Spain Delays and Prays That Zombies Repay Debt: Mortgages

By Sharon Smyth and Neil Callanan - May 30, 2012 3:01 AM GMT+0700

Spanish banks are masking their full exposure to soured property loans while they continue to prop up zombie developers, leading to credit-rating downgrades and plummeting share prices.

Spain is working to clean up its banks, requiring lenders set aside more for possible losses on loans deemed performing to developers like Metrovacesa SA (MVC), which hasn’t completed a project in more than a year and has none under way. While that represents about 30 billion euros ($38 billion) of increased provisions, it’s not enough because many loans said to be performing aren’t being repaid, according to Mikel Echavarren, chairman of Irea, a Madrid-based finance company specializing in real estate.

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Signs advertise properties for sale in Madrid. Photographer: Denis Doyle/Bloomberg

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May 29 (Bloomberg) -- Filipe Correia da Silva, head of Spanish and Portuguese equities at CA Cheuvreux, talks about Spain's financial system and debt crisis. CA Cheuvreux is part of the Credit Agricole Group. He speaks Erik Schatzker and Sara Eisen on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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Unfinished homes on a stalled residential housing project in Avila, Spain, May 15, 2012. Photographer: Angel Navarrete/Bloomberg

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Empty apartment blocks line a street at the Sesena residential development near Madrid. Photographer: Santi Burgos/Bloomberg News

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Construction equipment lies abandoned near unfinished homes on a stalled residential housing project in Avila. Photographer: Angel Navarrete/Bloomberg

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Irea Chairman Mikel Echavarren said, “Spain has engaged in a policy of delay and pray.” Photographer: Jesœs de la Plaza/Un pez vivo via Bloomberg

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“Spain has engaged in a policy of delay and pray,” Echavarren said in an interview. “The problem hasn’t been quantified by anyone because there is huge pressure not to tell the truth.”

The Economy Ministry says that Spanish banks have 184 billion euros of developers’ loans and assets that are “problematic,” while the remaining 123 billion euros are performing. The need for more reserves to cover losses on the loans can’t be ruled out, Nomura International analysts Daragh Quinn and Duncan Farr said in a May 14 report. If Spain took losses on developer loans like Ireland did, Spanish banks would need 8.9 billion euros under the best case to 76.5 billion euros of additional provisions in the worst scenario, Nomura estimates.

Bank Downgrades

Bankia, which Spain nationalized this month, said on May 25 it will seek 19 billion euros of state funds after it made 5.5 billion euros of provisions for non-developer loans, mostly home mortgages and company borrowing. Banco Santander SA (SAN) and Banco Bilbao Vizcaya Argentaria SA (BBVA), Spain’s biggest lenders, were among 16 of the country’s banks downgraded earlier this month by Moody’s Investors Service, which cited a recession and the increase in non-performing loans to real-estate companies.

Many Spanish banks are avoiding property sales so they don’t have to make mark to market valuations, which reflect current prices. Instead, they’re giving developers new loans to pay debt coming due to prevent defaults, said Ruben Manso, an economist at Mansolivar & IAX and a former Bank of Spain inspector.

“The larger banks have been selling bits and pieces and can absorb the losses,” Manso said. “Smaller savings banks are acting in bad faith in their refusal to allow transactions and saying they can’t mark to market because there isn’t one.”

A spokeswoman for CECA, the association for Spanish savings banks, said the group can’t comment on the banks’ commercial policies. She declined to be identified, citing the association’s policy.

Largest Developer

Metrovacesa, once Spain’s largest developer, is typical of the industry, according to Manso. The Madrid-based company, which once owned HSBC Holdings Plc’s London headquarters and had about a 50 billion-euro market value, was taken over by creditors in 2009 after its largest shareholder struggled to service billions of euros of debt.

Santander, BBVA, Banco Espanola de Credito SA, Banco Popular SA (POP), Banco Sabadell SA (SAB) and Bankia, canceled 2.2 billion euros of debts owed by the Sanahuja family in return for about 55 percent of Metrovacesa and purchased a further 10.8 percent of the stock in a deal that valued the company at 57 euros a share. The banks now own about 96 percent of Metrovacesa.

Losses Since 2008

Santander and its Banesto unit, which now own about 35 percent of Metrovacesa, value the stake at 772 million euros, or 2.24 euros a share, according to a spokesman for Santander, who declined to be identified citing company policy. In 2009 and 2011, they made provisions of 269 million euros and 100 million euros against their holding, according to a 2011 report by Santander’s auditor.

Metrovacesa has racked up 1.8 billion euros of losses since 2008. It has debt of 5.1 billion euros and property assets valued at 3.9 billion euros.

“The banks have made writedowns in their Metrovacesa stakes, but they haven’t taken the full hit,” Manso said.

Metrovacesa trades at 39 cents a share, valuing the company at about 385 million euros. UBS AG downgraded the shares to sell on May 22 and changed its target price to 32 cents. In August, its lenders renegotiated the terms of 3.6 billion euros of its debt, extending maturities on 2.47 billion euros of obligations and granting a five-year grace period for interest payments on 1.12 billion euros of loans.

High Occupancy

“Having no controlling stake in Metrovacesa means that its creditor banks don’t have to consolidate the company’s debt or assets and contaminate their own balance sheets,” Manso said. “There are hundreds of cases like Metrovacesa out there, albeit smaller in size, and this distorts the official amount of real estate and bad developer loans that banks profess to have.”

Metrovacesa isn’t a zombie, said a company spokesman, who declined to be identified, citing company policy. Metrovacesa has projects in mind, but the market doesn’t allow homebuilding, he said. The company’s rental assets have an occupancy rate of more than 90 percent, he added.

Santander, Spain’s largest bank, fell 2.4 percent to 4.30 euros at the close of trading in Madrid, compared with a 2.3 percent decline for the nation’s IBEX 35 Index. BBVA fell 2.6 percent to 4.64 euros. Shares of Bankia (BKIA), Spain’s third-largest bank, fell 16 percent to 1.14 euros.

Credit Swaps

The cost of protecting Spanish government debt from losses with credit-default swaps rose 2 basis points to a record 561 basis points, according to data compiled by Bloomberg.

As the yield on Spain’s 10-year bond approaches levels that led to bailouts in Ireland, Portugal and Greece, the Spanish government’s latest steps may not be enough to restore confidence in the country’s banks. Spain’s economy, the euro area’s fourth-largest, has been mired in a recession with 24 percent unemployment after a decade-long, debt-fueled property boom similar to the one in Ireland that ended in 2008.

Prices in Spain “probably haven’t reached the bottom yet, so it would be prudent for them to add in another cushion against the prospect of a further property market price fall,” Irish Bank Resolution Corp. Chairman Alan Dukes said in a May 16 interview. “The situation can change for the worse very rapidly.”

Irish Bank Resolution was formed in 2011 through a merger of Anglo Irish Bank Corp., the country’s third-biggest lender prior to the economic collapse, and Irish Nationwide Building Society. The Anglo Irish side of the bank expected to need 1.5 billion euros of new capital when it was nationalized at the beginning of 2009. By the end of March, the figure had swelled to 4 billion euros, according to Dukes. The Dublin-based bank’s total losses have been estimated to be as much as 28 billion euros when it’s finally wound down.

Before the Crash

Before Ireland’s real-estate crash, banks including Anglo Irish avoided getting appraisals to avoid bringing them before audit committees, according to four people familiar with the matter, who declined to be identified because the information is private.

Anglo Irish gave developers capital to finish projects in 2008 using personal loans. That way, the bank’s primary loan would continue to appear as performing, Irish developer Simon Kelly, who together with his family owes banks 800 million euros, said in a phone interview.

“The Irish property market had to collapse like the Spanish one because the economy was collapsing,” Kelly said. “Spain is looking like a re-run.”

More than half of Spain’s 67,000 developers can be categorized as “zombies,” according R.R. de Acuna & Asociados, a real-estate consulting firm. They have combined debt of 180 billion euros that will lead to 104 billion euros of losses that hasn’t been fully provisioned for, Acuna estimates.

Assets Worth Less

“They aren’t officially bankrupt because they have been refinanced time and time again,” Fernando Rodriguez de Acuna Martinez, a partner at the company, said by telephone. “Their assets are worth much less than their liabilities, they struggle to repay loans and they haven’t revaluated them to reflect today’s prices.”

In Ireland three years ago, developer Liam Carroll’s Ronnie Rentals Ltd. was forced to value its assets to market prices. Accumulated losses at the company more than trebled to 541 million euros in the six months through March 2009 after it provisioned for all known liabilities and anticipated losses, according to accounts filed last year with Ireland’s Companies Registration Office.

The Bank of Spain allows loans that are refinanced before turning delinquent and interest-only loans to be considered “normal” or “performing” on banks’ books, according to Manso.

Masking Delinquency

“You won’t find that data anywhere,” Manso said. “There has been a lot of cheating going on where banks have lent developers new money, classed as new lending, so they can pay off their original loans.” That’s masking delinquency, he said.

Refinancing the current and future zombie developers will cost 30 billion euros over the next two years, according to Acuna. The depreciation of those developer assets from 2012 onwards will generate a further 20 billion euros of losses in that time, he said.

The Bank of Spain doesn’t publish data on the amount of restructured developer loans or interest-only paying loans that are classed as normal. The bank closely monitors refinancing to ensure that arrears aren’t being hidden, said a spokeswoman for the Bank of Spain who declined to be identified.

High Occupancy

Spanish Economy Minister Luis de Guindos said on May 23 that provisioning from the new rules stood at 84 billion euros and coverage of all assets related to developer loans is now 45 percent, far higher than the European average and the 18 percent coverage before the regulations.

“The government has taken very significant steps, but I don’t believe they have fully recognized the deterioration,” Manso said.

Echavarren’s Irea brokered the refinancing of a 200 million-euro loan two years ago for a developer. After two more rounds of refinancing, there is about 180 million euros left on the loan and it’s classified as performing, he said, without identifying the company.

“The probability that this loan will be paid when it comes due is zero,” Echavarren said. “There are dozens of similar cases.”

Spain’s government and banks need to be more like their counterparts in Ireland and be more forthcoming about loan losses, according to Echavarren. He forecasts that the larger Spanish banks with income from international operations will be able to pay for domestic real-estate losses within two years. The rest can’t take such a hit and will have to be nationalized, he said.

“We cannot continue to jeopardize the whole financial system by not telling the truth,” Echavarren said.

To contact the reporters on this story: Sharon Smyth in Madrid at ssmyth2@bloomberg.net; Neil Callanan in London at ncallanan@bloomberg.net.

To contact the editors responsible for this story: Andrew Blackman at ablackman@bloomberg.net; Rob Urban at robprag@bloomberg.net.

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Facebook Shares Slump Below $29 as Options Trading Starts

By Inyoung Hwang - May 30, 2012 5:47 AM GMT+0700

Facebook Inc. (FB) shares fell to a new low, extending losses from the worst-performing large initial public offering during the past decade to more than 24 percent.

The stock fell 9.6 percent to $28.84 in New York, below the prior low of $30.94 on May 22. Facebook debuted on May 18 after underwriters sold shares at $38. Facebook options trading began today, with volume for puts exceeding calls by 1.2-to-1, data compiled by Bloomberg show. More than 200,000 puts giving the right to sell traded.

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Facebook went public as the equity index was heading for its biggest monthly decline since September. Photographer: Brendan Smialowski/AFP/Getty Images

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May 29 (Bloomberg) -- Brian Wieser, a senior analyst at Pivotal Research Group LLC, talks about the outlook for Facebook Inc. He speaks with Emily Chang on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)

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May 29 (Bloomberg) -- Bobby Heller, an options trader at On Point Executions LLC, talks about options trading in Facebook Inc. shares. Facebook fell to a new low, extending losses from the worst-performing large initial public offering during the past decade to more than 23 percent. Heller speaks with Matt Miller on Bloomberg Television's "Bottom Line." (Source: Bloomberg)

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May 29 (Bloomberg) -- Tom Forte, director and senior research analyst at Telsey Advisory Group, talks about the outlook for Facebook Inc. and ways the social networking company can increase its mobile advertising revenue. Forte speaks with Adam Johnson on Bloomberg Television's "InBusiness." (Source: Bloomberg)

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May 29 (Bloomberg) -- Walter Isaacson, biographer of late Apple Inc. co-founder Steve Jobs and chief executive officer of the Aspen Institute, talks about Mark Zuckerberg, chief executive officer of Facebook Inc., and the social networking company's stock performance. Isaacson speaks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

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May 29 (Bloomberg) -- Bloomberg's Betty Liu reports that Facebook shares reached a new low, dipping past the previous low of $30.94 in early trading. She speaks on Bloomberg Television's "In The Loop." (Source: Bloomberg)

Audio Download: Levitt Interview on Facebook

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Facebook and Morgan Stanley, its lead underwriter, faced criticism for boosting the number of shares sold in the IPO by 25 percent to 421.2 million in the days before the deal. Photographer: Shen Hong/XINHUA/Landov

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The Facebook Inc. logo is displayed at the Nasdaq MarketSite in New York. Photographer: Scott Eells/Bloomberg

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About $25 billion in market value has been erased from Facebook as bearish sentiment built in stock and options markets after the social networking site went public while U.S. equities headed for the biggest monthly decline since September. The company, its underwriters and Nasdaq OMX Group Inc. (NDAQ) were sued last week by investors who say they lost money in the IPO. June $30 puts were the most-active contracts, with volume at 23,723. They were followed by June $34 calls and June $32 calls.

“People are disillusioned,” Matt McCormick, who helps oversee $6.2 billion at Bahl & Gaynor Inc. in Cincinnati, said in a telephone interview. He doesn’t own shares of Facebook. “A lot of investors believed the hype,” he said. “In this type of volatile market environment, people are not going to take chances.”

Facebook shares climbed as high as $45 on May 18, when the shares ended the day with a price-earnings ratio of 83.1, making the Menlo Park, California-based company more expensive than 99 percent of Standard & Poor’s 500 Index stocks.

MF Global

The IPO, which set a record for technology companies by raising more than $16 billion, produced the worst five-day return among the 10 largest U.S. deals of the past decade. The 13 percent loss through May 24 exceeded the 10 percent drop by MF Global Holdings Inc. in its first five sessions.

The stock plunge has also pushed the purchase price for photo-sharing site Instagram Inc. below the $1 billion that Facebook offered last month. Facebook is paying $300 million in cash plus about 23 million shares of common stock to acquire Instagram. The deal is now valued at about $963 million.

Facebook and Morgan Stanley, its lead underwriter, faced criticism for boosting the number of shares sold in the IPO by 25 percent to 421.2 million in the days before the deal. They also increased the asking price to $34 to $38 from $28 to $35.

The first day of trading was disrupted by the “poor design” of Nasdaq OMX’s software for IPO auctions, Robert Greifeld, the chief executive officer of the exchange operator, said on May 20. The malfunction also prevented Nasdaq OMX from sending messages to brokerages confirming that clients’ orders went through.

“Investors are incorporating the risks embedded in the stock,” Brian Wieser, a senior analyst at New York-based Pivotal Research Group LLC, said in a telephone interview today. He has a sell rating on the stock and a $30 share-price estimate. “A lot of people are trying to trade the stock on the basis of those expectations. Options will be a very robust marketplace with respect to Facebook.”

To contact the reporter on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net

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

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Dollar Scarce as Top-Quality Assets Shrink 42%

By John Detrixhe - May 30, 2012 12:22 AM GMT+0700

The dollar is proving scarce, even after the Federal Reserve flooded the financial system with an extra $2.3 trillion, as the amount of the highest-quality assets available worldwide shrinks.

From last year’s low on July 27, the greenback has risen against all 16 of its major peers. Intercontinental Exchange Inc.’s Dollar Index surged 12 percent, higher now than when the Fed began creating dollars to buy bonds under its extraordinary stimulus measures at the end of 2008.

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The dollar is proving scarce, even after the Federal Reserve flooded the financial system with an extra $2.3 trillion, as the amount of the highest-quality assets available worldwide shrinks. Photographer: Scott Eells/Bloomberg

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May 29 (Bloomberg) -- Simon Grose-Hodge, head of investment advisory at LGT Bank in Singapore, talks about the outlook for the U.S. and European economies and currencies. Grose-Hodge also discusses the European Central Bank monetary policy. He speaks in Hong Kong with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

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International investors and financial institutions that are required to own only the highest quality assets to meet investment guidelines or new regulations are finding fewer options beyond dollar-denominated assets. The U.S. is one of only five major economies with credit-default swaps on their debt trading at less than 100 basis points, meaning they are viewed as almost risk free. A year ago, eight Group-of-10 nations fit that category, data compiled by Bloomberg show.

“The pool of high-rated assets has been shrinking, not just in the euro zone but elsewhere as well,” Ian Stannard, Morgan Stanley’s head of Europe currency strategy, said in a May 22 telephone interview. “With the core of Europe shrinking, and the available assets for reserve purposes shrinking, it makes the euro zone less attractive.”

Euro Depreciation

The dollar is gaining mainly at the expense of the euro, which has depreciated almost 5 percent in the past six months against a basket of nine major currencies tracked by Bloomberg as nations from Spain to Italy see their credit ratings downgraded amid the region’s sovereign crisis.

Spain, which has about $917.5 billion of debt, has been cut six levels by Moody’s Investors Service to A3 from Aaa in September 2010. Italy, with more than $2 trillion of debt, has been reduced four levels to A3 from Aa2 in October.

“We’re seeing many more periods of dollar buying during these uncertain times,” Ken Dickson, an investment director of currencies at Standard Life Investments in Edinburgh, which manages $257 billion, said May 24 in a telephone interview.

The U.S. currency appreciated 2.06 percent last week to $1.2517 per euro in New York after touching $1.2496, the strongest since July 2010. It gained 0.84 percent to 79.68 yen. The Dollar Index jumped 1.37 percent to 82.402, its fourth- straight weekly rally.

The dollar rose 0.5 percent to $1.2482 per euro as of 1:20 p.m. in New York. The greenback was little changed against the yen at 79.42.

Bigger Share

The five economies with default swaps trading at less than 100 basis points have a combined $14 trillion in debt, with the U.S. accounting for 75 percent, according to CMA data compiled by Bloomberg as of May 25. A year ago, when there were eight nations, the total was $24 trillion, with America making up 38 percent. German credit-swaps rose to 100 basis points today from 99 basis points last week.

Bank of America Merrill Lynch’s AAA Rated Global Fixed Income Index contained 3,597 securities with the highest ratings as of April 30, down from a high of 5,331 in December 2007, the fewest since November 2005. Dollar assets make up 65 percent of the index, up from 56 percent in 2008.

Hungary’s central bank is among reserve managers diversifying foreign-exchange holdings as the credit quality of European assets declines. The central bank said it will include dollars, yen and British pounds in its reserves, currently invested exclusively in euro-denominated securities.

No ‘Master Plan’

“The number of euro-denominated assets that meet our quality standards has dropped radically,” Magyar Nemzeti Bank President Andras Simor told reporters on May 14 in Budapest. “More and more securities were dropped from our portfolio as the credit grade of more and more countries fell below the single A category and as more and more securities don’t meet our market quality requirements.”

China Investment Corp. President Gao Xiqing said May 10 the nation’s sovereign wealth fund stopped buying government debt in Europe as the region’s turmoil intensifies. With an estimated $440 billion in assets, CIC is the world’s fifth-largest country fund, according to the Sovereign Wealth Fund Institute.

“Ever since the debt crisis broke out, there has never been a master plan for a resolution,” Jin Liqun, chairman of CIC’s supervisory board, said at an event hosted by the Centre for Policy Studies in London on May 22.

Such comments are bolstering the dollar’s status as the world’s primary reserve currency after a decade-long decline.

Official Holdings

The greenback’s share of global foreign-exchange reserves climbed in the last three-months of 2011 to 62.1 percent, the highest since June 2010, while holdings of euros fell to the lowest since September 2006 at 25 percent, according to the latest quarterly data from the International Monetary Fund.

Foreign official holdings of U.S. government debt increased in each of the first three months of 2012, climbing by 3.24 percent to $3.73 trillion in the best start to a year since 2009, according to data from the Treasury Department.

Demand from outside the U.S. helps the administration of President Barack Obama finance a budget deficit forecast to exceed $1 trillion for a fourth year.

A relatively strong dollar may also damp criticism of the Fed if it decides to expand its balance sheet to boost the economy. The Dollar Index tumbled 14 percent during the Fed’s two rounds of asset purchases, known as quantitative easing, or QE, between December 2008 and June 2011.

‘Way Oversold’

While the dollar is “somewhere safe to hide,” the euro is poised to rebound before Greek elections next month before resuming its decline against the U.S. currency, said John Taylor, founder of New York-based currency-hedge fund FX Concepts LLC, which oversees $3.9 billion.

“We are way oversold in the euro,” Taylor said on May 24 in an interview on Bloomberg Television’s “Inside Track” with Erik Schatzker and Sara Eisen.

The dollar’s appeal is also getting a boost as nations generally perceived as havens become less welcoming.

The Swiss National Bank introduced a 1.20 franc-per-euro limit in September after its currency rose to a record, hurting exporters and increasing the risk of deflation.

Japan spent 16.4 trillion yen ($206.6 billion) in intervention in 2010 and 2011, according to the Finance Ministry. The franc has lost 1.9 percent against the dollar this year and the yen has depreciated 3.1 percent.

“The other countries that often have some kind of a safe- haven attraction to them are slowly but surely saying that we’re not so sure we want our currencies to be stronger,” Standard Life’s Dickson said.

Bank Demand

Demand for dollars is also showing up in financial institutions needing to meet Basel III regulations set by the Bank for International Settlements. The new rules on capital reserves will “increase the price of safety” embedded in assets deemed a reliable store of value, the IMF wrote in an April 18 report.

The cost for banks to convert euro interest payments into dollars through the swaps market for three years has increased to 67.8 basis points below the euro interbank offered rate, or Euribor, from 34.8 basis points below in March 29, according to data compiled by Bloomberg. Negative spreads show a premium for dollar funding.

Dollar assets are also looking attractive on a relative basis, with yields on Treasuries due in 10 years averaging 0.37 percentage point more than German bunds of similar maturity. As recently as November, Treasuries yielded about 0.33 percentage point less than bunds.

“With the chronic problems and challenges in Europe, it’s hard to see how that’s going to overtake the dollar anytime in our lifetime, if the euro even still exists in our lifetime,” Tim Adams, a managing director at the Lindsey Group, a Fairfax, Virginia-based investment consultant and former Treasury undersecretary, said May 1 at the Bloomberg Washington Summit hosted by Bloomberg Link.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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Euro Rises as Greek Pro-Bailout Party Leads Opinion Polls

By Lucy Meakin and Masaki Kondo - May 29, 2012 4:56 AM GMT+0700

The euro rose against the dollar from the weakest level since July 2010 as polls showed Greece’s pro- bailout parties gaining ground, easing concern the nation will exit the currency bloc.

The Dollar Index fell for the first time in five days as demand for higher-yielding assets boosted stocks. Japan’s yen snapped a two-day decline against the dollar after minutes of the Bank of Japan (8301)’s April meeting damped speculation policy makers will increase monetary easing to achieve a 1 percent inflation goal.

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The euro is headed for its biggest weekly decline this year as signs that Europe’s debt crisis is damping growth curbed demand for the currency. Photographer: Simon Dawson/Bloomberg

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May 28 (Bloomberg) -- Peter Elston, head of Asia-Pacific strategy and asset allocation at Aberdeen Asset Management Plc, talks about the European sovereign debt crisis and its impact on investor sentiment. Elston speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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May 28 (Bloomberg) -- Mahathir Mohamad, Malaysia’s leader during the 1998 Asian financial crisis, says Greece leaving the euro would have limited effect on Asia. Susan Li reports on Bloomberg Television's "First Up." (Source: Bloomberg)

“It’s a momentary respite” for the euro, said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. (BK) in London. “There hasn’t been any positive news other than these polls. It’s a watch-and-wait market.”

The euro strengthened 0.2 percent to $1.2541 at 5 p.m. London time, after climbing as much as 0.9 percent. It dropped to $1.2496 on May 25, the weakest level since July 6, 2010. Europe’s shared currency was little changed at 99.67 yen. The dollar fell 0.3 percent to 79.47 yen

The 17-member shared currency has depreciated more than 5 percent versus the greenback in May, poised for the biggest monthly slump since September after inconclusive Greek elections on May 6 sparked concern the nation may exit the bloc. The euro has slid 3.3 percent this year.

U.S. financial markets are shut today for a holiday. The Stoxx Europe 600 Index of shares was little changed.

Greek Polls

Greece’s New Democracy party, which supports the plan negotiated by the government with international lenders, ranked first in all six opinion polls published on May 26 in campaigning for the June 17 general election. It led by as much as 5.7 percentage points over Syriza, the main party opposed to implementing the terms of financial aid packages, according to a poll by Kapa Research SA for To Vima newspaper.

The Dollar Index (DXY), which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, fell 0.2 percent to 82.215.

Gains in the euro were tempered before reports forecast to show the debt crisis is hurting the region’s economic growth.

Consumer confidence in the euro area was at minus 19.3 in May, from minus 19.9 in April, according to a Bloomberg News survey before the final reading is released on May 30. The unemployment rate climbed to 11 percent in April, the highest in data compiled by Bloomberg going back to 1990, economist forecasts in a separate survey showed before the June 1 report.

‘Base Case’

“The base case is that it’s on track for about $1.20, $1.21 or so,” Sean Callow, a senior currency strategist at Westpac Banking Corp. (WBC) in Sydney, said about the euro today in an interview with Bloomberg Television. “That’s pretty much just based on the deceleration in the European economy.”

Spain is considering injecting debt issued by the government or its bank-rescue fund instead of cash into the Bankia group, using a mechanism that would free it from raising the money from investors. The government hasn’t made a decision on whether to use its debt to recapitalize the nationalized lender and will decide in two or three months, a spokesman for the Economy Ministry, who asked not to be named in line with its policy, said in a phone interview today.

Until now, to pay for bank bailouts, the state would sell debt in the market through its bank rescue fund and use the cash to aid banks. A jump in yields has made debt sales more difficult and expensive, El Pais reported yesterday, without citing anyone.

This type of step “may generate more worry in markets,” Emma Lawson, a currency strategist at National Australia Bank Ltd. (NAB) in Sydney, wrote in a research note today.

Spanish Yields

Spain’s 10-year bond yield climbed 16 basis points, or 0.16 percentage point, to 6.42 percent after rising to this year’s high of 6.51 percent on May 16. Standard & Poor’s cut the nation’s credit rating on April 26 to BBB+ from A, saying there is an increasing likelihood the government will need to provide further fiscal support to the banking sector.

Hedge funds and other large speculators increased wagers the euro will decline versus the dollar to 195,361 in the period ended May 22, the most on record going back to 1999, according to the Washington-based Commodity Futures Trading Commission.

Lloyd’s of London Ltd. is prepared for a collapse of the European single currency that may be triggered if Greece leaves the euro, The Sunday Telegraph said, citing an interview with Chief Executive Officer Richard Ward.

Lloyd’s has a contingency plan to switch from euro underwriting to multi-currency settlement if Greece returns to the drachma, the newspaper said.

Fibonacci Charts

The euro is likely to extend losses against the yen after dropping below the 76.4 percent Fibonacci retracement of its advance from the January low and the March high, Bank of Tokyo- Mitsubishi UFJ Ltd. said in a report today. The common currency may decline to 97.04 yen, the January low, the bank said.

Fibonacci analysis is based on the theory that prices rise or fall by certain percentages after reaching a new high or low.

BOJ board members said they need to avoid any “misunderstanding” that the central bank would continue to increase the size of its asset-purchase program in an automatic manner, according to the minutes released today. The BOJ on April 27 boosted the amount of government debt it plans to buy for the period through June 2013.

“It looks like the BOJ is taking a somewhat less aggressive stance toward its easing measures,” said Daisuke Karakama, a market economist in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan’s third-largest banking group by market value. “That’s leading to a bit of buying in the yen.”

Swiss Franc

The Swiss franc weakened against 12 of 16 major peers tracked by Bloomberg after Swiss National Bank President Thomas Jordan said controls on capital inflows are among measures being considered by a government-led panel to stop the franc from strengthening if the euro-area debt crisis escalates.

“The working group focuses mainly on instruments to combat the franc strength based on a joint approach of the government and the central bank,” Jordan told the SonntagsZeitung newspaper in an interview published yesterday. “We also need to be prepared for the possibility of the currency union collapsing, even though I don’t expect it.” SNB spokesman Walter Meier confirmed Jordan’s remarks to the newspaper.

The franc weakened 0.1 percent against the euro to 1.20191. It dropped the most, or 0.9 percent, versus the New Zealand dollar and the South Korean won.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net

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

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Technicolor Dissects IPhones in Hunt for Patent Payoff

By Marie Mawad - May 29, 2012 5:00 AM GMT+0700

When Apple Inc. (AAPL)’s next iPhone hits store shelves, Technicolor SA (TCH)’s engineers will rush to get the handset -- not to make calls or play games, but to rip it apart.

Technicolor, an unprofitable French company that invented the process for color movies used in “The Wizard of Oz” and countless other classics, plans to cash in on its 40,000 video, audio and optics patents to turn its fortunes around. The company has a team of 220 people dissecting every new smartphone and tablet from industry goliaths such as Apple, Samsung Electronics Co. (005930) and HTC Corp. (2498) for patent infringements.

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Apple Inc.’s iPhone has fueled demand by making it easy to use data-intensive features, such as online applications and the Siri voice-activated personal assistant. Photographer: George Frey/Bloomberg

“We usually send manufacturers a big file, with photos of the guts of their products, pointing to where they’ve been using our technology without paying for it,” said Beatrix de Russe, a lawyer and executive vice president of intellectual property at Technicolor. “Once those images have sunk in, we can start negotiating.”

Patents have become a technology industry battleground as mobile-phone, tablet and computer makers try to lure consumers with constant improvements to their video and sound. Technicolor, which made the first color movie 90 years ago, holds key patents in digital audio and video.

“Smartphones have become the focal point for lawsuits and licensing talks,” said Yves Gassot, who heads consulting firm Idate Digiworld. “It’s because the market is so huge and is growing so quickly. At the same time, the smartphone is where you’ll find all the cutting-edge technology jammed into one place.”

Motorola Deal

Google Inc. (GOOG), creator of the market-leading Android mobile- phone technology, this month completed the $12.5 billion takeover of Motorola Mobility Holdings Inc.’s mobile-phone business and its 17,000 patents. Equipment vendor Ericsson AB expects to increase revenue from its 27,000 patents, while rival Alcatel-Lucent SA (ALU) says it plans to generate several hundred million euros this year alone from its 29,000 rights.

Prompted by surging demand for patents that regulate functions such as sliding gestures on touchscreens or the rendering of graphics for games and applications, lawsuits over smartphone and tablet technology have been filed worldwide. Samsung and Apple have sued each other in the past year on four continents over patent-infringement claims related to mobile technology and design.

Waking Up

Though Technicolor signed its first licensing deal in the 1950’s, de Russe said, ‘it feels like the rest of the world has just woken up to why patents are interesting.”

Technicolor has agreements with “all major manufacturers” and has also started talks with multiple vendors over new devices, she said, declining to give details on who the licensees are and who infringed patents in the past.

Patent licensing is the most profitable business of the company. The licensing division had a 76 percent operating profit margin last year, helped by 1,200 contracts with television, computer and handset makers. The company’s overall operating profit margin, based on continuing operations, stood at 14 percent. Licensing sales totaled 451 million euros, about 13 percent of total revenue.

Technicolor, which has been shifting business from outdated film processes to digital techniques and software for movie- making, helped with special effects for the Harry Potter film series. The Paris-based company has refinanced its debt, sold assets in declining movie-equipment units, closed factories and cut jobs during the past two years. For 2011, it posted a net loss of 323 million euros on sales of 3.5 billion euros, its fifth consecutive annual loss.

‘Dry Out’

Third Point LLC and Apollo Management Holdings, which together own 13.4 percent of Technicolor according to data compiled by Bloomberg, have been pushing for a sale of the company’s patent portfolio, Le Figaro newspaper reported April 19. Third Point and Apollo representatives declined to comment.

“If we start selling our patents, revenues will dry out,” de Russe said. “It’s a very short-term vision.”

In February, the company unveiled a three-year plan with a focus on expanding licensing programs to more devices and entering China, India and Brazil.

The market has started to react positively to Technicolor’s revamp. While Technicolor shares are down 68 percent in Paris trading from a year ago, they have risen 31 percent since January.

JPMorgan Offer

The stock yesterday surged 8.9 percent after investor Vector Capital Corp. offered to boost its holding from currently 0.6 percent to as much as 30 percent through a capital increase, competing with a similar May 3 offer from JPMorgan Chase & Co. (JPM) Shareholders are scheduled to choose one of the two deals on the June 20 annual general meeting.

JPMorgan has said it supports management’s patent strategy, which it calls “investing for growth.” Vector Capital said it would be a “committed partner in helping Technicolor execute its strategy.”

While the patent licensing business is lucrative, it often takes time before a company can cash in. Patent negotiations often last between one and four years, de Russe said.

The company is currently fighting in U.S. courts with Taiwanese manufacturers over patents used in LCD computer monitors, after it filed a complaint with the International Trade Commission. The process was started after several years of failed discussions.

“We’ve got a reputation for charging reasonable licensing fees and preferring friendly negotiations,” de Russe said. “That doesn’t mean we don’t drag people to court from time to time.”

To contact the reporter on this story: Marie Mawad in Paris at mmawad1@bloomberg.net

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

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Euro Strengthens as European Stocks Erase Advance

By Nick Baker - May 29, 2012 3:02 AM GMT+0700

The euro strengthened, rebounding from a four-day losing streak, as polls showed Greece’s pro- bailout parties gained ground. European stocks erased gains, Spanish bonds declined and yields on German two-year notes fell to a record low.

The euro rose 0.2 percent to $1.2538 at 4 p.m. New York time. The Stoxx Europe 600 Index lost less than 0.1 percent, moving lower after gaining as much as 0.9 percent, as banks slumped. Spain’s IBEX 35 dropped 2.2 percent while Germany’s DAX Index retreated 0.3 percent after adding 1.4 percent. Yields on two-year bunds slipped to 0.027 percent. Spanish bonds fell, pushing 10-year yields to the most relative to benchmark German bunds since the euro was created.

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Electronic ticker screens show stock prices inside the Athens Stock Exchange in Athens. Photographer: Simon Dawson/Bloomberg

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May 28 (Bloomberg) -- Norman Chan, head of investment at Calibre Asset Management Ltd. in Hong Kong, talks about global financial markets and his investment strategy. He also discusses Europe's sovereign debt crisis and China's economy. He speaks with John Dawson on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

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May 28 (Bloomberg) -- Mark Konyn, chief executive officer of Cathay Conning Asset Management Ltd., talks about Europe's debt crisis, the outlook for Asian markets and China's economic outlook. Konyn also discusses his investment strategy. He speaks with Susan Li, John Dawson, Angie Lau and Robyn Meredith on Bloomberg Television's "Asia Edge." Cathay Conning Asset Management is co-owned by Cathay Financial Holding Co. and Conning & Co. (Source: Bloomberg)

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May 28 (Bloomberg) -- International Monetary Fund Managing Director Christine Lagarde said she was sensitive to the plight facing Greece, while reiterating that the wealthy must pay their fair share of taxes. (Source: Bloomberg)

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May 28 (Bloomberg) -- Herald van der Linde, head of equity strategy for Asia-Pacific at HSBC Holdings Plc, talks about corporate earnings in the region. He speaks in Hong Kong with John Dawson on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

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May 28 (Bloomberg) -- Peter Elston, head of Asia-Pacific strategy and asset allocation at Aberdeen Asset Management Plc, talks about the European sovereign debt crisis and its impact on investor sentiment. Elston speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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May 28 (Bloomberg) -- Barbara Ridpath, chief executive officer of the International Centre for Financial Regulation, talks about the outlook for Europe's sovereign debt crisis and its implications for the global economy. Ridpath speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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May 28 (Bloomberg) -- Binay Chandgothia, a Hong Kong-based portfolio manager at Principal Global Investors, talks about the European sovereign debt crisis and his investment strategy. He speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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Antonis Samaras, leader of the New Democracy party. Photographer: Simon Dawson/Bloomberg

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Bankia plunged 23 percent. Photographer: Angel Navarrete/Bloomberg

European stocks reversed course and Spanish debt fell amid concern the nation’s lenders will need more financial support to weather Europe’s debt crisis. Spanish Prime Minister Mariano Rajoy said the euro region’s rescue fund should be able to bypass national governments and recapitalize distressed lenders directly, even as he argued his country’s banks won’t need external help. U.S. stock markets were shut for Memorial Day.

“Investor sentiment is very cautious and there is likely to be a lot of volatility with the Greek elections looming over the market,” said Keith Bowman, an equity analyst at Hargreaves Lansdown Plc in London. “A lot of people are sitting on the sidelines.”

Crude oil futures advanced 0.3 percent to $91.14 a barrel. Gold futures added 0.3 percent to $1,575.60 an ounce. Copper rose 0.6 percent to $3.467 a pound.

Canada, Emerging Markets

Canadian stocks erased gains as the commodities rally failed to give the Standard & Poor’s/TSX Composite Index its fifth straight advance. Trading volume was 61 percent less than the 10-day average amid the U.S. market holiday. The gauge lost 0.1 percent.

Emerging-market stocks rose for a third day as opinion polls of Greek voters eased concern the country will exit the euro area and speculation mounted China will take steps to boost its economy.

The MSCI Emerging Markets Index rose 0.9 percent. The Hang Seng China Enterprises Index of Chinese companies listed in Hong Kong climbed 1.1 percent. The Micex Index rose 0.8 percent in Moscow as OAO Lukoil, Russia’s second-largest oil producer, added 2 percent after first-quarter profit increased 7.7 percent. Brazil’s Bovespa Index gained 1.2 percent.

Futures on the S&P 500 added 0.5 percent.

Bankia

Bankia (BKIA) tumbled 13 percent as the lender nationalized by Spain this month seeks 19 billion euros ($23.8 billion) of state funds. Banco Popular Espanol SA dropped 7.5 percent for the second-biggest loss among banks in the Stoxx Europe 600.

Spanish bonds fell, pushing 10-year yields to the most relative to benchmark German bunds since the euro was created, amid concern the nation’s lenders will need additional financial support to weather Europe’s debt crisis.

Spain’s two-year note yield climbed to the highest since December after nationalized lender Bankia group said it will seek 19 billion euros ($23.8 billion) of state support. German two-year note yields dropped to a record even as opinion polls showed greater backing for Greece’s pro-bailout political parties. Italian bonds declined as business confidence slid more than economists forecast and borrowing costs rose at a sale of zero-coupon notes.

The yield on Spain’s 10-year bond climbed 16 basis points, or 0.16 percentage point, to 6.47 percent. The extra yield investors demand to hold the securities instead of their German counterparts expanded by 17 basis points to 511 basis points after reaching 514 basis points, the most since the euro’s introduction in 1999.

To contact the reporter on this story: Nick Baker in New York at nbaker7@bloomberg.net

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

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Greek Democratic Left Demands Euro Pledge to Back Syriza

By Maria Petrakis and Antonis Galanopoulos - May 28, 2012 6:57 PM GMT+0700

Greece’s Democratic Left party, which may determine the governing coalition following June 17 elections, said its backing for the biggest anti-bailout party depends on getting a guarantee to stay in the euro.

“We have two red lines: one is a policy which serves the country’s steady presence in Europe, the euro, the euro area, and the other is a gradual disengagement from the terms of the bailout,” party leader Fotis Kouvelis, 63, said in a May 25 interview in Athens. “All this needs to be set out because red lines may exist but the policies you choose is what matters.”

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Left-wing Democratic Left party leader Fotis Kouvelis speaks during his party's main pre-election rally in central Athens. Photographer: Louisa Gouliamaki/AFP/Getty Images

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Greece ’s Democratic Left party leader Fotis Kouvelis said in an interview, “We have two red lines: one is a policy which serves the country’s steady presence in Europe, the euro, the euro area, and the other is a gradual disengagement from the terms of the bailout.” Photographer: Angelos Tzortzinis/Bloomberg

With opinion polls indicating no party winning a majority, Kouvelis said he’d team with Syriza leader Alexis Tsipras, who advocates unilaterally canceling the austerity measures demanded for a bailout, with an agenda of re-negotiating the terms of the rescue. The cuts required for 240 billion euros ($306 billion) of aid have driven the country into the worst recession since World War II.

Kouvelis refused to join a unity government that didn’t include Syriza, the second-place finisher after a May 6 election, requiring the need for a revote. Another inconclusive result may mean the country runs out of money as soon as early July. International inspectors won’t visit Greece for a review that allows funds to be paid until a government is formed.

Opinion polls since the May 6 vote have shown Syriza challenging the New Democracy party, which voted for the bailout, for first place. Both would still need to team up with other parties to form a majority and govern.

Tsipras Rebuff

Syriza’s Tsipras, who has said he’ll try to keep Greece in the euro while pledging to cancel austerity measures, rebuffed approaches to form a coalition. The standoff reignited concern the country will leave the 17-nation euro area.

“Greece’s exit from the euro area would mean many and significant problems,” Kouvelis said. “I can’t rule it out being a possible choice of our partners. Such an eventuality, irrespective of the huge negative consequences on Greece, would also create problems for other countries in the euro area.”

Kouvelis says there is recognition now on a European level with talk of curbing youth unemployment and boosting growth that can help a new Greek government gradually revise some of the bailout terms. The “easy solutions” of pension and wage cuts taken in return for funds have driven 30 percent of the Greek population to live below the poverty line, with a “vanishing” middle class and “galloping” unemployment, he said. More than one in two young Greeks is out of work.

Black Market

Instead, not enough has been done to stamp out tax evasion, curb the black economy, which is 30 percent of output, and cut unnecessary health, pharmaceutical and defense spending, he said. The party advocates a banking system with a state- ownership stake.

“Greece has need of reforms, both on the level of how the state works and on the level of how markets work,” said Kouvelis, a lawyer who broke from Synaspismos, one of the groups making up Syriza, in June 2010 for what he called a slide into “anti-Europeanism.” “There are reforms, necessary actions, which must and should occur regardless of the presence of the IMF or troika in Greece.”

Syriza’s unexpected gains in the May 6 election left New Democracy and Pasok, which supported the second international rescue in an interim government this year, two deputies short of the 151 seats needed for a majority in Parliament.

Syriza won 16.8 percent of the vote compared with New Democracy’s 18.9 percent. Kouvelis won 6.1 percent giving the party 19 seats. Polls now show him between 5.3 percent and 7 percent.

‘Clear, Specific’

Kouvelis’s proposal for a unity government couldn’t work after Syriza rejected it, he said, because it would’ve lacked political and parliamentary support. Any agreement on a new government after June 17 would have to be “clear, specific” and in writing, he said, citing conflicting statements made since the election by Syriza members.

“If there is a policy statement, good,” he said. “If not, there can be no agreement because coalition governments to be useful, democratically effective, must be based on a policy statement, otherwise they are ready to collapse from the day of their birth.”

The June 17 elections will be more about the country’s future in the euro than a vote of protest against Pasok and New Democracy, he says.

Polls have consistently shown Greeks want to remain in the euro area. A Kapa poll of 1,016 Greeks on May 23 and May 24 showed that the May 6 election was primarily to “punish” the pro-bailout parties of New Democracy and Pasok, with 66 percent agreeing with that statement and nearly 26 percent saying the vote was about dropping the bailout.

Euro Backed

That survey showed that 65.5 percent believed the logic of staying in the euro would prevail at the June 17 ballot, with the same number saying they would stick to bailout terms compared with 24 percent who said it’s be preferable to abandon the currency.

“The great majority of Greeks want a solution, a government and the great majority want to stay in the euro,” Kouvelis said. “And because that doesn’t come from the wave of any magic wand but from policy, that’s why I think they will seek to vote responsibly.”

To contact the reporters on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net; Antonis Galanopoulos in Athens at agalanopoulo@bloomberg.net

To contact the editors responsible for this story: Tim Quinson at tquinson@bloomberg.net

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Funds Make Wrong-Way Bets Before Price Slump: Commodities

By Joe Richter - May 29, 2012 12:13 AM GMT+0700

Speculators raised bullish bets on commodities before signs of Europe’s deepening debt crisis and slowing Chinese growth drove prices lower for a fourth consecutive week, the longest slump since September.

Money managers boosted net-long positions across 18 U.S. futures and options by 9.5 percent to 675,362 contracts in the week ended May 22, government data show. The Standard & Poor’s GSCI Spot Index of 24 raw materials reached a five-month low on May 23. A gauge of net positions for 11 U.S. farm goods surged 21 percent, the most since February, before agriculture prices tracked by S&P posted the biggest weekly loss in eight months.

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a combine combine harvester works on a farm in Princeton, Illinois. Photographer: Daniel Acker/Bloomberg

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May 28 (Bloomberg) -- Binay Chandgothia, a Hong Kong-based portfolio manager at Principal Global Investors, talks about the European sovereign debt crisis and his investment strategy. He speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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Money managers boosted corn wagers by 30 percent to 109,022 futures and options contracts. Photographer: Diego Giudice/Bloomberg

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The euro dropped to the lowest since July 2010 on May 25. Photographer: Valentin Flauraud/Bloomberg

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Wen Jiabao, China's premier, said the nation should put “stabilizing growth in a more important position” and increase lending to support construction. Photographer: Nelson Ching/Bloomberg

The euro dropped to the lowest since July 2010 on May 25 after Catalonia’s president repeated his call for Spain’s central government to help regions access funding and S&P cut the credit ratings for five of the country’s banks. China’s biggest lenders may fall short of loan targets for the first time in at least seven years, three bank officials said, and the nation’s State Council refrained from backing Premier Wen Jiabao’s push to expand credit.

“It’s bit a surprising to see so much on the long side, because the trend is down in commodities,” said Walter ‘Bucky’ Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama. “We’re probably not going to see an extended rally until we get some type of monetary easing. Buying now is an aggressive move. You’re betting on a short-term pop from some sort of resolution in Europe.”

Agriculture Gauge

The S&P GSCI index fell 1.4 percent last week and is down 9.4 percent in May, heading for the biggest monthly loss since September. The S&P agriculture gauge tumbled 4.8 percent last week. The MSCI All-Country World Index of equities rose 0.7 percent, and Treasures slid 0.2 percent, a Bank of America Corp. index shows. The dollar rose 1.4 percent against a basket of six currencies, rallying for a fourth week.

Twenty of the 24 raw materials tracked by S&P dropped last week. Corn tumbled 9 percent, the most in a year, and cocoa slumped 7.2 percent, the biggest loss in 2012. Natural gas fell 3 percent today.

A political impasse in Greece, where voters rejected austerity measures in elections on May 6, has raised concern that country may leave the euro. Spain’s government is analyzing “with all caution” requests from regional governments to help them regain access to capital markets, Deputy Prime Minister Soraya Saenz de Santamaria said May 25. Catalonia is one of 17 semi-autonomous regions in the country.

Europe’s crisis risks deepening, damaging the world economy, the Paris-based Organization for Economic Cooperation and Development said in a report May 22.

‘Aggressive’ Stimulus

China’s Wen, in comments posted on the government’s website May 20, said the nation should put “stabilizing growth in a more important position” and increase lending to support construction. More “aggressive” stimulus measures will spur Chinese economic expansion and boost copper prices in the second half of the year, Morgan Stanley analysts led by New York-based Hussein Allidina said in a report May 21.

Copper inventories monitored by Shanghai’s exchange fell for a seventh straight week to the lowest since January. China is the world’s biggest consumer of industrial metals. Novelis Inc., the top global producer of rolled aluminum, said last week that doubling its output capacity may not be enough to meet rising demand from car makers.

“Where investors struggle at the moment is that they can see in the medium- to long-term it’s still a bull story,” said Jonathan Whitehead, the global head of commodities markets at Societe Generale SA. “Most of the reasons why commodities spent the 2000s going up are still there -- growing demand and increasing supply issues.”

$1.18 Billion

Investors pulled $1.18 billion from commodity funds in the week ended May 23, the fifth consecutive drop and the most this year, according to Brad Durham, a managing director at Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Gold and precious metals outflows totaled $631.7 million, also the biggest exit this year, he said.

Money managers boosted corn wagers by 30 percent to 109,022 futures and options contracts, the Commodity Futures Trading Commission said. That’s the biggest jump since July 2010. Last week’s 9 percent tumble in Chicago prices extended this year’s decline to 11 percent.

Speculators are bullish on wheat for the first time since September. Funds went from a short position, or betting on price declines, of 50,057 futures and options to a long holding of 7,026 in the week ended May 22, the CFTC data show. The gain of 57,083 contracts was larger than for any of the 18 raw materials tracked by Bloomberg. Prices fell 2.2 percent last week.

Export Sales

Slowing growth in China, the world’s biggest pork consumer, is eroding demand for grains used in livestock feed. In the week ended May 17, U.S. corn export-sales for delivery before Aug. 31, 2013, plunged 44 percent from a week earlier, the Department of Agriculture said May 24.

Gold wagers dropped for a third week to 77,318 contracts, extending a slump to the lowest since December 2008. Funds are bearish on copper prices for the first time since January, going to a net-short position of 2,808 contracts as of May 22, from net-long holdings of 4,833 a week earlier.

Nine of 18 analysts surveyed by Bloomberg expect the metal to drop this week and three were neutral. Traders were bearish for a second week, the first consecutive negative outlook since early April.

“There’s been a down shift in demand for a lot of commodities with the concerns over growth in China and Europe,” said Jack Ablin, the Chicago-based chief investment officer of BMO Harris Private Bank, which oversees about $60 billion of assets. “There are generally a lot of headwinds. We’re underweight in commodities and may go to zero.”

To contact the reporter on this story: Joe Richter in New York at jrichter1@bloomberg.net

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

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Dollar Scarce as Top-Quality Assets Shrink 42%

By John Detrixhe - May 29, 2012 4:00 AM GMT+0700

The dollar is proving scarce, even after the Federal Reserve flooded the financial system with an extra $2.3 trillion, as the amount of the highest-quality assets available worldwide shrinks.

From last year’s low on July 27, the greenback has risen against all 16 of its major peers. Intercontinental Exchange Inc.’s Dollar Index surged 12 percent, higher now than when the Fed began creating dollars to buy bonds under its extraordinary stimulus measures at the end of 2008.

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The dollar is proving scarce, even after the Federal Reserve flooded the financial system with an extra $2.3 trillion, as the amount of the highest-quality assets available worldwide shrinks. Photographer: Scott Eells/Bloomberg

International investors and financial institutions that are required to own only the highest quality assets to meet investment guidelines or new regulations are finding fewer options beyond dollar-denominated assets. The U.S. is one of only five major economies with credit-default swaps on their debt trading at less than 100 basis points, meaning they are viewed as almost risk free. A year ago, eight Group-of-10 nations fit that category, data compiled by Bloomberg show.

“The pool of high-rated assets has been shrinking, not just in the euro zone but elsewhere as well,” Ian Stannard, Morgan Stanley’s head of Europe currency strategy, said in a May 22 telephone interview. “With the core of Europe shrinking, and the available assets for reserve purposes shrinking, it makes the euro zone less attractive.”

Euro Depreciation

The dollar is gaining mainly at the expense of the euro, which has depreciated almost 5 percent the past six months against a basket of nine major currencies tracked by Bloomberg as nations from Spain to Italy see their credit ratings downgraded amid the region’s sovereign crisis.

Spain, which has about $917.5 billion of debt, has been cut six levels by Moody’s Investors Service to A3 from Aaa in September 2010. Italy, with more than $2 trillion of debt, has been reduced four levels to A3 from Aa2 in October.

“We’re seeing many more periods of dollar buying during these uncertain times,” Ken Dickson, an investment director of currencies at Standard Life Investments in Edinburgh, which manages $257 billion, said May 24 in a telephone interview.

The U.S. currency appreciated 2.06 percent last week to $1.2517 per euro in New York after touching $1.2496, the strongest since July 2010. It gained 0.84 percent to 79.68 yen. The Dollar Index jumped 1.37 percent to 82.402, its fourth- straight weekly rally.

Bigger Share

The five economies with default swaps trading at less than 100 basis points have a combined $14 trillion in debt, with the U.S. accounting for 75 percent, according to CMA data compiled by Bloomberg. A year ago, when there were eight nations, the total was $24 trillion, with America making up 38 percent.

Bank of America Merrill Lynch’s AAA Rated Global Fixed Income Index contained 3,597 securities with the highest ratings as of April 30, down from a high of 5,331 in December 2007, the fewest since November 2005. Dollar assets make up 65 percent of the index, up from 56 percent in 2008.

Hungary’s central bank is among reserve managers diversifying foreign-exchange holdings as the credit quality of European assets declines. The central bank said it will include dollars, yen and British pounds in its reserves, currently invested exclusively in euro-denominated securities.

“The number of euro-denominated assets that meet our quality standards has dropped radically,” Magyar Nemzeti Bank President Andras Simor told reporters on May 14 in Budapest. “More and more securities were dropped from our portfolio as the credit grade of more and more countries fell below the single A category and as more and more securities don’t meet our market quality requirements.”

No ‘Master Plan’

China Investment Corp. President Gao Xiqing said May 10 the nation’s sovereign wealth fund stopped buying government debt in Europe as the region’s turmoil intensifies. With an estimated $440 billion in assets, CIC is the world’s fifth-largest country fund, according to the Sovereign Wealth Fund Institute.

“Ever since the debt crisis broke out, there has never been a master plan for a resolution,” Jin Liqun, chairman of CIC’s supervisory board, said at an event hosted by the Centre for Policy Studies in London on May 22.

Such comments are bolstering the dollar’s status as the world’s primary reserve currency after a decade-long decline.

The greenback’s share of global foreign-exchange reserves climbed in the last three-months of 2011 to 62.1 percent, the highest since June 2010, while holdings of euros fell to the lowest since September 2006 at 25 percent, according to the latest quarterly data from the International Monetary Fund.

Official Holdings

Foreign official holdings of U.S. government debt increased in each of the first three months of 2012, climbing by 3.24 percent to $3.73 trillion in the best start to a year since 2009, according to data from the Treasury Department.

Demand from outside the U.S. helps the administration of President Barack Obama finance a budget deficit forecast to exceed $1 trillion for a fourth year.

A relatively strong dollar may also damp criticism of the Fed if it decides to expand its balance sheet to boost the economy. The Dollar Index tumbled 14 percent during the Fed’s two rounds of asset purchases, known as quantitative easing, or QE, between December 2008 and June 2011.

While the dollar is “somewhere safe to hide,” the euro is poised to rebound before Greek elections next month before resuming its decline against the U.S. currency, said John Taylor, founder of New York-based currency-hedge fund FX Concepts LLC, which oversees $3.9 billion.

‘Way Oversold’

“We are way oversold in the euro,” Taylor said on May 24 in an interview on Bloomberg Television’s “Inside Track” with Erik Schatzker and Sara Eisen.

The dollar’s appeal is also getting a boost as nations generally perceived as havens become less welcoming.

The Swiss National Bank introduced a 1.20 franc-per-euro limit in September after its currency rose to a record, hurting exporters and increasing the risk of deflation.

Japan spent 16.4 trillion yen ($206.6 billion) in intervention in 2010 and 2011, according to the Finance Ministry. The franc has lost 1.9 percent against the dollar this year and the yen has depreciated 3.1 percent.

“The other countries that often have some kind of a safe- haven attraction to them are slowly but surely saying that we’re not so sure we want our currencies to be stronger,” Standard Life’s Dickson said.

Bank Demand

Demand for dollars is also showing up in financial institutions needing to meet Basel III regulations set by the Bank for International Settlements. The new rules on capital reserves will “increase the price of safety” embedded in assets deemed a reliable store of value, the IMF wrote in an April 18 report.

The cost for banks to convert euro interest payments into dollars through the swaps market for three years has increased to 67.8 basis points below the euro interbank offered rate, or Euribor, from 34.8 basis points below in March 29, according to data compiled by Bloomberg. Negative spreads show a premium for dollar funding.

Dollar assets are also looking attractive on a relative basis, with yields on Treasuries due in 10 years averaging 0.37 percentage point more than German bunds of similar maturity. As recently as November, Treasuries yielded about 0.33 percentage point less than bunds.

“With the chronic problems and challenges in Europe, it’s hard to see how that’s going to overtake the dollar anytime in our lifetime, if the euro even still exists in our lifetime,” Tim Adams, a managing director at the Lindsey Group, a Fairfax, Virginia-based investment consultant and former Treasury undersecretary, said May 1 at the Bloomberg Washington Summit hosted by Bloomberg Link.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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