Asian Stocks Gain on Gold, Alcoa Forecast; Honda Drops on Yen

By Shani Raja

Sept. 3 (Bloomberg) -- Most Asian stocks advanced as gold prices climbed and after Alcoa Inc. said Chinese demand for aluminum will increase this year. Japanese carmakers fell as U.S. employers cut more jobs than forecast.

Newcrest Mining Ltd., Australia’s largest gold miner, climbed 7.7 percent after the metal climbed the most in more than five months yesterday. Aluminum Corp. of China Ltd. gained 7.3 percent in Shanghai. Honda Motor Co., which gets 45 percent of its revenue in North America, dropped 2.4 percent in Tokyo.

Five stocks advanced for every four that declined on the MSCI Asia Pacific Index, which added 0.1 percent to 112.57 as of 3:29 p.m. in Tokyo. The gauge has climbed 60 percent from a five-year low on March 9 on speculation the global economy is recovering. The rally has lifted the average price of stocks on the index to 1.5 times book value, close to an 11-month high.

“The economic data has caught up to where the market was,” said Stephen Halmarick, Sydney-based head of investment- markets research at Colonial First State, which holds about $115 billion. “For the equity market to really move on again, you need the next stage to take place, which is a more sustained recovery and better profitability.”

China’s Shanghai Composite Index climbed 4.6 percent, and Hong Kong’s Hang Seng Index gained 1 percent. Taiwan’s Taiex index advanced 0.9 percent. Japan’s Nikkei 225 Stock Average fell 0.6 percent.

U.S. Payrolls

Dainippon Sumitomo Pharma Co. rose 1.2 percent in Tokyo amid plans to buy a U.S. drugmaker. Murchison Metals Ltd. climbed 8.4 percent in Sydney after the Australian iron-ore producer increased its estimate of the size and value of a key mine. Kawasaki Kisen Kaisha Ltd., Japan’s third-largest shipping line, fell 1.8 percent after Nomura Securities Co. downgraded the stock.

Futures on the Standard & Poor’s 500 Index added 0.3 percent. The gauge lost 0.3 percent yesterday as a survey by ADP Employer Services showed businesses reduced payrolls by 298,000 in August, while economists had forecast a drop of 250,000.

The Federal Reserve expressed “considerable uncertainty” about the strength of the economic recovery, minutes of its August meeting showed, while U.S. Treasury Secretary Timothy Geithner told reporters in Washington yesterday it was too soon to remove policies aimed at boosting growth.

A weaker dollar spurred demand for gold as an alternative investment, sending the precious metal’s futures up by 2.3 percent in New York. The gain was the biggest since March 19.

Newcrest climbed 7.7 percent to A$31.85, while Lihir Gold Ltd., Australia’s second-biggest gold-mining company, jumped 7.2 percent to A$2.98. Zijin Mining Group Co., China’s largest gold mine, surged 8.4 percent to HK$6.87 in Hong Kong.

Drilling Program

Aluminum Corp., known as Chalco, rose 7.3 percent to 13.19 yuan. Klaus Kleinfeld, chief executive officer of Alcoa, the largest U.S. aluminum producer, raised the company’s forecast for global aluminum consumption and said China’s demand for the lightweight metal will increase this year.

Alcoa expects China’s consumption of the material to rise 4 percent this year, compared with a previous prediction of zero growth, Kleinfeld said in an interview in New York.

Dainippon Sumitomo rose 1.2 percent to 1,025 yen. The drugmaker plans to buy Sepracor Inc. for $2.6 billion to expand in the U.S., the world’s biggest drug market. Murchison Metals climbed 8.4 percent to A$1.94 in Sydney after reporting that a drilling program revealed the Jack Hills project to be “of a significantly larger scale” than previously considered.

Yen Gains

Honda sank 2.4 percent to 2,840 yen as the stronger Japanese currency threatened the value of sales generated overseas. The yen appreciated to as much as 91.95 per dollar, a level not seen since July 13. Japan’s currency also gained to a seven-week high versus the euro.

Toyota Motor Corp., the world’s largest automaker, lost 1.8 percent to 3,850 yen. Pioneer Corp., which makes car-navigation and audio systems, slipped 5.9 percent to 273 yen.

“Investors are turning cautious as employment concerns have flared up again, while the stronger yen is going to be tough on the exporters,” said Mitsushige Akino, who oversees the equivalent of $637 million at Tokyo-based Ichiyoshi Investment Management Co. “It’s going to be very hard for stocks to start pushing to new highs.”

Since July 31, the MSCI Asia Pacific Index has traded within the 110 and 114 range, Bloomberg data show. The rally since March has boosted the average price of stocks in the gauge to 23 times estimated earnings, compared with 16.5 times for the S&P 500.

Stimulus Plans

The index has climbed 26 percent this year as government stimulus measures revive the global economy. Australia’s statistics bureau yesterday reported second-quarter gross domestic product growth that was faster than economists estimated, while reports today showed the nation’s services industry contracted at a slower pace last month.

Karoon Gas Australia Ltd. rallied as much as 7.1 percent before closing up 3 percent at A$10.41. The company and ConocoPhillips, its partner in an exploration program off Australia’s northwest coast, exercised an option to drill two additional wells under a contract with Sedco Forex International Inc., Karoon said in a statement late yesterday.

In Taipei, Yulon Nissan Motor Co., a joint venture between Japan’s Nissan Motor Co. and Yulon Motor Co., surged 6.9 percent to NT$79 after General Motors Co. raised its full-year China sales forecast. China Motor Corp., which builds Mercedes-Benz vans in China, advanced 6.9 percent to NT$20.15.

Sumitomo Light Metal Industries Ltd. slipped 3.1 percent to 94 yen in Tokyo after the aluminum maker reversed its full-year forecast to a net loss of 5.2 billion yen from 2.5 billion yen profit, citing a restructuring-related charge.

Kawasaki Kisen Kaisha fell 1.8 percent to 391 yen. Nomura cut its recommendation on the stock to “reduce” from “neutral” because of overcapacity among container lines.

To contact the reporter on this story: Shani Raja in Sydney at sraja4@bloomberg.net.

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Edinburgh Hedge Funds Feel Madoff Effect as Clients Get Pickier

By Rodney Jefferson

Sept. 3 (Bloomberg) -- Hedge funds in Edinburgh say they escaped any direct losses from Bernard Madoff’s Ponzi scheme. That doesn’t mean they’re not living with his legacy.

Clients are demanding more disclosure, quicker access to their money and individual, rather than pooled, accounts after Madoff hurt the loosely regulated business, according to managers in the Scottish capital.

“The Madoff thing was a stunner for the market and it did lead to some pretty serious questions being asked by some investors,” said Andrew Kelly, who helps oversee 550 million pounds ($900 million) at Cartesian Capital Partners. “The industry as a whole probably overplayed the secrecy element, saying ‘leave us to run the money, we’re the smart guys here.’”

Hedge funds, which managed $1.43 trillion at the end of June, are competing for clients by disclosing more about their investments as well as trying to ensure returns keep up with global stock prices. The funds should be required to register and disclose data to regulators, the International Organization of Securities Commissions said in June.

The industry’s assets climbed $100 billion in the second quarter as funds advanced by an average 9.1 percent, the biggest gain in more than nine years, Chicago-based Hedge Fund Research Inc. reported on July 21. The MSCI World Index, a measure of developed stock markets, rose 20 percent in the same period.

“What Madoff’s done is throw into sharp relief what happens if you don’t do your proper due diligence,” said Allan MacLeod, managing director of hedge funds at Martin Currie Investment Management Ltd. in Edinburgh. “The bar was being raised anyway, and then Madoff has raised it again.”

Not Geneva

Edinburgh’s financial industry was built on managing money for pension plans and insurance companies. Geneva, whose institutions lost about $7 billion from investments with Madoff, by contrast is centered on private banking for the wealthy. Madoff, 71, is serving a 150-year prison term in Butner, North Carolina, after pleading guilty in a $65 billion fraud.

Martin Currie, the largest manager of hedge funds in the Scottish capital, and city rival SVM Asset Management have been attracting money from institutions. Martin Currie’s hedge fund assets rose about $400 million to $1.2 billion since January as investors become “more diligent and selective,” MacLeod said.

The company hired two people for hedge fund sales this week, one based in London and the other in New York, he said.

SVM received about 20 million pounds from U.K. investors during the past four months for a new regulated retail hedge fund, Chief Executive Officer Colin McLean said.

‘Regulatory Cover’

“Family offices and others, particularly post-Madoff, have really looked to try to protect themselves from being sued and look for that regulatory cover,” said McLean, 56, whose company has about 100 million pounds in so-called long-short strategies, funds that can bet on rising as well as falling markets.

Cartesian is trying to make up the assets it lost last year as clients pulled money, Kelly said. The company has 90 million pounds in hedge funds.

“I am not completely convinced the industry is seeing huge inflows,” said Kelly, 44. “There probably are now net inflows overall, but not significant ones and they are nothing like as significant as the outflows last year. That was devastating.

“We had strong performance last year and had outflows in the order of 20 percent,” he said. “That’s tough.”

Hedge funds, which are designed to do better when markets fall and tend to lag when they rise, must now show they are worth investing in as stocks rally, according to McLean.

‘More Pressure’

Investments in hedge funds declined 18 percent on average last year, the most since Hedge Fund Research started collecting the data in 1990. The MSCI World Index slumped 42 percent as economies went into recession and the financial industry imploded.

“At lot of people who generally do shorting did quite well last year and all of those have found this year quite difficult,” said McLean. “For funds that fell a bit last year, they are under a bit more pressure to show that they can keep up with markets and do better than conventional equity funds.”

Those regulated stock funds also aren’t coming under the same scrutiny as the hedge fund industry. While not a hedge fund manager, Madoff’s scheme led to questions about the reviews carried out by firms that manage funds of hedge funds.

These so-called funds of funds were among Madoff’s biggest clients. Madoff demanded anonymity as a cost of doing business, according to PBS’s “The Madoff Affair” aired on May 12.

Funds of Funds

Funds of funds from Geneva fell 22 percent last year, according to Eurekahedge and Hedge Fund Research. Their assets sank to $15 billion in May from $54.2 billion at the end of 2007, the figures showed.

“There’s no doubt Madoff was a bad thing for hedge funds, particularly for the fund of funds industry,” said MacLeod, 43. “The better quality funds whose due diligence process kept them out of Madoff will prosper.”

That means fund companies have to show more clearly what they are doing with a client’s money, publish more data on holdings and offer cheaper terms for trading stocks, according to the Edinburgh managers.

“If we’re not prepared to tell people what we’re doing, then we have a problem,” said Kelly.

To contact the reporter on this story: Rodney Jefferson in Edinburgh at r.jefferson@bloomberg.net

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German Stocks Pare Earlier Gains; BASF Drops on Nomura Downgrade

By Christiane Lenzner

Sept. 3 (Bloomberg) -- German stocks pared earlier gains, with the DAX Index falling 0.1 percent to 5,315.27 as of 9:19 a.m. in Frankfurt. BASF SE led declines, losing 2.7 percent to 34.94 euros after Nomura Holdings Inc. downgraded the stock to “reduce” from “neutral.”

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European Stocks Fluctuate Before ECB; U.S. Index Futures Gain

By Daniela Silberstein

Sept. 3 (Bloomberg) -- European stocks fluctuated before the European Central Bank’s meeting on interest rates. Asian shares rose and U.S. index futures gained as Alcoa Inc. said Chinese aluminum demand will increase and investors speculated the contraction in American service industries slowed.

Xstrata Plc and Antofagasta Plc advanced more than 1.3 percent after metals rose in London and Alcoa boosted its forecast for global aluminum consumption. Alcoa added 1 percent in German trading. Newcrest Mining Ltd., Australia’s largest gold miner, climbed 7.7 percent after the metal surged the most in more than five months yesterday.

Europe’s Dow Jones Stoxx 600 Index was little changed at 8:39 a.m. in London. The gauge has slumped 2.9 percent this week on concern that a six-month, 46 percent rally has outpaced the prospects for earnings and economic growth. The regional measure is valued at 48.6 times profit, the highest level since June 2003, according to weekly data compiled by Bloomberg.

The MSCI Asia Pacific Index added 0.2 percent. China’s Shanghai Composite Index surged 4.8 percent, the biggest rally since March, on speculation regulators will adopt measures to boost equities following declines in the past month.

Futures on the Standard & Poor’s 500 Index climbed 0.5 percent. The benchmark gauge for U.S. equities slid for a fourth straight day yesterday, the longest losing streak since May, as reports on job losses and factory orders spurred concern that the economy is struggling to recover.

Fed, ISM Services

The Federal Reserve expressed “considerable uncertainty” about the strength of the economic recovery, minutes of its August meeting showed yesterday, while U.S. Treasury Secretary Timothy Geithner told reporters in Washington that it was too soon to remove policies aimed at boosting growth.

A report today may show U.S. service industries shrank at a slower pace in August. The Institute for Supply Management’s index of non-manufacturing businesses, which make up almost 90 percent of the economy, rose to 48 -- the highest level in 11 months -- from 46.4 in July, according to the median forecast in a Bloomberg News survey. Readings below 50 signal contraction.

Data from the Labor Department may show that first-time claims for jobless benefits fell to 565,000 last week from 570,000 the week before, according to economists’ estimates.

ECB Meeting

The European Central Bank will leave interest rates at a record low of 1 percent today and signal it’s in no rush to withdraw emergency stimulus measures as the economy shows signs of recovering, economists said. The central bank, led by President Jean-Claude Trichet, won’t raise rates before the third quarter of 2010, another survey shows.

Xstrata rose 2.4 percent to 797.5 pence and Antofagasta gained 1.3 percent to 720 pence. Copper, lead, nickel and aluminum rose today on the London Metal Exchange.

Newcrest climbed 7.7 percent to A$31.85, while Lihir Gold Ltd., Australia’s second-biggest gold-mining company, jumped 7.2 percent to A$2.98. Zijin Mining Group Co., China’s largest gold mine, surged 9.2 percent to HK$6.92 in Hong Kong.

A weaker dollar spurred demand for gold as an alternative investment yesterday, sending the metal up 2.3 percent in New York.

Klaus Kleinfeld, chief executive officer of Alcoa, the largest U.S. aluminum producer, said in an interview in New York that China’s consumption of the lightweight metal will rise 4 percent this year. The company had previously predicted zero growth. Alcoa added 1 percent to $11.66 in Germany.

BASF SE slid 2.1 percent to 35.14 euros. Nomura Holdings Inc. cut the world’s largest chemical company to “reduce” from “neutral” because margins may decline next year.

To contact the reporter on this story: Daniela Silberstein in Zurich at dsilberstei2@bloomberg.net.

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FX Thoughts for the Day

Daily Forex Technicals | Written by Kshitij Consultancy Services | Sep 02 09 12:22 GMT |

USD-CHF @ 1.0671/74...Resistance at 1.0700 R: 1.0700 / 1.0750-60 / 1.0800-10 S: 1.0630-00 / 1.0570/ 1.0530-00 Swiss is trading in a very narrow range of 1.0650-80. As any significant move on either side was not seen during the day, our view continue to remain the same on the pair. On the upside 1.0700 is the significant level to watch for. A strong break above 1.0700 might see a rise towards the Resistance at the 55-DMA (1.0750) during the day. Note that the projected Max-High for the day is 1.0759. A further strong upmove above 1.0750 might take it up towards 1.0850 over the next few days. However if it continues to trade below 1.0700 we might see a downmove towards 1.0630-00 in the US session. A break below 1.0600 might further pull it down towards 1.0550-30. Cable GBP-USD @ 1.6223/26...Strong Support zone 1.60-61 R: 1.6222-44 / 1.6278 / 1.6350 S: 1.6113 / 1.6069 / 1.6029-20 / 1.5750 Cable has risen once again on the Support of 1.6113. And as mentioned in the morning, till this holds, we would continue to bet in favour of the Support zone of 1.60-1.61. We also continue to mention that if broken, it could be very bearish targeting 1.5750 (38.2% retracement of the rise since March 2009) initially and 1.5600 thereafter. Though the weekly charts suggest bearishness immediately, the same shall be comfirmed on a break of the Support zone mentioned above. Aussie AUD-USD @ 0.8303/07...Holding long R: 0.8338-53 / 0.8378 / 0.8450-70 S: 0.8280 / 0.8250-30 / 0.8175 Aussie traded in a range of 0.8280-0.8340 during the day. Failure to see a strong downmove below 0.8300 during the day is still keeping the bullish sentiment intact. on the upside a break above 0.8350 might see a rally once again towards the significant Resistance region 0.8450-70 over the next few sessions/days. On the downside as mentioned earlier significant Support is seen in the region 0.8250-30 which we expect to hold on any downmove below 0.8300. Holding: AUD 10K Long at 0.8280, SL 0.8210, TP Open. As soon as the market trades 0.8360 bring the SL up to 0.8290 Kshitij Consultancy Service http://www.fxthoughts.com Legal disclaimer and risk disclosure These views/ forecasts/ suggestions, though proferred with the best of intentions, are based on our reading of the market at the time of writing. They are subject to change without notice.Though the information sources are believed to be reliable, the information is not guaranteed for accuracy. Those acting in the market on the basis of these are themselves responsibly for any profits or losses that might occur, without recourse to us. World financial markets, and especially the Foreign Exchange markets, are inherently risky and it is assumed that those who trade these markets are fully aware of the risk of real loss involved.

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The Euro Area Narrowed Contraction was Confirmed Today

Daily Forex Fundamentals | Written by ecPulse.com | Sep 02 09 13:23 GMT |

Day after day, the European outlook brightens significantly boosted by the ongoing improvements in fundamentals, as activity is being revived once again from the protracted measures taken by policy makers to end the drastic downturn seen previously. The taken measures came to push two of the sixteen nations into an unexpected expansion, where France and Germany faced 0.3% expansion. However, the narrowed contraction seen in the second three months of the year records the fifth consecutive contraction. The gained back activity in the euro area was one of the reasons to narrow the pace of contractions in the second quarter, where the national governments of Germany and France introduced new measures in order to bolster the economy and stop the bleeding of unemployment rates. As we all know, Germany devoted some of it’s the money to support the car industry which was teetering on the brink of fading away, therefore a total of 2500 euros was givens to individuals in order to scarp their cars and purchase new ones. However, what really grabbed our attention today was the improvements seen to the Consumer spending where it added 0.2% in the second quarter, whereas the ongoing bailout finally came to create a sense of stability and encourage households to consider spending at the time prices plummet heavily into the negative levels giving the chance for households to use the increased purchasing power of the euro. The surprising thing seen today was the improvement seen in the export levels, as it contributed in narrowing the contractions seen previously. We can take those reading positively because the main reason behind the stalled activity in the sixteen nations was the drastic fall in export levels seen since the dilemma started, where Germany, the European economy which depends heavily on the levels of exports to external rivals faced a stalled demand, along with a weakened new orders to the manufacturing sector. Okay, projections in markets project further contractions this year, where according to the IMF a 4.8% contraction will be seen this year, as it would extend further in 2010 to -0.3%. However, personally I believe if improvements are taking place that rapid then economies will be heading toward an expansion faster than markets already projected, therefore an expansion would be taking place in the before the end of the 2010, but the threat of surging unemployment rates along with the threats of easing spending would stand as an obstacle in the path of improvements. Nevertheless, with the extensive actions taken by the European Central Bank and National governments the euro area will remain under prolonged stresses from the falling consumer prices, as it currently struggling in the negative levels. Yet we can’t really call a deflation in the sixteen nations because according the seen CPI readings we’ve seen it fall down to -0.7% but as seen in the last flash estimate it narrowed to -0.2% as a positive levels might take place in the upcoming periods. The sixteen nations are finally headed in the safe zone, because the pace of contractions had narrowed significantly given out some hopes of an expansion in the upcoming year, yet policy makers have to take actions in order to end the bleeding in some sectors. Ecpulse disclaimer: The content of ecPulse.com and any page in the website contain information for investors/traders and is not a recommendation to buy or sell currencies, stocks, gold, silver & energies, nor an offer to buy or sell currencies, stocks, gold, silver & energies. The information provided reflects the writers' opinions that deemed reliable but is not guaranteed as to accuracy or completeness. ecPulse is not liable for any losses or damages, monetary or otherwise that result. I recommend that anyone trades currencies, stocks, gold, silver & energies should do so with caution and consult with a broker before doing so. Prior performance may not be indicative of future performance. Currencies, stocks gold, silver &energies presented should be considered speculative with a high degree of volatility and risk

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USD Lower, AUD Rallies on Strong Q2 GDP

Daily Forex Fundamentals | Written by Easy Forex | Sep 02 09 12:20 GMT |

FX Highlights USD is opening mixed to lower and JPY rises as investors are cautious and fear recent rise in stocks and commodities is ahead of the economic news, AUD outperforms supported by strong Australian Q2 GDP, EU producer prices decline at a record pace, UK construction PMI declines Focus turns to today's release ADP employment, productivity unit, labor cost and factory orders Australia's Q2 GDP rises 0.6%, a 0.2% rise was expected, Australia's Swan says the government stimulus will be withdrawn and interest rates will have to be adjusted at some point, unemployment to remain elevated, AUD higher JPY trades at a seven week high supported by rising risk aversion, Japanese officials try to reassure the US about US and Japanese relations, DPJ party says they will not interfere with BOJ policy EU GDP falls 0.1% in Q2, producer prices decline at a record annual rate of 8.5% in June, EUR higher UK construction PMI comes in weaker than expected, GBP higher CAD lower, pressured by report that Canada's Liberals said they will no longer support the minority government Libor euro and sterling rates at record lows Challenger says job cuts were down 14% lower than a year ago International Financial Services says currency trading volume slumped by 25% form the same month last year from a record high, FX trading nearly doubled from April 2005 to April 2008 August auto sales up 1% above 14.1 mln for the first time since 2008, Ford sales rise 17% in August but Chrysler and GM sales lag as the cash for clunker program ends Economists declare the recession has ended as ISM rises above 50, S&P says it may not be until Q4 before we see solid evidence of recovery US equity markets set to open mixed, European equities 0.5% lower, Nikkei closed 250 points lower Upcoming Events US- Wednesday, ADP employment will be released expected at -250k compared to -371k last month along with Q2 final productivity and unit labor costs expected at -5.9% and -5.8% respectively and July factory orders expected at 1.8% compared to 0.4% last month, CAN- Wednesday, no major Canadian economic data is scheduled for release today By Michael J. Malpede Easy Forex Michael J. Malpede is Chief Market Analyst with Easy-Forex® and has previously been featured on Bloomberg TV, Bloomberg radio, Reuters, MarketWatch, Wall Street Journal, Chicago Tribune, Chicago Sun Times, Toronto Star and Nikkei press. In analyzing the markets, he draws from 29 years of Foreign Exchange Research as a Foreign Exchange Analyst. Please note that Forex trading (OTC Trading) involves substantial risk of loss, and may not be suitable for everyone. This report is provided by Easy- Forex® for informative purposes only. In no way it is a recommendation by Easy-Forex® for you to engage in any trade. It is your sole responsibility and you will have no claims with regards to this report against Easy-Forex®. If you do not agree to this, you are strongly advised not to use this report. Hence, Easy-Forex® shall not be held responsible for any outcome of trading decisions, in regards with this report or similar reports.

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South Korea Ratings Outlook Raised to Stable by Fitch

By Heejin Koo

Sept. 2 (Bloomberg) -- South Korea’s credit-rating outlook was raised to “stable” from “negative” by Fitch Ratings, citing the resilience of the nation’s economy and banks.

The country’s investment grade A+ is the same the company applies to Taiwan and China. Fitch lowered the outlook to negative in November on concern South Korea’s foreign-exchange reserves may decline due to its unstable financial system and widening current deficits.

“The term structure of banks’ debt has improved,” Fitch said in an e-mailed statement today. “On the public-finances front, Korea is likely to have avoided large fiscal costs associated with the deleveraging of the banking sector.”

Asia’s fourth-largest economy expanded 2.3 percent last quarter, the fastest pace in almost six years, as exports and household spending jumped. South Korea’s foreign-exchange reserves rose for a sixth month in August and it posted a current-account surplus in July, boosted by exports.

Fitch’s outlook “appears to reflect increased confidence on the Korean economy,” said Kim Seung Hyun, head of research at Taurus Investment Securities Co. in Seoul.

The Bank of Korea will probably report tomorrow the economy grew at a faster pace in the second quarter than initially estimated, Finance Minister Yoon Jeung Hyun said. Yonhap News cited Yoon as saying today second-quarter growth was probably between 2.6 percent and 2.7 percent.

Exports Improve

“The Korean economy has been resilient in the latest global economic downturn compared to the past,” said Taurus’s Kim. “That’s because exporters successfully boosted their global market share by increasing technological competitiveness, and reduced volatility arising from the global economic performance.”

South Korea’s foreign-exchange reserves rose to $245.5 billion in August after it received funds from the International Monetary Fund and as a weaker U.S. dollar increased the value of holdings in other currencies.

“Korea’s economic resiliency and the authorities’ upcoming efforts to re-establish a conservative fiscal agenda will likely provide scope for the government to revert to a fiscal balance position by 2011, with Korea being only one of six amongst all Fitch-rated sovereigns to do so from a deficit position,” Fitch said in the statement.

North Korea

South Korea slashed interest rates to a record low 2 percent to try to boost exports and encourage corporate and consumer spending. The government also allocated extra funds and spent 68 percent of this year’s budget through July in an effort to boost the economy.

South Korea’s sovereign ratings continue to balance its credit strengths, including fiscal prudence and external finance improvements, against potential security risks and reunification costs from North Korea, Fitch said.

North Korea today re-established telephone lines with the South Korean military, a year after severing them, in the latest reconciliatory gesture from the regime since last month.

North Korean leader Kim Jong Il also met with South Korea’s Hyundai Group Chairwoman Hyun Jeong Eun and released a worker detained for more than four months after criticizing the regime at a jointly run industrial park.

The moves contrast with North Korea’s military threats earlier this year, when the regime also launched a ballistic missile and conducted its second nuclear-weapons test.

To contact the reporter on this story: Heejin Koo in Seoul at hjkoo@bloomberg.net

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Thai Government to Spend $5.9 Billion on Economy by End of 2010

By Daniel Ten Kate and Haslinda Amin

Sept. 2 (Bloomberg) -- Thailand’s government will inject 200 billion baht ($5.9 billion) into the economy by the end of next year to bolster growth as a revival in export orders helps the nation recover from its first recession in a decade.

The spending is about a fifth of a 1.06 trillion-baht, three-year investment program on transportation, health and education projects, which will boost economic growth by as much as 2.5 percent a year, Finance Minister Korn Chatikavanij said in an interview today. Gross domestic product will expand in the fourth quarter from a year earlier as the spending kicks in this month and overseas demand improves, he said.

“Our forecast looks on solid ground,” Korn, a former chairman of JPMorgan Chase & Co.’s Thailand unit, told Bloomberg Television. “Every indication in terms of export orders has significantly improved in key sectors.”

Thailand’s benchmark stock index has surged 58 percent from this year’s low in March as companies from Hana Microelectronics Pcl to Delta Electronics (Thailand) Pcl report higher orders. The central bank has kept its key interest rate unchanged at 1.25 percent for three meetings after four cuts from December to April as a brighter global outlook bolster economic prospects.

“We have passed the bottom, but the recovery process will be gradual and take some time,” Prasert Bunsumpun, chief executive officer of PTT Plc, Thailand’s biggest energy company, said in Bangkok yesterday. “If the government can restore confidence, everything will come back.”

Australia’s economic growth unexpectedly accelerated to 0.6 percent in the second quarter on consumer spending, according to a Bureau of Statistics report today.

‘Stimulative’ Spending

Thailand’s planned government stimulus totals about 15 percent of GDP, Korn, 45, said.

“It will hit the economy in the month of September and onwards,” he said. “We have reason to be confident that it will be stimulative and lead to improved GDP growth later.”

The economy shrank 4.9 percent in the second quarter from a year earlier, after contracting 7.1 percent in the previous three months, the government said Aug. 24. GDP may decline as much as 3.5 percent in 2009 before expanding as much as 3 percent next year, it predicts.

Southeast Asia’s second-largest economy grew 2.3 percent in the second quarter from the previous three months, and may expand at a “similar” pace this quarter, Korn said.

Political turmoil since a 2006 coup has compounded Thailand’s economic woes as rival demonstrators seized airports, streets and government buildings in the past year. Anti- government protesters have pledged to continue targeting Abhisit, who they say lacks a popular mandate to govern.

Election Schedule

After his opponents forced the cancellation of an Asian summit in April, Abhisit set up a panel to recommend constitutional changes and said he wouldn’t call a new election until they were approved. Korn said his ruling Democrat party, which Abhisit heads, was “not stuck on that issue” and the timetable for amendments is not tied to a new election.

“Ideally, from an economic perspective, we want to be in position at least for another year in order to make sure our key policies are implemented before a general election is called,” he said. “That should give us sufficient time for political reform.”

Korn is “confident” his party’s key coalition ally Bhum Jai Thai, which left the previous government last year to shift power to Abhisit, is “on board” and won’t leave to trigger a new election. The Democrat party hasn’t won the most seats in an election since 1992.

“Our recovery will be very fast if we have political stability,” said Anant Asavabhokhin, president of Land & Houses Pcl. “The economy will turn around very quickly if people feel secure and come out to eat food and start spending.”

To contact the reporter on this story: Haslinda Amin in Singapore at hamin1@bloomberg.net; Daniel Ten Kate in Bangkok at dtenkate@bloomberg.net

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G-20 Risks ‘Catastrophe’ as Political Push Ebbs for Regulation

By Rich Miller and Simon Kennedy

Sept. 2 (Bloomberg) -- Economic policy makers from the Group of 20 nations gathering this week in London are finding that their drive to prevent the next financial crisis may be jeopardized by their success in countering the current one.

Stock markets are rebounding, with the MSCI World Index of 23 developed nations gaining 59 percent since March 9, when it reached its lowest level since 1995. Signs of economic revival are also appearing in countries such as the U.S. and U.K. after the worst slumps since World War II.

The rally is sapping the political push to impose tougher regulations on financial-services companies. While that might help earnings for New York-based Citigroup Inc., the third- largest U.S. bank, and Barclays Plc, the U.K.’s second-biggest lender, it may also leave the global economy susceptible to a fresh cycle of boom then bust.

“We’re getting a recovery, so dealing with the true problems is going to be more difficult,” said Raghuram Rajan, a former chief economist at the International Monetary Fund who is now a professor at the University of Chicago. “The risk is that we’re just going to tool around until the next crisis.”

U.S. Treasury Secretary Timothy Geithner, Bank of England Governor Mervyn King and other G-20 finance ministers and central bankers meet Sept. 4 and Sept. 5 to prepare for the Pittsburgh summit of leaders three weeks later. They are convening five months since their governments blamed “major failures” in supervision as one of the “fundamental causes” of the worldwide credit crunch and vowed to “strengthen financial regulation to rebuild trust.”

Expanding Economy

That drive is now in jeopardy as the crisis ebbs. The IMF predicted in July that the global economy will expand 2.5 percent in 2010 after contracting 1.4 percent this year. Banks are regaining lobbying strength, and other political goals such as health-care reform in the U.S. have captured the attention of legislatures. International differences, including over how to restrain bonuses, are also undermining the G-20’s united front.

Central bankers are already pressing governments not to slow the pace. “It would be a catastrophe not to draw all the lessons from the present crisis in terms of regulation,” European Central Bank President Jean-Claude Trichet told a symposium in Jackson Hole, Wyoming, on Aug. 21.

“Much remains to be done,” Bank of Israel Governor Stanley Fischer told attendees the same day. The former Citigroup vice chairman suggested the global banking system may need to undergo “radical restructuring,” perhaps by imposing limits on the size of individual financial companies.

Monitoring Power

Fischer also recommended that banks be forced to set aside more capital and central banks be given the power to monitor financial systems.

“What I’m very worried about is the recovery is going to come and the political will is going to disappear to actually repair the system,” said Stephen Cecchetti, head of the monetary and economic unit at the Bank for International Settlements in Basel, Switzerland, which serves as a bank for central banks.

Financial institutions may be the winners of a regulatory impasse because their profits would be spared, said Simon Johnson, a former chief IMF economist who is now a senior fellow at the Peterson Institute for International Economics, a Washington-based research organization.

President Barack Obama in June proposed the most sweeping overhaul of the U.S. financial-regulatory system in 75 years, calling for the creation of an agency to monitor mortgages and other consumer products and tighter oversight of the country’s biggest banks and institutions.

‘Material’ Effect

Congressional passage of his revamp would have a “material” effect on bank earnings, said Andrew Laperriere, a Washington-based managing director at International Strategy & Investment Group, an institutional brokerage. The MSCI World Financials Index has jumped 132 percent since its low of 35.01 on March 9.

Unless steps are taken to reduce complexity and leverage in financial markets, “we’re going to have a replay of what has just happened over the last few years,” said Richard Bookstaber, a former trader at New York-based Morgan Stanley, the sixth-biggest U.S. bank by assets.

He warned in 2007 that risks in the markets were becoming unmanageable. Since then banks, brokers and insurers have racked up more than $1.6 trillion of writedowns and credit losses, data compiled by Bloomberg show, and the world economy fell into recession.

Fastest Pace

Financial firms are showing signs of reverting to their old ways, Johnson said. Zurich-based Credit Suisse Group AG, Switzerland’s second-largest bank, and Scotia Capital, the investment-banking unit of Bank of Nova Scotia, Canada’s third- largest bank, are among those increasing lending to buyers of high-yield company loans and mortgage bonds at what may be the fastest pace since the crisis began.

In the U.S., Obama’s plans face resistance from lawmakers, overseers and the banking industry.

Federal Reserve Chairman Ben S. Bernanke, Federal Deposit Insurance Corp. Chairman Sheila Bair and other regulators have opposed giving up their consumer-protection powers under an administration plan to set up a new agency to police financial products. Banks have also opposed the new regulator, arguing it would add a layer of expense to their operations and raise borrowing costs for customers and companies.

“The industry has gotten really organized since the crisis began to ease,” said Johnson, who is also a professor at the Massachusetts Institute of Technology in Cambridge.

Risk Regulator

A number of lawmakers, including Christopher Dodd, a Connecticut Democrat and chairman of the U.S. Senate Banking Committee, have voiced unease about another administration proposal to give the Fed powers overseeing systemic risks. Dodd has said he is leaning toward giving that power to a council of regulators.

“There’s no chance reform gets done this year,” said Laperriere, noting the breadth of changes proposed by the administration. “It’s not very likely it gets done in the current Congress,” which concludes at the end of 2010, he said.

It also may take more than a year for the European Union to unify market oversight in its 27 nations. While leaders agreed in June to sharpen scrutiny of banks, the EU’s executive arm must now draft legislation that then goes to the European Parliament and individual governments.

National Money

The risk watchdog the EU has proposed will lack powers to enforce its warnings and won’t automatically be run by the ECB as originally planned. The U.K. has won a compromise to prevent the panel from making decisions involving national money.

Executive pay is an area of disagreement that may become a point of contention at this week’s meeting of financial officials from China, India, Canada and other G-20 countries. German Chancellor Angela Merkel and French President Nicolas Sarkozy are urging the G-20 to impose tougher limits on bank bonuses. U.K. Prime Minister Gordon Brown sees a cap as difficult to enforce, the Financial Times reported yesterday, citing an interview.

“Bonus payments are the thing that quite rightly drives a lot of people up the wall,” Merkel said in Berlin on Aug. 31 with Sarkozy beside her. The two leaders said they want the G-20 to limit the size of banks and tighten capital rules.

France drew criticism from U.S. analysts and investors last week by announcing it won’t hire financial firms unless they follow their French counterparts and apply rules that include a three-year deferral on two-thirds of bonus payments.

‘Tug of War’

“We’re in a tug of war between national political pressures and the desire to coordinate,” said Charles Dallara, managing director of the Washington-based Institute of International Finance, which represents the world’s biggest financial firms. “Right now the nationalist forces have the upper hand.”

He said that may lead to regulatory “fragmentation,” with supervisors trying to “protect their own backyard” and making the global system less stable in the process.

The longer the delay in adopting reforms, the more likely the drive will be dominated by politicians as opposed to “technocrats,” said Mohamed El-Erian, chief executive officer of Newport Beach, California-based Pacific Investment Management Co., manager of the world’s largest bond fund. In that case, reforms may end up being too “blunt,” he said.

“The run-up to the Pittsburgh G-20 meeting has attracted little attention,” said El-Erian, a former IMF official. “There is a risk that, after a successful London meeting in April, the G-20 process may lose momentum.”

To contact the reporters on this story: Rich Miller in Washington rmiller28@bloomberg.netSimon Kennedy in Paris at skennedy4@bloomberg.net.

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Norway’s Krone Slides After Manufacturing Industry Contraction

By Bo Nielsen

Sept. 2 (Bloomberg) -- Norway’s krone fell against the euro for the second consecutive day after a report showed the nation’s manufacturing industry unexpectedly shrank in August.

The krone also declined versus the dollar. A seasonally adjusted index based on responses from purchasing managers slid to 42.3 from a revised 50.1 in July, Fokus Bank ASA said in a statement today. A reading below 50 signals contraction. The median forecast of seven analysts surveyed by Bloomberg was for a reading of 51.

“The development is deviating sharply from developments in other countries,” Camilla Viland, a currency strategist in Oslo for DnB NOR ASA, Norway’s biggest bank, said in a note following the report.

Norway’s currency dropped 0.3 percent to 8.6981 per euro at 9:49 a.m. in Oslo, after weakening as much as 0.5 percent after the Fokus Bank figures. It declined 0.4 percent to 6.1192 against the dollar.

To contact the reporter on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net

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Australian Economic Growth Accelerates, Points to Rate Increase

By Jacob Greber

Sept. 2 (Bloomberg) -- Australia’s economic growth unexpectedly accelerated in the second quarter, driving the nation’s currency higher on expectations the central bank will raise borrowing costs from a half-century low.

Gross domestic product rose 0.6 percent, the biggest gain in more than a year, from the previous three months when it grew 0.4 percent, the Bureau of Statistics said in Sydney today. The median estimate of 20 economists surveyed by Bloomberg News was for a 0.2 percent expansion.

Today’s report confirms central bank Governor Glenn Stevens’ view that the economy has been “stronger than expected” as A$20 billion ($16.6 billion) of government cash handouts boosted spending at retailers such as Woolworths Ltd. and Harvey Norman Holdings Ltd. Australia joins other developed nations, including France and Germany, that are rebounding from the deepest global recession since the Great Depression.

“Australia clearly is in a sweet spot, one that we expect to extend through to year end,” said Glenn Maguire, chief Asia- Pacific economist at Societe Generale in Hong Kong. The Reserve Bank will raise interest rates by a quarter-percentage point in November, he added.

The Australian dollar rose to 83.04 U.S. cents at 12:38 p.m. in Sydney from 82.73 cents just before the report was released. The two-year government bond yield gained 7 basis points to 4.39 percent. A basis point is 0.01 percentage point. The benchmark S&P/ASX 200 index has climbed 41 percent since March 6.

Government Stimulus

Governor Stevens and his board left the overnight cash rate target at a 49-year low of 3 percent yesterday for a fifth month as the economy strengthens. GDP may expand further in coming quarters as the government spends A$22 billion on roads, railways and schools.

Traders forecast the central bank’s overnight cash rate target will be 175 basis points higher in 12 months, according to a Credit Suisse Group AG index based on interest-rate swaps at 12:35 p.m. in Sydney.

Consumer spending jumped 0.8 percent in the second quarter, the largest gain since the three months through December 2007, adding 0.5 percentage points to GDP.

The economy grew 0.6 percent from a year earlier, twice the pace forecast by economists, today’s report showed.

Analysts had cut their growth forecast in the past two days after reports showed a widening current account deficit in the second quarter and a record drop in business inventories.

Global Rebound

Government stimulus also helped lift Germany out of it its worst recession since World War II, a report showed on Aug. 25. Europe’s largest economy grew 0.3 percent from the first quarter, after four quarters of contraction. France’s economy, the second-biggest in the euro region, unexpectedly exited a year- long recession, gaining by the same amount as Germany.

By contrast, the U.K.’s economy shrank 5.5 percent in the second quarter, the most since records began in 1955, and U.S. GDP dropped 1 percent.

Today’s report showed engineering construction jumped 5.2 percent in the second quarter. The government last month approved Chevron Corp.’s A$50 billion liquefied natural gas venture, which will leapfrog Australia to second place behind Qatar as the world’s biggest LNG producers.

The Reserve Bank scrapped its forecast last month for the economy to contract this year, instead predicting gross domestic product will expand 0.5 percent. The bank expects growth will accelerate to 2.25 percent in 2010 and 3.75 percent in 2011.

Retail Profits

Reports this week showed building approvals rose for a second month in July and manufacturing expanded in August for the first time in 14 months. Consumer and business confidence have also surged to the highest levels in almost two years.

Woolworths Ltd., Australia’s largest retailer, said last week that profit in the six months ended June 28 jumped 16 percent.

“The troubles are probably behind us now and things are looking a lot better,” Gerry Harvey, chairman of Australia’s biggest electronics seller, Harvey Norman, said on Aug. 28. “Consumer sentiment is much higher than it was six months ago and there’s no reason to believe that won’t continue.”

Harvey Norman’s earnings in Australia, where it gets three quarters of its revenue, rose 4 percent in the year ended June 30.

“The stimulus is helping Australia defy global economic gravity,” Treasurer Wayne Swan told reporters in Canberra today. “Without economic stimulus, our economy would have contracted.” The government would start withdrawing its stimulus from the fourth quarter, he said.

The chain price index, a measure of retail prices, declined 2.2 percent in the second quarter from the previous three months, today’s report showed.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

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Norway’s Krone Won’t Suffer from PMI Drop, Credit Suisse Says

By Bo Nielsen

Sept. 2 (Bloomberg) -- Norway’s krone won’t suffer long from an unexpected August contraction in the manufacturing industry as the rest of the Scandinavian nation’s economy continues to improve, according to Credit Suisse Group AG.

“Given the recent data releases in Norway have all surprised the market on the upside, and the Norwegian economy should continue to benefit as oil prices drift higher, we doubt such a drawback in PMI is persistent,” Credit Suisse analysts led by London-based Ray Farris wrote in a note today. “We maintain our three-month krone forecast at 8.50 per euro.”

The krone fell 0.1 percent to 8.6750 per euro at 1:37 p.m. in Oslo, after falling as much as 0.5 percent after the manufacturing report was released today.

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Russia May Cut Rates This Month After Economy Slumped

By Alex Nicholson and Paul Abelsky

Sept. 2 (Bloomberg) -- Russia’s central bank may cut its key interest rate this month for the sixth time since it started easing policy in April after output contracted at a record pace and as the economy faces a slow recovery, a survey showed.

Bank Rossii may lower the refinancing rate by 0.25 of a percentage point to 10.5 percent this month, according to the median estimate of 12 economists surveyed by Bloomberg. The rate may fall to 10 percent by year-end, the survey showed. The bank, which doesn’t publish a timetable for rate meetings, began cutting on April 24 for the first time since 2007.

The economy of the world’s biggest energy exporter shrank a record 10.9 percent last quarter after a decline in global trade undermined demand for exports of raw materials from steel to oil. Lower rates have failed to revive credit flows and Prime Minister Vladimir Putin is urging bankers receiving state bailout funds to ramp up lending to resuscitate domestic demand.

“The central bank will continue to ease rates from historically tight levels,” said Rory MacFarquhar, a Moscow- based economist at Goldman Sachs Group Inc. “As the ruble remains comfortably within the 26-41 band against the basket, we see” a further 0.75 point in cuts in the next few months.

Russian policy makers are cutting rates as central banks in Europe and the U.S. turn their focus to the timing of possible rate increases to match an economic recovery. The Russian economy will shrink 6.8 percent this year, compared with a 4.8 percent decline in the euro region and a 2.8 percent contraction in the U.S., the Organization for Economic Cooperation and Development said on June 24.

‘Crisis’

“We’re not out of the crisis yet,” Finance Minister Alexei Kudrin said yesterday.

While most of Russia’s economic decline has stemmed from its reliance on commodity exports, reluctance amongst the country’s banks to lend funds has scuppered a domestic recovery. Overdue loans rose to 5.5 percent of total lending in July from 5 percent in June, central bank figures showed yesterday.

“High lending risks, the growth of overdue debt and high interest rates meant the necessary rate of lending to the economy could not be attained, despite active steps by the government and Bank Rossii,” the bank said on Aug. 26.

The pace of rate cuts will be constrained by inflation that’s hovered above 10 percent since October 2007, economists said. Consumer price growth accelerated to 12 percent in July, the Federal Statistics Service said on Aug. 4.

‘More Sticky’

“Inflation was showing signs of being a little bit more sticky on the way down than they would have liked,” said Manik Narain, a strategist at Standard Chartered in London. “We are seeing a more conservative stance, quite a watchful stance.”

Government stimulus measures are also impeding central bank efforts to ease policy. Russia will post its first budget deficit since 1999 this year, and the Finance Ministry forecasts a shortfall of 8.9 percent of gross domestic product.

“State financing is already sufficient -- it mustn’t be increased,” Kudrin said yesterday. Widening the deficit would require a tighter monetary stance, “and we are trying to do the opposite,” he said, warning against additional fiscal easing.

Inflation will accelerate and the ruble will weaken as the government taps its $88.5 billion Reserve fund to plug the deficit, Standard & Poor’s said in an Aug. 31 report.

“Russia’s past struggle with persistently high domestic inflation suggests further constraints on monetary policies in the future on the back of a fresh surge in inflation,” the ratings agency said.

‘In Sync’

With the scope for rate cuts limited, the central bank may seek to penalize banks that don’t release credit. Lenders may face limited access to the bank’s cash and other funding instruments if they fail to lower interest rates on deposits and credit facilities, First Deputy Chairman Alexei Ulyukayev warned in July.

“They are keeping liquidity conditions tight, which is in sync with keeping inflation stable,” Narain said.

The ruble may trade around 38 against its target dollar- euro basket by the end of September and weaken to 39.7 by the end of the year, according to the median estimate in the survey. That compares with 38.0546 at 12:35 p.m. in Moscow today.

The Russian currency lost as much as 0.6 percent and was down 0.5 percent to 31.9752 per dollar by 12:35 p.m. in Moscow, its weakest level since Aug. 19. It was little changed at 45.4755 per euro.

Investors are betting the ruble will depreciate to 32.68 per dollar in three months, according to non-deliverable forwards. NDF agreements gauge expectations of a currency’s movements by fixing an exchange rate at a particular level in the future.

Signs of Working

Central bank policy is showing some signs of working. Bank interest rates on loans to companies in July were the lowest in nine months as the slump in industrial production eased.

The average rate on loans in July was 14.7 percent, compared with 15.4 percent in June, Bank Rossii said on Aug. 26, though that report didn’t include data for OAO Sberbank, the biggest lender.

Industrial production rose for a second month in July, and gross domestic product also expanded for a second month in July, growing a seasonally adjusted 0.5 percent in the month, according to the Economy Ministry.

‘So-Called Bottom’

“The real economy saw a change in trends in June and July,” Ulyukayev said on Aug. 20. “The lowest point of the downturn was probably passed in May. The so-called bottom is behind us.”

Any recovery will fall short of the boom years Russia enjoyed between 2003 and 2007, when output expanded about 7 percent on average a year, some economists said.

“It’s still very much a case of the pace of contraction easing rather than the economy actually recovering,” said Neil Shearing, emerging-Europe economist at Capital Economics in London. “We’ll be lucky to get much more than stagnant growth next year.”

To contact the reporter on this story: Alex Nicholson in Moscow at anicholson6@bloomberg.net.

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G-20 Risks ‘Catastrophe’ as Push Ebbs for Regulation

By Rich Miller and Simon Kennedy

Sept. 2 (Bloomberg) -- Economic policy makers from the Group of 20 nations gathering this week in London are finding that their drive to prevent the next financial crisis may be jeopardized by their success in countering the current one.

Stock markets are rebounding, with the MSCI World Index of 23 developed nations gaining 59 percent since March 9, when it reached its lowest level since 1995. Signs of economic revival are also appearing in countries such as the U.S. and the U.K. after the worst slumps since World War II.

The rally is sapping the political push to impose tougher regulations on financial-services companies. While that might help earnings for New York-based Citigroup Inc., the third- largest U.S. bank, and Barclays Plc, the U.K.’s second-biggest lender, it may also leave the global economy susceptible to a fresh cycle of boom then bust.

“We’re getting a recovery, so dealing with the true problems is going to be more difficult,” said Raghuram Rajan, a former chief economist at the International Monetary Fund who is now a professor at the University of Chicago. “The risk is that we’re just going to tool around until the next crisis.”

U.S. Treasury Secretary Timothy Geithner, Bank of England Governor Mervyn King and other G-20 finance ministers and central bankers meet Sept. 4 and Sept. 5 to prepare for the Pittsburgh summit of leaders three weeks later. They are convening five months since their governments blamed “major failures” in supervision as one of the “fundamental causes” of the worldwide credit crunch and vowed to “strengthen financial regulation to rebuild trust.”

Global Growth

That drive is now in jeopardy as the crisis ebbs. The IMF plans to raise its global growth forecast to “just below” 3 percent for 2010 from its 2.5 percent estimate of July, Jorg Decressin, a division chief in the lender’s research department, said yesterday. Banks are regaining lobbying strength, and other political goals such as health-care reform in the U.S. have captured the attention of legislatures. International differences, including over how to restrain bonuses, are also undermining the G-20’s united front.

Central bankers are already pressing governments not to slow the pace. “It would be a catastrophe not to draw all the lessons from the present crisis in terms of regulation,” European Central Bank President Jean-Claude Trichet told a symposium in Jackson Hole, Wyoming, on Aug. 21.

‘Radical Restructuring’

“Much remains to be done,” Bank of Israel Governor Stanley Fischer told attendees the same day. The former Citigroup vice chairman suggested the global banking system may need to undergo “radical restructuring,” perhaps by imposing limits on the size of individual financial companies.

Fischer also recommended that banks be forced to set aside more capital and central banks be given the power to monitor financial systems.

“What I’m very worried about is the recovery is going to come and the political will is going to disappear to actually repair the system,” said Stephen Cecchetti, head of the monetary and economic unit at the Bank for International Settlements in Basel, Switzerland, which serves as a bank for central banks.

Financial institutions may be the winners of a regulatory impasse because their profits would be spared, said Simon Johnson, a former chief IMF economist who is now a senior fellow at the Peterson Institute for International Economics, a Washington-based research organization.

Sweeping Overhaul

President Barack Obama in June proposed the most sweeping overhaul of the U.S. financial-regulatory system in 75 years, calling for the creation of an agency to monitor mortgages and other consumer products and tighter oversight of the country’s biggest banks and institutions.

Congressional passage of his revamp would have a “material” effect on bank earnings, said Andrew Laperriere, a Washington-based managing director at International Strategy & Investment Group, an institutional brokerage. The MSCI World Financials Index has jumped 132 percent since its low of 35.01 on March 9.

Unless steps are taken to reduce complexity and leverage in financial markets, “we’re going to have a replay of what has just happened over the last few years,” said Richard Bookstaber, a former trader at New York-based Morgan Stanley, the sixth-biggest U.S. bank by assets.

Fastest Pace

He warned in 2007 that risks in the markets were becoming unmanageable. Since then banks, brokers and insurers have racked up more than $1.6 trillion of writedowns and credit losses, data compiled by Bloomberg show, and the world economy fell into recession.

Financial firms are showing signs of reverting to their old ways, Johnson said. Zurich-based Credit Suisse Group AG, Switzerland’s second-largest bank, and Scotia Capital, the investment-banking unit of Bank of Nova Scotia, Canada’s third- largest bank, are among those increasing lending to buyers of high-yield company loans and mortgage bonds at what may be the fastest pace since the crisis began.

Still, stocks fell around the world this week on concern that their rally has outpaced the prospects for earnings and economic growth. U.S. stocks dropped for a third day yesterday, the longest losing streak for the Standard & Poor’s 500 Index since June, amid worry banks will post more losses.

In the U.S., Obama’s plans face resistance from lawmakers, overseers and the banking industry.

Risk Regulator

Federal Reserve Chairman Ben S. Bernanke, Federal Deposit Insurance Corp. Chairman Sheila Bair and other regulators have opposed giving up their consumer-protection powers under an administration plan to set up a new agency to police financial products. Banks have also opposed the new regulator, arguing it would add a layer of expense to their operations and raise borrowing costs for customers and companies.

“The industry has gotten really organized since the crisis began to ease,” said Johnson, who is also a professor at the Massachusetts Institute of Technology in Cambridge.

A number of lawmakers, including Christopher Dodd, a Connecticut Democrat and chairman of the U.S. Senate Banking Committee, have voiced unease about another administration proposal to give the Fed powers overseeing systemic risks. Dodd has said he is leaning toward giving that power to a council of regulators.

“There’s no chance reform gets done this year,” said Laperriere, noting the breadth of changes proposed by the administration. “It’s not very likely it gets done in the current Congress,” which concludes at the end of 2010, he said.

National Money

It also may take more than a year for the European Union to unify market oversight in its 27 nations. While leaders agreed in June to sharpen scrutiny of banks, the EU’s executive arm must now draft legislation that then goes to the European Parliament and individual governments.

The risk watchdog the EU has proposed will lack powers to enforce its warnings and won’t automatically be run by the ECB as originally planned. The U.K. has won a compromise to prevent the panel from making decisions involving national money.

Executive pay is an area of disagreement that may become a point of contention at this week’s meeting of financial officials from China, India, Canada and other G-20 countries. German Chancellor Angela Merkel and French President Nicolas Sarkozy are urging the G-20 to impose tougher limits on bank bonuses.

Bonus Pools

France will suggest curbing bonus pools as a percentage of a bank’s revenue, imposing a ceiling on payments or taxing them, a finance ministry official told reporters yesterday. U.K. Prime Minister Gordon Brown sees a cap as difficult to enforce, the Financial Times reported yesterday, citing an interview.

“Bonus payments are the thing that quite rightly drives a lot of people up the wall,” Merkel said in Berlin on Aug. 31 with Sarkozy beside her. The two leaders said they want the G-20 to limit the size of banks and tighten capital rules.

France drew criticism from U.S. analysts and investors last week by announcing it won’t hire financial firms unless they follow their French counterparts and apply rules that include a three-year deferral on two-thirds of bonus payments.

“We’re in a tug of war between national political pressures and the desire to coordinate,” said Charles Dallara, managing director of the Washington-based Institute of International Finance, which represents the world’s biggest financial firms. “Right now the nationalist forces have the upper hand.”

Regulatory ‘Fragmentation’

He said that may lead to regulatory “fragmentation,” with supervisors trying to “protect their own backyard” and making the global system less stable in the process.

The longer the delay in adopting reforms, the more likely the drive will be dominated by politicians as opposed to “technocrats,” said Mohamed El-Erian, chief executive officer of Newport Beach, California-based Pacific Investment Management Co., manager of the world’s largest bond fund. In that case, reforms may end up being too “blunt,” he said.

“The run-up to the Pittsburgh G-20 meeting has attracted little attention,” said El-Erian, a former IMF official. “There is a risk that, after a successful London meeting in April, the G-20 process may lose momentum.”

To contact the reporters on this story: Rich Miller in Washington rmiller28@bloomberg.net;

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