By Sandrine Rastello
Oct. 6 (Bloomberg) -- The global credit crunch deepened in Europe as government leaders pledged to bail out troubled banks and protect depositors.
BNP Paribas SA will take control of Fortis's units in Belgium and Luxembourg after government efforts to ensure the company's stability failed, while Germany's government and financial institutions agreed on a 50 billion euro ($68 billion) rescue package for Hypo Real Estate Holding AG. U.K. Chancellor of the Exchequer Alistair Darling said Britain is ``ready to do whatever it takes'' to help its banks.
The developments yesterday came a day after a summit in Paris where leaders of Europe's four biggest economies stopped short of a plan mirroring the $700 billion rescue in the U.S. to counter the worst financial crisis since World War II. Instead, they agreed to work together to limit the economic fallout, ease accounting rules, and seek tougher financial regulations.
``Until now the solutions have appeared to be uncoordinated, so perhaps it's time for a more coordinated approach globally,'' said Torsten Slok, an economist at Deutsche Bank AG in New York. ``It's not just the U.S. and Europe, it's banks in every part of the world.''
French President Nicolas Sarkozy, who convened the Oct. 4 summit, called for a global summit ``as soon as possible'' to implement ``a real and complete reform of the international financial system.'' He said ``all actors'' must be supervised, including credit-rating firms and hedge funds. Executive-pay systems must also be reviewed, he said.
`New World'
``We want a new world to come out of this,'' Sarkozy said. ``We want to set up the basis for a capitalism of entrepreneurs, not speculators.''
Finance ministers from the Group of Seven industrialized nations meet in Washington later this week.
German Chancellor Angela Merkel's opposition to collective action underscored the hurdles to a European front. ``Each country must take its responsibilities at a national level,'' she told a joint press conference after the summit.
Amid the race to shore up Europe's faltering financial institutions, Belgian Prime Minister Yves Leterme said late yesterday BNP Paribas will buy 75 percent of Fortis Bank Belgium for 8.25 billion euros in stock and purchase the company's Belgian insurance operations. France's biggest lender will also acquire 66 percent of Fortis's bank in Luxembourg.
BNP Paribas
The Belgian government will have an 11.7 percent stake in BNP Paribas, and Luxembourg a 1.1 percent holding, after the purchases are completed, BNP Paribas Chief Executive Officer Baudouin Prot estimated.
The sale of Fortis's units comes after a Sept. 28 bailout of the company, formerly Belgium's biggest financial-services provider, went awry. It received an 11.2 billion euro capital injection from Belgium, the Netherlands and Luxembourg last week.
Meanwhile, Hypo won a reprieve after Germany's finance ministry said the country's banks and insurers agreed to double a credit line for Hypo Real Estate to 30 billion euros. The federal government's guarantee for the credit line remains unchanged, , Torsten Albig, a spokesman for Finance Minister Peer Steinbrueck, said late yesterday in an e-mailed statement.
Munich-based Hypo Real Estate had earlier announced that a government-backed 35 billion euro bailout plan collapsed after commercial banks withdrew their support.
Too Big to Fail
The government and the Bundesbank have said that Hypo Real Estate, the nation's second-biggest property lender, is too big to fail. Along with the bailout, Merkel said yesterday the government will guarantee savings by private account holders.
Until now, savings accounts, including those of small, privately held companies, have been guaranteed by 180 banks in Germany, the BDB private banks group said on Oct. 2. The guarantees of the banks covered 90 percent of an account's balance to a maximum of 20,000 euros, the group said.
In the U.K., Darling said the government, which took over Bradford & Bingley Plc last week, is ready to offer further support to banks that may get into financial difficulty, and he did not rule out a further injection of capital for failing institutions.
``We are ready to do whatever it takes, and that is, we've put money in to help banks generally,'' Darling told the British Broadcasting Corp.'s Sunday AM program. ``There are other measures we will be taking too, and I will announce them when we are ready to do that.''
Paris Summit
Darling's boss, Prime Minister Gordon Brown, was among the leaders gathered in Paris, along with Italian Prime Minister Silvio Berlusconi, Luxembourg Prime Minister Jean-Claude Juncker, European Commission President Jose Manuel Barroso and European Central Bank President Jean-Claude Trichet.
``The good news out of the Paris meeting is that the European heads of state now recognize the severity of this crisis,'' Goldman Sachs Group Inc. economists Natacha Valla and Erik Nielsen said in a note to investors. ``A pan-European approach would be much preferred, but given the urgency and complexities of organizing such measures between different fiscal regimes, national measures -- coordinated to the extent possible -- might still be good enough.''
Policy Recommendations
The leaders agreed on policy recommendations touching on regulation and accounting and said they'd press for looser enforcement of budget and competition rules at the EU level.
They said they would seek to harmonize guarantees of deposit levels. The U.K. bank regulator increased its insurance ceiling to 50,000 pounds ($88,300) per account from 35,000 pounds to stem a flow of funds to Ireland after officials in Dublin guaranteed all debts and deposits of its banks.
Anticipating increased spending, declining tax revenue, and government bank takeovers, European leaders called for ``greater flexibility'' in the application of the EU budget ceiling.
European finance ministers last month pledged to keep their budget deficits below 3 percent of gross domestic product even as the economic slowdown dents tax receipts and boosts welfare payments.
The leaders said they want to allow banks to keep some assets valued as if they'd be held until maturity, instead of having to review their value each quarter.
They also said they want to change accounting rules that require banks to review their holdings each quarter and report losses when the values decline, the so-called mark-to-market standard. Banks worldwide have written down more than $580 billion since last year, according to data compiled by Bloomberg.
To contact the reporter on this story: Sandrine Rastello in Paris at srastello@bloomberg.net
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Monday, October 6, 2008
Chavez's Cheap Oil Gives Him Sway Over U.S. Allies, Aid Funds
By Matthew Walter
Oct. 6 (Bloomberg) -- President Hugo Chavez has figured out how to use Venezuela's vast oil reserves to increase his regional influence while diminishing U.S. clout: He all but gives it away.
The self-proclaimed socialist revolutionary is allowing impoverished U.S. allies such as Honduras and the Dominican Republic to buy discounted oil with low-interest loans. Then he rebates the revenue back to those countries in the form of aid - - attached to strings he controls.
Venezuela's oil wealth gives it ``much more capacity for an aggressive foreign policy,'' says Jose Manuel Puente, a professor at the Center for Public Policy at the Instituto de Estudios Superiores de Administracion in Caracas. ``You can cultivate and multiply your revolution, and you can create more friction with the U.S.''
Record oil prices have allowed Chavez, 54, to boost spending on such agreements this year. Crude exports from Venezuela, the Western Hemisphere's biggest oil exporter, exploded since 2007.
Crude prices have soared 52 percent since the beginning of last year. In July, they touched a record $147.27 a barrel before retreating to $92.70 on Oct. 3. Revenue at state-owned Petroleos de Venezuela SA rose 69 percent in the first half of the year to $72.4 billion, according to the company's earnings statement.
Chavez's oil-subsidy program is aimed at the 18 Central American and Caribbean countries in Petrocaribe, an alliance he created in 2005.
Favorable Terms
Member nations, many of which have been buffeted by inflation in prices for fuel, food and other necessities, get 1 percent financing for their purchases and may be required to pay as little as 30 percent of the market price for the oil within 90 days, then get 25 years to pay the rest, Chavez explained at a July Petrocaribe summit in Maracaibo, Venezuela.
Through the program, Venezuela supplies more than 200,000 barrels a day to those countries, most of which rely entirely on imports for fuel. Some countries are receiving financing to cover more than half their oil imports.
Meanwhile, a portion of the loan repayments go neither to Venezuela's treasury nor the state oil company; instead, they are deposited into an aid fund for Petrocaribe countries that Venezuela jointly controls.
Costa Rican President Oscar Arias said in a Sept. 26 interview that he plans to join Petrocaribe and begin receiving 20,000 barrels of oil products a day.
Small Country, Big Help
``This will be a big help for a small country with such a high oil bill like ours,'' he said. ``This will provide a huge relief for our balance of payments.''
While Arias insisted that Chavez's ``tangible assistance'' won't effect his government's policies, the impact of the Venezuelan leader's efforts, political as well as economic, is visible throughout the region.
In Honduras, which began taking advantage of Chavez's largesse in January, a long history of friendly relations with the U.S. -- it took economic advice from the American-led World Bank in the 1990s and has allowed the U.S. to use its military bases -- has given way to a sharper tone.
In August, Honduran President Manuel Zelaya denounced U.S. ``imperialism,'' and praised Chavez's economic model.
``If the system that governed Honduras for 40 years had resolved the poverty, the indigence, the exclusion of more than 4 million Hondurans, we wouldn't be looking to the south, toward socialism,'' Zelaya said on Aug. 25 in Tegucigalpa as he signed up for new Venezuelan credit lines for agriculture initiatives and for oil-funded subsidies.
Off-Budget
Petrocaribe's funds are largely off-budget, in recipient nations as well as at home. Opposition parties in Argentina, Nicaragua and elsewhere have complained that their governments' Venezuelan aid programs lack transparency, both in terms of how much money they generate and how it is used.
Nicaragua's National Assembly held a special hearing Sept. 18 to investigate how much aid Venezuela has sent the country. While President Daniel Ortega says the total is $521 million since 2007, the central bank says it can only account for an estimated $185 million.
``The money is for the people of Nicaragua, not for Ortega,'' Victor Tinoco, a congressman with the opposition Sandinista Renovation Movement, said at the hearing.
Ortega has said he used the funds for his ``Zero Hunger'' program and for loans to farmers and to poor families to start small businesses.
`Extremely Murky'
``All of these funds are extremely murky,'' says Patrick Esteruelas, an analyst at the Eurasia Group in New York.
Chavez claims Petrocaribe was born out of concern for the impact rising oil prices were having on the poor in a region where, according to the World Bank, 17.9 percent of the population lives on less than $2 a day.
``We became alarmed when oil shot up to $120, $130, $140,'' Chavez said in a July 16 speech. ``Immediately, we activated Petrocaribe to protect our brothers, the smallest ones, the weakest ones.''
As oil prices rise, the amount each country borrows from Venezuela also increases. As of June, the Dominican Republic owed Venezuela $800 million, Dominican Finance Minister Vicente Bengoa told reporters at a conference in Cancun, Mexico.
Leaders associated with Chavez increasingly are imitating his class-warfare, anti-American rhetoric. After Chavez and his ally, Bolivian President Evo Morales, both kicked out their nation's U.S. envoys, Honduras delayed the acceptance of its U.S. ambassador's credentials in a show of solidarity.
Fuel Subsidies
The World Bank last year ranked Honduras as the fifth- poorest nation in Latin America and the Caribbean, with a per capita income of $1,600. The Central American nation has spent more than $140 million on fuel subsidies as of August, up from $55 million for all of last year, Finance Minister Rebeca Santos Rivera said in an interview.
Honduras's initial agreement with Chavez authorized it to import $800 million worth of Venezuelan oil products in 2007 and 2008. The Honduran government immediately resells the shipments to private importers, putting the profit into a fund administered by the central bank for state-sponsored investment projects, she says.
Venezuela's oil-related subsidies compete with aid to Latin America and the Caribbean from the U.S. Agency for International Development, which is projected to total $859.7 million this year, up 8.4 percent from last year and down from $1 billion provided in 2005.
Struggling U.S.
``The U.S. is struggling to come up with adequate alternatives to encourage or co-opt supporters within Latin America and rival Chavez's oil largesse,'' says the Eurasia Group's Esteruelas.
In some cases, Chavez has said he would accept goods and services as payment. In August, he suggested that the Dominican Republic could reduce its debt with tourism packages for Venezuelans.
``Already, the flexibility from Petrocaribe is greater than what we're receiving from the Inter-American Development Bank and the World Bank, in terms of financial conditions and time,'' says Santos, the Honduran finance minister.
President George W. Bush, tied up with a war in Iraq, hasn't given the region the attention he promised during his 2000 election campaign and this year couldn't get the Democratic-controlled U.S. House of Representatives to even vote on a free-trade agreement with Colombia, the U.S.'s strongest ally in South America.
Creating an Opening
That failure raises questions in the region about the U.S.'s reliability and creates an opening for Chavez, says Peter Hakim, president of the Washington-based Inter-American Dialogue, a policy analysis center focusing on Western Hemisphere affairs.
As small nations line up behind Chavez and his growing affinity for Iran and Russia, the U.S. risks fading cooperation on trade, energy projects and drug trafficking.
``We've seen how President Chavez's influence, with his rhetoric and his resources, has had an impact on our internal politics,'' says Felipe Salaberry, a Chilean lawmaker who helps run the Union of Latin American Parties, an alliance of ``center and center-right'' political groups.
``Using an anti-Yankee discourse among a population that's in a great state of need is always going to be attractive,'' he adds.
To contact the reporter on this story: Matthew Walter in New York at mwalter4@bloomberg.net
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Deflation May Be Next Threat as Commodities, Asset Markets Sink
By John Fraher
Oct. 6 (Bloomberg) -- As Federal Reserve Chairman Ben S. Bernanke and his global colleagues fight the worst financial crisis since the 1930s, one danger is looming larger by the day: deflation.
With asset markets tumbling, commodity prices plunging the most in 50 years and banks keeping a tighter grip on credit, the ingredients for a sustained period of falling prices are coalescing. While inflation is still a concern for many policy makers only months after oil and food prices peaked, the risk is their patchwork of rescue and stimulus packages will fail, and prices will start to fall throughout the broader economy.
``The ghost of deflation could be dragged out of the closet again in coming months,'' says Joerg Kraemer, chief economist at Commerzbank AG in London.
A global recession is already looking more likely, with the credit freeze stirring memories of Japan's decade-long struggle with deflation in the 1990s. So European Central Bank President Jean-Claude Trichet and Bank of England Governor Mervyn King may be forced to follow Bernanke, whose Fed has chopped its benchmark rate by 3.25 percentage points since August 2007 to 2 percent -- its most aggressive round of easing in two decades.
The deflation scenario might go like this: Banks worldwide, stung by $588 billion in writedowns related to toxic assets -- especially mortgage-related securities -- will further reduce the flow of credit, strangling growth. That will push house prices lower, forcing additional losses and making banks even more reluctant to lend. As the credit crisis worsens, businesses will find it almost impossible to raise prices.
A `Vicious' Cycle
``A vicious deflationary cycle'' could then ensue, says Tony Tan, deputy chairman of Government of Singapore Investment Corp., a sovereign-wealth fund that oversees more than $100 billion.
Prices are already falling in parts of the world economy. Home values dropped more than 10 percent in the U.K. and in the U.S. in the past year. Oil, copper and corn drove commodities toward their biggest weekly decline since at least 1956 on Oct. 3, with the Reuters/Jefferies CRB Index of 19 raw materials tumbling 10.4 percent. The Baltic Dry Index, a measure of commodity shipping costs, has dropped 75 percent since May.
``We are certainly more worried about deflation than inflation,'' says David Owen, chief European economist at Dresdner Kleinwort Group Ltd. in London. Central bankers need to ``get rates down and keep them there for quite some time,'' he says.
Aggressive Easing
Trichet said Oct. 2 that European policy makers have considered reversing their decision in July to raise their benchmark rate by a quarter point to 4.25 percent. Forty-six of the 61 economists surveyed by Bloomberg News expect the Bank of England to cut its key rate by at least a quarter point Oct. 9 from 5 percent.
The Fed has already responded to one deflationary scare this decade. With inflation approaching 1 percent in 2003, then- Chairman Alan Greenspan slashed its rate to a 45-year low of 1 percent and kept it there for a year, which its critics say helped fuel the property and credit boom that is now unraveling.
This time, the crisis is an increasingly dysfunctional banking system that may not be able to continue making loans that grease economic activity. Such a pullback, combined with slowing growth and falling asset and commodity prices, makes deflation more of a threat, Owen says.
Restricting Credit
Spooked by the collapse of Lehman Brothers Holdings Inc. and other institutions, banks are restricting access to credit. The London interbank offered rate, or Libor, they charge each other for three-month loans in dollars rose to 4.33 percent on Oct, 3, the highest since January.
Not all economists share Owen's gloomy outlook. Some say Bernanke and other central bankers have learned the lessons of Japan and the Great Depression so well they will do everything necessary to head off trouble.
Former Fed Governor Lyle Gramley says that while deflation is a risk ``if we were to go into a very, very prolonged recession and nobody did anything about it,'' he is ``not worried,'' because he's confident the Fed will act ``very, very, very aggressively.''
Bernanke, who has studied the Great Depression since he was a graduate student, has said that one key reason the U.S. stock- market crash of 1929 had such severe consequences was that lenders were forced to close and the banking system was deprived of liquidity.
`Lost Decade'
He has also studied Japan's ``lost decade '' of deflation, which was partly caused by a banking crisis, and has argued that its policy makers waited too long to respond to a stock-and- property price crash at the start of the 1990s. In a 2002 speech that earned him the nickname ``Helicopter Ben,'' he said governments and central banks must respond immediately to such a deflationary shock by dropping money into the banking system.
The caution of Japan's leaders -- who waited until 1999 before using taxpayers' money to bail out the banks -- cost their economy dearly. Lending shrank, unemployment more than doubled to 5.5 percent, and Japan experienced three recessions between 1990 and 2002. From 1997 to 2007, consumer prices dropped 2.2 percent. In the U.S., prices climbed 29 percent in the same period.
When credit markets started seizing up in August 2007, Bernanke set up $1.4 trillion in emergency borrowing for financial institutions. The ECB, the Bank of Japan and other central banks have set up similar lifelines. On Oct. 3, President George W. Bush signed into law Treasury Secretary Henry Paulson's $700 billion bank-rescue plan.
`Last Resort'
Commerzbank's Kraemer says the Fed might also consider further easing collateral requirements or purchases of government bonds ``as a last resort.''
Kraemer says he thinks a slowdown in inflation is more likely than deflation. The surge in commodity prices earlier this year drove inflation in the U.S., Europe and Asia to the strongest pace in at least a decade. Strategists have pointed to Paulson's rescue plan as an additional risk.
Japanese core consumer prices, which exclude fresh food, climbed 2.4 percent in August from August 2007. The U.S. core rate, which strips out food and energy, rose 2.5 percent from a year earlier.
Still, deflationary forces are mounting in the U.S. and other parts of the world economy. In Britain, the Nationwide Building Society says house prices have dropped 12.4 percent in the past year as banks restrict the supply of mortgages, putting the economy on course for its first recession since the early 1990s.
Deflationary Consequences
``The risk we must be careful not to underestimate is the deflationary consequences of the credit crisis,'' Bank of England Deputy Governor John Gieve said last month.
In the U.S., prices manufacturers paid for materials last month plunged the most since at least 1948, with the Institute for Supply Management's index dropping 23.5 points to 53.5 points.
The breakeven rate on U.S. 10-year Treasuries, a measure of price expectations, dropped to 1.5 percent from 2.6 percent in July. Japan is the only country whose bond market implies a lower inflation rate than the U.S.
All this is likely to make the Fed resume rate cuts, says Robert Dye, a senior economist at PNC Financial Services Group in Pittsburgh, Pennsylvania.
``If we're going over a cliff, we're not going to go over a cliff with a 2 percent federal funds rate,'' he says. ``What's the point of holding back?''
To contact the reporter on this story: John Fraher in London at jfraher@bloomberg.net
Read more...
Oct. 6 (Bloomberg) -- As Federal Reserve Chairman Ben S. Bernanke and his global colleagues fight the worst financial crisis since the 1930s, one danger is looming larger by the day: deflation.
With asset markets tumbling, commodity prices plunging the most in 50 years and banks keeping a tighter grip on credit, the ingredients for a sustained period of falling prices are coalescing. While inflation is still a concern for many policy makers only months after oil and food prices peaked, the risk is their patchwork of rescue and stimulus packages will fail, and prices will start to fall throughout the broader economy.
``The ghost of deflation could be dragged out of the closet again in coming months,'' says Joerg Kraemer, chief economist at Commerzbank AG in London.
A global recession is already looking more likely, with the credit freeze stirring memories of Japan's decade-long struggle with deflation in the 1990s. So European Central Bank President Jean-Claude Trichet and Bank of England Governor Mervyn King may be forced to follow Bernanke, whose Fed has chopped its benchmark rate by 3.25 percentage points since August 2007 to 2 percent -- its most aggressive round of easing in two decades.
The deflation scenario might go like this: Banks worldwide, stung by $588 billion in writedowns related to toxic assets -- especially mortgage-related securities -- will further reduce the flow of credit, strangling growth. That will push house prices lower, forcing additional losses and making banks even more reluctant to lend. As the credit crisis worsens, businesses will find it almost impossible to raise prices.
A `Vicious' Cycle
``A vicious deflationary cycle'' could then ensue, says Tony Tan, deputy chairman of Government of Singapore Investment Corp., a sovereign-wealth fund that oversees more than $100 billion.
Prices are already falling in parts of the world economy. Home values dropped more than 10 percent in the U.K. and in the U.S. in the past year. Oil, copper and corn drove commodities toward their biggest weekly decline since at least 1956 on Oct. 3, with the Reuters/Jefferies CRB Index of 19 raw materials tumbling 10.4 percent. The Baltic Dry Index, a measure of commodity shipping costs, has dropped 75 percent since May.
``We are certainly more worried about deflation than inflation,'' says David Owen, chief European economist at Dresdner Kleinwort Group Ltd. in London. Central bankers need to ``get rates down and keep them there for quite some time,'' he says.
Aggressive Easing
Trichet said Oct. 2 that European policy makers have considered reversing their decision in July to raise their benchmark rate by a quarter point to 4.25 percent. Forty-six of the 61 economists surveyed by Bloomberg News expect the Bank of England to cut its key rate by at least a quarter point Oct. 9 from 5 percent.
The Fed has already responded to one deflationary scare this decade. With inflation approaching 1 percent in 2003, then- Chairman Alan Greenspan slashed its rate to a 45-year low of 1 percent and kept it there for a year, which its critics say helped fuel the property and credit boom that is now unraveling.
This time, the crisis is an increasingly dysfunctional banking system that may not be able to continue making loans that grease economic activity. Such a pullback, combined with slowing growth and falling asset and commodity prices, makes deflation more of a threat, Owen says.
Restricting Credit
Spooked by the collapse of Lehman Brothers Holdings Inc. and other institutions, banks are restricting access to credit. The London interbank offered rate, or Libor, they charge each other for three-month loans in dollars rose to 4.33 percent on Oct, 3, the highest since January.
Not all economists share Owen's gloomy outlook. Some say Bernanke and other central bankers have learned the lessons of Japan and the Great Depression so well they will do everything necessary to head off trouble.
Former Fed Governor Lyle Gramley says that while deflation is a risk ``if we were to go into a very, very prolonged recession and nobody did anything about it,'' he is ``not worried,'' because he's confident the Fed will act ``very, very, very aggressively.''
Bernanke, who has studied the Great Depression since he was a graduate student, has said that one key reason the U.S. stock- market crash of 1929 had such severe consequences was that lenders were forced to close and the banking system was deprived of liquidity.
`Lost Decade'
He has also studied Japan's ``lost decade '' of deflation, which was partly caused by a banking crisis, and has argued that its policy makers waited too long to respond to a stock-and- property price crash at the start of the 1990s. In a 2002 speech that earned him the nickname ``Helicopter Ben,'' he said governments and central banks must respond immediately to such a deflationary shock by dropping money into the banking system.
The caution of Japan's leaders -- who waited until 1999 before using taxpayers' money to bail out the banks -- cost their economy dearly. Lending shrank, unemployment more than doubled to 5.5 percent, and Japan experienced three recessions between 1990 and 2002. From 1997 to 2007, consumer prices dropped 2.2 percent. In the U.S., prices climbed 29 percent in the same period.
When credit markets started seizing up in August 2007, Bernanke set up $1.4 trillion in emergency borrowing for financial institutions. The ECB, the Bank of Japan and other central banks have set up similar lifelines. On Oct. 3, President George W. Bush signed into law Treasury Secretary Henry Paulson's $700 billion bank-rescue plan.
`Last Resort'
Commerzbank's Kraemer says the Fed might also consider further easing collateral requirements or purchases of government bonds ``as a last resort.''
Kraemer says he thinks a slowdown in inflation is more likely than deflation. The surge in commodity prices earlier this year drove inflation in the U.S., Europe and Asia to the strongest pace in at least a decade. Strategists have pointed to Paulson's rescue plan as an additional risk.
Japanese core consumer prices, which exclude fresh food, climbed 2.4 percent in August from August 2007. The U.S. core rate, which strips out food and energy, rose 2.5 percent from a year earlier.
Still, deflationary forces are mounting in the U.S. and other parts of the world economy. In Britain, the Nationwide Building Society says house prices have dropped 12.4 percent in the past year as banks restrict the supply of mortgages, putting the economy on course for its first recession since the early 1990s.
Deflationary Consequences
``The risk we must be careful not to underestimate is the deflationary consequences of the credit crisis,'' Bank of England Deputy Governor John Gieve said last month.
In the U.S., prices manufacturers paid for materials last month plunged the most since at least 1948, with the Institute for Supply Management's index dropping 23.5 points to 53.5 points.
The breakeven rate on U.S. 10-year Treasuries, a measure of price expectations, dropped to 1.5 percent from 2.6 percent in July. Japan is the only country whose bond market implies a lower inflation rate than the U.S.
All this is likely to make the Fed resume rate cuts, says Robert Dye, a senior economist at PNC Financial Services Group in Pittsburgh, Pennsylvania.
``If we're going over a cliff, we're not going to go over a cliff with a 2 percent federal funds rate,'' he says. ``What's the point of holding back?''
To contact the reporter on this story: John Fraher in London at jfraher@bloomberg.net
Read more...
Philippines May End Rate Increases as Focus Shifts to Growth
By Francisco Alcuaz Jr.
Oct. 6 (Bloomberg) -- The Philippine central bank may stop raising interest rates as it predicts inflation will ease, allowing policy makers to focus on spurring growth amid a global economic slowdown.
Bangko Sentral ng Pilipinas will keep the rate it pays banks for overnight deposits at 6 percent today, ending three increases totaling 1 percentage point since early June, according to seven of nine economists in a Bloomberg survey. Two expect the central bank to raise the benchmark to 6.25 percent.
Easing commodity prices have given Asia's central banks room to reduce borrowing costs, or keep them on hold, as the deepening U.S. financial crisis heightens risks to the region's export-dependent economies. The Philippine government on Oct. 2 cut its 2008 growth target to as little as 4.4 percent, compared with a 7.2 percent expansion last year.
``Everyone's past raising rates now,'' said Song Seng Wun, an economist at CIMB-GK Securities Pte in Singapore. Bangko Sentral ``may be wondering whether to join the line of central banks that have already cut rates, especially in an environment where credit markets are too stressed for the normal functioning of the economy.''
Global credit markets are being squeezed by banks afraid to lend to each other after the failure of Lehman Brothers Holdings Inc. and other financial companies in the U.S. and Europe, Asia's biggest export markets. Half of the world faces recession, Goldman Sachs Group Inc. said in August.
Rate Cuts
New Zealand's economy contracted in the three months to June, driving the nation into its first recession in 10 years. Japan's economy shrank at an annual 3 percent rate in the second quarter, the steepest drop since 2001, while the euro-area contracted 0.2 percent in the same period.
Taiwan, China, Australia and New Zealand cut borrowing costs in September. Inflation has slowed in Thailand and Sri Lanka and policy makers in India and Indonesia forecast price gains will cool before the end of the year.
Philippine inflation probably eased to 12.3 percent in September from a 16-year high of 12.5 percent the previous month, according to the median estimate of nine economists in a Bloomberg News survey. The government will release consumer- price data tomorrow.
``Inflation has peaked,'' Economic Planning Secretary Ralph Recto said Oct. 2. ``There's pressure for easing interest rates.''
Inflation may have stopped accelerating last month, the central bank's Deputy Governor Diwa Guinigundo said Sept. 12. Crude prices have declined more than a third from the record $147.27 on July 11, helping the Philippines, which imports almost all of its oil.
Focus on Growth
The government, which has cut its growth forecasts four times this year, has pledged to increase agriculture and infrastructure spending to bolster the economy, abandoning its target of balancing the budget in 2008.
Philippine growth may slow further to as little as 4.1 percent next year as cooling global economies hurt exports and remittances, the government said last week.
The following tables show economists' estimates for the overnight rate and for September inflation.
Philippines Overnight Borrowing Rate
---------------------------------------------
Policy Meeting Oct. Nov. End
Dates 6 20 2008
---------------------------------------------
Median 6.00% 6.00% 6.00%
% forecasts at Median 78% 80% 60%
High 6.25% 6.50% 6.50%
Low 6.00% 6.00% 5.75%
Number of Estimates 9 5 5
---------------------------------------------
ATR-Kim Eng Capital 6.00% 6.00% 6.00%
BDO Unibank 6.25% 6.50% 6.50%
CIMB-GK Research 6.00% 6.00% 6.00%
Ideaglobal 6.00% 6.00% 6.00%
ING Groep NV 6.00% -- --
Moody's Economy.com 6.25% -- --
Reuters IFR 6.00% -- --
Standard Chartered 6.00% 6.00% 5.75%
UBS 6.00% -- --
---------------------------------------------
Philippines Consumer Price Index
---------------------------------------------------------
CPI CPI End Avg. Avg.
Firm YoY MoM 4Q 2008 2009
---------------------------------------------------------
Median 12.3% -0.1% 10.8% 9.7% 6.2%
Average 12.3% -0.1% 10.4% 9.6% 5.9%
High 13.0% 0.5% 12.3% 10.0% 7.5%
Low 11.3% -0.9% 8.4% 8.9% 3.2%
Number of Estimates 9 6 5 6 5
---------------------------------------------------------
ATR-Kim Eng Capital 12.2% -- 11.0% 10.0% 6.0%
BDO Unibank 12.6% 0.5% 12.3% 9.5% 7.5%
CIMB-GK Research 12.3% 0.0% 10.8% 9.8% 6.5%
Ideaglobal 12.5% 0.1% -- 10.0% --
ING Groep NV 12.1% -0.2% -- -- --
Moody's Economy.com 11.3% -0.9% 8.4% 8.9% 6.2%
Reuters IFR 13.0% -- -- -- --
Standard Chartered 12.1% -0.2% 9.5% 9.3% 3.2%
UBS 12.5% -- -- -- --
---------------------------------------------------------
To contact the reporter on this story: Francisco Alcuaz Jr. in Manila at falcuaz@bloomberg.net
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S. Korea Will Maintain Liquidity Support for Markets
By Seyoon Kim
Oct. 6 (Bloomberg) -- South Korea's Finance Minister Kang Man Soo said the government will continue to provide liquidity to the market through won-dollar swaps.
Banks should limit their foreign-currency holdings as it can stem cashflow to exporters, Kang said, according to speech notes distributed before his meeting with heads of local banks in Seoul today.
``It's likely to take quite a while until the credit crunch eases in the emerging markets,'' Kang said. ``We urge bank presidents to monitor the banks' liquidity status every day and try to acquire foreign-currency liquidity by selling overseas assets.''
The government said last week it will supply $5 billion to the Export-Import Bank of Korea to provide assistance to small businesses. The bank will set up a program that provides discounted promissory notes that allow exporters to receive funds from their overseas-trade proceeds more quickly.
South Korea also has said it will make available at least 4.3 trillion won ($3.6 billion) in extra loans to small and medium-sized companies struggling with rising costs and losses related to currency movements.
Kang urged banks ``not to hold onto too much foreign currency reserves'' saying the moves can reduce trade financing and can add difficulties to smaller exporting firms.
The won fell on Oct. 2, approaching a five-year low, as a seizure of global credit markets forced banks to turn to currency exchanges to meet their dollar-financing needs. The local currency fell 2.9 percent to 1,223.55 per dollar on Oct. 2 and has slumped 24 percent this year. The market was closed for public holiday on Oct. 3.
The nation's foreign reserves fell for a sixth month in September to $239.7 billion, from $243.2 billion in August, after authorities provided dollars in the swap market to boost liquidity and help stem the won's drop, according to data by the central bank.
To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net
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Oct. 6 (Bloomberg) -- South Korea's Finance Minister Kang Man Soo said the government will continue to provide liquidity to the market through won-dollar swaps.
Banks should limit their foreign-currency holdings as it can stem cashflow to exporters, Kang said, according to speech notes distributed before his meeting with heads of local banks in Seoul today.
``It's likely to take quite a while until the credit crunch eases in the emerging markets,'' Kang said. ``We urge bank presidents to monitor the banks' liquidity status every day and try to acquire foreign-currency liquidity by selling overseas assets.''
The government said last week it will supply $5 billion to the Export-Import Bank of Korea to provide assistance to small businesses. The bank will set up a program that provides discounted promissory notes that allow exporters to receive funds from their overseas-trade proceeds more quickly.
South Korea also has said it will make available at least 4.3 trillion won ($3.6 billion) in extra loans to small and medium-sized companies struggling with rising costs and losses related to currency movements.
Kang urged banks ``not to hold onto too much foreign currency reserves'' saying the moves can reduce trade financing and can add difficulties to smaller exporting firms.
The won fell on Oct. 2, approaching a five-year low, as a seizure of global credit markets forced banks to turn to currency exchanges to meet their dollar-financing needs. The local currency fell 2.9 percent to 1,223.55 per dollar on Oct. 2 and has slumped 24 percent this year. The market was closed for public holiday on Oct. 3.
The nation's foreign reserves fell for a sixth month in September to $239.7 billion, from $243.2 billion in August, after authorities provided dollars in the swap market to boost liquidity and help stem the won's drop, according to data by the central bank.
To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net
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Yen Unbeatable as Credit Seizure Proves `Carry Trade Is Dead'
By Ye Xie
Oct. 6 (Bloomberg) -- The same credit market collapse that drove Lehman Brothers Holdings Inc. into bankruptcy and sent bank borrowing costs in Europe to record highs is making the yen unbeatable.
Japan's currency was the best-performer in September and the only currency to appreciate against the dollar. Deutsche Bank AG, the biggest trader of foreign exchange, says the yen will rise 5 percent in coming months. New York-based Morgan Stanley is telling clients to buy the currency versus the euro and pound.
After seven years of providing the cheapest source of funds for investors buying higher-yielding New Zealand dollars, Australian dollars and Brazil reais, the yen is appreciating as $587 billion of subprime mortgage-related losses force banks to restrict credit. It strengthened 4.4 percent on a trade weighted basis in September, according to the Bank of Japan's effective exchange rate, the most since August 2007, when the seizure in capital markets began.
``We are in a multi-year trend reversal,'' said Paresh Upadhyaya, a senior vice president at Putnam Investment LLC in Boston who helps manage $50 billion in currency assets. ``We are going to see a global central bank easing cycle. The yen is the place to be in this environment of economic slowdown and heightened volatility.''
This year will be the first since 2002 that the economies of the U.S., euro-region and Japan all expand less than 2 percent, according to data compiled by Bloomberg. The BOJ's effective exchange rate rose 5 percent from April through September of that year, the best six-month performance since the end of 1999.
`Counter-Cyclical Currency'
Strategists are turning more bullish, forecasting the yen will end the year at 107 to the dollar, compared with an expectation of 109.15 on Sept. 12, according to the median of 40 estimates compiled by Bloomberg.
``The yen is a counter-cyclical currency,'' said Richard Benson, who oversees $14 billion of currency funds at Millennium Asset Management in London. ``When the global economy looks bad, the yen should do well.''
The currency lost 60 percent against the Australian and New Zealand dollars in the seven years ended June 30, and depreciated 24 percent versus the real and 20 percent to the British pound. The main cause was the so-called carry trade, where investors took out loans in Japan to take advantage of the lowest benchmark interest rates among the Group of 10 industrialized nations. They then sold the yen and invested the proceeds in high-yielding assets outside the country.
211 Percent Return
Investors who used the strategy to buy the New Zealand and Australian dollars, euro and pound, would have generated a return of 211 percent on average in the past seven years, according to data compiled by Bloomberg. The trades would have lost 13 percent this year.
The collapse of Lehman, the government takeovers of Fannie Mae, Freddie Mac, American International Group Inc. and Washington Mutual Inc. and the forced sales of Merrill Lynch & Co. and Wachovia Corp. reduced confidence in the world's financial system.
That in turn has made banks wary of lending to each other, pushing the three-month London interbank offered rate in dollars to 4.33 percent from 2.81 percent on Sept. 15, the day New York- based Lehman filed for bankruptcy protection, according to the British Bankers' Association in London. The increase in rates and drop in credit is forcing speculators to close out carry trades and pay back yen-denominated loans. The currency's biggest gain the past month has come against the real, rising 20 percent.
Lower Rates
The slowing world economy is also helping the yen by boosting expectations that central banks will lower borrowing costs. Policy makers in Europe, Australia, New Zealand and Brazil will cut interest rates next year, according to the median estimates of economists surveyed by Bloomberg.
Futures on the Chicago Board of Trade showed an 84 percent probability yesterday the U.S. Federal Reserve will lower its 2 percent target rate for overnight lending between banks by a half-percentage point at its Oct. 29 meeting. Traders saw no chance of a cut a month earlier.
``The carry trade is dead,'' said Derek Halpenny, European head of global currency research at Bank of Tokyo-Mitsubishi in London. ``The world is deleveraging.''
The yen strengthened to 143.99 per euro on Oct. 3, the highest level since June 2006, before ending the week at 145.11. It gained 0.6 percent against the dollar to 105.32.
Hedge funds and speculators increased bets that the yen will appreciate versus the dollar to the highest level since July 18, data from the U.S. Commodity Futures Trading Commission show. Wagers on an advance in the yen outnumbered those on a drop by 43,022 on Sep. 30. As recently as Sept. 2 they were betting on a decline in the yen.
Turning Bullish
Morgan Stanley strategists turned bullish last week, saying in an Oct. 2 report to clients thy yen may strengthen to 135 per euro and to 165 per pound from 188.10. Frankfurt-based Deutsche Bank expects it to rally to 100 to the dollar. Bank of Tokyo- Mitsubishi UFJ Ltd, Japan's largest bank by market value, raised its forecast last week to 100 per dollar by March from 102. It predicts the yen will gain 11 percent versus the pound in a year.
Further gains may depend on whether U.S. Treasury Secretary Henry Paulson's $700 billion plan to revive credit markets by purchasing depreciated assets from banks boosts investor confidence.
The carry trade ``is a strategy that has a good track record,'' said Pablo Frei, a money manager at Quaesta Capital in Switzerland, which oversees $1.2 billion in currency funds. ``You have to unwind carry during times of high risk. There will be a day that it will be put on again. The question is when.''
`Structural Shift'
Quaesta Capital's currency funds have reduced the amount of money in carry trades to less than 5 percent of assets, from about 30 percent a year ago, Frei said.
Investors in Japan will continue to invest internationally to diversify their holdings as risk appetites return, capping the yen's strength, said Rebecca Patterson, global head of foreign exchange in New York for the private wealth management unit of JPMorgan Chase & Co.
Japanese mutual funds increased purchases of overseas assets to 36.89 trillion yen ($369 billion) by the end of last year, from 3.06 trillion yen in 2000, according to Japan's Investment Trust Association.
``What's happened in Japan in the last two, three years has been a structural shift of the Japanese mindset,'' said Patterson. ``They view these as long term investments. The yen negative flows will slow in times of trouble like this. But I don't see a lot of this is a longer-term shift.''
Rising Volatility
Carry trades became popular as swings in exchange rates fell to record lows because there was less risk that rapid changes would wipe out profits.
Now, that is changing. Implied volatility on major currencies rose to 16.69 percent on Sept. 17, the highest level since 1998, according to the JPMorgan G7 Volatility Index. The gauge of price swings touched 5.76 percent in June 2007, the lowest since the index's inception in 1992.
The percentage of currency reserves held in yen by foreign central banks increased for a third straight quarter through June, according to the International Monetary Fund.
Yen now accounts for 3.4 percent of global reserves, compared with 2.8 percent a year earlier, the lowest amount since at least 1999. The dollar is the world's largest reserve currency at 62.5 percent, IMF figures show. Morgan Stanley strategists said in their Oct. 2 report that the yen may overtake the pound, which is No. 3 at 4.7 percent, in ``coming quarters.''
``There are many risks in the United States and Europe,'' said Satoshi Okumoto, a general manager at Fukoku Mutual Life Insurance Co. in Tokyo, which has $54.1 billion in assets and is Japan's eighth-biggest life insurance company. ``Fund managers are starting to shift their money to yen. They are starting to overweight yen in terms of currency allocation.''
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net.
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Road Less Traveled Offers Shelter From U.S. Mess: William Pesek
Commentary by William Pesek
Oct. 6 (Bloomberg) -- In times of trouble, investors often race to U.S. Treasuries. Alisher Djumanov suggests a far less obvious destination: Central Asia.
Kazakhstan, Kyrgyzstan, Mongolia, Tajikistan, Turkmenistan and Uzbekistan don't tend to come to mind when searching for safety. Nor do Armenia, Azerbaijan and Georgia in the Caucasus region. Yet there's increasing merit to taking the road less traveled, literally and figuratively.
``Amid global market volatility and sell-offs, frontier markets generally, and in Eurasia in particular, are holding their ground well,'' Djumanov, managing partner at Singapore- based Eurasia Capital Management, told me recently in Ulaanbaatar, Mongolia. ``This Eurasia region isn't for everyone, but those who come won't regret it.''
Eurasia Capital manages about $200 million in hedge funds across Central Asia and plans to sell shares in a Mongolia private-equity fund in Singapore in the first half of 2009.
Anyone who thinks Djumanov, 36, deserves a gold medal for understatement for noting that Central Asia isn't for everyone should consider a few things.
First off, how safe did Lehman Brothers Holdings Inc. end up being? How happy are those who invested two years ago in Merrill Lynch & Co. or General Motors Corp.?
The Nikkei 225 Stock Average is down 28 percent this year, the Hang Seng Index is down 36 percent, the Standard & Poor's 500 Index is down 24 percent, and the MSCI Emerging Markets Index is down 39 percent.
Strong Fundamentals
Djumanov says those seeking ``strong economic fundamentals'' will find them in Central Asia and the Caucasus, where seven of the 20 fastest-growing economies are located.
Much of that growth reflects the region's endowment of vast natural resources. Its riches are in great demand among nations including the so-called BRICs -- Brazil, Russia, India and China. That, Djumanov argues, bodes well for Eurasian stocks.
``Economies in the region are set to continue to grow rapidly in coming years,'' he says.
Annual increases in property prices in the Eurasia region have been 30 percent to 35 percent in recent years. While those increases may seem bubble-like, property markets are starting from an extremely low base and may reflect perfectly rational demand.
Take Mongolia. ``So many Mongolians live in substandard housing, and they want to change that,'' says Randolph Koppa, chief executive officer of the Trade & Development Bank of Mongolia. ``Incomes are going up, and that means more spending on housing and other needs.''
Credit Crisis
The Eurasia region's equity and bond markets are in their infancy. Djumanov estimates that total market capitalization of the region's stock markets is about $100 billion, or one-seventh what the U.S. government is mulling throwing at its credit crisis.
It's not just that Eurasian economies and markets are starting from a low base. What's more important is that the so- called frontier economies on which Djumanov is focused are undergoing pro-market changes to increase the independence and strength of the private sector. Governments are generally working to privatize state-owned enterprises and attract more foreign direct investment.
Djumanov thinks the best returns will be found through private-equity investments. Eurasia Capital expects to sell shares on London's Alternative Investment Market or Deutsche Boerse AG by next June to start other private-equity and property funds and to expand in Central Asia.
Silk Road
Investors like Djumanov are enthused by efforts to recreate the ``Silk Road,'' the centuries-old, 5,000-mile (8,045 kilometers) link between Asia and Europe that was used to carry silks and spices.
Organizations like the Asian Development Bank are involved in an almost $20 billion plan to invest in roads, railways and ferry routes to boost trade in a resource-rich region with vast economic potential. As those trade connections strengthen, investors could reap huge benefits.
The region isn't for the weak-kneed. Valid concerns about corruption, transparency, geopolitics, economic-policy missteps and progress toward democracy will scare most away. Here, two things are worth noting.
One, events in the U.S. are rapidly redefining the meaning of investment risk. U.S. authorities are investigating Fannie Mae, Freddie Mac, Lehman and American International Group Inc. as part of a probe into the collapse of the subprime-mortgage market. It's a reminder than even the biggest, most developed and most trusted economies have major transparency deficiencies.
Road Less Traveled
Two, it's all about potential. Now that the BRICs have been truly discovered, investors are looking for the next emerging- market stars like Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey and Vietnam. The Eurasia region also is worth a look.
``Clearly, the global economic turmoil will present major challenges for frontier markets,'' Djumanov says. ``But I am confident that in Eurasian countries undergoing sustainable economic growth, investors can find significant investment opportunities as these markets are going through the process of discovery.''
As these economies are in fact discovered, those who got there first may be happy they took the road less traveled. It's not like Wall Street looks a whole lot safer these days.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: William Pesek in Ulaanbaatar, Mongolia at wpesek@bloomberg.net
Read more...
Oct. 6 (Bloomberg) -- In times of trouble, investors often race to U.S. Treasuries. Alisher Djumanov suggests a far less obvious destination: Central Asia.
Kazakhstan, Kyrgyzstan, Mongolia, Tajikistan, Turkmenistan and Uzbekistan don't tend to come to mind when searching for safety. Nor do Armenia, Azerbaijan and Georgia in the Caucasus region. Yet there's increasing merit to taking the road less traveled, literally and figuratively.
``Amid global market volatility and sell-offs, frontier markets generally, and in Eurasia in particular, are holding their ground well,'' Djumanov, managing partner at Singapore- based Eurasia Capital Management, told me recently in Ulaanbaatar, Mongolia. ``This Eurasia region isn't for everyone, but those who come won't regret it.''
Eurasia Capital manages about $200 million in hedge funds across Central Asia and plans to sell shares in a Mongolia private-equity fund in Singapore in the first half of 2009.
Anyone who thinks Djumanov, 36, deserves a gold medal for understatement for noting that Central Asia isn't for everyone should consider a few things.
First off, how safe did Lehman Brothers Holdings Inc. end up being? How happy are those who invested two years ago in Merrill Lynch & Co. or General Motors Corp.?
The Nikkei 225 Stock Average is down 28 percent this year, the Hang Seng Index is down 36 percent, the Standard & Poor's 500 Index is down 24 percent, and the MSCI Emerging Markets Index is down 39 percent.
Strong Fundamentals
Djumanov says those seeking ``strong economic fundamentals'' will find them in Central Asia and the Caucasus, where seven of the 20 fastest-growing economies are located.
Much of that growth reflects the region's endowment of vast natural resources. Its riches are in great demand among nations including the so-called BRICs -- Brazil, Russia, India and China. That, Djumanov argues, bodes well for Eurasian stocks.
``Economies in the region are set to continue to grow rapidly in coming years,'' he says.
Annual increases in property prices in the Eurasia region have been 30 percent to 35 percent in recent years. While those increases may seem bubble-like, property markets are starting from an extremely low base and may reflect perfectly rational demand.
Take Mongolia. ``So many Mongolians live in substandard housing, and they want to change that,'' says Randolph Koppa, chief executive officer of the Trade & Development Bank of Mongolia. ``Incomes are going up, and that means more spending on housing and other needs.''
Credit Crisis
The Eurasia region's equity and bond markets are in their infancy. Djumanov estimates that total market capitalization of the region's stock markets is about $100 billion, or one-seventh what the U.S. government is mulling throwing at its credit crisis.
It's not just that Eurasian economies and markets are starting from a low base. What's more important is that the so- called frontier economies on which Djumanov is focused are undergoing pro-market changes to increase the independence and strength of the private sector. Governments are generally working to privatize state-owned enterprises and attract more foreign direct investment.
Djumanov thinks the best returns will be found through private-equity investments. Eurasia Capital expects to sell shares on London's Alternative Investment Market or Deutsche Boerse AG by next June to start other private-equity and property funds and to expand in Central Asia.
Silk Road
Investors like Djumanov are enthused by efforts to recreate the ``Silk Road,'' the centuries-old, 5,000-mile (8,045 kilometers) link between Asia and Europe that was used to carry silks and spices.
Organizations like the Asian Development Bank are involved in an almost $20 billion plan to invest in roads, railways and ferry routes to boost trade in a resource-rich region with vast economic potential. As those trade connections strengthen, investors could reap huge benefits.
The region isn't for the weak-kneed. Valid concerns about corruption, transparency, geopolitics, economic-policy missteps and progress toward democracy will scare most away. Here, two things are worth noting.
One, events in the U.S. are rapidly redefining the meaning of investment risk. U.S. authorities are investigating Fannie Mae, Freddie Mac, Lehman and American International Group Inc. as part of a probe into the collapse of the subprime-mortgage market. It's a reminder than even the biggest, most developed and most trusted economies have major transparency deficiencies.
Road Less Traveled
Two, it's all about potential. Now that the BRICs have been truly discovered, investors are looking for the next emerging- market stars like Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey and Vietnam. The Eurasia region also is worth a look.
``Clearly, the global economic turmoil will present major challenges for frontier markets,'' Djumanov says. ``But I am confident that in Eurasian countries undergoing sustainable economic growth, investors can find significant investment opportunities as these markets are going through the process of discovery.''
As these economies are in fact discovered, those who got there first may be happy they took the road less traveled. It's not like Wall Street looks a whole lot safer these days.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: William Pesek in Ulaanbaatar, Mongolia at wpesek@bloomberg.net
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Yen, Indonesian Rupiah, Taiwan Dollar: Asia Currency Preview
By Bob Chen
Oct. 6 (Bloomberg) -- The following events and economic reports may influence trading in Asian currencies today. Exchange rates are from the previous session.
Japanese yen: The Bank of Japan will start a two-day monetary policy meeting today. It will keep the benchmark overnight lending rate unchanged at 0.5 percent when the meeting's outcome is announced tomorrow, according to a Bloomberg News survey of economists.
The yen traded at 104.73 per dollar at 8:25 a.m. in Tokyo.
Indonesian rupiah: The Central Statistics Bureau will report inflation for September at 2 p.m. in Jakarta. Consumer prices rose 11.96 percent from a year earlier last month after climbing 11.85 percent in August, according to the median estimate in a Bloomberg survey of economists.
The Central Statistics Bureau will also report Indonesia's August trade figures at 2 p.m. Exports grew 32 percent from a year earlier, after climbing 25 percent in July, a separate Bloomberg survey showed.
The central bank will report foreign-currency reserves for the end of September as early as today. Indonesia's reserves fell to $58.36 billion in August from $60.56 billion the previous month.
The rupiah traded at 9,430.
Taiwan dollar: The statistics bureau will report inflation for September at 4 p.m. in Taipei. Consumer prices rose 4.1 percent from a year earlier, according to the median estimate in a Bloomberg survey of economists. Inflation slowed to 4.78 percent in August from a 14-year high of 5.91 percent the previous month.
The Taiwan dollar traded at NT$32.187.
Philippine peso: The central bank will keep the benchmark interest rate unchanged at 6 percent today after raising it three times since early June, according to a Bloomberg survey.
The central bank will report preliminary foreign-exchange reserves for September tomorrow. Reserves declined to $36.74 billion in August from a record high of $36.90 billion the previous month.
The Philippine peso traded at 47.04.
To contact the reporter on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net.
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Oct. 6 (Bloomberg) -- The following events and economic reports may influence trading in Asian currencies today. Exchange rates are from the previous session.
Japanese yen: The Bank of Japan will start a two-day monetary policy meeting today. It will keep the benchmark overnight lending rate unchanged at 0.5 percent when the meeting's outcome is announced tomorrow, according to a Bloomberg News survey of economists.
The yen traded at 104.73 per dollar at 8:25 a.m. in Tokyo.
Indonesian rupiah: The Central Statistics Bureau will report inflation for September at 2 p.m. in Jakarta. Consumer prices rose 11.96 percent from a year earlier last month after climbing 11.85 percent in August, according to the median estimate in a Bloomberg survey of economists.
The Central Statistics Bureau will also report Indonesia's August trade figures at 2 p.m. Exports grew 32 percent from a year earlier, after climbing 25 percent in July, a separate Bloomberg survey showed.
The central bank will report foreign-currency reserves for the end of September as early as today. Indonesia's reserves fell to $58.36 billion in August from $60.56 billion the previous month.
The rupiah traded at 9,430.
Taiwan dollar: The statistics bureau will report inflation for September at 4 p.m. in Taipei. Consumer prices rose 4.1 percent from a year earlier, according to the median estimate in a Bloomberg survey of economists. Inflation slowed to 4.78 percent in August from a 14-year high of 5.91 percent the previous month.
The Taiwan dollar traded at NT$32.187.
Philippine peso: The central bank will keep the benchmark interest rate unchanged at 6 percent today after raising it three times since early June, according to a Bloomberg survey.
The central bank will report preliminary foreign-exchange reserves for September tomorrow. Reserves declined to $36.74 billion in August from a record high of $36.90 billion the previous month.
The Philippine peso traded at 47.04.
To contact the reporter on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net.
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Euro Reaches 13-Month Low as Credit Crisis Spreads to Europe
By Stanley White and Candice Zachariahs
Oct. 6 (Bloomberg) -- The euro slid to a 13-month low against the dollar as European governments rushed to support financial institutions in the region hit by the widening global credit crisis.
The 15-nation currency also fell to the lowest in more than two years versus the yen as German Chancellor Angela Merkel said the government will guarantee personal bank deposits to shore up confidence in the banking system. Germany, the euro region's largest economy, will also join with banks and insurers to bail- out property lender Hypo Real Estate Holding AG, while Belgium announced a deal to rescue Fortis, the largest Belgian financial-services firm after an earlier rescue failed.
``Everything coming out has been fairly euro-negative,'' said Alex Sinton, a senior currency dealer at ANZ National Bank Ltd. in Auckland. ``The euro zone is the second domino of the globe to be falling over after the U.S.''
The euro declined to $1.3670 at 8:15 a.m. in Tokyo from $1.3772 late in New York on Oct. 3. It earlier reached 1.3617, the lowest since Sept. 5, 2007. The euro fell to 142.65 yen, the weakest since May 22, 2006, and traded at 143.29 yen from 145.11 yen. The dollar bought 104.88 yen from 105.32 yen.
The German government and the country's banks and insurers agreed on a 50 billion euro ($68 billion) rescue package for commercial property lender Hypo Real Estate Holding AG after an earlier bailout faltered.
European Bailouts
BNP Paribas SA, France's biggest bank, will take control of Fortis's units in Belgium after a government rescue of the Brussels and Amsterdam-based company failed. BNP Paribas will buy 75 percent of Fortis Bank Belgium from the government for 8.25 billion euros ($11.3 billion) in stock, and purchase the company's Belgian insurance operations, Prime Minister Yves Leterme told reporters.
The U.S. Congress on Oct. 3 passed a financial-market bailout designed to unlock credit markets. The bill authorizes the government to spend as much as $700 billion buying troubled assets from financial institutions reeling from record home foreclosures.
The yen rose to 80.07 per Australian dollar from 81.48 late in New York on Oct. 3. It also advanced to 68.72 versus the New Zealand dollar from 69.76
Japan's currency was the best-performer in September and the only currency to appreciate against the dollar as credit market collapse that drove Lehman Brothers Holdings Inc. into bankruptcy and sent bank borrowing costs in Europe to record highs makes the yen unbeatable.
Unbeatable Yen
Deutsche Bank AG, the biggest trader of foreign exchange, says the yen will rise 5 percent in coming months. New York- based Morgan Stanley is telling clients to buy the currency versus the euro and pound.
After seven years of providing the cheapest source of funds for investors buying higher-yielding New Zealand dollars, Australian dollars and Brazil reals, the yen is appreciating as $587 billion of subprime mortgage-related losses force banks to restrict credit. It strengthened 4.4 percent on a trade weighted basis in September, according to the Bank of Japan's effective exchange rate, the most since August 2007, when the seizure in capital markets began.
``We are in a multi-year trend reversal,'' said Paresh Upadhyaya, a senior vice president at Putnam Investment LLC in Boston who helps manage $50 billion in currency assets. ``We are going to see a global central bank easing cycle. The yen is the place to be in this environment of economic slowdown and heightened volatility.''
Futures traders increased their bets that the yen will gain against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show.
The difference in the number of wagers by hedge funds and other large speculators on an advance in the yen compared with those on a drop -- so-called net longs -- was 43,022 on Sep. 30, compared with net longs of 31,939 a week earlier.
To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net
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Oil Falls for Fourth Day on Speculation Demand Growth Slowing
By Gavin Evans
Oct. 6 (Bloomberg) -- Crude oil fell for a fourth day in New York on signs slowing global economic growth will reduce demand.
World markets are oversupplied and the Organization of Petroleum Exporting Countries may review output levels for the first quarter of 2009, Iranian Oil Minister Gholamhossein Nozari said Oct. 4. Saudi Aramco, the world's largest state-owned oil company, yesterday cut its official selling prices for light crude exports to the U.S., the world's largest consumer.
``There are certainly brokers making downgrades to both U.S. growth and commodity prices generally,'' said Mark Pervan, senior commodity strategist at Australia & New Zealand Banking Group Ltd. in Melbourne. ``The market is really going to slow pretty sharply over the next six to nine months.''
Crude oil for November delivery fell as much as $2.28, or 2.4 percent, to $91.60 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $92 at 7:48 a.m. in Singapore.
The contract fell 9 cents to $93.88 a barrel on Oct. 3, the lowest settlement price since Sept. 16, after U.S. lawmakers approved a $700 billion bank-rescue plan and the country's Labor Department reported a bigger-than-expected, 159,000-drop in payrolls in September.
New York oil prices declined 12 percent last week as reports showed U.S. fuel demand the previous four weeks was the lowest in almost seven years and manufacturing shrank in September at the fastest pace since the last recession in 2001.
Brent crude oil for November settlement fell 93 cents, or 1 percent, to $88.33 a barrel on London's ICE Futures Europe exchange on Oct. 3.
Global Slowdown
As bad as the U.S. employment and manufacturing reports were, there is also concern about the financial ``stress'' the U.S. bailout may put on the rest of the economy, ANZ's Pervan said. The higher dollar, also weighing on oil, reflects expectations that the slowdown is spreading globally.
``The next step is for Europe and Asia to feel the pain,'' he said.
The dollar rose to a 13-month high against a basket of currencies, reducing the investment appeal of dollar-denominated commodities. The euro fell as low as $1.3658 in early Asian trading from $1.3772 in late New York trading last week, after Germany said it will guarantee personal bank deposits in a bid to stabilize the nation's banking system.
To contact the reporter on this story: Gavin Evans in Wellington at gavinevans@bloomberg.net
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Oct. 6 (Bloomberg) -- Crude oil fell for a fourth day in New York on signs slowing global economic growth will reduce demand.
World markets are oversupplied and the Organization of Petroleum Exporting Countries may review output levels for the first quarter of 2009, Iranian Oil Minister Gholamhossein Nozari said Oct. 4. Saudi Aramco, the world's largest state-owned oil company, yesterday cut its official selling prices for light crude exports to the U.S., the world's largest consumer.
``There are certainly brokers making downgrades to both U.S. growth and commodity prices generally,'' said Mark Pervan, senior commodity strategist at Australia & New Zealand Banking Group Ltd. in Melbourne. ``The market is really going to slow pretty sharply over the next six to nine months.''
Crude oil for November delivery fell as much as $2.28, or 2.4 percent, to $91.60 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $92 at 7:48 a.m. in Singapore.
The contract fell 9 cents to $93.88 a barrel on Oct. 3, the lowest settlement price since Sept. 16, after U.S. lawmakers approved a $700 billion bank-rescue plan and the country's Labor Department reported a bigger-than-expected, 159,000-drop in payrolls in September.
New York oil prices declined 12 percent last week as reports showed U.S. fuel demand the previous four weeks was the lowest in almost seven years and manufacturing shrank in September at the fastest pace since the last recession in 2001.
Brent crude oil for November settlement fell 93 cents, or 1 percent, to $88.33 a barrel on London's ICE Futures Europe exchange on Oct. 3.
Global Slowdown
As bad as the U.S. employment and manufacturing reports were, there is also concern about the financial ``stress'' the U.S. bailout may put on the rest of the economy, ANZ's Pervan said. The higher dollar, also weighing on oil, reflects expectations that the slowdown is spreading globally.
``The next step is for Europe and Asia to feel the pain,'' he said.
The dollar rose to a 13-month high against a basket of currencies, reducing the investment appeal of dollar-denominated commodities. The euro fell as low as $1.3658 in early Asian trading from $1.3772 in late New York trading last week, after Germany said it will guarantee personal bank deposits in a bid to stabilize the nation's banking system.
To contact the reporter on this story: Gavin Evans in Wellington at gavinevans@bloomberg.net
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Japan Stocks Fall on Hypo Real Estate Bailout, U.S. Job Losses
By Masaki Kondo
Oct. 6 (Bloomberg) -- Japan's stocks fell as the biggest U.S. loss of jobs in five years and a bailout of Hypo Real Estate Holding AG fueled concern that a $700 billion bank rescue plan will fail to stem the global credit crisis.
Canon Inc., the world's biggest digital-camera maker, retreated 1.6 percent. Shinsei Bank Ltd. led financial shares lower after Germany agreed on a rescue plan for Hypo. Mitsui Fudosan Co., Japan's largest real-estate company, was poised to fall after UBS AG slashed its recommendation.
``Whereas measures to contain the credit crisis are being prepared, the deterioration of the global economy is increasingly apparent,'' Ryoji Musha, Tokyo-based chief investment officer at Deutsche Securities Inc., said in an interview with Bloomberg Television.
The Nikkei 225 Stock Average declined 115.29, or 1.1 percent, to 10,822.85 as of 9:04 a.m. in Tokyo. The broader Topix index fell 10.09, or 1 percent, to 1,037.88. All but three of 33 industry groups on the Topix slumped.
Concern turbulence in the credit market will spill over to the broader economy weighed on stock markets across the globe, driving down the MSCI World Index by 12 percent in September, the worst in a decade. The Nikkei lost 14 percent last month.
U.S. President George W. Bush signed a $700 billion bank rescue package into law to stem the crisis, which has claimed Bear Stearns Cos. and Lehman Brothers Holdings Inc. The legislation enables the government to purchase non-performing assets from financial institutions and to suspend an accounting rule requiring businesses to report losses if asset values fall.
U.S. payrolls dropped 159,000 last month, the most in five years, the Labor Department said on Oct. 3. The world's largest economy has now lost 760,000 jobs this year, compared with the 1.1 million created last year.
Nikkei futures expiring in December retreated 1.7 percent to 10,770 in Osaka and slumped 1.9 percent to 10,770 in Singapore.
To contact the reporter for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net.
Read more...
Oct. 6 (Bloomberg) -- Japan's stocks fell as the biggest U.S. loss of jobs in five years and a bailout of Hypo Real Estate Holding AG fueled concern that a $700 billion bank rescue plan will fail to stem the global credit crisis.
Canon Inc., the world's biggest digital-camera maker, retreated 1.6 percent. Shinsei Bank Ltd. led financial shares lower after Germany agreed on a rescue plan for Hypo. Mitsui Fudosan Co., Japan's largest real-estate company, was poised to fall after UBS AG slashed its recommendation.
``Whereas measures to contain the credit crisis are being prepared, the deterioration of the global economy is increasingly apparent,'' Ryoji Musha, Tokyo-based chief investment officer at Deutsche Securities Inc., said in an interview with Bloomberg Television.
The Nikkei 225 Stock Average declined 115.29, or 1.1 percent, to 10,822.85 as of 9:04 a.m. in Tokyo. The broader Topix index fell 10.09, or 1 percent, to 1,037.88. All but three of 33 industry groups on the Topix slumped.
Concern turbulence in the credit market will spill over to the broader economy weighed on stock markets across the globe, driving down the MSCI World Index by 12 percent in September, the worst in a decade. The Nikkei lost 14 percent last month.
U.S. President George W. Bush signed a $700 billion bank rescue package into law to stem the crisis, which has claimed Bear Stearns Cos. and Lehman Brothers Holdings Inc. The legislation enables the government to purchase non-performing assets from financial institutions and to suspend an accounting rule requiring businesses to report losses if asset values fall.
U.S. payrolls dropped 159,000 last month, the most in five years, the Labor Department said on Oct. 3. The world's largest economy has now lost 760,000 jobs this year, compared with the 1.1 million created last year.
Nikkei futures expiring in December retreated 1.7 percent to 10,770 in Osaka and slumped 1.9 percent to 10,770 in Singapore.
To contact the reporter for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net.
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Australia Stocks: Babcock & Brown, Newcrest, Platinum, Suncorp
By Shani Raja
Oct. 6 (Bloomberg) -- The S&P/ASX 200 Index fell for the third straight session, dropping 73.20 points, or 1.6 percent, to 4,622.20 at 10:25 a.m. in Sydney. The broader All Ordinaries Index lost 73.70 points, or 1.6 percent, to 4,629.10, while the futures index expiring in December declined 1.9 percent to 4,663.
Financial stocks: National Australia Bank Ltd. (NAB AU), the nation's largest lender, fell 83 cents, or 3.2 percent, to A$25.32, the most since Sept. 30. Australia & New Zealand Banking Group Ltd. (ANZ AU) dropped 33 cents, or 1.8 percent, to A$18.38, the lowest in almost two weeks. Babcock & Brown Ltd. (BNB AU), a manager of infrastructure assets, slipped 7 cents, or 3.8 percent, to A$1.77, among the 10 biggest losers on the benchmark index.
U.S. stocks declined the most last week since the September 2001 terrorist attacks, as concern that tightening credit markets will prolong an economic slowdown overshadowed the passage of a $700 billion financial-market rescue package.
Newcrest Mining Ltd. (NCM AU), Australia's largest gold producer, declined 89 cents, or 3.2 percent, to A$26.70, the lowest since Sept. 24. Gold futures for December delivery fell 1.3 percent to $833.20 an ounce in New York. The metal was down 6.2 percent in the week.
Platinum Australia Ltd. (PLA AU), owner of platinum mines in South Africa and Australia, slumped 10 cents, or 6.9 percent, to A$1.35, the lowest since March 2007. Platinum fell, capping the biggest weekly drop in 22 years, on concern auto sales in emerging markets will falter, further reducing demand for the metal used in car parts.
Suncorp-Metway Ltd. (SUN AU), Australia's third-largest general insurer, surged 82 cents, or 7.7 percent, to A$11.50, the highest since Aug. 28. Suncorp said it has been approached by companies wanting to buy its banking and wealth management units.
To contact the reporter on this story: Shani Raja in Sydney at sraja4@bloomberg.net.
Read more...
Oct. 6 (Bloomberg) -- The S&P/ASX 200 Index fell for the third straight session, dropping 73.20 points, or 1.6 percent, to 4,622.20 at 10:25 a.m. in Sydney. The broader All Ordinaries Index lost 73.70 points, or 1.6 percent, to 4,629.10, while the futures index expiring in December declined 1.9 percent to 4,663.
Financial stocks: National Australia Bank Ltd. (NAB AU), the nation's largest lender, fell 83 cents, or 3.2 percent, to A$25.32, the most since Sept. 30. Australia & New Zealand Banking Group Ltd. (ANZ AU) dropped 33 cents, or 1.8 percent, to A$18.38, the lowest in almost two weeks. Babcock & Brown Ltd. (BNB AU), a manager of infrastructure assets, slipped 7 cents, or 3.8 percent, to A$1.77, among the 10 biggest losers on the benchmark index.
U.S. stocks declined the most last week since the September 2001 terrorist attacks, as concern that tightening credit markets will prolong an economic slowdown overshadowed the passage of a $700 billion financial-market rescue package.
Newcrest Mining Ltd. (NCM AU), Australia's largest gold producer, declined 89 cents, or 3.2 percent, to A$26.70, the lowest since Sept. 24. Gold futures for December delivery fell 1.3 percent to $833.20 an ounce in New York. The metal was down 6.2 percent in the week.
Platinum Australia Ltd. (PLA AU), owner of platinum mines in South Africa and Australia, slumped 10 cents, or 6.9 percent, to A$1.35, the lowest since March 2007. Platinum fell, capping the biggest weekly drop in 22 years, on concern auto sales in emerging markets will falter, further reducing demand for the metal used in car parts.
Suncorp-Metway Ltd. (SUN AU), Australia's third-largest general insurer, surged 82 cents, or 7.7 percent, to A$11.50, the highest since Aug. 28. Suncorp said it has been approached by companies wanting to buy its banking and wealth management units.
To contact the reporter on this story: Shani Raja in Sydney at sraja4@bloomberg.net.
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U.S. Stock Futures Decline After Global Credit Crunch Deepens
By Nick Baker
Oct. 6 (Bloomberg) -- U.S. stock-index futures dropped as Hypo Real Estate Holding AG required a rescue by the German government, deepening concern that credit-market losses will worsen a global economic slowdown.
Germany and the nation's banks and insurers agreed on a 50 billion euro ($68 billion) package for commercial property lender Hypo, which reported a 95 percent plunge in second-quarter profit because of debt-related writedowns. BNP Paribas SA, France's biggest lender, will pay 8.25 billion euros to purchase Fortis's Belgium bank after a government bailout failed.
Standard & Poor's 500 Index futures expiring in December fell 18.2 points, or 1.6 percent, to 1,090.1 at 9:25 a.m. in Tokyo. The benchmark index for U.S. stocks tumbled 9.4 percent last week, the steepest slump since the September 2001 terrorist attacks, as concern the U.S. is headed for a recession overshadowed passage of a $700 billion bank bailout.
``It will probably be a rough week for global investors as they realize the credit crisis has a long way to play out,'' said Frederic Dickson, who helps oversee $25 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. ``U.S. action was an absolutely essential first step, and global intervention is needed.''
U.S. gross domestic product will drop the next two quarters, with unemployment reaching 8 percent by the end of 2009, New York-based Goldman Sachs Group Inc. said in a research note Oct. 3. Financial futures are pricing in an 84 percent chance the Federal Reserve will cut the target rate for overnight loans between banks by 0.5 percentage point by its Oct. 29 meeting.
Value Erased
About $20 trillion in value has been erased from stocks worldwide in the past year. The MSCI World Index of 23 developed countries lost 28 percent this year, the worst annual performance on record dating back to 1970. Investors in the U.S. face their first annual loss in six years after the S&P 500 dropped 30 percent from its October 2007 record.
The S&P 500, down 25 percent in 2008, still trades for 20.9 times profit from the past four quarters. Only four of 48 developed and emerging nations tracked by MSCI Inc. -- Switzerland, Jordan, Colombia and Morocco -- have a higher price- earnings ratio, according to data compiled by Bloomberg.
Profits among S&P 500 companies are forecast to slip 5.6 percent in the three months ended Sept. 30, the fifth straight quarterly decline, matching a streak ended in March 2002.
Financial shares in the S&P 500 declined the most this year, losing 35 percent, according to Bloomberg data. The bankruptcy of Lehman Brothers Holdings Inc. and government seizures of American International Group Inc., Fannie Mae and Freddie Mac extended financial companies' 21 percent drop in 2007, the biggest annual retreat since 1990.
To contact the reporter on this story: Nick Baker in New York at nbaker7@bloomberg.net.
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G7 To Meet Friday in Extremely Difficult Circumstances
| Daily Forex Fundamentals | Written by CurrencyThoughts | Oct 05 08 19:16 GMT | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Since the latter half of the 1980's, Group of Seven finance ministers and central bank heads have met three times each year to share information about their economies and to coordinate foreign exchange and some other policies. Their next meeting will be in Washington on October 10th. I have compiled a chronology below of what these meetings have said about foreign exchange and selected other areas. Levels of the dollar against the euro and yen and of oil prices at the time of the meetings are shown in the right-most column. Currency matters are not the main concern at the moment. The conversation will be about the deepening worldwide credit crunch, rapidly deteriorating economic outlook, are what governments and central banks can do to reduce the chances of a worst-case scenario. It would be a mistake, however, to ignore currency markets altogether. The dollar has performed well, and the euro has faded off its highs. These are two developments that officials were hoping to see. One danger to be avoided is a rout of the dollar. The dollar fiscal implications of the $700 billion bad-debt buyout bill are potentially adverse, and currency ramifications always arise in any discussion about coordinated interest rate changes. G7 Meetings Since the 9/11 Attacks: Evolution of Foreign Exchange Policy Coordination
Larry Greenberg | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sunday, October 5, 2008
Citigroup Says Court Orders Continued Wachovia Talks
By David Mildenberg and Josh Fineman
Oct. 5 (Bloomberg) -- Citigroup Inc. said a New York state court judge granted an order extending the bank's ``exclusivity agreement'' with Wachovia Corp., after Wells Fargo & Co. announced a competing bid for the North Carolina lender Friday.
New York State Supreme Court Judge Charles Ramos issued the emergency injunction last night, protracting Citigroup's agreement to negotiate the acquisition of parts of Charlotte- North Carolina based Wachovia ``until further order of the court,'' Citigroup said in an e-mailed statement. That accord was set to expire tomorrow. The two banks are required to appear before Ramos on Oct. 10, according to the statement.
Hobbled by $61 billion of losses stemming for the collapse of the mortgage market and ensuing credit contraction, Citigroup is in the midst of a takeover battle with Wells Fargo for control of Wachovia. A spokeswoman for Wells Fargo didn't immediately reply to requests for comment after Citigroup announced the court order.
``Wachovia believes its agreement with Wells Fargo is proper, valid and is in the best interest of shareholders, employees and the American taxpayers,'' said Christy Phillips Brown, a Wachovia spokeswoman. ``Under that agreement, Citigroup is always free to make a superior offer to Wachovia.''
Citigroup was seeking $60 billion in damages from Wells Fargo in connection with the proposed deal, the New York Times reported, citing a person briefed on the situation. Citigroup fell as much as 21 percent Friday in New York trading after Wells Fargo, the biggest U.S. bank on the West Coast, agreed to buy all of Wachovia for $15.1 billion. The bid trumped Citigroup's government-backed offer of $2.16 billion for Wachovia's banking operations.
Kovacevich, Pandit
``The taxpayer doesn't pay a penny'' for the Wells Fargo deal, Wells Chairman Richard Kovacevich, 64, said Friday in an interview. His company's bid is superior to Citigroup's also because it's a higher price and the combining banks ``share similar cultures and values.''
Vikram Pandit, Citigroup's chief executive officer, is counting on the Wachovia purchase to help rebuild after three quarters of losses totaling more than $17 billion. The bank's market value has dropped 38 percent this year to about $100 billion, leaving it below Wells Fargo. If Wells Fargo winds up with Wachovia, it would creep up on its New York rival with deposits of $787 billion, compared with Citigroup's $826 billion.
Pandit insisted Citigroup will prevail, citing the exclusive agreement signed by Wachovia. Kovacevich told investors during a conference call the deal with Wachovia is ``solid.''
Citigroup dropped 18 percent to $18.35 Friday in New York Stock Exchange composite trading, after having its biggest share decline in about 20 years. Wachovia rose 59 percent to $6.21. Wells Fargo declined 1.7 percent to $34.56.
Citi's Claim
Citigroup demanded Wells Fargo abandon the takeover. Buying Wachovia would give Citigroup the third-biggest U.S. bank network and cement its status as the nation's largest lender by assets.
``Any such agreement between Wachovia and Wells Fargo is illegal,'' Pandit, 51, said in the e-mail Friday. ``We continue to vigorously pursue Citigroup's interest and rights in completing this transaction.''
Citigroup may increase its offer, said a person with knowledge of the deliberations.
``I'm still not convinced that Citigroup can force this sale to happen,'' said Elizabeth Nowicki, a professor at Tulane University Law School in New Orleans and a former M&A lawyer at Sullivan & Cromwell. ``Citigroup may be facing the chance to get themselves a small settlement, and that's a nice shot in the arm for a company that's struggling.''
Regulators
The Federal Deposit Insurance Corp., helped broker Citigroup's purchase when Wachovia's health faltered. Chairman Sheila Bair said until a review of Wells Fargo's offer is completed, the agency will stand behind the Citigroup deal.
``We wanted to make clear that until things are settled with what's going on with this Wells bid, that the Citi deal was still there,'' Bair said Friday in an interview on Bloomberg Television's ``Political Capital with Al Hunt.'' Bair said the FDIC is reviewing the offer, and she told Hunt: ``You shouldn't'' assume the U.S. opposes Wells's offer.
Other bank regulators said they haven't evaluated Wells Fargo's offer.
``We have not yet reviewed the new Wells Fargo proposal and the issues that it raises,'' the Federal Reserve and Office of the Comptroller of the Currency said Friday in a statement. ``The regulators will be working with the parties to achieve an outcome that protects all Wachovia creditors, including depositors, insured and uninsured, and promotes market stability.''
Wells Fargo's Plan
Wells Fargo, run by Chief Executive Officer John Stumpf, had avoided bets on the subprime-mortgage market that contributed to $588 billion in writedowns and credit losses for financial firms worldwide. Wachovia in 2006 purchased Oakland, California-based Golden West Financial Corp. for $24 billion, acquiring a portfolio of option-adjustable rate mortgages that helped lead to $9.6 billion in losses this year.
Wells Fargo, in bidding for Wachovia, deviates from a strategy of seeking smaller acquisitions with less risk to fill gaps in its branch network. After the combination, the bank would have $1.42 trillion in assets, which may rank third in the U.S. depending on what other bank mergers are completed. It would have 10,761 branches in 39 states.
``Citi's purchase was too cheap for the assets and operations involved,'' said Jason Pride, research director at Haverford Trust Co. in Haverford, Pennsylvania. ``It's an excellent strategic deal for Wells Fargo given the geography of the branch network.''
To contact the reporters on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net; Josh Fineman in New York at jfineman@bloomberg.net.
Read more...
Oct. 5 (Bloomberg) -- Citigroup Inc. said a New York state court judge granted an order extending the bank's ``exclusivity agreement'' with Wachovia Corp., after Wells Fargo & Co. announced a competing bid for the North Carolina lender Friday.
New York State Supreme Court Judge Charles Ramos issued the emergency injunction last night, protracting Citigroup's agreement to negotiate the acquisition of parts of Charlotte- North Carolina based Wachovia ``until further order of the court,'' Citigroup said in an e-mailed statement. That accord was set to expire tomorrow. The two banks are required to appear before Ramos on Oct. 10, according to the statement.
Hobbled by $61 billion of losses stemming for the collapse of the mortgage market and ensuing credit contraction, Citigroup is in the midst of a takeover battle with Wells Fargo for control of Wachovia. A spokeswoman for Wells Fargo didn't immediately reply to requests for comment after Citigroup announced the court order.
``Wachovia believes its agreement with Wells Fargo is proper, valid and is in the best interest of shareholders, employees and the American taxpayers,'' said Christy Phillips Brown, a Wachovia spokeswoman. ``Under that agreement, Citigroup is always free to make a superior offer to Wachovia.''
Citigroup was seeking $60 billion in damages from Wells Fargo in connection with the proposed deal, the New York Times reported, citing a person briefed on the situation. Citigroup fell as much as 21 percent Friday in New York trading after Wells Fargo, the biggest U.S. bank on the West Coast, agreed to buy all of Wachovia for $15.1 billion. The bid trumped Citigroup's government-backed offer of $2.16 billion for Wachovia's banking operations.
Kovacevich, Pandit
``The taxpayer doesn't pay a penny'' for the Wells Fargo deal, Wells Chairman Richard Kovacevich, 64, said Friday in an interview. His company's bid is superior to Citigroup's also because it's a higher price and the combining banks ``share similar cultures and values.''
Vikram Pandit, Citigroup's chief executive officer, is counting on the Wachovia purchase to help rebuild after three quarters of losses totaling more than $17 billion. The bank's market value has dropped 38 percent this year to about $100 billion, leaving it below Wells Fargo. If Wells Fargo winds up with Wachovia, it would creep up on its New York rival with deposits of $787 billion, compared with Citigroup's $826 billion.
Pandit insisted Citigroup will prevail, citing the exclusive agreement signed by Wachovia. Kovacevich told investors during a conference call the deal with Wachovia is ``solid.''
Citigroup dropped 18 percent to $18.35 Friday in New York Stock Exchange composite trading, after having its biggest share decline in about 20 years. Wachovia rose 59 percent to $6.21. Wells Fargo declined 1.7 percent to $34.56.
Citi's Claim
Citigroup demanded Wells Fargo abandon the takeover. Buying Wachovia would give Citigroup the third-biggest U.S. bank network and cement its status as the nation's largest lender by assets.
``Any such agreement between Wachovia and Wells Fargo is illegal,'' Pandit, 51, said in the e-mail Friday. ``We continue to vigorously pursue Citigroup's interest and rights in completing this transaction.''
Citigroup may increase its offer, said a person with knowledge of the deliberations.
``I'm still not convinced that Citigroup can force this sale to happen,'' said Elizabeth Nowicki, a professor at Tulane University Law School in New Orleans and a former M&A lawyer at Sullivan & Cromwell. ``Citigroup may be facing the chance to get themselves a small settlement, and that's a nice shot in the arm for a company that's struggling.''
Regulators
The Federal Deposit Insurance Corp., helped broker Citigroup's purchase when Wachovia's health faltered. Chairman Sheila Bair said until a review of Wells Fargo's offer is completed, the agency will stand behind the Citigroup deal.
``We wanted to make clear that until things are settled with what's going on with this Wells bid, that the Citi deal was still there,'' Bair said Friday in an interview on Bloomberg Television's ``Political Capital with Al Hunt.'' Bair said the FDIC is reviewing the offer, and she told Hunt: ``You shouldn't'' assume the U.S. opposes Wells's offer.
Other bank regulators said they haven't evaluated Wells Fargo's offer.
``We have not yet reviewed the new Wells Fargo proposal and the issues that it raises,'' the Federal Reserve and Office of the Comptroller of the Currency said Friday in a statement. ``The regulators will be working with the parties to achieve an outcome that protects all Wachovia creditors, including depositors, insured and uninsured, and promotes market stability.''
Wells Fargo's Plan
Wells Fargo, run by Chief Executive Officer John Stumpf, had avoided bets on the subprime-mortgage market that contributed to $588 billion in writedowns and credit losses for financial firms worldwide. Wachovia in 2006 purchased Oakland, California-based Golden West Financial Corp. for $24 billion, acquiring a portfolio of option-adjustable rate mortgages that helped lead to $9.6 billion in losses this year.
Wells Fargo, in bidding for Wachovia, deviates from a strategy of seeking smaller acquisitions with less risk to fill gaps in its branch network. After the combination, the bank would have $1.42 trillion in assets, which may rank third in the U.S. depending on what other bank mergers are completed. It would have 10,761 branches in 39 states.
``Citi's purchase was too cheap for the assets and operations involved,'' said Jason Pride, research director at Haverford Trust Co. in Haverford, Pennsylvania. ``It's an excellent strategic deal for Wells Fargo given the geography of the branch network.''
To contact the reporters on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net; Josh Fineman in New York at jfineman@bloomberg.net.
Read more...
Jordan's Economy, New Jobs Are Top Priority, King Abdullah Says
By Massoud A. Derhally
Oct. 5 (Bloomberg) -- Jordan's economy and job creation are a top priority, King Abdullah said in a speech inaugurating the second session of the country's 15th parliament today.
``The economy still tops our priorities, especially its social dimension, due to the economic challenges that resulted from international rising prices,'' the monarch said. ``At the top of national priorities there stands, in the medium range, economic reform and the completion of a strong national economy that reflects positively on Jordanians' standard of living.''
Jordan, one of the smallest economies in the Middle East, imports more than 90 percent of its oil and relies on foreign investment and grants. Rising property prices and investments from oil-exporting Persian Gulf countries boosted Jordan's finance, insurance and real-estate industries by 8.5 percent.
The kingdom bordering Israel and the Palestinian territories received 294.8 million dinars ($416 million) in foreign grants in the first seven months of the year, a 280 percent jump from the same period last year, helping to finance three-quarters of the budget deficit.
``Achieving the economic prosperity we seek requires the immediate application of measures to guarantee financial stability and enhance the investment environment.'' Abdullah said. ``Among these measures is controlling inflation, activating banking policies that guarantee the safety of banking institutions and their reputations and elevating the monitoring tools of depositors and guaranteeing clients' rights.''
Higher Salaries
The king said the government needs to link salaries to inflation and ordered it to raise salaries starting next year. He also said the minimum wage will be raised.
Inflation accelerated to 19.8 percent in August, the highest since 1990, as food and commodity prices soared after the government removed fuel subsidies this year, causing diesel and kerosene prices to nearly double in the first six months.
Unemployment fell to 12 percent in the third quarter from 12.5 percent in the previous quarter and 14.3 percent a year earlier.
Abdullah said the government will implement a social security net that guarantees financial aid to those who need it, and it will also seek to expand health care, in cooperation with private industry.
The monarch said he directed the government to take the ``necessary steps to promote and attract investment'' from Persian Gulf countries.
Foreign direct investment in Jordan may increase as much as 27 percent this year to 3 billion dinars as the country benefits from the Middle East's booming oil wealth, Jordan Investment Board Chief Executive Officer Maen Nsour said on March 3.
Investment in the country, which has no natural resources, advanced to 2.2 billion dinars last year from 1.8 billion dinars in 2006 as investors gained from incentives such as tax exemptions, according to the Jordan Investment Board.
About half of last year's investment was by Gulf states in telecommunications, construction, tourism and health care.
To contact the reporter on this story: Massoud A. Derhally in Amman, Jordan, at mderhally@bloomberg.net
Read more...
Oct. 5 (Bloomberg) -- Jordan's economy and job creation are a top priority, King Abdullah said in a speech inaugurating the second session of the country's 15th parliament today.
``The economy still tops our priorities, especially its social dimension, due to the economic challenges that resulted from international rising prices,'' the monarch said. ``At the top of national priorities there stands, in the medium range, economic reform and the completion of a strong national economy that reflects positively on Jordanians' standard of living.''
Jordan, one of the smallest economies in the Middle East, imports more than 90 percent of its oil and relies on foreign investment and grants. Rising property prices and investments from oil-exporting Persian Gulf countries boosted Jordan's finance, insurance and real-estate industries by 8.5 percent.
The kingdom bordering Israel and the Palestinian territories received 294.8 million dinars ($416 million) in foreign grants in the first seven months of the year, a 280 percent jump from the same period last year, helping to finance three-quarters of the budget deficit.
``Achieving the economic prosperity we seek requires the immediate application of measures to guarantee financial stability and enhance the investment environment.'' Abdullah said. ``Among these measures is controlling inflation, activating banking policies that guarantee the safety of banking institutions and their reputations and elevating the monitoring tools of depositors and guaranteeing clients' rights.''
Higher Salaries
The king said the government needs to link salaries to inflation and ordered it to raise salaries starting next year. He also said the minimum wage will be raised.
Inflation accelerated to 19.8 percent in August, the highest since 1990, as food and commodity prices soared after the government removed fuel subsidies this year, causing diesel and kerosene prices to nearly double in the first six months.
Unemployment fell to 12 percent in the third quarter from 12.5 percent in the previous quarter and 14.3 percent a year earlier.
Abdullah said the government will implement a social security net that guarantees financial aid to those who need it, and it will also seek to expand health care, in cooperation with private industry.
The monarch said he directed the government to take the ``necessary steps to promote and attract investment'' from Persian Gulf countries.
Foreign direct investment in Jordan may increase as much as 27 percent this year to 3 billion dinars as the country benefits from the Middle East's booming oil wealth, Jordan Investment Board Chief Executive Officer Maen Nsour said on March 3.
Investment in the country, which has no natural resources, advanced to 2.2 billion dinars last year from 1.8 billion dinars in 2006 as investors gained from incentives such as tax exemptions, according to the Jordan Investment Board.
About half of last year's investment was by Gulf states in telecommunications, construction, tourism and health care.
To contact the reporter on this story: Massoud A. Derhally in Amman, Jordan, at mderhally@bloomberg.net
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