(BN) Spain Credit Rating Cut One Level to AA- by S&P, Outlook Remains Negative

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Spain's Credit Rating Cut by S&P on Weaker Growth Outlook

Oct. 14 (Bloomberg) -- Spain had its credit rating cut one level by Standard & Poor's, which cited a likely deterioration of the nation's bank assets and weaker economic growth prospects that will keep unemployment elevated.

S&P lowered its rating to AA- from AA, the company said in a statement, and the outlook is negative. Spain's rating by S&P has been lowered three times since it lowered the nations from AAA in 2009. A jobless rate as high as 21 percent may weigh on private consumption, it said.

"Despite signs of resilience in economic performance during 2011, we see heightened risks to Spain's growth prospects," S&P said in the statement. "The financial profile of the Spanish banking system will, in our opinion, weaken further, with the stock of problematic assets rising further."

Spain is paying yields of more than 5 percent on its 10- year bonds even after the European Central Bank stepped in to prop up its bond market on Aug. 8. The gap between Spanish and German 10-year borrowing costs was 310 basis points yesterday, compared with 325 basis points on Sept. 30.

Euro Slides

The euro declined for a second day against the dollar and yen after the ratings cut. The common currency declined 0.3 percent to $1.3743 as of 8:20 a.m. in Tokyo and fell 0.2 percent to 105.73 yen.

The decision comes two months after S&P stripped the U.S. of its AAA credit rating for the first time. While the Aug. 5 move roiled global markets, bond investors ignored S&P's warnings about U.S. creditworthiness and piled into Treasuries. The yield on the benchmark U.S. government bond fell to a record 1.6714 on Sept. 23.

The reduction of Spain's rating also comes after Moody's Investors Service on Oct. 4 warned "all but the strongest euro- area sovereigns" that they are likely to see further downgrades, as it cut Italy's debt for the first time in almost two decades. Moody's said that the increased funding risks caused by fallout from the region's debt crisis meant that "all but the strongest euro-area sovereigns are likely to face sustained negative pressure on their ratings."

General Election

Spain's Socialist government, which faces a general election on Nov. 20, has said the country may miss its 2011 growth forecast of 1.3 percent as the recovery slows. Unemployment rose in August to a record 21.2 percent and the manufacturing industry contracted the most in more than two years in September. Regional governments, which are responsible for health and education and hire half of Spain's public workers, are behind schedule to meet deficit targets, preliminary data showed Sept. 8.

The People's Party, which polls indicate may win an outright majority in the vote, has pledged a stricter budget law, spending limits for regional governments, and tax breaks to encourage companies to hire workers and become more competitive. PP leader Mariano Rajoy said on Sept. 15 he would send a "strong signal��� to markets and wouldn't deviate from the budget-deficit goal of 4.4 percent of gross domestic product in 2012 "under any circumstances."

Still, the PP voted against Zapatero's measures to cut public wages and freeze pensions, and has pledged to bring pensions "up to date" if it wins the election. Zapatero's austerity measures aim to slash the shortfall to 6 percent of GDP this year from 11 percent in 2009. The government forecasts the debt burden will grow to 67 percent this year, almost twice the 36-percent level in 2007.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net Stephanie Phang at sphang@bloomberg.net

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(BN) Euro Declines Versus Dollar, Yen After S&P Lowers Spain’s Credit Rating

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Euro Declines for Second Day After Spain Credit Rating Lowered

Oct. 14 (Bloomberg) -- The euro declined for a second day against the dollar and yen after Spain's credit rating was cut by Standard and Poor's, increasing concern that leaders are struggling to stop the region's debt crisis spreading.

The 17-nation currency pared its first weekly advance in a month against the dollar as S&P lowered Spain's grade on long- term sovereign debt to AA- from AA with a negative outlook. The dollar and yen gained against most major peers as investors sought the safest assets amid concern Europe's turmoil will infect the global economy.

The downgrade will "keep the pressure on the negative aspects of the European story," said Imre Speizer, a strategist in Auckland at Westpac Banking Corp., Australia's second-largest lender. "It's clearly a negative for risk sentiment. The euro had a decent drop. A month out and longer, I see it below $1.3150."

The euro declined 0.3 percent to $1.3735 as of 8:06 a.m. in Tokyo from $1.3777 in New York yesterday, paring this week's advance to 2.7 percent. The common currency weakened 0.3 percent to 105.63 yen after falling 0.6 percent to 105.95 yesterday. The dollar traded unchanged at 76.90 yen.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net Kristine Aquino in Singapore at kaquino1@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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(BN) Euro’s Affordable Salvation, in Five Steps: Laurence Kotlikoff

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Euro's Affordable Salvation, in Five Steps: Laurence Kotlikoff

Oct. 12 (Bloomberg) -- German Chancellor Angela Merkel and French President Nicolas Sarkozy are in a terrible bind. They don't want financially distressed European governments to default. But they can't afford to keep them solvent.

Collectively, the governments in question -- Greece, Ireland, Portugal, Spain and Italy -- owe more than 3 trillion euros ($4.1 trillion), much of it short term, and are still borrowing at a rapid clip. The market isn't buying their fiscal pledges or their risky paper, forcing the European Financial Stability Facility and the European Central Bank to step in. But the EFSF has its limits, and the ECB doesn't want to keep buying indefinitely.

There's a big rub, though. European banks hold large quantities of sovereign debt, so if the governments don't pay the banks, the banks might not be able to pay their depositors. Since depositors are paid on a first-come, first-served basis, widespread government defaults -- or even the expectation of them -- could produce a colossal bank run.

Financially strapped governments are in no position to borrow to bail out their banks. And if other governments do so, their own creditworthiness could be threatened. Indeed, investors are showing increased concern about Belgium, which together with France just committed to bail out Dexia SA (whose balance sheet is larger than Belgium's annual economic output). France and even Germany face a potential downgrade of their credit ratings, or so says the market. Default insurance on AAA rated French and German government bonds now costs roughly thrice and twice as much, respectively, as insuring AA+ U.S. Treasuries.

Bank Run

To some extent, the feared bank run is already under way. U.S. lenders and money-market funds are moving their money out of European banks, which are balking at lending to one another. This is exactly what happened before the bankruptcy of Lehman Brothers Holdings Inc. in 2008.

In this quiet run, the ECB is again left holding the bag. It's printing fresh euros to replace those fleeing the banks. But ECB President Jean-Claude Trichet doesn't want to go far beyond this, as signaled by his reluctance to provide financing to bolster the EFSF.

Merkel and Sarkozy are pledging to recapitalize Europe's banks, but doing so without fundamental banking reform will, over time, prove impossible. Governments can sell bonds to their banks knowing that Merkel and Sarkozy, in backing all European banks, are effectively guaranteeing the returns on these and other risky investments. Indeed, financial institutions could end up holding all the outstanding debt of distressed sovereigns as governments take advantage of free access to this guarantee. This "no fail" policy would create immense moral hazard -- or, rather, immoral certainty -- because it suggests that all bank creditors, not just depositors, will never lose a penny.

Plan Unclear

What specifically the two leaders have in mind remains unclear. Meanwhile, every day the crisis festers is another day a major run can spontaneously erupt. Just imagine how the media would react to long lines of desperate people trying to get their money out of every bank in every city, town and village in Europe.

Reporters might start asking whether the U.S. banking system is exposed to Europe and could also suffer a run. According to the Office of the Comptroller of the Currency, federally insured banks had sold more than $7 trillion in credit protection as of June 30. An unknown share of that insures European sovereign debt.

Insured Deposits

The Federal Deposit Insurance Corporation is supposed to stand ready to protect all insured deposits. But some muckraker -- say, Rush Limbaugh -- might point out that the FDIC has only about $4 billion in net assets with which to meet $6.5 trillion in deposit guarantees. And Limbaugh's avid followers might decide to get their money quick and use it to buy something real before the Federal Reserve starts printing the missing trillions. The Empty Wall Street movement would be a lot scarier than Occupy Wall Street.

Last month, I wrote about the impending global Greek tragedy. I'm getting more concerned and more convinced that the only safe way out is Europe's immediate switch to limited- purpose banking -- that is, transforming all European lenders into non-leveraged mutual funds. Once that happens, Merkel and Sarkozy can go back to their regular jobs and let the financial system run itself.

So what's the cost and way to get to limited-purpose banking? First, the ECB would inject 300 billion euros into the banks in exchange for shares, thereby making them solvent. Next, the European Union would require each bank to reorganize itself immediately as a 100 percent equity-financed mutual-fund holding company by following some simple steps.

1. Stop borrowing in any form, including checking and savings accounts.

2. Transform investment banking into a no-risk consulting business, and trading into a no-risk matching business.

3. Open cash mutual-fund accounts for all checking customers, and very strongly encourage them to put their money in the new accounts. This will transfer the banks' reserves to the mutual funds, which will automatically be backed to the buck because they will hold only cash. They will also constitute a perfectly safe, fully reliable payment system because funds can be accessed using checks, debit cards, and ATMs.

4. Very strongly encourage other short-term creditors to transfer their accounts to short-term money-market mutual funds. Have these mutual funds purchase the short-term assets held by the banks.

5. Very strongly encourage long-term bank creditors to swap their holdings for shares of mutual funds that specialize in long-term bonds, stocks or real estate. These mutual funds would then purchase those assets from the banks. In the case of real estate, the mutual funds would be closed-end funds, which don't provide for immediate redemptions but have shares that trade in secondary markets.

Such a banking system can't fail because it has no debt on which to default, and its assets always cover its liabilities. The transition can be done quickly, and the 300 billion-euro cost is small compared with eliminating the risk of financial collapse. Merkel and Sarkozy could even provide the protesters occupying Wall Street with a concrete goal for their movement: adopting a system that limits bankers to their sole legitimate purpose, which is boring, low-paying, safe financial intermediation.

(Laurence Kotlikoff, a professor of economics at Boston University, is a Bloomberg View columnist. The opinions expressed are his own.)

To contact the writer of this article: Laurence Kotlikoff at kotlikoff@gmail.com

To contact the editor responsible for this article: Mark Whitehouse at mwhitehouse1@bloomberg.net

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(BN) Some Federal Reserve Officials Sought to Retain Option of QE3, Minutes Say

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Some Fed Officials Sought to Retain QE3 Option, Minutes Say

Oct. 12 (Bloomberg) -- The Federal Reserve said some officials last month wanted to keep further asset purchases as an option to boost the economy as policy makers saw "considerable uncertainty" that U.S. growth will pick up.

Most participants favored giving additional information on the central bank's goals and how they influence the Fed's decisions, and most "saw advantages" in tying the Fed's near- zero interest rates to more specific developments in the economy, the Fed said in minutes of the Sept. 20-21 session, released today in Washington. Such changes may be expressed in ways other than the post-meeting statement, the Fed said.

The debate culminated in the Federal Open Market Committee's decision to replace $400 billion of Treasuries in the central bank's portfolio with longer-term debt to reduce borrowing costs. Three officials dissented. Chairman Ben S. Bernanke said last week the so-called Operation Twist program is a "significant step but not a game changer" for reviving growth and reducing unemployment stuck near 9 percent.

"A number of participants saw large-scale asset purchases as potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted," the minutes said.

Policy makers also decided on Sept. 21 to reinvest maturing housing debt into mortgage-backed securities in part to keep the Fed's Treasury holdings from getting too large and possibly causing a "deterioration in Treasury market functioning," the minutes said.

Benchmark Interest Rate

The FOMC left its benchmark rate in a range of zero to 0.25 percent, where it's been since December 2008, and reiterated its language from its August meeting that the rate is likely to stay very low through at least mid-2013.

The Standard & Poor's 500 Index of stocks pared gains, rising 1 percent to 1,207.25 at 4:41 p.m. in New York. Yields on 10-year Treasuries climbed 6 basis points, or 0.06 percentage point, to 2.21 percent.

Fed officials also considered a weaker version of Operation Twist that would reinvest principal payments on housing debt exclusively in long-term Treasury securities, the minutes said. Policy makers discussed lowering the 0.25 percent interest rate paid on banks' reserve deposits with the Fed; many officials expressed concern that such a move "risked costly disruptions to money markets and to the intermediation of credit."

Third Round

Additional asset purchases would constitute a third round of so-called quantitative easing after the Fed bought $2.3 trillion in housing and government debt in two rounds from December 2008 to June 2011. Some officials said expanding the Fed's balance sheet further "would be more likely to raise inflation and inflation expectations than to stimulate economic activity and argued that such tools should be reserved for circumstances in which the risk of deflation was elevated," the minutes said.

Philadelphia Fed President Charles Plosser, one of the dissenters, said after a speech today in Philadelphia that the threat of deflation would warrant more stimulus. He said Operation Twist won't have a "major impact" on the speed of the economic recovery and that he expects U.S. growth to "gradually accelerate" to about 3 percent next year.

As for the option of additional asset purchases, "it's there, it's possible, but it's a high hurdle," Michael Moran, chief economist at Daiwa Capital Markets America Inc. in New York, said in an interview with Bloomberg Television. "Most FOMC members are going to view that as a tool that should be reserved for if the economy were to start to decline or if we were to get into a situation where deflation is a risk," he said.

Specific Levels

At the August meeting, Bernanke and colleagues discussed adopting specific levels of inflation and unemployment as conditions for keeping interest rates near zero. Only Chicago Fed President Charles Evans has publicly supported the idea of allowing price increases faster than 2 percent annually as a way to lower unemployment.

The September minutes said that most participants "favored taking steps to increase further the transparency of monetary policy." Some committee members said it would be "useful" to clarify the link between monetary-policy decisions in the short term and longer-run objectives.

Unemployment Objective

A number of participants "expressed concerns" about communicating an objective for the unemployment rate because of monetary policy's indirect influence over labor markets. The Fed panel agreed that the long-run rate of inflation is determined by monetary policy. The minutes stopped short of saying the Fed was prepared to set an explicit inflation target.

"Participants generally saw the committee's post-meeting statements as not well suited to communicate fully the committee's thinking about its objectives and its policy framework," the minutes said. They agreed that they would need to use "other means" to supplement the statement, without specifying what those could be.

The Fed also discussed giving more information on the conditions under which interest rates would stay close to zero, which could make the statement "more effective" and provoke a more favorable response in financial markets, the minutes said.

Several officials saw a risk that such information "could be mistaken" for a statement of the Fed's longer-run objectives, and some said the central bank's Summary of Economic Projections, published four times a year, could be used to provide more details.

'Quite Leery'

Fed Governor Sarah Bloom Raskin said Sept. 27 that she will be "quite leery" of allowing inflation or price expectations to rise in an attempt to lower real interest rates. St. Louis Fed President James Bullard said the same day that faster inflation won't reduce the housing glut.

U.S. employers added 103,000 jobs last month, more than economists forecast, while the jobless rate held at 9.1 percent, the Labor Department said Oct. 7. Job gains have slowed for two straight quarters.

Bernanke said at a Joint Economic Committee hearing Oct. 4 that the two-year-old recovery is "close to faltering." The U.S. economy expanded at a 1.3 percent annual pace in the second quarter, up from 0.4 percent in the first quarter.

Fed staff economists reduced their forecast for growth in the second half of 2011 "and in the medium term," the minutes said, without giving specific figures. That was the staff's fifth consecutive downward revision to the near-term outlook, and the third consecutive revision to the medium-term forecast. Fed governors and regional presidents last gave economic projections in June and will publish revisions Nov. 2.

Relapse Into Recession

Sixty percent of respondents to last month's Bloomberg Global Poll see the U.S. economy deteriorating, and 50 percent said it will relapse into recession in the next year. Seventy- eight percent of respondents said the Fed's Operation Twist won't produce job growth.

Many policy makers at the meeting judged that inflation risks were "roughly balanced," and officials "generally judged that there was relatively little risk of deflation," the minutes said. The Fed's preferred price index, which excludes food and fuel costs, rose 1.6 percent in August from a year earlier, up from 1 percent in March.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net .

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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(BN) Senate Blocks Obama’s $447 Billion Jobs Plan Funded by Surtax on Wealthy

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Senate Blocks Obama's $447 Billion Job Creation Legislation

Oct. 11 (Bloomberg) -- Opponents of President Barack Obama's $447 billion jobs plan had enough votes to block the measure in the Senate, with two Democrats joining Republicans to derail his prime proposal to help turn around the struggling economy.

The tally on the test vote wasn't completed by early evening as the roll call remained open for Senator Jeanne Shaheen, a New Hampshire Democrat, who was on her way back to Washington to vote in support of the plan. More than 40 senators voted against permitting debate on the measure, effectively shelving it.

The broad plan includes cuts in payroll taxes for workers and employers and provides new funding for roads, bridges and other infrastructure.

Senate Minority Leader Mitch McConnell called the measure a "lousy idea" that relies on proposals similar to 2009's $825 billion stimulus, an effort he said that failed to work.

"If voting against another stimulus is the only way we can get Democrats in Washington to finally abandon this failed approach to job creation, then so be it," said McConnell, a Kentucky Republican.

Revised Plan

Senate Democratic leaders last week revised the president's initial proposal, partly to try to pick up more support within their party. That scrapped Obama's method of paying for the jobs proposal, including higher taxes on families making more than $250,000 a year. Senate leaders substituted a 5.6 percent surtax on people making at least $1 million annually.

Even so, Democratic Senators Jon Tester of Montana and Ben Nelson of Nebraska opposed the plan. "I can't support tax gimmicks that do little to create jobs" and don't address the need for a bipartisan deficit-cutting plan, Tester said in a statement.

Before the Senate voted, Majority Leader Harry Reid accused Republicans -- who are trying to take control of the Senate and White House in 2012 -- of attempting to hamper the economy for political benefit. He said Republicans are opposing job-creation ideas they supported in previous years.

"Republicans oppose those ideas now because they have a proven track record of creating jobs, and Republicans think if the economy improves it might help President Obama," said Reid, a Nevada Democrat. "So they root for the economy to fail, and oppose every effort to improve it."

Agenda in Limbo

The vote leaves Obama's economic agenda in limbo because the political parties disagree about what should be done to lower the nation's 9.1 percent unemployment rate, said Clint Stretch, managing principal of tax policy at Deloitte Tax LLP in Washington. Republicans seek permanent tax cuts and deregulation, while Obama and congressional Democrats want more federal spending and short-term tax reductions.

"I think the president's jobs initiative is at the end of its legislative life -- not that it really had one," Stretch said. He said the focus will likely shift away from jobs and toward the work of a congressional supercommittee that is tasked with finding a way to cut $1.5 billion from the federal deficit over 10 years.

Obama said today that, if lawmakers won't pass his entire $447 billion jobs package, it may be broken up into individual provisions that can get through Congress. The president said the Senate vote would pose a "moment of truth," allowing voters to see how senators stand on the jobs issue.

Breaking Up Plan

"I don't know how Congress will respond to the overall package, but our expectation is, is if they don't pass the whole package, we're going to break it up into constituent parts," Obama said as he met with his council on jobs and competitiveness in Pittsburgh.

Obama proposes to create jobs by cutting payroll taxes for workers and employers by half, extending jobless benefits, providing aid to states for schools and emergency workers and boosting spending on public works projects such as roads and bridges. He also would provide tax breaks for employers to hire the unemployed.

The plan considered today would be financed by Senate Democratic leaders' proposed surtax on people earning at least $1 million a year, which the U.S. Congressional Budget Office said would raise $453 billion.

Capping Deductions

Obama endorsed the leaders' plan. He had proposed capping itemized deductions for individuals earning more than $200,000 a year and couples earning more than $250,000. He also proposed raising taxes on private equity firm managers, real estate investors and venture capitalists, and ending oil and gas subsidies.

The new method of offsetting the bill's costs still ran into Democratic opposition. Senator James Webb, a Virginia Democrat, said he would vote to let debate start, but wouldn't support the Senate jobs legislation as it was drafted. He said a tax on millionaires that is income-based fails to address real issues of inequality in the tax code. He said the best method to spread the tax burden would be to boost taxes on capital gains.

"The present proposal looks good at first glance; it sounds good on a TV bite, but in all respect to the people who put it forward, I do not believe it's smart policy and it does not go where the real economic division lies in our country," Webb said.

In the House, Obama's plan also faces hurdles. Republicans who hold the majority oppose the tax increases, and party leaders there also have said it adds spending in many areas already bolstered in 2009's economic stimulus measure.

House Republican leaders say some of Obama's ideas, such as payroll tax cuts, are worth considering.

The Senate bill is S. 1660.

To contact the reporter on this story: Laura Litvan in Washington at llitvan@bloomberg.net

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

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(BN) U.S. Senate Passes Bill Allowing Duties to Offset China’s Undervalued Yuan

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Senate Passes Bill to Offset China's Undervalued Currency

Oct. 11 (Bloomberg) -- The U.S. Senate passed legislation letting companies seek duties to compensate for a weak Chinese yuan, putting pressure on House Speaker John Boehner to take up a bill he has called "dangerous."

The Senate voted 63-35 today to approve the measure backed by Democrats such as Senators Sherrod Brown of Ohio and Charles Schumer of New York and Republicans including Lindsey Graham of South Carolina and Jeff Sessions of Alabama.

China's leaders and Washington opponents such as Boehner and the U.S. Chamber of Commerce have said the measure risks starting a trade war. Senate passage will lead to demands that Boehner permit a House vote on the bill, according to Michael Moore, an economist in the Bush administration.

"Boehner would really push hard to not be backed into that," Moore, a professor at George Washington University in Washington, said in an interview. "It would never be good for the Speaker to be pushed into a vote that he doesn't want to take."

The Senate bill mandates that the Treasury Department identify misaligned currencies, instead of deciding whether a currency was manipulated, as is now required. Governments that undervalue their currencies and don't take corrective action would face penalties, including increased dumping duties, a ban on federal procurement in the U.S. and ineligibility to receive financing form the Overseas Private Investment Corporation.

Schumer, who has proposed similar measures on China's currency over the past six years, failed in his previous attempts to get an up-or-down Senate vote on a bill.

'Clocks Cleaned'

"To those who say it'll cause a trade war, we are in a trade war," Schumer said in a speech on the Senate floor Oct. 6. "We have our clocks cleaned every day and lose jobs every day because of unfair Chinese practices. To those who say China will retaliate, China has got far more to lose in this than we do."

The measure may stall in the House Ways and Means Committee, which controls trade legislation in its chamber. Representative Dave Camp, the Michigan Republican who heads the panel, hasn't committed to supporting the bill even though he voted for a similar measure last year backed by Representative Sander Levin of Michigan, top Democrat on the committee.

"While currency is certainly an issue, solely looking at currency manipulation misses the larger points," spokesman Jim Billimoria said last week in an e-mail. Camp "will begin looking aggressively at China's abuses this fall."

'Very Difficult'

Boehner, an Ohio Republican, and Senate Majority Leader Eric Cantor of Virginia voted against Levin's bill last year.

"To force the Chinese to do what is arguably very difficult to do I think is wrong, it's dangerous," Boehner said Oct. 6 at the Washington Ideas Forum, sponsored by Atlantic magazine and the Aspen Institute. ���Given the economic uncertainty around the world, it's just very dangerous and we should not be engaged in this.

''I frankly think the president agrees with me but why isn't the president speaking out?" Boehner said. "Is he too busy campaigning?"

President Barack Obama said at a news conference the same day that while "China has been very aggressive in gaming the trading system to its advantage and to the disadvantage of other countries, particularly the United States," he wants to avoid laws that "are symbolic, knowing that they're probably not going to be upheld by the World Trade Organization."

Levin has said that the House version of the legislation had 225 supporters and urged Boehner to let members vote.

Momentum 'Increasing'

"It's clear to me momentum is very much increasing," he told reporters today in Washington before the vote. "The pressure will mount here in the House to act."

Representative Mark Critz, a Pennsylvania Democrat who backs Levin's bill, sought in July to force a vote against the wishes of Republican leaders. He rounded up more than 173 House members, mostly Democrats, to sign a petition that would bring the measure to the floor. It needs at least 218 signatures, a majority, to succeed.

The yuan has appreciated 4.6 percent against the U.S. dollar in the past year and 24 percent in the past five years, the steepest advance among 25 emerging-market currencies tracked by Bloomberg. China limits currency conversions for investment purposes and buys dollars to slow the yuan's advance and preserve the competitiveness of China's exports.

Senate passage alone "is not enough to put us into the danger of a trade war," Moore said.

"The administration, U.S. trade officials, Treasury could say to the Chinese 'This is just posturing' if it's only the Senate," he said. "For it to really be problematic, both of them need to pass it."

The bill is S. 1619.

To contact the reporters on this story: Eric Martin in Washington at emartin21@bloomberg.net William McQuillen in Washington at bmcquillen@bloomberg.net

To contact the editor responsible for this story: Larry Liebert at lliebert@bloomberg.net

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(BN) Trichet Says Debt Crisis Shift to Larger Countries Increases Systemic Risk

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Trichet Sees 'Systemic' Risk Amid Debate on Greek Writedowns

Oct. 11 (Bloomberg) -- European Central Bank President Jean-Claude Trichet warned of threats to the financial system as the conflict among political leaders intensified over how to extricate Europe from the debt crisis.

"The crisis has reached a systemic dimension," Trichet told European lawmakers in Brussels today. "Sovereign stress has moved from smaller economies to some of the larger countries. The crisis is systemic and must be tackled decisively."

European officials are toiling to meet an end-of-month deadline set by French President Nicolas Sarkozy to get to grips with the crisis, which has propelled Greece to the brink of default, shaken world markets and fueled speculation that the 17-nation currency might not survive in its current form.

Trichet's message comes as Slovakian lawmakers vote on the euro region's retooled bailout fund. The country is the only member of the 17-nation euro area that hasn't ratified the measure agreed between leaders in July to fight turmoil that has spread from Greece to larger nations including Italy. Slovakia's largest opposition party, which pledged to reject the motion today, said it will back the revamp in a second vote if it fails to pass the first time.

Stocks in Europe dropped for the first time in five days and the euro fell from a three-week high against the dollar. The Stoxx Europe 600 Index slid 0.8 percent as of 11:46 a.m. in London. The euro fell 0.4 percent to $1.3588.

Italy sold 9.5 billion euros ($12.9 billion) of Treasury bills today, the maximum set for the auction, as borrowing costs fell and demand rose.

Slovak Vote

Today's crisis-management efforts range from a vote in Slovakia on upgrading the 440 billion-euro ($600 billion) rescue fund to the release of a report by European and International Monetary Fund experts on Greece's economic prospects. Risks to the region's economic outlook have increased as governments struggle to contain the crisis, the European Commission said in a separate assessment published today.

After Malta's endorsement late yesterday, the Slovak parliament stands as the only barrier to reinforcing the fund with the power to buy bonds in the primary and secondary markets, offer precautionary credit lines and enable the bolstering of bank capital.

Ratification Vote

Slovak Prime Minister Iveta Radicova sought to sideline opponents in her coalition by tying the EFSF ratification to a no-confidence motion. The Freedom of Solidarity party, one of the members of Radicova's four-way coalition, said it won't support the EFSF.

Nevertheless, Slovakia's opposition Smer party will back the bailout revamp in a second vote if the first one fails, its leader, Robert Fico, told reporters in the capital Bratislava. There is no date set for a repeated vote.

Political jousting in Slovakia, which sat out Greece's original 110 billion-euro aid program last year, showed how Europe's unanimous decision-making principle makes the emergency response hostage to local politics.

'Comprehensive'

In postponing a summit of euro leaders by five days yesterday to Oct. 23, European Union President Herman Van Rompuy sought extra time to pursue a "comprehensive" package including a solution for Greece, aid for banks and a further strengthening of the rescue fund.

The summit, now slated for a Sunday when the U.S. and European markets are closed, will be preceded by a finance ministers' meeting on a date to be determined. Weekends are Europe's traditional time for market-sensitive decisions, as when the euro area created the rescue fund in May 2010.

"There's no obvious solution," Luxembourg Finance Minister Luc Frieden told reporters in Luxembourg today. "There are several options that must be examined from the technical and political points of view."

Greek bondholders may face writedowns of more than the 21 percent envisioned in a July rescue plan, Luxembourg Prime Minister Jean-Claude Juncker said, setting the stage for high- stakes bargaining at the leaders' summit.

Juncker's Comments

Asked by Austrian television last night whether Europe is considering writedowns of 50 percent to 60 percent, Juncker, who chairs euro-area finance meetings, said: "We're talking about more." A spokesman for Juncker, Guy Schuller, said today Juncker meant euro-area officials were discussing investor losses on their Greek holdings exceeding 21 percent. Both the ECB and banks oppose such a revision.

The ECB gave its blessing to one method of bolstering the fund, saying it could be used to insure a portion of new bonds sold by debt-strapped nations, automatically extending the fund's coverage.

EFSF resources "should be dedicated to enhance sovereign debt new issuance of securities, thus multiplying their effect," ECB Vice President Vitor Constancio said in Milan yesterday.

Officials are working out how to scale up the EFSF's firepower without requiring another round of parliamentary approvals or dipping into the balance sheet of the ECB. The central bank has ruled out granting the EFSF a banking license.

For Greece, the endgame drew nearer with an announcement that EU, ECB and IMF experts are likely to complete their economic-review mission today.

The report will put Greece's 2011 budget deficit at 9.1 percent of gross domestic product, missing the original target of 7.5 percent and a revised target of 8.5 percent, Kathimerini newspaper reported, without citing anyone.

To contact the reporters on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net James G. Neuger in Brussels at jneuger@bloomberg.net

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

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(BN) Euro Drops Before Vote in Slovakia; Pound Declines as Manufacturing Slides

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Euro Falls Versus Dollar Before Slovakia Vote; Sterling Weakens

Oct. 11 (Bloomberg) -- The euro dropped from the highest level in almost three weeks against the dollar as Slovakian lawmakers prepared to vote on a proposal to retool the euro region's bailout fund.

The dollar rose against most of its major counterparts on increased demand for the most liquid assets. The pound weakened as U.K. manufacturing production contracted for a third month. New Zealand's dollar fell as the nation's budget deficit was wider than forecast. The euro slid even as a European Union, International Monetary Fund and European Central Bank team approved the next tranche of aid to Greece.

"Uncertainty persists because there is just not the political consensus to tackle these bigger issues in the euro zone," said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world's largest custodial bank, with more than $26 trillion in assets under administration. "We are treading water, waiting today."

The euro fell 0.2 percent to $1.3612 at 10:41 a.m. in New York after rising 2 percent yesterday in the biggest gain since July 2010. The shared currency reached $1.3699 yesterday, the highest level since Sept. 21. The euro dropped 0.2 percent to 104.36 yen today. The dollar was little changed at 76.71 yen.

South Korea's won was the best performer against the dollar among the most-traded currencies, rising as much as 0.9 percent to a two-week high of 1,160.80.

Korean Reserves

More than $300 billion of foreign-exchange reserves will help the nation weather market volatility, the Dong-A Ilbo newspaper reported, citing Benjamin Hung, chief executive officer of Standard Chartered Plc's Hong Kong unit.

The New Zealand dollar slid 0.6 percent to 77.90 U.S. cents after government financial statements showed the budget deficit widened to a record NZ$18.4 billion ($14 billion) in the year through June, from a NZ$16.7 billion estimate in the May budget.

Sterling slid for the first time in three days versus the dollar, dropping 0.3 percent to $1.5622 after a report showed Britain's manufacturing fell in August more than forecast.

Factory output fell 0.3 percent from July, when it slid a revised 0.2 percent, the Office for National Statistics said today in London. The median forecast of 24 economists in a Bloomberg News survey was for a drop of 0.2 percent. Overall industrial output, which includes mining and oil and gas, rose 0.2 percent.

Focus on Fundamentals

"Attention is once again returning to U.K. fundamentals, and the outlook is not encouraging," said Elizabeth Gregory, a market strategist in Geneva at Swissquote Bank SA, a unit of the financial and trading-services company Swissquote Group.

The Dollar Index rose 0.2 percent to 77.738 after yesterday's 1.4 percent decline, the biggest loss on a closing basis since July 13. The IntercontinentalExchange Inc. gauge, used to track the greenback against the currencies of six major U.S. trading partners, is weighted 57.6 percent to the euro.

The Standard & Poor's 500 Index gained 0.3 percent after rallying 3.4 percent yesterday. Alco Inc. reports its earnings today after the U.S. stock market closes, signaling the start of the earnings season. The S&P GSCI Total Return Index of 24 commodities was little changed after rising for four days.

"The euro zone, until we get into earnings season, is going to give the market direction," said Fabian Eliasson, head of U.S. currency sales at Mizuho Financial Group Inc. in New York. "There is a lot of local jawboning that is going around, and people have their own agendas, causing volatility."

Slovakia Vote

Slovakia may approve the euro region's retooled bailout fund after a political storm that will probably topple Prime Minister Iveta Radicova's governing coalition.

The nation's largest opposition party, which pledged to reject the motion today, will back the revamped European Financial Stability Facility in a second vote if lawmakers fail to approve it today, Robert Fico, the group's leader, told reporters today in the capital, Bratislava. That would give the measure a majority.

There is no date set for a repeat vote. The nation is the only member of the euro area that hasn't ratified the measure, following approval in Malta yesterday.

European Union and International Monetary Fund officials indicated that Greece will get an 8 billion-euro ($11 billion) loan next month under a 110 billion-euro bailout.

Two days ago, Germany and France set as a deadline the Nov. 3 meeting of the Group of 20 for a breakthrough in handling Europe's debt crisis after a meeting of German Chancellor Angela Merkel and French President Nicolas Sarkozy.

To contact the reporters on this story: Allison Bennett in New York at abennett23@bloomberg.net Emma Charlton in London at echarlton1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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(BN) Goldman Sachs Earnings Collapse Seen as Wells Fargo Heads for Record Year

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Goldman Sachs Earnings Collapse in Wells Fargo's Record Year

Oct. 11 (Bloomberg) -- Goldman Sachs Group Inc., whose shares have fallen 43 percent this year, may report its lowest quarterly profit since the 2008 financial crisis. Far from Wall Street, Wells Fargo & Co. is headed for record earnings.

Third-quarter U.S. bank earnings, which kick off with JPMorgan Chase & Co. on Oct. 13, will show that investment- banking businesses such as bond trading and merger advice declined, while retail operations like mortgage lending prospered, according to analysts including Richard Staite at Atlantic Equities LLP in London.

It's a reversal from 2009 and early 2010, when rising markets and a perfect trading record propelled New York-based Goldman Sachs to its highest profits ever, as commercial lenders including SunTrust Banks Inc. in Atlanta charged off billions of dollars of delinquent mortgages.

"You're going to see a big divergence between very poor earnings from pure capital-markets businesses and quite solid performance from the pure retail banks, particularly those that have a mortgage-origination business," said Staite.

Slowing economic growth and heightened worries about European sovereign debt have weighed on bank stocks all year. None of the 24 members of the KBW Bank Index has posted a gain in 2011, and the worst performer, Bank of America Corp., is down 53 percent. A jump in borrowing costs at some banks, including New York-based Morgan Stanley, began to subside last week as investors became more optimistic that European policy makers would solve the region's sovereign debt and banking crisis.

Job Cuts

"I hope European governments manage to come to a solution that causes an end to the kind of fear that the markets have lived through for the last 90 days," said David Hilder, a New York-based analyst at Susquehanna Financial Group LLP. "And if that happens, then I think you'll see activity levels pick up, possibly in the fourth quarter and certainly in 2012."

A decline in trading revenue over the past two quarters has led large investment banks to focus on cost reductions, including job cuts. Goldman Sachs, led by Chief Executive Officer Lloyd C. Blankfein, 57, said in July that it will cut about 1,000 jobs after its second-quarter drop in trading revenue was bigger than analysts estimated.

Bank of America, the largest U.S. lender by assets, announced plans last month to eliminate 30,000 jobs in the next few years. UBS AG, Switzerland's biggest bank, said in August it will cut about 3,500 positions, or 5.3 percent of its workforce, to reduce expenses. Morgan Stanley said it wants to bring down annual costs by $1 billion over the next three years.

Reduced Bonuses

The focus on expenses is likely to lead to lower compensation. Year-end bonuses for fixed-income traders and salespeople across Wall Street may fall 20 percent to 30 percent from last year, Johnson Associates Inc., a New York-based compensation-consulting firm, estimated on Aug. 12. Johnson said bonuses for equity traders will be flat to down 15 percent.

Executives at some Wall Street firms are planning more cuts to jobs and compensation after third-quarter results are released because they don't expect the industry to recover soon from a slowdown that's partly driven by regulatory changes, Richard Bove, an analyst at Rochdale Securities in Lutz, Florida, wrote in a note to investors on Oct. 6.

"The only action that they can take to deal with the expected environment is to cut costs," Bove wrote. "Translated, this will mean lower bonuses and fewer jobs."

New York Jobs

One out of every eight jobs in New York City and about 14 percent of New York State's tax revenue come from the securities industry and related activities, according to a report today from New York State Comptroller Thomas P. DiNapoli. He said the industry will probably lose almost 10,000 jobs by the end of 2012, bringing total losses to 32,000 since January 2008.

"It now seems likely that profits will fall sharply, job losses will continue, and bonuses will be smaller than last year," DiNapoli said in the report. "When Wall Street slows, New York City and New York State's budgets feel the impact and that is a concern."

Stock- and bond-market investors were spooked during the quarter by Standard & Poor's decision to downgrade the U.S. government's debt rating, a protracted Congressional debate over raising the government's borrowing limit, and by the Federal Reserve's decision to leave rates near zero until 2013 to combat stalling economic growth. Debate among European policy makers about how to solve deteriorating government finances and whether to add capital to banks also sparked fears that a misstep could lead to a new financial crisis.

Stock Drop

The S&P 500 Index dropped 14 percent during the quarter, the worst decline since the fourth quarter of 2008, and the Chicago Board Options Exchange Volatility Index, or VIX, which measures the cost of buying insurance against drops in the S&P 500 Index, surged 160 percent to its highest quarterly reading since the first three months of 2009.

Credit markets and commodities were also shaken during the quarter. The Markit CDX North America Investment Grade Index, which measures the price of buying derivatives to protect against a default on the corporate debt of 125 borrowers, climbed the most in the quarter since 2008. The average yields demanded on U.S. commercial-mortgage bonds in excess of Treasuries soared 108 basis points, the most since the last quarter of 2008, to 3.51 percent, according to Barclays Capital Index data. A basis point is 0.01 percentage point.

Oil Prices

Brent crude oil futures lost 8.6 percent in the third quarter, extending a 4.2 percent drop in the second, in its longest slump since the 2008 financial crisis.

"What I think was surprising when you got into September from August was how across-the-board the weakness was," said Charles Peabody, an analyst at Portales Partners LLC in New York. "Very often you get weakness in fixed income, but equities do well. This was literally every product. Every capital markets event was negative."

Goldman Sachs, which made more than 70 percent of its revenue in the first six months from investing its own money and trading, will likely be most affected by the market declines. The company's earnings will collapse to breakeven in the third quarter from $2.98 per share a year earlier, according to the average of 24 analysts' estimates compiled by Bloomberg. That would be the lowest since the fourth quarter of 2008, when the firm posted its only quarterly loss since going public in 1999.

Analysts' Estimates

Twelve of the analysts expect Goldman Sachs to report a loss for the three months on Oct. 18, driven by declines in its investments in companies such as Industrial & Commercial Bank of China Ltd., which fell 35 percent in the quarter in Hong Kong trading, and other assets such as real estate.

Analysts including Edward Najarian at International Strategy & Investments in New York also expect Morgan Stanley and Charlotte, North Carolina-based Bank of America to report quarterly losses once non-recurring items and debt-valuation adjustments are excluded. The adjustments are accounting gains taken when the price of a company's bonds declines.

Five of the largest U.S. banks -- Bank of America, JPMorgan Chase, Citigroup Inc., Goldman Sachs and Morgan Stanley -- will recognize $4.3 billion in such gains, according to estimates by Matthew Burnell, an analyst at Wells Fargo, the fourth-largest lender, which wasn't included. Analysts' estimates compiled by Bloomberg do not strip out debt-valuation adjustments.

Wells Fargo, based in San Francisco, and U.S. Bancorp in Minneapolis, which make most of their money from lending instead of investment banking, will probably report record earnings in the third quarter, according to an estimate by Richard Ramsden, a Goldman Sachs analyst in New York.

Doing Fine

In an Oct. 9 report titled "Traditional Banking Is Doing Just Fine," ISI's Najarian noted that Fed data for the 25 largest banks showed total loans grew 1.2 percent in the third quarter from the prior three months and that core deposits surged 6.8 percent, helping to replace more expensive forms of funding such as bond issues.

Average loans by banks will climb by a median 2 percent in the third quarter from the previous three months, the first increase after 10 consecutive quarterly declines, analysts at Evercore Partners Inc. said in an Oct. 3 note to investors. The boost is being driven by more loans to businesses as well as by a "notable pick-up" in mortgage and consumer lending, the analysts wrote.

The Fed's efforts to stimulate economic growth, most recently with the so-called Operation Twist plan to buy long- term Treasuries while selling shorter-term U.S. government debt, reduced the average rate on 30-year mortgages below 4 percent for the first time on record this month.

Refinancing Boost

Banks including Wells Fargo and JPMorgan will benefit from a third-quarter increase in fees from homeowners refinancing their mortgages and from higher profits selling those mortgages to government-sponsored entities such as Fannie Mae and Freddie Mac, according to Ramsden's Sept. 28 note. The Goldman Sachs analyst wrote that he expects mortgage-banking revenue to rise more than 40 percent from the prior quarter.

Wells Fargo, led by CEO John G. Stumpf, 58, will make 72 cents a share in the quarter, up 9 percent from a year earlier, according to the average estimate of 29 analysts surveyed by Bloomberg. The lender will earn a record $15.2 billion, or $2.82 per share, for the full year, according to the same analysts.

U.S. Bancorp, the largest bank in Minnesota, will earn 61 cents a share, up 36 percent from a year earlier, according to the average estimate of 29 analysts surveyed by Bloomberg.

Mary Eshet, a Wells Fargo spokeswoman, declined to comment, as did Stephen Cohen, a Goldman Sachs spokesman, and JPMorgan's Jennifer Zuccarelli.

JPMorgan's Profit

The split between Wall Street businesses and other types of banking will be demonstrated by JPMorgan, the second-biggest U.S. bank by assets. The New York-based company will report 95 cents of earnings per share for the quarter, just 6 percent lower than a year earlier, according to the average estimate of 30 analysts surveyed by Bloomberg.

Those earnings, the lowest in six quarters, may reflect gains in consumer lending and credit-card revenue as well as declines at the investment bank. James Staley, 54, who runs the investment bank, said at an investor presentation on Sept. 13 that "markets revenue" will decline about 30 percent from the second quarter and that fees from investment banking will be about $1 billion.

Lower Valuations

The last time fees at JPMorgan's investment bank were below $1.2 billion was in the first quarter of 2006, company statements show. Revenue from fixed-income and equity trading totaled $5.5 billion in the second quarter and hasn't been 30 percent lower than that since the fourth quarter of 2009, the statements show.

Staley said that the company's revenue from asset management is "definitely correlated with the equity markets" and will probably decline as a result of the drop in stocks. He also said that the company's private-equity business will probably report a loss of roughly $100 million.

Analysts are split on the outlook for bank stocks, even though all of them agree that their valuations are much lower than they've been historically compared with their book values.

Peabody, at Portales Partners, is advising investors to stay out of banks until key decisions are made in November by a U.S. deficit-cutting committee and by the Group of 20 countries, which are meeting to discuss capital requirements for the world's biggest banks.

Value Investors

Investors who typically seek to buy undervalued stocks, known as "value" investors, have only about 4 percent of their funds in bank stocks, less than the industry's weighting in the iShares S&P 500 Value Index Fund, according to a Sept. 29 analysis by ISI's Najarian. That means there's "considerable buying power" that could rush into large bank stocks whenever the outlook improves, he concluded.

"Everybody who's been negative on the banks has been right, and if you're positive on the banks you're taking a risk," said Roy Smith, a finance professor at New York University's Stern School of Business and a former Goldman Sachs partner. "The consensus is so negative at the moment that it's probably wrong."

Goldman Sachs shares fell to $94.70 in German trading today from their $96.14 close in New York yesterday. Wells Fargo stock was trading at $25.98 in Frankfurt trading today from its $26.13 close in New York yesterday.

To contact the reporters on this story: Christine Harper in New York at charper@bloomberg.net Michael J. Moore in New York at mmoore55@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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Long View: Historian sees S&P fall to 400 - markets - FT.com

Long View: Historian sees S&P fall to 400 - markets - FT.com:

Russell Napier, The author of the Anatomy of the bear, see S&P 500

I used to think "outliers" in the financial system are always talking B.S like Jim Rogers, Peter Schiff. But i have since ate my words.

Salute to them, i find that accepting outliers point of view normally the long term. Will position yourself for the ultimate moment.

I failed to profit from the Lehman moment, but not harmed either. This time round its time to position to profit from Lehman 2.0. Just like Soros i love that guy, retired but working behind, sometimes its not about the money its about "The Game" like the fictional Gordon Geeko says.

'via Blog this'

(BN) Global Stocks, Euro Strengthen on Bank Debt Pledge; Commodities Post Gains

Bloomberg News, sent from my iPad.

Stocks Rally, Euro Strengthens as Europe Pledges Debt Resolution

Oct. 10 (Bloomberg) -- Stocks rose, giving the Standard & Poor's Index its biggest gain since Aug. 23, and the euro surged the most since July 2010 versus the dollar after the leaders of France and Germany pledged to deliver a plan to stem the debt crisis. Commodities advanced for a fourth day.

The S&P 500 jumped 3.4 percent and the Dow Jones Industrial Average added 330.06 points to 11,433.18 at 4 p.m. New York time. The Stoxx Europe 600 Index climbed 1.7 percent to cap a four-day rally of 8.5 percent, its largest over that stretch of time since November 2008. The 17-nation euro currency appreciated 2 percent versus the dollar as it strengthened against 10 of 16 major peers. The S&P GSCI gauge of raw materials increased 2.1 percent. Costs to protect against a European sovereign default decreased.

The S&P 500 has rebounded 8.7 percent since Oct. 3, the most over the same amount of time since March 2009, on optimism European leaders will succeed in taming the debt crisis and as U.S. economic data beat estimates. German Chancellor Angela Merkel and French President Nicolas Sarkozy said yesterday they will deliver a plan to recapitalize European banks and address the Greek debt crisis by Nov. 3. Reports this week may show U.S. retail sales increased in September at the fastest pace in six months, adding to evidence that growth is rebounding.

"It's a risk-on day," Stephen Wood, who helps oversee about $163 billion as the New York-based chief market strategist for Russell Investments, said in a telephone interview. "Is it a relief rally? Yes, in some ways," he said. "While a Greece default is not something that can really be addressed or avoided, the consequences on the banking system can be avoided."

Financials, Energy

The S&P 500 added to last week's 2.1 percent advance and climbed above its highest closing level since Sept. 20. Gauges of financial, commodity and energy companies rose more than 4 percent for the biggest gains among 10 industries.

Citigroup Inc. and Bank of America Corp. rallied more than 6 percent to lead gains in all 24 stocks in the KBW Bank Index. Freeport-McMoRan Copper & Gold Inc. and ConocoPhillips climbed more than 4 percent as commodities rallied.

The Federal Reserve will release the minutes of its latest interest-rate setting meeting tomorrow. Data this week may show U.S. retail sales increased in September at the fastest pace in six months, helping to ease concern the recovery is faltering. The 0.7 percent rise in September retail sales anticipated by economists in a Bloomberg survey follows better-than-expected jobs figures reported last week, a rebound in construction spending in August and an acceleration in manufacturing in September.

Earnings Season

Earnings per share for the S&P 500, excluding financial companies, are forecast to have increased 14 percent in the third quarter, the smallest gain since the end of 2009, analysts' estimates compiled by Bloomberg show. Alcoa Inc., the biggest U.S. aluminum producer, will report earnings tomorrow after U.S. markets close, the first member of the Dow Jones Industrial Average to release third-quarter results.

It's time to "extend risk," Jonathan Golub, chief U.S. market strategist at UBS AG, wrote in a note to clients today. "As macro concerns subside, we believe that the stocks which have experienced the greatest price declines are likely to snap back the quickest."

Golub said industrial, raw material and energy shares are the most attractively valued. As the S&P 500 retreated from a three-year high at the end of April, those industries slid more than 21 percent through Oct. 7. The benchmark gauge slumped 15 percent during the same period.

'Everything Necessary'

The euro traded at $1.3649 after Merkel said European leaders will do "everything necessary" to ensure that banks have enough capital. The shared currency weakened on Oct. 7 after Fitch Ratings lowered Spain's foreign and local debt to AA- from AA+ and cut Italy's to A+ from AA-, citing an "intensification" of the region's crisis.

Automobile and chemical companies led gains in the Stoxx 600. Energy producers rose after HSBC Holdings Plc upgraded Premier Oil Plc, with BP Plc climbing 2.9 percent to contribute the most to the gauge's advance. Erste Group Bank AG tumbled 9.2 percent after saying it will post a full-year loss of as much as 800 million euros because of writedowns at its Hungarian and Romanian units. Ferrovial SA jumped 6.5 percent after agreeing to reduce its indirect holding in BAA Ltd., which owns London's Heathrow airport.

Dexia Breakup

Belgium said today it will buy part of Dexia SA and provide security for depositors as part of a plan to rescue the lender. Dexia lost 4.7 percent after sliding as much as 36 percent.

Belgium's purchase of the local consumer-lending unit of Dexia will end a 15-year cross-border experiment with France after the European debt crisis deepened. The Belgian federal government will pay 4 billion euros ($5.4 billion) for the division and guarantee 60 percent of a so-called bad bank to be set up for Dexia's troubled assets, Finance Minister Didier Reynders said at a press conference today.

Credit-default swaps on Belgium rose four basis points to 287, while the Markit iTraxx SovX Western Europe Index of swaps linked to 15 governments was 8.2 basis points lower at 323. Contracts on France were down five points at 172 and Germany's decreased three points to 95, according to CMA. Decreases signal improving perceptions of credit quality.

Greek, Belgian Bonds

The yield on the Greek 10-year bond advanced 38 basis points, driving the premium investors demand to hold the securities instead of benchmark German bunds 30 basis points higher to 21.83 percentage points. Belgian 10-year bond yields rose nine basis points, with similar-maturity French yields 11 points higher. Portuguese and Italian 10-year debt also declined. U.S. Treasuries aren't trading today because of the Columbus Day holiday.

The Swiss franc gained against all 16 of its most-traded peers, rising 2.6 percent versus the dollar. The dollar weakened against all 16 major counterparts and the Dollar Index, which tracks the currency against six major peers, fell 1.5 percent to 77.55 for its biggest drop since July 1, 2010. Australia's dollar climbed 2.2 percent against its U.S. peer, rising for the fifth straight day.

Oil advanced for a fourth day, gaining 2.9 percent to $85.41 a barrel in New York. Silver jumped 3.2 percent to $31.98 an ounce. Gold for December delivery added 2.1 percent to $1,670.80 an ounce.

Emerging Markets

The MSCI Emerging Markets Index rose 1.6 percent for a fourth consecutive advance, its longest winning streak since Sept. 1. The Bombay Stock Exchange Sensitive Index, or Sensex, jumped 2 percent. The WIG20 Index gained 3.4 percent after Prime Minister Donald Tusk won yesterday's Polish general election. The EGX30 Index slid 2.3 percent in Egypt after Coptic Christian protesters clashed with security forces in Cairo yesterday.

China's yuan advanced 0.6 percent to 6.3486 per dollar in Shanghai, the most since the currency's July 2005 revaluation, on speculation policy makers will tolerate gains after the U.S. said the Asian nation undervalues its currency. It was the strongest closing level since the country unified the official and market exchange rates at the end of 1993, according to the China Foreign Exchange Trade System.

To contact the reporters on this story: Stuart Wallace in London at swallace6@bloomberg.net Rita Nazareth in New York at rnazareth@bloomberg.net

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

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(BN) ‘Fairy Godmother’ Faith in Europe Boosting Stocks, Southwest’s Grant Says

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'Fairy God Mother' Faith in Europe Boosting Stocks, Grant Says

Oct. 10 (Bloomberg) -- Gains from Europe's biggest four-day stock surge since 2008 may vanish as German and French leaders have yet to resolve the region's sovereign debt crisis, said Mark Grant, a managing director at Southwest Securities Inc.

"The equity markets are rallying that the Fairy God Mother's going to show up," Grant, based in Fort Lauderdale, Florida, said today in an interview on Bloomberg Television's "Street Smart" program. "France and Germany don't have a plan."

The benchmark Stoxx Europe 600 Index advanced 1.7 percent in London trading, capping a four-day gain of 8.5 percent as German Chancellor Angela Merkel and French President Nicolas Sarkozy set an end-of-October deadline to devise a strategy to recapitalize banks, ease Greece's debt burden and fix Europe's economic governance.

The rally may be short-lived as European leaders dismantle Dexia SA, once the world's leading lender to municipalities, and wrangle over the scope of writedowns on Greek bonds, Grant said. Belgium said today it would buy Dexia's local consumer-lending unit for 4 billion euros ($5 billion) and guarantee 60 percent of a so-called bad bank after the company's short-term funding evaporated.

Credit-ratings firms may downgrade bonds issued by Belgium and France which, along with Luxembourg, will guarantee as much as 90 billion euros of interbank and bond funding for Dexia over 10 years, endangering the 17-nation monetary union's ability to contend with the debt burdens of countries such as Greece, Grant said.

"Once France gets downgraded, then the whole construct is in trouble," he said. "I think a lot more serious problems are just weeks ahead."

To contact the reporters on this story: Charles Mead in New York at cmead11@bloomberg.net Lisa Murphy in New York at Lmurphy25@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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(BN) Merkel-Sarkozy Plan to End Crisis Shifts to Banks With Three-Week Deadline

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Euro Leaders Target Bank Capital in Next 'Final' Crisis Plan

Oct. 10 (Bloomberg) -- Angela Merkel and Nicolas Sarkozy turned their crisis-fighting focus to banks, promising a recapitalization blueprint this month that will overtake a 12- week-old rescue plan that has yet to be put into place.

"We will recapitalize the banks," the French president said in Berlin yesterday at a joint briefing with the German chancellor without providing details. "We'll do it in complete agreement with our German friends because the economy needs it, to assure growth and financing."

Facing rising pressure to defuse turmoil that's raged for 19 months and growing concern Greece is headed to a default, Merkel said European leaders will do "everything necessary" to ensure that banks have enough capital. Sarkozy said they would deliver a plan by the Nov. 3 Group of 20 summit.

Searching for what each called a "durable" solution for Greece's debt load shows they have moved beyond a July 21 plan that Luxembourg's Jean-Claude Juncker called the "final package, of course." Their approach may spike a debt swap now being negotiated that would impose a 21 percent write-off and suggests investors take a bigger share of the losses, reflecting the deterioration of the Greek economy.

"There is a big difficulty with respect to the Greek situation because it is looking as if the July 21 agreement just isn't sufficient and that's been increasingly recognized in Greece and the rest of Europe," Julian Callow, chief European economist at Barclays Capital in London, said today on Bloomberg Television's On the Move with Francine Lacqua.

The euro strengthened to the highest this month, adding as much as 1.5 percent to $1.3583 at 11:45 a.m. in Berlin. Standard & Poor's 500 Index futures rose.

'One Step Behind'

"Maybe they're still running one step behind, but they are at least discussing the right things," said Carsten Brzeski, an economist at ING Group in Brussels.

Underscoring the urgency, directors of Franco-Belgian Dexia SA began dismantling the lender, the first victim of the debt crisis at the core of Europe. Belgium announced early today it would pay 4 billion euros ($5.4 billion) to take over the local consumer-lending unit as part of the process.

"By the end of the month, we will have responded to the crisis issue and to the vision issue," Sarkozy said. While the heads of Europe's two biggest economies reiterated their intention to keep Greece in the euro region, they left it to international auditors, known as the "troika," to guide the next steps. Sarkozy didn't repeat the line he used 10 days ago that "we can't let Greece fail."

Greek Restructuring

The focus on banks signals a willingness to accept a Greek debt restructuring, an outcome Sarkozy has resisted, according to Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington.

"In the end, Merkel and the slowing euro-area economy checkmated Sarkozy and forced him to choose between standing behind Greece or his own banks," Kirkegarrd said in an e-mail. "Unsurprisingly, he chose the latter."

After their eighth bilateral summit in 20 months, the two leaders unveiled no new agreement on what role should be played by the bailout fund, the European Financial Stability Facility, amid reports that they differed on how to use it.

A strengthening of the EFSF was part of the July 21 package, which has yet to be ratified by all 17 euro governments as Slovakia's ruling coalition struggles to back it.

'Great Risk'

European leaders are bracing for the consequences of a Greek default. German Finance Minister Wolfgang Schaeuble told Frankfurter Allgemeine Sonntagszeitung that euro governments may have come up short on the scale of Greek debt writedowns when they reached the agreement in July. He cited a "great risk" that the crisis could spread further.

European banks need as much as 200 billion euros of capital, Antonio Borges, the International Monetary Fund's European department head, said last week.

Merkel said a report from a team of inspectors from the IMF, the European Union and the European Central Bank later this month will help determine the next step to keep Greece in the 17-nation euro zone.

"On Greece, we are waiting for the troika report," Sarkozy said. "Here, too, we are on the same line: we will take the appropriate decisions."

The Greek debt load will climb to 172.7 percent of gross domestic product in 2012 -- about double Germany's -- as the economy contracts for a fifth year, the Finance Ministry said.

"The decision for a single currency was a path-breaking decision and therefore we'll defend it with all possible strength," Merkel said alongside Sarkozy. Sarkozy repeated several times that the two leaders agreed "on everything."

"The typical German-French experience over the last 20 months is that almost every time they really had to agree when time was running out, they agree," said Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London.

To contact the reporters on this story: Patrick Donahue in Berlin at pdonahue1@bloomberg.net Helene Fouquet in Paris at hfouquet1@bloomberg.net

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

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Both DXY and Bond down again, has the fed lose control?

Has the fed lose control of the US dollar and the Bonds? They have been controlling it very well for the past 1½ months or so.

Or suddenly there is risk on. and the Bond bubble will deflate a little.

I think the rally will be met with a sharp turn of events on Tuesday after US closes. According to my mini crystal ball which about 60% is correct ( why 40% is not correct? Political and human intervention).

problems are still there. Everytime when Shit is going to hit the fan. the Fan gets turn off. BUT they haven solve the SHIT problem!

(BN) Retail Sales in U.S. Probably Increased in September by Most in Six Months

Bloomberg News, sent from my iPad.

Retail Sales Probably Rose in September: U.S. Economy Preview

Oct. 9 (Bloomberg) -- U.S. retail sales increased in September at the fastest pace in six months, providing a sign of optimism for some merchants heading into the holiday shopping season, economists said before a report this week.

The projected 0.7 percent gain would follow no change in the previous month, according to the median of 69 forecasts in a Bloomberg News survey ahead of Commerce Department figures on Oct. 14. The trade gap widened in August, other data may show.

Macy's Inc. and Kohl's Corp. are among retailers adding more workers than last year in anticipation demand will hold up even amid limited job growth and stock-market volatility that's left Americans more pessimistic. President Barack Obama, lawmakers and the Federal Reserve face pressure to spur the employment gains needed to support household spending, which accounts for about 70 percent of the world's largest economy.

"The consumer thus far has remained fairly resilient to the worries of Wall Street," said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit. "Retailers right now are still pretty much treading water. They've managed their inventory and staffing levels very, very well to maintain profit levels."

Retail purchases excluding automobiles rose 0.3 percent last month after a 0.1 percent increase in August, economists said.

September light-vehicle deliveries climbed to a seasonally adjusted annualized rate of 13.1 million, according to Woodcliff Lake, New Jersey-based Autodata Corp. The rate is the highest since April's 13.2 million, when lost output caused by Japan's earthquake and tsunami began crimping supply of cars and parts.

Same-Store Sales

Same-store sales at retailers, excluding Wal-Mart Stores Inc., rose 5.5 percent in September compared with a year earlier, according to the International Council of Shopping Centers.

At the same time, slower job growth, the real-estate slump and a volatile stock market will limit retail sales growth to 2.8 percent during the holiday season this year, according to the National Retail Federation.

The gain to an estimated $465.6 billion in November and December sales compares with a 5.2 percent jump last year and the 10-year average of 2.6 percent, the Washington based NRF said last week. Stores may hire 480,000 to 500,000 seasonal employees, in line with the 495,000 added last year, the group said.

"Households have been very cautious in their spending decisions," Fed Chairman Ben S. Bernanke said Oct. 4 in congressional testimony. "Probably the most significant factor depressing consumer confidence, however, has been the poor performance of the job market."

Labor Market

The jobless rate held at 9.1 percent in September even as employers added more payrolls than forecast. The Labor Department said Oct. 7 that payrolls climbed by 103,000 workers after a revised 57,000 increase the prior month that was more than originally estimated. The figures reflected the end of a strike at Verizon Communications Inc. that brought 45,000 people back to work.

The White House last month submitted a $447 billion jobs bill to Congress that economists surveyed by Bloomberg forecast would help avoid a return to a recession by maintaining growth and pushing down the unemployment rate next year. The legislation faces Republican opposition.

Macy's, the second-biggest U.S. department-store chain, is increasing hiring of mostly part-time workers by 4 percent for the holiday season to match sales growth in its stores and online. Kohl's, the fourth-largest U.S. department-store chain, said last week it may hire more than 40,000 holiday workers, a 5 percent increase from 2010.

The Standard & Poor's Supercomposite Retailing Index is little changed this year, while the broader S&P 500 Index has declined 8.1 percent during the same period.

Companies may have started preparing for the holiday shopping season by ordering more imported merchandise in August. The U.S. trade deficit probably widened to $46 billion from $44.8 billion in July, economists said ahead of an Oct. 13 report from the Commerce Department.

                         Bloomberg Survey  ==============================================================                         Release    Period    Prior     Median Indicator                 Date               Value    Forecast ============================================================== Federal Budget $ Blns    WEEK      Sept.     -34.6     -64.5 Initial Claims ,000's    10/13     8-Oct      401       405 Cont. Claims ,000's      10/13     1-Oct      3700      3710 Trade Balance $ Blns     10/13      Aug.     -44.8     -46.0 Retail Sales MOM%        10/14     Sept.      0.0%      0.7% Retail ex-autos MOM%     10/14     Sept.      0.1%      0.3% Retail exauto/gas MOM%   10/14     Sept.      0.1%      0.3% Import Prices MOM%       10/14     Sept.     -0.4%     -0.4% Import Prices YOY%       10/14     Sept.     13.0%     12.4% U of Mich Conf. Index    10/14     Oct. P     59.4      60.4 Business Inv. MOM%       10/14      Aug.      0.4%      0.4% =============================================================== 

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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