Archive for May, 2011

Oil off highs as euro slips on euro zone debt fears

Tuesday, May 24th, 2011 | Finance News

SINGAPORE (Reuters) – The euro slipped back toward a two-month low and oil prices fell on Wednesday as a rally the previous day fizzled on fears about Europe's spreading debt crisis and the potential for a further reduction of positions in risky assets.

Asian stocks also fell, tracking weakness on Wall Street as firmer commodity prices were offset by lingering concerns over the economic outlook for the United States as well as euro zone debt woes.

The euro, which had rallied after better-than-expected German business confidence data on Tuesday, edged back in the direction of a two-month low of $1.3968 hit earlier this week. It has lost roughly 6 percent since early May.

Europe's policy options to avert a Greek debt default appear to be dwindling fast, casting a pall over the single currency and fueling fears of a chain reaction in other heavily indebted countries in the 17-nation euro area.

"Concern about Spain and Italy might be overblown, but the Greece issue is not going away, and if Greece restructures, that may open the door for Ireland and Portugal." said Brian Dolan, chief strategist at Forex.com.

The U.S. dollar (.DXY) rose 0.3 percent against a basket of major currencies.

A Greek debt default would hurt other peripheral euro zone states and could push Portuguese and Irish debt into junk territory, Moody's said on Tuesday, warning it would classify most forms of restructuring as a default.

As investors reduced exposure to riskier assets, MSCI's index of Asia-Pacific stocks outside Japan fell 0.7 percent while Japan's benchmark Nikkei slipped 0.46 percent.

Oil slid as the dollar rebounded against the euro, giving up some of its 2 percent rise overnight after Goldman Sachs raised its price forecasts for Brent crude. Brent crude for July delivery fell 0.64 percent to $111.81 a barrel, having swung between $109.50 and $112.65.

Euro-denominated gold hit a record high after the euro edged back toward a two-month low on euro zone debt fears.

Spot gold fell to $1,524.20 an ounce after rising as high as $1,527.45 on Tuesday, its strongest since May 4. Bullion was still below a lifetime high around $1,575 an ounce struck in early May.

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Emerging nations slam Europe push for IMF top job

Tuesday, May 24th, 2011 | Finance News

WASHINGTON (AFP) – The world's largest emerging economies on Tuesday slammed Europe's push to lock up the International Monetary Fund's top job, calling its hold on the position "obsolete."

One day after nominations opened to replace Dominique Strauss-Kahn as managing director, IMF directors from Brazil, Russia, India, China and South Africa -- the so-called BRICS economies -- said Europe's longstanding exclusive deal to lead the IMF "undermines the legitimacy of the Fund."

They strongly objected to the aggressive push by Europeans since last week to have one of their own to replace Strauss-Kahn, who resigned Wednesday after being arrested in New York on sexual assault allegations, which he denies.

"We are concerned with public statements made recently by high-level European officials to the effect that the position of managing director should continue to be occupied by a European," they said.

The 2008-2009 financial crisis in the United States and Europe showed the need to reform institutions like the IMF "to reflect the growing role of developing countries in the world economy," they said.

"This requires abandoning the obsolete unwritten convention that requires that the head of the IMF be necessarily from Europe."

Last week the IMF said it want to make a choice by the end of June, based on consensus among the 24 executive board directors, or possibly by a vote.

No formal nominations have been revealed but Mexico's government said it would propose Agustin Carstens, the respected Mexican central bank governor who has extensive experience at the IMF.

However, within days of Strauss-Kahn's May 14 arrest, European officials were already promoting French Finance Minister Christine Lagarde for the job.

In recent days she garnered strong endorsements from the German, British and Dutch finance ministers as well as New Zealand Prime Minister John Key.

Moreover, earlier Tuesday the chief French government spokesman Francois Baroin said even China was ready to back her.

"The Chinese are favorable to the candidacy of Christine Lagarde," Baroin, who is also France's budget minister, told Europe 1 radio.

"What is being drawn up is a European consensus," Baroin said, adding that France did not want "to make any gesture that could be interpreted as a form of contempt for emerging countries nor any sign of arrogance."

Many European leaders believe the deep problems of the European Union, with Greece, Portugal and Ireland in financial crisis, require an IMF chief current on the region's issues.

Developing country officials accuse the Europeans of trying to ramrod Lagarde through and scare off possible challengers.

For years developing countries have complained about the "gentlemen's agreement" dating to the founding of the IMF at the end of World War II that keeps a European running the Fund while an American leads its sister institution, the World Bank.

The five BRICS directors said that for credibility and legitimacy, the managing director should be selected "after broad consultation with the membership" and decided based on "the most competent person... regardless of his or her nationality."

They recalled then-Eurogroup president Jean-Claude Juncker pledging, at the time of French politician Strauss-Kahn's selection in 2007, that "the next managing director will certainly not be a European."

But they did not name any possible candidates, and so far, developing countries have not coalesced around any one person.

"It's a sign of the times that five directors are issuing a statement like this," said Daniel Bradlow, a law profesor and expert in international financial institutions at American University in Washington.

"They're not endorsing anyone, nor are they agreeing on a single candidate, which is unfortunate, but they have strong words against Europe.

Carstens, the most prominent developing country candidate with his hat in the ring, told Bloomberg television that he would only have a chance for the job if the process is transparent, allowing the IMF's 187 members "to compare resumes, compare experiences, hear the candidates and make up their minds."

"If the process is done in that way, I have a chance," he said.

On Wednesday attention will turn to Lagarde, expected to give a press conference ahead of the Thursday-Friday summit of the G-8 countries in Deauville, France.

On Friday an EU insider told AFP that her name would be advanced during the G-8 meeting, calling her a "shoo-in" as Europe's candidate.

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Treasury sells AIG shares in sore reminder of bailout

Tuesday, May 24th, 2011 | Finance News

NEW YORK/WASHINGTON (Reuters) – The Treasury is barely breaking even on its investment in beleaguered insurance giant American International Group Inc, according to an early litmus test of market interest in the firm's stock.

The Treasury sold 200 million shares of AIG at $29 per share, a slight discount from their closing price and not far above the $28.73 average price the Treasury will need to recoup its full investment in the company.

The $8.7 billion total sale, which included 100 million shares sold by AIG itself, was also far smaller than the $10 billion to $20 billion banking sources had been throwing around, and hinted at a persistent lack of investor interest in the firm despite its apparent strides.

Treasury acquired the shares under extreme duress, as the potential failure of the insurance giant threatened to exacerbate an already severe financial crisis in late 2008.

Tuesday's sale represented the first step in removing generous support for the insurance behemoth, which totaled over $180 billion in several installments.

Treasury will remain by far the majority shareholder of AIG, but its holdings now comprise 77 percent of the total, down from 92 percent before the sale.

"We're hopeful that we can recover all the investment that we made," Tim Massad, the Treasury's acting secretary for financial stability said during a conference call with reporters.

But he added that the extent of losses -- or profits -- would not be known until Treasury fully exits its stake.

Massad said there is no specific timetable for the sale of remaining shares. He added that, following an agreed "lock-up" period of 120 days, the Treasury would continue to reduce its holdings "in an orderly fashion."

"We're going to sell in a way to maximize value to the taxpayer," Massad said.

Treasury raised $5.8 billion on Tuesday. All told, it needs to raise $47.5 billion to break even on the equity portion of its investment in AIG.

WHO COULD FORGET?

AIG's share sale is important for the U.S. government, which is trying to sell out of multiple investments it made in companies during the financial crisis.

The bailouts were highly unpopular, especially after it became known that top managers in the very same AIG unit that drove the company into a rut had continued to pay themselves handsome bonuses even while receiving taxpayers' help.

The AIG share sale is also a key moment for Chief Executive Officer Robert Benmosche. Benmosche, who became AIG's fifth CEO in less than five years in August 2009, halted a plan to break the company up in a fire sale of its parts.

He instead embarked on a revival centered around two core businesses: U.S. life insurer SunAmerica and global property insurer Chartis. Other businesses were sold, taken public or left to operate with a view toward an eventual sale.

AIG was literally minutes from bankruptcy when it was rescued in September 2008. The various iterations of the rescue package ended up being worth $182 billion, dwarfing various other bailouts around the world during the financial crisis.

The question now is how quickly the U.S. government exits its investment and whether it breaks even.

Benmosche has said he expects the government to be out of its AIG position by mid-2012. Fitch Ratings said recently its own models for the company assume the government is out by the end of 2012.

(Additional reporting by Ben Berkowitz; Editing by Gary Hill)

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