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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.

The Dow Jones suffered its worst intra-day points fall. The Euro hit a one-year low against the Dollar on fears about the Euro-zone’s financial stability, following the Greek financial crisis. After Britain’s election produced a hung parliament, parties are working out a power-sharing deal.

Economic Backdrop

  • On Thursday 6 May a cascade of automated trades caused the Dow Jones Industrial Average to suffer its worst intra-day points fall – 998.5, or 9.2 per cent. It then recovered slightly, but it still ended the week down 5.71%. On Friday, 7 May, the FTSE 100 lost £35bn in value and, around the world, stockmarkets tumbled, with nearly $1 trillion wiped off the value of shares worldwide.
  • Wall Street’s fear gauge, the CBOE Volatility index, or the VIX, rose 26% Friday, to 41.43, ending at a fresh 12 month high.
  • The euro hit a one-year low against the dollar, falling nearly 5% as fears spread over Europe’s financial stability. Despite approval earlier this week of a €110 billion ($145 billion) bail-out of Greece by euro-zone countries and the International Monetary Fund, investors are worried that this will not prove sufficient, and that other European countries, notably Portugal and Spain, will get drawn into the crisis.

  • Analysts say the euro may find some relief from the expected establishment by the European Union on Sunday of a multibillion-euro stabilisation fund to protect the eurozone’s most vulnerable countries.
  • Gold surged to its highest level in five months this week as panicking investors pulled money out of risky assets and piled into the precious metal. Most analysts and traders believe it is only a matter of time before gold surpasses the all-time high of $1,226.10 set on December 3 last year.
  • In oil, ICE June Brent, the European benchmark, dropped $9.17, or 10.5 per cent, to $78.27.

Mergers and Acquisitions

  • UAL, the parent company of United Airlines, and Continental Airlines announced that they are to merge in an all-share deal worth around $3 billion. Assuming it gets the go-ahead from competition regulators, the new company, to be called United Continental Holdings, will be the world’s largest airline by passenger numbers. Consolidation in the aviation industry is being driven by continued losses.

Financial Institutions

  • Despite fears of a sovereign debt contagion, BNP Paribas, UBS and Société Générale all reported healthy quarterly profits. BNP’s profits rose by 47% to €2.3 billion, while UBS, one of the biggest victims of the crisis, said that it had made a first-quarter profit of SFr2.2 billion ($1.8 billion), compared with a SFr2 billion loss in the same period last year. Another embattled bank, Société Générale, made €1.1 billion, compared with a €278m loss last year. Both BNP and SocGen also detailed manageable exposures to Greek government debt.
  • HSBC is closing in on acquiring the remaining Asian retail and commercial assets being divested by Royal Bank of Scotland (RBS). RBS has appointed Lazard to seek potential bidders and manage the sale. The bank, which is majority-owned by the UK government, made a loss of £24.1bn ($39bn) last year.
  • Greece has hired investment bank Lazard to advise on its public finances as the country takes steps to cut its budget deficit in the wake of this weekend’s €110bn bail-out package. Lazard confirmed it had been hired to assist the Greek authorities but dismissed speculation that debt restructuring was one option being considered. However, the firm’s sovereign advisory team – an adviser on Argentina’s debt restructuring – is understood to be working with the Greek government.

Credit

  • Michel Barnier, EU internal market commissioner, said on 4 May that he would look at setting up a European credit rating agency, which could specialise in sovereign debt, as he believes there should be more diversity in the rating agency market, which is currently dominated by three players, Standard & Poor’s, Moody’s, and Fitch.
  • The commissioner noted that new pan-EU rules governing credit rating agencies – which will require them to register for the first time and be more transparent about their rating methodologies – would come into force in December. This legislation was passed last year, in the immediate aftermath of the 2008 financial turmoil when the role of agencies was subject to much criticism.
  • EU finance ministers met on 9 May to agree anti-contagion measures before markets opened this week. One possible measure would be for the EU to set up loan guarantees. Another measure would be a stabilisation fund (of €60bn – €80bn), which would provide credit lines to countries in crisis. The facility could be funded by EU bonds, the method chosen to help Hungary and Latvia in 2008. EU bonds would be backed by the 27-nation bloc, so carrying AAA ratings and making the debt as cheap as possible.

Other

  • The UK’s budget deficit will be larger than Greece’s this year and growth will be slower than the Treasury expects, according to new forecasts published on 7 May by the European Commission. “The deficit in 2010 is set to hit 12 per cent of gross domestic product,” the Commission said. That is more than any country in the European Union, including Ireland, whose deficit is set to reach 11.7 per cent, and Greece, where the deficit is predicted to be 9.3 per cent. The EU average deficit is forecast to be 7.2 per cent of GDP.
  • Financial reform in America moved closer. The Senate voted for an amendment that got rid of an upfront $50 billion levy on banks to cover the cost of liquidations, requiring instead that they pay the bill afterwards. A vote on the overall bill is expected shortly.
  • Australian mining companies were hit after the government announced plans for a new 40% tax on their profits. Shares in companies such as Rio Tinto and BHP Billiton, both partly Australian-owned, slumped following the news. The country expects to raise A$9 billion ($8.1 billion) each year from the move.
  • BP Plc has suffered a setback in an attempt to contain oil gushing into the Gulf of Mexico with a huge metal dome, when crystallised gas filled the structure. This was a blow to hopes of a quick, temporary solution to a growing environmental disaster.
  • BP chief executive Tony Hayward said a $US75 million ($84.45 million) legal cap on the liabilities for economic damages under federal law, which some US lawmakers now want to raise, would not be a limit and renewed promises to meet all “legitimate” claims.
  • BP suffered another blow on Friday when ratings agency Standard & Poor’s lowered its outlook to negative from stable and indicated a ratings downgrade was likely.
  • In the UK, David Cameron, the Conservative Party leader, offered to share power with the Liberal Democrats, in an attempt to secure his passage to Number 10 and reassure markets after Britain’s election produced a hung parliament.

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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