BOJ May Need to Get Bolder to Save Companies From Credit Crunch

By Mayumi Otsuma and Theresa Barraclough

Dec. 8 (Bloomberg) -- Bank of Japan Governor Masaaki Shirakawa may be forced to adopt more aggressive measures to ease a credit shortage for companies, economists say.

The central bank may have to augment last week’s decision to accept lower-grade corporate debt as collateral for loans to commercial banks by buying it from them outright. Banks shrugged off the Dec. 2 attempt to revive lending to businesses, driving yields on commercial paper to a record high.

“The BOJ’s latest steps for corporate financing turned out to be insufficient and failed to quench lenders’ thirst for cash,” said Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo. “The bank may come under pressure to buy commercial paper and even trim the key rate deeper.”

The central bank said on Dec. 2 that it will take BBB-rated corporate debt as collateral, attempting to encourage lenders to underwrite financing from businesses and improve their access to cash. The BOJ will also offer unlimited loans to banks between January and April as long as they submit enough collateral.

The programs failed to stem increases in borrowing costs that had been expanding even after the central bank cut the benchmark overnight lending rate to 0.3 percent on Oct. 31.

Yields on one-month commercial paper with the second- strongest credit rating climbed to a record 1.825 percent on Dec. 5, more than double the interbank rate. The Tokyo three-month interbank offered rate, or Tibor, a measure of the cost of lending between banks, rose to a 10-year high of 0.899 percent.

Avoiding Risk

“We can’t expect much support for lower-rated corporations unless someone becomes willing to take on credit risks,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute Inc. and a former central bank official.

One option is for the central bank to buy commercial paper and the government to guarantee losses should the securities default while they are on the bank’s balance sheet, Kumano said. Parliament would need to approve such a measure, he added.

The Federal Reserve and the U.S. government already have a similar arrangement, which Kumano said “can give a powerful boost for financing companies because it signals the joint effort by a government and a central bank.” Commercial paper is short-term debt companies use to fund daily activities like paying rent and staff.

Last week’s move “is going to have a negligible effect on the market because it is indirect,” said Tetsushi Nagato, a credit analyst at Schroder Investment Management Japan Ltd. While it improves commercial banks’ access to cash from the Bank of Japan, there’s no guarantee that lenders would become more willing to extend credit to companies.

Government Bonds

Shirakawa acknowledged on Dec. 2 that the measures would provide funds to businesses “indirectly” via the “wholesale market.” He said the programs will increase the central bank’s lending to commercial banks by 3 trillion yen ($33 billion).

The Bank of Japan may also opt to increase its monthly purchase of government bonds from lenders from 1.2 trillion yen, said RBS Securities’ Nishioka.

The step “can work as another tool to offer more funds to lenders,” Nishioka said. “This option can be more easily taken up than commercial paper purchases” because the decision can be made by the central bank alone, she said.

Global credit markets seized up after the bankruptcy of Lehman Brothers Holdings Inc. on Sept. 15. In Japan, 30 publicly traded companies have gone bust this year, the most in the postwar era.

Shirakawa may also have to lower the benchmark interest rate closer to zero percent even after repeating his reluctance to do so at least eight times in the past month, economists said. Since the October rate cut, the governor has warned that further reductions would dry up the flow of funds in the money market by diminishing returns and discouraging investors from participating in transactions.

“I think they have the ability to cut interest rates more. They may do it pretty soon,” said Guthrie Williamson, portfolio manager in Sydney at Principal Global Investors. “There is global move to cut interest rates and the BOJ wants to look like they are doing their bit.”

To contact the reporters on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net; Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net

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Japan Current-Account Surplus Narrows as Exports Fall

By Keiko Ujikane

Dec. 8 (Bloomberg) -- Japan’s current-account surplus narrowed for an eighth month in October as a deepening global slowdown caused exports to fall.

The surplus shrank 56.5 percent to 960.5 billion yen ($10.4 billion) from a year earlier, the Ministry of Finance said in Tokyo today. The median estimate of 22 economists surveyed by Bloomberg News was for the gap to narrow to 1.09 trillion yen.

Exports slumped the most in seven years, worsening Japan’s first recession since 2001, as the worldwide financial crisis choked off demand for the country’s cars and electronics. The yen’s 20 percent gain against the dollar is adding to exporters’ woes and eroding the value of investments Japanese have overseas.

“Exports will probably stay weak because of slowing global demand, taking a toll on Japan’s economy,” said Susumu Kato, chief economist at Calyon Securities in Tokyo. “The stronger yen also hurt exporters’ earnings and trimmed interest made on securities investments abroad.”

Shipments abroad fell 7.3 percent in October from a year earlier, the most since December 2001, today’s report showed. Imports climbed 8 percent, a quarter of the pace of September’s 33 percent, as energy costs fell.

Crude oil traded at $77.48 a barrel in October on average, falling from a record $147.27 a barrel on July 11. Japan gets virtually all of its oil from abroad.

The income surplus, the difference between money earned abroad and payments made to foreign investors in Japan, shrank 16.3 percent to 1.21 trillion yen from a year earlier because of the yen’s appreciation. Japan’s currency surged 7.8 percent against the dollar in October, the biggest monthly gain since December 1998.

The current account tracks the flow of goods, services and investment income between Japan and its trading partners. It includes trade not shown in the customs-cleared balance.

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net

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Fed, BOJ Signal We Are All Islamic Bankers Now: William Pesek

Commentary by William Pesek

Dec. 8 (Bloomberg) -- Attending Islamic finance conferences these days, it’s hard not to notice how this investment class is catching on.

The world’s roughly 1.5 billion Muslims need a way to bank and invest according to Islamic Sharia law, which bars receiving or paying interest on loans or deposits. A massive market infrastructure is being built to facilitate clients that include wildly rich Persian Gulf oil tycoons.

Yet isn’t this industry being pirated by the Bank of Japan, Federal Reserve and other central banks destined to offer interest-free loans? As U.S. President Richard Nixon, echoing Milton Friedman, famously quipped in 1971: “We are all Keynesians now.” By 2009, we may all be Islamic bankers, too.

It’s an odd yet apt comparison. Islamic banking is more about the means by which a certain group of people obtains money. Zero interest rates are about getting as much money, in any way possible, to everyone.

There’s still something to be said about the spreading appeal of scrapping interest rates. It’s no longer a unique aspect of certain transactions or a banking novelty. It’s becoming the norm, and it’s quite disorienting.

Japan’s benchmark interest rate is 0.3 percent and headed to zero in the months ahead. The U.S. federal funds rate is 1 percent and headed lower, too. The U.K.’s rate is 2 percent, Canada’s is 2.25 percent and the euro zone’s is 2.5 percent. As the fallout from the global crisis worsens, these and many other benchmark rates will edge toward zero.

Quantitative Easing

According to Islamic law, the charging of interest, or “riba” in Arabic, is unjust and exploitative. That concept bears little resemblance to Japan’s zero-interest-rate policies, or ZIRP. The BOJ never argued it was seeking to foster brotherhood or socio-economic justice.

But that’s exactly what the BOJ did. By eliminating borrowing costs, and going further in recent years with “quantitative easing,” the BOJ was doing its bit for social fairness and stability. It was about protecting the Japanese way of doing business and maintaining the equalitarianism on which the nation’s 127 million people pride themselves.

Now the Fed is heading down a similar road for similar reasons. With an unprecedented array of emergency-loan programs aimed at easing the worst credit crisis in seven decades, the Fed is engaging in Japan-like quantitative easing. The level of rates is one thing. The more fascinating development is the Fed pushing waves of extra liquidity into the financial system.

Bernanke-san

It’s no wonder that economists such as Michael Feroli at JPMorgan Chase & Co. in New York are referring to Fed Chairman Ben Bernanke as “Bernanke-san” these days.

Some worry the costs of all this will outweigh the benefits.

“The concern is ZIRP encourages inefficiency, and an inefficient allocation of resources is likely to ensue, as occurred in Japan,” says Benjamin Pedley, Hong Kong-based managing director of LGT Investment Management Ltd.

Pedley thinks it’s more important to pursue the kind of fiscal pump-priming counseled by John Maynard Keynes. It’s also vital that central banks buy their domestic bonds, rather than rely solely on interest rates.

“I don’t think zero percent makes a lot of difference to the real economy rather than, say, 1 percent or 2 percent,” Pedley says. “Better to halt rates near zero and rely on other policy avenues to get things back on track and then normalize rates as soon as possible.”

Great Potential

The BOJ never became sufficiently independent to move rates away from zero. The best it did was raise them to 0.5 percent. Politicians got used to easy money. In that sense, 3 percent growth in Japan isn’t as genuine as it is elsewhere. It’s the product of unhealthy and unsustainably easy monetary and fiscal policies. The Fed needs to avoid those pitfalls.

The point here isn’t to downplay a fast-rising asset class. Globally, Islamic banking assets are estimated at $600 billion to $650 billion and have registered annual growth of 10 percent to 15 percent over the last decade, according to Celent, a Boston- based financial research and consulting firm.

That kind of growth means Islamic assets will top $1 trillion by 2010, Alexa Lam, deputy chief executive officer of the Hong Kong Securities and Futures Commission, said at a EuroMoney conference in Hong Kong last month.

The reason why data from Boston and perspectives from Hong Kong are being highlighted here is to show just how anxious the world is to get a piece of Islamic finance. The figures and growth rates speak for themselves. Islamic bankers are looking to marry that potential with China’s rapid growth.

“The pie is getting bigger and bigger,” says Badlisyah Abdul Ghani, chief executive officer at CIMB Islamic, the Islamic banking arm of Malaysia’s second-largest bank.

Only now, the pie is going to get really, really big as the world’s major central banks offer zero-percent loans.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Jakarta at wpesek@bloomberg.net

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Oil Contango Pays Most in Decade as Shell Holds Crude in Ships

By Robert Tuttle and Alexander Kwiatkowski

Dec. 8 (Bloomberg) -- In the worst year ever for oil, investors can lock in the biggest profits in a decade by storing crude.

Traders who bought oil at the $40.81 a barrel on Dec. 5 could sell futures contracts for delivery next December at $54.65, a 34 percent gain. After taking into account storage and financing costs investors would earn about 11 percent, according to Andy Lipow, president of Houston consultant Lipow Oil Associates LLC. The premium, known as contango, is the biggest for a 12-month span of futures since 1998, when a glut drove crude down to $10.

Stockpiling crude may provide higher returns than commodities, stocks and Treasuries as the U.S., Japan and Europe endure simultaneous recessions for the first time since World War II. Crude sank 72 percent in New York since peaking at $147.27 in July. The Standard & Poor’s 500 Index fell 40 percent this year and two-year government notes yield 0.9 percent.

“The bottom line is that you buy crude at a low price and lock in a profit by selling it forward,” said Mike Wittner, head of oil market research at Societe Generale SA in London. “It’s low risk. The contango can definitely pay for storage and the cost of capital and leave plenty left over.”

Royal Dutch Shell Plc sees so much potential in the strategy that it anchored a supertanker holding as much as $80 million of oil off the U.K. to take advantage of higher prices for future delivery. The ship is one of as many as 16 booked for potential storage instead of transporting crude, said Johnny Plumbe, chief executive officer of London shipbroker ACM Shipping Group Plc.

Oil Storage

The tankers, if full, hold about 26 million barrels worth about $1 billion, more than the 22.9 million barrels sitting in Cushing, Oklahoma, where oil is stored for delivery against Nymex contracts. U.S. crude inventories rose 11 percent this year to 320.4 million barrels, according to the Energy Department.

“All the market operators keep placing oil in storage,” said Francisco Blanch, head of global commodities research at Merrill Lynch & Co. in London. “Even though the contango is steep, it could get steeper.”

Blanch said last week that oil may fall to $25 a barrel should the Chinese economy slip into recession and the Organization of Petroleum Exporting Countries fail to take enough crude off the market.

The Hague-based Shell, Europe’s largest oil company, last month chartered the supertanker Leander with an option to store North Sea Forties crude, according to Paris shipbroker Barry Rogliano Salles. The vessel arrived at Scotland’s Hound Point, the loading port for Forties, on Nov. 20, according to tracking data compiled by Bloomberg. Sally Hepton, a London-based spokeswoman at Shell, declined to comment.

Shell, Koch

Shell and Koch Industries Inc. of Wichita, Kansas, also hired four supertankers to hold oil in the U.S. Gulf Coast to take advantage of rising prices in the months ahead. They took Very Large Crude Carriers, or VLCCs, to move oil from the Middle East, said Bruce Kahler, a broker at Lone Star, R.S. Platou in Houston.

Koch Supply & Trading LP spokeswoman Katie Stavinoha declined to comment.

The cost to store crude at Cushing averages about 35 cents a barrel a month, Lipow said in an interview. The cost of financing the crude would also be about 35 cents a month. A trader would have to take ownership of the oil in January 2009 and deliver it during December, according to Nymex rules.

Supertanker Storage

A supertanker would cost about 90 cents a barrel per month for storage, according to data from shipbroker Galbraith’s Ltd. The amount varies, depending on the duration of the storage.

“The economics make sense if you can find somewhere to store the oil,” said Tony Quinn, managing director of Lincolnshire, U.K.-based Global Storage Agency Ltd., a bulk liquid storage terminal consultant. With depots in Europe almost full, “companies don’t have anything else they can do, so are chartering commercial tankers for floating storage.”

The reduced availability of credit may make it harder for traders and companies to purchase and store oil, said Merrill’s Blanch and Societe Generale’s Wittner.

“With this sort of contango, we would probably have seen a larger stock build were it not for the credit crunch,” said Olivier Jakob, managing director of consultant PetroMatrix in Zug, Switzerland.

The opportunity to benefit from the storage trade may disappear in weeks should OPEC cut output after its Dec. 17 meeting in Algeria. The group postponed a decision on production at its Nov. 29 gathering in Cairo.

“It’s still quite profitable as long as inventories are ample and OPEC does not remove the barrels from the market,” said Johannes Benigni, chief executive officer at Vienna-based consultancy JBC Energy GmbH.

To contact the reporter on this story: Robert Tuttle in New York at rtuttle@bloomberg.net; Alexander Kwiatkowski in London at akwiatkowsk2@bloomberg.net

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South Korean Won Gains Most in Week as Stocks Rally; Bonds Fall

By Kim Kyoungwha

Dec. 8 (Bloomberg) -- South Korea’s won rose the most in a week on speculation that foreign investors may increase purchases of shares after the Kospi index rallied. Bonds fell.

The currency is the best performer today in Asia outside Japan, after ruling and opposition parties agreed to reduce income and corporate taxes to spur economic growth. The economy grew 0.5 percent last quarter, the weakest pace since 2004.

“Demand for dollars became less intense after selling pressure from foreign investors eased and import settlements are also dwindling,” said Kim Sung Soon, a currency dealer with state-run Industrial Bank of Korea in Seoul. “The atmosphere is turning a bit favorable for the won.”

The won rose 0.8 percent to 1,464.75 per dollar as of 10:23 a.m. in Seoul, according to Seoul Money Brokerage Services Ltd. The currency shed 36 percent this year. The Kospi index rose 2.4 percent, extending gains into a second day

Income taxes will be lowered by a total of 2 percentage points gradually from next year through 2010, the Ministry of Strategy and Finance said in an e-mailed statement on Dec. 5.

Corporate tax on companies that earn net income of less than 200 million won ($135,208) will be reduced to 10 percent by 2010 from the current 13 percent, according to the government’s proposal announced on Sept. 1. The tax on larger companies with net income exceeding 200 million won will be cut to 20 percent by 2010 from 25 percent now, the proposal showed.

Bonds Decline

Bonds fell on speculation investors are reluctant to take positions ahead of the government’s auction to sell five-year debt. The finance ministry is to sell 1.4 trillion won via a weekly auction later in the morning.

The five-year yield declined to the lowest level since 2005 last week on speculation the central bank will cut interest rates again on Dec. 11 after lowering its benchmark three times in a month to spur the economy. The benchmark interest rate stood at 4 percent, the lowest since 2006.

The yield on the benchmark bond due September 2013 rose one basis point to 4.44 percent, according to the Korea Exchange. The price fell 0.03, or 3 won per 10,000 won face amount, to 106.96. A basis point is 0.01 percentage point.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net.

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Santos Shares Jump on Report CNPC Considering Bid

By Angela Macdonald-Smith

Dec. 8 (Bloomberg) -- Santos Ltd., Australia’s third- biggest oil and gas producer, jumped in Sydney trading after the South China Morning Post said China National Petroleum Corp. is considering linking with a partner for a bid.

Santos rose as much as 16 percent to A$14.08 on the Australian stock exchange, and was at A$13.47 at 12:16 p.m. local time, headed for the largest gain in nine days. The benchmark energy index advanced as much as 6 percent.

China National Petroleum has examined two potential partners for a bid without making any approaches, the newspaper reported, citing a person it didn’t identify. Potential partners may include Chevron Corp., BP Plc, Eni SpA and Total SA, it said. Santos owns Australia’s biggest onshore gas venture, which supplies the local market, as well as stakes in liquefied natural gas ventures.

“It would be difficult to put together a consortium where everyone gets their wants and requirements met,” said Andrew Williams, an oil and gas analyst at Credit Suisse Group in Melbourne. “Its just not an easy set of assets for anyone; if you want LNG what do you do with the domestic gas? If you want domestic gas what do you do with the LNG?”

Adelaide-based Santos won’t comment on speculation, said Matthew Doman, a spokesman. Liu Weijiang, a Beijing-based spokesman on overseas projects at China National Petroleum, didn’t immediately answer calls seeking comment.

A bid may need to be priced at about A$18 a share to “start to get interest” and about A$20 to succeed, Williams said.

Deutsche, Caliburn

South Australia on Nov. 29 removed a 15 percent limit on individual shareholdings in Santos, clearing the way for potential takeover bids. The company hired Deutsche Bank AG and Caliburn Partnership to advise it should it receive bids, the newspaper reported.

Santos is planning a A$7.7 billion LNG venture with Petroliam Nasional Bhd. in Queensland state and owns a stake in Exxon Mobil Corp.’s proposed Papua New Guinea LNG venture. It also has an interest in ConocoPhillips’ producing LNG project in Darwin, northern Australia, and in oil and gas fields in Western and southeastern Australia.

Santos’s LNG growth prospects, rather than its maturing Cooper Basin venture in central Australia, make the company a potential takeover target in the absence of the shareholder cap, Citigroup Inc. said in a Nov. 24 report. Santos has 60 percent of the Gladstone LNG, or GLNG, project with Petronas and the partners are due to start engineering and design work by the end of the year.

“Burdened by mature, low-margin legacy assets Santos has lagged its peers,” Citigroup analysts led by Di Brookman said in the report. “We believe this situation is changing as the company looks to bring to market two material projects in GLNG and PNG LNG.”

Beijing-based China National Petroleum, the state-owned parent of PetroChina Co., is the nation’s largest oil producer.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net

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Latvia’s IMF Bailout Plan Maintains Currency Peg, Trading Band

By Aaron Eglitis

Dec. 8 (Bloomberg) -- Latvia’s International Monetary Fund- led bailout package will involve loans from other European governments and will maintain the country’s currency peg to the euro, the IMF said.

The program “maintains Latvia’s current exchange rate parity and band,” said Christoph Rosenberg, IMF mission chief for the Baltic nation, in an e-mailed statement yesterday. Latvian Finance Minister Atis Slakteris on Dec. 4 told lawmakers that some IMF officials were seeking a devaluation of the lats.

Latvia, which joins Hungary, Ukraine, Serbia and Belarus among eastern European states asking for IMF financial help, may need as much as 5 billion euros ($6.3 billion), Fitch Ratings predicts. The economy may shrink 5 percent next year and, without spending cuts, the budget deficit may swell to 10 percent of gross domestic product, Slakteris said in the parliament.

The IMF is working with the European Commission, some European governments and regional and multilateral institutions, Rosenberg said in the statement.

The rescue plan “will require agreement on exceptionally strong domestic adjustment policies and sizeable external financing, as well as broad political consensus in Latvia,” Rosenberg said. “All participants are working to bring these program discussions to a rapid conclusion.”

The country has run a fixed exchange rate since the lats was reintroduced in 1993, first pegging it to a basket of currencies, and then to the euro at the beginning of 2005. Latvia has a quasi- currency board system, where the lats is backed by foreign currency and allowed to rise and fall against a midpoint per euro.

‘Good News’

Slakteris had warned that some IMF experts sought a currency devaluation as a way to help the economy recover.

It’s “good news” that the IMF does not favor a devaluation, said Lars Christensen, chief economist at Danske Bank A/S, by phone. “This will bring some comfort to the markets.”

The central bank said on Dec. 5 that its reserves fell about 30 percent in two months to $4.2 billion at the end of November as it defended the peg to the euro and the government took out money it kept in deposit. The bank bought 660.5 million lati ($1.2 billion) in the past nine weeks after the currency weakened to the limit of its band.

The government said on Dec. 3, it was increasing its stake in Parex Banka AS, the country’s second-biggest lender, to 85 percent from 51 percent as withdrawals mounted. The lender lost about 500 million lati in deposits since September and the government and banking regulator have imposed restrictions on withdrawals.

The economy of the former Soviet state that joined the European Union in 2004 contracted an annual 4.2 percent in the third quarter, the steepest drop since at least 1994. That compared with growth of 0.1 percent in the second quarter.

Industrial output fell for a sixth month in October, led by a decline in the production of furniture, paper and wood as the recession took hold. The unemployment rate rose to 6.1 percent in November, the highest level in 20 months.

Prime Minister Ivars Godmanis has said he will resign if lawmakers fail to approve his macroeconomic program, his spokesman Edgars Vaikulis said by telephone on Dec. 4.

To contact the reporter on this story: Aaron Eglitis in Riga, Lia, at aeglitis@bloomberg.net

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India’s Spending Plan May Be Too Little to Prevent Slowdown

By Cherian Thomas

Dec. 8 (Bloomberg) -- Indian Prime Minister Manmohan Singh’s spending plan and interest rate cuts unveiled over the weekend may not be enough to prevent economic growth slowing to the weakest pace in six years, economists say.

Singh plans to allocate an extra 200 billion rupees ($4 billion) as part of a total 3 trillion rupee spending plan for the rest of the financial year ending March 31. The Reserve Bank of India on Dec. 6 cut rates for the third time since October.

The size of the incremental expenditure, representing 0.3 percent of the gross domestic product, indicates the government wants to rely on monetary policy to stimulate growth. Lower interest rates will allow Indian companies to turn to local banks for funding rather than rely on lenders in the U.S. and Europe, where credit has dried up for many borrowers.

“No matter what steps India takes, they are unlikely to prevent growth from sliding next year,” said Tehmina Khan, international economist at Capital Economics Ltd. in London. “Investment spending, the main driver of growth in recent years, has been hit hard” because of the rout in stock markets and the liquidity squeeze overseas.

Forty percent of Indian industry’s funding in the year ended March 31 this year, when the economy grew at 9 percent, came from overseas borrowings and the sale of new shares in the stock market, Khan said.

In the year to March 31, 2009, “the moderation in growth will be more than anticipated,” Governor Duvvuri Subbarao said while announcing the rate cuts. He said the 7.5 percent growth forecast for the current year will be revised in the next monetary policy statement scheduled on Jan. 27.

Fiscal Steps

Subbarao said Dec. 4 that lower borrowing costs need to be augmented with fiscal steps to spur consumer demand. The amount Singh can spend is limited by the size of the government’s public debt, which makes up about 77 percent of gross domestic product, compared with 22 percent in China.

China unveiled a $581 billion spending plan last month to help its economy expand more than 8 percent for each of the next two years. Domestic consumption only accounts for 37 percent of Chinese GDP.

India, where domestic consumption makes up 60 percent of GDP, is being buffeted by the global recession because its integration with the world economy has been on the rise. For example, the volume of trade rose to 35 percent of GDP in the year ended March 31 from 21 percent in 1997-98, the year of the Asian financial crisis, according to the central bank.

Boost Needed

“India must give its economy as much boost as it can at this point,” said Sherman Chan, an economist with Moody’s Economy.com in Sydney. “No country, including India, can escape the impact of the global recession.”

India’s exports fell 12.1 percent in October, its first drop in seven years.

The country’s economic woes have been compounded by the terrorist attack on luxury hotels, a cafe and other places in its financial capital of Mumbai on Nov. 26, killing 163 people. The attacks prompted Merck KGaA, Daiichi Sankyo Co., GlaxoSmithKline Plc and Sanofi-Aventis SA to halt business trips to India.

Services such as hotels and travel will be hurt after the attacks, said Deepak N. Lalwani, director for India at Astaire & Partners Ltd., a London-based stock broking company.

Low Rates

Budget constraints are forcing India to rely more on interest-rate cuts to buoy the economy. India will forego about 87 billion rupees in revenue because of the 4 percent cut in central valued-added tax announced yesterday in the stimulus plan, Finance Secretary Arun Ramanathan said.

India’s debt sales in December will exceed its initial plan because of additional spending commitments, the finance ministry said on Dec. 5. The federal government will sell 100 billion rupees of bonds this month, or 70 billion rupees more than it had planned earlier.

Subbarao reduced the central bank’s repurchase rate for the third time in less than two months on Dec. 6, to 6.5 percent from 7.5 percent. He also cut the reverse repurchase rate at which it borrows overnight, to 5 percent from 6 percent, the first reduction since 2003.

Governor Subbarao’s move was made easier after the government reduced fuel prices by as much as 10 percent on Dec. 5, which may further drive down inflation from the current seven-month low of 8.40 percent.

Oil Prices

“The drop in oil prices is really important positive news for India,” Jim O’Neill, chief economist at Goldman Sachs Group Inc. in London, said in a Dec. 1 interview. “I am reasonably optimistic about India.”

Lower central bank rates may prompt non-state lenders, including ICICI Bank Ltd., to charge less. Only state-run banks, which control half the assets in India’s banking sector, have lowered their prime lending rates following the cuts in central bank rates since October.

“Merely making the environment more conducive won’t be enough,” said Prasanna Patankar, head of fixed-income trading at Securities Trading Corp. of India Ltd. “The growth momentum will take a few months to get moving fully.”

To contact the reporter on this story: Cherian Thomas in New Delhi at Cthomas1@bloomberg.net.

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Korea Won Gains Most in Week; Funds May Increase Stock Buying

By Kim Kyoungwha

Dec. 8 (Bloomberg) -- South Korea’s won rose the most in a week on speculation that foreign investors may increase purchases of shares after the Kospi index rallied.

The currency is Asia’s best performer today among the 10 most-traded regional currencies outside Japan, after ruling and opposition parties agreed to reduce income and corporate taxes to spur economic growth. The economy grew 0.5 percent last quarter, the weakest pace since 2004.

“Demand for dollars became less intense after selling pressure from foreign investors eased and import settlements are also dwindling,” said Kim Sung Soon, a currency dealer with state-run Industrial Bank of Korea in Seoul. “The atmosphere is turning a bit favorable for the won.”

The won rose 0.5 percent to 1,468.45 per dollar as of 9:16 a.m. in Seoul, according to Seoul Money Brokerage Services Ltd. The currency shed 36 percent this year.

The Kospi index rose 1.9 percent, extending gains into a second day as global funds turned to net buyers of stocks, after four days of selling more than they bought.

Income taxes will be lowered by a total of 2 percentage points gradually from next year through 2010, the Ministry of Strategy and Finance said in an e-mailed statement on Dec. 5.

Corporate tax on companies that earn net income of less than 200 million won ($135,208) will be reduced to 10 percent by 2010 from the current 13 percent, according to the government’s proposal announced on Sept. 1. The tax on larger companies with net income exceeding 200 million won will be cut to 20 percent by 2010 from 25 percent now, the proposal showed.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net.

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Australia, N.Z. Dollars Rise, U.S. Stock Rally Revives Optimism

By Candice Zachariahs

Dec. 8 (Bloomberg) -- The Australian and New Zealand dollars rose as a rally in U.S. equities at the end of last week spurred speculation that investors will buy higher-yielding assets.

The currencies jumped late on Dec. 5 in New York as stocks reversed an early slide, shrugging off a U.S. government report showing employers cut 533,000 jobs in November, the most in 34 years. The Australian dollar’s gains may be limited before a private report on job advertisements today. A government report on Dec. 11 may show November unemployment rose to a one-year high.

“There seems to be a bit of support off the fact that equity markets in the U.S. rallied after the payroll figure came out,” said Amy Auster, head of foreign-exchange and international economics research at Australia & New Zealand Banking Group Ltd. in Melbourne. “It’s still a situation of sell on rallies for the Aussie,” she said, referring to the currency by its nickname.

Australia’s currency gained 0.1 percent to 64.74 U.S. cents as of 9:49 a.m. in Sydney, from 64.67 cents in New York late last week. The currency rose 0.1 percent to 60.09 yen.

New Zealand’s dollar advanced 0.6 percent to 53.63 U.S. cents from 53.32 in New York last week. It bought 49.79 yen from 49.50.

ANZ reports November job ads at 11:30 a.m. in Melbourne.

Unemployment Rising?

The number of people employed in Australia fell by 15,000, according to the median estimate of 22 economists surveyed by Bloomberg News. That number gained 34,300 in October, driven by a jump in part-time jobs. The unemployment rate is forecast to grow to 4.4 percent, the highest since November 2007, from 4.3 percent. The statistics bureau will release the report on Dec. 11.

National Australia Bank Ltd. tomorrow releases its business confidence index for November. The gauge slumped 21 points in September to the lowest level since the series began in 1989. A consumer survey by Westpac Banking Corp. and Melbourne Institute showed last month that consumer confidence advanced after the most aggressive central-bank interest rate cuts since 1991. The December results will be issued on Dec. 10.

The currencies dropped last week on speculation interest- rate cuts by central banks worldwide won’t shore up consumer spending and growth. The Reserve Bank of Australia slashed rates 1 percentage point to 4.25 percent and New Zealand policy makers cut borrowing costs a record 1.5 percentage points to 5 percent.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

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Yen Falls as Stock Gains Encourage Purchases of High-Yielders

By Stanley White

Dec. 8 (Bloomberg) -- The yen declined against the Australian and New Zealand dollars as Asian stocks rallied, giving investors confidence to boost holdings of higher-yielding assets funded in the Japanese currency.

The yen weakened against the currencies, favorites of so- called carry trades, after Asian stocks rose for a second day as U.S. lawmakers neared agreement on bridge loans for General Motors Corp. and Chrysler LLC to help the automakers survive this month. The dollar declined against the euro as the possibility of a bailout reduced pressure on finance companies to hoard the U.S. currency during the credit crisis.

“The stock market is pulling the yen lower,” said Tokichi Ito, deputy general manager of foreign exchange in Tokyo at Trust & Custody Services Bank Ltd., a unit of Japan’s second- largest publicly traded lender. “Short-term loans to U.S. carmakers may provide a temporary solution to their woes.”

The yen fell to 60.25 per Australian dollar as of 9:52 a.m. in Tokyo from 60.02 on Dec. 5. Against the New Zealand dollar, the yen was quoted at 49.79 per dollar from 49.50 at the end of last week. The euro rose to $1.2762 from $1.2718. The yen was little changed at 92.68 per dollar and 118.38 per euro.

The yen may decline to 93.50 per dollar today, Ito said.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net

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U.K. May See Future Outbreaks of Mad Cow Disease, Study Finds

By Dermot Doherty

Dec. 8 (Bloomberg) -- The U.K. may see future outbreaks of mad cow disease as new findings suggest some people develop symptoms much later than others, a study found.

Illnesses such as mad cow disease are linked to abnormal proteins in the brain, called prions, and are determined by genetic factors, according to the study, published today by The Lancet Neurology journal. Differences in a person’s DNA may mean some people are more susceptible to the lethal nerve condition or take longer to develop symptoms, researchers at the U.K. Medical Research Council Prion Unit at University College London found.

Mad cow disease, also known as bovine spongiform encephalopathy, has infected more than 200,000 cattle in the U.K. Scientists in the mid-1990s found a possible link between BSE and a new variant of the fatal human illness, Creutzfeldt-Jakob disease, or CJD, which destroys brain tissue. Evidence indicates that people may develop the disease by eating meat from infected animals or through blood transfusions.

“A second wave of CJD with a longer incubation time might hit these shores, but we do not know whether this will be a tidal wave or just an imperceptible ripple,” Hans Kretzschmar at Ludwig-Maximillians University and Thomas Illig at the Helmholtz Zentrum, both in Munich, wrote in a comment in The Lancet.

The National Creutzfeldt-Jakob Disease Surveillance Unit in Edinburgh estimates that 164 people have died from CJD in the U.K. since 1990. Early symptoms include depression or psychosis, unsteadiness and involuntary movements. By the time of death, patients become immobile and mute.

The U.K. banned eating beef from cattle aged over 30 months from 1996 until 2005, when routine, nationwide testing began. The ban cost British farmers 500 million pounds ($728 million) a year. The U.K.’s food-safety regulator, the Food Standards Agency, said in October it supports a proposal to limit tests following a drop in the number of cattle with the lethal brain- wasting disease.

To contact the reporter on this story: Dermot Doherty in Geneva at ddoherty9@bloomberg.net

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Oil Ends Six Days of Declines as OPEC Signals Big Output Cut

By Gavin Evans

Dec. 8 (Bloomberg) -- Crude oil rose for the first time in seven days in New York after the Organization of Petroleum Exporting Countries’ president said there was consensus for a “significant” production cut when the group meets next week.

A “severe” cut may be needed to halt the decline in prices, group president Chakib Khelil told the Associated Press in a Dec. 6 interview. Some analysts are targeting a reduction of as much as 2 million barrels a day, he said, without saying how big a cut the group is planning.

“If you were to take 2 million barrels a day out of the market it will have an impact,” said Gerard Burg, minerals and energy economist at National Australia Bank Ltd. in Melbourne. “It’s really a demand dominated market” now, and that will temper the influence any cut has on prices, he said.

Crude oil for January delivery rose as much as $1.33, or 3.3 percent, to $42.14 a barrel in after-hours electronic trading on the New York Mercantile Exchange. It was at $42.05 at 11:14 a.m. Sydney time.

Oil fell 25 percent last week, the biggest weekly decline since the Persian Gulf war of 1991, as recession deepened in the U.S., Europe and Japan. Prices dropped 6.5 percent on Dec. 5 after a report showed U.S. payrolls plunged by 533,000 last month, the biggest decline in 34 years.

Deep Recession

“You’re really going to have a very deep, slow, drawn out recession in the western world” as households reduce spending to clear debt, Justin Smirk, senior economist at Westpac Banking Corp. in Sydney, said in a Bloomberg television interview. “Things will get worse before they get better” and pressure will remain on commodity prices through mid-2009, he said.

New York oil futures have dropped 72 percent since reaching a record $147.27 on July 11 as global stock markets plunged and the slowdown from the U.S. and Europe spread to Japan and China.

Slowing world economies will trim global oil demand growth to 0.2 percent next year, the International Energy Agency said Dec. 5. That’s a 170,000 barrel-a-day cut from the agency’s forecast last month.

Brent crude oil for January settlement rose $1.09 cents, or 2.7 percent, to $40.83 a barrel on London’s ICE Futures Europe exchange today. The contract fell 6 percent to $39.74 on Dec. 5, the lowest settlement since Dec. 29, 2004.

OPEC pumps about 40 percent of the world’s oil and cut daily output 1.5 million barrels in October as prices slumped and inventories rose.

While a 2 million barrel reduction would be higher than many expect, it would also lift spare capacity in the industry to more than 6 million barrels, the highest since 2002, National Australia’s Burg said.

To contact the reporter on this story: Gavin Evans in Wellington at gavinevans@bloomberg.net

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South Korea Stocks: Kangwon Land, Korea Electric, LG Household

By Saeromi Shin

Dec. 8 (Bloomberg) -- South Korea’s Kospi index rose 25.07, or 2.4 percent, to 1,053.20 as of 9:51 a.m. in Seoul.

The following are among the most-active stocks in South Korean markets.

Kangwon Land Inc. (035250 KS), which runs the nation’s only casino open to locals, rose 1,500 won, or 12 percent, to 13,650. Woori Investment & Securities Co. raised its recommendation to “buy,” from “hold,” in a note, saying the government’s casino tax rate is set to be fixed at a lower level than originally planned, which should boost investors’ appetite for the sector.

Korea Electric Power Corp. (015760 KS), which supplies almost all the power in the country, gained 1,250 won, or 4.8 percent, to 27,550.

Crude oil for January delivery slumped for a sixth day on Dec. 5, losing 6.6 percent to $40.81 a barrel in New York, the lowest settlement since December 2004.

Separately, the company will cut between 2,000 and 2,300 workers over the next three years, the Chosun Ilbo reported, citing a government official that it didn’t identify.

LG Household & Health Care Ltd. (051900 KS), the maker of cleaning and personal-hygiene products, gained 4,000 won, or 2.6 percent, to 156,000, adding to Friday’s 10 percent gain. HSBC Holdings Plc raised its recommendation to “overweight,” from “neutral,” in a note, citing solid margin growth in its cosmetics business, contribution from Coca-Cola bottling operations and attractive valuation.

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

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Japan Stocks Gain on U.S. Spending Plan, Bank Loan Growth

By Masaki Kondo and Patrick Rial

Dec. 8 (Bloomberg) -- Japanese stocks rose after U.S. President-elect Barack Obama announced the biggest public works program since the 1950s and as Japanese banks expanded loans at the fastest pace in at least 16 years.

Komatsu Ltd., the second-largest maker of earthmovers, rose 2.9 percent after Obama said he’s planning the biggest spending program since President Dwight D. Eisenhower created the interstate highway system. Mizuho Financial Group Inc., the country’s No. 3 bank by market value, gained 3.6 percent after companies turned to banks for funds as bond markets dried up. Tokyo Electric Power Co., Asia’s biggest power producer, advanced 1.8 percent after oil prices dropped the most since 1991 last week, reducing fuel costs.

The Nikkei 225 Stock Average climbed 63.80, or 0.8 percent, to 7,981.31 as of 9:48 a.m. in Tokyo. The broader Topix index rose 4.24, or 0.5 percent, to 790.26.

“A worsening employment situation usually gives lawmakers a mandate to take countermeasures,” Chisato Haganuma, a Tokyo- based strategist at Nomura Securities Co., said in an interview with Bloomberg Television. “These policies may trigger a rally in equity markets.”

The Topix fell 5.9 percent last week, the biggest decline since the five days ended Oct. 24, as looming prospects for the failure of General Motors Corp. and Chrysler LLC rattled investor confidence.

Roads, Bridges

Obama will boost investment in roads, bridges and public buildings to create and preserve 2.5 million jobs, he said on Dec. 6 in his weekly radio speech. The Labor Department said on Dec. 5 that U.S. companies cut payrolls at the fastest pace in 34 years, with the unemployment rate rising to the highest level since 1993.

Komatsu added 2.8 percent to 932 yen. Nippon Sheet Glass Co., which makes glass used for building facades, jumped 3.9 percent to 268 yen. Hitachi Construction Machinery Co., the world’s largest maker of giant excavators, gained 1.9 percent to 879 yen.

Mizuho advanced 2.6 percent to 216,100 yen. Fukuoka Financial Group Inc., the country’s largest regional lender, rose 3.8 percent to 299 yen, boosted by an upgrade to “neutral” from HSBC Holdings Plc.

Loans, excluding those by credit associations, rose 3.6 percent in November from a year earlier after growing 2.3 percent in October, the Bank of Japan said today. That was the biggest advance since the series started in 1992.

Tokyo Electric added 1.8 percent to 3,040 yen. Kansai Electric Power Co., the second-largest power producer in Japan, gained 1.1 percent to 2,660 yen.

Crude oil tumbled 25 percent last week to $40.81 a barrel, the biggest weekly drop since 1991, as the recession deepened in the U.S., Europe and Japan.

To contact the reporter for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net; Patrick Rial in Tokyo at prial@bloomberg.net.

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Bank of China, Formosa, Baosteel: Asia Ex-Japan Equity Preview

By Berni Moestafa

Dec. 8 (Bloomberg) -- The following companies may have unusual price changes today in Asia trading, excluding Japan. Stock symbols are in parentheses, and share prices are from the previous close, unless noted otherwise.

Bank of China Ltd. (3988 HK): China Ocean Shipping Group Co. said it had been granted a 74.5 billion yuan ($10.8 billion) credit line by the nation’s fourth-largest bank by assets. Bank of China added 7 cents, or 3.1 percent, to HK$2.35.

Baosteel Group Corp. (600019 CH): China’s biggest steelmaker said the global economic slowdown won’t deter its plans for a 60 billion yuan ($8.7 billion) steel plant project in Zhanjiang, Guangdong province. Baosteel rose 0.07 yuan, or 1.3 percent, to 5.49.

Formosa Petrochemical Corp. (6505 TT): Taiwan’s only publicly traded oil refiner plans to raise NT$18 billion ($537 million) from the sale of bonds. The company plans to issue unsecured corporate bonds with a maturity of not more than seven years, the company said. Formosa declined 60 cents, or 0.9 percent, to NT$69.2.

Regent Manner International Holdings Ltd. (1997 HK): The Hong Kong-based service provider to the electronics manufacturing industry said November sales fell 33 percent from a year earlier. Net consolidated turnover was $28.5 million, compared with $42.5 million in November 2007, the company said. Regent Manner declined 1 cent, or 1.6 percent, to 61 cents.

Yanzhou Coal Mining Co. (1171 HK): China’s fourth-biggest producer of the fuel said it conducted studies on potential projects and has yet to make a final decision on any acquisitions. The Australian Financial Review newspaper reported Yanzhou Coal was in talks to buy Brisbane-based Felix Resources Ltd. for more than A$3 billion ($1.9 billion). Yanzhou, which suspended trading of its shares on Dec. 5 because of “price-sensitive information,” was unchanged at HK$4.29.

To contact the reporter on this story: Berni Moestafa in Jakarta at bmoestafa@bloomberg.net

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Australia Stocks, Japan Futures Gain on U.S. Auto Rescue Plan

By Masaki Kondo

Dec. 8 (Bloomberg) -- Australian shares and Japan’s stock futures rose after lawmakers neared agreement on a rescue plan for American automakers, outweighing the biggest job losses in the U.S. in more than three decades.

BHP Billiton Ltd., the world’s biggest mining company, climbed 2.1 percent in Sydney even after oil prices fell to a four-year low. U.S.-traded receipts of Honda Motor Co., which gets more than half its profit from North America, advanced 3.6 percent from the closing price in Tokyo, while those of Sony Corp. gained 1.7 percent.

Australia’s S&P/ASX 200 Index rose 1.8 percent to 3,553.50 as of 10:20 a.m. in Sydney. New Zealand’s NZX 50 Index added 1.1 percent to 2,735.16 in Wellington. In New York, the Standard & Poor’s 500 Index climbed 3.7 percent on Dec. 5, after having dropped as much as 3.2 percent.

“A worsening employment situation usually gives lawmakers a mandate to take countermeasures,” Chisato Haganuma, a Tokyo- based strategist at Nomura Securities Co., said in an interview with Bloomberg Television. “These policies may trigger a rally in equity markets.”

Nikkei 225 Stock Average futures expiring in December closed at 8,015 in Chicago, higher than 7,900 in Osaka and up from 7,890 in Singapore. The Bank of New York Mellon Asia ADR Price Index, which tracks American depositary receipts of the region’s companies, gained 2.9 percent.

The MSCI Asia Pacific Index fell 3.8 percent last week, paring a 6.8 percent gain the previous week, as looming prospects for the failure of General Motors Corp. and Chrysler LLC rattled investor confidence. A report from automakers last week showed U.S. car sales tumbled by more than a third in November as the recession deepened.

Roads, Bridges

Democrats in Congress reached an agreement in principle with the Bush Administration on providing funds aimed to prevent the collapse of GM and Chrysler, a congressional aide said.

The Labor Department said on Dec. 5 that U.S. companies cut payrolls at the fastest pace in 34 years, with the unemployment rate rising to the highest level since 1993. President-elect Barack Obama will boost investment in roads, bridges and public buildings to create and preserve 2.5 million jobs, he said on Dec. 6 in his weekly radio speech.

Crude oil for January delivery slumped for a sixth day on Dec. 5, losing 6.6 percent to $40.81 a barrel in New York, the lowest settlement since December 2004. Prices have dropped 72 percent since reaching a record $147.27 on July 11.

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

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Blyth, Crown Holdings, Marshall & Ilsley: U.S. Equity Preview

By Lu Wang

Dec. 7 (Bloomberg) -- The following companies may have unusual price changes in U.S. trading tomorrow. Stock symbols are in parentheses, and share prices are as of 5:30 p.m. in New York on Dec. 5, unless otherwise specified.

Standard & Poor’s 500 Index futures expiring in December climbed 24.90, or 2.9 percent, to 872.40. Dow Jones Industrial Average futures rose 210, or 2.5 percent, to 8,612. Nasdaq-100 Index futures gained 43, or 3.8 percent, to 1,178.

Blyth Inc. (BTH US) fell 32 cents, or 4 percent, to $7.78 in trading after the official close of exchanges. The maker of candles and decoration products cut its financial forecast, saying it expects a loss of as much as 28 cents a share in fiscal 2009, compared with an earlier forecast of as much as $1.21 each.

Crown Holdings Inc. (CCK US): The packaging manufacturer, Silgan Holdings Inc. (SLGN US), Owens-Illinois Inc. (OI US) and Ball Corp. (BLL US) are among the companies that may rise as bottle and can sales increase and lower commodity prices cut production costs, Barron’s reported, citing Ghansham Panjabi, an analyst at Wachovia Securities Inc. Crown Holdings gained 47 cents to $16.64 on Dec. 5, Silgan rose $1.19, or 2.76 percent, to $44.30. Owens-Illinois rose 14 cents to $18.36, and Ball increased $1.14, or 3.4 percent, to $34.94.

Hecla Mining Co. (HL US): The second-largest U.S. silver producer said it will defer quarterly preferred dividends payable Jan. 1, to conserve cash. The stock gained 4.3 percent to $1.93 in regular trading.

Heelys Inc. (HLYS US) gained 56 cents, or 18 percent, to $3.65. The maker of wheeled sneakers said it will pay a one-time dividend of $1 share to stockholders of record on Dec. 15.

Honeywell International Inc. (HON US): The world’s largest maker of aircraft-cockpit instruments lost a bid for $10.6 million in royalties when a jury decided that Sandel Avionics Inc. didn’t infringe two U.S. patents. The stock added 4.2 percent to $26.54 in regular trading.

Kohl’s Corp. (KSS US): The fourth-largest U.S. department- store company said Senior Executive Vice President Thomas Kingsbury resigned effective Dec. 1. The stock gained 3.8 percent to $35.62 in regular trading.

Leucadia National Corp. (LUK US): The holding company with interests in insurance, wine and real estate may advance to $30 a share amid a stock market recovery, Barron’s reported, without citing anyone. Leucadia stock gained $1.45, or 8.5 percent, to $18.55.

Marshall & Ilsley Corp. (MI US): Wisconsin’s biggest bank said it will participate in two Federal Deposit Insurance Corp. programs designed to bolster finances at U.S. lenders. The stock rose 4.1 percent to $13.68 in regular trading.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

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Deutsche Boerse, NYSE Talks End, No ‘Conclusion’

By Nandini Sukumar

Dec. 7 (Bloomberg) -- Deutsche Boerse AG, which runs the Frankfurt stock exchange, said talks with NYSE Euronext, operator of the world’s largest stock market, have “now ended without any conclusion.”

“Deutsche Boerse group continually evaluates a number of options for all business in order to increase its value,” the exchange said in an e-mailed statement today. “This naturally includes regular contact with various potential partners, one of which may have been the NYSE. If these talks indeed took place, then they ended without any conclusion.”

The Frankfurt-based company is part-owner of Europe’s largest futures market, and NYSE Euronext, the owner of the New York Stock Exchange and markets across Europe, have held merger talks, Der Spiegel magazine reported, without citing anyone. A combination may help the exchanges reduce expenses and compete with new trading systems.

Europe’s biggest exchange commissioned an internal study on the feasibility of combining with its U.S. rival, four people with direct knowledge of the situation said yesterday. Deutsche Boerse’s shares dropped 63 percent in 2008, the worst annual decline in its stock since it went public seven years ago, and NYSE slid 76 percent as trading decreased in Europe and competition grew.

‘Good Deals’

“With share prices as low as they are, you could argue that there are some good deals to be had,” said James Angel, a finance professor at Georgetown University in Washington who follows exchanges. “I would expect that every major exchange company is doing similar studies.”

NYSE Euronext traded for 6.3 times annual profit last week, the lowest ever and down 90 percent from a high of 64.2 in January 2007. Deutsche Boerse fetched 8.1 times earnings in October, a record low, according to data compiled by Bloomberg.

Chief Executive Officer Reto Francioni discussed the report with Deutsche Boerse directors at a Nov. 25 board meeting, according to the people, who declined to be named because the study isn’t public. Any plans were at an early stage, they said.

A merger would cement control of Europe’s biggest markets in stocks, options and futures for Deutsche Boerse and unite rivals who battled for months over Paris-based Euronext NV before NYSE Group Inc. received approval in 2007 for a $13 billion takeover. Antitrust concern over Deutsche Boerse’s offer helped NYSE gain control of Euronext, the operator of the Paris, Amsterdam, Brussels and Lisbon stock markets.

Previous Bids

Alternative trading platforms such as Chi-X Europe Ltd., Bats Trading Inc. and Tuquoise are now eating into revenue for the two exchanges, while Nasdaq OMX Group Inc. has gained business from NYSE Euronext in the U.S.

Deutsche Boerse has been thwarted in bids to acquire exchanges this decade. Prior to withdrawing its offer for Euronext, it unsuccessfully pursued the London Stock Exchange in 2000 and again in 2004. In August 2004, SWX Group, operator of the Swiss stock exchange, rejected a proposal to start merger talks with Deutsche Boerse. An attempt to join with Borsa Italiana SpA fizzled two years later.

The German exchange acquired New York-based International Securities Exchange Holdings Inc. last year.

The enlarged company would be run by Francioni as chairman and the NYSE’s Duncan Niederauer as chief executive officer, with an eight-person board and an 18-member directorate, Spiegel said. The exchanges would create a Dutch-based holding company as a vehicle for the combination, Spiegel said. The new company would run its share trading from New York and its derivatives business from Frankfurt, it said.

Global Rout

This year’s rout in equities reduced trading on Deutsche Boerse, spurring pressure from shareholders to boost returns. The company’s shares have dropped 63 percent this year, valuing Deutsche Boerse at 9.8 billion euros ($12.5 billion). That compares with the 48 percent retreat in the Dow Jones Stoxx 600 Index. NYSE Euronext declined 76 percent, valuing the company at $5.7 billion.

The German bourse has fought over strategy with its two biggest shareholders, New York-based Atticus Capital LLC and London-based Children’s Investment Fund Management LLP. Deutsche Boerse said in October the hedge funds have “repeatedly” called for a breakup of the group. In November, Francioni said third- quarter results were “proof of the stability and sustainability of the business model of Deutsche Boerse.”

The company last month posted third-quarter profit that beat analysts’ estimates as the turmoil in financial markets boosted derivatives trading, offsetting slowing trading volume from equities at the Frankfurt stock exchange and the Xetra electronic trading platform. Deutsche Boerse is also part-owner of Eurex, Europe’s largest futures market.

New York-based Nasdaq in February extended its global reach by purchasing Sweden’s OMX AB, which runs bourses in seven European cities including Helsinki and Copenhagen. In September, Nasdaq introduced a trading platform to expand beyond Nordic markets and compete against London Stock Exchange Group Plc, NYSE Euronext and Deutsche Boerse.

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

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Obama Warns Economy Will Worsen Before It Recovers

By Edwin Chen and Julianna Goldman

Dec. 7 (Bloomberg) -- President-elect Barack Obama said the U.S. recession will worsen before a recovery takes hold and that he will offer an economic stimulus plan “equal to the task” without worrying about a short-term widening of the budget deficit.

Dealing with the loss of jobs, frozen credit markets, falling home prices and other signs of economic turmoil is “my number one priority,” Obama said on NBC today. Later at a Chicago news conference he said “more aggressive steps” are needed to cope with the housing crisis.

Even with the prospect of a federal budget shortfall approaching $1 trillion, “we can’t worry, short term, about the deficit,” he said on NBC’s “Meet the Press” program. “We’ve got to make sure that the economic stimulus plan is large enough to get the economy moving.”

The economy has shown signs of worsening since the Nov. 4 election. The Labor Department reported Dec. 5 that employers cut 533,000 workers last month, bringing losses this year to 1.91 million. U.S. stocks fell for the fourth time in five weeks as the worsening job market added to concern the recession is deepening.

“Things are going to get worse before they get better,” Obama, 47, who takes office on Jan. 20, said on NBC. In Chicago, Obama said the recession is still “rippling” through the economy.

Housing Crisis

Obama also said in Chicago that his economic team is working on plans to address the housing crisis, noting that he hasn’t seen the “kind of aggressive steps in the housing market to stem foreclosures” that he wants to see from President George W. Bush. Obama’s transition team has spoken with the outgoing administration about the situation, he said.

“If it is not done during the transition, it will be done by me,” Obama said.

The U.S. will come out of the downturn more competitive in the global marketplace if “bold” steps are taken now, Obama said.

“We will emerge stronger than we are right now,” Obama said at the Chicago news conference, called to announce that former Army Chief of Staff Eric Shinseki is his choice to head the U.S. Department of Veterans Affairs.

Construction Spending

While Obama didn’t offer any new details of his recovery plan in either the NBC interview or his news conference, he reiterated a commitment he made in his weekly radio address yesterday to the biggest investments in the nation’s infrastructure since the President Dwight D. Eisenhower created the interstate highway system a half-century ago.

Obama said state governors have many such projects that are “shovel ready,” meaning they could be undertaken swiftly and have an immediate impact on jobs. He also indicated that proposals -- which could include updating health care administration and public schools -- would be reviewed as part of his broader plan.

“The days of just pork coming out of Congress as a strategy, those days are over,” he said in the NBC interview, which was taped yesterday.

He declined to specify a price tag for the stimulus, saying his advisers are “busy working, crunching the numbers, looking at the macroeconomic data to make a determination as to what the size and the scope of the economic recovery plan needs to be. But it is going to be substantial.”

Potential Cost

Lawmakers in Congress suggested last month that the size of such a program may be between $500 billion and $700 billion. Jared Bernstein, named as economic policy director for Vice President-elect Joe Biden, said after the job numbers were released Dec. 5 that “it’s fair to assume the upper bound on a stimulus package is going up, not down.”

Obama sidestepped questions about whether he would delay making good on his campaign promise to repeal Bush administration tax cuts for those making $250,000 or more annually. He said his economic team is studying whether to raise those rates right away or wait until the tax cuts to expire on schedule in 2011.

During the hour-long NBC interview, Obama also said that while it’s not an option to let U.S. automakers “collapse” amid a recession and throw more workers out of jobs, any government loans or aid they get must be conditioned on the companies revamping their business and their products.

Auto Industry Aid

That also may mean management changes at General Motors Corp., Ford Motor Co. or Chrysler LLC, he said. The executives must abandon their “head-in-the-sand” approach and develop a “sustainable business model” that begins by building fuel efficient vehicles.

“They can’t keep on putting off the changes that they frankly should have made 20 or 30 years ago,” Obama said.

He called for “a new ethic of responsibility” for corporate leaders when it comes to executive compensation, saying they should be willing to give up some pay and bonuses to allow more workers to keep their jobs, retain medical insurance and stay in their homes.

“That kind of notion of shared benefits and burdens is something that I think has been lost for too long and is something that I’d like to see restored,” he said.

The circumstances aren’t unique to the auto industry, he added. “We have seen that across the board. Certainly we saw it on Wall Street.”

To contact the reporter on this story: Edwin Chen in Washington at echen32@bloomberg.net; To contact the reporter on this story: Julianna Goldman in Chicago at jgoldman6@bloomberg.net

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