World financial news

China will cut interest rates as many as five times by the end of 2009 and will step up spending to limit the effect of the “global financial tsunami'' on the nation's economic growth, Morgan Stanley said.

The central bank will cut borrowing costs by 27 basis points each time, reducing the one-year lending rate to as low as 5.85 percent next year from 7.2 percent now, Qing Wang, a Hong Kong- based economist, said in a note today. Government spending may add as much as 3 percentage points to economic growth, he said.

Global growth is slowing after the collapse and bailout of banks in the U.S. and Europe propelled the cost of borrowing in money markets to the highest ever. Slowing economic growth in Europe and the U.S., which account for 40 percent of China's total exports, will translate into lackluster exports, falling corporate profit and easing inflation, Wang said.

“A substantial improvement in the inflation outlook should help ease the lingering concerns about the inflationary consequences of an expansionary macroeconomic policy,'' Wang said. “We expect a decisive policy shift toward boosting growth in the coming weeks and months.''

Wang cut his forecast for inflation next year to 2.5 percent from 4 percent. He lowered his estimate for economic growth in China next year to 8.2 percent from 9 percent and lowered his forecast for this year to 9.8 percent from 10 percent.

More spending and tax cuts would contribute between 1 and 3 percentage points to growth, Wang said.

China can “afford to run multiyear fiscal deficits without running into debt sustainability problems,'' because it has public debt of only 30 percent of gross domestic product, Wang said (fast cash loans).

Property Market Risk

The main risk to his forecast was a “meltdown'' in the property sector across the country, “which would lead to a massive collapse in real-estate investment, Wang said.

The consequences would be so serious that even pro-growth policies wouldn't prevent the economy growing less than 7 percent, he said.

The probability of this happening is less than 25 percent, Wang estimated, contradicting a Sept. 12 report by Jerry Lou, a Morgan Stanley strategist, who said the “likelihood of a property sector meltdown is high.''

China thus has ample room for monetary and fiscal initiatives to help offset the impact of slower global growth, he added. This would entail “unwinding'' tightening measures introduced since last year, including “the 162 basis points interest rate hike, the 850 basis points hike of the required reserves ratio, and stringent administration bank lending quotas,'' he said.

The People's Bank of China cut the one-year lending rate to 7.20 percent from 7.47 percent, the first reduction in six years, last month.

Morgan Stanley forecasts that the U.S. economy will contract by 0.2 percent next year and that growth in the Europe will reach only 0.2 percent. It expects a 1 percent contraction in Japan.

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Oil prices were erratic near $94 a barrel Friday as investors waited to see if a reworked $700 billion bailout package would pass the U.S. Congress and help stabilize the economy of the world’s biggest crude consumer.

A short slide by the U.S. dollar against other major currencies was seen as helping boost oil prices, but expectations that U.S. jobless data to be released later Friday would show growing stress in the labor market kept a ceiling on gains.

By midday in Europe, light, sweet crude for November delivery was up 12 cents to $94.09 a barrel in electronic trading on the New York Mercantile Exchange.

Earlier in the session, the contract fell as low as $92.81 before rising to $94.85 and then slipping again.

Overnight, prices fell $4.56 to settle at $93.97, the lowest level since Sept. 16.

In London, November Brent crude rose 17 cents to $90.13 a barrel on the ICE Futures exchange.

The U.S. House of Representatives was expected to vote later Friday on the bank rescue package after the U.S. Senate overwhelmingly approved it Wednesday. House lawmakers stunned investors Monday by rejecting the bailout plan, although the Senate added $100 billion in tax breaks and other sweeteners in a bid to win over enough dissenting House votes.

"Approving the bailout may create a little bounce and alleviate the negative sentiment temporarily," said John Vautrain, an energy analyst with consultancy Purvin & Gertz in Singapore. "The problem is U.S. gasoline demand has been off one heck of a lot."

Statistics from the U (instant payday loan).S. Labor Department released Thursday showed more signs of a weakening economy, adding to concerns about falling oil demand.

The Labor Department reported that initial claims for jobless benefits increased by 1,000 to a seasonally adjusted 497,000, significantly above analysts’ estimate of 475,000 and a seven-year high.

Also Thursday, the U.S. Commerce Department said factory orders in August plunged by 4% compared to July, a much steeper decline than the 2.5% drop analysts expected and the biggest setback since a 4.8% plunge in October 2006.

"All the indicators have been very negative," Vautrain said. "There’s been an economic wallop, and people don’t have as much money to spend."

Significant gains over the past days by the dollar against the euro also have helped push down prices, but the greenback lost some ground early Friday.

Investors tend to buy commodities like oil to defend against dollar weakness and a hedge against inflation, but return to the U.S. currency as it strengthens.

The 15-nation euro rose to $1.3873 in Friday trading, while the dollar fell slightly to 105.10 yen.

In other Nymex trading, heating oil futures rose 0.65 cent to $2.716 a gallon, while gasoline prices added 0.7 cent to $2.262 a gallon. Natural gas for November delivery fell 1.1 cents to $7.47 per 1,000 cubic feet. 

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The St. Louis region is getting at least $17.2 million to help buy back and redevelop foreclosed properties, federal officials said this week.

The government has divvied up $3.92 billion in funds for the "neighborhood stabilization program" — a key piece of the foreclosure relief package passed by Congress this summer — and allocated $5.5 million to St. Louis, $9.4 million to St. Louis County and $2.3 million to St. Clair County. Those and other hard-hit regions, like St. Charles and Jefferson counties, also likely will receive funds allocated to states: $42.7 million for Missouri and $53.1 million for Illinois.

The funds are to be used to buy or redevelop vacant properties or help low-income buyers purchase a house paydayloans.

Nearly 6,400 area houses — one in every 192 households — were in the foreclosure process in the second quarter, according to RealtyTrac.

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Latin America's fastest economic expansion in 30 years may be coming to an end as the global credit crunch stunts investment and squeezes demand for the region's commodities.

“We're in a serious economic crisis,'' Colombian Vice President Francisco Santos said in an interview in his Bogota office. “Financing is going to get scarcer and scarcer, and that means that investment is going to be difficult to attract.''

The region's growth in 2009 may be cut to less than 3.3 percent, from 4.6 percent this year, according to economists at Barclays Capital. The slowdown will make it harder to further reduce poverty that's fallen to its lowest levels since before the “Lost Decade'' of the 1980s in which countries borrowed more than they could repay.

The crisis will test Latin America's decade-old commitment to debt reduction and open markets. Mexico this week shelved plans to privatize an airport, citing the U.S. crisis, while Costa Rican President Oscar Arias warned the country's growth rate may halve as investment drops. In Brazil, lending that has powered the country's fastest expansion in more than a decade is drying up, said Ricardo Espirito Santo, head of the Brazilian unit of Portugal's Banco Espirito Santo SA.

“The last four or five years were very good for Latin America, but that cycle is coming to an end,'' said Rodrigo Valdes, chief Latin America economist at Barclays Capital in New York. “We expect a deceleration in practically all economies.''

Cutting Forecasts

Brazilian economists lowered 2009 growth projections to 3.6 percent on Sept. 26, from 4 percent two months earlier, according to a central bank survey. JPMorgan Chase & Co. cut its forecast for Latin America's largest economy to 3.2 percent from 3.8 percent.

Mexico, the second-biggest economy, may expand 2.5 percent next year, according to the average estimate of 33 economists surveyed by the central bank, which released its report yesterday. They had previously forecast 3 percent.

The region has posted average growth of 5.5 percent a year during the past five years, a pace not seen since 1970 to 1974, according to International Monetary Fund statistics.

Latin America may also see a drop in remittances from emigrants living in the U.S. Money transfers from Mexicans living outside the country dropped a record 12.2 percent in August, the central bank said yesterday. Remittances accounted for almost 3 percent of Mexico's gross domestic product last year.

“Mexico is very tied to the U.S., and they're going to get hammered,'' said Mark Weisbrot, co-director of the Washington- based Center for Economic and Policy Research.

Plane Purchases Suffer

Empresa Brasileira de Aeronautica SA, the world's fourth- largest aircraft maker, said last week that tightening credit markets are making plane purchases difficult for some buyers (no fax payday loan) http://abc-cashadvance.com.

Brazil's Localiza Rent a Car SA, the region's biggest car- rental company, delayed this week a 300 million real ($157.6 million) bond sale because of “adverse market conditions.''

Central banks are injecting liquidity as foreign credit lines dry up. Chile's central bank canceled planned purchases of dollars and opened up a $500 million foreign currency swap window as the cost of borrowing dollars climbed.

“Local banks had counterparties overseas who provide them with dollars, but those banks have failed, been bought or tightened credit,'' said Ricardo Gomez, head of fixed-income sales and trading at Larrain Vial SA in Santiago.

Commodity Rout

Prices for commodities such as soy, gold, copper and oil, which helped fund the region's boom, have fallen 28 percent since their July 2 high, according to the RJ/CRB Commodity Price Index. Should prices return to their 10-year average, Latin America's balanced budgets would quickly revert to a deficit of 4.1 percent of gross domestic product, Morgan Stanley said in a Sept. 29 report.

Venezuelan President Hugo Chavez, who has relied on oil to fund his “21st-century socialism,'' said the U.S. crisis will hit the region with the force of a “hundred hurricanes'' and that “no country can say it won't be affected.''

Venezuela is the country most vulnerable to a commodity slowdown, having seen its terms of trade, a measure of export earnings, more than double since 2001, according to a study by Brazil's national development bank. Brazil and Mexico's trading terms improved less than the 22 percent regional average, according to the same study based on United Nations data.

“The big question for Latin America is how long and deep is this cyclical downturn going to be, and how much is it going to reduce commodity prices,'' said Nicholas Field, who helps oversee about $18 billion in emerging-market equities at London- based Schroders Plc.

Building Reserves

Analysts including Paulo Leme, chief Latin American economist at Goldman Sachs Group, Inc. say the slowdown may be milder than in previous crises. Many regional governments have used revenue from the commodity boom to pay down debt and build reserves.

The eight largest South American economies shrank their debt as a proportion of gross domestic product from 2001 to 2008, according to Merrill Lynch research. Merrill expects growth to slow to 3.4 percent next year from 4.6 percent in 2008.

“It was a good ride,'' said Gray Newman, chief Latin American economist at Morgan Stanley in New York. “But the era of abundance is over.''

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Credit-rating companies are turning negative on Iceland after the government bailed out the island nation's third-biggest bank amid a growing global financial crisis.

Within a 24-hour span, Standard & Poor's and Fitch Ratings lowered the country's rating and Moody's Investors Service put its Aa1 rating on review for a potential downgrade. Fitch yesterday lowered the country's long-term foreign currency rating to A- from A+, and said the rating remains on review for another cut. On Sept. 29, S&P reduced Iceland's foreign-currency debt rating one level to A- and also said it may lower it further.

Iceland said on Sept. 29 it will take a 75 percent stake in 104-year-old Glitnir Bank hf by investing 600 million euros ($859 million) after the firm's short-term funding dried up. The rescue followed a string of bailouts in Europe in the wake of a worldwide credit squeeze that's caused banks more than $550 billion in losses and writedowns.

“With the recent unprecedented global credit tightening and the crisis management response put in place all over the world, the risk that some of Iceland's banking system liabilities would migrate onto the balance sheet of the government materialized with the government's capital infusion into Glitnir,'' Moody's analyst Joan Feldbaum-Vidra said in a statement.

Glitnir and Kaupthing Bank hf, Iceland's biggest bank, have funded lending for acquisitions and other investments in northern Europe by borrowing in money markets rather than by using customers' deposits quick payday.

Krona Tumbles

Iceland's krona has tumbled 11 percent this week to 106.06 per dollar, making it the biggest decliner in the world. It has fallen more than 25 percent over the past three months.

The cost of insuring against a default by Iceland rose to a record after the bailout of Glitnir. Five-year credit-default swaps on the country's debt climbed 18 basis points to 5.87 percentage points at 5:40 p.m. in New York, according to CMA Datavision prices. That means it costs $587,000 to protect $10 million of the country's debt from default. A month ago, it cost $256,000.

Credit-default swaps are contracts used to speculate on a country or company's creditworthiness. An increase in the cost of protection indicates a perceived deterioration in credit-quality.

Moody's also cut Glitnir's rating to Baa2 from A2 yesterday while putting the ratings of Kaupthing and Landsbanki Islands hf on review for downgrade. S&P reduced Glitnir's rating to BBB from BBB+ on Sept. 29. Fitch lowered its credit ratings on Kaupthing, Glitnir, Landsbanki Islands hf and Straumur Burdaras Investment Bank hf.

“The risks to macroeconomic stability and sovereign creditworthiness arising from distress in the banking system have materially increased,'' Fitch Ratings Director Paul Rawkins said in a statement.

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