Italy’s Senate Speeds Austerity Vote

By Chiara Vasarri and Lorenzo Totaro - Nov 10, 2011 3:21 PM GMT+0700

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Prime Minister Silvio Berlusconi vowed to raise 5 billion euros ($8 billion) annually from asset sales, increase the retirement age and relax labor laws to convince European leaders Italy can reach its budget goals. Photographer: Eric FeferBerg/AFP/Getty Images

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Nov. 10 (Bloomberg) -- Marino Valensise, chief investment officer at Baring Asset Management Ltd., discusses Europe's debt crisis, global equity markets and investment allocation. Valensise speaks in Hong Kong with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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Nov. 10 (Bloomberg) -- Italy's Senate rushed to pass debt-reduction measures that clear the way for establishing a new government in a bid to restore confidence in Europe's second-biggest debtor. The Senate is set to vote tomorrow on a package of measures including asset sales and an increase in the retirement age. David Tweed reports on Bloomberg Television's "First Look" with Linzie Janis. (Source: Bloomberg)

Italy’s Senate rushed to pass debt- reduction measures that clear the way for establishing a new government that may be led by former European Union Competition Commissioner Mario Monti in a bid to restore confidence in Europe’s second-biggest debtor.

The Senate is set to vote tomorrow on a package of measures including asset sales and an increase in the retirement age. The Chamber of Deputies may vote the following day, and Prime Minister Silvio Berlusconi will resign “immediately,” Angelino Alfano, the secretary of Berlusconi’s People of Liberty party, said on state-owned Rai television last night.

Italian President Giorgio Napolitano named Monti yesterday as a Senator for Life, an honorary position that allows him to vote in the upper house of parliament. Alfano, when asked about whether Monti would lead the government, said that Berlusconi had backed his appointment as a Senator for life and first named Monti as EU commissioner in 1994. Monti may be nominated as soon as Nov. 13, newspaper Il Sole 24 Ore reported.

“A technocrat government, most likely headed by Mario Monti is in our view the best and at this stage probably the only possible credible outcome,” Nomura International economist Lavinia Santovetti wrote in a note to investors yesterday.

‘Dangerous Mix’

Italy’s bond yields remained about the 7 percent threshold that prompted Greece, Portugal and Ireland to seek bailouts after Berlusconi’s parliamentary majority unraveled and LCH Clearnet SA said it would demand additional collateral on Italian debt. German Finance Minister Wolfgang Schaeuble told lawmakers yesterday Italy may need to consider a request for European Union aid, two people present at the meeting said.

“A prolonged period of 10-year bond yields in excess of 7 percent alongside a faltering economy is a dangerous mix, and could send Italy’s debt dynamics lurching toward an unsustainable and ultimately insolvent position,” Raj Badiani, senior economist at HIS Global Insight wrote in a note to investors. “However, we continue to argue that Italy remains solvent, and that it can survive several quarters of expensive debt auctions.”

EU Pledge

The yield on Italy’s 10-year bond jumped 12 basis points to 7.37 percent, the highest since the introduction of the euro in 1999. The yield on the five-year bond rose 21 basis points to 7.8 percent. The premium investors demand to hold Italian’s 10- year debt over similar maturity German bunds reached 566 basis points, another euro-era record. Mediaset SpA, Berlusconi’s media company, gained 1.6 percent to 2.24 euros after yesterday’s 12 percent plunge, its worst decline in more than two months.

The budget measures presented last night were first pledged to European Union allies at a summit on Oct. 26 and are aimed at convincing investors Italy can overhaul its economy to reduce borrowing. Months of squabbling within Berlusconi’s Cabinet over the plans ended up fueling the collapse of the government and the selloff of the country’s debt. Berlusconi, after failing to muster a majority in a routine vote yesterday, told President Giorgio Napolitano he would resign as soon as the measures were passed.

Once Berlusconi resigns, Napolitano will begin consultation with political parties to see if they can agree to form a new government. Napolitano did a round of consultations with political parties earlier this month as the crisis deepened, an exercise which may help speed an agreement.

New Government

“This is in anticipation of giving him the task of forming a new government, probably on Monday morning -- this should stabilize the market,” Marino Valensise, chief investment officer in Hong Kong at Baring Asset Management Ltd., which manages about $53 billion, said in a Bloomberg Television interview. “The problem is access to financial markets -- rolling over debt,” rather than solvency, he said.

Italy will test investor demand today when it sells 5 billion euros of one-year bills today and then as much as 3 billion euros of five-year bonds on Nov. 14. The country is set to spend 77 billion euros this year in financing its debt and faces about 200 billion euros of bonds maturing in 2012.

U.S. President Barack Obama drew a distinction between Italy’s situation and that of Greece, the Italian news agency Ansa reported, citing an interview at the White House. “Italy isn’t Greece, it’s a large country and a rich country,” Obama said, according to Ansa. “Athens’ problem is really one of solvency,” while Italy’s difficulty “is more one of liquidity,” Obama said, Ansa reported.

Political Turmoil

The political turmoil in Italy coupled with Greece’s inability to name a new prime minister, contributed to declines in the euro and a slump in stocks. The single currency slid to a one-month low of $1.3484.

The measures presented to the Senate last night include a pledge to raise 15 billion euros ($20 billion) from real estate sales over the next three years, a two-year increase in the retirement age to 67 by 2026, opening up closed professions within 12 months and the gradual reduction in government ownership of local services.

The EU and the European Central Bank had pressured Italy to adopt the measures to try to spur growth and cut a debt of 1.9 trillion euros, more than Greece, Spain, Ireland and Portugal combined.

Italy failed to deliver some measures pledged to the EU, such as making it easier for companies to fire workers during economic downturns. The bill did include tax incentives to hire apprentice workers, though won’t seek to modify Article 18 of the labor code, which restricts firing practices.

Contagion

Italy’s bond yields began to climb in July as Europe’s failure to contain Greece’s debt woes fueled contagion. The country’s deficit of 4.6 percent of gross domestic product last year is similar to that of Germany’s at 4.3 percent and less than that of the U.K. and France.

The country has a surplus in its primary budget, which excludes debt interest payments, and its debt is barely rising. Still, at almost 120 percent of GDP, second only to Greece, the debt load began to spook investors in a country where economic growth has trailed the EU average for more than a decade.

The government in August announced a 45 billion-euro package of austerity measures to balance the budget in 2013. The plan helped convince the ECB to backstop Italian debt. The ECB has spent more than 100 billion euros since beginning its purchases of Italian and Spanish bonds on Aug. 8, an effort that has failed to stem the rise in yields.

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

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

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China Exports Slow as Europe Dims Outlook

By Bloomberg News - Nov 10, 2011 10:24 AM GMT+0700

China’s exports rose at the slowest pace in almost two years in October as Europe’s deepening debt crisis crimped demand, adding pressure on policy makers to support growth in the world’s second-biggest economy.

Overseas shipments rose 15.9 percent from a year earlier, customs bureau data showed today. The trade surplus was $17 billion, lower than all 24 estimates in a Bloomberg News survey. Imports climbed a more-than-forecast 28.7 percent.

Asian stocks slumped after a jump in Italian bond yields fanned concern Europe’s currency union will unravel and cause a recession in China’s largest export market. Chinese data yesterday showing inflation slowed, home sales fell and industrial output cooled have added to the case for the government to ease credit controls and roll out more measures to support growth.

“The weakness in exports is consistent with the external slowdown and we expect further declines in the growth rate,” said Ken Peng, a senior economist with BNP Paribas SA in Beijing. “Domestic demand growth is weakening so the strength in imports is likely temporary and we may get a sharp downturn next month.”

Stocks in China extended their decline after the data. The benchmark Shanghai Composite Index fell 1.3 percent to 2,492.12 at 11:06 a.m. local time. The yuan was trading 0.2 percent lower at 6.3518 in Shanghai.

European Crisis

Elevated unemployment and faltering expansion in the U.S. and Europe threaten to sap demand for exports that accounted for a quarter of China’s output last year.

Overseas sales were $157.5 billion in October, the lowest in five months, and had the smallest year-on-year increase since gains resumed in December 2009 after the global financial crisis, excluding holiday distortions. The growth rate compared with a median estimate of 16.1 percent in a Bloomberg News survey of 25 economists.

Import growth was higher than every estimate in a Bloomberg survey of 25 economists that had a median forecast of 22.2 percent. The median for the trade surplus was $25.8 billion.

“The robust growth in imports suggest both resilience in the Chinese economy and some initial positive impact of policy fine-tuning,” said Lu Ting, a Hong Kong-based economist with Bank of America Corp.

China’s purchases from the European Union rose 28.2 percent in October from a year earlier and imports from South Korea gained 21 percent, customs data showed.

Italian Slump

Investors yesterday propelled Italy’s 10-year bond yield to close at a euro-era high of 7.25 percent, escalating the region’s crisis after the promised exit of Prime Minister Silvio Berlusconi failed to convince them that his country can slash Europe’s second-largest debt burden.

China’s export growth to the European Union slowed to 7.5 percent in October from a year earlier. Sales to Italy slumped 18 percent from a year earlier, the second straight decline.

Orders from U.S. buyers at the Canton trade fair held in October and November in Guangdong province dropped 24 percent from a year earlier and those from European buyers fell 19 percent, organizers said last week. Chinese solar-panel maker Trina Solar Ltd. cut its forecast for 2011 shipments on Nov. 3 because customers in Europe have had difficulty financing projects.

China may slow the yuan’s appreciation against the U.S. dollar to 3 percent to 4 percent until the end of 2012 from an annualized pace of 5 percent this year, London-based Capital Economics Ltd. said in a Nov. 3 report. Citigroup’s Ding estimates gains will slow to 4 percent next year.

Slowing Yuan Gains

“The government may want to avoid allowing too much yuan appreciation as that would hurt exports,” Ding said. “But the currency will still rise as China wants to encourage imports and reduce the accumulation of its foreign-exchange reserves,” he said.

Premier Wen Jiabao said last month the government will fine-tune economic policies as needed to sustain growth amid a global slowdown. He also pledged to maintain a “basically stable” exchange rate.

--Victoria Ruan. With assistance from Ailing Tan in Singapore, Zheng Lifei and Huang Zhe in Beijing. Editors: Paul Panckhurst, Nerys Avery

To contact Bloomberg News staff on this story: Victoria Ruan in Beijing at +86-10-6649-7570 vruan1@bloomberg.net

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

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Batali Apologizes for Comparing Bankers to Hitler, Stalin

By Jeremy Gerard - Nov 10, 2011 11:31 AM GMT+0700

Celebrity chef and restaurant owner Mario Batali apologized for comparing bankers to Hitler and Stalin, while finance executives reacted with angry comments and calls for a boycott.

“To remove any ambiguity about my appearance at yesterday’s Time Person of the Year panel, I want to apologize for my remarks,” Batali said this afternoon through his spokeswoman, Pamela Lewy. “It was never my intention to equate our banking industry with Hitler and Stalin, two of the most evil, brutal dictators in modern history.”

Batali made the original comment yesterday at a panel sponsored by Time magazine and was quoted in a story posted on Forbes.com:

“So the ways the bankers have kind of toppled the way money is distributed and taken most of it into their hands is as good as Stalin or Hitler and the evil guys,” Batali said. “They’re not heroes, but they are people that had a really huge effect on the way the world is operating.”

The Forbes website said it had taken the comment directly from a transcript provided by Time.

Hundreds of users of the Bloomberg terminal’s interactive DINE function, where they can rate and comment on restaurants, posted sharply worded denunciations. Many called for a boycott of Batali’s approximately 20 establishments, which include the Manhattan power restaurants Babbo, Del Posto, Otto and Lupa.

“I love his restaurants, but I’m done with Mario Batali, I will never eat at another of his places,” Blant Hurt, an Arkansas businessman who frequently dined at Batali’s restaurants in New York and Las Vegas, wrote in an e-mail to Bloomberg News. “He’s insulted a considerable number of his customers at the very time Wall Street is shrinking organically. It’ll be interesting to see where his businesses are in five years. Very, very dumb move on his part.”

To contact the writer of this column: Jeremy Gerard in New York at jgerard2@bloomberg.net.

To contact the editor responsible for this story: Manuela Hoelterhoff at mhoelterhoff@bloomberg.net.

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Hynix Shares Slump in Seoul on Concern SK Telecom Stake Sale May Collapse

By Jun Yang and Saeromi Shin - Nov 10, 2011 9:24 AM GMT+0700

Hynix Semiconductor Inc. (000660) slumped in Seoul trading on concern the sale of a 20 percent stake in the chipmaker will collapse after the last likely bidder became entangled in a probe by prosecutors.

SK Telecom Co., the South Korean mobile-phone operator that indicated it may bid for Hynix, yesterday denied allegations that the founding family of the SK Group of companies had embezzled funds.

Hynix shares fell 4.5 percent to 21,050 won at 11:03 a.m. on the Korea Exchange as the fourth attempt in two years to unload the stake teetered. Shareholders including state-owned Korea Finance Corp. want to offload a stake they gained through a government-led bailout in 2001 while SK Telecom has been looking to expand into the $39 billion-a-year market for computer-memory chips to take on Samsung Electronics Co.

“Concerns that SK may pull out, coupled with continued weakness in chip prices, are battering the stock today,” said Han Sang Soo, a fund manager at Samsung Asset Management Co. in Seoul, which oversees about $30 billion. “If SK steps out, I think investors should prepare for further drop in share price.”

The deadline set by Hynix shareholders for bids is 5 p.m. local time today. The Seoul Prosecutors’ Office searched the offices of some SK Group affiliates on Nov. 8 to investigate allegations that funds had been misappropriated. Chairman Chey Tae Won will prove his innocence, the group said in an e-mailed response to questions from Bloomberg News the same day.

Futures Investments

Yonhap News reported that prosecutors have been investigating Chey since May to determine if he used money from SK companies to reduce personal losses from futures investments.

SK Telecom hasn’t yet made a decision on whether to submit a bid today, said Irene Kim, a Seoul-based spokeswoman for the carrier. Lee Sun Hwan, a spokesman at Korea Exchange Bank, which is leading the sale, said the mobile phone company hasn’t notified shareholders about its plans.

Hynix had a market capitalization of 13.1 trillion won based on yesterday’s closing price. If the 20 percent stake shareholders want to sell fetches 2.6 trillion won, it would rank the share sale as the largest for a Korean technology company since 1999, according to data compiled by Bloomberg.

SK Telecom’s interest in Hynix renewed concerns South Korean business groups known as chaebol were reviving practices of over-expansion that led to the financial crisis in the late 1990s, Shaun Cochran, head of Korea research at CLSA, said in July.

Chaebol Model

While supporters praise the chaebol for pulling the country out of poverty after the 1950-1953 Korean War and transforming it into Asia’s fourth-largest economy, the International Monetary Fund cited the debt-driven chaebol model as part of the reason the nation’s economy landed in a financial crisis at the end of 1997.

The probe into Chey comes less than four years after South Korea’s highest court reaffirmed a suspended sentence for him. In May 2008, the Supreme Court upheld a suspended three-year prison term for fraud.

The deadline for bids for Hynix was extended twice after STX Group, which had submitted a preliminary bid along with SK Telecom in July, pulled out in September. STX at that time cited global economic uncertainties and concerns over investments needed to keep the chipmaker competitive as the reasons for the pullout.

Hynix had a net loss of 562.6 billion won in the third quarter amid an industry downturn, after posting record sales and profit in 2010. The chipmaker reduced debt by more than 1 trillion won last year.

Share Prices

In the days following SK Telecom’s announcement it may bid, analysts at CLSA, Morgan Stanley, JPMorgan Chase & Co. (JPM) and Samsung Securities Co. cut their ratings on the stock, while Daishin Securities Co., Daiwa Securities Group Inc. and Nomura Holdings Inc. (8604) lowered their price estimates.

SK Telecom fell 0.3 percent to 152,500 won, extending its decline this year to 13 percent. Hynix, which is in its fourth- straight day of declines, has dropped 12 percent in 2011.

Fitch Ratings said in September if SK Telecom buys the stake with debt, “the company’s credit strength may be impaired,” echoing Standard & Poor’s July statement that the purchase would undermine the phone company’s credit rating.

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

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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Deutsche Telekom Profit Beats Estimates on Mobile-Phone Clients, Cost Cuts

By Cornelius Rahn - Nov 10, 2011 1:00 PM GMT+0700

Deutsche Telekom AG (DTE), Europe’s largest phone company, reported profit that beat analysts’ estimates after cost cuts boosted profitability in Germany while the T-Mobile USA wireless business added clients.

Third-quarter adjusted earnings before interest, taxes, depreciation and amortization fell 2.3 percent to 4.91 billion euros ($6.7 billion), the Bonn-based company said in an e-mailed statement today. That compared with the 4.71 billion-euro average estimate of 11 analysts compiled by Bloomberg. Net income climbed 15 percent to 1.07 billion euros, also topping estimates.

The former phone monopoly is banking on increased Web traffic over mobile phones and products such as television packages to make up for falling revenue from traditional landlines. It’s also fighting a U.S. government lawsuit against the proposed $39 billion sale of the T-Mobile USA unit to AT&T Inc. (T) That business lost 186,000 contract customers, while on a net basis, it increased clients for the first time in a year.

“We have once again demonstrated that we can stand our ground in a difficult environment,” Chief Executive Officer Rene Obermann said in the statement.

Deutsche Telekom confirmed its full-year forecasts, saying adjusted Ebitda will be about 14.9 billion euros from continuing operations and about $5.5 billion for T-Mobile USA. The company still expects free cash flow to be at least 6.5 billion euros.

Government Stake

Third-quarter revenue decreased 6 percent to 14.7 billion euros, in line with analyst estimates.

The German government, which owns about 32 percent of Deutsche Telekom, said yesterday it may accelerate a plan to dispose of the shares after agreeing to acquire a stake in European Aeronautic Defence and Space Co. from Daimler AG.

Some of Deutsche Telekom’s growth areas have been slowing recently. Domestic competition from cable providers such as Kabel Deutschland Holding AG (KD8) is limiting the operator’s expansion in the broadband and TV business. Selling phone connections and other products may become even harder in coming quarters as European Central Bank President Mario Draghi said last week that the euro-zone economy may dip into recession toward the end of the year.

The company’s German unit pushed the ratio of Ebitda to sales to a record of 41.5 percent last quarter, helped by its 4.2 billion-euro cost-cutting program running from 2010 through 2012. Deutsche Telekom plans additional spending cuts by unifying its information-technology structure over three to four years, people familiar with the plan said last month.

The European unit excluding Germany, led by former McKinsey & Co. consultant Claudia Nemat since October, is aiming to resume revenue growth even as austerity measures brought on by the European debt crisis pare consumer spending.

Vodafone Group Plc (VOD), the world’s biggest wireless operator whose German unit competes in Deutsche Telekom’s home market, this week raised its full-year forecast after beating analyst estimates on improved sales in India and on tiered data tariffs.

To contact the reporter on this story: Cornelius Rahn in Frankfurt at crahn2@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong in Berlin at kwong11@bloomberg.net

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Olympus Shows ‘Japan Way’ No Longer Excuse

By Tomoko Yamazaki, Shingo Kawamoto and Komaki Ito - Nov 10, 2011 1:24 PM GMT+0700

Olympus Corp. (7733)’s admission that it hid losses by overpaying advisers may lead to its delisting by the Tokyo Stock Exchange and is sparking criticism of corporate- governance standards in the world’s third-largest stock market.

Olympus, the world’s biggest maker of endoscopes, earlier this week said it concealed losses by paying $687 million to advisers on a 2008 acquisition. The TSE said it’s considering moving the Tokyo-based company to a watch list for possible delisting because of accounting fraud.

Olympus has lost more than 500 billion yen ($6.44 billion) of market capitalization since mid-October, when the company ousted President Michael C. Woodford and he went public with accusations of fraud. The scandal may prompt Japan’s publicly traded companies to improve self-regulation and responsiveness to investors, according to fund managers and strategists.

“This is a case where Japan’s outmoded practice of corporate governance remained and reared its ugly head,” said Shuhei Abe, president of Tokyo-based Sparx Group Co. “With Olympus’s case, it will no longer be justifiable for Japan Inc. to continue practicing under the excuse of the ‘Japan way of doing things.’”

‘Get Acts Together’

Olympus’s troubles compound the woes of Japan’s stock market, which reeled in the aftermath of the March 11 earthquake and tsunami that led to the worst nuclear crisis since Chernobyl in 1986. The benchmark Nikkei 225 Stock Average has lost 14 percent this year, and the value of shares listed in Japan now trails the U.S. and China.

Shares of Olympus plunged by the daily exchange-imposed limit of 100 yen to 484 yen today in Tokyo trading.

Foreign funds, including Olympus investor Southeastern Asset Management Inc., came to Japan to hold corporate directors responsible and seek higher returns. A government panel asked the TSE to bolster corporate-governance rules, and the Asian Corporate Governance Association said in 2008 that failure by Japanese corporate leaders to meet global standards would discourage investment in the country.

“The Japanese market is already looking unattractive to foreign investors,” said Hideaki Tsukuda, managing partner at Egon Zehnder International’s Tokyo office. “Japanese companies really have to get their acts together, taking this opportunity to strengthen their corporate-governance practices.”

Livedoor, Kanebo

Under Tokyo exchange rules, a company found to have falsified earnings statements is first placed under the “watch list” post, where it is kept for a month. During that period, the exchange will review the magnitude of the wrongdoings, including whether the falsification was done in an organized manner.

Should the falsification be considered malicious, the exchange may decide to delist the company. Once that decision is made, a monthlong waiting period commences before the stock is formally delisted.

“We will be waiting for the findings by the third-party committee, consider the adequacy of information disclosure and potential impact based on exchange’s rules,” said Kazuhiko Yoshimatsu, the head of corporate communication at the Tokyo Stock Exchange.

The companies previously delisted for fabricating earnings statements include Livedoor Co., Seibu Railway Co. and Kanebo Ltd., according to the bourse’s website.

Nov. 14 Deadline

Tadashi Kageyama, the Hong Kong-based head of Asia-Pacific investigations at risk consultant Kroll Inc., said he has investigated more than 150 corporate governance cases in the region during the past decade. Kageyama said he is “not really surprised to see a case like this.”

“Many times I have been disappointed when working with Japanese companies by them not giving full access,” he said. “The government needs tougher penalties on white-collar crime.”

Listed companies must submit their earnings statement by Nov. 14, based on Japan’s Financial Instruments and Exchange Law. Should Olympus fail to disclose all the statements necessary, it faces the risk of being delisted, said Yoshihiro Ito, chief strategist at Okasan Online Securities Co.

“I would imagine that Olympus would do its best to file earnings by the deadline,” Ito said. “But I don’t think that means it’s the end of the scandal because the focus will be on their disclosure of past earnings statements.”

U.S. Investigation

Olympus President Shuichi Takayama this week reversed earlier denials of wrongdoing and said the company was looking into the role played by special-purpose funds in hiding the losses, which date to the 1990s. 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.

The mechanism for hiding the losses is still under investigation, Takayama said. Japanese and U.S. regulators are probing allegations by Woodford that more than $1.5 billion was siphoned through offshore funds.

Olympus shareholder Baillie Gifford & Co., a U.K. asset manager, yesterday joined Southeastern Asset in calling for Woodford’s return, saying he is “the best man for the job.”

Selling Holdings

Olympus is included both in the Nikkei 225 (NKY) and the broader Topix index. Company shares have lost more than 80 percent of their value this year.

A possible delisting may prompt investors to sell their holdings to cut losses, while those managing index-tracking funds may have to sell once the delisting is decided to avoid tracking errors.

Meiji Yasuda Asset Management Co. said this week that eight funds it manages sold all their shares in Olympus. The investment arm of Japan’s third-largest life insurer sold the shares due to uncertainties over Olympus’s future profitability, the company said in a statement.

Terumo Corp., the biggest corporate shareholder in Olympus, said it did not rule out an option to sell stakes in the company. Terumo, Asia’s largest medical devices company, owned 6.81 million Olympus shares, or 2.51 percent of the total shares outstanding, as of March 31, making the company the 10th-largest shareholder, according to data compiled by Bloomberg.

“I had been saying Japan has great value and corporate governance is strong,” said Nicholas Smith, a Japan strategist at CLSA Asia-Pacific Markets Ltd. “Then Olympus blew and clients are asking if Japanese corporate governance is really OK.”

To contact the reporters on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net; Shingo Kawamoto in Tokyo at skawamoto2@bloomberg.net; Komaki Ito in Tokyo at kito@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net.

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Asia Stocks, Copper Drop as Bond Risk Gains

By Shiyin Chen - Nov 10, 2011 1:06 PM GMT+0700

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Nov. 10 (Bloomberg) -- Michael McCarthy, chief market strategist at CMC Markets Asia Pacific Pty Ltd. in Sydney, talks about the impact of Europe's political and economic turmoil on global financial markets. McCarthy speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

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Nov. 10 (Bloomberg) -- Scott Wren, senior equity strategist with Wells Fargo Advisors, talks about Europe's debt crisis, its implications for global financial markets and his investment strategy. U.S. stocks sank as a surge in Italian bond yields intensified the credit crisis and concern grew that European leaders may be unable to keep the euro zone intact. Wren speaks with Susan Li on Bloomberg Television's "First Up."(Source: Bloomberg)

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Nov. 10 (Bloomberg) -- Roger Bootle, managing director of Capital Economics Ltd., talks about Europe's sovereign debt crisis and its implications for the global economy and financial markets. Bootle speaks with Rishaad Salamat, Susan Li, John Dawson and Zeb Eckert on Bloomberg Television's "Asia Edge." (Source: Bloomberg)

Asian stocks tumbled the most in seven weeks, bond risk rose to a one-month high and copper dropped for a fifth day as Europe’s debt crisis drove Italian bond yields above 7 percent, Japanese machinery orders fell and Chinese exports grew at a slower-than-forecast pace.

The MSCI Asia Pacific Index sank 3 percent at 3:04 p.m. in Tokyo. Standard & Poor’s 500 futures were little changed after the U.S. index slumped 3.7 percent yesterday. The Markit iTraxx Asia Index of debt-default risk headed for the highest close since Oct. 11. The euro reached a one-month low, while South Korea’s won sank 1.5 percent. Copper dropped 2.4 percent and rubber fell as much as 7.2 percent.

Italy will seek to sell 5 billion euros ($6.8 billion) of Treasury bills today after yields on 10-year notes surged to 7.25 percent yesterday, more than the 7 percent level at which Greece, Ireland and Portugal sought international bailouts. German Chancellor Angela Merkel’s Christian Democratic Union may adopt a motion at a party congress next week to allow euro members to exit the currency area, a senior CDU lawmaker said.

“The market is going to be focused on Italy,” Scott Wren, a senior equity strategist at Wells Fargo Advisors LLC, said in a Bloomberg Television interview from St. Louis, Missouri. “A lot of people have made that 7 percent level to be the line in the sand and we’re well ahead of that now. Italy has a ton of debt to refinance next year so my best guess is that we’re going to see some sort of band-aid solution.”

Stocks Slump

About 15 shares declined for every one that advanced on MSCI’s Asia Pacific Index, which was set for the largest loss since Sept. 22. Japan’s Nikkei 225 Stock Average lost 2.9 percent, South Korea’s Kospi Index sank 3.5 percent, Australia’s S&P/ASX 200 Index tumbled 2.4 percent, and Hong Kong’s Hang Seng Index dropped 4.4 percent.

Fanuc Corp., Japan’s biggest maker of industrial robots, retreated 4.1 percent after data today showed the nation’s machinery orders fell 8.2 percent in September from August, more than the 7.1 percent decline forecast of economists surveyed by Bloomberg News. Noble Group Ltd., the Hong Kong-based supplier of raw materials, plunged 26 percent in Singapore after Chief Executive Officer Ricardo Leiman quit following the company’s first loss in about 14 years.

HSBC Holdings Plc (5) sank 8.1 percent in Hong Kong after Europe’s largest bank said investment banking profit fell in the third quarter. Industrial & Commercial Bank of China (1398) Ltd. tumbled 7.9 percent in Hong Kong after people with knowledge of the matter said Goldman Sachs Group Inc. raised $1.1 billion selling shares of the world’s largest lender by market value.

U.S. Trade

The S&P 500 dropped yesterday by the most since Aug. 18. Just one stock on the index gained yesterday, the least since June 2010. A Commerce Department report today may show the trade gap was $46 billion in September, little changed from $45.6 billion in August, economists surveyed by Bloomberg News said. Treasury 10-year yields gained five basis points, rebounding from a 12 basis point drop.

Jefferson County, Alabama, filed the biggest U.S. municipal bankruptcy after an agreement among elected officials and investors to refinance $3.1 billion in bonds fell apart. The county, home to Birmingham, the state’s most-populous city, listed assets and debt of more than $1 billion in Chapter 9 papers filed today in U.S. Bankruptcy Court in Birmingham.

Customs bureau data showed China’s export growth slowed to 15.9 percent in October from 17.1 percent the previous month. The median forecast in a Bloomberg News survey of 25 economists was for an increase of 16.1 percent. Imports jumped a more-than- forecast 28.7 percent, leaving a trade surplus of $17 billion.

Won, Peso

The South Korean won weakened as much as 1.7 percent to 1,136.75 per dollar, the most in a month. The Philippine peso fell 0.7 percent to 43.335 per dollar after a government report showed exports tumbled the most in two years in September.

The 17-nation euro fell to as low as $1.3515, its weakest since Oct. 10, before trading at $1.3547. The shared currency fetched 105.23 yen from 105.38 yesterday and earlier dropped 0.3 percent to 105.11, the least since Oct. 26.

Italy will auction one-year bills today. It paid 3.57 percent the last time it sold 12-month bills on Oct. 11, while similar-maturity debt currently yields about 8.46 percent. The country’s 10-year bond yield climbed as high as 7.48 percent yesterday. LCH Clearnet SA, a clearing house that guarantees investors’ trades are completed, increased the extra deposit it demands from clients to trade Italy’s government bonds.

Italian Vote

The Italian Senate will vote tomorrow on the package of debt-reduction measures that includes asset sales and an increase in the retirement age, with the Chamber of Deputies set to vote the following day. The vote will pave the way for the resignation of Prime Minister Silvio Berlusconi within days and the formation of a new government in a bid to restore confidence in Europe’s second-biggest debtor.

“The big concern is that Italy will need to get its funding from other sources than the market, but because of its size, people are very worried,” said Stephen Halmarick, Sydney- based head of investment markets research at Colonial First State Global Asset Management, which oversees about $150 billion. “The outcome of all this is the European economy will go into recession. That’s a big negative.”

The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan climbed 12 basis points to 215.5, Royal Bank of Scotland Group Plc prices show. The index is headed for the highest daily close since Oct. 11, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Copper, Rubber

The Markit iTraxx Australia index jumped 14 basis points to 195 basis points, according to Westpac Banking Corp. The gauge is set for its highest daily close since Oct. 13, according to data provider CMA.

Three-month copper tumbled as much as 2.6 percent to $7,430.50 a metric ton before trading at $7,451 on the London Metal Exchange. Zinc slipped 3.1 percent to $1,875 a ton and lead fell 2.7 percent to $1,925.

Rubber in Tokyo slumped as much as 7.2 percent to 252.8 yen a kilogram ($3,250 a ton), the lowest level since May 2010, before trading at 255.30 yen as Thai flooding cut vehicle production, reducing demand for the material used in tires.

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

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

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BNP-Credit Agricole Dream Turns to Nightmare as Italy Debt Crisis Spirals

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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MBIA Agrees to Terminate $10.6 Billion of Mostly Commercial Property Bets

By Shannon D. Harrington - Nov 10, 2011 6:39 AM GMT+0700

MBIA Inc. (MBI), the bond insurer that was shut out of the business of backing municipal debt because of soured bets on home loans and commercial-mortgage securities, said it agreed to terminate $10.6 billion of trades since the end of September.

The wagers, largely tied to commercial real estate, brings to $23 billion the amount of guarantees on collateralized-debt obligations that the company has ended this year, the Armonk, New York-based insurer said in a statement today. Of that sum, MBIA terminated $8.5 billion in the third quarter, it said.

The company didn’t disclose the cost to end the trades. The amounts paid or expected to be paid “continue to be consistent with our loss reserves,” Chief Financial Officer Chuck Chaplin said in the statement. Kevin Brown, a spokesman for MBIA, declined to comment further.

“These actions help stabilize MBIA Corp.,” Chaplin said in the statement. The trades terminated or in the process of being torn up this year “is greater than the amount commuted in all of 2010,” he said.

The cost to protect against a default by the MBIA unit that sold the guarantees fell.

Credit-default swaps on MBIA Insurance Corp. declined 2 percentage points following the statement to a mid-price of 40 percent upfront as of 4:39 p.m. in New York, according to broker Phoenix Partners Group. That means it would cost $4 million initially and $500,000 annually to protect $10 million of obligations for five years.

To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net

To contact the editor responsible for this story: Pierre Paulden at ppaulden@bloomberg.net

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IMF’s Lagarde Warns of Risk of ‘Lost Decade’

By Bloomberg News - Nov 9, 2011 9:25 PM GMT+0700

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Nov. 9 (Bloomberg) -- 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. Linda Yueh reports on Bloomberg Television's "Countdown" with Francine Lacqua and Owen Thomas. (Source: Bloomberg)

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 to 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 1.1 percent as of 5:13 p.m. in Tokyo.

“We are all caught in a higher debt trap,” Former Federal Reserve Chairman Paul Volcker said at an event in Singapore today, in response to a question on whether the U.S. has fallen into a liquidity trap like Japan. “That’s the problem with Greece, Spain, Italy, Portugal and Ireland. It’s not a very happy situation.”

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.

Asia’s Response

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.

“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 in her prepared text. “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.”

‘Right Direction’

Lagarde said plans by leaders of the euro-area economies and Group of 20 nations over the past month to increase a rescue package for Greece were a “step in the right direction” to resolving Europe’s debt crisis.

The enlarged European Financial Stability Facility should be able to start raising funds in December, she said.

European finance ministers meeting in Brussels this week pledged to roll out the bulked-up rescue fund next month after consulting investors and credit-rating companies over two options for translating the fund’s 440 billion euros ($607 billion) in guarantees into as much as 1 trillion euros of spending power.

--Li Yanping, with assistance from Lilian Karunungan in Singapore and Cherian Thomas in Bangalore. Editors: Paul Panckhurst, Patrick Henry

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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Stocks, Euro, Commodities Sink on Euro Concern

By Rita Nazareth and Michael P. Regan - Nov 10, 2011 6:19 AM GMT+0700

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Nov. 9 (Bloomberg) -- Joseph Lupton, global economist for JPMorgan Chase & Co., talks about efforts by European policy makers to resolve the region's sovereign debt crisis. Lupton also discusses the outlook for economies in Italy and Spain. He speaks with Tom Keene on Bloomberg Television's "Surveillance Midday." (Source: Bloomberg)

Play Video

Nov. 9 (Bloomberg) -- Gary Jenkins, head of fixed income at Evolution Securities Ltd., discusses the political turmoil in Italy and the European Central Bank's purchase of the nation's sovereign debt. He talks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)

U.S. stocks sank as a surge in Italian bond yields intensified the credit crisis and concern grew that European leaders may be unable to keep the euro zone intact. The euro slid to a one-month low and Treasuries rallied.

The Standard & Poor’s 500 Index lost 3.7 percent to close at 1,229.1 at 4 p.m. in New York, its worst drop in almost three months. The Stoxx Europe 600 Index slid 1.7 percent and yields on Italian government debt climbed to records. The euro fell as much as 2.3 percent to $1.3523, the weakest since Oct. 10. The yield on 10-year Treasuries sank 11 basis points to 1.97 percent. The S&P GSCI Index of commodities lost 1.3 percent as oil retreated from the highest price in three months.

German Chancellor Angela Merkel’s party may adopt a motion to allow nations to exit the euro without losing membership in the European Union, a senior lawmaker said. Earlier declines came after LCH Clearnet SA, a clearing firm that guarantees investors’ trades are completed, demanded larger deposits to back transactions of Italian bonds and Silvio Berlusconi’s offer to resign as prime minister triggered questions about who will lead Italy out of its crisis.

“The contagion effect is no longer a risk, it’s a fact in Europe,” Stephen Wood, who helps oversee about $163 billion as the New York-based chief market strategist for Russell Investments, said in a telephone interview. “Today’s news is Italy. The question is -- is it too big too fail, too big to bail?” he said. “If anyone exits the euro, that will be a game changer.”

Euro Concerns

Merkel’s Christian Democratic Union may adopt a motion at an annual party congress next week to allow euro members to exit the currency area. The motion has been accepted by the party for debate and probably has enough support to be passed by delegates, Norbert Barthle, the ranking CDU member of parliament’s budget committee, said today in a telephone interview in Berlin.

Separately, Reuters reported unnamed sources as saying Germany and France are discussing plans for a “radical overhaul” of the EU that may include a smaller euro zone. A French government official told Bloomberg News there are no plans to shrink the 17-nation euro area. Speculation about such a step is ridiculous, said the official, who spoke on condition of anonymity.

The S&P 500 halted a two-day rebound from its first weekly loss since September. Berlusconi’s offer to quit after austerity measures are passed triggered an afternoon rally yesterday that sent the index up 1.2 percent on optimism a new Italian leader may be more successful in taming the debt crisis.

Banks Slump

Citigroup Inc., Bank of New York Mellon Corp. and JPMorgan Chase & Co. tumbled more than 7 percent to lead declines in all 24 stocks in the KBW Bank Index (BKX), which sank 5.9 percent for its worst loss since Aug. 10. While the index of lenders is down more than 25 percent in 2011, it has trimmed its slump from 36 percent as of Oct. 3.

JPMorgan and Bank of America Corp. led losses in all 30 stocks in the Dow Jones Industrial Average, which sank 389.24 points, or 3.2 percent, to 11,780.94. Best Buy Co. rose 1.4 percent for the only gain in the S&P 500 after Cleveland Research said the electronics retailer may post its first monthly comparative sales gain in six quarters.

General Motors Co. (GM) tumbled 11 percent, its worst drop since its post-bankruptcy initial public offering a year ago, 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. slid 7.7 percent after the largest maker of graphic-design software cut its earnings forecast.

Volatility Index

The VIX, as the Chicago Board Options Exchange Volatility Index is known, surged 32 percent to 36.16 for its biggest increase in almost three months.

The dollar strengthened against 14 of 16 major peers and the Dollar Index, a gauge of the currency against six key counterparts, climbed 1.7 percent.

Almost 10 shares fell for each that rose in the Stoxx 600 and all 19 industry groups retreated. European markets closed before the Handelsblatt report. Admiral Group Plc plunged 26 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 12 percent.

The yield on Italy’s 10-year bond rose 48 basis points to 7.25 percent and the two-year yield surged 82 basis points to 7.20 percent, both reaching euro-era records. Rates on 10-year Italian debt climbed to a record 5.75 percentage points above benchmark German bunds.

Insuring Against Default

The cost of insuring against default on Italian government also debt rose to a record. Credit-default swaps on Italy jumped 47 basis points to 571, surpassing the previous record of 534 set Sept. 22, according to CMA. That compares with 750 basis points for Irish debt, 1,074 for Portuguese bonds and 94 for German bunds. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments increased 14 basis points to a one-month high of 342.

German Finance Minister Wolfgang Schaeuble told lawmakers that Italy should request aid if it needs it from the European Financial Stability Facility, two people present at the meeting in Berlin today said. European Central Bank Executive Board member Juergen Stark said the bank won’t become the lender of last resort to European governments.

‘Proverbial Frog’

“Policy makers have been, in a sense, the proverbial frog in the boiling water, putting out little fire after little fire without recognizing the bigger problem at hand and not trying to get in front of it,” Joseph Lupton, senior global economist at JPMorgan Chase & Co. in New York, told Bloomberg Television. “The EU summit of a couple weeks ago, the ink hasn’t even been on the paper yet, let alone dried, and markets are already puking on that. So something else needs to happen.”

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 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. Italy has 1.9 trillion euros of debt, the world’s fourth biggest and more than Greece, Spain, Portugal and Ireland combined.

The clearing firm said it has no plans to increase margins for trading of other nations’ bonds and will monitor all markets. LCH raised margins on Italy “because we’ve seen more volatility and less liquidity,” John Burke, the firm’s head of fixed income in London, said. “Liquidity is the key issue.”

Offloading Debt

“The whole move dates to European banks releasing Q3 results that showed how much euro peripherals’ debt we had offloaded in the third quarter,” Ray Attrill, head of currency strategy for BNP Paribas SA in New York, said in a telephone interview. “Since European bank regulators have effectively decreed that European sovereign debt is no longer risk-free for the purposes capital-ratio calculations, that’s caused a structural shift in the enthusiasm for financial institutions holding sovereign debt.”

Italy may be “beyond the point of no return” in becoming the next victim of Europe’s debt crisis even if the government implements austerity measures to reduce debt, Barclays Capital analysts say.

“Once set in motion, these self-reinforcing negative dynamics are very difficult to break,” analysts Michael Gavin, Piero Ghezzi and Antonio Garcia Pascual wrote in an e-mailed note late yesterday. “Prompt and effective policy action from Rome may be necessary to remove Italy from the downward spiral that threatens it, but we doubt that is sufficient.”

Into Disarray

Greek Prime Minister George Papandreou’s drive to put together a unity government fell into disarray as rival parties squabbled over the next premier, undermining their bid to secure bailout funds needed to prevent a financial collapse.

All 24 commodities tracked by the S&P GSCI Index fell except for coffee, led by declines of at least 3.2 percent in cocoa, zinc and Kansas wheat. Oil slipped 1.1 percent to $95.74 a barrel, resuming losses after gaining earlier as U.S. government data showed an unexpected decline in crude inventories and tumbling fuel stockpiles.

Gold futures declined from a seven-week high as the dollar’s surge curbed demand for the precious metal as an alternative investment.

The MSCI Emerging Markets Index fell for the first time in four days, losing 1.4 percent. Benchmark gauges in Brazil, Russia, Poland and Hungary declined at least 2.5 percent. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong climbed 2.2 percent as Chinese inflation slowed to a five-month low.

To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net; Michael P. Regan in New York at mregan12@bloomberg.net

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

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Jefferson County, Alabama, Votes to Declare Biggest Municipal Bankruptcy

By William Selway, Martin Braun and Margaret Newkirk - Nov 10, 2011 6:49 AM GMT+0700

Jefferson County, Alabama, commissioners voted 4-1 to file the largest U.S. municipal bankruptcy after reaching an impasse over concessions with holders of $3.14 billion of bonds.

JPMorgan Chase & Co. (JPM), which arranged most of the debt to fund a sewer renovation, will likely take the biggest loss in the process, which begins with a hearing 10 a.m. local time tomorrow.

A provisional agreement with creditors that commissioners approved in September included $1.1 billion in concessions and called for sewer-rate increases of as much as 8.2 percent for the first three years. The county, which encompasses the state’s largest city, Birmingham, couldn’t get signed commitments from creditors, Commission PresidentDavid Carrington said today.

In addition, the 25-member legislative delegation for the county was unable to unite behind bills needed to implement the tentative settlement.

“We’ve reached that last resort,” said Commissioner Joe Knight. “We could continue and keep kicking this can down the road, but I think the people of Jefferson County have had enough.”

Governor Robert Bentley, a Republican, said he was disappointed by the commission’s vote.

Limiting the Pain

“The Jefferson County sewer-debt crisis has been an impediment to economic growth in the state, and the bankruptcy filing will now be an even greater challenge to overcome,” he said in a statement. “Now we must rise to this new challenge, move forward to bring economic growth and stability to the Birmingham region, and do everything in our power to limit the impact of this decision.”

The county’s efforts to negotiate a definitive settlement were frustrated by the recent sale of sewer debt to investors who didn’t want to restructure the bonds under the terms of the September agreement, according to the bankruptcy filing.

Justin Perras, a spokesman for JPMorgan, said the bank had not wanted bankruptcy. JPMorgan held more than $1.2 billion of the county’s sewer debt as of May, according to a document provided by Bentley’s office in September.

“We offered very substantial financial concessions to make the deal happen while keeping sewer rates within the parameters proposed by the county,” he said in an e-mail. “While we’re disappointed by the county’s decision to file, we will continue to work toward a fair and reasonable solution.”

Cities in Trouble

The vote by officials in Alabama’s most populous county occurred about a month after Pennsylvania’s capital of Harrisburg sought court protection citing millions in overdue bond payments tied to a trash-to-energy incinerator. On Aug. 1, Central Falls, Rhode Island’s smallest city, sought court protection, citing pension costs it can’t afford. The municipality listed almost $21 million in general-obligation debt outstanding.

Even with the Chapter 9 filings, local-government bond defaults declined to $949 million in the first nine months of 2011, about one-third the pace of 2010 and 10 percent for corporate debt, according to the Distressed Debt Securities Newsletter, published by Miami Lakes, Florida-based Income Securities Advisor Inc.

Municipal bankruptcies are rarer than corporate failures. Jefferson’s is the 11th this year. In 2010 there were 13,713 corporate Chapter 11 filings, according to a website maintained by the Administrative Office of the U.S. Courts.

Outstripping Orange

The Jefferson filing eclipses the previous record, set in 1994 by Orange County, California. That county, which was driven into bankruptcy by $1.7 billion in losses on interest-rate bets, had about $2.2 billion in debt outstanding, according to a June 1995 financial report.

The Alabama filing might reignite concerns among investors over defaults in the $2.9 trillion U.S. municipal bond market.

“It’s going to create attention-grabbing headlines, and the question is how retail investors react,” Peter Hayes, a managing director at BlackRock Inc., the world’s largest asset manager and the owner of $95.6 billion of municipal bonds, said before today’s decision.

Bankruptcy had loomed over the county for more than three years. Commissioners sought to spare residents from ballooning fees needed to pay off the debt that financed a sewer project rife with corruption.

Rising Bills

The crisis intensified in March when the state’s highest court struck down a tax on wages that generated $70 million annually for the general fund. The county put employees on unpaid leave, closed courthouses and scuttled road repairs after losing the levy that provided about a quarter of its revenue.

The size of sewer-fee increases became a hurdle because residents can ill afford higher costs, according to Commissioner George Bowman, who represents one of county’s two poorest districts. Almost 70 percent of sewer users are in the two districts with the lowest average incomes, he has said.

Jefferson County’s system serves about 478,000 people through 144,000 accounts, according to a June report from John Young, the court-appointed receiver who runs the system.

The county’s median household income is about $45,000 a year, according to U.S. Census Bureau data. Many sewer customers reside in Birmingham, where the figure is about $32,000. The average residential wastewater bill is $37.74 a month, according to Young.

Banks and Bonds

The bankruptcy leaves banks such as JPMorgan, investors and the bond insurers Financial Guaranty Insurance Co. and Syncora Guarantee Inc. facing hundreds of millions of dollars in losses.

Michael Corbally, a spokesman for Syncora, declined to comment.

In addition to sewer bonds, Jefferson County has about $1 billion in other bond debt: $200 million of general obligation bonds and $814 million of school-construction bonds, according to its bankruptcy petition.

Jefferson now must show a federal judge that it can’t pay its bills and then draw up a plan for meeting obligations, which the court may reduce. Unlike corporate cases, creditors can’t try to seize or sell off county assets, and the court can’t appoint a trustee to run the county.

Municipalities have more leverage with creditors under Chapter 9 of the U.S. Bankruptcy Code than corporations have when reorganizing debt in Chapter 11 protection, said Marc Levinson, a lawyer who represented Vallejo, California, when that city went bankrupt. A judge has limited authority to force a municipality to take specific actions, Levinson said.

Limited Court Power

“About the only thing a judge has the power to do is dismiss the case,” Levinson said.

The crisis in Alabama arose when investors dumped Jefferson county’s bonds as the subprime mortgage-market meltdown sent ripples through Wall Street. Jefferson’s floating-rate securities were coupled with interest-rate swaps, a money-saving strategy pitched by banks that backfired. As credit markets convulsed in 2008, the county’s interest costs soared. When banks demanded early payoffs of the bonds, the county defaulted.

The debt deals also were rife with political corruption, leading the cost of the sewer project to soar as it was built during the 1990s. Former commission president and Birmingham Mayor Larry Langford, a Democrat, was convicted of accepting bribes in connection with the financing.

Corruption Fallout

Two former JPMorgan bankers are fighting Securities and Exchange Commission charges that they made $8 million in undisclosed payments to friends of commissioners to secure the bank’s role in the deals. In 2009, JPMorgan agreed to a $722 million settlement with the SEC.

The financings arranged under Langford converted almost all the county’s sewer debt into securities that carried interest rates that periodically reset, a strategy promoted by Wall Street as a way for borrowers to save money using short-term interest rates on debt that didn’t mature for decades. The swaps paired with the bonds were meant to hedge against adverse changes in the rates.

Exposed to Crisis

That strategy left the county exposed in 2008, when the credit crisis pushed up municipal lending rates. As banks began hoarding capital, the market froze for auction-rate bonds, a type of security used by Jefferson, and the county had to pay penalty interest rates.

After some bond insurers incurred losses on subprime- related securities, threatening the credit ratings they used to guarantee other Jefferson debts, investors in 2008 dumped the sewer securities on banks that had agreed to act as buyers of last resort. That triggered contractual requirements for the county to pay off $850 million of the debt in four years instead of the 30 or 40 under the original agreements, according to government records.

The demands pushed the county into defaulting. The uncertainty that has reigned since then has led some businesses, politicians and residents to be thankful for any route that would bring the saga to a close.

To contact the reporters on this story: William Selway in Washington at wselway@bloomberg.net; Martin Braun in New York at mbraun6@bloomberg.net; Margaret Newkirk in Birmingham at mnewkirk@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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U.S. Stocks Fall on Concern About Euro Exi

By Rita Nazareth - Nov 10, 2011 6:09 AM GMT+0700

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Nov. 9 (Bloomberg) -- Bloomberg's Deborah Kostroun reports on the performance of the U.S. equity market today. U.S. stocks slumped, driving the Standard & Poor’s 500 Index to its biggest decline since August, amid concern that European leaders may be unable to keep the euro zone intact as Italian yields surged to a record. Bloomberg's Pimm Fox also speaks. (Source: Bloomberg)

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Nov. 9 (Bloomberg) -- Mebane Faber, portfolio manager at Cambria Investment Management LLC, talks about asset allocation and strategy for his Cambria Global Tactical exchange-traded fund. Faber speaks with Adam Johnson and Lisa Murphy on Bloomberg Television's "Street Smart." (Source: Bloomberg)

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Nov. 9 (Bloomberg) -- David Joy, chief market strategist at Ameriprise Financial Inc., talks about the impact of global politics on financial markets, his investment strategy in the current environment and the European sovereign-debt crisis. Joy speaks on Bloomberg Television's "InBusiness With Margaret Brennan." (Source: Bloomberg)

U.S. stocks slumped, driving the Standard & Poor’s 500 Index to its biggest decline since August, amid concern that European leaders may be unable to keep the euro zone intact as Italian yields surged to a record.

Morgan Stanley and Goldman Sachs Group Inc. (GS) dropped at least 8.2 percent, following losses in European lenders, after LCH Clearnet SA raised the extra charge it levies on clients for trading Italian government bonds and index-linked securities. General Motors Co. (GM) tumbled 11 percent after abandoning its target for European results. Adobe Systems Inc. (ADBE) sank 7.7 percent on plans to cut jobs as it lessens its focus on older products.

The S&P 500 slid 3.7 percent to 1,229.10 as of 4 p.m. New York time, after rising 1.8 percent over the previous two days. The Dow Jones Industrial Average lost 389.24 points, or 3.2 percent, to 11,780.94. The Stoxx Europe 600 Index decreased 1.7 percent as the 10-year Italian note yield topped 7 percent.

“It’s just like a scary movie as it never ends,” Keith Wirtz, who oversees $16.7 billion as chief investment officer at Fifth Third Asset Management in Cincinnati, said in a telephone interview. “The overarching problem is that most of the economies in Europe can’t sustain the size of their governments. We’re going to have this headache for a long time to come.”

Today’s equity slump erased the month-to-date gain in the S&P 500. About 11 stocks fell for each that gained on U.S. exchanges. All 10 groups in the S&P 500 retreated as gauges of financial, commodity and industrial companies fell at least 3.8 percent. The Chicago Board Options Exchange Volatility Index, which measures the cost of using options as insurance against declines in the S&P 500, soared 32 percent to 36.16.

Bigger Deposits

Europe’s biggest clearinghouse said that customers must put down bigger deposits to trade Italian bonds as concern rises that the government will struggle to reduce the world’s third- largest debt burden. Italian yields surged as Prime Minister Silvio Berlusconi said he won’t resign until austerity measures are passed, even after he failed to muster an absolute majority on a routine ballot in parliament yesterday.

A senior lawmaker said German Chancellor Angela Merkel’s Christian Democratic Union may adopt a motion at an annual party congress next week to allow euro members to exit the currency area. In Greece, Prime Minister George Papandreou’s drive to put together a unity government fell into disarray as rival parties squabbled over the next premier.

“The Greek flu is hitting Italy,” James McDonald, chief investment strategist at Northern Trust Corp. in Chicago, which manages $643 billion, said in a telephone interview. The market wants to know “who’s going to be the new leadership? Until they know the new leadership’s willingness to implement reforms, they are going to require higher compensation.”

Banks Tumble

The KBW Bank Index sank 5.9 percent as all of its 24 stocks retreated, extending this year’s slump to 26 percent. Morgan Stanley (MS) fell 9 percent to $15.76. Goldman Sachs erased 8.2 percent to $99.67.

General Motors declined 11 percent, the biggest drop since its post-bankruptcy public offering a year ago, to $22.31. The automaker, which hasn’t turned an annual profit in Europe in more than a decade, abandoned its target for break-even results in the region as a quarterly loss there lowered overall profit.

Adobe lost 7.7 percent to $28.08. The company plans to cut 750 jobs as it lessens its focus on older products. The reduction, mostly in North America and Europe, will cost $87 million to $94 million before taxes, the company said. After the costs, net income will be 30 cents to 38 cents a share, compared with a previous forecast of 41 cents to 50 cents.

Thwart Recovery

Concern that Europe’s debt crisis may thwart a global economic recovery sent the Morgan Stanley Cyclical Index down 4.6 percent. The Dow Jones Transportation Average of 20 stocks slumped 3.8 percent. FedEx Corp. (FDX), operator of the biggest cargo airline, slipped 4.4 percent to $79.35. Apple Inc. (AAPL), the biggest technology company, lost 2.7 percent to $395.28.

Energy and raw material producers retreated as the dollar rose, reducing the appeal of commodities. Alcoa Inc. (AA), the largest U.S. aluminum producer, slid 5.4 percent to $10.20. Chevron Corp. (CVX) fell 4.2 percent to $104.28.

One stock in the S&P 500 rose today, the lowest number since June 2010. Best Buy Co. advanced 1.4 percent to $27.22. The world’s largest consumer-electronics retailer may post its first monthly comparative sales gains in six quarters, according to Cleveland Research.

Yahoo! Inc. swung between gains and losses, falling 0.3 percent to $15.92. Alibaba Group Holding Ltd. and Softbank Corp. are talking with private-equity funds about making a bid for all of the company without its blessing, people with knowledge of the matter said.

Cisco Beats Estimates

Cisco Systems Inc. (CSCO), which fell 3.8 percent in regular trading, rallied 3.8 percent to $18.28 at 6:07 p.m. New York time. The world’s biggest maker of networking equipment reported profit and sales that exceeded analysts’ estimates, bolstered by a turnaround effort and demand for data centers.

The S&P 500 may halt its biggest gain in 20 years, according to two indicators studied by technical analysts at UBS AG. October’s 11 percent rally, which was the biggest monthly advance since 1991, failed to leave the S&P 500 above its 200- day average, limiting the potential for a rally, the Zurich- based analysts wrote in a report yesterday.

The team also said their model for moving average convergence-divergence, or MACD, is heading into “bear mode.”

“We see the risk of more near-term weakness into next week,” Marc Muller and Michael Riesner wrote in the report. “Given the high volatility, we would see a pullback into next week still as a trading opportunity for aggressive traders, whereas, on the upside, we wouldn’t chase the market.”

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

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

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Alibaba, Softbank Said to Seek Partners for Yahoo Purchase

By Jeffrey McCracken and Brian Womack - Nov 10, 2011 5:26 AM GMT+0700

Alibaba Group Holding Ltd. and Softbank Corp. (9984) are talking with private-equity funds about making a bid for all of Yahoo! Inc. without the company’s blessing, people with knowledge of the matter said.

Alibaba and Softbank, in an effort to buy back stakes owned by Yahoo, have grown impatient with a lack of progress in direct talks with the company, said the people, who asked not to be named because the negotiations are private.

The Asian companies aim to work with partners that haven’t signed nondisclosure agreements circulated by Yahoo that can make it harder to bid for the whole company, the people said. Yahoo prefers to sell a smaller stake, rather than cede complete control, the people said. Alibaba Chairman Jack Ma has said he’s “very interested” in acquiring Yahoo.

“Alibaba Group and Softbank are willing to buy back their shares soon,” said Tomoaki Kawasaki, a Tokyo-based analyst at Cosmo Securities Co.

Representatives of Sunnyvale, California-based Yahoo, China-based Alibaba and Tokyo-based Softbank declined to comment.

Yahoo fell 5 cents to $15.92 at 4 p.m. in New York, giving it a market capitalization of $19.7 billion. The shares have fallen 4.3 percent this year.

Private-equity firms are reluctant to sign Yahoo’s NDA because it prohibits talks with other funds or strategic partners aimed at forming a larger bid, the people said.

TPG Signs NDA

Yahoo has asked interested parties to sign the NDA to receive management presentations and more access to confidential financial information, said the people.

TPG Capital is one of the private-equity firms that has signed a nondisclosure agreement, these people said. Yahoo continues to negotiate with holdouts to encourage a change of heart, the people said. Microsoft Corp. (MSFT) and Google Inc. (GOOG), Yahoo rivals that have expressed interest in financing a possible bid for the company, have not signed the NDAs, people said.

Yahoo is exploring strategic options and seeking a new chief executive officer after the September ouster of Carol Bartz, who struggled to fend off competition from Google and Facebook Inc. Jerry Yang, a co-founder and Yahoo board member, said last month that the company isn’t necessarily for sale.

Representatives of Mountain View, California-based Google and Redmond, Washington-based Microsoft declined to comment.

Tax Liability

Under one scenario being discussed, Softbank and Alibaba would buy back the stakes that Yahoo owns in the companies, according to the people. The remaining funding needed to buy the Yahoo business would come from a private-equity firm.

In another scenario, Softbank and Alibaba would fill their own funding gaps, one of the people said.

Yahoo has a stake of about 40 percent in Alibaba, the Chinese e-commerce company, and 35 percent of Yahoo! Japan, according to filings with the U.S. Securities and Exchange Commission.

Shareholders would incur a tax liability in certain circumstances, including in the event that Yahoo sells the Asian stakes to a party other than Alibaba or Softbank, according to a person with knowledge of the matter. The Asian companies would likely avoid tax hurdles by making the purchase themselves. That would help each company add to its stake, rather than result in a taxable investment gain, the person said.

The two stakes could equal about $15 billion, said one of these people, leaving a private-equity fund -- on its own or with other partners -- to come up with the remaining money.

The Financial Times reported last week that Alibaba and Softbank are trying to form a group of private-equity investors to back a full acquisition of Yahoo.

To contact the reporters on this story: Jeffrey McCracken in New York at jmccracken3@bloomberg.net; Brian Womack in San Francisco at bwomack1@bloomberg.net

To contact the editors responsible for this story: Tom Giles at tgiles5@bloomberg.net; Jennifer Sondag at jsondag@bloomberg.net

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Computer Sciences Declines After Cutting Fiscal Full-Year Profit Forecast

By Xu Wang - Nov 9, 2011 10:25 PM GMT+0700

Computer Sciences Corp. (CSC), a contractor for U.S. government agencies and companies, fell the most in almost three months after reducing its fiscal 2012 profit forecast amid “federal budget uncertainty.”

The shares declined 12 percent to $28.89 at 10:24 a.m. in New York, after dropping 13 percent for the biggest intraday slide since Aug. 10. Computer Sciences, based in Falls Church, Virginia, was down 34 percent this year before today.

“North American public sector business continues to be impacted by the federal budget uncertainty,” Chief Executive Officer Michael Laphen said in a statement today.

Earnings for the year ending March 31 will be $4.05 to $4.10 a share, excluding some items, the company said in the statement. In August, Computer Sciences forecast per-share profit of $4.70 to $4.80.

Computer Sciences also reported a second-quarter net loss of $2.88 billion, or $18.56 a share, including a goodwill impairment and a previously disclosed claims settlement. Excluding those items and costs related to the acquisition of health-care software maker ISoft, Computer Sciences had profit of 94 cents a share in the quarter ended Sept. 30, according to the statement. That beat the 68-cent average of 11 analyst estimates compiled by Bloomberg.

Revenue rose less than 1 percent from a year earlier to $3.97 billion. The company had net income of $184 million, or $1.18 a share, in the previous year’s second quarter.

To contact the reporter on this story: Xu Wang in New York at xwang206@bloomberg.net

To contact the editor responsible for this story: Ville Heiskanen at vheiskanen@bloomberg.net

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