Federal Reserve Vice Chairman Donald
Kohn said on Thursday that rising energy and food prices have
hit headline inflation, but this has only seeped into inflation
expectations by a little bit so far.
"For the moment, higher headline rates of inflation have
shown only a few tentative signs of embedding themselves in
core inflation or longer-term inflation expectations," he said
in remarks released in advance to the media in Washington.
"However, policymakers around the world must monitor the
situation carefully for signs that the increases in relative
prices globally do not generate persistently higher inflation,"
he said in the text of a speech to be delivered to the
International Research Forum on Monetary Policy in Frankfurt.
Kohn was to speak the day after the Federal Reserve held
interest rates unchanged at 2 percent while escalating its
warnings on inflation. Investors took this as a clear signal
that its next rate move would be up.
His speech was mainly about economic decoupling between the
United States -- where a collapse in the housing sector has
chilled growth -- and the rest of the world, where activity has
held up better. Kohn cautioned that the jury was still out.
"We are still in the midst of the current episode.
Financial markets remain stressed; housing markets in many
countries are adjusting after a sharp run-up in prices; and the
effects of the turmoil on economic activity in the United
States and elsewhere are still working themselves out.
"Accordingly, it is too early to tell how correlated U.S.
and foreign activity will have been in this period," he said.
Kohn noted that the clear global downturn in the period
after the collapse of the technology bubble in 2000-2001 might
owe something to the international nature of that market.
Housing, on the other hand, is produced from local inputs
and generates outputs that are not traded internationally.
While the evidence of the linkages between national
business cycles might not stand up to close empirical scrutiny,
Kohn said there was no doubt that higher energy and food prices
were impacting inflation at a global level. But he was at a
loss to explain why prices continued to surge.
"The reasons for the trajectory and persistence of
increases in prices of food and energy this year, as global
growth has moderated, are not entirely clear," he said.
He said that stronger earnings for commodity-exporting
countries, thanks to higher commodity prices, may have helped
shield these countries from the U.S. slowdown and account for
the resilience of emerging market growth so far.
But these countries should not ignore economic overheating
linked to the commodity boom, since this could have global
ramifications, Kohn warned.
"In those countries where strong commodity demands are
associated with rapid growth in aggregate demand that outstrips
potential supply, actions to contain inflation by restraining
aggregate demand would contribute to global price stability."
(Reporting by Alister Bull; Editing by Diane Craft)
Thursday it plans to shore up its finances with measures worth
more than 8 billion euros ($12.54 billion), including issuing
new shares, hitting its stock on dilution worries.
The Belgian-Dutch financial services group said it would
issue 1.5 billion euros in new shares, plus up to 2 billion
euros of non-dilutive preference shares. It will save 1.3
billion euros by not paying an interim 2008 dividend, and will
also sell non-core assets and sell and lease back real estate.
"We believe that 2008 will be a difficult year for our
industry and we do not expect an improvement in the economic
environment soon," Fortis Chief Executive Jean-Paul Votron said
in a statement.
"The measures announced today will help Fortis navigate
through the current challenging market circumstances."
One analyst said the measures would go some way to dispel
worries about the company's finances but were dilutive.
"There were lots of worries regarding Fortis's capital
action. These actions will take away some of these worries,"
said Theodoor Gilissen analyst Paul Beijsens.
"Unfortunately because of the excess shares, there will be
share dilution which is a negative thing for shareholders."
Fortis shares were down 11.1 percent at 11.27 euros by 4:07
a.m. EDT, making it the biggest loser on the DJ Stoxx index of
European banks (.SX7P) which was down 1.9 percent.
Reeling from the credit crunch like other global banks,
Fortis had already sought to raise more capital by selling a 5
percent stake in the group and half its asset management
business to China's Ping An Insurance Co Ltd (
It also needs funding for its 24 billion euro acquisition
and integration of parts of its former Dutch rival ABN AMRO.
The new Fortis plan comes after British bank Barclays
(BARC.L), which has one of the thinnest capital cushions among
European banks, said on Wednesday it had raised 4.5 billion
pounds ($8.88 billion) from investors without a rights issue.
Analysts said the steps should boost Fortis Bank's core
Tier 1 ratio -- a key measure of financial strength based on
capital available against perceived risk -- by about a
Fortis said the plan would help keep the ratio be well
above 6 percent by the end of 2009. That compared to 8.5
percent at the end of the first quarter, but that figure did
not yet include the impact of the ABN buy including goodwill
Fortis said its banking and insurance businesses continued
to be resilient despite the tough market and it expected second
quarter results in line with or slightly above the previous
quarter, when it booked a charge of 380 million euros from
subprime, structured credit and related investments.
"Lower capital gains are anticipated to be offset by lower
impairments on the structured credit portfolio," it said.
"After an initial relief that the 'news is out' and Fortis
has bitten the bullet, we think that doubts will come back
soon," Petercam analyst Ton Gietman said in a note, adding that
further write-downs might be necessary.
Fortis said it hoped to resume its policy of paying cash
dividends as early as the interim 2009 dividend. Its full-year
dividend will be paid in shares based on full-year profit.
It said it expected the sale of mature non-core assets to
boost solvency by about 2 billion euros, while a capital relief
program and a sale and lease-back transaction of real estate
should raise around 1.5 billion euros.
Fortis said it would place the 1.5 billion euros in new
shares with institutional investors. It has agreed a 180-day
lock-up period with the joint bookrunners: Merrill Lynch, JP
Morgan, Fortis Bank and Morgan Stanley.
Fortis said ABN expected to agree soon the sale of parts of
its Dutch businesses, including factoring company IFN Finance
which could go for 300 million euros below net asset value. It
said ABN might have to provide credit risk coverage of around
10 billion euros of risk weighted capital of those assets.
Fortis acquired ABN's Dutch operations, private banking and
asset management businesses after buying the Netherlands'
biggest bank in a consortium with Royal Bank of Scotland
(RBS.L) and Santander (
(Additional reporting by Harro ten Wolde; Editing by Paul
The London Stock Exchange (LSE.L) plans
to set up a pan-European, off-bourse trading platform with
Lehman Brothers (LEH.N), the groups said, to fend off start-up
rivals hurting LSE's business.
The joint venture called Baikal would offer access to
securities across 14 European countries in a so-called dark
liquidity trading pool that also offered algorithmic, or
computer-driven, trading functions.
"Baikal aims to address the growing complexity of order
execution (...) by allowing (...) participants to trade larger
orders in a trusted environment, thereby minimizing market
impact," the groups said on Thursday.
The joint venture will start business in the first quarter
of 2009, the groups said, and will be headed by LSE's chief
executive, Clara Furse.
The move comes a day after Project Turquoise, an
alternative European cash equities trading platform established
by a group of big investment banks, said it would go live on
On Tuesday, NYSE Euronext (NYX.N) bought 25 percent of the
Doha Securities Market for $250 million as western exchanges
are looking to boost their presence in booming emerging markets
as business in America and Europe slows.
Shares in LSE, Europe's biggest stock market, have fallen
over 50 percent this year amid fears it is losing market share
to new trading platforms such as Nomura-owned Instinet's Chi-X,
which offer faster trading execution times.
LSE shares were 5 percent lower, after jumping more than 11
percent in the previous session when Qatar's sovereign wealth
fund said it was in talks with London and German stock
exchanges for new partnerships.
Rising dissatisfaction from hedge funds with traditional
stock exchanges and the European Union's new MiFID market abuse
regulation have sparked the birth of an entire generation of
alternative trading venues.
LSE shareholders were enjoying a Middle-Eastern bidding war
for the exchange's business only nine months ago, but much of
the takeover speculation has disappeared, now that the
exchange's future looks much tougher and Qatar holds a 15
percent stake in the London-based company.
(Reporting by Mark Potter and Douwe Miedema; Editing by