which tracks the U.S. currency against those of six trading partners, jumped 0.6 percent.

Debt Sales

The French 10-year bond yield fell five basis points to 2.85 percent before the government sells as much as 8.5 billion euros of bills. The Netherlands sold 2.2 billion euros of three- and six-month bills.

The Greek 10-year yield rose four basis points to 34.26 percent, with the price of the October 2022 bond falling to 20.58 percent of face value.

The cost of insuring European sovereign debt rose for the first time in four days with the Markit iTraxx SovX Western Europe Index of credit-default swaps linked to 15 governments rising three basis points to 322 basis points.

Natural gas led declines in commodities, falling 1.2 percent. Oil in New York dropped to $96.73 a barrel. Copper was down to $8,483 a metric ton. China is the biggest buyer of the metal.

The MSCI Emerging Markets Index (MXEF) fell 0.4 percent. Romania’s BET Index tumbled 2.2 percent, the most in more than four months on a closing basis, after Prime Minister Emil Boc said he will resign following protests against cuts in spending and wages. The Philippine Stock Exchange Index (PCOMP) jumped 1.2 percent after the central bank cut lenders’ reserve-requirement ratios, while India’s benchmark index rose 0.6 percent.

To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net; Lynn Thomasson in Hong Kong at lthomasson@bloomberg.net;

To contact the editor responsible for this story: Stuart Wallace at Swallace6@bloomberg.net

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Euro Markets Rebound on Draghi-Merkel Policies

By Simon Kennedy and Jana Randow - Feb 6, 2012 5:57 PM GMT+0700
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Angela Merkel, Germany's chancellor, right, and Mario Draghi, president of the European Central Bank. Photographer: Michele Tantussi/Bloomberg

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Feb. 6 (Bloomberg) -- Steven Saywell, head of foreign-exchange strategy for Europe at BNP Paribas SA, discusses the outlook for the euro, dollar and Swiss franc. He speaks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)

Investors are buying what Mario Draghi and Angela Merkel are selling.

Bloomberg indexes of Europe’s banks and financial conditions are the highest since August, and money-market lending rates and bond yields from Italy to Spain are sliding. Such signs of improvement reflect mounting bets that the euro will last and the two-year debt crisis won’t, as emergency loans from European Central Bank President Draghi take hold and leaders including German Chancellor Merkel pivot from crafting tougher fiscal rules to considering bigger bailout funds.

“People ended last year thinking everything that could go wrong would go wrong, and it hasn’t,” said Jim O’Neill, chairman of Goldman Sachs Asset Management in London. “There is still an inbuilt skepticism about the euro project, but there’s a shift away from the dire mood.”

Whether respite extends to recovery isn’t guaranteed. Greece is trying to fend off insolvency and questions about its membership in the euro as it seeks another bailout, just as bondholders question Portugal’s ability to dodge default with 10-year yields topping 17 percent last month. A possible region- wide recession could be deepened by a credit crunch or budget cuts, while potential political land mines include Greek and French elections.

The euro slid the most in a week against the dollar amid political wrangling in Greece over austerity measures needed to secure a second bailout. The currency fell as much as 1 percent to $1.3030 and was at $1.3045 as of 10:54 a.m. in London.

Stiglitz Unconvinced

“I haven’t heard any convincing arguments that Europe will solve its problems,” said Nobel laureate Joseph Stiglitz.

Investors are starting to signal otherwise, as “a virtuous cycle is beginning to develop,” said Klaus Baader, co-chief European economist at Societe Generale SA in London. Bets made at Intrade.com implied a 39 percent probability on Feb. 3 of a country leaving the 17-nation currency bloc by the end of 2013, down from 56.8 percent Jan. 19.

The Bloomberg Europe Banks and Financial Services Index, which includes Deutsche Bank AG (DBK) and UniCredit SpA (UCG), has gained 18 percent so far this year. The spread between three-month Euribor and the overnight indexed swap rate -- a barometer of European banks’ willingness to lend to one another -- narrowed to 76 basis points last week from about 100 basis points on Dec. 8.

Beating U.S.

Meanwhile, the Bloomberg European Financial Conditions Index has risen to minus 2.9 from about minus five in early December. The Euro Stoxx 50 has climbed about 9 percent this year, and Germany’s benchmark DAX Index (DAX) is up 14.7 percent, more than double the Standard & Poor’s 500’s 6.9 percent advance.

Government bonds also are attracting buyers. Italy’s 10- year yield fell last week to the lowest since October, ending at 5.7 percent compared with more than 7 percent at the start of the year. Spain’s equivalent yield, at 4.988 percent, fell last week to the lowest since November 2010.

A Bank of America Merrill Lynch index shows euro-region government debt returned 4 percent in December, the most since the euro started trading in 1999. The currency is up 3.9 percent against the dollar since Jan. 16, when it closed at the lowest since August 2010.

“Tensions have eased noticeably,” even though “the euro crisis is far from over,” said Holger Schmieding, chief economist at Berenberg Bank in London. “Turning away from the prior panic mode, markets have drawn a clear distinction between Italy, Spain and Ireland on one side and Greece and Portugal on the other side.”

Giving Credit

Investors are handing credit to Draghi, who took the helm of the ECB Nov. 1 and almost immediately returned its benchmark interest rate to a record low of 1 percent, eased collateral rules and loaned banks an unprecedented 489 billion euros ($642 billion) for three years at the benchmark rate.

Such initiatives buoyed the ECB’s balance sheet by 15 percent since late October. The loans also enabled banks to bolster their own accounts, lend to customers or buy higher- returning assets, helping to avert what Draghi said Jan. 27 was a “major credit crunch.”

Banks will have a second chance later this month to borrow cheap cash until 2015, with analysts saying they may snap up even more than the original program’s 489 billion euros. The stigma of using the facility is fading, and the list of assets that banks can use as collateral will be broadened. The ECB’s Governing Council meets Feb. 9 in Frankfurt.

‘Huge Impact’

The three-year loans “had a huge impact across several asset classes,” said Huw Van Steenis, a banking analyst in London at Morgan Stanley. “We’ve gone from a period where the risk of a collapse was material to a situation where the systemic risk is coming down.”

All this has given governments time to step up efforts to repel speculators. Leaders last week agreed to accelerate to July -- a year ahead of schedule -- the introduction of a 500 billion-euro bailout fund. At the same time, Germany, Europe’s largest economy, may be open to the idea of combining that plan with the current temporary fund, which still has about 250 billion euros.

Euro-area members also are dispatching 150 billion euros to the International Monetary Fund, which is trying to boost its coffers by $500 billion. The result could be a combined cash pile of more than 1 trillion euros and likely more if planned leverage boosts Europe’s totals even higher.

Geithner’s Call

“The only way Europe’s going to be successful in holding this together, making monetary union work, is to build a stronger firewall,” U.S. Treasury Secretary Timothy F. Geithner said Jan. 27.

Political will also may be paying off. Seeking to restore fiscal credibility, governments last week inked a German- inspired treaty that requires countries to legislate for balanced-budget rules and speeds sanctions on nations with bloated deficits.

Italian Prime Minister Mario Monti’s standing in opinion polls rose last month, even after he pushed through 20 billion euros in tax increases and spending cuts, along with a plan to liberalize the economy.

Merkel used her Jan. 25 speech to the World Economic Forum in Davos, Switzerland, to underline her commitment to the euro, saying officials must “dare” to pursue even more European integration to tackle “a very clear erosion of confidence” internationally.

Signs of Resilience

Recent data indicate the region may be showing more resilience than previously predicted. European services and factory output expanded in January for the first time since August, led by growth in Germany and France, London-based Markit Economics said Feb. 3.

Economists at Goldman Sachs Group Inc. said last week they now anticipate the euro-area economy will contract 0.4 percent this year, compared with December’s prediction of 0.8 percent shrinkage.

The “breathing space” Draghi’s ECB has provided is “important for Europe certainly, but it has also been very important for emerging economies, because he has contributed to the stabilization of currencies and the revival of capital inflows,” Subir Gokarn, deputy governor of the Reserve Bank of India, said in a Feb. 2 interview. Still, “it’s not the substitute for a structural solution, which is needed.”

The ECB’s bank loans have failed to deal with pockets of insolvency, said Stuart Thomson, a portfolio manager at Ignis Asset Management in Glasgow. Greece, for example, is struggling to cut its debt to 120 percent of gross domestic product by 2020 from 144.9 percent in December and is in a protracted recession.

‘Solvency Crisis’

“Draghi has done the right thing in a very difficult situation, but he hasn’t solved problems,” said Thomson, who helps to manage about $121 billion. “Liquidity doesn’t work when there is a solvency crisis.”

Nobel laureate Paul Krugman predicts Greece will default and probably be forced from the euro area.

“The Greek situation is essentially impossible,” he said Feb. 2 at a conference in Moscow.

Greek officials spent the weekend in talks aimed at concluding a debt swap with private-sector creditors and winning a second international bailout as the country faces a 14.5 billion-euro bond payment on March 20.

It could default and still remain a member of the euro as long as it can balance its budget, billionaire investor George Soros told reporters in Davos, Switzerland, on Jan. 25.

Florida’s Default

While eight U.S. states and the territory of Florida defaulted on their debt in the early 1840s, “there was never an issue about the default being a catalyst for leaving,” because the underlying economic strength and political rationale for the union were still there, said Bart Mosley, chief investment officer in New York at Alprion Capital Management.

Even as European leaders say a Greek restructuring is unique, Portugal is striving to persuade investors it won’t renege on its debt. Investors have been paying the most ever to insure the debt against default amid speculation Portugal won’t be able to auction bonds next year before funds from its 78 billion-euro bailout run out.

BNP Paribas SA estimated Jan. 27 that the Portuguese economy will shrink 5 percent this year and face a 9 billion- euro funding shortfall at the end of 2013 unless it can sell the debt. GDP contracted 1.6 percent last year, according to the median estimate of economists surveyed by Bloomberg News.

Italy also must refinance debt equivalent to half of its annual GDP between now and 2014, even as its borrowing costs ease, according to Julien Seetharamdoo, an investment strategist at Coutts & Co in London. And Spain faces an uphill battle to cut its budget deficit to a target of 4.4 percent of GDP this year from 8 percent last year.

Keep Retrenching

Lenders also may keep retrenching, with Draghi himself acknowledging it isn’t clear if the ECB’s cash injections are finding their way into the economy. Central-bank data last week suggested a net 31 percent of banks tightened lending standards in the last three months of 2011 and a net 24 percent are likely to do so in the current quarter, according to calculations by Citigroup Inc. economist Guillaume Menuet.

Banks also face regulatory calls to raise an additional 114.7 billion euros of core capital by June.

“Reduced credit availability will dampen economic activity throughout the first half and push the region into recession,” Menuet said.

Governments also are cutting back. JPMorgan Chase & Co. economists estimate budget cuts will subtract about 1.3 percentage points from growth this year, double the U.S. rate. With unemployment as high as 22.9 percent in Spain and 10.4 percent in the euro area, the most since the currency began trading, the risk is even weaker expansion and higher debts.

Joining Greece

Laurence Boone, chief European economist at BofA Merrill Lynch, predicts France, Italy and Spain all will join Greece in recession.

“The most important need is economic growth,” said Barry Eichengreen, author of a 2006 history of the euro area and a professor at the University of California, Berkeley. “Europe doesn’t hold together politically without it.”

The austerity threat is prompting Francois Hollande, the front-runner in France’s presidential race, to say he will call for the renegotiation of Europe’s budget treaty if he wins the May election. Greece’s feuding political parties also will seek parliamentary power at some point soon, while Ireland may hold a referendum on the fiscal pact.

The risks mean officials will need to do more, said Stephen King, chief economist at HSBC Holdings Plc. He predicts the ECB will cut its key rate to 0.5 percent and ramp up its bond purchases, while Germany will bow to greater fiscal ties. The ECB already is under pressure to take losses or tap profits on its holdings of Greek bonds to help provide debt relief.

“The financial news has been OK but, all in all, the euro zone is still facing considerable difficulties,” King said.

To contact the reporters on this story: Simon Kennedy in London at skennedy4@bloomberg.net; Jana Randow in Frankfurt at jrandow@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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European Stocks Retreat on Greece Deadline

By Peter Levring - Feb 6, 2012 4:16 PM GMT+0700

European (SXXP) stocks dropped, with the Stoxx Europe 600 Index trimming a six-month high, as Greece struggled to reach a deal with its international creditors. U.S. index futures fell, while Asian shares rose.

Societe Generale SA, France’s second-biggest lender, and Credit Agricole SA (ACA) lost more than 3 percent. Glencore International Plc slid 4.3 percent after the Financial Times reported that the commodities trader may offer 2.8 shares for each Xstrata Plc (XTA) share, citing people familiar with the merger discussions between the two.

The benchmark Stoxx 600 declined 0.7 percent to 262.81 at 9:14 a.m. in London. The gauge rallied 3.6 percent last week as a U.S. payrolls report showed the world’s biggest economy added 243,000 jobs in January, beating the median economist estimate in a Bloomberg News survey. Futures contracts on the Standard & Poor’s 500 Index expiring in March slid 0.6 percent, while the MSCI Asia Pacific Index climbed 0.4 percent.

“This week is crunch time for Greece,” said Witold Bahrke, a senior strategist at PFA Pension A/S in Copenhagen, which manages $45 billion. “We can no longer completely exclude extreme scenarios such as a disorderly default or -- a bit further down the line -- an exit from the euro area. Investors have become fairly resilient towards news from Greece, but we are seeing small signs negative sentiment is taking over after the positive mood dominating markets recently.”

Greece Funding Agreement

Greece’s Prime Minister Lucas Papademos struck a tentative deal with the leaders of the three parties supporting his interim government to boost economic competitiveness and extend spending cuts. The politicians agreed in a five-hour meeting yesterday to make additional reductions this year equal to 1.5 percent of gross domestic product, according to an e-mailed statement from the premier’s office in Athens.

The policy makers meet at about midday today to work on the detail of plans for bank recapitalizations, ensuring the viability of pension funds and measures to reduce wage and non- wage costs to boost competitiveness.

The euro area’s debt crisis will cut China’s economic expansion almost in half if it worsens, a scenario that would warrant “significant” fiscal stimulus from the nation’s government, the International Monetary Fund said.

Based on the IMF’s “downside” forecast for the global economy, China’s growth would drop by as much as 4 percentage points from the fund’s current projection, which is for 8.2 percent this year, the organization said in a report released today by its China office in Beijing.

Banks paced declines in European (SXXP) equities, contributing the most to the Stoxx 600’s slide. Societe Generale (GLE) slid 3.9 percent to 23.31 euros, while Credit Agricole fell 3.6 percent to 5.13 euros.

Glencore retreated 4.3 percent to 462.1 pence as the FT reported that the company may offer an 8 percent premium over Xstrata’s closing share price on Feb. 1.

Xstrata declined 2 percent to 1,257.1 pence in London.

ABB Ltd. (ABBN) decreased 1.8 percent to 19.75 Swiss francs after UBS AG cut the shares to “neutral” from “buy.”

To contact the reporter on this story: Peter Levring in Copenhagen at plevring1@bloomberg.net

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

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China Bans Airlines From EU Carbon Scheme

By Bloomberg News - Feb 6, 2012 1:51 PM GMT+0700

China, home to the world’s fastest growing aviation market, banned airlines from taking part in a European Union carbon-emissions system designed to curb pollution, saying the program violates international rules.

The system contravenes the United Nations Framework Convention on Climate Change and international civil aviation regulations, the Civil Aviation Administration of China said in a statement posted on its website today. Carriers were also barred from using the EU program as a reason for raising fares, it said.

The EU hopes to resolve the issue through negotiations or it may ultimately be ruled on by the courts, Markus Ederer, its ambassador to China, said at a press briefing in Beijing today. India, the U.S., Russia and global airlines have also objected to the levy, saying it will be less effective than a global solution.

“I believe all sides will negotiate again and find a solution,” said Chai Haibo, vice president of the China Air Transport Association. “I can’t imagine that the worst case, such as the EU grounding Chinese flights, could happen.”

The airline group has called on the government to oppose the EU levy and it is working on a legal challenge in Germany. Whether the lawsuit will continue will depend on the EU reaction to the China ban, Chai said. The group’s members include China’s big three state-controlled carriers, Air China Ltd. (601111), China Southern Airlines Co. and China Eastern Airlines Corp. (670)

A call to Civil Aviation Administration of China wasn’t answered.

Emissions Program

The EU added aviation to a wider carbon-trading system on Jan. 1. The move could cost Chinese airlines as much as 800 million yuan ($127 million) in 2012, according to the China airline group.

Based on current carbon prices and the fact that airlines will get some emissions allowances for free, the system would boost Beijing-to-Brussels ticket prices by 17.50 yuan, Ederer said.

“I leave it to you to make a judgment on whether this is too much for saving the Earth,” he said.

Global System

Other nations’ carriers can be exempted from the EU system if their own governments introduce similar programs, he said. The International Civil Aviation Organization, a UN body, has said that it plans to form a global system.

The EU Court of Justice in December upheld the legality of the bloc’s drive to extend the world’s largest carbon cap-and- trade program beyond its borders. The system covers the EU’s 27 members as well as Iceland, Liechtenstein and Norway.

China Southern Chairman Si Xianmin said last week that Europe’s emission trading program is not beneficial in the current economic environment or for Europe’s efforts to escape the sovereign debt crisis. He made the comments at a briefing also attended by German Chancellor Angela Merkel and Chinese Premier Wen Jiabao.

The carrier, Asia’s biggest by passenger numbers, flies to Amsterdam and Paris. It intends to start services to London this year. Air China, the nation’s largest international carrier, generated 11 percent of revenue in Europe in the first half of last year. Its destinations in the region include London, Paris and Madrid.

Countries outside the European bloc have said that the emission trading program is illegal because carriers are charged for pollution that happens outside of Europe, for instance, on the first part of a flight from Asia to Europe. The countries say this should only be regulated by the affected nations.

India, Japan

India has asked carriers not to give emissions data to the EU, K.G. Vishwanath, Jet Airways (India) Ltd.’s vice president for commercial strategy & investor relations, said in a Jan. 23 conference call. The country also plans to work with other nations opposed to the program, Environment Ministry Joint Secretary M.F. Farooqui told reporters in New Delhi last week.

Shinichiro Ito, president of All Nippon Airways Co., Asia’s largest listed carrier by sale, said last month that he favored a global system over a regional one. The carrier and the Japanese government are working on ways to oppose the system, he said without elaboration.

The U.S. House of Representatives last year passed a bill prohibiting the country’s airlines from participating in the EU carbon program after the industry estimated that participation in the system would cost U.S. airlines $3.1 billion from 2012 to 2020. Bills in the U.S. also need approval from the senate and president before they become laws.

To contact Bloomberg News staff for this story: Jasmine Wang in Hong Kong at jwang513@bloomberg.net; Nicholas Wadhams in Beijing at nwadhams@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net

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Greek Leaders Wrestle With Spending Cuts Demanded for Rescue

By Natalie Weeks, Marcus Bensasson and Maria Petrakis - Feb 6, 2012 5:02 PM GMT+0700

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Feb. 6 (Bloomberg) -- Greek Prime Minister Lucas Papademos secured a general agreement on budget-cutting measures demanded by international creditors amid continued concern that political leaders may object to some of the points needed for the 130 billion-euro ($171 billion) rescue package. Linzie Janis and David Tweed report on Bloomberg Television's "Countdown." (Source: Bloomberg)

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Feb. 6 (Bloomberg) -- Steven Saywell, head of foreign-exchange strategy for Europe at BNP Paribas SA, discusses the outlook for the euro, dollar and Swiss franc. He speaks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)

Greek Prime Minister Lucas Papademos struck a tentative deal with political parties on austerity measures demanded by international creditors as European leaders maintained pressure to complete terms for a 130 billion-euro ($171 billion) rescue package.

Chiefs of the three parties supporting Papademos’s interim government were due to meet with the premier at about midday to hammer out details after setting a framework for recapitalizing banks, ensuring the viability of pension funds and reducing wages and non-wage costs to boost competitiveness. They agreed in a five-hour meeting yesterday to make additional reductions this year equal to 1.5 percent of gross domestic product.

With the country’s stability at stake, the accord marked a step forward as Athens played host to parallel negotiations over the weekend to secure the domestic consensus needed to win a second bailout while persuading Greece’s private creditors to accept bigger writedowns on their debt holdings.

This week, “Greece will be left, right and center taking it right down to the wire,” said Erik Nielsen, chief global economist at UniCredit SpA in London.

‘Make or Break’

Euro-area finance chiefs told Greek Finance Minister Evangelos Venizelos in a Feb. 4 conference call that an increase in the bailout package wasn’t forthcoming, underscoring their frustration at a lack of progress on fixing the economy. The effort to keep Greece from tumbling into default presents what Deutsche Bank AG Chief Executive Officer Josef Ackermann called a “make or break” moment.

The euro fell, losing 0.8 percent to $1.3048 as of noon in Athens amid the political wrangling.

Papademos was meeting the three party leaders today to hammer out the details of the measures. Antonis Samaras, the head of the second-biggest party, New Democracy, indicated he would oppose some measures that the so-called troika of international creditors have put forward.

“They are asking us for greater recession, which the country can’t take,” Samaras said as he left the meeting with Papademos. “I will fight to avoid that.”

Greece’s biggest public-sector and private-sector union groups, ADEDY and GSEE, called a 24-hour general strike for tomorrow to protest austerity measures.

Greece’s efforts to win a second bailout from the so-called troika -- the European Commission, the European Central Bank and the International Monetary Fund -- have hung in the balance over the past three days as negotiations in Athens failed to clinch an agreement. Venizelos said on Feb. 4 the talks were “on razor’s edge.”

Bond Redemption

Facing a 14.5 billion-euro bond payment on March 20 and general elections as soon as April, Papademos must heed international demands for greater austerity to complete the talks on a second aid package in time. Open questions involve how much more aid Greece needs, how much more austerity is required, and how to involve the European Central Bank in the private-sector creditor debt swap.

“If we determine that it’s all going wrong in Greece, then there won’t be a new program -- and that means in March you’ll have a declaration of bankruptcy,” Luxembourg’s Jean-Claude Juncker, who chairs euro finance meetings, told Der Spiegel magazine in an interview published yesterday.

Next Election

Guarantees from Greek political leaders such as Samaras, who leads in opinion polls, are key to securing the funds from the EU and IMF. International lenders want assurances that whoever wins the next election, which could be held in April, will stick to pledges made now to receive financing.

George Papandreou, the former prime minister who still leads the Pasok socialist party, the biggest in the Greek parliament, met with party members after the meeting to discuss the party’s response.

In a letter sent separately to Papademos, he proposed that Papademos’s mandate be extended to boost confidence among lenders the pledges will be implemented. That is an option likely to be opposed by Samaras, who has called for elections as soon as the new financing is agreed.

Agreement on a new plan, which includes a writedown of Greek debt held by private creditors, has been held up by insistence on the part of the EU and IMF on structural reforms that will underpin a return to competitiveness for the Greek economy as well as new fiscal measures for this year.

Rescue Blueprint

The rescue blueprint includes a loss of more than 70 percent for bondholders in a voluntary debt exchange and loans that will probably exceed the 130 billion euros now on the table. A formal offer for the debt swap must be made by Feb. 13 to allow all procedures to be completed before the March 20 bond comes due.

“One thing is clear: the Greek drama continues to unfold,” Joachim Fels, chief economist at Morgan Stanley wrote in a note yesterday. “A really, really bad scenario for the euro area -- a Greek default and departure from the euro area -- simply cannot be excluded.”

Greece has lagged behind budget targets set when it won an initial, taxpayer-funded rescue of 110 billion euros in May 2010, prompting euro-area threats to cut off aid and hastening a German push to make bondholders contribute. The country’s economy shrank 6 percent last year, according to the most recent IMF estimates, the budget deficit is still close to 10 percent of GDP and unemployment is about 18 percent.

Even after a second bailout, Greece may be saddled with too much debt, too little growth and too large a budget hole to do without even more money, which euro nations led by Germany are increasingly reluctant to offer.

Troika Measures

The troika wants the country to detail over 4 billion euros of measures to meet targets for 2011 and 2012 because wage cuts will deepen the recession and cause a shortfall this year, one government official told reporters in Athens.

The troika argues that cutting private-sector holiday allowances is among reforms necessary to boost competitiveness in the country. Those opposed say the cuts would deepen the country’s recession, now in its fifth year.

Papademos met yesterday with the lead negotiators on the debt accord with Greece, Charles Dallara, managing director of the International Institute of Finance, and Jean Lemierre, a senior adviser to the chairman of BNP Paribas SA. The debt swap, Venizelos said on Feb. 4 “is now the easiest part of the process.”

Creditors are prepared to accept an average coupon of as low as 3.6 percent on new 30-year bonds in the exchange, said a person familiar with the talks, who declined to be identified because a final deal hasn’t been struck yet.

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

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

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Asia Stocks Rise on U.S. Jobs Optimism

By Kana Nishizawa and Yoshiaki Nohara - Feb 6, 2012 7:37 AM GMT+0700

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Feb. 6 (Bloomberg) -- Bill Belchere, regional head of equity research at Mirae Asset Securities in Hong Kong, talks about the outlook for U.S. and Asia stocks, Europe's debt crisis and his investment strategy. Belchere speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Asian stocks rose, with a regional benchmark index set for its highest close in five months, after U.S. jobs data beat estimates and fueled optimism the world’s largest economy is recovering, boosting the earnings outlook for Asian exporters.

Nikon Corp. (7731), a maker of cameras and lenses that gets more than a quarter of its revenue from North America, jumped 10 percent in Tokyo after raising its full-year operating profit forecast. Panasonic Corp. (6752), a Japanese electronics company that receives almost half its sales outside the country, rose 6.7 percent. BHP Billiton Ltd., the world’s No. 1 mining company, gained 1.6 percent in Sydney after commodity prices increased.

“There’s a modestly constructive outlook for share markets,” said Andrew Pease, Sydney-based chief investment strategist for the Asia-Pacific region at Russell Investment Group, which manages about $150 billion. “In the second half of last year, talk was all about whether the U.S. will go back into a recession. Now I think talk will be about what will be the strength of the recovery in the U.S. That’s an important shift in the balance of risk.”

The MSCI Asia Pacific Index (MXAP) climbed 0.8 percent to 125.36 as of 9:35 a.m. in Tokyo, headed for its highest close since Sept. 1. Japan’s Nikkei 225 Stock Average gained 1.2 percent, while the broader Topix Index advanced 1.3 percent. Australia’s S&P/ASX 200 Index increased 1.2 percent. South Korea’s Kospi Index climbed 0.8 percent.

To contact the reporters on this story: Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net

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