Merkel Seeks EU Revamp With Sarkozy as S&P Puts 15 Euro Nations on Review

By Patrick Donahue and Helene Fouquet - Dec 6, 2011 4:05 PM GMT+0700

German Chancellor Angela Merkel and French President Nicolas Sarkozy strengthened their push for new rules to tighten euro-area economic cooperation as Standard & Poor’s said it may downgrade credit ratings across the region.

Hours after meeting in Paris yesterday, the leaders of Europe’s two biggest economies responded that they “took note” of the move by S&P, while both countries “reinforce their conviction” that common proposals for closer fiscal union in the European Union will lead the way out of the crisis.

“The actions of the last three years have shown that the euro zone governments are not prepared to act collectively in a way that convinces markets,” said Paul Donovan, deputy head of global economics at UBS AG in London. The S&P move “may perhaps heighten the desirability of coming out with a compelling solution for the French and the Germans.”

Germany and France risk losing their AAA credit ratings in a review of 15 euro nations for possible downgrade, S&P said. At an earlier meeting in Paris, Merkel and Sarkozy said both countries were aligned on backing automatic penalties for deficit violators and locking limits on debt into euro states’ constitutions. Investors say such moves might pave the way for the European Central Bank to do more to fight the debt crisis.

ECB Focus

The question is whether the Franco-German push toward integration is enough to prompt ECB President Mario Draghi to step up the central bank’s response, said Carsten Brzeski, an economist at ING Group in Brussels.

While the leaders’ announcement is “a good start to the week of truth,” Merkel and Sarkozy still “need to put money where their mouth is and bring everyone else on board,” Brzeski said by phone. “From a financial market perspective, it’s about them doing enough to deliver Draghi’s fiscal compact.”

The euro fell 0.4 percent against the U.S. dollar, trading at $1.3343 at 9:15 a.m. Frankfurt time -- down from an intraday high of $1.3487 yesterday as the S&P’s warning doused optimism over joint action by euro leaders. S&P put European nations including the six AAA-rated countries on watch for potential downgrades pending the outcome of a Dec. 9 summit of EU leaders.

‘Excessive’

Luxembourg Prime Minister Jean-Claude Juncker, who leads the group of euro-area finance ministers, said the warning by the rating company was like a “knockout blow” to governments that are undertaking measures to scale back deficits.

“I have to wonder that this news reaches us out of the clear blue sky at the time of the European summit -- this can’t be a coincidence,” Juncker said in an interview today on German radio broadcaster Deutschlandfunk.

The S&P move was “excessive,” saidVincent Truglia, managing director at New York-based Granite Springs Asset Management LLP and a former head of the sovereign risk unit at Moody’s Investors Service, a rival rating company.

“Countries like Germany, Luxembourg, Netherlands, Finland are AAA, and Austria is a pretty strong AAA,” he said.

S&P said that ratings could be cut by one level for Austria, Belgium, Finland, Germany, Netherlands and Luxembourg, and by up to two notches for the other governments.

The other countries warned are Estonia, France, Ireland, Italy, Malta, Portugal, Slovakia, Slovenia and Spain, according to S&P. The company said it maintained the negative outlook for Cyprus, and Greece wasn’t put on “creditwatch.”

‘United’ Resolve

With the fate of the currency shared by the 17 euro states at risk, Merkel and Sarkozy are stressing their common platform going into the summit that aims to end the crisis that’s now in its third year. After Merkel compared the mission to a “marathon” last week, Sarkozy said yesterday that euro leaders would go on a “forced march” to win back confidence.

Among the measures announced were plans to fast-track the euro’s permanent rescue fund to 2012, one year earlier than envisaged. Germany and France will also seek to ensure that decisions by the fund, the European Stability Mechanism, can be made by a “qualified majority” rather than a unanimous vote by the participating governments. Sarkozy said they aimed to reach consensus on treaty change with other euro leaders by March.

“We don’t have time -- we are conscious of the gravity of the situation,” Sarkozy said after meeting with Merkel over lunch at the Elysee palace. “We want to go as fast as possible based on this agreement between France and Germany, which is open to others.”

Response

Safeguarding banks, limiting the damage to Italy and Spain and finding additional rescue funds may hinge on the response to Franco-German demands for closer economic integration and tougher policing of fiscal rules.

Draghi signaled last week that should a “new fiscal compact” emerge among the euro nations, “other elements might follow.” Merkel and Sarkozy both declined to comment on Draghi’s comments, stressing the ECB’s independence.

“It’s a step in the right direction for the ECB but we’ll want to know how the automatic sanctions are triggered,” said Klaus Baader, co-chief economist at Societe Generale SA. “When France and Germany have joint press conferences and say we agree on everything you have to take that with a pinch of salt.”

With the EU summit looming, U.S. Treasury Secretary Timothy Geithner arrives in Frankfurt to meet with Draghi and Bundesbank President Jens Weidmann before heading to Berlin for talks with German Finance Minister Wolfgang Schaeuble. The ECB holds a policy meeting on Dec. 8.

‘Bit of Trust’

European leaders will seek to “win back a bit of trust” at the summit after “our reliability has suffered,” Merkel said in Paris. “We are steadfastly determined to make the decision at the council now.”

Merkel and Sarkozy yesterday repeated their rejection of jointly sold euro bonds in solving the crisis, while seeking to calm concerns of euro-area member states that the European Court of Justice would be able to veto national budgets as part of their proposal for centralized deficit supervision.

With euro bonds ruled out, “the onus is still on the ECB to print money to make huge loans or bond purchases and draw a line under the crisis,” said Jennifer McKeown, senior European economist at Capital Economics in London.

The move by S&P adds impetus to that, said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London.

“Anything which impacts the perceived creditworthiness of the main guarantors of euro zone debt is bad news for planned steps towards a fiscal union,” he said in an e-mail. “All this puts more pressure on the ECB to hold the fort.”

To contact the reporters on this story: Patrick Donahue in Berlin at pdonahue1@bloomberg.net; Helene Fouquet in Paris at hfouquet1@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net

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Swiss Re Estimates Insured Claims From Floods in Thailand at $600 Million

By Carolyn Bandel - Dec 6, 2011 3:44 PM GMT+0700

Swiss Re Ltd., the world’s second- biggest reinsurer, estimates insured claims from the flooding in Thailand at $600 million.

“The impact of this flood on the Thai economy and the companies that operate there is likely to be significant and could last some time,” said Brian Gray, chief underwriting officer at the Zurich-based reinsurer. “The floods have forced the closure of several major industrial estates.”

Thai Prime Minister Yingluck Shinawatra said on Dec. 3 that all areas of Bangkok will be free from flooding by the end of the month after northern and central Thailand experienced their highest rainfall in 50 years. The total insured market loss from the flooding, which claimed at least 657 lives, could be as much as $11 billion, Swiss Re said.

“The claim is higher than expected and is not yet finished” because of the complex loss assessment, said Fabrizio Croce, a Zurich-based analyst with Kepler Capital Markets. “We have to expect more claims, some potentially also delayed in 2012.”

Swiss Re dropped as much as 1.6 percent in Zurich trading and was down 0.7 percent at 49.36 Swiss francs as of 9:01 a.m. That valued the firm at 18.3 billion francs ($19.7 billion)

To contact the reporter on this story: Carolyn Bandel in Zurich at cbandel@bloomberg.net

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

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‘Rotten’ Olympus at Risk of Delisting After Report

By Mariko Yasu - Dec 6, 2011 4:07 PM GMT+0700

Olympus Corp. risks being delisted even if it makes a Dec. 14 deadline to announce earnings, the Tokyo Stock Exchange said after the release of an independent report into false accounting by the Japanese camera maker.

Senior management was “rotten to the core” and corrupted other layers of executives that touched it, according to the report of a panel probing Olympus’s schemes to cover up 135 billion ($1.7 billion) in losses and payments to advisers dating back decades. Failings by auditors and aid from banks in Europe and Singapore helped hide the losses, it said.

The exchange’s statement may undermine a rebound in Olympus shares since the company first admitted on Nov. 8 to using inflated takeover costs and advisory fees to hide investment losses dating back decades. Investigators in Japan, the U.S. and U.K. are still probing the transactions amid allegations kickbacks may have gone to organized crime.

“All of the people involved should be taken to court and made to pay for the damage they have done to the regular employees, stockholders,” said Edwin Merner, who helps oversee about $3 billion as Tokyo-based president of Atlantis Investment. “They will probably get off lightly since the politicians and bureaucrats are also mixed up in funny business and feel sympathy for top management since they could very well be next.”

Olympus said in a statement it accepts the panel’s report and that it will make all efforts to ensure it isn’t delisted. The Tokyo exchange said the report showed Olympus would have to restate its financial reports and that this may have a significant impact on the company, a condition for delisting.

No Evidence

The panel said it found no evidence that money was funneled to antisocial forces, a byword for criminal gangs. Masatoshi Kishimoto, 75, who was company president for eight years from 1993, and his successor Tsuyoshi Kikukawa were among former executives at Tokyo-based Olympus involved in the cover-up, according to the report.

The 26-page summary of a larger report stopped short of calling for a wholesale change in management at the company, saying the conspiracy was restricted to a small circle and wasn’t systemic.

Woodford’s Dismissal

The report came seven weeks after the dismissal of former Chief Executive Officer Michael C. Woodford, who questioned $1.4 billion in takeover costs including fees paid to a now-defunct Cayman Islands fund in the $2.1 billion takeover of Gyrus Group Plc in 2008. The 51-year-old British citizen resigned as a director Dec. 1 in the first step of a campaign to take control of the company from the board that fired him Oct. 14.

Shareholders should be given a chance to vote for new management after Olympus admitted Kikukawa and senior aides colluded to cover up losses dating back to the 1990s, Woodford said last week. Southeastern Asset Management Inc., Olympus’s largest overseas stockholder, joined Woodford in calls for a change of management.

Olympus shares, which declined to their lowest in 36 years on Nov. 11, rose 9.1 percent at the 3 p.m. close of trading in Tokyo, before the panel’s report. The stock has declined 52 percent since the dismissal of Woodford.

The company began making financial investments after 1985 as a strong yen hurt operating profit, the panel said. When Japan’s stock-market bubble burst at the end of 1989, the company purchased high-risk products and structured bonds in an effort to recoup the loss. In late 1990, the company had a little less than 100 billion yen of unrealized losses.

Olympus is “cooperating fully with investigators” including the Tokyo District Public Prosecutors Office, the Tokyo Metropolitan Police and Japan’s Securities and Exchange Surveillance Commission, spokesman Tsuyoshi Kitada said Dec. 5, declining to elaborate further.

To contact the reporter on this story: Mariko Yasu in Tokyo at myasu@bloomberg.net

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

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French, German Bonds Fall as S&P Puts 15 Nations on Review for Downgrade

By Emma Charlton and Paul Dobson - Dec 6, 2011 4:15 PM GMT+0700

French and German bonds dropped, leading declines among the euro-area’s government securities, after Standard & Poor’s said it may lower credit ratings across the region.

Belgian and Austrian 10-year bonds fell after S&P said yesterday 15 euro nations may have their rankings lowered as “continuing disagreements” among policy makers on how to tackle the debt crisis risks damaging their financial stability. Ten-year bunds declined for a second day as Germany and France strengthened their push for tighter euro-area economic cooperation yesterday before a European summit on Dec. 8-9.

“It’s a dramatic move,” said Padhraic Garvey, head of developed-market debt strategy at ING Groep NV in Amsterdam. “It makes it very difficult for a recovery of investor sentiment and it piles further pressure on legislators, which may be a good thing in the end. In order to reverse this, we need an incredibly positive outcome from the summit.”

French 10-year yields climbed 12 basis points, or 0.12 percentage point, to 3.25 percent at 9:13 am in London. The 3.25 percent bond due in October 2021 declined 0.99, or 9.90 euros per 1,000 euro ($1,338) face amount to 99.985. Ten-year German bund yields increased five basis points to 2.26 percent.

Ratings may be cut by one level for Austria, Belgium, Finland, Germany, Netherlands and Luxembourg, according to S&P. The company said it may lower the ratings of Estonia, France, Ireland, Italy, Malta, Portugal, Slovakia, Slovenia and Spain by up to two notches.

Belgium, Austria

Belgian 10-year yields advanced eight basis points to 4.41 percent, and rates on similar-maturity Austrian bonds climbed six basis points to 3.22 percent. Spain’s 10-year rates advanced one basis point to 5.13 percent.

Bunds fell yesterday as optimism Europe’s leaders are moving closer to agreeing on a plan to contain the debt crisis reduced demand for the safest assets. Government bonds from Italy and Spain rallied yesterday as German Chancellor Angela Merkel and French President Nicolas Sarkozy pushed for a rewrite of the European Union’s governing treaties to tighten economic cooperation as a first step toward ending the debt crisis.

The governments of France and Germany said in a statement they “recognize” the move by S&P and “affirm their conviction” that the common proposals made yesterday will strengthen coordination of budget and economic policy, and promote stability, competitiveness and growth.

Bailout Fund

Downgrades of Germany and France would affect the rating of the European Financial Stability Facility, the bailout fund for struggling euro member countries that has funded rescue packages for Greece, Ireland and Portugal partially through bond sales. If the EFSF has to pay higher interest on its bonds, it may not be able to provide as much funding for indebted nations.

Yields on EFSF 3.375 percent bonds due in July 2021 were little changed at 3.63 percent, Bloomberg data showed.

With the summit in Brussels looming, U.S. Treasury Secretary Timothy Geithner arrives in Frankfurt today to talk with political leaders and the European Central Bank, which holds a policy meeting Dec. 8.

The ECB will lower its benchmark rate by a quarter point to 1 percent, according to 53 of 58 economists in a Bloomberg News survey. Two said the central bank will cut rates to 0.75 percent, and three estimate it will leave them at 1.25 percent.

German bonds have handed investors a return of 7.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French bonds have gained 3.5 percent, Italian bonds have declined 4.9 percent and Spanish bonds have advanced 6.1 percent.

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net.

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

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Merkel, Sarkozy Unite as S&P Issues Warning

By Patrick Donahue and Helene Fouquet - Dec 6, 2011 4:05 PM GMT+0700

Play Video

Dec. 6 (Bloomberg) -- Barbara Ridpath, chief executive officer of the International Centre for Financial Regulation, talks about Standard & Poor's review of 15 euro nations' credit ratings, Europe's debt crisis and the outlook for the global banking industry. Ridpath speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Play Video

Dec. 6 (Bloomberg) -- Philippe D'Arvisenet, global chief economist at BNP Paribas SA, discusses the euro-zone crisis as Standard & Poor's said it may downgrade credit ratings across the region. He talks from Paris with Owen Thomas and Linda Yueh on Bloomberg Television's "Countdown." (Source: Bloomberg)

German Chancellor Angela Merkel and French President Nicolas Sarkozy strengthened their push for new rules to tighten euro-area economic cooperation as Standard & Poor’s said it may downgrade credit ratings across the region.

Hours after meeting in Paris yesterday, the leaders of Europe’s two biggest economies responded that they “took note” of the move by S&P, while both countries “reinforce their conviction” that common proposals for closer fiscal union in the European Union will lead the way out of the crisis.

“The actions of the last three years have shown that the euro zone governments are not prepared to act collectively in a way that convinces markets,” said Paul Donovan, deputy head of global economics at UBS AG in London. The S&P move “may perhaps heighten the desirability of coming out with a compelling solution for the French and the Germans.”

Germany and France risk losing their AAA credit ratings in a review of 15 euro nations for possible downgrade, S&P said. At an earlier meeting in Paris, Merkel and Sarkozy said both countries were aligned on backing automatic penalties for deficit violators and locking limits on debt into euro states’ constitutions. Investors say such moves might pave the way for the European Central Bank to do more to fight the debt crisis.

ECB Focus

The question is whether the Franco-German push toward integration is enough to prompt ECB President Mario Draghi to step up the central bank’s response, said Carsten Brzeski, an economist at ING Group in Brussels.

While the leaders’ announcement is “a good start to the week of truth,” Merkel and Sarkozy still “need to put money where their mouth is and bring everyone else on board,” Brzeski said by phone. “From a financial market perspective, it’s about them doing enough to deliver Draghi’s fiscal compact.”

The euro fell 0.4 percent against the U.S. dollar, trading at $1.3343 at 9:15 a.m. Frankfurt time -- down from an intraday high of $1.3487 yesterday as the S&P’s warning doused optimism over joint action by euro leaders. S&P put European nations including the six AAA-rated countries on watch for potential downgrades pending the outcome of a Dec. 9 summit of EU leaders.

‘Excessive’

Luxembourg Prime Minister Jean-Claude Juncker, who leads the group of euro-area finance ministers, said the warning by the rating company was like a “knockout blow” to governments that are undertaking measures to scale back deficits.

“I have to wonder that this news reaches us out of the clear blue sky at the time of the European summit -- this can’t be a coincidence,” Juncker said in an interview today on German radio broadcaster Deutschlandfunk.

The S&P move was “excessive,” saidVincent Truglia, managing director at New York-based Granite Springs Asset Management LLP and a former head of the sovereign risk unit at Moody’s Investors Service, a rival rating company.

“Countries like Germany, Luxembourg, Netherlands, Finland are AAA, and Austria is a pretty strong AAA,” he said.

S&P said that ratings could be cut by one level for Austria, Belgium, Finland, Germany, Netherlands and Luxembourg, and by up to two notches for the other governments.

The other countries warned are Estonia, France, Ireland, Italy, Malta, Portugal, Slovakia, Slovenia and Spain, according to S&P. The company said it maintained the negative outlook for Cyprus, and Greece wasn’t put on “creditwatch.”

‘United’ Resolve

With the fate of the currency shared by the 17 euro states at risk, Merkel and Sarkozy are stressing their common platform going into the summit that aims to end the crisis that’s now in its third year. After Merkel compared the mission to a “marathon” last week, Sarkozy said yesterday that euro leaders would go on a “forced march” to win back confidence.

Among the measures announced were plans to fast-track the euro’s permanent rescue fund to 2012, one year earlier than envisaged. Germany and France will also seek to ensure that decisions by the fund, the European Stability Mechanism, can be made by a “qualified majority” rather than a unanimous vote by the participating governments. Sarkozy said they aimed to reach consensus on treaty change with other euro leaders by March.

“We don’t have time -- we are conscious of the gravity of the situation,” Sarkozy said after meeting with Merkel over lunch at the Elysee palace. “We want to go as fast as possible based on this agreement between France and Germany, which is open to others.”

Response

Safeguarding banks, limiting the damage to Italy and Spain and finding additional rescue funds may hinge on the response to Franco-German demands for closer economic integration and tougher policing of fiscal rules.

Draghi signaled last week that should a “new fiscal compact” emerge among the euro nations, “other elements might follow.” Merkel and Sarkozy both declined to comment on Draghi’s comments, stressing the ECB’s independence.

“It’s a step in the right direction for the ECB but we’ll want to know how the automatic sanctions are triggered,” said Klaus Baader, co-chief economist at Societe Generale SA. “When France and Germany have joint press conferences and say we agree on everything you have to take that with a pinch of salt.”

With the EU summit looming, U.S. Treasury Secretary Timothy Geithner arrives in Frankfurt to meet with Draghi and Bundesbank President Jens Weidmann before heading to Berlin for talks with German Finance Minister Wolfgang Schaeuble. The ECB holds a policy meeting on Dec. 8.

‘Bit of Trust’

European leaders will seek to “win back a bit of trust” at the summit after “our reliability has suffered,” Merkel said in Paris. “We are steadfastly determined to make the decision at the council now.”

Merkel and Sarkozy yesterday repeated their rejection of jointly sold euro bonds in solving the crisis, while seeking to calm concerns of euro-area member states that the European Court of Justice would be able to veto national budgets as part of their proposal for centralized deficit supervision.

With euro bonds ruled out, “the onus is still on the ECB to print money to make huge loans or bond purchases and draw a line under the crisis,” said Jennifer McKeown, senior European economist at Capital Economics in London.

The move by S&P adds impetus to that, said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London.

“Anything which impacts the perceived creditworthiness of the main guarantors of euro zone debt is bad news for planned steps towards a fiscal union,” he said in an e-mail. “All this puts more pressure on the ECB to hold the fort.”

To contact the reporters on this story: Patrick Donahue in Berlin at pdonahue1@bloomberg.net; Helene Fouquet in Paris at hfouquet1@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net

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German Bonds Decline After S&P Warning on Euro Ratings; Stocks Pare Losses

By Stephen Kirkland and Lynn Thomasson - Dec 6, 2011 4:07 PM GMT+0700

Play Video

Dec. 6 (Bloomberg) -- Timothy Moe, a Hong Kong-based strategist at Goldman Sachs Group Inc., talks about the outlook for Asian stocks and Europe's sovereign debt crisis. He speaks from Singapore with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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Dec. 6 (Bloomberg) -- Jonathan Garner, the chief Asia and emerging-market strategist at Morgan Stanley in Hong Kong, talks about the region's stock markets. Garner also discusses Europe's sovereign debt crisis. He speaks with John Dawson on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

French and German bonds declined after Standard & Poor’s said it may cut the credit ratings of 15 European nations. Stocks pared losses on speculation the European Central Bank will be forced to take more steps to avert a deepening debt crisis.

The yield on France’s 10-year bond jumped 11 basis points at 8:54 a.m. in London, with the similar maturity German bund yield climbing three basis points. The euro weakened 0.2 percent to $1.3376, while the Swiss franc depreciated against all 16 major currencies tracked by Bloomberg. The Stoxx Europe 600 Index slid 0.2 percent, and S&P 500 Index futures increased 0.1 percent. Nickel and wheat led commodities lower.

Germany, France and four other nations may lose their AAA credit ratings depending on the result of a summit of European Union leaders on Dec. 9, S&P said yesterday. ECB President Mario Draghi will probably cut interest rates a quarter point to buoy the economy when policy makers meet Dec. 8, according to economists in a Bloomberg survey.

“The rating action may force the ECB to be more aggressive in inking up the presses if they want to avert a crisis,” Jim Reid, a strategist at Deutsche Bank AG in London, wrote in a research note. “2012 is looking to us like a year that will be decided by whether the ECB is a very different institution to what it is today. Thursday’s ECB post-meeting conference is shaping up to be a very interesting event for the week.”

The cost of insuring against default on European sovereign debt rose for the first time in seven days, with the Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments climbing six basis points to 326.

Nickel dropped 1.6 percent and wheat fell 1.4 percent. Copper declined 1.3 percent and oil in New York slipped 0.3 percent to $100.72 a barrel.

----With assistance from, Claudia Carpenter, Mark Gilbert, Abigail Moses and Daniel Tilles in London. Editors: Stephen Kirkland, Stuart Wallace

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

To contact the editor responsible for this story: Stuart Wallace at swallace6@bloomberg.net

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EU Revamp Pushed as S&P Issues Warning

By Patrick Donahue and Helene Fouquet - Dec 6, 2011 11:04 AM GMT+0700
Enlarge image

Downgrades of Germany and France would affect the rating of the European Financial Stability Facility, the bailout fund for struggling euro member countries that has funded rescue packages for Greece, Ireland and Portugal partially through bond sales. Photographer: Jacques Demarthon/AFP/Getty Images

Play Video

Dec. 6 (Bloomberg) -- Barbara Ridpath, chief executive officer of the International Centre for Financial Regulation, talks about Standard & Poor's review of 15 euro nations' credit ratings, Europe's debt crisis and the outlook for the global banking industry. Ridpath speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Play Video

Dec. 6 (Bloomberg) -- Phillip Swagel, a professor of economics at the University of Maryland’s School of Public Policy who was an assistant U.S. Treasury secretary for economic policy in the George W. Bush administration, talks about Europe's sovereign debt crisis. Standard & Poor’s said Germany and France may be stripped of their AAA credit ratings as the debt crisis prompts 15 euro nations to be put on review for possible downgrade. Swagel speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

German Chancellor Angela Merkel and French President Nicolas Sarkozy strengthened their push for new rules to tighten euro area economic cooperation after Standard & Poor’s said it may downgrade credit ratings across the region.

The leaders of Europe’s two biggest economies responded in a joint statement late yesterday that they “took note” of the move by S&P, while both countries “reinforce their conviction” that common proposals for closer fiscal union in the European Union will “strengthen coordination of budget and economic policy,” and promote stability and growth.

“The actions of the last three years have shown that the euro zone governments are not prepared to act collectively in a way that convinces markets,” said Paul Donovan, deputy head of global economics at UBS AG in London. The S&P move “may perhaps heighten the desirability of coming out with a compelling solution for the French and the Germans.”

Germany and France risk losing their AAA credit ratings in a review of 15 euro nations for possible downgrade, S&P said. At an earlier meeting in Paris, Merkel and Sarkozy said both countries were aligned on backing automatic penalties for deficit violators and locking limits on debt into euro states’ constitutions. Investors say such moves might pave the way for the European Central Bank to do more to fight the debt crisis.

ECB Focus

The question is whether the Franco-German push toward integration is enough to prompt ECB President Mario Draghi to step up the central bank’s response, said Carsten Brzeski, an economist at ING Group in Brussels.

While the leaders’ announcement is “a good start to the week of truth,” Merkel and Sarkozy still “need to put money where their mouth is and bring everyone else on board,” Brzeski said by phone. “From a financial market perspective, it’s about them doing enough to deliver Draghi’s fiscal compact.”

The euro fell for a third day after S&P’s announcement, which put European nations including the six AAA-rated countries on watch for potential downgrades pending the outcome of a Dec. 8-9 leaders summit. The 17-nation currency declined 0.3 percent to $1.3367 at 12:47 p.m. in Tokyo. Asia stocks (MXAP) dropped for the first time in seven days.

‘Excessive’

The S&P move was “excessive,” said Vincent Truglia, managing director at New York-based Granite Springs Asset Management LLP and a former head of the sovereign risk unit at Moody’s Investors Service, a rival rating company.

“Countries like Germany, Luxembourg, Netherlands, Finland are AAA, and Austria is a pretty strong AAA,” he said.

S&P said that ratings could be cut by one level for Austria, Belgium, Finland, Germany, Netherlands and Luxembourg, and by up to two notches for the other governments.

The other countries warned are Estonia, France, Ireland, Italy, Malta, Portugal, Slovakia, Slovenia and Spain, according to S&P. The company said it maintained the negative outlook for Cyprus, and Greece wasn’t put on “creditwatch.”

“The credit opinion is based on factors that can’t be influenced by Austria alone,” according to a statement from Austria’s finance ministry. “It is important that the summit later this week comes up with concrete results.”

With the fate of the currency shared by the 17 euro states at risk, Merkel and Sarkozy are stressing their common platform going into the summit that aims to end the crisis now in its third year.

‘United’ Resolve

“Germany and France are united in their resolve to take all necessary measures together with their European partners and the European institutions to safeguard the stability of the euro zone,” according to their statement e-mailed late yesterday after the S&P announcement.

Among the measures announced were plans to fast-track the euro’s permanent rescue fund to 2012, one year earlier than envisaged. Germany and France will also seek to ensure that decisions by the fund, the European Stability Mechanism, can be made by a “qualified majority” rather than a unanimous vote by the participating governments. Sarkozy said they aimed to reach consensus on treaty change with other euro leaders by March.

“We don’t have time -- we are conscious of the gravity of the situation,” Sarkozy said after meeting with Merkel over lunch at the Elysee palace. “We want to go as fast as possible based on this agreement between France and Germany, which is open to others.”

Response

Safeguarding banks, limiting the damage to Italy and Spain and finding additional rescue funds may hinge on the response to Franco-German demands for closer economic integration and tougher policing of fiscal rules.

Draghi signaled last week that should a “new fiscal compact” emerge among the euro nations, “other elements might follow.” Merkel and Sarkozy both declined to comment on Draghi’s comments, stressing the ECB’s independence.

“It’s a step in the right direction for the ECB but we’ll want to know how the automatic sanctions are triggered,” said Klaus Baader, co-chief economist at Societe Generale SA. “When France and Germany have joint press conferences and say we agree on everything you have to take that with a pinch of salt.”

With the EU summit looming, U.S. Treasury Secretary Timothy Geithner arrives in Frankfurt to meet with Draghi and Bundesbank President Jens Weidmann before heading to Berlin for talks with German Finance Minister Wolfgang Schaeuble. The ECB holds a policy meeting on Dec. 8.

‘Bit of Trust’

European leaders will seek to “win back a bit of trust” at the summit after “our reliability has suffered,” Merkel said in Paris. “We are steadfastly determined to make the decision at the council now.”

Merkel and Sarkozy yesterday repeated their rejection of jointly sold euro bonds in solving the crisis, while seeking to calm concerns of euro-area member states that the European Court of Justice would be able to veto national budgets as part of their proposal for centralized deficit supervision.

With euro bonds ruled out, “the onus is still on the ECB to print money to make huge loans or bond purchases and draw a line under the crisis,” said Jennifer McKeown, senior European economist at Capital Economics in London.

The move by S&P adds impetus to that, said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London.

“Anything which impacts the perceived creditworthiness of the main guarantors of euro zone debt is bad news for planned steps towards a fiscal union,” he said in an e-mail. “All this puts more pressure on the ECB to hold the fort.”

To contact the reporters on this story: Patrick Donahue in Berlin at pdonahue1@bloomberg.net; Helene Fouquet in Paris at hfouquet1@bloomberg.net

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

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Asia Faces ‘Much Greater’ Global Risks: ADB

By Shamim Adam - Dec 6, 2011 11:23 AM GMT+0700

Asian economies are facing “much greater downside risks” now because of the possibility of a recession in the U.S. and Europe and the threat of destabilizing capital flows, the Asian Development Bank said.

The biggest challenge for policy makers in emerging East Asian nations is to safeguard growth against the threat of another global economic crisis, the Manila-based lender said in its Asia Economic Monitor report today. Uncertainty over the world economy means officials in the region must have “sufficient flexibility” to adjust policies quickly, it said.

“The cautiously optimistic outlook for emerging East Asia is subject to much greater downside risks now than just a few months ago,” the ADB said. “The global economic recovery could flounder if the euro zone and the U.S. fall back into recession, causing another global financial crisis. Large and destabilizing capital flows could complicate the region’s macroeconomic management and jeopardize economic growth.”

Asian policy makers have shifted their focus to shielding growth, rather than stemming inflation, as Europe’s debt woes and a struggling U.S. economy increase the risk of another global recession. Australia lowered borrowing costs for a second straight month today and Indonesia and Thailand cut interest rates last month, while the Philippines in October unveiled a fiscal stimulus package to spur the economy.

Asia stocks fell for the first time in seven days today after Standard & Poor’s put 15 European nations on watch for potential ratings downgrades. The MSCI Asia Pacific Index retreated 1.3 percent as of 1:13 p.m. in Tokyo.

Best Case

Emerging East Asian economies may grow 7.2 percent next year after expanding 7.5 percent in 2011, according to the report today. The estimates are lower than the lender’s September prediction for 7.6 percent growth this year and 7.5 percent in 2012, it said.

The 2012 forecast is the “best case” scenario, Iwan Azis, head of the office of regional economic integration at the ADB, said in an interview with Bloomberg Television in Hong Kong today. Recessions in the U.S. and Europe may cut emerging East Asia’s growth rate to about 5.4 percent in 2012, he said.

“Asian policy makers should shift the pendulum from controlling inflation to stimulating growth,” Azis said. Governments can stimulate domestic demand through consumption and investment to offset weaker exports as the U.S. and European economies slow, he said.

‘Risk Aversion’

Asian stocks and currencies have retreated amid concern that the region’s export-reliant economies will suffer the impact of diminished global demand as the euro region struggles to stem its debt crisis. The MSCI Asia-Pacific Index (MXAP) fell about 16 percent last quarter, the biggest drop since the last three months of 2008.

Standard & Poor’s said yesterday Germany and France may be stripped of their AAA credit ratings as it put 15 euro nations on review for possible downgrade.

“The lingering eurozone debt crisis could boost risk aversion among investors, with rapid swings in risk appetite boosting capital flow volatility beyond the spurts and stops seen in the third quarter this year,” the ADB said. “Consequently, exchange rate volatility would follow from large but fickle capital movements.”

Asian central banks may undertake more foreign-exchange intervention if the debt crisis in Europe continues to worsen, as their currencies weaken because of capital outflows, Azis told reporters in Hong Kong today.

Not Immune

Emerging East Asia won’t be immune to a “major” slowdown in advanced economies, which would hurt the region’s economic growth and pose “significant” policy challenges, the ADB said.

“With the euro zone’s sovereign debt crisis unfolding and risks of faltering global recovery rising, macroeconomic policy must remain cautious and prudent,” it said. “Should the euro zone fall into a full-blown financial and economic crisis, emerging East Asian economies must respond promptly, decisively, and collectively.”

The ADB cut its 2012 growth estimate for China, the region’s largest economy, to 8.8 percent from a 9.1 percent forecast in September as external demand weakens and “government efforts to cool the economy and achieve a soft landing bear fruit,” it said.

The People’s Bank of China reduced lenders’ reserve requirements on Nov. 30 for the first time since 2008.

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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Asia Stocks Drop on Europe Concern

By Lynn Thomasson and Norie Kuboyama - Dec 6, 2011 11:49 AM GMT+0700

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Dec. 6 (Bloomberg) -- Timothy Moe, a Hong Kong-based strategist at Goldman Sachs Group Inc., talks about the outlook for Asian stocks and Europe's sovereign debt crisis. He speaks from Singapore with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Play Video

Dec. 6 (Bloomberg) -- Jonathan Garner, the chief Asia and emerging-market strategist at Morgan Stanley in Hong Kong, talks about the region's stock markets. Garner also discusses Europe's sovereign debt crisis. He speaks with John Dawson on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

Asia stocks (MXAP) dropped for the first time in seven days after Standard & Poor’s put 15 European nations on watch for potential ratings downgrades. Metals retreated and the euro fell against the dollar.

The MSCI Asia Pacific Index fell 1.3 percent as of 1:11 p.m. in Tokyo after rallying 8.5 percent in the last six sessions. Standard & Poor’s 500 Index futures lost 0.4 percent. Copper declined 1.7 percent, snapping two days of gains. Oil slid 0.5 percent to $100.47 a barrel. Australian stocks extended declines and the so-called Aussie weakened against the dollar after the central bank cut interest rates.

“There’s concern deficits will worsen in European countries such as Italy and Spain, and that will prompt a downgrade of ratings for government bonds,” said Fumiyuki Nakanishi, a strategist at SMBC Friend Securities Co. in Tokyo.

Germany, France and four other nations may lose their AAA credit ratings depending on the result of a summit of European Union leaders on Dec. 9, S&P said yesterday. Fitch Ratings said a property-price correction in China will lead to loan portfolios souring, while the Reserve Bank of Australia cited concern that euro-area turmoil is dimming prospects for the global economy as it lowered its benchmark rate a second month.

The euro declined 0.2 percent to $1.3379. Growth in German factory orders slowed in October, while the euro region’s economy expanded in the third quarter at the same pace as the prior three months, according to economist estimates compiled by Bloomberg before the data is released today.

Australia’s S&P/ASX 200 Index sank 1.1 percent and the currency retreated 0.6 percent to $1.0209. The central bank reduced the overnight cash-rate target by a quarter percentage point to 4.25 percent.

‘Downside Risk’

Asian economies are facing “much greater downside risks” now because of the possibility of a recession in the U.S. and Europe and the threat of destabilizing capital flows, the Asian Development Bank said in a report today. Uncertainty over the world economy means officials in the region must have “sufficient flexibility” to adjust policies quickly, it said.

About seven stocks fell for one that rose in the MSCI Asia Pacific Index today. Declines in Japan’s Nikkei 225 Stock Average, Hong Kong’s Hang Seng Index and Taiwan’s Taiex index exceeded 1 percent.

Industrial & Commercial Bank of China Ltd. (1398) slumped 1.9 percent in Hong Kong. Chinese banks’ risk related to the property market is understated, Charlene Chu, head of China financial institutions at Fitch Ratings, told reporters on a teleconference yesterday.

Copper, Oil

S&P 500 futures expiring in December fell to 1,249.70, signaling the U.S. equity benchmark may pare yesterday’s 1 percent gain. The Institute for Supply Management’s non- manufacturing index unexpectedly fell to 52 last month from 52.9 in October, according to a report yesterday. Fifty is the dividing line between expansion and contraction and the measure was projected to rise to 53.9, according to the median forecast in a Bloomberg News survey.

Copper in London declined as much as 2.1 percent to $7,776 a ton. Gold for immediate delivery retreated 0.5 percent to $1,714.68 an ounce. January oil futures slid as much as 0.6 percent to $100.38 a barrel on the New York Mercantile Exchange.

The cost of insuring corporate bonds in Japan against non- payment rose, according to credit-default swap traders. The Markit iTraxx Japan index increased 3 basis points to 193 basis points as of 9:44 a.m. in Tokyo, Deutsche Bank AG prices show. That’s the first increase in more than a week, according to data provider CMA.

To contact the reporters on this story: Lynn Thomasson in Hong Kong at lthomasson@bloomberg.net; Norie Kuboyama in Tokyo at nkuboyama@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net

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Patricia Dunn, Former HP Chairman, Dies at 58

By Laurence Arnold and Nick Turner - Dec 6, 2011 6:20 AM GMT+0700
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Hewlett-Packard Chairman Patricia Dunn in an undated company photo. Source: Hewlett-Packard Co. via Bloomberg

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Former Hewlett-Packard Chairman Patricia Dunn at a hearing on Capitol Hill on September 28, 2006. Photographer: Chris Kleponis/Bloomberg

Patricia Dunn, the onetime Hewlett- Packard Co. chairman fired in 2006 for overseeing a company (HPQ) investigation that relied on detectives posing as reporters to obtain phone records, has died. She was 58.

She died yesterday at her home in Orinda, California, according to a statement released by her family. The cause was ovarian cancer, one of three types of cancer she battled since 2002.

The Hewlett-Packard snooping scandal that cost Dunn her job, and had her facing criminal charges for a time, fueled debates over identity theft and corporate misbehavior. The company hired investigators who posed as reporters and company directors to obtain phone records of those people, a practice called “pretexting,” to root out who was leaking information to the media.

Dunn said she initiated the investigation at the insistence of a majority of Hewlett-Packard’s board and had received assurances that the methods used to obtain phone records were legal. One part of that probe, launched in January 2006, was prompted by a report by online news service Cnet.com that contained information discussed in a board strategy meeting.

The company’s board fired Dunn in September 2006, about four months before she planned to step down.

Pleased With Outcome

In 2007, Judge Ray Cunningham of Santa Clara Superior Court dismissed felony charges against Dunn, who had been charged with fraudulent wire communications, wrongful use of computer data, identity theft and conspiracy.

“I am pleased that this matter has been resolved fairly,” Dunn said at the time. “I have always had faith that the truth would win out.”

The investigation moved Congress and the California legislature to pass laws prohibiting the release of phone records without consent. Among the targeted reporters was Peter Burrows of BusinessWeek, which was acquired by Bloomberg LP in 2009.

Known as “Pattie,” Dunn repeatedly made Fortune magazine’s list of the most powerful women in business in the late 1990s and early 2000s, as co-chief executive officer of Barclays Global Investors, a unit of Barclays Plc. She stepped down as CEO in June 2002 to be treated for breast cancer and melanoma.

Newsweek Cover

The hunt for leakers at Hewlett-Packard wounded her public image. Newsweek magazine put her on its cover as “The Boss Who Spied on Her Board.”

“I was stunned,” Dunn told the New Yorker magazine for a 2007 article.

At the time, she was still facing criminal charges, and she told writer James Stewart that she feared not living long enough to beat them.

“I care deeply about what people who know me think,” she said. “But, in order to be exonerated, it takes so long. My legacy may be written before that can happen.”

She told Bloomberg Businessweek in 2010, “Some of this experience was negative and unhappy, but it didn’t ruin my life. I’ve expanded my work in the nonprofit community. You can move beyond something like this. I don’t see it as having defined me.”

Patricia Cecile Dunn was born on March 27, 1953, in Burbank, California, according to a biography on the website of All American Speakers LLC, which books paid lectures.

Degree in Journalism

She grew up in Las Vegas, where both her parents worked in the casino industry -- her father as entertainment manager at the Dunes and Tropicana hotels, her mother as a model and showgirl. After her father’s death when Dunn was 11, the family moved to California. Dunn began college at the University of Oregon and graduated in 1975 from the University of California at Berkeley, earning a degree in journalism.

Starting as a temporary secretary at Wells Fargo Investment Advisors, she worked her way up to CEO. Along the way she met William Jahnke, whom she would marry. Barclays bought the firm in 1996, and Dunn became the sole CEO in 1998.

She joined the Hewlett-Packard board in 1998, recruited by then-Chairman Lewis Platt, who cited her understanding of global financial markets while at Barclays.

“Pattie Dunn worked tirelessly for the good of HP,” Michael Thacker, a spokesman for the Palo Alto, California-based company, said in an e-mailed statement. “We are saddened by the news of her passing, and our thoughts go out to her family on their loss.”

Link With Fiorina

Dunn’s career was intertwined with the rise and fall of Carly Fiorina, another female executive who shattered the glass ceiling.

Fiorina was named CEO of Hewlett-Packard in 1999 after climbing the management ranks at Lucent Technologies Inc. Then 44, Fiorina was the first outsider to run Hewlett-Packard and the first woman in the position.

The board lost faith in her after she missed analysts’ earnings estimates and failed to meet goals set after the $18.9 billion purchase of Compaq Computer Corp.

Dunn played a central role in events leading to the 2005 ouster of Fiorina, writing a four-page report outlining the board’s concerns with her, the Wall Street Journal reported at the time. The company named Dunn chairman on Feb. 9, 2005.

Besides Jahnke, her husband of 30 years, survivors include daughters Janai Brengman and Michelle Cox, son Michael Jahnke and 10 grandchildren, according to the family statement.

To contact the reporters on this story: Laurence Arnold in Washington at larnold4@bloomberg.net; Nicholas Turner in San Francisco at nturner7@bloomberg.net

To contact the editor responsible for this story: Charles W. Stevens at cstevens@bloomberg.net

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Wrath of Jobs Over Android Awaits Validation in Apple-HTC Patent Decision

By Susan Decker - Dec 6, 2011 4:38 AM GMT+0700
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The International Trade Commission on Dec. 6 is scheduled to announce its decision in a patent-infringement complaint Apple filed in March 2010 against HTC Corp. Photo: Kevin Lee/Bloomberg

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Nov. 22 (Bloomberg) -- David Eiswert, a portfolio manager at T. Rowe Price Group Inc., talks about the outlook for Apple Inc. and Google Inc. Eiswert also discusses his investment strategy for technology shares and the evolution of the technology industry. He speaks with Mark Crumpton on Bloomberg Television's "Bottom Line." (Source: Bloomberg)

For two years, Apple Inc. (AAPL) has told the world that phones running on Google Inc. (GOOG)’s Android operating system are iPhone rip-offs. Now Apple is about to learn whether a U.S. trade agency thinks its claims have merit.

The International Trade Commission is set to rule Dec. 14 in a patent complaint lodged by Apple against rival smartphone maker HTC Corp. (2498) The decision, postponed from the original date of tomorrow, would mark the first final verdict from any judicial entity in Apple’s global patent war against HTC and fellow Android-phone makers Samsung Electronics Co. (005930) and Motorola Mobility Holdings Inc.

A ruling for Apple may lead to a ban on U.S. imports of HTC devices, derailing the Taoyuan, Taiwan-based company’s trajectory from a small contract manufacturer founded in 1997 to the biggest U.S. smartphone seller in the third quarter. A victory for HTC may help it secure favorable terms in any settlement with Apple.

“In the past two years, HTC has emerged essentially from obscurity by promoting their own brand and high-end phones, and they’ve largely been able to do this by leveraging Android,” said Alex Spektor, an analyst with Strategy Analytics Inc.

HTC generated about $5 billion in U.S. sales last year, according to a separate patent complaint it filed at the trade agency against Cupertino, California-based Apple. That’s more than half of HTC’s $9.1 billion (NT$275 billion) in global 2010 sales.

HTC Shares Fall

HTC sold 24 percent of the smartphones in the U.S. during the third quarter, ahead of Samsung’s 21 percent and Apple’s 20 percent, Canalys reported Oct. 31. The Android platform accounts for almost 70 percent of the U.S. smartphone market, the Palo Alto, California-based researcher said. There were 120.4 million smartphones worldwide in the third quarter, a 49 percent jump from the year-ago period, Canalys said.

Investors, speculating that HTC might lose the case, sent HTC to a 17-month low ahead of the ruling. HTC declined by its 7 percent daily limit to close at NT$448.50 on the Taiwan Stock Exchange, the lowest since July 2010. Apple rose $3.31 to $393.01 at 4:30 p.m. in Nasdaq Stock Market trading.

HTC’s Android phones, introduced in 2008, infuriated Steve Jobs, according to Walter Isaacson’s biography of the late Apple founder. Jobs made it his mission “to destroy Android,” which he said “ripped off the iPhone, wholesale,” according to the book.

Apple Claims

Apple contends that HTC’s Android phones infringe four Apple patents, including one for a system to detect telephone numbers in e-mails so they can be stored in directories or called without dialing the numbers. The commission is reviewing an agency judge’s findings that HTC infringed that patent and one covering the transmission of multiple types of data, along with two other Apple patents that the judge said weren’t infringed.

The case is one of about a dozen before the commission related to the dispute over Android devices. Microsoft is fighting with Motorola Mobility and Barnes & Noble Inc., while Apple has legal disputes with HTC, Samsung and Motorola Mobility around the world.

A federal judge in San Francisco denied Apple’s request to halt sales of Samsung’s Infuse 4 and Galaxy S 4G phones and its Galaxy 10.1 tablet while a patent case is pending. The judge found that Apple was likely to win on some infringement claims, while Samsung had raised “substantial questions” of invalidity of two of the four patents in the case. The judge still said Apple didn’t show it would be irreparably harmed by Samsung remaining on the market until the July trial.

HTC Setback

Apple also has patent-infringement suits pending against HTC in district court, though the trade agency tends to move more quickly.

An Apple victory would mark the second setback for HTC in two weeks at the agency. On Nov. 21, the commission rejected an agency judge’s findings that Apple was violating the patent rights of HTC’s S3 Graphics unit. HTC agreed to buy S3 Graphics for $300 million in July after the judge said Apple was infringing two S3 Graphics patents for video compression.

The commission is an independent agency set up to protect U.S. markets from unfair trade practices. It has the power to block imports of products found to infringe intellectual property rights.

HTC has said it has “alternative solutions in place” to work around the patents if a violation is found.

T-Mobile USA Inc., the fourth-largest U.S. wireless provider, said in an Oct. 6 filing with the trade agency that it has much to lose should there be any limit on HTC phones.

‘Locking In Consumers’

“An ever-increasing majority of T-Mobile’s U.S. customers prefer the Android platform and would be unable to purchase adequate substitutes in the near-term if HTC’s Android smartphones were excluded,” T-Mobile, a unit of Deutsche Telekom AG (DTE), said in the filing.

T-Mobile teamed with Google and HTC to sell the first Android phone in the U.S. in September 2008, and a majority of its current smartphone sales are devices made by HTC.

Google, which denies copying the iPhone and hasn’t been named in any of the trade agency complaints, argued in a filing that Apple is trying to control the U.S. smartphone market through litigation. HTC’s Android devices “are helping prevent Apple’s iOS from becoming the sole viable mobile platform and thus ‘locking in’ consumers and software developers to that platform,” Google said in the filing.

4G Phones

Apple has argued that it’s not trying to exclude all rival smartphones, only those using Apple inventions without permission.

“Apple is an American company that has poured billions of dollars in research and development and other investments into the U.S. economy,” Apple wrote in an Oct. 17 filing with the agency. “HTC is a foreign company that is free-riding on Apple’s research and development expenditures and resulting patents rather than creating its own innovations.”

There’s no guarantee that the commission will ban the HTC phones should it find that HTC violated Apple’s patents.

Neither T-Mobile nor Google took a position on the infringement issue, focusing instead on the possible import ban. T-Mobile said an exclusion order may undermine efforts to spread the newest generation of phones, known as 4G, even as the Obama administration favors expanding wireless high-speed Internet service into rural areas.

The Bellevue, Washington-based company, which doesn’t sell the iPhone, said it operates “America’s largest 4G network.”

‘Last Thing’

The trade agency’s staff, which acts as a third party on behalf of the public in certain cases, has said that an exclusion order is “unlikely to have any significant impact on the public interest” and demand for smartphones could be met by other companies, including Apple.

It does recommend a limited exception for 4G phones. HTC accounts for more than half of all 4G sales in the U.S., so the company should be allowed to continue to bring in those phones for six months until additional competitors enter the market, the staff recommended.

HTC isn’t expected to retain its top spot in smartphone sales this quarter. On Nov. 23, the company cut its fourth- quarter revenue forecast, citing the weak global economy and competition from Apple and Samsung.

Apple has begun selling the iPhone 4, and Samsung’s newest Galaxy has become its best-selling phone ever, said Spektor of Strategy Analytics. At the same time, Sprint Nextel Corp. (S), one of HTC’s customers, has begun selling the iPhone. Another loss at the trade agency would further undermine HTC’s position, Spektor said.

“The last thing they need is for a non-competitive factor to come into play,” said Spektor, who is based in Newton, Massachusetts. “HTC’s competitors in the Android space would be happy because the Android slice of the pie is less crowded.”

The case is In the Matter of Certain Personal Data and Mobile Communications Devices and Related Software, 337-710, U.S. International Trade Commission (Washington).

To contact the reporters on this story: Susan Decker in Washington at sdecker1@bloomberg.net;

To contact the editor responsible for this story: Michael Shepard at mshepard7@bloomberg.net

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Apple’s Claim of Android Rip-Off Awaits Ruling

By Susan Decker - Dec 6, 2011 4:38 AM GMT+0700

For two years, Apple Inc. (AAPL) has told the world that phones running on Google Inc. (GOOG)’s Android operating system are iPhone rip-offs. Now Apple is about to learn whether a U.S. trade agency thinks its claims have merit.

The International Trade Commission is set to rule Dec. 14 in a patent complaint lodged by Apple against rival smartphone maker HTC Corp. (2498) The decision, postponed from the original date of tomorrow, would mark the first final verdict from any judicial entity in Apple’s global patent war against HTC and fellow Android-phone makers Samsung Electronics Co. (005930) and Motorola Mobility Holdings Inc.

A ruling for Apple may lead to a ban on U.S. imports of HTC devices, derailing the Taoyuan, Taiwan-based company’s trajectory from a small contract manufacturer founded in 1997 to the biggest U.S. smartphone seller in the third quarter. A victory for HTC may help it secure favorable terms in any settlement with Apple.

“In the past two years, HTC has emerged essentially from obscurity by promoting their own brand and high-end phones, and they’ve largely been able to do this by leveraging Android,” said Alex Spektor, an analyst with Strategy Analytics Inc.

HTC generated about $5 billion in U.S. sales last year, according to a separate patent complaint it filed at the trade agency against Cupertino, California-based Apple. That’s more than half of HTC’s $9.1 billion (NT$275 billion) in global 2010 sales.

HTC Shares Fall

HTC sold 24 percent of the smartphones in the U.S. during the third quarter, ahead of Samsung’s 21 percent and Apple’s 20 percent, Canalys reported Oct. 31. The Android platform accounts for almost 70 percent of the U.S. smartphone market, the Palo Alto, California-based researcher said. There were 120.4 million smartphones worldwide in the third quarter, a 49 percent jump from the year-ago period, Canalys said.

Investors, speculating that HTC might lose the case, sent HTC to a 17-month low ahead of the ruling. HTC declined by its 7 percent daily limit to close at NT$448.50 on the Taiwan Stock Exchange, the lowest since July 2010. Apple rose $3.31 to $393.01 at 4:30 p.m. in Nasdaq Stock Market trading.

HTC’s Android phones, introduced in 2008, infuriated Steve Jobs, according to Walter Isaacson’s biography of the late Apple founder. Jobs made it his mission “to destroy Android,” which he said “ripped off the iPhone, wholesale,” according to the book.

Apple Claims

Apple contends that HTC’s Android phones infringe four Apple patents, including one for a system to detect telephone numbers in e-mails so they can be stored in directories or called without dialing the numbers. The commission is reviewing an agency judge’s findings that HTC infringed that patent and one covering the transmission of multiple types of data, along with two other Apple patents that the judge said weren’t infringed.

The case is one of about a dozen before the commission related to the dispute over Android devices. Microsoft is fighting with Motorola Mobility and Barnes & Noble Inc., while Apple has legal disputes with HTC, Samsung and Motorola Mobility around the world.

A federal judge in San Francisco denied Apple’s request to halt sales of Samsung’s Infuse 4 and Galaxy S 4G phones and its Galaxy 10.1 tablet while a patent case is pending. The judge found that Apple was likely to win on some infringement claims, while Samsung had raised “substantial questions” of invalidity of two of the four patents in the case. The judge still said Apple didn’t show it would be irreparably harmed by Samsung remaining on the market until the July trial.

HTC Setback

Apple also has patent-infringement suits pending against HTC in district court, though the trade agency tends to move more quickly.

An Apple victory would mark the second setback for HTC in two weeks at the agency. On Nov. 21, the commission rejected an agency judge’s findings that Apple was violating the patent rights of HTC’s S3 Graphics unit. HTC agreed to buy S3 Graphics for $300 million in July after the judge said Apple was infringing two S3 Graphics patents for video compression.

The commission is an independent agency set up to protect U.S. markets from unfair trade practices. It has the power to block imports of products found to infringe intellectual property rights.

HTC has said it has “alternative solutions in place” to work around the patents if a violation is found.

T-Mobile USA Inc., the fourth-largest U.S. wireless provider, said in an Oct. 6 filing with the trade agency that it has much to lose should there be any limit on HTC phones.

‘Locking In Consumers’

“An ever-increasing majority of T-Mobile’s U.S. customers prefer the Android platform and would be unable to purchase adequate substitutes in the near-term if HTC’s Android smartphones were excluded,” T-Mobile, a unit of Deutsche Telekom AG (DTE), said in the filing.

T-Mobile teamed with Google and HTC to sell the first Android phone in the U.S. in September 2008, and a majority of its current smartphone sales are devices made by HTC.

Google, which denies copying the iPhone and hasn’t been named in any of the trade agency complaints, argued in a filing that Apple is trying to control the U.S. smartphone market through litigation. HTC’s Android devices “are helping prevent Apple’s iOS from becoming the sole viable mobile platform and thus ‘locking in’ consumers and software developers to that platform,” Google said in the filing.

4G Phones

Apple has argued that it’s not trying to exclude all rival smartphones, only those using Apple inventions without permission.

“Apple is an American company that has poured billions of dollars in research and development and other investments into the U.S. economy,” Apple wrote in an Oct. 17 filing with the agency. “HTC is a foreign company that is free-riding on Apple’s research and development expenditures and resulting patents rather than creating its own innovations.”

There’s no guarantee that the commission will ban the HTC phones should it find that HTC violated Apple’s patents.

Neither T-Mobile nor Google took a position on the infringement issue, focusing instead on the possible import ban. T-Mobile said an exclusion order may undermine efforts to spread the newest generation of phones, known as 4G, even as the Obama administration favors expanding wireless high-speed Internet service into rural areas.

The Bellevue, Washington-based company, which doesn’t sell the iPhone, said it operates “America’s largest 4G network.”

‘Last Thing’

The trade agency’s staff, which acts as a third party on behalf of the public in certain cases, has said that an exclusion order is “unlikely to have any significant impact on the public interest” and demand for smartphones could be met by other companies, including Apple.

It does recommend a limited exception for 4G phones. HTC accounts for more than half of all 4G sales in the U.S., so the company should be allowed to continue to bring in those phones for six months until additional competitors enter the market, the staff recommended.

HTC isn’t expected to retain its top spot in smartphone sales this quarter. On Nov. 23, the company cut its fourth- quarter revenue forecast, citing the weak global economy and competition from Apple and Samsung.

Apple has begun selling the iPhone 4, and Samsung’s newest Galaxy has become its best-selling phone ever, said Spektor of Strategy Analytics. At the same time, Sprint Nextel Corp. (S), one of HTC’s customers, has begun selling the iPhone. Another loss at the trade agency would further undermine HTC’s position, Spektor said.

“The last thing they need is for a non-competitive factor to come into play,” said Spektor, who is based in Newton, Massachusetts. “HTC’s competitors in the Android space would be happy because the Android slice of the pie is less crowded.”

The case is In the Matter of Certain Personal Data and Mobile Communications Devices and Related Software, 337-710, U.S. International Trade Commission (Washington).

To contact the reporters on this story: Susan Decker in Washington at sdecker1@bloomberg.net;

To contact the editor responsible for this story: Michael Shepard at mshepard7@bloomberg.net

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S&P Places 15 Euro Nations on Warning for Downgrade

By Mark Deen and Ben Livesey - Dec 6, 2011 7:21 AM GMT+0700

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Dec. 6 (Bloomberg) -- Phillip Swagel, a professor of economics at the University of Maryland’s School of Public Policy who was an assistant U.S. Treasury secretary for economic policy in the George W. Bush administration, talks about Europe's sovereign debt crisis. Standard & Poor’s said Germany and France may be stripped of their AAA credit ratings as the debt crisis prompts 15 euro nations to be put on review for possible downgrade. Swagel speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Standard & Poor’s said Germany and France may be stripped of their AAA credit ratings as the debt crisis prompts 15 euro nations to be put on review for possible downgrade.

The euro area’s six AAA rated countries are among the nations to be placed on a negative outlook, and their credit ratings may be cut depending on the result of a summit of European Union leaders on Dec. 9, S&P said today in a statement. The euro reversed its gains and U.S. Treasuries rose earlier today after the Financial Times reported that the credit-ranking firm planned to reduce six AAA outlooks.

“Systemic stress in the eurozone has risen in recent weeks and reached such a level that a review of all eurozone sovereign ratings is warranted,” S&P said in a statement.

The downgrade warnings come as German Chancellor Angela Merkel and French President Nicolas Sarkozy push for a rewrite of the EU’s governing rules to tighten economic cooperation in a demonstration of unity on ending the debt crisis. With the fate of the currency shared by the 17 euro countries at risk, Merkel and Sarkozy presented a common platform for a Dec. 8-9 summit of EU leaders in Brussels that aims to halt the crisis now in its third year.

“The S&P move is yet another signal that euro area countries must take decisive action to deal with the crisis or else the problems will spread from Greece and others with the most acute fiscal problems to the rest of the euro zone,” said Phillip Swagel, a professor of economics at the University of Maryland’s School of Public Policy who was an assistant Treasury secretary for economic policy in the George W. Bush administration. “It is time for Germany and France to act -- either to save Greece and the others or to let them fail.”

Germany, Belgium

The firm said that ratings could be cut by one level for Austria, Belgium, Finland, Germany, Netherlands and Luxembourg, and by up to two notches for the other governments.

The other countries warned were Estonia, France, Ireland, Italy, Malta, Portugal, Slovakia, Slovenia and Spain, according to S&P. The company said it maintained the negative outlook for Cyprus, and Greece wasn’t put on “creditwatch.”

The euro pared gains against the dollar, trading at $1.3401 per euro at 5:01 p.m. in New York after rising as high as $1.3487.

In a joint statement, the governments of France and Germany said they “recognize” the move by S&P and “affirm their conviction that the common proposals made today will strengthen coordination of budget and economic policy, and promote stability, competitiveness and growth.”

S&P roiled global equity, bond, currency and commodity markets on Nov. 10, when it sent and then corrected an erroneous message to subscribers suggesting France’s rating had been downgraded.

Stability Facility

Downgrades of Germany and France would affect the rating of the European Financial Stability Facility, the bailout fund for struggling euro member countries that has funded rescue packages for Greece, Ireland and Portugal partially through bond sales. If the EFSF has to pay higher interest on its bonds, it may not be able to provide as much funding for indebted nations.

Yields on EFSF 3.375 percent bonds due in July 2021 2 basis points, snapping a five-day rally, to 3.6 percent, according to Bloomberg prices.

“Negative news is going to continue to spur rallies in the Treasury markets, at least until the ECB steps in to end this mess once and for all,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said before the announcement. “With the euro currency in a state of flux, the U.S. markets remain the only true safe haven.”

U.S. Downgrade

S&P downgraded the U.S.’s AAA credit rating by one level to AA+ for the first time Aug. 5, citing the nation’s political process and criticizing lawmakers for failing to cut spending or raise revenue enough to reduce record budget deficits.

Investors nevertheless sought Treasuries after the S&P rating cut sparked financial market turmoil. Treasuries gained 6.4 percent last quarter, their best performance since the last three months of 2008, according to Bank of America Merrill Lynch index data.

The rating company’s decision on the U.S. was flawed by a $2 trillion error, according to the Treasury Department. S&P disputed the Treasury’s assertions and said using the department’s preferred spending measures in its analysis didn’t affect its credit grade.

Moody’s Investors Service and Fitch Ratings affirmed their AAA credit ratings on Aug. 2, the day President Barack Obama signed a bill ending an impasse with lawmakers over raising the nation’s debt ceiling.

Federal Reserve Chairman Ben S. Bernanke said Treasury securities remain a core holding for investors. “The downgrade didn’t scare off any investors,” and the action, along with the prospect of other downgrades, hasn’t done “significant damage” to the economy, Bernanke said at a Nov. 10 at a town-hall-style event in El Paso, Texas.

German bunds are underperforming Treasuries for the first time since the European debt crisis began in 2009.

Best-Performing

Treasuries due in 10 years or more are 2011’s best- performing sovereign securities, returning 26 percent as of Nov. 30, according to Bloomberg/EFFAS indexes. German 30-year bunds yielded more than their U.S. peers last month for the first time since May 2009 as the government was only able to find buyers for 65 percent of a 6 billion euro ($8.1 billion) offering on Nov. 23, its worst auction in 16 years.

Credit-default swaps tied to France climbed 4 basis points on Dec. 2 to 196 basis points, while contracts insuring against a default on Germany’s debt were about unchanged 97 basis points, CMA data show. That compares with 51 basis points for credit swaps on the U.S. and 90 basis points for the U.K.

A basis point on a credit-swap contract protecting $10 million of debt for five years is equivalent to $1,000 a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Bond yields of countries stripped of their AAA ratings since 1998 have historically been little changed following the credit grade change, according to an Oct. 28 report from JPMorgan Chase & Co. analysts led by Terry Belton, global head of fixed-income and foreign-exchange research. The yield on 10- year Japanese government debt rose 10 basis points the week after it was cut to Aa1 by Moody’s in November 1998. The interest rate declined 3 basis points following the cut by S&P to AA+ in February 2001.

To contact the reporters on this story: Mark Deen in Paris at markdeen@bloomberg.net; 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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