The debt crisis in Europe is now fully systemic and will require a systemic response to resolve it, the president of European Council, which represents EU member states, said on Wednesday.
"The trouble has become systemic. We are witnessing a full-blown confidence crisis," Herman Van Rompuy said in a speech to a conference of EU ambassadors.
"Some may blame it on the irrationality of the market. But it's a fact and we need to confront it."
He said dramatic steps had been taken by euro zone leaders over the past 18 months to try to contain the crisis, but it was not enough.
"Today we are getting to the core of the matter. It is this: the systemic crisis needs a systemic answer. We need a significant step forward towards a real economic union commensurate with our monetary union."
That call mirrors signals from Germany and France that they want to move much more quickly and with more determination towards a fuller fiscal union in the 17 euro zone countries via a change of the EU treaty. But such a step will require sacrifices on the part of member countries, Van Rompuy said.
"Regardless of whether there will be treaty change or not: both entail a sacrifice of sovereignty in exchange for providing the economic and monetary union with a structural credibility," he said.
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Wednesday 30 November 2011
American Airlines files for bankruptcy
American Airlines filed for bankruptcy protection on Tuesday to cut labor costs in the face of high fuel prices and dampened travel demand, capping a prolonged descent for what was once the largest U.S. carrier.
AMR Corp, the parent of American Airlines, also filed for bankruptcy and replaced its chief executive.
The company, which employs about 88,000, has been mired for years in fruitless union negotiations, complaining that it shoulders higher labor costs than rival domestic and foreign carriers that have already restructured in bankruptcy.
United Continental Holdings Inc's United Airlines and Delta Air Lines Inc, both of which used Chapter 11 to cut costs and later found merger partners, are now the largest U.S. carriers. American ranks third.
"The world changed around us," incoming Chief Executive Tom Horton told reporters on a conference call. "It became increasingly clear that the cost gap between us and our competitors was untenable."
AMR named Horton as chairman and chief executive, replacing Gerard Arpey, who retired.
American plans to operate normally while in bankruptcy, but the Chapter 11 filing could punch a hole in the pensions of roughly 130,000 workers and retirees.
AMR pension plans are $10 billion short of what the carrier owes, and any default could be the largest in U.S. history, government pension insurers estimated.
Ray Neidl, aerospace analyst at Maxim Group, said a lack of progress in contract talks with pilots tipped the carrier into Chapter 11, though it has enough cash to operate. The carrier's passenger planes average 3,000 daily U.S. departures.
"They were proactive," Neidl said. "They should have adequate cash reserves to get through this."
PROBLEMS TO ADDRESS
Bankruptcy gives AMR a chance to pare less profitable operations, and could result in the sale of flight routes. The process also gives AMR more flexibility, according to Jack Williams, a professor of law at Georgia State University.
"There are considerable tax benefits that they will be able to use in a bankruptcy case, and they will be able to more aggressively manage their liabilities," Williams said.
But analysts question whether the bankruptcy will address operational shortcomings that have eroded revenue.
"Bankruptcy is not necessarily the be-all, end-all," said Helane Becker, an analyst with Dahlman Rose & Co. "They've got more problems to address in addition to the cost problem."
Shares of AMR closed Tuesday down $1.36, or 84 percent, at 26 cents, down from a 52-week high of $8.89 on January 7. Stock typically is wiped out in bankruptcy.
Shares of rival airlines rallied on expectations that reduced competition could boost fares. AMR had kept a lid on industrywide fares in its effort to keep its airplanes full.
United Continental shares closed up 6.3 percent at $17.63, Delta rose 5 percent to $7.80 and US Airways Group Inc climbed 4.4 percent to $4.46.
AMR shares were halted 28 times on the NYSE on Tuesday for triggering a circuit breaker rule, activated when a stock moves up or down at least 10 percent within five minutes.
SLIMMED-DOWN AMR
In its bankruptcy petition filed in Manhattan, AMR reported assets of $24.72 billion and liabilities of $29.55 billion. The company has $4.1 billion in cash.
One bankruptcy rule is "don't wait too long," Harvey Miller, a partner at Weil, Gotshal & Manges representing AMR, said at a court hearing. "Don't wait until the course is irreversible. That is what American Airlines is doing today."
AMR's bankruptcy filing showed few details about how the company would proceed, said Stephen Selbst, a bankruptcy attorney with Herrick Feinstein in New York.
"It's possible they are still in negotiations and don't want to put something on paper that might prejudice those negotiations," he said.
Experts believe AMR stands to save billions by restructuring its obligations in bankruptcy.
"AMR will no longer have its defined benefit pension plan, helping absorb nearly $7 billion in debt," Morningstar equity analyst Basili Alukos said.
"I imagine the company can save between $1.2 billion to $1.5 billion in labor costs, in addition to savings on repair and maintenance and better fuel burn," he said.
MERGER IN THE OFFING?
AMR said the bankruptcy has no direct legal impact on non-U.S. operations. It also said it was not considering debtor-in-possession financing.
But it could susceptible to unsolicited takeover bids from rival carriers. AMR has long said it could thrive on its own.
Robert Herbst, an analyst with AirlineFinancials.com and a former American pilot, said there was a "95 percent" chance American would join up with another carrier within two years.
"US Airways is probably toward the top of the list but it wouldn't be the only (potential merger partner)," he said.
A US Airways representative did not immediately return a phone call seeking comment.
Most large U.S. carriers are the products of mergers.
United Continental combined the former United Airlines and Continental Airlines, while Delta bought the former Northwest Airlines. US Airways was formed from a 2005 merger with America West Airlines.
US Airways and United Airlines filed for bankruptcy protection in 2002, and Delta and Northwest in 2005.
US Airways had tried to buy Delta out of bankruptcy.
Japan Airlines Co, one of American Airlines' alliance partners, filed for bankruptcy last year.
American Airlines said it would remain an active member of the oneworld global airline alliance.
LABOR PAIN
American struggled with labor costs despite massive concessions from unionized workers in 2003, which enabled it to avoid Chapter 11 at the time.
"That deal wasn't good enough," former American chief Robert Crandall told Reuters. "The other airlines that went bankrupt cut their costs much deeper than American.
"If you look at all of the elements of the problem, they all stem back to costs," he said. "It hasn't cut capacity effectively given the constraints" that labor placed.
Contract talks with pilots hit a wall in recent weeks over wages, benefits and work rules. Talks with unionized flight attendants have also flagged.
"While today's news was not entirely unexpected, it is nevertheless disappointing that we find ourselves working for an airline that has lost its way," David Bates, president of the Allied Pilots Association, said in a statement.
A wave of pilot retirements this year prompted speculation of a Chapter 11 filing, given that the retirements could preserve pensions that might be at risk of being terminated.
"The 18-month timeline allotted for restructuring will almost certainly involve significant changes to the airline's business plan and to our contract," Bates said.
The case is In re: AMR Corp, U.S. Bankruptcy Court, Southern District Of New York, No. 11-15463.
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Dutch Prime Minister Sees 'No Easy Solution'
The Dutch prime minister on Tuesday said he continues to back the European Central Bank's reluctance to step up purchases of Italian and Spanish government bonds, despite spreading turmoil in European financial markets.
"I know some in the U.S. are saying: Have the ECB solve the crisis," Mark Rutte said in an interview before meeting with President Barack Obama Tuesday afternoon. "Well, that would mean two things: You would have a lot more money in the system with the risk of inflation and....it would take off the pressure on Greece and Italy and others to reform."
Mr. Rutte leads a minority government in the Netherlands that has relied on votes of opposition parties to win approval for its role in European bailouts. He has generally sided with Germany in intra-European haggling over a resolution to the widening crisis.
"I would love us to move faster," Mr. Rutte said, acknowledging the growing anxiety inside and outside Europe about the slow pace of European decision-making. "But I do believe in the next couple of weeks there will be a lot of decisions. There is no easy solution." He said he is "pretty much convinced" the current round of talks will bear fruit.
If Italy or Spain need money, he said, they should turn not to the ECB but to the European Financial Stability Fund or the International Monetary Fund. In return, they should be required to embrace far-reaching changes—of pensions, labor markets, and the like—and accept strict outside supervision to assure they keep their promises. Despite widespread skepticism about current efforts underway to leverage the EFSF in some fashion, Mr. Rutte expressed confidence they will succeed.
But the EFSF may not be enough, he added. "I believe the IMF should get more involved," he said, and the Netherlands is willing to kick in some money "to fund the IMF with more money because they have not enough. "
"The good thing about the IMF," he said, "is there is no European politics involved. So you have this strict supervision from Washington from the IMF from [managing director] Christine Lagarde and her team, and there is no chance of any cozy European get-together where the rules could be bent a little bit and counties which get money could get away without implementing all the necessary reform."
"Never waste a crisis," Mr. Rutte said. "This is an opportunity to have these countries reform their economies. They have not done so in the past.
"I want the pressure of the markets because it helps," he said. "Look what has happened in Spain, a new government. In Italy, a new government. In Greece, a new government. We have the French president speaking for 45 minutes on television, basically telling his audience we want France to become more like Germany. Could you imagine this happening a couple of years ago? Inconceivable," he said.
Mr. Rutte, who doesn't face a general election until 2015, said domestic political opposition to the Greek bailout was strong, but that the spreading of the crisis has softened the public opposition to doing more for the rest of Europe. "We are an exporting nation, we are responsible for 625,000 jobs in the U.S. The U.S. is investing three times more in the Netherlands than you invest in Brazil, Russia, India and China put together. The common currency has been a huge benefit for it.
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Sarkozy Can Help the Euro—and Himself
For much of the past two years, Germany has endured a lot of criticism for its approach to the euro-zone crisis, not all of it fair. Some say it is guilty of ingratitude, failing to acknowledge how much of its own economic success is due to membership of the euro zone; many believe it has misused its political and economic power to impose ill-judged austerity policies on its European neighbors, worsening their economic crises; and it is accused of a lack of solidarity for refusing to allow policies that might end the crisis, such as greater European Central Bank intervention and the creation of common euro-zone bonds. The result is that Chancellor Angela Merkel can expect to receive much of the blame if, as some now expect, the common currency breaks up.
There is an element of truth to these criticisms. Germany has certainly often been slow to appreciate the consequences of its actions. It underestimated the speed and severity of the contagion that arose after it insisted on imposing losses on private-sector owners of government bonds as a condition of future bailouts; it failed to anticipate the devastating impact on confidence of Ms. Merkel's statement that Greece could leave the euro; and even now, Germany may be underestimating the seriousness of the current crisis—in particular how far the sovereign-debt crisis reflects a loss of confidence in the wider market rather than a lack of credibility in national fiscal policies.
Even so, Germany can't be faulted for its clear-sighted analysis of the euro's failings and what must be done to eliminate them. It has recognized that this is, above all, a governance crisis. Too many European governments had become the prisoners of vast, unproductive public sectors and over-mighty trade unions, buying electoral support with lavish entitlements that destroyed competitiveness and ran up unsustainable debts. At the same time, Germany recognized that the euro zone's institutional arrangements, including the Stability and Growth Pact that was supposed to guarantee fiscal discipline, had proved woefully inadequate. Finally, it recognized that only market forces, no matter how painful, could exert the necessary pressure on governments to reform.
Whatever the current market turmoil, Germany's approach has certainly yielded results: Greece, Ireland, Portugal, Italy, Spain and now Belgium have new governments committed to far-reaching fiscal and structural reform. Meanwhile, Germany's campaign to reform euro-zone governance is also bearing fruit. European Commission President José Manuel Barroso and the president of the European Council, Herman Van Rompuy, are both working on proposals to improve fiscal scrutiny and discipline. Ms. Merkel and French President Nicolas Sarkozy have also discussed fast-track reform ideas that could be implemented without an EU treaty change. A European Council summit on Dec. 9 will consider these proposals amid hopes they will pave the way for a "Grand Bargain," in which a clear commitment from euro-zone leaders to improve discipline and minimize moral hazard will pave the way for a major ECB intervention.
Indeed, the biggest obstacle to a resolution of the crisis may now be France rather than Germany. Unlike Germany, a federal state that has always been comfortable with ceding power to the European Commission, France is a highly centralized state whose own European vision has historically been based on political agreements between nation states. This division has long dogged the European project: France rejected former German Chancellor Helmut Kohl's plans for deeper political and fiscal integration at the creation of the euro; it broke the rules of the Stability and Growth Pact, flouted single-market rules and consistently resisted the kind of structural reforms now being demanded of euro-zone member states; more recently, it held up the "six-pack" reforms designed to increase economic policy coordination, only backing down as the price of securing Germany's support for this year's July 21 summit deal.
But French resistance to greater fiscal and political union may be crumbling under the intensity of the crisis. President Sarkozy is due to give a speech Thursday in which he will set out his plans for improving economic integration, increasing fiscal harmonization, guaranteeing discipline, ensuring solidarity and improving euro-zone governance, according to someone familiar with the situation. Whether these proposals will be far-reaching enough to win over Germany remains to be seen. Germany is determined that the euro zone must be based on the rule of law, not political deals. But it may have to give ground, too: Mr. Sarkozy may find it politically impossible to sell any deal to French voters that involves a loss of sovereignty unless Germany is prepared to commit to policies that lead to increased solidarity.
Nonetheless, for the first time since the crisis began two years ago, the outline of a possible long-term solution to save the euro is emerging; after two years of incremental solutions that only undermined market confidence, there is a growing realization that only much deeper fiscal and political union can create the conditions in which the ECB can act and member states might ultimately pool their tax bases to create euro bonds. The ECB, for its part, seems ready to act: It is actively considering a range of options to intervene in what it now considers is a real threat to monetary stability, including yield targeting and funding other bailout vehicles, such as the International Monetary Fund and European Financial Stability Facility, according to someone familiar with its thinking.
Sure, enormous execution risks remain. Any deal will need to be accepted and then ratified by all 17 members of the euro zone—and all 27 members of the European Union if treaty changes are required. And the euro zone is engaged in a race against time: Banks are hemorrhaging funding and parts of Europe already face a severe credit crunch; doubts will persist about the sustainability of some countries' debts. Many countries will take years to restore their competitiveness; further debt relief and possibly fiscal transfers may be needed to keep the euro zone together.
Further dark days are inevitable. But if Mr. Sarkozy can show the political leadership and imagination that has so far been conspicuously lacking throughout this crisis and put forward workable euro-zone governance proposals, he may yet start to draw a line under the crisis—and boost his chances of re-election next year.
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Euro Zone Falls Short on Fund (Video)
Euro-zone finance ministers agreed on Tuesday on details to expand the bloc's bailout fund but acknowledged it would have less capacity to help troubled nations than once hoped, and suggested future efforts to resolve the worsening crisis would depend on the European Central Bank and the International Monetary Fund coming to their aid.
An analysis presented at the meeting suggested the fund might raise between €500 billion and €750 billion ($700 billion to $1 trillion), according to a person familiar with the matter, far short of the €1 trillion or even €2 trillion that many had expected. After the meeting, officials didn't give a figure for its expected size.
But such sums would fall shy of the amount that would be needed to convince financial markets there is enough in the pot to rescue Italy and Spain, as well as to support Europe's troubled banks.
The rising debt-financing costs of Italy, represented at the meeting by its new prime minister, Mario Monti, were a major concern of the meeting, officials said, adding there were worries about the country's heavy borrowing need of about €400 billion next year.
An IMF official said the Washington-based fund could at present provide €100 billion to help Italy, if it came to that. That means that to assemble a credible backstop, the Europeans would need to raise a substantial amount of money elsewhere.
Jean-Claude Juncker, the Luxembourg prime minister who leads the finance ministers' meetings, said they "would continue to explore further options to expand" the fund.
Mr. Juncker reiterated European government support for proposals to strengthen the IMF, including through increased "bilateral loans." He gave no indication that there was progress on overcoming objections from other countries, including the U.S., which wants the Europeans to take primary responsibility for sorting out the crisis.
Before the meeting, Luxembourg's finance minister, Luc Frieden, said the €1 trillion target would be "very difficult to reach," because markets have soured on euro-zone assets. Plans to boost the fund revolve around garnering interest from private investors. Mr. Frieden said the bailout fund would have to act "together with" the IMF and the ECB.
The failure so far of euro-area governments to assemble a mammoth fund to rebuild confidence in the region's bond markets, coupled with further increases in borrowing costs for many of them, leaves them casting around for further measures to stem the crisis, which they hope to announce at a European summit on Dec. 8 and 9.
Ministers agreed on Tuesday to push ahead on proposals put forward last week in Brussels to tighten budget discipline in the euro area.
Another plan, being promoted by Germany and France, is for euro-zone governments to agree on a legally binding pact to centralize control of national budgets. They hope the agreement can be reached without resorting to time-consuming changes in European Union treaties and will be enough to persuade the ECB to step in forcefully to support the bond markets of weak governments.
European politicians have for months been reluctant to call publicly on the ECB to take a larger role.
The central bank is independent of the euro-zone governments, and it guards that status fiercely. With a lack of private-market interest in financing weak euro-zone countries, the ECB's virtually unlimited firepower—it can, after all, print euros—is seen by many analysts and economists as the only viable solution. Now, the reluctance to call for help is ebbing away.
Finland's finance minister said the bloc will have to look to the ECB as a last-resort option "if nothing else works," and the Belgian finance minister said ministers would "put on the table some proposals" to give the ECB and the IMF a more active role. The IMF is already a major player in the euro-zone rescue effort. It is providing €30 billion of Greece's €110 billion bailout, one-third of Portugal's €78 billion bailout, and a chunk of Ireland's aid as well.
However, it doesn't have the resources available, on its own, to lend hundreds of billions of euros to Italy. Yet national governments still aren't singing the same tune on whether the ECB should ramp up its printing presses. Resistance to the proposal is strong in Germany and the Netherlands.
"I know some in the U.S. are saying: Have the ECB solve the crisis," Dutch Prime Minister Mark Rutte said in an interview in Washington before meeting President Barack Obama on Tuesday afternoon.
"Well, that would mean two things: You would have a lot more money in the system with the risk of inflation and…it would take off the pressure on Greece and Italy and others to reform." Mr. Rutte said he believes the IMF should "get more involved," and that the Netherlands was willing to kick in some money to increase the IMF's available resources.
The ministers approved two methods to increase the firepower of the European Financial Stability Facility, the bloc's bailout fund. The EFSF will have around €250 billion after accounting for its current and expected commitments to Ireland, Portugal and Greece. Klaus Regling, the fund's chief executive of the European Financial Stability Facility, said increasing the fund's leverage would take time.
"We don't expect commitments from investors in the next days," he said.
Both methods involve seeking supplementing that sum with private finance. Under one, the EFSF would fund so-called "protection certificates" to be attached to new bonds issued by troubled euro-zone countries. The certificates would entitle holders to claim 20% to 30% of the bond's face value in case of default. In that way, €20 or €30 of EFSF money could induce private investors to purchase €100 of a country's bonds.
However, it doesn't have the resources available, on its own, to lend hundreds of billions of euros to Italy. Yet national governments still aren't singing the same tune on whether the ECB should ramp up its printing presses. Resistance to the proposal is strong in Germany and the Netherlands.
"I know some in the U.S. are saying: Have the ECB solve the crisis," Dutch Prime Minister Mark Rutte said in an interview in Washington before meeting President Barack Obama on Tuesday afternoon.
"Well, that would mean two things: You would have a lot more money in the system with the risk of inflation and…it would take off the pressure on Greece and Italy and others to reform." Mr. Rutte said he believes the IMF should "get more involved," and that the Netherlands was willing to kick in some money to increase the IMF's available resources.
The ministers approved two methods to increase the firepower of the European Financial Stability Facility, the bloc's bailout fund. The EFSF will have around €250 billion after accounting for its current and expected commitments to Ireland, Portugal and Greece. Klaus Regling, the fund's chief executive of the European Financial Stability Facility, said increasing the fund's leverage would take time.
"We don't expect commitments from investors in the next days," he said.
Both methods involve seeking supplementing that sum with private finance. Under one, the EFSF would fund so-called "protection certificates" to be attached to new bonds issued by troubled euro-zone countries. The certificates would entitle holders to claim 20% to 30% of the bond's face value in case of default. In that way, €20 or €30 of EFSF money could induce private investors to purchase €100 of a country's bonds.
"September and October were two very bad months...we saw a [deposit] outflow on the order of €13 billion to €14 billion. That is a very big number. Likewise, in the first 10 days of November, that rate of outflow continued," Mr. Provopoulos said.
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Tuesday 29 November 2011
Pressure mounts on Europe as finance ministers meet
Euro zone finance ministers are to agree on Tuesday the details of bolstering their bailout fund to help prevent contagion in bond markets, under pressure from the United States and ratings agencies to staunch a two-year-old debt crisis.
President Barack Obama pressed European Union officials on Monday to act quickly and decisively to resolve their sovereign debt crisis, which the White House said was weighing on the American economy.
Underlining the threat to tottering European economies, ratings agency Moody's warned on Tuesday it could downgrade the subordinated debt of 87 banks across 15 countries on concerns that governments would be too cash-strapped to bail them out.
Rival Standard & Poor's could downgrade the outlook on France's top-level triple-A credit status within the next 10 days, signaling a possible ratings cut, a newspaper reported. The news briefly hit the euro.
White House spokesman Jay Carney said Obama's message, delivered to top EU officials behind closed doors in Washington, was that: "Europe needs to take decisive action, conclusive action to handle this problem, and that it has the capacity to do so.
Poland's Foreign Minister Radoslaw Sikorski made a dramatic appeal in Berlin on Monday for Germany to show more leadership in the euro zone crisis.
"You know full well that nobody else can do it," he said in a speech in the German capital, referring to efforts to save Europe's monetary union.
"I will probably be the first Polish foreign minister in history to say so, but here it is: I fear German power less than I am beginning to fear German inactivity. You have become Europe's indispensable nation."
Tuesday's meeting of the Eurogroup, which brings together finance ministers from the 17 euro-zone members, was set to fix details of leveraging the European Financial Stability Fund (EFSF) so it can help Italy or Spain should they need aid.
They are also likely to approve the next tranche of emergency loans for Greece and Ireland.
Hopes that signs of concrete action could ease strains on the euro zone boosted markets, with Asian equities and the euro rising for a second day on Tuesday.
DETAILED PLANS
Documents obtained by Reuters on Sunday showed the detailed guidelines for the EFSF were ready for approval, opening the way for new operations and multiplying the fund's effective size.
The documents spell out rules for EFSF intervention on the primary and secondary bond markets, for extending precautionary credit lines to governments, leveraging its firepower and its investment and funding strategies.
"I would expect we will be in a position to approve the guidelines at a political level," a euro-zone official involved in the preparations for the ministers' meeting said.
The EFSF guidelines will clear the way for the 440 billion euro facility to attract cash from private and public investors to its co-investment funds in coming weeks.
The European Central Bank (ECB), which is now buying bonds of Spain and Italy on the market to prevent their borrowing costs running out of control, has been urging euro zone ministers to finalize the technical work on the EFSF quickly.
Officials have told Reuters that the leveraging mechanisms could become operational in January, but that may be too late.
With Germany rigidly opposed to the idea of the ECB providing liquidity to the EFSF or acting as a lender of last resort, the euro zone needs a way of calming markets, where yields on Spanish, Italian and French government benchmark bonds have all been pushed to euro lifetime highs.
ECB ROLE
The OECD rich nations' economic think-tank said on Monday the ECB should cut interest rates and abandon its reluctance to step up purchases of government bonds in order to restore confidence in the euro area.
The ECB shows no sign of doing so yet. It bought 8.5 billion euros of euro-zone government debt in the latest week, at a time of acute turmoil, in line with its previous activity but well short of what economists say is necessary to turn market sentiment around.
Sources have said the Obama administration has also urged Europe to allow the ECB to act as lender of last resort as the U.S. Federal Reserve does.
Germany and France stepped up a drive on Monday for coercive powers to reject euro zone members' budgets that breach EU rules, alarming some smaller nations who fear the plans by-pass mechanisms for ensuring equal treatment.
Berlin and Paris aim to outline proposals for a fiscal union before an EU summit on December 9 that is increasingly seen by investors as possibly the last chance to avert a breakdown of the single currency area.
"We are working intensively for the creation of a Stability Union," the German Finance Ministry said in a statement. "That is what we want to secure through treaty changes, in which we propose that the budgets of member states must observe debt limits.
Rumors about the threat to France's credit rating, which have circulated for several months, illustrate how the crisis has moved inexorably from indebted peripheral nations such as Greece and Portugal to the heart of Europe.
Economic and Financial daily La Tribune reported on its website that S&P's was preparing to change its outlook on France's sovereign rating from "stable" to "negative".
"It could happen within a week, perhaps 10 days," La Tribune quoted a source as saying.
The news coincided with the warning on subordinated debt from Moody's, which said the greatest number of ratings to be reviewed were in Spain, Italy, Austria and France, and knocked the euro a third of a cent before the currency recovered.
"Moody's believes that systemic support for subordinated debt in Europe is becoming ever more unpredictable, due to a combination of anticipated changes in policy and financial constraints," the agency said in a report.
Holders of subordinated debt are further back in the queue than owners of senior debt when it comes to a claim on a bank's assets, thus making it a riskier class of debt.
Mario Monti, Italy's prime minister and finance minister, will attend Tuesday's Eurogroup meeting to explain the reforms Italy plans to undertake to regain the confidence of markets.
Saddled with debt equal to 120 percent of GDP and soaring borrowing costs, Italy has been battling to avoid financial disaster, which analysts say would endanger the whole euro zone.
Italy must balance its budget by 2013 and offer immediate fiscal measures worth 11 billion euros if it wants to regain its credibility, according to a document on Italy that will be presented to the Eurogroup, Italy's La Repubblica newspaper said.
In a sign of intense market stress, short-term Italian yields last week climbed above those of longer-dated issues. Both are higher than the 7 percent level widely seen as unsustainable for the country's public finances.
The funding pressure is set to be underlined on Tuesday, when investors are expected to demand more than 7 percent at auction to buy three- and 10-year Italian debt.
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Economic Outlook Slows for the Global Economy
The global economic outlook has deteriorated significantly, the Organization for Economic Cooperation and Development said Monday, as it urged the European Central Bank to act decisively to prevent the euro-zone sovereign debt crisis from deepening and possibly dragging the U.S. economy to the brink of recession.
In its twice-yearly report on the global economic outlook, the OECD lowered its growth forecasts for the world's largest economies, and said the euro zone is headed toward a mild recession. It also warned that the bloc's debt crisis, now affecting countries previously seen as safe havens, could "massively escalate economic disruption if not addressed."
"Contrary to what was expected earlier this year, the global economy is not out of the woods," Chief Economist Pier Carlo Padoan wrote in his introduction to the report. "Above all, confidence has dropped sharply as skepticism has grown that euro-area policy makers can deal effectively with the key challenges they face."
The Paris-based think tank cut its forecasts among its 34 members to 1.9% this year and 1.6% in 2012, from 2.3% and 2.8% in May. The OECD said it expects the euro zone's economy to contract by 1% at an annualized rate in the last quarter of this year and by 0.4% in the first three months of 2012.
For 2012, the OECD said the 17-country bloc's economy will only grow by 0.2%.
"The euro zone must urgently take stronger measures," Mr. Padoan said in an interview. "The ECB should buy bonds, and set a limit to yields or a floor to bond value, so that markets know there's a counter party ready to trade at that level."
The German government managed to sell barely half the bonds it had offered in an auction last week, a sign that the currency area's troubles are affecting its strongest economies. In order to stop the contagion, policy makers need to secure "credible and substantial increases" in the capacity of the European Financial Stability Fund, the euro zone's bailout vehicle, together with a greater use of the ECB's balance sheet, Mr. Padoan said.
But there is little sign that euro-zone governments will agree on the measures the OECD believes are needed. Germany opposes France's plan to give the ECB a greater role in restoring calm to the bond markets. The ECB currently buys limited amounts of government bonds on the open market to stem the rise in borrowing costs.
The OECD warned that possible but unlikely outcomes, such as a disorderly default on government debt, or a breakup of the currency area would have repercussions around the world.
"A large negative event would, however, most likely send the OECD area as a whole into recession, with marked declines in activity in the United States and Japan, and prolong and deepen the recession in the euro area," Mr. Padoan wrote. "The emerging market economies would not be immune, with global trade volumes falling strongly, and the value of their international asset holdings being hit by weaker financial asset prices."
The OECD also warned that continued troubles in Europe, along with spending cuts and tax increases set to take place following the failure to reach a deal by the U.S. Congressional debt committee could push the U.S. economy to the brink of recession.
"Another serious downside risk is that no action will be agreed upon to counter the pre-programmed fiscal tightening in the U.S., which could tip the economy into a recession that monetary policy can do little to counter," Mr. Padoan said.
The OECD expects the world's largest economy to grow by 2% in 2012, having forecast an expansion of 3.1% in May. It expects growth to pick up again to 2.5% in 2013. But without action in Congress, the OECD projects that U.S. economic growth would be barely measurable at 0.3% next year that will only improve to 1.3% in 2013.
The economic slowdown also is affecting trade, the OECD said, as it cut its prediction for global trade growth to 6.7% for this year and 4.8% for 2012, less than the 8.1% and the 8.4% increase previously expected.
"The present situation is worse than in 2009," Mr. Padoan said. "Trade was the driver of economic growth after the 2008 financial crisis, but now we're seeing risks of protectionism."
The OECD said developing economies will continue to make a "substantial" contribution to global economic growth.
"Emerging economies are still growing at a healthy pace, but their growth rates are also moderating," Mr. Padoan wrote. "In these countries falls in commodity prices and the slower global growth have started to mitigate inflationary pressures."
However, the OECD said that in some cases, an immediate easing of monetary polices may not be appropriate.
"In deciding whether, when and how rapidly to ease, central banks need to take into account that inflation in some cases starts from a level well above implicit or explicit targets," the OECD said.
The OECD said China would be better able to respond to slower growth if the yuan were allowed to appreciate.
"Without such currency policy, domestic monetary policy instruments... have to be kept at comparatively more restrictive levels to keep inflation on track," the OECD said. "Such a strategy involves a risk of an excessive economic slowdown."
read more: Olympus Wealth Management
Children of the Revolution
One evening early this year, a red Ferrari pulled up at the U.S. ambassador's residence in Beijing, and the son of one of China's top leaders stepped out, dressed in a tuxedo.
Bo Guagua, 23, was expected. He had a dinner appointment with a daughter of the then-ambassador, Jon Huntsman.
The car, though, was a surprise. The driver's father, Bo Xilai, was in the midst of a controversial campaign to revive the spirit of Mao Zedong through mass renditions of old revolutionary anthems, known as "red singing." He had ordered students and officials to work stints on farms to reconnect with the countryside. His son, meanwhile, was driving a car worth hundreds of thousands of dollars and as red as the Chinese flag, in a country where the average household income last year was about $3,300.
The episode, related by several people familiar with it, is symptomatic of a challenge facing the Chinese Communist Party as it tries to maintain its legitimacy in an increasingly diverse, well-informed and demanding society. The offspring of party leaders, often called "princelings," are becoming more conspicuous, through both their expanding business interests and their evident appetite for luxury, at a time when public anger is rising over reports of official corruption and abuse of power.
State-controlled media portray China's leaders as living by the austere Communist values they publicly espouse. But as scions of the political aristocracy carve out lucrative roles in business and embrace the trappings of wealth, their increasingly high profile is raising uncomfortable questions for a party that justifies its monopoly on power by pointing to its origins as a movement of workers and peasants.
Their visibility has particular resonance as the country approaches a once-a-decade leadership change next year, when several older princelings are expected to take the Communist Party's top positions. That prospect has led some in Chinese business and political circles to wonder whether the party will be dominated for the next decade by a group of elite families who already control large chunks of the world's second-biggest economy and wield considerable influence in the military.
"There's no ambiguity—the trend has become so clear," said Cheng Li, an expert on Chinese elite politics at the Brookings Institution in Washington. "Princelings were never popular, but now they've become so politically powerful, there's some serious concern about the legitimacy of the 'Red Nobility.' The Chinese public is particularly resentful about the princelings' control of both political power and economic wealth."
The current leadership includes some princelings, but they are counterbalanced by a rival nonhereditary group that includes President Hu Jintao, also the party chief, and Premier Wen Jiabao. Mr. Hu's successor, however, is expected to be Xi Jinping, the current vice president, who is the son of a revolutionary hero and would be the first princeling to take the country's top jobs. Many experts on Chinese politics believe that he has forged an informal alliance with several other princelings who are candidates for promotion.
Among them is the senior Mr. Bo, who is also the son of a revolutionary leader. He often speaks of his close ties to the Xi family, according to two people who regularly meet him. Mr. Xi's daughter is currently an undergraduate at Harvard, where Mr. Bo's son is a graduate student at the Kennedy School of Government.
Already in the 25-member Politburo, Bo Xilai is a front-runner for promotion to its top decision-making body, the Standing Committee. He didn't respond to a request for comment through his office, and his son didn't respond to requests via email and friends.
The antics of some officials' children have become a hot topic on the Internet in China, especially among users of Twitter-like micro-blogs, which are harder for Web censors to monitor and block because they move so fast. In September, Internet users revealed that the 15-year-old son of a general was one of two young men who crashed a BMW into another car in Beijing and then beat up its occupants, warning onlookers not to call police.
An uproar ensued, and the general's son has now been sent to a police correctional facility for a year, state media report.
Top Chinese leaders aren't supposed to have either inherited wealth or business careers to supplement their modest salaries, thought to be around 140,000 yuan ($22,000) a year for a minister. Their relatives are allowed to conduct business as long as they don't profit from their political connections. In practice, the origins of the families' riches are often impossible to trace.
Last year, Chinese learned via the Internet that the son of a former vice president of the country—and the grandson of a former Red Army commander—had purchased a $32.4 million harbor-front mansion in Australia. He applied for a permit to tear down the century-old mansion and to build a new villa, featuring two swimming pools connected by a waterfall.
Many princelings engage in legitimate business, but there is a widespread perception in China that they have an unfair advantage in an economic system that, despite the country's embrace of capitalism, is still dominated by the state and allows no meaningful public scrutiny of decision making.
The state owns all urban land and strategic industries, as well as banks, which dole out loans overwhelmingly to state-run companies. The big spoils thus go to political insiders who can leverage personal connections and family prestige to secure resources, and then mobilize the same networks to protect them.
The People's Daily, the party mouthpiece, acknowledged the issue last year, with a poll showing that 91% of respondents believed all rich families in China had political backgrounds. A former Chinese auditor general, Li Jinhua, wrote in an online forum that the wealth of officials' family members "is what the public is most dissatisfied about."
One princeling disputes the notion that she and her peers benefit from their "red" backgrounds. "Being from a famous government family doesn't get me cheaper rent or special bank financing or any government contracts," Ye Mingzi, a 32-year-old fashion designer and granddaughter of a Red Army founder, said in an email. "In reality," she said, "the children of major government families get very high scrutiny. Most are very careful to avoid even the appearance of improper favoritism."
For the first few decades after Mao's 1949 revolution, the children of Communist chieftains were largely out of sight, growing up in walled compounds and attending elite schools such as the Beijing No. 4 Boys' High School, where the elder Mr. Bo and several other current leaders studied.
In the 1980s and '90s, many princelings went abroad for postgraduate studies, then often joined Chinese state companies, government bodies or foreign investment banks. But they mostly maintained a very low profile.
Now, families of China's leaders send their offspring overseas ever younger, often to top private schools in the U.S., Britain and Switzerland, to make sure they can later enter the best Western universities. Princelings in their 20s, 30s and 40s increasingly take prominent positions in commerce, especially in private equity, which allows them to maximize their profits and also brings them into regular contact with the Chinese and international business elite.
Younger princelings are often seen among the models, actors and sports stars who gather at a strip of nightclubs by the Workers' Stadium in Beijing to show off Ferraris, Lamborghinis and Maseratis. Others have been spotted talking business over cigars and vintage Chinese liquor in exclusive venues such as the Maotai Club, in a historic house near the Forbidden City.
On a recent afternoon at a new polo club on Beijing's outskirts, opened by a grandson of a former vice premier, Argentine players on imported ponies put on an exhibition match for prospective members.
"We're bringing polo to the public. Well, not exactly the public," said one staff member. "That man over there is the son of an army general. That one's grandfather was mayor of Beijing."
Princelings also are becoming increasingly visible abroad. Ms. Ye, the fashion designer, was featured in a recent edition of Vogue magazine alongside Wan Baobao, a jewelry designer who is the granddaughter of a former vice premier.
But it is Bo Guagua who stands out among the younger princelings. No other child of a serving Politburo member has ever had such a high profile, both at home and abroad.
His family's status dates back to Bo Yibo, who helped lead Mao's forces to victory, only to be purged in the 1966-76 Cultural Revolution. Bo Yibo was eventually rehabilitated, and his son, Bo Xilai, was a rising star in the party by 1987, when Bo Guagua was born.
The boy grew up in a rarefied environment—closeted in guarded compounds, ferried around in chauffeur-driven cars, schooled partly by tutors and partly at the prestigious Jingshan school in Beijing, according to friends.
In 2000, his father, by then mayor of the northeastern city of Dalian, sent his 12-year-old son to a British prep school called Papplewick, which according to its website currently charges £22,425 (about $35,000) a year.
About a year later, the boy became the first person from mainland China to attend Harrow, one of Britain's most exclusive private schools, which according to its website currently charges £30,930 annually.
In 2006, by which time his father was China's commerce minister, Mr. Bo went to Oxford University to study philosophy, politics and economics. The current cost of that is about £26,000 a year. His current studies at Harvard's Kennedy School cost about $70,000 a year.
A question raised by this prestigious overseas education, worth a total of almost $600,000 at today's prices, is how it was paid for. Friends said that they didn't know, though one suggested that Mr. Bo's mother paid with the earnings of her legal career. Her law firm declined to comment.
Bo Guagua has been quoted in the Chinese media as saying that he won full scholarships from age 16 onward. Harrow, Oxford and the Kennedy School said that they couldn't comment on an individual student.
The cost of education is a particularly hot topic among members of China's middle class, many of whom are unhappy with the quality of schooling in China. But only the relatively rich can send their children abroad to study.
For others, it is Bo Guagua's freewheeling lifestyle that is controversial. Photos of him at Oxford social events—in one case bare-chested, other times in a tuxedo or fancy dress—have been widely circulated online.
In 2008, Mr. Bo helped to organize something called the Silk Road Ball, which included a performance by martial-arts monks from China's Shaolin temple, according to friends. He also invited Jackie Chan, the Chinese kung fu movie star, to lecture at Oxford, singing with him on stage at one point.
The following year, Mr. Bo was honored in London by a group called the British Chinese Youth Federation as one of "Ten Outstanding Young Chinese Persons." He was also an adviser to Oxford Emerging Markets, a firm set up by Oxford undergraduates to explore "investment and career prospects in emerging markets," according to its website.
This year, photos circulated online of Mr. Bo on a holiday in Tibet with another princeling, Chen Xiaodan, a young woman whose father heads the China Development Bank and whose grandfather was a renowned revolutionary. The result was a flurry of gossip, as well as criticism on the Internet of the two for evidently traveling with a police escort. Ms. Chen didn't respond to requests for comment via email and Facebook.
Asked about his son's apparent romance at a news conference during this year's parliament meeting, Bo Xilai replied, enigmatically, "I think the business of the third generation—aren't we talking about democracy now?"
Friends say that the younger Mr. Bo recently considered, but finally decided against, leaving Harvard to work on an Internet start-up called guagua.com. The domain is registered to an address in Beijing. Staff members there declined to reveal anything about the business. "It's a secret," said a young man who answered the door.
It is unclear what Mr. Bo will do after graduating and whether he will be able to maintain such a high profile if his father is promoted, according to friends. He said during a speech at Peking University in 2009 that he wanted to "serve the people" in culture and education, according to a Chinese newspaper, Southern Weekend.
He ruled out a political career but showed some of his father's charisma and contradictions in answering students' questions, according to the newspaper. Asked about the pictures of him partying at Oxford, he quoted Chairman Mao as saying "you should have a serious side and a lively side," and went on to discuss what it meant to be one of China's new nobility.
"Things like driving a sports car, I know British aristocrats are not that arrogant," he said. "Real aristocrats absolutely don't do that, but are relatively low-key."
read more: Olympus Wealth Management
Facebook Targets Huge IPO (Video)
Facebook Inc. is inching closer to an initial public offering that it hopes will value the company at more than $100 billion, according to people familiar with the matter.
The social networking firm is now targeting a time frame of April to June 2012 for an initial public offering, said people familiar with the matter. The company is exploring raising $10 billion in its IPO—what would be one of the largest offerings ever—in a deal that might assign Facebook a $100 billion valuation, a number greater than twice that of such stalwarts as Hewlett-Packard Co. and 3M Co.
A Facebook IPO has been hotly anticipated for several years, and viewed as a defining moment for the latest Web investing boom. The company has been vague about whether it would even make such an offering and silent on timing of an IPO. "We're not going to participate in speculation about an IPO," said Facebook spokesman Larry Yu.
The company now appears poised to go ahead with a deal. But it will likely come to market at a time when investors are beginning to question the value of some newer Internet businesses.
The most recent IPO, an $805 million float of discount-deal service Groupon Inc. on Nov. 3, has plummeted 42% in price in the past five trading days after surging in its first day of trading. Business-networking service LinkedIn Corp., whose stock more than doubled from its IPO price on its first day of trading May 19, has since fallen 36%, but remains 33% above its IPO.
Facebook Chief Executive Mark Zuckerberg has in the past publicly expressed reluctance to do an IPO. And he has opted to keep Facebook private longer than many suspected he would.
But he is warming to the idea. Facebook is now in internal discussions over the timing of its filing with the Securities and Exchange Commission, and is considering filing dates as early as this year, said these people. Mr. Zuckerberg hasn't made any final decisions, these people cautioned.
Facebook remains aloof from Wall Street and shows signs of wanting to play by its own rules.
Companies often explore an IPO once they have $100 million in revenue. Facebook is expected to debut with more than $4 billion in revenue, making it bigger than Web veteran Yahoo Inc.
Facebook has gone so far as to craft its own prospectus, said the people familiar with the matter. A prospectus document—which is filed with the SEC outlining the company's business—is typically prepared by bankers and lawyers hired by a company.
Facebook Chief Financial Officer David Ebersman has been leading the company's talks with Silicon Valley bankers about an IPO, said people familiar with the matter.
Bankers are aggressively pursuing the company, but Facebook remains elusive about a commitment to specific banks, even though an IPO looms. Mr. Ebersman told some bankers that he is skeptical over what contribution investment banks could make to a Facebook IPO, since the company is so highly sought after by major investors, said people familiar with the matter.
The social network, which was started by Mr. Zuckerberg in 2004 out of his Harvard University dorm room, has led the way in reshaping how people share information and interact with others on the Web. It now counts 800 million users, with 500 million users logging into the site daily.
Facebook will be required to make its financial information public by April, because the company will cross the 500-shareholder limit by the end of this year. The SEC requires companies with more than 500 shareholders to publicly disclose its financial information.
Facebook could publish its financial information come April without an IPO, but board members and top executives have privately acknowledged that it would leave the company at a severe disadvantage, since they would have most of the liability that comes with being a public company, but lose out on the fundraising benefits of a public offering, said these people.
Only 13 IPOs have ever been completed with a value greater than $10 billion, and just three of those have been for U.S. companies, according to Dealogic, which tracks new securities issues. The only U.S. issuers at that size level have been Visa Inc. at $19.7 billion in 2008; General Motors Co. at $18.1 billion in 2010; and AT&T Wireless Services Inc. at $10.6 billion in 2000.
The most valuable company ever to go public was Industrial & Commercial Bank of China, which sold $21.9 billion of stock in October 2006 and finished its first day of trading with a market value of $148 billion, Dealogic said.
A Facebook offering of $10 billion would be the largest IPO by any technology or Internet company. The largest U.S. Internet IPO, the $1.9 billion sale in 2004 by Google Inc. which valued Google at $23 billion, ranks No. 3 among global Internet IPOs.
Facebook's revenue is driven by its online advertising business, as big brands rush to the site to interact with consumers through display ads and fan pages. Facebook's world-wide ad revenue is expected to hit $3.8 billion this year, up from $1.86 billion a year earlier, according to data compiled by eMarketer. Facebook's share of display ad revenue in the US is expected to grow to 16.3% in 2011 and 19.5% in 2012, eMarketer found.
read more: Olympus Wealth Management
Monday 28 November 2011
Euro rises, but bond sales leave it vulnerable
The euro rose on Monday as investors used later-denied reports on Italy going to the IMF to unwind some bearish positions, with many still downbeat about the single currency's prospects given scepticism about leaders' ability to resolve the debt crisis.
Investor attention was focussed on Belgian bond auctions later in the day, with the country looking to raise one to two billion euros at considerably higher costs after Standard & Poor's cut the country's credit rating late on Friday.
Belgium's benchmark 10-year yield has risen to near the 6 percent level, taking it closer to levels at which countries such as Portugal and Ireland had to start considering bailouts.
With Italy, France and Spain also looking to sell debt this week, analysts said the euro is likely to trade more in sync with bond yields. Borrowing costs for all three European countries have risen in recent days as contagion from the debt crisis spread, keeping the euro pinned near recent lows.
The euro rose 1 percent on the day to $1.3383, buoyed by players covering bets on losses that have begun to look stretched and extending gains after stop loss orders were triggered through $1.3355 and $1.3370. Traders said leveraged investors were buying the euro with more stops said to be above $1.3420.
The euro was also helped by gains for stock markets, driven by an unsourced report in Italian daily La Stampa that 600 billion euros could be made available at a rate of between 4-5 percent to give Italy breathing space for 18 months.
An IMF spokesperson said there were no discussions with the Italian authorities on a program for IMF financing and the amount the paper cited was well above the Fund's entire loan stock.
"The IMF report was denied and this brings the market's focus back to how critical a stage the sovereign debt crisis is at," said Jane Foley, senior currency analyst at Rabobank.
"The euro looks very vulnerable in a week where there is an awful amount of (debt) supply from euro zone countries. Trade will be directional and will be based on how the response is to these auctions."
Selling pressure on the euro intensified last week in the wake of a weak bond auction in Germany, the euro zone's safest haven. Italy's short-term debt sale on Friday was also poorly received, sending Italian two-year yields to a euro-era high above 8 percent.
Currency speculators increased their bearish bets against the euro in the latest week to Nov. 15. Steady selling has driven the currency down 7 percent against the U.S. dollar from a high of $1.4248 reached on Oct. 27 to a trough near $1.3213 on Nov. 25. It is more or less flat for the year.
SELLING INTO A REBOUND
Italian 10-year spreads over German bunds narrowed on Monday with dealers citing support from the European Central Bank, but overall sentiment towards euro zone assets remains bearish with investors seeking a comprehensive and quick solution from policymakers to contain the debt damage.
Morgan Stanley said reports of IMF funding for Italy and suggestion of "elite bonds" by triple-A rated countries were likely to provide only short-term relief to the euro and as such they maintain their medium term bearish view on the euro.
Germany denied a media report which said it was considering issuing joint bonds along with five other triple-A rated countries.
But officials have made clear that Germany and France are now exploring radical methods of securing deeper and more rapid fiscal integration among euro zone countries, even if they are aware that getting broad backing for the necessary treaty changes may not be possible.
Euro zone finance ministers will meet on Tuesday where detailed operational rules for the euro zone's bailout fund are ready for approval, documents obtained by Reuters showed. The meeting could also sign off Greece's 8 billion euro aid tranche.
"Whether progress on both of these can deliver a euro boost is doubtful, with the market focus moving on," said Tom Levinson, currency strategist at ING. "In this respect, after last week's poor bund auction, French and Belgium auctions will be watched closely."
The escalating debt crisis was starting to hurt the real economy, with the Organisation for Economic Co-operation and Development saying that euro zone powerhouse Germany appears to have entered a mild recession in the fourth quarter of 2011.
The latest bounce in the euro saw the dollar index fall 1 percent to 78.815, retreating from a two-month peak of 79.702 set Friday.
Against the yen, the dollar dipped 0.1 percent to 77.67 while it lost over 1 percent against the Swiss franc to trade at 0.9182 francs.
Commodity currencies outperformed the euro, with the Australian dollar surging more than 2 percent to $0.9945 , having climbed to a one-week high of $0.9955. The New Zealand dollar also 2.4 percent to $0.7566.
read more: Olympus Wealth Management
Investor attention was focussed on Belgian bond auctions later in the day, with the country looking to raise one to two billion euros at considerably higher costs after Standard & Poor's cut the country's credit rating late on Friday.
Belgium's benchmark 10-year yield has risen to near the 6 percent level, taking it closer to levels at which countries such as Portugal and Ireland had to start considering bailouts.
With Italy, France and Spain also looking to sell debt this week, analysts said the euro is likely to trade more in sync with bond yields. Borrowing costs for all three European countries have risen in recent days as contagion from the debt crisis spread, keeping the euro pinned near recent lows.
The euro rose 1 percent on the day to $1.3383, buoyed by players covering bets on losses that have begun to look stretched and extending gains after stop loss orders were triggered through $1.3355 and $1.3370. Traders said leveraged investors were buying the euro with more stops said to be above $1.3420.
The euro was also helped by gains for stock markets, driven by an unsourced report in Italian daily La Stampa that 600 billion euros could be made available at a rate of between 4-5 percent to give Italy breathing space for 18 months.
An IMF spokesperson said there were no discussions with the Italian authorities on a program for IMF financing and the amount the paper cited was well above the Fund's entire loan stock.
"The IMF report was denied and this brings the market's focus back to how critical a stage the sovereign debt crisis is at," said Jane Foley, senior currency analyst at Rabobank.
"The euro looks very vulnerable in a week where there is an awful amount of (debt) supply from euro zone countries. Trade will be directional and will be based on how the response is to these auctions."
Selling pressure on the euro intensified last week in the wake of a weak bond auction in Germany, the euro zone's safest haven. Italy's short-term debt sale on Friday was also poorly received, sending Italian two-year yields to a euro-era high above 8 percent.
Currency speculators increased their bearish bets against the euro in the latest week to Nov. 15. Steady selling has driven the currency down 7 percent against the U.S. dollar from a high of $1.4248 reached on Oct. 27 to a trough near $1.3213 on Nov. 25. It is more or less flat for the year.
SELLING INTO A REBOUND
Italian 10-year spreads over German bunds narrowed on Monday with dealers citing support from the European Central Bank, but overall sentiment towards euro zone assets remains bearish with investors seeking a comprehensive and quick solution from policymakers to contain the debt damage.
Morgan Stanley said reports of IMF funding for Italy and suggestion of "elite bonds" by triple-A rated countries were likely to provide only short-term relief to the euro and as such they maintain their medium term bearish view on the euro.
Germany denied a media report which said it was considering issuing joint bonds along with five other triple-A rated countries.
But officials have made clear that Germany and France are now exploring radical methods of securing deeper and more rapid fiscal integration among euro zone countries, even if they are aware that getting broad backing for the necessary treaty changes may not be possible.
Euro zone finance ministers will meet on Tuesday where detailed operational rules for the euro zone's bailout fund are ready for approval, documents obtained by Reuters showed. The meeting could also sign off Greece's 8 billion euro aid tranche.
"Whether progress on both of these can deliver a euro boost is doubtful, with the market focus moving on," said Tom Levinson, currency strategist at ING. "In this respect, after last week's poor bund auction, French and Belgium auctions will be watched closely."
The escalating debt crisis was starting to hurt the real economy, with the Organisation for Economic Co-operation and Development saying that euro zone powerhouse Germany appears to have entered a mild recession in the fourth quarter of 2011.
The latest bounce in the euro saw the dollar index fall 1 percent to 78.815, retreating from a two-month peak of 79.702 set Friday.
Against the yen, the dollar dipped 0.1 percent to 77.67 while it lost over 1 percent against the Swiss franc to trade at 0.9182 francs.
Commodity currencies outperformed the euro, with the Australian dollar surging more than 2 percent to $0.9945 , having climbed to a one-week high of $0.9955. The New Zealand dollar also 2.4 percent to $0.7566.
read more: Olympus Wealth Management
China eyes European assets as debt crisis bites-minister
China is preparing to buy up plum assets in Europe, the commerce minister said on Monday, as the escalating debt crisis leaves countries in the region increasingly vulnerable to the deep pockets of Chinese firms.
The fastest-growing major economy in the world is keen to invest in infrastructure in Western Europe, particularly in Britain, Lou Jiwei, the head of $400 billion China Investment Corp (CIC), wrote in the Financial Times at the weekend.
Indeed, Commerce Minister Chen Deming said China will send a trade and investment delegation to Europe next year, where potential investments will be on the agenda.
"Some European countries are facing a debt crisis and hope to convert their assets to cash and would like foreign capital to acquire their enterprises," he told a gathering of Chinese firms with overseas investments.
"We will be closely watching and pushing ahead with this effort."
China has given a cautious response to euro zone plans to raise funds from countries with big foreign exchange reserves, such as China or Japan, to boost the financial firepower of its rescue fund.
China already has some 600 billion euros ($798 billion) in euro-zone debt, a sizeable portion of its $3.2 trillion in foreign exchange reserves, the world's biggest stockpile of cash.
Instead, China may be more interested in investing in solid assets, such as companies or infrastructure. Some Chinese intellectuals argue that now is the time for Beijing to negotiate hard, securing access to, control over, or even ownership of some of Europe's best brand names, companies and intellectual property.
"It is a good opportunity for domestic firms to make equity investment in some European firms that may need cash badly right now because of the debt crisis," He Fan, a researcher at the Chinese Academy of Social Sciences, a top government think tank, said.
"The Chinese government has been nudging domestic firms to venture abroad and by encouraging capital outflows, it could also help the country to improve its international balance of payments."
Chen warned, however, that China may fight back if other countries use trade protectionism to block purchases. Chinese officials repeatedly emphasise that overseas deals have fallen through because of political opposition; although far more Chinese purchases have gone through without difficulty.
Last week, the Icelandic government rejected a plan by Chinese multimillionaire developer Huang Nubo to buy 300 sq km (186 sq miles), saying the plan did not meet legal requirements on foreign owernship.
Huang said the response revealed Western "hypocrisy and deep prejudice." Foreigners wrongly assume Chinese companies have ties to China's military, he said.
China's largest state-owned shipping firm COSCO has already made a major investment in Greece's historic Piraeus port as part of divestment plans.
"We are willing to import more products and encourage outbound investment, since the dollar is relatively weak for a long period of time," said Chen, who earlier this year urged Chinese firms to buy global brands.
MONEY TO BURN
Overseas investment by Chinese state-owned enterprises has mostly focused on resources given China's need to fuel annual economic growth of 9 percent to 10 percent.
Despite the enticing opportunities that Europe may offer, Chinese firms will move carefully for risk of being criticised for hasty moves that do not pay off, said Wang Jun, an economist at top government think-tank CCIEE in Beijing.
CIC, for example, was criticised for some of its early equity stakes in Western financial institutions during the global financial crisis because they subsequently fell in value.
In any case, there was no need for Chinese companies to rush to make investments in Europe, Wang said.
"At this point, I think it's too early to discuss," Wang said. "The euro zone crisis has not entirely played out and asset prices are very volatile. They haven't found their floor," he said.
"Overall, Europe is not a resources play, but its manufacturers are what would most interest us, with their market, their technology, and their strong experience."
CIC is particularly interested in infrastructure projects where governments could offer lower taxes or discounted bank loans in return for investment, Lou wrote in the Financial Times.
However, CIC indicated some caution about investing in Spain, whose borrowing costs have surged over fears of European debt contagion.
A visiting Spanish minister was met with polite disinterest earlier this month when he tried to interest CIC in upcoming divestments of state holdings in so-called cajas savings banks, in the national lottery company, airports and other infrastructure, sources said.
Chen indicated that China also faces its own investment constraints, noting expectations for a slowdown in China's economic growth next year.
Annual inflation in 2011 is likely to be about 5.5 percent -- overshooting a government target of 4 percent -- and inflationary pressures will continue next year, he said.
Another constraint, analysts say, is that China may not be a deep pocketed as it seems. They estimated that out of a foreign exchange arsenal of $3.2 trillion, only $100 billion may be spare per year to spend.
read more: Olympus Wealth Management
Google quits plans to make cheap renewable energy
Google Inc has abandoned an ambitious project to make renewable energy cheaper than coal, the latest target of Chief Executive Larry Page's moves to focus the Internet giant on fewer efforts.
Google said on Tuesday that it was pulling the plug on seven projects, including Renewable Energy Cheaper than Coal as well as a Wikipedia-like online encyclopedia service known as Knol.
The plans, which Google announced on its corporate blog, represent the third so-called "spring cleaning" announcement that Google has made since Google co-founder Page took the reins in April.
The changes come as Google is facing stiff competition in mobile computing and social networking from Apple Inc and Facebook, and as some investors have groused about rising spending at the world's No.1 Internet search company.
"To recap, we're in the process of shutting down a number of products which haven't had the impact we'd hoped for, integrating others as features into our broader product efforts, and ending several which have shown us a different path forward," wrote Google Senior Vice President of Operations Urs Holzle in the blog post.
Google said that it believed other institutions were better positioned to take its renewable energy efforts "to the next level."
Google began making investments and doing research into technology to drive down the price of renewable energy in 2007, with a particular focus on solar power technology.
In 2009, the company's so-called Green Energy Czar, Bill Weihl, told Reuters that he expected to demonstrate within a few years working technology that could produce renewable energy at a cheaper price than coal.
"It is even odds, more or less," Weihl said at the time. "In three years, we could have multiple megawatts of plants out there."
A Google spokesman said that Weihl had left Google earlier this month.
Google noted in its blog post that it would continue efforts to generate "cleaner, more efficient energy," including procuring renewable energy for its data centers.
Among the other projects included in Tuesday's "spring cleaning" were Google Knol, Google Search Timeline, Google Gear, Google Friend Connect, Google Bookmarks Lists and Google Wave, an ill-fated social networking and communication service that Google had previously said it would cease developing.
Google said that in December its email and calendar applications will no longer work with Gears technology, which allows Google's software to work when not connected to the Internet. Google said it is working to create offline capabilities into HTML5 technology instead.
Google Friend Connect, which allows website publishers to add social features to their sites, will be retired in March for all non-Blogger websites, Google said. It suggested that websites use its Google+ social network instead.
Earlier this year, Google said it would "wind down" Google Labs, a website that offered public access to experimental Google products, as well as terminating products that let consumers monitor their home energy consumption and keep track of their personal health records.
Shares of Google, which finished Tuesday's regular trading session down 94 cents, were up 86 cents at $580.86 in after hours trading.
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Putin Warns West on Interference
Russian Prime Minister Vladimir Putin launched his official presidential campaign on Sunday, accusing foreign powers of trying to influence Russia's elections and promising to press ahead with plans to boost defense spending to safeguard the country's dignity.
Mr. Putin's appearance in a soccer stadium here before 10,000 flag-waving supporters was a clear signal that he planned no changes to the top-down political system that he has shaped since assuming the presidency in 2000, despite some weakening of his own popularity in public-opinion polls.
It was his first appearance before a large public arena since he was booed a week ago at a martial-arts competition.
He lashed out at domestic opponents—many of whom have been excluded from the coming parliamentary and presidential elections—accusing them of playing a role in the Soviet collapse in 1991 and looting the country during the ensuing chaos.
He praised Russia's neighbors Kazakhstan and Belarus for helping with his plan to reintegrate former Soviet states into a "Eurasian Union" whose members would enjoy exclusive trade ties.
Mr. Putin, 59 years old, is expected to switch places with his longtime protégé, President Dmitri Medvedev, after March presidential elections in what critics and Kremlin officials alike have called a "castling"—referring to a chess move—of the two leaders. Elections for the State Duma on Dec. 4 will be a closely watched precursor to that contest; the Kremlin-controlled party, United Russia, is expected to win a majority of seats.
Kremlin officials say there are few differences between Messrs. Putin and Medvedev, and that their switch in roles will bring scant change. But analysts say the official return of Mr. Putin to the Kremlin may present difficulties for the West, amid his insistence that the U.S. and European Union are trying to undermine him.
Mr. Putin's speech Sunday before the pro-Kremlin United Russia party was riddled with parallels to a speech he delivered a few months before Russia's last presidential elections four years ago, where in the same stadium he promised a revival in Russia's government and denounced his critics as foreign-financed "jackals."
After accepting the party's formal nomination for president on Sunday, he told the cheering audience that "some foreign countries are gathering those they are paying money to—so-called grant recipients—to instruct them and assign work in order to influence the election campaign themselves."
He called the alleged funding a "wasted effort, as we say money thrown at the wind, firstly because Judas is not the most respected biblical character in our country."
In a clear jab at the financial troubles in the EU and the U.S., he advised governments that "it would be better to pay off their debt with this money and stop pursuing inefficient and costly economic policies."
Mr. Putin, who was initially installed in the Kremlin after the resignation of Boris Yeltsin 12 years ago, said he believed that only his government had the experience to take Russia into a better, more prosperous future. His critics, he said, had already discredited themselves with their own efforts to run the country and "ran it to complete collapse—I mean the collapse of the Soviet Union—while others went on to degrade the government and organize the unprecedented looting of the 1990s" in Russia.
"They destroyed industry, agriculture and the social sphere," he said, and "thrust the knife of civil war into Russia's very heart," referring to the two wars the Kremlin fought against Chechen separatists.
Because he stepped down from the presidency for the past three years, Mr. Putin now is eligible for two more six-year terms in office, and so could become the longest-serving Kremlin leader since Joseph Stalin.
Mr. Medvedev, who introduced Mr. Putin at the party meeting Sunday, said "there is no more successful, experienced or popular politician in Russia" and that in nominating him for president "we have officially determined our political future not just for the short term but for the long term."
Another high-level member of Mr. Putin's circle, Finance Minister Alexei Kudrin, resigned from the government in September after the so-called castling of leaders was announced. People close to Mr. Kudrin said he was disappointed that he wasn't offered the prime minister's job; Mr. Kudrin also said he was against a planned boost in military spending after elections.
Mr. Putin said on Sunday that he did plan such a boost and that "in the next five to ten years, we have to bring a new level and our armed forces to a new level."
"Of course it will be expensive," said Mr. Putin. "But we must do this if we want to protect the dignity of the country."
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Europe's Leaders Pursue New Pact
Euro-zone leaders are negotiating a potentially groundbreaking fiscal pact aimed at preventing the currency bloc from fracturing by tethering its members even closer together
The proposal, which hasn't yet been agreed to, would make budget discipline legally binding and enforceable by European authorities. Officials regard the moves as a first step toward closer fiscal and economic coordination within the currency area. That would mark a seminal shift in the governance of the 17-nation euro zone.
European officials hope a new agreement, which would aim to shrink the excessive public debt that helped spark the crisis, would persuade the European Central Bank to undertake more drastic action to reverse the recent selloff in euro-zone debt markets.
The proposed pact represents the boldest attempt by Europe's leaders to halt the spread of the crisis since they agreed in July to offer Greece a new bailout and to bolster the region's bailout fund. Those steps, initially hailed as a breakthrough, quickly proved insufficient.
Two years into a crisis that has posed the biggest challenge to European integration since World War II, the Continent's leaders now appear to be pursing a path that officials have long regarded as economically necessary but politically untenable—fiscal union.
As recently as this summer, measures such as a centralized fiscal-enforcement authority with power to seize control of national budgets would have been viewed in most capitals as an unacceptable invasion of sovereignty. That such steps are now under serious consideration reflects the perilous turn the crisis has taken in recent months.
The turmoil recently has encroached into the core of the euro zone, fueling fears that the currency bloc could collapse. Thus far, the ECB has refused to intervene more aggressively, demanding that the region's governments pursue fiscal and economic reforms.
Germany and France are leading the negotiations on the possible new pact among the euro zone's 17 members. One European official said there remains "a lot of arm wrestling" over its precise contents.
The plan could face resistance from some governments worried about a loss of sovereignty. But euro-zone officials don't expect struggling southern European countries to resist strongly because most are desperate to stay in the euro and to entice the ECB to give them more help. Moreover, the proposed pact would merely create a mechanism for enforcing fiscal discipline that they have agreed to already. Under the terms of their bailouts, their governments agreed to accept close supervision of their budgets by the International Monetary Fund and the EU.
If agreement is reached, a pact could be announced before the next European summit in early December and could come into force as soon as early 2012, according to officials close to the talks.
A majority of euro-zone governments hope that the pact would be an unstated quid pro quo for massive intervention in bond markets by the ECB. Many policy makers, investors and economists believe that only decisive ECB action can stop the unraveling of euro-zone debt markets and the collapse of Europe's historic experiment with a common currency.
It isn't clear how the ECB would respond to such a pact, and any change in course would be highly controversial within the bank. At least some ECB officials are open to such a tacit bargain with governments, according to people familiar with the matter.
The ECB has long worried that buying government bonds in big enough amounts to bring down countries' borrowing costs would make it easier for national politicians to delay the budget austerity and economic overhauls that are needed. Many ECB officials see the Franco-German plan as reducing this concern about so-called moral hazard, thereby removing a roadblock to bolder bond buying.
An agreement among the 17 euro members is being considered because the normal way to change Europe's rules—amending the European Union treaty—would require a hard-to-forge consensus and a lengthy ratification process among all 27 EU countries, 10 of which don't use the euro.
"It's a pact of euro-zone members for a new governance—a governance with genuine regulation and genuine sanctions that create real confidence," France's budget minister Valérie Pécresse told French television station Canal Plus on Sunday. She said European governments are continuing to discuss the possibility of amending the EU treaty, but that it was vital to "give evidence of the flawless solidity of the euro zone" as quickly as possible.
France is most eager for a new deal among euro members, while German Chancellor Angela Merkel still hopes a wider consensus for an EU treaty change can be reached, officials close to the talks say. Germany worries that a new fiscal union among euro members could create tension with noneuro countries that feel marginalized, such as the U.K.
But the worsening euro-zone crisis, coupled with the likelihood that any EU treaty change would take too long to save the common currency, have made Berlin more willing to contemplate a two-tier Europe, these officials say. The German government aims to continue to press for EU treaty changes as a second stage.
Italy's rising borrowing costs have helped create a new sense of urgency, European officials say. Ms. Merkel and other national leaders had hoped that Italy's replacement of scandal-plagued premier Silvio Berlusconi with the internationally respected Mario Monti would reassure investors that it is safe to lend to Italy. Instead, the selloff of Italian bonds has deepened since Mr. Monti's appointment, pushing Italian borrowing costs to as high as 7.8% last week—a level the country can't afford for long.
The growing risk that Italy could need a bailout, which the rest of Europe would struggle to pay for even with help from the International Monetary Fund, has sparked calls for the ECB to come to the rescue—to use its virtually unlimited financial firepower to stabilize government bond markets so that Italy can stay liquid.
The ECB has been buying government bonds since last year, but only on a limited scale. Its efforts haven't prevented the borrowing costs of Italy, Spain and other countries from rising to unsustainable levels. ECB officials have given several reasons for not intervening more decisively in bond markets, including moral hazard, fear of losing political independence, and the limits of the its legal mandate.
Many economists argue that the ECB can do more, legally. They also note that large-scale bond purchases by U.S. Federal Reserve and the Bank of England haven't eroded the political independence of those central banks.
Some ECB officials are expected to vote against any increase in the bank's firefighting role, including German Bundesbank President Jens Weidmann, the leading critic of central-bank intervention in bond markets.
Governments are hoping other ECB members will outvote Mr. Weidmann—especially if they are confident the German government supports the move. The ECB, though independent, has been loath to take actions that could spark a political backlash against it in Germany, the euro's most powerful member.
The possible euro-zone pact would be open to noneuro members that volunteer to join, but it would go ahead with or without them, euro-zone officials say. One legal precedent for such a coalition of the willing, officials say, is the Schengen agreement, under which a subset of EU members scrapped controls at their mutual borders.
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OECD Urges ECB to Act as Euro Zone Enters Recession
The global economic outlook has deteriorated significantly, the Organization for Economic Cooperation and Development said Monday, as it urged the European Central Bank to act more decisively to prevent the euro-zone sovereign debt crisis from deepening further.
In its twice-yearly report on the global economic outlook, the OECD lowered its growth forecasts for the world's largest economies, and said the euro zone has fallen into recession. It also warned that the bloc's debt crisis, now affecting countries previously seen as safe havens, could "massively escalate economic disruption if not addressed."
"Contrary to what was expected earlier this year, the global economy is not out of the woods," Chief Economist Pier Carlo Padoan wrote in his forward to the report. "Above all, confidence has dropped sharply as skepticism has grown that euro-area policy makers can deal effectively with the key challenges they face."
The Paris-based think tank cut its forecast for economic growth in its 34 members to 1.9% this year and 1.6% in 2012, from 2.3% and 2.8% in May. It expects the euro zone's economy to shrink by 1% at an annualized rate in the last quarter of this year and by 0.4% in the first three months of 2012. The 17-country bloc's economy will only grow by 0.2% in 2012, the OECD said.
"The euro zone must urgently take stronger measures," Mr. Padoan said in an interview with Dow Jones Newswires. "The ECB should buy bonds and set a limit to yields, or a floor to bond value, so that markets know there's a counter party ready to trade at that level."
To stop the contagion, policy makers need to secure "credible and substantial increases" in the capacity of the European Financial Stability Fund, the euro zone's bailout vehicle, together with a greater use of the ECB's balance sheet, Mr. Padoan said.
The euro zone's crisis passed another milestone last week, as the German government managed to sell barely half the bonds it wanted to in an auction, a sign that the currency area's troubles are affecting its strongest economies.
But there is little sign that euro-zone governments will agree on the measures the OECD believes are needed. Germany opposes France's plan to give the ECB a greater role in restoring calm to the bond markets. The ECB currently buys limited amounts of government bonds on the open market to stem the rise in borrowing costs.
The OECD warned that possible but unlikely outcomes such as a disorderly default on government debt, or a break up of the currency area would have serious consequences around the world.
"A large negative event would, however, most likely send the OECD area as a whole into recession, with marked declines in activity in the United States and Japan, and prolong and deepen the recession in the euro area," MR. Padoan wrote. "The emerging market economies would not be immune, with global trade volumes falling strongly, and the value of their international asset holdings being hit by weaker financial asset prices."
Concerns about deteriorating public finances are also growing outside Europe, after lawmakers heading a U.S. congressional supercommittee last week they failed to reach a deal to rein in a rising budget deficit, increasing the risk of draconian cuts to domestic programs and the military come January 2013.
"Another serious downside risk is that no action will be agreed upon to counter the pre-programmed fiscal tightening in the U.S., which could tip the economy into a recession that monetary policy can do little to counter," Mr. Padoan said.
The OECD expects the world's largest economy to grow by 2% in 2012, having forecast an expansion of 3.1% in May. It expects growth to pick up again to 2.5% in 2013.
The economic slowdown is also affecting trade, the OECD warned, as it cut its prediction for global trade growth to 6.7% for this year and 4.8% for 2012, less than the 8.1% and the 8.4% increase previously expected.
"The present situation is worse than in 2009," Mr. Padoan said. "Trade was the driver of economic growth after the 2008 financial crisis, but now we're seeing risks of protectionism."
The OECD said developing economies will continue to make a "substantial" contribution to global economic growth.
"Emerging economies are still growing at a healthy pace, but their growth rates are also moderating," Mr. Padoan wrote. "In these countries falls in commodity prices and the slower global growth have started to mitigate inflationary pressures."
However, the OECD said that in some cases, an immediate easing of monetary polices may not be appropriate.
"In deciding whether, when and how rapidly to ease, central banks need to take into account that inflation in some cases starts from a level well above implicit or explicit targets," the OECD said.
The OECD said China would be better able to respond to slower growth if the yuan were allowed to appreciate.
"Without such currency policy, domestic monetary policy instruments... have to be kept at comparatively more restrictive levels to keep inflation on track," the OECD said. "Such a strategy involves a risk of an excessive economic slowdown."
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