Business News: Battered Ireland Clings to Its Low Taxes

Business News: Battered Ireland Clings to Its Low Taxes

Battered Ireland Clings to Its Low Taxes

Posted: 23 Nov 2010 09:01 PM PST

Ireland to Detail Budget Plan as ‘Barbarians’ at Gate

Posted: 23 Nov 2010 08:12 PM PST

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By Dara Doyle

(Adds ratings cut in eighth paragraph.)

Nov. 24 (Bloomberg) -- Ireland’s Finance Minister Brian Lenihan will today lay out a four-year deficit-cutting program that his party may not be around to deliver, as the government’s majority evaporates and a bailout approaches.

Welfare cuts of 800 million euros ($1.1 billion) are among the steps planned to narrow the deficit to 3 percent of gross domestic product by the end of 2014, said a person familiar with the matter who declined to be identified because the plan is not yet public. The shortfall will be 12 percent of GDP this year, or 32 percent when the costs of a banking rescue are included.

The program will be published as the government races to finish talks on aid with the International Monetary Fund and the European Union. Lenihan’s coalition partners in the Green Party said two days ago that they will quit the government next month and independent lawmakers are threatening to block the 2011 budget, the first step in the four-year plan.

“The government’s days are numbered,” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin. “What we are likely to see in the next fortnight is growing pressures on the opposition parties to abstain on the major votes and pass the budget for the sake of political stability.”

Election Call

The biggest opposition parties, Fine Gael and Labour, say they want an election now because the government won’t survive to deliver on the plan. Prime Minister Brian Cowen said Nov. 22 he will hold national elections in early 2011 after first trying to win backing for the budget. Support for his Fianna Fail party, which has governed Ireland since 1997, dropped to a record low this month, a poll in the Sunday Business Post on Nov. 21 showed.

While the opposition backs the aim of reducing the deficit to the EU’s 3 percent limit by 2014, labor unions are planning “mass mobilization” in protest at the planned cuts, with a march in Dublin on Nov. 27.

“It appears that the day of reckoning has arrived,” said David Begg, head of the Dublin-based Irish Congress of Trade Unions, the umbrella group for unions, which is organizing the demonstration. “The Barbarians are at the gates.”

Standard & Poor’s today lowered its long-term credit rating for Ireland by two steps, to A, the sixth-highest grade, and warned that another downgrade is possible should the 2011 budget “fail to staunch wholesale funding outflows.”

Tax Rate

The government plans to cut the minimum wage, currently 8.65 euros an hour, by 12 percent, said the person familiar with the package to be announced. Lenihan will maintain Ireland’s 12.5 percent corporate tax rate, criticized by some European governments, as a pillar of national policy, said the person.

The plan may include 10 billion euros of spending cuts and 5 billion euros of tax increases, the Irish Times yesterday cited Alan Ahearne, an adviser to Lenihan, as saying.

The government relies on support from independent lawmakers Michael Lowry and Jackie Healy-Rae, who said this week they may withdraw their backing for the budget. Should Fianna Fail lose a special election for the Irish parliamentary seat of Donegal Southwest tomorrow, Lenihan may be forced to rely on opposition votes to pass the budget.

The risk premium on Ireland’s 10-year debt over German bunds, Europe’s benchmark, widened 45 basis points to 589 basis points yesterday on concern that the budget may not pass and the government will fall. The yield spread reached a record 652 basis points on Nov. 11.

European Union Economic and Monetary Affairs Commissioner Olli Rehn said yesterday it’s essential that Ireland passes the 2011 budget “sooner rather than later.”

“Let’s get it out of the way and move on,” he said in remarks broadcast by Dublin-based RTE.

--With assistance from Joe Brennan in Dublin. Editors: Alan Crawford, Fergal O’Brien

To contact the reporters on this story: Dara Doyle in Dublin at ddoyle1@bloomberg.net

To contact the editor responsible for this story: Colin Keatinge at ckeatinge@bloomberg.net.

Rothschild on Irish Debt Crisis

Posted: 24 Nov 2010 05:05 AM PST

How We'll Know If GM Is Really Fixed

Posted: 23 Nov 2010 09:01 PM PST

Blockbuster IPOs: Where Are They Now?

Posted: 17 Nov 2010 03:24 PM PST

Persian Gulf Investors Shun IPOs as Asia Sets Record

Posted: 23 Nov 2010 08:18 PM PST

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By Stefania Bianchi and Zahra Hankir

(Updates with MSCI benchmark change in third paragraph.)

Nov. 24 (Bloomberg) -- Companies in the Persian Gulf aren’t benefiting from record demand for share sales in emerging markets as debt concern hurts investor confidence.

Omani mobile-phone operator Nawras and Aluminium Bahrain BSC, the operator of an 850,000-metric-ton-a-year smelter, sold shares this month at the bottom of the range used to canvas investor interest in the stocks. The six-member Gulf Cooperation Council region generated $1.91 billion of initial public offerings this year, compared with $2.27 billion in the same period a year earlier, data compiled by Bloomberg show.

The region’s benchmark Bloomberg GCC 200 Index has gained 9.1 percent this year, compared with a 9.9 percent increase for the MSCI Emerging Markets Index. The average number of shares traded daily in Dubai has dropped 65 percent from the year- earlier period. By contrast, the pace of IPOs in Asia has climbed to a record since the crisis.

“It’s a chicken and egg situation,” said Mohammed Ali Yasin, chief investment officer at Abu Dhabi-based financial services company CAPM Investment PJSC. “With equity markets still struggling, it’s difficult to attract investors for IPOs, but then you need new offerings to stimulate the markets.”

The volume of shares traded in Dubai, Abu Dhabi and Oman is less than half what it was a year ago. It’s down 47 percent in Qatar, 43 percent in Saudi Arabia and 25 percent in Kuwait. Dubai’s economy is still struggling to recover from a 2009 slump amid concern that government-owned investment entities won’t be able to refinance loans used to finance a real-estate boom.

Axiom IPO

Axiom Ltd., a Dubai-based mobile-phone retailer, on Nov. 21 set a price range of 80 cents to $1.15 for the sale of as much as 35 percent of its shares to institutional investors in the United Arab Emirates’ first IPO in almost two years.

“Looking at the overall market sentiment where retail investors are still nervous, we felt that there would be enough demand just from institutional investors,” Axiom Chief Executive Officer Faisal Al Bannai said.

The 200 companies listed on the Gulf’s benchmark index are trading at 16.3 times earnings, according to data compiled by Bloomberg. That compares with 15 times for Dubai’s index and 14 times for the MSCI EM Index.

Still, “appetite is improving albeit slowly,” said Shehzad Janab, head of asset management at Dubai-based Daman Investments PSC. “The region is definitely on the radar screen for debt investors. It’s only a matter of time before the same holds true for institutional equity investors.”

Planned IPOs

Kuwait Energy Co., an oil and gas company that operates in the Middle East and eastern Europe, plans to go public in the next nine months, the company said Oct. 10. Emirates District Cooling LLC, a Dubai-based provider of central air conditioning, may offer shares by the end of 2011, Managing Director Adib Moubadder said in October.

Their success may hinge on how shares of Nawras and Aluminium Bahrain perform after their IPOs. Mazaya Qatar Real Estate Development Co., which raised $137.4 million in a stock sale in January, dropped 8.9 percent since the stock started trading in Doha on Oct. 17.

“Investors are really sensitive about valuations and won’t pay any price no matter how good the company is,” Fadi Al Said, head of equities at ING Investment Management (Dubai) Ltd, said. Aluminium Bahrain and Nawras will “set the tone for the upcoming pipeline of share sales,” he said.

Easier in Asia

Aluminium Bahrain, owned by sovereign wealth fund Bahrain Mumtalakat Holding Co., raised $339 million after going public at the bottom of the 0.90 dinar to 1.25 dinar range used to sell the stock to money managers. Nawras, which is controlled by Qatar Telecom QSC, sold shares for 702 baisas each, also the bottom of the range, after taking an additional week to find buyers for the shares. Nawras shares have gained 3.4 percent since the shares started trading on Nov. 1.

Companies in Asia are finding it easier to raise money through IPOs. Hong Kong’s AIA Group Ltd. and Coal India Ltd. raised almost the same amount in October as the total from U.S. equity sales in the first 10 months of 2010. Offerings from Malaysia’s Petronas Chemicals Group Bhd. and Australia’s QR National Ltd. this month contributed to the $158 billion raised in the region in 2010, according to data compiled by Bloomberg.

“Middle East and North Africa equities are depressed compared to emerging markets,” said Julian Bruce, director of equity sales at EFG-Hermes Holding SAE in Dubai. “The GCC has not fully recovered from the financial crisis, which will have a dampening effect on IPOs.”

Dubai Debt

Dubai racked up $109.3 billion of debt to transform the emirate into a tourism, trade and financial-services hub, according to International Monetary Fund.

Dubai World, one of the emirate’s three main state-owned holding companies, roiled markets worldwide last year after saying it would seek to delay repayments on its debt. Saudi Arabia’s Saad and Algosaibi business groups defaulted on at least $15.7 billion of loans last year. In September, Dubai World’s creditors agreed to alter the terms on $24.9 billion of the investment company’s debt.

“The retail investor is still suffering from the credit crunch of 2008 and the hit they took to their net worth is still fresh in their memories,” said Saad al Chalabi, an institutional trader at Al Ramz Securities in Abu Dhabi.

Before the financial crisis, economic growth and record- high oil prices spurred a flurry of share sales. Port operator DP World Ltd., a unit of Dubai World, raised $4.96 billion in November 2007 in the Middle East’s largest IPO. That offering was 15 times oversubscribed.

“We’re definitely keeping current market circumstances in mind,” Axiom’s Al Bannai said. “We have positioned the price at an extremely attractive level.”

--With assistance from Dana El Baltaji in Dubai. Editors: Edward Evans, Riad Hamade

To contact the reporter on this story: Stefania Bianchi in Dubai at sbianchi10@bloomberg.net.

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

After Harry Potter, Warner Seeks a New Hero

Posted: 23 Nov 2010 09:01 PM PST

Strapped States to Hollywood: Stay Home

Posted: 23 Nov 2010 09:01 PM PST

On the Dollar, Traders Back Bernanke

Posted: 23 Nov 2010 09:01 PM PST

Rousseff Said to Appoint Tombini as Brazil Bank Chief

Posted: 24 Nov 2010 04:54 AM PST

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By Andre Soliani and Iuri Dantas

(Adds markets in sixth paragraph, Meirelles in seventh.)

Nov. 24 (Bloomberg) -- Brazilian President-elect Dilma Rousseff will appoint Alexandre Tombini as central bank head, signaling she’ll keep the policies that helped her predecessor slow inflation to about 5 percent last month from as high as 17 percent in 2003.

The 46-year-old Tombini, who has served as a board member since 2005, will replace Henrique Meirelles, 65, Brazil’s longest-serving central bank chief, two government officials said on condition that they not be named because the decision hasn’t been made public. Meirelles, appointed in 2003, will remain at the post until the end of President Luiz Inacio Lula da Silva’s administration on Dec. 31, one of the officials said.

The Bovespa index of most-traded stocks increased almost sixfold under Meirelles and the real more than doubled against the dollar, becoming the best performer amid the 16 most-traded currencies tracked by Bloomberg. By tapping Tombini, Rousseff is seeking to extend policies that helped Brazil win its first investment grade rating in 2008, said Tony Volpon, a Latin America strategist at Nomura Securities in New York.

“The fact that it is him instead of someone else ensures the central bank won’t be taken by a new heterodox philosophy -- that there will be continuity,” Volpon said in a phone interview.

Tombini, who has a doctorate in economics from Illinois University, will need to be approved by the Senate before taking office.

The real gained 0.3 percent to 1.7302 per U.S. dollar at 10:41 a.m. in Sao Paulo. The yield on interest rate futures contracts due in January 2012 rose 3 basis points to 11.86 percent.

Interest Rate Votes

Before joining the Brasilia-based central bank, Tombini was the senior adviser to Brazil’s executive director at the International Monetary Fund. He’s one of eight people who vote to set interest rates in Brazil. The individual votes aren’t made public.

“This is the right moment to end the mission,” Meirelles told reporters in Brasilia today.

Rousseff will appoint Miriam Belchior as Planning Minister, replacing Paulo Bernardo, according to Bernardo. The president- elect invited Bernardo to her cabinet in a position that will be determined later, he told reporters in Brasilia. Finance Minister Guido Mantega will retain his position under Rousseff, said a person familiar with her decision on Nov. 18.

The extra yield investors demand to hold Brazilian debt rather than U.S. Treasuries has fallen to 189 basis points from 1,446 basis points on Dec. 31, 2002, the day before Lula took office, according to JPMorgan Chase & Co.’s EMBI+ index.

‘Greater Control’

Latin America’s biggest economy will expand 7.6 percent this year, the fastest pace in more than two decades, according to the median forecast in a central bank survey of about 100 economists.

Yields on interest rate future contracts rose across the board on Monday amid speculation that Rousseff would replace Meirelles and end the bank’s operational autonomy, potentially skewing policy in favor of economic growth at the expense of faster inflation.

“Tombini has a good education, he’s a professional,” said Pedro Tuesta, a Washington-based economist for Latin America at 4Cast Inc. “The problem is that this gives the impression that Dilma wants to have greater control of the central bank. I’m not saying that’s the way it is. She gives us that impression, and the impression has a certain base.”

Central bank policy makers are appointed and removed by the country’s president and aren’t limited by set terms. Lula appointed Meirelles to replace Arminio Fraga at the start of his term.

‘Showdown Coming’

Traders are wagering policy makers will be forced to resume interest rate increases early next year and push the benchmark interest rate to as high as 12.75 percent by the end of 2011, according to Bloomberg estimates based on interest rate futures.

“There’s a wide gap between the market pricing in what is needed and what some policy makers are hoping to be able to accomplish,” said Gray Newman, chief Latin America economist at Morgan Stanley in New York, who expects the bank to raise rates to 12.5 percent next year.

“There’s a showdown coming,” said Newman. “The market is expecting a pretty significant series of rate hikes and yet I think the new policy team is trying to adopt measures that will allow the central bank to cut rates.”

Rising Inflation

Bond traders are betting Brazil will miss its inflation target for the first time since 2003 as commodity prices jump and concern builds that Rousseff will fail to curb spending.

Investor expectations for annual inflation over the next two years, implied by the yield difference between the government’s inflation-linked and fixed-rate notes, rose to 6.68 percent as of yesterday, the highest since November 2008. That gap, known as the breakeven rate, tops the 6.5 percent upper limit in the bank’s target range for consumer price increases.

By tapping a policy maker who has worked under Meirelles, a former head of global banking at FleetBoston Financial Corp. for more than five years, Rousseff may be seeking to ease investor concerns.

“The Brazil market has matured enough that the change in a member of the central bank doesn’t imply great movements in the market as long as we know the philosophical position of the new central banker,” said Alfredo Coutino, Latin America director for Moody’s Analytics. “A person from the same board should bring relative calm to the markets.”

--With assistance by Jens Gould and Jon Levin in Mexico City, and Carla Simoes, Iuri Dantas and Arnaldo Galvao in Brasilia. Editors: Harry Maurer, Andrew J. Barden

To contact the reporters on this story: Andre Soliani in Brasilia at asoliani@bloomberg.net; Arnaldo Galvao in Brasilia at agalvao1@bloomberg.net

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

Drink Like the French, Avoid Binges to Spare Heart

Posted: 24 Nov 2010 04:53 AM PST

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By Eva von Schaper

(Updates with definition of binge drinking in seventh paragraph.)

Nov. 24 (Bloomberg) -- The French habit of drinking wine almost daily is less taxing to the heart than the Irish custom of downing an equivalent amount of alcohol on one or two nights a week, a study suggests.

Middle-aged men in Belfast had almost double the risk of developing heart disease compared with French drinkers who spread their consumption over a week, according to the study published today by the British Medical Journal. The researchers compared the intake of units of pure alcohol, which is found at higher concentrations in wine and spirits than in beer.

The findings bolster those of previous studies suggesting a link between ischemic heart disease, a condition in which blood supply to the heart is decreased, and drinking patterns such as bingeing. Having four or more drinks in a short period of time is more common in northern European countries and the U.S., according to the researchers.

“Certain groups lose the cardioprotective effect of alcohol when drinking in a binge pattern,” Annie Britton, an epidemiologist at University College London, who wrote an accompanying editorial, said in a telephone interview yesterday.

The study, led by Jean Ferrieres of Toulouse University, used data gathered over 10 years from almost 10,000 men in the French cities of Lille, Strasbourg and Toulouse, and compared it with information gathered in Belfast, Northern Ireland.

Heart Risk

The researchers asked the participants about the amount of alcohol they drank on a weekly and daily basis. The binge drinkers, who consumed the majority of their alcohol on one or two days, had almost twice the risk of heart attack or death from heart diseases compared with regular drinkers, the study found.

In France, the men drank 255 grams (9 ounces) of alcohol a week, compared with 282 grams for the Irish. In Belfast, mean consumption was two to three times as high on weekends, the study said. The researchers defined binge drinking as consuming more than 50 grams of alcohol over a short period of time.

U.S. guidelines recommend not more than one drink a day for women, and two drinks a day for men, according to the current Dietary Guidelines for Americans, published by the U.S. Department of Health and Human Services. A standard drink is 0.6 ounces of pure alcohol, which is found in 12 ounces of beer, 8 ounces of malt liquor or 5 ounces of wine, according to the Centers for Disease Control and Prevention.

Drinking Patterns

The biological effect of different drinking patterns on the heart isn’t quite clear yet, Britton said. Bingeing may make it more likely for the heart to beat infrequently and change low density lipoprotein or “bad” cholesterol. Steady alcohol intake may lead to favorable changes in high density lipoprotein or “good” blood lipids.

“We are not even close to understanding the biological mechanism behind this,” she said.

The study didn’t track the drinkers’ diets, which may play a role in their heart health, Britton said.

“You can imagine Belfast guys drinking several pints and then not having the most healthful of meals,” Britton said.

The protective effect of French drinking may also be due to the beverage, the study said, as wine has been found to protect against heart disease.

All drinkers should be aware that they are at greater risk of many other diseases, such as liver cirrhosis, pancreatitis and several kinds of cancer, Britton said.

--Editors: Kristen Hallam, Phil Serafino

To contact the reporter on this story: Eva von Schaper in Munich at evonschaper@bloomberg.net

To contact the editor responsible for this story: Phil Serafino at pserafino@bloomberg.net.

Ireland Rating Lowered by S&P as ‘Barbarians’ Gather

Posted: 24 Nov 2010 04:50 AM PST

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By Dara Doyle and Christopher Anstey

(Updates euro exchange rate in 10th paragraph.)

Nov. 24 (Bloomberg) -- Ireland’s debt rating was lowered two steps by Standard & Poor’s and may be cut again as the government prepares to unveil a four-year deficit-cutting plan and contagion spread through the rest of the euro region.

“The Irish government looks set to borrow over and above our previous projections to fund further bank capital injections into Ireland’s troubled banking system,” S&P said in a statement late yesterday. Putting the rating on review for downgrade reflects the risk that talks on a European Union-led rescue may fail to stanch capital flight, it said.

S&P cut Ireland’s long-term rating to A from AA- and the short-term grade to A-1 from A-1+, the statement said. The reduction leaves its long-term grade five steps above Greece, which has the highest junk, or high-risk, grade. S&P said Ireland is “on credit watch with negative implications,” an assessment which carries a three-month timeline.

The downgrade risks worsening an investor exodus from Irish bonds that has sparked turmoil through the euro region as Ireland hammers out an aid package with the EU and the International Monetary Fund to rescue its banking system. The extra yield that investors demand to hold Spanish 10-year bonds over German bunds yesterday rose to a euro-era record.

Prime Minister Brian Cowen said today in parliament in Dublin that a bailout of 85 billion euros ($113 billion) has been discussed, and that talks are continuing.

Bank Control

EU finance ministers cited a figure of about 85 billion euros for Ireland on a conference call on Nov. 21, according to two officials familiar with the talks. Of the total, 35 billion euros would be earmarked for banks and 50 billion euros to help finance the Irish government, the people said.

Irish welfare cuts of 800 million euros are among the steps planned to narrow the deficit to 3 percent of gross domestic product by the end of 2014, said a person familiar with the matter who declined to be identified because the plan is not yet public. The shortfall will be 12 percent of GDP this year, or 32 percent when the costs of a banking rescue are included.

Separately, Bank of Ireland Plc may end up in majority state control as the government injects more capital into the lender, two people familiar with the situation said yesterday.

Ireland’s government will seek to raise the core tier 1 capital levels of its banks to between 10.5 percent and 12 percent, the people said. Dublin-based broadcaster RTE earlier reported the plan, without citing anyone.

‘Day of Reckoning’

The euro slipped 0.2 percent to $1.3340, extending yesterday’s 1.9 percent slide. The yield on Ireland’s 10-year bond rose 34 basis points to 8.988 percent.

While opposition political parties back the aim of reducing the deficit to the EU’s 3 percent limit by 2014, labor unions are planning “mass mobilization” in protest at the planned cuts, with a march in Dublin on Nov. 27.

“It appears that the day of reckoning has arrived,” said David Begg, head of the Dublin-based Irish Congress of Trade Unions, the umbrella group for unions, which is organizing the demonstration. “The Barbarians are at the gates.”

Cowen is racing to finish talks with the EU and the IMF as support for his government crumbles. His Green Party junior coalition partners said two days ago that they will quit the government next month and independent lawmakers are threatening to block the 2011 budget, the first step in the four-year plan.

Ratings Warning

“The government’s days are numbered,” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin. “What we are likely to see in the next fortnight is growing pressures on the opposition parties to abstain on the major votes and pass the budget for the sake of political stability.”

Moody’s Investors Service said two days ago a “multi- notch” downgrade in Ireland’s credit rating was “most likely” because the bailout would increase its debt burden. Moody’s has an Aa2 long-term rating for the government, three steps higher than S&P’s new grade. Fitch Ratings has an A+ grade, one above S&P, data compiled by Bloomberg show.

An Irish finance ministry spokesman didn’t immediately respond to a call and e-mail seeking comment on S&P’s decision.

“With domestic demand unlikely in our view to recover until 2012, gross debt to GDP at end-2011 looks set to exceed our previous projections of 120 percent,” S&P said today. Ireland’s GDP has contracted for three consecutive years, and Irish Central Bank Governor Patrick Honohan has declared his country’s fiscal deterioration “worse than almost any other country.”

Irish Risk

The risk premium on Ireland’s 10-year debt over German bunds, Europe’s benchmark, widened to 606 basis points today from 586 yesterday. The yield spread reached a record 652 basis points on Nov. 11.

Irish banks forced the government to seek the bailout after loan impairments surged following the collapse of the country’s decade-long real estate boom in 2008. That year, the government pledged to back most liabilities, including all deposits in Irish banks, a promise that led the government to inject 33 billion euros to support the lenders.

As loan losses climbed, the government put the cost of the rescue at 50 billion euros in September this year, fueling investor doubts that Ireland could afford the rescue.

--With assistance from Wes Goodman in Singapore, Finbarr Flynn and Simone Meier in Dublin and Jennifer Ryan in London. Editors: John Fraher, Fergal O’Brien

To contact the reporters on this story: Chris Anstey at canstey@bloomberg.net; Dara Doyle at ddoyle1@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

Swaps Soar on ‘Sacrosanct’ Senior Europe Debt: Credit Markets

Posted: 24 Nov 2010 04:43 AM PST

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By Abigail Moses

Nov. 24 (Bloomberg) -- The cost of protecting against defaults on senior notes of European banks is soaring on speculation bondholders will be forced to take losses as governments try to share the burden of taxpayer-funded bailouts.

The Markit iTraxx Financial Index of credit-default swaps on senior debt rose 12.5 basis points, or 0.125 percentage point, to 163.5 basis points, the biggest increase since June. Contracts on Portugal’s Banco Espirito Santo SA are at a record, and Spain’s Banco Santander SA are at the highest level in five months.

Europe’s debt crisis has spread to Ireland from Greece, and bond investors bet that Portugal and Spain will be next in line for a bailout from the European Union and International Monetary Fund. The EU estimates a rescue for Ireland, downgraded yesterday by Standard & Poor’s, may total 85 billion euros ($113 billion).

“Senior bondholders will most likely find themselves as potential burden-sharers, which is in stark contrast with the rules of engagement of the market,” said Roberto Henriques, a fixed-income analyst at JPMorgan Chase & Co. in London. “Even at the worst point of the current crisis, it was generally a given that senior debt was sacrosanct.”

Subordinated bonds have largely borne the brunt of losses because they stop paying before senior securities in case of a default or debt restructuring. Should banks be unable to pay senior bondholders, they may find it more difficult and expensive to raise money. Anglo Irish Bank Corp. investors were forced to take 20 cents on the euro for subordinated debt this week.

Relative Yield

Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of similar maturity government debt rose 3 basis points to 169 basis points, the highest since Oct. 20, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Yields averaged 3.61 percent.

Market volatility increased as fighting broke out between North and South Korea and Europe’s debt crisis escalated. While Performance Food Group Co. withdrew a planned $550 million note sale citing “adverse market conditions,” the turbulence didn’t stop National Amusements Inc., the movie-theater chain and holding company controlled by billionaire Sumner Redstone, from making plans to issue $390 million of bonds. Loan prices fell and relative yields on emerging market debt soared.

“There’s a risk-off trade right now because there’s a lot of fear in the marketplace,” said Kingman Penniman, chief executive officer of KDP Investment Advisors in Montpelier, Vermont. “With the combination of everything that’s happening in Europe and Asia and the aggressive amount of new issuance that’s come recently, we’re definitely seeing a correction.”

Sales Pulled

Performance Food, owned by Blackstone Group LP and Wellspring Capital Management LLC, pulled its offering even after sweetening terms for the debt on Nov. 22 in an effort to attract investors, said a person familiar with the transaction who declined to be identified because the marketing was private.

Bain Capital LLC’s Burlington Coat Factory Warehouse Corp. decided to cancel a $1.5 billion debt financing on Nov. 18. In Asia, Hongkong Electric Holdings Ltd., delayed its sale of as much as $500 million of 10-year dollar bonds due to tensions on the Korean peninsula, two people familiar with the matter said today.

Yuzhou Properties Co., a developer in southern China, and Vietnam National Coal-Mineral Industries Group postponed dollar- denominated bond offerings as investor appetite for risk diminished, people with knowledge of the sales said yesterday.

Vienna Insurance

In Europe, Vienna Insurance Group, the east of the region’s biggest insurer, postponed its 500 million-euro ($666 million) sale of 30-year subordinated bonds, according to a banker involved in the transaction.

Caterpillar Inc., the world’s biggest maker of construction equipment, hired Goldman Sachs Group Inc. to help it sell yuan- denominated bonds in Hong Kong, according to a person familiar with the matter.

The Peoria, Illinois-based company plans to raise as much as 1 billion yuan ($150 million) from two-year bonds, said the person, who asked not to be identified as the matter is private.

National Amusements may sell its seven-year senior secured notes as soon as next week, said a person familiar with the transaction. The notes will have a provision allowing up to 10 percent of the debt to be redeemed at 103 percent annually during the first three years, after which time all of it can be called, said the person, who declined to be identified because terms aren’t set.

Most-Traded Bonds

Bonds from Fairfield, Connecticut-based General Electric Co. were the most actively traded U.S. corporate securities by dealers, with 98 trades of $1 million or more, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority.

Yields on Fannie Mae and Freddie Mac mortgage securities that guide home-loan rates rose to the highest in more than a year relative to 10-year Treasuries.

Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds climbed about 1 basis point to about 95 basis points more than 10-year U.S. debt as of 5 p.m. in New York, the widest spread since October 2009, data compiled by Bloomberg show. The gap was 76 basis points on Oct. 29.

In the asset-backed securities market, the Securities and Exchange Commission indefinitely extended the timeframe for bond issuers to omit credit ratings from marketing materials, effectively exempting companies from part of the U.S. Dodd-Frank financial reform act.

The Standard & Poor’s/LSTA US Leveraged Loan 100 Index fell 0.12 cent to 91.88 cents on the dollar, the third consecutive daily decline. The index, which tracks the 100 largest dollar- denominated first-lien leveraged loans, touched the lowest since Nov. 4.

Petco Loan

Petco Animal Supplies Inc. bucked the trend, with its $1.225 billion term loan rising as trading in the debt began. Petco’s seven-year loan, issued at 99 cents on the dollar, first changed hands at 100.25 cents, said people familiar with the situation who declined to be identified because the trades are private.

In emerging markets, relative yields rose 7 basis points to 254 basis points, the highest since Oct. 21, according to JPMorgan index data.

Fears of burden sharing are also being seen in senior bank bonds. The 1 billion euros of senior unsecured floating-rate notes due 2012 issued by Banco Espirito Santo were at 90.8 cents, down from 93.4 on Nov. 4, according to Bloomberg composite prices. Its 500 million euros of senior notes due 2013 were at 83 cents, down from 88.38 on Nov. 4.

Banco Bilbao Bonds

Banco Bilbao Vizcaya Argentaria SA’s 1.25 billion euros of 3.875 percent senior notes due 2015 were at 98.8 cents to yield 4.14 percent, down from 101.7 cents and a yield of 3.47 percent on Nov. 1, according to Bloomberg composite prices.

While Irish Finance Minister Brian Lenihan has pledged only to impose losses on holders of subordinated bonds of nationalized lenders, investors are concerned his promise won’t be honored as EU and IMF officials gain authority in Dublin.

“There will be private-sector burden-sharing,” said Willem Buiter, chief economist at Citigroup Inc. in London. “Ireland may be the first example, with haircutting of senior unsecured bank debt and possible sovereign debt restructuring as well in due course.”

Credit-default swaps on the senior debt of Ireland’s biggest lenders approached records highs. Contracts on Allied Irish Banks Plc climbed 103 to 954.5 while Bank of Ireland Plc jumped 89.9 to 735.7, according to CMA. The cost of insuring Ireland’s government debt climbed 13 to 588, while Portugal surged 13.5 to a record 5888 and Spain was up 9 to an all-time high of 310, CMA prices show.

SovX at Record

That helped drive the Markit iTraxx SovX Western Europe Index of contracts on 15 governments to a record-high 184 basis points, shrinking the difference with the Markit iTraxx Financial Index to 20.5 basis points.

Credit-default swaps typically rise as investor confidence deteriorates and fall as it improves, paying 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.

Dublin-based Anglo Irish was taken over by the government in January 2009 as loan losses spiraled after a real-estate bubble burst. The government has also taken a 36 percent stake in Bank of Ireland, the country’s biggest lender, and is preparing to take a majority share of Allied Irish.

Anglo Irish

Credit-default swaps on Anglo Irish’s bonds may be triggered following a subordinated debt exchange, with investors asking the International Swaps & Derivatives Association whether the transaction constitutes a so-called restructuring credit event.

If ISDA rules that Anglo Irish swaps can be triggered, buyers of insurance on the bank’s senior bonds should hold off demanding payment because they may recover more as the risk of holding the debt increases, according to Tim Brunne, a credit strategist at UniCredit SpA in Munich.

Forcing holders of senior bonds sold by some European banks to take losses may be necessary given the amount of debt involved, according to Brunne.

“You don’t have the possibility to solve the situation without cutting the link between the financial sector and the sovereign, and that’s a problem you see everywhere,” he said.

Rescue Spain

The 750-billion-euro European Financial Stability Facility, created in May to support the region’s most indebted governments, won’t be big enough to rescue Spain, Citigroup’s Buiter said. A rise in Spanish bank risk could be the “tipping point” for the financial credit swaps gauge, according to JPMorgan.

Credit-default swaps on Lisbon-based Banco Espirito Santo have climbed almost 300 basis points this month to 699, according to CMA. Contracts on Banco Santander are up about 80 to 232.

German Chancellor Angela Merkel wants buyers of new euro- region bonds to accept liability clauses starting in 2011, two years before a revamped crisis-management system kicks in, according to a government document obtained by Bloomberg News.

“The problem areas are there for all to see -- haircuts for subordinated bank debt holders and fear that senior holders could get dragged in,” said Suki Mann, a credit strategist at Societe Generale SA in London. “The market has moved on from Greece, is beating up on Ireland and is looking closely at Portugal.”

--With assistance from John Fraher, John Glover, Sharon L. Lynch, Mary Childs, Emre Peker, Tim Catts and Boris Korby in New York and Ed Johnson in Sydney. Editors: Michael Shanahan, Paul Armstrong

To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net

Merkel Push For Tougher 2011 Bond Terms Worsens Contagion

Posted: 24 Nov 2010 04:43 AM PST

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By Brian Parkin and Rainer Buergin

Nov. 24 (Bloomberg) -- German Chancellor Angela Merkel is pushing a plan to force investors to accept tougher terms on government bond purchases, deepening the turmoil across euro- region debt markets.

The premium on Spanish debt over German bunds rose to a euro-era record today and Portugal’s bonds dropped on investors’ concern the countries will have to follow Ireland and Greece and ask the European Union for rescue funds. While Spanish Finance Minister Elena Salgado argues there’s “absolutely” no risk of that, Spain today froze a plan to sell state-guaranteed power- revenue bonds, people with knowledge of the situation said.

Merkel’s drive for investors to foot more of the bill of future bailouts has reignited a sovereign debt crisis that threatened to rip the euro region apart in May. It has also sparked criticism from the European Central Bank and governments in Ireland and Spain. A government paper obtained by Bloomberg News shows Germany may press buyers of new euro-region bonds to accept liability clauses starting in 2011, two years before a revamped crisis-management system kicks in.

“I don’t know what her game is,” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin. “I don’t think the comments help whatsoever in terms of what’s going on in markets. The fire is on the way, it’s getting into the forest already.”

Merkel yesterday pushed the euro to a three-month low, saying that the currency faces an “exceptionally serious” situation.

Irritation

“That irritates me,” European Central Bank Governing Council member Ewald Nowotny told Austria’s ORF television late yesterday. “The euro is not in danger. Individual countries, and the banking systems of these countries, are in danger. You have to make the distinction.”

The currency fell 0.3 percent to $1.3331, extending yesterday’s 1.9 percent drop. The extra yield that investors demand to hold Spanish 10-year bonds over German counterparts rose 1 basis point to 235 basis points today. The yield on Portugal’s 10-year bond rose 7 basis points to 6.803 percent.

Bonds have plunged across the euro region’s periphery this month, forcing Ireland on Nov. 21 to turn to the EU and the International Monetary Fund for a bailout package. Prime Minister Brian Cowen, who will unveil his government’s four-year plan to cut its deficit today, says aid may be worth 85 billion euros ($113 billion). Ireland’s debt rating was lowered two steps to A from AA- by Standard & Poor’s late yesterday.

In Spain, the government froze the start of its 13.5 billion-euro program to sell power-revenue bonds until government debt market volatility abates, people with direct knowledge of the transaction said. The decision came hours after Salgado dismissed the risks of Spain needing aid.

‘Speculative Attack’

Asked in an interview on Punto Radio in Madrid today if Spain would need a bailout, Salgado said “absolutely not.” The euro faces “speculative attacks” which Spain is in the “best conditions to resist,” she said.

“To avoid a spreading disaster, the comforting statements issued by European ministers in recent days must be urgently translated into meaningful actions,” Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., wrote in the Financial Times today.

Merkel reiterated her push today for a permanent crisis- resolution mechanism for the euro region from 2013, telling lawmakers in parliament there’s a need to assert the “primary of poltics” over markets. A Finance Ministry document said that the “blanket” introduction of standardized collective-action clauses for all government bonds issued in the 16-nation euro region would be “unproblematic” and should begin next year. The Finance Ministry declined to comment.

‘Eminent Sense’

The government’s proposal “looks inconsistent with the implicit bail-out tool that runs to 2013,” Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich, said by telephone today. “Stamping new bonds’ standardized-liability clauses from 2013 may make eminent sense, but this proposal may cause even more nervousness.”

The latest stage of the European crisis is showing few signs of hurting Germany’s economy. German business confidence unexpectedly surged to a record high in November as domestic spending increased, the Ifo economic institute said today.

Some economists defended Merkel’s stance, with Harvard University Professor Kenneth Rogoff saying she’s “basically on the right side of the debate.”

“It’s true the German position has brought forward the problems, but Merkel rightly recognized there is no escaping these problems and they have to be confronted,” said Rogoff, who said in April that other countries would follow Greece and ask for aid. “Even her raising the restructuring idea was a very good thing. It needs to be addressed while it’s still manageable.”

New Mechanism

Finance ministers from Germany, France, Italy, Spain and the U.K. said in a statement distributed in Seoul on Nov. 12 that “any new mechanism would only come into effect after mid- 2013 with no impact whatsoever on the current arrangements.” A permanent mechanism, including the potential for bondholders to be held accountable, won’t apply to outstanding debt, they said.

According to the government paper, in the event of a sovereign debt crisis as happened in Greece, as a first step the clauses would result in the payment period for government bonds being extended. If the solvency problem continued, additional steps would be considered, including “further extension, interest-rate cuts and a reduction in the nominal value” on the bond, the paper said.

Germany is seeking to shape the permanent euro-area safety net before an EU summit next month when leaders are due to discuss the plan. The permanent mechanism is intended to replace the 750 billion-euro rescue fund set up in May in a bid to halt the debt crisis spreading from Greece.

“The last thing that financial markets need to hear right now is piecemeal information,” said Nick Kounis, head of macro research at ABN Amro Bank in Amsterdam. “European policymakers need to get a hold of this crisis before it starts moving towards bigger and bigger countries. Merkel’s remarks go in exactly the opposite direction.”

--With assistance from Tony Czuczka in Berlin, Jeffrey Black in Frankfurt, Jennifer Ryan in London, Jeff Black in Berlin and Simone Meier in Dublin. Editors: John Fraher, Alan Crawford

To contact the reporters on this story: Brian Parkin in Berlin at bparkin@bloomberg.net; Rainer Buergin in Berlin at rbuergin1@bloomberg.net

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

Spain Delays $18 Billion Power-Bond Program on Yields

Posted: 24 Nov 2010 04:33 AM PST

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By Ben Sills and Esteban Duarte

(Adds comment from investor in third paragraph, shares in seventh.)

Nov. 24 (Bloomberg) -- Spain has frozen the start of its 13.5 billion-euro ($18 billion) program to sell state-guaranteed power revenue bonds until government debt-market volatility abates, people with direct knowledge of the transaction said.

Bankers who were authorized yesterday to begin gauging investor interest in the first tranche of bonds will wait until the yield stabilizes on Spanish debt, roiled by Ireland’s bailout request, said two people who asked not to be named because the process is confidential. The sale may proceed after the yield settles, one of the people said.

“Going ahead with these bonds would have been almost crazy,” said Ivan Comerma, who manages about 3 billion euros as head of capital markets at Banc International Banca Mora in Andorra. “It would be better to wait till the waters calm down."

The spread between Spanish government bonds and German sovereign debt touched a euro-era record yesterday and today, reducing potential investor interest in the sale. Spain’s securities regulator authorized the banks to begin seeking buyers today.

The decision extends a two-year drought for the government in selling bonds to bridge the so-called tariff deficit as part of its decade-long policy to subsidize power rates, or tariffs.

The proceeds would pay back utilities including Iberdrola SA and Enel SpA’s Endesa unit for using their own funds to cover regulated costs. By doing so they helped keep increases in customer prices below or close to the inflation rate.

Spanish utility shares extended losses after the news with Iberdrola down 1 percent at 5.54 euros and Endesa 1.1 percent lower at 18.71 euros at 1:17 p.m. in Madrid.

A government Finance Ministry official who declined to be named in line with policy said there were no new developments.

Iberdrola and Endesa, Spain’s biggest power producers, are owed about 3.7 billion euros and 7.7 billion euros, respectively, after using their cash and debt to cover the gap between revenue they receive from customers and what has been promised by the government. About 3 billion euros is owed to other Spanish utilities, including Gas Natural SDG SA and the local units of E.ON AG and EDP-Energias de Portugal SA.

--With reporting by Emma Ross-Thomas in Madrid. Editors: Todd White, Paul Tobin

To contact the reporter on this story: Ben Sills in Madrid at bsills@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net

Stocks, U.S. Futures Rise on Profit, Economy; Irish Bonds Fall

Posted: 24 Nov 2010 04:32 AM PST

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By Stephen Kirkland

Nov. 24 (Bloomberg) -- Stocks in Europe rose from a six- week low and U.S. index futures gained as Porsche SE’s profit climbed and German business confidence unexpectedly improved. Spanish and Irish bond yields increased on concern the region’s financial crisis will spread.

The Stoxx Europe 600 Index added 0.7 percent, ending the biggest three-day drop since August, at 7:25 a.m. in New York. Futures on the Standard & Poor’s 500 Index gained 0.3 percent. Irish 10-year yields increased 35 basis points, while the yield on Spain’s note advanced 13 basis points. The S&P GSCI Index of 24 commodities rose for the first time in four days.

Porsche posted a more-than sevenfold increase in operating profit, and the Ifo institute said its gauge of Germany’s business climate rose to a record high this month. Reports today may show the U.S. economy is improving without stoking inflation, according to Bloomberg surveys of analysts. Ireland’s debt rating was lowered two steps yesterday by S&P, which signaled further downgrades should the government increase borrowing to bail out banks.

“What’s going on regarding the peripheral European countries is impacting sentiment, but that is presenting valuation opportunities,” said Kevin Lilley, who helps oversee about $2 billion at Royal London Asset Management. “There is still substantial upside to equity markets.”

Two stocks rose for every one that declined in Europe’s Stoxx 600. Porsche jumped 4 percent. Provident Financial Plc rallied 7.2 percent as sales advanced. SAP AG fell 1.5 percent after the software maker was ordered to pay $1.3 billion to rival Oracle Corp. for copyright infringement. Bank of Ireland sank 23 percent as the

U.S. Economy

U.S. futures advanced indicating the S&P 500 will pare yesterday’s 1.4 percent retreat. Household purchases rose 0.5 percent after a 0.2 percent gain in September, according to economists surveyed before a Commerce Department report at 8:30 a.m. in Washington. A separate release at the same time may show bookings for durable goods excluding cars and aircraft climbed 0.6 percent.

The Labor Department may say at 8:30 a.m. initial jobless claims fell to 435,000 in the week ended Nov. 20 from 439,000 the prior week, while at 10 a.m. the Commerce Department will probably say demand for new homes rose 1.6 percent to a 312,000 annual pace in October.

Spain, Ireland

Greek 10-year bonds sank for the fourth day, driving the yield 10 basis points higher to 12.15 percent. The yield on similar-maturity Irish debt jumped 29 basis points to 8.94 percent. The difference in yield, or spread, between the securities and bunds widened 21 basis points to 607 basis points, according to Bloomberg generic data. Portugal’s 10-year yield increased six basis points to 7.12 percent.

Credit-default swaps insuring Portuguese government debt climbed 13.5 basis points to 500.5 while those for Spain increased 9 basis points to 310, both all-time highs.

“The widening of the Spanish 10-year yield spread over Germany to a record does not bode well for the outlook of the euro-zone debt markets or the euro,” Derek Halpenny, European head of global currency research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, wrote in a report today. “The danger is that the financial markets discard fundamentals entirely.”

Irish Prime Minister Brian Cowen said a bailout of 85 billion euros ($114 billion) has been discussed as the government remains in talks over the amount of the rescue package from the European Union and the International Monetary Fund. The country’s labor unions plan Nov. 27 strikes to protest cuts designed to trim a deficit that will be 12 percent of gross domestic product this year and reach 32 percent when the cost of bank bailouts is taken into account.

Portuguese Strikes

Portuguese workers are walking off the job today to protest government austerity measures as the country faces its biggest strike in 22 years. German Chancellor Angela Merkel today repeated her call for bondholders to share the burden when nations can’t pay their debts.

The euro slipped 0.4 percent against the dollar, depreciating against 13 of its 16 most-traded peers. It dropped 0.3 percent versus the yen and 0.4 percent compared with the Swiss franc.

The S&P GSCI index of commodities rose 0.7 percent. Copper futures added 0.8 percent on the London Metal Exchange, and oil rose 0.6 percent to $81.72 a barrel. Corn for March delivery climbed 0.9 percent on the Chicago Board of Trade.

The 10-year Treasury yield was little changed at 2.77 percent before the U.S. auctions $29 billion of seven-year notes, the last of three sales this week totaling $99 billion.

The MSCI Emerging Markets Index slipped 0.4 percent to the lowest since September. The won closed down 0.4 percent, after falling as much as 3 percent following North Korea’s artillery fire on the South yesterday. China’s Shanghai Composite Index advanced 1.1 percent, rebounding from a six-week low.

--With assistance from David Merritt, Abigail Moses, Daniel Tilles, Jason Webb and Dan Weeks in London. Editors: Stephen Kirkland, Justin Carrigan

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

To contact the editor responsible for this story: Paul Sillitoe in London at psillitoe@bloomberg.net