Monday, September 29, 2008

US Economic Bulletin: Fortis Given 11.2 Billion; Paralysis deepens, etc

Fortis thrown €11bn lifeline by governments

By Peter Thal Larsen in London, Michael Steen in Amsterdam, and Tony Barber in Brussels
September 28 2008 19:56

Fortis was thrown an €11.2bn (£8.8bn) lifeline on Sunday night as the Belgian, Dutch and Luxembourg governments combined to inject capital into the embattled banking and insurance group in a last-ditch effort to shore up confidence among savers.

The partial nationalisation was announced in Brussels by Yves Leterme, Belgium’s prime minister, after a frantic weekend of talks involving ministers, central bankers and financiers.

Under the terms of the deal, the Belgian, Dutch and Luxembourg governments will inject capital to buy 49 per cent of Fortis’s banking subsidiaries in each of the three countries. Fortis is also expected to sell its stake in ABN Amro, the Dutch lender it agreed to buy as part of a break-up bid last year. Maurice Lippens, Fortis’s chairman, is expected to step down.

Fortis is the largest European financial institution to be bailed out as a result of the turmoil in the credit markets. The group, a giant of the Belgian and Dutch financial landscape, had become the latest focus of investor fears about the stability of the industry after ructions on Wall Street.

The decision to partly nationalise Fortis came after attempts to sell all or part of the group to BNP Paribas of France or ING of the Netherlands broke down when the governments balked at their demands for guarantees against possible future losses. Policymakers were desperate to announce a deal before markets opened Monday in an effort to avert a full-fledged crisis of confidence.

Fortis on Friday announced plans to speed up a €10bn disposal programme and the appointment of Filip Dierckx as chief executive – its second new chief executive in three months. However, bankers said the extent of the loss of confidence in Fortis meant a more far-reaching solution was needed.

Wouter Bos, Dutch finance minister, and Nout Wellink, president of the Dutch central bank, travelled to Brussels for talks with their Belgian counterparts Sunday afternoon. Meanwhile, Jean-Claude Trichet, European central bank president, was in Brussels to meet Mr Leterme.

The market turmoil has raised far-reaching questions about the ability of European governments to co-ordinate the rescue of an institution whose assets are several times the size of Belgium’s gross domestic product.

Fortis was scheduled to take full ownership of ABN’s private banking and Dutch retail banking arms next year but questions about its ability to finance the purchase have contributed to its woes. ING may yet emerge as a buyer for Fortis’s stake in ABN.

BNP was mainly interested in Fortis’s Belgian operations. But BNP was wary of assets on Fortis’s balance sheet, most notably its mortgage-backed securities, and sought government guarantees for a full takeover. Such a move was controversial, and the Belgian government favoured temporarily taking Fortis into state ownership rather than supporting a foreign takeover.

Belgium is desperate to prevent a panic because Fortis is the country’s biggest private sector employer and handles the bank accounts of half the population.

The bank has been under scrutiny since it announced plans to raise €8bn through a share issue and the sale of assets.

Additional reporting by Ralph Atkins in Frankfurt and Chris Hughes in London

Copyright The Financial Times Limited 2008

Payback provision in US bail-out plan

By James Politi, Krishna Guha, Daniel Dombey and Harvey Morris in Washington
September 28 2008 21:36

The US financial services sector could be forced to reimburse the US government for any losses on its $700bn rescue plan under a breakthrough agreement that paves the way for congressional approval as early as Monday.

After a weekend of frenzied talks, Hank Paulson, the Treasury secretary, and Nancy Pelosi, the Democratic House speaker, announced early on Sunday that a tentative deal had been reached authorising the government to buy up to $700bn of troubled assets from financial institutions.

The deal envisages historic restrictions on executive pay for banks involved in the programme and opens the door for the government to take equity warrants in those institutions.

Both Republicans and Democrats tried to claim credit for defending the interests of tax­payers amid public outrage at the prospect of spending $700bn to bail out Wall Street.

House Republicans, the most vocal opponents of the rescue plan, remained wary even after their leaders signed up to the agreement.

It remained possible that a significant number of House Republicans could refuse to back the bill.

The two presidential candidates gave their qualified support on the basis of the outline of the deal. John McCain said: “Let’s get this deal done, signed by the president, and get moving.” The Republican came under fire from Democrats last week who claimed he slowed the outcome by intervening in the talks. Barack Obama, his Democratic rival, said if concerns on issues such as executive pay were addressed, “my inclination would be to vote for it, understanding that I’m not happy”.

Democratic legislators said they had earlier spoken by telephone to Warren Buffett, the billionaire investor, who warned them of “the biggest financial meltdown in American history” if they failed to act.

Although final details of the legislation were still being worked on throughout the morning, Capitol Hill aides said they expected the House and Senate would both approve the measures early in the week.

On Saturday night, negotiators found a way to address concerns that the bail-out plan insufficiently protected taxpayers. If, after five years, losses were incurred by the government on the sale of the troubled assets it purchases through the programme, the US president would have to present a plan to recover the money from those who benefited from it.

While imposing curbs on the compensation of executives at companies participating in the bail-out, Democrats dropped demands that shareholders be given a vote on pay. The $700bn would be authorised fully but released in three stages, beginning with an initial $250bn. Congress would review and could in principle block the final $350bn disbursement.

Copyright The Financial Times Limited 2008

Grip of paralysis adds to threat of recession

By Chris flood
September 28 2008 19:55

The European Central Bank is expected to keep eurozone interest rates unchanged at 4.25 per cent at its monthly meeting on Thursday but the extraordinary storm battering global financial markets has complicated hugely the problems facing policymakers.

Central banks round the world have aggressively stepped up their efforts to support financial markets, co-ordinating their efforts to provide additional liquidity. But the political deadlock blocking progress with the US government’s radial plans to deal with toxic assets has sapped confidence badly and money markets have been gripped by a growing sense of paralysis.

As a result, financial conditions in the eurozone have tightened significantly over the past two weeks with the three-month euro Libor rate hitting 5.14 per cent on Friday, the highest level since the credit crisis began and well above the 4.29 per cent low for 2008 reached in late January.

This has prompted dire warnings from analysts about the eventual repercussions for household borrowing, consumer spending and corporate investment.

This week’s data releases will underline the growing threat of a recession in the eurozone as the crisis affecting financial markets continues to spill over into the wider economy.

The European Commission’s monthly survey has shown both consumer and business confidence declining sharply over the past 15 months, reflecting high oil prices and growing concerns about the impact of the credit crisis. September’s survey, due today, cannot be expected to register any improvement in confidence.

The purchasing managers survey’s for manufacturing (due on Wednesday) and the service sector (due on Friday) will show how falling confidence is translating into reduced activity levels, lower orders and weakening employment expectations.

The ECB recently cut its forecasts for gross domestic product growth in 2008 and 2009 but inflation remains a thorny problem, running at its highest rate since the creation on the single currency in 1999. Fearing inflationary pressures remain untamed, policymakers have frequently thrown cold water on any suggestions that interest rates should be cut.

However, eurozone inflation has come off its peak, retreating from 4 per cent in July to 3.8 per cent in August, helped by the pull back in oil prices this summer recent.

Hopes that inflation has indeed peaked have fuelled expectations that the ECB could start to cut rates in early 2009. Eurozone inflation data for September, due tomorrow, are expected to show a further fall to 3.6 per cent but this remains well above the ECB’s 2 per cent “comfort zone”.

In the US, consumer confidence data for September, due out tomorrow, are likely to fall from 56.9 in August to 55, reflecting ongoing deterioration in the American housing market and rising unemployment. Friday sees the release of US labour market data, with a fall of 90,000 expected for non-farm payrolls in September – which would push the unemployment rate up from 6.1 per cent to 6.2 per cent.

Copyright The Financial Times Limited 2008

Leaders call for tighter financial rules

By Sundeep Tucker and Jamil Anderlini in Tianjin
September 28 2008 19:23

The global financial system is in urgent need of more scrutiny and greater co-operation between national regulators if it is to avoid repeated crises, top policymakers and bankers warned at the World Economic Forum at the weekend.

As influential decision-makers from the US, Europe and Asia assembled in Tianjin, China, for the annual summer meeting, a consensus emerged over the need for more government regulation of financial markets in the wake of the global credit crisis.

Liu Mingkang, chairman of the China Banking Regulatory Commission, lambasted as “ridiculous” the approach of US regulators to permit 100 per cent-plus mortgages, which he identified as a major cause of the crisis. “The degree of leverage nowadays is dangerous and indefensible. Worse, it is not regulated by any prudential supervision.” He urged greater international co-operation among regulators. “The current crisis is global in nature but regulation is still national.”

Blame for the meltdown should rest with leaders in the financial sector, who needed to refocus efforts on risk management and governance. “A fish doesn’t stink from the tail,” he said.

Bill Rhodes, a senior vice-chairman of Citigroup, urged action to prevent further damage to the real economy. “One of the things that must come out of this crisis . . . is some form of international accounting standards.”

The WEF meeting is the first major global forum for policymakers after the recent mass financial panic.

The debates underscored the sense of shock at recent developments and the scale and depth of discussion necessary to fix the problems.

Mr Rhodes said he feared a repeat financial crisis unless regulators took decisive action to police the gigantic market for credit default swaps.

Many participants said the US-led global financial order faced a crisis of confidence that would lead to a rebalancing of financial and political power between nations, massive deleveraging and the end of easy credit.

There was also widespread acceptance among delegates for developing economies to be allowed to participate in the co-operative bodies that monitor financial stability.

Stephen Roach, chairman of Morgan Stanley Asia, said: “The asset bubble binge is over and that means a multi-year adjustment for the US economy as the excesses are unwound. The US will have its version of Japan’s lost decade.”

Copyright The Financial Times Limited 2008

No comments: