Italian Yields Top 7% as LCH Raises Margin, Berlusconi Offers to Resign

By Paul Dobson - Nov 9, 2011 7:08 PM GMT+0700

Italian bonds slumped, driving two- five-, 10- and 30-year yields to euro-era records, after LCH Clearnet SA raised the deposit it demands for trading the nation’s securities.

Two-year note yields rose above 10-year rates, with five- year debt climbing above 7.5 percent as Prime Minister Silvio Berlusconi’s offer to resign left his weakened government struggling to implement austerity measures to reduce borrowing costs. German 10-year bunds outperformed all their regional peers as the drop in Italian bonds boosted demand for the safest fixed-income assets. The euro sank and U.S. Treasuries jumped.

The LCH change for Italy “is a big deal in that it highlights the deterioration of its credit quality,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “The more pressing issue still remains the political backdrop. The market would love a technocrat government to get the reforms through. If we go down the election route we’ve probably got three months of inaction.”

The yield on Italy’s five-year notes jumped 82 basis points, or 0.82 percentage point, to 7.70 percent at 11:56 a.m. London time. The 4.75 percent securities due in September 2016 dropped 2.995, or 29.95 euros per 1,000-euro ($1,363) face amount, to 88.81.

Germany’s 10-year bund yield dropped six basis points to 1.74 percent, with the two-year note yield one basis point lower at 0.39 percent. The extra yield investors demand to hold 10- year Italian debt instead of bunds reached 5.75 percentage points, also a euro-lifetime high.

Euro-Region Bailouts

The increase in rates risks making it too expensive for Italy to borrow in the market. Ireland began talks to receive aid on Nov. 18 last year, three weeks after its 10-year yield breached 7 percent. Portugal asked for help on April 6, three months after its borrowing costs jumped past that level. Greek yields also breached 7 percent before winning aid in April 2010.

The European Commission sought “concrete answers” on how Italy will cut its budget deficit as surging Italian bond yields triggered a global market slide. European Union Economic and Monetary Commissioner Olli Rehn “was worried yesterday and continues to be worried today,” commission spokesman Amadeu Altafaj told reporters in Brussels today.

The so-called deposit factor for Italian bonds due in seven-to-10 years will be raised to 11.65 percent, LCH Clearnet said in a document on its website dated yesterday. That compares with a charge of 6.65 percent announced on Oct. 7. Additional costs on all securities maturing through 30 years and including inflation-linked bonds will be applied from today’s close, LCH said.

‘More Expensive’

“It becomes more expensive to fund a position in Italian bonds with higher clearing margins,” said Norbert Aul, a European interest-rate strategist at RBC Capital Markets in London. “This is in particular important for banks. Who is affected and to what extent is difficult to assess.” The revisions are weighing on Italian government bond prices, he said.

The two-year note yield climbed 90 basis points to 7.28 percent. The European Central Bank was said by four people with knowledge of the transactions to have bought Italian securities today. An ECB spokesman in Frankfurt declined to comment.

Credit-default swaps protecting Italy’s government bonds rose 12 basis points to a record 536, according to CMA prices, with the euro weakening 1.4 percent to $1.3642. The yield on the 10-year U.S. Treasury note fell 10 basis points to 1.98 percent. The Stoxx Europe 600 Index slid 2.1 percent.

Bond Auctions

Berlusconi said last night he’d step down as soon as parliament passed cost-cutting steps pledged to EU allies. He favors early elections, he said today, and Angelino Alfano, head of his People of Liberty party, might be the candidate. The government is yet to finish writing the austerity legislation, Mario Baldassarri, head of the Senate Finance Committee, said today.

Germany sold 1.5 billion euros of inflation-linked bonds maturing in April 2018 at an average yield of minus 0.4 percent. The auction drew bids for 1.8 billion euros of the securities, less than the maximum target of 2 billion euros, according to a Bundesbank statement.

Finland auctioned 1.5 billion euros of April 2017 and April 2021 securities.

The yield spread between German and French 10-year bonds jumped 15 basis points to 144 basis points, the most since before the start of the European common currency.

German bunds have handed investors a profit of 8.6 percent this year, matching U.S. Treasuries, which have also returned 8.6 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds lost 8.9 percent.

To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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Italy’s Woes Spell ‘Nightmare’ for BNP, Agricole

By Fabio Benedetti-Valentini - Nov 9, 2011 6:20 PM GMT+0700

BNP Paribas SA and Credit Agricole SA (ACA), France’s largest banks by assets, are finding that their pursuit of growth in neighboring Italy in the past decade has a downside: political risk.

As the world’s biggest foreign holders of Italian public and private borrowings -- with $416.4 billion of such debt at the end of June -- French lenders face collateral damage from the political turmoil that sent Italy’s bond yields to euro-era records. Austerity measures to balance Italy’s budget are also threatening growth in an economy that has lagged behind the European average for more than a decade, and may hurt the French banks’ consumer businesses.

“Italy was a dream investment for French banks,” said Christophe Nijdam, a bank analyst at AlphaValue in Paris. “Nobody could have imagined a sovereign crisis touching a G-7 economy at that time. But the political deadlock is turning the dream into a nightmare.”

Prime Minister Silvio Berlusconi, who failed to muster an absolute majority in a routine ballot in Rome yesterday, agreed to resign after parliament approves the country’s austerity plans next week. Berlusconi’s move forces Italy to seek a new regime stable enough to convince investors the country can fund itself and implement painful budget-cutting measures.

‘Gorilla in the Room’

Italy’s ability to refinance is critical to French financial institutions, which held $106.8 billion of government borrowings and $309.6 billion of private debt at the end of June, according to data from the Bank for International Settlements.

Italy’s 1.9 trillion euros ($2.6 trillion) of debt is the world’s fourth-largest, behind the U.S., Japan and Germany, and more than that of Greece, Spain, Portugal and Ireland combined. Relative to gross domestic product, it is the highest in Europe after Greece, standing at about 120 percent.

“Italy has always been the gorilla in the room for French banks,” said Julian Chillingworth, who helps manage 15 billion pounds ($24 billion) at London’s Rathbone Brothers Plc (RAT) and holds BNP shares. “Sovereign-debt investments in the euro zone are turning out to be like George Orwell’s Animal Farm: ‘All animals are equal but some are more equal than others.’ Italy is not as low risk as Germany or France. The immediate issue for Italy is refinancing.”

French AAA Rating

Italy has to refinance about 308 billion euros of bonds and bills maturing next year, according to Bloomberg data. The country’s bonds tumbled today, driving the five-year note yield to more than 7 percent for the first time since the euro’s creation in 1999. The extra yield investors demand to hold 10- year Italian debt instead of similar-maturity benchmark German bunds reached 5 percentage points.

Concern about French banks’ debt holdings in Europe’s troubled countries -- Greece, Portugal, Ireland, Spain and Italy -- has weighed on their stocks. Before today, the shares of BNP Paribas (BNP) had fallen 41 percent since early July. Credit Agricole tumbled 50 percent, more than the 27 percent drop in the 46- member Bloomberg Europe Banks and Financial Services Index. BNP Paribas slid as much as 3.6 percent today to 30.20 euros, while Credit Agricole fell as much as 2.6 percent to 5.02 euros.

A BNP spokeswoman declined to comment on the impact of the political turmoil in Italy as did a Credit Agricole spokeswoman.

French banks carried about 50 percent of the total private and public claims at European banks related to Italy at the end of June, according to BIS data. The French lenders’ holdings threaten to channel risk toward France, whose own AAA rating is threatened as the European crisis deepens.

Umbilical Cord

Between the French and Italian financial systems “there’s a kind of umbilical cord,” said Jacques-Pascal Porta, who helps manage 500 million euros at Ofi Gestion Privee in Paris, and holds shares in BNP Paribas and Credit Agricole. “If things turn sour in Italy, clearly it’s going to be a problem for the two banks. And given that these are two big French banks, it’s going to weigh on France’s rating too.”

BNP Paribas, based in Paris, held more Italian than French sovereign debt at the end of 2010. It has since cut back on its Italian sovereign holdings. France’s two biggest banks hold about 20 billion euros of Italian government debt.

“French banks’ Italian sovereign exposure in itself isn’t very systemic,” said Pierre Flabbee, a Paris-based analyst at Kepler Capital Markets. “Even in the unrealistic case of an Italian default, their level of exposure per se isn’t systemic for France. Italy is too big to fail because the consequences of a sovereign default on private debt would be incalculable.”

Disengagement Effort

French banks, like their European counterparts, are cutting Italian sovereign holdings. The banks’ participation in the government-debt flight is lowering the value of their remaining holdings and threatens to exacerbate the region’s crisis.

BNP Paribas last week said it cut those holdings by 40 percent, to 12.2 billion euros between July and the end of October. The move was part of an attempt to shrink its total sovereign debt holdings by 23 percent to 81.5 billion euros.

“We incurred losses” from the sales, BNP Paribas Chief Executive Officer Baudouin Prot said in a Bloomberg Television interview last week.

Credit Agricole’s net banking-book Italian debt holdings at the end of June were at 7.8 billion euros, it said Aug. 25.

Meanwhile, Italy’s austerity plan threatens to dampen economic activity and hurt the banks’ main business there. Over the last decade, BNP Paribas and Credit Agricole bought two of Italy’s 10 largest lenders.

Consumer Banking

“Italy has a strong economy; it just needs to be well managed,” BNP Paribas’s Prot said.

Berlusconi’s government has announced austerity measures amounting to more than 100 billion euros since July in an attempt to stem contagion from the euro-area debt crisis.

Italy’s government cut its growth forecast to 0.7 percent this year and 0.6 percent in 2012, from the 1.1 percent and 1.3 percent estimated in April. The unemployment rate rose to 8.3 percent in September from 8 percent in the previous month.

Drawn by one of Europe’s most lucrative consumer banking markets, French financial companies spent at least 20 billion euros since 2006 buying Italian banking and insurance assets.

“The pure retail banking exposure of the French banks in Italy is fully legitimate,” said AlphaValue’s Nijdam. “It was difficult to penetrate, no country really wants its neighbor to buy its domestic banks.”

‘Image Liability’

BNP Paribas, which acquired Rome-based Banca Nazionale del Lavoro SpA in 2006 for 9 billion euros, has about 950 outlets in Italy. Credit Agricole operates about 960 branches in the country. BNP’s 19,100 and Credit Agricole’s 12,000 employees in Italy are the most outside their home market.

“If there was a slow growth or a recession in Italy, maybe the profitability would be impacted, but I do believe that BNL would remain profitable,” Prot said.

In the third quarter, pretax profit at BNL, which was founded in 1913, rose 18 percent from a year earlier to 135 million euros.

BNP Paribas had 73.3 billion euros of loans at its BNL unit at the end of September, compared with BNL’s 32.2 billion euros of deposits, according to its website. The Italian retail- banking unit of Credit Agricole, which will report third-quarter results tomorrow, had 33.2 billion euros of loans and 32.8 billion euros of deposits at the end of June, company data show.

For now, the best option for French banks may be to hunker down and ride out the storm, said AlphaValue’s Nijdam.

“Italy is suffering from some political image liability,” he said. “It’s a solid economy and it makes sense for banks that have taken strategic industrial positions to remain there.”

To contact the reporter on this story: Fabio Benedetti-Valentini in Paris at fabiobv@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Edward Evans at eevans3@bloomberg.net

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Stocks, Euro Sink as Italy Yields Reach Record

By Stephen Kirkland - Nov 9, 2011 9:31 PM GMT+0700

Stocks and the euro plunged as Italian bond yields surged to euro-era records after a clearing firm increased the deposits it demands for trading the nation’s securities, intensifying the European credit crisis. The dollar strengthened and Treasuries surged.

The Standard & Poor’s 500 Index lost 1.3 percent to 1,259.73 at 9:31 a.m. in New York and the Stoxx Europe 600 Index slid 1.8 percent. The yield on Italy’s five-year note jumped 62 basis points to 7.50 percent. The euro weakened 1.7 percent to $1.3605, driving the Dollar Index up 1.4 percent. The yield on 10-year Treasuries sank 11 basis points to 1.97 percent. Oil fell from a three-month high to help lead commodities lower.

LCH Clearnet SA, a clearing house that guarantees investors’ trades are completed, raised the deposit it demands for trading Italian government bonds and index-linked securities. Italian Prime Minister Silvio Berlusconi agreed to step down after the approval of an austerity plan to tame the euro-region’s second-biggest debt, while Greek Prime Minister George Papandreou’s talks on forming an interim government dragged into a third day.

“There’s so much uncertainty, who’s going to take over, when are they going to take over, we just don’t know.” Gary Jenkins, the head of fixed income at Evolution Securities Ltd. in London, told Maryam Nemazee on Bloomberg Television’s “The Pulse” today. The market wants “a government in place as soon as possible to get the austerity measures passed. But they might not get what they want.”

Rally Halted

The S&P 500 snapped a two-day advance. Berlusconi’s offer to resign yesterday triggered an afternoon rally that sent the index up 1.2 percent amid optimism a new Italian leader would be more successful in taming the debt crisis.

General Motors Co. fell after rescinding its target for break-even results in Europe, a region where it hasn’t turned an annual profit in more than a decade. Adobe Systems Inc. tumbled after the largest maker of graphic-design software cut its earnings forecast.

More than 10 shares fell for every one that gained in the Stoxx 600 and all 19 industry groups retreated. Admiral Group Plc plunged 27 percent, the most since its initial public offering in 2004, as the U.K. car insurer said a period of higher-than-expected personal injury claims would lower reserves. Mediaset SpA, the broadcaster controlled by Berlusconi, fell 8.5 percent.

The yield on Italy’s 10-year bond rose 48 basis points to 7.25 percent, and the two-year yield surged 73 basis points to 7.11 percent. Credit-default swaps on Italy’s government bonds jumped 38 basis points to a record 562, according to CMA prices.

Deposit Factor

LCH Clearnet increased the so-called deposit factor for Italian bonds due in seven-to-10 years to 11.65 percent, the French unit of the clearinghouse said in a document on its website dated yesterday. That compares with a charge of 6.65 percent announced on Oct. 7. The additional costs will be applied from close-of-day positions today, LCH said.

New York oil dropped 1.4 percent to $95.49 a barrel, the first decline in six sessions. Zinc slumped for the first day this week, and copper declined for a fourth day, losing 1.3 percent. All 24 commodities tracked by the S&P GSCI Index declined, sending the gauge down 0.9 percent.

The MSCI Emerging Markets Index fell for the first time in four days, losing 0.8 percent. Benchmark gauges in Brazil, Russia, Poland and Hungary declined more than 2 percent. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong climbed 2.2 percent.

To contact the reporter on this story: Stephen Kirkland in London at skirkland@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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Italy’s Focus Shifts to Forming New Government

By Chiara Vasarri and Lorenzo Totaro - Nov 9, 2011 7:08 PM GMT+0700

Play Video

Nov. 9 (Bloomberg) -- Italian Senate Finance Committee Chairman Mario Baldassarri discusses Prime Minister Silvio Berlusconi's resignation offer and the European Central Bank's backing of Italian bonds. He talks with Francine Lacqua on Bloomberg Television's "On the Move." (Source: Bloomberg)

Play Video

Nov. 9 (Bloomberg) -- Salvatore Zecchini, a professor of economic policy at Rome's Tor Vergata University, discusses the fiscal challenges facing a potential caretaker government in Italy amid Silvio Berlusconi's offer to resign. He talks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)

Prime Minister Silvio Berlusconi’s offer to resign leaves Italy struggling to produce a new regime stable enough to implement painful austerity measures in a country that has averaged almost a government a year since World War II.

Berlusconi said today that he favored early elections and that Angelino Alfano, head of his People of Liberty party, might be the candidate. Berlusconi last night said he’d step down as soon as parliament passed cost-cutting steps pledged to European Union allies in a bid to convince investors Italy can curb record borrowing costs. Parliament is due to vote on the measures in the coming weeks.

Italian stocks and bonds fell today on concern that a change in leadership won’t be enough to contain the turmoil in a nation with the euro-region’s second-biggest debt. European officials’ inability to tackle the sovereign crisis led to a surge in Italian bond yields in recent weeks that further frayed Berlusconi’s fractious coalition as top ministers bickered over how to protect the country from the contagion.

“Whoever is in charge, the numbers remain the same and this morning they are even worse,” Simon Smith, chief economist at foreign-exchange broker FXPro Group Ltd., said in a research note. “This Roman road is currently leading to a cliff. Events have moved far faster than the labored political process of the EU can deal with.”

Bonds Decline

The yield on Italy’s 10-year bond surged 70 basis points to 7.47 percent as of 11:51 a.m. in London, and the five-year yield reached 7.7 percent; those levels drove Greece, Ireland and Portugal to seek international bailouts. LCH Clearnet SA, the French arm of Europe’s largest clearing house, said yesterday it would increase the extra deposit it demands from clients to trade all Italian government bonds and index-linked securities.

Credit-default swaps on Italy’s government bonds jumped 12 basis points to a record 536, according to CMA prices, while the euro dropped 1.4 percent. Italy’s FTSE MIB fell 4 percent and futures on the S&P 500 lost 2.5 percent. Contracts on the Dow Jones Industrial Average fell 1.9 percent.

Berlusconi’s pledge to resign came after he failed to muster an absolute majority on a routine parliamentary ballot, obtaining only 308 votes in the 630-seat Chamber of Deputies yesterday, after key lawmakers defected from his party this week to join the opposition.

EU Pressure

“Italy is now in a dance of death,” Fredrik Erixon, head of the European Centre for International Political Economy in Brussels, said in a telephone interview. “What we need is a strong reaction from other euro-zone leaders to calm markets. But we don’t have it.”

The EU stepped up pressure on Italy to deliver its debt- reduction measures even as Berlusconi’s government was unraveling. Italy’s 1.9 trillion euro-debt ($2.6 trillion) is bigger than that of Greece, Spain, Portugal and Ireland combined.

“The economic and financial situation in Italy is very worrying,” EU Economic and Monetary Commissioner Olli Rehn told reporters yesterday after a meeting of euro-area finance ministers in Brussels. Rehn said he sent Finance Minister Giulio Tremonti about 40 “very specific questions” on Italy’s economic pledges and expects answers by the end of the week.

New Elections

Once parliament passes the plan to implement the austerity measures and Berlusconi resigns, President Giorgio Napolitano will consult political leaders to see if there is to form another government with a broader majority.

Napolitano could also try to build support for a so-called technical government led by a prominent non-politician charged with implementing the economic overhaul and eventually preparing new elections. Former EU Competition Commissioner Mario Monti would be a candidate to lead such a government, Nomura International economist Lavinia Santovetti wrote in a note on Nov. 7.

Berlusconi and his allies insist that Italian voters and not political leaders should choose the next government. “I don’t think there are other feasible solutions,” Berlusconi told state-run RAI television last night. “It’s unfathomable that those who lost the elections can govern.”

Elections could further delay Italy implementing the measures pledged to the EU that also helped convince the European Central Bank to backstop its debt. The ECB has spent more than 100 billion euros on sovereign debt since starting its purchase of Italian and Spanish bonds on Aug. 8.

By law, elections must be held between 45 days and 75 days after the president has dissolved Parliament and the act has been published in the government’s Official Gazette.

Unstable

Most of the opposition parties have signaled they would support a broader coalition or a technical government in a country where election rules and party politics often produce unstable governments that rarely endure a full five-year term, even in the best of times. Any new government not chosen through elections would serve out the current legislative term until April 2013.

Berlusconi, 75, is Italy’s longest-serving prime minister, and has won three elections, governing for half the 17 years since he entered politics in 1994. His resignation doesn’t necessarily signal the end of his political career. He could lead his party in new elections, or run again in 2013.

Technical Government

Italy does have a track record of reaching outside the political spectrum for leaders of technical government, who are generally given a limited term and charged with carrying out specific reforms. Bank of Italy Governor Carlo Azeglio Ciampi was called in to run a technical government in 1993 that oversaw a broad labor market agreement between employers and unions. Treasury Minister Lamberto Dini pushed through a sweeping pension reform as head of another technical government starting in 1994.

Before Berlusconi resigns and Napolitano begins the consultations, both houses of parliament must approve the budget plan. The bill includes an amendment that codifies the implementation of the government’s 45.5 billion-euro austerity plan first announced in August and subsequent measures to trim debt and spur growth in an economy that has trailed the European average for more than a decade.

Berlusconi’s Cabinet agreed to attach some of Italy’s promised austerity and growth measures as an amendment to an existing spending bill. The amendment will include a plan to accelerate asset sales of as much as 60 billion euros, liberalize closed professions and local services and boost infrastructure investment, newspapers including Il Sole reported on Nov. 3.

“The key political point for Italy is now answering the following question: which government, with what wide majority, will be able to implement in a few days the structural reforms that we haven’t been able to implement in the last 10 years?” Mario Baldassarri, chairman of the Senate Finance Committee, said in an interview yesterday.

To contact the reporters on this story: Chiara Vasarri in Milan at cvasarri@bloomberg.net; Lorenzo Totaro in Rome at ltotaro@bloomberg.net

To contact the editors responsible for this story: Angela Cullen at acullen8@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net

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Financial Alchemy Foils Capital Rules in Europe

By Liam Vaughan - Nov 9, 2011 7:29 PM GMT+0700

Banks in Europe are undercutting regulators’ demands that they boost capital by declaring assets they hold less risky today than they were yesterday.

Banco Santander SA (SAN), Spain’s largest lender, and Banco Bilbao Vizcaya Argentaria SA (BBVA), the second-biggest, say they can go halfway to adding 13.6 billion euros ($18.8 billion) of capital by changing how they calculate risk-weightings, the probability of default lenders assign to loans, mortgages and derivatives. The practice, known as “risk-weighted asset optimization,” allows banks to boost capital ratios without cutting lending, selling assets or tapping shareholders.

Regulators in Europe, seeking to stem the region’s sovereign-debt crisis, ordered banks last month to increase core capital to 9 percent of risk-weighted assets by the end of June. Lenders, facing a 106 billion-euro shortfall, are reluctant to plug the gap by cutting dividends or bonuses and are struggling to sell assets or raise cash in rights offerings. Politicians are trying to stop banks from the alternative, cutting back lending, because it could trigger a recession.

“By allowing sophisticated banks to do their own modeling, we are allowing the poacher to participate in being the game- keeper,” said Adrian Blundell-Wignall, deputy director of the Organization for Economic Cooperation and Development’s financial and enterprise affairs division in Paris. “That risks making core capital ratios useless.”

Commerzbank, Lloyds

Spanish banks aren’t alone in using the practice. Unione di Banche Italiane SCPA (UBI), Italy’s fourth-biggest bank, said it will change its risk-weighting model instead of turning to investors for the 1.5 billion euros regulators say it needs. Commerzbank AG (CBK), Germany’s second-biggest lender, said it will do the same. Lloyds Banking Group Plc (LLOY), Britain’s biggest mortgage lender, and HSBC Holdings Plc (HSBA), Europe’s largest bank, both said they cut risk-weighted assets by changing the model.

“It’s probably not the highest-quality way to move to the 9 percent ratio,” said Neil Smith, a bank analyst at West LB in Dusseldorf, Germany. “Maybe a more convincing way would be to use the same models and reduce the risk of your assets.”

European firms, governed by Basel II rules, use their own models to decide how much capital to hold based on an assessment of how likely assets are to default and the riskiness of counterparties. The riskier the asset, the heavier weighting it is assigned and the more capital a bank is required to allocate. The weighting affects the profitability of trading and investing in those assets for the bank.

‘Gray Area’

While firms submit their models to national regulators once a year, they don’t have to disclose them publicly, and risk- weightings for the same assets vary among banks, regulators and analysts say.

“There are potentially significant differences in how different banks calculate RWA,” Daragh Quinn, an analyst at Nomura Holdings Inc. in London, said in a telephone interview. “It’s a very gray area.”

The Basel Committee on Banking Supervision, which has set its own capital standards for banks worldwide independent of those laid out by the European Banking Authority, said in September it planned to review how lenders apply weightings to make sure “the outcomes of the new rules are consistent in practice across banks and jurisdictions.”

That may mean publicly identifying lenders that game the rules, said a person with knowledge of the committee’s talks who declined to be identified because the discussions are private. A spokesman for the Basel committee declined to comment.

‘Anti-American’

Most U.S. banks are governed by Basel I rules, which assign standardized weightings to broad classes of assets, since the U.S. never adopted the second round of regulations.

The proportion of risk-weighted assets to total assets at European banks is half that of American banks, according to an April 6 Barclays Capital report written by analysts Simon Samuels and Mike Harrison. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon in September described the Basel III rules, which give banks until 2019 to increase their core capital ratio to 9.5 percent of risk-weighted assets, as “anti-American.”

Vikram Pandit, chief executive officer of Citigroup Inc. has called for banks to publish details of their risk-weightings on a quarterly basis. At a speech to the Bretton Woods Committee in Washington in September, he said weightings should also be “benchmarked” to ensure consistency across the industry.

Under Basel III, which maintains the same risk-weighting methodology as Basel II, all lenders will be required to use their own models to assess the riskiness of assets and therefore how much capital they need to hold.

“As you move to Basel III, these issues will become more ubiquitous, not less,” the OECD’s Blundell-Wignall said. “The core Tier 1 ratio is a ratio of two meaningless numbers, which itself is a meaningless number because banks can alter the ratio themselves. Basel III does absolutely nothing to address that.”

‘Naïve’ Methodology

Sheila Bair, who stepped down as chairman of the Federal Deposit Insurance Corp. in June, has called Europe’s adoption of risk-weighting “naive.” The Washington-based regulator guarantees most consumers’ deposits in U.S. banks.

“It is in a bank manager’s interest to say his assets have low risk, because it enables the bank to maximize leverage and return on equity, which in turn can lead to bigger pay and bonuses,” Bair wrote in Fortune magazine on Nov. 2. “Indeed, even during the Great Recession, as delinquencies and defaults increased, most European banks were saying their assets were becoming safer.”

Some regulators, including Bair, have pushed for a leverage ratio that would require lenders to hold a fixed amount of capital against total assets.

One reason there’s a difference between risk-weighted assets and total assets is that some securities, such as certain sovereign bonds, carry a zero risk-weighting, requiring banks to hold no capital.

‘Gaming the System’

“A basic leverage ratio would be rougher, but it takes away the risk of gaming the system,” said Stephany Griffith- Jones, an economist and lecturer in financial markets at Columbia University in New York. “We need to move away from outsourcing regulation of the banks to the banks.”

European bank stocks have tumbled 31 percent this year, valuing firms at 62 percent of tangible book value. By contrast, U.S. lenders, measured by the 24-company KBW Bank Index (BKX), have fallen 22 percent, valuing banks at 73 percent of book value.

Banco Santander, based in Madrid, and BBVA in Bilbao said they’re justified in adjusting risk-weightings because Spanish regulators have held them to higher standards than elsewhere.

Spanish banks have an average ratio of risk-weighted assets to total assets of 52 percent compared with 32 percent for U.K. banks, 31 percent for French and Benelux banks and 35 percent for German banks, analysts at Keefe, Bruyette & Woods Inc., wrote in an Oct. 26 report. A higher figure suggests a riskier balance sheet or a more conservative approach to risk-weighting.

‘Relative Discrimination’

“There’s a bias that penalizes the Spanish banks -- it’s a situation of relative discrimination,” Luis de Guindos, a former deputy finance minister, said at a Nov. 4 conference. “If it’s fair and suitable, investors won’t see it badly.”

Santander said it planned to increase capital by 4 billion euros by optimizing risk-weighted assets and internal models. BBVA said the total effect of revising its model was expected to be 2.1 billion euros of additional capital.

“Santander’s core capital exceeds that of any of its continental banking competitors,” a spokesman for the bank, who asked not to be identified by name in line with company policy, said in a phone interview.

Paul Tobin, a Madrid-based spokesman at BBVA, said the bank is “catching up with practices that are common elsewhere in Europe.” After making the changes, he said, “BBVA will still be one of the banks with the highest, if not the one with the highest, density of RWAs among large European banks.”

‘Less Faith’

Commerzbank Chief Financial Officer Eric Strutz said that adjusting the risk model was only one of four options being considered by the bank.

The lender needs “to look at models where our RWAs are higher than others because of market conditions,” Strutz said on a conference call with reporters Nov. 3. “Commerzbank is more at the upper end compared with other banks.”

UBI, based in Bergamo, Italy, said on Oct. 27 it’s confident of meeting the 9 percent target by converting debt, shedding assets and “the progressive changeover” to an “advanced” risk model.

Spokesmen for UBI and Commerzbank declined to comment, as did a representative of the EBA.

Investors are unlikely be satisfied by banks adjusting risk models to avoid raising capital, said Harrison, the Barclays analyst, who is based in London.

“Gaming RWAs isn’t helpful, particularly if the objective is to convince the market to invest in banks again,” Harrison said. “The risk is that it’s counterproductive, because there is even less faith in what the banks are telling you.”

To contact the reporter on this story: Liam Vaughan in London at lvaughan6@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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European Stocks Drop as Italian Bond Yields Jump to Euro Record

By Adria Cimino - Nov 9, 2011 8:42 PM GMT+0700

European stocks dropped for the third day in four after the spread between Italian and German bond yields widened to the most since the introduction of the euro and Italy’s credit-default swaps jumped to a record. Asian shares rose and U.S. index futures declined.

HSBC Holdings Plc (HSBA), Europe’s largest bank, retreated 6 percent. Dexia SA (DEXB) slumped 11 percent as the lender said its shareholder equity shrank because the Belgian government nationalized its unit in the country. Deutsche Post AG (DPW), Europe’s biggest postal service, jumped 3.6 percent after raising its full-year forecast.

The Stoxx Europe 600 Index fell 2 percent to 235.75 at 1:40 p.m. in London. Stocks earlier climbed as much as 1 percent after Italian Prime Minister Silvio Berlusconi offered to resign. The benchmark measure has still rallied 9.7 percent from this year’s low on Sept. 22 as investors speculated that the euro area would protect the economies of Italy and Spain from the sovereign-debt crisis.

“This is a negative spiral in terms of Italian debt,” said Yves Maillot, head of investments at Robeco Gestions SA in Paris, which oversees $6.8 billion. “We already were in a perilous situation. The level of debt in Italy is a very, very big problem. In spite of the good news of changes in Italian leadership, the problem is deeper.”

Futures on the Standard & Poor’s 500 Index expiring in December slid 2.5 percent, while the MSCI Asia Pacific Index gained 0.8 percent as a report showed China’s inflation slowed.

Italian Bond Yields

Italian 10-year bonds underperformed similar-maturity benchmark German bunds, driving the difference in yield between the securities to 500 basis points for the first time since before the euro was introduced in 1999. The spread widened to 501 basis points, or 5.01 percentage points.

Italy’s two-year notes slid, pushing the yield on the securities above the rate on 10-year bonds. The 10-year note yield climbed to 7.34 percent, a euro-era record.

The cost of insuring against default on the country’s sovereign bonds jumped 38 basis points to a record 562, according to CMA. That exceeded the previous record of 534 set on Sept. 22.

The cost to protect against losses in European stocks compared with U.S. stocks rose to the highest level since July. Implied volatility for Euro Stoxx 50 Index options expiring in three months rose to 1.36 times the measure for S&P 500 Index options. That was the highest ratio since July 20, according to data compiled by Bloomberg.

Austerity Measures

Berlusconi last night said he will step down as soon as parliament passes austerity measures. He had pledged to cut spending in a bid to convince investors that Italy can manage the euro area’s second-largest debt. The government has yet to write the austerity bill, said Mario Baldassarri, head of the Senate Finance Committee.

LCH.Clearnet Ltd. increased the extra deposit it demands from clients to trade all Italian government bonds and index- linked securities.

In Greece, Prime Minister George Papandreou’s talks on forming an interim government to avert the economy’s collapse dragged into a third day as a near-agreement with the biggest opposition party stalled on European Union demands for written commitments. The makeup of Greece’s new government is to be announced today, the Associated Press reported, citing a government official who it did not name.

China’s inflation slowed by the most in almost three years, giving officials more room to support growth as industrial production cools, a report today showed. Consumer prices rose 5.5 percent in October from a year earlier, the statistics bureau said. The measure declined 0.6 percentage points from September, its biggest slide since February 2009.

A German panel said it sees growth slowing to 0.9 percent next year because of the debt crisis.

HSBC, Mediaset Sink

HSBC dropped 6 percent to 505.4 pence, contributing the most to the Stoxx 600’s slide. The bank said pretax profit at its investment bank led by Samir Assaf fell to about $1 billion in the third quarter from a year-earlier. Bad-loan provisions increased to $3.89 billion from $3.15 billion, mainly related to its U.S. unit, the bank said.

Bank shares fell 3.7 percent, among the biggest drops of the 19 industry groups in the Stoxx 600, as Greek and Italian lenders slid. Piraeus Bank SA (TPEIR) retreated 5.6 percent to 25.5 euro cents, while Banca Popolare dell’Emilia Romagna Scrl (BPE) lost 4.3 percent to 5.59 euros. Alpha Bank AE (ALPHA) sank 4.9 percent to 1.16 euros.

Dexia, Mediaset Slide

Dexia, the lender being broken up after running out of short-term funding, plunged 11 percent to 37 euro cents. The bank said shareholder equity shrank 84 percent after the nationalization of its Belgian bank unit and declines in the value of government bond holdings.

Mediaset SpA (MS), the broadcaster controlled by Berlusconi, tumbled 8.9 percent to 2.28 euros after the premier offered to resign once parliament approves stability measures.

Admiral Group sank 29 percent to 851 pence for the biggest decline on the Stoxx 600 and the shares’ largest retreat since 2004. The U.K. car insurer that owns the confused.com website said full-year pretax profit will be toward the lower end of analysts’ estimates.

Legrand SA (LR) sank 4.7 percent to 24 euros. KKR & Co. and Wendel SA completed the sale of 24.3 million shares in the world’s largest maker of wiring devices at 24 euros apiece, the companies said.

Deutsche Post, CGGVeritas

Deutsche Post rallied 3.6 percent to 11.08 euros. The company lifted its full-year forecast as increasing express shipments in Asia and parcel volume from Internet retailing boosted third-quarter earnings. Earnings before interest and taxes in 2011 will exceed 2.4 billion euros, the company said. That compared with an earlier prediction for Ebit at the upper end of a 2.2 billion-euro to 2.4 billion-euro range.

CGGVeritas added 2.8 percent to 16.71 euros. The company reported third-quarter net income of $41 million and said it remains “confident” of achieving its full-year objectives. The seismic surveyor made a loss of $33 million in the year-earlier period.

To contact the reporter on this story: Adria Cimino in Paris at acimino1@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net

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Microsoft, AOL, Yahoo, strike ad alliance

Wed Nov 9, 2011 1:38am EST

(Reuters) - Yahoo Inc, Microsoft Corp and AOL Inc have set up an advertising partnership as Google and Facebook's online ad dominance grows.

The alliance, announced on Tuesday, allows each of the companies to sell each other's unsold premium advertising inventory -- known as display ads -- by early next year.

Display units are big splashy units that appear on Web pages and attract marketers interested in branding their products or services. Typically, these ads command higher rates.

Rik van der Kooi, corporate vice president of the Microsoft Advertising Business Group characterized the partnership in a statement as a "rising tide that lifts all boats."

"The spirit of the deal is important and we support it," said Nick Beil, president of the VivaKi Nerve Center, part of the advertising holding firm Publicis Groupe SA

Beil said the alliance was attractive because it broadens the potential reach of brand advertisers looking for premium inventory.

While the companies are striking a partnership, they still actively competing with each other for both advertiser spending and publisher partners, as well as maintain their own set of controls.

Yahoo, AOL and Microsoft executives said they are not expecting any issues from the Department of Justice, which could potentially frown upon the partnership because it could reduce competition or effect ad pricing.

"We're not reducing competition in any way, shape or form," said van der Kooi during a news call. "As a result of transparency, the competition is only going to increase. (We) don't expect any issues on that side."

Both Facebook and Google Inc are expected to increase their share of online display advertising in the United States in 2011 by 9.3 percent and 16.3 percent respectively, according to estimates from research firm eMarketer.

Meanwhile, AOL, Microsoft and Yahoo are forecast to lose share, with Facebook expected to surpass Yahoo for the first time this year.

"Other players in the industry are welcome to join us. This is not in response to anybody in particular," van der Kooi added.

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Olympus Urged to Purge Execs Over Losses

By Mariko Yasu and Naoko Fujimura - Nov 9, 2011 8:11 AM GMT+0700

Olympus Corp. (7733)’s admission that three of its top executives colluded to hide losses from investors fails to address the roles played by other officials, according to the company’s biggest overseas shareholder.

The Japanese camera maker’s shares slumped by their maximum limit for a second day after it yesterday reversed weeks of denials that there was any wrongdoing in its past acquisitions. The company fired Executive Vice President Hisashi Mori over his role in covering up the losses with former Chairman Tsuyoshi Kikukawa, who resigned last week, and said auditor Hideo Yamada would step down.

Olympus’ biggest overseas shareholder is now demanding investor relations head Akihiro Nambu go too because of his role as a director of Gyrus Group Plc, the U.K. takeover target used to funnel more than $600 million in inflated advisory fees to a Cayman Islands fund. And after Nambu, the rest of the board must follow, said Josh Shores, a London-based principal for Southeastern Asset Management Inc.

“Even if they didn’t know the specific details around where payments were going and exactly why, they knew that cash was going out the door and they also failed to raise their hands to ask questions,” Shores said. “I don’t know who else is involved, but somebody else is. There is a third party somewhere who received this money.”

Olympus plunged by 150 yen, or its 20 percent limit, following a 300 yen, or 29 percent drop yesterday.

Olympus President Shuichi Takayama yesterday said the company was looking into the role played by special purpose funds in hiding the losses, which date back to the 1990s.

Cayman Links

At least eight Cayman Islands entities have been linked to Olympus acquisitions that are suspected of playing a role in the accounting scandal. Five of those no longer exist, according to a search of the Caymans registry, which doesn’t give details on the individuals behind the companies.

Kikukawa, Mori and Nambu became the three directors of Gyrus in June 2008 following the $2 billion acquisition of the U.K. medical equipment maker in February that year. They were also directors of three companies set up to handle the takeover, including the decision to pay out advisory fees that amounted to more than a third of the acquisition’s value, filings show.

Olympus declined a request to interview Kikukawa and Mori. In six attempts to talk to Kikukawa at his home, the former chairman didn’t appear. Mori’s home address given in U.K. filings leads to a house under renovation in Kawasaki city, about an hour from central Tokyo. Nobody answered the doorbell on a recent visit to Nambu’s home in a seven-story condominium about 27 kilometers from the city center.

Japanese and U.S. regulators are probing allegations by former chief executive officer Michael C. Woodford that more than $1.5 billion was siphoned through offshore funds. That money may have been used to cancel out non-performing securities that Olympus was keeping off its books, according to a report in the Shukan Asahi magazine, which cited people familiar with the process.

Cockroaches

Yesterday’s plunge in Olympus shares pulled other Japanese equities lower on concerns the country hasn’t escaped corporate governance weaknesses that have dogged it since the stock market bubble burst at the end of 1989. Olympus shares have lost 76 percent of their value since Woodford took his accusations public after he was axed on Oct. 14.

“Institutional investors will stay away from Japan’s market until they confirm this is an isolated case,” said Koichi Kurose, chief economist in Tokyo at Resona Bank Ltd. Some “investors probably think that if there’s one cockroach, there may be 10 more,” he said.

‘Tobashi’

Olympus’ revelations echo the practice of hiding losses known as “tobashi” that became widespread in Japan in the late 1980s and led to the failure of Yamaichi Securities Co., according to Yasuhiko Hattori, a professor at Ritsumeikan University in Kyoto. Yamaichi used overseas paper companies to hide problematic securities, until it failed in 1997 with 260 billion yen ($3.3 billion) in hidden impairments.

Takayama declined to comment on the involvement of any securities firms in Olympus’ cover-up. The Topix Securities and Commodity Futures Index fell 11 percent, the most of any industry group in the broader gauge. Nomura Holdings Inc. (8604) tumbled 15 percent to the lowest in 37 years.

“There is speculation in the market that Nomura may somehow be involved in this Olympus case,” said Shoichi Arisawa, an Osaka-based manager at IwaiCosmo Holdings Inc. “Individual investors in particular probably sold after seeing a high volume of Nomura’s shares being traded.”

Nomura didn’t participate in Olympus’s concealment of losses, said Hajime Ikeda, managing director of corporate communications for the securities firm.

Nomura Unaware

“We are not aware of any involvement by Nomura in Olympus’s hiding of losses in the 1990s, and we weren’t involved when Olympus wrote off the losses” between 2006 and 2008, Ikeda said in a telephone interview in Tokyo yesterday.

The Tokyo Stock Exchange said it’s considering moving the shares in Olympus, the world’s biggest maker of endoscopes, to a watchlist for possible delisting. Takayama pledged to continue with the investigation into the losses, which he said were probably inherited by Kikukawa.

“The investigation must continue to determine how much rot there is,” said David Herro, chief investment officer of Harris Associates LP. “All responsible must, at a minimum, leave. Also, since the management’s credibility is nearly nonexistent, all of what they say must be verified.”

Bowed in Apology

Harris held 10.9 million Olympus shares as of June 30, a 4 percent stake that makes it the company’s second-biggest overseas investor. Southeastern had a 5 percent stake as of Aug. 16, according to data compiled by Bloomberg.

Olympus President Takayama yesterday said he was unaware of the hidden losses until he was told by Mori and Kikukawa the previous evening. At the press conference, he bowed three times in seven minutes to apologize.

In the weeks running up to his dismissal, Woodford was engaged in an exchange of letters with Kikukawa and Mori in which he detailed the allegations and which were copied to all member of the board.

After he was fired, Woodford went public with his concerns over the advisory fees and writedowns on three other transactions. All involved payments to Cayman Islands companies or special purpose vehicles whose beneficiaries are not known.

Olympus paid a total of 73.4 billion yen to increase stakes in Altis Co., News Chef Co. and Humalabo Co. between 2006 and 2008, which was also used to hide losses, it said yesterday. Olympus wrote down 55.7 billion yen, or 76 percent of the acquisition value, in March 2009, the company said in a statement Oct. 19.

“It’s beyond belief that Mr. Takayama claims he only found out about it last night,” Woodford said in a telephone interview yesterday. “If he didn’t know before I started writing my letters then he should have known after.”

To contact the reporters on this story: Mariko Yasu in Tokyo at myasu@bloomberg.net; Naoko Fujimura in Tokyo at nfujimura@bloomberg.net

To contact the editor responsible for this story: Ben Richardson at brichardson8@bloomberg.net

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Interactive’s Chief Bought 8 Million MF Global Shares as Broker Collapsed

By Matthew Leising and Nina Mehta - Nov 9, 2011 7:37 AM GMT+0700

Thomas Peterffy, whose Interactive Brokers Group Inc. (IBKR) declined to buy assets from MF Global Holdings Ltd., said he purchased 8 million shares in the futures broker as its stock plunged.

Interactive Brokers said in an e-mailed statement that the company, not Peterffy, purchased the stock. MF Global shares have fallen 98 percent from their peak this year. The week before it filed for bankruptcy on Oct. 31, the New York-based company’s shares fell 67 percent to $1.20. They have since dropped to 14 cents.

“I started to buy the stock as it went down,” Peterffy, chairman and chief executive officer of Greenwich, Connecticut- based Interactive Brokers, said today in a phone interview. He was worth $1.5 billion in 2009, according to Forbes, and he has the power to elect all board members at Interactive Brokers. “You win a few, you lose a few,” he said.

The firm, which Peterffy founded, said in its quarterly filing today that it owned MF Global shares valued at $16.7 million as of Sept. 30. Following the bankruptcy filing, Interactive Brokers reduced the value of those shares plus subsequent investments in the stock to zero, recognizing a $28.8 million loss, today’s filing with the Securities and Exchange Commission shows.

‘Huge Tragedy’

Customers of MF Global, the holding company for the broker- dealer that was run by ex-Goldman Sachs Group Inc. co-chairman Jon Corzine, have been able to transfer only a portion of their accounts to new brokers. The broker-dealer unit, MF Global Inc., faces liquidation. The lack of access to customer cash at MF Global is a “huge tragedy,” Peterffy said.

“It’s a horrible black spot on the futures industry,” he said. “The next time something like this happens, the positions should be immediately liquidated and the money distributed.”

Peterffy said an investment banker at Evercore Partners Inc. called him before MF Global collapsed to find out if he was interested in taking over any of the firm’s customer accounts. He said in the interview that he couldn’t talk about discussions he had with MF Global from the morning of Oct. 28 until the morning of Oct. 31 because he signed a non-disclosure agreement.

Interactive Brokers is no longer interested in taking over any of MF Global’s accounts, Peterffy said.

‘Not Infected’

“We would like to be a broker that is not infected by any of this event,” he said.

The Interactive Brokers executive had courted a business arrangement with MF Global for years, starting when the company’s customer assets were still part of Refco Inc. Refco went bankrupt two months after its August 2005 initial public offering that raised $670 million. CEO Phillip Bennett was later convicted of hiding hundreds of millions of dollars in bad debt. Man Group Plc outbid Interactive Brokers and bought Refco for $323 million. MF Global became a public company when it was spun off of Man Group in 2007.

An agreement between MF Global and Interactive Brokers would have given the owner of the futures broker use of Interactive Broker’s trading and risk-management systems, while Peterffy’s company would have used MF Global’s sales force.

“They were strong in sales and they had no technology,” Peterffy said. “Interactive Brokers is weak in sales and has the best technology.”

Technology Talks

Peterffy said he held discussions with CEOs Kevin Davis and Bernard Dan and global head of retail operations J. Randy MacDonald about MF Global using his company’s technology. The firms were close to finalizing a deal before Dan left MF Global and again in October, he said. The agreement would have led to MF Global running its equities and foreign exchange business on Interactive Brokers’ technology platform, with futures added later, Peterffy said.

“It’s been a many-years-long project for me that never came to fruition,” he said.

Corzine, 64, increased risk-taking at MF Global as part of his strategy to re-make the owner of the futures broker into an investment bank. The company suffered a ratings downgrade and loss of customers’ trust in late October related to its largest- ever quarterly loss and $6.3 billion in investments in European sovereign debt.

Discrepancies over missing customer funds used to back futures trades doomed a potential acquisition by Interactive Brokers, said Hans Stoll, an Interactive Brokers director and a professor of finance at Vanderbilt University in Nashville, Tennessee. The deal could have averted the bankruptcy filing.

‘Lots of Uncertainties’

“The board certainly considered that purchase and stepped away from it at a point where it became clear there were lots of uncertainties about the accounts and segregated funds,” Stoll said in a Nov. 1 interview.

Customers of MF Global whose money is trapped at the broker say the safeguards meant to protect them failed. The company filed for bankruptcy on Oct. 31, listing debt of $39.7 billion and assets of $41 billion after failing to find a buyer in the days leading to its collapse.

“It’s a huge tragedy,” Peterffy said. “I simply can’t understand why it is being dealt with the way it is. I agree that some of the money should be given to the clients as soon as possible.”

CME Group Inc., which has audit power over MF Global as part of its self-regulatory authorization, and James Giddens, the trustee overseeing the liquidation of MF Global, are working to locate money that is missing from client accounts. The U.S. Commodity Futures Trading Commission is investigating a $593 million-shortfall in those accounts, a person with knowledge of the regulatory probes said on Nov. 4.

“Never bend the rules,” Peterffy said about what he learned from the MF Global implosion. “You bend the rules a little bit and then it’s a slippery slope.”

To contact the reporters on this story: Matthew Leising in New York at mleising@bloomberg.net; Nina Mehta in New York at nmehta24@bloomberg.net

To contact the editors responsible for this story: Nick Baker at nbaker7@bloomberg.net; Alan Goldstein at agoldstein5@bloomberg.net

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Indian Trade Deficit Widens the Most Since at Least 1994, Pressuring Rupee

By Tushar Dhara - Nov 9, 2011 12:04 PM GMT+0700

India’s trade deficit widened the most in October in at least 17 years, adding pressure on the rupee, Asia’s worst performing currency this year.

Merchandise exports rose 10.8 percent to $19.9 billion last month from a year earlier, Commerce Secretary Rahul Khullar told reporters in New Delhi yesterday. Imports gained 21.7 percent to $39.5 billion, causing a trade deficit of $19.6 billion. That’s the biggest shortfall since April 1994, according to data compiled by Bloomberg.

India’s trade gap increased as merchandise shipments grew at the slowest pace in two years, dragged down by waning demand for engineering and petroleum products in Europe, Khullar said. The deficit may enlarge as higher oil costs boost the value of imports, said Hemendra Bhatia, chief currency strategist at Ahmedabad, India-based Vadilal Enterprises Ltd.

“The rupee will remain under pressure,” Bhatia said in an interview yesterday. “Exports will weaken because of the global slowdown.”

He expects the currency to fall to as much as 51.20 per dollar by the end of December.

The rupee dropped 0.6 percent to 49.79 against the dollar at 10:29 a.m. in Mumbai, weakening more than 10 percent since Jan. 1. The yield on the 7.80 percent government bond due April 2021 rose seven basis points, or 0.07 percentage point, to 9.10 percent. The BSE India Sensitive Index advanced 0.1 percent.

Inflation Risks

The Reserve Bank of India said last month that the rupee’s weakness adds to pressure on inflation, which has stayed above 9 percent since the start of December.

Still, the central bank said on Oct. 25 that its 13 interest-rate increases since mid-March 2010 will help curb inflation and signaled it was nearing the end of monetary tightening. It predicted India’s economy will expand 7.6 percent in the year ending March 31, lower than the 8 percent it estimated earlier.

“The impact of the rupee will show up in rising exports only later this year,” Khullar said. “We are having a very difficult autumn. Our exports are predominantly targeted toward Europe and clearly that’s where growth rate has contracted.”

Exports of engineering goods grew 2.6 percent in October from a year earlier, while petroleum products advanced 9.4 percent in the month, Khullar said.

Deficit Concerns

The trade deficit for the first seven months of the year that started April 1 was $93.7 billion and “that is clearly something to be worried about, because at this rate you’re clearly going to breach the $150 billion mark for the fiscal year,” he said.

India imports almost three-quarters of its oil requirements. Oil prices have gained 6.4 percent in New York this year.

Meanwhile, European finance ministers pledged to roll out a bulked-up rescue fund next month, leaving Greece and Italy on the front lines until then in the fight against the debt crisis.

As economic recoveries falter in the U.S. and Europe, India’s government plans to increase shipments to Africa and Latin America as it targets $500 billion in exports by 2014.

Exports may also get a boost after Pakistan last week granted trade concessions to India.

Under the so-called most-favored nation status, Pakistan will give its South Asian neighbor equal standing in international trade by removing non-tariff barriers, lowering customs duties and raising import quotas. India granted most- favored nation status to Pakistan in 1996.

To contact the reporter on this story: Tushar Dhara in New Delhi at tdhara1@bloomberg.net

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

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Thai Investments Put Japan Inc. in Flood’s Path

By Dave McCombs - Nov 8, 2011 10:01 PM GMT+0700

Japan, Thailand’s biggest foreign investor, may also be the largest overseas economic victim of record floods forcing companies including Toyota Motor Co., Hitachi Ltd. (6501) and Canon Inc. (7751) to halt output in the country.

Toyota, Asia’s biggest carmaker, scrapped its annual profit forecast yesterday, saying it needs more time to assess the financial toll from Thailand’s worst floods in almost 70 years. Canon, having shifted some camera production to the southeast Asian nation, cut its full-year profit outlook last month because of damage to output from the disaster.

Japan’s most profitable exporters built up factories in Thailand in the past three decades to cut labor costs and stem the erosion of profit caused by the yen’s appreciation against the dollar. Japanese direct investment in Thailand jumped 35 percent to about 100 billion baht ($3.4 billion) in 2010, led by the auto, metals and machinery industries, according to the Thai Ministry of Industry’s Board of Investment.

“Japan has shifted production to Thailand and other Asian nations because of the stronger yen, so among the G-3 nations, Japan faces the biggest impact from the Thai floods,” said Takahiro Sekido, chief Japan economist in Tokyo at Credit Agricole CIB. “Looking at the increase in trade and direct investment in Thailand in recent years, connectivity is rising and the floods will have an impact on Japan’s economy.”

Japan’s mainstay manufacturers, in particular, will be hit hard by the floods, Junichi Makino, chief economist at SMBC Nikko wrote in an Oct. 25 report. Full-year profits of listed Japanese non-financial companies may be cut by 3.9 percent this fiscal year as a result of the disaster, Makino estimates.

Toyota Hit

“If the Thai floods continue to reduce production for three months, Toyota’s operating profit may be cut by 200 billion yen,” said Koji Endo, an auto analyst at Advanced Research Japan. Toyota was already producing at full capacity to recover from the impact of the March earthquake in Japan, so there is a limit to what it can do to recover from losses from the Thai floods, he said.

The renewed threat to factories as water courses toward Bangkok’s central business district may worsen the effect of floods that have prompted Thailand’s central bank to slash its 2011 economic growth forecast and damped the earnings outlook for Japanese companies including Sony Corp. (6758), Nikon Corp. (7731) and Isuzu Motors Ltd. (7202)

Flooding across the region may also lead to “serious food shortages,” the United Nations Food & Agriculture Organization said in a report dated Oct. 21.

Damaged Farmland

About 12.5 percent of rice farmland in Thailand has been damaged, along with 6 percent in the Philippines, 12 percent in Cambodia, 7.5 percent in Laos and 0.4 percent in Vietnam, as storms hit the region since September, according to the report.

Toyota and rivals including Isuzu are still unable to determine when they can restore production in the country as damages from the flood are still being assessed. Isuzu extended its production halt until Nov. 11 because of parts shortages, it said in a statement yesterday. Separately, Toyota said it will extend output reductions until Nov. 18.

The floods may push back expansion plans at Toyota and Honda until the first quarter of 2012, Tracy Handler, a Troy, Michigan-based analyst at IHS Automotive, said Nov. 5.

Japanese manufacturers including Toyota may have more difficulty shifting output away from Thailand, where they have more concentrated supply chains than U.S. and European rivals including Ford Motor Co., said Sekido of Credit Agricole.

Thailand-Centric

“Ford, for instance, can probably shift production to North America or Mexico, but Thailand probably plays a more important role for Japanese companies,” he said. “American and European companies also have production lines in Thailand, but Japan is the closest geographically.”

Japan is the largest investor in Thailand, representing 57 percent of projects that were granted investment incentives last year, according to Thailand’s Board of Investment.

The setbacks come just as Japanese automakers and electronics manufacturers are restoring output after the March 11 earthquake and tsunami led to parts and power shortages that slashed output. The country’s exporters are also reeling from the yen’s gain to a postwar high on Oct. 31.

Nobuyuki Nakahara, a former Bank of Japan (8301) policy board member, urged the central bank to boost monetary easing 10-fold to weaken the currency.

“The Japanese economy will collapse unless the yen weakens to 100 yen per dollar,” Nakahara, a policy board member between 1998 and 2002, said in a Nov. 4 interview in Tokyo.

Third Recession

Japan fell into its third recession in a decade after the record earthquake and tsunami on March 11. Industrial output declined 4 percent in September from August, a sharper drop than analysts surveyed by Bloomberg News forecast. Export growth slowed to 2.4 percent from a year earlier in September from 2.8 percent in August, while retail sales also fell more than expected.

The Thai disaster is affecting the global supply chain at Japanese auto and electronics makers, further disrupting output. After Toyota halted output at its Southeast Asian production base, a shortage of parts prompted the company to cancel plans to run factories overtime in North America, where it had intended to make up for production lost because of the March 11 quake.

“This will not only impact Japan’s exports to Thailand, but also affect global supply chain of Japanese companies,” said Yoshimasa Maruyama, a chief economist at Itochu Corp. (8001) in Tokyo. “Production of Japanese firms in the U.S., Japan and other areas may also decrease.”

To contact the reporter on this story: Dave McCombs in Tokyo at dmccombs@bloomberg.net

To contact the editor responsible for this story: Frank Longid at flongid@bloomberg.net

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Treasuries Snap Two-Day Drop as Lagarde Highlights Global Slowdown Risks

By Masaki Kondo - Nov 9, 2011 2:33 PM GMT+0700

Treasuries snapped a two-day drop as government data sapped confidence in the global economy that International Monetary Fund Managing Director Christine Lagarde said is at risk of a “lost decade.”

Benchmark 10-year yields declined after a Chinese report showed inflation slowed in the world’s second-biggest economy. U.S. data today may indicate more Americans filed for unemployment benefits last week. A $32 billion auction of three- year Treasury notes yesterday attracted the highest demand since at least 1993 before a sale of $24 billion of 10-year debt today.

“The global economic situation is likely to help keep Treasury yields low,” said Masazumi Fukuoka, chief dealer at the Singapore branch of Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s largest listed lender. “China is slowing down.”

The yield on the 10-year note dipped one basis point to 2.07 percent at 6:57 a.m. London time, according to Bloomberg Bond Trader prices. The yield increased four basis points yesterday. The 2.125 percent securities maturing in August 2021 added 3/32, or $0.94 per $1,000 face value, to 100 16/32.

Advanced economies have a “special responsibility” to restore confidence and lift growth, while China should boost consumption and allow its currency to rise, the IMF leader said.

“If we do not act, and act together, we could enter a downward spiral of uncertainty, financial instability, and a collapse in global demand,” Lagarde said at a forum in Beijing today. “Ultimately, we could face a lost decade of low growth and high unemployment.”

China’s Economy

China’s statistics bureau said today producer prices rose 5 percent in October from a year earlier, less than any of 24 analyst forecasts in a Bloomberg News survey. Consumer prices gained 5.5 percent, in line with the median projection in a separate Bloomberg poll. The 0.6 percentage point decline from September’s rate was the biggest since February 2009.

Industrial output growth slowed to 13.2 percent last month from 13.8 percent in September.

Japan’s 10-year yields were little changed at 0.98 percent in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. They reached 0.965 percent on Sept. 22, the least since Nov. 9, 2010.

Exit Berlusconi

U.S. bonds slumped and stocks advanced yesterday after Italy’s Prime Minister Silvio Berlusconi offered to quit, stoking speculation the country will appoint a new leader who can curb its debt.

Berlusconi’s coalition has been unraveling since contagion from the euro region’s debt crisis led the country’s bond yields to surge, prompting Italy’s European Union allies and the European Central Bank to demand more austerity measures to balance the budget and try to spur growth.

U.S. government bonds have returned investors 8.5 percent in 2011, poised for the biggest annual gain since 2008, according to an index compiled by Bank of America Merrill Lynch.

“Treasuries are being bought in a flight to quality amid increased uncertainty caused by the prolonged debt problem in Europe,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-largest listed bank by market value..

Demand for Treasuries was limited as Asian stocks advanced, reducing the allure of U.S. government debt as a refuge.

The MSCI Asia Pacific Index of shares climbed 1.3 percent after the Standard & Poor’s 500 Index rose 1.2 percent in New York yesterday.

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

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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Lagarde Warns of ‘Lost Decade’ for Global Economy

By Bloomberg News - Nov 9, 2011 12:21 PM GMT+0700

International Monetary Fund Managing Director Christine Lagarde warned of the risk of a “lost decade” for the global economy unless nations act together to counter threats to growth.

“In our increasingly interconnected world, no country or region can go it alone,” Lagarde said in a speech at a forum in Beijing today. “There are dark clouds gathering in the global economy.” China and India echoed the call for cooperation in a separate statement.

Advanced economies have a “special responsibility” to restore confidence and lift growth, while China should boost consumption and allow its currency to rise, the IMF leader said. European leaders are looking to China as a potential source of funds as a sovereign-debt crisis threatens to engulf Italy, the third-biggest economy in the euro area.

Asian stocks rose for the first day in three today as easing inflation in China left more room for officials to support economic growth. A 5.5 percent gain in consumer prices in October was the least in five months, a government report showed.

China and India said that the global economy is in a “critical phase,” in a statement after the fifth meeting in a so-called financial dialogue between the two nations, usually held each year. The comments were dated yesterday and posted on a Chinese government website today.

International Cooperation

“In emerging markets, where growth is relatively stronger, there are clear signs of a slowing as developments in advanced economies begin to weigh on these countries,” the two nations said. “In the face of these challenges, both sides recognized that strengthening of international policy cooperation is needed at this juncture.”

The MSCI Asia Pacific Index rose 1 percent as of 1:25 p.m. in Tokyo.

In Italy, Prime Minister Silvio Berlusconi has offered to resign as his nation struggles with taming its debt burden and borrowing costs climb. Hong Kong Chief Executive Donald Tsang said this week that the world economy faces a 50 percent chance of a recession.

In Asia, policy makers need to respond nimbly should conditions worsen, Lagarde said today. They “can ease off the fiscal brakes, draw on reserves or regional reserve pooling arrangements, and reactivate central-bank swap lines,” she said. Lagarde cited high unemployment in advanced economies and economic and financial market declines that reinforce each other as concerns.

`Downward Spiral'

“If we do not act, and act together, we could enter a downward spiral of uncertainty, financial instability, and a collapse in global demand,” she said. “Ultimately, we could face a lost decade of low growth and high unemployment.”

Japan’s so-called lost decade during the 1990s saw the economy slip in and out of recession and grow at an average rate of about 1 percent a year after the collapse of a real-estate bubble.

In Asia, “countries need to prepare for any storm that might reach their shores,” Lagarde said. At the same time, a balancing act is required, because “some face continued overheating pressures and risks to financial stability from prolonged easy financial conditions.”

To contact the reporter on this story: Li Yanping in Beijing at yli16@bloomberg.net

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

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European Stock Futures Rise as Italy’s Silvio Berlusconi Offers to Resign

By Adria Cimino - Nov 9, 2011 2:20 PM GMT+0700

European stock futures advanced after Italian Prime Minister Silvio Berlusconi offered to resign, boosting optimism that the region’s debt crisis won’t spread. Asian stocks climbed and U.S. index futures declined.

Futures on the Euro Stoxx 50 Index, a benchmark for the euro area, jumped 1.1 percent to 2,330 at 7:16 a.m. in London. Futures on the U.K.’s FTSE 100 Index expiring in December added 0.7 percent. Futures on the Standard & Poor’s 500 Index expiring the same month slipped 0.4 percent, while the MSCI Asia Pacific Index gained 1.1 percent.

“Investors are clearly encouraged by the fact there will now be change at the top and for the time being at least, this is bringing the bulls back into play,” Terry Pratt, an institutional trader at IG Markets, wrote.

The Stoxx Europe 600 Index has rallied 12 percent from this year’s low on Sept. 22 as investors speculated that the euro area would protect the economies of Italy and Spain from the sovereign-debt crisis.

Berlusconi last night said he will step down as soon as parliament passes austerity measures. He had pledged to cut spending in a bid to convince investors that Italy can manage the euro area’s second-largest debt. The government has yet to present the text of the measures.

Europe’s inability to contain its debt crisis pushed the yield on Italy’s benchmark 10-year bond to 6.77 percent yesterday, the highest since the euro’s introduction in 1999 and near the 7 percent level that drove Greece, Ireland and Portugal to seek international bailouts. Italy’s 1.9 trillion euro-debt ($2.6 trillion) is bigger than that of Greece, Spain, Portugal and Ireland combined.

To contact the editor responsible for this story: Will Hadfield at whadfield@bloomberg.net

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Asian Stocks, Won Snap Two-Day Drop

By Shiyin Chen and Jonathan Burgos - Nov 9, 2011 3:06 PM GMT+0700

Stocks gained a third day and metals advanced after Chinese inflation slowed and Italian Prime Minister Silvio Berlusconi offered to resign. U.S. equity-index futures declined, while Treasuries climbed.

The MSCI All Country World Index rallied 0.4 percent at 8:06 a.m. in London and the Stoxx Europe 600 Index jumped 0.8 percent. Standard & Poor’s 500 contracts slid 0.5 percent after a 1.2 percent gain yesterday. Treasury 10-year yields decreased three basis points. The euro slid 0.3 percent against the dollar. The won strengthened for the first time in three days after South Korea’s unemployment rate fell. Nickel and tin each gained 1.1 percent, while Brent oil advanced for a fifth day.

China’s consumer price inflation slowed to 5.5 percent in October from 6.1 percent the previous month, while producer prices fell by more than economists had forecast, signaling the government may be able to reduce measures to cool its economy. Italy’sBerlusconi agreed to step down after the approval of an austerity plan in a vote next week, following a surge in the nation’s bond yields to a euro-era record yesterday.

“Now that we see inflation easing, it suggests that Asian central banks can switch to a more pro-growth strategy,” said John Woods, Hong Kong-based chief Asian strategist at Citigroup Inc.’s private bank. “The markets will take the near-term resolution of political uncertainties in Europe positively,”

About six shares advanced for every one that fell on the Stoxx 600. Italy’s FTSE MIB Index increased 1.4 percent, France’s CAC 40 rose 1.1 percent and the U.K.’s FTSE 100 Index added 0.8 percent.

The MSCI Asia Pacific index rose 1.1 percent, rebounding from a two-day 0.9 percent loss. Japan’s Nikkei 225 Stock Average and Australia’s S&P/ASX 200 Index climbed 1.2 percent each and Hong Kong’s Hang Seng Index added 1.7 percent.

Nomura, Olympus

Nomura Holdings Inc. rose 4.1 percent in Tokyo, rebounding from yesterday’s 15 percent plunge, after Japan’s biggest securities firm said it is unaware of any involvement in Olympus Corp.’s concealment of losses. Olympus sank 20 percent, extending yesterday’s 29 percent plunge.

Industrial & Commercial Bank of China (1398) Ltd., the world’s largest lender by market value, gained 3.6 percent in Hong Kong, pacing an advance among Chinese companies. The decline in consumer prices matched analysts’ forecasts and was the slowest since May. The producer price index was expected to fall to 5.8 percent, according to economists surveyed by Bloomberg News.

Separate figures showed industrial production rose 13.2 percent last month and retail sales increased 17.2 percent.

“The trend is in favor of China taking measures to improve economic development,” Peter So, co-head of research at CCB International Securities Ltd., said in a Bloomberg Television interview in Hong Kong.

Copper, Oil

Copper for three-month delivery rallied as much as 2.1 percent to $7,959.75 a metric ton on the London Metals Exchange, rebounding from a three-day, 1.3 percent decrease. Nickel added 1.1 percent and tin climbed 1.1 percent.

December-delivery Brent crude rose 0.4 percent to $115.47 a barrel on speculation Iran’s nuclear plans will threaten Middle East stability. New York-traded oil was little changed at $96.81 a barrel. U.S. gasoline supplies dropped 1.49 million barrels last week, the American Petroleum Institute said. An Energy Department report today may show they rose 1 million barrels, according to a Bloomberg News survey.

South Korea’s won strengthened as much as 0.9 percent to 1,111.38 per dollar. The unemployment rate fell to 3.1 percent in October from 3.2 percent the previous month, Statistics Korea said today. The median estimate in a Bloomberg News survey of 11 economists was for an increase to 3.3 percent. Taiwan’s dollar rose 0.1 percent to NT$30.066, and Malaysia’s ringgit gained 0.3 percent to 3.114.

Berlusconi’s Pledge

The 17-nation euro traded at 106.99 yen from 107.52 yesterday and pared yesterday’s 0.4 percent gain versus the dollar. Berlusconi’s pledge to resign came after he failed to muster an absolute majority on a routine parliamentary ballot after key lawmakers defected from his party this week.

The yield on Italy’s benchmark 10-year bond jumped 11 basis points yesterday to 6.77 percent before Berlusconi’s announcement, the most since the euro’s introduction in 1999 and near the 7 percent level that drove Greece, Ireland and Portugal to seek international bailouts. The extra premium investors demand to hold the debt instead of German bunds closed at a euro-era record 497 basis points. The yield was little changed today.

LCH Clearnet SA increased the so-called deposit factor charged for Italian bonds due in seven-to-10 years will be raised to 11.65 percent, according to a document on its website dated yesterday. That compares with a charge of 6.65 percent announced in an Oct. 7 document.

Bond Risk

The cost of protecting Asia-Pacific corporate and sovereign bonds from default decreased, with the Markit iTraxx Japan index falling three basis points to 175 basis points, Citigroup Inc. prices show. The gauge is set for its biggest one-day drop since Nov. 4, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Treasury 10-year yields declined to 2.05 percent, following a four-basis-point increase yesterday. The U.S. is scheduled to sell $24 billion of 10-year securities today and $16 billion of 30-year bonds tomorrow, after an auction of three-year notes yesterday attracted the highest demand on record.

Futures signal the S&P 500 may snap a two-day, 1.8 percent rally. International Monetary Fund Managing Director Christine Lagarde warned of the risk of a “lost decade” for the global economy unless nations act together to counter threats to growth.

To contact the reporters on this story: Shiyin Chen in Singapore at schen37@bloomberg.net; Jonathan Burgos in Singapore at jburgos4@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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China Inflation, Output Cools on Europe Crisis

By Bloomberg News - Nov 9, 2011 1:05 PM GMT+0700

China’s inflation slowed by the most in almost three years, giving officials more room to support growth as industrial production cools, Europe’s crisis threatens exports and a credit squeeze hits small businesses.

Consumer prices rose 5.5 percent in October from a year earlier, the statistics bureau said on its website today. The 0.6 percentage point decline from September’s rate was the biggest since February 2009. Industrial output growth slowed to 13.2 percent.

Most economists expect Premier Wen Jiabao’s government to loosen fiscal or monetary policy without cutting interest rates as inflation stays above a full-year target of 4 percent, a Bloomberg News survey showed this week. HSBC Holdings Plc said today that “targeted easing” may include measures to support smaller businesses and the construction of public housing and infrastructure.

“The combination of easing inflationary pressures, a protracted euro debt crisis and a potential property market slump has set the scene for an imminent policy easing,” said Liu Li-Gang, a Hong Kong-based economist with Australia & New Zealand Banking Group Ltd. “The time is right” for a cut in lenders’ reserve requirements, he said.

Industrial output growth was the least in a year and compared with a 13.8 percent gain in September, Bloomberg data show. Economists’ median estimate was for a 13.4 percent gain.

China’s inflation may moderate further as raw-material costs decline, reflecting headwinds to the global recovery from faltering U.S. growth and the prospect of a recession in Europe. Producer prices rose 5 percent, less than any of 24 analysts forecast and the smallest increase in a year, today’s data showed.

Swaps Decline

The benchmark Shanghai Composite Index rose 0.1 percent as of 2:01 p.m. local time. China’s swap market is starting to indicate chances for an interest-rate reduction in the coming year. The cost of fixing borrowing costs for a year fell below the 3.5 percent benchmark savings rate last month and reached 3.125 percent today.

Five of 13 forecasters in the Bloomberg News survey predicted no change in the one-year deposit rate before the end of 2012, five predicted an increase and three saw a cut.

Food costs rose 11.9 percent last month from a year earlier after a 13.4 percent increase in September, the statistics bureau said. Pork climbed 39 percent after a 44 percent jump.

Food accounted for 3.62 percentage points of the overall increase in consumer prices, the bureau said. Non-food inflation eased for a second month to 2.7 percent.

Credit Boom

The People’s Bank of China raised interest rates five times from October 2010 to July and boosted banks’ reserve requirements nine times to a record 21.5 percent for the biggest lenders to rein in a credit boom that fueled consumer and property prices.

The cost of housing in China has started to decline after a two-year government campaign to curb speculation and limit purchases. Poly Real Estate Group Co., China’s second-largest developer by market value, said Nov. 7 its contracted sales fell 39 percent from a year earlier last month. Barclays Capital estimates home prices may decrease by 10 percent to 30 percent in the next year.

“Without a doubt, the Chinese housing market is entering a difficult period,” Barclays’ Hong Kong-based economists led by Huang Yiping said in a Nov. 8 research note.

Farmer Subsidies

The government raised subsidies for farmers to increase food supplies, reduced transport charges to limit costs and told companies to refrain from putting up prices. The National Development and Reform Commission told liquor makers including Kweichow Moutai Co. and Wuliangye Yibin Co. in September to hold off planned price increases of as much as 30 percent.

Falling costs for commodities such as oil and an improved supply of pork are helping to ease price pressures even as the government is set to miss its full-year inflation target.

Gasoline and diesel prices were cut by 3.5 percent and 3.9 percent respectively on Oct. 9 for the first time this year after crude oil costs dropped. An index of manufacturers’ input prices fell the most in 17 months in October, China’s logistics federation and the statistics bureau said on Nov. 1.

The central bank may reduce reserve requirements for smaller lenders to help ease a credit squeeze, according to economists at banks including Mizuho Securities Asia Ltd. and Societe Generale SA.

The move would be part of a “fine tuning” of economic policies pledged by Wen last month to protect the economy against global economic turmoil. The government has already announced tax cuts for companies, trial reform of the value- added tax system and increased credit for smaller companies.

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

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