Europe Pressured by Geithner, Soros to Come to Grips With Sovereign Crisis

By Rainer Buergin and Belinda Cao - Sep 26, 2011 1:45 AM GMT+0700

European policy makers faced mounting pressure from foreign counterparts and investors to step up efforts to prevent their sovereign debt crisis from further roiling the world’s financial markets and economy.

U.S. Treasury Secretary Timothy F. Geithner set the tone at the annual meeting of the International Monetary Fund in Washington by warning that failure to combat the Greek-led turmoil threatened “cascading default, bank runs and catastrophic risk.” Billionaire investor George Soros said “something needs to be done” to safeguard Europe’s banks because Greece may be unable to avoid default.

Such calls leave European policy makers under pressure to further boost the ammunition of their regional rescue fund even as parliaments focus on ratifying a July plan to broaden its powers. Trading resumes tomorrow after global stocks entered their first bear market in two years last week on concern Greek insolvency is inevitable and Europe can’t contain the damage.

“The sovereign debt crisis in the euro area needs to be resolved promptly to stabilize market confidence,” People’s Bank of China Governor Zhou Xiaochuan said at the IMF talks, which conclude today.

‘Firewall Against Contagion’

In his strongest public push yet for action, Geithner pressed governments to unite with the European Central Bank to “create a firewall against further contagion” and defuse the “most serious risk now confronting the world economy.” Antonio Borges, the head of the IMF’s European department, said today the ECB is the only agent that can “scare” the markets.

Geithner wants authorities to use leverage to increase the spending strength of the 440 billion-euro ($594 billion) European Financial Stability Facility. Bank of Canada Governor Mark Carney said 1 trillion euros should be deployed.

There are indications European governments are heeding the advice although they signaled a preference to first pass into law a revamp of the EFSF that will allow it to buy bonds and aid banks. European members of the Group of 20 agreed Sept. 22 to “maximize” the fund’s impact, while there are also discussions under way on speeding the start of a permanent rescue program.

They may be working against the clock. Greece has yet to secure a second bailout amid questions about whether it can satisfy the aid terms. Economists at Citigroup Inc. say they expect the country to begin restructuring its debt as soon as December. Analysts at JPMorgan Chase & Co. predict the euro area will start contracting in the fourth quarter and that the ECB will cut interest rates next month.

‘Fundamental Issues’

“Policy makers need to move beyond ad hoc financial responses to address fundamental issues about the nature of European monetary and economic integration,” Deutsche Bank AG Chief Executive Officer Josef Ackermann told a banking conference in Washington.

Germany’s government has already begun debating how to shore up its banks if Greece defaults. One official from a G-20 country said yesterday that an eventual insolvency in the Mediterranean nation is likely.

Speaking to a banking conference in Washington today, Greek Finance Minister Evangelos Venizelos said his country “wants to make it and will make it,” and will never leave the euro.

Proposals to beef up the facility’s spending power include using the bonds it buys from stressed states as collateral for fresh loans from the ECB or offering the central bank credit protection for helping investors buy debt.

Increasing Heft

German Finance Minister Wolfgang Schaeuble said the ECB wasn’t necessarily needed to increase the facility’s heft, while Bundesbank President Jens Weidmann said involving the central bank would violate EU treaties. Schaeuble again rejected euro- area countries issuing joint bonds. Klaus Regling, the head of the EFSF, said today he doubts accessing the ECB “will fly” and that other ways of bolstering the fund may be detailed soon.

European finance officials will also examine this week the cost advantages of setting up the permanent fund, known as the European Stability Mechanism, a year earlier than its currently planned July 2013 start, according to a document prepared for the meetings and obtained by Bloomberg News. Spanish Economy Minister Elena Salgado said yesterday she would back early adoption of the fund and Schaeuble said that may be possible.

In a sign some in Europe resent Geithner’s campaign, outgoing ECB Executive Board member Juergen Stark said governments should do their “own homework before they give advice.” ECB President Jean-Claude Trichet noted Sept. 23 that the U.S. budget gap dwarfs that of the euro-area.

While the IMF vowed to “strongly support” Europe, Managing Director Christine Lagarde said its $384 billion lending chest may not be enough to meet all aid requests if the world economy worsens. The current lending capacity “looks comfortable today but pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders,” she said.

To contact the reporter on this story: Simon Kennedy in Washington at skennedy4@bloomberg.net.

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

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El-Erian Sees Global Economy Slowing Next Year

By Simon Kennedy, Rich Miller and Gabi Thesing - Sep 26, 2011 9:09 AM GMT+0700

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The International Monetary Fund's Managing Director, Christine Lagarde, speaks on Sept. 24 at a committee meeting during the IMF's annual meeting in Washington, D.C. Photographer: Stephen Jaffe/AFP/Getty Images/Newscom

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Pacific Investment Management Co.'s CEO Mohamed El-Erian. Photographer: Jonathan Alcorn/Bloomberg

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Mohamed El-Erian, chief executive officer of Pacific Investment Management Co. (PIMCO). Photographer: T.J. Kirkpatrick/Bloomberg

Pacific Investment Management Co., which runs the world’s biggest bond fund, is forecasting that advanced economies will stall over the next year as Europe slides into a recession, underscoring mounting investor concern about the global economic outlook.

There will be little-to-no economic growth in industrial nations in the coming 12 months as Europe’s economy shrinks by 1 percent to 2 percent and the U.S. stagnates, said Mohamed El- Erian, chief executive officer of Newport Beach, California- based Pimco. That will leave worldwide expansion at about 2.5 percent, less than the 4 percent forecast by the International Monetary Fund this year and next.

Such gloomy sentiment dominated weekend talks of policy makers, investors and bankers in Washington, where the IMF and World Bank held their annual meetings. The Dow Jones Industrial Average suffered its biggest loss since 2008 last week as the Federal Reserve said risks to the U.S. economy had increased and Europe’s debt crisis went unresolved.

“For the next 12 months, the global economy will slow materially with advanced economies struggling to grow much above zero,” El-Erian said in a Sept. 24 interview in Washington. “Emerging economies will maintain faster growth, albeit not as high as the last 12 months.”

Worst Experience

Former U.S. Treasury Secretary Lawrence Summers said he has been to 20 years of IMF gatherings, and “there’s not been a prior meeting at which matters have had more gravity and at which I’ve been more concerned about the future of the global economy.”

The euro dropped as trading began in Asia, stocks retreated and Treasuries advanced. The European currency fell 0.5 percent to $1.3435 as of 11:03 a.m. in Tokyo, the MSCI Asia Pacific index of equities was down 1.2 percent and yields on benchmark 10-year U.S. notes declined 1 basis point to 1.82 percent.

Finance ministers and central bankers urged European officials to intensify efforts to contain their 18-month debt crisis as Greece teetered on the edge of default. U.S. Treasury Secretary Timothy F. Geithner called on governments to unite with the European Central Bank to beef-up the capacity of their 440 billion-euro ($594 billion) bailout fund, warning that failure to act threatened “cascading default, bank runs and catastrophic risk.”

Trillion Euros

Bank of Canada Governor Mark Carney estimated 1 trillion euros may have to be deployed. U.K. Chancellor of the Exchequer George Osborne said a solution is needed by the time that Group of 20 leaders meet in Cannes, France, on Nov. 3-4.

“Patience is running out in the international community,” Osborne said. “The euro zone has six weeks to resolve this political crisis.”

Whether “the markets will accept the luxury of six weeks grace remains to be seen,” said Jim O’Neill, chairman of Goldman Sachs Asset Management in London. “In the interim, policy makers will have to feed markets with hope as to what might arrive in November and then not disappoint.”

Reports this week may reinforce the sense of weakness, with economists predicting that U.S. consumer spending slowed in August and business confidence in Germany, Europe’s largest economy, fell to a 15-month low this month.

Memphis, Tennessee-based FedEx Corp. (FDX), operator of the world’s biggest cargo airline, cut its full-year profit forecast last week amid declining demand in the U.S. and Asia. CEO Fred Smith nevertheless said he expects sluggish economic growth rather than a recession.

Soros’s Call

Billionaire investor George Soros said “something needs to be done” to safeguard Europe’s banks because Greece may be unable to avoid default. The IMF said last week that the turmoil has generated as much as 300 billion euros in credit risk for the region’s banks and advocated capital injections.

German Chancellor Angela Merkel said euro-region leaders must erect a firewall around Greece to avert a cascade of market attacks on other European states that would risk breaking up the currency area. “We have to be in a position to react,” Merkel said late yesterday on ARD television. “We have to be able to put up a barrier.”

European policy makers hinted they may soon heed Geithner’s advice and use leverage to increase the firepower of their rescue fund, while saying parliaments must first ratify a July plan to broaden its remit to include bond-buying and aiding banks. German Finance Minister Wolfgang Schaeuble and European Financial Stability Fund CEO Klaus Regling played down speculation the ECB would be needed to increase the fund’s heft.

World Waits

“Wait a few more days,” said Regling, when asked for details.

Finance officials will also discuss this week speeding implementation of a permanent rescue plan by a year to next July, according to a working paper obtained by Bloomberg News. ECB Governing Council members Ewald Nowotny and Luc Coene signaled in interviews in Washington that the central bank may say next week it will begin offering banks unlimited liquidity for as long as a year.

Greek Finance Minister Evangelos Venizelos said his country “wants to make it and will make it” and that it will always be a member of the euro area. Prime Minister George Papandreou said yesterday that the EU must take “strategic decisions” and that the end of the global economic crisis “appears even more distant.”

IMF Insufficient

While the IMF vowed to “strongly support” Europe, Managing Director Christine Lagarde warned its $384 billion war chest may not be enough to meet all aid requests if the world economy worsens. The current lending capacity “looks comfortable today but pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders,” she said.

The world economy will find some support from emerging markets, which will grow 4.5 percent to 5 percent over the next 12 months, and Japan’s 1.5 percent expansion, El-Erian said.

El-Erian popularized the “new normal” term to describe how growth patterns in the world economy changed after the worst recession since the Great Depression. The firm under-performed most of its bond mutual fund peers this year after a February decision to eliminate U.S. Treasuries from its Total Return Fund backfired as the securities rallied.

JPMorgan Chase & Co. Chief Economist Bruce Kasman said in Washington that Greece is already insolvent and headed toward a depression that will roil the euro area. His team revised their forecasts last week to show the region entering a recession in the next quarter and the ECB cutting its key interest rate on Oct. 6 to 1 percent from 1.5 percent.

“I fear very much that the situation will deteriorate further before it improves,” said Axel Weber, the former president of the Bundesbank, in Washington yesterday. “We will see much more drastic action” by policy makers if the situation in financial markets gets worse.

To contact the reporters on this story: Simon Kennedy in Washington at skennedy4@bloomberg.net. Gabi Thesing in Washington at gthesing@bloomberg.net Rich Miller in Washington at rmiller28@bloomberg.net

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

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UBS in ‘Disarray,’ Ermotti Named Interim CEO

By Giles Broom - Sep 26, 2011 6:13 AM GMT+0700
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A tram passes the headquarters of UBS AG bank in Zurich, Switzerland. Photographer: Chris Ratcliffe/Bloomberg

The exit of Chief Executive Officer Oswald Gruebel heightened the turmoil roiling UBS AG (UBSN) since it announced a $2.3 billion loss from unauthorized trading less than two weeks ago.

Gruebel, the head of Switzerland’s largest bank since February 2009, was replaced on an interim basis by Sergio Ermotti, who joined less than six months ago as CEO for Europe, the Middle East and Africa, UBS said on Sept. 24. The resignation of Gruebel, 67, who restored the Zurich-based bank to profit after record losses, marks the third CEO departure since 2007.

“This is a bank now in disarray,” said Christopher Wheeler, an analyst at Mediobanca Securities SpA in London who has an “outperform” rating on the stock. “The board made a terrible blunder” by not persuading Gruebel to stay, he said.

Morale within the investment-banking division, already depressed following the trading scandal, dropped even further in the wake of Gruebel’s departure, according to an executive at the unit who requested anonymity because he wasn’t authorized to speak publicly.

As the fallout from the trading scandal widens, a senior executive at UBS speculated that Gruebel quit to prevent the greater disruption that might have resulted from the departure of investment-banking chief Carsten Kengeter, who’s in the midst of shrinking the division. Kengeter, 44, is viewed by some at UBS as a favorite of Chairman Kaspar Villiger. Villiger told reporters after Gruebel’s departure that Kengeter had done an “excellent job” in covering positions after the loss and that there was no doubt about his future.

Gruebel ‘Shocked’

Gruebel, in a memo to staff, said he was convinced a change of leadership at the top was in the best interests of UBS. He resigned as the board grappled with the aftermath of the trading loss in Singapore, where members and executives convened for a meeting scheduled to coincide with the bank’s sponsorship of the Singapore Formula One Grand Prix.

“That it was possible for one of our traders in London to inflict a multibillion loss on our bank through unauthorized trading shocked me,” said Gruebel, a former trader whose career in finance spanned half a century. The scandal dealt a “significant setback” to UBS’s efforts to rebuild trust, he said in the memo.

Gruebel, who joined UBS after about 37 years at rival Credit Suisse Group AG, is the only person to have served as CEO of both of the biggest Swiss banks. Brought out of retirement to rebuild UBS after record losses, he returned the bank to profit about six months after arriving, resolved a dispute with the U.S. over banking secrecy that threatened the firm’s existence and stemmed nine straight quarters of client defections at the private bank.

More Departures?

Two senior UBS executives speculated on whether other departures might follow, such as Kengeter, Maureen Miskovic, 54, who took over as chief risk officer in January, and Thomas Daula, the chief operating officer at the investment bank. Miskovic previously served as chief risk officer at State Street Corp. and held the same role at Lehman Brothers Holdings Inc. for six years until 2002.

Daula, hired in June 2008 to run risk management at the investment bank, had been chief risk officer at Morgan Stanley in 2007 when that bank wrote down $9.4 billion on wrong-way proprietary trading bets on mortgage-related securities. He became COO at UBS’s investment bank in January.

Less Complex

Gruebel and Kengeter, 44, tried for the last two years to rebuild UBS into a top-tier investment bank, hiring more than 1,700 people and bringing in new business heads to replace those that left or were fired. They also increased risk-taking. Market turmoil and rising capital requirements led them to begin reversing that strategy even before the trading loss. The retrenchment is likely to accelerate now.

“In the future, the investment bank will be less complex, carry less risk and use less capital to produce reliable returns and contribute more optimally to UBS’s overall objectives.” Villiger, 70, told reporters two days ago.

UBS will probably scale back credit businesses that haven’t been very profitable and that will be affected most by the higher capital requirements under Basel III, said Cormac Leech, an analyst at Canaccord Genuity Ltd. in London who has a “hold” rating on UBS stock. The equities business, by contrast, “has a relatively high return so you’d expect them not to close that down,” Leech said.

UBS will announce further changes to the investment bank in a presentation to investors scheduled for Nov. 17, Ermotti said on a conference call with reporters two days ago.

Changing Aspirations

“They’ve got to change the aspirations of the investment bank and they’ve got to shrink it,” said Peter Thorne, a London-based analyst at Helvea SA.

UBS said it may be unprofitable in the third quarter after the unauthorized trading. The loss, less than two months after Gruebel said the firm had “one of the best” risk-management units in the industry, raised questions about the bank’s controls.

It resulted from trading in Standard & Poor’s 500, DAX and EuroStoxx index futures over the past three months, UBS said on Sept. 18. While the positions were taken within the “normal business flow of a large global equity trading house,” the size of the risk was hidden by phony trades, UBS said at the time.

Kweku Adoboli, 31, the UBS trader charged with fraud and false accounting that may have resulted in the loss, remained in custody after a hearing in London on Sept. 22. He has yet to enter a plea.

‘In a Vacuum’

The bank’s shares have declined by 7.4 percent in Swiss trading since the trading loss was announced and 34 percent this year. That compares with a 37 percent tumble in the Bloomberg Europe Banks and Financial Services Index, which tracks 46 companies.

Gruebel’s decision to leave throws into relief the lack of a succession plan at UBS, analysts said. Villiger is scheduled to step down in 2013 and be replaced as chairman by former Bundesbank President Axel Weber, 54, who lacks hands-on experience running a commercial bank. The trading loss also reduces the chance Kengeter will ascend to the top job.

Villiger, on the conference call with reporters on Sept. 24, said the board tried unsuccessfully to persuade Gruebel to remain until the annual shareholders meeting. He will be paid for a six-month notice period and have no further role at the bank. His sudden departure suggests a worrying level of disorder, especially as Chief Financial Officer Tom Naratil took up his post only three months ago, said Mediobanca’s Wheeler.

“They’ve left themselves in a vacuum,” Wheeler said. “It’s got a brand new CFO and now they’ve let the CEO walk away.”

Ermotti in Charge

Ermotti, a 51-year-old Swiss national who joined UBS in April after working at Merrill Lynch & Co. and UniCredit SpA (UCG), will be interim CEO while the board seeks a permanent successor to Gruebel, the bank said. In his 18 years at Merrill Lynch, Ermotti oversaw businesses including the global equities division before leaving in 2003 to join UniCredit, Italy’s biggest bank.

As UniCredit’s investment-banking chief, Ermotti also supervised global transaction and private banking. Ermotti had aimed to compete with the world’s top securities firms as mergers soared and business flourished before the subprime crisis spread and credit became scarce. He later scaled back the plan to focus on corporate and investment-banking business in UniCredit’s home markets.

To contact the reporter on this story: Giles Broom in Geneva at gbroom@bloomberg.net

To contact the editor responsible for this story: Frank Connelly in Paris at fconnelly@bloomberg.net

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Asian Stocks Decline, Led by Japanese Shares

By Lynn Thomasson - Sep 26, 2011 8:43 AM GMT+0700

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Sept. 26 (Bloomberg) -- Nicholas Smith, a Japan strategist at CLSA Asia-Pacific Markets Ltd., talks about the nation's financial markets and economy. Smith speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Asian stocks fell, sending the MSCI Asia Pacific Index to the lowest since June 2010, as Europe’s failure to tame the region’s sovereign-debt crisis threatens global economic growth.

Fanuc Corp., a producer of industrial robots, dropped 2.8 percent and trading company Mitsubishi Corp. lost more than 6.5 percent, dragging MSCI’s Asia equity benchmark to a third day of losses. Hanjin Shipping Co., South Korea’s largest shipping line, fell by the daily limit of 15 percent after saying it will sell new shares. Nippon Electric Glass Co., a maker of glass for electronic displays, sank 11 percent after cutting its profit forecast.

The MSCI Asia Pacific Index dropped 1.3 percent to 110.23 at 10:29 a.m. in Tokyo, with more than two stocks retreating for each that rose. The measure entered a so-called bear market last week after falling more than 20 percent from a May 2 high.

“There’s concern that the European debt crisis will spread,” said Takashi Hiroki, chief strategist at Monex Securities in Tokyo. “Stocks are falling as we get more concerned about a deceleration of the global economy. A sell-off in shares sensitive to the economy, such as commodity-related stocks, are a reflection of investors’ fears.”

Japan’s Nikkei 225 Stock Average tumbled 1.8 percent after being closed on Friday, when the MSCI Asia Pacific excluding Japan Index dropped 2 percent. The Nikkei is set for the lowest close since April 2009. South Korea’s Kospi Index (KOSPI) retreated 3.1 percent and Hong Kong’s Hang Seng Index swing between gains and losses after falling 9.2 percent last week.

Pimco Stagnation Forecast

European policy makers are facing mounting pressure to step up efforts to prevent their sovereign debt crisis from further roiling the world’s financial markets and economy. Pacific Investment Management Co., which runs the world’s biggest bond fund, is forecasting advanced economies to stall over the next year with Europe sliding into recession.

U.S. Treasury Secretary Timothy F. Geithner warned at the annual meeting of the International Monetary Fund in Washington that failure to combat the Greek-led turmoil threatened “cascading default, bank runs and catastrophic risk.” Billionaire investor George Soros said “something needs to be done” to safeguard Europe’s banks because Greece may be unable to avoid default.

The MSCI Asia Pacific Index lost 7.1 percent last week, the most in almost three years. The MSCI All-Country World Index of shares in emerging and developed economies dropped 7.8 percent through the week, entering a bear market for the first time in two years.

Fanuc fell 2.8 percent to 10,530 yen. Mitsubishi Corp. retreated 6.8 percent to 1,584 yen. Hanjin Shipping dropped 15 percent to 11,650 won. Nippon Electric Glass declined 11 percent to 669 yen.

To contact the reporter on this story: Lynn Thomasson in Hong Kong at lthomasson@bloomberg.net.

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net

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Greece Minister: ‘Whatever It Takes’ to Solve Crisis

By Meera Louis and Alaa Shahine - Sep 26, 2011 1:56 AM GMT+0700
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Greek Finance Minister Evangelos Venizelos. Photographer: Joshua Roberts/Bloomberg

Greek Finance Minister Evangelos Venizelos said his country will do “whatever it takes” to meet its budget goals and cautioned against making it a “scapegoat” for global economic woes.

Venizelos, who is also Greece’s deputy prime minister, pledged that the country will always remain a member of the euro zone, in an effort to dismiss investors’ concern that its debt crisis may cause it to break away from the currency union.

“Greece wants to make it and will make it,” he said in a speech today in Washington after attending the annual meetings of the International Monetary Fund and the World Bank. “We are ready to take the necessary initiatives at any political cost” to improve the economy, he said.

Greece has yet to secure a second international bailout amid questions about whether it can satisfy the terms for aid. Economists at Citigroup Inc. say they expect the country to begin restructuring its debt as soon as December. Analysts at JPMorgan Chase & Co. (JPM) predict the euro area will start contracting in the fourth quarter and that the European Central Bank will cut interest rates next month.

“It’s Greece’s final and irrevocable decision to do whatever it takes to fulfill its obligations towards its partners, towards the euro area, towards the IMF,” he said.

No ‘Domino Effect’

The size of Greece’s economy and its debt make it unlikely to be at the “heart” of Europe’s problems and incapable of “causing a domino effect of pan-European dimensions,” Venizelos said.

“Greece is not the euro area’s central problem, nor can it be the catalyst” for a financial crisis, he said, noting that Greece’s debt accounts for 3 percent of the euro area’s public debt.

Venizelos said that the biggest problem for his country is the public sector.

“The main problem for my country is the public sector and the capability of the public administration to offer the necessary services to our people, to our society with a cheaper, more clever way,” Venizelos said.

Greece’s top priority is “to organize a smaller, clever and cheaper state,” he said. “This is our basic need, not because this is an external obligation but because this is an internal, existential need.”

To contact the reporters on this story: Meera Louis in Washington at mlouis1@bloomberg.net; Alaa Shahine in Washington at asalha@bloomberg.net

To contact the editor responsible for this story: Kevin Costelloe at kcostelloe@bloomberg.net

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Europe Faces Geithner, Soros Pressure to Defuse Debt Turmoil

By Simon Kennedy and Eric Martin - Sep 25, 2011 6:59 AM GMT+0700

European policy makers faced mounting pressure from foreign counterparts and investors to step up efforts to prevent their sovereign debt crisis from further roiling the world’s financial markets and economy.

U.S. Treasury Secretary Timothy F. Geithner set the tone for yesterday’s annual meeting of the International Monetary Fund in Washington by warning that failure to combat the Greek- led turmoil threatened “cascading default, bank runs and catastrophic risk.” Billionaire investor George Soros said “something needs to be done” to safeguard Europe’s banks because Greece may be unable to avoid default.

Such calls leave European policy makers under pressure to further boost the ammunition of their regional rescue fund even as parliaments focus on ratifying a July plan to broaden its powers. Markets reopen tomorrow after global stocks entered their first bear market in two years last week on concern Greek insolvency is inevitable and Europe can’t contain the damage.

“The sovereign debt crisis in the euro area needs to be resolved promptly to stabilize market confidence,” People’s Bank of China Governor Zhou Xiaochuan said at the IMF talks, which conclude today.

‘Firewall Against Contagion’

In his strongest public push yet for action, Geithner pressed governments to unite with the European Central Bank to “create a firewall against further contagion” and defuse the “most serious risk now confronting the world economy.”

He wants authorities to use leverage to increase the spending strength of the 440 billion-euro ($594 billion) European Financial Stability Facility. Bank of Canada Governor Mark Carney said 1 trillion euros should be deployed.

There are indications European governments are heeding the advice although they signaled a preference to first pass into law a revamp of the EFSF that will allow it to buy bonds and aid banks. European members of the Group of 20 agreed Sept. 22 to “maximize” the fund’s impact, while there are also discussions under way on speeding the start of a permanent rescue program.

They may be working against the clock. Greece has yet to secure a second bailout amid questions about whether it can satisfy the aid terms. Economists at Citigroup Inc. say they expect the country to begin restructuring its debt as soon as December. Analysts at JPMorgan Chase & Co. predict the euro area will start contracting in the fourth quarter and that the ECB will cut interest rates next month.

‘Fundamental Issues’

“Policy makers need to move beyond ad hoc financial responses to address fundamental issues about the nature of European monetary and economic integration,” Deutsche Bank AG Chief Executive Officer Josef Ackermann told a banking conference in Washington.

Germany’s government has already begun debating how to shore up its banks if Greece defaults. One official from a G-20 country said yesterday that an eventual insolvency in the Mediterranean nation is likely.

Speaking to Greek Public Service television from Washington, Greek Finance Minister Evangelos Venizelos said a default would be “catastrophic” and will “never happen.”

Proposals to beef up the facility’s spending power include using the bonds it buys from stressed states as collateral for fresh loans from the ECB or offering the central bank credit protection for helping investors buy debt.

Increasing Heft

German Finance Minister Wolfgang Schaeuble said the ECB wasn’t necessarily needed to increase the facility’s heft, while Bundesbank President Jens Weidmann said involving the central bank would violate EU treaties. Schaeuble again rejected euro area countries issuing joint bonds.

European finance officials will also examine next week the cost advantages of setting up the permanent fund, known as the European Stability Mechanism, a year earlier than its currently planned July 2013 start, according to a document prepared for the meetings and obtained by Bloomberg News. Spanish Economy Minister Elena Salgado said yesterday she would back early adoption of the fund and Schaeuble said that may be possible.

In a sign some in Europe resent Geithner’s campaign, outgoing ECB Executive Board member Juergen Stark said governments should do their “own homework before they give advice.” ECB President Jean-Claude Trichet noted Sept. 23 that the U.S. budget gap dwarfs that of the euro-area.

While the IMF vowed to “strongly support” Europe, Managing Director Christine Lagarde said its $384 billion lending chest may not be enough to meet all aid requests if the world economy worsens. The current lending capacity “looks comfortable today but pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders,” she said.

To contact the reporters on this story: Simon Kennedy in Washington at skennedy4@bloomberg.net. Eric Martin in Washington at emartin21@bloomberg.net

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

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Japan May Boost Extra Budget Past 11 Trillion Yen, Maehara Says

By Aya Takada - Sep 25, 2011 2:10 PM GMT+0700

Seiji Maehara, policy affairs chief of the ruling Democratic Party of Japan, said the government may increase spending for this fiscal year beyond the originally proposed 11 trillion yen ($144 billion) in a third supplementary budget.

“There are insufficient points about the government plan,” Maehara said today on public broadcaster NHK.

To contact the reporter on this story: Aya Takada in Tokyo at atakada2@bloomberg.net

To contact the editor responsible for this story: Jim McDonald at jmcdonald8@bloomberg.net

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Ivory Coast Aims to Boost World Cocoa Market Share to 50%, President Says

By Marvin G. Perez - Sep 25, 2011 5:57 AM GMT+0700

Ivory Coast, the world’s largest- producer of cocoa, aims to increase its share of the world market to 50 percent as the West African country recovers from a civil war.

Reform of the cocoa industry “will be implemented in the next month or two,” President Alassane Ouattara said in an interview today in New York. “We will liberalize the whole chain” and attract investment so that cocoa is processed in the country, he said.

The country produces about one-third of global cocoa output. World prices for the commodity shot up to a 32-year high during the four months of violence between Ouattara and those loyal to his predecessor, Laurent Gbagbo. Gbagbo ruled Ivory Coast for a decade and refused to cede power after losing the presidency in a November election.

Damage to the economy caused by the impasse forced Ivory Coast to ask for a reassessment of $2.3 billion of Eurobonds after it missed two coupon payments on the debt in January and June. The International Monetary Fund is considering a $614 million loan for Ivory Coast under the lender’s extended-credit facility program, the Fund said on Sept. 15.

To restore investor confidence, Ouattara, an economist and a former deputy managing director at the IMF, hopes that the country will resume making payments on debt obligations next year as the economy improves, he said.

Restructuring Debt

The country’s economy is expected to expand 8 percent to 9 percent next year, after contracting 5 percent this year, the IMF said on Sept. 15. The government has restructured short-term bills into longer-term bonds after the previous government issued up to $1.2 billion in short-term Treasury bills maturing in three and six months, Ouattara said.

The government wants to increase the share growers get from cocoa prices. Currently, producers receive about 35 percent to 40 percent and the goal is to take that to “50 percent to 60 percent,” as part of the reconstruction efforts, he said.

“Farmers should get the fair share of what they produce,” Ouattara said.

Reforms in the cocoa industry would aim to eliminate some of the current layers of intermediaries between growers and exporters, he said, without elaborating.

To contact the reporter on this story: Marvin G. Perez in New York at mperez71@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

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XCMG Construction Said to Cancel Plans to Raise $1.1 Billion in Stock Sale

By Fox Hu and Kelvin Wong - Sep 25, 2011 12:36 PM GMT+0700

XCMG Construction Machinery Co., China’s biggest crane maker, scrapped plans to raise about $1.1 billion in a share sale in Hong Kong after some underwriters backed out of commitments to buy any unsold stock, three people with knowledge of the matter said.

Bankers on the deal may meet tomorrow to try to restructure the offering, said one of the people, who declined to be identified as discussions are private. XCMG pulled the sale after some underwriters backed out of an agreement to purchase any stock the company failed to sell, a commitment known as hard underwriting, the people said.

Sany Heavy Industry Co., the construction-equipment maker run by China’s richest man, is also delaying the sale pricing of its $3.3 billion Hong Kong stock sale as the city’s benchmark Hang Seng Index posted its biggest weekly loss since 2008. The sell-off has caused investors to lose money on 44 out of 51 initial public offerings this year, according to data compiled by Bloomberg, with shoemaker Hongguo International Holdings Ltd. tumbling 15 percent on its debut on Sept. 23.

Shenzhen-traded XCMG had planned to sell stock amounting to about 15 percent of the enlarged share capital at HK$21.35 ($2.74) to HK$26.39 apiece, people with knowledge of the transaction said Sept. 23.

Two phone calls made outside of regular business hours to XCMG’s headquarters in Xuzhou City, Jiangsu province, went unanswered. Reuters reported earlier that XCMG had delayed the offering, citing people it didn’t identify.

Market Value

XCMG said in a January 5 statement to the Shenzhen stock exchange that it planned to sell as much as a 20 percent stake in Hong Kong. XCMG fell 3.3 percent in Shenzhen trading last week, reducing the company’s market value to 41 billion yuan ($6.4 billion).

The Hang Seng Index slumped 9.2 percent last week to close at a more than two-year low. The Bloomberg Hong Kong IPO Index, which measures the first-year performance of new stocks, has fallen 28 percent this year.

Xiao Nan Guo Restaurants Holding Ltd. scrapped a HK$581 million ($75 million) IPO, according to a Sept. 21 filing. China Everbright Bank Co. pulled a $6 billion offering in August, having considered cutting the size of the sale in half as stocks dropped.

Sany, headed by Chairman Liang Wengen, is pushing ahead with an investor roadshow after delaying the sale pricing, previously set for Sept. 26, Tang Xiuguo, president of its parent company, said Sept. 23.

Enough Cashflow

The share-sale delay won’t affect Sany’s expansion plans, including construction of a U.S. plant that’s due to open this year, as the company has enough cashflow to finance operations he said.

Companies have raised $40 billion in Hong Kong share sales this year, led by China Construction Bank Corp.’s $8.3 billion offering last month. The tally is about the same as in the year- earlier period.

BOC International Ltd., Goldman Sachs Group Inc., Morgan Stanley (MS), China International Capital Corp., Credit Suisse Group AG (CSGN), ABCI Securities Co. and BNP Paribas (BNP) SA were among banks arranging the sale for XCMG, according to the people.

To contact the reporter on this story: Fox Hu in Hong Kong at fhu7@bloomberg.net

To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net

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NASA Says Six-Ton Research Satellite Falls to Earth Over the Pacific Ocean

By Dan Hart - Sep 25, 2011 1:51 AM GMT+0700

An 11,023-pound research satellite used in the study of Earth’s ozone layer came down today off the West Coast of the U.S., the National Aeronautics and Space Administration said on its website.

The Upper Atmosphere Research Satellite, which weighed five metric tons, entered Earth’s atmosphere between 11:23 p.m. yesterday and 1:09 a.m. New York time this morning, NASA said. The Joint Space Operations Center at Vandenberg Air Force Base in California said the satellite came down over the northern Pacific Ocean, off the coast.

Nicholas Johnson, an orbital decay scientist for NASA at Johnson Space Center in Houston, said the agency doesn’t know the precise point where the satellite entered the atmosphere. Earlier, the agency said it anticipated 26 objects from the satellite’s breakup to survive and land in an area more than 500 miles (804 kilometers) long.

“The vast majority of that track was over water,” said Johnson in a conference call. He said there hadn’t been any sightings of the satellite or debris.

UARS was released by the space shuttle Discovery in 1991 to study chemicals in the atmosphere, including chlorine monoxide, which destroys ozone, and methane. It was decommissioned in 2005, with six of its 10 instruments still functioning, and moved into a lower orbit.

The last time a large NASA satellite made an uncontrolled landing was in 1979, when Skylab, a space station weighing 75 metric tons and Pegasus 2, a satellite, both fell to Earth.

To contact the reporter on this story: Dan Hart in Washington at dahart@bloomberg.net

To contact the editor responsible for this story: Sylvia Wier at swier@bloomberg.net

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Australia ‘Rock Solid’ in Midst of Global Crisis, Swan Says

Australia is facing the current global economic turmoil from a position of strength, with low unemployment, a strong banking system and a big investment pipeline, Treasurer Wayne Swan said today.

“The international economy has entered a dangerous new phase,” Swan wrote in his weekly e-mailed economic note. Still, Australia’s “successful response to the global financial crisis and record of economic reform means our fundamentals today are rock solid.”

Global markets are in turmoil on fears that a default by Greece will exacerbate an 18-month debt crisis and tip Europe and the global economy back into recession. The International Monetary Fund cut its forecast for global economic growth this month and predicted “severe” repercussions if Europe fails to contain its debt crisis or if U.S. policy makers reach an impasse over a fiscal plan.

European governments are exploring speeding the start of a permanent rescue fund for their cash-strapped economies and senior finance officials will examine next week the cost advantages of setting up the fund, known as the European Stability Mechanism, a year earlier than its currently planned July 2013 start, according to a document prepared for the meetings and obtained by Bloomberg News.

Same Determination

“Major economies need to deal with the current challenges with the same determination that saw us stare down the global financial crisis,” Swan wrote in his note from Washington, where he attended meetings of the Group of 20 finance ministers, the IMF and the World Bank.

“While the Australian economy has grown over 5 percent since the crisis struck, many of our peers still haven’t made up the ground they lost,” Swan said.

Australia’s gross domestic product expanded more than economists forecast last quarter, driven by rising consumer spending and a rebound in exports after natural disasters disrupted coal mining at the start of the year. The economy will grow by 1.8 percent this year, the Washington-based IMF said last week.

The U.S. economy will expand 1.5 percent this year, and Europe 1.6 percent, assuming volatility in financial markets doesn’t worsen and U.S. authorities agree on a fiscal plan that both supports the economy and outlines fiscal consolidation over the medium term, the IMF said.

‘Political Phase’

A deadlock in the U.S. Congress over extending the nation’s debt limit and trimming budget limits brought the world’s biggest economy to the brink of default on July 31.

“The crisis has now entered a new ‘political phase’ with markets calling for swift action by policy makers,” Swan said. “Even though we are likely to see bouts of instability continue for some time to come, we need to remember that our situation couldn’t be more different to many of our peers.”

To contact the reporter on this story: Nichola Saminather in Sydney at nsaminather1@bloomberg.net

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Geithner Urges End to European ‘Cascading Default’ Threat

By Ian Katz and Simon Kennedy - Sep 25, 2011 3:13 AM GMT+0700
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U.S. Treasury Secretary Timothy F. Geithner. Photographer: Joshua Roberts/Bloomberg

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Timothy Geithner, U.S. treasury secretary, stands after the the International Monetary Fund (IMF) Governors group photo at the IMF and World Bank annual fall meeting in Washington. Photographer: Joshua Roberts/Bloomberg

U.S. Treasury Secretary Timothy F. Geithner pressed European policy makers to intensify their efforts to end the 18-month sovereign debt crisis and avoid the “threat of cascading default, bank runs and catastrophic risk.”

In his strongest public push yet for Europe to step up its crisis-fighting, Geithner said strains in the euro-area’s budgets and banks are the “most serious risk now confronting the world economy.” He urged governments to unite with the European Central Bank to immediately “create a firewall against further contagion.”

Geithner’s call -- made today at the annual meeting of the International Monetary Fund in Washington and echoed by other finance chiefs -- came at the end of a week in which stocks entered their first bear market in two years. The slide partly reflected worries among investors that Greece is nearing default and Europe’s repeated failure to stop its woes from spreading may cause another global recession.

Bank of Canada Governor Mark Carney said Europe should make available about 1 trillion euros ($1.35 trillion) to “overwhelm” the crisis, more than double the current rescue package. U.K. Chancellor of the Exchequer George Osborne called for “credible” action to support European banks, some of which the IMF says need recapitalizing. The Washington-based lender said today it’s ready to “strongly support” Europe.

‘Resolved Promptly’

“The sovereign debt crisis in the euro area needs to be resolved promptly to stabilize market confidence,” People’s Bank of China Governor Zhou Xiaochuan told the IMF.

There are indications European governments are heeding the lobbying as they study working with the ECB to boost the firepower of their bailout fund through leverage. They may also accelerate the start of a permanent rescue program and the ECB could soon increase lending to banks.

The pressure is on them as billionaire investor George Soros said today that Greece may be unable to avoid default and its neighbors should prepare for that. Pacific Investment Management Co. Chief Executive Officer Mohamed El-Erian and former U.S. Treasury Secretary Lawrence Summers drew parallels this week between Europe’s troubles and the 2008 financial crisis.

Economists at Citigroup Inc. said yesterday they now expect Greece to begin restructuring its debt as soon as December, while those at JPMorgan Chase & Co. said the euro area will start contracting in the fourth quarter and that the ECB will cut interest rates next month.

Greek Default

Germany’s government has already begun debating how to shore up German banks in the event Greece defaults, while ECB Governing Council member Klaas Knot said this week he no longer excludes a Greek bankruptcy. One official from a G-20 country said an eventual Greek default is likely.

European finance officials will examine next week the cost advantages of setting up the fund, known as the European Stability Mechanism, a year earlier than its currently planned July 2013 start, according to a document prepared for the meetings and obtained by Bloomberg News.

Drawing on paid-in capital, the ESM will have a 500 billion-euro ($677 billion) war chest that could help shield countries like Italy. It also includes provisions for sharing costs with bondholders for countries with “unsustainable” debt.

Temporary Fund

Asked by Bloomberg Television about bringing forward the ESM’s start date, European Union Economic and Monetary Affairs Commissioner Olli Rehn said the focus for now is on upgrading the temporary fund, the 440 billion-euro European Financial Stability Facility. Spanish Economy Minister Elena Salgado said she would back early adoption of the fund.

Debate increased among EU officials this week over how to ratchet up the spending power of the EFSF through leverage once a revamp in about mid-October leaves it able to buy bonds in markets and aid banks.

One way of achieving that, proposed by economists Daniel Gros and Thomas Mayer, is for the EFSF to operate like a bank and borrow from the ECB, using the bonds it purchases as collateral. Other suggestions are for the EFSF to guarantee ECB bond purchases or help the central bank make loans to investors who buy stressed-country debt, with the facility absorbing initial losses.

Using leverage mimics the U.S. response to the 2008 crisis. While Geithner pitched the idea at a Sept. 16 meeting with euro- area finance chiefs in Poland, it met initial resistance from Germany, Europe’s dominant economy.

‘Cannot Wait’

“Decisions as to how to conclusively address the region’s problems cannot wait until the crisis gets more severe,” Geithner said today.

The ECB may also step up its own initiatives to support markets and growth, Governing Council members Luc Coene and Ewald Nowotny said in Washington. Potential measures include the revival of 12-month loans to banks and Coene didn’t rule out cutting the 1.5 percent benchmark interest rate.

ECB President Jean-Claude Trichet, attending his final IMF meetings before retiring Oct. 31, yesterday said European policy makers “are not blind and we are not hiding.”

Greek Prime Minister George Papandreou said yesterday his government was determined to proceed with the implementation of the July 21 decision for a second financing package. Osborne said no G-20 plan had been formed for a Greek default and Spain’s Salgado said there had been no discussion over such an event.

To contact the reporters on this story: Ian Katz in Washington at ikatz2@bloomberg.net; Simon Kennedy in Washington at skennedy4@bloomberg.net.

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JPMorgan’s Kasman Sees European Recession, Greek Depression

By Dawn Kopecki - Sep 25, 2011 5:36 AM GMT+0700

JPMorgan Chase & Co. (JPM) chief Economist Bruce Kasman said Greece is insolvent and headed toward a depression that will cause catastrophic damage across Europe.

“We have a social contract that’s been broken between Greece and the rest of the region,” Kasman said today during a panel discussion at the Institute of International Finance annual meeting in Washington. “Greece is insolvent and the European Union needs to deal with that. It hasn’t yet come to terms with that.”

Kasman said the uncoordinated and sporadic response from the region’s political leaders has “fed fears” in the markets that they don’t have the wherewithal to deal with the region’s fiscal problems. The lack of clarity in solving Greece’s credit problems has exacerbated the problem.

“Damage is done,” Kasman said. “Europe in our mind is entering recession.” Greece is heading toward a depression, he said.

To contact the reporter on this story: Dawn Kopecki in New York at dkopecki@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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Gruebel Resigns From UBS Following Trading Scandal

By Giles Broom - Sep 25, 2011 5:00 AM GMT+0700
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Oswald Gruebel, chief executive officer of UBS AG. Photographer: Sebastian Derungs/AFP/Getty Images

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Sept. 22 (Bloomberg) -- Kweku Adoboli, the UBS AG trader accused of fraud and false accounting that led to a $2.3 billion loss, arrives at a hearing in a London court where he may ask to be released on bail while awaiting trial. Maryam Nemazee and Poppy Trowbridge report on Bloomberg Television's "The Pulse." (Source: Bloomberg)

UBS AG (UBSN), Switzerland’s largest bank, named an interim chief executive officer after Oswald Gruebel resigned the post in the wake of a $2.3 billion loss from unauthorized trading.

Gruebel, who held the top job since February 2009, will be replaced on an interim basis by Sergio P. Ermotti, the bank’s CEO for Europe, the Middle East and Africa, UBS said yesterday in a statement. Gruebel, 67, handed in his resignation as the Zurich-based bank’s board of directors met in Singapore.

“That it was possible for one of our traders in London to inflict a multibillion loss on our bank through unauthorized trading shocked me,” Gruebel said in a memo to staff yesterday. “This incident has worldwide repercussions, including political ones. I did not take the step of resigning lightly. I am convinced that it is in the best interests of UBS to approach the future with a new leader at the top.”

Gruebel, who joined UBS after about 37 years at rival Credit Suisse Group AG, is the only person to have served as CEO of both of the biggest Swiss banks. Brought out of retirement to rebuild UBS after record losses, he returned the bank to profit about six months after arriving, resolved a dispute with the U.S. over banking secrecy that threatened the firm’s existence and stemmed nine straight quarters of client defections at the private bank. He also led an expansion of the investment bank.

‘Excellent Job’

Chairman Kaspar Villiger, on a conference call with reporters, said the board tried unsuccessfully to persuade Gruebel to remain until the annual shareholders meeting next year. He will be paid for a six-month notice period and have no further role at the bank. Carsten Kengeter, the head of UBS’s investment bank, did an “excellent job” in covering positions after the crisis and there is no doubt about his future, Villiger said.

UBS plans to shrink the division following the loss. Gruebel and Kengeter, 44, tried for the last two years to rebuild the unit into a top-tier investment bank, hiring more than 1,700 people and bringing in new business heads to replace those that left or were fired. They also increased risk-taking. Still, market turmoil and rising capital requirements had led them to begin reversing the buildup even before the trading loss. About 45 percent of 3,500 job cuts announced last month were slated for the investment bank.

‘Less Complex’

“In the future, the investment bank will be less complex, carry less risk and use less capital to produce reliable returns and contribute more optimally to UBS’s overall objectives,” Villiger said yesterday. “The investment bank will continue to strengthen its alignment with UBS’s wealth management businesses.”

UBS will probably scale back credit businesses that haven’t been very profitable and that will be affected most by the higher capital requirements under Basel III, said Cormac Leech, an analyst at Canaccord Genuity Ltd. in London who has a “hold” rating on UBS stock. The equities business, by contrast, “has a relatively high return so you’d expect them not to close that down,” Leech said.

UBS will announce further changes to the investment back in a presentation to investors scheduled for Nov. 17, Ermotti said on the call with reporters.

Gruebel an ‘Obstruction’

“They’ve got to change the aspirations of the investment bank and they’ve got to shrink it,” said Peter Thorne, a London-based analyst at Helvea SA. “I presume Gruebel was a bit of an obstruction to that because he felt the world was going back to the good old days and UBS was going to be a powerful investment bank.”

UBS said it may be unprofitable in the third quarter after the unauthorized trading. The loss, less than two months after Gruebel said the firm had “one of the best” risk-management units in the industry, raised questions about the bank’s controls.

It resulted from trading in Standard & Poor’s 500, DAX and EuroStoxx index futures over the past three months, UBS said on Sept. 18. While the positions were taken within the “normal business flow of a large global equity trading house,” the size of the risk was hidden by phony trades, UBS said at the time.

Kweku Adoboli, 31, the UBS trader charged with fraud and false accounting that may have resulted in the loss, remained in custody after a hearing in London on Sept. 22. He has yet to enter a plea.

The bank’s shares have declined by 7.4 percent in Swiss trading since the trading loss was announced, and 34 percent this year. That compares with a 37 percent tumble in the Bloomberg Europe Banks and Financial Services Index, which tracks 46 companies.

‘Terrible Blunder’

Gruebel’s decision to leave throws into relief the lack of a succession plan at UBS, analysts said. Chairman Villiger, 70, is scheduled to step down in 2013 and be replaced by former Bundesbank President Axel Weber, 54, who lacks hands-on experience running a commercial bank. The trading loss also reduces the chance Kengeter will ascend to the top job.

The departure of Gruebel may prove a blow to UBS and suggests a worrying level of disorder, especially as Chief Financial Officer Tom Naratil took up his post only three months ago, said Chris Wheeler, an analyst at Mediobanca Securities SpA in London.

“The board has made a terrible blunder” in not persuading him to stay, said Wheeler, who has an “outperform” rating on the stock. “That would have allowed some continuity with Axel Weber coming in. This is a bank now in disarray. It’s got a brand new CFO and now they’ve let the CEO walk away.”

Ermotti

Ermotti, a 51-year-old Swiss national who joined UBS in April after working at Merrill Lynch & Co. and UniCredit SpA (UCG), will be interim CEO while the board seeks a permanent successor to Gruebel, the bank said. In his 18 years at Merrill Lynch, Ermotti oversaw businesses including the global equities division before leaving in 2003 to join UniCredit, Italy’s biggest bank.

As UniCredit’s investment banking chief, Ermotti also supervised global transaction and private banking. Ermotti had aimed to compete with the world’s top securities firms as mergers soared and business flourished before the subprime crisis spread and credit became scarce. He later scaled back the plan to focus on corporate and investment banking business in UniCredit’s home markets.

Ermotti, who became deputy CEO at UniCredit in July 2007, will be a candidate for the permanent top job at UBS, Helvea’s Thorne said.

To contact the reporter on this story: Giles Broom in Geneva at gbroom@bloomberg.net

To contact the editor responsible for this story: Frank Connelly in Paris at fconnelly@bloomberg.net

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EU May Speed Permanent Fund to Stem Crisis

By James G. Neuger and Rainer Buergin - Sep 24, 2011 6:57 AM GMT+0700
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Passengers wait in a bus queue behind a television screen warning of stock market falls, broadcast on Sky News, in London on Sept. 23, 2011. Photographer: Chris Ratcliffe/Bloomberg

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Sept. 23 (Bloomberg) -- Goldman Sachs Asset Management Chairman Jim O’Neill talks about the relationship of the BRIC nations with the global economy, Chinese inflation and growth, the Japanese yen and the European equity markets. O'Neill speaks with Tom Keene on Bloomberg Television's "Surveillance Midday." (Source: Bloomberg)

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Sept. 23 (Bloomberg) -- Jay Bryson, senior global economist at Wells Fargo Securities LLC, discusses the potential impact of a Greek default on the European banking system, and the role of European Financial Stability Facility in helping the euro-region's debt crisis. Bryson speaks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

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Sept. 23 (Bloomberg) -- Carlo Cottarelli, director of the International Monetary Fund's fiscal affairs department, speaks about U.S. fiscal policy and the European sovereign-debt crisis. He speaks with Tom Keene on Bloomberg Television's "Surveillance Midday." (Source: Bloomberg)

European governments are exploring speeding the start of a permanent rescue fund for their cash- strapped economies amid fresh signs they may bolster efforts to halt the worsening sovereign debt crisis.

Senior finance officials will examine next week the cost advantages of setting up the fund, known as the European Stability Mechanism, in 2012, a year earlier than planned, according to a document prepared for the meetings and obtained by Bloomberg News.

As Greece’s prospects darken and the 18-month debt crisis threatens to tip Europe and the global economy back into recession, the euro area’s managers are stepping up efforts to identify measures that can stop it from spreading. Their strategy to date has been criticized at the annual meetings of the International Monetary Fund and World Bank, which continue today in Washington.

“Patience is running out in the international community,” U.K. Chancellor of the Exchequer George Osborne told reporters yesterday.

That pressure increased after concerns that a Greek default may be inevitable helped push global stocks into their first bear market in two years. Economists at Citigroup Inc. said yesterday they now expect Greece to begin restructuring its debt as soon as December, while those at JPMorgan Chase & Co. said the euro area will start shrinking in the fourth quarter.

Trimming Decline

U.S. stocks advanced yesterday, trimming the biggest weekly decline since October 2008 for the Dow Jones Industrial Average, amid speculation that policy makers will act to prevent the crisis from spiraling. Yields on 2-year Greek government notes nevertheless rose to 70 percent.

Drawing on paid-in capital, the ESM will have a 500 billion-euro ($677 billion) war chest that could help shield countries like Italy. It also includes provisions for sharing costs with bondholders for countries with “unsustainable” debt.

Faster ESM enactment would yield a “more effective financing structure” that cuts the extra debt of donor countries by 38.5 billion euros, saving Germany alone 11.5 billion euros, the paper said. “This gain is to be considered as a minimum,” it said.

Asked by Bloomberg Television about bringing forward the ESM’s start date, European Union Economic and Monetary Affairs Commissioner Olli Rehn said the focus for now is on upgrading the temporary fund, the 440 billion-euro European Financial Stability Facility.

Revamped EFSF

Public debate increased this week over how to allow the EFSF to buy bonds in markets and aid banks once it is revamped about mid-October. European lawmakers may face opposition from taxpayers balking at handing over even more cash to the facility.

An alternative option, inspired by the U.S. response to the 2008 financial crisis, is to use leverage to add to the EFSF’s firepower, according to Rehn and French Finance Minister Francois Baroin.

While U.S. Treasury Secretary Timothy Geithner pitched that idea at a Sept. 16 meeting with euro-area finance chiefs in Poland, it met initial resistance from Germany, Europe’s dominant economy.

One route, proposed by economists Daniel Gros and Thomas Mayer, is for the EFSF to operate like a bank and borrow from the European Central Bank, using the bonds it purchases as collateral. Another suggestion is to guarantee ECB loans to investors who buy stressed-country debt, with the EFSF covering initial losses.

‘Unavoidable’

Boosting the EFSF is “unavoidable” in the long run and may be followed by the issuance of joint euro bonds, Klaas Knot, the Dutch representative on the ECB’s Governing Council, said in a De Telegraaf interview published yesterday.

The ECB may also step up its own crisis-fighting as soon as next month, Governing Council members Luc Coene and Ewald Nowotny said in Washington. Potential measures include the revival of 12-month loans to banks and Coene didn’t rule out cutting the 1.5 percent benchmark interest rate. JPMorgan Chase and Royal Bank of Scotland Group Plc predict a 50-basis point reduction when policy makers gather Oct. 6.

ECB President Jean-Claude Trichet, attending his final IMF meetings before retiring Oct. 31, said the ECB “stands ready” to keep supplying unlimited liquidity to banks and pressed lawmakers to ratify the EFSF.

Speculative Attacks

Established in May 2010 after stopgap loans to Greece failed to restore market confidence, the EFSF was given a three- year lifespan amid expectations the crisis would run its course.

As Ireland and Portugal succumbed to speculative attacks, Germany then pushed for a permanent fund. Its statutes need to be approved by the 17 euro-area countries and it requires all 27 EU countries to pass a treaty amendment to become operational.

Ratification discussions have barely gotten under way. Germany won’t consider a timetable for approving the ESM until the reinforced EFSF is in place, the government said last week. German lawmakers vote to ratify the package next week.

While speedier enactment of the ESM would require donor countries to pay in as of 2012, those costs would be more than offset by switching away from the EFSF’s guarantee system, the working paper said. However, aid recipients would also have to contribute.

Planning Document

In a separate planning document obtained by Bloomberg News, EU officials said a buyback of Greek debt, part of the nation’s second bailout, should be broad-based and occur at the same time as a bond swap now being negotiated. The document says the operation would be open to all investors and include all of Greece’s outstanding government bonds. It also recommends making the buyback conditional on the debt swap, in order to minimize the amount of time that rating companies would consider Greece to be in “selective default.”

German Finance Minister Wolfgang Schaeuble suggested yesterday the terms of Greece’s international rescue may need to be revised. “One has to see whether what has been envisaged in June, July is still sustainable in the light of more recent developments,” Schaeuble told reporters in Washington. At the same time, he said that “to speculate on this at the current juncture would be wrong.”

Greek Prime Minister George Papandreou said yesterday his government was determined to proceed with the implementation of the July 21 decision for a second financing package.

“Since much is said and written, many scenarios, I want to stress once again, that our decision is to complete the July agreement,” he said.

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net Rainer Buergin in Washington via rbuergin1@bloomberg.net

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

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Romney Rips Perry for ’Heart’ Debate Comment

By Julie Hirschfeld Davis - Sep 24, 2011 11:00 AM GMT+0700
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Rick Perry, Texas Governor and Republican presidential candidate. Photographer: Michael Nagle/Getty Images

Rick Perry was chastised yesterday by his top rival in the Republican presidential race for his support of allowing illegal-immigrant students in Texas to pay in-state tuition at public universities, an issue posing a political vulnerability for the Texas governor.

The day after a nationally televised debate in which Perry’s immigration stance sparked sustained criticism and his defense of it drew audience boos, former Massachusetts Governor Mitt Romney spotlighted the issue at a gathering of conservatives in Orlando, Florida.

“My friend Governor Perry said that if you don’t agree with his position on giving that in-state tuition to illegals, then you don’t have a heart,” Romney said. “I think if you’re opposed to illegal immigration, it doesn’t mean that you don’t have a heart; it means that you have a heart and a brain.”

Romney, who is Perry’s closest competitor in polls on the Republican race, was reprising Perry’s defense of the tuition program at the Sept. 22 debate in Orlando.

“If you say that we should not educate children who have come into our state for no other reason than they’ve been brought there by no fault of their own, I don’t think you have a heart,” Perry said at the forum that featured nine presidential contenders.

Perry’s Challenge

For Perry, the immigration issue could present a unique challenge. His stance fits the profile of his state, which has a large and growing Hispanic population. Yet it threatens to alienate many of the fiscal and social conservatives outside of Texas who hold sway in Republican nominating contests and oppose government aid to illegal immigrants.

Perry, speaking to the same audience as Romney yesterday, didn’t address the immigration matter, although he suggested a poor debate performance shouldn’t be held against him.

“It’s not who is the slickest candidate or the smoothest debater that we need to elect,” he said. “We need to elect the candidate with the best record and the best vision for this country.”

Perry criticized Romney on health care, equating a plan enacted during his governor’s term in Massachusetts with “socialized medicine,” and calling it “misguided.”

Perry’s immigration position drew sharp opposition from other rivals at the debate, including Minnesota Representative Michele Bachmann. She also came back to the issue during her appearance yesterday before the conservative activists, saying, “We will not have taxpayer-subsidized benefits for illegal immigrants or their children.”

Border Fence

Bachmann reiterated her debate vow to build a border fence the length of the U.S. border with Mexico, which Perry has denounced as impractical and ineffective.

Bachmann said at the debate: “I would build a fence on America’s southern border -- on every mile, on every yard, on every foot on every inch of the southern border.”

Romney said yesterday that what he “still can’t get over is the idea that a state would decide to give a $100,000 discount to illegals to go to school in their state.”

His comment referred to the estimate he had used at the debate of how much more a four-year degree would cost an illegal immigrant student at a Texas college who paid out-of-state tuition.

Florida Republican leaders and activists are meeting in Orlando for a three-day conference that culminates in a non- binding straw poll of the presidential candidates today.

Romney earlier this year said he wouldn’t actively campaign in any straw polls. In Florida, Perry was favored among 28 percent of the Republicans surveyed by Quinnipiac University Sept. 14-19, and Romney was favored among 22 percent.

To contact the reporter on this story: Julie Hirschfeld Davis in Orlando, Florida at or Jdavis159@bloomberg.net.

To contact the editor responsible for this story: Mark Silva at msilva@bloomberg.net

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Kodak Draws $160M From Revolving Credit Line

By Krista Giovacco and Mary Childs - Sep 24, 2011 5:39 AM GMT+0700

The cost to protect Eastman Kodak Co. (EK)’s debt from default rose to the highest level in more than a month after the 131-year-old camera maker drew down $160 million from its revolving bank line.

Credit-default swaps linked to the Rochester, New York- based company rose 2.2 percentage points to 41 percent upfront, according to data provider CMA. That means investors would pay $4.1 million initially and $500,000 annually to protect $10 million of Kodak’s debt.

The borrowing came less than a month after Chief Executive Officer Antonio Perez said the patents Kodak is trying to sell have generated interest from potential bidders. The company is trying to raise cash to continue funding inkjet printing and other digital businesses that it has projected will generate operating profits by 2013.

“Here this guy says he is going to sell these patents for a lot of money and now he is borrowing from the bank,” Ken Luskin, chief executive officer of Intrinsic Value Asset Management Inc., which owns 3.6 million Kodak shares, said in a telephone interview. “What is going on? The communication is horrible.”

Kodak shares dropped as much as 20 percent to $1.90 in after-hours trading after closing at $2.38 in regular New York Stock Exchange composite trading

Kodak will pay interest beginning at 1.5 percentage points more than the base rate, the company said today in a regulatory filing. It may repay the money at any time without penalty.

Cash Management

The company entered into a restated credit agreement in April for the five-year asset-based revolving line for up to $400 million. Proceeds may be used for general corporate purposes, including the purchase of its 7.25 percent bonds due in 2013, Kodak said in an April 27 regulatory filing.

The credit facility “has been a part of Kodak’s cash- management tool kit for quite some time,” Christopher Veronda, a spokesman for Kodak, said in an e-mailed statement. “The purpose of the revolving credit facility is to bridge timing differences between cash outflows and inflows, which is a common practice at many corporations.”

To contact the reporters on this story: Krista Giovacco in New York at kgiovacco1@bloomberg.net; Mary Childs in New York at mchilds5@bloomberg.net

To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net

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Boeing Seeks Lift With 787 Debut

By Susanna Ray - Sep 24, 2011 3:22 AM GMT+0700
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An All Nippon Airways Co. (ANA) flight attendant stands in the open doorway of a Boeing Co. 787 Dreamliner at Paine Field in Everett, Washington on Aug. 6, 2011. Photographer: Stuart Isett/Bloomberg

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Aug. 29 (Bloomberg) -- Bloomberg's Paul Allen reports from a ceremony at Boeing Co.’s factory in Everett, Washington, on production of the 787 Dreamliner and 777 aircraft. The 787 Dreamliner received its so-called type certifications from U.S. and European governments, verifying that it complies with aviation standards. (Source: Bloomberg)

Boeing Co. (BA)’s newest, biggest plane has cast a shadow over ceremonies to mark the three-years-late first delivery of its smaller cousin, the composite-plastic 787 Dreamliner.

Handing over the initial 747-8 jumbo jet on Sept. 19 was supposed to open a week of public-relations victories as Boeing delivered the first of its two beleaguered aircraft models. Instead, Boeing had to cancel three days of events as the launch customer for the 747-8 balked at the last minute.

The planemaker now heads into a weekend of celebrations for the 787, the jet being counted on to return Boeing to the top spot in industry sales lost to Airbus SAS in 2003. Chicago-based Boeing is trying to boost monthly Dreamliner output fivefold in the next two years to help make up for the delays.

“Boeing is not only facing issues on the 747, they need the 787 production ramp-up to go smoothly,” said Heidi Wood, a Morgan Stanley analyst in New York who recommends holding the stock. “But at the moment, it isn’t going real well.”

Speeding up final assembly will be pivotal for Boeing. Planemakers receive most of their payments as jets move through the production cycle before delivery, and airlines’ contracts generally provide for penalties upon delays. Boeing’s aim is to reach 10 Dreamliners a month by 2013, a record level for wide- body aircraft, as it works off a backlog for 821 orders.

“The aerospace supply base is working overtime just to produce two airplanes a month,” Wood said in an interview. “We are convinced that the ramp-up is going to be longer and more arduous than Boeing is describing.”

First Customer

Japan’s All Nippon Airways Co. will be the first airline to get the 787. The events for the handover begin on Sept. 25 near the wide-body jet factory in Everett, Washington, where Boeing builds the Dreamliner and the 747-8.

Scott Fancher, the 787 program chief, said Boeing is working “very hard” with customers to make sure the plane will meet their needs and resolve any concerns. Boeing has said the initial Dreamliners are overweight, as are the first 747-8s, and the company is working to make them lighter.

“We feel pretty good about this airplane and getting it ready to deliver to ANA,” Fancher said this week in a Bloomberg Television interview.

The 747-8 was already two years behind schedule before the freighter version’s entry into service was delayed indefinitely Sept. 16 by Cargolux Airlines International SA’s “unresolved issues.” On Sept. 21, Atlas Air Worldwide Holdings Inc. (AAWW) said it was dropping orders for three of its 12 747-8s, citing delays and “performance considerations.”

Multiple Models

That leaves Boeing tweaking that plane, starting work on a new U.S. Air Force tanker based on the 767 jet and developing an upgraded version of its top-selling single-aisle 737 model -- as well as ending the manufacturing setbacks that stalled the 787 by 2013 while unveiling a larger variant the same year.

“They really need to get it going like a Swiss watch,” Steven Udvar-Hazy, chief executive officer of jet lessor Air Lease Corp., said in an interview this week.

Udvar-Hazy, who has been buying planes from Boeing for four decades, predicted that delays on the Dreamliner may lengthen as the company tries to increase the production tempo. The 787 is the first airliner to be made out of carbon fibers spun around a barrel mold and baked, instead of traditional riveted aluminum, so its assembly is more complicated.

‘Financial Dimension’

“The financial dimension of this is critical,” Udvar-Hazy said. “The faster they can ramp up, the more revenue they can produce.”

Boeing rose 79 cents, or 1.3 percent, to $59.51 at 4:15 p.m. in New York Stock Exchange composite trading, paring its decline for this year to 8.8 percent. The shares have tumbled 41 percent since the first 787 delay in October 2007.

Boeing had been counting on design changes in the next Dreamliner variant, the 787-9, to apply to the first model, the 787-8, and help simplify manufacturing, Wood said. The engineering on the newer version isn’t done yet and its introduction is likely to be delayed a year until 2014, which would crimp 787-8 output, she said.

Boeing is sticking to its 2013 targets, said Lori Gunter, a spokeswoman in Everett.

The Dreamliner uses a new production system in which 65 percent of the jet is built by suppliers and flown to Boeing plants for assembly. Contractors struggled with new materials and responsibilities, contributing to the seven delays to the plane, originally due to enter service in May 2008.

Fighting Congestion

Boeing designed the 787 to counter rising congestion at hub airports. Lighter-weight plastics help reduce fuel consumption, increasing the range to as much as 9,800 miles (about 15,800 kilometers), more than any similar-sized jet.

That will let airlines add routes between smaller cities that lack the traffic to fill jumbo jets like the passenger version of the 747-8, rather than having to fly travelers through hubs. All Nippon plans to familiarize crews with the 787 on domestic trips, then put it on long-haul routes in 2012.

Carriers will still be clamoring for as many 787s as Boeing can build each month, Morgan Stanley’s Wood said. “As the world economies are under pressure, airlines might review parking their bigger airplanes and want to fly a smaller, mid-sized, twin-engine plane instead,” she said.

The challenge for Boeing is reaching production targets on its most-complicated plane while having so many other projects under development, she said.

“They’re craving engineering resources,” Wood said. “That issue on resources is what helped contribute to the 747-8 and 787 delays. It’s not a small problem.”

To contact the reporter on this story: Susanna Ray in Seattle at sray7@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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