S&P Cuts Italy Rating on Weak Growth Outlook

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Pedestrians pass the Colosseum in Rome. Italy follows Spain, Ireland, Portugal, Cyprus and Greece as euro-region countries having their credit rating cut this year. Photographer: Alessandra Benedetti/Bloomberg

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Sept. 20 (Bloomberg) -- Komal Sri-Kumar, chief global strategist at TCW Group Inc., talks about Standard & Poor’s downgrade of Italy’s credit rating, the outlook for the European economy and stocks. Sri-Kumar speaks from Los Angeles with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Italy’s credit rating was cut by Standard & Poor’s on concern that weakening economic growth and a “fragile” government mean the nation won’t be able to reduce the euro-region’s second-largest debt burden.

The rating was lowered to A from A+, with a negative outlook, S&P said in a statement. S&P said Italy’s net general government debt is the highest among A-rated sovereigns, and the company now expects it to peak later and at a higher level than it previously anticipated.

The decision sent the euro sliding for a third day against the dollar as investor concern rises that European policy makers will fail to contain the debt crisis. Greece’s government plans another call with its main creditors today as it seeks to stave off default, while U.S. Treasury Timothy F. Geithner urged the region to adopt additional tools.

“It’s a reminder that we’ve had the market in control but policy makers have been slow to think in any forward-looking context,” said Adrian Foster, head of financial-market research for Asia at Rabobank Groep NV in Hong Kong. “Policy makers across the euro-zone have been well and truly asleep at the wheel for quite a while now and are only taking measures when the market pushes them to it.”

Euro Falls

The euro fell 0.5 percent to $1.3625 at 9:25 a.m. in Tokyo. Stocks also retreated, with the MSCI Asia Pacific index down 1.1 percent, and futures on the U.S. S&P 500 index losing 0.6 percent.

S&P said it lowered its outlook for Italy’s growth to a 0.7 percent annual average for 2011 to 2014, from a prior projection of 1.3 percent. “We believe the reduced pace of Italy’s economic activity to date will make the government’s revised fiscal targets difficult to achieve,” it said.

Italy follows Spain, Ireland, Portugal, Cyprus and Greece as euro-region countries having their credit rating cut this year. Prime Minister Silvio Berlusconi passed a 54 billion-euro ($73 billion) austerity package this month that convinced the European Central Bank to buy its bonds after borrowing costs surged to euro-era records in August. The plan to balance the budget in 2013 wasn’t enough to sway S&P.

“We expect that Italy’s fragile governing coalition and policy differences within parliament will continue to limit the government’s ability to respond decisively to domestic and external macroeconomic challenges,” S&P said.

U.S. Rating

The decision comes just weeks after S&P stripped the U.S. of its AAA credit rating for the first time. While the Aug. 5 move roiled global markets, bond investors ignored S&P’s warnings about U.S. creditworthiness and piled into Treasuries. The yield on the benchmark U.S. government bond fell to a record 1.8770 on Sept. 12.

Italy’s downgrade may aggravate a volatile political situation -- Berlusconi faces four trials -- after a decade with virtually no economic growth that has undermined debt reduction. Its government debt was 119 percent of gross domestic product last year, more than any euro country after Greece.

Unlike Ireland and Portugal, which followed Greece in seeking bailouts from the European Union and the International Monetary Fund, Italy until July had managed to skirt the worst of the fallout from the debt crisis.

While its budget gap was 4.6 percent of GDP in 2010, lower than France and Germany, debt will reach 120 percent this year.

Growth Outlook

Italy’s economy expanded an average 0.2 percent annually from 2001 to 2010, compared with 1.1 percent in the euro area. GDP rose 0.3 percent in the second quarter from the three months through March, when it grew 0.1 percent, the national statistics institute said on Sept. 9.

With austerity in the pipeline, “we now expect the economy to contract in 2012 and 2013,” Ben May, an economist at Capital Economics Ltd. in London, said in a Sept. 9 note.

Berlusconi pushed through two packages of deficit cuts since mid-July totaling about 100 billion euros. Measures included raising the value-added tax by one percentage point to 21 percent and a levy on incomes of more than 300,000 euros to balance the budget by 2013. The second, announced on Aug. 5, was a condition of ECB support.

While ECB purchases knocked more than 100 basis points off the yield in a week, borrowing costs began rising again as the government diluted the package. That prompted Berlusconi to revise the plan, introducing the increase in the value-added tax, raising the levy on high earners and lifting the retirement age for women.

Yield Premium

The yield on 10-year notes was at 5.6 percent yesterday, pushing the difference investors demand to hold Italian bonds instead of benchmark German bunds to 379 basis points. The cost of insuring Italian debt against default was 488 basis points compared with 240 on Dec. 31, 2010.

S&P in May and Moody’s Investors Service in June first warned that they may downgrade Italy, saying the government may miss its revenue and deficit targets amid chronically sluggish growth and possible political instability.

The government’s first budget package approved in May wasn’t enough to convince S&P that Italy will be able to reduce its debt. The rating company said on July 1 that even with the budget cuts, there’s a “one-in-three likelihood that the ratings could be lowered within the next” two years because anemic economic growth would undermine fiscal goals.

Greek Calls

Meantime, Greek Finance Minister Evangelos Venizelos held “substantive” discussions with European Union and International Monetary Fund officials about securing a sixth installment of rescue funds, the Athens-based finance ministry said in an e- mailed statement after a teleconference last night. A second call will be held tonight.

Geithner said that new crisis-fighting measures may eventually be agreed even after some European officials poured cold water on his proposals at a summit in Poland at the weekend.

“I think you’re going to see them draw on the lessons of our crisis, draw on the lessons of things that worked here in the United States,” Geithner said in a Bloomberg Television interview yesterday in Washington. “I think you’ll see that reflected in some of the choices they make.”

To contact the reporter on this story: Jeffrey Donovan in Rome at jdonovan26@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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Geithner: Europe Will Follow ‘Lessons’ of U.S.

By Ian Katz and Julianna Goldman - Sep 20, 2011 5:49 AM GMT+0700
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Treasury Secretary Tim Geithner arrives for a meeting of the G7 Finance ministers and 'Deauville Partnership' in Marseille, southern France, on Septembre 10, 2011. Photographer: Gerard Julien/AFP/Getty Images

U.S. Treasury Secretary Timothy F. Geithner predicted that Europe will adopt some of the same measures the U.S. took to battle the financial crisis that started in 2008.

“I think you’re going to see them draw on the lessons of our crisis, draw on the lessons of things that worked here in the United States,” Geithner said in a Bloomberg Television interview today in Washington. “I think you’ll see that reflected in some of the choices they make.”

In the aftermath of the September 2008 bankruptcy of Lehman Brothers Holdings Inc., the U.S. adopted the $700 billion Troubled Asset Relief Program and the Federal Reserve conducted stress tests of the 19 largest financial institutions to ensure their capital was adequate to withstand a more severe economic downturn. The Fed also set up the Term Asset-Backed Securities Loan Facility, or TALF, to keep consumer credit flowing.

Geithner visited Poland last week to meet with European officials, who rebuffed his suggestions for fixing their debt crisis. The Treasury secretary urged European leaders to set aside their differences to excise “catastrophic risks” from the markets.

“The Europeans are under a lot of pressure still,” Geithner said today. “They’re going through a really tremendously difficult job of trying to build a stronger union, stronger economic union with a very strong financial firewall to help those countries that are undertaking reforms.”

Europeans “have a lot of work to do,” Geithner said. “They recognize that more than anybody.”

Stocks Slide

Stocks in Europe slid today, halting a four-day rally for the Stoxx Europe 600 Index, as investors speculated that Greece may not receive an aid payment that would help it avoid default.

Greek Prime Minister George Papandreou’s government will hold another call with its main creditors tomorrow. Finance Minister Evangelos Venizelos held “substantive” discussions with officials from the European Union and International Monetary Fund about securing a sixth installment of rescue funds, the Athens-based finance ministry said in an e-mailed statement. A second call will be held tomorrow evening.

To contact the reporters on this story: Ian Katz in Washington at ikatz2@bloomberg.net; Julianna Goldman in Washington at jgoldman6@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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OPEC’s $1 Trillion Cash Quiets Poor on $100 Oil

By Ayesha Daya and Vivian Salama - Sep 20, 2011 3:01 AM GMT+0700

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Egyptian demonstrators rally in downtown Cairo's Tahrir square on July 29, 2011. Photographer: Khaled Desouki/AFP/Getty Images

Saudi Arabia will spend $43 billion on its poorer citizens and religious institutions. Kuwaitis are getting free food for a year. Civil servants in Algeria received a 34 percent pay rise. Desert cities in the United Arab Emirates may soon enjoy uninterrupted electricity.

Organization of Petroleum Exporting Countries members are poised to earn an unprecedented $1 trillion this year, according to the U.S. Energy Department, as the group’s benchmark oil measure exceeded $100 a barrel for the longest period ever. They are promising to plow record amounts into public and social programs after pro-democracy movements overthrew rulers in Tunisia, Egypt and Libya and spread to Yemen and Syria.

Unlike past booms, when Abu Dhabi bought English soccer club Manchester City and Qatar acquired a stake in luxury carmaker Porsche SE, Gulf nations pledged $150 billion in additional spending this year on their citizens. They will need to keep U.S. benchmark West Texas Intermediate crude oil at more than $80 a barrel to afford their promises, according to Bank of America Corp.

“A sharp increase in spending to accommodate social pressures has averted potential disquiet over governance in most countries, though in the longer-term economic reforms will be needed to buoy private-sector growth and job creation,” Jean- Michel Saliba, a London-based economist at Bank of America, said in an e-mail Sept. 8. “Without the social spending, Gulf protests would possibly move the nations toward constitutional monarchy.”

OPEC’s basket of crudes, a weighted average of the group’s main export grades, has been trading at above $100 since Feb. 21. The basket price was $110.69 a barrel on Sept. 16 while WTI on the New York Mercantile Exchange closed that day at $87.96.

Arab Spring

Tunisia’s ouster of President Zine El Abidine Ben Ali in January set up the so-called Arab Spring, as protests led to the end of Hosni Mubarak’s 30-year reign in Egypt and threatened the Assad family’s hold on Syria.

Libya’s rebel council met Sept. 19 to form a cabinet after seven months of fighting to end Muammar Qaddafi’s 42-year rule. Yemeni President Ali Abdullah Saleh is under pressure to step down after 33 years running the Arab world’s poorest country. Unemployment is at 11 percent in the Middle East and North Africa and as high as 22 percent in Algeria, according to the United Nations Development Program.

Across Yemen’s northern border, in Saudi Arabia, OPEC’s biggest member is funding housing, salary increases and the creation of 60,000 new jobs at the interior ministry, according to royal decrees announced on March 18. At least 1 billion riyals ($267 million) has been allocated to the Saudi Ministry of Islamic affairs and The Commission for the Promotion of Virtue and Prevention of Vice after clerics backed a ban on domestic protests.

Religious Funding

The religious establishment’s new funds include 500 million riyals to restore mosques and 300 million riyals to support Islamic call and guidance offices, according to the decrees. Money is being spent on installing devices in public squares, markets and schools to deliver audio and video broadcasts with “advice and moral lessons,” the Commission’s President Muhammad al-Eidy said in May.

“They probably feel like they’ve got to do a lot more spending this time and they are focusing on social spending, whereas previous investments were business or private-sector driven,” said Gabriel Sterne, associate director in London at Exotix, an investment bank, and a former economist at the International Monetary Fund and the Bank of England.

$1 Trillion Revenue

OPEC will need WTI at above $80 a barrel to maintain the increased social spending because the costs of Persian Gulf budget obligations have more than doubled since 2006 to $77, with Saudi Arabia needing an average $82, according to Deutsche Bank AG. OPEC’s basket price at more than $100 puts it on course to earn $1.01 trillion this year, the U.S. government said.

During the oil rally that peaked in 2008 before the onset of the global financial crisis, Abu Dhabi, holder of most of the U.A.E.’s crude reserves, pledged $22 billion to construct Masdar City, powered by renewable energy that would rest on concrete blocks under which electric driverless vehicles would transport residents. Qatar began building an academic hub, attracting American institutions such as Georgetown University in Washington and Texas A&M University in College Station, Texas, with funding from a government-run foundation.

Shoring Up Support

This time, rulers are shoring up domestic support. Demonstrations in Saudi Arabia, the Arab world’s biggest economy, failed to take off in March as citizens were offered extra money for housing. Government employees had their salaries increased 15 percent and got two months extra pay. Kuwaitis received 1,000 dinars ($3,664) and free food for 13 months, state news agency KUNA said in January. Earlier this month, Qatar’s crown prince Sheikh Tamim bin Hamad al-Thani ordered 30 billion riyals ($8.2 billion) in civil servant salary increases and pension-fund allowances.

“As soon as the government announced handouts, people went out and bought cars,” said John Stadwick, managing director of General Motors Co. (GM)’s Middle East operations. Sales in Saudi Arabia climbed as much as 48 percent a month since April, compared with a decline in February and March, he said.

Gulf nations are also aiding neighboring Sunni monarchies to prop up dynasties that have ruled parts of the Middle East for centuries. They pledged $20 billion for Oman and Bahrain to fend off protests and invited Morocco and Jordan to join the six-member Gulf Cooperation Council which will include economic assistance. In addition, newly democratic Egypt received $20 billion from Qatar and $4 billion from Saudi Arabia as the Gulf seeks to retain influence in the most populous Arab nation.

OPEC Spending Rises

Of OPEC’s 12 members, nine increased 2011 budgets and of the remaining three, only Nigeria amended its budget lower, while the U.A.E. doesn’t disclose its public spending. Nigeria, Africa’s biggest oil producer, set up a $1 billion wealth fund in May split into an infrastructure fund, a future generations fund and a stabilization fund. Algeria’s cabinet approved a 25 percent budget increase to pay for the salary raise and food subsidies amid protests that have ended 19 years of emergency rule and led to a review of the election law.

OPEC decided against raising oil supplies at its June meeting even as Libya’s conflict curbed exports. Output of about 30 million barrels a day lags behind the 31.3 million barrels the world needs from the region in the third quarter, according to the International Energy Agency. Half of Saudi Arabia’s 8 percent increase in June production to 9.7 million barrels a day was used in its own power plants as domestic demand reached a record, data from the Paris-based IEA showed.

Cut Production

“Saudi Arabia will cut back after its summer surge,” said Leo Drollas, London-based chief economist at the Centre for Global Energy Studies, the researcher founded by former Saudi Oil Minister Zaki Yamani. “If it doesn’t trim now then prices might lurch downwards on lower demand, and it needs a minimum basket price of $90 for what it wants to do this year.”

Oil in New York has dropped 25 percent since its April 29 high of $113.93 on concern demand will fall as Europe grapples with its debt crisis and unemployment in the U.S. hovers at 9 percent. WTI averaged $92.66 in the past year.

The OPEC basket will stay above $100 a barrel for the rest of this year, according to forecasts from five banks and consultants, including Barclays Plc and Sanford C. Bernstein & Co. Its previous record period above this level was from April 7 to Sept. 8, 2008. OPEC’s members are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

Not all the spending initiatives work right away, even though citizens praise the changes.

Give More Power

Abu Dhabi plans to provide more services to poorer citizens by focusing on communities like Ras Al Khaimah after academics and journalists signed an online petition calling for the country’s Federal National Council, an advisory body with no executive authority, to be chosen by universal suffrage and given more power.

Less than a week after Mubarak’s ouster in Egypt, the city of 250,000 people got a visit from Abu Dhabi Crown Prince Sheikh Mohammed bin Zayed Al Nahyan. Learning they lacked electricity, Sheikh Mohammed, who is next in line to the nation’s presidency, summoned a utility executive who arrived within two hours by helicopter. “Give them power now,” he ordered.

Sheikh Mohammed “sat with the people and listened to our needs,” said Yousuf al-Nuaimi, chairman of the Chamber of Commerce in Ras Al Khaimah, one of seven U.A.E. cities whose per capita income is 45 times less than Abu Dhabi. The Crown Prince promised electricity to the northern sheikhdom, home to one of five pro-democracy activists arrested this year, from a plant in nearby Fujairah and 1 billion dirhams ($270 million) for road and housing improvements, al-Nuaimi said.

Seven months after the visit, Ras Al Khaimah is still waiting for power but residents don’t blame the crown prince.

“Abu Dhabi is not the problem,” al-Nuaimi said. “The Federal Water and Electricity Authority is the problem. They need to do the connection but they are not. I hope the next step will be for Abu Dhabi to take over FEWA so that we can enjoy the power they promised us.”

To contact the reporters on this story: Ayesha Daya at adaya1@bloomberg.net; Vivian Salama in Abu Dhabi at vsalama@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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Samsung considers legal action over Apple's new iPhone: source

Tue Sep 20, 2011 12:27am EDT

(Reuters) - Samsung Electronics Co is considering legal action to ban sales of Apple's new iPhone, a source familiar with the matter said on Tuesday, in what could be its strongest step to defend against claims by the U.S. firm that the South Korean firm had copied its product designs.

The source declined to elaborate further on where Samsung planned to take legal actions and the Maeil Business Newspaper reported that the South Korean firm may seek injunction request on Apple's new iPhone in Europe.

Samsung said it would not comment on ongoing legal issues.

The two technology firms have been locked in intensifying legal battles in nine countries over their flagship smartphone and tablet products.

The move comes after Apple successfully blocked Samsung from selling its latest tablets in Germany and some smartphone models in the Netherlands and forced its rival to indefinite delay launching new tablets in Australia.

After Apple's latest legal victory in Germany earlier this month, Samsung said it would take all available legal options.

Apple has not produced a new version of its best-selling iPhone for more than a year. The product is crucial for the world's No.1 smartphone maker to keep its strong sales momentum as Samsung is quickly closing on the gap with its Galaxy line of products.

Apple sold 20.3 million iPhones in the second quarter and Samsung shipped just one million units less than that.

Media reports have said Apple's product will go one sale in October.

Apple first sued Samsung in April, claiming its strongest competitor had "slavishly" copied its product designs, and Samsung had since counter-sued, arguing Apple infringed on its mobile technologies.

Samsung is also a major supplier of chips and displays for Apple's smartphones and tablet products.

(Reporting by Miyoung Kim; Editing by David Chance)

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Obama offers $3 trillion debt plan, tax hikes on rich

US President Barack Obama gestures as he talks about cutting the U.S. deficit by raising taxes, from the Rose Garden of the White House in Washington, September 19, 2011. [Photo/Agencies]

WASHINGTON - U.S. President Barack Obama laid out a $3.6 trillion plan on Monday to cut U.S. budget deficits partly by raising taxes on the rich, but Republicans rejected it as a political stunt and made clear the proposal has little chance of becoming law.

Highlights of Obama's plan: TAX INCREASES The plan would raise nearly $1.6 trillion from changes to the U.S. tax code. Of that, $866 billion in savings would come from allowing President George W. Bush's tax cuts for individuals making more than $200,000 to expire. An additional $710 billion would come from ridding the tax code of special breaks. Obama has proposed limiting deductions for higher-income households and eliminating breaks for oil and gas companies and firms that purchase corporate jets. The plan would also boost taxes on certain income earned by fund managers often called "carried interest." Hedge fund managers and some others pay a lower capital gains tax rate for managing clients' investments. In a populist step designed to appeal to voters, Obama would require millionaires to pay higher taxes. He has called that idea the "Buffett Rule" because it is based on a suggestion put forth by billionaire Warren Buffett, an ally of the president. Buffett has written that rich people like himself often pay less in tax than those who work for them because of tax-code loopholes and the low rates he pays on his investment income. DOMESTIC SPENDING PROGRAMS Obama's plan includes $580 billion in cuts to domestic spending programs. Of that, $248 billion will come from savings in the Medicare health program for older Americans with most of the cuts targeting payments mainly to insurance companies and hospitals. Obama would seek savings of $72 billion in the Medicaid health program for the poor. Administration officials said Obama will pledge to veto any plan that would cut benefits for Medicare recipients unless the wealthy and big corporations are required to pay their "fair share" of taxes. In a decision that is likely to please many Democrats, Obama is not proposing raising the age at which Americans become eligible for Medicare benefits, currently set at 65. He also is not proposing any changes to Social Security. The plan includes $250 billion in savings from other mandatory programs, including $33 billion in savings from agriculture subsidies, payments, and programs. It also includes $42.5 billion in reforms to federal employee benefit programs. HIGHER MORTGAGE FEES The plan proposes a 10 basis point increase in "guarantee fees" that Fannie Mae and Freddie Mac charge to mortgage customers, to produce projected savings of $28 billion over 10 years. The White House has backed increasing guarantee fees as part of a way to lessen the government's footprint in the U.S. housing finance system. WINDING DOWN WARS The plan assumes $1.1 trillion in savings from winding down the war in Iraq and moving ahead with planned troop reductions from Afghanistan. Critics have labeled this element of the plan a gimmick because it does not represent new policy but instead reflects drawdowns of U.S. forces that have already been announced. POSTAL SERVICE RESTRUCTURING Obama's plan includes a reform of the postal system, which has been facing a funding crisis. "These reforms would provide U.S. Postal Service with over $20 billion in cash relief over the next several years and in total would reduce the federal deficit by $19 billion over 10 years," according to the plan. SAVINGS ON INTEREST PAYMENTS The plan assumes $430 billion in savings on interest payments because of the cuts elsewhere in the budget.

Vowing to veto any plan that relies solely on spending cuts to reduce deficits, the Democratic president's recommendations set the stage for an ideological fight with Republicans opposed to tax increases that will stretch through Election Day 2012.

"I will not support any plan that puts all the burden of closing our deficit on ordinary Americans," Obama said. "We are not going to have a one-sided deal that hurts the folks who are most vulnerable."

Obama's speech reflected a more aggressive defense of Democratic principles after he took a battering in two previous budget battles with Republicans this year that helped drive his approval rating to new lows.

Most Americans say they are unhappy with Obama's economic leadership, and the president's re-election hopes could hinge on his ability to convince voters that Republicans represent the rich, not the middle class.

On Monday, he repeatedly said all Americans must pay their "fair share" of taxes, and he sharpened the difference between his vision for America and that of Republicans in a speech meant to regain support among core supporters who have said Obama has failed to stick to liberal principles.

Republicans have consistently opposed any measures resembling tax hikes, saying they will hurt the struggling economy by increasing the burden on job-creating businesses. Republican leaders stuck to that position on Monday, quickly rejecting Obama's plan.

"Veto threats, a massive tax hike, phantom savings, and punting on entitlement reform is not a recipe for economic or job growth," said Republican Senate leader Mitch McConnell.

John Boehner, speaker of the House of Representatives and the top Republican in Congress, said Obama failed to offer a "serious" recommendation to the special bipartisan congressional committee tasked with finding at least $1.2 trillion in savings.

"Pitting one group of Americans against another is not leadership," Boehner said.

Politics, but a plan?

Analysts were skeptical Obama's plan would help America's standing with credit rating agencies such as Standard & Poor's, which last month downgraded U.S. government debt and expressed concern that Washington was too divided to tackle its mountain of debt.

Obama's plan, which will be sent to the "super committee" of six Republicans and six Democrats considering deficit reduction, proposes $3 trillion in savings over 10 years.

These include cuts to Medicare spending aimed mainly at healthcare providers, particularly big drug companies, and some hospital stocks fell sharply on Wall Street on Monday.

But roughly half of overall savings come from higher tax revenues, under the president's proposal.

That would include allowing tax breaks for upper income Americans to expire at the end of 2012, capping popular deductions for things like mortgage interest and charitable donations, and closing corporate tax loopholes.

"This is purely politics, aimed at Obama's demoralized base. It undoubtedly has been poll-tested, so now Obama has a populist campaign issue. There's obviously no chance this could pass" on a vote in Congress, said Greg Valliere, chief political strategist at consultancy Potomac Research Group.

Rudolph Penner, a former director of the Congressional Budget Office, said rating agencies would not be impressed by Obama's failure to recommend deeper healthcare cuts.

"If I were S&P I would not change my rating on the basis of this proposal," he said.

"Buffett rule"

Obama's call to overhaul the U.S. tax code included a "Buffett Rule," named after billionaire investor Warren Buffett, that would set a minimum tax rate for people earning more than $1 million a year.

The tax would only apply to a tiny minority of the millions of Americans who file tax returns, but White House aides said it would set a standard of fairness.

Senior Senate Democrat Charles Schumer said Congress should run with the "Buffett Rule" and urged lawmakers put it into legislation that could be voted upon.

While critics derided Obama's plan as purely political, some analysts saw a sober bid to tackle big fiscal problems.

"Obama's new plan is both a serious legislative proposal and an effort to stake out his ground for his re-election campaign," said Sarah Binder, a senior fellow at The Brookings Institution, although she said Republicans' resistance to tax hikes would likely thwart a compromise.

The super committee must propose a deficit plan by Nov. 23. Congress must then vote on the panel's proposal by Dec. 23 or automatic spending cuts will be triggered across government agencies, beginning in 2013.

Palatable to be left

Obama said his plan, together with savings agreed under an August debt ceiling deal, will cut $4 trillion from the deficit over 10 years, helping deflect Republican claims he is a "tax and spend liberal" that have hurt him with independent voters.

Obama's suggestions do not raise the eligibility age for Medicare recipients, something he proposed during debt ceiling negotiations with Boehner over the summer.

Instead, he is proposing something more palatable to the left wing of his party -- $248 billion in savings from Medicare, the government health program for the elderly. The bulk of that would come from reducing overpayments to health care providers.

Medicare and Medicaid are viewed by analysts as the biggest contributors to long-term U.S. deficits, a driving issue in the election. The U.S. budget deficit in 2011 is expected to be about $1.3 trillion.

taken from : chinadaily
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LNG Price Boom Seen as Japan Vies With China While Exxon’s Shipments Grow

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A liquefied natural gas (LNG) tanker is moored in Sodegaura City, Chiba Prefecture, Japan. Liquefied gas costs surged about 33 percent after Japan’s March 11 earthquake and tsunami and have since climbed toward $16 per million Btu. Photographer: Tomohiro Ohsumi/Bloomberg

Liquefied natural gas prices are surging to a three-year high as demand from Japan, China and India outpaces supply increases, boosting sales for producers from BG Group Plc (BG/) to Exxon Mobil Corp. (XOM)

Record Japanese imports to replace nuclear power after the Fukushima Dai-Ichi disaster, plus a 27-percent jump in China’s first-half purchases, may send prices to about $20 per million British thermal units this winter, up 71 percent from 2010 and the highest since 2008, according to data compiled by Bloomberg. The world’s spare production capacity shrank about 50 percent this year as consumption grew, and will continue to decline through 2014, Sanford C. Bernstein & Co. says.

Rising LNG prices are encouraging Exxon and BG, which got 27 percent of its operating profit from the fuel in the first half, to develop and transport more. That may spur North American exports by 2016 and help the world’s fastest-growing economies contain inflation from rising oil and coal costs.

“LNG demand will go up, there’s no other alternative,” said P.K. Jain, the New Delhi-based director of finance at GAIL India Ltd. (GAIL), the nation’s biggest gas distributor and a co-owner of Petronet LNG Ltd., the largest buyer. “Demand will rise in Asia as Japan increases LNG use after Fukushima and even in Europe, with countries moving away from nuclear, long-term demand for LNG may rise.”

More Optimistic

Demand for gas cooled to liquid and transported by ships may be making U.S. forecasters more optimistic about natural gas. Bulls outnumber bears by about six to one, a reversal from the one-to-two ratio a month ago, according to Bloomberg data. While gas futures on the New York Mercantile Exchange have slumped 14 percent this year to $3.801 per million British thermal units, LNG, which is not exchange-traded, has gained.

Liquefied gas costs surged about 33 percent after Japan’s March 11 earthquake and tsunami caused reactor meltdowns at Tokyo Electric Power Co.’s Fukushima plant, and have since climbed toward $16 per million Btu, according to Mark Greenwood, an analyst at Citigroup Inc. in Sydney. They may rise to $20 this winter, according to the median forecast in a Bloomberg News survey of eight analysts.

The country bought spot shipments at $15 per million Btu in July, according to Ministry of Finance data. Spot deliveries, typically from utilities facing emergency and weather-related needs, reached a 33-month high in June and July. The 10 regional power suppliers bought and consumed record amounts for a second month in August amid all-time low utilization rates at nuclear plants, the Federation of Electric Power Companies said.

Price Forecasts

“We see prices going to $20,” said Peter Buchanan, an economist at CIBC World Markets Inc. in Toronto. His forecasts for natural gas at Henry Hub in Erath, Louisiana, the benchmark for futures traded on the Nymex, were the second-most accurate after Bank of America Corp. for the eight quarters ended June 30, according to data compiled by Bloomberg.

Sixty percent of the 19 analyst forecasts compiled by Bloomberg on Sept. 9 were bullish on U.S. gas, while 13 percent were negative. That compares with 29 percent that were optimistic and 57 percent bearish a month earlier.

Global LNG demand grew 9 percent in the first half and 13 percent over the past 12 months, Bernstein Research said in an Aug. 29 report. Spare production capacity is likely to shrink to 26 million metric tons a year in 2011 and to 2 million by 2014, stoking prices and benefiting BG, Royal Dutch Shell Plc (RDSA), Total SA (FP) and PetroChina Co., according to the report.

‘Insufficient Supply’

“Given the underlying strength in demand from emerging markets and Japan, there is insufficient supply coming onto the market over the next three years which will lead to tighter spare capacity and higher prices,” Neil Beveridge, the Hong Kong-based senior analyst at Bernstein, said in an e-mail. “Asian customers will increasingly be competing with European customers, which will lead to higher gas prices outside of North America.”

Atomic power provided about 30 percent of the electricity in Japan, the world’s third-biggest economy, before March 11. About 76 percent of Japan’s 54 reactors are offline, with more scheduled to shut for maintenance. Demand is unlikely to ease anytime soon as Prime Minister Yoshihiko Noda, who replaced Naoto Kan as premier on Sept. 2, struggles to win public support for restarting reactors.

The Japanese government and Tokyo Electric Power Co. are expected to say tomorrow they plan to finish cooling reactor pressure vessels at the crippled Fukushima Dai-Ichi nuclear power plant by the end of this year, Tokyo Broadcasting System reported on its website.

German Decision

“The Japanese tsunami certainly did increase the demand quite dramatically for LNG imports into the region, which effectively tightened the global LNG market more quickly than most people had anticipated,” said Allison Nathan, a senior commodities economist at Goldman Sachs Group Inc. in New York. “We now see the global market as tight.”

Supplies have become scarcer partly because Germany decided on March 15 to close eight of its 17 atomic stations following Fukushima. Qatar, the world’s biggest LNG producer, said Sept. 5 it will shut three of seven production lines for maintenance through October.

Japan’s senior vice minister of trade and industry, Seishu Makino, asked U.S. Energy Secretary Steven Chu at a meeting in San Francisco last week to increase exports.

Cheniere Energy, the Houston-based Blackstone Group LP- backed owner of the Sabine Pass terminal in Louisiana, got approval to ship fuel to Japan in May. The Freeport terminal in Freeport, Texas, and the Lake Charles facility in Lake Charles, Louisiana, are also seeking clearance for exports, according to Akinobu Yoshikawa, deputy manager for Japan’s Petroleum and Natural Gas Division.

“The impact for our imports will be big,” Yoshikawa told reporters in Tokyo Sept. 14.

North American Exports

Before the tsunami, Japan used about 70 million tons of LNG a year. The demand will rise as much as 15 million tons, or 21 percent, in the 2011 fiscal year and as much as 20 million tons in 2012, the Institute of Energy Economics said in August.

North America may export about 5 billion cubic feet a day of LNG, or roughly the combined LNG export capacity of Nigeria and Algeria, globally by 2017 from projects that turn surplus gas from shale-rock formations to LNG for shipment to customers in Asia and Europe, according to the Eurasia Group, a New York- based consultant. That’s about half of the six proposed developments by companies including Cheniere in the U.S. Gulf Coast and British Columbia.

The U.S. may produce more than 12 trillion cubic feet of shale gas a year by 2020 in a “high-case scenario,” about a three-fold jump from last year’s level, as it boosts output by hydraulic fracturing, or fracking, of gas trapped in shale deposits, Gaffney, Cline & Associates, a unit of Baker Hughes Inc., the world’s third-largest oilfield-services provider, said in a presentation in Singapore on Sept. 12.

2020 Surplus

“In the high-case scenario, U.S. shale gas could provide an exportable surplus by 2020,” Stuart Traver, a consultant for the company in Singapore, said in the presentation. Shale gas accounted for approximately 20 percent of total U.S. production in 2010.

In fracking, producers force chemically treated water into underground shale wells to break up rock and let gas flow. About 84 trillion cubic feet of undiscovered, technically recoverable gas lie in the Marcellus Shale under New York and seven other states, the U.S. Geological Survey said Aug. 23. The U.S. Environmental Protection Agency is studying the effects of fracking because opponents say it’s a threat to drinking water.

Qatar and producers such as Australia, Malaysia and Indonesia are competing to satisfy demand for LNG from China and India, the world’s fastest-growing major economies. China’s imports rose 27 percent to 5.2 million tons in the first half of 2011 from a year earlier and reached a record in July, according to customs data.

PetroChina Terminal

PetroChina started trial operations at its 3.5 million ton- a-year Jiangsu LNG terminal in May and is buying two spot cargoes a month. It may boost purchases in coming months, Liu Wenfei, a director at the terminal, said Sept. 16. China National Offshore Oil Corp., operator of three terminals, may increase imports by 16 percent via its Guangdong facility this year, a company official said the same day.

India’s LNG imports increased 26 percent in the first half, according to Bernstein estimates. The country’s gas use may double to as much as 400 million cubic meters a day by 2016, while domestic supply may be about 200 million cubic meters, A.K. Balyan, managing director of New Delhi-based Petronet LNG, said last month. The company is planning a 50 percent expansion of capacity to convert LNG back into gas and has held talks with Cheniere on supply contracts, Balyan said in June.

While their LNG needs increase, the economies of Asia are struggling to damp rising prices, including the costs of coal and oil. China has raised interest rates five times since October to contain inflation, which has been above the government’s 2011 target of 4 percent every month this year. Indian inflation has held above 9 percent throughout 2011 even after six rate increases.

Higher Costs

Newcastle coal from Australia, an Asian pricing benchmark, surged 29 percent since Sept. 24, 2010, to $122.90 a ton. Brent crude oil futures rose 41 percent in the past year to $111.54 a barrel.

The U.S. may export enough LNG within five years to push down global gas prices if the cost disparity between domestic supplies and those in Europe and Asia remains about the same, Gerard Mestrallet, the chairman and chief executive officer of Courbevoie, Paris-based GDF Suez, Europe’s largest LNG importer, said in a Sept. 9 interview in New York.

Asia’s purchases of term LNG, or contractual supplies, are typically priced off a basket of imported Japanese crude oil, known as the Japan Crude Cocktail. Spot LNG is usually linked to the U.K.’s National Balancing Point, with Asia paying a premium to divert cargoes away from Europe.

U.S. Prices

Natural gas in the U.S. trades at about $4 per million Btu, while Asia pays at least $14, Traver said in the presentation. North American LNG could be delivered at about $9 per million Btu, encouraging utilities in Asia to seek a new pricing regime linked to the U.S. benchmark, he said. Term supplies of LNG to Asia have been linked to oil prices since Japan first started buying the fuel more than four decades ago.

Australia may produce an additional 60 million tons of LNG from projects in western Australia and coal seam gas ventures in Queensland by 2016, according to Bernstein Research. That includes the Gorgon project, developed by Chevron Corp. (CVX), Exxon and Shell.

Short-term demand will be affected by temperatures in the coming Northern Hemisphere winter, when heating requirements increase.

“If Japan gets terribly cold weather, they’ll be out buying in the spot market, driving up prices,” said Zach Allen, president of Pan Eurasian Enterprises Inc., a Raleigh, North Carolina-based tracker of LNG shipments who predicts prices may rise 26 percent this winter. “Prices can always spike much higher than that over very short periods.”

To contact the reporter on this story: Dinakar Sethuraman in Singapore at dinakar@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net

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Hedge Fund Heavyweight Says Gold Bet Not Over

Gold, platinum and Brent oil will lead gains in commodities as investors seek to protect their assets and shortages emerge, according to Tony Hall, the hedge- fund manager who earned 33 percent for his clients this year.

Gold may climb 21 percent to a record $2,200 an ounce by the end of 2011, platinum may gain 10 percent and Brent could rise 25 percent to $140 a barrel in six months, said the London- based chief investment officer of Duet Commodities Fund Ltd., which manages more than $100 million of assets. Its eight-month gain compares with a mean return of 0.6 percent across commodity hedge funds tracked by HedgeFund.net and beat larger rivals such as Clive Capital LLP and Fortress Commodities Offshore Fund Ltd.

“The fear of recession, the fear of worse economic numbers is weighing on commodities and stopping gains from fundamentals from coming through,” said Hall, 31, who spars as a heavyweight boxer. “We still believe in the gold story. If you believe the world is in trouble or in further economic growth disruption, then gold is a good safe haven. If you believe that the world is going to come out okay, then it’s a good inflation hedge.”

At a time when the MSCI All-Country World Index of global equities declined 10 percent this year, the Standard & Poor’s GSCI measure of 24 commodities advanced 2.7 percent, led by silver, gold and energy.

Investors held about $431 billion in raw materials by July, an almost fivefold gain in six years, Barclays Capital says. As equity holders contend with losses of $8.5 trillion since May, speculators made their biggest wagers on higher commodity prices in almost three months in the week to Sept. 6 as they anticipated that even weaker economic growth will mean shortages.

Winning Run

Gold advanced 28 percent to $1,819.88 this year, heading for an 11th consecutive annual gain, the longest winning streak in at least nine decades. It’s the second-best performer in the S&P GSCI behind silver, which rose 31 percent. Gold is trading at 45 times the price of silver, down from a multiple of 84 in 2008. Silver, the precious metal most used in industry, rose more than threefold to $40.4338 since the end of that year.

The gold price of $2,200 predicted by Hall would be 15 percent more than the all-time high of $1,921.15 reached Sept. 6. It would still be below the then-record $850 reached in 1980, equal to $2,337 now in inflation-adjusted terms. Bullion had tumbled 5.7 percent from its all-time high by Sept. 16.

Central banks are expanding their gold reserves for the first time in a generation. Euro-area nations added 0.8 metric ton to their holdings this year, the first increase since 2001, International Monetary Fund data show. Central banks and government institutions worldwide bought 192.3 tons in the first half, according to the World Gold Council.

Arno Pilz

“I’d say gold will have a very good run higher, and a very good retracement would be justified,” Hall said. “If we see a retracement back to $1,700, I think at that point would be a good opportunity to get in.”

Gold and platinum-group metals, used mostly in jewelry and catalytic converters for cars, were the best performers for Duet in the past two months, said Hall, who has traded commodities for about a decade. The fund also profited from betting against silver in May and June, he said. Silver futures traded on the Comex exchange in New York fell from $49.845 an ounce on April 25 to as low as $32.30 on May 12.

That trading idea came from Arno Pilz, 42, who founded the fund with Hall in July 2010. The former head of metals trading at Lehman Brothers Holdings Inc. oversees the fund’s investments in precious and industrial metals while Hall runs the energy trades. They plan to add an agricultural specialist in second- half 2012 at the earliest and cap total assets at $1 billion.

Clive Capital

Pilz, who has traded metals since 1999, has a Master of Philosophy degree in management studies from Oxford University’s Templeton College. He makes his own cider and salami and is building a 1:2 scale Land Rover for his two daughters.

Hall and Pilz beat larger rivals including Clive Capital, which oversees $4.8 billion and fell 11 percent this year, and the $1.1 billion Fortress Commodities Offshore Fund, which returned about 1.8 percent, according to people with direct knowledge of the funds’ performance.

Duet’s best trade was on Brent crude in the second quarter, Hall said. The contract, traded on ICE Futures Europe in London, gained as much as 34 percent this year as fighting erupted in Libya, which has Africa’s largest oil reserves. The disruption to supplies of light crudes, which yield a higher proportion of more profitable products including gasoline, increased demand for similar grades such as Brent.

‘New Highs’

Brent costs about $24.59 a barrel more than the West Texas Intermediate grade traded on the New York Mercantile Exchange, a global benchmark, up from about parity in 2009. The premium dropped from $25.93 on Sept. 6 after a 600,000-barrel cargo of Libyan crude was offered for shipment, a sign exports may resume, said three people with direct knowledge of the transaction.

Brent slumped 12 percent to $111.81 a barrel since early April because of concern that slower economic growth will curb demand for energy. The Paris-based International Energy Agency cut global oil demand forecasts for this year by 200,000 barrels a day and 400,000 a day for 2012 on Sept. 13, and said stockpiles in developed nations fell to below the five-year average for the first time since the global recession in 2008.

“Eventually the crude fundamentals will come through and become the dominant factor,” said Hall, who holds an economics degree from University of Bath. “We are going to see new highs in Brent over the next six months.”

More than half Duet’s commodity book is expressed through options, with crude and precious metals positions concentrated in periods three to six months ahead, said Hall, who previously worked for Credit Suisse Group AG and Deutsche Bank AG.

Gasoil Cracks

Fuel was also the fund’s worst trade, on a view concerning price differentials of gasoil and other products.

“Energy relative value has been the most disappointing part of the portfolio this year, with our view that middle distillates would outperform other products,” he said.

The so-called cracks, reflecting the spread between the price of the refined product and crude, slumped 29 percent since peaking at $24.17 a barrel on March 16, according to data from PVM Oil Associates, a London-based brokerage. Gasoil is typically used as a heating fuel.

Speculators held 1.275 million net-long futures and options across 18 commodities tracked by the U.S. Commodity Futures Trading Commission in the week ended Sept. 6, the most since the week ended June 14, data compiled by Bloomberg show. They had raised that combined position for four consecutive weeks. They cut their bullish bets by 5.2 percent in the latest week.

Platinum Bull

Duet is also bullish on platinum, which gained 2.3 percent to $1,810.38 an ounce this year. The metal, mined mostly in South Africa, will trade as high as $2,000 to $2,200 this year, Hall said. Holdings in exchange-traded products backed by the commodity are at a near-record 44.3 tons, valued at about $2.6 billion, data compiled by Bloomberg show.

Platinum is trading at a ratio of 2.5 times the price of palladium, compared with a 10-year average of 3.5. The metals are mined together and both are used in autocatalysts.

Platinum supply will fall 21,000 ounces short of demand this year, widening to a deficit of 54,000 ounces in 2012, Barclays Capital estimates. Mining companies are going as deep as 1.4 miles underground to maintain output, pumping chilled air down mine shafts to cool seams as hot as 160 degrees Fahrenheit.

“Platinum looks like great value in the precious metals complex,” Hall said. “Platinum is a store of value, a precious metal and an industrial metal. If the economy picks up we’re going to see bigger demand in catalytic converters.”

To contact the reporter on this story: Chanyaporn Chanjaroen in Singapore at cchanjaroen@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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Crude Drops to One-Week Low on Signals Oil-Demand Growth Slowing

By Christian Schmollinger and Lananh Nguyen - Sep 19, 2011 6:40 PM GMT+0700

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Sept. 19 (Bloomberg) -- Samuel Ciszuk, a senior Middle East energy analyst at IHS Energy, discusses Abdalla el-Badri's leadership of the Organization of Petroleum Exporting Countries. He speaks with Owen Thomas on Bloomberg Television's "Countdown." (Source: Bloomberg)

Oil fell to a one-week low in New York on speculation fuel demand will falter as economic growth in the U.S. weakens and the debt crisis in Europe worsens. Brent oil’s premium to U.S. futures widened.

Crude dropped as much as 1.8 percent after European finance ministers ruled out using stimulus measures to spur the economy. OPEC Secretary-General Abdalla El-Badri said today that global demand for oil is rising less than expected. Reports this week may show U.S. home sales held near the lowest this year and construction fell. Government data last week showed U.S. fuel use shrank.

“The increasingly gloomy economic situation might stop crude’s recent upward trend,” analysts led by David Wech at Vienna-based researcher JBC Energy GmbH said in a note today.

Oil for October delivery on the New York Mercantile Exchange fell as much as $1.61 to $86.35 a barrel, the lowest price since Sept. 12, and was at $87.15 at 12:36 p.m. London time. The more actively traded November contract slid 87 cents, or 1 percent, to $87.31. Front-month futures have lost 4.6 percent this year.

Brent crude for November settlement dropped 29 cents to $111.93 a barrel on the London-based ICE Futures Europe Exchange. The European benchmark future was at a premium of $24.62 to the November price of West Texas Intermediate, compared with a record settlement of $26.87 on Sept. 6.

OPEC Outlook

El-Badri said fiscal woes in Europe and high unemployment in the U.S. are curbing global oil-demand growth. Crude supply from the Organization of Petroleum Exporting Countries may be boosted by 500,000 to 600,000 barrels a day from Libya’s eastern and western fields “soon,” he said at a conference in Dubai.

Fighting in Libya since February has reduced the availability of light, sweet crude, or oil with low density and sulfur content. The country’s output fell to 45,000 barrels a day last month, according to Bloomberg estimates, compared with the 1.6 million barrels a day the nation pumped in January.

European finance leaders meeting with U.S. Treasury Secretary Timothy Geithner last week in Poland said their 18- month debt crisis leaves no room for tax cuts or extra spending to spur an economy that will barely grow in the second half of 2011. The 17 euro nations accounted for about 12 percent of global oil demand in 2010, according to Bloomberg calculations based on BP Plc’s annual Statistical Review of World Energy.

“If the markets were looking for a positive, meaningful surprise from the two days of talks going on in Europe, they did not get it,” Edward Meir, a New York-based analyst at MF Global Holdings Ltd. said in a note today. “As a result of the looming deadlock with Greece and the rather inconclusive negotiations, we could see a negative turn for commodity markets.”

Technical Analysis

U.S. housing starts dropped 2.3 percent in August from July, according to the median estimate of 64 economists surveyed by Bloomberg News before a Commerce Department report tomorrow. Existing-home sales probably rose 1.7 percent from an eight- month low, a separate poll showed.

Oil in New York also declined after front-month futures failed to breach the 50-day moving average for a fourth day on Sept. 16, according to data compiled by Bloomberg. This indicator is at $90.16 a barrel today. Investors tend to sell contracts when a price advance stalls below a technical- resistance level.

Hedge funds raised bullish bets on oil by the most since March in the week ended Sept. 13 as a storm curtailed production in the Gulf of Mexico, according to the U.S. Commodity Futures Trading Commission’s Commitments of Traders report. West Texas futures gained 4.9 percent in the period of the report and have dropped 3.7 percent since then.

No named storms or tropical cyclones are active in the Atlantic or Pacific, the U.S. National Hurricane Center’s website shows. Tropical Storm Maria was downgraded to a post- tropical cyclone on Sept. 16 after crossing Newfoundland, according to the center.

To contact the reporters on this story: Christian Schmollinger in Singapore at christian.s@bloomberg.net Lananh Nguyen in London at lnguyen35@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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Berlin Election Deals Blow to Merkel Coalition

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Germany's chancellor and leader of the Christian Democratic Union party (CDU) Angela Merkel. Photographer: Michele Tantussi/Bloomberg

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An election campaign poster picturing German Chancellor and Christian Democrats (CDU) Chairwoman Angela Merkel. Photographer: Sean Gallup/Getty Images

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Angela Merkel, Germany's chancellor. Photographer: Jock Fistick/Bloomberg

German Chancellor Angela Merkel’s party was defeated in a Berlin state election and her coalition ally lost all its seats after turning skepticism over euro-area bailouts into a campaign theme, stoking government infighting over the debt crisis.

The Social Democrats, the main opposition party nationally, extended their 10-year rule in the German capital after beating Merkel’s Christian Democrats into second place in yesterday’s election. Merkel’s Free Democratic coalition partner, known as the liberals, crashed out of a regional assembly for the fifth time this year, while the Pirate Party won its first-ever seats.

The results in Berlin cap a year in which voters punished Merkel’s coalition over its handling of the debt crisis and adds to her pressure as she struggles to balance domestic fatigue over shouldering euro-region rescues with international calls that she do more to stem the contagion. That’s widening fissures in her government as the three-way coalition descends into open conflict over the euro’s future and financial aid for Greece.

“The issue now is how long the liberals hold onto the coalition, whether they break it off ahead of time,” Nils Diederich, a politics professor at Berlin’s Free University, said by phone. “The FDP are being pushed into the corner more and more, so you can’t rule out that they could pull off something like that to gain from it politically.”

Preliminary Results

The Social Democrats took 28.3 percent in Berlin to secure a third term for SPD Mayor Klaus Wowereit, while the Christian Democrats had 23.4 percent, preliminary results showed. The Greens had 17.6 percent, their best-ever result in the city, and the Left 11.7 percent. That means the current SPD-Left coalition cannot resume power and the SPD can choose to govern with either the Greens or the CDU as junior coalition partner.

The result is an acknowledgement of the Merkel government’s woes, said Sigmar Gabriel, SPD leader. His party, which supports euro bonds and a bigger euro rescue fund, has now entered the state government in each of the eight state elections held this year and last.

“The SPD is back,” Gabriel said.

The Pirate Party, which campaigned on open access to technology and Internet freedom, took 8.9 percent to win its first seats in any legislature in Germany’s 16 states. The FDP had 1.8 percent, its worst result in Berlin since World War II.

The “dramatic” loss of support for the FDP shows “euro- skeptic populism has no place” in the political landscape, Cem Oezdemir, the Greens co-leader, said on ZDF.

Euro ‘Duty’

Economy Minister Philipp Roesler, who leads the FDP nationally, put an “orderly default” for Greece on the table last week, further roiling financial markets and earning him rebukes from Merkel’s party. Merkel responded by sharpening her arguments in defense of the euro, saying Germany has a “duty” to preserve the joint currency because it helps exports, makes the country richer and underpins Europe.

“Angela Merkel made clear that the CDU stands true to its pro-European ideals,” Peter Altmaier, the CDU’s chief whip in the federal parliament, said on ZDF. “Some euro-skeptic posters went up in the last days of the campaign and they didn’t make any impact,” he said, without saying to which party he was referring.

The Free Democrats made critical remarks over Germany’s participation in rescues for fellow euro members Greece, Ireland and Portugal in their Berlin campaign. In a radio ad posted on the FDP website, the party said that “as a taxpayer, you shouldn’t pay other countries’ debts. Vote for the FDP.”

Not ‘Posturing’

“Our position on the future of Europe wasn’t posturing for this or any other election,” Christian Lindner, FDP general secretary, told reporters in Berlin in comments broadcast live. “It was about taking on our responsibility for Europe and for our currency, and we will hold firm to that.”

The Free Democrats have struck a more skeptical tone on bailouts as the lower house of parliament, the Bundestag, prepares for a Sept. 29 vote on an overhauled European Financial Stability Facility that includes sovereign bond-buying powers.

The party is likely to hold a members’ vote on their attitude toward the EFSF’s successor from 2013, the European Stability Mechanism, which is due to go the Bundestag later this year or early next year, the Hamburger Abendblatt newspaper cited Lindner as saying in an interview on Sept. 17.

A governing coalition between the Christian Democrats and a “fundamentally euro-skeptic” party would be unthinkable, CDU Finance Minister Wolfgang Schaeuble told Bild am Sonntag in an interview the same day.

‘Credibility Problem’

The euro is a “core issue” for the Free Democrats and the party isn’t about to back down from its stance “because it didn’t hit the right notes with Berlin voters,” Bjoern Saenger, a federal FDP lawmaker and member of the lower house of parliament’s finance committee, said in a telephone interview.

“Markets seek clarity and it must be clear to anyone that the Greek patient is being kept alive artificially,” Saenger said. “The FDP has a credibility problem but giving ground on our position on the crisis would worsen matters. The days when Germany would just reach for the check book to solve a problem in Europe are coming to a close. Somebody needs to say it.”

To contact the reporters on this story: Patrick Donahue in Berlin at at pdonahue1@bloomberg.net; Brian Parkin in Berlin at bparkin@bloomberg.net.

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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STX Scraps Plan to Buy Stake in Hynix, Leaving SK Telecom as Sole Bidder

STX Group scrapped plans to buy a stake in Hynix Semiconductor Inc. (000660), leaving mobile-phone operator SK Telecom Co. as the only suitor left to bid for 20 percent of the world’s second-largest computer-memory chipmaker.

The South Korean shipbuilding and shipping group dropped its interest because of concerns over the level of investments needed to keep the chipmaker competitive and global economic uncertainties, STX Corp., which was planning to lead the group’s bid, said in a statement today in Seoul. The 146.1 million shares up for sale are valued at 3.1 trillion won ($2.7 billion) based on Hynix's latest stock price.

STX Chairman Kang Duk Soo’s withdrawal removes the only competition SK Chairman Chey Tae Won faced in making a bid in defiance of analysts at brokerages including Morgan Stanley and Daiwa Securities Group Inc., who oppose the idea of a phone operator buying control of a chipmaker. Hynix’s main shareholders, who have failed to sell their stake three times since 2009, said they will discuss how to proceed with the sale.

“SK Telecom and shareholders are now going to have to have one-on-one talks,” Shin Hyun Joon, a Seoul-based analyst at Dongbu Securities Co. said by telephone. Because of reduced competition, “you can’t rule out the possibility that the sale could fall through,” Shin said.

Hynix fell 4.1 percent to close at 21,000 won in Seoul trading. STX Corp., which was teaming up with Aabar -- a state- run United Arab Emirates investment company -- for its bid, rose 3.8 percent. SK Telecom declined 3.5 percent.

‘Reasonable’ Decision

SK Telecom hopes Hynix shareholders will proceed with the sale, Lauren Kim, a Seoul-based spokeswoman for the carrier said by telephone. The company will review the results of its due diligence, the outlook of the chip industry and details of sale conditions to make a “reasonable” decision,’’ she said.

Hynix’s main shareholders will discuss whether they will proceed with their current plan, said Lee Sun Hwan, Seoul-based spokesman for Korea Exchange Bank. (004940) Park Seong Ae, a Seoul-based spokeswoman for Hynix, declined to comment on STX’s decision.

STX said delays in reaching an agreement with its Middle Eastern bidding partner was also a factor that contributed to its decision.

Hynix shareholders, led by Korea Exchange Bank, said this month they plan to sell a 20 percent stake that includes 101.85 million new shares and 44.25 million existing ones held by shareholders.

The shareholders, a group of financial institutes that spent $4.6 billion to bail out the chipmaker in the past decade, had planned to receive bids for Hynix by Oct. 24 and select a preferred bidder by the end of October.

Hyosung Corp. (004800), the sole bidder in a sale attempt two years ago, walked away from negotiations in November that year, saying speculation that it received political favors to pursue the takeover made it difficult to negotiate a fair acquisition.

To contact the reporter on this story: Jun Yang in Seoul at jyang180@bloomberg.net; Seonjin Cha in Seoul at scha2@bloomberg.net;

To contact the editors responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net; Young-Sam Cho at ycho2@bloomberg.net

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Apple Orders Processor Chips from Taiwan Semiconductor, Apple Daily Says

By Chinmei Sung - Sep 19, 2011 6:15 AM GMT+0700

Apple Inc. (AAPL) placed order at Taiwan Semiconductor Manufacturing Co. to make the so-called A6 processor chips, the Apple Daily reported today, without citing where it got the information. The Taiwanese chipmaker will start shipment at the end of the first quarter, according to the report.

To contact the reporter on this story: Chinmei Sung in Taipei at csung4@bloomberg.net

To contact the editor responsible for this story: Rebecca Evans at revans6@bloomberg.net

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Bernanke Joins King Tolerating Inflation

By Scott Lanman and Simon Kennedy - Sep 19, 2011 4:18 PM GMT+0700

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U.S. Federal Reserve Chairman Ben S. Bernanke and Bank of England governor Mervyn King. Dimier/Bloomberg

Inflation flashing red may be less of a green light for higher interest rates as global growth falters.

Some Federal Reserve policy makers favor keeping their benchmark rate close to zero until price increases reach a level Vincent Reinhart, a former top official, says could be 3 percent. The Bank of England has held its key rate at a record low even as U.K. inflation breached its 2 percent target for 21 months. Brazil executed a surprise cut Aug. 31 to safeguard its economy even after inflation quickened to a six-year high.

Policy makers such as Fed Chairman Ben S. Bernanke and Bank of England Governor Mervyn King may be challenging central-bank orthodoxy to replenish depleted toolkits and support recoveries at risk of sliding back into recession. Tolerating higher inflation may make long-term Treasuries less attractive while supporting stocks and commodity prices, said Jim Kochan, chief fixed-income strategist at Wells Fargo Advantage Funds.

“There’s a hint of desperation here,” said Kochan, who helps manage $216 billion in Menomonee Falls, Wisconsin. “They’re clearly concerned that monetary policy to date hasn’t really accomplished what they expected it to. So they ask themselves, why? And what could we do about it?”

If adopted, the strategy might be called “Generate Inflation Now,” or GIN, Reinhart said, a reversal of the Ford Administration’s “Whip Inflation Now,” or WIN, program in the 1970s.

‘Cutoff’ Question

“Everybody knows high inflation is bad,” said Reinhart, the Fed’s director of monetary affairs from 2001 to 2007 who will become Morgan Stanley’s chief U.S. economist in October. “Nobody is sure of where the cutoff is.”

Bernanke and his Federal Open Market Committee gather tomorrow in Washington for a two-day meeting and will issue a statement Sept. 21 at 2:15 p.m. New York time. Some economists anticipate additional stimulus aimed at reducing long-term borrowing costs and boosting growth. The Fed cut the target for its benchmark federal funds rate almost to zero in December 2008 and has since purchased $2.3 trillion of bonds.

The FOMC at its Aug. 9 meeting considered conditioning its pledge to keep interest rates at record lows “on explicit numerical values for the unemployment rate or the inflation rate,” according to minutes released Aug. 30. The commitment should be contingent on joblessness falling to around 7 percent or 7.5 percent as long as inflation stays below 3 percent in the medium term, Charles Evans, president of the Federal Reserve Bank of Chicago, said in a Sept. 7 speech.

Focus on Core

Unemployment was 9.1 percent in August, and the Fed’s preferred inflation gauge, which excludes volatile energy and food prices, rose 1.6 percent in July. Policy makers should focus on core inflation to better reflect trends that are “likely to be sustained over the medium term,” the International Monetary Fund said in a chapter of its World Economic Outlook released Sept. 14, ahead of its annual meeting of central bankers and finance ministers this week.

Columbia University’s Michael Woodford and Harvard University’s Kenneth Rogoff are among proponents of faster price increases, which should result in lower interest rates adjusted for inflation. This might stimulate spending, along with a side- effect of helping pare record debt loads.

While computer simulations imply this strategy will work, it’s untested in the real world, said Woodford, a professor who co-taught economics with Bernanke at Princeton University. There has been “nervousness” among central bankers about saying “you would allow inflation,” he said. Now “there’s at least more willingness to discuss the issue.”

Faltering Growth

Consumer prices worldwide may rise at a slower pace after jumping earlier this year as faltering economic growth drags down food and energy costs. JPMorgan Chase & Co. (JPM) economists estimate inflation in developed markets will average 1.3 percent in the second quarter of 2012, down from 2.7 percent in the same period this year.

The Fed should get U.S. prices back to the path they were on before the September 2008 collapse of Lehman Brothers Holdings Inc., Nobel laureate Roger Myerson at the University of Chicago said Aug. 23 on Bloomberg Television.

According to Bloomberg calculations, the central bank would need to generate annual inflation of 3.3 percent in the two years through July 2013 to return to a hypothetical 2 percent path since July 2008, under the Commerce Department’s personal- consumption-expenditures price index. This gauge rose 2.8 percent in July from a year ago.

Weaker Currencies

Changing policy to tolerate higher inflation means lower bond prices in the long run and weaker developed-market currencies, including the dollar and pound, against emerging markets, said Stephen Jen, managing partner at SLJ Macro Partners LLP in London.

Wells Fargo’s Kochan and Pacific Investment Management Co.’s Anthony Crescenzi agree bond prices would suffer. If the Fed successfully implemented this strategy and European officials managed to contain the continent’s sovereign-debt crisis, two-year yields, which traded at a record low of 0.1512 percent today, might be little changed, while 10-year rates increased to a range between 3 percent and 4 percent within two or three years, said Crescenzi, who helps manage $1.3 trillion as executive vice president at Pimco in Newport Beach, California.

Yields on 10-year Treasuries were at 1.99 percent at 9:56 a.m. in London today. U.S. debt was the best-performing asset class in August as bond investors ignored Standard & Poor’s Aug. 5 decision to strip the U.S. of its AAA rating. Treasuries returned 2.8 percent, while the global bond market gained 1.99 percent, Bank of America Merrill Lynch index data show.

Economic Benefits

Crescenzi cautions that faster inflation may not produce the economic benefits proponents project, instead reducing the amount of goods and services households and businesses could buy. That would cut production -- and eventually incomes.

“It would turn a virtuous cycle into vicious,” he said. “I see it as quite negative.”

Central banks with a target also may have to squelch price increases later, risking harm to growth and “a serious disinflation,” said Raghuram Rajan, former IMF chief economist and a professor at the University of Chicago’s Booth School of Business.

More than 20 central banks have adopted some type of inflation target since the Reserve Bank of New Zealand pioneered the strategy two decades ago. Such targets help control expectations of future price pressures and provide clarity about the direction of interest rates.

Failed to Prevent

The strategy nonetheless took a hit for failing to anticipate or prevent the worst economic crisis since the Great Depression. In the future, inflation targets should be coupled with a tool that helps deliver financial stability, a report sponsored by the Brookings Institution said last week.

The Bank of England has left its benchmark rate at 0.5 percent since March 2009. While inflation may reach 5 percent in the next few months, it might have been below the bank’s 2 percent target without temporary shocks such as this year’s oil- price spike, King said in an Aug. 15 letter to Chancellor of the Exchequer George Osborne.

The U.K. eventually may want to adopt a goal that accounts for stronger global price pressures, said Simon Hayes, chief U.S. economist at Barclays Capital.

Any change at the Fed would face opposition at the U.S. central bank, where policy makers favor a long-run inflation goal of 1.7 percent to 2 percent, according to their most recent economic projections in June.

‘Meager Savings’

Richard Fisher, president of the Federal Reserve Bank of Dallas, told reporters Sept. 12 he couldn’t imagine trying to explain the shift to unemployed workers and others “who don’t want their income or meager savings eroded by price increases.” He was one of three officials to dissent from the August decision to keep rates near zero through at least mid-2013.

Of 27 central banks Morgan Stanley monitors with formal or informal targets, 15 now face inflation running above their aim. Some emerging-market officials may be sacrificing their goal to support economic growth or financial stability, Peter Attard Montalto, an economist at Nomura International Plc in London, said in a Sept. 12 report that identified Turkey and Hungary.

Brazil cut its benchmark rate to 12 percent on Aug. 31 as consumer prices rose 7.23 percent from a year earlier. While the increase exceeded the 6.5 percent upper limit of the bank’s target range for a fifth straight month, officials remain committed to the policy and price increases will start to ease, President Alexandre Tombini, said Sept. 8.

German Legacy

Among developed countries, the European Central Bank has proved less tolerant of faster price increases -- a legacy of Germany’s hatred of the inflation often blamed for weakening democracy in the 1920s and aiding Adolf Hitler’s rise to power.

The Frankfurt-based central bank, which aims to keep inflation just below 2 percent, raised its benchmark rate twice this year, to 1.5 percent, even as the Greek-led debt crisis threatened expansion. With economies slowing, President Jean- Claude Trichet said Sept. 8 that price risks are “broadly balanced” in the medium term, despite inflation at 2.5 percent in August.

More central banks may make similar efforts to “explain away” the temporary nature of inflation as a reason to ignore it, said Jen, a former IMF economist. Policy makers “will put more emphasis on growth,” he said.

To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net; Simon Kennedy in London at skennedy4@bloomberg.net.

To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net; John Fraher at jfraher@bloomberg.net.

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China Will Likely Limit Stimulus in Any Global Slump, Deutsche Bank Says

By Paul Panckhurst and Sophie Leung - Sep 19, 2011 3:17 PM GMT+0700

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China’s government is wrestling with elevated inflation and the threat of a deeper economic slowdown because of the debt crisis in Europe, the nation’s biggest export market, and weakness in the U.S. economy. Photographer: Stefen Chow/Bloomberg

China’s stimulus in any world economic slump is unlikely to be more than half the nation’s estimated 9.3 trillion yuan ($1.46 trillion) fiscal and monetary expansion from November 2008 through 2010, Deutsche Bank AG said.

While highly speculative, a sketch of the government’s possible response is emerging from “our discussions in China,” Hong Kong-based economist Ma Jun said in a note dated Sept. 16. The government would limit any measures because of the costs associated with the previous package, including asset bubbles, inflation and non-performing loans, Ma said.

China’s government is wrestling with elevated inflation and the threat of a deeper economic slowdown because of the debt crisis in Europe, the nation’s biggest export market, and weakness in the U.S. economy. Deutsche forecasts that China’s growth may cool to 7.3 percent in the first quarter of next year compared with 9.5 percent in the second quarter of 2011.

The Shanghai Composite Index fell 1.4 percent as of the 11:30 a.m. local-time break in trading, set for the lowest close in 14 months.

Stimulus measures would mostly be fiscal rather than monetary, Ma added. Efforts to boost consumption could include consumer vouchers, subsidies for consumer goods, temporary cuts in fees for electricity and water, and temporary tax breaks for small businesses.

Housing, Agriculture

The government could allocate more investment to public housing and “long neglected” agricultural infrastructure, Ma said. He said that 40,000 dams, or about 45 percent of the total, are in need of repair. The labor-intensive services sector could be used to absorb workers from export industries, he said.

Wu Xiaoling, a former deputy central bank governor, said that the government shouldn’t expand monetary or fiscal stimulus because of price pressures and central and local- government debt. Her comments were published today by the Financial News, the central bank’s newspaper.

Wu said China’s economy is highly likely to slow next year.

To contact the reporters on this story: Paul Panckhurst in Beijing at ppanckhurst@bloomberg.net; Sophie Leung in Hong Kong at sleung59@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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