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In Case You Missed It: Business News Round-up

Beth 005Contributed by Beth Collinge of CTG – a division of ILX Group plc.


US stocks moved to fresh 19-month highs. The euro fell to a one-year low against the dollar and a three-month low against the pound. George Papandreou, Greece’s prime minister, has made a formal request for the proposed European Union-IMF emergency loan package to be activated. President Barack Obama argued last week for a bill that would overhaul US financial regulation.

Economic Backdrop

  • On Friday, US stocks moved to fresh 19-month highs, with the S&P 500 up 0.7%, and the DJIA up 1.68%, following positive durable goods orders and property market data.
  • In the currency markets, the euro fell to a one-year low against the dollar and a three-month low against the pound following comments from Dominique Strauss-Kahn, IMF managing director, that: “There is no silver bullet to solve [the Greek budget deficit] in an easy manner.” This added to the fear that the eurozone would struggle to resolve the fiscal crisis.

  • The pound dipped against the dollar to $1.5354 on news that, according to an initial estimate, Britain’s economy grew by just 0.2% in the first quarter, about half of what had been expected. These poor GDP figures followed gloomy ones for jobs, inflation and the public deficit earlier in the week.
  • Following another unanimous vote from the Bank of England’s Monetary Policy Committee (MPC) this month to maintain UK interest rates unchanged, the minutes of the last meeting were published on 21 April. These revealed worries among some members about the level of inflation, which strong March inflation data will no doubt increase. Its next interest rate decision has been rescheduled to 10 May so as to not clash with the election.
  • The yield on the US 10-year Treasury rose 4bp to 3.81% as the assets’ haven attraction diminished. US debt was also impacted by reports on CNBC that a growing number of Federal Reserve members were pushing for the central bank to start selling its mortgage assets.
  • Commodities picked up at the end of the week on the solid US economic data. Gold rose 1.56% on the week per cent to $1,155 an ounce.

Mergers and Acquisitions

  • Arriva, one of Britain’s biggest train and bus operators, agreed to a £1.6 billion ($2.5 billion) takeover from Deutsche Bahn, Germany’s state-owned rail company. More mergers are expected in Europe as transport markets are opened to competition.

Financial Institutions

  • An International Monetary Fund (IMF) report this week said that leading economies should impose new taxes on bank balance sheets to pay for financial clean-ups, and consider an additional levy on bank profits and pay. The IMF report is premised on the belief that another financial crisis could lead to a fresh round of tax-payer bail-outs, which it calculates might cost 2-4% of each country’s GDP.
  • The report proposes a Financial Activities Tax (FAT), which consists of a levy on the value added of ALL financial institutions, including insurers, hedge funds, and private equity firms.
    It comprises two elements: a tax on profits and a tax on remuneration.
    It appears that the FAT is intended to be levied on top of normal corporation tax, and will only apply to profits above the normal return.
  • The second aspect is a Financial Stability Contribution (FSC). The FSC would comprise a levy on all financial companies, and is designed to pay for the fiscal cost of any future government support to the sector in the event of another financial crisis. The monies raised could either accumulate in a “resolution fund” to cover the expected cost of winding down failed institutions or they could feed into general revenues. The levy rate would initially be flat but would be refined over time to reflect risk, similar to an insurance premium: riskier companies should pay more tax.
  • These proposed measures are strongly opposed by the insurers, hedge funds, private equity and Australian and Canadian banks, who are caught in the net, but who feel that they did not contribute to the financial crisis.
  • The Securities and Exchange Commission’s civil charges against Goldman Sachs and Fabrice Tourre, an employee, over a complex security that lost investors $1bn (£650m, €750m), were strongly refuted. Goldman’s Chairman, Lloyd Blankfein, and other senior members of the Goldman team are to appear before the US Senate Committee investigating the case on Tuesday 27 April.
  • Citigroup reported $4.4 billion in net income for the first three months of 2010, its best profit in almost three years. Citi lost around $30 billion during the credit crisis.
  • Bank of America posted a net profit for the first quarter of $3.2 billion, a drop of 24% compared with a year earlier. Morgan Stanley’s quarterly net income was $1.8 billion.
  • Credit Suisse had a good three months, in which it recorded the biggest gain in new assets from wealthy clients for five years, a sharp contrast to the Swiss bank’s bigger rival, UBS, which has been hurt by net outflows of customers’ cash.
  • Lehman Brothers‘ liquidators have filed a lawsuit against Nomura for allegedly trying to profit from the collapsed investment bank’s estate, in the first of a series of anticipated legal claims against Lehman’s former trading partners. Nomura, which has filed in excess of $1bn in derivatives-related claims against Lehman’s US estate, is the first bank to be targeted for allegedly seeking inflated amounts that overestimate the true losses suffered by the Japanese securities firm.

Credit

  • George Papandreou, Greece’s prime minister, bowed to overwhelming pressure from financial markets on Friday 23 April and made a formal request for the proposed European Union-IMF emergency loan package to be activated. This will be the first rescue of a euro area country. Greece’s socialist government said the prospect of financial collapse had forced it to ask for the activation of a €30bn ($40bn) lifeline that could ultimately be worth €45bn once a contribution from the International Monetary Fund is included.
  • Greece must refinance €8.5bn in bonds that mature on May 19, and interest rates on Greek debt had reached cripplingly high levels by the middle of the week. They remained high in spite of some market relief that Greece had requested the bail-out. Negotiations with a team from the Commission, ECB and IMF are due to be completed on May 6 but much uncertainty surrounds the disbursement of the loans. This follows news that Greece’s public deficit last year was even worse than expected, perhaps more than 14% of GDP, and a fresh downgrading of Greek bonds.
  • Portuguese yields continued to move higher, on fears of contagion. Lisbon’s 10-year bond yield rose 2bp to 5.01 per cent. Portugal’s CDS rose 3 per cent.
  • Portugal is doing better than Greece in its budget deficit (9.4% of GDP in 2009, compared with 12.7%) and public debt (85% of GDP this year, against 124% in Greece). Unlike Greece, its public accounts are credible and it has a record of taking tough fiscal measures when necessary — between 2005 and 2007, it cut its budget deficit in half, from 6.1% of GDP to 2.6%. A four-year austerity programme to chop the budget deficit again, this time to 2.8% of GDP in 2013, has been adopted.. However, Portugal’s biggest problem is not primarily fiscal: it is its lack of real growth. Real GDP growth over the decade since Portugal joined the euro has been the slowest in the zone.

Other

  • EADS, the European aerospace and defense company that owns Airbus, decided to submit a fresh bid to build flying tankers for the American air force. The company’s American partner in the project, Northrop Grumman, pulled out of the process in March claiming the terms favour Boeing.
  • On 19 April the Financial Times published highlights of a survey by the Institute of Chartered Accountants of England and Wales (ICAEW). It concluded that the audit report does not provide useful information and auditors should give a more subjective view of their clients to help investors and regulators make decisions.In its findings, the ICAEW discovered that the audit process that takes place inside banks and out of the view of investors was considered essential in “imposing discipline” on how finance directors present company accounts.However, the audit report – which is the information made available to investors – was considered a compliance document lacking in usefulness and information.
  • President Barack Obama argued last week for a bill that would overhaul US financial regulation. The proposed law would ban banks from trading with their own money and prevent them from investing in internal hedge funds and private equity funds. The overhaul would also force a large portion of the lucrative derivatives market on to exchanges and clearing houses.

Note: The details contained in this article have been drawn from a daily review of the Financial Times and The Economist.

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