U.S. corporate earnings probably fell for a sixth-straight quarter, the longest streak in at least 20 years, as consumer spending on automobiles, homes and retailers collapsed.
Fourth-quarter profit at companies in the Standard & Poor’s 500 Index may have dropped an average of 11.9 percent from a year earlier, according to data compiled by Bloomberg.
The slump would be the longest since at least 1988 when the index began compiling the data, said Standard & Poor’s senior analyst Howard Silverblatt. Weyerhaeuser Co., the largest North American lumber producer, said fourth-quarter earnings will be “significantly” lower than it expected. General Motors Corp., which is receiving a $9.4 billion government bailout, may report a loss of $6.61 a share, according to analysts’ estimates.
“The earnings weakness has spread beyond the financial sector,” said John Praveen, the Newark, New Jersey-based chief investment strategist at Prudential International Investments Advisers LLC, a unit of Prudential Financial Inc., which manages about $602 billion. “I don’t think this is the bottom.”
Analysts are predicting the streak will reach eight quarters with a 10.3 percent decline in the first three months of 2009 and a drop of 5.8 percent in the second quarter. Analysts currently expect a 12.6 percent increase in earnings in the third quarter next year.
The S&P 500 Index has fallen 25 percent in the fourth quarter through Dec. 26, the biggest drop since the third quarter of 1974. For the year, the index has plummeted 41 percent, the worst annual performance since a 47 percent drop in 1931, according to data compiled by Bloomberg.
Dollar’s Gains
Earnings slid 23 percent in the second quarter, the most since at least 1998, according to Bloomberg data, and 18 percent in the third quarter. Profit declined 22 percent in the fourth quarter of 2007.
In prior years, the declining value of the dollar meant overseas earnings boosted profit of U.S. companies, Praveen said. Now with the dollar gaining against currencies in Europe and Japan, profit from overseas doesn’t help the bottom line as much, he said.
Of 10 industry groups in the S&P 500, seven will see earnings decline, analysts estimated.
Raw-materials producers will be hit hardest, with profit falling about 63 percent, according to analysts.
Weyerhaeuser cut its dividend by more than half on Dec. 19. Analysts on average expect a loss of 50 cents a share compared with a profit of 51 cents a share in the same period a year earlier.
The next biggest group affected is consumer discretionary, which includes the auto industry. Earnings for these companies may be down 47 percent. Consumer spending, which accounts for more than two- thirds of the U.S. economy, fell at a revised 3.8 percent annual rate, according to the U.S. government. It’s the first decline since 1991 and the biggest since 1980. The unemployment rate has climbed to 6.7 percent, the highest level since 1993.
Retail, Finance Earnings
Among retailers, Office Depot Inc. may report a loss of 5 cents a share compared with a 10-cent profit a year earlier, according to analysts’ estimates. The world’s second-largest office-supplies retailer said it will close almost 10 percent of its North American stores and cut 2,200 jobs as the U.S. recession saps demand for business furniture.
Financial services companies, which have been weighed down by $1 trillion in losses and writedowns from the collapse of the subprime mortgage market, should be able to stop a run of five straight quarters of declining profit.
In finance, earnings are expected to rise 68 percent, led by Bank of America Corp. where a per-share profit of 25 cents is predicted, up from 7 cents a share a year earlier, according to the average of 21 analysts’ estimates in a Bloomberg survey.
‘Turning the Corner’
“We are turning the corner,” said Thomas Sowanick, chief investment officer of Princeton, New Jersey-based Clearbrook Financial LLC, which manages $20 billion. “If we do enter into a period where credit quality stabilizes, you could get a huge jolt to earnings.”
Others aren’t as optimistic. The banks and real estate sub- groups may fall 31 percent and 21 percent, respectively, on average, according to analyst estimates.
“My gut feeling says analysts are too optimistic in terms of the magnitude of the write offs,” said Frederic Dickson, who helps oversee about $19 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. “It probably won’t be as bad as we saw a year ago, but there could be some shock value.”
Monday, December 29, 2008
Biggest Bond Buyers Favor European Notes as ECB Cut
The world’s biggest bond investors are betting European Central Bank President Jean-Claude Trichet will be forced to follow Federal Reserve Chairman Ben S. Bernanke and step up the pace of interest-rate cuts.
BlackRock Inc., Schroder Investment Management and Standard Life Investments Ltd., which together oversee $1.6 trillion, are buying German debt securities even though yields are close to record lows. Barclays Capital, the top primary dealer of German debt, says bunds offer “unprecedented value” because the ECB will accelerate rate cuts as the economic slump deepens.
“It still makes sense to be long selective markets and Europe is one of those,” said Michael Krautzberger, a European fund manager in London at BlackRock, which manages $1.3 trillion. “The ECB is behind the curve.”
While the Fed reduced its target rate 4.25 percentage points this year to as low as zero, and the Bank of England cut its benchmark by 3.5 percentage points to 2 percent, the Frankfurt- based ECB lagged behind.
The ECB lowered the main refinancing rate by 1.5 percentage points to 2.5 percent and will cut the benchmark rate 1 percentage point to 1.5 percent by June, based on the median of 16 economists’ forecasts compiled by Bloomberg.
Closer to Fed
Even though Trichet said in a Dec. 16 speech further reductions may fail to bolster the economy as long as banks refuse to lend to each other, the ECB may bring its key rate closer to the Fed’s, according to Gregor MacIntosh, a money manager in Edinburgh at Standard Life. The firm has about $265 billion in assets.
“The European economy will underperform the U.S. next year,” Macintosh said. “On a relative basis, European bonds look more attractive than the U.S. market.”
German bunds returned 12.1 percent this year, including price gains and reinvested interest, the most since gaining 16 percent in 1995, according to Merrill Lynch & Co. index data. French government debt returned 11.5 percent, while Spanish bonds added 8.8 percent.
Treasuries returned more than bunds, handing investors 14.6 percent. A rally in Treasuries in the fourth quarter pushed 10- year U.S. debt yields to 89 basis points below bunds of similar maturity, the lowest since 1993. As recently as last month they yielded 22 basis points, or 0.22 percentage point, more than bunds.
The spread was 84 basis points by 3:29 p.m. in London.
‘Unlikely’ Reversal
Investors piled into the relative safety of government debt this year as credit losses and writedowns at the world’s largest financial companies surpassed $1 trillion and Europe, the U.S. and Japan entered their first simultaneous recessions since World War II. The rally drove yields on German two-year notes down by more than 200 basis points to 1.73 percent, the steepest drop since falling 268 basis points in 1995.
“A reversal of the bullish trend is unlikely to take hold before the third quarter of next year,” said Laurent Fransolet, head of European fixed-income strategy at Barclays in London. Fransolet recommends bonds due in five and 10 years, which he says offer “unprecedented value.”
Yields on German 10-year notes will fall to 2.85 percent by the end of the second quarter from 2.93 percent last week before rising to 3.20 percent at year-end 2009, according to Barclays. The London-based bank buys more debt at German government-bonds auctions than any of the other 28 primary dealers, according to the Bundesbank.
Breaking Even
While analysts expect yields on 10-year bunds to rise to 3.4 percent by the end of 2009, investors will likely break even for the year, according to the median of 10 forecasts compiled by Bloomberg.
An investor buying $1 million of 10-year bunds would lose about $5,000 by the end of next year if the yield rose to the level forecast in the survey. That compares with the $78,000 a buyer of the same amount of 10-year Treasuries would lose should the yield increase to the 3.4 percent predicted in a separate Bloomberg poll of 54 strategists.
Bonds may fall in 2009 as governments prepare to sell a record amount of debt to finance bank bailouts amid falling tax revenue, according to Zurich-based UBS AG, Switzerland’s biggest bank.
Germany will issue a record 323 billion euros ($456 billion) of debt next year, including 149 billion euros of bonds maturing in more than one year, according to the Federal Finance Agency. France plans to sell a record 145 billion euros of securities.
‘Overwhelming Issuance’
“The sheer amount of issuance due from European governments is likely to overwhelm potential demand,” UBS strategists Meyrick Chapman and Andrew Rowan wrote in a report to clients Dec. 18. Investors will see “the bulk of the returns” in the first half and “barely break even” in the second, the London- based analysts said.
Two-year German note yields will rise to 2.05 percent by the end of next year, according to the median of 10 economists’ forecasts compiled by Bloomberg, from 1.694 percent today.
The global credit seizure prompted the world’s biggest central banks to cut rates and offer record amounts of cash to prevent financial institutions from collapse following the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc.
“A quicker-than-expected return to risk appetite is a risk for bonds and could lead to a sell-off, even though the European economy isn’t likely to recover in the next half or one year from now,” said Michiel de Bruin, who manages about $18 billion as head of European government bonds at F&C Asset Management’s Dutch unit in Amsterdam.
No Choice on Rates
Trichet may have no choice but to lower borrowing costs again, according to David Scammell, a money manager in London at Schroder, a unit of the U.K.’s largest publicly traded fund company. The economy of the 15 nations sharing the euro will shrink 1 percent in 2009 after expanding 1 percent this year, based on the median of 15 forecasts compiled by Bloomberg. The U.S. is likely to contract 1 percent, a separate poll shows.
“Poor economic numbers will bring them to their knees,” said Scammell, whose parent firm oversees $19 billion of assets. “The ECB will have to cut interest rates more aggressively. We are bullish on European bonds, as next year is not going to be any better than this year in terms of the economy.”
Growing pessimism over the economy and expectations of rate reductions drove the yield on two-year bonds to 148 basis points below 10-year bunds in November, the widest spread since 2004.
As the ECB brings rates closer to zero, the gap may narrow because investors will seek higher yields offered by longer-dated securities, Scammell said.
“The curve will flatten because there’s nowhere for the short end to go anymore, and not because of expectations of an economic recovery,” he said. “The U.S. led this cycle and it’s moving into a curve-flattening mode. Europe is likely to follow.”
BlackRock Inc., Schroder Investment Management and Standard Life Investments Ltd., which together oversee $1.6 trillion, are buying German debt securities even though yields are close to record lows. Barclays Capital, the top primary dealer of German debt, says bunds offer “unprecedented value” because the ECB will accelerate rate cuts as the economic slump deepens.
“It still makes sense to be long selective markets and Europe is one of those,” said Michael Krautzberger, a European fund manager in London at BlackRock, which manages $1.3 trillion. “The ECB is behind the curve.”
While the Fed reduced its target rate 4.25 percentage points this year to as low as zero, and the Bank of England cut its benchmark by 3.5 percentage points to 2 percent, the Frankfurt- based ECB lagged behind.
The ECB lowered the main refinancing rate by 1.5 percentage points to 2.5 percent and will cut the benchmark rate 1 percentage point to 1.5 percent by June, based on the median of 16 economists’ forecasts compiled by Bloomberg.
Closer to Fed
Even though Trichet said in a Dec. 16 speech further reductions may fail to bolster the economy as long as banks refuse to lend to each other, the ECB may bring its key rate closer to the Fed’s, according to Gregor MacIntosh, a money manager in Edinburgh at Standard Life. The firm has about $265 billion in assets.
“The European economy will underperform the U.S. next year,” Macintosh said. “On a relative basis, European bonds look more attractive than the U.S. market.”
German bunds returned 12.1 percent this year, including price gains and reinvested interest, the most since gaining 16 percent in 1995, according to Merrill Lynch & Co. index data. French government debt returned 11.5 percent, while Spanish bonds added 8.8 percent.
Treasuries returned more than bunds, handing investors 14.6 percent. A rally in Treasuries in the fourth quarter pushed 10- year U.S. debt yields to 89 basis points below bunds of similar maturity, the lowest since 1993. As recently as last month they yielded 22 basis points, or 0.22 percentage point, more than bunds.
The spread was 84 basis points by 3:29 p.m. in London.
‘Unlikely’ Reversal
Investors piled into the relative safety of government debt this year as credit losses and writedowns at the world’s largest financial companies surpassed $1 trillion and Europe, the U.S. and Japan entered their first simultaneous recessions since World War II. The rally drove yields on German two-year notes down by more than 200 basis points to 1.73 percent, the steepest drop since falling 268 basis points in 1995.
“A reversal of the bullish trend is unlikely to take hold before the third quarter of next year,” said Laurent Fransolet, head of European fixed-income strategy at Barclays in London. Fransolet recommends bonds due in five and 10 years, which he says offer “unprecedented value.”
Yields on German 10-year notes will fall to 2.85 percent by the end of the second quarter from 2.93 percent last week before rising to 3.20 percent at year-end 2009, according to Barclays. The London-based bank buys more debt at German government-bonds auctions than any of the other 28 primary dealers, according to the Bundesbank.
Breaking Even
While analysts expect yields on 10-year bunds to rise to 3.4 percent by the end of 2009, investors will likely break even for the year, according to the median of 10 forecasts compiled by Bloomberg.
An investor buying $1 million of 10-year bunds would lose about $5,000 by the end of next year if the yield rose to the level forecast in the survey. That compares with the $78,000 a buyer of the same amount of 10-year Treasuries would lose should the yield increase to the 3.4 percent predicted in a separate Bloomberg poll of 54 strategists.
Bonds may fall in 2009 as governments prepare to sell a record amount of debt to finance bank bailouts amid falling tax revenue, according to Zurich-based UBS AG, Switzerland’s biggest bank.
Germany will issue a record 323 billion euros ($456 billion) of debt next year, including 149 billion euros of bonds maturing in more than one year, according to the Federal Finance Agency. France plans to sell a record 145 billion euros of securities.
‘Overwhelming Issuance’
“The sheer amount of issuance due from European governments is likely to overwhelm potential demand,” UBS strategists Meyrick Chapman and Andrew Rowan wrote in a report to clients Dec. 18. Investors will see “the bulk of the returns” in the first half and “barely break even” in the second, the London- based analysts said.
Two-year German note yields will rise to 2.05 percent by the end of next year, according to the median of 10 economists’ forecasts compiled by Bloomberg, from 1.694 percent today.
The global credit seizure prompted the world’s biggest central banks to cut rates and offer record amounts of cash to prevent financial institutions from collapse following the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc.
“A quicker-than-expected return to risk appetite is a risk for bonds and could lead to a sell-off, even though the European economy isn’t likely to recover in the next half or one year from now,” said Michiel de Bruin, who manages about $18 billion as head of European government bonds at F&C Asset Management’s Dutch unit in Amsterdam.
No Choice on Rates
Trichet may have no choice but to lower borrowing costs again, according to David Scammell, a money manager in London at Schroder, a unit of the U.K.’s largest publicly traded fund company. The economy of the 15 nations sharing the euro will shrink 1 percent in 2009 after expanding 1 percent this year, based on the median of 15 forecasts compiled by Bloomberg. The U.S. is likely to contract 1 percent, a separate poll shows.
“Poor economic numbers will bring them to their knees,” said Scammell, whose parent firm oversees $19 billion of assets. “The ECB will have to cut interest rates more aggressively. We are bullish on European bonds, as next year is not going to be any better than this year in terms of the economy.”
Growing pessimism over the economy and expectations of rate reductions drove the yield on two-year bonds to 148 basis points below 10-year bunds in November, the widest spread since 2004.
As the ECB brings rates closer to zero, the gap may narrow because investors will seek higher yields offered by longer-dated securities, Scammell said.
“The curve will flatten because there’s nowhere for the short end to go anymore, and not because of expectations of an economic recovery,” he said. “The U.S. led this cycle and it’s moving into a curve-flattening mode. Europe is likely to follow.”
Rohm & Haas Drops After Dow Deprived of Kuwaiti Funds
Rohm & Haas Co., the target of a $15.4 billion takeover offer, dropped the most in 20 years in New York trading after suitor Dow Chemical Co. lost access to $9 billion of cash planned to fund the acquisition.
Kuwait yesterday scrapped a deal to buy a 50 percent stake in Dow Chemical’s plastics unit, eliminating proceeds earmarked for the takeover. Rohm & Haas, a maker of paint and circuit-board coatings, fell $14.36, or 23 percent, to $49.20 at 9:39 a.m. in New York Stock Exchange trading, the most since October 1987. Midland, Michigan-based Dow Chemical declined $3.75, or 19 percent, to $15.59.
While the collapse of the joint venture damages Dow Chemical Chief Executive Officer Andrew Liveris’s plan to cut the company’s reliance on commodity products, it may also leave shareholders of Rohm & Haas in the lurch. The Philadelphia-based business rose 64 percent after Dow Chemical’s $78-a-share offer on July 10 and has already lost 10 percent this month in New York trading.
“This throws into question whether the Rohm & Haas acquisition will go through,” said London-based Christopher Middleton, CEO of Atlantic Equities LLP, in a phone interview. “It’s less likely, because they still need to find the money.”
Liveris planned to fund the purchase with a $13 billion bridge loan, a $3 billion equity investment by Warren Buffett’s Berkshire Hathaway Inc. and a $1 billion investment by the Kuwait Investment Authority. Dow needed only about $5 billion of the bridge loan assuming the Kuwait proceeds, Chief Financial Officer Geoffery Merszei said Oct. 23 on a conference call.
Rohm & Haas issued a statement today saying the aborted deal “is not a closing condition for the proposed merger” and that it “continues to work diligently towards completing the proposed transaction with Dow in early 2009.”
Overpriced
The Kuwaiti government has been under pressure from opposition lawmakers to scrap the deal, which they said was overpriced. Some members of parliament threatened public questioning of Prime Minister Sheikh Nasser al-Mohammed al-Sabah, a nephew of Emir Sheikh Sabah al-Ahmed al-Sabah, Kuwait’s ruler. They said the investment was too large at a time of falling oil prices.
Crude-oil futures in New York have dropped more than 70 percent from the record $147.27 a barrel in July on signs that a deepening global recession is cutting demand for fuel and energy. Oil reached a four-year low of $32.40 on Dec. 19.
“There is a reassessment on the part of all of the sovereign wealth funds about where they want to be strategically,” said Middleton. “Commodity prices have come off an awful lot, and these funds have become more circumspect.”
Breakup Payment
Kuwait’s state-owned Petrochemical Industries Co. has the advantage of seeing how faltering demand impaired the $11.6 billion acquisition of General Electric Co.’s plastic division by Saudi Arabia’s chemical company. Saudi Basic Industries Corp., also known as Sabic, plans to cut 1,000 jobs, or 9.5 percent of its plastics unit workforce, after taking over the business last year. The Riyadh-based chemicals supplier is reducing thermoplastic production by about 20 percent.
“Dow is extremely disappointed with the decision by the Kuwait government and is in the process of evaluating its options pursuant to the joint-venture formation agreement,” Dow Chemical said yesterday in the statement.
Either side can claim as much as $2.5 billion if the other cancels the transaction, Dow Chemical said in a Dec. 1 regulatory filing.
“It is doubtful that Dow will be able to easily raise the funds” to complete the Rohm & Haas deal, Sean Egan, managing director of Egan-Jones Ratings Co. of Haverford, Pennsylvania, said in an e-mailed report. Dow has been “skewered,” he said.
Holiday Sales Drop to Force Bankruptcies, Closings
U.S. retailers face a wave of store closings, bankruptcies and takeovers starting next month as holiday sales are shaping up to be the worst in 40 years.
Retailers will close 12,000 stores in 2009, according to Howard Davidowitz, chairman of retail consulting and investment- banking firm Davidowitz & Associates Inc. in New York. AnnTaylor Stores Corp., Talbots Inc. and Sears Holdings Corp. are among chains shuttering underperforming locations.
More than a dozen retailers, including Circuit City Stores Inc., Linens ‘n Things Inc., Sharper Image Corp. and Steve & Barry’s LLC, have sought bankruptcy protection this year as the credit squeeze and recession drained sales. Investors will start seeing a wide variety of chains seeking bankruptcy protection in February when they file financial reports, said Burt Flickinger.
“You’ll see department stores, specialty stores, discount stores, grocery stores, drugstores, major chains either multi- regionally or nationally go out,” Flickinger, managing director of Strategic Resource Group, a retail-industry consulting firm in New York, said today in a Bloomberg Radio interview. “There are a number that are real causes for concern.”
Sales at stores open at least a year probably dropped as much as 2 percent in November and December, the International Council of Shopping Centers said last week, more than the previously projected 1 percent decline. That would be the largest drop since at least 1969, when the New York-based trade group started tracking data. Gap Inc. and Macy’s Inc. are among retailers will report December results on Jan. 8.
Women’s Clothing, Electronics
Consumers spent at least 20 percent less on women’s clothing, electronics and jewelry during November and December, according to data from SpendingPulse.
Retail Metrics Inc.’s December comparable-store sales index will drop an estimated 1.2 percent, or 5 percent excluding Wal- Mart Stores Inc. Retailers’ fourth-quarter earnings may fall 19 percent on average, the seventh consecutive quarterly decline, according to Ken Perkins, president of Retail Metrics, a Swampscott, Massachusetts-based consulting firm.
Probably 50,000 stores could close without any effect on consumer choice, Gregory Segall, a managing partner at buyout firm Versa Capital Management Inc., said this month during a panel discussion held at Bloomberg LP’s New York offices. Only retailers with healthy balance sheets will survive the recession, according to Matthew Katz, a managing director at consulting firm AlixPartners LLP.
Store Closings
About 200,000 stores may close in 2009, compared with a record 160,000 in 2008, Flickinger said.
The U.S. economy shrank in the third quarter at a 0.5 percent annual pace, the worst since 2001, according to the Commerce Department. Economists surveyed by Bloomberg in the first week of December forecast the world’s largest economy will contract through the first half of 2009.
The Standard & Poor’s 500 Retailing Index shed 34 percent this year before today, with only two of its 27 companies rising.
The index doesn’t include Wal-Mart, the world’s largest retailer, which fell 21 cents to $55.14 at 9:58 a.m. in New York Stock Exchange composite trading. Wal-Mart shares gained 16 percent this year through Dec. 26.
“If you’re going to be in retail right now, the discount space is where you want to be,” Patrick McKeever, a senior equity analyst at MKM Partners LLC, said today in a Bloomberg Television interview.
Discount Advantage
Discounts of 70 percent off or more by Macy’s, AnnTaylor Stores Inc. and other retailers failed to prevent a spending drop of as much as 4 percent during the final two months of the year, according to data from SpendingPulse. Consumers are trained for sales, according to Patti Freeman Evans, an analyst at Jupiter Research in New York.
“The situation is not going to right itself in January; it’s going to be a long while that discounting’s going to be around,” said Evans. “Consumers are going to get used to it and it’s going to very difficult for retailers to move forward in a full-price mode.”
Retail bankruptcies may help the industry in the long run, according to Flickinger.
“We’ll be going from a Dickens-esque worst of times this December to the best of times in future Decembers because we’ll rationalize out all the redundant retailers and retail space in shopping centers,” Flickinger said.
Recession Opens U.S.-China Rift Paulson Talks Bridged
The global recession is re-exposing fissures in U.S.-China relations that Treasury Secretary Henry Paulson spent more than two years smoothing over.
Heightened tensions between China and the U.S. may worsen a contraction in world trade that already threatens to deepen and prolong the economic downturn. The friction comes as President- elect Barack Obama readies a two-year stimulus package worth as much as $850 billion that will require the U.S. to borrow more than ever from China, the largest buyer of Treasury securities.
“The American economic slump is running into the Chinese economic slump,” says Derek Scissors, a research fellow at the Washington-based Heritage Foundation. “It's creating the conditions for a face-off between Beijing and the U.S. Congress, possibly leading to destabilization of the world's most important bilateral economic relationship.”
Paulson, 62, who visited China 70 times during his career on Wall Street, made improving ties a priority when he arrived at the Treasury in 2006. He advocated diplomacy instead of confrontation, establishing a twice-yearly “strategic economic dialogue” with officials in Beijing, aimed at cooling tensions and deterring Congress from taking up trade sanctions.
The approach produced some results, including a pledge to share data on food safety and agreement to allow foreign mutual funds to invest in China's stock market. The value of China's currency, the yuan, rose 21 percent versus the dollar from 2005 levels to redress what U.S. officials saw as an unfair price advantage for Chinese products.
Shelved Sanctions
Paulson refrained from labeling China a currency manipulator and hailed an end to tax rebates on Chinese exports as a sign of improving trade relations. Congressional leaders, though dissatisfied with the pace of progress, shelved sanctions legislation.
Paulson “achieved some success, but it was much more difficult to get the Chinese to restructure their economy,” says Myron Brilliant, vice president for Asia at the U.S. Chamber of Commerce in Washington. Now, Brilliant says, the economic crisis has prompted China to turn back to “export-oriented policies that could lead to an increase in the trade imbalance” and new tensions with the U.S.
China's exports declined in November for the first time in seven years, and economic growth may slow by more than half to as little as 5 percent in 2009, according to Royal Bank of Scotland Plc. That has prompted China's leaders to increase tax rebates on thousands of exported products; meanwhile, the yuan's steady rise against the dollar stalled in July, and the currency has barely budged since. It was trading at 6.8462 a dollar at 1:33 p.m. in Shanghai today, from 6.8414 on Dec. 26.
A Harder Line
In the U.S., business and labor groups, along with lawmakers, are pushing the new Obama administration to take a harder line with China than President George W. Bush did.
Senate Finance Committee Chairman Max Baucus, a Democrat from Montana, plans legislation that would raise tariffs on dumped imports from China and other nations. And newly elected Democratic congressmen such as Larry Kissell of North Carolina and Dan Maffei of New York have pledged actions to stop jobs from being shipped to China.
Lawyers representing companies such as Nucor Corp., the second-largest U.S. steelmaker, NewPage Corp., a maker of coated paper, and smaller textile and steel pipe makers say they are considering new trade complaints against China. During the presidential campaign, Obama promised groups including the National Council of Textile Organizations and the Alliance for American Manufacturing that he would take a tougher stance on China's currency policies.
Pushing Back
Officials in Beijing will push back, says James McGregor, chairman of Beijing-based research firm JL McGregor & Co. and author of the book “One Billion Customers,” about doing business in China. Chinese leaders “will do whatever they need to protect their interests and to say to the U.S., 'Do not mess with us on this one,'” he says.
Paulson, before leaving for talks in Beijing this month, told business representatives his biggest concern was that China was changing course and reversing moves it had made during the past year to cut aid to exporters and stimulate domestic consumption.
China's five-year plan through 2010 seeks to rebalance growth away from exports -- so far, without significant result. Household consumption slumped to slightly more than 35 percent of China's gross domestic product last year from 45 percent in 1993. By contrast, consumer spending represents more than two-thirds of the U.S. economy.
Low Consumption
“What separates China from the rest of the world is its incredibly low level of consumption relative to GDP,” says Brad Setser, a fellow at the Council on Foreign Relations in Washington. “What can China do that would most directly help the world economy during a period of very severe weakness? Get its consumption back up to 40 percent of GDP.”
Policies in both countries are shaped by the need to cope with steep declines in employment. More than 10 million migrant workers lost their jobs in China during the first 11 months of this year, Caijing Magazine reported Dec. 17, citing a Labor Ministry official.
The total will likely grow in 2009. The World Bank forecasts that global trade, which grew 6.2 percent in 2008, will shrink by 2.1 percent next year, the first such contraction since 1982.
The collapse in overseas demand is exposing China's years of overinvestment in industries such as automobiles and telecommunications.
Sitting on a Stockpile
China's steel industry, the world's largest, is sitting on a stockpile of 63 million metric tons, equivalent to about 13 percent of annual production, and Baosteel Group General Manager He Wenbo said in November that his company was facing the “most difficult” period since it was founded 30 years ago.
The government is considering measures including buying unsold inventory and raising export rebates to help steelmakers weather the slowdown, Minister of Industry and Information Li Yizhong said Dec. 12.
In the U.S., factory payrolls have shrunk by 4 million during the eight years of the Bush administration, and total job losses this year may top 2 million.
“China-bashing will only intensify in a softer economic climate,” says Stephen Roach, chairman of Morgan Stanley's Asia division in Hong Kong. “Bipartisan congressional support for anti-China trade legislation has been gathering in intensity.”
Obama's Pledges
Obama made specific pledges on the campaign trail to take a tougher approach to China than the Bush administration did. He has said the failure by Bush and Paulson to label China a currency manipulator was “unacceptable,” and he endorsed legislation to let U.S. companies seek import duties to compensate for the advantage an undervalued currency gives their Chinese competitors.
Obama also pledged to reverse course from Bush and consider petitions seeking higher tariffs on specific Chinese products.
American businesses, labor unions and lawmakers are already gearing up to force Obama's hand. Steelmakers, paper producers and textile companies are preparing trade complaints that could lead to increased tariffs. Unions and lawmakers plan to push measures to force China to raise the value of its currency.
McGregor says Obama's China policy will require a balancing act “fundamentally different” from what his predecessors faced: Obama's Treasury will need to fund a budget deficit heading for $1 trillion this year and “you don't scream at your banker.” China's holdings of U.S. Treasury securities, at $653 billion, are the world's largest.
That means an increase in trade tension “is very easy for China to handle,” says Guan Anping, a managing partner of Beijing-based law firm Anjin & Partners and a legal adviser to former Vice Premier Wu Yi until 1993. “China can react by reducing its purchases of U.S. government bonds.”
Even so, the Obama administration may not need much prodding to take a harder line on the currency issue, says William Reinsch, president of the National Foreign Trade Council and a former Clinton administration trade official.
“There will be consequences,” he says. “But they will do it anyway, if only to distinguish themselves from Bush.”
Thursday, December 25, 2008
Russia’s Central Bank Devalues Ruble for Third Time in Week
Russia devalued the ruble for the third time in a week, sending the currency to its lowest level against the dollar since January 2006, as oil’s drop below $37 a barrel dimmed the outlook for growth.
The ruble, down 18 percent against the dollar since the beginning of August, weakened 0.9 percent against the U.S. currency to 28.6905 and 1.4 percent versus the euro to 40.1773, near an all-time low.
The central bank allowed the ruble to fall about 1 percent against a basket of dollars and euros, accelerating the slide after spending 27 percent of reserves, or $162.7 billion, trying to defend the currency over four months. Oil, Russia’s biggest export earner, lost 4 percent to $37.43 on the New York Mercantile Exchange and is down nearly 75 percent since the July high. The government requires oil to average $70 to balance its 2009 budget.
“As long as oil remains depressed and at many year lows the central bank has no other choice but to carry on with its devaluation,” said Mikhail Galkin, head of fixed income research at MDM Bank in Moscow.
The currency has fallen 14 percent against the dollar and 11 percent versus the euro this year amid the plunge in oil, international condemnation of the country’s war with Georgia and the spreading global credit crisis. BNP Paribas SA estimates investors withdrew $211 billion from Russia since August. The nation’s oligarchs, who and took over assets of the biggest companies after the collapse of the Soviet Union in 1991, are vying for $78 billion of Kremlin loans to meet debt payments.
Recession
The economy, which recovered from the government’s 1998 debt default to expand an average 7 percent in the eight years to 2007, may slip into a recession in the first half of 2009, Kremlin economic adviser Arkady Dvorkovich told Bloomberg Television on Dec. 19.
The government will post a budget deficit next year for the first time in a decade and will use its $132.6 billion reserve fund, or extra oil revenue the government has set aside, to cover the financing gap, Dvorkovich told reporters in Moscow today.
An “accelerating” ruble devaluation is “detrimental” to economic growth because it stimulates currency speculation and limits new lending, Evgeny Gavrilenkov, chief economist at Troika Dialog in Moscow, wrote in a research note today. Troika Dialog earlier called for a one-time depreciation of as much as 20 percent.
“If in 2009 the oil price is between $30 and $40 and the state carries on with its strange policies on the money market, the possibility of an economic downturn will rise,” Gavrilenkov said.
Currency Basket
The ruble fell 1.2 percent against the basket of dollars and euros that the central bank uses to manage its fluctuations, and traded at 33.86 at 5:02 p.m. in Moscow.
Bank Rossii allowed the ruble to decline against its currency basket for the third time in four working days and the 10th time since Nov. 11, according to a central bank official who declined to be identified.
The Micex stock index fell for the first time in four days to 654.29, a drop of 1.1 percent.
Vietnam's Trade Deficit Widens to Record $17 Billion
Vietnam's trade deficit widened to a record $17 billion in 2008, boosted by higher imports of equipment for projects such as the country's first oil refinery.
The gap expanded 21 percent from $14.1 billion a year earlier, according to preliminary figures from the General Statistics Office in Hanoi. Exports rose 29.5 percent to $62.91 billion and imports climbed 27.5 percent to $79.92 billion.
Vietnam's growing trade deficit created concern in the first half of a currency crisis. While the gap's slower growth since then has eased fears, analysts from companies including Credit Suisse Group AG and CLSA Asia-Pacific Markets forecast further trade deficits in years to come.
The government is pursuing ``an investment drive which continues to suck in imports,'' Anthony Nafte, a Hong Kong-based senior economist at CLSA Asia-Pacific Markets, wrote in a note sent last week. ``The current-account deficit will increase in 2009 as export revenues plummet and the investment drive prevents a steeper fall in imports.''
Morgan Stanley said on May 28 that Vietnam was heading for a ``currency crisis'' similar to that of Thailand's baht in 1997 because the current-account deficit was projected to widen to an ``unsustainably large'' level. The banking system and inflation rate are ``additional complicating factors,'' it had said.
Bank Lending
Vietnam's government tightened bank lending this year as part of an attempt to restrict imports and narrow the pace at which the trade shortfall was widening.
``The authorities have controlled the situation well,'' DWS Vietnam Fund Ltd. said in a note this month, referring to concern about the Vietnamese economy earlier in the year. There has been ``continued improvement in the balance of payments,'' DWS Vietnam said.
Imports in 2008 were led by foreign machinery and equipment purchases, which rose 22 percent to $13.61 billion. Vietnam's first oil refinery has been under construction all year at Dung Quat Bay in the central province of Quang Ngai, and is due to open in February 2009.
The refinery may reduce petroleum product imports, which rose 40 percent by value this year to $10.81 billion, while slipping 2 percent by volume. The average global price of crude oil has been 40 percent higher so far this year than in 2007.
Steel imports rose 24 percent by value to $6.34 billion while decreasing 5 percent by volume, based on the General Statistics Office figures.
Roads, Power Plants
``Even though economic growth is slowing, Vietnam still needs to develop infrastructure like its roads and power plants,'' said Alan Young, chief operating officer of Vietnam Industrial Investments Ltd., which operates steel plants in Vietnam. ``People will still need steel.''
Exports were paced in 2008 by crude oil, which climbed 23 percent by value to $10.45 billion while slipping 8 percent by volume. Garment shipments advanced 18 percent to $9.1 billion, the same pace of growth posted by Vietnamese footwear exports, which totaled $4.7 billion.
The impact of a tougher global economic environment may take as many as six months to show up in export figures, according to Shirley Justice, the Ho Chi Minh City-based chief Vietnam representative for Nike Inc., the world's largest athletic-shoe maker.
`We are already beginning to see the signs, through increased order cancellations,'' Justice said, in e-mailed comments.
BOJ May Consider ‘Extraordinary Steps,’ Kamezaki Says
The Bank of Japan may consider “extraordinary steps” to counter financial-market turmoil and a deepening recession, policy board member Hidetoshi Kamezaki said.
“The Bank of Japan is committed to doing its utmost to contribute to stabilizing financial markets,” Kamezaki, 65, said today at a business meeting in Takamatsu, western Japan. “Extraordinary times demand extraordinary steps.”
The central bank lowered the overnight lending rate on Dec. 19 to 0.1 percent from 0.3 percent, the second cut in two months, and decided to buy corporate debt for the first time to pump money into the ailing economy. Kamezaki later told reporters that room for cutting the rate further is “limited” and the bank’s next policy steps should focus on improving funding for companies and influencing longer-term borrowing costs.
“The sense of crisis about the economy and financial markets mounted drastically within the central bank over the past month,” said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. “We expect the bank to start buying corporate bonds, and it may resume purchasing stocks and even go further if credit markets face a crisis.”
Japanese companies have struggled to find investors who are willing to buy their debt since the global financial crisis intensified in September. Kamezaki said taking on businesses’ credit risk is a “very extraordinary step for a central bank.”
Credit Risk
Purchasing commercial paper, or short-term corporate securities, means the central bank assumes the risk that companies will default on the debt, a concern highlighted by board members at their November meeting, minutes showed today. Japan needs to discuss how far the bank should go to support funding for companies, Governor Masaaki Shirakawa said Dec. 22.
Central bank officials are examining the feasibility of buying a wider range of securities, including corporate bonds and stocks, and the policy board will make a decision based on their findings, Kamezaki said at today’s press conference.
Kamezaki echoed remarks by Shirakawa that a key rate at 0.1 percent barely keeps the money market working and the bank should avoid a policy that impedes its function. The former executive at trading company Mitsubishi Corp. said he has no preconceptions about future interest-rate policy.
The bank “has virtually exhausted what it can do with rates to support the economy,” said Mamoru Yamazaki, an international strategist at RBS Securities Japan Ltd. in Tokyo. “The question now is how far the BOJ can expand the range of assets it buys to provide money, particularly to companies.”
‘Aggressive Measures’
Japanese banks’ borrowing costs eased for a sixth day. The Tokyo three-month interbank offered rate, or Tibor, fell to 0.76 percent after reaching a decade-high 0.922 percent on Dec. 16.
“The Bank of Japan has implemented aggressive measures and we expect they will help to lower money market rates,” said Nobuto Yamazaki, an executive fund manager at Diam Asset Management in Tokyo.
The global economy will decline more sharply in the near future because markets will remain unstable, Kamezaki said.
He said he’s “very concerned” about the outlook for exports, referring to November trade numbers that showed overseas shipments tumbled a record 26.7 percent from a year earlier. Spending by consumers at home will keep weakening because job prospects and wages are deteriorating, he said.
Reports tomorrow are likely to show industrial production fell in November, unemployment climbed and inflation eased.
Factory output tumbled 6.8 percent from a month earlier, according to economists surveyed by Bloomberg News. Consumer prices excluding fresh food rose 1.1 percent from a year earlier, slower than the 1.9 percent in October, analysts predict.
Consumer-price inflation will keep slowing, even as a growing number of companies manage to pass costs on to households, Kamezaki said.
NYU Claims $24 Million Loss as Madoff-Related Lawsuits Mount
New York University, the largest private university in the U.S. by number of students, became the latest known victim of Bernard Madoff’s alleged $50 billion Ponzi scheme when it sued a fund manager over $24 million in losses.
J. Ezra Merkin, his Gabriel Capital LP fund and Ariel Fund Ltd. invested NYU’s money with Madoff without telling investors or proper due diligence, according to a complaint filed yesterday in New York state court in Manhattan. NYU, which said it had $94 million invested in Ariel, alleged Merkin made all the investment and executive decisions for the fund.
When Merkin “proposed investing the university’s money with Mr. Madoff without telling us he had already done so, he was explicitly told this was not a proper investment vehicle,” NYU spokesman John Beckman said in a statement. Merkin didn’t “exercise reasonable judgment in investing NYU’s money.”
The claim adds NYU to a growing list of alleged victims of Madoff, including Liliane Bettencourt, the world’s wealthiest woman and the daughter of L’Oreal SA founder Eugene Schueller; Spanish billionaire Alicia Koplowitz; U.S. filmmaker Steven Spielberg; Nobel laureate Elie Wiesel; and Yeshiva University.
Madoff, 70, was arrested Dec. 11 at his Manhattan home after allegedly confessing to his sons that his business was a “giant Ponzi scheme” that may have cost investors $50 billion, according to an FBI complaint. Madoff has been charged by federal prosecutors with one count of securities fraud and faces as much as 10 years in prison if convicted. Clients of Madoff had about $36 billion with his firm, according to a Bloomberg tally that may include some double counting.
The Fallout
Since Madoff’s arrest, the fallout from the alleged fraud continues to spread. New York-based money manager Thierry Magon de La Villehuchet, who may have lost $1.4 billion of client funds invested with Madoff, was found dead in his Manhattan office on Dec. 23 in what police said was an apparent suicide.
The New York City Medical Examiner said yesterday it had completed an autopsy of De La Villehuchet, a co-founder and chief executive officer of Access International Advisors, and results will be returned next week.
Bettencourt, the L’Oreal heiress, invested part of her $22.9 billion fortune with Madoff through De La Villehuchet, according to two people familiar with the matter.
And Fairfield Greenwich Group, a hedge-fund firm that had $7.5 billion invested with Madoff, has been sued for allegedly failing to protect its clients’ assets.
$1.5 Billion Fund
Gabriel Capital, a $1.5 billion fund, plans to liquidate due to Madoff losses, Merkin said in a Dec. 18 investor letter. The fund lost 39 percent this year through Nov. 30, mirroring the drop in the S&P 500 Index. Merkin told Ariel investors it also plans to wind down in light of the losses from the Madoff fraud, according to the NYU lawsuit.
New York State Supreme Court Justice Herman Cahn in Manhattan yesterday issued a temporary restraining order barring Merkin “from taking any action to liquidate Ariel” prior to a Jan. 6 hearing before Justice Richard Lowe. Cahn is also prohibiting Merkin from taking any action to move assets of Ariel or Gabriel or to destroy any Madoff-related documents, according to the order.
Cahn’s order “will have no impact on the previously announced plans for Ariel Fund” to wind down, Merkin’s lawyer, Andrew Levander, said in a statement. “It is significant that the court rejected NYU’s request to prevent Ariel Fund from selling assets as part of its wind-down process, and we expect that process to continue.”
Yeshiva University
Merkin, the chairman of GMAC LLC, the finance arm of General Motors Corp. that is 51 percent owned by Cerberus Capital Management LLC, was also blamed by Yeshiva University for losses. The school alleged it lost about $110 million in investments tied to Madoff, most through Merkin’s Ascot Partners LP fund.
Merkin resigned as a school trustee and as its investment chairman on Dec. 12. Madoff was also a trustee. Additionally, Tufts University said last week that it lost $20 million, or less than 2 percent of its endowment, from investments through Ascot.
New York Law School sued Merkin and Ascot last week for investing in funds run by Madoff. That suit, filed in Manhattan federal court, seeks class action, or group, status on behalf of other Ascot investors. The law school allegedly had $3 million invested in Ascot.
In another lawsuit filed yesterday in Manhattan federal court, Family Management Corp. and Chief Executive Officer Seymour Zises were accused of fraud for allegedly investing most of the fund’s assets with Madoff, after claiming that no more than 35 percent of assets “would be allocated to any one investment vehicle,” according to the complaint. As of May 31, Family Management had about $1.3 billion under management, according to the complaint.
$610,000 Invested
The investor who sued, David Newman, alleged he had $610,000 invested in Zises’s New York-based fund. The suit also seeks class action status and unspecified damages. Zises declined to comment.
District Attorney Thomas Zugibe of Rockland County, New York, who had been probing Madoff’s auditors, said yesterday he had suspended his investigation of accountant David Friehling, leaving the matter to the U.S. attorney in Manhattan. Friehling & Horowitz operated out of a 550-square-foot space in New City, a northern suburb of New York City in Rockland County.
Madoff, who hasn’t formally responded to a securities fraud charge against him, is due to return to court Jan. 12, unless prosecutors indict him before then. Prosecutors and defense lawyers may also agree to postpone the court date.
In a Dec. 18 interview, Sorkin said Madoff’s company is �cooperating fully with the government. Madoff met with prosecutors earlier this month, according to people familiar with the case.
The cases are New York University v. Ariel Fund Ltd., 08- 8603803, New York State Supreme Court (Manhattan), and Newman v. Family Management, 08-cv-11215, U.S. District Court for the Southern District of New York (Manhattan).
Dai-Ichi Life Is Said to Hire Nomura, Merrill for IPO
Dai-ichi Mutual Life Insurance Co. hired Nomura Holdings Inc., Merrill Lynch & Co. and Mizuho Financial Group Inc. to sell its shares in Japan’s biggest initial public offering in a decade, two people familiar with the sale said.
Nomura, Merrill and Mizuho’s securities unit are preparing to sell more than 1 trillion yen ($11 billion) of the insurer’s shares in Japan and overseas, said the people, who declined to be identified before a public announcement. Dai-ichi Life will list on the Tokyo Stock Exchange on April 1, 2010, the company said in a statement on its Web site today.
Japan’s second-biggest life insurer plans to convert to a joint-stock company with a market value of as much as 3 trillion yen, according to a document prepared by the company and obtained by Bloomberg News in December 2007. The deal would boost the sagging market for initial public offerings in Japan, which slumped 80 percent from a year earlier to 123.2 billion yen in 2008, according to T&C Financial Research Inc.
“Investors around the world will show interest in the life insurer’s public offering because it’s global and the stock will be big enough to be included in benchmark indexes,” said Kazumi Tanaka, a Tokyo-based analyst for initial public offerings at T&C Financial. “Still, it may face some difficulty if severe market conditions continue.”
Nomura spokesman Shuji Sato, Merrill Lynch’s Tokyo-based spokesman Tsukasa Noda and Mizuho spokeswoman Masako Shiono all declined to comment, as did Dai-ichi Life spokesman Makoto Atarashi. The company is owned by its 8.4 million policyholders.
Investment Strategy
“Competition in the life insurance market will increase further with the aging population and declining birth rate,” Dai-ichi Life President Katsutoshi Saito said in a document sent to policyholders in July. “We need the listing to make management strategy more flexible and to increase transparency.”
Japanese life insurers, mostly mutual societies owned by policyholders, need to boost returns because they sold policies in the 1980s with projected yields of as much as 6 percent. Dai- ichi in October was projecting returns of 3.1 percent this year.
Kazunori Sato, co-deputy head of the company’s investment planning division, said in October that Dai-ichi Life would hold fast to its present course after increasing investments in overseas bonds with currency hedges in the six months ended Sept. 30. Sato said Dai-ichi Life simultaneously cut holdings of domestic bonds during the first half.
Companies in the Asia-Pacific region made $87.8 billion worth of equity and equity-linked transactions this year, down from $217.7 billion a year earlier and $208.7 billion in 2006, according to data compiled by Bloomberg.
Nomura, Japan’s biggest brokerage, was the top-ranked underwriter for Japanese equity transactions this year while Mizuho ranked 10th, according to Bloomberg data. Merrill ranked fifth in the Asia-Pacific region.
Dai-ichi Life boosted ordinary revenue to 2.22 trillion yen for the six months ended Sept. 30, from 2.17 trillion yen a year earlier.
Monday, December 22, 2008
Japan Exports Plunge Record 27% as Recession Deepens
Japan’s exports plunged the most on record in November as global demand for cars and electronics collapsed, signaling more factory shutdowns and job cuts are likely as the recession deepens.
Exports fell 26.7 percent from a year earlier, the Finance Ministry said today in Tokyo. That was more than the 22.3 percent decline estimated by economists and the sharpest since comparable data were made available in 1980.
Shipments to the U.S. slid an unprecedented 34 percent and sales to China slumped the most in 13 years, underscoring why the Bank of Japan lowered its key interest rate to 0.1 percent last week. The yen’s surge to a 13-year high is amplifying the woes of exporters including Toyota Motor Corp., which may announce a lower earnings forecast at a press briefing today.
“Japan’s export crash is finally upon us, and this is the worst thing that could happen,” said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. “The recession will be very severe as companies adjust investment, production and labor.”
The yen weakened and stocks rose on speculation emergency loans to General Motors Corp. and Chrysler LLC will stem a deeper U.S. downturn.
Japan’s currency fell to 90.02 per dollar as of 1:16 p.m. in Tokyo from 89.50 before the trade report was published and 87.14 on Dec. 17, the strongest since 1995. The Nikkei 225 Stock Average climbed 1 percent.
Getting Worse
The government today lowered its assessment of the world’s second-largest economy, saying it’s “worsening” for the first time since 2002. Gross domestic product shrank in the past two quarters, sending Japan into its first recession since 2001.
Toyota, Honda Motor Co. and Sony Corp. are among the companies that are shedding thousands of workers and closing production lines as profits dwindle. Car exports slid 32 percent last month, the most ever, and semiconductors slumped 29 percent, the ministry said.
Today’s report showed the global recession is spreading to the emerging markets that propped up exports as demand from the U.S. and Europe evaporated. Exports to Asia fell 27 percent, the most in 22 years. Shipments to China, Japan’s largest trading partner, tumbled 25 percent, the steepest decline since 1995.
“There are no markets that can make up for the drop in demand for Japanese-made goods,” Dai-Ichi Life’s Shinke said.
Exports to Europe slid 31 percent, the second-most ever.
Another Deficit
Imports fell 14.4 percent, the first decline in 14 months, as oil costs eased and the yen gained. That wasn’t enough to prevent a trade deficit of 223.4 billion yen ($2.5 billion), the third shortfall in four months.
The yen strengthened 25 percent against the dollar this year as the global financial crisis prompted investors to sell riskier assets purchased with money borrowed in the currency.
Honda President Takeo Fukui said last week that the carmaker may shift more manufacturing overseas if the yen strengthens further and urged government action to halt its ascent. Every 1 yen gain against the dollar cuts Honda’s annual operating profit by 18 billion yen, according to the company.
Finance Minister Shoichi Nakagawa said last week that he has “the means” to sell yen to stem its appreciation. Japan hasn’t intervened in the foreign-exchange market since 2004.
Companies are also struggling to obtain funding as the market turmoil dissuades investors from buying corporate debt. To help businesses get financing, the Bank of Japan last week decided to buy commercial paper for the first time.
Gloomy Households
Sales at home are unlikely to make up for the collapse in demand from abroad. Households, whose confidence is at a record low, pared spending in each of the eight months to October as wage growth stagnated and job prospects worsened.
The Finance Ministry last week submitted an extra budget for the year ending March that includes 2 trillion yen in cash handouts for households as Prime Minister Taro Aso tries to spur spending. That may be too little, too late, economists say.
“Japan’s economy has never weaned itself off of the overbearing reliance on exports, and especially to the U.S.,” said Kirby Daley, senior strategist and head of capital introductions at Newedge Group. “Japan did nothing to prepare itself” for the collapse in demand from abroad.
China Cuts Key Rates for Fifth Time in Three Months
China cut interest rates for the fifth time in three months after trade growth collapsed because of recessions in the U.S., Europe and Japan.
The one-year lending rate will drop by 0.27 percentage point to 5.31 percent and the deposit rate by the same amount to 2.25 percent from tomorrow, the People’s Bank of China said on its Web site. The central bank also reduced the proportion of deposits lenders must set aside as reserves by 0.5 percentage point.
Today’s measures are likely to be supplemented by a second stimulus plan aimed at spurring consumer spending following a 4 trillion yuan ($584 billion) package in November that was focused on infrastructure. China’s exports fell for the first time in seven years last month, imports plunged and manufacturing shrank by a record, threatening to push the world’s fourth-largest economy into its deepest slowdown in two decades.
“Monetary policy is now playing a supportive role to the main show in town: fiscal stimulus,” said Stephen Green, head of China research at Standard Chartered Bank Plc in Shanghai
The reserve requirement will drop to 15.5 percent for big banks and to 13.5 percent for smaller ones effective Dec. 25. The reduction will release a further 300 billion yuan of possible lending, according to Green.
‘Less Aggressive’
“The surprise is how small the move is,” said Mark Williams, an economist with Capital Economics in London. “There’s been a sudden very rapid deterioration in all China’s economic data over the last 8 to 12 weeks.”
China’s economic growth may slow to 5 percent next year, less than half the 11.9 percent expansion in 2007, according to Royal Bank of Scotland Plc. The World Bank forecasts the economy will expand by 7.5 percent in 2009. The government is targeting an 8 percent expansion.
China cut interest rates by 1.08 percentage points last month, the biggest reduction in 11 years.
The Federal Reserve lowered the main U.S. interest rate to as low as zero for the first time on Dec. 16, as policy makers seek to revive credit and end the longest slump in a quarter- century. The Bank of Japan cut its benchmark rate to 0.1 percent from 0.3 percent three days later.
China’s CSI 300 Index fell for the first time in six days, closing 1.7 percent lower before the rate announcement. The yuan was little changed, closing 0.07 percent lower at 6.8510 per dollar in Shanghai.
Social Stability
China’s slowdown threatens to trigger unrest as factories close and unemployment climbs in the world’s most populous nation.
Uniden Corp., a Japanese maker of wireless communication gear including cordless phones, said Dec. 11 it will eliminate 6,200 jobs in China. Zhang Ping, China’s top economic planner, warned last month of the risk of “massive unemployment.”
China’s cabinet, the State Council, pledged yesterday to give more power to local governments to support their property markets and end a nationwide real-estate slump. The government said Dec. 13 it will boost money supply by 17 percent next year to encourage lending and buoy domestic consumption.
“The cuts are less aggressive than expected,” said Kevin Lai, an economist with the Daiwa Institute of Research in Hong Kong. “The central bank may want to save bullets until next quarter and wait to see how the policies announced so far work.”
Lai and economists at HSBC Holdings Plc and Capital Economics Ltd. had anticipated at least a 54-basis-point reduction.
‘Worst Case’
The government has switched from battling inflation in the first half of the year to guarding against the risk that falling prices will contribute to the economy spiraling down. Inflation was the slowest in 22 months in November.
Exports fell 2.2 percent last month after growing 19.2 percent in October. Imports plunged 17.9 percent.
China’s exporters are facing greater payment risks and rising shipment costs as some importers grow short of cash and trade finance costs surge, Vice Trade Minister Fu Ziying said over the weekend. Compensation payouts by China’s export credit insurance company almost tripled in the first 10 months of this year, Fu said.
China needs to prepare for a “worst case scenario” as the global economic slump deepens, central bank Governor Zhou Xiaochuan said Dec. 4.
The central bank may cut its benchmark rate by a further 27 basis points and reduce the bank reserve ratio by as much as 100 basis points in January to avert the risk of deflation and add liquidity before the Chinese New Year holiday, Daiwa’s Lai said.
The government aims for an 8 percent expansion to generate jobs and avoid social instability, China Banking Regulatory Commission Chairman Liu Mingkang said in Beijing on Dec. 13.
Oligarchs Seek $78 Billion as Credit Woes Help Putin
Russian oligarchs are lining up for $78 billion of Kremlin loans to survive the credit squeeze, handing Prime Minister Vladimir Putin the opportunity to increase government control of the nation’s biggest companies.
Just 12 years after they gained ownership of the former Soviet Union’s industries by bailing out the government, the tables have been turned. More than 100 business leaders are vying for loans from Putin and the administration of President Dmitry Medvedev because Russian companies have about $110 billion of foreign obligations due next year, according to the central bank, double the total owed in Brazil, India and China.
Business leaders who tripled international debt in the past three years are putting up part of their stock as collateral for government support because they’ve been hobbled by tumbling commodity prices and the biggest drop in the ruble since Russia’s default in 1998. Putin already is aiding billionaires Roman Abramovich and Oleg Deripaska and considering requests from Dmitry Pumpyansky of pipemaker OAO TMK, OAO Severstal’s Alexei Mordashov and AFK Sistema’s Vladimir Yevtushenkov.
“Some of them will definitely lose their property, either to the state or to investors,” billionaire Alexander Lebedev, 49, said in a Dec. 8 interview, 11 days before Deutsche Bank AG demanded early repayment of a loan guaranteed by 3 percent of Moscow-based ZAO National Reserve Corp.’s 29 percent stake in OAO Aeroflot, the national airline. “They’ve been over- borrowing and sales of their companies have been falling.”
Loans-for-Shares
The oligarchs, Russian business leaders who used their political influence to help gain assets after the collapse of communism, essentially dictated the policies that allowed them to gain control of the nation’s biggest companies in the 1990s by providing financing to the government that was never repaid.
Anatoly Chubais, who oversaw the government’s sale of assets through the so-called loan-for-shares program, said in an interview in 2000 that the plan was necessary to create “big private capital” and help then-President Boris Yeltsin win reelection in 1996 to prevent a return to communism. Chubais, 53, is now chief executive officer of Moscow-based Russian Nanotechnology Corp.
Vnesheconombank, the Russian state lender known as VEB, is responsible for handling the bailouts. In return for one-year loans, VEB is requiring a representative at the company and the right to veto any debt or major asset sale, according to the bank’s Web site. Putin, 56, is head of its supervisory board. Borrowers offer shares, assets or export revenue as collateral.
Fewer Oligarchs
“It’s extremely unlikely they’ll all be able to repay in a year,” said Zina Psiola, a money manager at Clariden Leu AG in Zurich with $220 million in Russian equities. “Some oligarchs will no longer be oligarchs.”
At least 10 of the 25 wealthiest owners have faced margin calls from lenders since August as Russia’s worst financial crisis since 1998 wiped $230 billion from the value of their equity, according to data compiled by Deutsche Bank and Bloomberg.
Profits for four of Russia’s largest steel producers as well as Moscow-based TMK, the biggest maker of pipes for the oil and gas industry, will fall by about 50 percent to $10.5 billion next year as prices of the metal plunge, according to Clemens Grafe, an economist at UBS AG in London. That may leave the companies unable to pay for anything beyond their $10.3 billion of debt in 2009.
“If they have to pay this then they have no money for capital expenditure, no nothing,” Grafe said.
Shrinking Reserves
Prospects for refinancing debt are dwindling. Russia’s war with Georgia, a 75 percent drop in oil and the worsening credit crisis led investors to pull $211 billion from the country’s stocks, bonds and currency since August, according to BNP Paribas SA. The withdrawals weakened the ruble by 17 percent against the dollar, forcing the government to drain $163 billion, or 27 percent, from foreign-currency reserves. The ruble fell to the lowest level in almost three years against the dollar today.
Russian companies have about twice as much foreign debt due in 2009 than the $56 billion total owed by companies and the governments of China, India, and Brazil combined, according to data compiled by Commerzbank AG and RBC Capital Markets.
The leaders of Russia, Kazakhstan and three other former Soviet states agreed last week to form a $10 billion fund to help their economies weather financial turmoil, Kazakh President Nursultan Nazarbayev’s press service said on its Web site today, without providing more details.
State Control
Greater state involvement may reassure investors, said Jerome Booth, head of research at Ashmore Group Plc in London, which manages $32 billion of emerging-market assets including Russian corporate debt.
“There’s less chance of mass defaults in Russia than in Western Europe,” Booth said. “There’s a degree of state control in the economy already, so this will be more of the same.”
The prime minister, saying he has no intention of nationalizing the economy, pledged on Dec. 4 to offer loans and buy stakes in companies that solicit help, releasing collateral and selling back the holdings later.
Putin, who served eight years as president before becoming prime minister, provided $12 billion of loans since October to companies such as those backed by Abramovich, 42, and Deripaska, 40, and pledged $38 billion more. That covers only half the amount sought. Among the applicants is Pumpyansky, 44, of TMK, which owes $1.7 billion in 2009, more than forecast earnings. Yields on TMK’s dollar bonds due September 2009 topped 80 percent last month. TMK plans to delay some investments and is seeking to refinance with longer-term debt, according to an e- mailed statement.
Deripaska Selling
Deripaska is selling Moscow-based Soyuz Bank and may part with control of insurer OAO Ingosstrakh in Moscow, Vedomosti reported last week. Named Russia’s richest man by Forbes in April, Deripaska ceded stakes in auto-parts maker Magna International Inc. in Canada and German builder Hochtief AG to banks in October after the stocks lost more than half of their market value.
VEB’s $4.5 billion loan allowed Deripaska’s United Co. Rusal to keep a 25 percent stake in OAO GMK Norilsk Nickel, Russia’s biggest metals producer. A further $1.8 billion went to Evraz, the steelmaker part-owned by Abramovich.
Deripaska said he’s seeking to sell stakes in “practically all” his companies including Rusal, the world’s biggest maker of aluminum, to pay off loans, according to comments in the Wall Street Journal confirmed by spokesman Sergei Babichenko today. Deripaska said he hopes to have new investors in the companies by end of March.
Sistema, Evraz
Yevtushenkov’s Sistema in Moscow may seek as much as $2 billion from Moscow-based VEB to pay debts next year.
Moscow-based Evraz and Cherepovets-based Severstal didn’t respond to requests for comments.
“Not all of them are going to be helped out,” said Kieran Curtis, who helps manage $787 million in emerging market debt at Aviva Investors Ltd. in London. “I’m not convinced we know who is going to get state funds and that will be a major factor in terms of rollovers and redemptions.”
Vladimir Potanin, the biggest owner of OAO GMK Norilsk Nickel shares, may lose them to the government within a year, Vedomosti reported today, citing an unidentified Kremlin official. The shares are pledged against a $3 billion loan from state-controlled lender OAO VTB Group. Potanin has received margin calls on the debt after the stock lost value this year, the Moscow-based newspaper said.
Without a revival in commodity prices or state help, some Russian companies risk failing, according to Pacific Investment Management Co., which runs the world’s largest bond fund.
“It really depends on whether they can weather the storm with metals prices,” said Tim Haaf, Pimco emerging-market fund manager in Munich, who helps oversee $50 billion of emerging- market debt including Russian bonds. “We’re very conservative on Russia.”
Just 12 years after they gained ownership of the former Soviet Union’s industries by bailing out the government, the tables have been turned. More than 100 business leaders are vying for loans from Putin and the administration of President Dmitry Medvedev because Russian companies have about $110 billion of foreign obligations due next year, according to the central bank, double the total owed in Brazil, India and China.
Business leaders who tripled international debt in the past three years are putting up part of their stock as collateral for government support because they’ve been hobbled by tumbling commodity prices and the biggest drop in the ruble since Russia’s default in 1998. Putin already is aiding billionaires Roman Abramovich and Oleg Deripaska and considering requests from Dmitry Pumpyansky of pipemaker OAO TMK, OAO Severstal’s Alexei Mordashov and AFK Sistema’s Vladimir Yevtushenkov.
“Some of them will definitely lose their property, either to the state or to investors,” billionaire Alexander Lebedev, 49, said in a Dec. 8 interview, 11 days before Deutsche Bank AG demanded early repayment of a loan guaranteed by 3 percent of Moscow-based ZAO National Reserve Corp.’s 29 percent stake in OAO Aeroflot, the national airline. “They’ve been over- borrowing and sales of their companies have been falling.”
Loans-for-Shares
The oligarchs, Russian business leaders who used their political influence to help gain assets after the collapse of communism, essentially dictated the policies that allowed them to gain control of the nation’s biggest companies in the 1990s by providing financing to the government that was never repaid.
Anatoly Chubais, who oversaw the government’s sale of assets through the so-called loan-for-shares program, said in an interview in 2000 that the plan was necessary to create “big private capital” and help then-President Boris Yeltsin win reelection in 1996 to prevent a return to communism. Chubais, 53, is now chief executive officer of Moscow-based Russian Nanotechnology Corp.
Vnesheconombank, the Russian state lender known as VEB, is responsible for handling the bailouts. In return for one-year loans, VEB is requiring a representative at the company and the right to veto any debt or major asset sale, according to the bank’s Web site. Putin, 56, is head of its supervisory board. Borrowers offer shares, assets or export revenue as collateral.
Fewer Oligarchs
“It’s extremely unlikely they’ll all be able to repay in a year,” said Zina Psiola, a money manager at Clariden Leu AG in Zurich with $220 million in Russian equities. “Some oligarchs will no longer be oligarchs.”
At least 10 of the 25 wealthiest owners have faced margin calls from lenders since August as Russia’s worst financial crisis since 1998 wiped $230 billion from the value of their equity, according to data compiled by Deutsche Bank and Bloomberg.
Profits for four of Russia’s largest steel producers as well as Moscow-based TMK, the biggest maker of pipes for the oil and gas industry, will fall by about 50 percent to $10.5 billion next year as prices of the metal plunge, according to Clemens Grafe, an economist at UBS AG in London. That may leave the companies unable to pay for anything beyond their $10.3 billion of debt in 2009.
“If they have to pay this then they have no money for capital expenditure, no nothing,” Grafe said.
Shrinking Reserves
Prospects for refinancing debt are dwindling. Russia’s war with Georgia, a 75 percent drop in oil and the worsening credit crisis led investors to pull $211 billion from the country’s stocks, bonds and currency since August, according to BNP Paribas SA. The withdrawals weakened the ruble by 17 percent against the dollar, forcing the government to drain $163 billion, or 27 percent, from foreign-currency reserves. The ruble fell to the lowest level in almost three years against the dollar today.
Russian companies have about twice as much foreign debt due in 2009 than the $56 billion total owed by companies and the governments of China, India, and Brazil combined, according to data compiled by Commerzbank AG and RBC Capital Markets.
The leaders of Russia, Kazakhstan and three other former Soviet states agreed last week to form a $10 billion fund to help their economies weather financial turmoil, Kazakh President Nursultan Nazarbayev’s press service said on its Web site today, without providing more details.
State Control
Greater state involvement may reassure investors, said Jerome Booth, head of research at Ashmore Group Plc in London, which manages $32 billion of emerging-market assets including Russian corporate debt.
“There’s less chance of mass defaults in Russia than in Western Europe,” Booth said. “There’s a degree of state control in the economy already, so this will be more of the same.”
The prime minister, saying he has no intention of nationalizing the economy, pledged on Dec. 4 to offer loans and buy stakes in companies that solicit help, releasing collateral and selling back the holdings later.
Putin, who served eight years as president before becoming prime minister, provided $12 billion of loans since October to companies such as those backed by Abramovich, 42, and Deripaska, 40, and pledged $38 billion more. That covers only half the amount sought. Among the applicants is Pumpyansky, 44, of TMK, which owes $1.7 billion in 2009, more than forecast earnings. Yields on TMK’s dollar bonds due September 2009 topped 80 percent last month. TMK plans to delay some investments and is seeking to refinance with longer-term debt, according to an e- mailed statement.
Deripaska Selling
Deripaska is selling Moscow-based Soyuz Bank and may part with control of insurer OAO Ingosstrakh in Moscow, Vedomosti reported last week. Named Russia’s richest man by Forbes in April, Deripaska ceded stakes in auto-parts maker Magna International Inc. in Canada and German builder Hochtief AG to banks in October after the stocks lost more than half of their market value.
VEB’s $4.5 billion loan allowed Deripaska’s United Co. Rusal to keep a 25 percent stake in OAO GMK Norilsk Nickel, Russia’s biggest metals producer. A further $1.8 billion went to Evraz, the steelmaker part-owned by Abramovich.
Deripaska said he’s seeking to sell stakes in “practically all” his companies including Rusal, the world’s biggest maker of aluminum, to pay off loans, according to comments in the Wall Street Journal confirmed by spokesman Sergei Babichenko today. Deripaska said he hopes to have new investors in the companies by end of March.
Sistema, Evraz
Yevtushenkov’s Sistema in Moscow may seek as much as $2 billion from Moscow-based VEB to pay debts next year.
Moscow-based Evraz and Cherepovets-based Severstal didn’t respond to requests for comments.
“Not all of them are going to be helped out,” said Kieran Curtis, who helps manage $787 million in emerging market debt at Aviva Investors Ltd. in London. “I’m not convinced we know who is going to get state funds and that will be a major factor in terms of rollovers and redemptions.”
Vladimir Potanin, the biggest owner of OAO GMK Norilsk Nickel shares, may lose them to the government within a year, Vedomosti reported today, citing an unidentified Kremlin official. The shares are pledged against a $3 billion loan from state-controlled lender OAO VTB Group. Potanin has received margin calls on the debt after the stock lost value this year, the Moscow-based newspaper said.
Without a revival in commodity prices or state help, some Russian companies risk failing, according to Pacific Investment Management Co., which runs the world’s largest bond fund.
“It really depends on whether they can weather the storm with metals prices,” said Tim Haaf, Pimco emerging-market fund manager in Munich, who helps oversee $50 billion of emerging- market debt including Russian bonds. “We’re very conservative on Russia.”
TED Spread Narrows to Least Since Lehman on Rates, Cash Flood
The TED spread, a gauge of banks’ willingness to lend, slipped below 150 basis points for the first time since before the collapse of Lehman Brothers Holdings Inc. amid speculation U.S. borrowing costs near zero and promises of further government cash will help unfreeze credit.
The spread, the difference between what banks and the U.S. government pay to borrow money, narrowed as the London interbank offered rate, or Libor, for three-month dollar loans fell and Treasury borrowing costs rose. The Libor dropped three basis points, or 0.03 percentage point, to 1.47 percent, the British Bankers’ Association said today. The rate on the three-month Treasury bill added 4 basis points to minus 0.009 percent.
“There are expectations central banks will keep liquidity in the market and we have more or less a zero rate in the U.S., so over time the fixings should ease off,” said Jan Misch, a money-market trader in Stuttgart at Landesbank Baden- Wuerttemberg, Germany’s biggest state-owned lender. “After the turn of the New Year we should see a softening of these rates.”
Central banks are pumping money into the financial system to combat the worst economic slump since the Great Depression. Credit markets, which seized up after Lehman’s bankruptcy, remain locked amid almost $1 trillion in losses and writedowns tied to mortgage-related securities. The Federal Reserve cut its benchmark rate to as low as zero last week and said it will flood the economy with cash.
TED Spread
The TED spread decreased three basis points to 148 basis points, the least since Sept. 12. The measure remains historically high, having averaged 38 basis points in the year before the credit crisis began in August 2007.
The Libor-OIS spread, a gauge of cash scarcity favored by former Fed Chairman Alan Greenspan, narrowed three basis points to 126 basis points. The spread averaged 8 basis points in the year before the start of crunch and will narrow to 92 basis points by March, forwards contracts show.
Lower interest rates aren’t being passed onto consumers. While the average cost of a fixed 30-year mortgage fell to 5.19 percent on Dec. 18, that’s 371 basis points higher than the three-month dollar Libor, compared with an average 97 basis points in the 12 months before the crisis.
Banks increased deposits with the European Central Bank in its overnight facility Dec. 19 even after the interest rate paid was reduced a day earlier. Deposits rose to 230.7 billion euros ($322.9 billion), the third straight day they exceeded 200 billion euros. The daily average in the first eight months of the year was 427 million euros.
‘Getting Worse’
“There’s no pickup in actual volumes of lending in the interbank market,” Misch said. “It is probably getting worse because of the year-end, as banks try to keep their balance sheets as small as possible. There’s no guarantee volumes will pick up in the New Year.”
The Tokyo three-month interbank offered rate, or Tibor, slipped almost 11 basis points, the most in a decade, to 0.796 percent, after the Bank of Japan last week cut its benchmark rate and said it would adopt new ways of adding money to the system. Hong Kong’s interbank offered rate, or Hibor, for three- month loans fell five basis points to 1.05 percent, the lowest level since January 2005. The euro interbank offered rate, or Euribor, for three-month loans fell three basis points to 5.05 percent, the lowest level since June 27, 2006.
Libor, the benchmark for $360 trillion of financial products worldwide, is set by a panel of banks in a survey by the BBA before noon each day in London. Euribor is set earlier in the day by members of the European Banking Federation.
Libor may suffer a “re-explosion” by June should the financial crisis worsen, ING Groep NV said Dec. 19.
“The systemic risk hasn’t gone away, and it’s entirely possible that the risk may re-elevate in the next six months,” Padhraic Garvey, head of investment-grade debt strategy at ING in Amsterdam, said in an interview. “The risk is if something happens -- banking sector troubles, hedge funds troubles -- and leads to a breakdown in trust again, then Libor will go up.”
The spread, the difference between what banks and the U.S. government pay to borrow money, narrowed as the London interbank offered rate, or Libor, for three-month dollar loans fell and Treasury borrowing costs rose. The Libor dropped three basis points, or 0.03 percentage point, to 1.47 percent, the British Bankers’ Association said today. The rate on the three-month Treasury bill added 4 basis points to minus 0.009 percent.
“There are expectations central banks will keep liquidity in the market and we have more or less a zero rate in the U.S., so over time the fixings should ease off,” said Jan Misch, a money-market trader in Stuttgart at Landesbank Baden- Wuerttemberg, Germany’s biggest state-owned lender. “After the turn of the New Year we should see a softening of these rates.”
Central banks are pumping money into the financial system to combat the worst economic slump since the Great Depression. Credit markets, which seized up after Lehman’s bankruptcy, remain locked amid almost $1 trillion in losses and writedowns tied to mortgage-related securities. The Federal Reserve cut its benchmark rate to as low as zero last week and said it will flood the economy with cash.
TED Spread
The TED spread decreased three basis points to 148 basis points, the least since Sept. 12. The measure remains historically high, having averaged 38 basis points in the year before the credit crisis began in August 2007.
The Libor-OIS spread, a gauge of cash scarcity favored by former Fed Chairman Alan Greenspan, narrowed three basis points to 126 basis points. The spread averaged 8 basis points in the year before the start of crunch and will narrow to 92 basis points by March, forwards contracts show.
Lower interest rates aren’t being passed onto consumers. While the average cost of a fixed 30-year mortgage fell to 5.19 percent on Dec. 18, that’s 371 basis points higher than the three-month dollar Libor, compared with an average 97 basis points in the 12 months before the crisis.
Banks increased deposits with the European Central Bank in its overnight facility Dec. 19 even after the interest rate paid was reduced a day earlier. Deposits rose to 230.7 billion euros ($322.9 billion), the third straight day they exceeded 200 billion euros. The daily average in the first eight months of the year was 427 million euros.
‘Getting Worse’
“There’s no pickup in actual volumes of lending in the interbank market,” Misch said. “It is probably getting worse because of the year-end, as banks try to keep their balance sheets as small as possible. There’s no guarantee volumes will pick up in the New Year.”
The Tokyo three-month interbank offered rate, or Tibor, slipped almost 11 basis points, the most in a decade, to 0.796 percent, after the Bank of Japan last week cut its benchmark rate and said it would adopt new ways of adding money to the system. Hong Kong’s interbank offered rate, or Hibor, for three- month loans fell five basis points to 1.05 percent, the lowest level since January 2005. The euro interbank offered rate, or Euribor, for three-month loans fell three basis points to 5.05 percent, the lowest level since June 27, 2006.
Libor, the benchmark for $360 trillion of financial products worldwide, is set by a panel of banks in a survey by the BBA before noon each day in London. Euribor is set earlier in the day by members of the European Banking Federation.
Libor may suffer a “re-explosion” by June should the financial crisis worsen, ING Groep NV said Dec. 19.
“The systemic risk hasn’t gone away, and it’s entirely possible that the risk may re-elevate in the next six months,” Padhraic Garvey, head of investment-grade debt strategy at ING in Amsterdam, said in an interview. “The risk is if something happens -- banking sector troubles, hedge funds troubles -- and leads to a breakdown in trust again, then Libor will go up.”
BNP Paribas suspends takeover of Fortis of Belgium
BNP Paribas bowed to the inevitable on Thursday and said that it was suspending its takeover of the Belgian financial services company Fortis after a court ruling that effectively froze the deal.
BNP Paribas, one of the largest French banks, had offered €14.5 billion, or $21 billion, for Fortis after the Belgian company neared collapse in the aftermath of the implosions of American International Group and Lehman Brothers.
But the Brussels Court of Appeals found on Dec. 12 that the Belgian government had not fully considered the interest of Fortis shareholders when it sought to sell the company in early October, a move that effectively wiped out the company's equity. The court said shareholders must be allowed to vote on the deal by mid-February.
That ruling, which the government has said it will try to overturn, effectively ended BNP's chances of closing the deal quickly. Lawyers in Brussels representing Dutch and Belgian shareholders of Fortis have said that the case could drag on for months or even years.
Under the circumstances, "the acquisition of a stake by BNP Paribas in Fortis Banque cannot proceed as initially planned," BNP said. As a result, a BNP shareholder meeting set for Friday to approve the deal has been canceled.Céline Castex, a BNP spokeswoman, said the bank nonetheless remained interested in pursuing a deal for Fortis.
Shares of Fortis have risen 25 percent since the court ruling last week amid hope that the deal would be renegotiated.
BNP might have been seeking to reduce uncertainty surrounding its business after its shares came under heavy selling pressure this week.
The bank revealed Tuesday that its corporate and investment banking unit lost €710 million in the first 11 months of 2008, partly from €350 million of exposure to the fraud allegedly perpetrated by Bernard Madoff in New York. BNP shares, which fell 17 percent Wednesday, fell 3.6 percent in Paris on Thursday.
Previously a Dutch-Belgian company, Fortis neared collapse at the end of September. A deal between the Dutch, Belgian and Luxembourg governments to salvage the bank collapsed, and the Dutch decided on Oct. 3 to nationalize the Netherlands operations at a price of €16.8 billion. On Oct. 5, BNP Paribas agreed to acquire Fortis's banking and insurance operations in Belgium and Luxembourg for €14.5 billion.
"I think the deal with BNP will probably go through in the end," Jaap Meijer, a banking analyst at Dresdner Kleinwort in London, said. The deal makes sense for BNP and Fortis debt holders, if not for Fortis shareholders, he added.
Fortis appears to be fairly well capitalized after proceeds from the sale of the Dutch arm were injected into Belgium arm, he said, and BNP had been depending on the acquisition to bolster its capital ratio.
Without a deal, he said, it might have to seek funding from the French government.
Fortis's Belgian business might be attractive to another bidder, like ING Group, the Dutch financial services company, Meijer said, though he noted that mustering funding for a bid could be difficult under current conditions.
Castex declined to comment on any plans BNP might have to raise funds.
In the Netherlands, a commercial court on Nov. 24 granted the request of the VEB shareholders group for an investigation of all activities of the company going back to mid-2007, when it began to pursue the ill-fated acquisition of ABN AMRO, a deal that left it saddled with an onerous debt at the height of the credit crisis.
Niels Lemmers, legal counsel for the VEB, said Thursday that Dutch shareholders would decide whether to pursue their own lawsuits after the investigators issue their findings next year.
Shareholders in the Netherlands believe Fortis's parts were sold off much too cheaply, he said, citing a Morgan Stanley estimate that the Dutch business was worth €22.5 billion, far more than the €17.8 billion the Dutch government had paid for it.
"In the end, the Dutch and Belgian governments saved the bank, they saved the financial system," Lemmers said. "We don't question that, but we do question the terms and the conditions."
AP study finds $1.6B went to bailed-out bank execs
Banks that are getting taxpayer bailouts awarded their top executives nearly $1.6 billion in salaries, bonuses, and other benefits last year, an Associated Press analysis reveals.
The rewards came even at banks where poor results last year foretold the economic crisis that sent them to Washington for a government rescue. Some trimmed their executive compensation due to lagging bank performance, but still forked over multimillion-dollar executive pay packages.
Benefits included cash bonuses, stock options, personal use of company jets and chauffeurs, home security, country club memberships and professional money management, the AP review of federal securities documents found.
The total amount given to nearly 600 executives would cover bailout costs for many of the 116 banks that have so far accepted tax dollars to boost their bottom lines.
Rep. Barney Frank, chairman of the House Financial Services committee and a long-standing critic of executive largesse, said the bonuses tallied by the AP review amount to a bribe 'to get them to do the jobs for which they are well paid in the first place.
'Most of us sign on to do jobs and we do them best we can,' said Frank, a Massachusetts Democrat. 'We're told that some of the most highly paid people in executive positions are different. They need extra money to be motivated!'
The AP compiled total compensation based on annual reports that the banks file with the Securities and Exchange Commission. The 116 banks have so far received $188 billion in taxpayer help. Among the findings:
_The average paid to each of the banks' top executives was $2.6 million in salary, bonuses and benefits.
_Lloyd Blankfein, president and chief executive officer of Goldman Sachs, took home nearly $54 million in compensation last year. The company's top five executives received a total of $242 million.
This year, Goldman will forgo cash and stock bonuses for its seven top-paid executives. They will work for their base salaries of $600,000, the company said. Facing increasing concern by its own shareholders on executive payments, the company described its pay plan last spring as essential to retain and motivate executives 'whose efforts and judgments are vital to our continued success, by setting their compensation at appropriate and competitive levels.' Goldman spokesman Ed Canaday declined to comment beyond that written report.
The New York-based company on Dec. 16 reported its first quarterly loss since it went public in 1999. It received $10 billion in taxpayer money on Oct. 28.
_Even where banks cut back on pay, some executives were left with seven- or eight-figure compensation that most people can only dream about. Richard D. Fairbank, the chairman of Capital One Financial Corp., took a $1 million hit in compensation after his company had a disappointing year, but still got $17 million in stock options. The McLean, Va.-based company received $3.56 billion in bailout money on Nov. 14.
_John A. Thain, chief executive officer of Merrill Lynch, topped all corporate bank bosses with $83 million in earnings last year. Thain, a former chief operating officer for Goldman Sachs, took the reins of the company in December 2007, avoiding the blame for a year in which Merrill lost $7.8 billion. Since he began work late in the year, he earned $57,692 in salary, a $15 million signing bonus and an additional $68 million in stock options.
Like Goldman, Merrill got $10 billion from taxpayers on Oct. 28.
The AP review comes amid sharp questions about the banks' commitment to the goals of the Troubled Assets Relief Program (TARP), a law designed to buy bad mortgages and other troubled assets. Last month, the Bush administration changed the program's goals, instructing the Treasury Department to pump tax dollars directly into banks in a bid to prevent wholesale economic collapse.
The program set restrictions on some executive compensation for participating banks, but did not limit salaries and bonuses unless they had the effect of encouraging excessive risk to the institution. Banks were barred from giving golden parachutes to departing executives and deducting some executive pay for tax purposes.
Banks that got bailout funds also paid out millions for home security systems, private chauffeured cars, and club dues. Some banks even paid for financial advisers. Wells Fargo of San Francisco, which took $25 billion in taxpayer bailout money, gave its top executives up to $20,000 each to pay personal financial planners.
The rewards came even at banks where poor results last year foretold the economic crisis that sent them to Washington for a government rescue. Some trimmed their executive compensation due to lagging bank performance, but still forked over multimillion-dollar executive pay packages.
Benefits included cash bonuses, stock options, personal use of company jets and chauffeurs, home security, country club memberships and professional money management, the AP review of federal securities documents found.
The total amount given to nearly 600 executives would cover bailout costs for many of the 116 banks that have so far accepted tax dollars to boost their bottom lines.
Rep. Barney Frank, chairman of the House Financial Services committee and a long-standing critic of executive largesse, said the bonuses tallied by the AP review amount to a bribe 'to get them to do the jobs for which they are well paid in the first place.
'Most of us sign on to do jobs and we do them best we can,' said Frank, a Massachusetts Democrat. 'We're told that some of the most highly paid people in executive positions are different. They need extra money to be motivated!'
The AP compiled total compensation based on annual reports that the banks file with the Securities and Exchange Commission. The 116 banks have so far received $188 billion in taxpayer help. Among the findings:
_The average paid to each of the banks' top executives was $2.6 million in salary, bonuses and benefits.
_Lloyd Blankfein, president and chief executive officer of Goldman Sachs, took home nearly $54 million in compensation last year. The company's top five executives received a total of $242 million.
This year, Goldman will forgo cash and stock bonuses for its seven top-paid executives. They will work for their base salaries of $600,000, the company said. Facing increasing concern by its own shareholders on executive payments, the company described its pay plan last spring as essential to retain and motivate executives 'whose efforts and judgments are vital to our continued success, by setting their compensation at appropriate and competitive levels.' Goldman spokesman Ed Canaday declined to comment beyond that written report.
The New York-based company on Dec. 16 reported its first quarterly loss since it went public in 1999. It received $10 billion in taxpayer money on Oct. 28.
_Even where banks cut back on pay, some executives were left with seven- or eight-figure compensation that most people can only dream about. Richard D. Fairbank, the chairman of Capital One Financial Corp., took a $1 million hit in compensation after his company had a disappointing year, but still got $17 million in stock options. The McLean, Va.-based company received $3.56 billion in bailout money on Nov. 14.
_John A. Thain, chief executive officer of Merrill Lynch, topped all corporate bank bosses with $83 million in earnings last year. Thain, a former chief operating officer for Goldman Sachs, took the reins of the company in December 2007, avoiding the blame for a year in which Merrill lost $7.8 billion. Since he began work late in the year, he earned $57,692 in salary, a $15 million signing bonus and an additional $68 million in stock options.
Like Goldman, Merrill got $10 billion from taxpayers on Oct. 28.
The AP review comes amid sharp questions about the banks' commitment to the goals of the Troubled Assets Relief Program (TARP), a law designed to buy bad mortgages and other troubled assets. Last month, the Bush administration changed the program's goals, instructing the Treasury Department to pump tax dollars directly into banks in a bid to prevent wholesale economic collapse.
The program set restrictions on some executive compensation for participating banks, but did not limit salaries and bonuses unless they had the effect of encouraging excessive risk to the institution. Banks were barred from giving golden parachutes to departing executives and deducting some executive pay for tax purposes.
Banks that got bailout funds also paid out millions for home security systems, private chauffeured cars, and club dues. Some banks even paid for financial advisers. Wells Fargo of San Francisco, which took $25 billion in taxpayer bailout money, gave its top executives up to $20,000 each to pay personal financial planners.
Friday, December 19, 2008
JPMorgan Adds to $14 Billion CLO Bet Amid Downgrades
JPMorgan Chase & Co. is adding to a $14 billion bet on collateralized loan obligations while other investors flee the market amid plummeting prices.
Within the past month, the largest U.S. bank by assets bought about $1.1 billion of the AAA rated portions of the securities for about 80 cents on the dollar, according to a person familiar with the transactions who declined to be identified because the trades were private. The bonds are typically backed by speculative-grade loans used to finance leveraged buyouts.
JPMorgan, based in New York, is buying even as the worst economy since World War II forces Chicago-based newspaper owner Tribune Co. and other companies to default. Standard & Poor’s said this month that lower-rated portions of scores of CLOs may face downgrades due to the “rapid deterioration in the credit quality” of the corporate loans.
“If everything’s fine and the companies pay back their loans, the AAA is paid back at par,” said David Preston, an analyst at Wachovia Corp. in Charlotte, North Carolina. “If the situation gets worse, the bonds get paid back quicker and the yield rises.”
That’s because downgrades may trigger a clause in CLO contracts forcing managers to pay off top-ranked bonds faster, at the expense of lower-rated debt. Those managers include firms such as New York-based Kohlberg, Kravis Roberts & Co., which may see investments and fees decline as underlying loan prices fall.
In Better Shape
JPMorgan, under Chief Executive Officer Jamie Dimon, wrote down $20.5 billion since the start of the credit crisis, less than a third of Citigroup Inc.’s total. It also received $25 billion from the U.S. government’s $700 billion bailout fund.
Dimon, 52, is using this financial strength relative to competitors to bulk up on the best pieces of the high-yield loan pools, just as he took advantage of market turmoil by taking over troubled financial companies Bear Stearns Cos. in March and Washington Mutual Inc. in September. Brian Marchiony, a spokesman for JPMorgan in New York, declined to comment.
“There aren’t enough people with the cash to buy these securities,” said Colin Fleury, a portfolio manager at Henderson Global Investors Ltd. in London, which oversees $80 billion of assets including CLOs. “You need to have a medium- term view because if you want to get your cash back you may struggle to find someone to take you out of the position.”
$14 Billion Stake
JPMorgan bought $200 million of top-rated CLOs last week, after purchasing $900 million in the previous month, according to people familiar with the transaction, who declined to be identified because the details are private. That’s on top of at least $14 billion of such investments the bank already held, according to a third-quarter regulatory filing.
CLOs are a kind of collateralized debt obligation, debt instruments that repackage loans into securities of varying risk that pay investors different yields. The safest AAA notes, as designated by rating companies, yield the lowest returns. The latest purchase by JPMorgan yields between 2.8 percentage points and 4.7 percentage points more than the benchmark London interbank offered rate, or Libor.
The market for the securities ballooned amid the record number of buyouts, with $605.5 billion issued since 2001, according to JPMorgan. The bank has been the biggest arranger of high-risk, high-yield loans from 2001 through 2007, according to Bloomberg data. Money managers, including private equity firms, hedge funds and insurance companies, set up teams to manage the loan pools, growing revenue by charging management fees and earning a return on the stakes of the debt that they kept.
Sales Fell
Then the seizure in credit markets hit and CLO sales fell to $64 billion this year as investors moved to safer government debt. Financial institutions have taken losses and writedowns of about $1 trillion since the start of 2007, according to Bloomberg data.
Yields on top-rated portions of loan pools have climbed to 5 percentage points more than the Libor from 1.85 percentage points in July, JPMorgan data show. Yields rose as loan prices dropped 31 cents this year to a record 63.5 cents on the dollar, according to S&P’s Leveraged Commentary and Data unit.
S&P said Dec. 5 that the lower-rated portions of 127 CLOs managed by firms including KKR and Carlyle Group of Washington may face downgrades.
Even with downgrades rising at a record pace, according to S&P, AAA rated portions of the pools are likely to survive the credit crunch, said James Finkel, chief executive officer of Dynamic Credit Partners, a New York-based investment adviser with $5 billion in assets.
“As the economy worsens, the market may love the CLOs less and the tranches may be downgraded” he said. “But they’re still likely to be paid back.”
Recommending CLOs
More than 90 percent of U.S. companies with ratings below BBB- by S&P and Baa3 by Moody’s Investors Service would need to default before an investor buying top-ranked CLO bonds at 80 cents on the dollar lost money, said Finkel. He said he’s buying AAA rated portions and is recommending the trade to clients.
CLOs can typically hold no more than 7.5 percent of their assets in loans rated CCC or lower without having to book them at market value rather than face value. Falling loan prices and increasing downgrades are causing some loan pools to breach those limits, forcing managers to divert cash or repay senior debt.
Wachovia’s Preston said 14 CLOs are failing tests in this way. The proportion of companies rated lower than CCC+, seven grades below investment grade, nearly doubled to 8.2 percent this month from 4.4 percent in October, according to New York- based S&P. It was 2.7 percent at the end of 2007.
High Default Rates
“It’s not a given that any investors in CLOs will be paid back,” said Preston. “There are extreme scenarios that could produce losses on even the AAA bonds.”
Recent bankruptcies helped send corporate default rates to their highest level since May 2002, according to S&P. The percentage of loans defaulting rose to 4.11 percent this month, from 0.97 percent last December, S&P said.
Loan downgrades to CCC may increase to 15 to 20 percent of the total outstanding, said Jeffrey Kushner, managing director at investment firm BlueMountain Capital Management LP, whose London unit oversees $5 billion of assets, including corporate loans.
“No CLO manager in the world will be unaffected by the CCC issue,” said Kushner. “Most CLO equity right now is probably worth close to zero.”
The equity portion is the unrated piece that loses money first and is typically owned by pension funds, hedge funds and private-equity firms, because it pays more.
‘Historic’ Declines
KKR’s debt-management unit, KKR Financial Holdings LLC, said in a regulatory filing last month that it expects three of five CLOs it issued in 2006 and 2007 to fail valuation tests after declines in loan prices of “historic magnitude.” The San Francisco-based company sold pools of high-yield loans to fund the purchase of more than $8 billion of leveraged, or speculative grade, loans.
A KKR affiliate invested $525.4 million in the “junior notes,” the company’s November regulatory filing said. Interest payments from the loans the private-equity firm bought will likely be directed to paying down the top-rated slices of the CLOs, according to a KKR Financial conference call with analysts on Dec. 16.
KKR Financial replaced Chief Executive Officer Saturnino Fanlo Dec. 15 after losing 95 percent of its value this year on the New York Stock Exchange. David Lilly, a New York-based spokesman for KKR, declined to comment.
Carlyle “assembled the assets in the CLO portfolios in a way to perform through a recession,” said Michael Zupon, head of the company’s U.S. leveraged finance team in New York. He wouldn’t comment on the performance of the loan pools.
GM and Chrysler Will Get $13.4 Billion in U.S. Loans
General Motors Corp. and Chrysler LLC will get $13.4 billion in emergency government loans in exchange for substantially restructuring their businesses, President George W. Bush announced.
Another $4 billion will be available to GM in February provided Congress releases the second half of the $700 billion Troubled Asset Relief Program fund originally set up to bail out financial institutions. The automakers have until March 31 to meet the conditions of the loans, including demonstrating they have a plan to become profitable, or be forced to repay.
Winning the assistance is a reprieve for GM, the biggest U.S. automaker, and No. 3 Chrysler after they said they would run out of operating funds as soon as this month. Bush is stepping in after Senate Republicans’ refusal last week to take up a House- approved rescue raised the prospect that the companies would fail, costing millions of jobs.
“These are not ordinary circumstances,” Bush said at the White House today. “In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action.”
The United Auto Workers are “disappointed” that Bush added “unfair conditions singling out workers,” the union’s president, Ronald Gettelfinger, said in a statement.
“We will work with the Obama administration and the new Congress to ensure that these unfair conditions are removed,” Gettelfinger said.
‘Necessary Step’
President-elect Barack Obama endorsed the plan, calling it a “necessary step” to avoid a major blow to the economy.
“The auto companies must not squander this chance to reform bad management practices and begin the long-term restructuring that is absolutely required to save this critical industry,” Obama said in a statement.
GM is reeling from almost $73 billion in losses since 2004 and a 22 percent slump in U.S. sales this year, while the drop at Auburn Hills, Michigan-based Chrysler is 28 percent, the steepest among the major automakers.
The package is intended for GM and Chrysler initially. Ford Motor Co., the second-biggest U.S. automaker, has said it can continue operating without aid for now.
The loan term is three years. Of the initial $13.4 billion, GM would get $9.4 billion and Chrysler $4 billion, said Joel Kaplan, Bush’s deputy chief of staff.
Debt Priority
Under the terms of the plan, the government’s debt would have priority over any other creditors. The automakers also must provide warrants for non-voting stock, accept limits on executive pay, and give the government access to financial records.
No dividends may be issued until the loans are repaid. In addition, the automakers must cut their debt by two-thirds in an equity exchange.
For workers, GM and Chrysler would be required to make half of the payments to a union retirement fund in equity and eliminate a program that pays union workers when they don’t have work. Unions and management would have to negotiate a plan to have compensation and work rules in place by Dec. 31, 2009, that will make the U.S. companies competitive with foreign automakers. The requirements could be modified by negotiations with the union and debt holders.
GM shares rose 40 cents, or 11 percent, to $4.06 at 12:46 a.m. in New York Stock Exchange composite trading. Ford gained 5 cents, or 1.8 percent, to $2.89. Before today, the companies’ shares had tumbled 85 percent and 58 percent this year.
Cerberus
Cerberus Capital Management LP, the New York-based buyout firm that owns Chrysler, said today it will hand over equity in the company’s automotive operations to labor and creditors as part of the loan agreement. “Concessions by all relevant constituencies” are needed to restructure Chrysler, Cerberus said in an e-mailed statement.
Democratic Senator Carl Levin of Michigan said the plan “gives the industry breathing room.” In a conference call with reporters, he said Bush was wise to set the automakers’ restructuring targets “as non-binding goals which are subject to negotiations.”
Republican Senator John McCain of Arizona, his party’s presidential nominee this year, said he regretted that the president decided to “give away” $17 billion to the automakers “while failing to receive any serious concessions from the industry.”
The conditions are largely those set out in the legislation passed by the House and blocked in the Senate.
‘Huge Amount of Work’
“We’ve got a huge amount of work to do over the next 90 days and beyond,” GM Chief Executive Officer Rick Wagoner said at a Detroit news conference.
“Chrysler is committed to meeting these requirements,” the company’s chief executive officer, Bob Nardelli, said in a statement.
The government rejected letting the companies go bankrupt, as had been urged by some lawmakers opposed to a bailout.
Bankruptcy would “worsen a weak job market and exacerbate the financial crisis,” Bush said. “It could send our suffering economy into a deeper and longer recession.”
The terms of the loans represent a major challenge for the automakers, Maryann Keller, an independent auto analyst and consultant in Greenwich, Connecticut, said in a Bloomberg Television interview.
“The restructuring they’re going to have to go through will be huge,” Keller said. “I can’t see a way for GM to operate properly with the capital structure they have.”
Kaplan said representatives of Obama, who takes office Jan. 20, have been kept informed of the administration’s actions.
‘Car Czar’
The Treasury secretary would in effect be a “car czar,” making sure the automakers meet deadlines and having the authority to revoke the loans, Kaplan said. The Bush administration didn’t want to designate an independent overseer with a month left in office.
Kaplan, asked if Chrysler should merge with GM, sidestepped the question.
“We are not going to tell the manufacturers what the right structure is for them to be viable; we’re just going to tell them that if you want taxpayers’ assistance, you’re going to have to make those decisions, and you’re going to have to prove it,” he said.
Treasury will need to go to Congress to get the remaining $350 billion in TARP funds released, including the $4 billion in additional loans to the automakers, Kaplan said. That may be left for Obama’s administration, he said.
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