Archive for October, 2010

EU debates cracking down on deficits, debts

Thursday, October 28th, 2010 | Uncategorized

BRUSSELS – Germany and France faced a struggle Thursday to get skeptical EU partners to endorse new rules on state spending which they say are needed to prevent another government debt crisis in Europe.

German Chancellor Angela Merkel and French President Nicolas Sarkozy headed to a two-day EU summit in Brussels seeking to strip EU voting rights from repeat overspenders and allow for an orderly default of highly indebted countries, measures that would require an arduous effort to change the basic EU treaty.

Those proposals — coming on top of early warnings and potential fines for violators of the EU's debt and deficit levels — have raised major objections across the EU.

European Commission President Manuel Barroso called losing voting rights "unacceptable" adding it "never be accepted by" all 27 EU governments.

While the EU leaders may back tougher debt and deficit rules, many governments oppose tinkering with the EU treaty to provide for an orderly default deal and change voting rights for incorrigible overspenders.

That is likely to take years and lead to several national referendums. In recent years, these have killed off reforms and created a crisis of confidence.

Public dismay with the EU led Dutch and French voters to kill the European Constitution in 2005. And Irish voters have also repeatedly dismissed treaty amendments.

"We are very very critical" of changing the EU treaty, said Austrian Finance Minister Josef Proell.

The debt crisis that has gripped Greece and Ireland — and to a lesser extent Portugal and Spain — has left the 16-nation eurozone scrambling for stricter enforcement of rules aimed at keeping governments from running big deficits and undermining the shared currency.

Because of the financial crisis of 2008 and the economic slump that followed, countries have gone beyond EU limits on deficits and public debt of 3 percent and 60 percent of GDP respectively. Almost all eurozone nations today have deficits and debts that exceed the maximum ceilings.

Existing provisions to punish overspending governments were never enforced as EU governments lacked the political will to punish fellow members of the club. Limits on deficits are needed because overspending can undermine the euro.

But German Chancellor Angela Merkel says those limits aren't enough to prevent another debt crisis. She is pushing for a permanent mechanism that would force private creditors to shoulder part of the cost when a highly indebted country can no longer pay back its debts.

Swedish Prime Minister Fredrik Reinfeldt said, "We support a permanent crisis management system. We have seen that we need this."

Last week Berlin won backing from France for such an orderly default procedure. In return, Germany gave up its wish for near-automatic fines for overspenders.

Merkel is under pressure from German taxpayers who bridle at seeing their money put on the line to cover the excesses of less disciplined countries. Germany is the biggest contributor to the euro110 billion ($152 billion) emergency loan given to Greece, and to a euro440 billion ($607 billion) stability fund for the wider eurozone that would not be tapped unless needed.

These two backstops expire in 2013, when Greece's debt will likely reach 150 percent of GDP, more than double than is allowed under the eurozone rules.

Germany wants the eurozone stability fund to be made permanent, but only if bond holders such as big banks and hedge funds bear some of the costs of risky lending to a highly indebted country — either by rescheduling of repayments or accepting a so-called haircut, a reduction of the total sum they are owed.

Without a permanent crisis mechanism, Berlin argues, either rich countries like Germany will have to continue bailing out their weaker neighbors or indebted countries will face surging funding costs like they did this spring.

"Germany cannot and will not give a simple extension" to the current stability facility, Merkel told the German parliament Wednesday.

At the outset of the summit it was unclear what a permanent crisis resolution mechanism would look like, who would run it, and how it would be funded.

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Funds dump U.S. stocks for emerging markets: Reuters poll

Thursday, October 28th, 2010 | Finance News

LONDON (Reuters) – Solid growth in emerging markets and a struggling U.S. economy prompted global investors to pump money into Asian and Latin American stocks in October, Reuters polls showed on Thursday.

Four surveys of 56 leading investment houses in the United States, Europe ex-UK, Britain and Japan showed equity holdings at their highest level in six months and bonds at their lowest since May.

But the overall figures masked a shift away from U.S. and euro zone equities toward emerging markets and Britain, whose major companies have large global exposure.

Overall, the 56 firms raised equity holdings to 52.7 percent of a typical portfolio of mixed assets from 50.8 percent in September.

Bonds dropped to 34.6 percent from 36.1 percent and cash fell to 5.0 percent from 5.4 percent, still a high enough level to provide more fuel for a risk rally.

Within equity portfolios, however, it is clear that the primary driver for the October stock market rally has been a shift into emerging markets.

Exposure to equities in emerging Europe, Asia ex-Japan. Latin America and Africa/Middle East rose to 15.6 percent of a typical stock portfolio from 14.3 percent a month earlier.

By contrast, investors cut U.S. equity holdings to 42.4 percent from 43.2 percent, and euro zone stocks to 20.8 from 21.6 percent.

Respondents said one of the main catalysts for the move to equities was the prospect for more asset-buying, or quantitative easing, from central banks, mainly the U.S. Federal Reserve. This would pump liquidity into the system, weaken the dollar, make emerging market currencies more attractive and lift commodity prices.

"We have been putting some cash back to work recently, particularly into equities and precious metals," said Neil Michael, executive director, investment strategies at London & Capital.

"These assets will benefit from QE because investors will be looking to re-invest the proceeds from the sale of government bonds to the central banks."

REGIONALLY

U.S. fund managers raised their exposure to equities in October and cut their high allocation to fixed-income assets.

The 14 U.S.-based fund management firms polled raised equity holdings for a second consecutive month to an average 62.4 percent of their assets, compared with 61.7 percent in September and 61.5 percent in August.

Fixed-income securities, including government, investment-grade and high-yield "junk" bonds, dropped for a second consecutive month to 30.4 percent in October from 31.1 percent in September.

European fund managers outside Britain lifted their equity holdings to an eight-month high while cutting bonds and cash.

The poll of 17 Europe-based asset management firms showed a typical mixed portfolio holding 48.4 percent in equities in October, its highest since February, compared with 46.6 percent last month.

They held 39.0 percent in bonds, the lowest level since June. Cash holdings fell to a nine-month low of 6.0 percent from 6.6 percent in September.

Japanese fund managers raised their weighting for equities to the highest level in 10 months while cutting their exposure to bonds.

The 13 managers polls lifted their average weighting for equities to 46.6 percent, the highest since December, from 45.7 percent the previous month.

The weighting for bonds fell to 46.8 percent in October from 48.5 percent a month earlier. Cash positions increased to 3.7 percent after falling to a low for this year of 2.9 percent in September.

UK fund managers rounded off the broad move to equities and reduced their exposure to bonds and cash.

The survey of 12 British fund managers found that the average equities allocation jumped to 53.5 percent from 49.1 percent in September. Bond holdings slipped to 22.2 percent from 24.7 percent.

Cash dropped to 7.1 percent from 8.7 percent.

(Additional reporting by Natsuko Waki, Claire Milhench and Michel Rose in London, Akiko Takeda and Chikafumi Hodo in Tokyo, Jennifer Ablan in New York and Banagalore Polling Unit; editing by Stephen Nisbet)

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Daimler lifts targets again as Q3 profit surges

Thursday, October 28th, 2010 | Finance News

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BERLIN – Car maker Daimler AG's third-quarter net earnings surged as strong sales in China and the U.S. helped push revenue 30 percent higher, prompting the company to raise its full-year forecast again.

Daimler reported Thursday net profit of euro1.61 billion ($2.2 billion) for the July-September period, up from just euro56 million a year earlier. Revenue climbed to euro25.07 billion from euro19.31 billion.

The company said it "assumes it will be able to continue along this successful path also in the fourth quarter" and now expects earnings before interest and taxes from its ongoing business of more than euro7 billion this year.

In July, it had set a target of euro6 billion — itself lifted from a previous outlook of euro4 billion.

"Of course, the world economy is not yet as stable as it was before the recession, but we are confident that we will continue to operate successfully in our markets," CEO Dieter Zetsche said in a statement.

Daimler's third-quarter earnings before interest and taxes increased to euro2.42 billion from euro470 million.

That figure was boosted by euro183 million gain from the adjustment of health care and pension benefits at Daimler Trucks North America, and by a euro218 million gain from a win in a lawsuit involving Daimler, the company said.

However, Daimler mainly credited the recovery of global auto markets and efficiency improvements for the gain.

It sold 475,110 vehicles, up 23 percent compared with last year's third quarter. The core Mercedes-Benz Cars division sold 317,496 cars worldwide, a climb of 17 percent, but the Daimler Trucks division also contributed a healthy increase — its sales climbed 44 percent to 94,813.

For the full year, Daimler said it now expects Mercedes-Benz Cars to produce EBIT from ongoing business of about euro4.5 billion — up from the euro4 billion it targeted in July. It set the forecast for Daimler Trucks at more than euro1.1 billion — up from euro1 billion.

For the year's first nine months, Daimler reported net profit of euro3.53 billion — compared with a loss last year of euro2.29 billion.

Revenue rose 24 percent to euro71.37 billion over the nine months, from euro57.6 billion. EBIT came in at euro5.71 billion, compared with last year's loss of euro1.96 billion.

Daimler shares were up 0.4 percent in Frankfurt trading at euro47.80.

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