JUST before the Fourth of July weekend, Paul A. Volcker packed his fishing gear and set off for his annual outing to the Canadian wilds to cast for Atlantic salmon.
Fred R. Conrad/The New York Times
Paul Volcker, a White House adviser and former Fed chairman, is worried that Congress may not do enough to prevent financial crises.
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Weekend Business Podcast: Jeff Sommer with Tim O’Brien and Louis Uchitelle on Paul Volcker’s disappointment.
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Fred R. Conrad/The New York Times
Paul Volcker in his office with his wife, Anke Dening. He helped to write part of the current financial overhaul bill.
He left behind a group of legislators in Washington still trying to nail down a controversial attempt to overhaul the nation’s financial regulations in the wake of the country’s most serious economic crisis since the Great Depression.
A well-regarded lion of the regulatory world, Mr. Volcker had endorsed the legislation before he went fishing, but unenthusiastically. If he were a teacher, and not a senior White House adviser and the towering former chairman of the Federal Reserve, he says, he would have given the new rules just an ordinary B — not even a B-plus.
“There is a certain circularity in all this business,” he concedes. “You have a crisis, followed by some kind of reform, for better or worse, and things go well for a while, and then you have another crisis.”
As the financial overhaul took final shape recently, he worked the phone from his Manhattan office and made periodic visits to Washington, trying to persuade members of Congress to make the legislation more far-reaching. “Constructive advice,” he calls it, emphasizing that he never engaged in lobbying.
For all of what he describes as the overhaul’s strengths — particularly the limits placed on banks’ trading activities — he still feels that the legislation doesn’t go far enough in curbing potentially problematic bank activities like investing in hedge funds.
Like few other policy giants of his generation, Mr. Volcker has been a pivotal figure in the regulatory universe for decades, and as he looks back at his long, storied career he confesses to some regrets, in particular for failing to speak out more forcefully about the dangers of a seismic wave of financial deregulation that began in the 1970s and reached full force in the late 1990s.
Despite his recent efforts to ensure that the financial legislation might correct what he regards as some of the mistakes of the deregulatory years, he’s concerned that it still gives banks too much wiggle room to repeat the behavior that threw the nation into crisis in the first place.
Some analysts share Mr. Volcker’s worries that the proposed changes may ultimately not be enough.
“It could be we will look back in 10 years and say, ‘Wow, Volcker really changed the tone of the debate and the outcome,’ ” says Simon Johnson, an economist at the Massachusetts Institute of Technology and a historian of financial crises and regulation. “But I kind of worry that is not going to happen.”
Hear, hear, says Mr. Volcker.
“People are nervous about the long-term outlook, and they should be,” he says.
AMONG the tools that Mr. Volcker has been able to deploy when regulatory debates heat up is the public support he enjoys in financial and political circles.
He earned that esteem over many years, and is famously credited for making tough-minded choices to tame runaway inflation as Fed chairman from 1979 to 1987, when he served under Presidents Jimmy Carter and Ronald Reagan.
At the age of 82, Mr. Volcker is from a generation of Wall Street personalities who accepted strict financial regulation as a fact of life through much of their careers. In his recent push for more stringent financial regulations than he believed Congress — and the Obama administration, for that matter — were inclined to approve, he lined up public support for a tougher crackdown from other well-known financiers who are roughly his age, including George Soros, Nicholas F. Brady, William H. Donaldson and John C. Bogle.
His most visible contribution to the current regulatory overhaul effort is what has come to be known as the Volcker rule, which in its initial form would have banned commercial banks from engaging in what Wall Street calls proprietary trading — that is, risking their own funds to speculate on potentially volatile products like mortgage-backed securities and credit-default swaps.
Such bets added considerable tinder to the financial conflagration that erupted in 2008. Many went horribly awry, and the federal government used taxpayer money to bail out banks, Wall Street firms and even a major insurer.
“I did not realize that the speculative trading by commercial banks had gotten as far out of hand as it had,” says Mr. Volcker, explaining why he first proposed the rule 18 months ago.
Congressional handicappers and Wall Street originally gave the Volcker rule a slim chance of becoming part of the overhaul bill — until, in fact, it got solidly on track to do just that.
Mr. Volcker thinks that Congress has watered down his trading rule — more on that later — but rather than roar in protest, he has resigned himself to the present shape of the Volcker rule as well as the overall legislation.
“The success of this approach is going to be heavily dependent on how aggressively and intelligently it is implemented,” he says, emphasizing that a new, 10-member regulatory council authorized by the bill will have to be vigilant and tough to prevent the nation’s giant banks and investment houses from pulling America into yet another devastating credit crisis. “It is not just a question of defining what needs to be done, but carrying it out in practice, day by day, bank by bank.”
The 2,400-page financial overhaul legislation, already passed by the House, is coming up for a vote in the Senate this week.
The Obama administration says it is now satisfied with the broader legislation, and in particular with the Volcker rule in its amended form.
“The Volcker rule was designed to make sure that banks could not engage in proprietary trading or create risks to the system through their investments in hedge funds or private equity,” says Neal S. Wolin, the deputy Treasury secretary. “We accomplished that.”
Some members of Congress who have backed the bill still say that it is not as restrictive as they would like, but that a more sweeping bill — one that also hewed to Mr. Volcker’s original conception — wouldn’t make it through the Senate, where the vote is expected to be close.
Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, subscribes to that view. He says that there are stronger measures he would have preferred to see in the bill, including the original version of the Volcker rule, but that political reality dictated otherwise.
“I would give the present bill an A-minus,” Mr. Frank says, “when you consider that six months ago people were saying the Volcker rule had no chance.”
Mr. Frank is quick to point out that Mr. Volcker signed off on the compromises that got the Volcker rule into the bill. Mr. Volcker doesn’t dispute that.
“The thing went from what is best to what could be passed,” he says.
Saturday, July 10, 2010
Sri Lanka Unexpectedly Cuts Interest Rates After EU Denies Trade Benefits
Sri Lanka’s central bank unexpectedly cut its benchmark interest rates for the first time in eight months to support economic growth after the European Union withdrew trade concessions this week.
The Central Bank of Sri Lanka reduced the reverse repurchase and repurchase rates by a quarter-point to 9.5 percent and 7.25 percent, respectively, according to a statement on the Colombo-based bank’s website today. Only one of four economists surveyed by Bloomberg News predicted the decision.
Governor Ajith Nivard Cabraal has room to keep borrowing costs low as higher farm output helped slow inflation for a fourth month in June. The EU on July 5 announced it will temporarily deny preferential trade access to Sri Lanka from Aug. 15, saying the country failed to respond to European pleas to improve its human rights record. Exports make up about a fifth of Sri Lanka’s $41 billion economy.
“The government wants to step up growth as risks to exports emerge,” said Saminda Weerasinghe, a research manager at Acuity Stockbrokers Pvt. in Colombo. “Inflation is under control and that helps boost consumer demand.”
The monetary policy decision was announced after the nation’s financial markets closed. The benchmark Colombo All- Share Index fell 0.4 percent to 4,505.69 today. It has climbed 33 percent this year and is the best performer after Mongolia and Bangladesh in the Asia Pacific. The Sri Lankan rupee was little changed at 113.43 against the dollar.
Bucks Trend
Cabraal’s move contrasts with his counterparts in South Korea, India, Malaysia and Taiwan, who have raised rates in recent weeks as Asia leads the global economic recovery.
Acuity’s Weerasinghe said Sri Lanka needs low borrowing costs to rebuild the nation’s war-torn northern and eastern parts after the Liberation Tigers of Tamil Eelam rebels were defeated in May 2009, ending a 26-year separatist struggle.
Land recovered from the Tamil Tigers-controlled areas has enabled farmers to expand cultivation, helping drive down the inflation rate to less than half the average pace of the five years through 2009.
Paddy production in the September-to-March season rose 9 percent to an unprecedented 2.6 million tons, according to the statistics department.
Consumer prices in the capital, Colombo, rose 4.8 percent in June from a year earlier after a 5.3 percent gain in May.
“Going forward, inflation is expected to remain subdued, at single digit levels, during the remainder of the year,” the central bank said today.
Sri Lanka is aiming to accelerate growth to 7 percent in 2010, the fastest pace since 2006, to cut poverty in a country where the World Bank estimates almost half the population lives on less than $2 a day.
Prospects of faster growth are attracting overseas companies to Sri Lanka.
HSBC Holdings Plc, earlier this year, opened the first branch by any foreign bank in Jaffna, the former stronghold of the Tamil Tigers. Minor International Pcl, Thailand’s biggest hotel operator, announced plans in May to invest in Sri Lanka to tap growing leisure and business travelers.
The Central Bank of Sri Lanka reduced the reverse repurchase and repurchase rates by a quarter-point to 9.5 percent and 7.25 percent, respectively, according to a statement on the Colombo-based bank’s website today. Only one of four economists surveyed by Bloomberg News predicted the decision.
Governor Ajith Nivard Cabraal has room to keep borrowing costs low as higher farm output helped slow inflation for a fourth month in June. The EU on July 5 announced it will temporarily deny preferential trade access to Sri Lanka from Aug. 15, saying the country failed to respond to European pleas to improve its human rights record. Exports make up about a fifth of Sri Lanka’s $41 billion economy.
“The government wants to step up growth as risks to exports emerge,” said Saminda Weerasinghe, a research manager at Acuity Stockbrokers Pvt. in Colombo. “Inflation is under control and that helps boost consumer demand.”
The monetary policy decision was announced after the nation’s financial markets closed. The benchmark Colombo All- Share Index fell 0.4 percent to 4,505.69 today. It has climbed 33 percent this year and is the best performer after Mongolia and Bangladesh in the Asia Pacific. The Sri Lankan rupee was little changed at 113.43 against the dollar.
Bucks Trend
Cabraal’s move contrasts with his counterparts in South Korea, India, Malaysia and Taiwan, who have raised rates in recent weeks as Asia leads the global economic recovery.
Acuity’s Weerasinghe said Sri Lanka needs low borrowing costs to rebuild the nation’s war-torn northern and eastern parts after the Liberation Tigers of Tamil Eelam rebels were defeated in May 2009, ending a 26-year separatist struggle.
Land recovered from the Tamil Tigers-controlled areas has enabled farmers to expand cultivation, helping drive down the inflation rate to less than half the average pace of the five years through 2009.
Paddy production in the September-to-March season rose 9 percent to an unprecedented 2.6 million tons, according to the statistics department.
Consumer prices in the capital, Colombo, rose 4.8 percent in June from a year earlier after a 5.3 percent gain in May.
“Going forward, inflation is expected to remain subdued, at single digit levels, during the remainder of the year,” the central bank said today.
Sri Lanka is aiming to accelerate growth to 7 percent in 2010, the fastest pace since 2006, to cut poverty in a country where the World Bank estimates almost half the population lives on less than $2 a day.
Prospects of faster growth are attracting overseas companies to Sri Lanka.
HSBC Holdings Plc, earlier this year, opened the first branch by any foreign bank in Jaffna, the former stronghold of the Tamil Tigers. Minor International Pcl, Thailand’s biggest hotel operator, announced plans in May to invest in Sri Lanka to tap growing leisure and business travelers.
Petraeus flies in to Kandahar
General David Petraeus, the new head of Nato forces in Afghanistan, flew to the southern city of Kandahar on Friday for briefings with US officers leading an operation to stop infiltration by insurgents.
Gen Petraeus’ decision to visit Kandahar less than a week after assuming command of international forces in Afghanistan underscores the importance US commanders attach to their campaign to secure the country’s second-biggest city.
Some 700 US troops have fanned out across the city in the past few weeks to set up 13 check-points on major roads which they man jointly with 600 officers from the mobile Afghan National Civil Order Police.
The deployment of US forces into Kandahar over the past few weeks represents a key element in the strategy devised by General Stanley McChrystal, Gen Petraeus’ predecessor, to roll back growing Taliban influence.
Kandahar is regarded as the movement’s centre of physical and spiritual gravity and Nato commanders see ending a campaign of suicide bombings, assassination and intimidation as vital to proving that the insurgency can be contained before US troops start to withdraw in a year’s time.
Gen Petraeus inherited the task of securing Kandahar after Gen McChrystal was forced to resign following the publication of disparaging remarks made by him and his aides about Obama administration officials. Gen Petraeus said at a change-of-command ceremony in Kabul on Sunday that the war was at a “critical moment.”
An escort of four Black Hawk helicopters deposited Gen Petraeus at a US outpost built in the past two weeks on the northern edge of the city. He rode in a convoy of armoured vehicles across a patch of desert to a newly-built check-point made with concrete blast walls and razor wire and manned by US and Afghan forces.
Guarding a pass between rocky outcrops linking Kandahar with the northern district of Arghandab, a centre of Taliban activity, the check-point is among the first to become operational.
The operation has thrust US forces of the 82nd Airborne Division into a highly visible role in the deeply conservative city of some 800,000 people, where the Taliban movement began its ascent to power in the mid-1990s. Taliban leaders have sought to regain their influence over the city by directing attacks from sanctuaries across the border in Pakistan, where the security establishment has a long history of support for the movement.
The three-week-old mission into Kandahar forms the vanguard of a wider campaign that is shaping up to be the biggest US operation of the nine-year war. Thousands of US troops deployed under the troop surge ordered by Barack Obama, the US president, in December are due to target insurgent strongholds scattered in rural areas to the north and west of Kandahar later this year.
After concentrating much of the additional forces sent to Afghanistan by Mr Obama in the past year in neighbouring Helmand Province, US commanders hope the Kandahar operation will mark a turning point in the war. An increased sense of security in Kandahar would also provide ammunition for US generals struggling to convince voters in Nato countries that the mounting cost in lives of the campaign can eventually translate into a peaceful future for Afghanistan.
The strategy faces huge challenges in a province where widespread disenchantment with the government of Hamid Karzai, Afghanistan’s president, has fuelled sympathy for the insurgents among disenfranchised communities.
Although US special forces maintain a significant base on the outskirts of Kandahar, and a unit of American military police are working to train the city’s police, the rise of check-points manned by American troops is a new sight.
Children routinely pelt US armoured vehicles rumbling through the city with rocks, though some residents have extended a cautious welcome to soldiers arriving in their neighbourhoods. Warier residents fear their presence will encourage insurgents to stage suicide bombings or plant explosives nearby, but US officers hope to win the population over by proving they can reduce the number of attacks.
Gen Petraeus’ decision to visit Kandahar less than a week after assuming command of international forces in Afghanistan underscores the importance US commanders attach to their campaign to secure the country’s second-biggest city.
Some 700 US troops have fanned out across the city in the past few weeks to set up 13 check-points on major roads which they man jointly with 600 officers from the mobile Afghan National Civil Order Police.
The deployment of US forces into Kandahar over the past few weeks represents a key element in the strategy devised by General Stanley McChrystal, Gen Petraeus’ predecessor, to roll back growing Taliban influence.
Kandahar is regarded as the movement’s centre of physical and spiritual gravity and Nato commanders see ending a campaign of suicide bombings, assassination and intimidation as vital to proving that the insurgency can be contained before US troops start to withdraw in a year’s time.
Gen Petraeus inherited the task of securing Kandahar after Gen McChrystal was forced to resign following the publication of disparaging remarks made by him and his aides about Obama administration officials. Gen Petraeus said at a change-of-command ceremony in Kabul on Sunday that the war was at a “critical moment.”
An escort of four Black Hawk helicopters deposited Gen Petraeus at a US outpost built in the past two weeks on the northern edge of the city. He rode in a convoy of armoured vehicles across a patch of desert to a newly-built check-point made with concrete blast walls and razor wire and manned by US and Afghan forces.
Guarding a pass between rocky outcrops linking Kandahar with the northern district of Arghandab, a centre of Taliban activity, the check-point is among the first to become operational.
The operation has thrust US forces of the 82nd Airborne Division into a highly visible role in the deeply conservative city of some 800,000 people, where the Taliban movement began its ascent to power in the mid-1990s. Taliban leaders have sought to regain their influence over the city by directing attacks from sanctuaries across the border in Pakistan, where the security establishment has a long history of support for the movement.
The three-week-old mission into Kandahar forms the vanguard of a wider campaign that is shaping up to be the biggest US operation of the nine-year war. Thousands of US troops deployed under the troop surge ordered by Barack Obama, the US president, in December are due to target insurgent strongholds scattered in rural areas to the north and west of Kandahar later this year.
After concentrating much of the additional forces sent to Afghanistan by Mr Obama in the past year in neighbouring Helmand Province, US commanders hope the Kandahar operation will mark a turning point in the war. An increased sense of security in Kandahar would also provide ammunition for US generals struggling to convince voters in Nato countries that the mounting cost in lives of the campaign can eventually translate into a peaceful future for Afghanistan.
The strategy faces huge challenges in a province where widespread disenchantment with the government of Hamid Karzai, Afghanistan’s president, has fuelled sympathy for the insurgents among disenfranchised communities.
Although US special forces maintain a significant base on the outskirts of Kandahar, and a unit of American military police are working to train the city’s police, the rise of check-points manned by American troops is a new sight.
Children routinely pelt US armoured vehicles rumbling through the city with rocks, though some residents have extended a cautious welcome to soldiers arriving in their neighbourhoods. Warier residents fear their presence will encourage insurgents to stage suicide bombings or plant explosives nearby, but US officers hope to win the population over by proving they can reduce the number of attacks.
Friday, July 9, 2010
Suicide blast kills dozens in Pakistan
PESHAWAR, Pakistan, July 9 – A suicide bomber on a motorbike killed up to 45 people and wounded dozens in an attack outside the office of a senior government official in Pakistan’s northwest on Friday, government and hospital officials said. The bomber struck when people were gathered around the office in the Mohmand ethnic Pashtun tribal region on the Afghan border, where security forces have stepped up attacks on Taliban militants in recent weeks.
“There were two blasts. The first one was small but the second was a big one. Up to 45 people have been killed,” Rasool Khan, the region’s assistant political agent, told Reuters. The attack took place outside his office.
An administration official, Mehraj Khan, had earlier described the incident as a suicide attack, but there were no details available on how the second blast happened.
Hospital officials said nearly 80 people were being treated for multiple wounds, while government officials put the number of wounded at about 40.
Among the wounded were several internally displaced people, who were collecting relief goods near the blast site.
Thousands of people have been uprooted by the militant violence and security forces’ operations in the northwestern region.
“I was standing about 200 yards away from the office when I heard the blast. I don’t know how it happened but I could see several bodies lying on the ground after the explosion and people running in all directions,” said Riaz Hussain, a witness.
Television footage showed victims being pulled out of the debris. The blast also damaged several cars and about 30 shops, witnesses said.
A security official at the scene said the blast also damaged a nearby prison wall and several inmates had escaped.
Pakistan launched two major offensives in the northwest last year against homegrown Taliban militants who have killed hundreds of people in retaliatory attacks across Pakistan, mostly in the northwest, but also in major cities.
Two suicide bombers killed at least 42 people in an attack on Pakistan’s most important Sufi shrine in the eastern city of Lahore last week.
The Pakistani Taliban, allies of the Afghan Taliban, have lost ground in army offensives over the past year.
They were pushed out of the Swat valley, northwest of Islamabad, and in October the army began an offensive in the militants’ South Waziristan bastion on the Afghan border.
The offensive was extended to Orakzai in March as many of the militants who fled the South Waziristan operation took refuge there and in Mohmand. Hundreds of militants have since been killed in airstrikes in the two regions.
Jet fighters killed about a dozen militants in attacks in Orakzai on Friday, security officials said. There was no independent verification of the casualties as militants often dispute and reject official figures.
“There were two blasts. The first one was small but the second was a big one. Up to 45 people have been killed,” Rasool Khan, the region’s assistant political agent, told Reuters. The attack took place outside his office.
An administration official, Mehraj Khan, had earlier described the incident as a suicide attack, but there were no details available on how the second blast happened.
Hospital officials said nearly 80 people were being treated for multiple wounds, while government officials put the number of wounded at about 40.
Among the wounded were several internally displaced people, who were collecting relief goods near the blast site.
Thousands of people have been uprooted by the militant violence and security forces’ operations in the northwestern region.
“I was standing about 200 yards away from the office when I heard the blast. I don’t know how it happened but I could see several bodies lying on the ground after the explosion and people running in all directions,” said Riaz Hussain, a witness.
Television footage showed victims being pulled out of the debris. The blast also damaged several cars and about 30 shops, witnesses said.
A security official at the scene said the blast also damaged a nearby prison wall and several inmates had escaped.
Pakistan launched two major offensives in the northwest last year against homegrown Taliban militants who have killed hundreds of people in retaliatory attacks across Pakistan, mostly in the northwest, but also in major cities.
Two suicide bombers killed at least 42 people in an attack on Pakistan’s most important Sufi shrine in the eastern city of Lahore last week.
The Pakistani Taliban, allies of the Afghan Taliban, have lost ground in army offensives over the past year.
They were pushed out of the Swat valley, northwest of Islamabad, and in October the army began an offensive in the militants’ South Waziristan bastion on the Afghan border.
The offensive was extended to Orakzai in March as many of the militants who fled the South Waziristan operation took refuge there and in Mohmand. Hundreds of militants have since been killed in airstrikes in the two regions.
Jet fighters killed about a dozen militants in attacks in Orakzai on Friday, security officials said. There was no independent verification of the casualties as militants often dispute and reject official figures.
Asia Currencies Rally This Week, Led by Won, on Rate Increases
July 10 (Bloomberg) -- Asian currencies gained this week as signs economic expansion is gathering momentum prompted central bankers in South Korea and Malaysia to increase borrowing costs, underpinning fund inflows into the region.
The won climbed to a two-week high after the Bank of Korea unexpectedly yesterday raised interest rates for the first time since August 2008, and said the economy will see “solid growth” in coming months. The ringgit strengthened for a second day after Bank Negara Malaysia on July 8 lifted its overnight rate for the third time in 2010.
“The knee-jerk reaction has been to buy up the won and we still like Asian currencies,” said Thio Chin Loo, a senior currency strategist at BNP Paribas SA in Singapore. “They’ve been upgrading growth forecasts and they did hint as well before this about inflation picking up.”
The won appreciated 2.8 percent to 1,195.85 per dollar in Seoul from July 2, according to data compiled by Bloomberg. The ringgit strengthened 0.9 percent to 3.1965, Taiwan’s dollar climbed 0.5 percent to NT$32.125 and the Philippine peso rose 0.8 percent to 46.165.
The Bloomberg-JPMorgan Asia Dollar Index, which tracks the region’s 10 most-traded currencies excluding the yen, gained 0.6 percent from July 2. The MSCI Asia-Pacific Index of shares climbed 4 percent, its best week in seven months.
Rate Outlook
South Korea’s central bank boosted the seven-day repurchase rate to 2.25 percent from a record-low 2 percent, a move forecast by four of 14 economists surveyed by Bloomberg News. The rest predicted borrowing costs would be kept unchanged for a 17th month.
The finance ministry on June 24 raised its 2010 economic growth forecast to 5.8 percent, from a December projection of 5 percent, and said the nation needs to “normalize” fiscal and monetary policies.
Asian currencies were also supported this week after the International Monetary Fund raised its projection for global growth and U.S. data helped shore up confidence a recovery in the world’s largest economy will be sustained.
The IMF predicted a 4.6 percent expansion, the biggest gain since 2007. A U.S. report this week suggested retailers’ sales climbed in the February-June period at the fastest pace in four years and the government on July 8 said initial jobless claims decreased by 21,000 to 454,000 in the week ended July 3, lower than the median economist estimate in a Bloomberg survey.
‘Robust’ Growth
Bank Negara Malaysia lifted its overnight rate to 2.75 percent from 2.5 percent on July 8, saying recent trends in industrial production, financing activity, the labor market and exports showed growth “remained robust in the second quarter.” The ringgit has gained 7.2 percent this year, Asia’s best performance.
“The increase is justified with a background of strong economic growth,” said Akira Banno, a treasury adviser at Bank of Tokyo-Mitsubishi UFJ Bhd. in Kuala Lumpur. “This move will likely attract more foreign funds and support the ringgit.”
The local economy expanded 10.1 percent in the first quarter, the fastest pace in a decade. Government reports this month showed factory output and exports rose for a sixth month. The monetary policy stance remains supportive of growth, the central bank said.
The baht gained 0.3 percent this week to 32.33 per dollar as 11 of 17 economists surveyed by Bloomberg forecast the Bank of Thailand will raise its policy rate by a quarter point to 1.5 percent at a July 14 review. The Philippine central bank will decide on interest rates the following day.
The Singapore’s dollar gained 1.1 percent to S$1.3781 against its U.S. counterpart as analysts forecast the city- state’s economic growth accelerated in the second quarter, according to a Bloomberg survey. The government will report its preliminary estimate on July 14.
Elsewhere, China’s yuan was little changed from July 2 at 6.7735 and the Indonesian rupiah edged up 0.2 percent to 9,043. Vietnam’s dong held at 19,085, halting the biggest slide in four months last week. India’s rupee strengthened 0.3 percent to 46.665.
The won climbed to a two-week high after the Bank of Korea unexpectedly yesterday raised interest rates for the first time since August 2008, and said the economy will see “solid growth” in coming months. The ringgit strengthened for a second day after Bank Negara Malaysia on July 8 lifted its overnight rate for the third time in 2010.
“The knee-jerk reaction has been to buy up the won and we still like Asian currencies,” said Thio Chin Loo, a senior currency strategist at BNP Paribas SA in Singapore. “They’ve been upgrading growth forecasts and they did hint as well before this about inflation picking up.”
The won appreciated 2.8 percent to 1,195.85 per dollar in Seoul from July 2, according to data compiled by Bloomberg. The ringgit strengthened 0.9 percent to 3.1965, Taiwan’s dollar climbed 0.5 percent to NT$32.125 and the Philippine peso rose 0.8 percent to 46.165.
The Bloomberg-JPMorgan Asia Dollar Index, which tracks the region’s 10 most-traded currencies excluding the yen, gained 0.6 percent from July 2. The MSCI Asia-Pacific Index of shares climbed 4 percent, its best week in seven months.
Rate Outlook
South Korea’s central bank boosted the seven-day repurchase rate to 2.25 percent from a record-low 2 percent, a move forecast by four of 14 economists surveyed by Bloomberg News. The rest predicted borrowing costs would be kept unchanged for a 17th month.
The finance ministry on June 24 raised its 2010 economic growth forecast to 5.8 percent, from a December projection of 5 percent, and said the nation needs to “normalize” fiscal and monetary policies.
Asian currencies were also supported this week after the International Monetary Fund raised its projection for global growth and U.S. data helped shore up confidence a recovery in the world’s largest economy will be sustained.
The IMF predicted a 4.6 percent expansion, the biggest gain since 2007. A U.S. report this week suggested retailers’ sales climbed in the February-June period at the fastest pace in four years and the government on July 8 said initial jobless claims decreased by 21,000 to 454,000 in the week ended July 3, lower than the median economist estimate in a Bloomberg survey.
‘Robust’ Growth
Bank Negara Malaysia lifted its overnight rate to 2.75 percent from 2.5 percent on July 8, saying recent trends in industrial production, financing activity, the labor market and exports showed growth “remained robust in the second quarter.” The ringgit has gained 7.2 percent this year, Asia’s best performance.
“The increase is justified with a background of strong economic growth,” said Akira Banno, a treasury adviser at Bank of Tokyo-Mitsubishi UFJ Bhd. in Kuala Lumpur. “This move will likely attract more foreign funds and support the ringgit.”
The local economy expanded 10.1 percent in the first quarter, the fastest pace in a decade. Government reports this month showed factory output and exports rose for a sixth month. The monetary policy stance remains supportive of growth, the central bank said.
The baht gained 0.3 percent this week to 32.33 per dollar as 11 of 17 economists surveyed by Bloomberg forecast the Bank of Thailand will raise its policy rate by a quarter point to 1.5 percent at a July 14 review. The Philippine central bank will decide on interest rates the following day.
The Singapore’s dollar gained 1.1 percent to S$1.3781 against its U.S. counterpart as analysts forecast the city- state’s economic growth accelerated in the second quarter, according to a Bloomberg survey. The government will report its preliminary estimate on July 14.
Elsewhere, China’s yuan was little changed from July 2 at 6.7735 and the Indonesian rupiah edged up 0.2 percent to 9,043. Vietnam’s dong held at 19,085, halting the biggest slide in four months last week. India’s rupee strengthened 0.3 percent to 46.665.
Google Wins Lifeline to Keeping Operating in China, for Now
July 10 (Bloomberg) -- Google Inc.’s victory in China -- by winning permission to keep delivering search results there -- may prove short-lived.
The company was surprised by how quickly China renewed Google’s Internet-services license, Chief Executive Officer Eric Schmidt said yesterday in an interview. There were no formal negotiations between Google and Chinese officials over the decision, a person familiar with the matter said.
Getting the go-ahead gives Google a chance to win search share lost to market leader Baidu Inc. and woo advertisers put off by the company’s half-year dispute with the government. Some Google operations were in jeopardy as it balked at censorship rules that require companies to filter Web content.
China renewed the license through 2012, and officials will revisit the decision annually. China’s government can still use its authority to yank the license if it deems Google’s compliance wanting, said Sandeep Aggarwal, an analyst at Caris & Co. in San Francisco.
“Google remains at risk at China,” Aggarwal said. “Chinese regulators gave them a back door.”
Google, owner of the world’s most popular search engine, went public with its dispute in January, saying it was no longer willing to comply with China’s filtering regulations.
“We look forward to continuing to provide Web search and local products to our users in China,” the company said on its blog yesterday. Spokeswoman Jessica Powell declined to say whether China had imposed any conditions on renewing the permit.
Complicating Search
Google, based in Mountain View, California, won approval after changing the way it handled search requests. After closing its Chinese search engine in March, it had been automatically redirecting users to its unfiltered site in Hong Kong. To allay officials’ concerns, Google added an extra hurdle for Chinese Web surfers, directing them to a landing page that in turn pointed them to the Hong Kong site.
That change comes at a price, said Gene Munster, an analyst at Piper Jaffray Cos.
“The landing page strategy for Google.cn adds one more complication to Google’s user experience in China,” Munster said in a research note yesterday. “Every step added to the search process will ultimately cause Google to lose some users.”
China also made concessions. Letting Google keep operating may help the government show it’s open to outside competition, said Scott Kessler, head of technology equity research at Standard & Poor’s, who rates Google “strong buy.”
Risks for China
“There were definitely risks if Google were to be unceremoniously dismissed from a country lock, stock and barrel,” said Kessler, who’s based in New York. “Then, you’d have Baidu as the sole, dominant player there with the likelihood of continued gains in market share.”
Google’s Schmidt, who was in Sun Valley, Idaho, for a conference with media executives, said in an interview he learned of the renewal decision early yesterday.
“This is the outcome we were hoping for, we just didn’t expect a decision this soon,” Schmidt said. “Literally, the good news came overnight.”
Wang Lijian, spokesman at the Ministry of Industry and Information Technology, said the government is likely to post a statement on its website.
China’s decision may also constitute a nod to the Chinese people who voiced support for the company, partly through lighting candles outside Google offices, said Heath Terry, who rates Google “outperform” at FBR Capital Markets in New York.
Holding Vigil
“It signifies the importance of Google to China -- from the candlelight vigils outside of the headquarters to the sheer usage numbers of Google in China,” he said. “Google is important to the Chinese people and I think the government heard that.”
Google’s decision to end self-censorship has cost the company partnerships with China Unicom (Hong Kong) Ltd. and Tom Online Inc., and lifted sales at Baidu.
“Google doesn’t really want to leave China, because it’s a very big market and there is a lot of potential for them,” Bruno Lippens, a fund manager at Pictet Asset Management SA in Geneva, said before the renewal. “It goes much broader than just business issues. It’s about cultural differences and fundamental beliefs like freedom of speech and privacy.”
Google rose $10.93, or 2.4 percent, to $467.49 on the Nasdaq Stock Market yesterday. The shares have declined 25 percent this year.
Google resubmitted a license renewal application last week. The company had said in January it would stop censoring content and threatened to exit the Chinese market after cyber attacks originating from the nation targeted its systems.
‘Sophisticated’ Attacks
The “highly sophisticated” attacks were aimed at obtaining proprietary information and personal data belonging to human-rights activists who use the company’s Gmail e-mail service, it said.
Since it began redirecting Chinese users, Google’s search results have been screened by China’s so-called Great Firewall, a government monitoring system that blocks overseas services such as Facebook Inc. and Google’s YouTube.
The firewall limits Chinese Web users’ access to information on topics ranging from Tibet’s independence movement to the 1989 crackdown on protesters in Tiananmen Square.
Google’s market share in China fell to 30.9 percent in the first quarter from 35.6 percent three months prior, according to data from research firm Analysys International. Baidu’s share increased to a record 64 percent from 58.4 percent, according to Analysys. Baidu fell $1.23, or 1.7 percent, to $71.20 yesterday.
Biggest Web Market
Bank of America Corp.’s Merrill Lynch estimated in April Google would generate $160 million in sales this year from China. That’s less than 1 percent of the company’s projected total revenue this year, according to the average of 29 analyst estimates compiled by Bloomberg. It earned sales of about $335 million from China in 2009, according to Analysys.
China had 384 million Internet users at the end of 2009, the government estimates. That’s more than the total U.S. population, and according to EMarketer Inc., it may grow to 840 million by 2013.
Baidu in April said it benefited from Google’s “semi- exit.” The Chinese company expects “healthy” growth in customers and average spending by clients will continue, Baidu CEO Robin Li said in a conference call in April.
Google’s advertisers in China may have cut their spending by as much as 30 percent on average, and shifted their business mostly to Baidu, Credit Suisse Group AG analyst Wallace Cheung wrote in an April report. This has let Baidu charge higher prices, according to Cheung.
The license renewal comes after the U.S. said China took a “significant step” last month when it ended the yuan’s peg to the dollar and allowed markets to drive the currency higher. It’s not yet clear whether China’s policy shift will correct the yuan’s undervaluation, the U.S. Treasury Department said.
The company was surprised by how quickly China renewed Google’s Internet-services license, Chief Executive Officer Eric Schmidt said yesterday in an interview. There were no formal negotiations between Google and Chinese officials over the decision, a person familiar with the matter said.
Getting the go-ahead gives Google a chance to win search share lost to market leader Baidu Inc. and woo advertisers put off by the company’s half-year dispute with the government. Some Google operations were in jeopardy as it balked at censorship rules that require companies to filter Web content.
China renewed the license through 2012, and officials will revisit the decision annually. China’s government can still use its authority to yank the license if it deems Google’s compliance wanting, said Sandeep Aggarwal, an analyst at Caris & Co. in San Francisco.
“Google remains at risk at China,” Aggarwal said. “Chinese regulators gave them a back door.”
Google, owner of the world’s most popular search engine, went public with its dispute in January, saying it was no longer willing to comply with China’s filtering regulations.
“We look forward to continuing to provide Web search and local products to our users in China,” the company said on its blog yesterday. Spokeswoman Jessica Powell declined to say whether China had imposed any conditions on renewing the permit.
Complicating Search
Google, based in Mountain View, California, won approval after changing the way it handled search requests. After closing its Chinese search engine in March, it had been automatically redirecting users to its unfiltered site in Hong Kong. To allay officials’ concerns, Google added an extra hurdle for Chinese Web surfers, directing them to a landing page that in turn pointed them to the Hong Kong site.
That change comes at a price, said Gene Munster, an analyst at Piper Jaffray Cos.
“The landing page strategy for Google.cn adds one more complication to Google’s user experience in China,” Munster said in a research note yesterday. “Every step added to the search process will ultimately cause Google to lose some users.”
China also made concessions. Letting Google keep operating may help the government show it’s open to outside competition, said Scott Kessler, head of technology equity research at Standard & Poor’s, who rates Google “strong buy.”
Risks for China
“There were definitely risks if Google were to be unceremoniously dismissed from a country lock, stock and barrel,” said Kessler, who’s based in New York. “Then, you’d have Baidu as the sole, dominant player there with the likelihood of continued gains in market share.”
Google’s Schmidt, who was in Sun Valley, Idaho, for a conference with media executives, said in an interview he learned of the renewal decision early yesterday.
“This is the outcome we were hoping for, we just didn’t expect a decision this soon,” Schmidt said. “Literally, the good news came overnight.”
Wang Lijian, spokesman at the Ministry of Industry and Information Technology, said the government is likely to post a statement on its website.
China’s decision may also constitute a nod to the Chinese people who voiced support for the company, partly through lighting candles outside Google offices, said Heath Terry, who rates Google “outperform” at FBR Capital Markets in New York.
Holding Vigil
“It signifies the importance of Google to China -- from the candlelight vigils outside of the headquarters to the sheer usage numbers of Google in China,” he said. “Google is important to the Chinese people and I think the government heard that.”
Google’s decision to end self-censorship has cost the company partnerships with China Unicom (Hong Kong) Ltd. and Tom Online Inc., and lifted sales at Baidu.
“Google doesn’t really want to leave China, because it’s a very big market and there is a lot of potential for them,” Bruno Lippens, a fund manager at Pictet Asset Management SA in Geneva, said before the renewal. “It goes much broader than just business issues. It’s about cultural differences and fundamental beliefs like freedom of speech and privacy.”
Google rose $10.93, or 2.4 percent, to $467.49 on the Nasdaq Stock Market yesterday. The shares have declined 25 percent this year.
Google resubmitted a license renewal application last week. The company had said in January it would stop censoring content and threatened to exit the Chinese market after cyber attacks originating from the nation targeted its systems.
‘Sophisticated’ Attacks
The “highly sophisticated” attacks were aimed at obtaining proprietary information and personal data belonging to human-rights activists who use the company’s Gmail e-mail service, it said.
Since it began redirecting Chinese users, Google’s search results have been screened by China’s so-called Great Firewall, a government monitoring system that blocks overseas services such as Facebook Inc. and Google’s YouTube.
The firewall limits Chinese Web users’ access to information on topics ranging from Tibet’s independence movement to the 1989 crackdown on protesters in Tiananmen Square.
Google’s market share in China fell to 30.9 percent in the first quarter from 35.6 percent three months prior, according to data from research firm Analysys International. Baidu’s share increased to a record 64 percent from 58.4 percent, according to Analysys. Baidu fell $1.23, or 1.7 percent, to $71.20 yesterday.
Biggest Web Market
Bank of America Corp.’s Merrill Lynch estimated in April Google would generate $160 million in sales this year from China. That’s less than 1 percent of the company’s projected total revenue this year, according to the average of 29 analyst estimates compiled by Bloomberg. It earned sales of about $335 million from China in 2009, according to Analysys.
China had 384 million Internet users at the end of 2009, the government estimates. That’s more than the total U.S. population, and according to EMarketer Inc., it may grow to 840 million by 2013.
Baidu in April said it benefited from Google’s “semi- exit.” The Chinese company expects “healthy” growth in customers and average spending by clients will continue, Baidu CEO Robin Li said in a conference call in April.
Google’s advertisers in China may have cut their spending by as much as 30 percent on average, and shifted their business mostly to Baidu, Credit Suisse Group AG analyst Wallace Cheung wrote in an April report. This has let Baidu charge higher prices, according to Cheung.
The license renewal comes after the U.S. said China took a “significant step” last month when it ended the yuan’s peg to the dollar and allowed markets to drive the currency higher. It’s not yet clear whether China’s policy shift will correct the yuan’s undervaluation, the U.S. Treasury Department said.
Thursday, July 8, 2010
Japan Polls Say Kan May Lose Upper House Control in Election
Japanese politicians crisscrossed the country ahead of this weekend’s election as polls showed Prime Minister Naoto Kan may fail in his bid to retain control of both houses of parliament, hindering his ability to pass legislation.
Many voters are undecided about who to support in the July 11 contest for half the 242 seats in the upper house. The electorate is divided over Kan’s suggestion to raise the national sales tax, and his Democratic Party of Japan’s first 10 months in office were marred by the departure of his predecessor after campaign finance scandals and a dispute with the U.S.
“This is a very difficult election,” said Yu Miyasaka, a 23-year-old university student watching a campaign speech in Tokyo two days ago. “I haven’t decided who to vote for.”
Three newspaper polls published today said the ruling coalition may fall short of keeping the 56 seats needed to maintain its majority in the chamber. The main opposition Liberal Democratic Party, ousted from power last August in elections for the more powerful lower house, and the new Your Party are likely to gain, the surveys showed.
Kan has said his primary goal is to keep all of the DPJ’s 54 seats. The Asahi newspaper said the Democrats may win fewer than 50 seats. The LDP may increase their seats from 38 to about 44, while Your Party may go from zero to 11. Between 30 and 40 percent of voters haven’t made up their mind, the Asahi said.
Coalition Woes
The paper said coalition partner People’s New Party may not win any of the three seats it is contesting, which would hamper the government’s ability to get legislation smoothly through parliament. The Asahi interviewed 49,653 people on July 6-7 and didn’t provide a margin of error.
Kan has called for a debate on whether to as much as double the 5 percent consumption tax, stressing that Japan must confront a debt amounting to $80,000 per person to avoid the kind of fiscal crisis that has made Europe a riskier bet for investors. While saying any rise in the tax is “at least two to three years off,” he casts the debate in terms of the need to pay for Japan’s rising social welfare costs.
“More voters are puzzled about which party to choose this time compared with last year,” said Airo Hino, associate professor of political science at Tokyo’s Waseda University. “Voters are ambivalent, making results unpredictable and possibly destabilizing Japanese politics as the ruling bloc may fail to win a majority.”
Hatoyama’s Resignation
The DPJ under Yukio Hatoyama last August defeated the LDP in the lower house, ending more than 50 years of almost unbroken control. Hatoyama quickly ran into trouble and resigned on June 2 over his broken promise to relocate a U.S. military base from Okinawa as well as campaign finance scandals involving him and chief party strategist Ichiro Ozawa.
Hatoyama shifted spending from public works to households, passing legislation to give households a monthly stipend of 13,000 yen ($147) per child and eliminating public high school fees.
“Do you want political stability or political confusion,” Kan said at a July 3 campaign stop northwest of Tokyo. “If the opposition wins many seats, then the two chambers of parliament will be divided and political confusion will continue, and this is not good for Japan.”
His approval rating dropped to 43 percent from 66 percent after he took office on June 8, the Mainichi newspaper said today. Thirty-six percent of those surveyed said they’ll vote for the DPJ while 17 percent chose the LDP and 15 percent picked Your Party. The newspaper polled 1,072 people on July 7-8 and didn’t provide a margin of error.
While the world’s second-biggest economy continues to recover from recession, it is still grappling with 12 years of deflation, and the unemployment rate reached a five-month high of 5.2 percent in May. The Nikkei 225 Stock Average is down 9.6 percent this year.
Many voters are undecided about who to support in the July 11 contest for half the 242 seats in the upper house. The electorate is divided over Kan’s suggestion to raise the national sales tax, and his Democratic Party of Japan’s first 10 months in office were marred by the departure of his predecessor after campaign finance scandals and a dispute with the U.S.
“This is a very difficult election,” said Yu Miyasaka, a 23-year-old university student watching a campaign speech in Tokyo two days ago. “I haven’t decided who to vote for.”
Three newspaper polls published today said the ruling coalition may fall short of keeping the 56 seats needed to maintain its majority in the chamber. The main opposition Liberal Democratic Party, ousted from power last August in elections for the more powerful lower house, and the new Your Party are likely to gain, the surveys showed.
Kan has said his primary goal is to keep all of the DPJ’s 54 seats. The Asahi newspaper said the Democrats may win fewer than 50 seats. The LDP may increase their seats from 38 to about 44, while Your Party may go from zero to 11. Between 30 and 40 percent of voters haven’t made up their mind, the Asahi said.
Coalition Woes
The paper said coalition partner People’s New Party may not win any of the three seats it is contesting, which would hamper the government’s ability to get legislation smoothly through parliament. The Asahi interviewed 49,653 people on July 6-7 and didn’t provide a margin of error.
Kan has called for a debate on whether to as much as double the 5 percent consumption tax, stressing that Japan must confront a debt amounting to $80,000 per person to avoid the kind of fiscal crisis that has made Europe a riskier bet for investors. While saying any rise in the tax is “at least two to three years off,” he casts the debate in terms of the need to pay for Japan’s rising social welfare costs.
“More voters are puzzled about which party to choose this time compared with last year,” said Airo Hino, associate professor of political science at Tokyo’s Waseda University. “Voters are ambivalent, making results unpredictable and possibly destabilizing Japanese politics as the ruling bloc may fail to win a majority.”
Hatoyama’s Resignation
The DPJ under Yukio Hatoyama last August defeated the LDP in the lower house, ending more than 50 years of almost unbroken control. Hatoyama quickly ran into trouble and resigned on June 2 over his broken promise to relocate a U.S. military base from Okinawa as well as campaign finance scandals involving him and chief party strategist Ichiro Ozawa.
Hatoyama shifted spending from public works to households, passing legislation to give households a monthly stipend of 13,000 yen ($147) per child and eliminating public high school fees.
“Do you want political stability or political confusion,” Kan said at a July 3 campaign stop northwest of Tokyo. “If the opposition wins many seats, then the two chambers of parliament will be divided and political confusion will continue, and this is not good for Japan.”
His approval rating dropped to 43 percent from 66 percent after he took office on June 8, the Mainichi newspaper said today. Thirty-six percent of those surveyed said they’ll vote for the DPJ while 17 percent chose the LDP and 15 percent picked Your Party. The newspaper polled 1,072 people on July 7-8 and didn’t provide a margin of error.
While the world’s second-biggest economy continues to recover from recession, it is still grappling with 12 years of deflation, and the unemployment rate reached a five-month high of 5.2 percent in May. The Nikkei 225 Stock Average is down 9.6 percent this year.
World Bank approves $6.2bn Pakistan loan
WASHINGTON, July 8 – The World Bank on Thursday approved a four-year $6.2bn lending program for Pakistan that seeks to boost tax revenues, make energy supplies more reliable and improve conditions in conflict-hit areas.
While the lending strategy from 2010 to 2013 is slightly less than the $6.5bn committed during the last four-year period, the program hones in on specific trouble spots in Pakistan.
Pakistan’s battles with al-Qaeda-linked militants have uprooted nearly 3m people since 2009 and put an extra burden on the country’s struggling economy.
The World Bank said it will intensify its efforts to help the government increase tax revenues, which has caused chronic underfunding of key services and made the country reliant on foreign aid.
Pakistan’s tax-to-GDP ratio is one of the world’s lowest.
“Raising the ratio of tax to GDP – currently only 10.2 per cent of GDP – is essential to mobilize resources to invest in human development and infrastructure, build resilience to future shocks, and guard against costly and disruptive growth reversals,” the Bank said in a statement.
Pakistan was due to implement a value-added tax or a reformed general sales tax of 15 per cent by July 1, but the 2010/2011 budget deferred the move to October 1 because of a failure to reach consensus among provinces. The Bank’s plan envisages working with provinces to boost revenues.
In the energy sector, the Bank said it will help Pakistan tap its huge hydropower potential to make power supplies more reliable and improve the distribution of natural gas system, which through leakage or inefficiencies has higher than average losses.
The country has long suffered from chronic power shortages that have angered the public and stifled industry. In April, the government announced measures to cut state electricity consumption by half.
The World Bank said it will also focus its lending on addressing problems in Pakistan’s conflict-hit areas. These include Federally Administered Tribal Areas near the Afghan border, and Khyber-Pakhtunkhwa province, formerly known as North West Frontier, which has been targeted by militants but is not an Islamist stronghold.
In particular, the World Bank said funding will be aimed at health and education, and improving the livelihoods of people, particularly for young men, living in these areas.
“This strategy recognizes that to steer Pakistan back on a path of broad-based growth, create jobs, and reduce poverty, a prolonged period of macroeconomic stability, financial discipline and sound policies is required,” said Rachid Benmessaoud, World Bank country director for Pakistan
While the lending strategy from 2010 to 2013 is slightly less than the $6.5bn committed during the last four-year period, the program hones in on specific trouble spots in Pakistan.
Pakistan’s battles with al-Qaeda-linked militants have uprooted nearly 3m people since 2009 and put an extra burden on the country’s struggling economy.
The World Bank said it will intensify its efforts to help the government increase tax revenues, which has caused chronic underfunding of key services and made the country reliant on foreign aid.
Pakistan’s tax-to-GDP ratio is one of the world’s lowest.
“Raising the ratio of tax to GDP – currently only 10.2 per cent of GDP – is essential to mobilize resources to invest in human development and infrastructure, build resilience to future shocks, and guard against costly and disruptive growth reversals,” the Bank said in a statement.
Pakistan was due to implement a value-added tax or a reformed general sales tax of 15 per cent by July 1, but the 2010/2011 budget deferred the move to October 1 because of a failure to reach consensus among provinces. The Bank’s plan envisages working with provinces to boost revenues.
In the energy sector, the Bank said it will help Pakistan tap its huge hydropower potential to make power supplies more reliable and improve the distribution of natural gas system, which through leakage or inefficiencies has higher than average losses.
The country has long suffered from chronic power shortages that have angered the public and stifled industry. In April, the government announced measures to cut state electricity consumption by half.
The World Bank said it will also focus its lending on addressing problems in Pakistan’s conflict-hit areas. These include Federally Administered Tribal Areas near the Afghan border, and Khyber-Pakhtunkhwa province, formerly known as North West Frontier, which has been targeted by militants but is not an Islamist stronghold.
In particular, the World Bank said funding will be aimed at health and education, and improving the livelihoods of people, particularly for young men, living in these areas.
“This strategy recognizes that to steer Pakistan back on a path of broad-based growth, create jobs, and reduce poverty, a prolonged period of macroeconomic stability, financial discipline and sound policies is required,” said Rachid Benmessaoud, World Bank country director for Pakistan
Biggest Defaulters on Mortgages Are the Rich
LOS ALTOS, Calif. — No need for tears, but the well-off are losing their master suites and saying goodbye to their wine cellars.
The housing bust that began among the working class in remote subdivisions and quickly progressed to the suburban middle class is striking the upper class in privileged enclaves like this one in Silicon Valley.
Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.
More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.
By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.
Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.
“The rich are different: they are more ruthless,” said Sam Khater, CoreLogic’s senior economist.
Five properties here in Los Altos were scheduled for foreclosure auctions in a recent issue of The Los Altos Town Crier, the weekly newspaper where local legal notices are posted. Four have unpaid mortgage debt of more than $1 million, with the highest amount $2.8 million.
Not so long ago, said Chris Redden, the paper’s advertising services director, “it was a surprise if we had one foreclosure a month.”
The sheriff in Cook County, Ill., is increasingly in demand to evict foreclosed owners in the upscale suburbs to the north and west of Chicago — like Wilmette, La Grange and Glencoe. The occupants are always gone by the time a deputy gets there, a spokesman said, but just barely.
In Las Vegas, Ken Lowman, a longtime agent for luxury properties, said four of the 11 sales he brokered in June were distressed properties.
“I’ve never seen the wealthy hit like this before,” Mr. Lowman said. “They made their plans based on the best of all possible scenarios — that their incomes would continue to grow, that real estate would never drop. Not many had a plan B.”
The defaulting owners, he said, often remain as long as they can. “They’re in denial,” he said.
Here in Los Altos, where the median home price of $1.5 million makes it one of the most exclusive towns in the country, several houses scheduled for auction were still occupied this week. The people who answered the door were reluctant to explain their circumstances in any detail.
At one house, where the lender was owed $1.3 million, there was a couch out front wrapped in plastic. A woman said she and her husband had lost their jobs and were moving in with relatives. At another house, the family said they were renters. A third family, whose mortgage is $1.6 million, said they would be moving this weekend.
At a vacant house with a pool, where the lender was seeking $1.27 million, a raft and a water gun lay abandoned on the entryway floor.
Lenders are fearful that many of the 11 million or so homeowners who owe more than their house is worth will walk away from them, especially if the real estate market begins to weaken again. The so-called strategic defaults have become a matter of intense debate in recent months.
Fannie Mae and Freddie Mac, the two quasi-governmental mortgage finance companies that own most of the mortgages in America with a value of less than $500,000, are alternately pleading with distressed homeowners not to be bad citizens and brandishing a stick at them.
In a recent column on Freddie Mac’s Web site, the company’s executive vice president, Don Bisenius, acknowledged that walking away “might well be a good decision for certain borrowers” but argues that those who do it are trashing their communities.
The housing bust that began among the working class in remote subdivisions and quickly progressed to the suburban middle class is striking the upper class in privileged enclaves like this one in Silicon Valley.
Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.
More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.
By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.
Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.
“The rich are different: they are more ruthless,” said Sam Khater, CoreLogic’s senior economist.
Five properties here in Los Altos were scheduled for foreclosure auctions in a recent issue of The Los Altos Town Crier, the weekly newspaper where local legal notices are posted. Four have unpaid mortgage debt of more than $1 million, with the highest amount $2.8 million.
Not so long ago, said Chris Redden, the paper’s advertising services director, “it was a surprise if we had one foreclosure a month.”
The sheriff in Cook County, Ill., is increasingly in demand to evict foreclosed owners in the upscale suburbs to the north and west of Chicago — like Wilmette, La Grange and Glencoe. The occupants are always gone by the time a deputy gets there, a spokesman said, but just barely.
In Las Vegas, Ken Lowman, a longtime agent for luxury properties, said four of the 11 sales he brokered in June were distressed properties.
“I’ve never seen the wealthy hit like this before,” Mr. Lowman said. “They made their plans based on the best of all possible scenarios — that their incomes would continue to grow, that real estate would never drop. Not many had a plan B.”
The defaulting owners, he said, often remain as long as they can. “They’re in denial,” he said.
Here in Los Altos, where the median home price of $1.5 million makes it one of the most exclusive towns in the country, several houses scheduled for auction were still occupied this week. The people who answered the door were reluctant to explain their circumstances in any detail.
At one house, where the lender was owed $1.3 million, there was a couch out front wrapped in plastic. A woman said she and her husband had lost their jobs and were moving in with relatives. At another house, the family said they were renters. A third family, whose mortgage is $1.6 million, said they would be moving this weekend.
At a vacant house with a pool, where the lender was seeking $1.27 million, a raft and a water gun lay abandoned on the entryway floor.
Lenders are fearful that many of the 11 million or so homeowners who owe more than their house is worth will walk away from them, especially if the real estate market begins to weaken again. The so-called strategic defaults have become a matter of intense debate in recent months.
Fannie Mae and Freddie Mac, the two quasi-governmental mortgage finance companies that own most of the mortgages in America with a value of less than $500,000, are alternately pleading with distressed homeowners not to be bad citizens and brandishing a stick at them.
In a recent column on Freddie Mac’s Web site, the company’s executive vice president, Don Bisenius, acknowledged that walking away “might well be a good decision for certain borrowers” but argues that those who do it are trashing their communities.
Reliance Industries Borrows $1 Billion for Five, Seven Years From Banks
Reliance Industries Ltd., owner of the world’s largest refinery, raised $1 billion in loans from banks, two people involved in the transaction said.
India’s biggest company by market value borrowed $500 million for five years agreeing to pay 170 basis points over the London interbank offered rate, the people said, declining to be identified before a public announcement. Reliance borrowed the balance for seven years and will pay 190 basis points over Libor, the people said.
Bank of America Merrill Lynch, Sumitomo Mitsui Financial Group, Inc. and Credit Agricole CIB helped the Mumbai-based company raise the funds, one of the people said.
Reliance spokesman Manoj Warrier declined to comment.
India’s biggest company by market value borrowed $500 million for five years agreeing to pay 170 basis points over the London interbank offered rate, the people said, declining to be identified before a public announcement. Reliance borrowed the balance for seven years and will pay 190 basis points over Libor, the people said.
Bank of America Merrill Lynch, Sumitomo Mitsui Financial Group, Inc. and Credit Agricole CIB helped the Mumbai-based company raise the funds, one of the people said.
Reliance spokesman Manoj Warrier declined to comment.
Wednesday, July 7, 2010
Retailer Bonds Pull Away as Time Warner Sells: Credit Markets
July 8 (Bloomberg) -- Retailers, buoyed by sales growing at the fastest pace in four years, are outperforming the U.S. corporate bond market as investors wager the economy will avoid a double-dip recession.
The bonds have returned 2.8 percent since the end of May as the market gained 1.9 percent, according to Bank of America Merrill Lynch index data. Greensboro, North Carolina-based apparel maker VF Corp., the index’s best performer in June, returned 5 percent for the month.
Retail sales probably expanded at an average monthly rate of 4 percent in the five months through the end of June, the biggest gain since 2006, the International Council of Shopping Centers said before a report due today. Discount retailers such as Wal-Mart Stores Inc. are attractive to investors because consumers are likely to switch to cheaper products if the economy slows, said Payden & Rygel’s Greg Tornga.
“People were out and about, spending money,” said Tornga, head of investment-grade strategy at the Los Angeles-based firm, which has more than $50 billion in assets under management. “They weren’t necessarily spending a lot of money, but it was an improvement over last year.”
Retailer debt returns exceeded the average for U.S. corporate bonds in each of the past three months, Bank of America Merrill Lynch index data show. Retailers returned 3.25 percent in June, compared with 1.89 percent for the market. Bonds from Bentonville, Arkansas-based Wal-Mart, the world’s biggest retailer, returned 3.61 percent last month. Target Corp. of Minneapolis, the second-biggest U.S. discount retailer, gained 4.2 percent.
Time Warner Offering
Elsewhere in credit markets, the extra yield investors demand to own corporate bonds instead of government debt was unchanged at 196 basis points, or 1.96 percentage point, Bank of America Merrill Lynch’s Global Broad Market Corporate index shows. Yields averaged 3.957 percent.
Time Warner Inc., the New York-based owner of the Warner Bros. movie studio and the HBO cable channel, raised $3 billion in a three-part bond offering, its biggest since November 2006.
The company’s $1 billion of 6.1 percent, 30-year bonds yield 215 basis points more than similar maturity Treasuries, compared with the spread of 162 basis points it paid on $600 million of 6.2 percent 2040 bonds issued in March, according to data compiled by Bloomberg.
Bondholder Protection
The cost of protecting corporate debt from default in the U.S. fell for the fourth straight day.
Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 5.7 basis points to a mid-price of 116 basis points, according to Markit Group Ltd.
In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings dropped 1.18 to 123, Markit prices show. The Markit iTraxx Asia index of swaps on 50 investment- grade borrowers outside Japan dropped 9.5 to 130.5 as of 8:20 a.m. in Hong Kong, according to Credit Agricole CIB.
The indexes typically fall as investor confidence improves and rise as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Bank of America Merrill Lynch cut its forecast for U.S. investment-grade debt sales in 2010 to $700 billion from $800 billion, citing growth in company cash balances.
“Many issuers in high grade have flexibility to stay on the sidelines because balance sheets have become increasingly liquid over the past couple of years both for banks and industrials,” Bank of America analysts Hans Mikkelsen and Yuriy Shchuchinov wrote in a report.
Morgan Stanley
Morgan Stanley, owner of the world’s largest brokerage, was the most actively traded U.S. corporate bond yesterday by primary dealers followed by General Electric Co., Bloomberg data show. The most actively traded junk bond was Anadarko Petroleum Corp. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s.
Fannie Mae plans to sell three-year benchmark notes today, the Washington-based mortgage-finance company with U.S. government support said in a statement.
Citigroup Inc., Deutsche Bank AG and UBS AG are managing the transaction, Fannie Mae said. Investors should buy the 3- year notes and sell existing 2-year agency debt after the spread between the maturities “steepened slightly,” according to Jim Vogel, head of agency-debt research for FTN Financial in Memphis, Tennessee.
Retail Sales
The extra yield investors demand to hold emerging-market bonds rather than government notes declined the most in almost a month. The spread tightened 11 basis points to 323 basis points, the most it has narrowed since June 10, according to JPMorgan Chase & Co.’s Emerging Market Bond index.
Retail sales in June probably came in at the high end of a projected 3 percent to 4 percent range, the ICSC trade group said.
“Consumer spending picked up in the first half, and that by itself is very attractive for bond investors,” Lloyd McAdams, chief investment officer at Santa Monica, California- based Pacific Income Advisers, with $4.5 billion of assets under management.
The extra yield investors demand to own retailers’ bonds widened 2 basis points since the end of May to 118, as the overall market expanded 9 basis points to 315, according to Bank of America Merrill Lynch index data.
S&P has upgraded 10 investment-grade consumer non-cyclical borrowers this year and cut 8 issuers, compared with 2 increases and 12 downgrades in the same period last year, Bloomberg data show.
Wal-Mart, Target
Wal-Mart sold $3 billion of debt in a three-part offering on June 30 in its biggest dollar-denominated bond transaction since July 2001, Bloomberg data show.
Wal-Mart, which operates in 15 countries, has benefited from growth in Mexico, Canada and China, as sales declined at U.S. stores amid the worst recession since the 1930s. The company affirmed an earnings forecast on June 4 for second- quarter U.S. same-store sales ranging from a decline of 2 percent to an increase of 1 percent. Comparable-store sales have fallen for four straight quarters.
Target’s $1 billion of 5.375 percent notes due in 2017 have risen 5.77 cents to 114.16 cents on the dollar this year, the highest on record, according to Trace, the bond-price reporting system of Financial Industry Regulatory Authority.
Bigger Grocery Sections
Expanding grocery sections and adding smaller-format stores are priorities at Target, Chief Executive Officer Gregg Steinhafel said during a conference call on May 19. Same-store sales rose 2.8 percent in the first quarter, Target said May 19 in a statement.
VF reported net income of $163.5 million in its fiscal quarter ended April 3, compared with $100.9 million a year earlier, the maker of Lee and Wrangler jeans said in a May 12 regulatory filing.
“These names are higher quality, defensive in nature, naturally outperforming in times of risk reduction and defensive positioning,” said Nicholas Finkelman, who helps oversee $3.5 billion of bonds as a money manager at New York-based Ryan Labs Inc. “Valuations are a bit rich in these names on a relative basis, but they still have defensive qualities that may prove to be of significant value, if it’s going to be a bumpy ride.”
The bonds have returned 2.8 percent since the end of May as the market gained 1.9 percent, according to Bank of America Merrill Lynch index data. Greensboro, North Carolina-based apparel maker VF Corp., the index’s best performer in June, returned 5 percent for the month.
Retail sales probably expanded at an average monthly rate of 4 percent in the five months through the end of June, the biggest gain since 2006, the International Council of Shopping Centers said before a report due today. Discount retailers such as Wal-Mart Stores Inc. are attractive to investors because consumers are likely to switch to cheaper products if the economy slows, said Payden & Rygel’s Greg Tornga.
“People were out and about, spending money,” said Tornga, head of investment-grade strategy at the Los Angeles-based firm, which has more than $50 billion in assets under management. “They weren’t necessarily spending a lot of money, but it was an improvement over last year.”
Retailer debt returns exceeded the average for U.S. corporate bonds in each of the past three months, Bank of America Merrill Lynch index data show. Retailers returned 3.25 percent in June, compared with 1.89 percent for the market. Bonds from Bentonville, Arkansas-based Wal-Mart, the world’s biggest retailer, returned 3.61 percent last month. Target Corp. of Minneapolis, the second-biggest U.S. discount retailer, gained 4.2 percent.
Time Warner Offering
Elsewhere in credit markets, the extra yield investors demand to own corporate bonds instead of government debt was unchanged at 196 basis points, or 1.96 percentage point, Bank of America Merrill Lynch’s Global Broad Market Corporate index shows. Yields averaged 3.957 percent.
Time Warner Inc., the New York-based owner of the Warner Bros. movie studio and the HBO cable channel, raised $3 billion in a three-part bond offering, its biggest since November 2006.
The company’s $1 billion of 6.1 percent, 30-year bonds yield 215 basis points more than similar maturity Treasuries, compared with the spread of 162 basis points it paid on $600 million of 6.2 percent 2040 bonds issued in March, according to data compiled by Bloomberg.
Bondholder Protection
The cost of protecting corporate debt from default in the U.S. fell for the fourth straight day.
Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 5.7 basis points to a mid-price of 116 basis points, according to Markit Group Ltd.
In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings dropped 1.18 to 123, Markit prices show. The Markit iTraxx Asia index of swaps on 50 investment- grade borrowers outside Japan dropped 9.5 to 130.5 as of 8:20 a.m. in Hong Kong, according to Credit Agricole CIB.
The indexes typically fall as investor confidence improves and rise as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Bank of America Merrill Lynch cut its forecast for U.S. investment-grade debt sales in 2010 to $700 billion from $800 billion, citing growth in company cash balances.
“Many issuers in high grade have flexibility to stay on the sidelines because balance sheets have become increasingly liquid over the past couple of years both for banks and industrials,” Bank of America analysts Hans Mikkelsen and Yuriy Shchuchinov wrote in a report.
Morgan Stanley
Morgan Stanley, owner of the world’s largest brokerage, was the most actively traded U.S. corporate bond yesterday by primary dealers followed by General Electric Co., Bloomberg data show. The most actively traded junk bond was Anadarko Petroleum Corp. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s.
Fannie Mae plans to sell three-year benchmark notes today, the Washington-based mortgage-finance company with U.S. government support said in a statement.
Citigroup Inc., Deutsche Bank AG and UBS AG are managing the transaction, Fannie Mae said. Investors should buy the 3- year notes and sell existing 2-year agency debt after the spread between the maturities “steepened slightly,” according to Jim Vogel, head of agency-debt research for FTN Financial in Memphis, Tennessee.
Retail Sales
The extra yield investors demand to hold emerging-market bonds rather than government notes declined the most in almost a month. The spread tightened 11 basis points to 323 basis points, the most it has narrowed since June 10, according to JPMorgan Chase & Co.’s Emerging Market Bond index.
Retail sales in June probably came in at the high end of a projected 3 percent to 4 percent range, the ICSC trade group said.
“Consumer spending picked up in the first half, and that by itself is very attractive for bond investors,” Lloyd McAdams, chief investment officer at Santa Monica, California- based Pacific Income Advisers, with $4.5 billion of assets under management.
The extra yield investors demand to own retailers’ bonds widened 2 basis points since the end of May to 118, as the overall market expanded 9 basis points to 315, according to Bank of America Merrill Lynch index data.
S&P has upgraded 10 investment-grade consumer non-cyclical borrowers this year and cut 8 issuers, compared with 2 increases and 12 downgrades in the same period last year, Bloomberg data show.
Wal-Mart, Target
Wal-Mart sold $3 billion of debt in a three-part offering on June 30 in its biggest dollar-denominated bond transaction since July 2001, Bloomberg data show.
Wal-Mart, which operates in 15 countries, has benefited from growth in Mexico, Canada and China, as sales declined at U.S. stores amid the worst recession since the 1930s. The company affirmed an earnings forecast on June 4 for second- quarter U.S. same-store sales ranging from a decline of 2 percent to an increase of 1 percent. Comparable-store sales have fallen for four straight quarters.
Target’s $1 billion of 5.375 percent notes due in 2017 have risen 5.77 cents to 114.16 cents on the dollar this year, the highest on record, according to Trace, the bond-price reporting system of Financial Industry Regulatory Authority.
Bigger Grocery Sections
Expanding grocery sections and adding smaller-format stores are priorities at Target, Chief Executive Officer Gregg Steinhafel said during a conference call on May 19. Same-store sales rose 2.8 percent in the first quarter, Target said May 19 in a statement.
VF reported net income of $163.5 million in its fiscal quarter ended April 3, compared with $100.9 million a year earlier, the maker of Lee and Wrangler jeans said in a May 12 regulatory filing.
“These names are higher quality, defensive in nature, naturally outperforming in times of risk reduction and defensive positioning,” said Nicholas Finkelman, who helps oversee $3.5 billion of bonds as a money manager at New York-based Ryan Labs Inc. “Valuations are a bit rich in these names on a relative basis, but they still have defensive qualities that may prove to be of significant value, if it’s going to be a bumpy ride.”
Japan’s Machinery Orders Slump 9.1%, Most Since 2008
July 8 (Bloomberg) -- Japanese machinery orders fell the most since August 2008, a sign that any rebound in business investment may be too weak to drive the economic recovery.
Orders, an indicator of future capital spending, slid 9.1 percent from April, the Cabinet Office said today in Tokyo. It was the first decline in three months, and exceeded the median 3 percent drop in a Bloomberg News survey of 24 economists.
The report prompted Cabinet Office spokesman Keisuke Tsumura to say the economic outlook is becoming less certain, while Bank of Japan Governor Masaaki Shirakawa maintained his view that the economy will keep expanding. Separate figures showed a cooling of exports, which have been the main driver of the nation’s rebound from its worst postwar recession.
“Pressure on the BOJ to ease monetary policy further will continue to increase,” said Kenro Kawano, a debt strategist in Tokyo at Credit Suisse Group AG. “The central bank’s policy is heading toward an easing bias.”
The yen traded at 87.97 per dollar at 10:17 a.m. in Tokyo from 87.83 before the report. Japan’s currency has gained 10 percent in the past three months, threatening to erode exporters’ profit earned abroad. The Nikkei 225 Stock Average climbed 2.7 percent after a trade group said U.S. retail sales grew at the fastest pace in four years.
The drop in machine orders was the biggest since they fell 10.2 percent in August 2008, revised figures showed today. The current-account surplus narrowed 8.1 percent to 1.205 trillion yen ($14 billion) in May from a year earlier as export growth slowed, the Finance Ministry said.
Recovery Trend
“Exports and production are expected to keep increasing,” though at a slower pace, as overseas economies continue to improve, Shirakawa said at a quarterly meeting of the bank’s branch managers in Tokyo today. “Domestic private demand will likely keep improving and the Japanese economy is likely to stay on a recovery trend.”
Shirakawa repeated that the central bank intends to keep a “very accommodative financial environment.” Japan’s central bank has held the benchmark interest rate at 0.1 percent since cutting it December 2008.
As the global recovery helps companies including Elpida Memory Inc. return to profit, businesses have accumulated record stockpiles of cash. A more sustainable recovery depends on them deploying that money as the expansion shows signs of losing steam.
Hoarding Cash
Companies “are just sitting on their cash,” Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo, said before the report. “They have limited plans of investing in Japan because most corporations do not expect the domestic economy to come back strongly.”
Businesses are also holding back on hiring staff. The unemployment rate climbed to a five-month high of 5.2 percent in May while wages dropped, reports showed last week.
Even so, Prime Minister Naoto Kan’s Cabinet raised its view of the economy last month amid signs of a stabilization in capital spending. “The foundation for a self-sustaining recovery is being laid,” the government said in the assessment.
Japanese computer-memory chip maker Elpida is among firms that are planning on spending more as business prospects improve. The Tokyo-based company will boost its investment budget to 115 billion yen ($1.3 billion) this fiscal year from 43.8 billion yen in the year ended March.
Large businesses aim to increase spending by 4.4 percent in the year ending March 2011, the first gain in three years, according to the Bank of Japan’s Tankan survey released last week. Manufacturers expect their profits to more than double in the same period, the Tankan showed.
Japan can’t count on continued surges in overseas demand for much longer, according to economist Tatsushi Shikano.
“Overseas economies will probably begin to lose steam at the end of the year,” said Shikano, senior economist at Mitsubishi UFJ Securities Co. in Tokyo. “That means exports and production may lose momentum, leading to a halt in the increases in capital spending.”
Orders, an indicator of future capital spending, slid 9.1 percent from April, the Cabinet Office said today in Tokyo. It was the first decline in three months, and exceeded the median 3 percent drop in a Bloomberg News survey of 24 economists.
The report prompted Cabinet Office spokesman Keisuke Tsumura to say the economic outlook is becoming less certain, while Bank of Japan Governor Masaaki Shirakawa maintained his view that the economy will keep expanding. Separate figures showed a cooling of exports, which have been the main driver of the nation’s rebound from its worst postwar recession.
“Pressure on the BOJ to ease monetary policy further will continue to increase,” said Kenro Kawano, a debt strategist in Tokyo at Credit Suisse Group AG. “The central bank’s policy is heading toward an easing bias.”
The yen traded at 87.97 per dollar at 10:17 a.m. in Tokyo from 87.83 before the report. Japan’s currency has gained 10 percent in the past three months, threatening to erode exporters’ profit earned abroad. The Nikkei 225 Stock Average climbed 2.7 percent after a trade group said U.S. retail sales grew at the fastest pace in four years.
The drop in machine orders was the biggest since they fell 10.2 percent in August 2008, revised figures showed today. The current-account surplus narrowed 8.1 percent to 1.205 trillion yen ($14 billion) in May from a year earlier as export growth slowed, the Finance Ministry said.
Recovery Trend
“Exports and production are expected to keep increasing,” though at a slower pace, as overseas economies continue to improve, Shirakawa said at a quarterly meeting of the bank’s branch managers in Tokyo today. “Domestic private demand will likely keep improving and the Japanese economy is likely to stay on a recovery trend.”
Shirakawa repeated that the central bank intends to keep a “very accommodative financial environment.” Japan’s central bank has held the benchmark interest rate at 0.1 percent since cutting it December 2008.
As the global recovery helps companies including Elpida Memory Inc. return to profit, businesses have accumulated record stockpiles of cash. A more sustainable recovery depends on them deploying that money as the expansion shows signs of losing steam.
Hoarding Cash
Companies “are just sitting on their cash,” Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo, said before the report. “They have limited plans of investing in Japan because most corporations do not expect the domestic economy to come back strongly.”
Businesses are also holding back on hiring staff. The unemployment rate climbed to a five-month high of 5.2 percent in May while wages dropped, reports showed last week.
Even so, Prime Minister Naoto Kan’s Cabinet raised its view of the economy last month amid signs of a stabilization in capital spending. “The foundation for a self-sustaining recovery is being laid,” the government said in the assessment.
Japanese computer-memory chip maker Elpida is among firms that are planning on spending more as business prospects improve. The Tokyo-based company will boost its investment budget to 115 billion yen ($1.3 billion) this fiscal year from 43.8 billion yen in the year ended March.
Large businesses aim to increase spending by 4.4 percent in the year ending March 2011, the first gain in three years, according to the Bank of Japan’s Tankan survey released last week. Manufacturers expect their profits to more than double in the same period, the Tankan showed.
Japan can’t count on continued surges in overseas demand for much longer, according to economist Tatsushi Shikano.
“Overseas economies will probably begin to lose steam at the end of the year,” said Shikano, senior economist at Mitsubishi UFJ Securities Co. in Tokyo. “That means exports and production may lose momentum, leading to a halt in the increases in capital spending.”
Army takes to streets of Kashmir capital
India sent its army on to the streets of Srinagar, the capital of Kashmir, on Wednesday to enforce a strict curfew, after four civilians were killed in violent clashes between police and angry mobs of youths.
The Muslim-majority Kashmir valley, which is a popular summer holiday spot for India’s affluent middle class, has been rocked by increasingly violent protests since June 14, when a 17-year-old boy was killed, apparently by a stray bullet fired by security forces
In the cycle of angry protests and harsh crackdowns that have followed, another 14 civilians, including many teenagers, have been killed. Each fresh killing has fuelled renewed anger and protests, which have often turned violent and led to more casualties.
Authorities imposed a curfew across Kashmir for several days last week in what Omar Abdullah, the chief minister, described as a necessary measure to “stop this cycle of violence”.
But on Tuesday, protests erupted again and soon turned violent after the retrieval of the body of a teenage boy who locals said had drowned while fleeing police after a protest Monday night.
Indian television showed images of security forces firing straight into mobs of yelling, stone-pelting youth, and also of crowds of angry women marching through the streets.
The renewed bloodshed in Kashmir come as the foreign ministers of India and Pakistan prepare to meet next week in an tenuous effort to revive the peace process, which was suspended after the Mumbai terror attacks in November 2008.
Analysts have expressed concern that the renewed violence could complicate efforts to renew the tentative dialogue. P. Chidambaram, India’s interior minister, last week accused Lashkar-e-Toiba, the Pakistan-based militant group, of fomenting the unrest. An exchange of fire across a usually quiet section of the Kashmir border reported on Wednesday by the armies of each side resulted in the death of two Indian troops and the wounding of one Pakistani soldier and several villagers, Reuters reported.
Kashmiri human rights activists say they believe the protests are an eruption of spontaneous anger at the oppressive presence of the security forces and their lack of accountability for human rights violations, including civilian deaths. In Pakistan on Tuesday, militant groups held anti-India protests.
“I want to assure my brothers in Indian-occupied Kashmir that we will continue to support you until we liberate every inch of our motherland from Indian subjugation,” Syed Salahuddin, a top commander of militant group Hizb-ul-Mujahideen, told protesters.
Kashmir is at the centre of a decades-old dispute between nuclear-armed neighbours India and Pakistan, which have fought three wars over the picturesque Himalayan province.
Throughout the 1990s, Kashmir was rocked by a violent, Pakistan-backed separatist insurgency, but militant violence has declined sharply over the last decade. However, India’s huge military presence remains a source of major friction with the local population, which bristles at the frequent curfews, checkpoints and disruptions.
Kashmiris have been clamouring for the repeal of the Armed Forces Special Powers Act, which they say allows security forces to act with impunity.
The Muslim-majority Kashmir valley, which is a popular summer holiday spot for India’s affluent middle class, has been rocked by increasingly violent protests since June 14, when a 17-year-old boy was killed, apparently by a stray bullet fired by security forces
In the cycle of angry protests and harsh crackdowns that have followed, another 14 civilians, including many teenagers, have been killed. Each fresh killing has fuelled renewed anger and protests, which have often turned violent and led to more casualties.
Authorities imposed a curfew across Kashmir for several days last week in what Omar Abdullah, the chief minister, described as a necessary measure to “stop this cycle of violence”.
But on Tuesday, protests erupted again and soon turned violent after the retrieval of the body of a teenage boy who locals said had drowned while fleeing police after a protest Monday night.
Indian television showed images of security forces firing straight into mobs of yelling, stone-pelting youth, and also of crowds of angry women marching through the streets.
The renewed bloodshed in Kashmir come as the foreign ministers of India and Pakistan prepare to meet next week in an tenuous effort to revive the peace process, which was suspended after the Mumbai terror attacks in November 2008.
Analysts have expressed concern that the renewed violence could complicate efforts to renew the tentative dialogue. P. Chidambaram, India’s interior minister, last week accused Lashkar-e-Toiba, the Pakistan-based militant group, of fomenting the unrest. An exchange of fire across a usually quiet section of the Kashmir border reported on Wednesday by the armies of each side resulted in the death of two Indian troops and the wounding of one Pakistani soldier and several villagers, Reuters reported.
Kashmiri human rights activists say they believe the protests are an eruption of spontaneous anger at the oppressive presence of the security forces and their lack of accountability for human rights violations, including civilian deaths. In Pakistan on Tuesday, militant groups held anti-India protests.
“I want to assure my brothers in Indian-occupied Kashmir that we will continue to support you until we liberate every inch of our motherland from Indian subjugation,” Syed Salahuddin, a top commander of militant group Hizb-ul-Mujahideen, told protesters.
Kashmir is at the centre of a decades-old dispute between nuclear-armed neighbours India and Pakistan, which have fought three wars over the picturesque Himalayan province.
Throughout the 1990s, Kashmir was rocked by a violent, Pakistan-backed separatist insurgency, but militant violence has declined sharply over the last decade. However, India’s huge military presence remains a source of major friction with the local population, which bristles at the frequent curfews, checkpoints and disruptions.
Kashmiris have been clamouring for the repeal of the Armed Forces Special Powers Act, which they say allows security forces to act with impunity.
Owner of Exploded Rig Exploits Offshore Status
Transocean is the world’s largest offshore drilling company, but until its Deepwater Horizon rig exploded in the Gulf of Mexico in April, few Americans outside the energy business had heard of it. It is well known, however, in a number of other countries — for testing local laws and regulations.
Human rights advocates have called for an investigation into Transocean’s recent dealings in Myanmar. They cite its involvement in a drilling project that apparently included a company that is suspected of having ties to two men accused of laundering money for Myanmar’s repressive government, which is under United States trade sanctions.
Transocean has disclosed in Securities and Exchange Commission filings that its drilling equipment was shipped by a forwarder through Iran and that until last year it held a stake in a company that did business in Syria. The State Department says Syria and Iran sponsor terrorism.
In Norway, Transocean is the subject of a criminal investigation into possible tax fraud. The company has said in S.E.C. filings that Norwegian officials could assess it about $840 million in taxes and penalties. The filings also said that a final ruling against Transocean could have a “material impact” on the company, which has suffered a drop in its stock price of more than 40 percent since the Gulf of Mexico incident.
And in the United States, a federal bankruptcy judge recently found that one of Transocean’s merger partners had repeatedly abused the legal system to try to avoid potential liability in a pollution case in Louisiana. Transocean is also the target of tax inquiries in the United States and Brazil.
Transocean declined though an outside spokesman to make company officials available for comment. The company said in a statement that it had always acted appropriately and believed that it would prevail in any investigations.
It is not unusual for large multinational companies like Transocean to find themselves in legal or tax controversies around the world and Transocean has noted the issues that face it in public filings. The company’s most significant safety problem overseas involved a 2007 episode in which eight people died off the coast of Scotland when a support vessel capsized while towing a huge chain used to position a Transocean rig. A Norwegian board of inquiry found that missteps by several parties, including Transocean and the support vessel’s owner, had contributed to the incident.
But the company’s practices in the United States and abroad have come under new scrutiny since the oil spill in the gulf. Last week, the chairman of the Senate Finance Committee, Max Baucus, Democrat of Montana, said that the panel would investigate whether Transocean had used its corporate base in Switzerland to exploit United States tax laws.
In its dealings with lawmakers, Transocean has stood its ground. Last month, in response to a demand that Transocean delay a planned distribution to shareholders of $1 billion in dividends, the company declared that paying the dividend “in no way affects Transocean’s ability to meet it legal obligations.”
Transocean has largely blamed BP, the well’s operator, for the spill, describing it as a company that took shortcuts on safety. Transocean has had a long relationship with BP, and for the last two years, BP has been Transocean’s largest single customer, accounting for 12 percent of its $11.5 billion in operating revenue in 2009, public filings show.
Industry analysts said that strong ties between the companies reflected the fact that both had staked their financial futures on pushing oil exploration as far off shore as possible. Transocean, which drills in some 30 countries and employs more than 18,000 people, owns nearly half of the 50 or so deepwater platforms in the world.
“These people are capable and considered the gold standard of deepwater drilling,” said Peter Vig, managing director at RoundRock Capital Management, an energy hedge fund in Dallas.
Transocean’s evolution into the world’s biggest deep-sea driller follows a decade-long acquisition and merger spree.
It began in 1996 when a Texas-based company called Sonat OffshoreDrilling acquired Transocean ASA, then Norway’s largest offshore driller. Three years later, the company, now known as Transocean, shifted its headquarters for tax purposes to the Cayman Islands from Houston, though a vast majority of its executives still work in Houston,. In subsequent years, it acquired or merged with other drillers including R&B Falcon, the drilling unit of Schlumberger and GlobalSantaFe. Then, in 2008, for tax purposes, it moved its headquarters again, this time to Switzerland from the Cayman Islands.
Human rights advocates have called for an investigation into Transocean’s recent dealings in Myanmar. They cite its involvement in a drilling project that apparently included a company that is suspected of having ties to two men accused of laundering money for Myanmar’s repressive government, which is under United States trade sanctions.
Transocean has disclosed in Securities and Exchange Commission filings that its drilling equipment was shipped by a forwarder through Iran and that until last year it held a stake in a company that did business in Syria. The State Department says Syria and Iran sponsor terrorism.
In Norway, Transocean is the subject of a criminal investigation into possible tax fraud. The company has said in S.E.C. filings that Norwegian officials could assess it about $840 million in taxes and penalties. The filings also said that a final ruling against Transocean could have a “material impact” on the company, which has suffered a drop in its stock price of more than 40 percent since the Gulf of Mexico incident.
And in the United States, a federal bankruptcy judge recently found that one of Transocean’s merger partners had repeatedly abused the legal system to try to avoid potential liability in a pollution case in Louisiana. Transocean is also the target of tax inquiries in the United States and Brazil.
Transocean declined though an outside spokesman to make company officials available for comment. The company said in a statement that it had always acted appropriately and believed that it would prevail in any investigations.
It is not unusual for large multinational companies like Transocean to find themselves in legal or tax controversies around the world and Transocean has noted the issues that face it in public filings. The company’s most significant safety problem overseas involved a 2007 episode in which eight people died off the coast of Scotland when a support vessel capsized while towing a huge chain used to position a Transocean rig. A Norwegian board of inquiry found that missteps by several parties, including Transocean and the support vessel’s owner, had contributed to the incident.
But the company’s practices in the United States and abroad have come under new scrutiny since the oil spill in the gulf. Last week, the chairman of the Senate Finance Committee, Max Baucus, Democrat of Montana, said that the panel would investigate whether Transocean had used its corporate base in Switzerland to exploit United States tax laws.
In its dealings with lawmakers, Transocean has stood its ground. Last month, in response to a demand that Transocean delay a planned distribution to shareholders of $1 billion in dividends, the company declared that paying the dividend “in no way affects Transocean’s ability to meet it legal obligations.”
Transocean has largely blamed BP, the well’s operator, for the spill, describing it as a company that took shortcuts on safety. Transocean has had a long relationship with BP, and for the last two years, BP has been Transocean’s largest single customer, accounting for 12 percent of its $11.5 billion in operating revenue in 2009, public filings show.
Industry analysts said that strong ties between the companies reflected the fact that both had staked their financial futures on pushing oil exploration as far off shore as possible. Transocean, which drills in some 30 countries and employs more than 18,000 people, owns nearly half of the 50 or so deepwater platforms in the world.
“These people are capable and considered the gold standard of deepwater drilling,” said Peter Vig, managing director at RoundRock Capital Management, an energy hedge fund in Dallas.
Transocean’s evolution into the world’s biggest deep-sea driller follows a decade-long acquisition and merger spree.
It began in 1996 when a Texas-based company called Sonat OffshoreDrilling acquired Transocean ASA, then Norway’s largest offshore driller. Three years later, the company, now known as Transocean, shifted its headquarters for tax purposes to the Cayman Islands from Houston, though a vast majority of its executives still work in Houston,. In subsequent years, it acquired or merged with other drillers including R&B Falcon, the drilling unit of Schlumberger and GlobalSantaFe. Then, in 2008, for tax purposes, it moved its headquarters again, this time to Switzerland from the Cayman Islands.
Monday, July 5, 2010
HSBC Clients With Asian Accounts Said to Face U.S. Tax Probe
July 6 (Bloomberg) -- The Justice Department is conducting a criminal investigation of HSBC Holdings Plc clients who may have failed to disclose accounts in India or Singapore to the Internal Revenue Service, according to three people familiar with the matter.
One client got a letter from the Justice Department in late June that said prosecutors had “reason to believe that you had an interest in a financial account in India that was not reported to the IRS on either a tax return” or a Treasury Department report disclosing foreign accounts, according to a copy read to Bloomberg News by a lawyer for one of the clients.
“This is a global initiative by IRS and the Department of Justice,” said Robert McKenzie, an attorney at Arnstein & Lehr in Chicago who said he spoke to two people who got letters.
The probes show how the U.S. is expanding its crackdown on offshore tax evasion beyond Switzerland and UBS AG, the largest Swiss bank, said Barbara Kaplan, a tax lawyer at Greenberg Traurig LLP in New York. London-based HSBC is Europe’s biggest lender by market value.
“It’s clear that the IRS and the Department of Justice are intending to pursue other depositors outside of Switzerland,” Kaplan said. “They’ve announced it before, and they are moving forward in that regard.”
The letters could mean that prosecutors got data on HSBC account holders from the bank, McKenzie said.
“My speculation is that there has to be some level of cooperation within HSBC, or someone within HSBC providing these names to the government,” McKenzie said. “I would bet, under pressure, HSBC cooperated.”
HSBC spokeswoman Diane Bergan declined to comment.
The UBS Agreement
UBS avoided prosecution last year by admitting it aided tax evasion from 2000 to 2007, paying $780 million, and agreeing to disclose secret account data on more than 250 clients. It later agreed to disclose data on another 4,450 clients.
Seventeen UBS clients, two bankers and three alleged enablers of tax crimes have been prosecuted since the bank signed the deferred prosecution agreement. Another 15,000 U.S. residents sought to avoid prosecutions last year by disclosing offshore accounts.
IRS Commissioner Douglas Shulman said last October his agency was scouring those disclosures “to identify financial institutions, advisers and others” who helped taxpayers cheat on taxes. He said the IRS is hiring 800 people in the next year and increasing staff in eight overseas offices, including Hong Kong. It also will open offices in Beijing, Sydney and Panama City.
Not Named
The letters don’t mention HSBC by name yet are all directed to people with accounts at the bank, according to lawyers who saw them. About a dozen HSBC clients got letters in late June from Kevin Downing, a senior attorney in the Justice Department’s tax division who led the UBS probe, according to the people.
Tax attorney Larry Campagna said that prosecutors often give taxpayers a chance to explain their accounts to the Justice Department. Campagna represents clients of banks in the offshore tax investigation and hasn’t seen the letters.
Sometimes such letters leads to a guilty plea, and sometimes there’s an explanation that causes a prosecution to drop the investigation, said Campagna of Chamberlain Hrdlicka in Houston.
The letters went to U.S. residents who have ties to India, including people who inherited money from relatives or maintained assets there after leaving the country, according to three lawyers who read them and asked not to be identified. Some letters referred to undisclosed bank accounts in Singapore, two of the lawyers said.
Not Just UBS
“We’ve been telling our clients that the non-disclosure of foreign accounts is not just a UBS problem,” said tax attorney Richard Sapinski of Sills Cummis & Gross in Newark, New Jersey, represents clients in the offshore investigation. He doesn’t have a client who got a letter.
“We’ve spoken to the prosecutors and high-level people in the IRS, and our conclusion was they were going to pursue people with undisclosed foreign accounts anywhere for a very long time to come,” he said.
Several weeks ago, Downing toured Singapore, Hong Kong and Beijing, meeting with regulators and bankers about offshore tax prosecutions. He spoke to tax lawyers at a conference sponsored by New York University on June 18.
“We just took down the largest private wealth management bank in the world,” Downing said, referring to UBS. “Do you really think we’re going to have trouble doing the next one?”
No UBS Redux
He referred to his tour in Asia, saying: “Neither the banks nor the governments want to have a UBS-type situation. They want to do it nice and quiet. They don’t want to be the focus of attention. The Department of Justice and IRS are devoting a ton of resources to this issue.”
The Justice Department has charged three HSBC clients with tax crimes in the past year.
A Virginia surgeon, Andrew Silva, was sentenced to two years probation after admitting he hid assets at HSBC from U.S. tax authorities and smuggled more than $200,000 in cash to his home when the bank said it would close his Swiss bank account.
Two Miami Beach hotel developers, Mauricio Cohen Assor and his son Leon Cohen Assor, were indicted on charges of hiding more than $150 million in assets from the IRS, including accounts held at HSBC. They have pleaded not guilty and face a Sept. 7 trial in federal court in Fort Lauderdale, Florida.
One client got a letter from the Justice Department in late June that said prosecutors had “reason to believe that you had an interest in a financial account in India that was not reported to the IRS on either a tax return” or a Treasury Department report disclosing foreign accounts, according to a copy read to Bloomberg News by a lawyer for one of the clients.
“This is a global initiative by IRS and the Department of Justice,” said Robert McKenzie, an attorney at Arnstein & Lehr in Chicago who said he spoke to two people who got letters.
The probes show how the U.S. is expanding its crackdown on offshore tax evasion beyond Switzerland and UBS AG, the largest Swiss bank, said Barbara Kaplan, a tax lawyer at Greenberg Traurig LLP in New York. London-based HSBC is Europe’s biggest lender by market value.
“It’s clear that the IRS and the Department of Justice are intending to pursue other depositors outside of Switzerland,” Kaplan said. “They’ve announced it before, and they are moving forward in that regard.”
The letters could mean that prosecutors got data on HSBC account holders from the bank, McKenzie said.
“My speculation is that there has to be some level of cooperation within HSBC, or someone within HSBC providing these names to the government,” McKenzie said. “I would bet, under pressure, HSBC cooperated.”
HSBC spokeswoman Diane Bergan declined to comment.
The UBS Agreement
UBS avoided prosecution last year by admitting it aided tax evasion from 2000 to 2007, paying $780 million, and agreeing to disclose secret account data on more than 250 clients. It later agreed to disclose data on another 4,450 clients.
Seventeen UBS clients, two bankers and three alleged enablers of tax crimes have been prosecuted since the bank signed the deferred prosecution agreement. Another 15,000 U.S. residents sought to avoid prosecutions last year by disclosing offshore accounts.
IRS Commissioner Douglas Shulman said last October his agency was scouring those disclosures “to identify financial institutions, advisers and others” who helped taxpayers cheat on taxes. He said the IRS is hiring 800 people in the next year and increasing staff in eight overseas offices, including Hong Kong. It also will open offices in Beijing, Sydney and Panama City.
Not Named
The letters don’t mention HSBC by name yet are all directed to people with accounts at the bank, according to lawyers who saw them. About a dozen HSBC clients got letters in late June from Kevin Downing, a senior attorney in the Justice Department’s tax division who led the UBS probe, according to the people.
Tax attorney Larry Campagna said that prosecutors often give taxpayers a chance to explain their accounts to the Justice Department. Campagna represents clients of banks in the offshore tax investigation and hasn’t seen the letters.
Sometimes such letters leads to a guilty plea, and sometimes there’s an explanation that causes a prosecution to drop the investigation, said Campagna of Chamberlain Hrdlicka in Houston.
The letters went to U.S. residents who have ties to India, including people who inherited money from relatives or maintained assets there after leaving the country, according to three lawyers who read them and asked not to be identified. Some letters referred to undisclosed bank accounts in Singapore, two of the lawyers said.
Not Just UBS
“We’ve been telling our clients that the non-disclosure of foreign accounts is not just a UBS problem,” said tax attorney Richard Sapinski of Sills Cummis & Gross in Newark, New Jersey, represents clients in the offshore investigation. He doesn’t have a client who got a letter.
“We’ve spoken to the prosecutors and high-level people in the IRS, and our conclusion was they were going to pursue people with undisclosed foreign accounts anywhere for a very long time to come,” he said.
Several weeks ago, Downing toured Singapore, Hong Kong and Beijing, meeting with regulators and bankers about offshore tax prosecutions. He spoke to tax lawyers at a conference sponsored by New York University on June 18.
“We just took down the largest private wealth management bank in the world,” Downing said, referring to UBS. “Do you really think we’re going to have trouble doing the next one?”
No UBS Redux
He referred to his tour in Asia, saying: “Neither the banks nor the governments want to have a UBS-type situation. They want to do it nice and quiet. They don’t want to be the focus of attention. The Department of Justice and IRS are devoting a ton of resources to this issue.”
The Justice Department has charged three HSBC clients with tax crimes in the past year.
A Virginia surgeon, Andrew Silva, was sentenced to two years probation after admitting he hid assets at HSBC from U.S. tax authorities and smuggled more than $200,000 in cash to his home when the bank said it would close his Swiss bank account.
Two Miami Beach hotel developers, Mauricio Cohen Assor and his son Leon Cohen Assor, were indicted on charges of hiding more than $150 million in assets from the IRS, including accounts held at HSBC. They have pleaded not guilty and face a Sept. 7 trial in federal court in Fort Lauderdale, Florida.
Fuel protests bring India to a halt
Transport and businesses across India were severely disrupted on Monday by a dawn-to-dusk strike called by opposition parties to protest against the government’s decision to raise fuel prices.
Many flights, long-distance and local trains, and bus services were cancelled; businesses – from large IT companies such as Infosys and Wipro to small grocery shops – were closed; and trading volumes on the Bombay Stock Exchange plummeted. Many schools and colleges stayed shut and private vehicles stayed off the road.
India’s Hindu nationalist opposition Bharatiya Janata party and the leftist parties had called the national strike in protest at the government’s decision last month to raise fuel prices when Indians were already reeling from double-digit inflation.
Vijay Sharma, a government administration worker from Delhi, explained why he had participated in a BJP rally supporting the protest: “We have nothing left at the end of the week to save, everything is too expensive; the cost of housing, transport, education and food,” he told the Financial Times.
“We also get taxed so much. How are we to meet the ever-increasing demands of our children?”
The BJP, which has been torn by internal rivalries and feuding since its defeat in last year’s parliamentary elections, and the Communist party, which now controls just two states, have vowed to keep up the pressure until the government reverses its decision.
But as it struggles to curb its widening deficit, the government of Manmohan Singh, prime minister, has insisted that it will stand firm, saying India, which imports nearly 80 per cent of its crude oil, can no longer afford the huge cost of keeping domestic fuel prices below world market levels.
“There is no question of a fuel price rollback,” Pranab Mukherjee, finance minister, told Indian journalists shortly before the 12-hour strike began.
Analysts did not expect a repeat of Monday’s disruptive strike, which the Confederation of Indian Industry said cost the economy about $650m (€519m, £431m).
“Honestly, I don’t think the BJP’s heart is in this,” said Pratap Bhanu Mehta, president of the New Delhi-based Centre for Policy Research. “My own sense is that it is largely symbolic.”
The BJP draws its core support from India’s prosperous trading community, which would be hard hit by strikes, and which Mr Mehta described as “the same class that is least worried about this inflation.”
Congress ended state control over petrol prices last month, and vowed gradually to phase out subsidies on diesel, measures that Mr Singh called “much needed reforms”.
The government also raised the prices of still highly subsidised kerosene and cooking gas.
“The subsidies for the petroleum products have reached a level which is not connected to sound financial management of our country,” Mr Singh said a few days after the moves.
“This decision has been taken to put some burden on the common people, but I think it is manageable.”
Even after the price increases – which will save the government an estimated $5.2bn – New Delhi will spend about $11.6bn in the current financial year, holding domestic retail prices of diesel, kerosene and cooking gas below world market prices.
In 2002, the then BJP-led government tried to deregulate India’s state-controlled fuel prices. When global crude prices shot up a few years later, however, the ruling Congress, which had returned to power on a pledge to look out for the “common man,” party ordered state-owned oil marketing companies to hold retail fuel prices down.
However, the government’s top economic advisers, and most economists, were unanimous in seeing the subsidy regime as unsustainable.
“All the political parties have at one time or the other acknowledged that India . . . has to move domestic prices in line with international trends,” Vikram S. Mehta, chairman of Shell India, wrote in a newspaper commentary on Monday.
Higher fuel prices were expected to add to India’s inflation, which rose to10.2 per cent in May. The BJP said it objected to the timing of the fuel price rise, which it said would exacerbate public hardship caused by the increase in prices of food and other items. However, analysts said the Congress probably felt it had to act now, well ahead of state elections.
Many flights, long-distance and local trains, and bus services were cancelled; businesses – from large IT companies such as Infosys and Wipro to small grocery shops – were closed; and trading volumes on the Bombay Stock Exchange plummeted. Many schools and colleges stayed shut and private vehicles stayed off the road.
India’s Hindu nationalist opposition Bharatiya Janata party and the leftist parties had called the national strike in protest at the government’s decision last month to raise fuel prices when Indians were already reeling from double-digit inflation.
Vijay Sharma, a government administration worker from Delhi, explained why he had participated in a BJP rally supporting the protest: “We have nothing left at the end of the week to save, everything is too expensive; the cost of housing, transport, education and food,” he told the Financial Times.
“We also get taxed so much. How are we to meet the ever-increasing demands of our children?”
The BJP, which has been torn by internal rivalries and feuding since its defeat in last year’s parliamentary elections, and the Communist party, which now controls just two states, have vowed to keep up the pressure until the government reverses its decision.
But as it struggles to curb its widening deficit, the government of Manmohan Singh, prime minister, has insisted that it will stand firm, saying India, which imports nearly 80 per cent of its crude oil, can no longer afford the huge cost of keeping domestic fuel prices below world market levels.
“There is no question of a fuel price rollback,” Pranab Mukherjee, finance minister, told Indian journalists shortly before the 12-hour strike began.
Analysts did not expect a repeat of Monday’s disruptive strike, which the Confederation of Indian Industry said cost the economy about $650m (€519m, £431m).
“Honestly, I don’t think the BJP’s heart is in this,” said Pratap Bhanu Mehta, president of the New Delhi-based Centre for Policy Research. “My own sense is that it is largely symbolic.”
The BJP draws its core support from India’s prosperous trading community, which would be hard hit by strikes, and which Mr Mehta described as “the same class that is least worried about this inflation.”
Congress ended state control over petrol prices last month, and vowed gradually to phase out subsidies on diesel, measures that Mr Singh called “much needed reforms”.
The government also raised the prices of still highly subsidised kerosene and cooking gas.
“The subsidies for the petroleum products have reached a level which is not connected to sound financial management of our country,” Mr Singh said a few days after the moves.
“This decision has been taken to put some burden on the common people, but I think it is manageable.”
Even after the price increases – which will save the government an estimated $5.2bn – New Delhi will spend about $11.6bn in the current financial year, holding domestic retail prices of diesel, kerosene and cooking gas below world market prices.
In 2002, the then BJP-led government tried to deregulate India’s state-controlled fuel prices. When global crude prices shot up a few years later, however, the ruling Congress, which had returned to power on a pledge to look out for the “common man,” party ordered state-owned oil marketing companies to hold retail fuel prices down.
However, the government’s top economic advisers, and most economists, were unanimous in seeing the subsidy regime as unsustainable.
“All the political parties have at one time or the other acknowledged that India . . . has to move domestic prices in line with international trends,” Vikram S. Mehta, chairman of Shell India, wrote in a newspaper commentary on Monday.
Higher fuel prices were expected to add to India’s inflation, which rose to10.2 per cent in May. The BJP said it objected to the timing of the fuel price rise, which it said would exacerbate public hardship caused by the increase in prices of food and other items. However, analysts said the Congress probably felt it had to act now, well ahead of state elections.
Rogoff Says China Property Starting to ‘Collapse’
July 6 (Bloomberg) -- China’s property market is beginning a “collapse” that will hit the nation’s banking system, said Kenneth Rogoff, the Harvard University professor and former chief economist of the International Monetary Fund.
As China’s economy develops, “especially at the speed it’s growing, it’s going to have bumps,” said Rogoff, speaking in an interview with Bloomberg Television in Hong Kong. He also said that while recoveries across the global economy are “very slow,” the danger of a return to recession isn’t “elevated.”
Rogoff’s concern echoes that of investors, who sent China’s benchmark stock index to its worst loss in more than a year last week. China’s data have been a focus because the nation has led the global recovery from the worst postwar recession.
The Shanghai Composite Index tumbled 6.7 percent last week, and dropped 0.8 percent yesterday to close at 2,363.95. In the U.S., the world’s largest economy, the benchmark Standard & Poor’s 500 index capped a ninth day of declines in 10 sessions on July 2 after a government report showed fewer private-sector American jobs were created in June than forecast.
Chinese authorities intensified a crackdown on property speculation after announcing the economy expanded at an 11.9 percent annual pace in the first quarter, the most since 2007. Measures have included raising minimum mortgage rates and down payment ratios for some home purchases. Officials may also start a trial property tax, according to state media.
Sales Dive
The efforts have contributed to a slump in real-estate sales, while prices continue to climb. The value of property sales dropped 25 percent in May from the previous month. The increase in prices, at an annual 12.4 percent in May according to a government survey of 70 cities, was down from a 12.8 percent advance in April.
“You’re starting to see that collapse in property and it’s going to hit the banking system,” said Rogoff, 57, who also serves on the Group of 30, a panel of central bankers, finance officials and academics led by former Federal Reserve Chairman Paul Volcker. “They have a lot of tools and some very competent management, but it’s not easy.”
Premier Wen Jiabao’s government has been trying to cool the economy to alleviate the threat of asset-price bubbles. The central bank has told lenders to set aside more money as reserves, and targeted a 22 percent cut in credit growth at banks this year, to 7.5 trillion yuan ($1.1 trillion).
Growth Outlook
Economists at banks from Goldman Sachs Group Inc. to BNP Paribas SA and China International Capital Corp. have lowered their gross domestic product forecasts for China in recent weeks. Goldman last week cut its growth forecast for China this year to 10.1 percent from 11.4 percent because of the government’s monetary tightening measures.
Property prices will probably fall in some regions of China in about three months, said Xu Shaoshi, minister of Land and Resources, according to a Securities Times story yesterday. Values are now stagnant, Xu also said, according to the report.
Rogoff in February said that real estate values in Beijing and Shanghai had “taken a departure from reality,” and a real- estate bubble bursting would be the most likely cause of a slump in Chinese growth to as low as 2 percent at some point in the coming decade.
His view clashes with that of Stephen Roach, chairman of Morgan Stanley Asia Ltd., who said last month the property boom in China isn’t a bubble. While portions of the market such as high-end apartments are overheating, residential demand will remain robust as rural Chinese migrate to bigger cities, according to Roach.
‘Just a Sliver’
“This is just a sliver of the property boom,” Roach said in a radio interview from Hong Kong with Tom Keene on Bloomberg Surveillance, citing that each year since 2000, between 15 and 20 million people migrate to Beijing, Shanghai, and second- and third-tier cities in mainland China. “This property has not overheated and the demand for this property is very, very solid.”
A bust could impair the nation’s banking system, and China’s financial regulator said June 15 that it saw growing credit risks in the real-estate industry, warning of increasing pressure from non-performing loans.
Risks associated with home mortgages are rising and a “chain effect” may reappear in real-estate development loans, the China Banking Regulatory Commission said in its annual report.
Bank Earnings
The record credit expansion last year helped propel earnings at the nation’s lenders, with financial institutions reporting 668.4 billion yuan of combined profits in 2009, a 15 percent gain from a year earlier, according to the CBRC.
China’s five largest state-controlled banks have announced plans to raise as much as $54.5 billion of capital by selling bonds and shares after they extended record loans last year to support a government-led stimulus plan.
Agricultural Bank of China Ltd., which is in the midst of a $20.1 billion initial public offering in Shanghai and Hong Kong, told investors yesterday that real-estate loans are among the biggest risks facing the industry.
Weaker growth in China, as well as decisions by developed countries to tighten fiscal policy, may slow the global economic recovery, which Rogoff said is unlikely to slide into a so- called double-dip recession.
Rich nations will reduce their primary budget deficits, excluding interest payments, by 1.6 percentage points next year, the most since the Organization for Economic Cooperation and Development began keeping records in 1970, according to JPMorgan Chase & Co. economists. The budget squeeze will lop 0.9 percentage point off growth in 2011.
Double-Dip Risk
“The bad news is the recoveries are very slow,” Rogoff said. At the same time, “the fact that we’re not growing super fast, doesn’t necessarily say well therefore we’re about to enter something worse.”
In the aftermath of a financial crisis, “you don’t get a typical recovery” with a so-called “v-shaped” trajectory of surging output after a decline, he said.
By contrast, Nobel laureate Paul Krugman, a professor of economics at Princeton University, wrote in a June 28 column in the New York Times that the global economy is in a depression caused by a “failure of policy.” Krugman blamed governments for moving to reduce budget deficits rather than focusing on lowering historically high unemployment levels.
Rogoff reiterated his criticism of China’s exchange-rate policy, saying that the June 19 announcement of a resumption of “flexibility” in the yuan was a “master stroke” because it removed the issue from the Group of 20 summit later that month.
China’s history of counting on overseas demand to drive its development needs to change, and it’s unrealistic to expect its export growth will be maintained “at the pace it’s been doing,” Rogoff said. “It’s impossible. At some point they have to redirect their strategy” for economic growth, he said.
As China’s economy develops, “especially at the speed it’s growing, it’s going to have bumps,” said Rogoff, speaking in an interview with Bloomberg Television in Hong Kong. He also said that while recoveries across the global economy are “very slow,” the danger of a return to recession isn’t “elevated.”
Rogoff’s concern echoes that of investors, who sent China’s benchmark stock index to its worst loss in more than a year last week. China’s data have been a focus because the nation has led the global recovery from the worst postwar recession.
The Shanghai Composite Index tumbled 6.7 percent last week, and dropped 0.8 percent yesterday to close at 2,363.95. In the U.S., the world’s largest economy, the benchmark Standard & Poor’s 500 index capped a ninth day of declines in 10 sessions on July 2 after a government report showed fewer private-sector American jobs were created in June than forecast.
Chinese authorities intensified a crackdown on property speculation after announcing the economy expanded at an 11.9 percent annual pace in the first quarter, the most since 2007. Measures have included raising minimum mortgage rates and down payment ratios for some home purchases. Officials may also start a trial property tax, according to state media.
Sales Dive
The efforts have contributed to a slump in real-estate sales, while prices continue to climb. The value of property sales dropped 25 percent in May from the previous month. The increase in prices, at an annual 12.4 percent in May according to a government survey of 70 cities, was down from a 12.8 percent advance in April.
“You’re starting to see that collapse in property and it’s going to hit the banking system,” said Rogoff, 57, who also serves on the Group of 30, a panel of central bankers, finance officials and academics led by former Federal Reserve Chairman Paul Volcker. “They have a lot of tools and some very competent management, but it’s not easy.”
Premier Wen Jiabao’s government has been trying to cool the economy to alleviate the threat of asset-price bubbles. The central bank has told lenders to set aside more money as reserves, and targeted a 22 percent cut in credit growth at banks this year, to 7.5 trillion yuan ($1.1 trillion).
Growth Outlook
Economists at banks from Goldman Sachs Group Inc. to BNP Paribas SA and China International Capital Corp. have lowered their gross domestic product forecasts for China in recent weeks. Goldman last week cut its growth forecast for China this year to 10.1 percent from 11.4 percent because of the government’s monetary tightening measures.
Property prices will probably fall in some regions of China in about three months, said Xu Shaoshi, minister of Land and Resources, according to a Securities Times story yesterday. Values are now stagnant, Xu also said, according to the report.
Rogoff in February said that real estate values in Beijing and Shanghai had “taken a departure from reality,” and a real- estate bubble bursting would be the most likely cause of a slump in Chinese growth to as low as 2 percent at some point in the coming decade.
His view clashes with that of Stephen Roach, chairman of Morgan Stanley Asia Ltd., who said last month the property boom in China isn’t a bubble. While portions of the market such as high-end apartments are overheating, residential demand will remain robust as rural Chinese migrate to bigger cities, according to Roach.
‘Just a Sliver’
“This is just a sliver of the property boom,” Roach said in a radio interview from Hong Kong with Tom Keene on Bloomberg Surveillance, citing that each year since 2000, between 15 and 20 million people migrate to Beijing, Shanghai, and second- and third-tier cities in mainland China. “This property has not overheated and the demand for this property is very, very solid.”
A bust could impair the nation’s banking system, and China’s financial regulator said June 15 that it saw growing credit risks in the real-estate industry, warning of increasing pressure from non-performing loans.
Risks associated with home mortgages are rising and a “chain effect” may reappear in real-estate development loans, the China Banking Regulatory Commission said in its annual report.
Bank Earnings
The record credit expansion last year helped propel earnings at the nation’s lenders, with financial institutions reporting 668.4 billion yuan of combined profits in 2009, a 15 percent gain from a year earlier, according to the CBRC.
China’s five largest state-controlled banks have announced plans to raise as much as $54.5 billion of capital by selling bonds and shares after they extended record loans last year to support a government-led stimulus plan.
Agricultural Bank of China Ltd., which is in the midst of a $20.1 billion initial public offering in Shanghai and Hong Kong, told investors yesterday that real-estate loans are among the biggest risks facing the industry.
Weaker growth in China, as well as decisions by developed countries to tighten fiscal policy, may slow the global economic recovery, which Rogoff said is unlikely to slide into a so- called double-dip recession.
Rich nations will reduce their primary budget deficits, excluding interest payments, by 1.6 percentage points next year, the most since the Organization for Economic Cooperation and Development began keeping records in 1970, according to JPMorgan Chase & Co. economists. The budget squeeze will lop 0.9 percentage point off growth in 2011.
Double-Dip Risk
“The bad news is the recoveries are very slow,” Rogoff said. At the same time, “the fact that we’re not growing super fast, doesn’t necessarily say well therefore we’re about to enter something worse.”
In the aftermath of a financial crisis, “you don’t get a typical recovery” with a so-called “v-shaped” trajectory of surging output after a decline, he said.
By contrast, Nobel laureate Paul Krugman, a professor of economics at Princeton University, wrote in a June 28 column in the New York Times that the global economy is in a depression caused by a “failure of policy.” Krugman blamed governments for moving to reduce budget deficits rather than focusing on lowering historically high unemployment levels.
Rogoff reiterated his criticism of China’s exchange-rate policy, saying that the June 19 announcement of a resumption of “flexibility” in the yuan was a “master stroke” because it removed the issue from the Group of 20 summit later that month.
China’s history of counting on overseas demand to drive its development needs to change, and it’s unrealistic to expect its export growth will be maintained “at the pace it’s been doing,” Rogoff said. “It’s impossible. At some point they have to redirect their strategy” for economic growth, he said.
US beefs up efforts to secure Kandahar
The US military has deployed its heaviest troop presence in the southern Afghanistan city of Kandahar since the Taliban were ousted in 2001.
The forces form the vanguard of an operation aimed at securing the movement’s heartland.
US paratroopers are building checkpoints on main roads and conducting patrols with Afghan police in an attempt to deny insurgents access to the country’s second-largest city and reassure a population living in fear of suicide bombings.
“Kandahar city, because of the lack of forces, has been an intelligence black hole,” Lieutenant-Colonel David Oclander told the Financial Times, speaking at one of the half-completed checkpoints. “Now we’re going to start work and really get a much better picture from our efforts to get to know our neighbours.”
Lt-Col Oclander commands a battalion of US paratroopers of the 82nd Airborne Division that has fanned out to outposts in the city’s suburbs over the past few weeks. A US infantry battalion typically comprises about 700 troops.
The deployment represents a sharp increase in the number of US troops in Kandahar, which had previously consisted of a small unit deployed to train Afghan police and special forces conducting operations to hunt down insurgent leaders.
The Afghan government has sent 600 officers of the Afghan National Civil Order Police to Kandahar to work alongside the US troops. US officers regard them as better trained than Afghanistan’s mainstream police force, which has a reputation for corruption and ill-discipline.
The police will man the 13 checkpoints that the US paratroopers aim to complete this month. Each installation is like a miniature military base, with living quarters for troops, blast walls and guard towers. Drivers waiting while police search their vehicles for weapons or bomb-making materials will be able to peruse billboards containing pro-government messages and wanted posters featuring Taliban commanders.
Nato commanders regard the campaign to secure Kandahar, a city of an estimated 800,000 people, as critical to their strategy to bring the insurgency under control before US troops are due to start leaving Afghanistan next July.
Insurgents have waged a campaign of intimidation, suicide bombings and assassinations in response, feeding concerns in the west over whether the surge strategy of Barack Obama, the US president, can tame the Taliban.
The fate of the operation will hinge on whether the presence of the US and Afghan security forces can change the mood in a city where fear of the Taliban and disillusionment with the government of Hamid Karzai, Afghan president, run deep.
Resentment of the influence wielded by Ahmed Wali Karzai, President Karzai’s half-brother who chairs Kandahar’s provincial council, has fuelled sympathy for the insurgents in some communities.
The US also plans to deploy thousands of troops to root out insurgents from havens in rural districts to the north and west of the city.
Although the offensive was widely expected to take place this summer, the bulk of these operations are now due to take place later this year.
Some residents were anxious about the prospect of US forces moving into their neighbourhoods, fearing the checkpoints will be targets for attacks. US officers acknowledged that insurgents might be able to circumvent the barriers but said their presence would make it harder for them to influence the city.
The forces form the vanguard of an operation aimed at securing the movement’s heartland.
US paratroopers are building checkpoints on main roads and conducting patrols with Afghan police in an attempt to deny insurgents access to the country’s second-largest city and reassure a population living in fear of suicide bombings.
“Kandahar city, because of the lack of forces, has been an intelligence black hole,” Lieutenant-Colonel David Oclander told the Financial Times, speaking at one of the half-completed checkpoints. “Now we’re going to start work and really get a much better picture from our efforts to get to know our neighbours.”
Lt-Col Oclander commands a battalion of US paratroopers of the 82nd Airborne Division that has fanned out to outposts in the city’s suburbs over the past few weeks. A US infantry battalion typically comprises about 700 troops.
The deployment represents a sharp increase in the number of US troops in Kandahar, which had previously consisted of a small unit deployed to train Afghan police and special forces conducting operations to hunt down insurgent leaders.
The Afghan government has sent 600 officers of the Afghan National Civil Order Police to Kandahar to work alongside the US troops. US officers regard them as better trained than Afghanistan’s mainstream police force, which has a reputation for corruption and ill-discipline.
The police will man the 13 checkpoints that the US paratroopers aim to complete this month. Each installation is like a miniature military base, with living quarters for troops, blast walls and guard towers. Drivers waiting while police search their vehicles for weapons or bomb-making materials will be able to peruse billboards containing pro-government messages and wanted posters featuring Taliban commanders.
Nato commanders regard the campaign to secure Kandahar, a city of an estimated 800,000 people, as critical to their strategy to bring the insurgency under control before US troops are due to start leaving Afghanistan next July.
Insurgents have waged a campaign of intimidation, suicide bombings and assassinations in response, feeding concerns in the west over whether the surge strategy of Barack Obama, the US president, can tame the Taliban.
The fate of the operation will hinge on whether the presence of the US and Afghan security forces can change the mood in a city where fear of the Taliban and disillusionment with the government of Hamid Karzai, Afghan president, run deep.
Resentment of the influence wielded by Ahmed Wali Karzai, President Karzai’s half-brother who chairs Kandahar’s provincial council, has fuelled sympathy for the insurgents in some communities.
The US also plans to deploy thousands of troops to root out insurgents from havens in rural districts to the north and west of the city.
Although the offensive was widely expected to take place this summer, the bulk of these operations are now due to take place later this year.
Some residents were anxious about the prospect of US forces moving into their neighbourhoods, fearing the checkpoints will be targets for attacks. US officers acknowledged that insurgents might be able to circumvent the barriers but said their presence would make it harder for them to influence the city.
Sunday, July 4, 2010
Bharti upbeat on profiting out of Africa
For Sunil Bharti Mittal, the $10.7bn acquisition in June of most of the African assets of Zain of Kuwait was the culmination of more than a decade of trying to enter a market once dubbed “the hopeless continent” by the Economist magazine.
These efforts, which started 12 years ago with a bid by his group, Bharti Airtel, India’s biggest mobile operator, for a telecoms licence in Botswana, have turned him into a staunch believer in Africa’s growth prospects.
EDITOR’S CHOICE
Bharti criticises ‘inflated’ India 3G prices - May-19
Bharti profit falls as competition bites - Apr-28
Protests over Zain African assets sale - Apr-12
Bharti seals deal for Zain networks - Mar-30
Bharti’s tough task in unforgiving market - Mar-30
Bharti awaits green lights for Zain deal - Mar-29
“The next wave is Africa. Minerals and metals, resources – everybody is investing, China’s rushing in there, now Europe is rushing there,” Mr Mittal tells the Financial Times at his headquarters in New Delhi. “You are going to see a lot of action in Africa. It is to my mind the continent of hope.”
The 52-year-old telecoms entrepreneur, who built his mobile company from scratch into a company with nearly 134m subscribers and in the process created a personal fortune estimated by Forbes at $7.8bn, will need all the optimism he can muster for his African adventure.
If successful, the foray could prove visionary at a time when India’s domestic telecom market is suffering from intense competition and the high cost of third-generation spectrum. Bharti is battling proposed regulatory reforms that it argues are unduly burdensome on some of the largest operators.
But if Bharti’s African push is slow to produce results, the group could find itself burdened with debt and struggling to realise Mr Mittal’s ambition of becoming one of the top global telecom companies.
“The company’s leverage and cash-flow protection measures will deteriorate significantly following its largely debt-funded acquisition of Zain Africa,” Standard & Poor’s warned last month after lowering Bharti’s credit rating.
Yet, for Mr Mittal, the acquisition of Zain’s 15 networks in countries including Nigeria and Burkina Faso is not as adventurous as it might first appear.
The assets used to belong to a Sudanese businessman, Mo Ibrahim, who was a business partner of Mr Mittal during the 1990s and once held a stake in Bharti Airtel.
When Mr Ibrahim sold the African assets, then known as Celtel, in 2005, Bharti put in a bid but was trumped by Zain. In the intervening years, the Indian tycoon tried twice to buy South Africa’s MTN before clinching the Zain deal.
Since closing the transaction on June 8, Bharti has held a “leadership conclave” bringing together executives from the 15 African assets it bought. It has begun dispatching Indian executives to Africa. Mr Mittal says there will be up to 50 Indian expatriates out of a total workforce of 6,500 in its African operations.
The immediate challenge is to wring more minutes of usage out of the African networks, particularly in large countries such as Nigeria. In India, it costs below 1 cent a minute to make a call while in the former Zain networks it costs an average of 20 times that.
Mr Mittal said Bharti plans to use its economies of scale and relationships with equipment vendors to extend the coverage of its networks while lowering the cost per minute of calls to help generate more traffic.
Bharti wants to increase its African subscriber numbers to 100m by mid or end-2012 from 42m today and annual revenue to $5bn from $3.6bn now. He also wants to increase earnings before interest, taxation, depreciation and amortisation to $2bn from $1.2bn now.
The deal has been criticised as expensive by analysts, who say it will be earnings dilutive over the next few years.
While Mr Mittal admits Bharti’s debt has risen from minimal levels to just below three times ebitda, he says such levels are normal for most telecom companies. “One good thing is that the new debt we have picked up is at a very good rate, so in some sense our African acquisition costs us in terms of interest outflow every year $200m and that’s pretty comfortable.”
But while Africa offers challenges and hope in equal measure, Mr Mittal’s Indian home market is proving more troublesome. Bharti is fighting regulatory proposals that would require it to make retrospective payments on spectrum it holds and it must pay nearly $3bn for third generation mobile spectrum it acquired during a recent auction.
On top of this, Bharti faces intense competition from 14 rivals. The latest new entrant is India’s wealthiest man, Mukesh Ambani, who is planning to begin offering fourth generation mobile services in the next few years.
Mr Mittal, however, is sanguine about the prospect of more competition. “Competition is there. There are [already] 14 players, so if there are going to be 15 players, that’s fine.”
Grocery debate
Sunil Bharti Mittal has called for New Delhi to open up grocery stores and other retail formats to foreign direct investment, as the country’s largest business houses struggle to make progress in the sector, write Joe Leahy and Amy Kazmin.
India’s Congress-led coalition government is preparing to reopen public debate on allowing foreign investors into so-called “multi-brand retail” stores, which – like Walmart – sell goods from many manufacturers, as part of a battle against rises in food prices.
At least 30 per cent of Indian farm produce is ruined before it reaches consumers due to the highly inefficient supply chain – in particular a lack of cold chain logistics infrastructure.
“India’s cold chain logistics cannot be fixed unless large-scale investments come in and foreign direct investment [in retail] is one of the good sources for this,” said Mr Mittal, whose company Bharti Enterprises is Walmart’s Indian partner.
The Indian government is expected to soon release a consultation paper on foreign direct investment in retail to try to reach a national consensus on the issue.
Tens of millions of “middlemen”, traders who control the supply chain between farmers and retailers, have staunchly opposed FDI in Indian retail, as have millions of small shop owners who fear corporate retailers will put them out of business.
New Delhi has allowed foreign investors to own up to 51 per cent of “single-brand” retail stores, such as Marks and Spencer, but has restricted foreign companies to owning wholesale outlets only.
Bharti has joined up with Walmart in the wholesale, “cash-and-carry” segment but is keen to see its partner enter the high street.
These efforts, which started 12 years ago with a bid by his group, Bharti Airtel, India’s biggest mobile operator, for a telecoms licence in Botswana, have turned him into a staunch believer in Africa’s growth prospects.
EDITOR’S CHOICE
Bharti criticises ‘inflated’ India 3G prices - May-19
Bharti profit falls as competition bites - Apr-28
Protests over Zain African assets sale - Apr-12
Bharti seals deal for Zain networks - Mar-30
Bharti’s tough task in unforgiving market - Mar-30
Bharti awaits green lights for Zain deal - Mar-29
“The next wave is Africa. Minerals and metals, resources – everybody is investing, China’s rushing in there, now Europe is rushing there,” Mr Mittal tells the Financial Times at his headquarters in New Delhi. “You are going to see a lot of action in Africa. It is to my mind the continent of hope.”
The 52-year-old telecoms entrepreneur, who built his mobile company from scratch into a company with nearly 134m subscribers and in the process created a personal fortune estimated by Forbes at $7.8bn, will need all the optimism he can muster for his African adventure.
If successful, the foray could prove visionary at a time when India’s domestic telecom market is suffering from intense competition and the high cost of third-generation spectrum. Bharti is battling proposed regulatory reforms that it argues are unduly burdensome on some of the largest operators.
But if Bharti’s African push is slow to produce results, the group could find itself burdened with debt and struggling to realise Mr Mittal’s ambition of becoming one of the top global telecom companies.
“The company’s leverage and cash-flow protection measures will deteriorate significantly following its largely debt-funded acquisition of Zain Africa,” Standard & Poor’s warned last month after lowering Bharti’s credit rating.
Yet, for Mr Mittal, the acquisition of Zain’s 15 networks in countries including Nigeria and Burkina Faso is not as adventurous as it might first appear.
The assets used to belong to a Sudanese businessman, Mo Ibrahim, who was a business partner of Mr Mittal during the 1990s and once held a stake in Bharti Airtel.
When Mr Ibrahim sold the African assets, then known as Celtel, in 2005, Bharti put in a bid but was trumped by Zain. In the intervening years, the Indian tycoon tried twice to buy South Africa’s MTN before clinching the Zain deal.
Since closing the transaction on June 8, Bharti has held a “leadership conclave” bringing together executives from the 15 African assets it bought. It has begun dispatching Indian executives to Africa. Mr Mittal says there will be up to 50 Indian expatriates out of a total workforce of 6,500 in its African operations.
The immediate challenge is to wring more minutes of usage out of the African networks, particularly in large countries such as Nigeria. In India, it costs below 1 cent a minute to make a call while in the former Zain networks it costs an average of 20 times that.
Mr Mittal said Bharti plans to use its economies of scale and relationships with equipment vendors to extend the coverage of its networks while lowering the cost per minute of calls to help generate more traffic.
Bharti wants to increase its African subscriber numbers to 100m by mid or end-2012 from 42m today and annual revenue to $5bn from $3.6bn now. He also wants to increase earnings before interest, taxation, depreciation and amortisation to $2bn from $1.2bn now.
The deal has been criticised as expensive by analysts, who say it will be earnings dilutive over the next few years.
While Mr Mittal admits Bharti’s debt has risen from minimal levels to just below three times ebitda, he says such levels are normal for most telecom companies. “One good thing is that the new debt we have picked up is at a very good rate, so in some sense our African acquisition costs us in terms of interest outflow every year $200m and that’s pretty comfortable.”
But while Africa offers challenges and hope in equal measure, Mr Mittal’s Indian home market is proving more troublesome. Bharti is fighting regulatory proposals that would require it to make retrospective payments on spectrum it holds and it must pay nearly $3bn for third generation mobile spectrum it acquired during a recent auction.
On top of this, Bharti faces intense competition from 14 rivals. The latest new entrant is India’s wealthiest man, Mukesh Ambani, who is planning to begin offering fourth generation mobile services in the next few years.
Mr Mittal, however, is sanguine about the prospect of more competition. “Competition is there. There are [already] 14 players, so if there are going to be 15 players, that’s fine.”
Grocery debate
Sunil Bharti Mittal has called for New Delhi to open up grocery stores and other retail formats to foreign direct investment, as the country’s largest business houses struggle to make progress in the sector, write Joe Leahy and Amy Kazmin.
India’s Congress-led coalition government is preparing to reopen public debate on allowing foreign investors into so-called “multi-brand retail” stores, which – like Walmart – sell goods from many manufacturers, as part of a battle against rises in food prices.
At least 30 per cent of Indian farm produce is ruined before it reaches consumers due to the highly inefficient supply chain – in particular a lack of cold chain logistics infrastructure.
“India’s cold chain logistics cannot be fixed unless large-scale investments come in and foreign direct investment [in retail] is one of the good sources for this,” said Mr Mittal, whose company Bharti Enterprises is Walmart’s Indian partner.
The Indian government is expected to soon release a consultation paper on foreign direct investment in retail to try to reach a national consensus on the issue.
Tens of millions of “middlemen”, traders who control the supply chain between farmers and retailers, have staunchly opposed FDI in Indian retail, as have millions of small shop owners who fear corporate retailers will put them out of business.
New Delhi has allowed foreign investors to own up to 51 per cent of “single-brand” retail stores, such as Marks and Spencer, but has restricted foreign companies to owning wholesale outlets only.
Bharti has joined up with Walmart in the wholesale, “cash-and-carry” segment but is keen to see its partner enter the high street.
Asia Stocks, Commodities Snap Declines; Won Gains on Goldman
July 5 (Bloomberg) -- Asian stocks snapped four days of decline while commodities and the won gained on optimism the region will continue to grow even as there are mounting concerns about the pace of the global recovery.
The MSCI Asia Pacific Index gained 0.2 percent to 111.90 as of 11:30 a.m. in Tokyo. Oil increased for the first time in six days and copper advanced in London for a second day. Futures on the Standard & Poor’s 500 Index rose 0.3 percent. The U.S. benchmark declined 0.5 percent on Friday.
Investor optimism rose as valuations became more compelling following the MSCI Asia Pacific Index’s 13 percent decline since this year’s April 15 peak and after Premier Wen Jiabao said China will ensure “steady and relatively fast” growth. Gains were muted by the 125,000 decline in U.S. payrolls last month and after European Central Bank President Jean-Claude Trichet pressed governments to trim their budget deficits, saying this was needed to boost confidence.
“The outlook for growth around the world is certainly not as optimistic as it was a few months ago,” said Toby Hassall, a commodity analyst at CWA Global Markets Pty in Sydney. “There will be the longer-term participants in the market who are viewing this decline in price as a good time to get long.”
Japan’s Nikkei 225 Stock Average rose 0.4 percent as the weaker yen boosted Japanese companies’ revenue from overseas when they are repatriated. The Shanghai Composite Index retreated 0.7 percent.
Centennial Takeover
Centennial Coal Co. surged 33 percent in Sydney after Banpu Pcl agreed to buy the 80 percent of Centennial it doesn’t already own. CSR Ltd., Australia’s No. 2 building-products maker, climbed 3.2 percent after agreeing to sell its Sucrogen sugar unit to Wilmar International Ltd. for A$1.75 billion ($1.5 billion). Canon Inc., the world’s biggest maker of cameras, gained 0.9 percent in Tokyo as the yen weakened against the euro.
China Cosco Holdings Co., the nation’s biggest shipping company by market value, fell 1.3 percent as the Baltic Dry Index, a measure of commodity-shipping costs, extended the longest losing streak since August 2005.
Crude oil rose 0.8 percent to $72.69 a barrel in New York, recovering from its biggest weekly decline in eight. Three-month delivery copper climbed as much as 1.6 percent to $6,510 a metric ton on the London Metal Exchange.
Goldman Boosts Won
South Korea’s won strengthened for the first time in five days after Goldman Sachs Group Inc. raised its 2010 economic growth forecast. The won led gains among regional currencies, having last week recorded the biggest loss as purchasing managers’ surveys showed manufacturing growth was slowing in the U.S., Europe and China.
The won strengthened 0.6 percent to 1,221.60 per dollar in Seoul, after sliding 1.1 percent last week, according to data compiled by Bloomberg.
The Bank of Korea will keep its benchmark interest rate at a record-low 2 percent at a review this week, according to seven of 10 economists surveyed by Bloomberg. Three predicted a quarter of a percentage point increase.
“Offshore players are selling dollars more than expected,” said Ha Jun Woo, a currency trader for Daegu Bank Ltd. in Seoul. “We’re also seeing preemptive bets ahead of the central bank’s monetary policy meeting. If interest rates rise, that will push investors to sell dollars and buy the won.”
Euro Weakens
The euro declined from near its strongest level in six weeks amid speculation the sovereign debt crisis in Europe will force the region’s central bank to keep interest rates at a record low.
The euro fell 0.2 percent to $1.2542 in Tokyo, from $1.2566 on July 2, when it reached $1.2612, the most since May 21. The yen traded at 87.91 per dollar from 87.75 last week in New York, after climbing to 86.97 on July 1, the strongest since Dec. 2. It bought 110.13 per euro from 110.27.
“The ECB will be forced into a lower-for-longer stance on its monetary policy,” said Sue Trinh, a senior currency strategist in Hong Kong at Royal Bank of Canada. “We are still very bearish on the euro and expect a move toward $1.15 by the end of the year.”
The MSCI Asia Pacific Index gained 0.2 percent to 111.90 as of 11:30 a.m. in Tokyo. Oil increased for the first time in six days and copper advanced in London for a second day. Futures on the Standard & Poor’s 500 Index rose 0.3 percent. The U.S. benchmark declined 0.5 percent on Friday.
Investor optimism rose as valuations became more compelling following the MSCI Asia Pacific Index’s 13 percent decline since this year’s April 15 peak and after Premier Wen Jiabao said China will ensure “steady and relatively fast” growth. Gains were muted by the 125,000 decline in U.S. payrolls last month and after European Central Bank President Jean-Claude Trichet pressed governments to trim their budget deficits, saying this was needed to boost confidence.
“The outlook for growth around the world is certainly not as optimistic as it was a few months ago,” said Toby Hassall, a commodity analyst at CWA Global Markets Pty in Sydney. “There will be the longer-term participants in the market who are viewing this decline in price as a good time to get long.”
Japan’s Nikkei 225 Stock Average rose 0.4 percent as the weaker yen boosted Japanese companies’ revenue from overseas when they are repatriated. The Shanghai Composite Index retreated 0.7 percent.
Centennial Takeover
Centennial Coal Co. surged 33 percent in Sydney after Banpu Pcl agreed to buy the 80 percent of Centennial it doesn’t already own. CSR Ltd., Australia’s No. 2 building-products maker, climbed 3.2 percent after agreeing to sell its Sucrogen sugar unit to Wilmar International Ltd. for A$1.75 billion ($1.5 billion). Canon Inc., the world’s biggest maker of cameras, gained 0.9 percent in Tokyo as the yen weakened against the euro.
China Cosco Holdings Co., the nation’s biggest shipping company by market value, fell 1.3 percent as the Baltic Dry Index, a measure of commodity-shipping costs, extended the longest losing streak since August 2005.
Crude oil rose 0.8 percent to $72.69 a barrel in New York, recovering from its biggest weekly decline in eight. Three-month delivery copper climbed as much as 1.6 percent to $6,510 a metric ton on the London Metal Exchange.
Goldman Boosts Won
South Korea’s won strengthened for the first time in five days after Goldman Sachs Group Inc. raised its 2010 economic growth forecast. The won led gains among regional currencies, having last week recorded the biggest loss as purchasing managers’ surveys showed manufacturing growth was slowing in the U.S., Europe and China.
The won strengthened 0.6 percent to 1,221.60 per dollar in Seoul, after sliding 1.1 percent last week, according to data compiled by Bloomberg.
The Bank of Korea will keep its benchmark interest rate at a record-low 2 percent at a review this week, according to seven of 10 economists surveyed by Bloomberg. Three predicted a quarter of a percentage point increase.
“Offshore players are selling dollars more than expected,” said Ha Jun Woo, a currency trader for Daegu Bank Ltd. in Seoul. “We’re also seeing preemptive bets ahead of the central bank’s monetary policy meeting. If interest rates rise, that will push investors to sell dollars and buy the won.”
Euro Weakens
The euro declined from near its strongest level in six weeks amid speculation the sovereign debt crisis in Europe will force the region’s central bank to keep interest rates at a record low.
The euro fell 0.2 percent to $1.2542 in Tokyo, from $1.2566 on July 2, when it reached $1.2612, the most since May 21. The yen traded at 87.91 per dollar from 87.75 last week in New York, after climbing to 86.97 on July 1, the strongest since Dec. 2. It bought 110.13 per euro from 110.27.
“The ECB will be forced into a lower-for-longer stance on its monetary policy,” said Sue Trinh, a senior currency strategist in Hong Kong at Royal Bank of Canada. “We are still very bearish on the euro and expect a move toward $1.15 by the end of the year.”
Asia Convertible Slump Means Citi Sees 25% Gain: Credit Markets
July 5 (Bloomberg) -- The worst quarter for Asian equities in more than a year has pushed yields on convertible bonds higher than some debt that can’t be exchanged for stock, prompting strategists to predict gains of 25 percent or more as the region’s economy posts the fastest growth in the world.
“Upside of 25 percent from here would be a conservative estimate and it could be as much as 50 percent,” Kim Wong, Citigroup Inc.’s head of convertible bond trading for Asia, said in a telephone interview from Hong Kong.
The debt lost 3.92 percent in May and June as measured by Bank of America Merrill Lynch indexes, while the MSCI Asia Pacific Index of stocks fell 10.4 percent. PT Bumi Resources’ $375 million of equity-linked notes due 2014 yield 16 percent, compared with 11.3 percent for its $300 million of bonds due 2016, according to Exane SA and ING Groep NV prices. Shares in Indonesia’s biggest coal producer fell 16.4 percent to 1,880 rupiah (21 cents) in Jakarta this year through June 30.
With the economy in the Asia-Pacific region forecast by Barclays Capital to grow 7.6 percent this year, faster than the 4.7 percent for the world overall, the securities are a bargain, according to Swiss bank Lombard Odier Darier Hentsche & Cie. Some 250 convertible dollar-denominated bonds are outstanding in Asia-Pacific excluding Japan, compared with 3,406 that can’t be exchanged for equity, according to data compiled by Bloomberg.
‘Reward Looks Good’
“If equity markets recover strongly you could make 50 percent, 60 percent” on the debt, Nathalia Barazal, a money manager who helps oversee 3 billion euros ($3.8 billion) of equity-linked securities globally at Lombard Odier, said in a phone interview from Geneva. “If they don’t, you’ve still got a bond with the safety net of a positive yield, so either way the risk versus reward looks good.”
Convertible bonds are notes that can convert to stock at a predetermined ratio. When stocks fall, the option to convert loses its value, pushing prices down.
Elsewhere in credit markets, the cost of protecting Asian and Australian bonds from default fell, according to traders of credit-default swaps. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan declined 2 basis points to 136 basis points, according to Credit Agricole CIB. The Markit iTraxx Australia index dropped 3 basis points to 133 basis points, the lowest in a week, according to Nomura Holdings Inc. and CMA DataVision.
The extra yield investors demand to own corporate bonds rather than government debt rose 2 basis points last week to an average of 197 basis points, or 1.97 percentage points, based on Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The spread has fluctuated between 190 and 201 basis points since May 25 after widening from the low this year of 142 on April 21. Yields ended last week at 3.98 percent, compared with 3.99 percent on June 25.
‘Sobering Reassessment’
Corporate bond sales tumbled last week as credit-default swap indexes jumped. General Motors Co. is seeking a $5 billion revolving line of credit as concern that the economy will slow leads investors to shun loans.
“In the beginning of April it felt like we were off to the races again,” said Tom Newberry, the New York-based head of global leveraged-finance at Credit Suisse Group AG, the fourth- biggest underwriter of leveraged loans this year. There’s since been a “sobering reassessment,” he said.
Companies issued about $10.8 billion of bonds worldwide in the five-day period ended July 2, a drop of 57 percent from the previous week, data compiled by Bloomberg show. That’s the least in five weeks and below this year’s average of $25.3 billion.
Swaps Jump
Credit-default swaps tied to U.S. corporate bonds jumped the most in six weeks. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, climbed 8.6 basis points to 122.75 basis points, the biggest weekly rise since the period ended May 21, according to Markit Group Ltd.
In London the Markit iTraxx Europe Index of swaps on 125 investment-grade companies rose 0.7 basis point to 127.04. The indexes typically increase as investor confidence deteriorates and fall as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of bonds and loans.
GM is talking with banks about setting up a revolving line of credit of $5 billion or more, said two people with knowledge of the plan. The Detroit-based automaker may use the line to pay business costs while using cash to refinance more expensive debt, said one of the people, who asked not to be identified because the talks are private.
GM also wants a credit line to establish relationships with banks, the people said. Noreen Pratscher, a GM spokeswoman, declined to comment.
Loans, Convertibles
The automaker is seeking the loan as prices for the debt weaken. The S&P/LSTA US Leveraged Loan 100 Index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, fell 0.93 cent last week to 87.88 cents on the dollar. The index lost 3.7 percent last quarter after gaining 4.7 percent in the first three months of the year.
Convertible bonds overall have lost 1.48 percent this year after gaining 36.3 percent in 2009 as stocks rallied amid a recovery in the economy. The securities lost 29.3 percent in 2008, Bank of America Merrill Lynch index data show. The firm’s broad corporate bond gauge has gained 5.07 percent following an increase of 16.3 percent in 2009.
Equity-linked securities have been hurt along with stocks amid concern that Europe’s sovereign debt crisis and attempts by governments to reduce spending will slow economic expansion. The MSCI World Index of stocks has tumbled 11.45 percent in 2010.
Asia Recovery
The average yield on equity-linked bonds from Europe, the Middle East and Africa has “almost doubled” since January, providing new opportunities for investors, said Barclays Capital equity-linked analyst Angus Allison, citing the London-based bank’s EMEA Convertibles index.
Asian convertibles may be more attractive than those of Europe and the U.S. because the region’s relative economic strength should translate into a faster equity market recovery, according to Barazal at Lombard Odier, which also runs an Asian convertible bonds fund worth $350 million.
“If it’s growth, budget deficits, whatever you’re looking at in Europe, Asia looks better,” Barazal said. “We’re overweight Asia because the fundamentals are good.”
PT Berlian Laju Tanker’s $125 million of 2015 convertible bonds yield 28.2 percent, compared with 19.7 percent for its $400 million of non-convertible bonds due 2014, according to Mizuho Securities Co. and BNP Paribas SA prices.
Concentration Risk
SM Investment Corp., the Philippines company which owns the country’s largest bank by assets and its biggest shopping mall operator, has $300 million of 2012 convertible bonds yielding 4.4 percent, Nomura prices show. Its $350 million of 2013 bonds which aren’t convertible yield 4.1 percent, BNP prices show.
Infratil Ltd., the New Zealand investor in energy and transport companies, has NZ$77.3 million ($53.2 million) of 2012 convertible bonds yielding 10.2 percent, New Zealand Exchange Ltd. prices show. Its NZ$20 million of 2011 notes which aren’t convertible yield 7.9 percent.
The size of Asia’s convertible bond market means volatility is higher than in other parts of the world, according to James Simmons, a money manager at hedge fund Enhanced Investment Products Ltd. The firm doesn’t own any equity-linked notes.
“The vast majority of the market is concentrated in the hands of a small number of people, all of whom act at the same time,” he said in a phone interview from Hong Kong. “I’m not saying equities won’t go up or credit spreads won’t tighten, just that I think you’re not being paid enough to take on that kind of additional risk right now.”
“Upside of 25 percent from here would be a conservative estimate and it could be as much as 50 percent,” Kim Wong, Citigroup Inc.’s head of convertible bond trading for Asia, said in a telephone interview from Hong Kong.
The debt lost 3.92 percent in May and June as measured by Bank of America Merrill Lynch indexes, while the MSCI Asia Pacific Index of stocks fell 10.4 percent. PT Bumi Resources’ $375 million of equity-linked notes due 2014 yield 16 percent, compared with 11.3 percent for its $300 million of bonds due 2016, according to Exane SA and ING Groep NV prices. Shares in Indonesia’s biggest coal producer fell 16.4 percent to 1,880 rupiah (21 cents) in Jakarta this year through June 30.
With the economy in the Asia-Pacific region forecast by Barclays Capital to grow 7.6 percent this year, faster than the 4.7 percent for the world overall, the securities are a bargain, according to Swiss bank Lombard Odier Darier Hentsche & Cie. Some 250 convertible dollar-denominated bonds are outstanding in Asia-Pacific excluding Japan, compared with 3,406 that can’t be exchanged for equity, according to data compiled by Bloomberg.
‘Reward Looks Good’
“If equity markets recover strongly you could make 50 percent, 60 percent” on the debt, Nathalia Barazal, a money manager who helps oversee 3 billion euros ($3.8 billion) of equity-linked securities globally at Lombard Odier, said in a phone interview from Geneva. “If they don’t, you’ve still got a bond with the safety net of a positive yield, so either way the risk versus reward looks good.”
Convertible bonds are notes that can convert to stock at a predetermined ratio. When stocks fall, the option to convert loses its value, pushing prices down.
Elsewhere in credit markets, the cost of protecting Asian and Australian bonds from default fell, according to traders of credit-default swaps. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan declined 2 basis points to 136 basis points, according to Credit Agricole CIB. The Markit iTraxx Australia index dropped 3 basis points to 133 basis points, the lowest in a week, according to Nomura Holdings Inc. and CMA DataVision.
The extra yield investors demand to own corporate bonds rather than government debt rose 2 basis points last week to an average of 197 basis points, or 1.97 percentage points, based on Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The spread has fluctuated between 190 and 201 basis points since May 25 after widening from the low this year of 142 on April 21. Yields ended last week at 3.98 percent, compared with 3.99 percent on June 25.
‘Sobering Reassessment’
Corporate bond sales tumbled last week as credit-default swap indexes jumped. General Motors Co. is seeking a $5 billion revolving line of credit as concern that the economy will slow leads investors to shun loans.
“In the beginning of April it felt like we were off to the races again,” said Tom Newberry, the New York-based head of global leveraged-finance at Credit Suisse Group AG, the fourth- biggest underwriter of leveraged loans this year. There’s since been a “sobering reassessment,” he said.
Companies issued about $10.8 billion of bonds worldwide in the five-day period ended July 2, a drop of 57 percent from the previous week, data compiled by Bloomberg show. That’s the least in five weeks and below this year’s average of $25.3 billion.
Swaps Jump
Credit-default swaps tied to U.S. corporate bonds jumped the most in six weeks. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, climbed 8.6 basis points to 122.75 basis points, the biggest weekly rise since the period ended May 21, according to Markit Group Ltd.
In London the Markit iTraxx Europe Index of swaps on 125 investment-grade companies rose 0.7 basis point to 127.04. The indexes typically increase as investor confidence deteriorates and fall as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of bonds and loans.
GM is talking with banks about setting up a revolving line of credit of $5 billion or more, said two people with knowledge of the plan. The Detroit-based automaker may use the line to pay business costs while using cash to refinance more expensive debt, said one of the people, who asked not to be identified because the talks are private.
GM also wants a credit line to establish relationships with banks, the people said. Noreen Pratscher, a GM spokeswoman, declined to comment.
Loans, Convertibles
The automaker is seeking the loan as prices for the debt weaken. The S&P/LSTA US Leveraged Loan 100 Index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, fell 0.93 cent last week to 87.88 cents on the dollar. The index lost 3.7 percent last quarter after gaining 4.7 percent in the first three months of the year.
Convertible bonds overall have lost 1.48 percent this year after gaining 36.3 percent in 2009 as stocks rallied amid a recovery in the economy. The securities lost 29.3 percent in 2008, Bank of America Merrill Lynch index data show. The firm’s broad corporate bond gauge has gained 5.07 percent following an increase of 16.3 percent in 2009.
Equity-linked securities have been hurt along with stocks amid concern that Europe’s sovereign debt crisis and attempts by governments to reduce spending will slow economic expansion. The MSCI World Index of stocks has tumbled 11.45 percent in 2010.
Asia Recovery
The average yield on equity-linked bonds from Europe, the Middle East and Africa has “almost doubled” since January, providing new opportunities for investors, said Barclays Capital equity-linked analyst Angus Allison, citing the London-based bank’s EMEA Convertibles index.
Asian convertibles may be more attractive than those of Europe and the U.S. because the region’s relative economic strength should translate into a faster equity market recovery, according to Barazal at Lombard Odier, which also runs an Asian convertible bonds fund worth $350 million.
“If it’s growth, budget deficits, whatever you’re looking at in Europe, Asia looks better,” Barazal said. “We’re overweight Asia because the fundamentals are good.”
PT Berlian Laju Tanker’s $125 million of 2015 convertible bonds yield 28.2 percent, compared with 19.7 percent for its $400 million of non-convertible bonds due 2014, according to Mizuho Securities Co. and BNP Paribas SA prices.
Concentration Risk
SM Investment Corp., the Philippines company which owns the country’s largest bank by assets and its biggest shopping mall operator, has $300 million of 2012 convertible bonds yielding 4.4 percent, Nomura prices show. Its $350 million of 2013 bonds which aren’t convertible yield 4.1 percent, BNP prices show.
Infratil Ltd., the New Zealand investor in energy and transport companies, has NZ$77.3 million ($53.2 million) of 2012 convertible bonds yielding 10.2 percent, New Zealand Exchange Ltd. prices show. Its NZ$20 million of 2011 notes which aren’t convertible yield 7.9 percent.
The size of Asia’s convertible bond market means volatility is higher than in other parts of the world, according to James Simmons, a money manager at hedge fund Enhanced Investment Products Ltd. The firm doesn’t own any equity-linked notes.
“The vast majority of the market is concentrated in the hands of a small number of people, all of whom act at the same time,” he said in a phone interview from Hong Kong. “I’m not saying equities won’t go up or credit spreads won’t tighten, just that I think you’re not being paid enough to take on that kind of additional risk right now.”
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