October 21, 2011: Some News That Matters

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Saab Automobile’s chances of avoiding bankruptcy dwindled after the two Chinese companies that had agreed to invest in the company instead offered to buy it for a token sum. Citing people familiar with the discussions, http://ftalphaville.ft.com/thecut/2011/10/21/708181/saab-investment-plan-in-trouble/The Cabinet of Japanese Prime Minister Yoshihiko Noda signed off on steps to deal with the soaring yen on Friday, the WSJ reports. Fleshing out proposals made last month, Tokyo’s plan aims to curb further http://ftalphaville.ft.com/thecut/2011/10/21/708101/japan-moves-closer-to-52bn-yen/

Dexia, the stricken Franco-Belgian lender that has been at the centre of recent market turmoil, loaned €1.5bn of fresh capital to its two largest institutional shareholders which then used the cash to buy Dexia shares before 2008, http://ftalphaville.ft.com/thecut/2011/10/21/708106/e1-5bn-dexia-loans-used-to-buy-shares-in-dexia/

Daniel Tarullo, one of the five governors of the Federal Reserve board, says the central bank should consider large scale purchases of mortgage-backed securities if the economy does not improve, the FT reports. “A large-scale MBS purchase programme has many of the benefits associated with purchases of longer-duration Treasury securities, http://ftalphaville.ft.com/thecut/2011/10/21/708096/fed-urged-to-weigh-new-moves-to-boost-economy/

European leaders will be forced to hold a second summit, perhaps as early as Wednesday, because of the inability of Germany and France to reach a deal on how to increase the firepower of the eurozone’s €440bn rescue fund. European leaders confirmed that a high-stakes summit on Sunday aimed at finalising a plan to shore up the eurozone would proceed.http://ftalphaville.ft.com/thecut/2011/10/21/708091/europe-forced-into-another-summit/

China will allow local governments to issue bonds directly for the first time in almost 20 years as Beijing acts to prevent potential defaults by provincial and city-level governments that could wreak havoc in the country’s financial sector, http://ftalphaville.ft.com/thecut/2011/10/20/708031/china-municipalities-to-issue-bonds/

Investment banks are exploiting gaps in global pay reforms to persist with some of their most contentious practices, including guaranteeing lucrative bonuses to employees regardless of their performance, industry data show. Guaranteed bonuses to new hires accounted for 8.5 per cent of the average bonus pool for 2010 at 51 top financial institutions, according to a study published by the Institute of International Finance (IIF), an industry lobby group. http://www.ft.com/intl/cms/s/0/ee686396-fa4f-11e0-b70d-00144feab49a.html#axzz1bIJzFnrd

Asian stock markets were modestly higher in tentative trade Friday, as confusing signals from European leaders on plans to contain the euro-zone debt crisis kept most buyers at bay. Japan’s Nikkei Stock Average rose 0.1%, Australia’s S&P/ASX 200 added 0.4%, South Korea’s Kospi Composite climbed 1.1% and New Zealand’s NZX-50 was up 0.2%. Dow Jones Industrial Average futures were up 18 points in screen trade.  Copper ticked up over 1.0% in early Asian trade after the red metal settled down 6.2% at a 15-month low in New York Thursday amid uncertainty over the European sovereign debt crisis, fears of slowing demand from China and the fallout from a Chinese government crackdown on metal-for-collateral. http://online.wsj.com/article/SB10001424052970204618704576643932972632812.html?mod=WSJ_hp_LEFTWhatsNewsCollection

Standard & Poor’s Corp. said on Thursday that it would likely downgrade the credit ratings of France, Spain, Italy, Ireland and Portugal if the euro zone slips into another recession, which many economists say is likely. Bank ratings in the region would also take a hit under the two possible scenarios analysed in the S&P report. “These stress scenarios are not our central expectation, but a simulation of the possible outcomes if such hypothetical events were to occur,” the ratings company said. http://online.wsj.com/article/SB10001424052970204485304576643291268634866.html?mod=WSJASIA_hpp_LEFTTopWhatNews

Two years ago, a French banker flew to Washington on an emergency mission: Persuade International Monetary Fund chief Dominique Strauss-Kahn that his concerns about the health of the European banking sector were unfounded. The trip was a success. Mr. Strauss-Kahn agreed to keep his fears under wraps to avoid causing market panic, according to people familiar with the matter.http://online.wsj.com/article/SB10001424052970204485304576641561540266494.html?mod=WSJ_hp_LEFTWhatsNewsCollection

Spanish banking giant Banco Santander SA frequently says that it doesn’t shuttle money among its far-flung units, a declaration meant to assure investors that its parent won’t raid those units for cash in a pinch. The bank has “a model of subsidiaries which are autonomous in funding and capital,” Chairman Emilio Botín said in a speech here last month. The same day, Santander’s chief executive delivered a slide presentation that said “Each subsidiary is responsible for its own capitalisation and funding needs… no cross border funding.”http://online.wsj.com/article/SB10001424052970203752604576643013234914774.html?mod=WSJ_hp_LEFTWhatsNewsCollection

The head of Japan’s auto industry asked trade and industry minister Yukio Edano on Friday for a drastic response to the persistently strong yen, warning that Japan’s economy is already “hollowing out” due to the strong currency.  In a meeting between Edano and executives of the Japan Automobile Manufacturers Association, JAMA president Toshiyuki Shiga said “fundamental countermeasures are needed against the strong yen.” http://www.marketwatch.com/story/japan-auto-group-head-need-major-response-on-yen-2011-10-21

French President Nicolas Sarkozy and German Chancellor Angela Merkel will meet Saturday night in Brussels to prepare for the summit meeting of European leaders set for Sunday, the leaders said in a joint statement Thursday. “The president and the chancellor have agreed to provide a comprehensive and ambitious response to the current crisis in the euro area,” which will include implementing a revamped euro-zone bailout fund, strengthening the capital of European banks and strengthening economic integration and economic governance, the statement said. http://www.marketwatch.com/story/merkel-sarkozy-to-meet-saturday-in-brussels-2011-10-20

ICE Brent crude for December rose $1.37 to settle at $109.76 a barrel, having traded from $107.31 to $110.17. The expiring U.S. front-month November crude fell 81 cents to settle at $85.30 a barrel. U.S. December crude fell only 22 cents to settle at $86.07 a barrel. Brent’s trading volume was 1 per cent below its 30-day average and U.S. volume 13 per cent under. Brent’s premium to its U.S. counterpart rose to $23.69. Brent’s recovery and a forecast for a cold winter helped push U.S. heating oil futures higher. U.S. gasoline futures also ended with a gain. http://www.reuters.com/article/2011/10/20/us-markets-oil-idUSTRE7922QH20111020

“Prices appear to be consolidating within the range of $1,550 and $1,700.” Spot gold gained 0.4 per cent $1,625.12 an ounce by 0253 GMT, but was headed for a drop of 3.2 per cent from a week earlier, its biggest weekly decline in nearly a month. U.S. gold rose as much as 1.1 per cent to $1,630.9, before easing to $1,626.90, on course for a 3.3 per cent weekly decline. Technical analysis suggested spot gold could rebound to $1,650 during the day, said Reuters market analyst Wang Tao. http://www.reuters.com/article/2011/10/21/us-markets-precious-idUSTRE78M11C20111021

The ranks of the poor rose in almost all U.S. states and cities in 2010, despite the end of the longest and deepest economic downturn since the Great Depression the year before, U.S. Census data released on Thursday showed. Mississippi and New Mexico had the highest poverty rates, with more than one out of every five people in each state living in poverty. Mississippi’s poverty rate led, at 22.4 per cent, followed by New Mexico at 20.4 per cent. New Hampshire had the lowest poverty rate, at 8.3 per cent, making it the only state with a poverty rate below 10 per cent. Twelve states had poverty rates above 17 per cent, up from five in 2009, while poverty rates in 10 metropolitan areas topped 18 per cent, the data showed. http://www.reuters.com/article/2011/10/20/us-usa-states-poverty-idUSTRE79J83O20111020

Plans to tackle the euro zone debt crisis have stalled with Paris and Berlin at odds over how to increase the firepower of the region’s bailout fund, French President Nicolas Sarkozy said on Wednesday. Sarkozy told French lawmakers the dispute was holding up negotiations and flew to Frankfurt to talk with German Chancellor Angela Merkel in an attempt to break the deadlock ahead of a make-or-break European leaders’ summit on Sunday. The two leaders left that meeting without speaking to waiting reporters. Asked if a deal had been reached, Jean-Claude Juncker, chairman of the Eurogroup of euro zonefinance ministers who attended the evening meeting, replied: “We’re still in meetings Saturday, Sunday.” http://www.reuters.com/article/2011/10/20/us-eurozone-idUSTRE79I0IC20111020

European governments may unleash as much as 940 billion euros ($1.3 trillion) to fight the debt crisis, seeking to break a deadlock between Germany and France that is forcing leaders to hold two summits within four days.  Negotiations on combining the European Union’s temporary and planned permanent rescue funds as of mid-2012, while scrapping a ceiling on bailout spending, accelerated this week after efforts to leverage the temporary fund ran into European Central Bank opposition and provoked the French-German clash, two people familiar with the discussions said. They declined to be identified because political leaders will have to decide. http://www.bloomberg.com/news/2011-10-20/eu-said-to-mull-wielding-1-3-trillion-as-franco-german-discord-mars-talks.html

Italian Prime Minister Silvio Berlusconi‘s surprise nomination of Ignazio Visco to run the Bank of Italy sets up a possible clash with French President Nicolas Sarkozy over the composition of the European Central Bank’s Executive Board. Berlusconi chose Visco, a 30-year veteran of the Bank of Italy, to succeed Mario Draghi, who is to become president of the ECB when Jean-Claude Trichet’s term ends this month. The Italian premier had indicated he might choose ECB Executive Board member Lorenzo Bini Smaghi for the post, which would free up a seat on the ECB’s decision-making board for a Frenchman.http://www.bloomberg.com/news/2011-10-21/berlusconi-s-bank-choice-risks-france-tensions.html

Federal Reserve Governor Daniel Tarullo‘s call for resuming large-scale purchases of mortgage bonds may boost chances the central bank will start a third round of asset buying aimed at reviving U.S. growth. Policy makers should move the tool “back up toward the top of the list” because it would help the economy through lower mortgage costs that would boost home purchases and spending by people who refinance their home loans, Tarullo said late yesterday in a speech in New York http://www.bloomberg.com/news/2011-10-20/fed-s-tarullo-says-central-bank-should-weigh-resuming-mortgage-purchases.html

India‘s rupee dropped past the 50 per dollar level for the first time since May 2009 on speculation slowing economic growth and faster inflation will deter foreign investment. The currency was poised for its biggest weekly loss this month after China reported Oct. 18 that its third-quarter gross domestic product increased at the slowest pace in two years. Food inflation in India accelerated to 10.6 per cent in the week ended Oct. 8 from a year earlier, the fastest pace since April, government data showed yesterday. Concern Europe‘s debt crisis is worsening also sapped demand for emerging-market assets.http://www.bloomberg.com/news/2011-10-21/rupee-weakens-past-50-a-dollar-for-first-time-since-may-2009.html

The economy appears slightly healthier than many had feared it was a few weeks ago, raising hopes that it can end the year on an upward slope. A raft of data Thursday show layoffs are trending down to a six-month low and factories in the Mid-Atlantic are growing again after contracting for two months. Nevertheless, home sales fell and the housing market is expected weigh on the economy deep into 2012. The outlook for the final six months of the year has improved from August, when many thought the economy was at growing risk of falling back into a recession. Other recent reports showed hiring picked up slightly in September and consumers boosted their spending on retail goods by the most since March.

The Obama administration and the regulator for Fannie Mae and Freddie Mac are expected to unveil new steps to help distressed homeowners in the next week or two, a senior congressional aide said on Thursday.  The aide commented on the plan after Democratic Senator Dianne Feinstein said the Federal Reserve planned to send Congress “legislative recommendations” on housing. The aide said Feinstein “misspoke for a second” and meant the administration and the Federal Housing Finance Agency. http://www.foxbusiness.com/markets/2011/10/20/new-housing-plan-expected-soon-congress-aide/#ixzz1bOCTM3nC

Home sales are on pace to match last year’s dismal figures — the worst in 13 years. The average rate on 30-year fixed mortgages was nearly unchanged this week after rising last week. Freddie Mac says the average rate on 30-year loans edged down to 4.11% from 4.12% last week. The week before, it fell to 3.94%, lowest rate ever, according to the National Bureau of Economic Research. The average rate on the 15-year fixed mortgage ticked up to 3.38 per cent from 3.37 per cent. It hit a record-low of 3.26 per cent two weeks ago. http://www.usatoday.com/money/economy/housing/story/2011-10-20/home-sales-mortgage-rates/50838908/1

EU leaders are to hold another summit by Wednesday, because they will not be able to agree a rescue plan for the euro on Sunday. French President Nicolas Sarkozy and German Chancellor Angela Merkel said a crisis strategy would be discussed on Sunday and adopted at the next meeting. EU leaders need to agree a second bailout for Greece, how to recapitalize banks and a stronger bailout fund. President Sarkozy also called for talks with the private sector. The private sector talks would be “to find an agreement allowing to strengthen the sustainability” of Greek debt. Previous disagreements between France and Germany about the bailout plans have centred on how much the private sector would have to contribute to any package. http://www.bbc.co.uk/news/business-15393260

The ONS said sales volumes including petrol rose by 0.6pc on the month after a fall of 0.4pc in August, giving an annual rise of 0.6pc. Analysts had forecast flat sales on the month and an annual rise of 0.7pc. Excluding fuel, retail sales went up 0.7pc on the month and were 0.4pc higher on the year, above analysts’ expectations for the monthly rise.  The figures offer a rare bit of good news for British retailers which otherwise have been struggling. http://www.telegraph.co.uk/finance/economics/8838002/Retail-sales-rise-on-surprise-jump-in-laptop-sales.html

European leaders were given a stark warning last night that Greece’s debt burden remains unsustainable, despite the €65bn (£57bn) in bailout funding the country has received since May 2010. The warning was contained in the draft text of the decision of the “troika” mission of officials – from the European Central Bank, the International Monetary Fund and the European Commission – on Athens’ progress towards stabilising its public finances. http://www.independent.co.uk/news/business/news/new-greek-bailout-cash-comes-with-dire-warning-2373672.html

The department store Debenhams and better-than-expected retail sales data have provided the UK’s beleaguered high street with some much-needed cheer ahead of the crucial Christmas trading period. Debenhams unveiled a 10 per cent rise in pre-tax profits to £166.1m for the 53 weeks to 3 September, a share buy-back and said it was “optimistic” about its prospects. The retailer also revealed extensive plans to grow its store numbers in the UK and overseas, as well as expanding online. http://www.independent.co.uk/news/business/news/the-uk-high-street-is-alive-and-well-debenhams-says-2373684.html

Policymakers must consider how to stimulate lending to revive the economy, the City’s chief watchdog said, as he also conceded that regulators may never be able to prevent customers being “ripped off”. Lord Turner, chairman of the Financial Services Authority, told an audience at the Mansion House in the heart of the City on Thursday that current economic conditions meant the authorities should switch from imposing strict rules on banks to focusing on ways to make them lend more. http://www.guardian.co.uk/business/2011/oct/20/turner-fsa-regulators-banks-consumers

The possibility of an interest rate cut is off the table as inflation is not expected to ease significantly in the September quarter, economists say. The Australian Bureau of Statistics will on Wednesday release the September quarter Consumer Price Index, the key measure of inflation. In recent weeks, some market observers have been predicting an interest rate cut before the end of 2011. The money market has been pricing in a series of rate cuts based on global growth worries, spiralling government debt in Europe and the weak non-mining sectors of the Australian economy.
Read more: http://www.smh.com.au/business/high-cpi-keeps-rate-cut-off-the-table-20111021-1mbqr.html#ixzz1bOFJ4rUm

Greek MPs have passed a deeply resented austerity bill that has led to violent protests on the streets of Athens, despite some dissent from one Socialist MP. The new measures include pay and staff cuts in the public service as well as pension cuts and tax hikes for all Greeks. The bill passed by majority vote in the 300-member parliament. Former labour minister Louka Katseli voted against one article that scales back collective labour bargaining rights. http://www.smh.com.au/business/world-business/greeks-pass-austerity-bill-despite-riots-20111021-1max8.html#ixzz1bOFc52MB

Chinese stocks fell to the lowest levels since March 2009 on Thursday, as mounting concerns over a slowing economy and a standstill of the European bailout talks continued to weigh on investors. The benchmark Shanghai Composite Index slumped 1.94 per cent, or 46.15points, to close at 2,331.37, the lowest level since March 2009. The Shenzhen Component Index suffered heavier losses by plunging 3.06percent, or 309.51 points, to close at 9,796.23, breaching the key 10,000 mark and set a new low since June 2010. http://news.xinhuanet.com/english2010/china/2011-10/20/c_131202627.htm

China is expected to replace Japan as the world’s second-wealthiest country after the United States with total fortune shooting to nearly US$40 trillion by 2016, Credit Suisse AG said in a report yesterday.
However, the accumulation of fortune will be achieved along with an expanding wealth gap in China where the Gini coefficient, a commonly used measure of inequality of wealth, has already passed an extremely dangerous level. China, which has surpassed Japan as the world’s second-biggest economy, will soon also catch up with the neighbour in terms of total wealth.http://news.xinhuanet.com/english2010/china/2011-10/20/c_131202237.htm

Peru’s Finance Minister Luis Miguel Castilla said Thursday the coming months won’t see a recession, but warned that financial authorities should “be prepared” for a global economic slowdown as it would have repercussions on the Andean nation. Castilla said there are “remote” possibilities that a recession may hit Peru’s economy, but the ongoing effects of the international crisis are still difficult to assess. “It is not correct to speak about a crisis in Peru, because the country’s rates are growing dynamically and the inflation is showing a downward trend,” he said.http://news.xinhuanet.com/english2010/business/2011-10/21/c_131204245.htm

China’s social financing, a broad measure of funds raised by entities in the real economy, shrank 1.26 trillion yuan (194 billion U.S. dollars) from a year earlier to 9.8 trillion yuan in the first three quarters, the central bank said Thursday. All sub-indicators grew at slower paces from the same period last year, except foreign-currency loans which expanded by 184.9 billion yuan from a year earlier to 477 billion yuan, and entrusted loans which increased by 562.5 billion yuan to 1.07 trillion yuan, the People’s Bank of China said in a statement on its website. The yuan-denominated lending accounted for 58 per cent of total social financing, up one percentage point from a year earlier, according to the statement. http://www.cs.com.cn/english/ei/201110/t20111021_3096128.html

Food inflation surged ahead to breach the psychological double-digit barrier at 10.60 per cent for the week ended October 8 against 9.32 per cent in the previous week, leaving no one in doubt that the Reserve Bank of India (RBI) will continue with its hawkish monetary policy stance on October 25. More disturbing is the fact that the fresh spurt in WPI (wholesale price index)-based food inflation does not suffer from the statistical anomaly of base effect as the food price spiral during the same week last year was also at a high of 15.72 per cent. http://www.thehindu.com/business/Economy/article2554825.ece

Even as the U.S. has continued to press India to undertake more investor-friendly reforms under the bilateral Strategic Dialogue, the World Bank on Thursday virtually congratulated India and 29 other countries for significant strides in making their regulatory environments more business-friendly. In a report titled Doing Business 2012: Doing Business in a More Transparent World the World Bank and the International Finance Corporation said that between June 2010 and May 2011, there were 245 business regulatory reforms worldwide, which was 13 per cent more reforms than in the previous year.http://www.thehindu.com/business/article2556115.ece

At a time when India Inc. is saddled with the twin problem of high inflation and low industrial growth, Prime Minister’s Economic Advisory Council (PMEAC) Chairman C. Rangarajan on Thursday pitched for roll back of the excise duty stimulus that was provided to the industry to combat the slowdown in the wake of the global meltdown in 2008. At an interactive session at the Economic Editors’ Conference here, Dr. Rangarajan made out a case for urgent rationalisation of subsidies along with roll-back of excise duties to the pre-crisis levels if the budgeted fiscal deficit target for 2011-12 is to be met. “Adjustment in subsidies will have to be done as early as possible. Otherwise, we will not be in a position to contain [the] fiscal deficit,” he said.http://www.thehindu.com/business/Economy/article2556047.ece

An amazing surge in India’s exports to the Bahamas has stoked the lingering suspicion that a slice of the country’s trades is sham transactions done to bring back money stashed in secret accounts with offshore banks.  In just two years, exports to the Bahamas – best known as a tax haven – have shot up from $2.2 million in 2008-09 to $2.2 billion in 2010-11, according to commerce department data. The number in no way matches the data on the Bahamas’ global imports, which according to UNCTAD – the global trade and investments monitoring agency – was $2.8 billion in 2010.http://economictimes.indiatimes.com/news/economy/foreign-trade/sudden-surge-in-indias-exports-to-bahamas-raises-doubts/articleshow/10433953.cms

The heads of South Korean banks expressed concerns Friday that the current turmoil in the global financial market may lead to difficulties in securing mid- and long-term overseas borrowing, the central bank said. The Bank of Korea (BOK) quoted 10 chiefs of local banks as saying that local banks have secured a large bulk of foreign exchange liquidity in advance in an attempt to fend off a potential liquidity squeeze. However, lingering concerns about the global financial markets may make it difficult for them to raise foreign borrowing in the mid-and long term, such as from bond sales. The remarks came when BOK governor Kim Choong-soo met with local bank heads in a monthly meeting. http://english.yonhapnews.co.kr/business/2011/10/21/46/0503000000AEN20111021004200320F.HTML

Syria may start using the Russian ruble for banking transactions if the European Union bans it from operations in euros, central bank governor Adib Mayaleh said Thursday. As a first step, the Syrian central bank has begun posting the exchange rate for the ruble as well as the Chinese yuan on its daily bulletin, Mayaleh said in an interview with the Arabic-language Russia Today channel. “Don’t forget that we can carry out operations in rubles,” Mayaleh said, according to an e-mailed transcript of the interview. “In the nearest future we will agree on parameters for switching to close cooperation with Russian banks and using the ruble for international settlements.” http://www.themoscowtimes.com/business/article/syria-may-switch-from-euro-to-ruble-banking/445970.html#ixzz1bOHxVI9A

Washington – The International Monetary Fund and the World Bank have visited Libya and will return there in “coming weeks” to assess economic and financial needs, an IMF spokesperson said on Thursday.  Officials from the IMF and World Bank visited Libya earlier this month to conduct a fact-finding mission on the economy and public financial management issues, IMF spokesman Gerry Rice told reporters.  “Follow-up missions are planned to undertake a needs assessment,” he said but was unable to give dates for the next visits. http://www.fin24.com/Economy/World-BankIMF-to-assess-aid-for-Libya-20111020

Greece will eventually fall. Where to look for the next set of violence is probably Italy and the very “quiet” Spain. The problems Spain is facing are huge. Spain is also the only country with a property collapse, that is slowly collapsing further, while people enjoy the sun. With so many unsold homes, the balance sheets won’t look good for many years to come. Despite the political juice from Zapatero, austerity plans and talk of a brighter future, people are suffering, and getting poorer by the day. Spain just hit new alarming Poverty levels, and there is no leveraged EFSF to save Spain.http://www.thetrader.se/2011/10/20/remember-spain-pain/

Good summary of the Argentinian Default. What caused the collapse, and what lessons are to be learnt for the current Greek situation? In 1998, Argentina entered what turned out to be a four-year depression, during which its economy shrank 28 per cent. Argentina’s experience has been cited as an example of the failure of free markets and fixed exchange rates, among other things. The evidence does not support those views. Rather, bad economic policies converted an ordinary recession into a depression. Three big tax increases in 2000-2001 discouraged growth, and meddling with the monetary system in mid 2001 created fear of currency devaluation. As a result, confidence in Argentina’s government finances evaporated. In a series of blunders that made matters even worse, from December 2001 to early 2002, succeeding governments undermined property rights by freezing bank deposits; defaulting on the government’s foreign debt in a thoughtless manner;http://www.thetrader.se/2011/10/20/argentinas-economic-crisis/

This post originally appeared at The Trader.

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