China’s Cooler 4.2% Inflation May Presage More Easing

By Bloomberg News - Dec 9, 2011 1:33 PM GMT+0700
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Food prices climbed 8.8 percent in November from a year earlier, less than the 11.9 percent gain in October, today’s report showed. Photographer: Nelson Ching/Bloomberg

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Dec. 9 (Bloomberg) -- Nigel Chalk, the International Monetary Fund's Washington-based China mission chief, talks about the risks Hong Kong's economy faces from a possible global economic slowdown triggered by Europe's debt crisis. The IMF said Hong Kong must be ready to provide "significant and immediate" fiscal stimulus should a worsening crisis threaten to drive the city into recession. Chalk speaks with John Dawson on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

China’s inflation reached a 14-month low and industrial production rose less than forecast, bolstering the case for more stimulus measures to shore up growth in the world’s second-largest economy.

Consumer prices rose 4.2 percent from a year earlier, the statistics bureau said on its website. Output gained 12.4 percent, the least since August 2009 and below a median forecast of 12.6 percent. A separate report showed passenger-car sales rose the least in six months.

Premier Wen Jiabao’s government may telegraph at an annual economic works conference in coming days that growth is now a greater concern than inflation, given risks posed by Europe’s crisis and a domestic property-market slowdown. Investors have been paring back expectations for gains in the yuan as China slows, with 12-month non-deliverable forwards today suggesting a 0.8 percent decline against the dollar.

“Curbing inflation is a good thing, but the reason why inflation is slowing is because the global economy is slowing,” said Koji Toda, chief fund manager at Resona Bank Ltd. in Tokyo, which oversees the equivalent of $68 billion. “If you see that fact, you can’t be so optimistic.”

Yuan forwards fell 0.2 percent to 6.4140 per dollar as of 1:09 p.m. in Hong Kong.

Australia & New Zealand Banking Group Ltd. (ANZ) said the nation’s economy is cooling more quickly than expected, with a rebound possible in the second quarter after more easing. Passenger-car sales rose 0.3 percent to 1.34 million units, the China Association of Automobile Manufacturers said.

Retail Sales, Investment

Producer prices gained 2.7 percent, the least in almost two years, the statistics bureau reports showed. Retail sales rose a more-than-estimated 17.3 percent. Fixed-asset investment excluding rural areas climbed 24.5 percent in the first 11 months from a year earlier compared with 24.9 percent in the first 10 months, today’s releases showed.

The MSCI Asia Pacific Index dropped 2 percent as of 2:59 p.m. in Tokyo after leaders meeting in Brussels said European nations will channel as much as 200 billion euros ($267 billion) to the International Monetary Fund to tackle the region’s debt crisis.

In South Korea, the central bank may cut its economic growth forecast for next year if Europe’s crisis worsens beyond the first quarter, which currrently seems unlikely, Lee Sang Woo, director-general of its research department, said today. The monetary authority sees a 3.7 percent expansion.

Hong Kong, Japan

Hong Kong may have to stand behind banks and deposits should the global economy slump, Nigel Chalk, the International Monetary Fund’s China mission chief, told Bloomberg Television today. An IMF report said that the city needs to be ready to add “significant and immediate” fiscal stimulus.

Japan’s growth rebound in the aftermath of the March earthquake was less than initially estimated, a government report showed today, underscoring the case for the Bank of Japan (8301) to add stimulus. Gross domestic product increased an annualized 5.6 percent last quarter, compared with a preliminary figure of 6 percent.

A slowdown in Japan’s growth is “unavoidable” for now, Kiyohiko Nishimura, deputy governor of the central bank, said in Tokyo today.

Also due today is a U.S. trade report that may show the nation’s deficit rose to $44 billion in October from $43.1 billion in September, according to the median forecast in a Bloomberg News survey of analysts.

In China, officials due to meet for the Central Economic Work Conference to set the policy framework for next year may consider further stimulus. The Economic Observer has reported that the meeting will be from Dec. 12 to 14.

‘Prudent’ Policies

In December last year, the Politburo said the nation would shift its monetary stance to “prudent” from “moderately loose.” At that point, the government had already raised interest rates and reserve requirements, showing how changes in the official description of policy can lag behind the implementation.

Today’s data showed inflation moderating on smaller gains in food prices, which climbed 8.8 percent from a year earlier, less than the 11.9 percent gain in October.

“The policy wind is going to increasingly blow in the direction of easing,” Yao Wei, a Hong Kong-based economist at Societe Generale SA, wrote this week. Officials may decide at the work meeting that “stabilizing growth” will replace “stabilizing prices” as the policy priority, she said.

Interest Rates

Nomura Holdings Inc. says China’s central bank may cut interest rates in the first quarter as growth reaches a “trough.” The Shanghai stock index (SHCOMP), China’s benchmark, has declined more than 17 percent this year on concern growth will falter, damping company earnings and boosting banks’ bad debts.

The property market is cooling after a government crackdown on speculation. Nomura estimates economic growth may slow to 7.5 percent in the January-March period, the least since the global financial crisis, from an estimated 8.6 percent this quarter.

Inflation may average about 4 percent in 2012, Zheng Jingping, the statistics bureau’s chief engineer, wrote this week. Consumer-price gains reached a three-year high of 6.5 percent in July and have exceeded the government’s full-year target of 4 percent every month this year.

The People’s Bank of China cut the amount of cash lenders must set aside as reserves for the first time in three years this month, adding cash to the financial system to support growth. An official manufacturing index contracted for the first time since February 2009 as export orders and new orders slumped, adding to evidence that growth is ebbing.

Statistics bureau data show nationwide housing transactions declined 25 percent by value in October from the previous month. China Vanke Co. (000002), the nation’s biggest listed property developer, said November sales fell 36 percent from a year earlier.

China’s expansion slowed to 9.1 percent in the third quarter, the least in two years, after the government raised interest rates, tightened credit and expanded property-market curbs.

To contact Bloomberg News staff for 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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Iran Shows Off Downed U.S. Spy Drone on TV

By John Walcott - Dec 9, 2011 12:01 PM GMT+0700

The unmanned RQ-170 Sentinel is still highly classified, yet since one came down in Iran five days ago, it’s a lot less secret.

The Lockheed Martin Corp. (LMT) spy drone, which is designed to be virtually invisible to radar and carries advanced communications and surveillance gear, made a 2 1/2 minute television debut yesterday on Iran’s state-owned Press TV channel. U.S. intelligence officials are assessing the apparent loss of its highly classified technology.

The official Iranian Republic News Agency reported that the Foreign Ministry yesterday protested the “violation of Iran’s airspace by a U.S. spy drone on Dec. 4,” the day Iranian forces claimed to have shot down the aircraft, 140 miles inside the Iranian border from Afghanistan.

Several U.S. officials, who spoke on condition of anonymity because the drone program is classified, said the greatest concern is that access to the aircraft could give Russian or Chinese scientists insight into its flight controls, communications gear, video equipment and any self-destruct or return-to-base mechanisms.

In addition, they said, the remains of the RQ-170 could help a technologically sophisticated military or science establishment develop Infrared Surveillance and Targeting (IRST) technology that under some conditions are capable of detecting stealth aircraft such as drones and the new Lockheed Martin F- 35s.

Seems Real

The Pentagon and the Central Intelligence Agency declined to comment yesterday on whether the aircraft the Iranians displayed is real. A U.S. defense official, however, said the plane appears to be an actual RQ-170, though he said U.S. experts were still examining the video.

Two U.S. officials with knowledge of the RQ-170 program said that some details, including the seams on the drone’s fuselage, its access ports and its unusual air intake, appear to confirm that it’s genuine.

The aircraft shown on Iranian TV -- or at least its forward and upper surfaces -- appeared to be in good condition for a high-altitude plane that the Iranians initially said they had shot down.

The most frightening prospect raised by what appears to be a largely intact Sentinel is that the Iranians’ second claim about how they brought it down -- by hacking into its controls and landing it themselves -- might be true, said a U.S. intelligence official, who spoke only on the basis of anonymity because the RQ-170 is part of a Secret Compartmented Intelligence (SCI) program, a classification higher than Top Secret.

Hacking Claim

The official said the possibility that the Iranians or someone else hacked into the drone’s satellite communications is doubly alarming because it would mean that Iranian or other cyber-warfare officers were able to disable the Sentinel’s automatic self-destruct, holding pattern and return-to-base mechanisms. Those are intended to prevent the plane’s secret flight control, optical, radar, surveillance and communications technology from falling into the wrong hands if its controllers at Creech Lake Air Force Base or the Tonopah Test Range, both in Nevada, lose contact with it.

Nevertheless, the Obama administration didn’t seriously consider bombing the wreckage or sending special operations forces into Iran to destroy or retrieve it because either would be an act of war, the two officials said.

The officials said that, depending on the real condition of the wreckage, Chinese or Russian access to the drone is a much greater concern than a possible Iranian effort to reverse- engineer the RQ-170, which they said is unlikely given the drone’s special coatings and other materials.

Basic Stealth Technology

As for its stealthy shape, they said, an RQ-170 has been photographed, and basic stealth shape and skin technology is now some 35 years old.

The officials said that the loss of the RQ-170 is a warning about the limitations of drone technology and the dangers of relying too heavily on it.

First, they said, although the newest drones are being designed to operate autonomously, they still need to navigate by communicating with global positioning satellites, and those communications, the satellites and ground stations are vulnerable to jamming and spoofing, or deception, by sophisticated enemies.

In recent years, one of the officials said, computer hackers thought to be part of extensive Chinese or Russian cyber espionage efforts have attacked the computer networks of numerous defense contractors, including Lockheed Martin; broken into two satellite ground stations and planted keystroke logging software in some military computers.

Air Defense Systems

Second, even the most advanced drones aren’t immune to air defense systems, and advances in infrared detection and Doppler radar, the same kind used to detect tornadoes and other air turbulence, are likely to render them more vulnerable. Drones are called “low observable,” not “invisible,” for a reason, one of the officials said.

The RQ-170 was flying a reconnaissance mission inside Iranian airspace when its controllers lost contact with it, the two U.S. officials said.

The officials said that for three years the U.S. has been flying two types of unmanned surveillance missions over Iran and along the Afghanistan-Iran border from a 9,200-foot runway at a former Soviet airbase in Shindand in western Afghanistan’s Heart province. Publicly available satellite photographs don’t show the new runway, only an old one built by Soviet forces when they occupied Iran two decades ago.

Monitoring Construction

In addition to monitoring construction and other activity at suspected Iranian nuclear facilities from high altitudes, the officials said, the Central Intelligence Agency has been using drones to monitor cross-border traffic and Iranian support for insurgents.

The CIA, not the Air Force, flies the missions inside Iran so they are covert operations that the U.S. government can deny.

The Iranian Foreign Ministry said it presented its protest to the Swiss ambassador to Tehran, Livia Leu Agosti, who represents U.S. interests in the country.

In a letter to UN leaders, Iran denounced “the provocative and covert operations” against Iran by the U.S. The “blatant and unprovoked” air violation “is tantamount to an act of hostility,” Iranian Ambassador Mohammad Khazaee said in the letter to UN Secretary-General Ban Ki-Moon and Russian Ambassador Vitaly Churkin, current president of the Security Council.

To contact the reporter on this story: John Walcott in Washington at jwalcott9@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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Zynga Is Said to Get Enough Orders to Cover All Shares in Planned IPO

By Zijing Wu and Douglas MacMillan - Dec 9, 2011 12:48 AM GMT+0700

Zynga Inc., the biggest maker of games on Facebook, received enough orders to cover all the shares being sold in its initial public offering, said two people with knowledge of the situation.

The people declined to be identified as the process is private. Zynga plans to sell 100 million shares for $8.50 to $10 apiece, according to regulatory filings. The high end of that price range would value San Francisco-based Zynga at $7 billion.

The IPO would be the largest by a U.S. Internet company since that of Google Inc. in 2004. Filling the orders for Zynga’s shares a few days into the roadshow is a good sign, said Lise Buyer, principal of the Class V Group, an IPO advisory firm in Palo Alto, California.

“They’re off to a promising start,” Buyer said. “But it’s way too early to draw any conclusions because an indication in the book is not a commitment. If the euro zone falls apart on the 9th, all bets are off.”

Zynga is offering about 14 percent of its common stock, a larger portion than companies including Groupon Inc., LinkedIn Corp., and Pandora Media Inc. have sold this year in their public debuts. Morgan Stanley and Goldman Sachs Group Inc. (GS) are managing the offering, according to the filing.

Dani Dudeck, a spokeswoman for the company, declined to comment, as did Pen Pendleton, a spokesman for New York-based Morgan Stanley, and Andrea Rachman, a spokeswoman for New York- based Goldman Sachs.

Rival’s Valuation

Zynga plans to list under the symbol ZNGA on the Nasdaq Stock Market. The IPO values Zynga at as much as 6.8 times revenue in the year through Sept. 30, or more than three times rival Electronic Arts Inc. (ERTS)’s price relative to sales over the same period.

The company, founded by Mark Pincus in 2007, makes games such as FarmVille, CityVille and Mafia Wars, which are available via Facebook Inc. More than 90 percent of Zynga’s revenue comes from the social-networking site, the most popular in the world.

Facebook itself is considering raising about $10 billion in an IPO that would value the company at more than $100 billion, a person with knowledge of the matter said last month.

To contact the reporters on this story: Zijing Wu in London at zwu17@bloomberg.net; Douglas MacMillan in San Francisco at dmacmillan3@bloomberg.net

To contact the editors responsible for this story: Jennifer Sondag at jsondag@bloomberg.net; Jacqueline Simmons at jackiem@bloomberg.net

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India’s HCL Targets ‘Aggressive’ Acquisitions Amid European Debt Crisis

By Beth Mellor - Dec 9, 2011 7:00 AM GMT+0700

HCL Technologies Ltd., an Indian provider of technology services whose clients include Deutsche Bank AG and GlaxoSmithKline Plc (GSK), said the European debt crisis will help it to buy and partner with local companies.

The New Delhi-based company targets deals in the Nordic countries, Germany and France because continental Europe is the “biggest growth area for us,” Chief Executive Officer Vineet Nayar said in an interview in HCL’s London office. Clients often want to work with a local vendor and HCL will pursue “aggressive partnerships in the local markets and aggressive acquisitions,” he said.

Potential targets are probably more “open for acquisition” as a result of the current economic crisis, Nayar said. HCL’s order pipeline is “bigger than ever before” and the company plans to expand offerings for data analysis and cloud computing, which let clients rent software delivered over the Web rather than install it on their own machines.

Indian IT and software companies are benefitting from rising corporate spending on computer services and from governments trying to improve efficiency with technology as budget cuts bite. HCL bought U.K. software provider Axon Group for $658 million in 2008, its biggest ever deal. Indian rival Tata Consultancy Services Ltd. (TCS) said in September it was weighing acquisitions in France, Germany, Japan and the U.S.

“All large Indian IT companies are looking at the M&A game more closely, given that valuations have come down in Europe,” said Standard Chartered analyst Pankaj Kapoor, who has an “outperform” rating on HCL shares.

Search for Value

Before today, HCL had dropped 8.4 percent in Mumbai trading this year, valuing the company at $5.6 billion.

HCL doesn’t plan to expand its U.K. presence and would only be interested in British companies with a strong continental European footprint, Nayar said.

HCL is also benefitting from the current economic climate as more companies and governments are ditching their existing information technology service providers and searching for partners that offer better value, he said.

The $1 trillion information technology services market is “at the beginning of a phase of further disruption, similar to the one the low-cost airlines have brought in the transportation industry,” because of “low-cost” cloud-computing services, researcher Gartner Inc. said Dec. 1.

Gartner in October predicted worldwide enterprise IT spending will rise by 3.9 percent to $2.7 trillion in 2012. While growth will slow from a predicted 5.9 percent increase in 2011, the researcher said that “despite the global economic challenges, enterprises will continue to invest in IT.”

Phone-Hacking Probe

The HCL CEO reiterated that the company is cooperating with the U.K. Home Affairs committee and Metropolitan Police in a phone-hacking inquiry at News Corp.’s U.K. publishing unit.

HCL, which won a five-year contract to manage News International’s data center and networks in 2009, said in a letter to U.K. lawmakers this year it was asked for assistance in deleting e-mails nine times between April 2010 and July 2011.

In January 2011, the month when News Corp. began handing information to the police, the company requested help to “truncate a particular database,” according to the letter. HCL said it wasn’t able to handle the request and suggested another company.

Nayar said it is “common practice across all customers” for IT services providers to be asked to delete data, and that “only the customer knows what the data is.” He also said that “we don’t store the data and therefore the actual deletion was done by some other agency.”

To contact the reporter on this story: Beth Mellor in London at bmellor@bloomberg.net

To contact the editor responsible for this story: Simon Thiel in London at sthiel1@bloomberg.net

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Texas Instruments Sees Sales Below Estimates

By Ian King - Dec 9, 2011 12:01 PM GMT+0700

Texas Instruments Inc. (TXN) shares dropped in extended trading after the second-largest U.S. chipmaker’s fourth-quarter sales forecast fell short of analysts’ estimates amid weaker demand for electronics components.

Revenue will be $3.19 billion to $3.33 billion, the Dallas- based company said in a statement yesterday. On average, analysts had estimated sales of $3.41 billion, according to data compiled by Bloomberg.

Texas Instruments gets most of its revenue from analog chips, semiconductors that are key components in everything from missiles to washing machines, making its earnings a broad indicator of demand across the economy. Sales are being hurt by slowing purchases of electronics and falling orders from telecommunications-equipment makers.

“There’s no confidence out there,” said Tore Svanberg, a San Francisco-based analyst at Stifel Nicolaus & Co. He recommends buying Texas Instruments stock, which he owns himself. “Distributors are still very cautious and are still drawing down inventory.”

In October, Texas Instruments predicted fourth-quarter revenue would be $3.26 billion to $3.54 billion. This is the first quarter that Texas Instruments is including its National Semiconductor Corp. acquisition in the forecasts. That transaction closed on Sept. 23.

Texas Instruments’ stock fell as much as 6.9 percent to $27.87 after the report. The shares had earlier declined 2.5 percent at yesterday’s close in New York, leaving them down 7.9 percent for the year.

Inventory Reduction

“The weakness is pretty much broad-based, with the exception of wireless,” Texas Instruments Vice President Ron Slaymaker said on a conference call with analysts. “Orders will likely decline some from the third quarter.”

Texas Instruments is shipping fewer chips than its customers are using, evidence of a reduction of inventory by its distributors, Slaymaker said. By region, Europe is the weakest, followed by Asia and then the U.S., he said. Only Japan will grow this quarter as it continues to rebound from the effects of the March earthquake and tsunami.

The European sovereign debt crisis and budget struggles in the U.S. are helping suppress consumer spending. The Bloomberg Consumer Comfort Index was at minus 50.3 in the period ended Dec. 4, after a reading of minus 50.2 the prior week. The gauge has been at minus 50 or worse for 11 of the past 12 weeks, an unprecedented stretch of pessimism in its 26-year history.

Applications Chips

Texas Instruments’ OMAP applications processor is the main chip in Amazon.com Inc.’s new Kindle Fire tablet and smartphones made by Motorola Mobility Holdings Inc. and other handset manufacturers. OMAP, or Open Multimedia Application Platform, chips are estimated to represent about 7 percent of the company’s revenue, according to Chris Danely, an analyst at JPMorgan Chase & Co.

Profit in the fourth quarter, including costs related to the acquisition of National Semiconductor, will be 21 cents to 25 cents a share, the company said yesterday. In October, Texas Instruments forecast earnings of 28 cents to 36 cents.

Three of Texas Instruments’ largest customers are Avnet Inc. (AVT), Arrow Electronics Inc. and WPG Holdings Ltd. (3702) -- all distributors of electronic components -- which account for a combined 23 percent of the company’s sales, according to Bloomberg data.

Texas Instruments ranked second behind Santa Clara, California-based Intel Corp. (INTC) among U.S. chipmakers in total sales last year.

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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Asian Stocks Drop as ECB Damps Bond-Buying Speculation, Slowing GDP Growth

By Kana Nishizawa - Dec 9, 2011 10:59 AM GMT+0700

Asian stocks (MXAPJ) fell for a second day amid economic reports indicating Europe’s debt crisis is contributing to slower growth in Japan, South Korea and China.

Nippon Sheet Glass Co., which counts Europe as its biggest market, fell 2 percent in Tokyo after the European Central Bank damped speculation it would step up debt purchases. Renhe Commercial Holdings Co., a Chinese developer of underground shopping centers, sank 9.6 percent after a report that a customer defaulted on 2 billion yuan ($314 million) in debts. BHP Billiton Ltd. (BHP), the largest global mining company, retreated 3.6 percent in Sydney after commodity prices declined.

The MSCI Asia Pacific Index (MXAP) slid 2.1 percent to 114.82 as of 12:43 p.m. in Tokyo, the biggest decline in a month. The gauge is headed for a 2.4 percent decline for the week after gaining 8 percent last week.

“The ECB Chief saying he didn’t hint at more bond purchases was a disappointment for the market, and it also gave the market a reason to lock in profits after markets gained last week,” said Takashi Aoki, who helps manage 120 billion yen at Tokyo-based Mizuho Asset Management Co. “China’s inflation data signals there will be more easing ahead, which is positive for markets” over the long term, he said.

All 10 industry groups on the Asia-Pacific measure dropped, with about six stocks falling for each that rose. The gauge’s advance last week was the largest in four years, after China reduced curbs on lending and the Federal Reserve led central banks in cutting funding costs for European lenders.

Regional Indexes

Japan’s Nikkei 225 Stock Average (NKY) sank 1.4 percent after the nation’s economy grew less than the government’s initial estimate last quarter. Australia’s S&P/ASX 200 index fell 1.3 percent, while South Korea’s Kospi Index (KOSPI) declined 1.4 percent. Hong Kong’s Hang Seng Index fell 1.9 percent, while China’s Shanghai Composite Index slid 0.5 percent.

The MSCI Asia Pacific Index declined 15 percent this year through yesterday, compared with a drop of 1.9 percent by the S&P 500 and a 14 percent slump by the Stoxx Europe 600 Index. Stocks in the Asian benchmark are valued at 12.9 times estimated earnings on average, compared with 12.5 times for the S&P 500 and 10.4 times for the Stoxx 600.

Nippon Sheet Glass fell 2 percent to 149 yen in Tokyo. HSBC Holdings Plc (5), Europe’s biggest lender by market value, retreated 3 percent to HK$60.50 in Hong Kong.

Futures on the Standard & Poor’s 500 Index (SPXL1) rose 0.2 percent today. The S&P 500 Index of stocks slid 2.1 percent in New York yesterday, snapping a three-day rally, after European Central Bank President Mario Draghi said he didn’t signal stepping up government bond purchases.

Draghi Denial

Draghi’s comments roiled the U.S. market. He kept the onus on European leaders, who are meeting in Brussels, to solve the debt crisis by repeating his call for a “fiscal compact” and denying he had hinted the ECB would automatically support such an initiative with more government bond purchases.

ECB policy makers meeting in Frankfurt yesterday reduced the benchmark interest rate by a quarter percentage point to 1 percent, matching a record low. They also loosened collateral rules so that banks can borrow more from the ECB and announced two unlimited three-year loans. The measures “should ensure enhanced access of the banking sector to liquidity,” Draghi told reporters.

China’s consumer prices rose 4.2 percent in November from a year earlier, slowing from a 5.5 percent gain in the previous month, the National Bureau of Statistics said. The median estimate of economists surveyed by Bloomberg was for a 4.5 percent increase.

“Not That Easy”

“The market has been swinging between optimism and pessimism,” said Koji Toda, chief fund manager at Resona Bank Ltd. in Tokyo, which oversees the equivalent of $68 billion. “Investors had bought back shares on optimism the European crisis would be solved somehow, but now it’s confirmed the reality is not that easy.”

BHP fell 3.6 percent to A$35.66 in Sydney. Cnooc Ltd (883), China’s biggest offshore oil producer, slid 3.4 percent to HK$14.80 in Hong Kong, while Jiangxi Copper Co. (358), the biggest Chinese producer of the metal, retreated 5.2 percent to HK$17.98.

Crude oil prices for January delivery sank 2.1 percent to $98.34 a barrel in New York yesterday, while the London Metal Exchange Index of prices for six metals including copper and aluminum slid 1.1 percent.

Renhe tumbled 9.6 percent to 94 Hong Kong cents, the biggest drop in the MSCI Asia Pacific Index, and C C Land Holdings Ltd. (1224) dropped 8.7 percent to HK$1.58 in Hong Kong. C C’s Chairman Zhang Songqiao bought properties from Renhe and defaulted on 2 billion yuan of payment linked to the purchases, Hong Kong Economic Journal newspaper reported, citing unidentified people. The shares pared their losses after Eva Chan, C C Land’s Hong Kong-based spokeswoman, denied the report.

To contact the reporter on this story: Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net

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

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EU States to Send IMF $267 Billion in New Crisis Fight

By James G. Neuger and Gregory Viscusi - Dec 9, 2011 12:24 PM GMT+0700

European leaders added 200 billion euros ($267 billion) to their crisis-fighting warchest and tightened anti-deficit rules, seeking to lure the European Central Bank into stepping up its rescue operations.

In an accord hailed by ECB President Mario Draghi, the leaders laid out a new “fiscal compact” to prevent future debt runups, accelerated the startup of a planned 500 billion-euro rescue fund and scaled back bondholder loss-sharing provisions.

“It’s a very good outcome for euro-area members and it’s going to be the basis for a good fiscal compact and more disciplined economic policy in euro-area countries,” Draghi told reporters after 12 hours of overnight talks in Brussels.

European leaders navigated a labyrinth of political, legal and economic constraints amid unrelenting pressure from financial markets to craft a new approach to fighting the crisis, which now threatens to engulf Italy and Spain.

At the same time, the leaders ventured into untested legal territory by plotting to anchor the tougher budget rules in a separate euro-area treaty after Britain and Hungary balked at amending the existing treaty covering all 27 European Union countries.

The euro was little changed in reaction to the measures, the fifth wide-ranging crisis-containment package since the unprecedented 110 billion-euro bailout of Greece and was followed by the setup of a 440 billion-euro rescue fund in May 2010.

Extraction

The currency was at $1.3335 as of 2:01 p.m. Tokyo time, close to its level at the end of European trade. Stocks in Asia came off their lows of the day, with the MSCI Asia Pacific Index down 1.9 percent, after falling as much as 2.3 percent. Futures contracts on the U.S. Standard & Poor’s 500 Index were also 1.9 percent lower.

European governments for the first time extracted a contribution from the euro region’s national central banks, getting them to lend 150 billion euros to the International Monetary Fund’s general resources. Central banks from non-euro EU states will chip in around 50 billion euros more.

European governments are counting on that downpayment to attract reserve-rich emerging markets such as China to join in the rescue, a month after Europe’s efforts to solicit outside aid ran into obstacles at a Group of 20 meeting.

“I appreciate this demonstration of leadership from Europe and I’m hopeful that others will also do their part,” IMF Managing Director Christine Lagarde said after attending the Brussels summit.

The focus now shifts to the ECB’s central management, after Draghi said last week that “other elements” could follow a push by governments to push through a fiscal union. At the same time, Draghi yesterday damped expectations that a Brussels deal on fiscal discipline would prompt it to rapidly supplement its 207 billion-euro bond-buying operations.

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Gregory Viscusi in Brussels at gviscusi@bloomberg.net

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

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Boehner: Payroll Tax Cut Can Pass U.S. House

By Steven Sloan and Richard Rubin - Dec 9, 2011 12:01 PM GMT+0700

U.S. House Speaker John Boehner and Senate Majority Leader Harry Reid are poised for a collision next week of their bids to extend or expand a payroll tax cut for workers.

House Republicans rallied yesterday behind a plan Boehner is preparing that would pair an extension of the current payroll tax cut with eased restrictions on some industrial emissions and expedited approval of an oil pipeline from Canada. Reid is focused on expanding cuts to the worker payroll tax and enacting a surtax on annual income exceeding $1 million to pay for it.

Both leaders agree on extending the Social Security payroll tax cut in some manner, addressing expanded unemployment benefits that will lapse at the end of the year, preventing cuts to physician reimbursements by Medicare and enacting some spending reductions. Their differences over how to pay for a comprehensive package, along with some of their priorities, present procedural hurdles that are tough to clear, said Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat.

“At this moment, I don’t see the formula that gets 60 votes,” he said. “I’m still hopeful that we will.”

The House and Senate won’t hold votes today and most lawmakers are returning to their districts for the weekend. They face a Dec. 31 deadline to address the payroll tax cut or workers will receive 2 percent less in paychecks starting in January.

‘Classic Moment’

That’s a result that both parties want to avoid, said Senator Joseph Lieberman, a Connecticut independent.

“It’s a classic moment of this session of Congress, which is that both parties are for something and we can’t figure out how to get it done,” he said.

The biggest fights likely will center on a Republican demand that the bill include language that would expedite the approval of the Keystone XL pipeline in Canada. The proposed TransCanada Corp. (TRP) pipeline would carry oil from Canada to the U.S. The Obama administration put off a decision on the pipeline until 2013.

President Barack Obama has said he would reject efforts to tie approval of the pipeline to extension of a payroll tax cut. Boehner said the issue should be addressed in the package because development of the pipeline will create jobs.

‘The Keystone pipeline project would create tens of thousands of jobs immediately,” Boehner said. “At a time when the American people are still asking the question ‘where are the jobs?,’ this is a bipartisan proposal that the president ought to endorse.”

Veto Possibility

Representative Jeb Hensarling, a Texas Republican, exhorted Obama not to use his veto on the pipeline issue.

“Mr. President, we will have some of your ideas in the bill, maybe it’s time for you to try some of ours,” he told reporters after the Republican meeting.

House Democratic leader Nancy Pelosi of California said Republicans were “injecting poison pills” into the legislation, knowing Obama wouldn’t sign it into law with those provisions.

Both parties are interested in continuing expanded unemployment benefits beyond their scheduled expiration at the end of the year. They are divided over the details. Over time, Republicans want to scale back how long the unemployed can claim compensation from 99 weeks to 79 weeks and eventually 59 weeks, said Representative Pat Tiberi, an Ohio Republican.

House Ways and Means Committee Chairman Dave Camp, a Michigan Republican, said yesterday that Republican leaders are still talking to members about unemployment benefits “to try to find a policy that everyone can agree on.”

Other Provisions

Pelosi said reducing the benefits to 59 weeks would be “problematic” for her caucus.

The Republican bill also would overturn an Obama administration rule that bars states from conducting drug tests for recipients of unemployment compensation and would include income-based eligibility for food stamps, according to Representative Aaron Schock, an Illinois Republican.

Both parties have expressed interest in avoiding reductions in reimbursements by Medicare that are due to begin Jan. 1. The Republican bill would prevent the cuts for two years and provide physicians with reimbursements that would be 1 percent larger than they were this year, according to Representative Phil Gingrey, a Georgia Republican who is a physician. That would cost $39 billion over 10 years, according to the Congressional Budget Office.

Longer-Term Fixes

Gingrey said Camp promised to consider longer-term fixes to the Medicare reimbursement system next year. Camp’s pledge persuaded Gingrey to back the package, Gingrey said.

Republicans will find savings, according to Gingrey, by expanding the pool of higher-income Medicare beneficiaries who would be required to pay larger premiums for Part B physician care. The plan includes income-based eligibility for the drug benefit program under Medicare Part D.

Upper-income senior citizens would pay “closer to the true cost” of the programs, Gingrey said.

Another area of potential agreement is a provision that allows the complete write-off of capital investments that Representative Charles Boustany of Louisiana said would be included in the Republican measure. Unless Congress acts, the ability for full write-offs expires Dec. 31, and in 2012 companies could receive only 50 percent bonus depreciation.

Representative Sander Levin of Michigan, the top Democrat on the Ways and Means panel, said he could support that provision.

Senate Action

The Senate blocked separate Democratic and Republican bills yesterday that would have extended or expanded the payroll tax next year. The Democratic measure, which failed to advance in a 50-48 vote, would have reduced the payroll tax to 3.1 percent next year for employees. The Republican bill, which stalled in a 22-76 vote, would have extended the payroll tax at the current 4.2 percent rate for one year.

Both bills needed 60 votes to advance. After the votes, Reid said the Republican proposal being drafted in the House wouldn’t succeed in his chamber.

“House Republicans’ bill is a partisan joke that has no chance of passing the Senate,” he said in a press release. “Instead of playing political games, Congress should work to find common ground.”

The House could vote on the Republican plan as soon as Dec. 13, Gingrey said. The House’s work won’t likely be completed if Democrats in the Senate block the measure, setting up possible back-and-forth maneuvering between the chambers next week.

Boehner “put enough red meat for their Tea Party folks to get it done,” said Representative Henry Cuellar, a Texas Democrat. “But on the way back, he’s going to lose a lot of those folks because they’re going to strip out things and then it’s up to the Democrats to come in and help it out.”

To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net; Steven Sloan in Washington at ssloan7@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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Verizon Could Gain ‘Missing Piece’ for Online-Video Service With Redbox

By Scott Moritz - Dec 9, 2011 4:13 AM GMT+0700

Verizon Communications Inc. (VZ)’s talks to combine with movie-rental kiosk operator Redbox for an online-video service could lead to the phone company gaining expertise needed to start a business rivaling Netflix Inc. (NFLX)

Verizon, the second-largest U.S. phone company, has been meeting with Redbox, a unit of Coinstar Inc. (CSTR), in an effort to work out a content-distribution plan, according to a person familiar with the talks. The carrier has also met with other potential video partners and final details for any arrangement haven’t been determined, said the person, who declined to be identified because the talks aren’t public.

Phone companies and pay-TV providers are seeking ways to enter the online-video market dominated by Netflix and Hulu LLC as consumers increasingly watch movies and TV shows over the Internet. A combination with Redbox, known for its DVD-rental vending machines, would provide New York-based Verizon with knowledge about working with content providers and a brand consumers associate with movie distribution.

“There’s a missing piece that they are looking for,” said Sam Greenholtz, an analyst with Telecom Pragmatics in Westminster, Maryland. “They need the expertise that goes with this business, like how to make it run and what to charge.”

Marci Maule, a spokeswoman for Bellevue, Washington-based Coinstar, declined to comment.

“Verizon talks to a lot of companies,” Deidre Hart, a Verizon spokeswoman, said in an e-mail. “There are no definitive agreements to discuss with anyone at this time.”

Part of Strategy

Coinstar rose 7.8 percent to $47.45 at the close in New York, the biggest gain in more than a year. The stock has lost 16 percent this year. Verizon declined 1.3 percent to $37.81.

“I would definitely see it as a positive” for Redbox, said Eric Wold, a B Riley & Co. analyst in San Francisco. “It could create a fairly attractive combination plan for consumers.”

Yesterday, Verizon Chief Executive Officer Lowell McAdam said online video will be part of the company’s strategy as it seeks to expand distribution. He also said the company had looked at Hulu when its owners sought buyers for the business.

“Hulu is out and they’ve moved on to Redbox,” said Greenholtz, a former Verizon employee who has consulted for the company, and who was briefed by Verizon about the video plans. “Everything is on the table and nothing has been nailed down.”

Verizon is interested in Internet Protocol TV technology, or IPTV, to compete with Netflix and cable companies such as Comcast Corp. (CMCSA) and Time Warner Cable Inc. (TWC), Tony Wible, an analyst at Janney Montgomery Scott LLC, said this week.

‘Recognized Name’

Streaming video to televisions, computers and portable devices is a market that has attracted other technology companies, including Apple Inc. (AAPL), Google Inc. (GOOG) and Amazon.com Inc. (AMZN)

Yesterday, TechCrunch reported that Verizon and Redbox plan to start a joint service on May 28. The service will be credit- based and include several tiers, some of which include rentals of physical discs, TechCrunch said.

Verizon has “some of the key pieces,” Greenholtz said. With on-demand movies and TV shows for its FiOS service and an extensive landline network, “you can see where it’s not much of a stretch to get this stuff on a wireless signal also,” he said.

What’s missing, Greenholtz said, is more video-distribution knowhow.

“They need a recognized name, the Hollywood knowledge and the talent,” he said. “That’s something they think Hulu or Redbox would give them.”

To contact the reporter on this story: Scott Moritz in New York at smoritz6@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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Stocks in U.S. Decline as ECB Chief Damps Speculation on Bond Purchases

By Rita Nazareth - Dec 9, 2011 5:32 AM GMT+0700

U.S. stocks fell, snapping a three- day gain, as the European Central Bank damped speculation it would boost debt purchases and amid a report Germany rejected some proposals to fight the crisis at a summit of leaders.

Banks tumbled as Morgan Stanley (MS), Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) retreated at least 5.2 percent. Alcoa Inc., Intel Corp. and General Electric Co. dropped more than 2.5 percent, pacing declines among the biggest American companies. Hartford (HIG) Financial Services Group Inc. decreased 8.2 percent after the insurer said it is targeting additional cost cuts as it copes with a “fragile economic recovery.”

The Standard & Poor’s 500 Index retreated 2.1 percent to 1,234.35 at 4 p.m. New York time as 487 out of 500 stocks declined. The Dow Jones Industrial Average lost 198.67 points, or 1.6 percent, to 11,997.70. The Russell 2000 Index of small companies tumbled 3.1 percent to 722.68.

“There’s a temptation to take capital out of the market,” Michael Shaoul, chairman of Marketfield Asset Management in New York, which oversees $1 billion, said in a telephone interview. “You have the concern that the last few times Europe leaders have sat down and talked about this they made a mess of it. People are preparing for the worst.”

Comments from ECB President Mario Draghi roiled the global markets. He kept the onus on European leaders meeting in Brussels to solve the debt crisis by repeating his call for a “fiscal compact” and denying he had hinted the ECB would automatically support such an initiative with more bond purchases.

German Opposition

Equities extended losses in the final hour of trading as Reuters reported that Germany reiterated its opposition to some of the debt-crisis fighting measures being discussed at the summit in Brussels, including issuing common euro-zone debt or running the temporary and permanent bailout funds simultaneously. The European Banking Authority said European Union banks must raise 114.7 billion euros ($152.8 billion) in fresh capital, up from a previous estimate of 106 billion euros.

Today’s decline sent the S&P 500 lower for 2011. It has pared its decline from the end of April to 9.5 percent after dropping as much as 19 percent from this year’s high in April. The gauge has erased its year-to-date loss six times since the beginning of October amid speculation Europe’s steps to tame its crisis would avert a global recession.

All 10 industries in the S&P 500 declined as financial shares tumbled 3.7 percent as a group. The KBW Bank Index (BKX) sank 3.9 percent as all of its 24 stocks retreated. Morgan Stanley declined 8.4 percent, the most in the S&P 500, to $15.88. Citigroup dropped 7 percent to $27.75. JPMorgan fell 5.2 percent to $32.22, for the biggest decline in the Dow.

Alcoa, Intel, GE

The Morgan Stanley Cyclical Index retreated 2.9 percent, while the Dow Jones Transportation Average sank 2.5 percent amid concern about economic growth. Alcoa slid 4.3 percent to $9.47. Intel lost 3.7 percent to $24.71. GE fell 2.6 percent to $16.31.

Hartford tumbled 8.2 percent to $17.20. Core earnings, which exclude some investment results, will be $3.30 to $3.60 a share next year, according to a presentation today from the company. That compares with the $3.51 average estimate of 18 analysts surveyed by Bloomberg.

Costco Wholesale Corp. (COST) declined 2 percent to $85.76 after the largest U.S. warehouse-club chain said profit margin shrank in the first quarter because of rising costs.

McDonald’s Corp. (MCD) rose 0.5 percent to $96.92, a record. The shares had the only gain in the Dow. The world’s largest restaurant chain said sales at stores open at least 13 months rose 7.4 percent globally last month, driven by demand in Japan and China.

Stocks May Gain

The U.S. stock market may gain in coming months as economic prospects for the country improve, said Dennis Gartman, an economist and the publisher of the Gartman Letter. At the Inside Commodities conference today in New York, Gartman said he’s starting to get more “bullish” on U.S. equities.

Stock-futures rallied earlier today after the ECB cut interest rates and offered banks unlimited cash for three years. In the U.S, data showed that fewer Americans than forecast filed applications for unemployment benefits last week, reflecting a drop in firings that may signal the job market is on the mend.

“We have two positives and a question mark,” David Kelly, who helps oversee $394 billion as chief market strategist for JPMorgan Funds in New York, said in a telephone interview. “The unemployment claims show the U.S. continues to decouple from Europe’s problems. The second thing is the ECB’s further commitment to stabilize the bank system. The question mark is left to European leaders. We need to see more of a commitment to enforce fiscal discipline and a plan for economic growth.”

200-Day Average

The S&P 500 today is more than 1 percent below its average price in the last 200 days (SPX) after briefly surpassing it in each of the last three days, data compiled by Bloomberg show. The index hasn’t closed above the chart line since Nov. 8, the day before a decline of 3.7 percent. It fell 5.2 percent in the two days after it rose above the 200-day average on Oct. 28.

“It isn’t encouraging for the bulls to see the S&P 500 continue to find trouble near its 200-day moving average,” Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research, said in a telephone interview from Cincinnati. “Then, consider the year-to-date break-even is around 1,257, and you have two logical areas of potential resistance that are clearly holding the market back here.”

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

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

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EU Leaders Work on ‘Fiscal Compact’ to Lure Central Bank Into Euro Fight

By James G. Neuger and Stephanie Bodoni - Dec 9, 2011 7:11 AM GMT+0700
Enlarge image

Angela Merkel, Germany's chancellor, arrives to attend a working dinner as part of a two-day summit of European Leaders at the European Council headquarters in Brussels. Merkel damped expectations, saying the euros' credibility has suffered. Photographer: Jock Fistick/Bloomberg

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Dec. 9 (Bloomberg) -- Kent Smetters, a professor at the University of Pennsylvania’s Wharton School and a former Treasury Department economic policy official, talks about Europe's sovereign debt crisis. He speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

European leaders battled into the night to halt two years of debt-driven turmoil in financial markets and dispel concerns that the 17-nation euro currency is on the brink of unraveling.

Leaders worked on a “fiscal compact” at a Brussels summit to restore bondholders’ confidence and make it possible for the European Central Bank and International Monetary Fund to step up contributions to the rescue effort. No agreement has yet been reached, said two government officials familiar with the talks.

Chancellor Angela Merkel of Germany, Europe’s dominant economy, damped expectations, saying the euro’s credibility has suffered and calling the 15th summit in 23 months part of a “step-by-step” solution to the crisis that has cast doubt on the currency’s survival. Italian and Spanish bonds tumbled and the U.S. Standard & Poor’s Index fell the most in two weeks as some investors reined in optimism about the summit’s outcome.

European leaders are navigating a labyrinth of political, legal and economic constraints amid unrelenting pressure from financial markets to craft a fifth “comprehensive” package to stamp out the crisis that began with the Greek government discovering an unexpected budget hole in October 2009.

Talks that started at 7:30 p.m. yesterday dragged past midnight, with the leaders yet to tackle how to anchor tougher budget rules in European treaties. The debate focused on a proposal to cap structural deficits at 0.5 percent of gross domestic product and require each country to establish an “automatic correction mechanism” when budgets stray from the target.

‘More Intrusive’

The proposal, laid out by European Union President Herman Van Rompuy, also foresaw a near-automatic disciplinary procedure for high-deficit countries and “more intrusive control” of taxing and spending by governments that flout the rules.

Whether the meeting wraps up on schedule today or runs into the weekend, the leaders are likely to leave Brussels with much business unfinished. Planned treaty amendments won’t be penned until March and may take several more months to enshrine in law.

In addition, the independent ECB signaled yesterday that a Brussels deal to strengthen fiscal discipline wouldn’t prompt it to rush to the rescue of Spain or Italy, the two countries now seen as most vulnerable.

ECB President Mario Draghi said he was “kind of surprised” by a view that took hold in markets last week that the central bank would rapidly supplement its 207 billion-euro ($276 billion) bond-buying operations in response to a summit announcement of steps toward a closer fiscal union. Draghi is taking part in the summit.

Bond Slide

Italian 10-year bonds slid the most in almost a month, pushing up yields by 44 basis points to 6.43 percent. Bonds of other high-yielding countries also fell as investors sought the relative safety of German debt. The yield on 10-year bunds declined 9 basis points to 2.01 percent.

The euro slipped 0.5 percent yesterday and was little changed at $1.3344 at 9:02 a.m. in Tokyo. In the U.S., where President Barack Obama has been pushing European leaders to find a solution to the crisis, the S&P 500 lost 2.1 percent to 1,234.35 points.

Still, Draghi didn’t rule out a proposal up for discussion at the summit that would channel about 150 billion euros from national central banks into the IMF’s crisis-fighting war chest. Euro-area governments expect central banks of non-euro EU countries to chip in 50 billion euros more.

The ECB provided breathing space yesterday, trimming its main interest rate by a quarter-point to 1 percent and pledging to offer commercial banks unlimited cash for three years to tide them through the crisis.

Treaty Change

ECB measures sought to alleviate the impact of the debt crisis on the banking system, now in need of 114.7 billion euros in fresh capital, according to a European Banking Authority announcement yesterday. European lenders will have to raise a total of 8 billion euros more than estimated by the EBA in October.

With Greece, Ireland and Portugal drawing on a combined 256 billion euros in European and IMF loans and Greece counting on 130 billion euros more, the government leaders’ focus shifted to preventing future budgetary crackups. That would happen by reinforcing a “stability pact” that Germany conceived in the 1990s and watered down in 2005.

“What’s important for me is that the euro can only win back its credibility if we change the treaties a way that develops toward a stability union,” Merkel said before the summit. “That’s what at the core here for me.”

Draft Proposal

Van Rompuy’s draft proposal contained elements that are taboo for Germany, including the “possibility of moving toward common debt issuance” and enabling a planned permanent rescue fund to act as a bank that could borrow from the ECB.

Looming over the crisis management was a decision by Standard and Poor’s decision to issue a downgrade warning for 15 euro-area governments pending the summit outcome.

“We need more solidarity in the euro zone and more discipline,” French President Nicolas Sarkozy said at a pre- summit meeting of conservative leaders in Marseille. Europe is in an “extraordinarily dangerous situation.”

In a joint pre-summit letter to European leaders, Merkel and Sarkozy set a March 2012 deadline for an agreement on treaty amendments, calling on euro states to set up their own fiscal- enforcement system in the absence of an accord among all 27 EU governments.

That go-it-alone threat plus a call for a financial transaction tax set up a showdown with U.K. Prime Minister David Cameron, head of the biggest EU country still using its own currency. Cameron comes to Brussels vowing to defend London’s status as Europe’s premier financial market.

British Interests

“We need obviously to get that stability in the euro zone that’s good for European countries, good for Britain as well,” Cameron said on his way into the summit. “But also we need to protect Britain’s interests.”

Merkel and Sarkozy pushed back against the U.K. demands, regarding Cameron’s plea as a distraction from efforts to shore up the euro zone, a German government official said on condition of anonymity.

Van Rompuy’s draft called for the permanent rescue fund, the 500 billion-euro European Stability Mechanism, to be set up in July 2012, a year ahead of schedule. He proposed letting it lend the full amount, instead of lowering its lending limit by the roughly 170 billion euros already committed by the temporary rescue fund, the European Financial Stability Facility.

In a concession by Germany, the revamped permanent fund will follow IMF practices on imposing potential losses on holders of bonds of debt-ridden states. Merkel agreed in the pre-summit letter that the two writedowns imposed on Greek bondholders this year were “unique and exceptional.”

Finnish Sensitivity

National sensitivities pervade the negotiations, such as Finland’s objection to scrapping the unanimity rule for decisions by the fund to grant aid packages. Van Rompuy proposed that an 85 percent supermajority could vote to release aid funds only when an “urgent decision” is required.

European leaders “now recognize the urgency of doing something serious and bold,” Obama said at a White House news conference yesterday. “The question is whether they can muster the political will to get it done.”

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Stephanie Bodoni in Brussels at

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

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EU Battles to Save Euro as Merkel Eyes ‘Step by Step’ Solution to Crisis

By James G. Neuger and Stephanie Bodoni - Dec 9, 2011 1:54 AM GMT+0700

Play Video

Dec. 8 (Bloomberg) -- David Trone, managing director at JMP Securities, talks about the the possibility of a breakup of the euro zone. Trone, speaking with Tom Keene on Bloomberg Television's "Surveillance Midday," also discusses former MF Global Holdings Ltd. Chief Executive Officer Jon Corzine's testimony before the House Agriculture Committee today and the outlook for U.S. financial stocks. (Source: Bloomberg)

European leaders battled over the fate of the euro in last-ditch efforts to stem two years of turmoil in financial markets and put the debt-addled continent on a sounder economic footing.

Plans to funnel central bank loans through the International Monetary Fund started to fall into place as French President Nicolas Sarkozy warned “there’ll be no second chance” in the absence of a credible crisis-containment strategy from a summit that began today in Brussels.

Chancellor Angela Merkel of Germany, Europe’s dominant economy, damped expectations, saying the euro’s credibility has suffered and calling the 15th summit in 23 months part of a “step-by-step” solution to the crisis that has cast doubt on the currency’s survival.

European leaders began open-ended talks over dinner at 7:30 p.m., with no press briefing scheduled. They are navigating a labyrinth of political, legal and economic constraints amid unrelenting pressure from financial markets in a bid to craft a fifth “comprehensive” package to stamp out the crisis that began with the Greek government discovering an unexpected budget hole in October 2009.

Spanish and Italian bonds tumbled and the Stoxx Europe 600 Index lost 1.5 percent, reversing a 1 percent advance, as some investors reined in expectations about the summit’s outcome.

Whether the meeting wraps up on schedule tomorrow or runs into the weekend, the leaders are likely to leave Brussels with much business unfinished. Planned amendments to European treaties won’t be penned until March and may take several more months to enshrine in law.

‘Kind of Surprised’

In addition, the independent European Central Bank signaled today that a Brussels deal to tighten budget-deficit rules for the 17 euro governments wouldn’t prompt it to rush to the rescue of Spain or Italy, the two countries now seen as most vulnerable.

ECB President Mario Draghi said he was “kind of surprised” by a view that took hold in markets last week that the central bank would rapidly supplement its 207 billion-euro bond-buying operations in response to a summit announcement of steps toward a closer fiscal union. Draghi is taking part in the summit.

“The ball is still in the politicians’ court, increasing pressure on EU leaders to come up with longer-term solutions for the debt crisis,” said Mohit Kumar, head of European interest- rate strategy at Deutsche Bank AG in London. “This won’t bode well for periphery bonds.”

ECB War Chest

Italian 10-year bonds slid the most in almost a month today, pushing up yields by 44 basis points to 6.43 percent. Bonds of other high-yielding countries also fell as investors sought the relative safety of German debt. The yield on 10-year bunds declined 9 basis points to 2.01 percent. The euro was down 0.7 percent on the day at $1.3318.

Still, Draghi didn’t rule out a proposal up for discussion tonight that would channel about 150 billion euros ($200 billion) from national central banks into the IMF’s crisis- fighting war chest. Euro-area governments expect central banks of non-euro EU countries to chip in 50 billion euros more.

The ECB provided breathing space today, trimming its main interest rate by a quarter-point to 1 percent and pledging to offer commercial banks unlimited cash for three years to tide them through the crisis.

Treaty Change

ECB measures sought to alleviate the impact of the debt crisis on the banking system, now in need of 114.7 billion euros in fresh capital, according to a European Banking Authority announcement today. European lenders will have to raise a total of 8 billion euros more than estimated by the EBA in October.

With Greece, Ireland and Portugal drawing on a combined 256 billion euros in European and IMF loans and Greece counting on 130 billion euros more, the government leaders’ focus shifted to preventing future budgetary crackups by reinforcing a “stability pact” that Germany conceived in the 1990s and watered down in 2005.

“What’s important for me is that the euro can only win back its credibility if we change the treaties a way that develops toward a stability union,” Merkel said before the summit. “That’s what at the core here for me.”

Marching in lockstep with Merkel, Sarkozy pressed for national balanced-budget amendments, ironclad barriers against excessive deficits and debt, and new powers for European authorities to dictate budgets in countries that overstep the limits. The tougher system, to be anchored in European treaties, would go beyond crisis-triggered rules that take effect next week.

‘More Solidarity’

Their task has been complicated by Standard and Poor’s decision to issue a downgrade warning for 15 euro-area governments pending the summit outcome.

“We need more solidarity in the euro zone and more discipline,” Sarkozy said at a pre-summit meeting of conservative leaders in Marseille. Europe is in an “extraordinarily dangerous situation.”

In a joint letter to European leaders yesterday, Merkel and Sarkozy set a March 2012 deadline for an agreement on treaty amendments, calling on euro states to set up their own fiscal- enforcement system in the absence of an accord among all 27 EU governments.

That go-it-alone threat plus a call for a financial transaction tax set up a showdown with U.K. Prime Minister David Cameron, head of the biggest EU country still using its own currency. Cameron comes to Brussels vowing to defend London’s status as Europe’s premier financial market.

‘Britain’s Interests’

“We need obviously to get that stability in the euro zone that’s good for European countries, good for Britain as well,” Cameron said on his way into the summit. “But also we need to protect Britain’s interests.”

A consensus is emerging to speed the setup of a permanent rescue fund, the 500 billion-euro European Stability Mechanism. It is likely to go into operation in late 2012, instead of mid- 2013 as originally planned, the EU diplomat said. No decision is likely tonight on combining it with the current rescue fund, the 440 billion-euro European Financial Stability Facility, the diplomat said.

In a concession by Germany, the revamped permanent fund will follow IMF practices on imposing potential losses on holders of bonds of debt-ridden states. Merkel agreed in yesterday’s letter that the two writedowns imposed on Greek bondholders this year were “unique and exceptional.”

National sensitivities pervade the negotiations, such as Finland’s objection to scrapping the unanimity rule for decisions by the fund to grant aid packages.

U.S. Treasury Secretary Timothy F. Geithner, on the final leg of a three-day trip to Europe, has urged policy makers to work with central banks to erect a “stronger firewall.”

“The leaders of Europe are moving this week to strengthen the foundations of monetary union,” Geithner said after talks with Italian Prime Minister Mario Monti in Milan. “These are vital and critical but also very challenging reforms. And they will take time.”

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Stephanie Bodoni in Brussels at

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

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Corzine: I Didn’t ‘Intend’ to Break Rules

By Silla Brush and Lorraine Woellert - Dec 9, 2011 5:17 AM GMT+0700

Jon S. Corzine told lawmakers he never intended to break any rules as head of MF Global Holdings Ltd. and doesn’t know what happened to an estimated $1.2 billion in missing client funds.

“I’m not in a position, given the number of transactions, to know anything specifically about the movement of any specific funds,” Corzine said today at a House Agriculture Committee hearing in Washington. “I certainly would never intend to direct or have segregated funds moved.”

Under subpoena and under oath, the former Democratic senator and New Jersey governor testified on Capitol Hill for two and a half hours, repeatedly apologizing to investors, customers and employees of the failed New York brokerage.

“I simply do not know where the money is, or why the accounts have not been reconciled to date,” Corzine said. “I apologize, both personally and on behalf of the company, to our customers, our employees and our investors. I truly know that they are bearing the brunt” of the collapse.

Under repeated questioning, Corzine said that he did not knowingly authorize any movement of funds out of client accounts, and that any such transfers could have been a misunderstanding or misinterpretation of his intent.

‘Fix This’

Corzine said that on the evening of Oct. 30, the night before MF Global filed what has become the eighth-largest U.S. bankruptcy, he was informed of the shortfall in client accounts and told employees, “We’ve got to fix this,” and “We’ve got to find the money.” He speculated that someone “could misinterpret” such remarks.

James W. Giddens, the trustee overseeing the liquidation of the firm, has estimated that $1.2 billion in client money is missing. The Commodity Futures Trading Commission, Securities and Exchange Commission and Justice Department are investigating.

Corzine, who resigned as chairman and chief executive officer of MF Global on Nov. 4, said in his opening remarks that he was “stunned” when he learned that the company couldn’t account for “many hundreds of millions of dollars.”

Corzine’s appearance before the House Agriculture Committee, which oversees the CFTC, came after the panel voted to issue a subpoena to compel his testimony. The Senate Agriculture Committee and a House Financial Services subcommittee also voted to subpoena Corzine.

Answering All Questions

Corzine didn’t once decline to answer a question or invoke his Fifth Amendment right to remain silent.

“As a former United States senator who recognizes the importance of congressional oversight, and recognizing my position as former chief executive officer in these terrible circumstances, I believe it is appropriate that I attempt to respond to your inquiries,” Corzine said in a written statement to the committee.

Corzine said he offered to testify to Congress without subpoena in January, by which time he might have been better able to prepare. “While I intend to be responsive to the best of my ability today, without adequate time and materials to prepare, I may be unable to respond to various questions members might pose,” he told lawmakers.

CFTC commissioner Jill Sommers, testifying in advance of Corzine, said regulators are still working to trace all the transactions and that some client funds may be recovered.

“If there is any customer money that has been transferred out of the accounts, that is part of what we are working together to find and that money will be clawed back to be distributed back to customers,” Sommers, the commissioner overseeing the agency’s investigation of MF Global, told the committee.

Penalties Possible

MF Global employees could face civil or criminal penalties if rules or laws were violated, Sommers said.

“They are subject to civil prosecution under our rules, and there would also be potential for criminal violations,” Sommers said.

MF Global filed for bankruptcy protection after making risky bets on some of Europe’s most indebted countries. Sommers said that regulators haven’t found evidence that client funds were incorporated in the European debt positions.

Under current rules, customer money is supposed to be kept segregated from the firms’ accounts. “We were receiving daily segregation reports from MF Global and those did not raise red flags for us until right before the bankruptcy,” Sommers said.

If funds are missing because of internal errors at MF Global, Corzine may have breached responsibilities under Sarbanes-Oxley rules, according to Daniel Collins, a professor of accounting at the University of Iowa’s Tippie College of Business.

Corzine Vote

Under the 2002 law -- for which Corzine voted as senator -- top executives must certify the accuracy of financial statements and assess whether they have sufficient safeguards to catch fraud and bookkeeping errors. Corzine signed off on MF Global’s quarterly reports prior to the bankruptcy.

“Whether these are operational errors or not is a serious matter,” Collins said in a phone interview. “If effective controls for monitoring the flow of the funds from the clients through the different investments are not in place, then that would be a breach of the Sarbanes-Oxley responsibilities of top management.”

Internal Controls

President George W. Bush signed Sarbanes-Oxley into law after accounting scandals at Enron Corp. and WorldCom Inc. eroded investor confidence. Executives must also have internal controls certified by an outside auditor under the law.

In his written statement, Corzine for the first time provided details on so-called repurchase-to-maturity transactions that have drawn legal and regulatory scrutiny in the weeks since the bankruptcy. He described himself as a “strong” advocate of the transactions while saying that because he isn’t an accountant he can’t vouch for the way the transactions were handled.

“I accept responsibility for the RTM trades that MF Global engaged in from the time that I arrived at MF Global until my departure, on November 3, 2011, and I strongly advocated the trading strategy that I have described,” he said.

MF Global’s board was told of the European debt trades and approved limits on the risk in the trades by specific countries, Corzine told lawmakers. “The directors approved sovereign risk limits for these RTM trades. At the time of the bankruptcy, MF Global was within these risk limits,” he said.

None of the foreign debt securities that MF Global used in the repo transactions has yet defaulted or been restructured, Corzine said.

Lobbying Efforts

He acknowledged lobbying the CFTC and its Chairman Gary Gensler, a former colleague at Goldman Sachs Group Inc., on a rule change relating to how client funds can be invested. Corzine said he took part in a conference call with Gensler on the matter, a conversation that involved other officials.

“I did not exert undue or improper influence on regulators,” Corzine told lawmakers. He said in his written statement that he and Gensler saw each other at a number of other personal and business events in 2010 and 2011, but that the two didn’t discuss regulatory matters.

Gensler has recused himself from involvement in matters related to the MF Global bankruptcy because of his ties to Corzine, who was co-chairman of Goldman Sachs before entering politics. The client funds rule, which was delayed by Gensler to give commissioners more time to debate the regulation, has since been completed.

Rating Downgrades

Corzine’s testimony detailed events leading up to the firm’s bankruptcy, insisting that its losses were related to ratings downgrades on its European debt portfolio, not to direct losses on those positions. Following a disappointing earnings report, clients and counterparties began to withdraw business and collateral.

“Despite our best efforts to sell assets and generate liquidity, the marketplace lost confidence in the firm,” Corzine said.

Corzine reiterated that his knowledge of specific transactions involving client funds was limited.

“There were an extraordinary number of transactions during this period, the last few days of MF Global. And I do not know, for example, whether there were operational errors at MF Global or elsewhere, or whether banks and counterparties have held onto funds that should rightfully have been returned to MF Global,” Corzine said. “I am sure that the trustee in bankruptcy, the SIPC receiver, and the regulators are working to answer these questions and to understand precisely what happened during the firm’s last days and hours.”

To contact the reporters on this story: Silla Brush in Washington at sbrush@bloomberg.net; Lorraine Woellert in Washington at lwoellert@bloomberg.net.

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net

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Gas-Fracking Chemicals Detected in Wyoming Aquifer, EPA Says

By Jim Efstathiou Jr. - Dec 9, 2011 3:50 AM GMT+0700

The U.S. Environmental Protection Agency said for the first time it found chemicals used in extracting natural gas through hydraulic fracturing in a drinking-water aquifer in west-central Wyoming.

Samples taken from two deep water-monitoring wells near a gas field in Pavillion, Wyoming, showed synthetic chemicals such as glycols and alcohols “consistent with gas production and hydraulic-fracturing fluids,” the agency said today in an e- mailed statement.

The U.S. gets about one-third of its gas from fracturing, or fracking, in which millions of gallons of chemically treated water and sand are forced underground to break rock and let trapped vapor flow. The findings give ammunition to environmental groups, such as the Natural Resources Defense Council, that have said the drilling risks tainting drinking water and needs stronger regulation.

“This is just evidence of why we need better rules,” Amy Mall, senior policy analyst for the group in Washington, said in an interview. “It’s a game-changer. EPA experts and scientists have recognized that there is real contamination, that there is a real scientific basis for linking it to fracking.”

After complaints from residents of Pavillion, about 230 miles (370 kilometers) northeast of Salt Lake City, the EPA began investigating private drinking-water wells about three years ago. Calgary-based Encana Corp. (ECA), Canada’s largest natural- gas producer, owns about 150 wells in Pavillion, according to spokesman Doug Hock.

‘Not Definitive’

“They’ve used terms like ‘likely,’” Hock said today in an interview. “What they’ve come up with here is a probability. It’s not a definitive conclusion.”

Synthetic chemicals discovered in the aquifer are just as likely “the result of contamination from their own sampling,” he said.

Industry representatives such as Aubrey McClendon, chairman and chief executive officer of Chesapeake Energy Corp. (CHK), the most active U.S. oil and natural-gas driller among well operators, have said there haven’t been proven cases of fracking fluids contaminating drinking water.

“Try not to be the 51st person to write a story about the alleged contamination of somebody’s water well from fracking,” McClendon said April 8 at the Society of American Business Editors and Writers conference at Southern Methodist University in Dallas. “There have been some issues with drilling wells. They don’t come from fracking.”

Deep Monitoring

In 2010, the U.S. Department of Health and Human Services recommended that Pavillion residents use alternate sources of water for drinking and cooking. While testing detected petroleum hydrocarbons in wells and in groundwater, the agency at the time said it couldn’t pinpoint the source of the contamination.

The EPA dug two deep monitoring wells into the aquifer and found “compounds likely associated with gas-production practices, including hydraulic fracturing,” according to today’s statement. Levels of the chemicals in the deep wells are “well above” acceptable standards under the Safe Drinking Water Act, the agency said.

Fracking chemicals may have entered the aquifer through faulty well construction, gaps in impermeable rock or fractures created during drilling, the EPA said.

“There are various things that can go wrong, but it all points to the fact that we need stronger rules,” Mall said.

‘Poor Aquifer’

Encana has been providing drinking water to about 21 families in Pavillion since August, 2010, Hock said. Some residents were already using outside water sources “because they realize it’s a very poor aquifer,” he said.

Hock said he wasn’t sure if Encana used the synthetic chemicals found in the aquifer when fracking wells in Pavillion.

“I don’t believe that we did,” Hock said. “I don’t know for certain.”

Today’s draft findings are specific to Pavillion, where fracking is occurring “in and below the drinking-water aquifer” and close to water wells, the agency said. The findings will be submitted to an independent scientific review panel.

“Given the area’s complex geology and the proximity of drinking water wells to ground water contamination, EPA is concerned about the movement of contaminants within the aquifer and the safety of drinking-water wells over time,” the agency said.

To contact the reporter on this story: Jim Efstathiou Jr. in New York at jefstathiou@bloomberg.net

To contact the editor responsible for this story: Larry Liebert at lliebert@bloomberg.net

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