Hartford, Lincoln, Genworth Buy S&Ls, May Gain Treasury Funds

By Andrew Frye

Nov. 15 (Bloomberg) -- Hartford Financial Services Group Inc.,Genworth Financial Inc. and Lincoln National Corp. plan to buy lenders, a move that may entitle the insurers to billions of dollars from the Treasury's bank rescue fund.

Hartford, which posted a $2.6 billion third-quarter loss, jumped 21 percent in New York trading after agreeing to buy Sanford, Florida-based Federal Trust Corp. for $10 million. That may allow the insurer to convert to a savings-and-loan holding company and qualify for $1.1 billion to $3.4 billion from the Treasury, according to a company statement yesterday.

Genworth and Lincoln also sought recognition as S&L holding companies as they seek to buy thrift institutions in Minnesota and Indiana, Office of Thrift Supervision spokesman Bill Ruberry said. They're following American Express Co., Goldman Sachs Group Inc. and Morgan Stanley, which sought bank status to get U.S. backing and bolster themselves against the worst financial crisis since the Great Depression.

``Wave a wand and suddenly Hartford is not an insurance company but a bank -- it's voodoo,'' said Jim Glickenhaus, who helps manage $2 billion at Glickenhaus & Co. in New York. Treasury and lawmakers ``need to take a deep breath and see what they're doing.''

Aegon NV, the Dutch insurer that got a 3 billion-euro lifeline from the Netherlands last month, said it wants to buy Suburban Federal Savings Bank of Crofton, Maryland. Aegon owns U.S. insurer Transamerica.

Hartford surged $2.19 to $12.65 at 4:15 p.m. in New York Stock Exchange composite trading, after touching $9.55 earlier in the day. The stock is down 82 percent this year. Chief Executive Officer Ramani Ayer is seeking a second capital injection, five weeks after investment losses forced the company to sell $2.5 billion in stock and bonds to Allianz SE.

Declining Equities

Lincoln dropped 5.2 percent to $14.35 and Genworth, based in Richmond, Virginia, fell 3.9 percent to $1.47.

Hartford joins more than 50 regional banks that applied to tap the government aid program by yesterday's deadline. Treasury Secretary Henry Paulson's $250 billion recapitalization program injected $125 billion into nine of the largest lenders, and set aside more than $46 billion to buy preferred shares from smaller and regional banks. New York-based American International Group Inc. got $40 billion from a separate $100 billion fund in the Treasury's Troubled Asset Relief Program.

Hartford is ``looking for maximum flexibility and stability,'' Ayer said in the company's statement. Securing capital on the government's terms ``could be a prudent course in this market environment.''

Genworth, Lincoln

The insurer was rocked by the declining value of equities that back client annuities and a slump in bonds tied to ailing financial companies. Ayer announced plans this month to cut 500 jobs, or about 2 percent of staff, after the insurer had its credit grade cut by Fitch Ratings.

Genworth, whose stock is down 94 percent this year, plans to buy Inter Savings Bank of Maple Grove, Minnesota, Ruberry said. Richmond, Virginia-based Genworth was hurt by a surge in claims at its mortgage insurance division as well as investment losses. Philadelphia-based Lincoln is seeking to acquire Newton County Loan & Savings of Goodland, Indiana, he said.

``We've said previously that the TARP program is one of a series of levers we are considering,'' Genworth spokesman Al Orendorff said, reading from a prepared statement. Laurel O'Brien, a spokesman for Lincoln, didn't return an after-hours phone call seeking comment.

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net

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Pelosi Says Automakers Need to Restructure to Ensure Viability

By Vincent Del Giudice

Nov. 15 (Bloomberg) -- House Speaker Nancy Pelosi said U.S. automobile manufacturers need to restructure ``to ensure their long-term economic viability.''

In a statement issued in Washington, Pelosi also said that the ``appropriate source of funding for this short-term assistance is the Troubled Assets Relief Program (TARP) recently authorized by Congress.''

``Any effort to divert funds from the advanced technology initiative contained in Section 136 of last year's energy bill is a step backward in assuring the viability and competitiveness of the U.S. auto industry,'' Pelosi's statement said.

Earlier today, Ron Gettelfinger, head of the United Auto Workers, said General Motors Corp., Ford Motor Co. and Chrysler LLC need U.S. financial assistance before President-elect Barack Obama takes office on Jan. 20.

To contact the reporter on this story: Vincent Del Giudice in Washington at vdelgiudice@bloomberg.net.

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Electricity Demand May Fall 7% in U.K. Next Year, Times Says

By Nandini Sukumar

Nov. 15 (Bloomberg) -- Electricity demand may fall 7 percent next year as a recession in the U.K. forces hundreds of factories to close and consumers to cut back on consumption, the Times reported, citing research from Inenco.

By the end of last month, average peak demand for electricity was down 3 percent on a year earlier, the Times said, citing the research. There is a close correlation between energy demand and gross domestic product, the Times cited Inenco as saying.

To contact the reporter on this story: Nandini Sukumar in London at nsukumar@bloomberg.net

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EasyJet Chief Moved Shares to `Protect Investments,' FT Reports

By Nandini Sukumar

Nov. 15 (Bloomberg) -- EasyJet Plc founder Stelios Haji- Ioannou said he transferred some of his family's shares to his holding company to protect his investments, the Financial Times reported, citing a statement from the executive.

Haji-Ioannou will now be able to appoint two members to the board of Europe's second-largest discount airline, according to the report. ``I am merely applying my rights under the articles of association of the company to protect my investment,'' Haji-Ioannou was cited as saying.

``I did not request a dividend now,'' he also told the newspaper. The company should plan to pay a dividend in 2011 if financial markets allow it, he was cited as saying.

To contact the reporter on this story: Nandini Sukumar in London at nsukumar@bloomberg.net

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China to provide MNCs with better development conditions

BEIJING - Chen Jian, Chinese vice Commerce Minister said on Saturday that the country would provide better development conditions for foreign multinational corporations (MNCs).

"China would ramp up efforts to create better legal protection, policy support, market environment and growth opportunities for them," Chen said at the 2nd International CEO Roundtable of Chinese and Foreign MNCs.

He said global investors' confidence would not recover in a short period of time amid the financial turmoil and predicted the combined foreign direct investment (FDI) globally could possibly decrease by 10 to 30 percent.

Figures revealed that FDI in China expanded by 35.06 percent in the first 10 months year on year to US$81.1 billion.

However, FDI in China stood at US$6.72 billion last month, down by 2.02 percent year on year. This was the first time that China saw negative FDI growth this year.

Chen added that although the current financial turmoil would brought some challenges to Chinese economy, China still boasts the potential of stable and relatively fast economic growth.

China Daily

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Saudi King Pledges Global `Stability' in Oil Markets at G-20

By Timothy R. Homan

Nov. 15 (Bloomberg) -- Saudi Arabia will help alleviate global financial stress by maintaining stable oil markets and boost its own economy by funding infrastructure projects, King Abdullah said in Washington.

``We will continue to fulfill our role in ensuring the stability of the oil market,'' Abdullah said today in a statement after a five-hour summit with the Group of 20 leaders. ``We will continue the program for government investment in spending on basic projects and services.''

Abdullah said he expects infrastructure spending ``for the government and oil sectors to exceed $400 billion over the next five years.''

The world leaders agreed that more action must be taken to shore up the global economy while improving regulation of financial markets, according to a statement released by the White House after the meeting. Nations should act individually ``as deemed appropriate'' to deal with domestic economic concerns.

Abdullah, the only Gulf head of state represented at the meeting, said the ``region is not immune to the effects of this crisis.'' He added that Saudi Arabia will ``continue our coordination with the Arab countries to reduce the adverse effects'' of the global economy.

OPEC decided on Nov. 13 to meet in Cairo at the end of the month for its third meeting in as many months as oil prices fell to a 21-month low. The group announced a reduction of 1.5 million barrels a day on Oct. 24, after a September agreement to pare excess supplies by observing official output quotas.

``Saudi Arabia has made many sacrifices, including maintaining costly additional productive capacity amounting to about 2 million barrels per day,'' Abdullah said in today's statement.

G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union.

The Netherlands and Spain are also represented, as are the IMF, World Bank, the Financial Stability Forum and United Nations.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

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Ecuador's Correa Says He'll Seek Legal Basis for Debt Default

By Matthew Walter

Nov. 15 (Bloomberg) -- Ecuadorean president Rafael Correa said he'll suspend payments on foreign debt he deems ``illegitimate'' should an upcoming report find there is legal basis to do so.

Ecuador will use a 30-day grace period on a $30.6 million bond payment due today to analyze its legal options, Finance Minister Maria Elsa Viteri said yesterday.

``If there's a sufficient basis to say we can't pay this illegitimate debt, that's what we'll do,'' Correa said today in his weekly address, according to a statement posted on the government's Web site. ``That the bonds fall and the country risk rises doesn't hold the least interest for us. Here we'll act for the country and the common good.''

The price on the $510 million bond maturing in 2012 plunged to as low as 14 cents on the dollar yesterday, sending yields over 100 percent, as investors braced for the first sovereign default since the global financial crisis deepened in September. Standard & Poor's cut the country's rating today to CCC-, nine levels below investment grade and three lower than its previous rating.

The decision not to make today's interest payment isn't a moratorium, since the government legally has until Dec. 15 to make the payment, Correa said. A committee will present an audit of Ecuador's foreign debt on Nov. 20, which the government will use to determine the legitimacy of its foreign debt.

``I've received a preliminary report from this commission and the results are truly horrifying,'' Correa said.

To contact the reporter on this story: Matthew Walter in Caracas at mwalter4@bloomberg.net

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Italy to Present 80 Billion-Euro Stimulus Package Next Week

By Andrew Davis

Nov. 15 (Bloomberg) -- The Italian government plans next week to present an economic stimulus plan of 80 billion euros ($101 billion) in public and private spending on highways and other new infrastructure projects.

About half of the allocation will come from European Union funds that will be made available more quickly to spur environmental projects and research and development, Italian Finance Minister Giulio Tremonti said today after the meeting of leaders of the G-20 nations in Washington.

The government will appropriate 12 billion euros for infrastructure spending and 4 billion euros will be raised from private investors, Tremonti said. ``The measures are in line with what other European countries are doing and are also in line with our budget,'' he said.

European governments are shoring up banking systems buffeted by a credit crisis that originated in U.S. mortgage finance. The region's leaders are also increasing spending to revive economic growth. The economy of the 15 nations sharing the euro slipped into recession in the third quarter.

Highway companies such as Atlantia SpA will have to link toll increases to more investment, Tremonti said. The plan should prompt more than 10 billion euros in additional highway construction and maintenance, he said.

Much of the new spending will qualify as ``one-off'' measures and be excluded from calculating Italy's budget deficit, Tremonti said. The deficit won't exceed the EU limit of 3 percent of gross domestic product next year, said.

To contact the reporter on this story: Andrew Davis in Washington at abdavis@bloomberg.net

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Japan's Aso Says Dollar Should Remain World's Reserve Currency

By John Brinsley

Nov. 15 (Bloomberg) -- Japanese Prime Minister Taro Aso told global leaders the U.S. dollar needs to remain the world's reserve currency, in contrast to suggestions by French President Nicolas Sarkozy that there are alternatives.

``We said we need to support the dollar-centered currency system,'' Aso said at a news conference in Washington after the Group of 20 meeting.

Sarkozy, who argues that the international financial turmoil calls for restructuring global systems, today told reporters that ``you can't talk world governance without talking currencies. The euro doesn't exist? The yuan doesn't exist?'' He spoke after leaders agreed to work together to stabilize financial markets and boost global growth.

Aso also said Japan pledged to provide as much as $100 billion from its foreign-exchange reserves to the International Monetary Fund for emergency loans to developing countries. Similar donations from other countries with large currency reserves such as China and those in the Middle East would be welcome, he said.

``Just because no one else pledged any money at this meeting doesn't mean they won't go home and talk about it,'' Aso said. Japan yesterday pledged $2 billion to a World Bank fund intended to help recapitalize struggling banks in developing countries.

Japan's $955 billion in foreign-exchange reserves are second only to the $1.9 trillion held by China.

To contact the reporter on this story: John Brinsley in Washington at jbrinsley@bloomberg.net

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U.K.'s Brown Says Opposition Should Be `Responsible' on Pound

By Mark Deen

Nov. 15 (Bloomberg) -- British Prime Minister Gordon Brown urged the opposition Conservative Party to be ``responsible'' in commenting on currencies after it warned the government runs the risk of triggering a ``collapse'' in the pound.

``It's not sensible for me to talk about exchange rates,'' Brown told reporters today in Washington, where he is attending a summit of the Group of 20 leaders. ``People are looking to politicians to be both responsible and share leadership'' through the economic turmoil.

The rebuke follows an interview with The Times newspaper by George Osborne, who is responsible for the Conservatives' economic policy, in which he said, ``We are in danger, if the government is not careful, of having a proper sterling collapse, a run on the pound.''

Those comments are the first from a senior U.K. politician to raise the specter of a currency crisis comparable to those suffered by Britain in the 1970s or early 1990s, or to indicate that the British currency may suffer a fate similar to that of Iceland's in recent weeks.

The pound has lost more than a quarter of its value in four months, declining to less than $1.50 this week from more than $2 in July. It's dropped 20 percent this month alone against the euro, currently buying about 1.16 of the European currency, down from almost 1.27 at the end of October.

In 1992, when the currency broke its peg to others in the European Union, the pound fell from $2 on Sept. 8 to less than $1.50 in the final week of December. In September that year, it fell 10 percent against the Deutsche mark, the largest European currency before the creation of the euro.

Keynes Parallel

With Britain's budget deficit already the largest since the end of World War II in the six months through September, Brown is preparing to announce another increase in borrowing in the government's pre-budget report on Nov. 24.

Speaking at the Council of Foreign Relations in New York yesterday, Brown mocked skeptics, noting that economist John Maynard Keynes was criticized by U.K. Treasury officials in 1929 for proposing increased government spending to help fight what became an economic depression that lasted until the 1930s.

Brown said that when he was directly in charge of Britain's finances as chancellor of the exchequer, he went into the Treasury's library and found a copy of Keynes's proposal marked ``inflation, extravagance, bankruptcy'' by the civil servant in charge of the department at the time. The reference drew laughter from the crowd and Brown suggested that avoiding Keynesian policies now could also lead to a depression.

Push for Cooperation

The anecdote was meant to bolster Brown's case to world leaders for fiscal stimuli to ward off a global downturn. He is pressing the G-20 to slash taxes and raise spending at the summit today.

``I've been pressing for cooperation on fiscal and monetary policy'' around the world, Brown said. He acknowledged the ability to ease policies differs between economies.

An agreement by the G-20 would give him political cover to take such actions in the U.K., where the government's shortfall was already 37.6 billion pounds in the six months through September. Osborne told the Times that expanding the deficit further carries risks.

``The danger'' is that borrowing ``pushes up long-term interest rates, which is a huge burden on the economy,'' Osborne told the Times. ``The more you borrow as a government, the more you have to sell that debt, and the less attractive your currency seems.''

Stimulus Justified

Bank of England Governor Mervyn King said this week that the government's plans were correct, as long as they were ``temporary.'' The stimulus is justified because of the ``extraordinary'' economic circumstances the U.K. and the world are facing, he told journalists three days ago.

Osborne criticized Brown, saying his plans to pump up the economy were aimed more at winning the next election, which must be held by mid-2010 at the latest.

Brown ``doesn't care'' how much he borrows,'' Osborne told The Times. ``His view is he probably won't win the next election. `The Tories can clear this mess up after I've gone.' That is deeply irresponsible. It's a scorched-earth policy, which I think the history books will write up as a total disaster,'' he said, according to the newspaper.

Politically, Brown has benefited from the financial crisis in recent months, with some polls showing his popularity increasing after he devised a bank bailout plan that was copied by other countries.

Osborne, in contrast, has suffered, with newspapers reporting yesterday that Conservative leader David Cameron may strip him of some of his responsibilities within the party.

Now, by raising the issue of a falling pound, Osborne is seeking to damage Brown in the way that the Conservative government of John Major was damaged in 1992 by the sterling crisis of the time. The episode helped rob the party of its reputation for competence on the economy, contributing to its ejection from office after 18 years in the 1997 election.

To contact the reporters on this story: Mark Deen in Washington at markdeen@bloomberg.net

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Poland May Delay Euro Adoption to Avoid Referendum, PAP Reports

By Monika Rozlal

Nov. 15 (Bloomberg) -- Poland may delay its planned adoption of the euro by a year to quell opposition calls for a national vote on the currency switch, PAP said, without saying where it got the information.

Prime Minister Donald Tusk pledged to adopt the euro as of 2012 provided the opposition supports the required constitution change before the country joins the Exchange Rate Mechanism II, the news agency said. The opposition Law & Justice party Chairman Jaroslaw Kaczynski said it will support the plan only if the nation has a referendum on adoption of the common European currency, PAP reported.

Slawomir Nowak, chief political adviser to Tusk, told broadcaster TVN24 late yesterday that Poland won't join the ERM- 2 until the constitution is changed.

To contact the reporter on this story: Monika Rozlal in Warsaw at mrozlal@bloomberg.net

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China's Wen Pledges Support for Smaller Companies Amid Slowdown

By Zhang Shidong

Nov. 15 (Bloomberg) -- China's Premier Wen Jiabao pledged more funding and fiscal support for small and medium-sized enterprises to help them weather the slowdown in the domestic and global economy.

Banks should make it easier for small companies to get loans and the central government will set aside more money to help businesses upgrade their technology, Wen said during a two-day visit to factories in southern Guangdong province, according to a statement on the government's Web site today.

China faces a ``formidable challenge'' to prevent a slump in the world's fourth-biggest economy, top planning official Mu Hong said yesterday. The government on Nov. 9 announced a 4 trillion yuan ($586 billion) stimulus package after slowing exports and falling output signaled a deepening slowdown.

``Support for the healthy development of small and medium-size companies is of great significance to promote economic growth, increase fiscal revenue, expand urban employment and maintain social stability,'' Wen said. ``I have come to the Pearl River Delta to boost morale. If we give top priority to development we will be able to overcome difficulties.''

China's central bank last month urged the nation's banks to create new credit products and financial services for small and medium-sized businesses and boost lending to the segment. Yi Gang, vice governor of the People's Bank of China, said yesterday that new services would ``largely address'' the funding difficulties faced by many small businesses.

Export Slump

Thousands of workers have lost their jobs in Guangdong this year as export orders have slumped. Smart Union Group (Holdings) Ltd., a toymaker that supplies Mattel Inc. and Hasbro Inc. shut last month, laying off 7,000 people in Dongguan city.

A quarter of Hong Kong-owned businesses in the Pearl River Delta manufacturing hub in Guangdong may go bankrupt as a result of the global financial crisis, Clement Chen, chairman of the Federation of Hong Kong Industries, said in an Oct. 20 interview.

Guangdong province was the biggest contributor to China's economy last year, accounting for 12.4 percent of gross domestic product and nearly a third of the nation's $1.2 trillion of exports, government statistics show. Half the nation's toy exporters have closed this year, and 67,000 smaller enterprises filed for bankruptcy in the first half, according to government statistics.

Wen visited factories in Guangzhou, Shenzhen, Dongguan and Foshan, including Shenzhen Hangsheng Electronics Co., an auto electronic products maker, and Galanz Group, the world's biggest microwave oven producer, the statement said.

He urged companies to bring out new products, improve the quality of their goods and improve their competitiveness to help them survive the global economic turbulence.

``In the face of the international financial crisis, we need to develop a contingency plan, map out long-term development strategies and turn crises into opportunities,'' he said.

To contact the reporter on this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net

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Canada's Harper Says He May Propose Another Stimulus Package

By Theophilos Argitis

Nov. 15 (Bloomberg) -- Canadian Prime Minister Stephen Harper said he is considering a proposal for an additional economic stimulus package that may generate the country's first budget deficit in more than a decade.

The increase in spending would be part of global efforts to boost demand in the world economy, Harper said today in Washington, following a meeting of heads of state from the Group of 20 countries. Canadian Finance Minister Jim Flaherty said in an interview with Bloomberg News that he may expedite fiscal measures planned for next year's budget.

``If there is a worldwide agreement that we will engage in sufficient stimulus to do our part of carrying global economic demand, we will fulfill our part of that agreement,'' Harper told reporters. ``If we do short-term deficit spending as a deliberate policy,'' he said, ``we will have to be able to demonstrate to Canadians that those deficits will genuinely be short term.''

Growth in the world's eighth-biggest economy will slow to 0.6 percent this year, the lowest level since 1991, the Bank of Canada said on Oct. 23. Canada is confronting weak demand from the U.S. and slumping prices for commodities, which generate about half the country's export revenue.

Leaders from the biggest developed and emerging nations today agreed more must be done to shore up a global economy sliding into recession. Harper said there was ``recognition'' at the meeting that monetary policy wasn't sufficient to lift the world economy out of its current malaise.

Canada's agreement to participate in global stimulus ``could well result'' in a deficit next year, Flaherty said.

``The next budget may be earlier than usual'' to accommodate the additional stimulus, he said in the interview. ``Things are getting worse globally.''

To contact the reporter on this story: Theophilos Argitis in Washington at targitis@bloomberg.net.

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Canada Not Seeking Joint North American Auto Bailout, Aide Says

By Theophilos Argitis

Nov. 15 (Bloomberg) -- Canada isn't seeking to engineer a coordinated support package with the U.S. for ailing North American carmakers, though Industry Minister Tony Clement will travel to Washington next week to gather information, a Canadian official said.

Canadian Press cited Clement late yesterday as saying he would travel to Washington to examine the viability of an ``integrated solution'' between the two countries.

Canada isn't looking at a joint bailout package, said the official, who spoke on condition they not be identified by name. Clement will go to Washington to gain a better understanding of U.S. plans for the industry, the official said.

Auto manufacturers and parts suppliers in Canada are struggling as U.S. auto sales slump amid waning consumer confidence. October was the worst month for car sales since 1945, according to General Motors Corp., hurting Canada's Magna International, Linamar Corp. and Martinrea International.

To contact the reporters on this story: Theophilos Argitis in Washington at targitis@bloomberg.net.

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Rio Postpones Investor Meetings on Financial Crisis

By Rebecca Keenan and Jesse Riseborough

Nov. 14 (Bloomberg) -- Rio Tinto Group, trying to prevent a $65 billion hostile takeover by BHP Billiton Ltd., delayed investor meetings scheduled for this month in Sydney and London so it can weigh the effects of the global financial crisis.

``We will review the timing early in the new year when we can better assess the impact of recent market turbulence on our short- medium term plans,'' Amanda Buckley, spokeswoman for the London- based company, said today by phone from Melbourne. Rio had planned to hold financial community seminars in Sydney on Nov. 25 and in London on Nov. 27, she said.

The world's largest mining companies are cutting output and reviewing investment plans as the global economy slows and commodity prices decline. Rio this week cut its 2008 iron ore output target by 10 percent after saying last month it may delay $10 million of asset sales and would review project spending.

``It's going to be a difficult time to update the market,'' said Tim Barker, who helps manage more than $54 billion of assets at BT Financial Group in Sydney and was due to attend the briefing. ``It is not a good time for them, given the position they are in with BHP. They have their back to the wall, fighting off what appears to be a strong competitor with a competent attack.''

Shares of Rio rose 4.4 percent to A$72.00 at the 4:10 p.m. Sydney time close on the Australian stock exchange. It's trading at a 22 percent discount to BHP's all-stock offer, which it rejected in February as too low.

Cut Earnings

Rio, the second-largest iron ore exporter, became Australia's biggest corporate credit risk as banks bought protection to hedge their loans, credit-default swaps show. The cost of protecting mining companies' debt from default has been rising since September, when concern about the global economy caused oil and commodity prices to tumble.

Rio's earnings this year may be reduced by 9 percent because of the iron ore cuts, UBS AG said this week. Iron ore accounted for about 30 percent of Rio's sales last year. BHP spokeswoman Samantha Evans today re-iterated the company's comment on Nov. 10 that it had no plans to cut production.

``Rio seems to have changed from being on the front foot and talking about growth projects'' to pulling back on them, said Angus Aitken, director at Southern Cross Equities Ltd. ``Surely the Rio board knows merging with BHP is the best possible outcome for the longer term in this environment. You can feel the Rio Tinto board about to capitulate.''

Market Recovery

Cia. Vale do Rio Doce, the largest iron ore supplier, began output cuts last month and doesn't expect a market recovery until next year. ArcelorMittal, the world's biggest steelmaker, said earlier this month it will reduce production by as much as 35 percent in the U.S. and 30 percent in Europe after prices tumbled.

BHP may be resisting reviewing output because it's seeking competition clearance for its bid for Rio from the European Commission, the executive arm of the European Union, BT'S Barker said. ``BHP can't be proactive in making cuts in the iron ore market because the EU would view it as a negative,'' he said.

BHP has received a formal complaint on Nov. 4 from the EU outlining antitrust objections to the deal. The combination of BHP and Rio would vie with Brazil's Vale as the world's largest supplier of iron ore, the raw material used to make steel.

Swaps on London-based Rio were quoted at 690 basis points at 12:00 p.m. in Sydney, compared with 350 for BHP, ABN Amro Holding NV prices show. Both mining companies are listed in Australia and London. Rio contracts traded at about 300 basis points a month ago, according to CMA Datavision.

To contact the reporter on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net

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South Korea `Open' to Possibility of More Stimulus, Shin Says

By Shamim Adam

Nov. 15 (Bloomberg) -- South Korea is ``open'' to the possibility of implementing more fiscal measures to boost its economy amid expectations growth will slow further, Deputy Finance Minister Shin Je Yoon said.

Korea's economy has the resources to introduce such steps, and won't need to tap the International Monetary Fund for loans because it has sufficient foreign-exchange reserves and other lines of credit it can draw upon, Shin said to reporters in Washington today after leaders of the Group of 20 nations met.

South Korea is boosting spending and pumping money into the banking system to limit economic damage from the global credit crisis that has sent its currency down 33 percent this year and led to a 43 percent plunge in the benchmark stock index. The government has guaranteed banks' debt up to $100 billion and provided lenders with U.S. dollars.

``If circumstances worsen, we are ready anytime to take more action,'' Shin said. ``We want to stimulate domestic demand by using fiscal policy. We still have much room to implement'' such measures.

The South Korean stock market is unlikely to see any further ``drastic'' outflow of capital, Shin said.

Finance Minister Kang Man Soo this month unveiled a 14 trillion won ($10 billion) package of extra spending and corporate tax breaks, adding to almost $20 billion in income-tax reductions announced in September.

Room to Lower

The Bank of Korea also has room to lower interest rates to bolster the economy, Shin said, adding that any decision by policy makers will be an independent one.

The central bank has slashed interest rates, most recently on Nov. 7, in an effort to shield the economy from sinking into the first recession in a decade.

South Korean President Lee Myung Bak met with U.S. President-elect Barack Obama's representatives, former Secretary of State Madeleine Albright and former Republican Congressman Jim Leach, during his visit to Washington.

Completion of the U.S.-South Korea free-trade agreement, which hasn't been ratified by lawmakers in either country because of opposition to U.S. beef and South Korean automobiles, is the most important economic issue between the two nations, Shin said.

The pact ``will be a very big stimulus to the Korean economy,'' Shin said.

To contact the reporter on this story: Shamim Adam in Washington at sadam2@bloomberg.net

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Hu Tells Leaders Growth in China Will Help Lift World Economy

By Michael Forsythe

Nov. 15 (Bloomberg) -- Chinese President Hu Jintao, speaking to leaders from the Group of 20 nations in Washington, said China can help alleviate the impact of the financial crisis and slowing global growth by stoking its own economy.

“Steady and relatively fast growth in China is in itself an important contribution to international financial stability and world economic growth,” Hu said today, according to the official Xinhua News Agency.

Last week China announced a $586 billion economic stimulus, focused on building low-rent housing, roads, railways and airports. The package also allows tax deductions for fixed assets such as machinery to stimulate investment. Farmers will also benefit from more subsidies.

The announcement came amid signs that China’s own growth is slowing. The country’s gross domestic product grew by 9 percent in the third quarter from a year earlier, the slowest rate in five years.

China accounted for 27 percent of global economic growth last year, more than any other nation, according to the International Monetary Fund.

“China has taken an active part in the international cooperation to deal with the financial crisis and played a positive role in maintaining international financial stability and promoting the development of the world economy,” Xinhua quoted Hu as saying.

Hu suggested that rich countries must take the lead in addressing the crisis.

Developed nations “should undertake their due responsibilities and obligations” by stabilizing their economies, restoring growth and taking steps to “safeguard investors’ interests,” Xinhua reported Hu as saying.

To contact the reporter on this story: Michael Forsythe in Washington at mforsythe@bloomberg.net.

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Merkel Meets GM's Opel Managers Next Week Over Crisis

By Jann Bettinga and Brian Parkin

Nov. 15 (Bloomberg) -- German Chancellor Angela Merkel will hold crisis talks next week with executives of General Motors Corp.'s Opel unit, which is asking Germany for loan guarantees as its U.S. parent struggles to survive.

Merkel invited the heads of Opel in Germany and Europe as well as the division's works council chief for talks on Nov. 17 in Berlin, the government said today in an e-mailed statement. Focus magazine has said Opel may get 2 billion euros ($2.5 billion) worth of government guarantees.

Opel is asking for assistance as its parent company seeks a U.S. government bailout to avert bankruptcy. The German unit yesterday said it wants loan guarantees in case it's affected by the parent's crisis and ``GM's financial situation were to intensify.'' Opel approached the federal government for help as well as the states of Hesse, North Rhine-Westphalia, Rhineland- Palatinate and Thuringia, where the carmaker has plants.

``It's important that we have a good discussion on the right steps to take and that we try to support the auto industry,'' Merkel said in the statement.

She and Finance Minister Peer Steinbrueck are in Washington for talks with leaders of the Group of 20 industrial nations on the financial crisis. Steinbrueck and Economy Minister Michael Glos will hold talks about Opel's situation with the federal states on Nov. 18, Merkel said in the statement.

Preventive Measure

Opel spokeswoman Gudrun Langer couldn't be reached for comment. The carmaker previously has decline to comment on the amount it has sought. Germany's federal government may shoulder 1 billion euros worth of loan guarantees and the four states another billion, Focus said in a summary of a report to be published Nov. 17.

Separately, Germany's Bild am Sonntag said GM will give Opel 1 billion euros worth of assets it holds in Europe, which the unit could use as guarantees for loans. Germany's federal and state governments would guarantee at least 1 billion euros, the newspaper said in a summary of a report to be published tomorrow, citing unidentified people in the government.

The unit isn't facing a liquidity problem, Opel's works council leader, Klaus Franz, said today in a statement. The guarantees would be a ``preventive measure'' in the event that GM's problems in the U.S. intensify, he said.

Drop in Sales

Opel, which targets mainly low-income buyers, has been among automakers hardest hit by the credit crunch. The brand's European sales have fallen 12 percent this year, more than twice the industry-wide drop, according to the European Automobile Manufacturers' Association.

In April, Detroit-based GM vowed to invest 9 billion euros in Opel through 2012 as part of an effort to introduce 20 models within four years.

GM and fellow U.S. carmakers Ford Motor Co. and Chrysler LLC would receive $25 billion in loans out of a $700 billion bailout package approved earlier this year under legislation that Representative Barney Frank of Massachusetts and Senator Carl Levin of Michigan are writing. President George W. Bush's administration opposes using those funds for the auto companies.

Opel, known as Vauxhall in the U.K., said yesterday the government aid would cover developing vehicles and equipment for its German factories and that it would ``under no circumstances'' be used outside Europe.

To contact the reporter on this story: Brian Parkin in Washington on bparkin@bloomberg.net; Jann Bettinga in Frankfurt at jbettinga@bloomberg.net

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Pakistan Agrees to $7.6 Billion IMF Loan Program

By Khalid Qayum

Nov. 15 (Bloomberg) -- Pakistan reached an agreement in principle with the International Monetary Fund on a $7.6 billion loan package aimed at preventing the nation from defaulting on foreign debt and restoring investor confidence.

The loan ``will be used for the balance of payments and to build our foreign reserves,'' Shaukat Tarin, the de facto finance minister, said today at a televised news conference in Karachi.

Pakistan, a center in the war on terrorism, has been forced to seek IMF assistance after its foreign-exchange reserves shrank 75 percent in the past year to $3.5 billion last week, the equivalent of one month's imports, and a group of donor nations declined to provide funds. Hungary, Iceland and Ukraine also have negotiated IMF packages in recent weeks as the global economic crisis has radiated beyond the financial sector.

``The IMF loan will help in stabilizing the economy only if the government shows the political will to implement the Fund's program,'' said Samiullah Tariq, head of research at InvestCapital & Securities Ltd. in Karachi. Pakistan's civilian governments from 1988 to 1999 did not complete seven separate IMF loan programs because of ``tough'' IMF conditions, he said.

``The IMF didn't give us any conditions different from our economic stabilization program,'' Tarin said. ``The IMF counseled us to increase the key interest rate to curb inflation,'' he said.

No Net Borrowing

The State Bank of Pakistan, the nation's central bank, increased its benchmark interest rate by 2 percentage points, the most in more than a decade, to 15 percent on Nov. 12, citing inflation that reached 25 percent in October, a 30-year high.

The government of President Asif Ali Zardari aims to reduce the budget deficit to 4.3 percent of gross domestic product in the fiscal year that ends June 30, 2009, from 7.4 percent last year. It also has pledged there will be no net borrowing by the central bank in the fiscal year.

The IMF regards Pakistan's targets as ``realistic and achievable provided we show discipline and determination,'' Tarin said.

The Fund's board will vote on the loan program ``shortly,'' Managing Director Dominique Strauss-Kahn said today in an e- mailed statement in Washington.

The IMF funds would be available over 23 months and have an interest rate of 3.5 percent to 4.5 percent, Tarin said. They will have to be repaid by 2016.

Pakistan last completed an IMF loan program in 2004 during the military government of former President Pervez Musharraf.

Balance of Payments

Pakistan's economic crisis mounted after Zardari's Pakistan Peoples Party-led government, which came to power in March, was paralyzed for almost six months by political wrangling. The rupee in October plunged to an all-time low and the balance of payments deficit in the first three months of the fiscal year started July 1 widened to $3.95 billion, from $2.27 billion a year earlier. The deficit reached a record $14 billion last year.

Standard & Poor's yesterday cut Pakistan's debt rating to CCC from CCC+, the lowest level in 10 years, citing the risk of a default on external debt payments of $3 billion due in the next 12 months.

Pakistan's economy has ``deteriorated significantly'' and growth may slow to a six-year low, the IMF said in an Oct. 20 report. Growth is likely to weaken to 3.5 percent in the current fiscal year from 5.8 percent last year, the IMF said. The government forecasts the economy will expand 5.5 percent in the fiscal year.

`Give Confidence'

Pakistan expects to get the ``maximum'' amount of funds upfront from the IMF to meet $3.5 billion to $4.5 billion of needs this fiscal year, Tarin said. The country may receive the first installment this month, he said.

The IMF loan ``will give confidence to investors, and it will help us in seeking more aid from friendly countries and other lenders'' such as the World Bank and Asian Development Bank, Tarin said.

Pakistan will seek financial support from the `Friends of Pakistan' group, which is due to meet on Nov. 17 in the United Arab Emirates. The group, which was established last month to help Pakistan stabilize its economy, includes the U.S., U.K., China and Saudi Arabia.

``The `Friends of Pakistan' group wanted us to get an IMF endorsement for our economic program,'' Tarin said.

To contact the reporter on this story: Khalid Qayum in Islamabad at kqayum@bloomberg.net.

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IMF's War Chest, Surveillance Role Expand to Confront Crisis

By Christopher Swann

Nov. 15 (Bloomberg) -- The International Monetary Fund, struggling a year ago with less relevance and revenue, emerged from Group of 20 talks with more money to lend and a mandate to step up its monitoring of a global financial system in crisis.

``Unfortunately, I'm not expecting that countries will stop lining up in front of the IMF during the coming weeks,'' IMF Managing Director Dominique Strauss-Kahn said at a press conference today after G-20 talks in Washington. ``Our role in surveillance will certainly increase.''

Demand for IMF loans is soaring as market turmoil spreads from rich nations to poorer ones. The IMF has lent $40 billion in the past two weeks, and more requests for aid are under review. Japan yesterday offered to lift the fund's lending capacity to $300 billion from $200 billion.

``To face a crisis like this, we need multilateral entities that are much stronger, much more active and much more agile,'' Mexican President Felipe Calderon told a press conference.

The IMF in late October approved a short-term lending program that almost doubles the amount developing countries are allowed to borrow. Eligible countries can draw 500 percent of their quota -- the amount they contribute to the IMF -- as many as three times in a 12-month period. The usual IMF loan length is three to five years.

The G-20, in a statement released earlier today, said the IMF has an ``important role in crisis response'' and sought to ensure it has ``sufficient resources to continue playing their role in overcoming the crisis.''

``We should review the adequacy of the resources of the IMF, the World Bank Group and other multilateral development banks and stand ready to increase them where necessary,'' the G- 20 said in the statement.

Saudi Arabia, China

British Prime Minister Gordon Brown has called on other nations with large foreign exchange reserves, such as Saudi Arabia and China, to pledge resources to the IMF.

A year ago, a newly appointed Strauss-Kahn faced annual losses of $400 million by 2010 if the IMF's business didn't improve and its staff of 2,600 wasn't reduced. Strauss-Kahn, in a statement released a month after taking office in November 2007, said an overhaul of the IMF needed to address the ``twin issues of the fund's relevance and legitimacy.''

Earlier today, the Washington-based lender announced that it had agreed to a $7.6 billion loan to Pakistan, the latest in a series of assistance packages in the past month. Last week the fund approved a $15.7 billion loan to Hungary and a $16.4 billion loan to Ukraine.

Iceland is in talks for $2.1 billion and Belarus is seeking $2 billion. Strauss-Kahn said today the IMF's executive board would complete the Iceland deal Nov. 19.

Japan's $100 Billion

The office of Japanese Prime Minister Taro Aso released a statement yesterday announcing the $100 billion addition to the IMF's coffers and calling on other members of the fund to boost the amount they contribute.

``The IMF has been called into question over recent years because there have been no fires to put out in the global financial system,'' said Claudio Loser, the former director of the fund's Western Hemisphere department and now a scholar at the Inter-American Dialogue, a policy-analysis center in Washington. ``Now there are plenty of fires to put out.''

Yesterday the fund said it would strengthen its surveillance of financial markets, conducting ``early warning exercises'' along with the Financial Stability Forum, or FSF. The FSF includes officials from the Group of Seven nations along with Australia, Singapore, Switzerland and the Netherlands.

Supervisory Role

The IMF and FSF ``should strengthen their collaboration, enhancing efforts to better integrate regulatory and supervisory responses'' and also ``conduct early warning exercises,'' the G- 20 statement said.

In the days leading up to the G-20 meetings, European officials urged the IMF to conduct mandatory reviews of all 185 member nations' financial systems, in order to better anticipate market turmoil.

Officials from countries including Switzerland and the Netherlands said the IMF should expand its Financial Sector Assessment Program, a voluntary early-warning system set up in 1999 in the aftermath of the Asian financial crisis. The check- ups seek to identify weaknesses in a country's financial institutions and rules and assess how well risks are managed.

So far this year, the IMF has conducted voluntary financial-sector reviews for just 11 countries, mostly in eastern Europe. Expanding the reviews to all 185 member states would make them comparable to the yearly assessments the IMF does on the economies of its members.

On Nov. 6, the IMF released updated forecasts for the world's leading industrial and developing economies that predicted contractions in the U.S., Japan and euro region in 2009. Global growth will be 2.2 percent next year, down from 3.7 percent this year, the IMF said.

To contact the reporters on this story: Christopher Swann in Washington at cswann1@bloomberg.net;

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G-20 Calls for Action on Growth, Regulatory Changes

By Michael McKee and Simon Kennedy

Nov. 15 (Bloomberg) -- Leaders from the biggest developed and emerging nations agreed more must be done to shore up a global economy sliding into recession, and laid out regulatory proposals to prevent a recurrence of the financial crisis.

In a statement after a five-hour summit in Washington, the Group of 20 urged a ``broader policy response'' to spur growth, including potential interest-rate cuts and fiscal stimulus. The group set a March 31 deadline for recommendations on tightening accounting standards, strengthening derivatives markets and increasing oversight of hedge funds and debt-rating firms.

``There was a common understanding that all of us should promote a pro-growth economic policy,'' U.S. President George W. Bush said. U.K. Prime Minister Gordon Brown said ``there is a clear determination on the part of world leaders in every continent to take necessary action to move economies out of this difficult period.''

The call for an overhaul of the world financial industry indicates leaders want future expansions to be smooth, without the boom and bust that has hurt developed nations this decade. Their lack of any specific pledges to stimulate growth may disappoint some investors, analysts said.

Disappointment Risk

With no clear promise to cut taxes and interest rates together, markets may be disappointed, said Carl Weinberg, chief economist at High Frequency Economics Ltd. in Valhalla, New York. ``This isn't a strong action statement on addressing the matters at hand.''

Rather than coordinate action, nations should act ``as deemed appropriate to domestic conditions,'' the leaders said in their statement.

The group pledged not to erect new trade barriers, guaranteed more resources for the International Monetary Fund if needed and promised to meet again before May.

Tumbling stock markets and forecasts for a worldwide recession are intensifying pressure on the G-20 leaders to act, 15 months after the credit crunch began. The IMF predicts advanced economies will together contract next year for the first time since World War II.

Writedowns and losses totaling $964.6 billion at financial institutions have triggered a surge in the cost of credit, cutting off access to capital for consumers and companies. The euro-area fell into its first recession in 15 years in the third quarter and data suggest the U.S., Japan and U.K. have as well.

China Shudders

Emerging markets are also feeling the pain, with Chinese industrial production growing at the weakest in seven years last month. The MSCI World Index of stocks is close to its lowest since 2003 and has fallen 45 percent this year.

The G-20 leaders, representing 90 percent of the world economy, blamed the crisis on investors who ``sought higher yields without an adequate appreciation of the risks.'' At the same time, the group faulted regulators in developed nations for failing to ``adequately appreciate and address the risks building up in financial markets.''

Reaching agreement on what to do was difficult, French President Nicolas Sarkozy said after the meeting. ``I'm a friend of the U.S. but it wasn't always easy,'' he said. ``There were misunderstandings to overcome.''

Bush Exits

Sarkozy, who pushed Bush into convening the summit, and other European leaders want more government control -- reaching across international borders -- over lending practices and investing. Bush, with only two months left before he leaves office, opposes any movement toward a global authority overseeing financial markets.

The statement papered over differences by recognizing that regulation is ``first and foremost'' a national responsibility, while at the same time demanding ``intensified international cooperation'' to oversee financial firms whose operations and problems cross national borders.

The leaders called for the creation of ``supervisory colleges'' for bank regulators around the world to better to coordinate oversight and share information about activities and risk-taking of international banks.

Capital standards should be raised, they said, particularly for banks' structured credit and securitization activities.

The leaders directed their finance ministers to work on recommendations for enhancing disclosure by investors and institutions, including hedge funds, of their financial conditions.

Ratings Companies

Debt-rating companies, which blessed many of the products that have since gone into default, should be registered, and oversight of their actions strengthened to ensure they provide unbiased information and avoid conflicts of interest.

Accounting standards should be harmonized around the world, the group said, and regulators should consider whether current rules properly value securities, particularly complex, illiquid products, during times of stress.

The leaders endorsed the use of clearinghouses for financial derivatives to back trades and absorb losses in case of a dealer failure. The first central clearinghouse for the $33 trillion credit-default swap market should be in operation by year-end in the U.S., under an agreement signed yesterday by three U.S. financial regulators.

Such products should be traded on exchanges or electronic trading platforms, the leaders said, and more disclosure should be required for other derivatives traded over the counter.

Executive Pay

The leaders said executive compensation should be managed to ``avoid excessive risk-taking,'' while stopping short of calling for any caps.

Warning against protectionism as a way to fight recession, the G-20 vowed not to raise any trade barriers for the next year. They also said they will seek ways by the end of the year to conclude the Doha round of trade talks that collapsed in July.

An accord ``would be a signal that would be of equal weigh as an economic stimulus program,'' German Chancellor Angela Merkel said.

The governments will review the ``adequacy of resources'' at the IMF and World Bank, and look for ways to increase them, along with buttressing the role of smaller economies. Some emerging-market nations with large reserves have been reluctant to raise contributions to the IMF unless they are given more of a say in how the organization is run.

Leaders will meet again before the end of April, most likely in London, when a new American administration is in office. President-elect Barack Obama didn't attend the meeting, sending former Secretary of State Madeleine Albright and former Republican Representative Jim Leach to meet delegations instead.

Eclipsing G-8

Heads of emerging-market nations said the G-20 should now replace the Group of Eight as the forum for addressing economic issues.

Brazilian President Luiz Inacio Lula da Silva said the G-8 has ``become a group of friends'' and there's ``no sense in making political and economic decisions without the G-20 countries.''

The G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union.

The Netherlands and Spain were also represented, as were the IMF, World Bank, Financial Stability Forum and United Nations.

To contact the reporter on this story: Michael McKee in Washington at mmckee@bloomberg.netSimon Kennedy in Washington at Skennedy4@bloomberg.net;

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G-20 Seeks Doha Trade Round Breakthrough by Year End

By Fabio Alves and Brian Parkin

Nov. 15 (Bloomberg) -- The Group of 20 said they will seek a deal by the end of the year on concluding the seven-year Doha round of global trade talks.

``We shall strive to reach agreement this year on modalities that leads to a successful conclusion'' of the trade round, the G-20 leaders said in a statement released after talks in Washington.

World Trade Organization negotiators have been trying to reach an agreement since 2001 to cut agriculture subsidies and tariffs on industrial goods. Nine days of talks ended on July 29 after India and the U.S. disagreed over how poor nations could increase duties to protect their economies from surging farm imports.

Indian Prime Minister Manmohan Singh said today in Washington that his government is ``willing to work constructively with other major players to reach a balanced and mutually beneficial outcome.''

Leaders including Brazilian President Luiz Inacio Lula da Silva and German Chancellor Angela Merkel said an agreement could counter the current global slowdown and strengthen future economic growth.

``The best solution to keep the financial crisis from spilling over to the real economy is to complete the Doha Round,'' Lula said in Washington.

Merkel said an accord ``would be a signal that would be of equal weight as an economic stimulus program'' and said there were ``just a small number'' of obstacles to a pact.

Protectionism

The G-20 officials said rejecting protectionism was of ``critical importance'' and pledged not to raise trade barriers for the next 12 months.

``One of the dangers during a crisis such as this is that people will start implementing protectionist policies,'' U.S. President George W. Bush told reporters today. ``I'm pleased that the leaders reaffirmed the principles behind open markets and free trade.''

The Paris-based Organization for Economic Cooperation and Development this week predicted global trade growth would slow next year to 1.8 percent from 4.7 percent this year. Singh said industrial countries could help revive trade in developing countries by expanding export credit finance at a time when risk is limiting its availability.

``There is a need to intervene to overcome this market failure,'' Singh said. ``A collapse in trade is the last thing that one wants in the current crisis, with all its implications for growth and employment.''

To contact the reporter on this story: Fabio Alves in Washington at Falves3@bloomberg.net

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Treasury Two-Year Yields Touch Five-Year Low as Economy Worsens

By Dakin Campbell and Cordell Eddings

Nov. 15 (Bloomberg) -- Treasuries rose for a second straight week, with two-year note yields touching the lowest in five years, as economic growth worsened and Treasury Secretary Henry Paulson changed the terms of the financial-rescue plan.

The yield difference between two- and 10-year notes widened to a five-year high as traders increased bets the Federal Reserve will cut interest rates and focused on short-maturity debt as the Treasury sold the most longer-term securities since 1990. Paulson said the government would no longer buy troubled mortgage assets and would instead focus on relieving pressures in consumer-credit markets.

``There will be a short-term mentality in the Treasury market,'' said Paul Horrmann, a strategist in Jersey City, New Jersey, at ICAP Plc, the world's largest inter-dealer broker. ``The atmosphere is still risk averse and will probably stay this way until the negative news gets better.''

The two-year note yield fell 12 basis points, or 0.12 percentage point, on the week to 1.22 percent, according to BGCantor Market Data. It touched a five-year low of 1.14 percent on Nov. 13. The 1.5 percent security due in October 2010 rose 7/32, or $2.19 per $1,000 face amount, to 100 17/32. The 10-year note's yield dropped 6 basis points to 3.74 percent. It touched 3.63 percent, the lowest in more than two weeks.

Rates on one-month Treasury bills, viewed as a haven in times of turmoil, fell 4 basis points to 0.05 percent on the week. They touched a record low of 0.04 percent Nov. 13.

Rescue Package

The government sold $55 billion of three-, 10- and 30-year securities at its so-called quarterly refunding during the week to pay for the $700 billion financial-rescue plan and fund a widening budget deficit.

Treasuries will fall over the next six months as the U.S. increases borrowing to bail out its financial system, while government debt in Europe, Asia and Latin America rallies, a monthly survey of Bloomberg users showed.

Paulson said on Nov. 12 that buying ``illiquid'' mortgage- related assets under the rescue plan conceived for that purpose ``is not the most effective'' use of funds. Instead, he proposed shifting the focus to relieving pressures on automobile, credit card, and consumer loans.

The Group of 20 heads of state are meeting in Washington this weekend amid Europe's first recession in 15 years. The region's gross domestic product shrank 0.2 percent last quarter from the previous three months, when it also contracted 0.2 percent, the European Union's statistics office said Nov. 14.

`Flight-to-Quality Bid'

The U.S., Japan, the U.K. and the euro region are headed for their first simultaneous recessions since World War II, according to the International Monetary Fund.

Sales at U.S. retailers dropped 2.8 percent last month, the Commerce Department said yesterday. It was the fourth consecutive drop and the biggest since records began in 1992. Initial claims for unemployment insurance rose last week to the highest level since September 2001, when the economy was last in a recession.

``We are not getting a lot of warm and fuzzy numbers about the economy,'' said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. ``The weaker-than-expected retail sales number and another equity sell-off are supporting the flight-to- quality bid into the Treasuries.''

U.S. stocks retreated for a second straight week, with the Standard & Poor's 500 Index falling 6.2 percent.

Futures on the Chicago Board of Trade showed an 84 percent chance the Fed will lower its 1 percent target rate for overnight bank lending by 50 basis points at its Dec. 16 meeting. The odds were 64 percent a week ago.

Week's Theme

Two-year notes, more sensitive to monetary policy than longer-maturity securities, outperformed 10-year notes and pushed the gap between the two to 2.62 percent on Nov. 13.

``The essential steepening of the yield curve has been the theme of the week, led by two-year notes,'' said Carl Lantz, an interest-rate strategist in New York at Credit Suisse Securities USA LLC, one of the 17 primary dealers that trade with the Fed. ``The market is still expecting weak data to continue and more from the Fed in terms of liquidity.''

Yields indicate banks are less willing to make loans to each other even as Paulson said it was ``very important'' for banks to lend. The difference between what they and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 2.10 percentage points, from 2.01 percentage points Nov. 7.

Banks' borrowing costs for dollars rose in the past two days after falling for 23 straight days. The London interbank offered rate for three-month funding increased 9 basis points to 2.24 percent, the British Bankers' Association said.

Uncompleted Transactions

An industry group that advises the Treasury on trading in government debt recommended measures to reduce the record level of uncompleted transactions that have plagued the bond market in the past two months as the credit crunch worsened. The Treasury Market Practices Group urged changes in market practices ranging from financial penalties on failed trades to margining and bilateral cash settlement of failing transactions.

To contact the reporter on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net.

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