It will tighten checks on cross-border capital flows and cash transfers
Bloomberg 29 October 2008
China needs to prepare for any potential net outflows of capital and form a mechanism to manage crises caused by the global financial turmoil, the nation’s top currency regulator said.
The State Administration of Foreign Exchange (SAFE) will tighten checks on cross-border capital flows through the services trade and cash transfers by individuals in and out of the country, according to a statement posted on its website.
The country should ‘prepare for risks of potential reversal in international payments and have contingency plans’, according to the statement.
China approved new foreign-exchange management rules in August, allowing the government to take ‘necessary safeguarding and control’ measures to cope with an imbalance in international payments or economic crises.
The nation is at risk of ‘massive outflows’ of capital if expectations for the yuan appreciation turn around, the central bank said in a report released in June.
Gains in the currency, described by the International Monetary Fund as ‘substantially undervalued’, have stalled against the dollar since mid-July.
In yesterday’s statement, SAFE also forecast the world economy was likely to slow. China will make efforts to boost domestic demand and maintain ‘stable and relatively fast’ economic development, the currency regulator said.
The nation will use a combination of fiscal, industrial, financial and tax policies, it said.
Growth in China’s capital and financial account surplus slowed by 20 per cent in the first half of the year to US$71.9 billion from a year earlier, the statement said. A surplus or deficit in the account measures investment flows.
Capital outflows from the service trade exceeded inflows by US$3.3 billion, increasing from US$3.1 billion a year ago, SAFE said.
The surplus from the current account, which measures goods and services, increased 18 per cent to US$191.7 billion in the first six months.
China holds the world’s biggest foreign-exchange reserves, according to data compiled by Bloomberg. The nation’s reserves totalled US$1.9 trillion as of September.
Meanwhile, Zhou Zhengqing, a former China Securities Regulatory Commission chairman, said China should restrict short selling in its stock market, which has slumped almost 70 per cent this year.
Citigroup, Credit Suisse Link Loans to Swaps in Shift
By Pierre Paulden and Caroline Hyde
Oct. 29 (Bloomberg) -- Citigroup Inc. and Credit Suisse Group AG are among banks tying corporate loan rates to credit- default swaps, raising borrowing costs and exposing companies to derivatives accused of crippling the financial system.
Nestle SA, the biggest food producer, Nokia Oyj, the largest mobile-phone maker, FirstEnergy Corp., the Ohio-based owner of electric utilities, and at least three other companies bowed to banks' demands to link the interest rate on credit lines to the swaps, which are used to bet on borrowers' likelihood of default.
Banks are toughening terms following $678 billion in writedowns and losses, rising funding costs and a jump in companies drawing on lines they'd already negotiated. Before markets seized up this year, most rates on $6 trillion of revolving loans were based on a borrower's debt rating and priced at an amount over the London interbank offered rate.
``We want banks to be able to provide credit and liquidity to a company like ourselves and they're only going to be willing to do that if they feel it has market pricing built into it,'' Randy Scilla, FirstEnergy's assistant treasurer, said in a phone interview from Akron, Ohio.
Companies such as FirstEnergy may have little choice but to accept the new terms. Banks arranged $603 billion of loans in the U.S. this year through yesterday, down from $1.73 trillion in 2007, according to data compiled by Bloomberg. Even a plan by U.S. Treasury Secretary Henry Paulson to buy $250 billion of shares in financial companies as part of a global injection of $3 trillion into capital markets may not be enough to stem the lending decline.
`That's Crazy'
The inclusion of the swaps shows that banks are shifting away from setting loan pricing by relying on debt ratings and Libor, a benchmark rate that is set each day in London by tallying the cost of 16 banks to borrow from each other. Three- month Libor, the typical benchmark for loans, rose to 4.82 percent on Oct. 10, the highest this year, as markets froze. The rate was set at 3.42 percent today.
The move to swap-based pricing may leave companies exposed to fluctuations in instruments that aren't listed on government- regulated exchanges.
``That's crazy,'' said Lynn Tilton, chief executive officer of $6 billion private-equity firm Patriarch Partners in New York, which loans or lends money to more than 70 companies. ``This will accelerate the downward spiral of market prices and raise borrowing costs to unsustainable levels.''
FirstEnergy
The default swaps were created so bondholders and banks could buy protection against a borrower's inability to repay debts. The market ballooned to more than $60 trillion in the last decade as investors used the instruments to bet on companies. The Securities and Exchange Commission is probing allegations trading helped create a panic that caused the collapse of Lehman Brothers Holdings Inc.
FirstEnergy, with utilities in Ohio, Pennsylvania and New Jersey, agreed this month to link interest rates on a $300 million credit line to the cost of Libor as well as the sum of the spread on its default swaps and those of Credit Suisse, according to a regulatory filing.
Loans from the Zurich-based bank would require total interest payments of about 6 percentage points over Libor if the power company draws on the bank line, according to regulatory filings and Bloomberg data. That's almost 14 times the spread on a $2.75 billion credit line the company negotiated in 2006.
`Unprecedented Times'
The utility would pay Libor plus 3 percentage points to draw on the line, according to company filings. Based on yesterday's levels, FirstEnergy would be charged an additional 1.70 percentage points, reflecting the levels of its credit- default swaps, and another 1.35 percent to account for the bank's own spread, according to Scilla.
Pricing on the loan will change as Libor and the swap spreads on Credit Suisse or FirstEnergy move.
Spreads on FirstEnergy's default swaps reached a record high of 1.80 percentage points on Oct. 20, up from 0.48 percentage points a year ago and 0.12 percentage points in February 2007, according to CMA Datavision. Credit Suisse's have risen threefold since December.
``We're in unprecedented times right now,'' Scilla said. FirstEnergy doesn't anticipate needing to borrow from the line, he said.
Swings in credit-default swap prices can be more pronounced than a company's perceived nonpayment risk would suggest, said John Grout, policy and technical director at the U.K.'s Association of Corporate Treasurers in London.
Cap Included
Some companies, including Nestle and NiSource Inc., which owns Indiana's largest gas utility, convinced banks to include a cap on the level of its swaps.
Vevey, Switzerland-based Nestle is seeking to refinance 6 billion euros ($7.7 billion) of debt, according to bankers familiar with the discussions. It wants to set up a backup for a commercial-paper program that's ``not intended'' to be drawn down, said Roddy Child-Villiers, head of investor relations. The debt being arranged by Citigroup will be linked to a percentage of the company's default swaps. Jeffrey French, a London-based spokesman for Citigroup, declined to comment.
NiSource Finance Corp., the Merrillville, Indiana-based company's finance arm, agreed last month to a $500 million revolving credit line arranged by Barclays Plc. The line is priced at Libor plus 85 percent of the 30-day average of the company's credit-default swap rate, according to spokesman Tom Cuddy. The swap price has a ceiling of 1.75 percent and a floor of 1.25 percent, he said. Bank of America Corp. and JPMorgan Chase & Co. are among the six other banks that agreed to provide the line, according to a filing.
`Illogical Flaw'
Nokia is also paying a spread over Libor based on its derivatives, according to Arja Suominen, a Helsinki, Finland- based spokeswoman.
Credit lines were once seen mainly as emergency funds to be tapped as a last resort. Since markets tightened last year, at least 36 companies hurt by the slowing economy and an inability to tap commercial paper or bond markets have borrowed $30 billion on previously negotiated lines, according to Pacific Investment Management Co. in Newport Beach, California.
``Historically there's been an illogical flaw in the price of revolving credit facilities and backstop loans in particular, they were priced very cheaply as they were never meant to be drawn down,'' said David Slade, head of European leveraged finance at Credit Suisse in London. ``But now, in the current environment, these lines are being used and banks need to be properly recompensed.''
Libor Concerns
Goodyear Tire & Rubber Co., the largest U.S. tiremaker, drew $600 million from its credit line last month after it couldn't gain access to $360 million of cash in a money market fund. The Akron, Ohio-based company, rated BB- by and Standard & Poor's, is paying 1.25 percentage points more than Libor, or 4.72 percentage points. It would pay about 12 percentage points if it were to negotiate a new loan today, based on the average of similarly rated companies in an S&P index. Spokesman Keith Price declined to comment.
Concerns that Libor may not truly reflect borrowing costs helped bring about the change. The rate came under scrutiny as the debt-market seizure deepened. Some lenders may have provided numbers to the British Bankers' Association that underestimated their cost of funds, the Bank for International Settlements in Basel, Switzerland, said in March. The BBA said on April 16 that any member deliberately understating rates would be banned.
Banks are also seeking to shift from a reliance on credit ratings amid concern Moody's Investors Service and S&P have been too slow to act when credit quality deteriorates.
Push For Change
The push for the change is coming as the U.S. government and New York Attorney General Andrew Cuomo investigate whether the swaps were manipulated by short sellers to spread false rumors about financial companies. People who sell short hope to profit by repurchasing the securities later at a lower price and returning them to the holder.
``We're going through a transformation right now with regard to pricing of credit,'' FirstEnergy's Scilla said. ``It wasn't long ago that banks were basically giving away credit. That could be part of the reason we're in the problem we're in today. And those days are gone.''
Dubai: A massive rush at jewellery shops has led to a shortage of gold at some outlets, prompting some shopkeepers to overcharge customers, Gulf News has learnt.
Jewellers are seeing a huge rush of buyers as gold prices are currently at a two-year low.
Shopkeepers said the rush, a combined result of the Hindu festival of Diwali and lower prices. has resulted in a shortage of gold bars. But they denied any hoarding by outlets.
"There is enough gold available in the market and sales are at their peak over the last couple of days with the market falling drastically," jewellers said across the emirate.
Gulf News received complaints from readers who encountered jewellers charging more than the market price.
A buyer who asked not to be named said: "The price of gold prompted me to visit the Gold Souq in Sharjah. However, most retailers claimed they were sold out. Outlets where gold was available were openly overcharging. They said it was in short supply. The price of 24 carat stood at Dh88.75 but they were openly charging Dh92.50. This is clearly an unfair practice."
Shubash Golati, a buyer, said: "It is a tradition to buy gold during the four-day Indian festival of Diwali. I bought 22 carat jewellery worth Dh5,000. I wanted to buy a 100 gramme gold bar but was told that it is out of stock."
Shortage
H.R. Bafna, financial controller from Siroya Jewellers, said a physical shortage of gold is happening worldwide.
He said: "It is matter of physical delivery. It might take a day or two to replenish the stocks. But I am sure that there is no hoarding by jewellers because the market rate has dropped. This has resulted in a tremendous rush of buyers and so the gold bars are out of stock."
In reply to buyers' complaints that gold outlets are cashing in on the limited stocks and buyer rush, Bafna said: "There is a possibility, but I can't confirm this."
A counter salesman at the Joy Alukkas outlet in Bur Dubai said for the last couple of days there have been no fluctuations in gold prices.
He said: "From a customer's point of view this is an excellent time to buy."
He too denied any hoarding taking place. "If the demand for gold is high it is but obvious that some stocks will run out. Some retailers take advantage of this."
Vienna -- The slump in oil prices has spread relief among consumers and fuel-reliant industries, but also is squeezing the companies who could invest in new sources of oil -- spurring concerns that prices will prompt them to shelve investments.
Industry executives warn that could mean the world will face a dramatic ramping up of prices as soon as the global economy, and demand, begins to rebound.
"Low oil prices are very dangerous for the world economy," said Mohamed Bin Dhaen Al Hamli, the United Arab Emirates' energy minister, speaking Tuesday at an oil-industry conference.
"We need an adequate and reasonable oil price that will continue to stimulate investment."
With prices now languishing, he said, "a lot of projects that are in the pipeline are going to be reassessed."
The global economic slowdown has driven down demand for oil, pushing crude prices to levels not seen since the spring of 2007.
In an attempt to stem the decline, the Organization of Petroleum Exporting Countries agreed last week to slash output by 1.5 million barrels a day -- its biggest single reduction in almost eight years.
But the move didn't stop the slide. US benchmark crude for December delivery fell 49 cents on Tuesday, or 0.78%, to $62.73 on the New York Mercantile Exchange.
That is down about 57% from its record high of $ 145.29 in July.
Nobuo Tanaka, head of the International Energy Agency, the Paris-based watchdog, was one of several experts at the annual Oil and Money conference here predicting that the industry could be setting the stage for yet another supply-and-demand whiplash down the road.
"We're concerned that supply won't catch up with demand after this crisis," Mr. Tanaka said.
"The supply crunch may come again, but in a more acute way." The price of crude began its rally five years ago, when an oil industry that hadn't invested enough in new capacity during the years of low prices failed to cope with surging demand from the booming economies of China and India.
That scenario could now play out all over again.
"I hope we don't go through the same cycle," said Mr. Al Hamli.
In two years' time, "we could see much higher prices than we saw three months ago, if the investments are not going through," said Fatih Birol, the IEA's chief economist.
To be sure, most big oil companies have shown no sign of trimming their investments. Royal Dutch Shell PLC says it is sticking to its capital-investment target of $36 billion for this year -- the largest in its history -- and Chevron Corp. is also charging ahead with its $ 23 billion program.
Most of the majors' big projects are designed to break even at prices substantially lower than the current cost of crude. "I don't think there will be major changes in investment," said Paolo Scaroni, chief executive of Italian oil company ENI SpA.
"Maybe in unconventionals, but not conventional oil projects." Yet it is precisely the so-called unconventionals that have become a big focus of the oil companies' activities in recent years.
Billions of dollars have been poured into squeezing crude out of Canada's gooey tar sands, converting Venezuela's heavy oil, and pumping ultra-sour natural gas in the Middle East. Some of those projects could now be scaled back or even abandoned, conference speakers said.
Already, some independent companies producing natural gas in the US have announced cuts in investment.
"If this oil price stays low, alternative energy, Canadian oil sands, Brazilian new discoveries will be out of the market," said Abdalla Salem El-Badri, OPEC's secretary-general.
Though forecasters expect demand for oil to be flat or even negative next year in the rich world, it is likely to grow in countries like China, whose economy has so far weathered the world-wide financial crisis.
Mr. Birol said falling oil prices will also deter investment in alternative energy. Low-carbon technologies such as wind and solar were economically competitive only so long as oil prices were high.
Countries set to meet in Copenhagen next year to agree a new deal on curbing emissions may decide it is a "luxury" in view of the financial crisis.
Lower oil prices are "not good news for climate change," he said.
By Henny Sender in Tokyo and Francesco Guerrera in New York October 27 2008
Lloyd Blankfein, Goldman Sachs' chief executive, called Vikram Pandit, his Citigroup counterpart, last month to discuss a merger, in a dramatic example of the secret manoeuvring that preceded the government bail-out of the financial sector.
The call, which was made at the tentative suggestion of the regulatory authorities or at least with their blessing, was made shortly after Goldman had won surprise approval to convert itself from a securities firm into a commercial bank on September 21, according to several people familiar with the events.
They added that the conversation was brief as Mr Pandit rejected the proposal at once.
A deal would have been structured as a Citi takeover of Goldman. In spite of the slide in Citi's shares, its market value around the time of Mr Blankfein's call was $108bn, roughly double Goldman's capitalisation.
A merger between Citi and Goldman would have resulted in thousands of redundancies in their investment banking units and would have forced out several senior executives. Combining the two companies' widely different cultures would also have been a challenge.
However, uniting Goldman's strengths in risk management, advisory services and proprietary trading with Citi's large retail deposit base and huge corporate client network could have created a powerful financial giant.
Industry insiders argue that such a deal could have also benefited the US financial system by creating a counterpoint to JPMorgan Chase and Bank of America, two institutions that have significantly expanded during the recent raft of government-induced rescue deals.
Goldman executives were not fully convinced of the merits of a deal with Citi but felt there was little downside in placing a call.
The possibility of serious merger talks between Citi and Goldman became a non-starter after this month's decision by the US Treasury to inject $125bn of capital in the two companies and seven rivals. The move was designed to allay investors' fears of further failures among large US financial groups.
But Mr Blankfein's call illustrates the pressure faced by Wall Street groups to consider bold strategic moves before the government bail-out of the sector.
Goldman has long wrestled with the question of whether to combine with a commercial bank to maintain its hold on big corporate clients by boosting its lending capability.
However, its success in the years before the current turmoil had reduced the need for such a merger.
At the same time, Citi traditionally felt it did not need another securities group because it already had a large and established investment bank.
But over the past 18 months Citi has suffered more than $65bn in writedowns and credit losses and raised more than $70bn from outside investors as its shares have plummeted by more than 70 per cent. Goldman has fared much better but was forced to convert into a bank holding company to gain permanent access to Federal Reserve funds and quell market fears over its business model. Shortly afterwards it raised $10bn from investors including Warren Buffett.
Goldman, Citi and regulators declined to comment.
This month, Gary Crittenden, Citi's chief financial officer, told analysts the group had had recent conversations with three banks. He said two - Washington Mutual, which was bought by JPMorgan, and Wachovia, which went to Wells Fargo - were known, but a third had not been "talked about publicly in any way".
Oct. 30 (Bloomberg) -- The Federal Reserve agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore, expanding its effort to unfreeze money markets to emerging nations for the first time.
The Fed set up ``liquidity swap facilities with the central banks of these four large systemically important economies'' effective until April 30, the central bank said yesterday in a statement. The arrangements aim ``to mitigate the spread of difficulties in obtaining U.S. dollar funding.''
South Korea's benchmark stock index had its biggest gain since at least 1980, the won surged and the cost of protecting Asia-Pacific bonds from default tumbled on optimism the measures will prevent the global credit crisis from upending financial markets. The Fed and China cut interest rates yesterday, followed by Hong Kong and Taiwan today.
``The swap lines will help unclog the liquidity pipeline and that action is boosting markets even more than'' the Fed's rate cut, said Venkatraman Anantha-Nageswaran, head of research at Bank Julius Baer & Co. in Singapore. ``It's a step in the right direction and prevents things from getting worse.''
South Korea's Kospi Index surged 10.5 percent to 1072.81 at 12:33 p.m. in Seoul. The won jumped 10 percent against the dollar. Singapore's Straits Times Index climbed 3.6 percent.
The cost of protecting Asia-Pacific bonds from default tumbled, with the Markit iTraxx Asia credit-default swap index of 50 borrowers falling the most since its was created in September 2007.
IMF Credit Lines
The Fed announcement coincided with a decision by the International Monetary Fund to almost double borrowing limits for emerging market countries while waiving demands for economic austerity measures.
The Fed and IMF actions ``show international resolve to support strong performing emerging-market economies adversely impacted by the current financial market turbulence,'' U.S. Treasury Secretary Henry Paulson said in a statement.
Emerging-market investors have created ``massive demand for dollars and a reduction of liquidity in other currencies'' by going back to investing in the U.S. currency, said David Spegel, head of emerging-market strategy at ING Financial Bank NV in New York.
The Fed swap lines ``are designed to help restore liquidity so that a vicious negative spiral doesn't occur,'' he said.
The yield premium on emerging-market dollar bonds over U.S. Treasuries narrowed yesterday by 61 basis points, or 0.61 percentage point, to 7.21 percentage points, according to JPMorgan Chase & Co.'s EMBI+ index. The spread has jumped 5.72 percentage points from a record low of 1.49 percentage points in June 2007, and reached its widest since 2002 earlier this month.
Emerging Markets
``The Fed is there to support large emerging markets that have done their homework over the past several years like South Korea, Brazil, Singapore and Mexico,'' said Alonso Cervera, a Latin America economist with Credit Suisse Group in New York. ``These are large, relevant emerging countries that have followed responsible fiscal and monetary policies for the past several years and now are going through tough times.''
The Fed also created this week a $15 billion swap line with its New Zealand counterpart and removed limits this month on four existing swap lines, including one with the European Central Bank. The Fed set up a $10 billion arrangement with Australia's central bank last month and then tripled it to $30 billion.
`Hoped-For Result'
``The hoped-for result is that we don't see the global financial crisis worsen still more,'' said Lyle Gramley, a former Federal Reserve governor who is now senior economic adviser at Stanford Group Co. ``The Fed is making dollars available to the central banks of these countries who are trying to meet the needs of their banking systems.''
The Bank of Korea cut interest rates by a record amount on Oct. 27 and the government pledged to guarantee local banks' debts to help lenders struggling to access foreign funds. Stocks and the won tumbled last week, prompting concern the country may face a currency crisis a decade after the IMF organized a $57 billion bailout to help repay overseas debt.
The swap line with the Fed ``will expand our foreign- exchange reserves and help stabilize the currency market,'' Bank of Korea Governor Lee Seong Tae told reporters in Seoul today. ``We'll also try to cooperate with other central banks to stabilize global and local financial markets.''
Dollar, Yen Fall as Rate Cuts, Stock Rally Boost Risk Appetite
By Stanley White
Oct. 30 (Bloomberg) -- The dollar and the yen fell as a wave of global interest-rate cuts sparked a rally in Asian stocks, bolstering demand for higher-yielding assets.
The greenback slid for a third day against the euro after the Federal Reserve reduced its target lending rate to the lowest in a half-century. The yen dropped to a one-week low versus the European currency on speculation the Bank of Japan will lower borrowing costs when it meets tomorrow. South Korea's won jumped the most in a decade after the Fed extended swap lines to alleviate a shortage of dollars in the nation.
``The significant easing of monetary policy will help the global growth outlook,'' said Tony Morriss, a senior currency strategist at Australia & New Zealand Banking Group in Sydney. ``We're seeing a major correction of the U.S. dollar and Japanese yen. They were among the key beneficiaries of the flight to quality that's being unwound.''
The dollar fell to $1.3292 per euro, the lowest since Oct. 21, and traded at $1.3196 as of 2:10 p.m. in Tokyo from $1.2963 late yesterday. The yen weakened to 98.35 per dollar from 97.39. The euro gained to 129.80 yen from 126.26 yen. It earlier reached 131.04, the weakest since Oct. 22.
The won jumped 14 percent to 1,253.55 per dollar, the biggest advance since January 1998. The currency two days ago sank to a decade-low of 1,495 as mounting risk aversion prompted investors to dump emerging-market assets.
The ICE's Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and the Swedish krona, fell 2 percent, extending the biggest decline since October 1998. It touched the highest level since April 2006 on Oct. 28.
Stocks Rally
The MSCI Asia-Pacific Index of regional shares rose 7.7 percent for a third day of gains. Japan's Nikkei 225 Stock Average climbed 7.6 percent and South Korea's Kospi index surged 12 percent, the biggest gain since at least 1980.
U.S. policy makers reduced the fed funds target by a half- percentage point to 1 percent yesterday, matching a level reached in June 2003 and before that during the Dwight Eisenhower administration in the late 1950s.
Gross domestic product shrank by 0.5 percent in the third quarter for its biggest decline since the 2001 recession, data due at 8:30 a.m. today in Washington will show, according to a Bloomberg News survey of economists.
Rate Cuts
``The Fed is doing what it can given a weakening U.S. economy,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. based in Tokyo. ``This puts the focus on the interest-rate differential, and that will force the dollar to go lower.''
The U.S. central bank has cut its benchmark rate from 5.25 percent in the past 13 months and created six lending programs channeling more than $1 trillion into the financial system to limit the severity of a looming recession.
``The easing bias in the U.S. is going to continue,'' said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments in Boston.
The Australian dollar rose to 68.30 U.S. cents from 66.81 cents late yesterday in New York on speculation a rate cut in China, the world's largest consumer of industrial metals, will boost demand for Australia's exports.
The People's Bank of China yesterday reduced its benchmark one-year lending rate to 6.66 percent from 6.93 percent. Taiwan's central bank followed suit today, lowering the discount rate on 10-day loans to banks to 3 percent from 3.25 percent.
Yen Selling
The yen fell against higher-yielding currencies as Asian stocks gained on speculation monetary officials across the globe can thaw a seizure in credit markets.
Against the Australian dollar, the yen fell to 67.13 from 65.04 late yesterday in New York. It also declined to 58.32 per New Zealand dollar from 57.02. Interest rates are 0.5 percent in Japan, 6 percent in Australia and 6.5 percent in New Zealand.
The yen also declined as investors speculated that the Bank of Japan will cut borrowing costs tomorrow. The currency slumped the most since 1974 and stocks rallied after the Nikkei newspaper said Oct. 28 that policy makers are leaning toward lowering rates.
The Group of Seven industrial nations expressed concern Oct. 27 about the yen's ``excessive volatility'' and Japan's Finance Minister Shoichi Nakagawa said the same day that his government was ready to act if needed to arrest the currency's recent gains.
``Selling orders for the yen are piling up,'' said Mitsuru Sahara, senior currency sales manager at Bank of Tokyo- Mitsubishi UFJ Ltd., a unit of Japan's biggest publicly traded lender. ``Stocks are looking strong, and that takes some safe- haven flows away from the yen. A possible BOJ rate cut is also a negative.''
The yen may decline to 99.79 per dollar today, he said.
By MICHAEL R. CRITTENDEN and JESSICA HOLZER OCTOBER 30, 2008
WASHINGTON -- The U.S. government's latest plan to aid struggling homeowners could move as many as three million people into more-affordable mortgages, according to people familiar with the effort.
The proposal, which has been designed by the Treasury Department and Federal Deposit Insurance Corp., is close to being finalized. Estimated to cost between $40 billion and $50 billion, the plan would have the government agree to share a portion of any losses on a modified mortgage offered by lenders.
Funding for the plan could potentially come out of the $700 billion financial-rescue program authorized by Congress earlier this month. The plan, which was previewed during Congressional testimony last week, would represent one of the most aggressive and sweeping moves to address the nation's foreclosure mess, among the last elements of the crisis yet to be addressed by concerted government intervention.
Corinne Hirsch, a spokeswoman with the White House's Office of Management and Budget, said the program "is currently in a White House policy process," suggesting it's in the final stages of being reviewed. Treasury spokeswoman Jennifer Zuccarelli said "the administration is looking at ways to reduce foreclosures."
FDIC spokesman Andrew Gray said: "While we have had productive conversations with Treasury and the administration about options for the use of credit enhancements and loan guarantees, it would be premature to speculate about any final framework or parameters of a potential program."
The program is one of a series of ideas under consideration designed to address the root causes of the financial crisis.
At a conference Wednesday, FDIC Chairman Sheila Bair, who first suggested such a plan, said policy makers need to take additional action to help people stay in their homes, in order to prevent the continued downward spiral of the housing market. "Everyone in Washington now agrees that more needs to be done to help homeowners," she said. Ms. Bair noted the FDIC was working to implement a framework for systematically modifying loans.
The legislation authorizing the Troubled Asset Relief Program required Treasury to take steps to help homeowners avoid foreclosure. As many as 7.3 million American homeowners are expected to default on their mortgages between 2008 and 2010, with 4.3 million of those losing their homes, according to Moody's Economy.com, a research firm.
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China gears up for potential net capital outflows
It will tighten checks on cross-border capital flows and cash transfers
Bloomberg
29 October 2008
China needs to prepare for any potential net outflows of capital and form a mechanism to manage crises caused by the global financial turmoil, the nation’s top currency regulator said.
The State Administration of Foreign Exchange (SAFE) will tighten checks on cross-border capital flows through the services trade and cash transfers by individuals in and out of the country, according to a statement posted on its website.
The country should ‘prepare for risks of potential reversal in international payments and have contingency plans’, according to the statement.
China approved new foreign-exchange management rules in August, allowing the government to take ‘necessary safeguarding and control’ measures to cope with an imbalance in international payments or economic crises.
The nation is at risk of ‘massive outflows’ of capital if expectations for the yuan appreciation turn around, the central bank said in a report released in June.
Gains in the currency, described by the International Monetary Fund as ‘substantially undervalued’, have stalled against the dollar since mid-July.
In yesterday’s statement, SAFE also forecast the world economy was likely to slow. China will make efforts to boost domestic demand and maintain ‘stable and relatively fast’ economic development, the currency regulator said.
The nation will use a combination of fiscal, industrial, financial and tax policies, it said.
Growth in China’s capital and financial account surplus slowed by 20 per cent in the first half of the year to US$71.9 billion from a year earlier, the statement said. A surplus or deficit in the account measures investment flows.
Capital outflows from the service trade exceeded inflows by US$3.3 billion, increasing from US$3.1 billion a year ago, SAFE said.
The surplus from the current account, which measures goods and services, increased 18 per cent to US$191.7 billion in the first six months.
China holds the world’s biggest foreign-exchange reserves, according to data compiled by Bloomberg. The nation’s reserves totalled US$1.9 trillion as of September.
Meanwhile, Zhou Zhengqing, a former China Securities Regulatory Commission chairman, said China should restrict short selling in its stock market, which has slumped almost 70 per cent this year.
Citigroup, Credit Suisse Link Loans to Swaps in Shift
By Pierre Paulden and Caroline Hyde
Oct. 29 (Bloomberg) -- Citigroup Inc. and Credit Suisse Group AG are among banks tying corporate loan rates to credit- default swaps, raising borrowing costs and exposing companies to derivatives accused of crippling the financial system.
Nestle SA, the biggest food producer, Nokia Oyj, the largest mobile-phone maker, FirstEnergy Corp., the Ohio-based owner of electric utilities, and at least three other companies bowed to banks' demands to link the interest rate on credit lines to the swaps, which are used to bet on borrowers' likelihood of default.
Banks are toughening terms following $678 billion in writedowns and losses, rising funding costs and a jump in companies drawing on lines they'd already negotiated. Before markets seized up this year, most rates on $6 trillion of revolving loans were based on a borrower's debt rating and priced at an amount over the London interbank offered rate.
``We want banks to be able to provide credit and liquidity to a company like ourselves and they're only going to be willing to do that if they feel it has market pricing built into it,'' Randy Scilla, FirstEnergy's assistant treasurer, said in a phone interview from Akron, Ohio.
Companies such as FirstEnergy may have little choice but to accept the new terms. Banks arranged $603 billion of loans in the U.S. this year through yesterday, down from $1.73 trillion in 2007, according to data compiled by Bloomberg. Even a plan by U.S. Treasury Secretary Henry Paulson to buy $250 billion of shares in financial companies as part of a global injection of $3 trillion into capital markets may not be enough to stem the lending decline.
`That's Crazy'
The inclusion of the swaps shows that banks are shifting away from setting loan pricing by relying on debt ratings and Libor, a benchmark rate that is set each day in London by tallying the cost of 16 banks to borrow from each other. Three- month Libor, the typical benchmark for loans, rose to 4.82 percent on Oct. 10, the highest this year, as markets froze. The rate was set at 3.42 percent today.
The move to swap-based pricing may leave companies exposed to fluctuations in instruments that aren't listed on government- regulated exchanges.
``That's crazy,'' said Lynn Tilton, chief executive officer of $6 billion private-equity firm Patriarch Partners in New York, which loans or lends money to more than 70 companies. ``This will accelerate the downward spiral of market prices and raise borrowing costs to unsustainable levels.''
FirstEnergy
The default swaps were created so bondholders and banks could buy protection against a borrower's inability to repay debts. The market ballooned to more than $60 trillion in the last decade as investors used the instruments to bet on companies. The Securities and Exchange Commission is probing allegations trading helped create a panic that caused the collapse of Lehman Brothers Holdings Inc.
FirstEnergy, with utilities in Ohio, Pennsylvania and New Jersey, agreed this month to link interest rates on a $300 million credit line to the cost of Libor as well as the sum of the spread on its default swaps and those of Credit Suisse, according to a regulatory filing.
Loans from the Zurich-based bank would require total interest payments of about 6 percentage points over Libor if the power company draws on the bank line, according to regulatory filings and Bloomberg data. That's almost 14 times the spread on a $2.75 billion credit line the company negotiated in 2006.
`Unprecedented Times'
The utility would pay Libor plus 3 percentage points to draw on the line, according to company filings. Based on yesterday's levels, FirstEnergy would be charged an additional 1.70 percentage points, reflecting the levels of its credit- default swaps, and another 1.35 percent to account for the bank's own spread, according to Scilla.
Pricing on the loan will change as Libor and the swap spreads on Credit Suisse or FirstEnergy move.
Spreads on FirstEnergy's default swaps reached a record high of 1.80 percentage points on Oct. 20, up from 0.48 percentage points a year ago and 0.12 percentage points in February 2007, according to CMA Datavision. Credit Suisse's have risen threefold since December.
``We're in unprecedented times right now,'' Scilla said. FirstEnergy doesn't anticipate needing to borrow from the line, he said.
Swings in credit-default swap prices can be more pronounced than a company's perceived nonpayment risk would suggest, said John Grout, policy and technical director at the U.K.'s Association of Corporate Treasurers in London.
Cap Included
Some companies, including Nestle and NiSource Inc., which owns Indiana's largest gas utility, convinced banks to include a cap on the level of its swaps.
Vevey, Switzerland-based Nestle is seeking to refinance 6 billion euros ($7.7 billion) of debt, according to bankers familiar with the discussions. It wants to set up a backup for a commercial-paper program that's ``not intended'' to be drawn down, said Roddy Child-Villiers, head of investor relations. The debt being arranged by Citigroup will be linked to a percentage of the company's default swaps. Jeffrey French, a London-based spokesman for Citigroup, declined to comment.
NiSource Finance Corp., the Merrillville, Indiana-based company's finance arm, agreed last month to a $500 million revolving credit line arranged by Barclays Plc. The line is priced at Libor plus 85 percent of the 30-day average of the company's credit-default swap rate, according to spokesman Tom Cuddy. The swap price has a ceiling of 1.75 percent and a floor of 1.25 percent, he said. Bank of America Corp. and JPMorgan Chase & Co. are among the six other banks that agreed to provide the line, according to a filing.
`Illogical Flaw'
Nokia is also paying a spread over Libor based on its derivatives, according to Arja Suominen, a Helsinki, Finland- based spokeswoman.
Credit lines were once seen mainly as emergency funds to be tapped as a last resort. Since markets tightened last year, at least 36 companies hurt by the slowing economy and an inability to tap commercial paper or bond markets have borrowed $30 billion on previously negotiated lines, according to Pacific Investment Management Co. in Newport Beach, California.
``Historically there's been an illogical flaw in the price of revolving credit facilities and backstop loans in particular, they were priced very cheaply as they were never meant to be drawn down,'' said David Slade, head of European leveraged finance at Credit Suisse in London. ``But now, in the current environment, these lines are being used and banks need to be properly recompensed.''
Libor Concerns
Goodyear Tire & Rubber Co., the largest U.S. tiremaker, drew $600 million from its credit line last month after it couldn't gain access to $360 million of cash in a money market fund. The Akron, Ohio-based company, rated BB- by and Standard & Poor's, is paying 1.25 percentage points more than Libor, or 4.72 percentage points. It would pay about 12 percentage points if it were to negotiate a new loan today, based on the average of similarly rated companies in an S&P index. Spokesman Keith Price declined to comment.
Concerns that Libor may not truly reflect borrowing costs helped bring about the change. The rate came under scrutiny as the debt-market seizure deepened. Some lenders may have provided numbers to the British Bankers' Association that underestimated their cost of funds, the Bank for International Settlements in Basel, Switzerland, said in March. The BBA said on April 16 that any member deliberately understating rates would be banned.
Banks are also seeking to shift from a reliance on credit ratings amid concern Moody's Investors Service and S&P have been too slow to act when credit quality deteriorates.
Push For Change
The push for the change is coming as the U.S. government and New York Attorney General Andrew Cuomo investigate whether the swaps were manipulated by short sellers to spread false rumors about financial companies. People who sell short hope to profit by repurchasing the securities later at a lower price and returning them to the holder.
``We're going through a transformation right now with regard to pricing of credit,'' FirstEnergy's Scilla said. ``It wasn't long ago that banks were basically giving away credit. That could be part of the reason we're in the problem we're in today. And those days are gone.''
Dubai runs out of gold on Diwali rush
By Sunita Menon
October 27, 2008
Dubai: A massive rush at jewellery shops has led to a shortage of gold at some outlets, prompting some shopkeepers to overcharge customers, Gulf News has learnt.
Jewellers are seeing a huge rush of buyers as gold prices are currently at a two-year low.
Shopkeepers said the rush, a combined result of the Hindu festival of Diwali and lower prices. has resulted in a shortage of gold bars. But they denied any hoarding by outlets.
"There is enough gold available in the market and sales are at their peak over the last couple of days with the market falling drastically," jewellers said across the emirate.
Gulf News received complaints from readers who encountered jewellers charging more than the market price.
A buyer who asked not to be named said: "The price of gold prompted me to visit the Gold Souq in Sharjah. However, most retailers claimed they were sold out. Outlets where gold was available were openly overcharging. They said it was in short supply. The price of 24 carat stood at Dh88.75 but they were openly charging Dh92.50. This is clearly an unfair practice."
Shubash Golati, a buyer, said: "It is a tradition to buy gold during the four-day Indian festival of Diwali. I bought 22 carat jewellery worth Dh5,000. I wanted to buy a 100 gramme gold bar but was told that it is out of stock."
Shortage
H.R. Bafna, financial controller from Siroya Jewellers, said a physical shortage of gold is happening worldwide.
He said: "It is matter of physical delivery. It might take a day or two to replenish the stocks. But I am sure that there is no hoarding by jewellers because the market rate has dropped. This has resulted in a tremendous rush of buyers and so the gold bars are out of stock."
In reply to buyers' complaints that gold outlets are cashing in on the limited stocks and buyer rush, Bafna said: "There is a possibility, but I can't confirm this."
A counter salesman at the Joy Alukkas outlet in Bur Dubai said for the last couple of days there have been no fluctuations in gold prices.
He said: "From a customer's point of view this is an excellent time to buy."
He too denied any hoarding taking place. "If the demand for gold is high it is but obvious that some stocks will run out. Some retailers take advantage of this."
Oil's slide threatens future supply
October 29, 2008
Vienna -- The slump in oil prices has spread relief among consumers and fuel-reliant industries, but also is squeezing the companies who could invest in new sources of oil -- spurring concerns that prices will prompt them to shelve investments.
Industry executives warn that could mean the world will face a dramatic ramping up of prices as soon as the global economy, and demand, begins to rebound.
"Low oil prices are very dangerous for the world economy," said Mohamed Bin Dhaen Al Hamli, the United Arab Emirates' energy minister, speaking Tuesday at an oil-industry conference.
"We need an adequate and reasonable oil price that will continue to stimulate investment."
With prices now languishing, he said, "a lot of projects that are in the pipeline are going to be reassessed."
The global economic slowdown has driven down demand for oil, pushing crude prices to levels not seen since the spring of 2007.
In an attempt to stem the decline, the Organization of Petroleum Exporting Countries agreed last week to slash output by 1.5 million barrels a day -- its biggest single reduction in almost eight years.
But the move didn't stop the slide. US benchmark crude for December delivery fell 49 cents on Tuesday, or 0.78%, to $62.73 on the New York Mercantile Exchange.
That is down about 57% from its record high of $ 145.29 in July.
Nobuo Tanaka, head of the International Energy Agency, the Paris-based watchdog, was one of several experts at the annual Oil and Money conference here predicting that the industry could be setting the stage for yet another supply-and-demand whiplash down the road.
"We're concerned that supply won't catch up with demand after this crisis," Mr. Tanaka said.
"The supply crunch may come again, but in a more acute way." The price of crude began its rally five years ago, when an oil industry that hadn't invested enough in new capacity during the years of low prices failed to cope with surging demand from the booming economies of China and India.
That scenario could now play out all over again.
"I hope we don't go through the same cycle," said Mr. Al Hamli.
In two years' time, "we could see much higher prices than we saw three months ago, if the investments are not going through," said Fatih Birol, the IEA's chief economist.
To be sure, most big oil companies have shown no sign of trimming their investments. Royal Dutch Shell PLC says it is sticking to its capital-investment target of $36 billion for this year -- the largest in its history -- and Chevron Corp. is also charging ahead with its $ 23 billion program.
Most of the majors' big projects are designed to break even at prices substantially lower than the current cost of crude. "I don't think there will be major changes in investment," said Paolo Scaroni, chief executive of Italian oil company ENI SpA.
"Maybe in unconventionals, but not conventional oil projects." Yet it is precisely the so-called unconventionals that have become a big focus of the oil companies' activities in recent years.
Billions of dollars have been poured into squeezing crude out of Canada's gooey tar sands, converting Venezuela's heavy oil, and pumping ultra-sour natural gas in the Middle East. Some of those projects could now be scaled back or even abandoned, conference speakers said.
Already, some independent companies producing natural gas in the US have announced cuts in investment.
"If this oil price stays low, alternative energy, Canadian oil sands, Brazilian new discoveries will be out of the market," said Abdalla Salem El-Badri, OPEC's secretary-general.
Though forecasters expect demand for oil to be flat or even negative next year in the rich world, it is likely to grow in countries like China, whose economy has so far weathered the world-wide financial crisis.
Mr. Birol said falling oil prices will also deter investment in alternative energy. Low-carbon technologies such as wind and solar were economically competitive only so long as oil prices were high.
Countries set to meet in Copenhagen next year to agree a new deal on curbing emissions may decide it is a "luxury" in view of the financial crisis.
Lower oil prices are "not good news for climate change," he said.
Goldman chief sought tie-up talks with Citi
By Henny Sender in Tokyo and Francesco Guerrera in New York
October 27 2008
Lloyd Blankfein, Goldman Sachs' chief executive, called Vikram Pandit, his Citigroup counterpart, last month to discuss a merger, in a dramatic example of the secret manoeuvring that preceded the government bail-out of the financial sector.
The call, which was made at the tentative suggestion of the regulatory authorities or at least with their blessing, was made shortly after Goldman had won surprise approval to convert itself from a securities firm into a commercial bank on September 21, according to several people familiar with the events.
They added that the conversation was brief as Mr Pandit rejected the proposal at once.
A deal would have been structured as a Citi takeover of Goldman. In spite of the slide in Citi's shares, its market value around the time of Mr Blankfein's call was $108bn, roughly double Goldman's capitalisation.
A merger between Citi and Goldman would have resulted in thousands of redundancies in their investment banking units and would have forced out several senior executives. Combining the two companies' widely different cultures would also have been a challenge.
However, uniting Goldman's strengths in risk management, advisory services and proprietary trading with Citi's large retail deposit base and huge corporate client network could have created a powerful financial giant.
Industry insiders argue that such a deal could have also benefited the US financial system by creating a counterpoint to JPMorgan Chase and Bank of America, two institutions that have significantly expanded during the recent raft of government-induced rescue deals.
Goldman executives were not fully convinced of the merits of a deal with Citi but felt there was little downside in placing a call.
The possibility of serious merger talks between Citi and Goldman became a non-starter after this month's decision by the US Treasury to inject $125bn of capital in the two companies and seven rivals. The move was designed to allay investors' fears of further failures among large US financial groups.
But Mr Blankfein's call illustrates the pressure faced by Wall Street groups to consider bold strategic moves before the government bail-out of the sector.
Goldman has long wrestled with the question of whether to combine with a commercial bank to maintain its hold on big corporate clients by boosting its lending capability.
However, its success in the years before the current turmoil had reduced the need for such a merger.
At the same time, Citi traditionally felt it did not need another securities group because it already had a large and established investment bank.
But over the past 18 months Citi has suffered more than $65bn in writedowns and credit losses and raised more than $70bn from outside investors as its shares have plummeted by more than 70 per cent. Goldman has fared much better but was forced to convert into a bank holding company to gain permanent access to Federal Reserve funds and quell market fears over its business model. Shortly afterwards it raised $10bn from investors including Warren Buffett.
Goldman, Citi and regulators declined to comment.
This month, Gary Crittenden, Citi's chief financial officer, told analysts the group had had recent conversations with three banks. He said two - Washington Mutual, which was bought by JPMorgan, and Wachovia, which went to Wells Fargo - were known, but a third had not been "talked about publicly in any way".
Fed Opens Swaps With South Korea, Brazil, Mexico
By Steve Matthews and William Sim
Oct. 30 (Bloomberg) -- The Federal Reserve agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore, expanding its effort to unfreeze money markets to emerging nations for the first time.
The Fed set up ``liquidity swap facilities with the central banks of these four large systemically important economies'' effective until April 30, the central bank said yesterday in a statement. The arrangements aim ``to mitigate the spread of difficulties in obtaining U.S. dollar funding.''
South Korea's benchmark stock index had its biggest gain since at least 1980, the won surged and the cost of protecting Asia-Pacific bonds from default tumbled on optimism the measures will prevent the global credit crisis from upending financial markets. The Fed and China cut interest rates yesterday, followed by Hong Kong and Taiwan today.
``The swap lines will help unclog the liquidity pipeline and that action is boosting markets even more than'' the Fed's rate cut, said Venkatraman Anantha-Nageswaran, head of research at Bank Julius Baer & Co. in Singapore. ``It's a step in the right direction and prevents things from getting worse.''
South Korea's Kospi Index surged 10.5 percent to 1072.81 at 12:33 p.m. in Seoul. The won jumped 10 percent against the dollar. Singapore's Straits Times Index climbed 3.6 percent.
The cost of protecting Asia-Pacific bonds from default tumbled, with the Markit iTraxx Asia credit-default swap index of 50 borrowers falling the most since its was created in September 2007.
IMF Credit Lines
The Fed announcement coincided with a decision by the International Monetary Fund to almost double borrowing limits for emerging market countries while waiving demands for economic austerity measures.
The Fed and IMF actions ``show international resolve to support strong performing emerging-market economies adversely impacted by the current financial market turbulence,'' U.S. Treasury Secretary Henry Paulson said in a statement.
Emerging-market investors have created ``massive demand for dollars and a reduction of liquidity in other currencies'' by going back to investing in the U.S. currency, said David Spegel, head of emerging-market strategy at ING Financial Bank NV in New York.
The Fed swap lines ``are designed to help restore liquidity so that a vicious negative spiral doesn't occur,'' he said.
The yield premium on emerging-market dollar bonds over U.S. Treasuries narrowed yesterday by 61 basis points, or 0.61 percentage point, to 7.21 percentage points, according to JPMorgan Chase & Co.'s EMBI+ index. The spread has jumped 5.72 percentage points from a record low of 1.49 percentage points in June 2007, and reached its widest since 2002 earlier this month.
Emerging Markets
``The Fed is there to support large emerging markets that have done their homework over the past several years like South Korea, Brazil, Singapore and Mexico,'' said Alonso Cervera, a Latin America economist with Credit Suisse Group in New York. ``These are large, relevant emerging countries that have followed responsible fiscal and monetary policies for the past several years and now are going through tough times.''
The Fed also created this week a $15 billion swap line with its New Zealand counterpart and removed limits this month on four existing swap lines, including one with the European Central Bank. The Fed set up a $10 billion arrangement with Australia's central bank last month and then tripled it to $30 billion.
`Hoped-For Result'
``The hoped-for result is that we don't see the global financial crisis worsen still more,'' said Lyle Gramley, a former Federal Reserve governor who is now senior economic adviser at Stanford Group Co. ``The Fed is making dollars available to the central banks of these countries who are trying to meet the needs of their banking systems.''
The Bank of Korea cut interest rates by a record amount on Oct. 27 and the government pledged to guarantee local banks' debts to help lenders struggling to access foreign funds. Stocks and the won tumbled last week, prompting concern the country may face a currency crisis a decade after the IMF organized a $57 billion bailout to help repay overseas debt.
The swap line with the Fed ``will expand our foreign- exchange reserves and help stabilize the currency market,'' Bank of Korea Governor Lee Seong Tae told reporters in Seoul today. ``We'll also try to cooperate with other central banks to stabilize global and local financial markets.''
Dollar, Yen Fall as Rate Cuts, Stock Rally Boost Risk Appetite
By Stanley White
Oct. 30 (Bloomberg) -- The dollar and the yen fell as a wave of global interest-rate cuts sparked a rally in Asian stocks, bolstering demand for higher-yielding assets.
The greenback slid for a third day against the euro after the Federal Reserve reduced its target lending rate to the lowest in a half-century. The yen dropped to a one-week low versus the European currency on speculation the Bank of Japan will lower borrowing costs when it meets tomorrow. South Korea's won jumped the most in a decade after the Fed extended swap lines to alleviate a shortage of dollars in the nation.
``The significant easing of monetary policy will help the global growth outlook,'' said Tony Morriss, a senior currency strategist at Australia & New Zealand Banking Group in Sydney. ``We're seeing a major correction of the U.S. dollar and Japanese yen. They were among the key beneficiaries of the flight to quality that's being unwound.''
The dollar fell to $1.3292 per euro, the lowest since Oct. 21, and traded at $1.3196 as of 2:10 p.m. in Tokyo from $1.2963 late yesterday. The yen weakened to 98.35 per dollar from 97.39. The euro gained to 129.80 yen from 126.26 yen. It earlier reached 131.04, the weakest since Oct. 22.
The won jumped 14 percent to 1,253.55 per dollar, the biggest advance since January 1998. The currency two days ago sank to a decade-low of 1,495 as mounting risk aversion prompted investors to dump emerging-market assets.
The ICE's Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and the Swedish krona, fell 2 percent, extending the biggest decline since October 1998. It touched the highest level since April 2006 on Oct. 28.
Stocks Rally
The MSCI Asia-Pacific Index of regional shares rose 7.7 percent for a third day of gains. Japan's Nikkei 225 Stock Average climbed 7.6 percent and South Korea's Kospi index surged 12 percent, the biggest gain since at least 1980.
U.S. policy makers reduced the fed funds target by a half- percentage point to 1 percent yesterday, matching a level reached in June 2003 and before that during the Dwight Eisenhower administration in the late 1950s.
Gross domestic product shrank by 0.5 percent in the third quarter for its biggest decline since the 2001 recession, data due at 8:30 a.m. today in Washington will show, according to a Bloomberg News survey of economists.
Rate Cuts
``The Fed is doing what it can given a weakening U.S. economy,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. based in Tokyo. ``This puts the focus on the interest-rate differential, and that will force the dollar to go lower.''
The U.S. central bank has cut its benchmark rate from 5.25 percent in the past 13 months and created six lending programs channeling more than $1 trillion into the financial system to limit the severity of a looming recession.
``The easing bias in the U.S. is going to continue,'' said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments in Boston.
The Australian dollar rose to 68.30 U.S. cents from 66.81 cents late yesterday in New York on speculation a rate cut in China, the world's largest consumer of industrial metals, will boost demand for Australia's exports.
The People's Bank of China yesterday reduced its benchmark one-year lending rate to 6.66 percent from 6.93 percent. Taiwan's central bank followed suit today, lowering the discount rate on 10-day loans to banks to 3 percent from 3.25 percent.
Yen Selling
The yen fell against higher-yielding currencies as Asian stocks gained on speculation monetary officials across the globe can thaw a seizure in credit markets.
Against the Australian dollar, the yen fell to 67.13 from 65.04 late yesterday in New York. It also declined to 58.32 per New Zealand dollar from 57.02. Interest rates are 0.5 percent in Japan, 6 percent in Australia and 6.5 percent in New Zealand.
The yen also declined as investors speculated that the Bank of Japan will cut borrowing costs tomorrow. The currency slumped the most since 1974 and stocks rallied after the Nikkei newspaper said Oct. 28 that policy makers are leaning toward lowering rates.
The Group of Seven industrial nations expressed concern Oct. 27 about the yen's ``excessive volatility'' and Japan's Finance Minister Shoichi Nakagawa said the same day that his government was ready to act if needed to arrest the currency's recent gains.
``Selling orders for the yen are piling up,'' said Mitsuru Sahara, senior currency sales manager at Bank of Tokyo- Mitsubishi UFJ Ltd., a unit of Japan's biggest publicly traded lender. ``Stocks are looking strong, and that takes some safe- haven flows away from the yen. A possible BOJ rate cut is also a negative.''
The yen may decline to 99.79 per dollar today, he said.
Relief Nears for 3 Million Strapped Homeowners
By MICHAEL R. CRITTENDEN and JESSICA HOLZER
OCTOBER 30, 2008
WASHINGTON -- The U.S. government's latest plan to aid struggling homeowners could move as many as three million people into more-affordable mortgages, according to people familiar with the effort.
The proposal, which has been designed by the Treasury Department and Federal Deposit Insurance Corp., is close to being finalized. Estimated to cost between $40 billion and $50 billion, the plan would have the government agree to share a portion of any losses on a modified mortgage offered by lenders.
Funding for the plan could potentially come out of the $700 billion financial-rescue program authorized by Congress earlier this month. The plan, which was previewed during Congressional testimony last week, would represent one of the most aggressive and sweeping moves to address the nation's foreclosure mess, among the last elements of the crisis yet to be addressed by concerted government intervention.
Corinne Hirsch, a spokeswoman with the White House's Office of Management and Budget, said the program "is currently in a White House policy process," suggesting it's in the final stages of being reviewed. Treasury spokeswoman Jennifer Zuccarelli said "the administration is looking at ways to reduce foreclosures."
FDIC spokesman Andrew Gray said: "While we have had productive conversations with Treasury and the administration about options for the use of credit enhancements and loan guarantees, it would be premature to speculate about any final framework or parameters of a potential program."
The program is one of a series of ideas under consideration designed to address the root causes of the financial crisis.
At a conference Wednesday, FDIC Chairman Sheila Bair, who first suggested such a plan, said policy makers need to take additional action to help people stay in their homes, in order to prevent the continued downward spiral of the housing market. "Everyone in Washington now agrees that more needs to be done to help homeowners," she said. Ms. Bair noted the FDIC was working to implement a framework for systematically modifying loans.
The legislation authorizing the Troubled Asset Relief Program required Treasury to take steps to help homeowners avoid foreclosure. As many as 7.3 million American homeowners are expected to default on their mortgages between 2008 and 2010, with 4.3 million of those losing their homes, according to Moody's Economy.com, a research firm.
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