Good Financial Times: March 2009

Monday, March 30, 2009

'Big Bang' Pioneers Rethink Banking Overhaul

London launched a radical set of market reforms known as Big Bang, turning the city into ground zero of a revolution that begat today's buckling global financial system. Now, as leaders of the world's 20 largest economies gather here to fix that system, some Big Bang architects are questioning the ideal of unfettered capitalism on which it was built.

In retrospect, they say, the movement unleashed unanticipated forces such as global banks whose influence extends beyond the reach of any one regulator. Those forces may be difficult for the G-20 -- or anyone -- to rein in.

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London Prepares for the G-20

London is bracing for angry protests before and during Thursday's Group of 20 summit, which will see fortresslike security for world leaders.

Few events embody the free-market thinking that shaped modern finance better than Big Bang. Under former Prime Minister Margaret Thatcher, a small group of officials, including Treasury chief Nigel Lawson and Secretary of State for Trade and Industry Cecil Parkinson, scrapped decades-old rules at the stock exchange and other institutions that they feared could leave London trailing behind rapidly globalizing markets.

The reforms helped trigger an economic boom and boosted the status of London's banking district, known as the City, as one of the world's financial hubs -- and as a testing ground for some innovations that wound up at the center of the current crisis.

Looking back two decades later, Messrs. Lawson and Parkinson say at least one thing went wrong: Banks were allowed to grow too big for anyone, including their own managers, to oversee.

"The notion that banks would get as big and as bloated as they did get -- that was totally unexpected," says Mr. Lawson, who like Mr. Parkinson is now a member of the House of Lords, the upper house of the U.K. Parliament.

As a result, they take a dim view of G-20 leaders' efforts to expand the global regulatory system to match the size and complexity of the financial system.

Over the past few decades, banking conglomerates have delved into a range of businesses, including buying and selling complex derivatives contracts as well as putting their own money on the line in bets on financial markets. In the process, they have become so large -- U.K. bank assets amount to £7.9 trillion ($11.31 trillion) -- that governments have little choice but to bail them out when they get into trouble.

The solution, Messrs. Lawson and Parkinson say, is to break banks into the separate businesses they used to be. Mr. Lawson recommends introducing a version of the U.S. Depression-era Glass-Steagall Act. The legislation created a wall between commercial banks, which take deposits and make loans, and securities firms, which take bigger risks with their money. By making sure commercial banks don't get too entangled with securities firms, the logic goes, regulators could keep troubles at the latter from infecting the former.

To be sure, restoring a separation among different businesses would be a daunting task, given the deep and complex connections among types of financial institutions.

Big Bang began with a seemingly small move: abolishing fixed commissions at the London Stock Exchange, which at the time was an exclusive association of small financial houses that dominated the U.K. trade in stocks and bonds. The competition unleashed by the move, which went into force in 1986, broke down a barrier that had helped keep the system stable: The separation of brokerage firms, which executed clients' trades, from so-called jobbers, or securities firms that risked their own money by taking positions in stocks and bonds.

In addition to ensuring that brokers weren't betting against their clients, the separation prevented firms from getting big enough to be a systemic threat.

Once the fixed commissions were gone, falling profit margins pushed the brokers and jobbers into mergers with big global banks. That opened the way for U.S. banks such as Citicorp (now Citigroup Inc.) and U.K. banks such as Barclays Bank PLC (now Barclays PLC) to get into the risky business of securities dealing -- something that was still banned in the U.S. under Glass-Steagall, repealed only in 1999.

Attracted by the freedom and later by the U.K.'s famously light-touch regulation, global banks turned the City into a laboratory for new financial products.

Now, as U.K. regulators seek to crack down by expanding supervision to cover the entire universe of banking, including hedge funds and structured investment vehicles, the Big Bang veterans are skeptical.

Amid preparations for the G-20 summit, authorities in England made five arrests Monday, according to the Associated Press. Police arrested five people in Plymouth, 240 milesfrom London under terrorism laws, the AP reported, and recovered a haul of replica weapons, fireworks and activist propaganda. Law-enforcement officials said officers are investigating whether the group planned to target the summit.

U.S. Considers Bankruptcy for GM, Chrysler

The Obama administration, wading deeply into the U.S. auto business, is weighing a plan to fix General Motors Corp. and Chrysler by dividing their "good" and "bad" assets and plunging them into bankruptcy to purge their biggest problems.

Such a move -- barring 11th-hour concessions from bondholders, unions and others -- would mightily transform two companies that have helped define American industrial power over the past century. They also would represent one of the biggest-ever government incursions into private enterprise, a move fraught with political risk and controversy for the fledgling Obama administration as it becomes clear that government involvement in the operations of GM and Chrysler will dwarf that of any other company receiving U.S. aid.

The government would like to see the "good" GM, comprising brands such as Chevrolet and Cadillac, remain an independent company, according to an administration official. The "good" Chrysler would be sold to Fiat SpA, assuming that proposed deal is completed, this person said.

President Barack Obama on Monday warned GM and Chrysler that they couldn't depend on unending taxpayer loans and gave the companies a brief window to craft plans -- 60 days for GM and 30 for Chrysler -- that would justify fresh government support. But he also pledged to do all he could to save the industry.

Detroit in Crisis

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Statements and Documents

"We cannot, we must not, and we will not let our auto industry simply vanish," Mr. Obama said at the White House.

The remarks came a day after the administration announced the ouster of GM Chief Executive Rick Wagoner and rejected the restructuring plans that GM and Chrysler had hoped would lead to another infusion of government cash. The administration is set to remove the majority of GM's board of directors. One senior administration official said the aim was to start GM "with a clean sheet of paper."

GM's stock fell 25% on the news, down 92 cents to $2.70 in 4 p.m. New York Stock Exchange trading.

The administration's interventions struck a new tone of seriousness amid the recent uproar over executive bonuses at financial companies receiving big government loans. With the auto makers, the government has now laid down stringent terms for new support and raised, in the case of Chrysler, the possibility it could be left to collapse.

At the same time, the administration's new plan is sure to ignite a battle over the government's role in the economy, what sacrifices will be required of labor unions, and whether it makes sense for U.S. taxpayers to assist a foreign company, Fiat, in an alliance with a U.S. company, Chrysler.

As part of their proposed pact, Fiat and Chrysler agreed over the weekend to scale down the Italian auto maker's initial stake in Chrysler to 20% as a condition of the Treasury Department's bailout. Fiat earlier this year struck an agreement to take a 35% stake in Chrysler initially, and up to an additional 20% at a later date.

Many hot-button issues remain unresolved, above all the fortunes of about 140,000 members of the United Auto Workers union and the health-care plan for the group's hundreds of thousands of retirees.

President Obama argued Monday that the U.S. auto industry -- and, by default, its largest component, GM -- was unique in its centrality to the U.S. economy. "This industry is, like no other, an emblem of the American spirit," he said. "It is a pillar of our economy." He went on to insist that the government had no intention of running GM.

His auto team's dissection of what ails GM, on the other hand, underscores how deeply the administration plans to plunge into the finer points of the company's business plan. In a five-page analysis of GM's viability, the team critiqued GM's marquee next-generation project, the electric-powered Chevy Volt, as "too expensive to be commercially successful in the short-term." It notes that much work needs to be done to boost the overall fuel-efficiency of GM's fleet of cars and trucks.

With GM, the Obama administration is interested not just in preserving jobs, but in pushing other policy prescriptions, in particular creating a "company of the future" with clean and energy-efficient vehicles, a frequent campaign theme during Mr. Obama's quest for the presidency.

The auto plan came packaged with several new government initiatives whose price tags remain unclear. The government said it would guarantee the warranties for all new GM and Chrysler cars until the two companies return to health. It also plans to speed up government fleet purchases, and to support a congressional bid to offer large tax incentives for new car purchases, with money for the program coming out of the $787 billion stimulus package. Mr. Obama also said that the Internal Revenue Service was creating a new tax benefit for car buyers.

Auto executives and Obama aides said the bankruptcy route isn't preferred or in anyway preordained. The automakers could avoid that outcome if they manage in coming weeks to strike tough bargains with their shareholders, creditors, and the union. But concessions on that front have so far proved largely elusive, giving the bankruptcy option a much higher likelihood of success.

"We have significant challenges ahead of us, and a very tight timeline," said new GM Chief Executive Fritz Henderson. In a conference call with reporters, Mr. Henderson acknowledged that bankruptcy was very much a possibility. "There are ways to do this out of court, but we're getting ready to do in court if necessary," he said.

GM and Chrysler have had bankruptcy attorneys devising plans to split their companies in two for several months. Mr. Obama's task force has told the companies the administration prefers this route as a way to reorganize the two auto makers, rather than the prolonged out-of-court process that has so far frustrated administration officials, people familiar with the discussions said.

GM looks increasingly like it will in fact be forced into filing for bankruptcy protection, sometime in mid-to-late May, and that the surviving "new GM" would retain select brands and some international operations, said several people familiar with the situation. Stakes in this new GM could be given to creditors and UAW members. It is also possible the new company could be sold whole or in parts to investors.

A key ingredient in acting on this plan is getting the UAW to agree to an entirely new labor contract, including major reductions in health-care benefits, according to several people involved in the matter. "That's the No.1 wild card here," one of these people said Monday.

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The Journal's John Stoll says that with billions in taxpayer money on the line, the Obama administration needs to work closely with GM to forge a more dramatic restructuring.

Japan Jobless Rate Jumps to a Three-Year High of 4.4%

Japan’s unemployment rate rose to a three-year high in February and job openings disappeared at the fastest pace in more than three decades as the export-led recession spread to households.

The unemployment rate climbed to 4.4 percent from 4.1 percent in January, the statistics bureau said today in Tokyo, the highest since January 2006. The ratio of jobs available to each applicant tumbled to 0.59 last month from 0.67, the biggest drop since December 1974, the Labor Ministry said.

Household spending fell for a 12th month as exporters from Toyota Motor Corp. to NEC Corp. reined in hiring and contained wages. Prime Minister Taro Aso has ordered his third stimulus package since October to prevent the economic slump from deepening as the nation heads for its worst recession since 1945.

“Japan’s labor market will keep deteriorating,” said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. “The question is how much consumer spending will become a drag on the economy as wages and employment conditions worsen.”

The median estimate of 35 economists surveyed by Bloomberg was for the jobless rate to rise to 4.3 percent. Household spending fell 3.5 percent, a separate report today showed.

The yen traded at 97.39 per dollar at 8:40 a.m. in Tokyo from 97.36 before the report was published.

Oki Electric Industry Co., a maker of communications equipment, said it will cut administrative workers after a slump in demand forced it to widen its profit loss forecast this month.

Contain Costs

New jobs are also becoming harder to come by as companies try to contain costs. Toyota, the world’s largest automaker, this month said it will almost halve recruitment of new graduates in Japan to the lowest level in 14 years after forecasting its first loss in almost six decades. NEC Corp., Japan’s largest personal computer maker, said it plans to cut new hires by almost 90 percent to 100 people.

Bleak job prospects are taking their toll on consumers, whose outlays account for more than half of the economy. Retail sales fell at the fastest pace in seven years in February and weak demand prompted supermarket operators Ito-Yokado Co. and Seiyu Ltd. to cut prices of food, clothing and household products this month.

Some 77 percent of jobless people aren’t receiving unemployment benefits, the highest figure among Group of Seven nations except Italy, whose data weren’t available, the International Labour Organization said in a report last week.

‘Pretty Slow’

“The policy response has been pretty slow in creating a safety net for unemployment, which is putting downward pressure on the whole economy,” said Noriaki Matsuoka, an economist at Daiwa Asset Management Co. in Tokyo.

The jobless rate will reach a postwar high of 5.5 percent in the first quarter of next year, according to the median estimate of 14 economists surveyed by Bloomberg News.

To contact the reporters on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

Russian Economy Will Shrink 4.5%, World Bank Says

Russia’s economy will probably shrink 4.5 percent this year after oil prices slumped and global contagion spread, driving up unemployment and pushing more people into poverty, the World Bank forecast.

“As the crisis continues to spread to the real economy around the world, initial expectations that Russia and other countries will recover fast are no longer likely,” the bank said in a report today. In November, it saw growth of 3 percent, based on oil prices of $75 a barrel and global expansion.

The slump may last longer and be deeper than in the aftermath of the 1998 government’s $40 billion debt default and 70 percent ruble devaluation, which triggered bank runs and wiped out citizens’ savings. A contraction may be prolonged by a drop in household consumption and a “second wave” of non- performing corporate loans, Zeljko Bogetic, the World Bank’s Moscow-based lead economist, said today in Moscow.

“There is a risk of further deterioration in the world economy and in Russia,” Bogetic said. “The real economy has deteriorated more than expected. I’d call it a silent tsunami, a more gradual tsunami than the one we’ve seen, with the steady increase of non-performing loans that will be potentially damaging for the global economy and Russia.”

Capital Outflow

Russia’s government says the economy will shrink 2.2 percent this year after a decade-long expansion. The Cabinet this month approved a revised budget with the first deficit in 10 years of 2.98 trillion rubles ($88.2 billion), or 7.4 percent of projected gross domestic product.

“We disagree with the World Bank forecast, it’s too pessimistic for Russia,” First Deputy Prime Minister Igor Shuvalov said in Moscow today.

The revision was calculated on an average price of $41 a barrel and an inflation rate of about 13 percent. The budget contains 1.6 trillion rubles in anti-crisis spending.

Inflation will be between 11 percent and 13 percent this year as higher import prices offset falling consumer demand, the unavailability of loans and capital outflow, the bank said.

Net capital outflow may reach $170 billion as Russian banks and companies pay off more than $130 billion of external debt and foreign direct investment dwindles to less than $5 billion this year, Bogetic said. Russia’s central bank estimates that less than $83 billion will be taken out of the economy this year, First Deputy Chairman Alexei Ulyukayev said March 27.

Help the ‘Vulnerable’

The government’s anti-crisis response should shift from a focus on the financial sector and companies toward targeting small and medium-size businesses, infrastructure and “cushioning the impact on the vulnerable” the bank said.

Russia should earmark additional funds, equivalent to about 1 percent of gross domestic product for one year, to provide a temporary fiscal boost on programs including child allowance, unemployment benefits and pensions, the bank said. The spending program would increase the deficit by 0.75 percent this year because it will extend into 2010.

The number of jobless people will probably rise by 2.7 million people in 2009, growing to more than 12 percent of the working population, the World Bank said. The number of poor may climb by 2.75 million, resulting in a 16 percent poverty rate.

The bank estimates about a quarter of the population is vulnerable to poverty. Russia also faces a severe housing shortage, with about 7 percent sharing living space with other households and one in two persons having less than 10 square meters (108 square feet) per capita.

While the government has said it will maintain planned spending levels on priority programs in education, public health and housing this year, Russia needs to implement quicker measures to contain the crisis in the short term.

Limited Space

Russia’s international reserves are sufficient to finance the projected budget shortfall, though the need to preserve funds for next year means “the space for more fiscal stimulus this year appears limited,” the report said.

At the same time, the focus on tax relief in Russia’s stimulus package may undermine the revenue base after the price of oil tumbled. Oil will probably stay at about $40 to $50 a barrel this year, easing pressure on the ruble, and rise to $75 in the “medium term,” Bogetic said.

The foreign-currency stockpile, the world’s third-largest after China’s and Japan’s, has been eroded by 36 percent from an August record of $598.1 billion, as Bank Rossii sold dollars and euros to manage a 30 percent “gradual devaluation” of the ruble against the dollar.

The World Bank predicts new pressures on Russia’s banking sector as credit markets remain frozen and bad loans increase. The share of non-performing loans may exceed 10 percent of the total by the end of this year from 3.8 percent in January.

Russia has allocated 555 billion rubles of budget money to aid lenders and may also allow banks to swap shares for sovereign ruble bonds to help them boost capital, Finance Minister Alexei Kudrin said last week.

-- With reporting by Anastasia Ustinova in Moscow. Editors: Chris Kirkham,

To contact the reporter on this story: Paul Abelsky in St. Petersburg at pabelsky@bloomberg.net.

G-20 Targets Hedge Funds as Leaders Near Consensus

Leaders of advanced and emerging economies are closing ranks behind plans for tougher rules on financial markets to prevent another collapse like the one that wiped out much of Wall Street.

A global approach to regulation has been gaining momentum ahead of the Group of 20 summit April 2 in London. U.S. President Barack Obama, U.K. Prime Minister Gordon Brown and their G-20 counterparts aim to merge their national blueprints for strengthened regulation into a united front to rein in hedge funds, derivatives trading, executive pay and excessive risk- taking by financial firms.

“There is reason for optimism that progress toward stronger global regulation has begun,” says Daniel Price, who was President George W. Bush’s G-20 negotiator and is now senior partner for global issues at Sidley Austin LLP in Washington. “We’re beginning to see the outlines of a convergence.”

Agreement on a shared regulatory agenda would provide the G-20 summit with a measure of success even as leaders remain at odds over trade policy, fiscal stimulus and the status of the dollar. A joint regulatory approach is crucial to prevent investors from seeking out markets with the most permissive rules, setting off a race to the bottom as countries vie to attract capital.

The call for greater regulation unites China, possessor of the most vibrant economy in the developing world, and the U.S., possessor of the world’s largest economy. China’s central bank governor, Zhou Xiaochuan, challenged the West to fix flaws in financial supervision on March 26, the same day U.S. Treasury Secretary Timothy Geithner outlined a broad initiative designed to do just that.

International Framework

“Having the U.S. and Chinese on board makes it a whole lot more likely” that an international framework will eventually emerge, says Harvard University’s Kenneth Rogoff, former chief economist of the International Monetary Fund.

Rogoff says that “it seems virtually certain that four to five years from now, the world will have either a global financial regulator or, more likely, a treaty on global financial regulation with a secretariat, akin to the World Trade Organization.” Still, he adds, “nothing is going to happen quickly.”

‘Lobbying Ferociously’

John Taylor, a former U.S. Treasury official and now at Stanford University, says the process is “going to be drawn out” as lawmakers in individual countries wrangle over rewriting the rules. That will give financial firms the opportunity to seek changes that dilute new restrictions, says Richard Portes, a professor at the London Business School.

“Banks are lobbying ferociously against anything that will undermine their businesses and pay,” he says.

When G-20 leaders last met in November, with the Bush administration in its final months, the U.S. resisted European suggestions for a single global regulator and government oversight of hedge funds. Now, proposals from the Obama administration are giving the push for a global regulatory overhaul a second wind.

“We must ensure that global standards for financial regulation are consistent with the high standards we will be implementing in the United States,” Geithner told Congress March 26.

Calling for “new rules of the game,” Geithner plans to bring hedge funds, private-equity firms and derivatives markets under federal supervision for the first time. A new systemic- risk regulator would have power to force companies to increase their capital or cut their borrowing, and authorities would be able to seize them if they came unstuck.

‘More Effective Role’

Geithner suggests empowering the Financial Stability Forum, a group of international market regulators, to “play a more effective role” alongside the IMF and the World Bank in promoting and monitoring new international regulations.

“There now appears to be common interest in pushing for a global systemic regulator,” says Stephen Roach, chairman of Morgan Stanley Asia in Hong Kong. “It won’t be easy, however, for Europe and the U.S. to come to a consensus on who that new regulator should be and what type of enforcement mechanism can be used to empower any such body.”

The U.S., which has long expected other nations to follow its lead on regulations, may now have to yield to more cooperation, says former Federal Reserve Chairman Paul Volcker.

Zhou’s Advice

“The U.S. is no longer in a position to dictate that the world does it according to the way we’ve done it,” Volcker, head of Obama’s Economic Recovery Advisory Board, told a March 6 conference at New York University.

China’s Zhou underscored that point in an article published by the People’s Bank of China March 26 that criticized western economic policies and recommended regulators be allowed to “act boldly and expeditiously without having to go through a lengthy or even painful approval process.”

“China has to be listened to,” says Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. “What they are trying to do is exert maximum influence on the design of the new global financial architecture.”

A new collaborative strategy was evident in a working paper released on March 27 by the Canadian government on behalf of the G-20, which comprises 19 developed and emerging economies plus the European Union and represents 85 percent of the world economy.

The working paper recommended that leaders agree to regulate hedge funds and other nonbanking pools of capital that pose “systemic” risks and strengthen rules requiring financial institutions to build up capital cushions.

First Rules

“We have reason to believe that there will be a fair degree of consensus,” Canadian Prime Minister Stephen Harper said in an interview with Bloomberg News.

The EU will propose its first rules for the $1.4 trillion hedge-fund industry next month, while the U.K. is also considering stepping up oversight.

After financial firms raced to raise more than $1 trillion of capital to cover losses, governments want “institutions to take less risk and build up buffers in good times,” says Marco Annunziata, chief economist at UniCredit MIB in London.

The U.K.’s market regulator cites Spain as a model, after preemptive cushioning helped its biggest lenders, including Banco Bilbao Vizcaya Argentaria SA, avoid the need for government recapitalization at the end of a real-estate boom. The country was nevertheless forced to mount its first major bank rescue today, of Caja Castilla-La Mancha savings bank.

Revamp

In addition, central banks and regulators are signed up to a revamp of the so-called Basel II bank-capital standards after a 2003 rewrite was never fully applied in the U.S., leaving European banks to compete under different rules.

G-20 countries are also spurring accounting-standard setters to speed up the work of narrowing differences so investors can compare financial statements around the world.

Any agreement at the G-20 would hand leaders a way of papering over other policy differences. European governments have resisted a U.S. push for more stimulus spending. The World Bank says most G-20 members have taken actions that restrict trade, even after pledging to avoid protectionism.

A fresh split emerged last week as China proposed the creation of a new international reserve currency, only to run into immediate U.S. opposition.

On regulation, at least, “there’s definitely a unified framework forming now,” says Jim O’Neill, chief economist at Goldman Sachs Group Inc. in London. “Whether it works will only be known when the next crisis hits.”

To contact the reporters on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net Matthew Benjamin in Washington at mbenjamin2@bloomberg.net John Rega in Brussels at jrega@bloomberg.net.

Friday, March 27, 2009

U.S. Economy: Spending Growth Slowed in February

American consumers’ spending slowed in February and their confidence remained near a three-decade low this month, reflecting the toll of a deteriorating job market.

Purchases advanced 0.2 percent after climbing 1 percent in January, the Commerce Department said today in Washington. The Reuters/University of Michigan final index of consumer sentiment was 57.3 in March after 56.3 in February.

Taken together with the spending jump in January, today’s figures offer a picture of an economy that remains in recession, while no longer worsening. With a separate report showing California and six other states have unemployment rates above 10 percent, the data make it critical that Federal Reserve and Obama administration stimulus actions take effect by mid-year.

“We’re certainly not out of the woods by any means, but perhaps we’re seeing some signs of stabilization,” Jay Bryson, a global economist at Wachovia Corp. in Charlotte, North Carolina, said in a Bloomberg Television interview.

A report yesterday from Best Buy Co., the largest U.S. electronics retailer, matched Bryson’s assessment. The Richfield, Minnesota-based company reported that profit fell less than analysts forecast for the quarter ended Feb. 28. Chief Executive Officer Brad Anderson said “we were pleased when the quarter finished stronger than it began.”

Stocks Drop

The Standard & Poor’s 500 Stock Index fell 2 percent to close at 815.94. Treasuries fell, with yields on benchmark 10- year notes at 2.76 percent.

Much of the February gain in consumer spending was because of an increase in prices, leaving so-called real purchases with a decline for the month. Economists had forecast spending would rise 0.2 percent, after an originally reported 0.6 percent gain the prior month, according to the median of 68 estimates in a Bloomberg News survey.

Incomes fell 0.2 percent, after a 0.2 percent increase in January. The survey median projected a 0.1 percent decrease.

Because spending rose as earnings fell, the savings rate decreased to 4.2 percent from 4.4 percent in January. As recently as August, the rate was at 0.8 percent, indicating Americans are trying to boost savings as unemployment climbs.

The Reuters/University of Michigan index continues to hover near the 28-year low of 55.3 reached in November. The median forecast was 56.8. The index of consumer expectations six months from now, which more closely predicts the direction of spending, rose to 53.5 from 50.5 in February.

‘Bottoming Out’

“Overall confidence, even though it’s at low levels, is kind of bottoming out,” said Brian Bethune, chief financial economist at IHS Global Insight in Lexington, Massachusetts. “A lot of incentives are at play to get consumers to do things they ordinarily wouldn’t” given the downturn, he said, referring to the fiscal stimulus and efforts to revive credit.

President Barack Obama today meets with chief executive officers of some of the nation’s biggest banks, seeking support for his plan to stabilize the financial system.

Today’s Commerce report showed inflation accelerated. The price gauge tied to spending patterns rose 1 percent from February 2008, up from a 0.8 percent 12-month gain in January. The Fed’s preferred gauge of prices, which excludes food and fuel, climbed 1.8 percent, more than forecast.

Adjusted for inflation, spending dropped 0.2 percent, following a 0.7 percent gain the prior month.

Disposable income, or the money left over after taxes, decreased 0.1 percent, after rising 1.6 percent the previous month. Adjusted for inflation, disposable income dropped 0.4 percent.

Durable Goods

Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, dropped 1.5 percent last month after rising 3.2 percent in January. Purchases of non-durable goods and services were unchanged.

Still, the inflation-adjusted spending so far this quarter is higher than the fourth-quarter average, setting the stage for a gain after plunging late last year.

The economy shrank in the fourth quarter at a 6.3 percent annual pace, the worst performance since 1982, in what may be the depths of the recession. Consumer spending fell at a 4.3 percent rate, marking the first back-to-back declines in excess of 3 percent since records began in 1947.

“We’re seeing a minimal amount of consumption, as people are just spending on bare necessities,” Lindsey Piegza, an economic analyst at FTN Financial in New York, said before the report. “You can’t have stable consumer spending until you have stable incomes or wealth accumulation.”

Carmakers General Motors Corp. and Chrysler LLC are still counting on government aid for survival. U.S. auto sales in February slid to the lowest rate since December 1981, led by a 53 percent plunge for Detroit-based GM.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

Jobless Rate Exceeds 10% in Three More U.S. States

The number of U.S. states with a jobless rate exceeding 10 percent almost doubled in February as the worst employment slump in the postwar era spread.

Nevada, North Carolina and Oregon last month joined the four other states that had previously climbed above 10 percent, according to Labor Department data released today in Washington. Michigan, at 12 percent, remained the state with the highest unemployment rate, followed by South Carolina at 11 percent and Oregon at 10.8. California and Rhode Island bring the total number of states to seven.

Job losses have spread from areas battered by the housing recession and auto slump to states like the Carolinas where non- auto manufacturers and service companies are cutting staff. Economists at Merrill Lynch & Co. in New York and Wachovia Corp. in Charlotte, North Carolina, are among those projecting joblessness nationwide will surpass 10 percent.

“We so seldom see an economy down so broadly,” said Steve Cochrane, a senior economist at Moody’s Economy.com in West Chester, Pennsylvania. ‘The impact from the downturn in manufacturing is heading south from the Midwest. Job losses have broadened out across all industries because of the credit crunch, the lack of consumer confidence and the global slump.”

Forty-nine states and the District of Columbia registered increases in the unemployment rate last month, led by Oregon, North Carolina and New Jersey, the Labor Department said. Nebraska was the only state to post a decrease after the rate jumped the prior month.

Housing Slump

The states where home prices surged and then crashed remain among the hardest hit, including Nevada, with its 10.1 percent joblessness. Nicole Wolf, 39, was working for Harrah’s Entertainment Inc. in Las Vegas for the human resources department until this month when she was laid off from her job that paid $94,000 a year.

With her home worth less than her mortgage, and paying $800 a month to cover student loans, Wolf is trying to find a job in marketing or communications before her severance pay runs out.

“I’m assuming I’ll have a job or declare bankruptcy,” Wolf said in a telephone interview.

The outlook for finding work this month hasn’t improved. The world’s largest economy probably lost more than 600,000 jobs in March for a fourth straight month, and the jobless rate jumped to a 25-year high of 8.5 percent, according to the median estimate of economists surveyed by Bloomberg News before next week’s report from Labor.

Bernanke on Unemployment

Federal Reserve Chairman Ben S. Bernanke said in Washington March 10 that it was “certainly well within the realm of possibility” that unemployment nationwide could rise above 10 percent “for a period.”

With the recession already matching the longest in the postwar period, the jobless and the needy are becoming more evident across the country.

Gabriela Romero, who works for the Fresno County Economic Opportunities Commission, last month organized a food drive in Mendotta, California, a city where four of 10 workers are unemployed, and arrived to find a crush of people seeking assistance.

“It was just a free-for-all,” she said. “You have people waiting in line for hours, pregnant women, disabled people.”

Since the recession began in December 2007, the economy has lost 4.4 million jobs, already more than the 3.5 million jobs President Barack Obama is targeting to save or create with his $787 billion recovery program.

California, Florida

Payroll employment in February decreased in 49 states and the District of Columbia, led by California’s loss of 116,000 jobs. Florida had the second-biggest drop with 49,500 workers dismissed, followed by 46,100 positions cut in Texas, 41,600 in Pennsylvania and 37,200 in Illinois.

Surpassing 10 percent unemployment has a psychological impact and may further curtail spending, said Doug Woodward, a University of South Carolina regional economist in Columbia.

“It’s creating more anxiety and more fear,” he said. “It’s feeding on itself.”

Job losses are spreading from manufacturers such as General Motors Corp., Caterpillar Inc. and International Business Machines Corp. to other firms like lumber producer Weyerhaeuser Co., media companies like the New York Times Co. and even the U.S. Postal Service. They are affecting all income brackets and professions.

Quarter Million

Fred Herrmann, 33, of Minneapolis, lost his job as a mortgage broker making $250,000 a year in December when his company folded. He said he’s applied for 25 finance and sales jobs, each making $14 to $18 an hour plus commission.

“There’s not a whole lot of high-paying jobs,” he said. “When you go from making a quarter of a million a year to 15 bucks an hour, that’s not good.”

On the lower end of the scale, Arthur Bolden, 61, is finding it harder than ever to get a job as a day laborer.

While he used to get $10 an hour, the prevailing wage now is $7 or $8 an hour, he said, as he waited for work outside of a Mecklenburg County, North Carolina, social services building. “People don’t even have money to pay for landscaping or to cut grass.”

The jobless rates in North Carolina, at 10.7 percent, and Rhode Island, at 10.5, were the highest for those states since records began in 1976. Georgia, at 9.3 percent, also set a new high mark.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

U.K. Recession Worse Than Estimated on Spending Slump

The U.K. economy’s contraction in the fourth quarter was deeper than previously estimated as consumer spending and construction slumped the most since 1980.

Gross domestic product fell 1.6 percent from the third quarter, exceeding the prior measurement of 1.5 percent, which was also the median forecast of 27 economists in a Bloomberg News survey. Construction dropped 4.9 percent and consumer spending declined 1 percent.

Bank of England Chief Economist Spencer Dale said today that the British economy’s short-term prospects are “bleak.” Spending in shops and on homes has plunged after banks rationed loans and the financial crisis wiped 1.9 trillion pounds ($2.7 trillion) off consumers’ wealth. The pound fell against the dollar after the report.

“The headline figure is very disappointing,” said Philip Shaw, chief economist at Investec Securities in London. “We see the economy shrinking until the middle of the year. It’s very difficult to see it gaining any momentum of recovery until the third quarter at the earliest.”

The pound dropped as much as 0.6 percent after the release of the data, which showed the worst contraction since 1980, when Margaret Thatcher was prime minister. The U.K. currency was at $1.4290 as of 5:56 p.m. in London.

Prime Minister Gordon Brown, whose popularity has faded as the recession deepened, said agreements the government signed with Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc requiring the banks to boost lending will help the economy in the coming months.

‘Obligation to Lend’

“The banks are now under an obligation to lend 50 billion pounds,” Brown told journalists in Vina del Mar, Chile, as he finished a five-day diplomatic tour. “So the position we were in last year where the banking system had frozen, we now seeing results.”

From a year earlier, the economy shrank 2 percent in the fourth quarter, the statistics office said. That compares with the previous estimate of 1.9 percent, which matched the median forecast of 25 economists.

Officials revised their measurements of manufacturing in the quarter, saying it dropped 4.9 percent instead of 5.1 percent. Services fell 0.8 percent, compared with the previous estimate of 0.9 percent. The drop in construction was more than four times as much as the earlier measurement.

Government Spending

Government spending rose 1.3 percent, compared with the previous estimate of 1.5 percent. Fixed investment fell 1.4 percent instead of 2.3 percent as measured in the last release, the statistics office said.

U.K. retail sales posted the smallest annual gain in more than 13 years last month, the statistics office said yesterday. Sales plunged 1.9 percent from January, four times as much as economists forecast.

Next Plc, the U.K.’s second-largest clothing retailer, said yesterday full-year profit fell 15 percent as Britons cut spending at its stores and home-shopping catalog. Moss Bros Group Plc, the U.K.’s third-largest suit retailer, said yesterday it will cut capital spending by as much as 69 percent and is omitting its dividend as customers rein in spending.

Unemployment Jump

Unemployment rose at the fastest pace since 1971 in February as companies were forced to lay off staff. HSBC Holdings Plc, Europe’s biggest bank by market value, said on March 25 that about 1,200 U.K. employees may lose their jobs as it responds to a “challenging” environment.

Consumers still saved more money during the quarter. The household savings ratio rose to 4.8 percent, the most since the first three months of 2006, from 1.7 percent in the third quarter, the statistics office said.

The central bank has embarked on a program to spend as much as 150 billion pounds ($219 billion) to buy U.K. government debt, corporate bonds and other assets with newly created money in order to ease credit strains and encourage spending.

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net.

Wednesday, March 25, 2009

Madoff’s Refusal on Conspiracy Said to Block Deal

- Bernard Madoff, facing a lifelong
sentence for the largest Ponzi scheme in history, didn’t agree to
a plea deal with prosecutors because of their demand that he
admit to a conspiracy, a charge that would require him to say he
worked with others, said people familiar with the matter.

Madoff’s decision not to negotiate a deal means the
government won’t have his help in determining whether his
employees assisted in the fraud, the people said. Madoff, 70,
will plead guilty today to all 11 counts he faces without any
promise of leniency or anything else in return. He could receive
150 years in prison at sentencing on charges including fraud,
perjury and money laundering.

Talks between defense lawyers and prosecutors over the
charges extended into late last week before the government
decided to proceed with the counts against him, according to a
person familiar with the matter.

“The information crafted by the government does not contain
a conspiracy charge, and you can read what you like into that,”
Mauro Wolfe, a Madoff attorney, said yesterday in an interview,
referring to a document listing the charges that was filed March
10 in federal court in Manhattan. “The information speaks for
itself.”

Madoff told 4,800 investors in November that their accounts
held $64.8 billion, though their holdings were a “small
fraction” of that, the government said in court papers. Madoff
defense lawyer Ira Sorkin said during a March 10 court hearing in
the case that his client will plead guilty today. Madoff arrived
at the courthouse this morning for the 10 a.m. hearing.

False Account Documents

Madoff told workers to create false account documents and
trade confirmations of phony returns, and to create false
financial statements for regulators, according to the government.

Prosecutors working for acting Manhattan U.S. Attorney Lev
Dassin said Madoff didn’t act alone in the fraud, which dated
back to the 1980s, according to the people. Janice Oh, a
spokeswoman for Dassin, declined to comment.

Madoff was arrested Dec. 11 and charged with securities
fraud for using billions of dollars from new investors to pay off
old ones at his New York-based firm, Bernard L. Madoff Investment
Securities LLC. He was charged after the government said he
confessed to his sons and the Federal Bureau of Investigation
that he led a $50 billion Ponzi scheme.

At the March 10 hearing, prosecutors said Madoff would plead
guilty to securities fraud, as well as mail fraud, wire fraud,
investment adviser fraud, three counts of money laundering, false
statements, perjury, false filings with the Securities and
Exchange Commission and theft from an employee benefit plan.
Madoff, free on $10 million bond, may be jailed after his plea.

Conspiracy Charge

A conspiracy charge requires prosecutors to prove that two
or more people agreed to commit an illegal act, and that they
committed at least one act to further the crime. Madoff could be
charged later with conspiracy, and prosecutors may still charge
others involved in the scheme, former federal prosecutor
Christopher Clark said in an interview.

“It’s kind of rare in a white-collar case to have a one-
person indictment -- you often have a number of people
included,” Clark said. “You need two to tango in a conspiracy.
One thing it says about the current moment is that there’s no
other individual they’re claiming Madoff is conspiring with.”

By not charging Madoff with conspiracy, the government
“signaled it’s not going to stand in the way of him pleading
guilty,” said Daniel Richman, a former federal prosecutor who
now teaches law at Columbia University. Most judges would require
him to identify his co-conspirators if he were to plead guilty on
that charge, “and that would prevent him from going forward.”

Fictitious Returns

The U.S. claimed that Madoff hired unqualified workers for
his investment advisory business to generate documents showing
fictitious returns for investors. Madoff sought to give the
appearance of “operating a legitimate investment advisory
business” in which client funds were traded, when “no such
business was actually being conducted.”

Assistant U.S. Attorney Marc Litt said in court on March 10
that Madoff doesn’t have a plea bargain. Through such deals,
defendants often receive some benefit for pleading guilty, such
as a reduced sentence, in return for providing details about a
crime. Litt said Madoff will be required to plead guilty to all
11 counts.

In a March 10 statement, Dassin said the investigation of
the fraud is continuing.

By not entering a plea deal, Madoff may be trying to protect
employees of his firm, former federal prosecutor Christopher
Steskal said in an interview.

Protecting Employees

Madoff’s brother Peter was chief compliance officer at the
company, and his sons Mark and Andrew held senior positions in
the market-making and proprietary trading businesses. None of
Madoff’s family members have been accused of any wrongdoing.

Bernard Madoff’s wife, Ruth, who had been represented by
Sorkin, will hire her own lawyer, Sorkin said March 10.

An attorney for Peter Madoff, John “Rusty” Wing, didn’t
return a call seeking comment. Martin Flumenbaum, an attorney for
the sons, has said they “were not involved in the firm’s asset
management business” and “had no knowledge whatsoever of the
fraud.”

Prosecutors and regulators have been probing whether the
chief financial officer at the advisory firm, Frank DiPascali
Jr., knew of the fraud, according to people familiar with the
case. DiPascali has denied wrongdoing. His lawyer, Marc Mukasey,
didn’t return a call seeking comment.

Andrew Lankler, a lawyer for Madoff’s auditor, David
Friehling, declined to comment. A call to Madoff’s longtime aide,
Annette Bongiorno, wasn’t immediately returned. They aren’t
accused of any wrongdoing.

The criminal case is U.S. v. Madoff, 09-cr-00213, U.S.
District Court for the Southern District of New York (Manhattan).

To contact the reporters on this story:
David Voreacos in federal court in Newark, New Jersey, at
dvoreacos@bloomberg.net;
Robert Schmidt in Washington at rschmidt5@bloomberg.net;
David Glovin in New York federal court
at dglovin@bloomberg.net.

Porsche Obtains EU10 Billion Loan After Rounding Up New Lenders

By Steve Rothwell and Chris Reiter

March 25 (Bloomberg) -- Porsche SE, maker of the 911 sports car, turned to new banks to help refinance a 10 billion- euro ($13.5 billion) loan needed to buy Volkswagen AG stock. Former lenders Merrill Lynch and ABN Amro didn’t take part.

The credit crunch and recession meant banks took longer to sign up for the facility, which replaces one coming due this month, Porsche said today. It has yet to finalize terms for an extra 2.5 billion euros required to boost working capital.

“In the wake of the extremely difficult global economic environment and the turbulence in the bond market, banks needed additional assessment, thus resulting in a need for extra time,” the Stuttgart-based company said in a statement.

The group of 15 banks providing the loan includes some that weren’t involved in previous credits, Porsche said. The carmaker needs funds as it seeks to extend a stake in VW to 75 percent in order to deepen ties to its biggest supplier and bring the larger company’s cash flow into its books.

Porsche was little changed at 38.36 euros as of 10:06 a.m. in Frankfurt. The stock has declined 27 percent this year, valuing the company at 6.72 billion euros. Volkswagen was trading up 3.4 percent at 221.40 euros. It has lost 12 percent this year and has a market value of 69 billion euros.

“The loan extension won’t be enough to let Porsche raise its stake in Volkswagen,” said Heiko Moehringer, an analyst at Landesbank Baden-Wuerttemberg in Stuttgart. “It’s already tapped some of the credit line and needs the buffer to weather the downturn.”

15 Banks

The credit line will be guaranteed by a group of banks comprising Barclays Capital, Commerzbank, LBBW, Deutsche Bank, UBS, Credit Suisse, Santander, BayernLB, BNP Paribas, Calyon, UniCredit/HVB, Helaba, Intesa, WestLB and DZ-Bank.

The senior lenders on the previous facility included Merrill Lynch & Co., since bought by Bank of America Corp., and ABN Amro Holding NV, now part of Royal Bank of Scotland Group Plc. Neither bank was immediately available for comment.

Porsche said the loan will come in two tranches spanning 12 months, with 6.7 billion euros of the total extendable for a further year. The company said it aims to pay down the smaller tranche quickly and is applying for credit ratings that should be determined by May.

The carmaker also has a “a framework contract” to increase the loan to 12.5 billion euros in coming weeks.

Porsche has been accumulating shares of Wolfsburg, Germany-based Volkswagen since 2005 and owned 50.8 percent of Europe’s biggest auto manufacturer as of Jan. 5.

“The renewal of the credit line is a relief for short- term funding concerns,” Arndt Ellinghorst, an analyst with Credit Suisse in London, said in a note. Porsche should stick with its current VW stake while the issue of Lower Saxony’s blocking minority holding in the company is unresolved, he said.

To contact the reporters on this story: Steve Rothwell in London at srothwell@bloomberg.net; Chris Reiter in Berlin at creiter2@bloomberg.net.

Japan Slips 0.1%, Australia Rises

HONG KONG -- Asian stock markets ended mixed Wednesday, with Chinese shares snapping a seven-session winning streak and financial stocks in some other markets retreating after recent heady gains.

Analysts were also divided as to the outlook. "Sentiment is now improving. So investors may take advantage of the profit-taking to come back into the market. I think there is more upside," said Marco Mak, head of research at Taifook Research.

But sounding a cautious note, IG Index Strategist Anthony Grech said: "There is the question of how effective the latest bailout plan from the U.S. is going to be. Looking at the market reaction in isolation Monday it seems as if it was being treated as manna from heaven, but these bailouts have proved a lot harder in the execution."

Japan's Nikkei 225 Average ended down 0.1% at 8,479.99, while the broader Topix Index gained 0.7%. Hong Kong's Hang Seng Index fell 2.1% while China's Shanghai Composite fell 2% for its first decline in eight sessions. New Zealand's NZX-50 slipped 0.2%.

Australia's S&P/ASX 200 advanced 0.8%, South Korea's Kospi Composite rose 0.6% and Taiwan's Taiex rose 2%.

India's Sensex rose 2.1% though Singapore's Straits Times Index declined 0.9%.

In Tokyo trading, Shinsei Bank shares fell 2.6% and Mitsubishi UFJ Financial Group slipped 0.6%, reversing some gains from earlier in the week.

Some exporters advanced, with Toyota Motor Corp. rising 1.3%, despite data showing Japan's exports plunged 49.4% in February from a year earlier, faster than a 43% decline in imports.

Nikko Citigroup analyst Tsutomu Fujita wrote in a report that Japan's public pension funds are net buyers in local equities so far this month, and may continue to increase the weighting of equities in their portfolios through the end of March.

In Sydney, shares of Rio Tinto added 1.1% after the Australian Competition and Consumer Commission said it will not block Chinalco's US$19.5 billion investment in the miner, clearing the first hurdle for the deal.

Brambles stock sank 11.7% after it lost a PepsiCo Inc. contract to supply wooden pallets.

In Hong Kong, shares of market heavyweight HSBC Holdings dropped 4.7%, after surging nearly 10% Tuesday. Refining giant China Petroleum & Chemical Corp., also known as Sinopec, saw its stock jump 5.5% a day after the Chinese government raised domestic motor fuel prices.

"The decision this week to raise prices despite a still-lackluster economic environment shows that the Chinese government is committed to [Bejing's] fuel price reform," Moody's Economy.com economist Sherman Chan wrote in a note.

Fisher & Paykel Appliances jumped 10.3% on news it had negotiated a temporary agreement with the assembly work force and a union at its Auckland refrigeration unit. The agreement for a 35-hour working week arrangement will prevent around 60 job losses, the company said.

Malaysia's main index added 0.1%, Philippine shares gained 1.1%, Thailand's SET Index slipped 0.3% and Indonesian shares lost 1.1%.

The U.S. dollar at ¥97.61 recently, compared with ¥98.34 earlier. The euro was down at ¥131.41 from ¥132.57 earlier in the day and ¥131.60 in the U.S.

Against the dollar, the euro traded at $1.3528, from $1.3443.

Some selling had come into riskier -- and thus higher-yielding -- currencies like the Australian dollar, which had fallen below US$0.70. The aussie was recently buying US$0.6932.

"I think the path of least resistance is still over US$0.70 - there's a pretty good correlation between the Aussie and equities and risk appetite generally," said ICAP senior economist Adam Carr.

Spot gold fell 30 cents to $925.80 a troy ounce, after falling in New York.

Front-month Nymex crude oil futures were down $1.16 at $52.82 a barrel. Data from the American Petroleum Institute showed U.S. crude inventories rose by 4.577 million barrels in the week to March 20, ahead of analysts' expectations for a 1.3 million-barrel build, reflecting soft demand.

Write to V. Phani Kumar at phani.kumar@dowjones.com, Rosalind Mathieson at rosalind.mathieson@dowjones.com and Philip Vahn at philip.vahn@dowjones.com

Tuesday, March 24, 2009

Bank of China Said to Get Initial Approval for Rothschild Deal

March 24 (Bloomberg) -- Bank of China Ltd., the world’s third-largest lender by market value, received initial government approval for its delayed 236 million-euro ($322 million) investment in La Compagnie Financiere Edmond De Rothschild, two people with knowledge of the matter said.

The purchase of a 20 percent stake in the Paris-based asset manager was endorsed by China’s State Council ahead of an April 1 deadline, the people said, declining to be identified because the matter is private. Wang Zhaowen, a Beijing-based spokesman at Bank of China, declined to comment.

Bank of China was forced to extend an original Dec. 31 deadline for the deal, announced in September, after failing to get state approval. The move may be a sign the Chinese government is easing curbs on overseas acquisitions by financial firms that were imposed after almost $10 billion of losses on investments, including in Morgan Stanley and Barclays Plc.

Bank of China, which is expected to report today that 2008 profit climbed 21 percent to 67.8 billion yuan ($9.9 billion) according to a Bloomberg survey of analysts, rose 0.9 percent in Hong Kong at 2:30 p.m. Financial stocks rallied worldwide after the U.S. yesterday unveiled a plan to remove $500 billion of toxic assets from its banks.

Compagnie Financiere Edmond de Rothschild, the French fund- management unit of closely held LCF Rothschild Group, and Bank of China will begin an asset-management and private-banking venture to sell Rothschild’s financial products through the Chinese lender’s 10,800 branches, according to a Sept. 18 statement announcing the investment. The French firm managed 29.6 billion euros in assets at the end of 2007.

$570 Billion Cash

Chinese banks are more confident about making acquisitions over the next 12 months than rivals in other parts of the Asia- Pacific region because of their “comparatively stronger balance sheets,” PricewaterhouseCoopers LLP said yesterday, citing a survey done this year.

Chinese banks posted a 31 percent increase in combined profit for 2008 and will continue to outperform overseas rivals, Liu Mingkang, chairman of the China Banking Regulatory Commission, said last month. The nation’s three largest banks held a total of $570 billion in cash and cash equivalents as of Sept. 30, more than the combined market value of the world’s seven biggest non- Chinese lenders.

The last overseas bank acquisition to receive approval was China Merchants Bank Co.’s purchase of Hong Kong’s Wing Lung Bank Ltd. in September. That acquisition was completed only after China Merchants twice extended a deadline.

Chinese regulators last week blocked Coca-Cola Co.’s $2.3 billion takeover of the country’s biggest domestic juicemaker, citing competition concerns.

To contact the reporter of this story: Luo Jun in Shanghai at jluo6@bloomberg.net

Yen, Dollar Decline as Stocks Advance on U.S. Toxic-Asset Plan

March 24 (Bloomberg) -- The yen dropped to a five-month low against the euro and the dollar declined on speculation U.S. plans to help banks dispose of toxic assets will spur investors to seek higher yields.

The dollar approached a two-month low versus the European currency after Treasury Secretary Timothy Geithner unveiled proposals to finance as much as $1 trillion in purchases of illiquid property assets, damping demand for the safety of the greenback. South Korea’s won, Australia’s dollar and the British pound strengthened for a third day against the yen as Asian stocks extended a worldwide rally on optimism the worst of the global financial turmoil may be over.

“Active policy steps by the U.S. government tentatively weaken demand for ‘safe’ currencies,” said Akira Takei, who helps oversee the equivalent of $42.5 billion as head of non-yen bonds in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second-largest bank. “Capital inflows into the currencies of emerging markets are rising.”

The yen fell 1.5 percent to 134.11 per euro as of 6:17 a.m. in London from 132.17 late yesterday in New York, after touching 134.51, the weakest level since Oct. 21. That’s the biggest loss since March 4. Japan’s currency slipped 1.2 percent to 98.10 per dollar from 96.95.

The dollar dropped to $1.3668 per euro from $1.3633 yesterday in New York. It reached $1.3738 on March 19, the lowest since Jan. 9. Against the British pound, the greenback fell to $1.4720 from $1.4572. It touched $1.4727, the lowest since Feb. 10.

Higher Yields

The yen weakened against all the 16 most-traded currencies on speculation the stock rally will spur investors to purchase higher-yielding assets overseas. Japan’s benchmark interest rate is 0.1 percent, compared with 1.5 percent in the euro region, and 3.25 percent in Australia.

South Korea’s won advanced 2.1 percent to 14.07 versus the yen, Australia’s dollar climbed 1.7 percent to 69.53 yen and the pound appreciated 2.4 percent to 144.65 yen. The U.K. currency reached 144.91 yen, the highest since Dec. 1.

The Nikkei 225 Stock Average rose 3.3 percent, its sixth gain in seven days, and the MSCI Asia Pacific Index of regional equities advanced 2 percent.

“Shares in the region are rising, suggesting improving risk-taking appetite among investors,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “Japan’s fundamentals are deteriorating. The yen will probably be sold.”

Japan’s currency also declined for a third day against the dollar on concern a government report tomorrow will show the economy posted a trade deficit for a fifth month, suggesting reduced demand for the nation’s exports.

Trade Deficit

The Finance Ministry may say tomorrow the custom-cleared trade shortfall was 20 billion yen ($205 million) in February, narrowing from a record 956.9 billion yen in January, according to a Bloomberg News survey of economists.

The yen has fallen versus 15 of the 16 major currencies this quarter, weakening the most versus Norway’s krone and Brazil’s real. Against the yen, the krone has surged 20 percent to 15.6492 and the real has climbed 12 percent to 43.7271.

The Dollar Index, which the ICE uses to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, dropped 5.4 percent in March, paring its gain this quarter to 2.4 percent. The Fed said on March 18 it would buy as much as $300 billion of Treasuries and increase purchases of agency mortgage-backed securities to cut borrowing costs.

“For now, the dollar should remain under pressure,” Ashley Davies, a Singapore-based currency strategist at UBS AG, wrote in a note today. “The dollar was undermined last week by the Fed’s action.”

Buy British Pound

Investors should buy the British pound against the yen on speculation the U.K. government’s strategy of pumping money into the financial system will boost banking shares, according to BNP Paribas SA.

The Bank of England bought 7 billion pounds ($10 billion) of gilts in the week through March 19 with newly created money using its Asset Purchase Facility. The central bank’s so-called quantitative easing has helped reduce the cost of protecting U.K. government bonds from default and is “positive” for assets such as equities and commodities, said BNP Paribas, France’s largest bank, in a research note yesterday.

“Sterling is the one way to trade that, given the correlation between sterling and financial stocks,” Sharada Selvanathan, a currency strategist in Hong Kong at BNP Paribas, said in an interview, confirming the note. “That’s a key reason why sterling-yen should have broken out, and it has broken out since yesterday.”

Credit default swaps on U.K. government debt dropped to 113.64 basis points yesterday from 122.00 basis points on March 20, according to CMA Datavision prices.

To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.

Good Financial Times