Business News: A Savings Boon for Banks

Business News: A Savings Boon for Banks

A Savings Boon for Banks

Posted: 02 Dec 2010 02:00 PM PST

Lawmakers Target Social Security, Tax Breaks to Reduce Deficit

Posted: 05 Dec 2010 09:09 PM PST

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By Heidi Przybyla and Mike Dorning

Dec. 6 (Bloomberg) -- Lawmakers may embrace plans by President Barack Obama’s debt commission to curb the costs of Social Security and $1 trillion in tax breaks even as comprehensive deficit reduction hinges on whether both parties seek confrontation or accommodation.

While the commission lacked the votes to send its proposal to Congress, bipartisan agreement on the panel will open a debate over the retirement system and the tax breaks, which include the home-mortgage deduction, several lawmakers and analysts said.

Any significant effort confronts what commission co- chairman Erskine Bowles called “the threat pressed upon us by these ever-increasing deficits.” Senate Budget Committee Chairman Kent Conrad, a Democrat, wants Obama to convene a summit, and House Republicans Dave Camp, incoming Ways and Means Committee chairman, and Paul Ryan, who will head the Budget Committee in January, say they’ll use the plan as a basis for hearings on the deficit.

“I put the likelihood at 15 percent that we would have any kind of deficit-reduction package in the next two years,” said Diane Swonk, chief economist for Mesirow Financial Inc. in Chicago. “That’s not that high. But it’s higher than I would have put it two weeks ago.”

Obama thanked the panel for highlighting “the magnitude of the challenge facing us” without embracing specific proposals. White House Budget Director Jack Lew has invited commission members to meet.

‘Strong Beginning’

“I would prefer to even go further in deficit reduction than this package,” Conrad, a commission member, said yesterday on “Fox News Sunday.” He called the proposal, backed by 11 of the panel’s 18 members, “a strong beginning,” with the “next logical step” a meeting between Obama and bipartisan Congress leaders.

Pressures to extend Bush-era tax cuts and respond to 9.8 percent unemployment will hamper fiscal restraint for now, said Lou Crandall, chief economist at Wrightson ICAP LLC, a unit of London-based ICAP Plc, the world’s largest broker of trades between banks.

“It is difficult for the congressional leadership to drive two conflicting processes at once,” Crandall said. “Congress is probably going to have to take things one step at a time.”

Still, 10-year Treasury note yields were at 3.01 percent on Dec. 3, suggesting the bond market isn’t too concerned yet about the deficit.

Voters Concerned

The federal budget deficit for the fiscal year ended Sept. 30 was $1.3 trillion or 8.9 percent of gross domestic product, according to a calculation released by the Treasury Department in October. Voters consider the shortfall their second most pressing concern, according to a Bloomberg National Poll.

The plan by Bowles, a former chief of staff to President Bill Clinton, and Republican co-chairman Alan Simpson, a former senator from Wyoming, would increase taxes by $1 trillion by 2020. It would scale back or eliminate hundreds of tax deductions, exclusions or credits such as those allowing homeowners to write off interest on their mortgage payments. It would also cut individual and corporate income tax rates.

Social Security benefits would be reduced, the gas tax would go up by 15 cents, discretionary spending would be lowered by $1.6 trillion and Medicare pared by $400 billion.

Tweaks Needed

Peter Orszag, who was running the White House budget office when Obama formed the panel, said if Congress makes any progress on the debt-reduction proposal, it’s most likely to be on Social Security’s long-term financial challenges.

“The most auspicious part of these proposals is in Social Security, where you need some tweaks to get bipartisan agreement, but they are tweaks,” said Orszag, who led the Congressional Budget Office before joining the Obama administration in 2009.

That sentiment was echoed by panel members including Alice Rivlin, another former CBO director, and Andrew Stern, president emeritus of the Service Employees International Union, among the nation’s largest labor organizations.

“Almost everybody mentioned it at some point in the deliberations,” said Rivlin. “Social Security can be done, I’m convinced now,” said Stern.

Republicans signal they intend to make their first order of business federal programs directed at specific groups. Republicans “must immediately start a conversation with the nation about the kind of entitlement changes that are necessary,” Majority Leader-elect Eric Cantor said in a statement Dec. 3.

Higher Earners

On Social Security, the commission’s report proposes moving to a formula that slows future benefit growth, particularly for higher earners, and raising the retirement age to 68 by 2050.

Previous efforts by Presidents Clinton and George W. Bush to overhaul the retirement system failed.

Now, Dick Durbin of Illinois, the Senate’s No. 2 Democrat, says: “If we want to come up with something bipartisan to work on together, Social Security is a good candidate.”

Durbin also said in an interview that “this commission opened a door that nobody has looked behind a long time, and that’s tax expenditures.”

Clearing out tax breaks appeals to Republicans looking to simplify the code and lower income tax rates.

Representative John Boehner, an Ohio Republican who becomes House speaker next month, said in an August speech in Cleveland that lawmakers need to “take a long and hard look at the undergrowth of deductions, credits, and special carve-outs that our tax code has become.”

Lower-Income Earners

Democrats can be brought on board by making sure the plan helps lower-income earners, said Mark Warner, a Virginia Democrat leading a bipartisan group of senators seeking common ground.

Higher-earning filers benefit the most from the exemptions because they are more likely to itemize their returns. That would allow Democrats to argue that doing away with them and cutting rates helps those who earn less, said Rivlin.

Edward Kleinbard, a tax professor at the University of Southern California who once headed the staff of Congress’s Joint Committee on Taxation, said limiting tax breaks may be gaining bipartisan support though Congress probably would have to phase in changes over 10 years.

“You can’t go cold turkey on removing these kinds of subsidies,” he said.

The commission report would allow taxpayers to claim a mortgage deduction up to $500,000 on their primary homes.

Bumpy Road

Even with the show of goodwill on the panel, the road to congressional consensus will be bumpy. Swonk said the transformation of deficits to surpluses during the 1990s came only after a series of politically painful actions.

Tax increases contained in the 1993 deficit-cutting package that Clinton passed through Congress were in turn taken up by Republicans as a campaign issue in the 1994 midterm election. Clinton’s Democratic Party lost control of both houses.

It may take a fiscal shock, such as a drop of confidence in state or local bonds that spreads to the Treasury market, to spur action on the commission’s proposals, Orszag said.

The commission has “put ideas back on the table that, if we do run into a fiscal tremor, can be picked up,” he said.

--With assistance from Ian Katz in Washington. Editors: Mark McQuillan, Robin Meszoly

To contact the reporters on this story: Heidi Przybyla in Washington at hprzybyla@bloomberg.net; Mike Dorning in Washington at morning@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net.

Deficits and Debt as Far as the Eye Can See

Posted: 02 Dec 2010 02:00 PM PST

Can the Euro Survive?

Posted: 02 Dec 2010 02:00 PM PST

Michael Glimcher: Musings of a REIT Maven

Posted: 05 Dec 2010 06:45 PM PST

New Rules Aimed at Preventing Stock Crash

Posted: 05 Dec 2010 09:16 PM PST

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By Nina Mehta

Dec. 6 (Bloomberg) -- Quoting obligations aimed at improving prices in equity markets take effect today as part of regulators’ attempt to prevent a repeat of the May 6 crash.

The rules require market makers to submit bids and offers within 8 percent of the prevailing price for the biggest U.S. stocks. They ban stub quotes, or placeholder requests that range from pennies to thousands of dollars that were adopted in response to rules requiring traders to maintain bids and offers. Stub quotes resulted in a “significant proportion” of the almost 20,800 trades voided on May 6 when $862 billion in equity value was briefly erased in 20 minutes, regulators said.

“The rules will lead to the removal of stub quotes and the black eye stub quotes were on May 6,” said Chris Isaacson, chief operating officer of Bats Global Markets, the Kansas City, Missouri-based exchange operator that accounted for 10.2 percent of U.S. stock volume last month. “They were an anachronism. This is a good change for the market.”

Stub quotes were first employed on Archipelago Exchange in 2002 when the venue joined the Intermarket Trading System, which operated an order-routing network linking exchanges. ITS required markets to submit two-sided quotes, or both bids and offers, according to Jamie Selway, a managing director at Investment Technology Group Inc. in New York and the chief economist at ArcaEx at the time. The venue began operating as a so-called electronic communication network in 1997.

Old Regulation

“Stub quotes were an artifact of old regulation,” Selway said. “They were never meant to trade.” The new rules will also establish a buffer of liquidity that will “eliminate the clearly erroneous trades that trigger trading halts,” he said, referring to the circuit breakers introduced in June for Standard & Poor’s 500 Index companies and later expanded to the Russell 1000 Index and more than 300 exchange-traded funds.

ITS was disbanded in 2007 when the Securities and Exchange Commission revamped equities trading and forced the New York Stock Exchange to become faster and more automated. NYSE bought Archipelago Holdings Inc. in 2006 in a deal that made the 214- year-old Big Board a publicly traded company. It became NYSE Euronext in a merger completed in 2007.

As trading in the first half of the last decade moved away from dealer markets and toward what’s known as limit-order books, in which liquidity comes from brokers and their customers, some market makers that had two-sided quoting requirements began widening their spreads, or the difference between the bids and offers they submitted to exchanges, Selway said. Stub quotes eliminated the need to repeatedly update one side of the quote and made the job easier, Selway said.

Best Prices

The new rules probably won’t increase liquidity at the best prices in the market, Isaacson said. By requiring quotes that guarantee liquidity, they will avoid the problem of voided trades that occurred on May 6, he said.

NYSE was the sole venue that didn’t cancel trades that day. Designated market makers and curbs that operated only on that exchange prevented share prices from plunging on NYSE, often by pausing trading in stocks for a few seconds or minutes.

For securities subject to single-stock circuit breakers, market makers will now have to place buy orders within 8 percent of the national best bid and place sell requests no higher than 8 percent of the national best offer between 9:45 a.m. and 3:35 p.m. New York time.

Wider Band

For the first 15 minutes and last 25 minutes of the trading day, market makers must quote within 20 percent of the national best bid or offer, or NBBO. If a stock isn’t in the program of trading curbs, firms must quote within 30 percent of the NBBO. The safeguards halt trading for five minutes if a security moves 10 percent within a five-minute period.

“It’s not a big stretch for us to add 100 shares on either side of the market for the vast majority of issues,” said Jamil Nazarali, a senior managing director and head of electronic trading at a market-making subsidiary of Knight Capital Group Inc. “Where it may be an issue is for those firms that don’t do a lot of trading, calling themselves market makers and hanging out with a very wide quote. They’ll have to decide whether they want to be market makers.”

Nasdaq OMX Group Inc.’s main exchange had 136 market makers in October, the most of any venue though down from 143 a year ago and 429 in 2000, according to the company. The number decreased annually in all but one year this decade as some firms merged or dropped out of an increasingly competitive business.

Nasdaq, Bats

Market makers on venues such as Nasdaq and Bats will be able to use exchange systems to automatically update their quotes to ensure they comply with the new requirements while limiting the risks as prices move. The exchanges will update bids and offers so they’re within set ranges of the NBBO. While NYSE Arca ended its program that facilitated bids at 1 cent and sell orders at twice the stock’s last closing price, it’s developing a system that allows firms to automatically quote a certain percentage away from the NBBO, according to a notice.

The quoting requirements could pose risks for some firms in less-liquid stocks, said Nazarali, who’s based in Jersey City, New Jersey. For those shares, the spread between the national best bid and offer may be more than 60 percent of the share price, he said. To comply with the new rules, market makers will have to quote within that range, forcing them to buy at higher prices or sell for less than they would prefer, he said.

“It’s going to force a lot of people who want to be market makers to post much tighter quotes,” Nazarali said.

--Editors: Chris Nagi, Nick Baker

To contact the reporter on this story: Nina Mehta in New York at nmehta24@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.

Are Americans as Poor as They Feel?

Posted: 02 Dec 2010 02:33 PM PST

What Americans Are Really Paying for Things

Posted: 09 Nov 2010 05:28 PM PST

Banks to Boost Profit on Money-Market Products: Islamic Finance

Posted: 06 Dec 2010 04:38 AM PST

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By Camilla Hall

Dec. 6 (Bloomberg) -- Islamic banks will be offered a range of new money-market instruments in coming months, allowing lenders to earn larger returns from excess cash stored at central banks or locked into longer-dated securities.

The International Islamic Liquidity Management Corp., which is being set up in Kuala Lumpur by 11 central banks, will sell its first short-term bills in dollars early next year, Malaysian central bank Governor Zeti Akhtar Aziz said Oct. 28. Prime Rate Capital Management LLP plans to start a $250 million Islamic cash fund in January, Chief Executive Officer Christopher Oulton said in a Nov. 23 interview. The U.A.E.’s central bank auctioned its first Shariah-compliant certificates of deposits on Nov. 10.

Demand for services complying with Shariah law is increasing about 15 percent annually and assets under management may almost triple to $2.8 trillion by 2015, according to the Kuala Lumpur-based Islamic Financial Services Board, a standards body for the industry. Money-market products will allow banks to invest idle cash more profitably, Paris-based Anouar Hassoune, an analyst at Moody’s Investors Service, said in an e-mailed response to questions on Dec. 1.

“Liquidity is basically managed by accumulating central bank and interbank placements, as well as some government bonds, the latter still being relatively scarce,” he said. “Banks are penalized by crystallizing a significant amount of funds in cash forms.”

U.K. Options

Shariah-compliant short-term investment products will fill a hole in the industry, according to London-based Prime Rate Capital, which oversees $3.8 billion of assets.

“There is a dearth of products and none of them are overnight,” Oulton said. “The alternatives include just leaving it and getting no return at all.” Islamic banks will be able to place their deposits with the fund, which will then buy and sell commodities in so-called Murabahah transactions, he said.

A Murabahah contract is a sale and deferred-payment accord based on an asset, usually a commodity such as oil, sugar or metals, in which the cost and profit margin are pre-agreed.

“Even though there are providers out there, this particular segment needs some institutional deepening,” said Ahmad Alanani, the Dubai-based director of fixed-income sales at investment bank Exotix Ltd.

Certificates of Deposits

Global sales of sukuk, which pay returns based on asset flows to comply with the religion’s ban on interest, fell 31 percent this year to $13.8 billion, Bloomberg data show. Issuance reached a record $31 billion in 2007.

Shariah-compliant bonds returned 11.3 percent this year, the HSBC/NASDAQ Dubai US Dollar Sukuk Index shows. Debt in emerging markets gained 13.8 percent, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

The difference between the average yield for emerging- market sukuk and the London interbank offered rate narrowed two basis points to 347 on Dec. 3 and has narrowed 26 basis points since Sept. 30, the HSBC/NASDAQ Dubai US Dollar Sukuk Index showed.

Malaysia’s 3.928 percent Islamic note due in June 2015 rose, driving the yield seven basis points lower to 2.86 percent today, according to prices provided by Royal Bank of Scotland Group Plc. The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s dropped three basis points to 380, according to data compiled by Bloomberg.

Money Markets

The U.A.E. central bank offered Islamic certificates of deposits of one week up to one year, the monetary authority said in an e-mailed statement Nov. 14. Bahrain, the only country in the Persian Gulf to sell Islamic debt due in six months or less, plans to issue additional securities, central bank Governor Rasheed al-Maraj said in an Oct. 27 interview in Marrakesh, Morocco.

The International Islamic Financial Market, founded by the central banks of Bahrain, Indonesia and Malaysia, plans to create Shariah-compliant repurchase agreements to help Islamic banks manage funds and boost trading, Chief Executive Officer Ijlal Ahmed Alvi said in August.

The first global Shariah-compliant money-market securities will be sold by International Islamic Liquidity Management on a regular basis, Malaysia’s Zeti said in an interview in Washington on Oct. 10.

“Instead of having a series of different counterparts for the placement of excess liquidity and borrowing short-term from a number of correspondents, the idea is to have a one-stop shop for liquidity placements and short-term borrowing,” said Moody’s Hassoune.

--Editors: Shanthy Nambiar, Claudia Maedler.

To contact the reporter on this story: Camilla Hall in Dubai at chall24@bloomberg.net

To contact the editor responsible for this story: Shanthy Nambiar at snambiar1@bloomberg.net

Treasuries Gain as Bernanke Says Fed May Boost Debt Purchases

Posted: 06 Dec 2010 04:24 AM PST

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By Keith Jenkins and Ron Harui

Dec. 6 (Bloomberg) -- Treasuries rose, pushing 10-year note yields down from almost a four-month high, after Federal Reserve Chairman Ben S. Bernanke said the central bank may increase purchases of the securities to underpin the economic recovery.

Benchmark 10-year notes advanced for the first time in four days as Bernanke said unemployment may take five years to fall to a normal level of 5 to 6 percent and Fed buying of Treasury securities beyond the $600 billion announced last month is possible. Employers added fewer workers in November than analysts forecast, Labor Department figures showed last week.

“Bernanke’s comments about possible further Fed buying have lifted Treasuries,” said Peter Chatwell, a fixed-income strategist at Credit Agricole SA in London. “The labor market data was disappointing.”

The 10-year note yield fell five basis points, or 0.05 percentage point, to 2.96 percent at 7:19 a.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in November 2020 increased 13/32, or $4.06 per $1,000 face amount, to 97 5/32.

The yield on the note climbed to 3.04 percent on Dec. 3, the highest level since July 28. The two-year note yield dropped two basis points to 0.46 percent today after touching 0.44 percent, the lowest level since Nov. 23.

The purchase of more bonds than planned is “certainly possible,” Bernanke said in an interview broadcast yesterday on CBS Corp.’s “60 Minutes” program. “It depends on the efficacy of the program” and the outlook for inflation and the economy, he said.

Fed Debt Buying

The central bank will purchase $1.5 billion to $2.5 billion of Treasuries maturing from August 2028 to November 2040 today, according to the New York Fed’s website.

U.S. employers added 39,000 workers in November, less than the most pessimistic forecast of economists surveyed by Bloomberg, Labor Department figures showed Dec. 3. The jobless rate rose to 9.8 percent from 9.6 percent, supporting the Fed’s decision to pump more money into the financial system.

“At the rate we’re going, it could be four, five years before we are back to a more normal unemployment rate” of about 5 percent to 6 percent, Bernanke said.

A further gain in Treasuries may be tempered before the government sells $66 billion of notes and bonds this week. The U.S. will auction $32 billion of three-year securities tomorrow, $21 billion of 10-year debt on the following day and $13 billion of 30-year bonds on Dec. 9.

Yield Forecast

“The 10-year yield at 3 percent is an obvious barrier for further selling, but with this week’s supply ahead of us, we expect to see the long end of the market under pressure,” Credit Agricole’s Chatwell said.

The yield on the 10-year note will end the year at 2.64 percent, according to the average forecast in a Bloomberg News survey of banks and securities companies, with the most recent estimates given the heaviest weightings. The two-year note yield is forecast to close 2010 at 0.50 percent.

The extra yield investors require to hold 10-year notes over 2-year debt narrowed five basis points today to 2.49 percentage points.

Two-year rates tend to track the Fed’s target for overnight lending because of their shorter maturity. Yields on longer-term bonds are more influenced by inflation and by the size of the government’s debt.

Ten-year Treasury note futures may rise to 128 1/32 if they sustain a break above a key resistance level, according to Societe Generale SA, citing technical indicators.

‘Pullback Line’

“It would take a break above the short-term rising pullback line, which comes at 124 9/32 today, to confirm that the 10-year T-note is on its way back to the early November high of 128 1/32,” Fabien Manac’h, a technical analyst at the bank in Paris, wrote in an e-mailed report.

The 10-year note futures contract climbed 1/2 to 124 6/32. It reached 128 1/32 on Nov. 4.

Yields on 10-year bunds are poised to rise above comparable maturity U.S. Treasuries for the first time since June 2009 on concern Germany will assume a greater burden to support the European Monetary Union.

The difference, or spread, narrowed to as little as 7 basis points on Nov. 29, from 90 basis points in April as the 85 billion euro ($113 billion) aid package for Ireland failed to stem concern that Europe’s debt crisis will broaden. The spread was at 10 basis points today.

Treasuries have handed investors a 6.9 percent return this year, according to Bank of America Merrill Lynch data. German debt has gained 6.4 percent, the indexes show.

--With assistance from Daniel Kruger in New York. Editors: Dennis Fitzgerald, Mark McCord

To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Ron Harui in Tokyo at rharui@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

Treasuries, Dollar Rise on Prospect of Fed Buying; Euro Weakens

Posted: 06 Dec 2010 04:21 AM PST

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By Stephen Kirkland

Dec. 6 (Bloomberg) -- Treasuries rose and the dollar snapped a three-day decline after Federal Reserve Chairman Ben S. Bernanke said the central bank may boost purchases of U.S. securities. The euro weakened amid divisions over steps to halt the debt crisis, while U.S. stock index futures fell.

U.S. 10-year Treasury yields lost five basis points to 2.96 percent at 7:15 a.m. in New York, the steepest drop in two weeks. The Dollar Index rose 0.5 percent to 79.742 and the euro depreciated against 13 of its 16 major counterparts. The forint tumbled the most among currencies worldwide after Moody’s Investors Service cut Hungary’s credit rating. The Stoxx Europe 600 Index was little changed, while futures on the Standard & Poor’s 500 Index slipped 0.2 percent after stocks in both regions had their biggest weekly rally in a month. Silver pared gains after climbing to a 30-year high.

Fed purchases of Treasuries beyond the $600 billion announced are “possible” given that U.S. unemployment may take five years to fall to a normal level, Bernanke said in an interview broadcast yesterday by CBS Corp.’s “60 Minutes” program. European officials meet today in Brussels after Belgian Finance Minister Didier Reynders said on Dec. 4 that the 750 billion-euro ($1 trillion) bailout fund might be expanded, while Germany opposes any increase.

“If U.S. rates are entering into a phase of renewed softness this would likely be coincident with more dollar weakness into year end,” Jane Foley, senior foreign-exchange strategist at Rabobank International in London, wrote in a report today. At the same time, “there appear to be broad divisions” in the euro-region over how to preserve the currency union, she said.

Treasuries, Dollar

The yield on two-year Treasuries dropped two basis points to 0.45 percent. The Dollar Index, which measures the greenback against six of its most-traded peers, rebounded after falling to a 10-day low on Dec. 3. The yen weakened 0.4 percent to 82.87 per dollar and strengthened 0.7 percent to 109.99 per euro.

The euro weakened 0.9 percent to $1.3297 after reaching a two-week high of $1.3442. Hungary’s forint sank 1.3 percent against the euro after Moody’s downgraded the country’s debt to the lowest investment grade and indicated it may cut the rating to junk. The BUX index of stocks lost 1 percent.

German bunds advanced, snapping a three-day decline, as Spanish and Italian government bonds fell. The bund yield was one basis point lower at 2.84 percent. The Spanish 10-year yield added seven basis points to 5.15 percent, while the equivalent Italian yield climbed five basis points to 4.5 percent. The cost of insuring bonds sold by Italy climbed nine basis points to 218, with credit-default swaps for Spain rising 11 basis points to 308, according to CMA, a data provider.

Sanpaolo, UniCredit

Bank stocks led declining shares in Europe, as Intesa Sanpaolo SpA and UniCredit SpA, Italy’s biggest lenders, and Spain’s Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA all fell at least 2 percent. Desire Petroleum Plc plunged 45 percent after saying the Rachel North well off the Falkland Islands won’t produce oil. De La Rue Plc, the world’s biggest printer of banknotes, rose a record 23 percent after saying it received an approach that could lead to an offer. Hochtief AG gained 5.1 percent after the company said Qatar Holding LLC aims to become a major shareholder.

The decline in U.S. futures indicated the S&P 500 may snap a three-day advance. The benchmark gauge has rallied 9.8 percent this year and 20 percent since hitting its 2010 low on July 2.

Silver rose 0.8 percent to $29.6275 an ounce after earlier today climbing to $29.915, the highest price since March 1980. Silver has advanced 75 percent this year. Cotton dropped 2.2 percent, the first decline in a week, and corn fell 0.5 percent.

Natural gas climbed 1.1 percent to $4.395 for a million British thermal units. Crude for January delivery fell 0.5 percent to $88.78 a barrel in New York.

--With assistance from Matthew Brown, Claudia Carpenter, David Merritt, Abigail Moses and Steve Voss in London. Editors: Stephen Kirkland, Paul Sillitoe

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

X5 to Buy Kopeyka for $1.1 Billion as Wal-Mart Lurks

Posted: 06 Dec 2010 04:21 AM PST

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By Ilya Khrennikov

(Updates with regulatory approval in last paragraph.)

Dec. 6 (Bloomberg) -- X5 Retail Group NV, Russia’s largest retailer, agreed to acquire Moscow-based discounter Kopeyka for 35 billion rubles ($1.1 billion) in cash to reinforce its market leadership as Wal-Mart Stores Inc. seeks to enter the country.

X5, controlled by billionaire Mikhail Fridman’s Alfa Group, will also assume net debt of no more than 16.5 billion rubles, bringing the total transaction value to 51.5 billion rubles, the Moscow-based company said today in a statement.

The purchase of closely held Kopeyka will add about 700 stores in Russia, where rising commodity prices and consumer spending are fueling an economic recovery. Wal-Mart’s attempts to enter the country by acquisition have been frustrated by disagreements on price, the Bentonville, Arkansas-based company said in June. The world’s largest retailer held talks earlier this year to acquire Kopeyka, according to Kommersant newspaper.

“We expect Wal-Mart to enter the Russian market within two-to-three years, and we think that they will seriously consider M&A opportunities,” Mikhail Terentiev, a London-based analyst at Nomura Holdings Inc., said in a phone interview. Kopeyka will strengthen X5’s leadership of the market, he said.

Wal-Mart has pursued several acquisition opportunities in Russia, though has been thwarted by disagreements over price, international chief Doug McMillon said in June. A call to the company’s press office out of hours wasn’t immediately returned.

The transaction price values Kopeyka at 12.1 times estimated earnings before interest, taxes, depreciation and amortization, according to Maria Kolbina, an analyst at VTB Capital in Moscow. The compares with 14.9 times for X5 and 10.8 times for competitor OAO Dixy Group, Kolbina wrote in a note.

Wimm-Bill-Dann

Russia has attracted foreign investment as its economic growth is forecast to accelerate to 4.3 percent next year from 4 percent in 2010, according to the International Monetary Fund. PepsiCo Inc. last week agreed to buy control of Wimm-Bill-Dann Dairy & Juice Co. for $3.8 billion to become the country’s biggest food-and-beverage company.

Adding Kopeyka’s 317 discount stores in Moscow and surrounding areas to its own 422 outlets will give X5 a market share of about 13 percent in the capital city, leaving “significant” room for growth, X5 said. The Kopeyka stores will be converted to X5’s Pyaterochka brand over two years.

“Kopeyka should perfectly compliment X5’s Pyaterochka portfolio, further strengthening the company’s lead in the discounter segment,” Mikhail Krasnoperov, an analyst at Troika Dialog in Moscow, said in an e-mailed research note.

X5 shares rose 64 cents, or 1.6 percent, to $41.84 at 12:07 p.m. in London, where the stock has its main listing.

X5 said it has identified “substantial scope” to improve efficiency at Kopeyka through larger-scale merchandise purchasing and reduced administration costs.

Earnings Multiple

The purchase from billionaire Nikolai Tsvetkov, who also controls UralSib Financial Corp., will be partly financed with a five-year 30 billion-ruble loan from OAO Sberbank, X5 said. The rest will be funded from existing credit facilities.

After the transaction, net debt will be “slightly” more than 3 times earnings before interest, taxes, depreciation and amortization, which is “well within the company’s balance sheet target ratios and credit facilities covenants,” X5 said.

Russian regulators have approved the deal, which should be completed by the end of this month, X5 said.

--With assistance from Anastasia Ustinova in Moscow and Sarah Shannon in London. Editors: Paul Jarvis, Celeste Perri.

To contact the reporters on this story: Ilya Khrennikov in Moscow at ikhrennikov@bloomberg.net.

To contact the editor responsible for this story: Amanda Jordan at ajordan11@bloomberg.net.

Moody’s Cuts Hungary Credit by Two Grades on Budget

Posted: 06 Dec 2010 04:19 AM PST

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By Zoltan Simon and Edith Balazs

(Updates prices in fifth paragraph.)

Dec. 6 (Bloomberg) -- Hungary’s sovereign credit rating was reduced by Moody’s Investors Service on concern that the government’s policy of plugging budget holes with “temporary measures” won’t be sustainable.

Moody’s downgraded Hungary’s rating two steps to Baa3, its lowest investment grade, the company said today in a statement from Frankfurt. The outlook is negative. The decision brings Moody’s in line with Standard & Poor’s. Fitch Ratings ranks Hungary one step higher at BBB.

Prime Minister Viktor Orban is bringing private pension funds under state control and imposing special taxes on banking, energy, telecommunications and retailing to cut the budget gap to the European Union limit of 3 percent of gross domestic product next year. Hungary is the EU’s most-indebted eastern member, with debt estimated at 79 percent of GDP this year.

“Today’s downgrade is primarily driven by the Hungarian government’s gradual but significant loss of financial strength, as the government’s strategy largely relies on temporary measures rather than sustainable fiscal consolidation policies,” Dietmar Hornung, Moody’s lead analyst for Hungary, said in the statement. “As a consequence, the country’s structural budget deficit is set to deteriorate.”

Most Vulnerable

The forint slid 1.3 percent to 280.06 per euro at 1:08 p.m. in Budapest, snapping a four-day rally and dropping the most among 25 emerging-market currencies tracked by Bloomberg. The yield on bonds maturing in February 2016 rose 13 basis points to 8.09 percent. The BUX Index of stocks fell 1 percent.

“We reiterate that we do not like what is happening in Hungary and see the forint as one of the most vulnerable currencies in the region,” Elisabeth Andreew, chief currency strategist at Nordea Bank AB in Copenhagen, said in an e-mail.

With 3 trillion forint ($14.2 billion) in private pension fund assets, Hungary is following the example of Argentina, which in 2001 confiscated about $3.2 billion of pension savings before the country stopped servicing its debt. The government in Buenos Aires nationalized the $24 billion industry two years ago to compensate for falling tax revenue after a 2005 debt restructuring.

Moody’s put Hungary’s rating on review for a downgrade in July after economic-policy talks between the government and the International Monetary Fund failed. Hungary was the first EU member to obtain an IMF-led bailout in 2008. Orban ended IMF cooperation saying he needed “freedom” to conduct economic policy.

Protecting Popularity

Orban, elected in April on a pledge to end five years of austerity after the worst recession in 18 years, plans to use the retirement fund assets to pay current government pensions and reduce debt as he seeks to cut the budget deficit. He backtracked on a campaign pledge to “defend” private pension funds with the plan to liquidate them.

The Cabinet is also using taxes on the financial, energy, retail and telecommunication industries to plug budget holes and fund a reduction in the personal income tax. The government plans to announce spending cuts of as much as 800 billion forint at the end of February, Economy Minister Gyorgy Matolcsy said on Nov. 23 without providing details.

“The government is relying only on short-term measures and doing everything to avoid losing popularity,” said Daniel Bebesy, who oversees $1.5 billion at Budapest Investment Management. “We don’t see any signs of structural changes, only the patching of budget holes by spending the private pension fund savings.”

2011 Budget

The Moody’s downgrade came after the government unveiled the 2011 budget, which forecasts 3 percent economic growth and 3.5 percent inflation. The budget shortfall is estimated at 2.94 percent of GDP, down from 3.8 percent this year.

The government’s measures are “largely ad hoc,” sufficient to meet short-term budget targets while failing to address the “structural deficit” that may lead to the shortfall widening to 6 percent of GDP by 2014, Standard & Poor’s said on Nov. 3.

The budget plan is “bold but risky,” overestimating economic growth, Christoph Rosenberg, head of a visiting IMF delegation, said in Budapest on Oct. 25. The Washington-based lender estimates the economy will grow 2.5 percent next year.

‘Non-Credible Policy’

Hungary’s negative outlook at Moody’s “hints at the possibility of further bad, non-credible policy and fiscal unsustainability coming through in the near term,” Peter Attard Montalto, a London-based analyst at Nomura International, said in an e-mailed note.

The government will freeze the state’s nominal wage bill next year and cut as many as 30,000 of the 690,000 public-sector jobs by attrition, Matolcsy said Oct. 30.

The Cabinet will use 540 billion forint from the private pension plans to plug holes in the state retirement fund, in addition to the 360 billion forint that will come next year from redirecting employees’ social security payments, according to the 2011 draft budget. The state fund has a shortfall of 900 billion forint, Matolcsy said Nov. 25.

The rest of the privately managed pension savings, to be allocated to a special fund, would be used to cut Hungary’s debt level, Matolcsy said.

“We will be looking very closely at the consolidation measures the government has promised to announce next year and they will obviously feed into the larger picture,” Hornung said in a phone interview after Moody’s announcement. “The measures themselves won’t necessarily trigger a rating action on our part but they will be a key element of our assessment.”

--Editors: Balazs Penz, Willy Morris

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Willy Morris at wmorris@bloomberg.net

Iran Nuclear Negotiators Begin, No Breakthrough Seen

Posted: 06 Dec 2010 04:11 AM PST

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By Jonathan Tirone

(Updates with comments from advisory group chief in fourth paragraph.)

Dec. 6 (Bloomberg) -- U.S. and European diplomats will seek to build a framework for future talks with Iran over its nuclear program as negotiators meet for the first time in a year.

Diplomats from the so-called P5+1 group, composed of China, France, Germany, Russia, the U.K. and the U.S., sat down with their Iranian counterparts at 9:30 a.m. on a rainy day in Geneva. Television trucks awaited their arrival outside the International Conference Center.

The goal of the talks is to find a way for the P5+1 to build momentum for further negotiations, say past and present diplomats from countries participating. An immediate breakthrough isn’t likely, they say.

“Trust is going to take a long time to develop and they’re not going to come out of this meeting with an agreement,” Paul Ingram, executive director of the British American Security Information Council, a London-based policy advisory group, said today by telephone. “There is an increased willingness now to discuss real issues.”

President Barack Obama called his Chinese counterpart, Hu Jintao, yesterday to stress “the importance of P5+1 unity” at the talks, the White House said today in a statement. Iran’s deputy secretary of the Supreme National Security Council, Ali Bagheri, met with Russian deputy Foreign Minister Sergei Ryabkov last night in Geneva, the Islamic Republic News Agency reported.

Iran’s negotiator, Saeed Jalili, opened the talks by condemning the assassination of physicist Majid Shahriari, state-run Mehr news agency said, citing an unidentified Iranian official in Geneva.

Diplomacy Needed

The two-day meeting is the latest chance to avert a clash with Iran, holder of the world’s No. 2 oil and natural gas reserves, over its nuclear program. The U.S. and European countries accuse Iran of seeking to build nuclear weapons. Iran says its nuclear program is designed to generate electricity for a growing population.

“This should be, has to be, resolved diplomatically,” U.S. IAEA Ambassador Glyn Davies said on Dec. 4 at a press briefing in Vienna. “It’s possible to reach an understanding eventually, but it’s going to take a long time.” Tensions have escalated since Iran accused U.S., Israeli and U.K. agents of murdering a nuclear scientist in a Nov. 29 bombing. The U.S. said it wasn’t involved while Israel and the U.K. declined to comment.

Lack of Flexibility

“It is far from assured that both sides will show flexibility to move beyond the initial stage,” Richard Dalton, a former British ambassador to Iran who consults with the London-based Chatham House policy-advisory group, said in a telephone interview. “The atmosphere doesn’t look very good.”

Negotiators will need to split into groups to address the gulf separating the sides, Dalton said. The P5+1 group wants Iran to address concerns about the nuclear weapons allegations. Iran has sought to broaden the talks to include issues of regional security.

Iran wants to discuss a wide range of issues “related to international security and political and economic cooperation toward resolving global problems,” Iranian President Mahmoud Ahmadinejad said on Dec. 4, according to the state-run Fars news agency.

“The objective is to engage Iran into a phased approach to confidence building, which should lead to meaningful negotiations,” Ruediger Luedeking, Germany’s ambassador to the International Atomic Energy Agency, said on Dec. 2 in Vienna on behalf of the European powers participating in the talks.

‘Serious’ Talks

The talks are the first since October 2009, when meetings included one-on-one discussions between Jalili and U.S. Undersecretary of State for Political Affairs William Burns. Jalili and Burns are each heading their respective delegations at today’s meeting. European Union foreign policy chief Catherine Ashton is leading the P5+1 delegation.

Iranian Foreign Minister Manouchehr Mottaki said on Dec. 1 that his government hopes for “serious” talks in Geneva and that Iran shouldn’t have to “compromise” its rights. UN sanctions have deprived the country of $60 billion in energy- related investment, according to U.S. estimates.

“There is still room for a renewed effort to break down mistrust and begin a careful, phased process of building confidence between Iran and the international community,” Burns told the House Foreign Affairs Committee in a Dec. 1 hearing. Negotiators will “look for ways in which we could build confidence in steps.”

French political secretary Jacques Audibert, German political director Emily Haber, U.K. political director Geoffrey Adams and Chinese assistant Foreign Minister Wu Hailong represented their countries at the negotiations.

--With assistance from Ladane Nasseri in Tehran. Editors: Leon Mangasarian, Jennifer Freedman

To contact the reporter on this story: Jonathan Tirone in Geneva at jtirone@bloomberg.net

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

European Leaders Split on Larger Fund, New Eurobond

Posted: 06 Dec 2010 04:07 AM PST

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By Simone Meier and Ewa Krukowska

(Updates with markets in fourth paragraph.)

Dec. 6 (Bloomberg) -- European officials voiced divisions over the steps needed to stop the sovereign debt crisis as Germany opposes increasing the 750 billion-euro ($1 trillion) bailout fund and the introduction of joint European bonds.

Belgian Finance Minister Didier Reynders told reporters on Dec. 4 that the fund might be expanded if ministers decide to introduce a larger permanent facility when the current temporary one expires. Luxembourg and Italy today called for the creation of joint European bonds. Both proposals were today rejected by German Chancellor Angela Merkel.

European policy makers head to Brussels today for a regular meeting on concern their rescue fund may not be large enough to stop contagion spreading from Greece and Ireland to Spain. While Sarkozy and Merkel last month rejected expanding the fund, European Central Bank President Jean-Claude Trichet on Dec. 3 indicated governments should consider such a move.

Signs of disunity prompted investors to sell the debt of some euro nations. The yield on Spain’s 10-year government climbed 10 basis points to 5.08 percent as of 12:01 p.m. in London and Portugal’s 10-year yield increased 9 basis points to 5.81 percent. The euro halted a three-session rally, dipping 0.8 percent to $1.3262. Today’s meeting starts at 5 p.m. in Brussels.

“I see no need to expand the fund right now,” Merkel told reporters in Berlin today. European treaties don’t “allow eurobonds as far as we’re concerned.”

Permanent Tool

European Union leaders last month agreed on a mechanism to smooth bond restructurings after 2013 when the European Financial Stability Facility will be replaced with the so-called European Stability Mechanism. Investors speculate that debt- strapped nations won’t be able to cut deficits fast enough.

“We need to increase the total amount of money for the permanent mechanism coming into 2013,” Reynders told reporters in Brussels. “If it is possible to organize it earlier, why not?”

Belgium’s representative on the ECB’s Governing Council, Guy Quaden, said today he also favors stocking up the fund. Their remarks came after Belgian bond spreads jumped to the highest in at least 17 years.

“For the moment, I ask to think about a permanent mechanism with a larger size,” said Reynders. The International Monetary Fund “is in favor of a larger mechanism. They are ready to follow the process if we decide in Europe.”

Larger Fund

IMF spokesman William Murray declined to comment. Managing Director Dominique Strauss-Kahn is scheduled to join today’s regular meeting of euro-region finance ministers.

The IMF will ask the EU to enlarge the bloc’s rescue package, Reuters reported yesterday, citing an IMF report it obtained. The Washington-based fund will also recommend that the ECB buys more government bonds, Reuters said.

Today’s meeting comes after Luxembourg Finance Minister Jean-Claude Juncker and Italian counterpart Giulio Tremonti wrote a letter to the FT calling for the introduction of a joint European government bond.

“E-Bonds” would be sold by a European Debt Agency, which could be created as early as this month and finance as much as 50 percent of the issuances by EU members to create a deep market, they said. Bonds of countries with weaker budget deficits could be converted into European bonds at a discount, the letter said.

“As long as we have a national competence for fiscal policy, we cannot give up the instruments for incentives and sanctions for members of the eurozone,” German Finance Minister Wolfgang Schaeuble said in an interview with the FT today.

Portugal ‘Remedy’

European officials are today set to approve Ireland’s 85 billion-euro bailout to help stabilize the country’s banking system and push down the budget deficit. Reynders said ministers will also discuss the outlook for Portugal, which is struggling to quash speculation it will also need external aid.

“I said two weeks ago that it’s quite needed for Ireland to ask for help,” he said. “We need now to find a remedy for Portugal to see is it necessary or not, but to avoid the contagion. We will follow that in the next weeks and months.”

Trichet last week called on political leaders to do more to fix their budgets and stamp out a sovereign debt crisis that’s ricocheted through European markets for more than a year. Asked about increasing the size of the cash pool on Dec. 3, he said “they must go as far as possible and be as effective as possible.” The ECB last week was forced to step up bond purchases to fight the turmoil.

Taking Steps

“We expect that after another round of market tensions, the European fiscal policy makers will eventually come up with additional measures to fight the crisis,” Citigroup Inc. economists including Juergen Michels and Michael Saunders in London said in an e-mailed note on Dec. 3. “As the ECB is the only institution with a large and credible financial room, we expect that eventually the ECB will be forced to increase its contribution to the rescue packages substantially.”

French Finance Minister Christine Lagarde said today that “we have taken steps within euro-zone to address this issue with massive funding and what our leaders have said is that we shall defend the euro,” in a speech on a visit to New Delhi.

“The difficulty we have is like other countries in Europe: we need to solve the problem of contagion coming from Greece, Ireland and maybe now Portugal,” Reynders said. “We don’t have any real problem in Belgium for the moment like that.”

--With assistance from Sandrine Rastello in Washington, Richard Weiss in Frankfurt, Scott Hamilton in London and Unni Krishnan in New Delhi. Editors: Craig Stirling, John Fraher

To contact the reporters on this story: Simone Meier in Zurich at smeier@bloomberg.net; Ewa Krukowska in Brussels at ekrukowska@bloomberg.net

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

Groupon Prankster Mason Not Joking in Google Rebuff, Weighs IPO

Posted: 05 Dec 2010 09:16 PM PST

Luring Hollywood to Cloud Computing

Posted: 02 Dec 2010 02:00 PM PST