Archive for March, 2011

Portugal to choose new govt as debt woes worsen

Thursday, March 31st, 2011 | Finance News

LISBON, Portugal – Portugal's financial plight deepened Thursday when official figures showed the debt-stressed country's budget deficit last year was 8.6 percent of gross domestic product — way above the government target of 7.3 percent that was intended to allay market fears.

The estimate by the National Statistics Institute was another setback for Portugal's struggle to avoid taking a bailout, like those Greece and Ireland accepted last year, as it faces two months without a government before a June 5 general election and debt repayments it can't afford.

The deficit figure is far above the eurozone's limit of 3 percent, though the statistics institute noted its measurements were based on new EU accounting rules which include the cost of helping banks and state companies.

Outgoing finance minister Fernando Teixeira dos Santos said that without the accounting changes the deficit last year would have been 6.8 percent, showing that his austerity measures are paying off.

He also complained about the accounting alterations, saying it was "like changing the score after the game has ended."

Though Portugal's economy represents less than 2 percent of the eurozone's GDP, its troubles could wreck European efforts to shake off a debt crisis that has dogged the continent for more than a year. European leaders had hoped that the rescue of Greece and Ireland would ease investor concerns and spare banks across the continent that are exposed to eurozone debt.

But Portugal's political uncertainty and crushing debt load have conspired to stoke the crisis.

Its financial difficulties over the past year have pushed the yield on its 10-year bond to a euro-era record of 8.4 percent — an unsustainable level for the ailing country which is expected to enter a double-dip recession this year. It is also roughly the same level that eventually forced reluctant Athens and Dublin to accept help.

Despite that, Portugal continued to defy predictions it will be shut out of financial markets, announcing the sale of up to euro1.5 billion ($2.13 billion) in bonds on Friday and up to euro1 billion ($1.42 billion) in short-term Treasury bills next week.

The government quit last week in a dispute with opposition parties over a new batch of measures to restore the country's fiscal health.

President Anibal Cavaco Silva announced Thursday in a televised address to the nation that a national ballot for a new administration will be held on the first Sunday in June. He said Portugal faces "a huge challenge" to beat what he said was an "unprecedented" crisis.

Rating agencies have downgraded the country's credit worthiness three times in recent days, adding to market pressure on Portugal to accept financial help it has insisted it doesn't want or need.

On Thursday, the statistics institute also said that the 2009 deficit was 10 percent, higher than its previous calculation of 9.6 percent, and that public debt in 2010 was 92.4 percent of GDP — meaning the amount Portugal owes is close to the amount of wealth it generates in a year.

Teixeira dos Santos, the finance minister, noted the outgoing government doesn't have the legitimacy to negotiate help, leaving the country in a perilous political limbo that will last more than two months.

Meanwhile, Portugal faces a major test of its finances in April when it has to rollover euro4.5 billion. Another crunch comes in June when it has to find euro4.96 billion ($7 billion) for another bond repayment.

The main parties, wary of the political stigma associated with a bailout, have all said they don't intend to ask for outside help. A bailout commits a country to fiscal policies which would limit politicians' room for maneuver.

All parties agree on the need to cut debt but differ over the scope and scale of austerity measures. The outgoing government has cut pay and pensions and hiked taxes, triggering protests including another rail strike Friday.

Ireland's financial collapse also brought down its government, with the main opposition party winning a later ballot.

Diego Iscaro, an analyst at IHS Global Insight, said a bailout is "very likely" and would provide breathing space for Portugal to enact reforms aimed at reviving a weak economy that has posted measly annual growth of less than 1 percent a year over the past decade.

However, "it's difficult to see where growth is going to come from," Iscaro said.

Domestic demand has slumped amid austerity measures such as tax hikes and pay cuts introduced by the outgoing government. Also, around a quarter of Portuguese exports go to neighboring Spain, where recession and unemployment around 20 percent have reduced consumption.


EU concessions for Ireland depend on growth:

Thursday, March 31st, 2011 | Finance News

DUBLIN (Reuters) – Europe may offer Ireland concessions on its bailout if weak economic growth prevents Dublin from meeting its targets under an EU-IMF bailout, central bank governor Patrick Honohan said on Thursday.

Ireland has vowed to top up its banks' capital cushion to the tune of 70 billion euros and radically overhaul the sector to persuade investors it has the nation's financial crisis under control.

But Honohan, who also sits on the European Central Bank's (ECB) governing council, said Ireland's ability to meet its debt and fiscal targets under the EU-IMF rescue package would depend on whether the Irish economy can return to growth after a three-year slump.

"Of course we are under tremendous pressure on the financial arrangements (of the EU-IMF deal) but getting the economy going again, returning to growth will make that affordable," he said in an interview with a local television station.

"If our economy goes well, if we get back to growth, get to full employment, then we can pay this easily. If economic growth is weak, then it won't be so easy."

"So I think the arrangements with our European partners could over time be restructured in such a way that we give them a bigger share of our prosperity and our growth and on the other side if things don't go well that we would have deferrals and a longer period of time."

Ireland's economy shrank sharply in the fourth quarter, official data showed last week, reinforcing concerns about its debt mountain.

Honohan said Ireland's relationship with Europe would suffer if the government tried to impose losses on any senior bondholders in Irish banks.

"There would be consequences for our relationship," he said.

(Reporting by Carmel Crimmins; Editing by Steve Orlofsky)


Japan to take control of Tokyo Electric Power: report

Thursday, March 31st, 2011 | Finance News

TOKYO (Reuters) – Japan's government plans to take control of Tokyo Electric Power Co (9501.T), the operator of a stricken nuclear power plant, by injecting public funds, the Mainichi newspaper said on Friday.

But the government is unlikely to take more than a 50 percent stake in the company, an unnamed government official was quoted by the daily as saying.

"If the stake goes over 50 percent, it will be nationalized. But that's not what we are considering," the official said.

The company, also known as TEPCO, has come under fire for its handling of the emergency at its Fukushima Daichi nuclear complex, triggered by a March 11 earthquake and tsunami that left more than 27,500 people dead or missing.

A series of missteps and mistakes, combined with scant signs of leadership, have undermined confidence in the company. TEPCO shares are down almost 80 percent since the disaster.

Mainichi quoted a government official as saying: "It will be a type of injection that will allow the government to have a certain level of (management) involvement."

TEPCO officials could not immediately be reached for comment.

The company could face compensation claims topping $130 billion if the nuclear crisis dragged on, Bank of America-Merrill Lynch estimated this week, further fuelling expectations the government would step in to save Asia's largest utility.

Under law, TEPCO co u ld be exempt from compensation for nuclear accidents caused by natural disasters. But Mainichi quoted the official as saying it would not be possible to apply the legislation given strong public sentiment.

Anger against the company has seen protests outside its Tokyo headquarters, with people demanding an end to nuclear power and calling the company "criminal".

Investor concern about TEPCO mounted after its president, Masataka Shimizu, was admitted to hospital this week and the company said 2 trillion yen ($24 billion) in emergency loans from Japan's major banks would not cover its rising costs.

Liabilities for compensation claims alone could be up to 11 trillion yen ($133 billion) -- nearly four times TEPCO's equity -- if the nuclear crisis drags on for two years, an analyst at Bank of America Merrill Lynch wrote in a report.

TEPCO has around $91 billion in debt including some $64 billion in bonds. That excludes about $24 billion recently secured in loans from domestic lenders.

At the end of December, TEPCO had equity of about $35 billion, its accounts show.

Bank of America-Merrill Lynch said shareholders were very likely to take a big hit and a rapid resolution of the crisis was the only way to keep costs down.

If the situation can be turned around within the next two months, compensation costs may be less than 1 trillion yen. Costs will rise to 3 trillion yen if it drags on for six months, analyst Yusuke Ueda wrote.

Experts, however, say a final resolution of the nuclear disaster is likely to take decades and there could be many further setbacks.

TEPCO could burn through 2 trillion yen in about a year, said CLSA equity analyst Penn Bowers, as it pays extra for fuel to run its thermal plants, among other costs.

(Additional reporting by Taiga Uranaka; Editing by Dean Yates)