In Case You Missed It: Business News Round-Up

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

While US investors focused on the prospects of more quantitative easing (QE2), in Europe attention remained fixed on sovereign debt concerns and fiscal austerity. Ireland was the centre of unwelcome attention, as credit rating agencies lowered their ratings of Irish banks and the potential cost of bailing out the banks rose to 50 billion Euro, which would increase the budget deficit to around 32% of GDP.

Economic Backdrop

Data released last week ranged from an upbeat survey of China’s manufacturing sector, to UK and eurozone factory activity slowing, with an unexpected drop in German retail sales during August. Nevertheless, consumer and business confidence rose in the euro area in September, with Germany leading the economic-sentiment indicator for the 16-member currency union close to a three-year high.
Americans were not as optimistic, as job and wage concerns drove the consumer-confidence index down. The US Institute for Supply Management’s manufacturing composite index eased as expected to 54.4 in September from 56.3 in August.
The euro surged to a six-month high of $1.3767 last week as the prospects of further quantitative easing from central banks other than the European Central Bank lifted the single currency and allowed it to shrug off persistent concerns over the fiscal health of countries, such as Spain and Ireland, on the periphery of the eurozone. The euro also rose 2 per cent to a four-month peak of £0.8695 to the pound, as Adam Posen, a member of the Bank of England’s monetary policy committee called for further quantitative easing to stimulate the UK economy.

Mergers and Acquisitions

Bright Food, the Chinese food group, is in exclusive talks to buy United Biscuits in a deal that would value the maker of Jaffa Cakes and Hula Hoops crisps at almost £2.5bn including debt. Middlesex-based United Biscuits is already foreign owned: Blackstone, the US private equity group, and PAI Partners, the French buy-out firm, bought the company in 2006 for £1.6bn.

Financial Institutions

HSBC replaced Stephen Green, who last month announced he will be stepping down as chairman at the end of 2010 to assume a position in Britain’s coalition government. Michael Geoghegan, the bank’s chief executive, resigned as he was passed over for the top job, which went to Douglas Flint, the group’s finance director. Stuart Gulliver, head of investment banking, will be Mr Geoghegan’s successor as chief executive.
UniCredit’s board has unanimously appointed Federico Ghizzoni, one of its most longstanding senior managers as its new chief executive to replace Alessandro Profumo, who was ousted in a board coup last week.
Royal Bank of Scotland (RBS), the UK lender that is still 84 per cent owned by the taxpayer, has one of the biggest exposures to Irish sovereign debt, according to data disclosed by Europe’s leading banks during a high-profile “stress test” in July. RBS held £3.3bn ($5.2bn) worth of Irish government bonds in its banking book and another £958m in its trading book at the end of March, giving the group a total net exposure of nearly £4.3bn, the figures show. That is more than quadruple the Irish sovereign holdings disclosed by Bank of Ireland, and 20 per cent more than those detailed by Allied Irish Banks, the troubled domestic lender now set to be nationalised.
Royal Bank of Scotland announced it will shed up to 500 jobs from its investment banking arm.
JPMorgan Chase is in talks to acquire another part of RBS Sempra Commodities, the trading group partly owned by Royal Bank of Scotland, after the US bank bought the bulk of the business earlier this year.

Credit

Last Wednesday Standard & Poor’s, the credit rating agency, downgraded Anglo Irish Bank’s subordinated debt by three notches to triple C and warned there was a “clear and present risk” of a restructuring of the bonds. Earlier in the week, Moody’s Investors Service similarly downgraded the bank’s sub bonds, but also downgraded Anglo Irish’s senior bonds by three notches because of the “greater marginal risk” that the government would not support those creditors.
Moody’s also downgraded Spain’s government bonds, citing weak economic growth, the difficulty of cutting the budget deficit and higher borrowing needs. The downgrade by one notch from its top rating of triple A to Aa1 makes Moody’s the last of the three big rating agencies to downgrade the country as a result of the global economic crisis.
Dubai returned to the markets for the first time since Dubai World, a government-owned holding company, announced it would have to restructure its debt of some $25 billion in November 2009. The emirate managed to raise $1.25 billion in a two-part bond sale, which was heavily oversubscribed.

Other

The two-year blanket government guarantee covering the liabilities of Ireland’s six domestic lenders expired on Thursday. The guarantee, which represented a €440bn (£375bn) contingent liability for the Irish state, was introduced in September 2008 to prevent a run on Anglo Irish Bank. The government has to date had to provide €22.9bn in state aid just to keep Anglo Irish afloat. Ireland is already financing the largest budget deficit in the European Union at 11.6 per cent of gross domestic product. Ireland is set to provide a four-year budget plan to the European Commission in the next few days. Investors warned that Ireland may still be forced to turn to the eurozone bail-out fund, the European Financial Stability Facility, even if it succeeds in delaying such a move until the middle of next year at the earliest.
Ireland’s government injected an additional €10bn into three financial institutions, including Anglo Irish Bank, a failed property lender. The rescue costs for this one bank represent a staggering 21 per cent of Irish GDP, more than the entire bill for sorting the Japanese banking crisis of 1997 and almost twice the cost of the Finnish crisis in the early 1990s.
As part of the new bail-out the finance minister will authorise the immediate transfer of Anglo Irish’s remaining €25.9bn in non-performing property loans to the National Asset Management Agency, the government body set up to house troubled assets from the banking crisis. At one swipe, the move will halve Anglo Irish’s size. The rest of the loans will be wound down over time.
In anticipation that Allied Irish Banks may now be targeted by the markets, the country’s finance ministry said it would probably take majority control of Allied Irish Banks. It is estimated that the eventual cost of bailing out the banks and building societies will rise to as much as €50 billion ($68 billion). This will cause the deficit to increase to around 32% of the country’s GDP. Irish ten-year bond yields have climbed above 6.5%.
The European Commission, the European Union’s executive arm, proposed legislation that would grant it more powers over member states’ public finances. The EU executive outlined plans to prevent a repeat of Greece’s debt crisis by making chronic deficit offenders deposit 0.2 per cent of their gross domestic product with Brussels. The interest-bearing deposit would be converted into a fine unless the country brought its budget gap below the EU limit of three per cent, while repeat offenders will incur annual fines of 0.1 per cent of GDP. The legislation will need to be approved by EU governments in the European Council and the European Parliament.
Tim Geithner, the US Treasury secretary, chaired the first meeting of the new council of regulators on Friday to consider which financial companies will be subject to tougher capital requirements and closer supervision. The Financial Stability Oversight Council, whose members include Ben Bernanke, the Federal Reserve chairman, is charged with heading off the sort of “systemic risks” that threatened the financial system in 2008.
The House of Representatives approved a bill to treat the yuan’s exchange rate as a subsidy. The legislation was backed by both Democrats and Republicans and is a response to what American lawmakers believe is systematic manipulation to keep the Chinese currency undervalued. China said the bill could harm ties between the two countries. It is unlikely that the bill will be passed by the Senate and signed into law by Barack Obama.
The UK Treasury has commissioned a study into the practice in markets of ultra-fast automated trading because of concerns that a computer-generated error could have “significant impact” on the economy. The move is a sign of rising concern about the rapid growth of computer algorithms and so-called “high-frequency trading”, which allows traders to buy and sell shares, derivatives and foreign exchange in fractions of a second. The practice now accounts for up to 60 per cent of US equity markets, while the London Stock Exchange estimates that more than a quarter of its trades are driven by high-frequency trading. But it has generated controversy in the wake of the “flash crash” in the US on May 6, when the Dow Jones index plunged 1,000 points in 20 minutes before recovering. Critics say some high-frequency strategies unfairly reap profits for traders at the expense of others in the markets. They also say that malfunctioning algorithms could destabilise markets. Defenders of high-frequency trading say most of it has helped increase liquidity since the days of pit trading and it has narrowed bid-ask spreads, making it cheaper and easier for investors to get better prices.

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