Ford Motor plans to use expanded capacity in India to launch eight new models over the next five years and export its locally assembled small Figo car to about 50 countries.
The Detroit carmaker’s strategy for its Indian operations were detailed in remarks prepared for delivery at a conference in New Delhi on Thursday by Joe Hinrichs, head of Ford’s Asia-Pacific and Africa operations.
EDITOR’S CHOICE
Editorial: Go east, young car salesman - Aug-13
Lex: US car sales - Aug-11
beyondbrics: Mahindra says it can revive Ssangyong - Aug-03
In depth: Car industry: after the crisis - Aug-12
Mr Hinrichs said the new models would be built with chassis used for similar models – under the company’s “One Ford” strategy, which has become an increasingly important part of its drive to integrate worldwide operations.
The Figo is one of several small models – also including Volkswagen’s Polo and the Nissan Micra – that have sharply boosted car sales in India this year. Domestic sales reached a new record in July, up 38 per cent from a year earlier.
Some carmakers see India as a more promising market than China in the next few years, with an estimated 10m-11m Indians expect to shift from two-wheeled forms of transport to small cars. By contrast, sales in China rose at their slowest pace in 15 months in July.
Ford unveiled a $500m plan last September to double capacity of its assembly plant in Chennai and to build a new engine plant. It has also set up new dealerships to make up ground lost earlier to its domestic and foreign rivals.
Toyota, Honda and Volkswagen are among other carmakers that are increasingly focusing on India as a small-car manufacturing hub. The new investments have coincided with a recovery in India’s economy and a revival of credit, with banks and finance companies now more willing to provide auto loans.
Ford India began exporting the Figo to South Africa in May. Mr Hinrichs said future markets will include Mexico, North African countries and the United Arab Emirates.
He estimated that Ford’s sales in the Asia-Pacific region and Africa would make up two-thirds of its worldwide growth over the next decade.
General Motors, Ford’s bigger Detroit rival, already sells more vehicles in China than in the US. It said that it plans to concentrate on China and Brazil.
Japanese carmakers are expanding production in India and other overseas markets partly to reduce their dependence on exports from Japan, whose profitability has been dented by the surging yen. Toyota announced a five-year plan last month to build factories in China, India, Brazil and the US.
Thursday, August 26, 2010
A Big Surprise: Troubled Assets Garner Rewards
American taxpayers are already poised to make unexpected billions from rescuing the nation’s banks. Now, they could reap another sizable profit from a government program devised to purge troubled real estate assets from the financial system.
The Obama administration made the so-called Public-Private Investment Program a centerpiece of its plan to help unlock the frozen credit markets in the spring of 2009, when a lack of buyers for complex mortgage securities threatened the health of the nation’s banks and put a drag on lending.
Under the program, the government provided matching funds and ultracheap loans to investment firms like AllianceBernstein and Oaktree Capital that agreed to buy mortgage securities from banks, insurers and other financial institutions.
Taxpayers stood to share in any of the profits, though the prospects of such a windfall were seen as secondary to the goal of unclogging the markets.
Nine months into the program, the eight investment funds chosen by the Treasury Department have generated an estimated return of about 15.5 percent for taxpayers, according to an analysis of their results through the end of June by Linus Wilson, an assistant professor of finance at the University of Louisiana, Lafayette.
Two of the investment funds — one operated by an Angelo Gordon-GE Capital consortium and another by BlackRock — have gotten off to even stronger starts, posting returns of more than 20 percent.
That translates into a paper profit of roughly $657 million for taxpayers. Some Wall Street analysts project that taxpayers could earn as much as $6.2 billion on these investments over the next nine years, from an investment of about $22 billion.
To be sure, the funds’ standout performance can be attributed to a rally in the mortgage bond market that began late last year and may be hard to repeat.
Still, it is a remarkable turnabout. When the administration announced the Public-Private Investment Program, critics lambasted it as yet another giveaway to private equity firms and other Wall Street money managers — a program so ill-conceived that one prominent economist, the Nobel laureate Joseph Stiglitz, characterized it at the time as a “robbery of the American people.”
But the strong start of the funds has pushed aside many of those concerns.
“We feel very good about the performance to date,” said David N. Miller, the Treasury Department’s chief investment officer who oversees its bailout-related holdings.
The administration has not yet provided its own profit projections, and all proceeds will be used to pay down the nation’s ballooning debt. But any windfall, Mr. Miller suggested, would be icing on the cake for taxpayers.
The program’s main benefit, he said, has been to help revive the market for complex mortgage bonds, whose trading ground to a halt a year and a half ago. That helped break the downward spiral of asset prices and paved the way for a wave of new bond deals, which lenders rely on to finance new mortgages.
“We view that as accomplishing the mission,” Mr. Miller said.
The scope of the government’s action was scaled back before it got started. In fact, the original purpose of the $700 billion federal bailout program, authorized by Congress during the tenure of Treasury Secretary Henry M. Paulson Jr., was to buy mortgage assets much more aggressively. Instead, that money was used to make direct investments in troubled banks.
So, to restart the trading of mortgage assets, the incoming Treasury secretary, Timothy F. Geithner, announced the creation of a smaller Public-Private Investment Program. The administration hoped to establish market prices for the assets so that banks would not have to sell them at fire-sale prices, which would have threatened their solvency.
As a side effect, though, the extraordinary government interventions in the banking system made necessary by the financial crisis have turned the United States government into one of the world’s biggest vulture investors.
In addition to the $22 billion the Treasury Department has invested in the public-private program, the Federal Reserve has amassed about $69 billion of distressed loans and bonds from the 11th-hour rescues of Bear Stearns and the American International Group. That program appears poised to turn its own multibillion-dollar profit for taxpayers.
Together the Treasury and Fed have allocated more than twice as much taxpayer money toward distressed real estate assets as the combined total the 10 largest private real estate investment funds have raised for such assets over the last decade, according to Prequin, a financial information provider.
In normal market conditions, these funds are the lifeblood of real estate financing.
All that money invested by the government is still tiny compared with the estimated $1.8 trillion worth of distressed residential and commercial mortgage-related securities that were eligible for sale when the investment funds drafted by the Public-Private Investment Program began their purchases last fall, according to a Barclays Capital research report. Those assets remain on the books of many Wall Street investment houses, insurers and banks.
What the program has provided, though, is a big dose of confidence in the markets, assuring investors that there would be a steady stream of buyers for distressed securities.
More than 100 investment firms applied to participate in the program and raised money from private investors. Even though only eight funds were chosen to receive government money, many of the others have nonetheless been dabbling in the market, helping to bid up prices.
“That literally changed supply and demand,” said Wilbur L. Ross Jr., the veteran vulture investor who helps manage Invesco’s public-private fund.
The Public-Private Investment Program has run into its share of problems. For example, a second component of the program — to be run by the Federal Deposit Insurance Corporation and intended to encourage the purchase of real estate loans rather than bonds — never got off the ground.
Also, some of the early promises that ordinary investors would be able to “profit from the bailout” by owning stakes in public-private investment funds have failed to materialize. BlackRock, for example, failed to win regulatory approval to create a mutual fund for ordinary investors that would have largely invested in the firm’s public-private fund.
Legg Mason and Nuveen Investments have offered consumers the chance to own smaller slivers of the program’s investments through the Mortgage Opportunity mutual funds they sell — although they have only modestly outperformed their peers.
Government watchdogs have also raised concerns about the program. Neil M. Barofsky, the special inspector general assigned to monitor the use of bailout funds, faulted the Treasury Department by saying it had failed to establish “appropriate metrics and internal controls.”
Fund managers brief federal officials at least monthly on their performance, but Mr. Barofsky concluded that expecting private firms to develop detailed policies and procedures “is not appropriate in light of the risk of conflicts of interest inherent” in the public-private investment program. His follow-up audit of the public-private fund managers is expected to be completed in September.
Meanwhile skeptics like Professor Wilson question whether the government’s favorable financing terms were actually encouraging the fund managers in the program to make risky wagers without giving taxpayers a big enough piece of the upside.
“The U.S. Treasury has given the asset managers incentives to swing for the fences,” Professor Wilson said. “The asset managers have hit some early home runs, yet we are still in the first inning of these investments.”
Although the program’s eight investment funds have posted solid results so far, they have invested only about $16.2 billion, or just over 55 percent of the $29.2 billion of the total money they have raised, according to government data through June.
The Treasury Department has put up roughly three-quarters of that total, matching dollar-for-dollar money put up by private investors while also providing an even bigger helping of debt financing at about 1.3 percent, well below normal interest rates.
The Obama administration made the so-called Public-Private Investment Program a centerpiece of its plan to help unlock the frozen credit markets in the spring of 2009, when a lack of buyers for complex mortgage securities threatened the health of the nation’s banks and put a drag on lending.
Under the program, the government provided matching funds and ultracheap loans to investment firms like AllianceBernstein and Oaktree Capital that agreed to buy mortgage securities from banks, insurers and other financial institutions.
Taxpayers stood to share in any of the profits, though the prospects of such a windfall were seen as secondary to the goal of unclogging the markets.
Nine months into the program, the eight investment funds chosen by the Treasury Department have generated an estimated return of about 15.5 percent for taxpayers, according to an analysis of their results through the end of June by Linus Wilson, an assistant professor of finance at the University of Louisiana, Lafayette.
Two of the investment funds — one operated by an Angelo Gordon-GE Capital consortium and another by BlackRock — have gotten off to even stronger starts, posting returns of more than 20 percent.
That translates into a paper profit of roughly $657 million for taxpayers. Some Wall Street analysts project that taxpayers could earn as much as $6.2 billion on these investments over the next nine years, from an investment of about $22 billion.
To be sure, the funds’ standout performance can be attributed to a rally in the mortgage bond market that began late last year and may be hard to repeat.
Still, it is a remarkable turnabout. When the administration announced the Public-Private Investment Program, critics lambasted it as yet another giveaway to private equity firms and other Wall Street money managers — a program so ill-conceived that one prominent economist, the Nobel laureate Joseph Stiglitz, characterized it at the time as a “robbery of the American people.”
But the strong start of the funds has pushed aside many of those concerns.
“We feel very good about the performance to date,” said David N. Miller, the Treasury Department’s chief investment officer who oversees its bailout-related holdings.
The administration has not yet provided its own profit projections, and all proceeds will be used to pay down the nation’s ballooning debt. But any windfall, Mr. Miller suggested, would be icing on the cake for taxpayers.
The program’s main benefit, he said, has been to help revive the market for complex mortgage bonds, whose trading ground to a halt a year and a half ago. That helped break the downward spiral of asset prices and paved the way for a wave of new bond deals, which lenders rely on to finance new mortgages.
“We view that as accomplishing the mission,” Mr. Miller said.
The scope of the government’s action was scaled back before it got started. In fact, the original purpose of the $700 billion federal bailout program, authorized by Congress during the tenure of Treasury Secretary Henry M. Paulson Jr., was to buy mortgage assets much more aggressively. Instead, that money was used to make direct investments in troubled banks.
So, to restart the trading of mortgage assets, the incoming Treasury secretary, Timothy F. Geithner, announced the creation of a smaller Public-Private Investment Program. The administration hoped to establish market prices for the assets so that banks would not have to sell them at fire-sale prices, which would have threatened their solvency.
As a side effect, though, the extraordinary government interventions in the banking system made necessary by the financial crisis have turned the United States government into one of the world’s biggest vulture investors.
In addition to the $22 billion the Treasury Department has invested in the public-private program, the Federal Reserve has amassed about $69 billion of distressed loans and bonds from the 11th-hour rescues of Bear Stearns and the American International Group. That program appears poised to turn its own multibillion-dollar profit for taxpayers.
Together the Treasury and Fed have allocated more than twice as much taxpayer money toward distressed real estate assets as the combined total the 10 largest private real estate investment funds have raised for such assets over the last decade, according to Prequin, a financial information provider.
In normal market conditions, these funds are the lifeblood of real estate financing.
All that money invested by the government is still tiny compared with the estimated $1.8 trillion worth of distressed residential and commercial mortgage-related securities that were eligible for sale when the investment funds drafted by the Public-Private Investment Program began their purchases last fall, according to a Barclays Capital research report. Those assets remain on the books of many Wall Street investment houses, insurers and banks.
What the program has provided, though, is a big dose of confidence in the markets, assuring investors that there would be a steady stream of buyers for distressed securities.
More than 100 investment firms applied to participate in the program and raised money from private investors. Even though only eight funds were chosen to receive government money, many of the others have nonetheless been dabbling in the market, helping to bid up prices.
“That literally changed supply and demand,” said Wilbur L. Ross Jr., the veteran vulture investor who helps manage Invesco’s public-private fund.
The Public-Private Investment Program has run into its share of problems. For example, a second component of the program — to be run by the Federal Deposit Insurance Corporation and intended to encourage the purchase of real estate loans rather than bonds — never got off the ground.
Also, some of the early promises that ordinary investors would be able to “profit from the bailout” by owning stakes in public-private investment funds have failed to materialize. BlackRock, for example, failed to win regulatory approval to create a mutual fund for ordinary investors that would have largely invested in the firm’s public-private fund.
Legg Mason and Nuveen Investments have offered consumers the chance to own smaller slivers of the program’s investments through the Mortgage Opportunity mutual funds they sell — although they have only modestly outperformed their peers.
Government watchdogs have also raised concerns about the program. Neil M. Barofsky, the special inspector general assigned to monitor the use of bailout funds, faulted the Treasury Department by saying it had failed to establish “appropriate metrics and internal controls.”
Fund managers brief federal officials at least monthly on their performance, but Mr. Barofsky concluded that expecting private firms to develop detailed policies and procedures “is not appropriate in light of the risk of conflicts of interest inherent” in the public-private investment program. His follow-up audit of the public-private fund managers is expected to be completed in September.
Meanwhile skeptics like Professor Wilson question whether the government’s favorable financing terms were actually encouraging the fund managers in the program to make risky wagers without giving taxpayers a big enough piece of the upside.
“The U.S. Treasury has given the asset managers incentives to swing for the fences,” Professor Wilson said. “The asset managers have hit some early home runs, yet we are still in the first inning of these investments.”
Although the program’s eight investment funds have posted solid results so far, they have invested only about $16.2 billion, or just over 55 percent of the $29.2 billion of the total money they have raised, according to government data through June.
The Treasury Department has put up roughly three-quarters of that total, matching dollar-for-dollar money put up by private investors while also providing an even bigger helping of debt financing at about 1.3 percent, well below normal interest rates.
India business wary over nuclear law
India’s lower house of parliament on Wednesday approved a draft nuclear liability law that the national nuclear power company and Indian business groups fear will jeopardise the benefits of New Delhi’s nuclear deal with the US.
The state-owned Nuclear Power Corp of India and leading industry bodies warned the draft law would throttle the country’s fledgling nuclear power industry, by deterring private companies from providing nuclear equipment or raw materials to India.
Global nuclear companies such as GE, Westinghouse, Bechtel and Areva are keen to enter the Indian market because of New Delhi’s ambitious plans to expand its nuclear energy capacity from 4,000 megawatts of installed capacity to 30,000MW by 2020. These companies have been waiting for India to lay out its legal framework for liability – the final step of India’s 2008 civil nuclear deal with the US.
The draft law is intended to ensure quick compensation for victims of nuclear accidents without the need to prove fault.
However, Indian industry groups say a provision allowing nuclear power plant operators to seek recourse from equipment or raw material suppliers for 80 years after a plant’s construction would deter international nuclear energy companies and some local companies from doing nuclear commerce with India.
In a letter to Manmohan Singh, prime minister, the Federation of Indian Chambers of Commerce and Industry warned the legislation “threatens to completely undo the government’s efforts to accelerate nuclear power generation in our country”.
The Confederation of Indian Industry said separately that the provision would be “a major deterrent” to India’s nuclear power operators accessing foreign technology.
“No manufacturer, Indian or foreign, would be able to serve the nuclear power industry,” Sudhinder Thakur, executive director of the national nuclear power group, said this week.
“The government has the powers to make laws, but in making laws, we should not defeat the purpose for which the laws are made.”
Mr Singh defended the bill – which must still be approved by the upper house – saying it was the final step to end India’s decades-long status as a nuclear pariah, following its 1974 and 1998 nuclear weapons tests.
“This bill completes our journey to end the nuclear apartheid that the world imposed on us,” Mr Singh told parliament ahead of the vote.
Most countries with a large nuclear energy sector fix absolute and exclusive liability on nuclear power plant operators, which are normally able to access insurance to cover their risk. With up to 300 companies supplying components, materials, and services to build a nuclear power plant, industry groups say pinpointing liability in case of an accident is considered nearly impossible – and many suppliers, especially of small parts, could not afford to insure against a long accident risk.
However, the debate on the nuclear liability bill was affected by the recent resurgence of public anger over the 1984 Bhopal gas disaster.
The state-owned Nuclear Power Corp of India and leading industry bodies warned the draft law would throttle the country’s fledgling nuclear power industry, by deterring private companies from providing nuclear equipment or raw materials to India.
Global nuclear companies such as GE, Westinghouse, Bechtel and Areva are keen to enter the Indian market because of New Delhi’s ambitious plans to expand its nuclear energy capacity from 4,000 megawatts of installed capacity to 30,000MW by 2020. These companies have been waiting for India to lay out its legal framework for liability – the final step of India’s 2008 civil nuclear deal with the US.
The draft law is intended to ensure quick compensation for victims of nuclear accidents without the need to prove fault.
However, Indian industry groups say a provision allowing nuclear power plant operators to seek recourse from equipment or raw material suppliers for 80 years after a plant’s construction would deter international nuclear energy companies and some local companies from doing nuclear commerce with India.
In a letter to Manmohan Singh, prime minister, the Federation of Indian Chambers of Commerce and Industry warned the legislation “threatens to completely undo the government’s efforts to accelerate nuclear power generation in our country”.
The Confederation of Indian Industry said separately that the provision would be “a major deterrent” to India’s nuclear power operators accessing foreign technology.
“No manufacturer, Indian or foreign, would be able to serve the nuclear power industry,” Sudhinder Thakur, executive director of the national nuclear power group, said this week.
“The government has the powers to make laws, but in making laws, we should not defeat the purpose for which the laws are made.”
Mr Singh defended the bill – which must still be approved by the upper house – saying it was the final step to end India’s decades-long status as a nuclear pariah, following its 1974 and 1998 nuclear weapons tests.
“This bill completes our journey to end the nuclear apartheid that the world imposed on us,” Mr Singh told parliament ahead of the vote.
Most countries with a large nuclear energy sector fix absolute and exclusive liability on nuclear power plant operators, which are normally able to access insurance to cover their risk. With up to 300 companies supplying components, materials, and services to build a nuclear power plant, industry groups say pinpointing liability in case of an accident is considered nearly impossible – and many suppliers, especially of small parts, could not afford to insure against a long accident risk.
However, the debate on the nuclear liability bill was affected by the recent resurgence of public anger over the 1984 Bhopal gas disaster.
Wednesday, August 25, 2010
Wal-Mart Asks Supreme Court to Hear Bias Suitc
Wal-Mart Stores asked the Supreme Court on Wednesday to review the largest employment discrimination lawsuit in American history, involving more than a million female workers, current and former, at Wal-Mart and Sam’s Club stores.
Nine years after the suit was filed, the central issue before the Supreme Court will not be whether any discrimination occurred, but whether more than a million people can even make this joint claim through a class-action lawsuit, as opposed to filing claims individually or in smaller groups.
In April, the United States Court of Appeals for the Ninth Circuit in San Francisco ruled 6-5 that the lawsuit could proceed as a jumbo class action — the fourth judicial decision upholding a class action.
The stakes are huge. If the Supreme Court allows the suit to proceed as a class action, that could easily cost Wal-Mart $1 billion or more in damages, legal experts say.
More significant, the court’s ruling could set guidelines for other types of class-action suits. “This is the big one that will set the standards for all other class actions,” said Robin S. Conrad, executive vice president of the National Chamber Litigation Center, an arm of the United States Chamber of Commerce, which has filed several amicus briefs backing Wal-Mart.
Meanwhile, the women at the core of the original lawsuit, known as Dukes v. Wal-Mart, have tried to move on with their lives. Some still work at Wal-Mart and have been promoted or received raises. One still works as a greeter there. Others have left Wal-Mart.
The case began nearly a decade ago with one woman, Stephanie Odle, who was upset to discover that the top manager at the Sam’s Club where she worked as an assistant store manager had been administering a promotion test to the three male assistant store managers but not to her.
That came after Ms. Odle discovered that a male assistant manager at a previous Sam’s Club where she worked had been earning $23,000 more a year than she was. When she complained, she said, the district manager responded, “Stephanie, that assistant manager has a family and two children to support.”
“I told him, ‘I’m a single mother, and I have a 6-month-old child to support,’ ” she recalled in an interview.
Lawyers representing the plaintiffs recruited Ms. Odle after obtaining a data showing that just a third of Wal-Mart’s managers were women even though two-thirds of its employees were. The lawyers wanted to enlist a Wal-Mart employee whose complaints about pay and promotions would be a base from which to build a broader sex discrimination case.
Ms. Odle’s story, along with those of six other women, became the seed of the 2001 lawsuit that accused Wal-Mart of systematic discrimination against women in pay and promotions. No one expected it to become such a drawn-out battle.
In its appeal, Wal-Mart said the Ninth Circuit’s decision had contradicted earlier decisions of the Supreme Court and other appeals courts and had wrongly relieved the plaintiffs of the burden of proving individual injury.
“This conflict and confusion in class-action law is harmful for everyone — employers, employees, businesses of all types and sizes, and the civil justice system,” said Theodore Boutrous, a lawyer for Wal-Mart.
In its filing, Wal-Mart argued that while a class action might be appropriate for plaintiffs seeking changes to the retailer’s behavior, the status was improper for seeking monetary damages.
The company said the complaints of the seven women were not typical of the more than one million women who have worked at Wal-Mart in the last decade. In a statement Wednesday, Wal-Mart said that it “has been recognized as a leader in fostering the advancement and success of women in the workplace.”
Brad Seligman, a lawyer for the women, disputed Wal-Mart’s legal analysis. “The ruling upholding the class in this case is well within the mainstream that courts at all levels have recognized for decades,” he said in an e-mail Wednesday. “Only the size of the case is unusual, and that is a product of Wal-Mart’s size and the breadth of the discrimination we documented. There is no ‘too big to be liable’ exception in civil rights laws.”
The slow grind of the legal process has taken its toll on the plaintiffs.
Nine years after the suit was filed, the central issue before the Supreme Court will not be whether any discrimination occurred, but whether more than a million people can even make this joint claim through a class-action lawsuit, as opposed to filing claims individually or in smaller groups.
In April, the United States Court of Appeals for the Ninth Circuit in San Francisco ruled 6-5 that the lawsuit could proceed as a jumbo class action — the fourth judicial decision upholding a class action.
The stakes are huge. If the Supreme Court allows the suit to proceed as a class action, that could easily cost Wal-Mart $1 billion or more in damages, legal experts say.
More significant, the court’s ruling could set guidelines for other types of class-action suits. “This is the big one that will set the standards for all other class actions,” said Robin S. Conrad, executive vice president of the National Chamber Litigation Center, an arm of the United States Chamber of Commerce, which has filed several amicus briefs backing Wal-Mart.
Meanwhile, the women at the core of the original lawsuit, known as Dukes v. Wal-Mart, have tried to move on with their lives. Some still work at Wal-Mart and have been promoted or received raises. One still works as a greeter there. Others have left Wal-Mart.
The case began nearly a decade ago with one woman, Stephanie Odle, who was upset to discover that the top manager at the Sam’s Club where she worked as an assistant store manager had been administering a promotion test to the three male assistant store managers but not to her.
That came after Ms. Odle discovered that a male assistant manager at a previous Sam’s Club where she worked had been earning $23,000 more a year than she was. When she complained, she said, the district manager responded, “Stephanie, that assistant manager has a family and two children to support.”
“I told him, ‘I’m a single mother, and I have a 6-month-old child to support,’ ” she recalled in an interview.
Lawyers representing the plaintiffs recruited Ms. Odle after obtaining a data showing that just a third of Wal-Mart’s managers were women even though two-thirds of its employees were. The lawyers wanted to enlist a Wal-Mart employee whose complaints about pay and promotions would be a base from which to build a broader sex discrimination case.
Ms. Odle’s story, along with those of six other women, became the seed of the 2001 lawsuit that accused Wal-Mart of systematic discrimination against women in pay and promotions. No one expected it to become such a drawn-out battle.
In its appeal, Wal-Mart said the Ninth Circuit’s decision had contradicted earlier decisions of the Supreme Court and other appeals courts and had wrongly relieved the plaintiffs of the burden of proving individual injury.
“This conflict and confusion in class-action law is harmful for everyone — employers, employees, businesses of all types and sizes, and the civil justice system,” said Theodore Boutrous, a lawyer for Wal-Mart.
In its filing, Wal-Mart argued that while a class action might be appropriate for plaintiffs seeking changes to the retailer’s behavior, the status was improper for seeking monetary damages.
The company said the complaints of the seven women were not typical of the more than one million women who have worked at Wal-Mart in the last decade. In a statement Wednesday, Wal-Mart said that it “has been recognized as a leader in fostering the advancement and success of women in the workplace.”
Brad Seligman, a lawyer for the women, disputed Wal-Mart’s legal analysis. “The ruling upholding the class in this case is well within the mainstream that courts at all levels have recognized for decades,” he said in an e-mail Wednesday. “Only the size of the case is unusual, and that is a product of Wal-Mart’s size and the breadth of the discrimination we documented. There is no ‘too big to be liable’ exception in civil rights laws.”
The slow grind of the legal process has taken its toll on the plaintiffs.
China Inflation Data Second-Guessed as Housing Prices Rise
Aug. 26 (Bloomberg) -- Lydia Wang, a 28-year-old marketing manager in Shanghai, gripes that the shoes and clothing she normally buys are at least 50 percent pricier than in 2009. Wu Sengyun, a 54-year-old retiree in the coastal city of Ningbo, Zhejiang, says prices of fruit and fish are up more than 20 percent in the past year.
Willy Lin has cut back on free drumsticks in the canteen of his Jiangxi clothing factory as meat and vegetables grow dear. “The workers suffer,” he says. “Everybody is crying.”
Officially, China’s consumer price inflation topped out at 3.3 percent in July compared to a year before, a 21-month high. Officials say the spike is a one-off caused by crop damage from recent flooding. Other costs, they say, such as cars, mobile phone bills, and clothing, are falling, and pressure on prices should ease as the economy cools. At an Aug. 12 press conference, Pan Jiancheng, a deputy director in the statistics bureau, said the inflationary threat was “overhyped.”
Consumers, investors, analysts and academics interviewed by Bloomberg BusinessWeek in its Aug. 30 issue beg to differ.
“There has been a jump in prices that isn’t reflected in the numbers,” said Chinese Academy of Social Sciences economist Yu Yongding, a former adviser to China’s central bank.
Michael Pettis, a finance professor at Peking University, said he wonders how a country that grew 10.3 percent last quarter and is seeing upward pressure on wages could register a price rise of a few percentage points. Multinationals in China expect to raise wages an average of 8.4 percent this year, according to Hewitt Associates Inc., a human resources consultant.
Ordinary Chinese
Ordinary Chinese have yet to see increases in their housing, education, and medical expenses reflected in the official numbers, these analysts said.
“Inflation could well be 6 percent now for most people in China,” Peking University’s Pettis said.
If the doubters are right, then the government has an inflation problem that it either hasn’t figured out how to measure, or has chosen to ignore. Other vital Chinese statistics, like retail sales and unemployment, have also been murky. In the case of inflation, misjudging could prevent the kind of swift action needed to tame prices now, and force the government to apply harsher measures later, such as an increase in interest rates or an appreciation of the currency to curb growth. There are political risks too: Social unrest in China has been triggered when ordinary workers can’t keep up with the cost of living.
Data ‘Oddity’
Unlike most countries, China refuses to release in detail how much weighting it gives different product categories when calculating inflation, a situation that World Bank senior economist Louis Kuijs called an “oddity.” An official with the statistics bureau said there has been no major change in the basket that makes up the price index since 2005. Plans call to adjust the weighting next year to reflect housing costs more and food prices less, said the official, who declined to be identified because of agency rules.
Chinese consumers, when asked, will detail how household expenses have changed in the past decade. Medical costs are the No. 1 concern for 84 percent of China’s rural residents, according to a recent survey by the Economist Intelligence Unit. Officially, medical prices are only up 2.8 percent so far this year. That number does not include the cost of gifts to hospital doctors and administrators to ensure adequate care.
Housing and rising rental costs also eat up more of Chinese budgets. For 26-year-old Beijing resident Wang Yulu, the monthly rent of her 35-square-meter one-bedroom apartment just increased more than 20 percent, to $338.
Too Expensive
“It’s too expensive,” said Wang, who works in the Beijing office of a Hong Kong advertising company. “I’m thinking of moving.”
Getting a handle on rising prices is a particular challenge in China. Hundreds of millions of rural Chinese keep moving to cities, pushing up rents and food prices in urban coastal areas. The prices charged by millions of restaurants, coffee shops, and fitness centers go largely unrecorded as entrepreneurs evade taxes. A standard foot massage, popular in Chinese cities, has risen from around $10 in 2008 to about twice that today, said Zoe Wang, a 29-year-old strategy consultant from Shanghai.
“Unfortunately, my salary didn’t double,” she said. Official figures only record a 0.4 percent rise in recreation and education costs this year. China doesn’t separate these two categories in its figures.
Residents in far-western China face higher prices in part because of the long distances products must travel to reach them. A fast-growing population of pensioners feels price increases much more acutely than others.
Pensions Spent
Said retiree Wei Mingxiang, 54, as she shopped carefully in Beijing’s Rundeli vegetable market: “Prices have gone up too far. My entire monthly pension of $147 is spent on food.” One staple, cowpeas, recently doubled in price in two weeks to 40 cents a pound.
By periodically releasing wheat, rice, and corn from its reserves, the government has avoided the 100 percent price surge that hit global grain markets in 2007 and 2008. Beijing continues to cap prices on everything from phone bills to water, electricity, and fuel prices, and when it wants to cool growth the government orders banks to stop lending.
“The government has tended to use less mainstream instruments that economists don’t like so much,” said Kuijs of the World Bank. “And they tend to use interest rates less.”
Deposit Rates
One-year deposit rates at 2.25 percent have not been changed since November 2008, which means Chinese savers are actually losing money now that inflation has passed 3 percent. Officials fear higher rates could draw speculative investors into China.
Some analysts said that Beijing is doing a decent job of calculating prices. Arthur Kroeber, the Beijing-based managing director of economic consultancy Dragonomics, estimated that actual inflation may exceed the official figure but by not much more than one percentage point. Kroeber added that a tightening labor market and rising wages will push China into higher inflation in the coming years.
Others wondered whether the historic aversion of China’s rulers to the political risks of inflation creates pressures to keep official figures low.
Factory Jobs
Similar pressures help explain how official unemployment targets of just over 4 percent were met in 2008 and 2009, when China’s factories laid off tens of millions of workers, some economists said.
“The government has made it quite clear” what its inflation target is for 2010, Tsinghua University management professor Patrick Chovanec blogged on Aug. 12. “A whole parade of official sources have issued statements over the past few weeks predicting, with the unruffled, enigmatic certainty one normally associates with a blackjack dealer dealing a fixed deck, that inflation will come in right at 3 percent this year.”
Willy Lin has cut back on free drumsticks in the canteen of his Jiangxi clothing factory as meat and vegetables grow dear. “The workers suffer,” he says. “Everybody is crying.”
Officially, China’s consumer price inflation topped out at 3.3 percent in July compared to a year before, a 21-month high. Officials say the spike is a one-off caused by crop damage from recent flooding. Other costs, they say, such as cars, mobile phone bills, and clothing, are falling, and pressure on prices should ease as the economy cools. At an Aug. 12 press conference, Pan Jiancheng, a deputy director in the statistics bureau, said the inflationary threat was “overhyped.”
Consumers, investors, analysts and academics interviewed by Bloomberg BusinessWeek in its Aug. 30 issue beg to differ.
“There has been a jump in prices that isn’t reflected in the numbers,” said Chinese Academy of Social Sciences economist Yu Yongding, a former adviser to China’s central bank.
Michael Pettis, a finance professor at Peking University, said he wonders how a country that grew 10.3 percent last quarter and is seeing upward pressure on wages could register a price rise of a few percentage points. Multinationals in China expect to raise wages an average of 8.4 percent this year, according to Hewitt Associates Inc., a human resources consultant.
Ordinary Chinese
Ordinary Chinese have yet to see increases in their housing, education, and medical expenses reflected in the official numbers, these analysts said.
“Inflation could well be 6 percent now for most people in China,” Peking University’s Pettis said.
If the doubters are right, then the government has an inflation problem that it either hasn’t figured out how to measure, or has chosen to ignore. Other vital Chinese statistics, like retail sales and unemployment, have also been murky. In the case of inflation, misjudging could prevent the kind of swift action needed to tame prices now, and force the government to apply harsher measures later, such as an increase in interest rates or an appreciation of the currency to curb growth. There are political risks too: Social unrest in China has been triggered when ordinary workers can’t keep up with the cost of living.
Data ‘Oddity’
Unlike most countries, China refuses to release in detail how much weighting it gives different product categories when calculating inflation, a situation that World Bank senior economist Louis Kuijs called an “oddity.” An official with the statistics bureau said there has been no major change in the basket that makes up the price index since 2005. Plans call to adjust the weighting next year to reflect housing costs more and food prices less, said the official, who declined to be identified because of agency rules.
Chinese consumers, when asked, will detail how household expenses have changed in the past decade. Medical costs are the No. 1 concern for 84 percent of China’s rural residents, according to a recent survey by the Economist Intelligence Unit. Officially, medical prices are only up 2.8 percent so far this year. That number does not include the cost of gifts to hospital doctors and administrators to ensure adequate care.
Housing and rising rental costs also eat up more of Chinese budgets. For 26-year-old Beijing resident Wang Yulu, the monthly rent of her 35-square-meter one-bedroom apartment just increased more than 20 percent, to $338.
Too Expensive
“It’s too expensive,” said Wang, who works in the Beijing office of a Hong Kong advertising company. “I’m thinking of moving.”
Getting a handle on rising prices is a particular challenge in China. Hundreds of millions of rural Chinese keep moving to cities, pushing up rents and food prices in urban coastal areas. The prices charged by millions of restaurants, coffee shops, and fitness centers go largely unrecorded as entrepreneurs evade taxes. A standard foot massage, popular in Chinese cities, has risen from around $10 in 2008 to about twice that today, said Zoe Wang, a 29-year-old strategy consultant from Shanghai.
“Unfortunately, my salary didn’t double,” she said. Official figures only record a 0.4 percent rise in recreation and education costs this year. China doesn’t separate these two categories in its figures.
Residents in far-western China face higher prices in part because of the long distances products must travel to reach them. A fast-growing population of pensioners feels price increases much more acutely than others.
Pensions Spent
Said retiree Wei Mingxiang, 54, as she shopped carefully in Beijing’s Rundeli vegetable market: “Prices have gone up too far. My entire monthly pension of $147 is spent on food.” One staple, cowpeas, recently doubled in price in two weeks to 40 cents a pound.
By periodically releasing wheat, rice, and corn from its reserves, the government has avoided the 100 percent price surge that hit global grain markets in 2007 and 2008. Beijing continues to cap prices on everything from phone bills to water, electricity, and fuel prices, and when it wants to cool growth the government orders banks to stop lending.
“The government has tended to use less mainstream instruments that economists don’t like so much,” said Kuijs of the World Bank. “And they tend to use interest rates less.”
Deposit Rates
One-year deposit rates at 2.25 percent have not been changed since November 2008, which means Chinese savers are actually losing money now that inflation has passed 3 percent. Officials fear higher rates could draw speculative investors into China.
Some analysts said that Beijing is doing a decent job of calculating prices. Arthur Kroeber, the Beijing-based managing director of economic consultancy Dragonomics, estimated that actual inflation may exceed the official figure but by not much more than one percentage point. Kroeber added that a tightening labor market and rising wages will push China into higher inflation in the coming years.
Others wondered whether the historic aversion of China’s rulers to the political risks of inflation creates pressures to keep official figures low.
Factory Jobs
Similar pressures help explain how official unemployment targets of just over 4 percent were met in 2008 and 2009, when China’s factories laid off tens of millions of workers, some economists said.
“The government has made it quite clear” what its inflation target is for 2010, Tsinghua University management professor Patrick Chovanec blogged on Aug. 12. “A whole parade of official sources have issued statements over the past few weeks predicting, with the unruffled, enigmatic certainty one normally associates with a blackjack dealer dealing a fixed deck, that inflation will come in right at 3 percent this year.”
India Risks Nuclear Isolation With Break From Chernobyl Accord
Aug. 26 (Bloomberg) -- India’s push to end a three-decade ban on buying nuclear equipment from abroad may founder on laws passed by its own parliament.
Lawmakers in New Delhi approved a bill last night that makes suppliers and builders of atomic reactors potentially liable in the event of an accident. That’s broader than a 1997 accord signed by more than 80 nations in the wake of the Chernobyl disaster that limits compensation claims to operators.
The bill, intended to open the world’s second-fastest growing atomic energy market by setting a legal framework, may deter companies from bidding for $175 billion of contracts. India needs suppliers including GE Hitachi Nuclear Energy and Westinghouse Electric Co. to meet its target of boosting nuclear power generation 13-fold by 2030 to drive economic growth.
“India needs to realize if they don’t satisfy international liability standards, equipment vendors won’t supply,” said Mark Hibbs, a Berlin-based nuclear policy analyst at the Carnegie Endowment for International Peace. “There are many other opportunities” in Western Europe, the U.S., Canada, Japan and South Korea that are all expanding capacity, he said.
Prime Minister Manmohan Singh’s ruling Congress Party had to rewrite the Civil Liability for Nuclear Damage Bill to ensure it passed before U.S. President Barack Obama visits India this year. The government, which lacks a majority in parliament, had to insert a clause to allow compensation claims against suppliers to gain enough votes to pass the bill.
‘Not Practical’
“This clause doesn’t appear in any domestic legislation in any other country,” and runs counter to international convention, said Sudhinder Thakur, executive director at Nuclear Power Corp. of India, the nation’s monopoly operator. “If you supply $2 million of equipment, how can you be held liable for up to $300 million over 80-odd years? It’s not practical.”
The bill sets a 15 billion rupee ($322 million) cap on payouts by Nuclear Power Corp. with the government responsible for damages beyond that. After paying compensation, Nuclear Power Corp. can seek money from suppliers for defective equipment or materials, according to the bill.
The opposition have fought any attempt to shield foreign suppliers from liability, bolstered by public outrage over the December 1984 leak of poisonous gas at a Union Carbide Corp. factory in Bhopal city, which killed 3,800 people. Midland, Michigan-based Dow Chemical Co., which acquired Union Carbide in 1999, says all liabilities were settled in a $470 million settlement in 1989.
‘Not Possible’
“If it leads to contracts where, as a supplier, you face undefined liabilities connected to the main nuclear liability of the plant, it will really not be possible for major suppliers to participate,” said M.V. Kotwal, senior executive vice president of Larsen & Toubro Ltd.’s heavy industries division. “The liability has to be limited to a certain amount and a certain time.”
Larsen & Toubro, based in Mumbai, signed a preliminary agreement with GE Hitachi, a venture between General Electric Co. and Hitachi Ltd., in May 2009 to build nuclear power plants.
None of India’s biggest prospective suppliers, including GE Hitachi Nuclear Energy or Westinghouse Electric, are likely to sign contracts if they can be held liable for third-party damages, said the Carnegie Endowment’s Hibbs. GE spokeswoman Deepali Girdhar and Westinghouse spokesman Scott Shaw declined to comment on the legislation.
“Liability agreements were revised after Chernobyl to make crystal clear that the operator is responsible for liability,” said Hibbs by telephone from Berlin. “Firms would not agree to any arrangements which would leave undecided or vague what the operators’ liability were in the case of an accident.”
Nuclear Accident
The meltdown at the Chernobyl plant in Ukraine, the worst nuclear accident in history, prompted an overhaul of nuclear liability conventions to help streamline compensation and litigation, and spread the financial burden.
The 1997 Vienna Convention on Civil Liability for Nuclear Damage channels liability for nuclear accidents to plant operators irrespective of fault. A supplementary convention allows operators to draw upon a central fund of at least 300 million International Monetary Fund special drawing rights ($455 million) to help pay for damages.
The system helps to simplify litigation and pool payouts in a sector where one reactor can have thousands of suppliers and claims.
‘Changed Fundamentally’
“The method for handling claims and damages is being changed fundamentally,” said Suhaan Mukerji, a New Delhi-based lawyer, who is advising the industry on the bill. “It raises the possibility of disputes between operators and suppliers.”
India won access to atomic fuels and technology in September 2008 when the 45-member Nuclear Suppliers Group lifted a three-decade ban on exports to the country on a U.S. proposal.
The government aims to expand its nuclear capacity to 60,000 megawatts by 2030 from 4,560 megawatts at the end of July. India’s total power generation capacity was 163,670 megawatts as of July 31, according to the Central Electricity Authority.
The legislation passed last night needs the approval of the upper house of parliament and the consent of President Pratibha Patil before it becomes law.
The bill “enables India to enter into nuclear commerce with other willing countries in order to widen its development options in meeting its energy requirements,” Singh told the lower house of parliament before the vote. “Our government has tried to complete the journey towards ending the regime of nuclear apartheid.”
Lawmakers in New Delhi approved a bill last night that makes suppliers and builders of atomic reactors potentially liable in the event of an accident. That’s broader than a 1997 accord signed by more than 80 nations in the wake of the Chernobyl disaster that limits compensation claims to operators.
The bill, intended to open the world’s second-fastest growing atomic energy market by setting a legal framework, may deter companies from bidding for $175 billion of contracts. India needs suppliers including GE Hitachi Nuclear Energy and Westinghouse Electric Co. to meet its target of boosting nuclear power generation 13-fold by 2030 to drive economic growth.
“India needs to realize if they don’t satisfy international liability standards, equipment vendors won’t supply,” said Mark Hibbs, a Berlin-based nuclear policy analyst at the Carnegie Endowment for International Peace. “There are many other opportunities” in Western Europe, the U.S., Canada, Japan and South Korea that are all expanding capacity, he said.
Prime Minister Manmohan Singh’s ruling Congress Party had to rewrite the Civil Liability for Nuclear Damage Bill to ensure it passed before U.S. President Barack Obama visits India this year. The government, which lacks a majority in parliament, had to insert a clause to allow compensation claims against suppliers to gain enough votes to pass the bill.
‘Not Practical’
“This clause doesn’t appear in any domestic legislation in any other country,” and runs counter to international convention, said Sudhinder Thakur, executive director at Nuclear Power Corp. of India, the nation’s monopoly operator. “If you supply $2 million of equipment, how can you be held liable for up to $300 million over 80-odd years? It’s not practical.”
The bill sets a 15 billion rupee ($322 million) cap on payouts by Nuclear Power Corp. with the government responsible for damages beyond that. After paying compensation, Nuclear Power Corp. can seek money from suppliers for defective equipment or materials, according to the bill.
The opposition have fought any attempt to shield foreign suppliers from liability, bolstered by public outrage over the December 1984 leak of poisonous gas at a Union Carbide Corp. factory in Bhopal city, which killed 3,800 people. Midland, Michigan-based Dow Chemical Co., which acquired Union Carbide in 1999, says all liabilities were settled in a $470 million settlement in 1989.
‘Not Possible’
“If it leads to contracts where, as a supplier, you face undefined liabilities connected to the main nuclear liability of the plant, it will really not be possible for major suppliers to participate,” said M.V. Kotwal, senior executive vice president of Larsen & Toubro Ltd.’s heavy industries division. “The liability has to be limited to a certain amount and a certain time.”
Larsen & Toubro, based in Mumbai, signed a preliminary agreement with GE Hitachi, a venture between General Electric Co. and Hitachi Ltd., in May 2009 to build nuclear power plants.
None of India’s biggest prospective suppliers, including GE Hitachi Nuclear Energy or Westinghouse Electric, are likely to sign contracts if they can be held liable for third-party damages, said the Carnegie Endowment’s Hibbs. GE spokeswoman Deepali Girdhar and Westinghouse spokesman Scott Shaw declined to comment on the legislation.
“Liability agreements were revised after Chernobyl to make crystal clear that the operator is responsible for liability,” said Hibbs by telephone from Berlin. “Firms would not agree to any arrangements which would leave undecided or vague what the operators’ liability were in the case of an accident.”
Nuclear Accident
The meltdown at the Chernobyl plant in Ukraine, the worst nuclear accident in history, prompted an overhaul of nuclear liability conventions to help streamline compensation and litigation, and spread the financial burden.
The 1997 Vienna Convention on Civil Liability for Nuclear Damage channels liability for nuclear accidents to plant operators irrespective of fault. A supplementary convention allows operators to draw upon a central fund of at least 300 million International Monetary Fund special drawing rights ($455 million) to help pay for damages.
The system helps to simplify litigation and pool payouts in a sector where one reactor can have thousands of suppliers and claims.
‘Changed Fundamentally’
“The method for handling claims and damages is being changed fundamentally,” said Suhaan Mukerji, a New Delhi-based lawyer, who is advising the industry on the bill. “It raises the possibility of disputes between operators and suppliers.”
India won access to atomic fuels and technology in September 2008 when the 45-member Nuclear Suppliers Group lifted a three-decade ban on exports to the country on a U.S. proposal.
The government aims to expand its nuclear capacity to 60,000 megawatts by 2030 from 4,560 megawatts at the end of July. India’s total power generation capacity was 163,670 megawatts as of July 31, according to the Central Electricity Authority.
The legislation passed last night needs the approval of the upper house of parliament and the consent of President Pratibha Patil before it becomes law.
The bill “enables India to enter into nuclear commerce with other willing countries in order to widen its development options in meeting its energy requirements,” Singh told the lower house of parliament before the vote. “Our government has tried to complete the journey towards ending the regime of nuclear apartheid.”
Tuesday, August 24, 2010
Ireland Credit Rating Cut One Step by S&P on Bank-Rescue Costs
Aug. 25 (Bloomberg) -- Ireland’s long-term sovereign credit rating was cut one step to AA- by Standard & Poor’s on concern about the rising cost of supporting the country’s struggling banks.
S&P raised its estimate for recapitalizing the banking system to as much as 50 billion euros ($63 billion) from a previous estimate of as much as 35 billion euros. The rating is the lowest since 1995, according to data compiled by Bloomberg.
“A further downgrade is possible if the fiscal cost of supporting the banking sector rises further, or if other adverse economic developments weaken the government’s ability to meet its medium-term fiscal objectives,” S&P said in a statement yesterday.
Ireland has suffered the worst recession on record as a decade-long housing boom ended and the financial system came close to collapse. Prime Minister Brian Cowen is now trying to convince investors the country can shoulder the cost of rescuing Anglo Irish Bank Corp., nationalized last year as bad debts surged.
“They’re going to pay very high yields for a prolonged period of time,” Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, said in an interview. “The misfortune for Ireland is not only have they had an incredible housing bust, they have also had a very poorly regulated banks and that sets them quite apart” from a country such as Spain.
‘Flawed’
The downgrade comes as a slowing global economy prompts traders to dash for the safety of U.S. Treasuries and German bunds. The extra yield demanded by investors to hold 10-year Irish government bonds over German counterparts yesterday rose to a record of 318 basis points, 12 points higher than their level before a European Union-led rescue plan for the euro region was announced on May 1.
Ireland’s debt agency said in a statement that S&P’s analysis is “flawed” and that its decision was based on an “extreme” estimate of bank recapitalization needs. It also said that the country is fully funded into the second quarter of 2011. A spokesman for the finance ministry said Ireland still plans to cut its budget deficit to below the EU’s limit of 3 percent of gross domestic product by the end of 2014.
S&P said its new projections suggest that Ireland’s net general government debt will rise toward 113 percent of gross domestic product in 2012. That’s more than 1.5 times the median for the average of euro zone sovereign nations, and “well above” the debt burdens the New York-based firm said it projects for similarly rated countries in the region such as Belgium at 98 percent and Spain at 65 percent.
ECB Plan
The spreads on Spanish and Irish bonds have risen above the levels touched in May, when the Greek fiscal crisis prompted the European Central Bank to buy government bonds for the first time. ECB council member Axel Weber signaled in an interview on Aug. 19 that he’s relaxed with current yields, saying that the bond purchase program was designed to smooth tensions in bond markets rather than set a floor to prices.
Irish counterpart Patrick Honohan said a day later that the Anglo Irish issue must be resolved soon because of the impact it is having on investors. Supporting the bank may result in a net cost of about 22 billion euros to 25 billion euros to the Irish government, he said.
“This is a matter which will need to be finally put to rest very soon,” Honohan said in Tokyo. “The uncertainty around it is having a disproportionate impact on international investors.”
S&P raised its estimate for recapitalizing the banking system to as much as 50 billion euros ($63 billion) from a previous estimate of as much as 35 billion euros. The rating is the lowest since 1995, according to data compiled by Bloomberg.
“A further downgrade is possible if the fiscal cost of supporting the banking sector rises further, or if other adverse economic developments weaken the government’s ability to meet its medium-term fiscal objectives,” S&P said in a statement yesterday.
Ireland has suffered the worst recession on record as a decade-long housing boom ended and the financial system came close to collapse. Prime Minister Brian Cowen is now trying to convince investors the country can shoulder the cost of rescuing Anglo Irish Bank Corp., nationalized last year as bad debts surged.
“They’re going to pay very high yields for a prolonged period of time,” Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, said in an interview. “The misfortune for Ireland is not only have they had an incredible housing bust, they have also had a very poorly regulated banks and that sets them quite apart” from a country such as Spain.
‘Flawed’
The downgrade comes as a slowing global economy prompts traders to dash for the safety of U.S. Treasuries and German bunds. The extra yield demanded by investors to hold 10-year Irish government bonds over German counterparts yesterday rose to a record of 318 basis points, 12 points higher than their level before a European Union-led rescue plan for the euro region was announced on May 1.
Ireland’s debt agency said in a statement that S&P’s analysis is “flawed” and that its decision was based on an “extreme” estimate of bank recapitalization needs. It also said that the country is fully funded into the second quarter of 2011. A spokesman for the finance ministry said Ireland still plans to cut its budget deficit to below the EU’s limit of 3 percent of gross domestic product by the end of 2014.
S&P said its new projections suggest that Ireland’s net general government debt will rise toward 113 percent of gross domestic product in 2012. That’s more than 1.5 times the median for the average of euro zone sovereign nations, and “well above” the debt burdens the New York-based firm said it projects for similarly rated countries in the region such as Belgium at 98 percent and Spain at 65 percent.
ECB Plan
The spreads on Spanish and Irish bonds have risen above the levels touched in May, when the Greek fiscal crisis prompted the European Central Bank to buy government bonds for the first time. ECB council member Axel Weber signaled in an interview on Aug. 19 that he’s relaxed with current yields, saying that the bond purchase program was designed to smooth tensions in bond markets rather than set a floor to prices.
Irish counterpart Patrick Honohan said a day later that the Anglo Irish issue must be resolved soon because of the impact it is having on investors. Supporting the bank may result in a net cost of about 22 billion euros to 25 billion euros to the Irish government, he said.
“This is a matter which will need to be finally put to rest very soon,” Honohan said in Tokyo. “The uncertainty around it is having a disproportionate impact on international investors.”
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