Trichet’s Vision Unravels as Investors Shun Italy, Spain Debt

By Emma Ross-Thomas

Jan. 16 (Bloomberg) -- European Central Bank President Jean-Claude Trichet’s vision of economies converging behind the shield of a shared currency may be unraveling.

The gap between the interest rates Spain, Italy, Greece and Portugal must pay investors to borrow for 10 years and the rate charged to Germany has ballooned to the widest since before they joined the euro. The difference may grow further as Europe’s worst recession since World War II hurts budgets and credit ratings across the region.

Diverging bond yields hurt Trichet’s argument that the ECB’s inflation-fighting mandate ushered in an era of stability for nations that once suffered rampant price growth. They also make it tougher for the ECB, which cut its key rate to a record yesterday, to set one benchmark for all 16 euro nations. That may delay recovery as governments try to fund stimulus plans.

“It will act as an additional braking mechanism on these economies,” said Julian Callow, chief European economist at Barclays Capital in London. “For the ECB it makes it harder to determine the future evolution of the economy.”

Trichet has asserted that the ECB, which was modeled on the Bundesbank, and the prospect of euro membership helped some nations import the credibility built up by Germany in the decades after World War II. In May, Trichet said the euro prompted a “convergence of market interest rates” to the level set by “the most credible national currencies” before monetary union.

The yield on Spain’s 10-year bond averaged 8.5 percent in the six years before it joined the euro and the gap with the equivalent German bond was 246 basis points. In the next eight years, the average yield fell to 4.5 percent and the spread to 13 basis points.

Greek Downgrade

That convergence is now being thrown into reverse. In the past week, Standard & Poor’s has downgraded Greece’s credit rating, and those of Portugal and Spain are also under threat.

The difference between the Spanish and German 10-year bonds rose to 114 basis points yesterday, the highest since 1997. The spread on Italy’s bond was also the most in 12 years and the Greek spread was the most since 1999.

Investors are becoming more discerning about who they lend to as shrinking economies force governments to increase budget deficits. Greece’s shortfall may widen to 3 percent of gross domestic product next year, Ireland’s to 7.2 percent and Portugal’s to 3.3 percent, the European Commission said in November. Standard & Poor’s said Jan. 12 that Spain’s deficit could top 6 percent this year.

Toll on Currency

The worsening economic outlook is pushing the euro lower. The currency has lost 7 percent against the Swiss franc, 5 percent versus the yen and 4 percent compared with the dollar in the past month. It has declined 8 percent versus the pound since Dec. 30, when it reached an all-time high of 98 pence.

As well as spoiling Trichet’s dream of a more-united European economy, the differing borrowing costs mean rate cuts will have a more uneven impact across the region and restrain recoveries in some countries.

Trichet said yesterday officials were “observing the market spreads,” which were related in part to the broader financial market turmoil. The widening spreads underlined the importance of governments keeping within European budget rules, he said.

The ECB cut its main rate by a half point to 2 percent yesterday, which matches the record low set between 2003 and 2005.

“There is a question mark about a much more patchy upswing,” said Ken Wattret, senior economist at BNP Paribas SA in London. “The divergence of economies will continue to raise questions about whether monetary union is functioning.”

Fiscal Challenge

That last debate has received a fresh airing among those who question whether the single currency is ultimately sustainable without a common fiscal policy. Harvard University economist Martin Feldstein, who was skeptical of the euro from the start, said in November that diverging bond yields suggest investors “regard a breakup as a real possibility.”

While part of the recent trading may amount to a bet the bloc will splinter, the probability remains “very, very small, given the political will and the perceived complications of someone leaving,” said Jonathan Loynes, chief European economist at Capital Economics Ltd. in London.

Spanish Finance Minister Pedro Solbes said Jan. 13 the idea of a country leaving the euro zone was “inconceivable.” Italian Finance Minister Giulio Tremonti said yesterday the euro project was “totally sustainable.”

Inside Advantages

“When push comes to shove it would be more expensive to be out of the system right now than inside,” said Marc Chandler, head of currency strategy at Brown Brothers Harriman & Co. in New York. While the yield on Greece’s 10-year bond stood at 5.4 percent yesterday, Hungary, which may set a new euro entry target date by March, must pay 9 percent.

The problem for Trichet is that bond spreads will probably continue to widen, said David Owen, chief economist at Dresdner Kleinwort. With governments borrowing to stimulate their economies, bonds sold by the more-troubled economies may become even less attractive, he said.

“You don’t, within the euro-system, have to buy Spanish paper at all,” Owen said.

Thomas Mayer, chief European economist at Deutsche Bank AG, said the diverging yields are a “warning shot” to governments to improve competitiveness through restraining costs or have investors impose discipline on them by choking off capital just when they need it most.

“You get this if you enter a really bad recession,” he said. “It’s obviously a very harsh medicine but you could say the market is dishing out this medicine.”

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

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Obama Popularity May Be Investors’ Nightmare: Michael R. Sesit

Commentary by Michael R. Sesit

Jan. 16 (Bloomberg) -- Can the Obama effect last?

The U.S. president-elect is so admired, engenders such high aspirations and is such a wellspring of hope that no one could meet these expectations. That’s bad news for financial markets.

Barack Obama is four days from entering the White House with more at stake than any president since Franklin Delano Roosevelt.

So far, markets are betting that he will succeed. The Standard & Poor’s 500 Index has rallied 12 percent since Nov. 20. And from 2.06 percent on Dec. 30, the yield on the 10-year U.S. Treasury bond has risen to 2.20 percent, suggesting the flight- to-safety trade has abated somewhat. Meanwhile, the dollar has advanced 9.7 percent against the euro since mid-December.

The make-up of Obama’s economic team was leaked to the press on Nov. 21 and formally revealed a few days later.

The group is impressive. Federal Reserve Bank of New York President Timothy Geithner was designated to be the new Treasury secretary. Lawrence Summers, former Treasury secretary in Bill Clinton’s administration, was tapped to head the National Economic Council, with the smart money betting he’ll take over the Federal Reserve in 2010. And Paul Volcker, a highly respected former Fed chairman, was named to head an economic advisory board.

Optimism surrounding the appointments was so high that the S&P 500 wracked up its biggest four-day rally since 1933.

The euphoria may be overdone.

Bank Lobbying

Vested interests in the financial community, lobbying by banks and other institutions, and congressional resistance might stymie the much-needed redesign of the U.S. regulatory structure.

Lawmakers, angered at the Bush administration’s handling of the first $350 billion of the $700 billion Troubled Asset Relief Program, might not approve release of the second half. Failure to do so would have a “negative” impact on markets, House Financial Service Committee Chairman Barney Frank said this week.

Foreign investors may balk at financing a U.S. budget deficit that the Congressional Budget Office projects will grow to $1.2 trillion this year even without new spending being approved. Investors might conclude -- many economists already have -- that Obama’s plans for an additional $775 billion two- year stimulus program aren’t enough to resuscitate the economy.

The proposed package was caught in crossfire last week between lawmakers favoring more outlays for social programs, conservatives opposed to increased spending and moderates concerned about growing deficits.

Scandals and Infighting

The president-elect’s popularity, like any head of state’s, will also be vulnerable to the demands of domestic constituencies such as labor unions, to scandals and infighting within his administration, and to foreign-policy setbacks.

New Mexico Governor Bill Richardson, nominated to be Commerce secretary, has already had to withdraw his name from consideration because of an investigation into a contract awarded to a company run by a political donor.

Potentially more damaging are revelations of Geithner’s past tax difficulties, which, even if he’s confirmed as Treasury secretary, would leave him as damaged goods. The stock market plummeted 4 percent at one point on Jan. 14, after the issue became public.

In short, the pressures of office are such that no president can permanently escape alienating the politically powerful or antagonizing sizable segments of the population. Adapting from Abraham Lincoln, you can please some of the people all of the time, all of the people some of the time, but you can’t please all of the people all of the time.

‘Profound Irresponsibility’

Although he has begged off commenting on some issues, especially foreign affairs, saying the U.S. has only one president at a time, Obama has moved forcefully in the financial and economic arena. He has mostly managed expectations deftly -- regardless of the brouhaha over the proposed stimulus package -- prodded Congress to act on his requests and made sure his predecessors and Wall Street carry the can for the country’s mess.

Obama last week blamed the economy’s troubles on “an era of profound irresponsibility that stretched from corporate boardrooms to the halls of power in Washington, D.C.”

In another populist move, the new administration will direct the Treasury to limit executive pay, dividend payments and stock buybacks by financial institutions that get “exceptional assistance” from the TARP, Summers wrote to Congress leaders.

“There is a devastating economic crisis that will become more difficult to contain with time,” Obama said at a news conference last week. “Today, we face a world of unconventional challenges from the spread of stateless terrorist networks and weapons of mass destruction to the grave dangers posed by failed states and rogue regimes.”

Agent of Change

A day earlier, he offered a bleak description of the U.S. economy that was seemingly designed to push Congress to pass the stimulus package. Obama portrayed a country where the unemployment rate is accelerating, family income is falling and “a generation of potential and promise” may be lost without prompt Congressional action.

“I don’t believe it’s too late to change course, but it will be if we don’t take dramatic action,” he said. “If nothing is done, this recession could linger for years.”

As a candidate, Obama ran as an agent of change. If he is prevented from implementing that commitment, the market consequences will be severe. That’s the price of being regarded as a messiah, even if he never sought the epithet.

(Michael R. Sesit is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Michael R. Sesit in Paris at at msesit@bloomberg.net

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Russia Proposes European Companies Share Cost of Transit Gas

By Yuriy Humber and Halia Pavliva

Jan. 16 (Bloomberg) -- Russia proposed that European companies form a group to share the cost of natural gas Ukraine needs to operate its pipelines, as part of efforts to resolve a dispute that’s halted supplies through the country for 10 days.

The move came as Russian Prime Minister Vladimir Putin prepared to meet his Ukrainian counterpart, Yulia Timoshenko, in Moscow tomorrow.

Natural gas jumped and the ruble slid to a record low as the continent endured a second week without gas supplies from Ukraine. The meeting was called after the EU threatened to urge companies in the 27-nation bloc to seek legal redress if supplies aren’t resumed without further delay. The crisis has led to power shortages across the Balkans, with rationing introduced and factories shut down because of a lack of fuel.

“This is a rare lose-lose situation,” Eugen Weinberg, senior commodity analyst at Commerzbank AG, said in a Bloomberg Television interview. “I think it will take a few days to resolve as emotions have risen and the subject has moved from being a purely business issue to a political one.”

Russia stopped flows through Ukraine on Jan. 7 after negotiations over gas prices and transit fees broke down. OAO Gazprom, the Russian gas exporter that provides a quarter of the continent’s gas needs, estimates it has lost $1.1 billion in export revenue since the crisis unfolded.

Sharing Risk

Gazprom, Russia’s gas-export monopoly, could sell gas to the group for resale to Ukraine, Putin said yesterday, according to his spokesman Dmitry Peskov. Putin considers it “absurd” to give Ukraine free gas for running the pipeline system, Peskov told reporters.

“Russia is not ready to take all the risks,” Peskov said on a conference call after Putin made the proposal at a Moscow meeting with Paolo Scaroni, chief executive officer of Italy’s Eni SpA.

Timoshenko sent a telegram to Putin yesterday guaranteeing Russian transit flows to EU nations “apart from 8 percent of gas used to fuel gas-pumping,” according to a statement on the government’s Web site. An argument over the so-called technical gas, needed to ensure Ukraine’s pipeline system can operate, has been one of the sticking points in the conflict between Russia and Ukraine.

Gazprom plans to contact other European companies such as Germany’s E.ON Ruhrgas AG with Putin’s proposal in the next few hours after Scaroni said the Italian oil producer would look “favorably” on this solution, according to Peskov.

Eni Role

The pipeline network must be filled with about 140 million cubic meters of gas to operate, while pumping stations use about 20 million cubic meters a day, Scaroni told reporters on a conference call.

“We will pay for the gas and be paid back in gas at the moment Ukraine and Russia reach an agreement,” he said, adding that Italian Prime Minister Silvio Berlusconi backed the plan. Eni would lead the EU group, Scaroni said.

A gas consortium has been discussed by Russia and Ukraine since at least 2006, when then-President Putin and his Ukrainian counterpart, Viktor Yushchenko, said they would welcome assistance from European energy companies in operating Ukraine’s gas pipelines.

Yushchenko has repeatedly said the pipelines, which carry most Russian gas exports to western Europe, will remain state- owned by Ukraine.

‘Reliability’

German Chancellor Angela Merkel took aim at Russia a day before she’s due to host talks with Putin in Berlin, saying Moscow could lose its “reliability” as an energy partner if gas deliveries are interrupted for much longer. Russia’s behavior has been “unacceptable,” Fatih Birol, the chief economist of the International Energy Agency, said in Madrid.

Russian President Dmitry Medvedev on Jan. 14 invited Ukraine and the EU to an emergency summit in Moscow this weekend to reach a settlement and also prevent a repeat of the crisis.

He made the proposal after meeting the prime ministers of Slovakia, Moldova and Bulgaria, nations hit hardest by the supply cutoff. The disruption has already led to renewed calls for region to diversify its sources of energy away from Russia.

The EU said it’s ready to send representatives to a meeting to “assist” Russia and Ukraine in reaching a settlement. EU officials “urge once again Russia and Ukraine to resume gas supplies to the EU immediately,” spokesman Johannes Laitenberger told reporters in Brussels yesterday.

EU Representatives

Czech Industry Minister Martin Riman said he and EU Energy Commissioner Andris Piebalgs would attend the meeting as “observers” if Ukraine also took part.

Yushchenko met with U.K. Prime Minister Gordon Brown in London today. Brown later issued a statement urging an “urgent resolution” to the dispute, which he said was causing “severe economic and social difficulties” in a number of EU countries.

Gas prices in the U.K., Europe’s largest market, climbed as much as 8.1 percent to 67 pence a therm yesterday, according to broker Spectron Group Ltd. That’s equal to $9.79 a million British thermal units. The ruble fell as low as 32.4668 per dollar.

Gazprom’s overall deliveries to Europe fell by about 60 percent when it halted transit flows and supplies to Ukraine’s domestic market were suspended Jan. 1.

In 2006, Russia turned off gas exports to Ukraine for three days, causing volumes to fall in the EU, and also cut shipments by 50 percent last March during a debt spat.

To contact the reporters on this story: Yuriy Humber in Moscow at yhumber@bloomberg.net; Halia Pavliva in New York at hpavliva@bloomberg.net

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Woodside Scraps Planned California LNG Import Project

By Angela Macdonald-Smith

Jan. 16 (Bloomberg) -- Woodside Petroleum Ltd., Australia’s second-largest oil and gas producer, scrapped a plan to import liquefied natural gas into California because market conditions no longer support the project.

An application to U.S. regulators for planning approval for the OceanWay venture, which was to be built off Los Angeles, is being withdrawn, Perth-based Woodside said today in a statement to the Australian stock exchange.

Woodside, which supplies LNG to North Asia, had intended to provide 15 percent of California’s annual gas supplies from a vessel and buoy system off the coast. The state’s gas and electricity utilities in December cut their forecast for gas demand growth to 0.1 percent a year through 2030, from 0.5 percent two years earlier, citing no growth from power generators and declining industrial use.

“If the forecast was for flat gas demand through 2030, it was always going to be difficult to import significant tranches of gas into California,” said Andrew Williams, an energy analyst at Credit Suisse Group in Melbourne. “It’s no great loss in terms of I don’t think anyone had it in their numbers for Woodside. But what it does do is limit their long-term gas options.”

Woodside dropped as much as 35 cents, or 1 percent, to A$33.70 in Sydney trading and was at A$33.70 at 10:35 a.m. local time. The decline compared with a gain or as much as 1.2 percent in the exchange’s benchmark energy index.

Lower Prices

Today’s statement follows Woodside’s decision in December to cut the size of the project, citing community and regulatory concerns, and weaker customer demand. Larger rival BHP Billiton Ltd. dropped a similar, $800 million proposal in 2007 amid opposition from local residents and environmental groups.

“We still believe in the long-term value of liquefied natural gas as a new source of clean, reliable and secure energy for Los Angeles,” Steve Larsen, president of Woodside Natural Gas, said in the statement. “But we must acknowledge the impact of the current market.”

Woodside originally announced its plans for OceanWay based on four consecutive years of declining U.S. gas production, said Roger Martin, a spokesman in Perth. Since then, production has increased and output in 2008 is expected to be more than 20 trillion cubic feet for the first time since 1974, he said. The company wouldn’t rule out re-submitting the planning application should market conditions change, he said.

Potential Charge

Woodside, 34 percent owned by Royal Dutch Shell Plc, can’t say yet whether it would include a charge in its accounts for expenditure so far on the project, Martin said, declining to quantify the amount.

Gas prices in California are likely to be lower than global LNG prices in the “near-term,” meaning that “significant” LNG deliveries to the state are unlikely, Richard Myers, program and project supervisor of the California Public Utilities Commission, said in a December presentation.

Natural gas futures in New York have dropped 57 percent in the past six months as the slowing economy cut demand. Crude oil prices have plunged 74 percent in the same period.

Sempra Energy, owner of the largest U.S. natural gas utility, opened North America’s first West Coast terminal last year, on Mexico’s Baja Peninsula. The U.S. has import plants on the western coast, from where supplies would be received from Asian producers.

‘Difficult Environment’

Former Australian Resources Minister Ian Macfarlane said in 2004 the U.S. could become Australia’s largest export market for LNG, buying more than A$50 billion worth over 30 years starting as early as 2010.

“Twelve or 18 months ago we were all starting to contemplate the world as one global gas market, and that required the opening up of the states on the West Coast,” Credit Suisse’s Williams said. “It looks as if that will take a bit longer to happen now. It highlights it’s going to be a pretty difficult operating environment for the next few years.”

LNG is natural gas chilled to liquid form for transportation by tanker to destinations not connected by pipeline. Woodside produces the fuel at the North West Shelf venture in Western Australia, where it is also building the Pluto LNG plant.

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

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South Korean Won Rebounds From Lowest in Month on Stock Advance

By Kim Kyoungwha

Jan. 16 (Bloomberg) -- South Korea’s won rose, rebounding from a one-month low, as local stocks rallied on the prospects government aid will shore up Bank of America Corp.

The currency, Asia’s worst performer last year, is still headed for its biggest weekly loss in almost two months on concern a deepening global recession will hurt demand for Korean exports and that further U.S. bank failures will prompt hoarding of dollars. South Korea’s department-store sales fell by the most in almost two years in December, government data showed.

“Currency moves are getting initial support from gains in the stock markets,” said Kim Jae Eun, an economist with Hana Daetoo Securities Co. in Seoul. Still, she added, “doubts and fears on whether policy measures will work to shore up the economy are growing, shaking investment confidence.”

The won rose 0.9 percent to 1,379.85 per dollar as of 9:21 a.m. in Seoul, according to Seoul Money Brokerage Services Ltd. The currency lost 2.7 percent on the week, the biggest since Nov. 21 and the worst among the 10 most-traded Asian currencies outside of Japan. The Kospi index is up 0.5 percent after a 6 percent drop yesterday.

Sales at the nation’s three-biggest department stores, including Lotte Shopping Co., declined 4.5 percent from a year earlier, after gaining 7.5 percent in November, the Ministry of Knowledge Economy said in Gwacheon today. Sales at discount stores dropped 5.8 percent following November’s 2.3 percent rise.

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

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Yen Falls as Stock Gains, Bank Bailouts Increase Risk Appetite

By Stanley White

Jan. 16 (Bloomberg) -- The yen fell for a second day against the euro on speculation stock gains and measures to stabilize the U.S. financial system will encourage investors to buy higher-yielding assets funded in Japan’s currency.

The yen also weakened versus the Australian and New Zealand dollars and South Africa’s rand after the U.S. Senate voted to release the second half of a $700 billion financial rescue package to U.S. President-elect Barack Obama. Bank of America Corp., the biggest U.S. bank by assets, is nearing an agreement on federal aid that may include up to $20 billion in new capital, easing concern losses at financial institutions will spread.

“A lot of people, myself included, are trying to buy the euro against the yen,” said Motonari Ogawa, director of currency trading in Tokyo at Barclays Capital Inc., the fourth- largest U.K. lender. “Stocks are on a firm footing, and that increases appetite for risk.”

The yen fell to 118.93 per euro as of 10:37 a.m. in Tokyo from 117.87 late yesterday in New York. The dollar rose to 90.17 yen from 89.84 yen. The euro bought $1.3187 from $1.3115. The yen may depreciate to 121.30 versus the euro today, Ogawa said.

Against the Australian dollar, the yen slipped to 60.43 from 59.55 late yesterday in New York. Japan’s currency also declined to 49.01 versus the New Zealand dollar from 48.28. The yen weakened to 9.0438 per South African rand from 8.9936. Benchmark interest rates are 4.25 percent in Australia, 5 percent in New Zealand, 11.5 percent in South Africa and 0.1 percent in Japan.

Stock Gains

The MSCI Asia-Pacific Index of regional shares rose 1.3 percent and the Nikkei 225 Stock Average gained 1.6 percent and Standard & Poor’s 500 Index futures advanced 0.9 percent.

The U.S. government will use as much as $100 billion to ease the housing crisis and stabilize the financial system, Lawrence Summers, economic adviser for Obama, said yesterday. The president-elect takes office on Jan. 20.

Bank of America may also get a $120 billion “backstop” to help it cope with troubled assets after its purchase of Merrill Lynch & Co. last year, a person familiar with the matter said.

BOA moved forward its quarterly earnings report to today. The world’s largest banks have posted losses and writedowns of about $1 trillion since the start of 2007 on mortgage-related securities, according to data compiled by Bloomberg.

“We have to take the Bank of America news positively, because the alternative of not helping the financial system would be disastrous for sentiment,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “There are high hopes for Obama’s administration, which may support celebratory buying of the dollar.”

The dollar may rise to $1.3095 per euro today, he said.

ECB Rates

The euro fell 2.1 percent against the dollar this week, headed for a third weekly decline against the dollar, its longest losing streak in almost two months, after European Central Bank President Jean-Claude Trichet signaled interest rates may fall further.

“We didn’t say that it was now the limit and we wouldn’t move any more,” Trichet told reporters in Frankfurt yesterday after the central bank lowered its main refinancing rate by a half-percentage point to 2 percent, matching a record low.

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

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N.Z. Dollar Volatility Reaches Two-Month High as Risks Rise

By Liz Capo McCormick

Jan. 16 (Bloomberg) -- New Zealand dollar volatility touched the highest level in almost two months amid concern a weakening global economy will damp investor demand for the country’s exports.

The kiwi, as New Zealand’s currency is dubbed, has declined more than 9 percent versus the U.S. currency this week. Standard & Poor’s lowered the outlook on Zealand’s AA+ credit rating to negative from stable on Jan. 13, citing the risk that the nation’s current account deficit and overseas debt may curb growth and investment. Falling global economic growth means less demand and lower prices for the country’s exports, which include meat and hides, aluminum and dairy products.

“Volatility is reacting to expectations on the economic side and realized risks are starting to rise,” said Sebastien Galy, a currency strategist at BNP Paribas Securities SA in New York. “There is clearly more downward potential for commodity currencies, like the New Zealand dollar, that are much more exposed to the weakening of global demand for its exports.”

The implied volatility on one-month options for the New Zealand-U.S. dollar exchange rate reached 30.8 percent yesterday, the highest since Nov. 24. The rate, which is a measure of expected price swings and which traders quote as part of setting currency option prices, is up about 9 percentage points from a recent three-month low of 21.08 on Dec. 16. Volatility remains below a record high of 42.97 percent set on Oct. 24, the highest since at least August 1997, or a far back as Bloomberg compiles data.

Further Declines Predicted

The kiwi dropped 0.6 percent to 53.91 U.S. cents in late New York trading yesterday, near a one-month low. The currency will weaken approximately 13 percent to 46 U.S. cents by the end of the second quarter, according to BNP.

Falling global growth weighs on domestic output as it reduces demand for commodities, which make up about 70 percent of New Zealand’s exports. New Zealand’s prime minister, John Key, said yesterday the economy may not grow this year and the jobless rate may reach 7 percent, up from the latest reported figure of 4.2 percent.

Options are contracts granting the right, but not the obligation, to buy or sell a specific amount of a security at a pre-set price and within a set time period.

Volatility in New Zealand dollar options is rising faster on puts, which grant the right to sell it versus the U.S. dollar, than on calls, which allow purchases.

Put-Options Premium

The one-month so-called risk-reversal rate on Kiwi-U.S. dollar options reached minus 4.2 percent, its greatest put premium since Dec. 17. The rate reached minus 7.85 percent on Oct. 27, its greatest premium since at least October 2003, or as far back as Bloomberg compiles data. Negative values show greater demand for Kiwi puts versus calls.

“If you owe the rest of the world a lot of money, then there is more risk potential when the economy degrades very fast,” Galy said. “Realized risks increase, the bigger the imbalances are.”

New Zealand’s current account deficit, the broadest measure of trade, is 8.6 percent of gross domestic product. The U.S. current account deficit was 4.8 percent of GDP, and the Euro zone countries’ was 0.5 percent, as of September.

To contact the reporters on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

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Crude Oil Set for Two-Week Decline After OPEC Cuts Forecast

By Mark Shenk and Samantha Zee

Jan. 16 (Bloomberg) -- Crude oil traded little changed, set for a two-week decline of more than 20 percent, after OPEC said demand will drop this year.

Consumption of OPEC crude will shrink 4.2 percent to 29.5 million barrels a day, according to the group’s monthly report released yesterday. The discount of oil in New York to the Brent grade in London widened to as much as $10.79 a barrel yesterday, a record, because of rising supplies at Cushing, Oklahoma, the delivery point for barrels traded on the U.S. exchange.

“The overriding factor impacting the market is the fact that we are in the midst of a global recession, which is buffeting the U.S., even China,” said Rachel Ziemba, an analyst at RGE Monitor, an economic research company in New York. “That’s going to be a negative for oil demand.”

Crude oil for February delivery was at $35.59 a barrel, up 19 cents, on the New York Mercantile Exchange at 9:16 a.m. Singapore time after falling as much as 27 cents, or 0.8 percent, to $35.13. Yesterday, futures dropped $1.88, or 5 percent, to $35.40 a barrel, the lowest settlement since Dec. 24. Prices are down 62 percent from a year ago.

Brent crude oil for February settlement declined 39 cents, or 0.9 percent, to settle at $44.69 a barrel on London’s ICE Futures Europe exchange yesterday. The more-active March Brent contract rose 6 cents to $47.68 a barrel.

Crude-oil inventories at Cushing, Oklahoma, where West Texas Intermediate traded on the Nymex is stored, climbed 2.5 percent to 33 million barrels last week, the Energy Department said earlier this week. It was the highest since at least April 2004, when the department began keeping records for the location.

$50 WTI

“On average, we expect prices to be around $50 for WTI and Brent” this year, Francisco Blanch, head of commodities research at Merrill Lynch & Co. in London, said on Bloomberg television. “We’ve made no distinction even though the WTI market does seem oversupplied due to a number of issues around the Cushing area.”

The price of oil for delivery next December is 65 percent higher than for the front-month contract, allowing traders to profit if they can store crude. February 2009 crude ended the day at a $8.14 discount to March, from $3.88 on Jan. 5. This structure, in which the subsequent month’s price is higher than the one before it, is known as contango.

“The front end of the Nymex is weighed down by all of the oil at Cushing,” said Tom Bentz, senior energy analyst at BNP Paribas in New York. “WTI is the weakest crude grade out there right now.”

Reduced Demand

The Organization of Petroleum Exporting Countries shaved its global demand estimate for 2009 by 20,000 barrels to 85.66 million barrels a day. That brings this year’s reduction to 180,000 barrels a day, or 0.2 percent.

“Consumption could start to stabilize and potentially start to recover a little bit toward the end of this year, maybe early into next year,” Blanch said. “Of course, this is very dependent on fiscal and monetary policies starting to yield the expected result, which is some stimulus to economic activity.”

There will be a “major contraction” in demand among members of the Organization for Economic Cooperation and Development, with the United States being the “main contributor,” to this reduction, OPEC said.

U.S. fuel demand fell 6 percent last year, the biggest drop since 1980, as prices touched records and the economy contracted, the industry-funded American Petroleum Institute said yesterday.

U.S. crude stockpiles increased 1.14 million barrels to 326.6 million barrels last week, the highest since Aug. 31, 2007, the Energy Department said Jan. 14. Gasoline and distillate fuel supplies also rose.

Morgan Stanley is seeking a supertanker to store crude oil, joining Citigroup Inc. and Royal Dutch Shell Plc in trying to profit from higher prices later in the year, four shipbrokers said. Frontline Ltd., the world’s biggest owner of supertankers, said Jan. 14 about 80 million barrels of crude oil is being stored in tankers, the most in 20 years.

To contact the reporters on this story: Mark Shenk in New York at mshenk1@bloomberg.net; Samantha Zee in Los Angeles at szee@bloomberg.net.

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Australia, N.Z. Dollars Set for Biggest Weekly Loss in 3 Months

By Ron Harui and Tracy Withers

Jan. 16 (Bloomberg) -- The Australian and New Zealand dollars headed for the biggest weekly losses in almost three months on increasing concern the global slowdown is worsening, reducing demand for higher-yielding currencies.

Australia’s currency touched a five-week low against the dollar as a government report yesterday showed the nation’s unemployment rate rose to the highest in almost two years. New Zealand’s currency declined to the lowest level in more than six weeks as a government valuation agency said yesterday the country’s house prices dropped the most in December since 2005.

“The Aussie dollar is down quite a bit” for the week, said Adam Carr, senior economist in Sydney at ICAP Australia Ltd., part of the world’s largest interbank broker. “What is sparking that is renewed risk aversion and concerns over the global economy. The path of least resistance is down for the Aussie,” he said, referring to the currency by its nickname.

Australia’s dollar bought 66.64 U.S. cents as of 11:40 a.m. in Sydney from 70.34 cents in New York on Jan. 9 and 66.12 cents late in Asia yesterday. The 5.3 percent weekly decline was the biggest since Oct. 24. It reached 65.38 cents, the lowest since Dec. 12. The currency traded at 59.90 yen from 63.59 yen on Jan. 9 and 58.79 yen yesterday, when it touched 58.20 yen, the lowest in almost five weeks.

The Australian currency may decline to 65 cents and possibly as low as 63 cents in the next few weeks, Carr said.

New Zealand’s dollar traded at 54.04 U.S. cents from 59.20 cents on Jan. 9 and 53.48 cents late in Asia yesterday. The 8.7 percent weekly decline was the largest since Oct. 24. It reached 52.80 cents, the weakest since Dec. 4. The currency bought 48.57 yen from 53.49 yen on Jan. 9 and 47.56 yen yesterday. It touched 47.16 yen, the lowest since September 2001.

The two currencies rose today as gains in Asian stocks encouraged investors to buy higher-yielding assets.

Jobless Rate

Australia’s jobless rate climbed in December to 4.5 percent, from 4.4 percent, as full-time employment plunged by 43,900, the statistics bureau said in Sydney. The total number of people employed dropped 1,200.

New Zealand house prices fell 7.4 percent last month from a year earlier, the biggest decline since the series began in 2005, Quotable Value New Zealand Ltd. said in an e-mailed report. A second report showed house sales dropped 23 percent in December from a year earlier and it took longer to sell property.

“It has been a week of carnage for the New Zealand dollar,” said Danica Hampton, a strategist at Bank of New Zealand Ltd. in Wellington. “The U.S. dollar strengthened as investors digested continued weakness in global equities and the European Central Bank’s rate cut” to 2 percent from 2.50 percent yesterday.

Risk Appetite

Both currencies have paced declines in U.S. stocks, which are a bellwether for investors’ risk appetite. As concerns over the global economy deteriorate, investors typically sell stocks and reduce their holdings of higher-yield currencies.

The Standard & Poor’s 500 Index of U.S. equities has fallen 5.2 percent this week on concern banks will need more government aid. The index rose 0.1 percent yesterday on reports that Bank of America Corp. doesn’t need as much funding from the U.S. Treasury’s Troubled Asset Relief Program as earlier predicted.

Benchmark interest rates are 5 percent in New Zealand and 4.25 percent in Australia, compared with 0.1 percent in Japan and as low as zero in the U.S., making the South Pacific nations attractive destinations for so-called carry trades.

In a carry trade, investors get funds in a country with low borrowing costs and invest in one with higher interest rates. The risk is currency market moves erase those profits.

Financing Costs

Financing costs in Australia declined. The difference between the rate Australian banks charge each other for three- month loans and the overnight swap rate fell to 51.8 basis points today from 58.4 basis points on Jan. 9. The gauge, a measure of cash scarcity, averaged 11 basis points in the five years before the credit crunch started in August 2007.

Australian government bonds headed for weekly gains. The yield on the 10-year note fell to 3.94 percent today from 4.12 percent on Jan. 9. It reached 3.84 percent yesterday, the lowest since at least 1969 according to data compiled by Bloomberg. The two-year yield dropped to 2.59 percent from 2.87 percent a week earlier. It touched 2.47 percent yesterday, the least since 1983.

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, declined to 3.80 percent today from 4.28 percent at the end of last week.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Tracy Withers in Wellington at twithers@bloomberg.net.

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Thailand’s SET May Rise to 550 by End-2009, Citi Says

By Chen Shiyin

Jan. 15 (Bloomberg) -- Thailand’s SET Index may climb 25 percent by the end of the year because of government measures to bolster the nation’s slowing economy and attractive valuations, according to Citigroup Inc.

The brokerage forecast the benchmark index to climb to 550, 25 percent higher than yesterday’s close, Suchart Techaposai, Citigroup’s Bangkok-based head of research, wrote in a report. Easing political tensions in the nation will also help boost consumer sentiment and business confidence, the analyst said.

The SET Index dropped 48 percent last year, the biggest slump in 11 years, as street protests helped topple the government and the global credit crisis worsened. The measure, which climbed 1.3 percent yesterday after the central bank slashed interest rates more than economists expected, fell 3.4 percent to 424.66 at 11:44 a.m. local time today, compared with the 3.8 percent drop of the MSCI AC Asia Pacific Index.

“Low oil prices, huge saving pools at both the macro and household levels, low corporate debt, limited investment excesses, and strong banking balance sheets will allow Thailand’s economy to effectively respond to the low interest- rate policy,” Suchart wrote in the report.

Prime Minister Abhisit Vejjajiva, elected by parliament last month, plans to spend 300 billion baht ($8.6 billion) on public works, farm subsidies and cheap loans to counter the slump in Southeast Asia’s second-largest economy.

Interest Rate Cut

The Bank of Thailand yesterday lowered its one-day bond repurchase rate by three-quarters of a percentage point to 2 percent. The decision was expected by four of 19 economists in a Bloomberg News survey.

Gross domestic product probably shrank in the fourth quarter as a global recession and the closure of Bangkok airports hurt trade and tourism, the finance ministry has said. Growth this year will probably be the slowest since a recession in 1998, the government said.

Investors should buy Bangkok Bank Pcl, Kasikornbank Pcl and Siam Commercial Bank Pcl, the nation’s three largest banks by market value, because the companies will benefit from expansion in the nation’s economy, the Citigroup analyst said.

The brokerage also favors shares of Advanced Info Service Pcl, Land and Houses Pcl and L.P.N. Development Pcl, according to the report.

Kasikorn Asset Management Co., the country’s second-biggest mutual fund company that manages about 250 billion baht, last week said it expects the SET to rise to 600. The estimate was also based on increased government spending and ahead of yesterday’s rate cut.

After last year’s decline, the SET is now valued at 7.15 times reported earnings, the lowest in Asia after Singapore and Pakistan, according to data compiled by Bloomberg.

“Compelling valuations reflect excessive bearish sentiment relative to macro fundamentals,” Suchart wrote. “Once growth unfolds, though weaker, it will arguably be better than what is currently priced in by the market.”

To contact the reporter on this story: Chen Shiyin in Singapore at schen37@bloomberg.net.

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Asian Stocks Gain, Pare Weekly Loss, on Weak Yen, Intel Margins

By Patrick Rial and Masaki Kondo

Jan. 16 (Bloomberg) -- Asian stocks rose, lifting the region’s benchmark index from a five-week low, as the yen weakened and an Intel Corp. report raised optimism that an earnings slump for chipmakers may be easing.

Hynix Semiconductor Inc., the world’s second-largest computer-memory chipmaker, jumped 4.6 percent after Intel, the world’s top maker of semiconductors, said inventory drawdowns that had eroded earnings may be ending and profit margins may improve later this year. Brother Industries Ltd., a Japanese maker of office equipment, soared 6.9 percent as the weaker yen signaled greater profitability for exporters.

“The weakening yen will help push up Japanese stocks,” Soichiro Monji, chief strategist at Daiwa SB Investments Ltd., which manages about $53 billion, said in an interview with Bloomberg Television. “There’s not much encouraging news about earnings, so the rebound won’t be big.”

The MSCI Asia Pacific Index gained 1.1 percent to 83.95 as of 9:23 a.m. in Tokyo. The gauge slumped 4.4 percent yesterday, its biggest drop since Dec. 2 and the lowest value since Dec. 8. The index is set for a 6.7 percent drop this week, the most since the period ending Nov. 21.

Japan’s Nikkei 225 Stock Average added 1.3 percent to 8,126.96. Mitsubishi UFJ Financial Group Inc., the country’s biggest lender by value, gained even after reporting a writedown on stock holdings of more than $3 billion.

Other regional markets open for trading also gained. U.S. stocks rebounded from intraday declines yesterday, with the Standard & Poor’s 500 Index finishing the day 0.1 percent higher, after sliding as much as 3 percent.

Stock Losses

The yen weakened to as much as 90.03 against the dollar today from 88.97 at the 3 p.m. close of stock trading in Tokyo yesterday. The dollar rose against the yen and euro after European Central Bank President Jean-Claude Trichet yesterday signaled he may cut interest rates again in March after the ECB reduced its benchmark rate by half a percentage point to 2 percent. A weaker yen boosts the value of overseas sales for Japanese companies.

Mitsubishi UFJ will book a loss of 288 billion yen ($3.2 billion) for the three months to Dec. 31 to write down its investment in Japanese stocks, it said yesterday after markets shut. The bank maintained its 220 billion yen profit forecast.

Intel yesterday reported a 90 percent tumble in fourth- quarter net income from a year earlier as gross margins fell to 53 percent. Margins may trough in the current quarter and rebound thereafter, the company’s chief financial officer said.

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

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Ascendas, Baoshan, Cathay Pacific: Asia Ex-Japan Equity Preview

By Berni Moestafa

Jan. 16 (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.

South Korean Banks: The nation’s financial institutions including Kookmin Bank, Korea Development Bank and Woori Finance Holdings Co. were placed on review for possible downgrade, Moody’s Investors Service said. KB Financial Group Inc. (105560 KS), parent of Kookmin Bank, fell 3,550 won, or 9.2 percent, to 35,200. Woori Finance (053000 KS), parent of the nation’s second-biggest bank, fell 940 won, or 11 percent, to 7.560.

Ascendas Real Estate Investment Trust (AREIT SP): Singapore’s second-biggest property trust may raise as much as S$410.6 million ($274 million) from a placement and an offering of preferred units, a sale document indicated. The trust will sell 353.9 million new units, or a 21 percent stake, to investors at S$1.13 to S$1.16 each, according to the document. Ascendas dropped 10 cents, or 7.4 percent, to S$1.26.

Ayala Corp. (AC PM): The fifth-biggest Philippine company by market value said in a statement to the stock exchange that it has invested all the 5.95 billion pesos ($126 million) it raised from the sale of preferred shares. The stock fell 9 pesos, or 3.9 percent, to 223 pesos.

Baoshan Iron & Steel Co. (600019 CH): The company’s parent, Baosteel Group Corp. and its competitors may have to limit domestic prices of iron ore sold from their inventories, said two people familiar with the situation. Baoshan lost 0.04 yuan, or 0.8 percent, to 5.09 yuan.

BHP Billiton Ltd. (BHP AU): The world’s biggest mining company agreed to pay Mitsubishi Materials Corp. 70 percent more in 2009 copper processing fees, the first increase in three years. BHP fell A$2.04, or 6.6 percent, to A$28.90.

BIMB Group Holdings Bhd. (BIMB MK): The Malaysian Islamic banking group said in a statement to the exchange that its Bank Islam Malaysia Bhd. unit hasn’t discussed or concluded any terms with a potential partner to expand its business. BIMB, last traded on Jan. 14, declined 1.1 percent to 90 sen.

Cathay Pacific Airways Ltd. (293 HK): Hong Kong’s largest carrier won approval to delay construction of a new cargo terminal in the city by two years as global recession damps trade demand. Cathay Pacific fell 21 cents, or 2.4 percent, to HK$8.38.

China Southern Airlines Co. (1055 HK): The company opened a representative office in Taipei yesterday, becoming the first Chinese airline to gain a foothold in the Taiwan market, Deutsche Presse-Agentur reported on its Web site. China Southern, the nation’s largest carrier, retreated 3 cents, or 2.3 percent, to HK$1.26.

Dongfang Electric Corp. (1072 HK): China’s second-biggest power-equipment maker said 2008 profit will more than halve from a year earlier after a May 12 earthquake destroyed a factory and killed workers. Dongfang retreated 0.86 cents, or 4.8 percent, to HK17.10.

Manila Water Co. (MWC PM), the utility that serves the eastern half of the nation’s capital, said it’s open to increasing rates in stages to soften the blow on consumers, and a delay in the adjustment will not hurt its business. The company made the statement after the water regulator said it didn’t allow the utility to raise rates in February. Manila Water fell 1 peso, or 7.3 percent, to 12.75 pesos.

Philippine National Bank (PNB PM): The fourth-biggest domestic bank by assets said in a filing to the stock exchange that the central bank allowed it to pay 3 billion pesos of debt ahead of a 2015 maturity. PNB, as the stock is called, fell 50 centavos, or 3.5 percent, to 14 pesos.

Posco (005490 KS): Asia’s third-biggest steelmaker posted a 721 billion won ($521 million) fourth-quarter profit, missing analysts’ estimates. The company also said that it will cut crude steel production by up to 12 percent this year. The stock slipped 20,000 won, or 5.3 percent, to 359,000 won.

TM International Bhd. (TI MK): The Malaysian state-owned fixed-line phone operator said it is seeking permission from the Securities Commission to extend to as late as July 29 a deadline to implement its sale of as much as 10 percent of stock. The earlier regulatory approval TM received for the proposed stake sale expires on Jan. 29, TM said in a statement to the exchange. TM lost 16 sen, or 4.4 percent, to 3.46 ringgit.

Woodside Petroleum Ltd. (WPL AU): Australia’s second- biggest oil and gas producer made an oil and gas discovery in Libya’s western region of Ghadames, Libya’s National Oil Corp. said. Woodside fell 1.60 cents, or 4.5 percent, to A$34.05.

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

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Japan Stocks Rebound as Weaker Yen Boosts Earnings Prospects

By Masaki Kondo

Jan. 16 (Bloomberg) -- Japanese stocks rebounded, narrowing the Nikkei 225 Stock Average’s biggest weekly drop in almost three months, as a weaker yen raised speculation company earnings will improve.

Honda Motor Co., which gets more than half its profit from North America, jumped 3.5 percent, while Sony Corp. added 3.2 percent. Mitsubishi Materials Corp., Japan’s third-largest copper producer, leapt 2.3 percent after prices for the metal rose for the first time in three days. Tokyo Steel Manufacturing Co. leapt 4.4 percent on a newspaper report the company’s annual earnings may triple. Nippon Yusen K.K. sent shipping lines lower after commodity transport fees broke a seven-day winning streak.

“The weakening yen will help push up Japanese stocks,” Soichiro Monji, chief strategist at Daiwa SB Investments Ltd., which manages about $53 billion, said in an interview with Bloomberg Television. “There’s not much encouraging news about earnings, so the rebound won’t be big.”

The Nikkei climbed 132.99, or 1.7 percent, to 8,156.30 as of 10:14 a.m. in Tokyo. The broader Topix index rose 14.27, or 1.8 percent, to 810.26, with more than two stocks gaining for each that fell.

The Nikkei headed for an 7.6 percent decline this week, the worst since Oct. 24, on concern companies from Sony to Toshiba Corp. will miss earnings’ forecasts and as a record decline in machinery orders pointed to a prolonged global recession. The Topix was poised for a 5.2 percent drop.

Honda, Japan’s second-biggest automaker, rose 3.5 percent to 1,928 yen, while Sony, which gets a quarter of its sales from the U.S., added 3.2 percent to 2,045 yen. Denso Corp., an auto- part affiliate of Toyota Motor Corp., climbed 2.9 percent to 1,575 yen after Mitsubishi UFJ Securities Co. raised its rating on the stock to “outperform” from “market perform.”

Weakening Yen

The yen weakened to as much as 90.03 against the dollar today from 88.97 at the 3 p.m. close of stock trading in Tokyo yesterday. The dollar rose against the yen and euro after European Central Bank President Jean-Claude Trichet yesterday signaled he may cut interest rates again in March after the ECB reduced its benchmark rate by half a percentage point to 2 percent. A weaker yen boosts the value of overseas sales for Japanese companies.

Mitsubishi Materials added 2.3 percent to 225 yen. Copper futures for March delivery gained for the first time in three days today, rising as much as 3.9 percent. Sumitomo Metal Mining Co., Japan’s second-biggest copper smelter, added 3 percent to 888 yen.

Tokyo Steel gained 4.4 percent to 995 yen. The company’s operating profit at the parent level may surge to 52 billion yen ($578 million) in the year to March 31 from 15.2 billion yen a earlier, the Nikkei newspaper reported today.

Falling Fees

Nippon Yusen, Japan’s largest shipping company, slumped 2.5 percent to 498 yen, leading its peers to the biggest decline among 33 industry groups on the Topix. Smaller rival Kawasaki Kisen Kaisha Ltd. lost 1.1 percent to 373 yen. The Baltic Dry Index, a measure of shipping costs for commodities, retreated 1.3 percent, the first drop since Jan. 5.

Nikkei futures expiring in March added 0.8 percent to 8,100 in Osaka and gained 0.9 percent to 8,100 in Singapore.

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

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Geithner’s Senate Hearing Delayed By Republicans

By Ryan J. Donmoyer

Jan. 15 (Bloomberg) -- Senate Republicans moved yesterday to delay Timothy Geithner’s confirmation as Treasury secretary, pushing President-elect Barack Obama to defend his nominee’s “embarrassing” mistake of underpaying his taxes.

Senate Finance Committee Chairman Max Baucus was forced to reschedule Geithner’s confirmation hearing for Jan. 21 after Arizona Senator Jon Kyl, the panel’s second-ranking Republican, objected to holding the session tomorrow.

While Kyl said he requested the delay because of a scheduling conflict, Republicans may be using Geithner’s tax troubles to gain political leverage, said Bill Frenzel, a former Republican congressman from Minnesota.

“Obviously, they’re after something else,” Frenzel said of the Senate Republicans -- “perhaps something unrelated,” such as pushing for larger tax cuts in the fiscal-stimulus bill than the Democrats who are crafting the measure support.

Baucus said yesterday he was trying to persuade Kyl to remove his objection so that Geithner’s hearing could be held tomorrow. If he is unsuccessful, Obama will take office on Jan. 20 without a Treasury secretary at a time when the economy struggles through a credit crisis that has transferred control of large swaths of the financial sector to the department.

Stuart Levey, the U.S. Treasury Department’s top official on terrorism financing, will run the agency as acting secretary starting on Jan. 20, when the outgoing administration leaves, pending Geithner’s confirmation, a person briefed on the matter said.

Political Risk

Frenzel, 80, a guest scholar on economic studies at the Brookings Institution in Washington, said the re-scheduling of the Geithner hearing could carry political risk for Republicans, who lost seats in the Senate and House in the November election to the Democrats, who control both chambers and will next week take back the presidency.

“If they’re doing this to flex their muscles, all they’re going to do is dig their hole a little deeper.”

At least two Republicans on the Finance Committee, Pat Roberts of Kansas and Orrin Hatch of Utah, said they would back Geithner.

Obama, in comments to reporters yesterday, said of the questions about Geithner’s taxes, “Look, is this an embarrassment? Yes. But it was an innocent mistake.” He also said that Geithner, 47, will be approved by the Senate.

‘Honest Mistake’

Baucus also expressed support for Geithner. “This is an honest mistake and it’s clear there was no intention not to pay it and he did pay immediately, as soon as his mistake was discovered,” Baucus, a Montana Democrat, said. “Add to that, the country needs him.”

Geithner, president of the Federal Reserve Bank of New York, told committee members on Jan. 13 that he had discovered he underpaid his taxes for several years earlier this decade. With the interest penalties, he paid the Internal Revenue Service $48,268, according to documents released by the Finance Committee. Obama told CBS News that his team knew of Geithner’s tax issue before his nomination for the post in November.

As Treasury secretary, Geithner would oversee the IRS, the largest agency in his department. Iowa Senator Charles Grassley, the top Republican on the panel, called the tax issue “disconcerting.”

‘Hardly a Precedent’

“There’s hardly a precedent for it,” Grassley said in an interview with Bloomberg Television. Senators must weigh their concern about Geithner’s tax situation with his qualifications to steer the economy out of its troubles, Grassley said. “For the next seven days or so, they’re going to be weighed.”

Kyl, in seeking the postponement of the hearing on Geithner tomorrow, said it was likely to conflict with a Senate Judiciary Committee hearing for Eric Holder, Obama’s nominee to be attorney general. Kyl serves on both panels.

“He’s reserving his right to attend both confirmation hearings,” said Ryan Patmintra, the senator’s spokesman. He said the Holder hearing, scheduled for today, may extend into tomorrow.

Kyl hasn’t decided how he’ll vote on Geithner’s nomination, Patmintra said.

Roberts, the Kansas senator, said he spoke with Geithner on the telephone and that he is a “good man” who “really knows his stuff.” Although Roberts said the timing of the disclosure about Geithner’s taxes is “troubling,” he said his “guesstimate is he’ll be approved with my vote.”

At issue is Geithner’s failure to pay self-employment taxes while working at the International Monetary Fund. In addition, questions were raised about a lapse of his housekeeper’s legal status.

‘Appropriately Paid’

Geithner said he was unaware that the woman’s immigration papers had expired three months before she stopped working for him, according to an official on Obama’s transition staff. The Finance Committee said taxes for the housekeeper were “appropriately paid.”

The IRS in 2006 and 2007 offered leniency to U.S.-based employees of international organizations and foreign embassies, saying there were rampant problems with tax-law compliance.

“The IRS estimates that as many as half of these employees subject to U.S. tax fail to report their wages, claim deductions they are not entitled to, incorrectly establish” retirement plans, “fail to pay self-employment tax or fail to file tax returns,” the agency said in a March 22, 2007, news release.

Self-Employment Taxes

Geithner, who prepared his own tax returns in 2000, 2001, 2002 and 2005 and used paid preparers in other years, acknowledged receiving a written guide on how to pay the self- employment taxes he owed, according to a summary of the case by the committee. He also late-filed Social Security taxes for household employees in the 1990s, the committee said.

The Treasury secretary-designate didn’t pay some of the back taxes until it was clear he would be nominated for the post, the panel said. He also made other errors such as claiming dependent-care deductions for sending a child to sleep-away camp; only the cost of day-camps is deductible.

Hatch, the Utah senator, in discussing his support for Geithner said, “If we expect perfection around here we’d never have anyone for any of these positions.” He also said, “The man is qualified, competent, one of the best choices” Obama has made.

Former IRS Commissioner Mortimer Caplin, who served from 1961-1964 and founded the law firm Caplin & Drysdale, agreed that Geithner’s tax errors are forgivable.

“It sounds like an honest mistake to me,” said Caplin, 92. “It’s very understandable.”

Don Alexander, another former IRS commissioner who served from 1973-1977, said Geithner would have a more difficult time winning confirmation if the economy weren’t in crisis.

“He is getting a pass,” Alexander, 87, said. “But not a free pass; this won’t help him at all in his later duties. It’s a problem that someone who’s running the Treasury Department should not have.”

To contact the reporters on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net; Nicholas Johnston in Washington at njohnston3@bloomberg.net

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