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Saturday 18 October 2008
Private equity firms diversify to ride market dips
Gone were the days when it was possible to buy companies at realistic prices with cheap debt, and rely on balance-sheet restructuring and rising valuations to create equity value.
Private equity firms diversify to ride market dips
By LYNETTE KHOO 18 October 2008
Gone were the days when it was possible to buy companies at realistic prices with cheap debt, and rely on balance-sheet restructuring and rising valuations to create equity value.
Private equity firms now have to look long and hard at how to create value for investors amid current market contractions, says a PricewaterhouseCoopers report released yesterday.
To do so, they need to diversify their portfolios and help businesses achieve internal growth through organisational changes and operational improvements, the PWC report says.
Calling this an inflexion point for the industry, the report notes that larger funds are now broadening their investment criteria and geographical horizons. Longer holding period for portfolio companies has also prompted private equity managers to manage their portfolio more actively.
Private equity firms that do not already have appropriate in-house expertise are hiring operationally experienced managers and specialists in organisational change and turnarounds, to complement existing in-house resources.
‘The private equity industry is witnessing a dramatic downturn in deal activity and is suffering from a lack of leverage caused by the turmoil in the financial markets,’ said Ong Chao Choon, Asia-Pacific transactions leader at PWC.
‘This has a major impact on the ability to finance larger transactions but also creates a lack of buyers for existing portfolio companies,’ he added.
According to data from Dealogic, private equity firms have tightened their belts this year. Announced financial sponsor buyouts worldwide skidded 72 per cent from a year ago to US$178.1 billion so far in 2008, the lowest first nine-month period since 2003.
But private equity firms had it good last year. According to PWC, some US$297 billion of private equity and venture capital was invested globally in 2007 - a 26 per cent increase from 2006.
In Asia-Pacific, private equity investments jumped 36 per cent to US$86 billion in 2007. Singapore moved up six places to become the 10th most popular destination for private equity investment globally and the third most popular in Asia-Pacific, after such funds invested here surged 157 per cent from 2006 to US$5.35 billion.
‘The amounts invested in individual countries were small by the standards of today’s huge transactions, but they undeniably show a significant shift in investment,’ the PWC report says.
North America remains the largest private equity market. Funds raised climbed 18 per cent to US$302.8 billion last year. Some US$107.1 billion was invested in the country, up 35 per cent on 2006.
While shifting economic conditions have prompted private equity firms to diversify their investment strategies, the PWC report warns that this must be accompanied by appropriate controls. As they forge new businesses and capital sources, they will have to make sure that internal processes support such growth, it adds.
SEOUL, South Korea (AP) - As financial turmoil spreads around the world, South Korea may prove to be one of the most vulnerable countries in Asia.
With its banks facing potential trouble, its currency and stocks reeling and consumer debt on the rise, the country's woes have stirred memories of the regional economic crisis that struck it more than a decade ago.
Now, amid criticism that officials have done too little too late, government leaders are racing to restore confidence in the country's economy.
On Friday, the government held an emergency meeting to discuss how best to respond to the market turmoil. In recent days, officials have sought to reassure their fellow citizens that another collapse isn't in the making.
Afterwards, the government indicated an announcement could come Sunday.
"Korea's foreign exchange reserves amount to $240 billion, all of which are readily available at anytime," President Lee Myung-bak told the nation on Monday in a radio address. That figure was 27 times larger than when the Asian financial crisis hit the country in 1997, he said.
Currency reserves can be wielded for varied purposes, including to defend the value of a country's currency and generally shore up the financial system.
Despite Lee's reassurance, some analysts have sounded alarms about South Korea, most notably its banks.
They say the global credit crunch is making it hard for local banks to acquire dollars and other foreign currency needed to refinance activities such as foreign-denominated loans to domestic companies and cite personal debt levels as a cause for worry.
Also, the country's broadest measure of trade -- the current account -- is expected to record an annual deficit for the first time in a decade, meaning South Korea is spending more on goods, services and investments from overseas than it sells abroad.
South Korean stocks have been no exception to the worldwide rout in equities spurred by the U.S. credit meltdown, falling 38 percent this year. They had already dropped 22 percent even before the collapse last month of Lehman Brothers Holdings Inc., the U.S. investment bank.
South Korea's currency was also having a bad 2008 even before declines against the U.S. dollar accelerated amid the crisis. The won has plummeted almost 30 percent this year against the dollar and had its worst single day -- a drop of 9.7 percent Thursday -- since Dec. 31, 1997.
"Ongoing stress in the Korean financial market seems to be a mixture of domestic credit crisis, balance of payment crisis and global credit crisis," Citibank Korea economist Oh Suk-tae wrote in a report last week.
Standard & Poor's Ratings Services said this week it may downgrade the credit ratings on some of South Korea's biggest banks, citing "a more than 50 percent chance that the global liquidity squeeze could threaten Korean banks' foreign currency funding."
"We expect the stress on the Korean financial system to be prolonged," S&P analyst Kim Eng Tan said Friday.
South Korea's consumer debt levels soared in 2003 after the government encouraged credit card use to spur the economy, and rey are rising again.
National Information & Credit Evaluation Inc., a credit information provider, said in its quarterly magazine that an index monitoring South Korean household debt was at 75.1 in June, down from 87.2 the previous year. A reading below 80 implies "caution required."
Some analysts, such as Alaistair Chan of Moody's.com, call "overblown" any fears that South Korea could fall into a full-fledged meltdown such as the 1997-98 Asian contagion, citing its "vast foreign reserves."
Those reserves, while indeed formidable, have been falling as the Bank of Korea, the central bank, is believed to have been using them to try and stem the won's declines by purchasing dollars.
S&P expressed disappointment Wednesday that "no wide-scale government measure has been announced" such as "blanket deposit guarantees and underwriting of interbank lending risks" implemented in other countries.
Minister of Strategy and Finance Kang Man-soo said Friday after the special meeting that the government would announce what he called "pre-emptive, decisive and sufficient" measures on Sunday.
The government has maintained that its banks are healthy and says the country's situation is not dire.
"Korea's banking sector is sound in terms of asset strength, capital adequacy, profitability, and other soundness measures," the Financial Supervisory Service said last week.
Besides its hefty foreign currency reserves -- the world's sixth largest -- the government says other factors are in its favor such as manageable corporate debt levels and an expected turnaround in its current account deficit --a broad measure of trade in goods and services -- as early as this month.
Goldman Sachs economist Kwon Goohoon says South Korea's accumulated budget surpluses since 2000, low public debt and sharply falling commodity prices are all pluses.
Nevertheless, he expects the economy to slow to annual growth of 3.9 percent next year, the lowest since 2003.
Tom Byrne, a senior vice president and regional credit officer with Moody's Sovereign Risk Group, said Friday that South Korean banks were under "severe pressure," but expressed confidence the government's reserves were adequate.
"At the same time, the unprecedented turmoil in the global financial system makes seeing through this exceptional crisis, let alone the expected downturn in the economic cycle, very difficult," he said.
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Associated Press writers Jae-soon Chang and Jae-hyun Jeong contributed to this report.
China to help Pakistan out of economic crisis - envoy
Fri Oct 17, 2008
ISLAMABAD (Reuters) - China has assured Pakistan of help to get out of its economic crisis, the Pakistani ambassador to Beijing said on Friday, but he gave no details and did not say if China had agreed to urgently needed new loans.
Pakistan, a nuclear-armed U.S. ally, is struggling to come to grips with a financial crisis. Islamabad's rapidly dwindling foreign reserves are at their lowest level since 2002.
It needs $3 billion to $4 billion or it risks defaulting on a $500 million bond due to mature in February, economists say.
President Asif Ali Zardari, the widower of former prime minister Benazir Bhutto, ended a four-day visit to China on Friday during which Premier Wen Jiabao pledged cooperation.
"There will be a negative impact on Pakistan of the world financial crisis. We have to make efforts ourselves but China has assured us, and they will help us to come out of this crisis," said Masood Khan, Pakistan's ambassador to China.
The Washington Post said on Thursday Pakistan was seeking up to $3 billion from China. The Financial Times reported earlier that Zardari hoped to secure concessional loans of $500 million to $1.5 billion.
"There has always been cooperation between Pakistan and China in a specific framework, and this time too we have made efforts to increase bilateral cooperation through various existing mechanisms," Khan said. He did not elaborate.
Pakistan is facing a balance of payments crisis, inflation running at close to 25 percent and heavy government borrowing from the central bank to cover a budget deficit.
The rupee weakened 2.78 percent to a record low of 84.40 rupees to the dollar on Friday after reserves fell by $570 million and on pressure from import payments, dealers said.
The rupee has lost 27 percent against the dollar since the beginning of the year.
Zardari was due back in Pakistan late on Friday.
Shaukat Tarin, a respected banker appointed last week as economic troubleshooter, said he would hold a news conference on Saturday. He was travelling back from China with Zardari.
Tarin said on Monday he was sure Pakistan would fulfil upcoming debt obligations of $3 billion.
Zardari and Chinese President Hu Jintao signed 11 agreements on trade and economic cooperation on Wednesday.
Pakistani officials have also been to Washington and the Gulf to drum up support but there have been no firm commitments.
China agreed to provide $500 million in a concessional loan to help Pakistan meet balance of payment needs in April and the Asian Development Bank has also lent Pakistan $500 million.
The collapse in housing and construction has combined with the global financial crisis to create one of Spain's worst periods in decades.
When Romanian-born Ion Lacureanu migrated to Spain five years ago, he found himself in one the fastest-growing countries in the European Union. Spain's booming job market and average annual economic growth of 3 percent were the envy of the region. Soon the 38-year-old Lacureanu was flourishing as a self-employed construction worker in Valladolid, a city of 320,000. He earned €2,200 ($2,975) a month and had so much work he had to hire other workers to help him out.
He doesn't have to hire anyone anymore. "For the past six months I've just worked three or four days a month, and I've earned no more than [$473]," says Lacureanu. "There is almost no work."
Spain's decade-long construction boom began to run out of steam last year, and now the global financial crisis is drying up the international funding that financed the country's huge infrastructure investments. Antonio Argandoña, professor of economics at Barcelona's IESE business school, says the construction industry, which spurred gross domestic product growth in the last decade, is going to stall for the next five to seven years. That in turn will spark unemployment and drag down investment and consumer spending.
Loss of EU Subsidies
Making matters worse, the European Union also has cut back on its financial support for Spain, since the EU now has to shift subsidies to newer members in Eastern Europe. "We are in danger of a general economic collapse," says Argandoña. "We'll see negative growth within this year…This is a long and deep crisis." During the second quarter of 2008, Spain's GDP increased just 1.8 percent from the same period a year earlier, the lowest growth rate in more than a decade. The International Monetary Fund now forecasts GDP growth this year of just 1.4 percent, and a 2 percent decline in 2009.
The collapse in housing and construction has mingled with the global financial crisis to create one of Spain's worst periods in decades. The Ibex 35, the benchmark index of the Madrid stock market, is down more than 38 percent since January. Although Spanish commercial banks have less exposure to toxic loans than other countries, on Oct. 13 Spanish Prime Minister Jose Luís Rodríguez Zapatero drafted a $136 billion plan to help Spain's banks amid the global financial crisis. Until now, they have largely fared better than rivals in some other European countries, especially surging Santander, which has moved quickly in recent weeks to snap up weaker banks in Britain and the U.S.
Earlier this month, the government approved a $41 billion fund -- which may be extended to $68 billion -- to buy high-quality assets from banks, and raised bank deposit insurance from €20,000 to €100,000 in order to boost confidence.
These bold actions, though, may not be enough to stave off a deep downturn. The IMF recently forecast that Spain will enter a recession in 2009 -- its first since 1993 -- and said it "will be harder-hit than other European countries." The Spanish government's National Institute of Employment has already revealed that unemployment rate reached 11.3 percent in September, the highest level since 1997. The country probably will have more than 3 million people out of work by the middle of next year, and "we'll continue to be the top European country in terms of unemployment," says Rafael Pampillón, professor of economic environment and analysis of countries at Madrid's Instituto de Empresa business school. "Until the market buys all the houses [that have been built] -- and this will take two or three years -- employment won't grow again."
Hurting Everywhere
The housing bust already is spilling over to other industries such as furniture and home appliances, says Argandoña. Elías Muñoz, 55, owner of a small furniture store in Granollers, a city 20 miles north of Barcelona, says furniture sales in Spain have dwindled because of the crisis and the "huge lack of confidence." Thanks to business generated from his Web site, Muñoz has so far been able to offset the weakness in demand.
Other industrial and service sectors also are feeling the pinch. September sales of new cars declined more than 30 percent from the same month a year ago. Seat, a Spanish unit of Germany's Volkswagen, and other major automakers including General Motors and Ford are struggling to avoid layoffs in Spain.
Hotels and restaurants are being hit by lower consumer confidence and slackening tourism. Manuel Díaz-Obregón, 33, director of the Don Fadrique restaurant in downtown Seville, sees the recession at work every day. "About a year ago we used to serve 40 lunches a day, and now we serve just 30 or so," he says. "People think twice before ordering and look more at the price."
Shuttered Factories
The textile industry, too, has been widely affected. Already under enormous competitive pressure from Asia and Eastern Europe (the industry lost 61,000 jobs between 2003 and 2007), it may now see further losses due to Spain's domestic downturn. Case in point: Unión General de Trabajadores, a major Spanish trade union, announced on Oct. 8 that textile company Grupo Sáez Merino, owner of Spanish brand icons such as Lois Jeans, is about to shut its operations down and lay off its 350 employees. An employee who declined to be identified said, "The company is closing down, and nobody is allowed to give any kind of information about it."
Like immmigrant Ion Lacureanu, hundreds of thousands of Spanish baby boomers are now on the brink of losing their jobs. "Things have turned out pretty bad. I don't know how this is going to be fixed," Lacureanu says. Pampillón argues that greater liberalization of labor markets would give companies more incentives to hire people, while further privatizations of state companies could bolster growth. But "the solution is not easy," he adds. "The crisis will continue."
After Britain and the US injected massive amounts of capital into their banks, Switzerland has taken emergency measures to try to shore up its banking system. Sean Farrell reports
Friday, 17 October 2008
In an extraordinary move for a nation proud of its financial prudence and stability, Switzerland was forced to take emergency measures yesterday to shore up its two biggest lenders to prevent a collapse in confidence in the country's banking system.
The state will inject SFr6bn (£3.1bn) into UBS, its biggest bank, in return for a 9.3 per cent stake, and will allow UBS to unload $54bn (£31bn) of toxic assets, including sub-prime mortgages and Alt-A securities, into a fund controlled by the central bank.
Credit Suisse, the No 2 Swiss lender, obeyed instructions from the central bank by raising about SFr10bn from investors in the market, including the Qatar Investment Authority, which is already a big shareholder and is a major stakeholder in Barclays. The fundraising, which allows Credit Suisse to meet tough new Swiss capital rules, represented about 12 per cent of the bank's existing equity.
Switzerland had to act to underpin confidence in its prized banking system after Britain, the US and others announced massive capital injections into their major lenders. Without doing likewise, the Swiss banks would have been left exposed to market jitters and speculation.
The country of 7.5 million people houses SFr3.46trn of bank deposits, almost seven times its gross national product. That is less than Iceland, whose deposits are nine times GDP, but much higher than the UK where deposits are close to double GDP.
"It's clear that we have a confidence problem," Philipp Hildebrand, the Swiss National Bank's vice president, said. "It is notably the two large banks that are affected."
The woes of its banks, and UBS in particular, have rocked Switzerland, where the financial sector accounts for almost 15 per cent of output. The government said it did not intend to hold the stake in UBS for many years and hoped to sell it to private investors soon. It will impose changes in corporate governance and risk controls in return for the state's support.
The capital increase will lift UBS's tier one capital ratio to 11.5 per cent by the end of the year from 10.4 per cent. After its fundraising, Credit Suisse's tier one ratio would have been 13.7 per cent at the end of September, compared with the 10.8 per cent the bank reported.
The Swiss government also said it would follow other European governments by increasing its depositor protection scheme from the current SFr30,000 level. It stressed that the country's other banks were generally sound.
UBS said the government's measures should help it reverse withdrawals of client assets. Wealthy clients have been taking money out of the bank's core wealth management business because of a stream of writedowns at the investment banking division, which expanded into structured credit just before the market imploded in the summer of 2007.
Net outflows of SFr49.3bn hit the wealth management business in the third quarter, while the global asset management division leaked SFr34.4bn. The withdrawals increased as the financial crisis worsened in September after the bankruptcy of Lehman Brothers in the US. UBS recorded a small net profit of SFr296m for the third quarter, though it was helped by benefits from the reduced value of its own debt and tax gains.
UBS said its biggest need was to reduce its exposure to illiquid assets, whose plunging value has caused massive losses and shattered confidence in the bank, and that the central bank's fund would help it get back to running its business as normal. The investment bank made new writedowns and losses of $4.4bn on top of $42bn of writedowns since the start of the credit crunch.
"All European governments intervened and this left the Swiss banks at a competitive disadvantage," Dirk Becker at Kepler, the brokerage, told Reuters. "The Swiss have recapitalised their banks and made them the best capitalised banks in the world."
Credit Suisse saw strong inflows at its wealth management business of about SFr14bn in the quarter but made a net loss of about SFr1.3bn due to new writedowns.
The government also said that if refinancing problems emerged, it would guarantee banks' new short- and medium-term interbank liabilities and money market transactions. The move would follow a key step announced by the UK as part of its rescue package for the sector.
Shares in the two banks rose after the rescue package was announced but fell at the end of the session in line with the wider market after gloomy employment numbers from the US increased fears about the world economy. Credit Suisse drop-ped 0.9 per cent to SFr45.5 while UBS lost 4.9 per cent, closing at SFr19.09.
Like other governments, Switzerland has acted to try to stop the financial crisis wreaking havoc on the wider economy. With banks refusing to lend to each other, the cost and lack of credit for small businesses and corporations threatens to turn the economic downturn into a punishing recession.
"This package of measures will contribute to the lasting strengthening of the Swiss financial system," the government said. "The resulting stabilisation is beneficial for overall economic development in Switzerland and is in the interests of the economy as a whole."
Ukraine and Baltic states also hit hard by the financial crisis
With even the mighty Swiss banking system needing government support, it will come as little surprise that a swathe of emerging market economies are suddenly looking fragile.
Ukraine emerged yesterday as the winner of the title "the next Iceland", with the International Monetary Fund offering the former Soviet republic up to $14bn (£8bn) to shore up its financial system. An IMF delegation landed in the country on Wednesday to try to stabilise the country's battered banking sector and ailing currency, hit hard by the global financial crisis. The central bank was forced to impose restrictions on deposit withdrawals and lending after panicked savers rushed to empty their accounts, draining the banking system of more than $1.3bn. The authorities also had to rescue two key banks and battle a sharp fall in the currency as the stock market plunged.
Ukraine emerged as the biggest crisis after Hungary agreed to borrow up to €5bn from the European Central Bank. Capital Economics warned that there were risks for a swathe of emerging European economies in the Baltics and the Balkans, including Lithuania and Latvia.
Their problem is that they have been living beyond their means by borrowing to finance increases in their standard of living.
Jitters spread to Asia yesterday after Standard & Poor's, the credit rating agency, warned that Korean banks would struggle to repay their debt.
For the first time since 1960, the cost of living will start to shrink next year, in a worrying parallel of the Japanese "disease" of the 1990s, according to new research.
The news comes amid growing speculation that the Bank of England will soon be forced to cut borrowing costs to 2pc or below, taking them to their lowest level since it was founded in 1694.
The Monetary Policy Committee last week unexpectedly cut rates by a half percentage point to 4.5pc in the face of the financial crisis. However, there is also growing evidence that inflation, which has risen above 5pc in recent months, is set for a dramatic fall. The Retail Price Index – the most comprehensive measure of UK high street prices, will drop at an almost unprecedented rate to -2pc by the second half of next year, according to new research from Fathom Consulting.
It said the fall was largely due to the drop in mortgage costs and house prices, which together form a large part of the RPI. However, lower food and energy prices would also play an important role. Since modern comparable records began in 1956, the RPI has dropped into negative territory only once, in the late 1950s and early 1960s, but it only dropped as far as a rate of -0.5pc.
Andrew Brigden, economist at Fathom Consulting, said: "This does have worrying implications – particularly if it heralded a general period of deflation. The risk is we have a rerun of Japan because you simply can't [cut interest rates] to below zero."
Japan suffered almost a decade of deflation and falling economic growth in the 1990s after its debt-fuelled economic bubble burst with painful consequences. Despite cutting official interest rates to zero and pumping cash into the economy, the Bank of Japan was unable to pull prices back up into positive territory for years. However, Fathom predicts RPI will drop below zero for only a few months.
Whereas high inflation tends to encourage borrowing, deflation encourages saving and, as a result, discourages companies from investing and spending today what they could save for tomorrow.
Fathom's prediction is based on the assumption that the Bank of England cuts interest rates to 2pc within a year. Although markets anticipate borrowing costs falling to only 3.5pc, a growing cohort of economists think it will be forced into taking more drastic action. Mr Brigden said if oil prices came back below $70 a barrel and house prices fall at an even faster rate, the level of RPI inflation could fall as low as -3pc and remain in negative territory for a year.
Although Fathom does not expect the Consumer Price Index – the measure targeted by the Bank's MPC – to drop into negative territory, Prof Peter Spencer, of the Ernst & Young Item Club, said such an eventuality was not out of the question.
"This time next year we're looking at all of these huge increases in bills coming out of the index, and then potentially falling," he said. "CPI will go viciously negative – it's looking increasingly likely that it drops below target. It could easily go into negative territory, along with RPI."
China has begun a multi-billion-pound scheme in the far-Western province of Xinjiang to build roads and railways that will open up Central Asia.
By Malcolm Moore in Shanghai 18 Oct 2008
By the end of this year, nine railway lines will be under construction, including a railway from China to Pakistan and a rail link through Kyrgyzstan and Uzbekistan, at a total cost of over £50 billion.
Lines will also run east from Xinjiang into Mongolia and onto the Qinghai plateau. Currently, the only line linking Xinjiang with central Asia is a 285-mile line to the Alataw Pass which connects to Kazakhstan's rail system.
More than 1,300 miles of track will be laid in the next decade, almost doubling the infrastructure in the area, according to Wu Jian, the deputy head of the railway bureau in Urumqi, the capital of the restive Xinjiang province.
The move will connect Xinjiang to railway lines as far off as Moscow and Tehran and a direct route is also being planned over through the Hindu Kush into Kabul. The move will open up Central Asia to Chinese goods and companies, and will serve as conduits for oil and petrol to be brought back.
Xinjiang, with almost 140 billion barrels of oil reserves and 11 trillion cubic metres of gas, is one of the main sources of Chinese energy. The region is also criss-crossed with pipelines from Russia and Kazakhstan which help to power the eastern capitals of Beijing and Shanghai.
China is also gambling that increased trade with its Muslim neighbours may help to calm disputes and religious unrest within Xinjiang, which has been a political thorn in the side of the leadership.
Xinjiang's native Uighur population are ethnic Muslims who have railed against Chinese rule. Uighur pressure groups have complained that it is Han Chinese, rather than the locals, who have most benefited from the region's trade links and energy wealth.
Although annual natural gas production in the Tarim Basin has increased 20 times between 2000 and 2007, the profits have flowed eastwards. In 2005, Xinjiang's provincial government was only given 240 million yuan (£19 million) out of the 14.8 billion yuan of tax revenue from the oil industry.
Wang Lequan, the hardline politburo member who is governor of Xinjiang, recently vowed to conduct a crackdown against separatist Muslims, and banned the observance of the Ramadan festival.
"We must always maintain a high-pressure, strike-hard posture, adhering to a policy of taking the offensive, striking when they show their heads and making pre-emptive attacks," he said, vowing to spend winter and spring conducting a "concentrated re-education across the whole region".
French lender uncovers €600 million loss on unauthorized trading
Matthew Saltmarsh October 17, 2008
PARIS: Groupe Caisse d'Épargne, a large French mutual bank, said Friday that it had lost €600 million as a result of unauthorized derivatives trading for the bank's own account.
The lender, which is in merger talks with a domestic rival, attributed the loss in a statement to "extreme market volatility" on stock exchanges last week and said the position was closed on Friday. The government said it would investigate the incident.
A spokeswoman for the bank added that the incident was "a big mistake" rather than a fraud of the type that the trader Jérôme Kerviel has been accused of perpetrating at the French bank Société Générale.
Market rumors of a big derivatives loss at a large bank rattled the Paris stock market last week, adding to downward pressure on banks' shares and prompting Société Générale and the French-Belgian bank Dexia to issue denials.
The loss, equivalent to about $800 billion, "does not affect the financial solidity of the group and will have no consequences on clients," Groupe Caisse d'Épargne said. The bank, which is unlisted, added that it retained more than €20 billion in shareholder equity.
The spokeswoman said that a team of "around six traders" from the proprietary desk was responsible for the trades and that they had been suspended pending inquiries. Speaking on the condition of anonymity under company policy, she said that she was unaware of whether they would face legal charges.
Groupe Caisse d'Épargne announced last week that it was in merger talks with Groupe Banque Populaire. Their central operating units, Caisse Nationale des Caisses d'Épargne and Banque Fédérale des Banques Populaires, which are also unlisted, jointly own nearly 70 percent of the French investment bank Natixis.
Natixis has suffered from exposure to subprime mortgage securities and other stricken derivatives. The two banks formed Natixis in 2006 by combining their investment banking and asset management operations.
The Groupe Caisse d'Épargne spokeswoman said the illicit trading "will not affect our merger discussions with Banque Populaire, which are continuing at a very fast pace." She said there was no date yet planned for the announcement of a possible deal.
Because of the credit crisis, the French authorities are eager to see consolidation in the sector, analysts said. The two banks said last week that a merger would create a group with revenue of €17.5 billion, deposits of €480 billion and a network 8,200 branches in France with nearly 100,000 employees.
The banks said their networks were largely complementary and would be able to operate in a decentralized fashion while preserving their identities in a merged institution.
The spokeswoman also said the derivatives involved were based on equity indexes. The loss, she added, will be written off by the bank's operating company, Caisse Nationale des Caisses d'Épargne. The positions were discovered this week by the bank's internal auditors, she said, and the Bank of France, the Finance Ministry and the Financial Market Authority, or AMF, were informed as soon as the incident was uncovered.
The French finance minister, Christine Lagarde, said in a statement that the losses did not threaten the financial strength of Caisse d'Epargne. Lagarde said she had asked the French banking commission to investigate the incident and to ensure that French lenders were complying with market rules. Caisse d'Epargne will also conduct an internal inquiry.
This week, France detailed a €360 billion effort to bolster its banks as part of a coordinated European effort. The government will create a fund that will raise money to guarantee debt for as long as five years as a way to make cash available to banks unwilling to lend to one another. The banks will then be able to obtain these funds in exchange for putting up their own collateral, including debt not now accepted as collateral by the European Central Bank. In addition, a second state-sponsored company will provide as much as €40 billion in direct capital injections to banks that request it, in exchange for handing over equity stakes to the government.
The winner of the 2008 Nobel Prize for economics said the US is plunging into a ``nasty recession'' with a ``lot of suffering'' to come, even if policy makers succeed in unfreezing the credit markets.
``That's baked in,'' Princeton University professor and New York Times columnist Paul Krugman said in an interview on ``Night Talk'' with Mike Schneider to be broadcast later today on Bloomberg Television. ``There is a lot of downward momentum.''
He said a rise in the unemployment rate to 7% ``seems almost certain'' and he put the odds of an increase to 8% at ``better than even.'' The jobless rate in September stood at a five-year high of 6.1%.
Signs that the economy is falling into a recession multiplied this week with news that retail sales have fallen for three straight months, single-family housing starts hit a 26- year low and consumer confidence plunged the most on record.
Krugman voiced some doubts that the steps that Treasury Secretary Henry Paulson is taking to combat the credit crisis will succeed and suggested that more might be needed.
Paulson rolled out plans this week to use $US250 billion ($362 billion) of taxpayer funds to purchase stakes in thousands of financial firms to try to halt a credit freeze that threatens to bankrupt companies and hammer the job market.
``It's not clear there's enough money,'' Krugman said.
He added that Paulson may also have to insist that the banks use the money they're receiving to make new loans if the plan is to work. ``They may need to be much more interventionist than they have been thus far,'' the Princeton professor said.
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Private equity firms diversify to ride market dips
By LYNETTE KHOO
18 October 2008
Gone were the days when it was possible to buy companies at realistic prices with cheap debt, and rely on balance-sheet restructuring and rising valuations to create equity value.
Private equity firms now have to look long and hard at how to create value for investors amid current market contractions, says a PricewaterhouseCoopers report released yesterday.
To do so, they need to diversify their portfolios and help businesses achieve internal growth through organisational changes and operational improvements, the PWC report says.
Calling this an inflexion point for the industry, the report notes that larger funds are now broadening their investment criteria and geographical horizons. Longer holding period for portfolio companies has also prompted private equity managers to manage their portfolio more actively.
Private equity firms that do not already have appropriate in-house expertise are hiring operationally experienced managers and specialists in organisational change and turnarounds, to complement existing in-house resources.
‘The private equity industry is witnessing a dramatic downturn in deal activity and is suffering from a lack of leverage caused by the turmoil in the financial markets,’ said Ong Chao Choon, Asia-Pacific transactions leader at PWC.
‘This has a major impact on the ability to finance larger transactions but also creates a lack of buyers for existing portfolio companies,’ he added.
According to data from Dealogic, private equity firms have tightened their belts this year. Announced financial sponsor buyouts worldwide skidded 72 per cent from a year ago to US$178.1 billion so far in 2008, the lowest first nine-month period since 2003.
But private equity firms had it good last year. According to PWC, some US$297 billion of private equity and venture capital was invested globally in 2007 - a 26 per cent increase from 2006.
In Asia-Pacific, private equity investments jumped 36 per cent to US$86 billion in 2007. Singapore moved up six places to become the 10th most popular destination for private equity investment globally and the third most popular in Asia-Pacific, after such funds invested here surged 157 per cent from 2006 to US$5.35 billion.
‘The amounts invested in individual countries were small by the standards of today’s huge transactions, but they undeniably show a significant shift in investment,’ the PWC report says.
North America remains the largest private equity market. Funds raised climbed 18 per cent to US$302.8 billion last year. Some US$107.1 billion was invested in the country, up 35 per cent on 2006.
While shifting economic conditions have prompted private equity firms to diversify their investment strategies, the PWC report warns that this must be accompanied by appropriate controls. As they forge new businesses and capital sources, they will have to make sure that internal processes support such growth, it adds.
South Korea braces for crisis fallout
By KELLY OLSEN
October 17, 2008
SEOUL, South Korea (AP) - As financial turmoil spreads around the world, South Korea may prove to be one of the most vulnerable countries in Asia.
With its banks facing potential trouble, its currency and stocks reeling and consumer debt on the rise, the country's woes have stirred memories of the regional economic crisis that struck it more than a decade ago.
Now, amid criticism that officials have done too little too late, government leaders are racing to restore confidence in the country's economy.
On Friday, the government held an emergency meeting to discuss how best to respond to the market turmoil. In recent days, officials have sought to reassure their fellow citizens that another collapse isn't in the making.
Afterwards, the government indicated an announcement could come Sunday.
"Korea's foreign exchange reserves amount to $240 billion, all of which are readily available at anytime," President Lee Myung-bak told the nation on Monday in a radio address. That figure was 27 times larger than when the Asian financial crisis hit the country in 1997, he said.
Currency reserves can be wielded for varied purposes, including to defend the value of a country's currency and generally shore up the financial system.
Despite Lee's reassurance, some analysts have sounded alarms about South Korea, most notably its banks.
They say the global credit crunch is making it hard for local banks to acquire dollars and other foreign currency needed to refinance activities such as foreign-denominated loans to domestic companies and cite personal debt levels as a cause for worry.
Also, the country's broadest measure of trade -- the current account -- is expected to record an annual deficit for the first time in a decade, meaning South Korea is spending more on goods, services and investments from overseas than it sells abroad.
South Korean stocks have been no exception to the worldwide rout in equities spurred by the U.S. credit meltdown, falling 38 percent this year. They had already dropped 22 percent even before the collapse last month of Lehman Brothers Holdings Inc., the U.S. investment bank.
South Korea's currency was also having a bad 2008 even before declines against the U.S. dollar accelerated amid the crisis. The won has plummeted almost 30 percent this year against the dollar and had its worst single day -- a drop of 9.7 percent Thursday -- since Dec. 31, 1997.
"Ongoing stress in the Korean financial market seems to be a mixture of domestic credit crisis, balance of payment crisis and global credit crisis," Citibank Korea economist Oh Suk-tae wrote in a report last week.
Standard & Poor's Ratings Services said this week it may downgrade the credit ratings on some of South Korea's biggest banks, citing "a more than 50 percent chance that the global liquidity squeeze could threaten Korean banks' foreign currency funding."
"We expect the stress on the Korean financial system to be prolonged," S&P analyst Kim Eng Tan said Friday.
South Korea's consumer debt levels soared in 2003 after the government encouraged credit card use to spur the economy, and rey are rising again.
National Information & Credit Evaluation Inc., a credit information provider, said in its quarterly magazine that an index monitoring South Korean household debt was at 75.1 in June, down from 87.2 the previous year. A reading below 80 implies "caution required."
Some analysts, such as Alaistair Chan of Moody's.com, call "overblown" any fears that South Korea could fall into a full-fledged meltdown such as the 1997-98 Asian contagion, citing its "vast foreign reserves."
Those reserves, while indeed formidable, have been falling as the Bank of Korea, the central bank, is believed to have been using them to try and stem the won's declines by purchasing dollars.
S&P expressed disappointment Wednesday that "no wide-scale government measure has been announced" such as "blanket deposit guarantees and underwriting of interbank lending risks" implemented in other countries.
Minister of Strategy and Finance Kang Man-soo said Friday after the special meeting that the government would announce what he called "pre-emptive, decisive and sufficient" measures on Sunday.
The government has maintained that its banks are healthy and says the country's situation is not dire.
"Korea's banking sector is sound in terms of asset strength, capital adequacy, profitability, and other soundness measures," the Financial Supervisory Service said last week.
Besides its hefty foreign currency reserves -- the world's sixth largest -- the government says other factors are in its favor such as manageable corporate debt levels and an expected turnaround in its current account deficit --a broad measure of trade in goods and services -- as early as this month.
Goldman Sachs economist Kwon Goohoon says South Korea's accumulated budget surpluses since 2000, low public debt and sharply falling commodity prices are all pluses.
Nevertheless, he expects the economy to slow to annual growth of 3.9 percent next year, the lowest since 2003.
Tom Byrne, a senior vice president and regional credit officer with Moody's Sovereign Risk Group, said Friday that South Korean banks were under "severe pressure," but expressed confidence the government's reserves were adequate.
"At the same time, the unprecedented turmoil in the global financial system makes seeing through this exceptional crisis, let alone the expected downturn in the economic cycle, very difficult," he said.
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Associated Press writers Jae-soon Chang and Jae-hyun Jeong contributed to this report.
China to help Pakistan out of economic crisis - envoy
Fri Oct 17, 2008
ISLAMABAD (Reuters) - China has assured Pakistan of help to get out of its economic crisis, the Pakistani ambassador to Beijing said on Friday, but he gave no details and did not say if China had agreed to urgently needed new loans.
Pakistan, a nuclear-armed U.S. ally, is struggling to come to grips with a financial crisis. Islamabad's rapidly dwindling foreign reserves are at their lowest level since 2002.
It needs $3 billion to $4 billion or it risks defaulting on a $500 million bond due to mature in February, economists say.
President Asif Ali Zardari, the widower of former prime minister Benazir Bhutto, ended a four-day visit to China on Friday during which Premier Wen Jiabao pledged cooperation.
"There will be a negative impact on Pakistan of the world financial crisis. We have to make efforts ourselves but China has assured us, and they will help us to come out of this crisis," said Masood Khan, Pakistan's ambassador to China.
The Washington Post said on Thursday Pakistan was seeking up to $3 billion from China. The Financial Times reported earlier that Zardari hoped to secure concessional loans of $500 million to $1.5 billion.
"There has always been cooperation between Pakistan and China in a specific framework, and this time too we have made efforts to increase bilateral cooperation through various existing mechanisms," Khan said. He did not elaborate.
Pakistan is facing a balance of payments crisis, inflation running at close to 25 percent and heavy government borrowing from the central bank to cover a budget deficit.
The rupee weakened 2.78 percent to a record low of 84.40 rupees to the dollar on Friday after reserves fell by $570 million and on pressure from import payments, dealers said.
The rupee has lost 27 percent against the dollar since the beginning of the year.
Zardari was due back in Pakistan late on Friday.
Shaukat Tarin, a respected banker appointed last week as economic troubleshooter, said he would hold a news conference on Saturday. He was travelling back from China with Zardari.
Tarin said on Monday he was sure Pakistan would fulfil upcoming debt obligations of $3 billion.
Zardari and Chinese President Hu Jintao signed 11 agreements on trade and economic cooperation on Wednesday.
Pakistani officials have also been to Washington and the Gulf to drum up support but there have been no firm commitments.
China agreed to provide $500 million in a concessional loan to help Pakistan meet balance of payment needs in April and the Asian Development Bank has also lent Pakistan $500 million.
Bleak Economic Outlook for Spain
By Manuel Baigorri
10/17/2008
The collapse in housing and construction has combined with the global financial crisis to create one of Spain's worst periods in decades.
When Romanian-born Ion Lacureanu migrated to Spain five years ago, he found himself in one the fastest-growing countries in the European Union. Spain's booming job market and average annual economic growth of 3 percent were the envy of the region. Soon the 38-year-old Lacureanu was flourishing as a self-employed construction worker in Valladolid, a city of 320,000. He earned €2,200 ($2,975) a month and had so much work he had to hire other workers to help him out.
He doesn't have to hire anyone anymore. "For the past six months I've just worked three or four days a month, and I've earned no more than [$473]," says Lacureanu. "There is almost no work."
Spain's decade-long construction boom began to run out of steam last year, and now the global financial crisis is drying up the international funding that financed the country's huge infrastructure investments. Antonio Argandoña, professor of economics at Barcelona's IESE business school, says the construction industry, which spurred gross domestic product growth in the last decade, is going to stall for the next five to seven years. That in turn will spark unemployment and drag down investment and consumer spending.
Loss of EU Subsidies
Making matters worse, the European Union also has cut back on its financial support for Spain, since the EU now has to shift subsidies to newer members in Eastern Europe. "We are in danger of a general economic collapse," says Argandoña. "We'll see negative growth within this year…This is a long and deep crisis." During the second quarter of 2008, Spain's GDP increased just 1.8 percent from the same period a year earlier, the lowest growth rate in more than a decade. The International Monetary Fund now forecasts GDP growth this year of just 1.4 percent, and a 2 percent decline in 2009.
The collapse in housing and construction has mingled with the global financial crisis to create one of Spain's worst periods in decades. The Ibex 35, the benchmark index of the Madrid stock market, is down more than 38 percent since January. Although Spanish commercial banks have less exposure to toxic loans than other countries, on Oct. 13 Spanish Prime Minister Jose Luís Rodríguez Zapatero drafted a $136 billion plan to help Spain's banks amid the global financial crisis. Until now, they have largely fared better than rivals in some other European countries, especially surging Santander, which has moved quickly in recent weeks to snap up weaker banks in Britain and the U.S.
Earlier this month, the government approved a $41 billion fund -- which may be extended to $68 billion -- to buy high-quality assets from banks, and raised bank deposit insurance from €20,000 to €100,000 in order to boost confidence.
These bold actions, though, may not be enough to stave off a deep downturn. The IMF recently forecast that Spain will enter a recession in 2009 -- its first since 1993 -- and said it "will be harder-hit than other European countries." The Spanish government's National Institute of Employment has already revealed that unemployment rate reached 11.3 percent in September, the highest level since 1997. The country probably will have more than 3 million people out of work by the middle of next year, and "we'll continue to be the top European country in terms of unemployment," says Rafael Pampillón, professor of economic environment and analysis of countries at Madrid's Instituto de Empresa business school. "Until the market buys all the houses [that have been built] -- and this will take two or three years -- employment won't grow again."
Hurting Everywhere
The housing bust already is spilling over to other industries such as furniture and home appliances, says Argandoña. Elías Muñoz, 55, owner of a small furniture store in Granollers, a city 20 miles north of Barcelona, says furniture sales in Spain have dwindled because of the crisis and the "huge lack of confidence." Thanks to business generated from his Web site, Muñoz has so far been able to offset the weakness in demand.
Other industrial and service sectors also are feeling the pinch. September sales of new cars declined more than 30 percent from the same month a year ago. Seat, a Spanish unit of Germany's Volkswagen, and other major automakers including General Motors and Ford are struggling to avoid layoffs in Spain.
Hotels and restaurants are being hit by lower consumer confidence and slackening tourism. Manuel Díaz-Obregón, 33, director of the Don Fadrique restaurant in downtown Seville, sees the recession at work every day. "About a year ago we used to serve 40 lunches a day, and now we serve just 30 or so," he says. "People think twice before ordering and look more at the price."
Shuttered Factories
The textile industry, too, has been widely affected. Already under enormous competitive pressure from Asia and Eastern Europe (the industry lost 61,000 jobs between 2003 and 2007), it may now see further losses due to Spain's domestic downturn. Case in point: Unión General de Trabajadores, a major Spanish trade union, announced on Oct. 8 that textile company Grupo Sáez Merino, owner of Spanish brand icons such as Lois Jeans, is about to shut its operations down and lay off its 350 employees. An employee who declined to be identified said, "The company is closing down, and nobody is allowed to give any kind of information about it."
Like immmigrant Ion Lacureanu, hundreds of thousands of Spanish baby boomers are now on the brink of losing their jobs. "Things have turned out pretty bad. I don't know how this is going to be fixed," Lacureanu says. Pampillón argues that greater liberalization of labor markets would give companies more incentives to hire people, while further privatizations of state companies could bolster growth. But "the solution is not easy," he adds. "The crisis will continue."
Is Switzerland the next Iceland?
After Britain and the US injected massive amounts of capital into their banks, Switzerland has taken emergency measures to try to shore up its banking system. Sean Farrell reports
Friday, 17 October 2008
In an extraordinary move for a nation proud of its financial prudence and stability, Switzerland was forced to take emergency measures yesterday to shore up its two biggest lenders to prevent a collapse in confidence in the country's banking system.
The state will inject SFr6bn (£3.1bn) into UBS, its biggest bank, in return for a 9.3 per cent stake, and will allow UBS to unload $54bn (£31bn) of toxic assets, including sub-prime mortgages and Alt-A securities, into a fund controlled by the central bank.
Credit Suisse, the No 2 Swiss lender, obeyed instructions from the central bank by raising about SFr10bn from investors in the market, including the Qatar Investment Authority, which is already a big shareholder and is a major stakeholder in Barclays. The fundraising, which allows Credit Suisse to meet tough new Swiss capital rules, represented about 12 per cent of the bank's existing equity.
Switzerland had to act to underpin confidence in its prized banking system after Britain, the US and others announced massive capital injections into their major lenders. Without doing likewise, the Swiss banks would have been left exposed to market jitters and speculation.
The country of 7.5 million people houses SFr3.46trn of bank deposits, almost seven times its gross national product. That is less than Iceland, whose deposits are nine times GDP, but much higher than the UK where deposits are close to double GDP.
"It's clear that we have a confidence problem," Philipp Hildebrand, the Swiss National Bank's vice president, said. "It is notably the two large banks that are affected."
The woes of its banks, and UBS in particular, have rocked Switzerland, where the financial sector accounts for almost 15 per cent of output. The government said it did not intend to hold the stake in UBS for many years and hoped to sell it to private investors soon. It will impose changes in corporate governance and risk controls in return for the state's support.
The capital increase will lift UBS's tier one capital ratio to 11.5 per cent by the end of the year from 10.4 per cent. After its fundraising, Credit Suisse's tier one ratio would have been 13.7 per cent at the end of September, compared with the 10.8 per cent the bank reported.
The Swiss government also said it would follow other European governments by increasing its depositor protection scheme from the current SFr30,000 level. It stressed that the country's other banks were generally sound.
UBS said the government's measures should help it reverse withdrawals of client assets. Wealthy clients have been taking money out of the bank's core wealth management business because of a stream of writedowns at the investment banking division, which expanded into structured credit just before the market imploded in the summer of 2007.
Net outflows of SFr49.3bn hit the wealth management business in the third quarter, while the global asset management division leaked SFr34.4bn. The withdrawals increased as the financial crisis worsened in September after the bankruptcy of Lehman Brothers in the US. UBS recorded a small net profit of SFr296m for the third quarter, though it was helped by benefits from the reduced value of its own debt and tax gains.
UBS said its biggest need was to reduce its exposure to illiquid assets, whose plunging value has caused massive losses and shattered confidence in the bank, and that the central bank's fund would help it get back to running its business as normal. The investment bank made new writedowns and losses of $4.4bn on top of $42bn of writedowns since the start of the credit crunch.
"All European governments intervened and this left the Swiss banks at a competitive disadvantage," Dirk Becker at Kepler, the brokerage, told Reuters. "The Swiss have recapitalised their banks and made them the best capitalised banks in the world."
Credit Suisse saw strong inflows at its wealth management business of about SFr14bn in the quarter but made a net loss of about SFr1.3bn due to new writedowns.
The government also said that if refinancing problems emerged, it would guarantee banks' new short- and medium-term interbank liabilities and money market transactions. The move would follow a key step announced by the UK as part of its rescue package for the sector.
Shares in the two banks rose after the rescue package was announced but fell at the end of the session in line with the wider market after gloomy employment numbers from the US increased fears about the world economy. Credit Suisse drop-ped 0.9 per cent to SFr45.5 while UBS lost 4.9 per cent, closing at SFr19.09.
Like other governments, Switzerland has acted to try to stop the financial crisis wreaking havoc on the wider economy. With banks refusing to lend to each other, the cost and lack of credit for small businesses and corporations threatens to turn the economic downturn into a punishing recession.
"This package of measures will contribute to the lasting strengthening of the Swiss financial system," the government said. "The resulting stabilisation is beneficial for overall economic development in Switzerland and is in the interests of the economy as a whole."
Ukraine and Baltic states also hit hard by the financial crisis
With even the mighty Swiss banking system needing government support, it will come as little surprise that a swathe of emerging market economies are suddenly looking fragile.
Ukraine emerged yesterday as the winner of the title "the next Iceland", with the International Monetary Fund offering the former Soviet republic up to $14bn (£8bn) to shore up its financial system. An IMF delegation landed in the country on Wednesday to try to stabilise the country's battered banking sector and ailing currency, hit hard by the global financial crisis. The central bank was forced to impose restrictions on deposit withdrawals and lending after panicked savers rushed to empty their accounts, draining the banking system of more than $1.3bn. The authorities also had to rescue two key banks and battle a sharp fall in the currency as the stock market plunged.
Ukraine emerged as the biggest crisis after Hungary agreed to borrow up to €5bn from the European Central Bank. Capital Economics warned that there were risks for a swathe of emerging European economies in the Baltics and the Balkans, including Lithuania and Latvia.
Their problem is that they have been living beyond their means by borrowing to finance increases in their standard of living.
Jitters spread to Asia yesterday after Standard & Poor's, the credit rating agency, warned that Korean banks would struggle to repay their debt.
Britain faces deflation for first time since 1960
By Edmund Conway
17 Oct 2008
For the first time since 1960, the cost of living will start to shrink next year, in a worrying parallel of the Japanese "disease" of the 1990s, according to new research.
The news comes amid growing speculation that the Bank of England will soon be forced to cut borrowing costs to 2pc or below, taking them to their lowest level since it was founded in 1694.
The Monetary Policy Committee last week unexpectedly cut rates by a half percentage point to 4.5pc in the face of the financial crisis. However, there is also growing evidence that inflation, which has risen above 5pc in recent months, is set for a dramatic fall. The Retail Price Index – the most comprehensive measure of UK high street prices, will drop at an almost unprecedented rate to -2pc by the second half of next year, according to new research from Fathom Consulting.
It said the fall was largely due to the drop in mortgage costs and house prices, which together form a large part of the RPI. However, lower food and energy prices would also play an important role. Since modern comparable records began in 1956, the RPI has dropped into negative territory only once, in the late 1950s and early 1960s, but it only dropped as far as a rate of -0.5pc.
Andrew Brigden, economist at Fathom Consulting, said: "This does have worrying implications – particularly if it heralded a general period of deflation. The risk is we have a rerun of Japan because you simply can't [cut interest rates] to below zero."
Japan suffered almost a decade of deflation and falling economic growth in the 1990s after its debt-fuelled economic bubble burst with painful consequences. Despite cutting official interest rates to zero and pumping cash into the economy, the Bank of Japan was unable to pull prices back up into positive territory for years. However, Fathom predicts RPI will drop below zero for only a few months.
Whereas high inflation tends to encourage borrowing, deflation encourages saving and, as a result, discourages companies from investing and spending today what they could save for tomorrow.
Fathom's prediction is based on the assumption that the Bank of England cuts interest rates to 2pc within a year. Although markets anticipate borrowing costs falling to only 3.5pc, a growing cohort of economists think it will be forced into taking more drastic action. Mr Brigden said if oil prices came back below $70 a barrel and house prices fall at an even faster rate, the level of RPI inflation could fall as low as -3pc and remain in negative territory for a year.
Although Fathom does not expect the Consumer Price Index – the measure targeted by the Bank's MPC – to drop into negative territory, Prof Peter Spencer, of the Ernst & Young Item Club, said such an eventuality was not out of the question.
"This time next year we're looking at all of these huge increases in bills coming out of the index, and then potentially falling," he said. "CPI will go viciously negative – it's looking increasingly likely that it drops below target. It could easily go into negative territory, along with RPI."
China extends influence into Central Asia
China has begun a multi-billion-pound scheme in the far-Western province of Xinjiang to build roads and railways that will open up Central Asia.
By Malcolm Moore in Shanghai
18 Oct 2008
By the end of this year, nine railway lines will be under construction, including a railway from China to Pakistan and a rail link through Kyrgyzstan and Uzbekistan, at a total cost of over £50 billion.
Lines will also run east from Xinjiang into Mongolia and onto the Qinghai plateau. Currently, the only line linking Xinjiang with central Asia is a 285-mile line to the Alataw Pass which connects to Kazakhstan's rail system.
More than 1,300 miles of track will be laid in the next decade, almost doubling the infrastructure in the area, according to Wu Jian, the deputy head of the railway bureau in Urumqi, the capital of the restive Xinjiang province.
The move will connect Xinjiang to railway lines as far off as Moscow and Tehran and a direct route is also being planned over through the Hindu Kush into Kabul. The move will open up Central Asia to Chinese goods and companies, and will serve as conduits for oil and petrol to be brought back.
Xinjiang, with almost 140 billion barrels of oil reserves and 11 trillion cubic metres of gas, is one of the main sources of Chinese energy. The region is also criss-crossed with pipelines from Russia and Kazakhstan which help to power the eastern capitals of Beijing and Shanghai.
China is also gambling that increased trade with its Muslim neighbours may help to calm disputes and religious unrest within Xinjiang, which has been a political thorn in the side of the leadership.
Xinjiang's native Uighur population are ethnic Muslims who have railed against Chinese rule. Uighur pressure groups have complained that it is Han Chinese, rather than the locals, who have most benefited from the region's trade links and energy wealth.
Although annual natural gas production in the Tarim Basin has increased 20 times between 2000 and 2007, the profits have flowed eastwards. In 2005, Xinjiang's provincial government was only given 240 million yuan (£19 million) out of the 14.8 billion yuan of tax revenue from the oil industry.
Wang Lequan, the hardline politburo member who is governor of Xinjiang, recently vowed to conduct a crackdown against separatist Muslims, and banned the observance of the Ramadan festival.
"We must always maintain a high-pressure, strike-hard posture, adhering to a policy of taking the offensive, striking when they show their heads and making pre-emptive attacks," he said, vowing to spend winter and spring conducting a "concentrated re-education across the whole region".
French lender uncovers €600 million loss on unauthorized trading
Matthew Saltmarsh
October 17, 2008
PARIS: Groupe Caisse d'Épargne, a large French mutual bank, said Friday that it had lost €600 million as a result of unauthorized derivatives trading for the bank's own account.
The lender, which is in merger talks with a domestic rival, attributed the loss in a statement to "extreme market volatility" on stock exchanges last week and said the position was closed on Friday. The government said it would investigate the incident.
A spokeswoman for the bank added that the incident was "a big mistake" rather than a fraud of the type that the trader Jérôme Kerviel has been accused of perpetrating at the French bank Société Générale.
Market rumors of a big derivatives loss at a large bank rattled the Paris stock market last week, adding to downward pressure on banks' shares and prompting Société Générale and the French-Belgian bank Dexia to issue denials.
The loss, equivalent to about $800 billion, "does not affect the financial solidity of the group and will have no consequences on clients," Groupe Caisse d'Épargne said. The bank, which is unlisted, added that it retained more than €20 billion in shareholder equity.
The spokeswoman said that a team of "around six traders" from the proprietary desk was responsible for the trades and that they had been suspended pending inquiries. Speaking on the condition of anonymity under company policy, she said that she was unaware of whether they would face legal charges.
Groupe Caisse d'Épargne announced last week that it was in merger talks with Groupe Banque Populaire. Their central operating units, Caisse Nationale des Caisses d'Épargne and Banque Fédérale des Banques Populaires, which are also unlisted, jointly own nearly 70 percent of the French investment bank Natixis.
Natixis has suffered from exposure to subprime mortgage securities and other stricken derivatives. The two banks formed Natixis in 2006 by combining their investment banking and asset management operations.
The Groupe Caisse d'Épargne spokeswoman said the illicit trading "will not affect our merger discussions with Banque Populaire, which are continuing at a very fast pace." She said there was no date yet planned for the announcement of a possible deal.
Because of the credit crisis, the French authorities are eager to see consolidation in the sector, analysts said. The two banks said last week that a merger would create a group with revenue of €17.5 billion, deposits of €480 billion and a network 8,200 branches in France with nearly 100,000 employees.
The banks said their networks were largely complementary and would be able to operate in a decentralized fashion while preserving their identities in a merged institution.
The spokeswoman also said the derivatives involved were based on equity indexes. The loss, she added, will be written off by the bank's operating company, Caisse Nationale des Caisses d'Épargne. The positions were discovered this week by the bank's internal auditors, she said, and the Bank of France, the Finance Ministry and the Financial Market Authority, or AMF, were informed as soon as the incident was uncovered.
The French finance minister, Christine Lagarde, said in a statement that the losses did not threaten the financial strength of Caisse d'Epargne. Lagarde said she had asked the French banking commission to investigate the incident and to ensure that French lenders were complying with market rules. Caisse d'Epargne will also conduct an internal inquiry.
This week, France detailed a €360 billion effort to bolster its banks as part of a coordinated European effort. The government will create a fund that will raise money to guarantee debt for as long as five years as a way to make cash available to banks unwilling to lend to one another. The banks will then be able to obtain these funds in exchange for putting up their own collateral, including debt not now accepted as collateral by the European Central Bank. In addition, a second state-sponsored company will provide as much as €40 billion in direct capital injections to banks that request it, in exchange for handing over equity stakes to the government.
Krugman predicts 'nasty' US recession
October 18, 2008
The winner of the 2008 Nobel Prize for economics said the US is plunging into a ``nasty recession'' with a ``lot of suffering'' to come, even if policy makers succeed in unfreezing the credit markets.
``That's baked in,'' Princeton University professor and New York Times columnist Paul Krugman said in an interview on ``Night Talk'' with Mike Schneider to be broadcast later today on Bloomberg Television. ``There is a lot of downward momentum.''
He said a rise in the unemployment rate to 7% ``seems almost certain'' and he put the odds of an increase to 8% at ``better than even.'' The jobless rate in September stood at a five-year high of 6.1%.
Signs that the economy is falling into a recession multiplied this week with news that retail sales have fallen for three straight months, single-family housing starts hit a 26- year low and consumer confidence plunged the most on record.
Krugman voiced some doubts that the steps that Treasury Secretary Henry Paulson is taking to combat the credit crisis will succeed and suggested that more might be needed.
Paulson rolled out plans this week to use $US250 billion ($362 billion) of taxpayer funds to purchase stakes in thousands of financial firms to try to halt a credit freeze that threatens to bankrupt companies and hammer the job market.
``It's not clear there's enough money,'' Krugman said.
He added that Paulson may also have to insist that the banks use the money they're receiving to make new loans if the plan is to work. ``They may need to be much more interventionist than they have been thus far,'' the Princeton professor said.
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