McDonald’s New CEO Focuses on Chicken Amid Shaky Economy

By Leslie Patton - Jul 3, 2012 3:38 AM GMT+0700

McDonald’s Corp. (MCD)’s new chief executive officer is playing chicken with the menu.

As Don Thompson, 49, steps into the CEO role at the world’s largest restaurant chain, customers may see more new chicken items instead of beef. Thompson is pulling from McDonald’s 160- item recipe book, which includes bone-in chicken wings and cashew teriyaki salads with chicken, to sell new food and attract cash-conscious consumers amid a shaky global economy. It’s a “tremendous opportunity,” Thompson said during a consumer conference on May 30.

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McDonald's Corp. chicken selects in San Francisco. Photographer: David Paul Morris/Bloomberg

“Some great examples include our large wrap in Europe and snack items like Chicken McBites,” he said. “Our customers have given us permission to stretch our brand, so we are entering new categories with new products.”

McDonald’s is looking to draw budget-minded Americans with chicken items, which can be priced lower than other proteins, according to Bryan Elliott, an analyst at Raymond James & Associates in St. Petersburg, Florida. “The consumer is expressing some recent signs of distress” and chicken costs are “cheap relative to beef right now by a lot,” he said.

McDonald’s, along with other fast-food operators, is facing government austerity programs in Europe, declining consumer confidence in the U.S. and slowing economic growth in Asia. Sales at McDonald’s stores open at least 13 months rose 3.3 percent worldwide in May, trailing analysts’ estimates for growth of 5.2 percent.

McDonald’s fell 0.5 percent to $88.08 at the close in New York. The company’s shares have slumped 12 percent this year, compared with a 3 percent gain for the Bloomberg U.S. Quick- Service Restaurant Index. (BNUSQSVR)

Healthier Perception

Chicken also is “perceived to be healthier,” Elliott said. “That could certainly be a factor in their thinking.”

A Big Mac has 550 calories, while a six-piece order of Chicken McNuggets has 280 calories.

Last week, the Oak Brook, Illinois-based company began selling 410-calorie Spicy Chicken McBites in the U.S. At the same time, Americans are expected to eat more poultry. Chicken consumption in the U.S. will increase 1.7 percent to 82 pounds (37 kilograms) a person in 2013, while beef consumption may decline 2.2 percent next year to 54.5 pounds, according to data from the U.S. Department of Agriculture.

Thompson, who introduced Americans to McCafe specialty coffees and smoothies, started at McDonald’s 22 years ago as an electrical engineer. He’s managed regions including Denver, San Diego and the Midwest, and was president of McDonald’s USA from 2006 to 2010, before being named chief operating officer. After Jim Skinner, the previous CEO, Thompson was the company’s highest paid executive last year -- making $4.07 million, including an $829,000 salary.

Strategic Plans

“I’ve kind of led a lot of strategic planning and initiatives,” Thompson said during a telephone interview earlier this year. He brought McCafe drinks from Australia to the U.S. in 2009 and is now introducing them in Canada. As COO, he also led remodeling efforts, added double-lane drive-throughs to stores and extended restaurant hours -- about 40 percent of U.S. locations are open 24 hours a day.

The chain has introduced snack wraps, 290-calorie oatmeal and McCafe fruit smoothies during the past five years to appeal to more health-conscious consumers and draw afternoon traffic. McDonald’s is also promoting chocolate-dipped ice cream cones and s’mores pies for a limited time in the U.S. and may test new dessert items this year, Phillip Juhan, an analyst at BMO Capital Markets in Atlanta, said in an interview.

“Dessert is going to be an area of opportunity for them and one that they’re going to push” at U.S. stores, he said.

Recipe Book

McDonald’s recipe book “can be a core strength, but it can also be a detriment if you get to be too broad with your menu,” Darren Tristano, executive vice president at Chicago-based researcher Technomic Inc., said in an interview. They have to make sure that new food can be made quickly at thousands of locations, he said.

There is no change from McDonald’s strategy -- the company’s so-called Plan to Win, Thompson said in the interview.

“A transition in leadership is not a change in strategy at McDonald’s,” Thompson said.

McDonald’s has more than 33,500 stores worldwide, of which about 80 percent are franchised.

To contact the reporter on this story: Leslie Patton in Chicago at lpatton5@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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Iran-Oil Sanctions Risk Biggest OPEC Export Loss Since Libya

By Ewa Krukowska - Jul 2, 2012 2:31 AM GMT+0700

European Union sanctions on Iran entered into full force yesterday after exemptions on some contracts and insurance ended, boosting crude prices and pressure on the Persian Gulf nation to halt its nuclear- enrichment program.

The reduction in Iranian exports may become the biggest supply disruption from a member of the Organization of Petroleum Exporting Countries since an armed rebellion all but halted pumping in Libya last year, according to the International Energy Agency. It also comes as a strike by Norwegian workers is curbing flows from North Sea fields.

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A petrol station in central Tehran. Iran, the second-biggest producer in OPEC after Saudi Arabia, was producing about 3.3 million barrels a day in May. Full implementation of sanctions will remove about 1 million barrels a day during the second half of the year as buyers disappear and Iranian storage tanks become full, the Paris-based IEA forecast in a June 13 report. Photographer: Behrouz Mehri/AFP/Getty Images

“We expect Brent oil prices to be supported by Iranian oil sanctions and potential loss of supplies from the North Sea,” Gordon Kwan, the head of regional energy research at Mirae Asset Securities based in Hong Kong, said in a June 28 report. “The imminent EU insurance ban on tankers carrying Iranian crude could drive up demand for Brent and Dubai crude.”

Brent futures fell below $90 a barrel on June 21 for the first time in 18 months as concern that Europe’s debt crisis would spread sapped the outlook for fuel use worldwide. Now, the Iran embargo and Norwegian strike are stoking speculation about a rebound in prices, according to analysts such as Kwan and Ole Hansen at Saxo Bank A/S. Brent for August settlement surged 7 percent on June 29 to close at $97.80 a barrel on the ICE Futures Europe exchange.

Unsold Barrels

Iran, the second-biggest producer in OPEC after Saudi Arabia, was producing about 3.3 million barrels a day in May. Full implementation of sanctions will remove about 1 million barrels a day during the second half of the year as buyers disappear and Iranian storage tanks become full, the Paris-based IEA forecast in a June 13 report.

Mohammad Ali Khatibi, Iran’s governor to OPEC, warned yesterday that the EU would bear “the consequences of politicizing the market,” without specifying what he meant, the state-run Iranian Students News Agency reported.

Mahmoud Bahmani, Iran’s central bank governor, said his nation “isn’t sitting by idly” and has a “very suitable” $150 billion in foreign currency reserves to help weather the latest trade and financial curbs. “We have programs to fight the sanctions, and we will confront hostile policies,” Bahmani said yesterday, according to the state-run Mehr news agency.

Emergency Meeting

Iran urged OPEC to call an emergency meeting to address the group’s production in excess of its targeted 30 million barrels a day, Mehr reported June 30, citing Oil Minister Rostam Qasemi. Disregard of the limit by some OPEC members “will negatively impact oil prices in the international market,” Qasemi said. The 12-member organization, which decided on June 14 to retain its daily ceiling of 30 million barrels, pumped about 1.6 million barrels more than that in May, according to data compiled by Bloomberg.

The EU agreed in January to ban oil imports from Iran, offering a five-month phase-in period for existing contracts to let member states such as Greece find alternative supplies. An exemption on tanker insurance restrictions for the worldwide shipping industry also ran out today.

Foreign ministers from the 27-nation bloc decided on June 25 the exemptions shouldn’t be extended after talks between Iran and the world’s powers about the nuclear program failed to reach a breakthrough since they started in April. Iran denies that it is developing nuclear weapons.

‘Toughest Measures’

“These are the toughest measures the EU has adopted against Iran to date,” U.K. Foreign Secretary William Hague said yesterday in a statement. “It is in the power of the Iranian leadership to end Iran’s current isolation, but unless they change course, the pressure will only increase.”

The EU ban on insurance for ships carrying Iranian oil affects 95 percent of the world’s tankers because they’re covered by the 13 members of the London-based International Group of P&I Clubs, which is adhering to the EU rule.

In an effort to retain an important Asian customer, Iran offered to supply oil to South Korea using its own tankers, a government official in Seoul said June 29, asking not to be identified because the matter is confidential.

Complementing the European sanctions, a U.S. law enacted Dec. 31 cuts off international banks from the U.S. financial system if they settle oil trades with Iran. The U.S. rule gave importing nations, including China, India and Japan, until June 28 to demonstrate they had “significantly reduced” their purchases of Iranian oil in order to qualify for exemptions.

Crude Dependence

Oil and its derivatives account for nearly 80 percent of Iran’s exports and about half of government revenue, according to the U.S. Energy Information Administration, which estimates the country’s 2010 net oil export revenues at $73 billion.

Iran’s oil exports may “gradually” decline by 20 percent to 30 percent after sanctions start and amid field maintenance work, Deputy Oil Minister Ahmad Qalebani said on June 26.

Such acknowledgement hasn’t erased tensions over the sanctions. Iran warned it can strike any target in the Strait of Hormuz and the Gulf and will soon equip ships with missiles capable of firing more than 300 kilometers (186 miles), Mehr reported June 29, citing a commander of the Islamic Revolutionary Guards Corps. Tankers carrying about a fifth of globally traded oil exit the Gulf though the Hormuz chokepoint.

Iranian ‘Playground’

“The Strait of Hormuz and the Persian Gulf is Iran’s playground and no one else’s,” Mehr cited Admiral Ali Fadavi as saying. “Any issues related to the Strait of Hormuz will be a very big story that will have consequences on the price of oil.”

A survey of 42 analysts on June 28 showed that 16, or 38 percent of them, predicted crude futures will increase in the week starting today, citing the new sanctions. Among the remainder, 12 forecast little change in prices and 14 expected a decline.

“That is the wildcard, the Iranian situation,” Torbjoern Kjus, an oil analyst at Oslo-based bank DnB ASA, said by phone on June 29.

“Nobody can be totally certain how it’s really going to affect the market,” he said. “There’s probably been huge inventory builds in Iran, and this could pose a bearish effect for next year or the second half of this year if there is a resolution.”

To contact the reporter on this story: Ewa Krukowska in Brussels at ekrukowska@bloomberg.net

To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net

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Hedge Funds Win on Bull Bets Before Biggest Rally: Commodities

By Tony C. Dreibus and Joe Richter - Jul 2, 2012 3:00 AM GMT+0700

Hedge funds lifted their bullish commodity bets for a third week, just before a European agreement to contain the region’s debt crisis spurred the biggest rally in raw-material prices in three years.

Money managers increased their combined net-long positions across 18 U.S. futures and options by 15 percent to 724,783 contracts in the week ended June 26, Commodity Futures Trading Commission data show. That’s the biggest gain since January. Corn holdings rose to the most in five weeks, and sugar wagers climbed to the highest since mid-April.

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Most markets surged June 29 after European leaders agreed to a 120 billion-euro ($152 billion) plan to stimulate growth and ease terms for loans to Spanish banks. The Standard & Poor’s GSCI Spot Index of 24 commodities jumped 5.6 percent, the biggest gain since April 2009, the euro climbed the most this year and Spanish bonds rallied. Europe consumes 18 percent of the world’s copper and accounts for 22 percent of oil demand, data from Barclays Plc and BP Plc show.

Policy makers “are addressing a lot of issues that were taboo,” said Mihir Worah, who manages Pacific Investment Management Co.’s $22 billion Commodity Real Return Strategy Fund from Newport Beach, California. “Whether this plan works or not, the fact that they’re talking about them is important. Stable or growing economies support more commodity demand.”

Equities Rally

The S&P GSCI index rose 6.3 percent last week. The MSCI All-Country World Index of equities gained 2.5 percent and the U.S. Dollar Index, a measure against six trading partners, retreated 0.8 percent. Treasuries returned 0.1 percent, a Bank of America Corp. index shows.

Leaders from the 17-nation euro zone ended talks last week by dropping the requirement that governments get preferred- creditor status on crisis loans to Spain’s banks and opened the door to recapitalizing lenders directly with bailout funds once Europe sets up a single banking supervisor. Until now, they had to get aid through their governments. Germany’s parliament approved the creation of a permanent bailout fund June 29.

Orders for U.S. durable goods climbed more than forecast in May, easing concern that U.S. manufacturing is faltering. Bookings rose 1.1 percent, the first gain in three months, the Commerce Department said June 27. Business activity expanded in June at a faster pace than expected, a gauge from the Institute for Supply Management-Chicago Inc. showed June 29.

Economic Confidence

The rally in commodities may not last because “the cloud of Europe is still going to hang over the market for several quarters,” said Jack Ablin, the chief investment officer of BMO Harris Private Bank in Chicago, which oversees about $60 billion of assets. Economic confidence in the euro area slumped to the lowest in more than 2 1/2 years in June and German unemployment increased more than economists forecast, separate reports showed June 28. Spain and Cyprus became the fourth a fifth euro members to seek external aid last month.

The S&P GSCI slumped 13 percent last quarter, the most since the global recession, and tumbled into a bear market on June 21 amid the escalating fiscal crisis and after the Federal Reserve refrained from starting another round of debt buying. More than $3.6 trillion has been erased from the value of global equities since March 31, data compiled by Bloomberg show.

Money managers pulled $193 million from commodity funds in the week ended June 27, according to data from Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Investor outflows were $8.2 billion in May, the highest monthly total since a record $9.8 billion in September, Barclays said on June 25, citing its measure of exchange-traded products, index- linked funds and medium-term notes.

Morgan Stanley

Morgan Stanley stuck with recommendations that investors buy gold, copper and iron ore. As Europe’s crisis threatens growth, investors should seek “exposure only to those metals and bulk commodities that reflect the benefits of tight supply conditions and pockets of residual demand strength,” analysts Peter Richardson and Joel Crane said in a report June 28.

Rio Tinto Group, the world’s third-largest mining company, said June 29 that economic growth in China will accelerate in the second half of this year even as European turmoil escalates. The Asian country is the world’s biggest consumer of everything from aluminum to cotton to pork.

Funds boosted their bullish oil wagers for the first time in eight weeks, increasing the net-long position by 1 percent to 124,017 contracts, CFTC data show. New York futures surged 9.4 percent on June 29, the biggest gain in more than three years.

Farm Bets

A measure of 11 U.S. farm goods showed speculators raised bullish wagers in agricultural commodities by 24 percent to 533,095 contracts, the biggest gain since February. Traders switched to betting on a wheat rally with a net-long position of 40,194 contracts, compared with a net-short holding of 5,182 the prior week, the government said.

Money managers boosted wagers on higher corn prices by 53 percent to 108,542 contracts, the highest since May 22. The grain surged 15 percent last week, the biggest gain since December 2008, after a government report showed inventories tumbled the most in 16 years and as dry weather parched fields.

Crops wilted as little or no rain fell in growing areas in the past month, according to the National Weather Service. A dry spell this severe happens only once every quarter-century, said Sal Gilbertie, who helps manage $79 million of assets as the president and chief investment officer of Teucrium Trading LLC in Santa Fe, New Mexico. The U.S. is the world’s biggest corn producer and exporter.

“Commodities are priced at a very good value right now,” said Bill Greiner, who oversees $13 billion of assets as chief investment officer at Mariner Wealth Advisors in Kansas City, Missouri. “That’s traditionally the time you want to step up and buy.”

To contact the reporters on this story: Tony C. Dreibus in Chicago at tdreibus@bloomberg.net; 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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Barclays Chairman Said to Be Poised to Resign After Libor Fine

By Howard Mustoe - Jul 2, 2012 6:01 AM GMT+0700

Barclays Plc (BARC) Chairman Marcus Agius plans to resign after the bank was fined a record 290 million pounds ($455 million) for trying to rig interest rates, sparking a political outcry, according to a person briefed on the matter.

An announcement may come as soon as today, said the person, who asked not to be identified because the move hasn’t been made public. Agius, 65, has been chairman of Britain’s second-largest bank by assets since January 2007.

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Barclays Plc Chairman Marcus Agius. Photographer: Brian Capon/British Bankers' Association via Bloomberg

He is the most senior executive to offer to step down following probes by global regulators into whether lenders colluded to manipulate Libor. Chief Executive Officer Robert Diamond remains under pressure from lawmakers after U.K. and U.S. regulators found the lender “systematically” attempted to rig the London and euro interbank offered rates for profit.

“Politicians will see this as him taking a bullet for Bob Diamond,” said Christopher Wheeler, a London-based banking analyst at Mediobanca SpA. “They realized they needed to do something, and Agius was chairman during the time they got fined for -- but will it be enough?”

Both Diamond and Agius have been called to appear this week before British lawmakers on the Treasury Select Committee. Separately, the U.K. government is preparing an inquiry into the future of Libor, including introducing criminal penalties for people who breach rules surrounding the rate, said a Treasury spokesman, who declined to be named citing government policy.

David Cameron

Prime Minister David Cameron on June 28 called for accountability to go “all the way to the top,” while opposition Labour Party leader Ed Miliband has called for a full inquiry into the industry’s practices.

Barclays has tumbled 17 percent since the fine was announced on June 27, making it this year’s worst performer in the five-member FTSE 350 banks index.

Diamond, who built up and ran the securities unit during the period being probed by regulators, may keep his job because he has no obvious successor, according to Chirantan Barua, an analyst at Sanford Bernstein Research in London. None of the bank’s largest shareholders have publicly called for Diamond’s resignation so far.

“Shareholders will be worried that if Bob goes, the stock may go down another 10 percent,” Wheeler said.

Diamond, 60, his three top lieutenants, Chief Operating Officer Jerry del Missier, Finance Director Chris Lucas and corporate and investment banking chief Rich Ricci have already forfeited their bonuses for this year following the fines.

Michael Rake

Agius is likely to be replaced by Michael Rake, Sky News reported yesterday. Rake, 64, is chairman of BT Group Plc and has been a director of Barclays since 2008. Officials at Barclays declined to comment.

Agius joined Barclays after a 34-year career at Lazard Ltd., where he had been chairman of the firm’s London unit. There, he advised on banking takeovers including Halifax Group Plc’s 2001 merger with Bank of Scotland to create HBOS Plc. As non-executive chairman of BAA Plc, Agius helped the owner of London’s Heathrow airport negotiate a higher takeover price from Grupo Ferrovial SA in 2006.

He had already faced investor pressure when the lender raised more than 5 billion pounds in 2008 from a group of funds from Abu Dhabi and Qatar without giving existing shareholders the opportunity to buy new stock. Shareholders including Legal & General Group Plc complained at the time their pre-emption rights had been ignored, and in protest about 16 percent of investors opposed Agius’s re-election as chairman in April 2009.

BBC, BBA

He also had to apologize to shareholders for failing to communicate the firm’s pay plans to investors clearly in April after 27 percent of shareholders voted against Diamond’s 12 million-pound compensation package.

Agius is also a board member of the British Broadcasting Corp. and chairman of the British Bankers’ Association, the industry lobby group that oversees Libor.

Libor is determined by about 18 banks’ daily estimates of how much it would cost them to borrow from one another for different time frames and in different currencies. Because banks’ submissions aren’t based on real trades, the potential exists for the benchmark to be manipulated by traders.

At least a dozen firms, including Citigroup Inc., Royal Bank of Scotland Group Plc and UBS AG, are being probed by regulators worldwide for colluding to rig the rate, the benchmark for more than $360 trillion of securities, including mortgages, student loans and swaps.

False Submissions

Barclays traders routinely coordinated with counterparts from at least four other banks in an attempt to move interest rate benchmarks, according to documents released on June 27 by the U.S. Commodity Futures Trading Commission, the U.S. Justice Department and the U.K. Financial Services Authority.

Derivatives traders requested the false submissions in the Libor and Euribor setting process, as they were “motivated by profit and sought to benefit Barclays’ trading positions,” the U.K. Financial Services Authority said.

Andrew Tyrie, the chairman of Parliament’s Treasury committee, said Diamond will have to answer questions about who profited from the firm’s false submissions and who at Barclays knew about them, according to an interview with the Daily Mail.

“There appear to have been at least two motives for the rigging of Libor,” Tyrie was cited as saying in the interview. “The first was to enable traders to make a profit. The second was to support share prices at a crucial time -- and that is something that might reasonably be considered the responsibility of the relevant companies as a whole.”

SFO Probe?

The U.K. Serious Fraud Office is considering whether to open a formal investigation, its spokesman said last week. The U.S. Justice Department is conducting its own criminal probe into the attempted manipulation of interbank offered rates.

FSA Chairman Adair Turner said yesterday the Barclays fine shows regulator needs more powers to bring criminal charges.

“Further steps were made a few years ago to give us the ability to bring criminal charges in particular areas of market abuse, but they did not cover the Libor market,” Turner said in an interview on the British Broadcasting Corp.’s “Andrew Marr Show.” “We now have to look further and see whether we should strengthen these powers considerably.”

To contact the reporter on this story: Howard Mustoe in London at hmustoe@bloomberg.net

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

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Limits on Spending Power Seen as Health Ruling’s Legacy

By Bob Drummond - Jul 2, 2012 5:00 AM GMT+0700

The Supreme Court decision upholding President Barack Obama’s health-care law has drawn attention for limiting Congress’s authority over interstate commerce, yet constitutional scholars say its biggest impact may be a curb on lawmakers’ ability to alter state Medicaid funding.

The justices on June 28 upheld the core of the Patient Protection and Affordable Care Act, which says Americans must have health insurance or pay a penalty. The court ruled that while Congress doesn’t have power under the Constitution’s Commerce Clause to make Americans buy health policies, it can tax people who don’t have coverage.

While the rest of the health-care decision was decided on 5-4 votes among the justices, a 7-2 majority said that while Congress may put conditions on the use of money provided for expanded Medicaid programs, it couldn’t take away existing Medicaid funding from states that don’t participate.

“The holding on the Medicaid expansion could be significant,” said Jenny Martinez, a Stanford University law professor. “It could limit the federal government’s ability to change or expand spending programs once they have been in place for a while and have reached a significant scale.”

Martinez said that the justices’ Commerce Clause finding probably wouldn’t be far-reaching. “There aren’t so many laws, after all, that are similar to the Affordable Care Act in regulating so-called inaction,” she said in an e-mail.

Claim Validated

Congress’s authority to regulate interstate commerce provides the constitutional foundation for many federal laws, creating high stakes whenever the issue hits the Supreme Court.

Opponents of the health-care law said after the ruling that, while they failed to derail the insurance requirement, the section of the high court’s decision on the commerce power represented a victory in a long-running legal argument over limits on Congress’s regulatory authority.

The ruling “validates our claim that a congressional power to compel that all Americans engage in commerce was a constitutional bridge too far,” Georgetown University law professor Randy Barnett said in a statement.

While the court ultimately upheld the law, the decision “is a tremendous victory for re-establishing constitutional limits on the power of the federal government,” Wisconsin’s Republican Attorney General J.B. Van Hollen said in a statement.

‘Modest Limitation’

Still, the specific limits outlined in the health-care decision -- that Congress can’t make Americans buy something they don’t want -- may not do much to tie the government’s hands down the road, University of Michigan law professor Richard Friedman said.

That “modest limitation” on Congress’s power to regulate interstate commerce is followed, in Chief Justice John Roberts’s decision, by a constitutional road map showing lawmakers how they can use the government’s taxing authority get around it, Friedman said in an e-mail.

“All it really does is say that the commerce power doesn’t authorize Congress to require people to buy goods or services -- but this is the first time Congress has felt the need to do so,” he said. “If the need should ever arise again -- it’s highly unlikely that Congress will ever feel the need to require people to buy broccoli -- Congress can achieve much of the same result by imposing a tax, and making sure it looks like a tax.”

Gun to Head

The separate section of the decision -- in which Roberts wrote that Congress can’t use federal funding as a “gun to the head” to force states to expand Medicaid eligibility -- “is the most important part of the decision” in terms of future implications, said Anne Joseph O’Connell, a law professor at the University of California at Berkeley.

Justices Stephen Breyer and Elena Kagan, two Democratic appointees, joined the five justices picked by Republican presidents in putting a new restriction on Congress’s spending power.

“It appears that seven justices have come to the conclusion that some federal grants to the states have become such an integral part of our political system that threatening to withhold them has gone beyond Congress merely putting conditions on money that it offers and crossed the line into coercion,” Friedman said.

While the health-care law, designed to expand health- insurance coverage to millions of uninsured Americans, is the only time the federal government has required people to buy something, Congress often requires state and local governments to comply with policy restrictions as a condition for receiving federal money. Courts have generally given the U.S. government leeway to attach strings dictating the ways that federal dollars can be spent.

Drinking Age

The Supreme Court in 1987 upheld a law that withheld some federal highway funding from states that didn’t raise their legal drinking age to at least 21. The court in that case said conditions on federal funding could, hypothetically, become so pervasive that state governments had no realistic choice but to comply -- a situation that could infringe state sovereignty. The health-care decision marked the first time the justices actually held that a federal program was too coercive.

“This is the first time that they put any teeth” into what previously had been a largely academic debate about limits on Congress’s spending power, Jesse Choper, a law professor at the University of California at Berkeley, said in a telephone interview. “In many ways that is the most significant part of the decision.”

Title IX

Congress has used conditions on federal funding as a policy tool in many areas. The law known as Title IX, for example, says that schools getting federal money must provide equal athletic opportunities for women. Some federal funding for schools and libraries requires them to install Internet filters to block obscene material. The No Child Left Behind law said states had to implement specific education reforms as a condition for getting federal funds.

“The inability to cut down on existing programs in order to force states to take on new responsibilities does indicate that, in federal-state relations, the Congress has fewer powers than most had supposed,” Richard Epstein, a professor at New York University, said in an e-mail.

While restricting Congress’s legal reach under its commerce and spending authority, the high court ultimately upheld the insurance requirement under the constitutional power to levy taxes.

That holding, in fact, “could lead to a greater expansion of federal power than if they had upheld it under the Commerce Clause,” New York University law professor Barry Friedman said in a telephone interview. The court struck down “an expansion of the commerce power that wasn’t going to be used very often” and, in its place, backed a broad interpretation of what Congress can accomplish with taxes.

To contact the reporter on this story: Bob Drummond in Washington at bdrummond@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net

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Mexicans Vote in Election Expected to Return PRI to Power

By Eric Martin and Nacha Cattan - Jul 2, 2012 3:27 AM GMT+0700.

Daniel Aguilar/Getty Images

Enrique Pena Nieto, presidential candidate for the Institutional Revolutionary Party (PRI), with supporters during his final campaign rally on June 27, 2012 in Monterrey City in Mexico's state of Nuevo Leon.

Mexicans are voting in an election where presidential front-runner Enrique Pena Nieto is looking to return the once-dominant Institutional Revolutionary Party to power after a 12-year hiatus.

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A citizen casts his vote in Mexico City. Photographer: Omar Torres/AFP/Getty Images

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A voter casts her ballot in Oaxaca. Photographer: Carlos Salinas/AFP/Getty Images

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Mexican presidential candidate Andres Manuel Lopez Obrador of the Democratic Revolution Party waves during a press before casting his vote in Mexico City. Photographer: Ronaldo Schemidt/AFP/Getty Images

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Mexican presidential candidate Josefina Vazquez Mota of the National Action Party (PAN) shows her ink-stained fingers after casting her vote in Huisquilucan, Mexico. Photographer: Johan Ordonez/AFP/Getty Images

The most recent poll taken last week showed the PRI candidate leading Andres Manuel Lopez Obrador of the Democratic Revolution Party by 13 percentage points. Josefina Vazquez Mota of the ruling National Action Party, or PAN, was in third. Also at stake are all 500 seats in the Chamber of Deputies, 128 in the Senate, as well as six governorships and the capital.

Pena Nieto has maintained a lead throughout the race, fueled by pledges to boost salaries held back by economic growth that averaged 1.8 percent a year, half the rate of Brazil, since President Felipe Calderon took office in 2006. The 45-year-old former governor of Mexico state, the country’s most-populous, has also promised to turn the tide in a drug war blamed for more than 47,000 deaths under Calderon and pursue tax, labor and energy overhauls to boost competitiveness.

“All three of the candidates reflect what most open political races are about, which is how do you improve people’s lives,” Thomas “Mack” McLarty, former chief of staff for U.S. President Bill Clinton and his special envoy to the Americas, said in an interview. “The real story here is that Mexico’s democracy continues to evolve and develop and progress.”

Mexico’s 79.5 million registered voters will cast ballots from 8 a.m. to 6 p.m. in each of Mexico’s three time zones. Pollsters including GEA-ISA will release exit polls as soon as voting ends at 9 p.m. New York time, while the Federal Electoral Institute will publish preliminary results at about 11:45 p.m. Mexico City time.

Conceding Defeat

Many Mexicans will be looking to see if Lopez Obrador, 58, who has focused his campaign on boosting spending for the poor, will concede defeat if he loses. After the last elections in 2006, which the PRD candidate lost by less than a percentage point after leading in most pre-election polls, his supporters occupied streets in the capital for weeks claiming fraud.

Lopez Obrador arrived before 8:00 a.m. at his voting station in Mexico City and had to wait more than 45 minutes until it was formally opened.

“I trust the people of Mexico, I believe in the people,” he said, according to the Reforma newspaper. “We are going to win.”

Celebration of Democracy

Lopez Obrador’s party has alleged the PRI is trying to buy votes by handing supporters shop gift cards, while the PAN has said Pena Nieto’s party is giving away bank cards. The PRI has denied the claims and its leadership yesterday in a press conference said it has asked all of its representatives to abide by electoral laws.

“I want in this electoral day the people of Mexico to be the winner,” Pena Nieto said after voting in his hometown of Atlacomulco, in the state of Mexico. “I want this day to be a celebration of our democracy.”

Whereas Lopez Obrador arrived in a single car to vote, Pena Nieto came in a convoy of three dark sport utility vehicles and took several photos with supporters on his way in and out.

The PRI’s 71 years in power were marked by “theft and devaluation,” said Maria Etchegaray, 82, as she lined up to vote in Mexico City. “I am going to vote for Vazquez Mota because I’ll never vote for the PRI,” she said, adding that Lopez Obrador “scares” her.

At the same polling station, Enrique Torres said he would vote for Pena Nieto, describing him as more “refined.” Lopez Obrador’s “time has passed,” he said.

Distrust

Doubts over the fairness of elections when PRI was in power and the 2006 standoff between Calderon and Lopez Obrador have fueled mistrust among Mexicans. A survey taken June 22-24 by Mexico City-based Consulta Mitofsky showed that 30 percent of voters have “a lot” of confidence in the Federal Electoral Institute’s ability to oversee the election, less than the 44 percent ahead of the 2006 vote.

In the past few weeks, Pena Nieto has faced student protests organized on the Internet and driven in part by concern he will erode civil liberties and revive corruption that thrived when the PRI ruled alone for 71 years until 2000.

Vazquez Mota, 51, has promised to continue the pro-business policies and drug crackdown initiated by Calderon, who is barred by the constitution from seeking re-election.

Opinion Polls

Pena Nieto had 38.4 percent support in the poll Mitofsky, compared with 25.4 backing for Lopez Obrador and 20.8 percent for Vazquez Mota. The poll of 1,000 registered voters had a 3.1 percentage-point margin of error.

The same poll shows the PRI and its coalition partner the Green Party garnering at least 274 of the 500 seats in the lower house of Congress, though backing for PRI legislative candidates had slipped to the lowest in the campaign. Currently, the PRI’s coalition has 262 seats.

Grupo Financiero Banorte SAB, Mexico’s third-largest bank, forecast in a June 27 note to clients that the coalition would win a majority in the Senate, where it’s currently the second- biggest plurality after Calderon’s party, while falling short of one in the lower house.

In the lower house vote, 300 lawmakers are elected directly while the remaining 200 are chosen through a system of proportional representation based on the national congressional vote. In the Senate, 96 are elected directly, with three named per state. The remaining 32 are chosen through proportional representation.

Changing Tactics

Pena Nieto has said that if elected he plans to spur growth by making it easier for companies to hire and fire workers, increasing tax collection and encouraging more businesses to join the formal economy. He also said he plans to loosen Petroleos Mexicanos’ oil monopoly, which was formed when his party nationalized the then foreign-owned industry in 1938.

Pena Nieto has said he’ll change tactics in the drug war, reducing violence by focusing on the worst crimes such as murder and kidnapping and eventually return the army to the barracks. In a Bloomberg interview in November, he rejected as “nonsense” and “propaganda” accusations by his rivals that he’ll negotiate with criminal gangs.

Vazquez Mota has tried to lift her candidacy by reminding voters of the PRI’s past, citing in a June 10 debate the 1968 massacre in Mexico City’s Tlatelolco Square when the military killed hundreds of students protesting anti-democratic practices days before the city hosted the Olympic Games. Pena Nieto was two years old at the time.

“People are going to be asking ‘Is this a new PRI?’ which his campaign suggests, or is he the young, handsome face of the old PRI,” said Diana Villiers Negroponte, a nonresident senior fellow at the Brookings Institution in Washington. “I don’t think any of us can make that conclusion with certainty until January or February,” after the new president takes office on Dec. 1.

To contact the reporter on this story: Nacha Cattan in Mexico City at ncattan@bloomberg.net; Eric Martin in Mexico City at emartin21@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.

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Spain Beats Italy 4-0 to Clinch Third Straight Soccer Trophy

By Tariq Panja - Jul 2, 2012 5:01 AM GMT+0700

Laurence Griffiths/Getty Images

Xavi Hernandez of Spain lifts the trophy as he celebrates with teammates following victory in the UEFA EURO 2012 final match between Spain and Italy at the Olympic Stadium on July 1 in Kiev.

Spain beat Italy 4-0 last night to become the first nation to retain soccer’s European Championship title and the only one from the continent to win three straight major competitions.

David Silva, Jordi Alba, and substitutes Fernando Torres and Juan Mata scored at Kiev’s Olympic Stadium for the 2010 world champion, which started its winning treble at Euro 2008.

Italy was forced to play the final 30 minutes a man down after running out of substitutes when Thiago Motta left injured. The Azzurri were no match for a Spanish team that recorded the biggest victory margin in a European Championship or World Cup final, and Spain captain Iker Casillas was able to hold aloft the Henri Delaunay Trophy for the second time in his career.

“To win three titles is almost impossible,” said Spain coach Vicente del Bosque, who has now won European, world and Champions League titles. “Congratulations to the players. I didn’t really want to be the coach who wins but the coach who educates, I want to keep preparing them for the future.”

Spain also extended its record of not conceding a goal in knockout matches since a 3-1 defeat to France in the last 16 of the 2006 World Cup. That was also the last time it was eliminated from a major tournament.

“They really have made history tonight, deservedly so,” Italy coach Cesare Prandelli said. “They have been playing tremendous football for years. Once Thiago Motta went off injured we didn’t have anything left in the tank. When you’re down to 10 men you can’t carry on, the game’s over”

Keep Possession

For all its dominance of the ball Spain had struggled to score goals in knockout matches. Only once since a 3-0 victory over Russia at Euro 2008 had Las Rojas scored more than one goal in major elimination matches. That 2-0 win over France in this year’s competition was followed by a penalty-shootout victory over Portugal in the semifinal after that match finished 0-0.

Prandelli’s decision to ask his team to press higher upfield than Spain’s opponents usually do made for an open contest. Any hope of an Italy comeback was ended when Motta was stretchered off in the 61st minute.

Spain, led by Xavi Hernandez and Andres Iniesta in midfield, showed off how it could maintain possession even with opponents snapping into tackles and closing down space.

Silva Strikes

The opening goal came following a sweeping move involving 13 passes in the 14th minute. It ended when Iniesta played in Cesc Fabregas, who swept behind Giorgio Chiellini and crossed for Silva to head in. Fabregas was chosen ahead of Alvaro Negredo as Del Bosque named a team without a recognized striker.

Chiellini almost pulled Italy level three minutes later but was unable to keep his header on target. That was the Juventus defender’s last contribution before he hobbled off to become the first Italian casualty of the night.

Italy pressed without creating clear openings, and Spain continued to carry a greater threat when it countered.

The second goal arrived four minutes before halftime. Xavi exchanged passes with Alba who surged beyond a clutch of defenders to collect the ball and slot past Gianluigi Buffon.

Prandelli replaced Antonio Cassano at halftime with Antonio Di Natale, who scored Italy’s goal when the teams last met in a 1-1 draw in the group stage. Chances came at both ends. Di Natale failed to profit from two openings within six minutes of entering the game. First he headed over and was then unable to beat Casillas after receiving a pass from Riccardo Montolivo. In between those efforts Spain also went close.

Torres, Mata Score

Fabregas tricked his way past three players and was only denied by a last-gasp lunge as the goal loomed. Spain’s appeals for a handball off Leonardo Bonucci from the corner that followed were turned down by referee Pedro Proenca.

Italy’s chances effectively ended when Motta, who’d replaced Montolivo in the 57th minute, left on a stretcher.

The extra space allowed Spain to toy with its opponents and double the scoreline in the final six minutes.

First Xavi won the ball in midfield and immediately transferred it to Torres who rolled it into the corner of Buffon’s goal. Then Torres set up Chelsea teammate Mata to net in the 88th minute.

“We saw right from the start that they looked fresher, we had spent a lot of energy in the past week,” Prandelli said. “It was a fantastic tournament for us and I have to congratulate the lads.”

Spain beat Germany 1-0 at the Euro 2008 final in Vienna, when Torres got the goal. He’s now the only man to score in two Euro finals. Alba’s strike was his first for his country.

“It was my first final and we created history, I’m very happy,” Alba told reporters. “I can’t believe it, it still has to sink in. I’ve also signed for Barcelona and now I want to celebrate.”

To contact the reporter on this story: Tariq Panja at the Olympic Stadium in Kiev via the London newsroom at tpanja@bloomberg.net

To contact the editor responsible for this story: Christopher Elser at celser@bloomberg.net

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China’s Manufacturing Growth Weakens as New Orders Decline

By Bloomberg News - Jul 1, 2012 8:16 AM GMT+0700

China’s manufacturing expanded at the weakest pace this year as new orders and export demand dropped, adding to evidence the nation’s economic slowdown is deepening, a government report showed today.

The Purchasing Managers’ Index fell to 50.2 in June from 50.4 in May, the Beijing-based National Bureau of Statistics and China Federation of Logistics and Purchasing said. That compares with the 49.9 median estimate in a Bloomberg News survey of 24 economists. A reading above 50 indicates expansion.

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Employees put on clean suits at Semiconductor Manufacturing International Corp. (SMIC), in Shanghai. Photographer: Qilai Shen/Bloomberg

Today’s data increase the odds Premier Wen Jiabao will introduce more stimulus to stem a deceleration in the world’s second-biggest economy that may have extended into a sixth quarter. The central bank will fine-tune economic policies in a “timely and appropriate” manner, central bank Governor Zhou Xiaochuan said on June 29.

“The weaker reading should trigger more-aggressive policy easing,” Sun Junwei, a Beijing-based economist with HSBC Holdings Plc, said before the release. “Economic growth will rebound to over 8.5 percent in the second half once these additional easing measures filter through,” she said.

Steps may include a reduction in interest rates, four cuts in banks’ reserve requirements, more fiscal spending on public works and tax cuts, according to Sun, who forecasts second- quarter economic growth may have slid to 7.8 percent from a year earlier, after slowing to 8.1 percent in the first three months of the year.

Orders Contract

A separate purchasing managers’ index released by HSBC Holdings Plc and Markit Economics indicated that manufacturing may have contracted for an eighth month in June, according to a preliminary reading on June 21. The final reading of the survey, which covers more than 420 companies and is weighted more toward smaller businesses, is due tomorrow.

The federation’s index is based on responses from managers at 820 companies in 31 industries.

A measure of output fell to 52.0 in June from 52.9 the previous month, according to the federation. A gauge of new orders contracted for a second month and export orders contracted for the first time since January.

Gains in China’s currency against the U.S. dollar have stalled as growth in Asia’s biggest economy has slowed and Europe’s debt crisis curbed demand for exports. The yuan weakened 0.88 percent in the second quarter, according to the China Foreign Exchange Trade System, its biggest quarterly decline since a dollar peg ended in 2005.

Profits Fall

UBS AG cut its end-2012 estimate for the yuan to 6.25 to 6.35 per dollar from a previous forecast of 6.15, according to a June 29 note.

The benchmark Shanghai Composite Index has fallen 9.6 percent from this year’s peak on March 2 on concern the government isn’t loosening monetary policy quickly enough to stem a slowdown. The gauge rose for the first time in eight days on June 29 on speculation European turmoil is easing after the region’s leaders agreed to soften repayment conditions for loans to Spanish banks.

Industrial companies’ profits fell for a second month in May, a statistics bureau report showed on June 29, adding to signs the economy is weakening.

Baoshan Iron & Steel Co., China’s biggest publicly traded steelmaker, said June 11 it lowered prices as demand from makers of appliances and cars slowed. Prices were cut by as much as 400 yuan ($63) a metric ton for July delivery, the Shanghai-based company said in a statement on its trade website bsteel.com the same day.

--Zheng Lifei. With assistance from Cynthia Li in Hong Kong. Editors: Nerys Avery, Scott Lanman

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at lzheng32@bloomberg.net

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

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Christie Calls Special Legislative Session on Tax Cuts

By Terrence Dopp - Jul 1, 2012 2:19 AM GMT+0700

New Jersey Governor Chris Christie called for a special session of the Democratic-led Legislature to pass his proposed tax cut, which he said lawmakers “held hostage” in the $31.7 billion budget approved this week.

Christie, a first-term Republican, said in a statement he has sent a letter to Senate President Stephen Sweeney and Assembly Speaker Sheila Oliver, both Democrats, notifying them of the session. Christie said he plans to address a joint session of the Senate and Assembly at 11 a.m. on July 2.

In his February budget address, Christie called for a 10 percent income-tax cut across the board. He later agreed with Democrats on a plan to give residents property-tax credits. Senate Budget Committee Chairman Paul Sarlo, a Democrat from Wood-Ridge, said his party opted to delay the credits until later in the year, conditional upon revenue meeting expectations.

“The budget, which contained billions of dollars in spending, failed to address the single issue that strikes at the heart of our shared interests, and our continued prosperity,” Christie, 49, said in the letter, according to a statement released today by his office. “Lowering the tax burden on every New Jersey resident is a matter of unique and critical interest that demands our immediate and full attention.”

Property-Tax Credits

The governor vetoed $361 million in spending initiatives added on by Democrats when he signed the spending plan in Trenton. New Jersey law allows governors to call the Legislature into session when they deem doing so is “in the public interest.”

Democrats in their budget stuck closely to the revenue and spending targets outlined by Christie and set aside $183 million in the state’s rainy day account to cover property-tax credits.

“We presented the governor with a budget committed to providing middle-class tax relief, and regardless of the governor’s political theater no tax breaks will even go into effect until 2013,” said the Senate’s Sweeney in a statement this afternoon. “While the last thing anyone wants in the middle of a heat wave is hot air coming from Trenton, we will be there.”

The legislature’s top budget analyst has said tax collections may drop as much as $1.4 billion below Christie’s original targets through the end of next fiscal year, double a revised figure from Treasurer Andrew Sidamon-Eristoff.

To contact the reporter on this story: Terrence Dopp in Trenton at tdopp@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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Iran Oil Sanctions Starting Risks Biggest OPEC Loss Since Libya

By Ewa Krukowska - Jul 1, 2012 5:01 AM GMT+0700

Behrouz Mehri/AFP/Getty Images

A petrol station in central Tehran. Iran has halted its limited oil sales to France and Britain in retaliation for a phased EU ban on Iranian.

European Union sanctions on Iran entered into full force today after exemptions on some contracts and insurance ended, boosting crude prices and pressure on the Persian Gulf nation to halt its nuclear-enrichment program.

The reduction in Iranian exports may become the biggest supply disruption from a member of the Organization of Petroleum Exporting Countries since an armed rebellion all but halted pumping in Libya last year, according to the International Energy Agency. It also comes just as a strike by Norwegian workers is curbing flows from North Sea fields.

“We expect Brent oil prices to be supported by Iranian oil sanctions and potential loss of supplies from the North Sea,” Gordon Kwan, the head of regional energy research at Mirae Asset Securities based in Hong Kong, said in a June 28 report. “The imminent EU insurance ban on tankers carrying Iranian crude could drive up demand for Brent and Dubai crude.”

Brent futures fell below $90 a barrel on June 21 for the first time in 18 months as concern that Europe’s debt crisis would spread sapped the outlook for fuel use worldwide. Now, the Iran embargo and Norwegian strike are stoking speculation about a rebound in prices, according to analysts such as Kwan and Ole Hansen at Saxo Bank A/S. Brent for August settlement surged 7 percent on June 29 to close at $97.80 a barrel on the ICE Futures Europe exchange.

Unsold Barrels

Iran, the second-biggest producer in OPEC after Saudi Arabia, was producing about 3.3 million barrels a day in May. Full implementation of sanctions will remove about 1 million barrels a day during the second half of the year as buyers disappear and Iranian storage tanks become full, the Paris-based IEA forecast in a June 13 report.

Iran called on OPEC to convene an emergency meeting to address the group’s production in excess of its target of 30 million barrels a day, the state-run Mehr news agency reported yesterday, citing Oil Minister Rostam Qasemi. Disregard of the limit by some OPEC members “will negatively impact oil prices in the international market,” Qasemi said. The 12-member organization, which decided on June 14 to retain its daily ceiling of 30 million barrels, pumped about 1.6 million barrels more than that in May, according to data compiled by Bloomberg.

The EU decided in January to ban oil imports from Iran, offering a five-month phase-in period for existing contracts to let member states such as Greece find alternative supplies. An exemption on tanker insurance restrictions for the worldwide shipping industry also ran out today.

Nuclear Impasse

Foreign ministers from the 27-nation bloc decided on June 25 the exemptions shouldn’t be extended after talks between Iran and the world’s powers about the nuclear program failed to reach a breakthrough since they started in April. Iran denies that it is developing nuclear weapons.

“Our purpose is to persuade Iran to come and negotiate with us and to show by action the reassurance that we’re seeking,” the EU’s foreign policy chief, Catherine Ashton, told a news conference in Luxembourg after the ministers met. “We need, not just in the EU but across the world, to keep the pressure up.”

The EU ban on insurance for ships carrying Iranian oil affects 95 percent of the world’s tankers because they’re covered by the 13 members of the London-based International Group of P&I Clubs, which is adhering to the EU rule.

In an effort to retain an important Asian customer, Iran offered to supply oil to South Korea using its own tankers, a government official in Seoul said June 29, asking not to be identified because the matter is confidential.

Parallel Action

Complementing the European sanctions, a U.S. law enacted Dec. 31 cuts off international banks from the U.S. financial system if they settle oil trades with Iran. The U.S. rule gave importing nations, including China, India and Japan, until June 28 to demonstrate they had “significantly reduced” their purchases of Iranian oil in order to qualify for exemptions.

Oil and its derivatives account for nearly 80 percent of Iran’s exports and about half of government revenue, according to the U.S. Energy Information Administration, which estimates the country’s 2010 net oil export revenues at $73 billion.

Iran’s oil exports may “gradually” decline by 20 percent to 30 percent after sanctions start and amid field maintenance work, Deputy Oil Minister Ahmad Qalebani said on June 26.

Such acknowledgement hasn’t erased tensions over the sanctions. Iran warned it can strike any target in the Strait of Hormuz and Persian Gulf and will soon equip ships with missiles capable of firing more than 300 kilometers (186 miles), Mehr reported June 29, citing a commander of the Islamic Revolutionary Guards Corps. Tankers carrying about a fifth of globally traded oil exit the Gulf though the Hormuz chokepoint.

Iranian ‘Playground’

“The Strait of Hormuz and the Persian Gulf is Iran’s playground and no one else’s,” Admiral Ali Fadavi told Mehr. “Any issues related to the Strait of Hormuz will be a very big story that will have consequences on the price of oil.”

A survey of 42 analysts on June 28 showed that 16, or 38 percent of them, predicted crude futures will increase in the week starting tomorrow, citing the new sanctions. Among the remainder, 12 forecast little change in prices and 14 expected a decline.

“That is the wildcard, the Iranian situation,” Torbjoern Kjus, an oil analyst at DnB ASA, an Oslo-based bank, said by phone on June 29.

“Nobody can be totally certain how it’s really going to affect the market,” he said. “There’s probably been huge inventory builds in Iran, and this could pose a bearish effect for next year or the second half of this year if there is a resolution.”

To contact the reporter on this story: Ewa Krukowska in Brussels at ekrukowska@bloomberg.net

To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net

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Republicans May Try Reconciliation for Health Repeal in 2013

By Kathleen Hunter - Jun 30, 2012 2:53 AM GMT+0700

Should they win control of the U.S. Senate and the White House in November, Republicans say they would consider using a fast-track budget process to repeal parts of President Barack Obama’s 2010 health-care overhaul.

“In the House we are prepared to do that and I’m sure if you speak to my colleagues in the Senate they are as well,” House Majority Leader Eric Cantor, a Virginia Republican, said today in an interview with Bloomberg Television. “This is a big deal for the American people. Health care is one of the most personal decisions that families make, that’s what at stake here.”

The fast-track budget procedure, known as reconciliation, allows lawmakers to bypass a Senate filibuster by lowering the threshold for passage of certain legislation in that chamber from 60 votes to a simple majority.

Cantor’s comments came a day after the U.S. Supreme Court upheld the core of the 2010 Patient Protection and Affordable Care Act, ruling that Congress has the authority to require Americans to carry health insurance or pay a penalty.

House Republican leaders immediately announced that the chamber, which has voted 30 times to eliminate, defund or scale back parts or all of the health-care law, will vote again July 11 on repeal. Days after taking control of the House in January 2011, all of the chamber’s Republicans and three Democrats voted to pass a measure ending the health-care law.

Senate Majority

Efforts to repeal or chip away at the health-care law have died in the U.S. Senate, where Democrats have a 53-seat majority.

Republicans say the best chance for success in their repeal efforts lies in winning control of the Senate and electing Republican Mitt Romney as president in November.

Even then it would be a challenge to muster the 60 votes needed to overcome a Democratic filibuster in the Senate. Republicans could try to bypass a filibuster by using the reconciliation process.

“There have never been 60 popularly elected Republican senators,” said Senator Roy Blunt, a Missouri Republican, in an interview. “So whatever we’re able to do legislatively in the Senate, reconciliation becomes really important.”

Senator Bob Corker, a Tennessee Republican, said, “It’s always better if you can deal with something in a normal legislative fashion,” adding that it was premature to discuss options for repeal in 2013 without knowing the outcome of the election.

‘Just Talk’

“Right now, until we know what the makeup of the Senate’s going to be this next year and who’s president, all the talk is just that, just talk,” Corker said in an interview.

The House’s chief tax writer, Ways and Means Committee Chairman Dave Camp, today didn’t rule out the possibility of using reconciliation to repeal the law if Republicans were to control both chambers of Congress and the White House next year.

“I’d like to repeal the bill,” Camp, a Michigan Republican, said in an interview on Bloomberg Television’s “Political Capital With Al Hunt” airing this weekend. “And I’d like to do it however we can, because I do think it -- this -- imposing the federal government between individuals and their doctors is still wrong. And just because something’s constitutional doesn’t make it a good law.”

Gallup Poll

A nationwide USA Today-Gallup poll of 1,012 adults surveyed after yesterday’s Supreme Court ruling showed a 46-46 percent split on whether they agreed with the decision. Seventy-nine percent of Democrats agreed with the ruling, 83 percent of Republicans disagreed, and independents were split with 45 percent in favor and 42 percent opposing the decision.

Democrats, who controlled the House and Senate in 2009 and 2010 when Congress was considering the health care law, turned to reconciliation to pass the law after they lost their 60-seat Senate majority in January 2010 with the election of Massachusetts Republican Scott Brown.

In both chambers of Congress, Democrats provided all of the votes for the health-care measure. They lost control of the House in the 2010 midterm elections.

Senate Majority Leader Harry Reid, a Nevada Democrat, told reporters yesterday that the prospect of a Republican-controlled Senate using the fast-track process to push repeal was “all the more reason that the American people should understand” that Democrats “want to focus on jobs, not taking away benefits that millions of Americans have today for sure.”

Policy Provisions

Because reconciliation applies only to measures that affect spending or revenue, many policy provisions in the health-care law probably would fall outside the scope of it, meaning the tool could be used to repeal part, not all, of the law.

Though Democrats control the Senate’s agenda, Republicans in the chamber have pledged to press ahead with repeal efforts.

“Yesterday’s decision gives us the clearest proof yet that this bill has to go,” Minority Leader Mitch McConnell, a Kentucky Republican, said today. “It needs to be repealed to clear the way for common sense, step-by-step reforms that protect Americans’ access to the care they need, from the doctor they choose, at a lower cost. And that’s precisely what Republicans intend to.”

To contact the reporter on this story: Kathleen Hunter in Washington at khunter9@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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Euro Rises After EU Leaders Renounce Spain Loan Seniority

By Joseph Ciolli - Jun 30, 2012 4:23 AM GMT+0700

The euro surged the most this year against the dollar after European leaders eased terms on loans to Spanish banks, taking a step toward resolving the region’s debt crisis and boosting demand for the shared currency.

The 17-nation euro posted its biggest gain in eight months versus the yen as European Union President Herman Van Rompuy said officials meeting in Brussels agreed to drop the condition that emergency loans to Spanish banks give creditor governments preferred status. The Australian and New Zealand dollars advanced as stock gains boosted demand for higher-yielding assets.

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Traffic passes in front of the Palais Garnier Opera House in Paris. French gross domestic product was probably unchanged from the fourth quarter, matching the government’s previous projection, according to the median estimate of economists in a Bloomberg News survey before the national statistics office releases the figure today.Photographer: Balint Porneczi/Bloomberg

Play Video

June 29 (Bloomberg) -- Economics Nobel Laureate Joseph Stiglitz, Richard Corbett, an aide to European Union President Herman Van Rompuy and Arnab Das, managing director of market research and strategy at Roubini Global Economics talk about the future of the euro zone and the leaders' summit in Brussels. They speak with Linda Yueh on Bloomberg Television's "Last Word: Economic Edge." (Source: Bloomberg)

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June 29 (Bloomberg) -- Kathleen Brooks, research director at Forex.com, a unit of online currency trading company Gain Capital Holdings Inc., talks about the outlook for the euro after European leaders agreed to relax conditions on emergency loans for Spanish banks. She speaks with Francine Lacqua on Bloomberg Television's "On the Move." (Source: Bloomberg)

“The move that we saw today was a positive step by European leaders,” Joe Manimbo, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co. (WU), said in a telephone interview. “It’s not the best-case scenario, but it certainly exceeds the market’s really low expectations heading into the summit.”

The euro advanced 1.8 percent to $1.2667 at 5 p.m. New York time after rising as much as 2 percent, the biggest intraday gain since Oct. 27. The shared currency jumped 2.2 percent to 101.04 yen, gaining as much as 2.6 percent, the most since Oct. 31. The yen fell 0.4 percent to 79.79 per dollar.

Implied volatility among currencies fell, touching the lowest level since May 8, according to a JPMorgan Chase & Co. gauge. The JPMorgan Global FX Volatility Index declined to 9.56, up from this year’s low of 8.84 in April. The high was 12.37 in January and the average this year is 10.36.

Haven Assets

Even as the euro has outperformed the U.S. dollar on demand for higher-risk assets, the currency’s performance against other counterparts has been muted because the EU’s emergency-loan decision did barely enough to meet already-low expectations, Manimbo said.

The euro was little changed against nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes. Haven assets were the worst performers, with the greenback slumping 0.7 percent and the Japanese currency falling 1.3 percent. Canada’s dollar was the best performer with a 0.5 percent increase.

The euro was rose 0.1 percent against the New Zealand dollar and dropped 0.1 percent against the Swedish krona and Australian dollar. Hedge funds and other large speculators hold a net-short euro position, or bet that the currency will fall against the dollar, of 141,066 contracts, as of June 19. The speculative positioning reached a euro-era record-high June 5.

“I don’t think that what was announced is a big game changer at this point,” Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York, said in a telephone interview. “There’s still no bond-buying framework in place. There’s still a structural problem that hasn’t been addressed yet.”

Quarterly Drop

The euro is still set for its biggest quarterly drop against the dollar and the yen since September. The euro has weakened 8.6 percent versus the yen since March 31, and 5.1 percent against the dollar.

The euro may face resistance at its June 18 high of $1.2748, according to data compiled by Bloomberg based on trading patterns. Resistance refers to an area on a price graph where sell orders may be clustered. The stronger the resistance, the more buying is needed to rise through that level.

The yen fell versus all of its major counterparts as rising U.S. Treasury yields draw more funds into dollar-based securities, helping weaken Japan’s currency. Treasury two-year notes yield about 19 basis points, or 0.19 percentage point, more than Japanese bonds of similar maturity. The spread has widened from 13 basis points in September.

Dollar Index

The market’s risk-on tone has reversed recent safe-haven flows, Eric Theoret, a currency strategist in Toronto at Bank of Nova Scotia (BNS)’s Scotia Capital unit, wrote today in a note to clients. Bank of Japan (8301) policy, domestic fundamentals and a growing global risk appetite should push the U.S. dollar to 83 yen, according to Theoret.

The Dollar Index (DXY) fell as much as 1.7 percent, the most since Oct. 27, ending a two-day rally as the EU’s Spanish bond decision decreased investor appetite for risk-averse assets. The index is used by IntercontinentalExchange Inc. to track the greenback against the currencies of six U.S. trading partners.

The dollar has weakened against nine of its 16 most-traded counterparts this year, with the Mexican peso’s 4.3 percent rise leading gainers. The euro dropped 2.3 percent versus the dollar and the yen fell 3.6 percent, the biggest decline after the Brazilian real’s 7.1 percent plunge.

Spain, Italy

Spain’s 10-year bond yield dropped 61 basis points to 6.33 percent, the biggest decline since Dec. 5. Italy’s 10-year yield slid 38 basis points to 5.82 percent.

EU leaders gathered today for a second day of talks to discuss measures to stem a debt crisis that’s spurred five euro members to seek international bailouts. Euro-bloc finance ministers will enact today’s deal on loans to Spanish banks at a meeting on July 9, Rompuy said, calling the accord a “breakthrough.”

The European Union has “addressed the issues on the seniority of Spanish loans,” said Roy Teo, a currency strategist in Singapore at ABN Amro Private Bank. “The fact that right now they are renouncing the seniority status means private bondholders will have similar, equal, weighting. It’s positive for the euro.”

‘Raising Funds’

South Africa’s rand rose against all but one of its major counterparts, rallying the most in more than nine months as stocks and commodities surged after the decision to support Spain’s banks boosted demand for riskier assets. The currency gained 2.8 percent to 8.1642 per dollar after rising as much as 3.4 percent, its biggest increase since Sept. 27.

Canada’s dollar also advanced the most since Nov. 30 versus the dollar as rising stocks and commodities increased demand for higher yielding assets. The so-called loonie appreciated 1.6 percent to C$1.0166.

The Australian dollar appreciated 1.9 percent to $1.0238 and gained 1.7 percent for the week. New Zealand’s dollar rose 1.7 percent to 80.13 U.S. cents.

“Anything that looks to be supportive of Spain and Italy in raising funds is going to be positive,” said Sacha Tihanyi, a strategist in Hong Kong at Scotiabank, a unit of Bank of Nova Scotia. “As long as these headlines continue to come out with this sort of flavor, we can see the Aussie and kiwi get squeezed a bit higher.”

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net

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

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