Archive for June, 2010

Hungary eyes budget cuts, market says signals mixed (Reuters)

Monday, June 7th, 2010 | Finance News

BUDAPEST (Reuters) –
Hungary's government vowed to cut spending on Monday as it strove to repair damage from comments last week about a possible Greece-style debt crisis, but a renewed pledge of tax cuts kept markets on edge.

Economy Minister Gyorgy Matolcsy said the country's new center-right Fidesz government, which took office on May 29, would stick to the budget deficit target of 3.8 percent and would need to cut spending worth 1.0-1.5 percent of gross domestic product (GDP) to do so.

But he later said the government could introduce a flat personal income tax for families, lower than current rates, which would be hard to square with commitments agreed under a 2008 bailout from the European Union and International Monetary Fund.

Moody's credit rating agency said the government's willingness to consider unorthodox measures was cause for concern, while other analysts said Fidesz was still sending mixed messages to international and domestic audiences, a practice which prompted the selloff that sent the forint to a one-year low last week.

"We'll stick to our 3.8 percent budget deficit level for this year. It was agreed by the IMF and the EU and it was also agreed by the Hungarian government so there is no doubt about that, we'll stick to that figure," Matolcsy told CNBC.

He repeated that there were blunders in government communication last week, when officials suggested there was a slim chance Budapest would avoid a similar fate to Athens, but added "it is blatant that Hungary is not Greece."

Economists say last week's comments from officials appeared to be a case of the new government preparing to backtrack on promises made before it swept an April election.

But they said mixed messages, and previous statements that this year's budget deficit could be as high as 7 percent of GDP, continued to sow confusion.

"One cannot help being puzzled when Hungarian officials talk about a much larger than planned budget deficit and at the same time rule out austerity measures and instead promise tax cuts," said Danske Bank analyst Lars Christensen.

The government started a three-day meeting on Saturday and is expected to decide on an action plan on Monday.

UNORTHODOX METHODS

Most economists say Hungary is in a much stronger position than Greece. Its deficit and debt ratios to GDP are not nearly as high; public debt was about 80 percent last year, compared with 133 percent projected for Greece this year.

It also ran a current account surplus last year and had a budget gap of 4 percent after deep spending cuts.

But Moody's said the government's statements and its consideration of unorthodox measures to boost growth brought new attention to Hungary's still high public and external debt.

"In our view, these uncertainties threaten to further impair Hungary's creditworthiness," Moody's analyst Dietmar Hornung said, adding Hungary's Baa1-rated government bonds were on negative outlook.

Citing unnamed sources, online news portal Index reported the government was considering levying a special tax on banks and channeling private pension funds to the state system as a way to boost revenues and hit its budget deficit goal.

Neither the government nor banking officials were available to comment, but the report sent shares tumbling 5 percent on the Budapest bourse, which briefly suspended trading in leading lender OTP Bank (OTPB.BU) after its shares fell 10 percent.

At 0950 GMT, OTP was down 1.2 percent.

Markets steadied, with the forint hovering just off a one-year low, keeping pressure on regional peers like the Polish zloty. Concern over Hungary also helped drag the euro to a four-year low against the dollar on Friday.

The yield that investors demand to hold Hungary's 3-year government bonds rose by 15 basis points from Friday to 5-month highs at 7.25 percent, while 5- and 10-year yields stayed near 9-month highs.

"The market will return to normalcy once again," one fixed income trader said. "(But) it will take much longer than the weakening took."

Economy Minister Matolcsy said that by end-May the budget deficit had reached 87 percent of the full-year target but the government would keep it under control. While there was no need for an austerity package, having a fiscal stimulus package was not an option now.

He also told domestic viewers on TV2 television the government was examining a possible 15-20 percent flat tax for families.

"As we see now, and the government is preparing to make such a decision, that from January 1, 2011, a flat family tax could be introduced and finalized over a period of two years," he said.

(Reporting by Krisztina Than and Marton Dunai; writing by Michael Winfrey; Editing by Ruth Pitchford)

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Accused French rogue trader Kerviel to stand trial (AP)

Monday, June 7th, 2010 | Finance News

PARIS – Jerome Kerviel says he's living the simple life these days. The former French trader accused of gambling away billions of his bank's money has a job in the suburbs making euro2,300 ($2,700) a month. He doesn't take vacations. His adrenaline-fueled life on the trading floor seems far away.

Two and a half years after the scandal broke, Kerviel goes on trial in Paris on Tuesday, accused by Societe Generale SA of risking tens of billions of euros of its money in trades that led to nearly euro5 billion (more than $7 billion) in losses once the bank unwound his positions in January 2008.

At the time it was considered history's biggest trading fraud, but it was soon dwarfed by a global financial crisis, the fall of Lehman Brothers and the Bernard L. Madoff multibillion-dollar Ponzi scheme.

Kerviel, the accused rogue trader, already has hammered out his defense in a book and interviews with French media, casting himself as an everyman who got carried away, a scapegoat for the bank, the victim of an out-of-control banking system.

It's a tactic that seems crafted to tap into popular discontent at a time of ongoing financial scandals and economic turmoil. His case destabilized the banking sector, already on the verge of the 2008 meltdown, and heightened pressure for better financial regulation, still high on today's agenda for governments worldwide.

Helping along that message is the 33-year-old's standing as an anti-hero in France. The son of a metalworker and a hairdresser, Kerviel grew up in the provinces and lacked the snooty education usually required for coveted trading jobs, yet he nonetheless managed to humiliate a banking powerhouse and expose the weakness of its controls.

A few bank executives resigned in the scandal's aftermath, including longtime Chairman Daniel Bouton. Kerviel's superiors were questioned in the probe, but none of them face charges.

Kerviel's dark-haired Gallic good looks also helped his mystique: T-shirts were sold proclaiming their wearers "Jerome Kerviel's girlfriend."

The former futures trader's defense contends his supervisors were aware of his risks but did not stop them as long as he was making money for Societe Generale. The bank denies that claim.

In Kerviel's book out last month, "L'Engrenage: Memoires d'un trader" ("The Spiral: Memoirs of a Trader"), he compared his former job to prostitution — with his superiors eagerly counting his days' earnings — and likened that milieu to a "great banking orgy."

Kerviel is charged with forgery, breach of trust and unauthorized computer use. He risks five years in prison as well as a fine of euro375,000 ($448,000) if convicted.

Societe Generale lawyer Jean Veil told the Sunday paper Le Journal du Dimanche that the bank would also ask for euro4.9 billion in damages, the amount lost in the scandal's aftermath, though he acknowledged that realistically Kerviel couldn't pay it. The massive sum earned Kerviel a nickname, "the 5-billion-euro man."

Among the defense arguments expected in court, Kerviel has argued that the bank was trying to deflect attention from subprime-related losses by making him a scapegoat.

Societe Generale secretly began unwinding some 50 billion euros ($78 billion) of Kerviel's positions on Jan. 21, 2008, when U.S. markets were closed because of Martin Luther King Day, putting massive pressure on futures markets and exacerbating its losses. That week was marked by turmoil in financial markets worldwide.

The bank revealed its actions three days later, when it also announced subprime-related writedowns and provisions of euro2.05 billion. Societe Generale's legal team has said it is absurd to claim the bank was seeking to hide its subprime exposure.

Societe Generale has been gradually recovering from the trading scandal, but it's been an up-and-down ride. It successfully raised capital not long after the Kerviel affair broke, but then was hit by the global financial crisis in late 2008.

It weathered the meltdown better than some, and paid back its state loans early. This year the bank has faced another challenge — euro3 billion in exposure to Greek government debt — but reported euro1.06 billion in profit for the first quarter and is forecasting a profitable year.

The trial is expected to last through late June. Questions abound, including how Kerviel managed to cover up his risky trading for so long. An internal report by the bank has said managers failed to follow up on 74 different alarms about Kerviel's activities and queries from derivatives exchange Eurex.

And why did Kerviel take such huge risks? He is not believed to have profited personally — he never made more than euro100,000 annually, including his bonus — and insists he only wanted to earn money for Societe Generale.

In an interview last month with Le Journal du Dimanche, Kerviel said his mother instilled him with a dogged sense of dedication to your job, and he often helped out in her hair salon. Kerviel has reportedly received media training for his "I'm just an average guy" strategy.

Asked, "How are you living these days?" Kerviel responded: "Modestly, like a lost of people," adding that he has a small apartment, doesn't go on vacation and earns euro2,300 a month at a computer services company outside Paris.

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Germany to unveil cuts to welfare, jobs (AP)

Monday, June 7th, 2010 | Finance News

BERLIN – Germany was close to finalizing Monday a major package of government savings, which would likely cut social welfare benefits, slash public sector jobs, and raise taxes to tackle the budget deficit.

With the debt crisis undermining the euro, Chancellor Angela Merkel's government is determined to tackle Germany's deficit — which while among the smallest in Europe is still above the official EU limit.

Several other countries — notably Greece, Spain and Portugal — have already embarked on much tougher austerity drives.

Merkel brought together her Cabinet for a two-day meeting at the chancellery that started Sunday to discuss the package. She said as she went into the meeting that Germany can no longer live beyond its means, insisting "we can only spend what we take in."

"Our citizens' greatest concern is that public deficits could grow to become immense," Finance Minister Wolfgang Schaeuble said.

Measures reportedly under consideration include cuts to public-service jobs, a reduction of handouts to new parents and new taxes on power providers.

Germany had a budget deficit of 3.1 percent of gross domestic product last year. It is expected to exceed 5 percent this year, still well above the European Union's 3 percent threshold.

Officials say Germany needs to save euro10 billion ($12 billion) a year through 2016 to meet a constitutional balanced budget requirement.

Opposition politicians and union officials criticized the prospect of cutbacks on social spending.

The head of Germany's labor union federation, Michael Sommer, argued that Germany should increase taxes for the rich and introduce a financial market transaction tax to help narrow its budget gap.

"In a situation like this ... we must do everything to stabilize the state's finances — and that means those who have more really being drawn on to finance this state," Sommer said on Suedwestrundfunk radio.

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