World financial news

TORONTO

The eurozone’s biggest banks will struggle Wednesday over how much they are willing to contribute to a new support package for debt-ridden Greece.

At a meeting in Paris, senior executives from European lenders will try to come up with terms under which they would be prepared to buy up new Greek bonds, currently seen as one of the riskiest investments in the world.

The banks find themselves in a tricky position: On one hand, they have to satisfy countries like Germany and the Netherlands, which want to keep the amount of money they lend Greece as low as possible. On the other, they want to avoid losses that would hurt their results and could get them in trouble with shareholders.

Eurozone governments have said that private-sector contributions to a new rescue package for Greece _ likely an extra euro115 billion through mid-2014 on top of the euro110 billion already granted a year ago _ would have to be “substantial” but should not be considered a default.

Both goals have proved to be difficult. German banks said last week that they would be willing to participate in a so-called bond rollover, but their contribution would only amount to some euro2 billion, since most of their holdings expire after 2014.

At the same time, rating agencies, which have become the umpires in this exercise, have already indicated that even a relatively soft rollover, as one proposed recently by the French banking federation, would move Greece into a rating of “selective default” at least for some time and could force banks to record losses on affected bonds.

The banks may not agree on the final terms of a rollover at their meeting Wednesday, held under the auspices of the Institute of International Finance. “The meeting tomorrow … is part of a series of meetings of leading private creditors to Greece to support the reform program,” said Frank Vogl, a spokesman for the IIF, adding that similar get-togethers are planned over the coming weeks.

Under the French proposal, which has gained traction also with German lenders, banks would reinvest 50 percent of their holdings in new Greek bonds with a maturity of up to 30 years, in return for hefty interest rates and being secured by a separate safety fund Business Card Holders.

Already, eurozone governments are growing uncomfortable with the power they have handed to rating agencies. German Chancellor Angela Merkel said Tuesday that the three institutions that oversee the Greek bailout _ the International Monetary Fund, the European Central Bank and the European Commission _ should make their own assessment of the rollover, regardless of what the credit rating agencies say.

“I trust above all the judgment of those three institutions,” Merkel said.

Her comments came after Standard & Poor’s said the current French proposal to have banks roll over their Greek debt holdings “would likely amount to a default,” while fellow rating agency Moody’s said banks may have to record impairment charges on the affected bonds.

The ratings are important for the European Central Bank, which won’t accept bonds as collateral that have been rated as “selective default” or worse by all major agencies. That would cut Greek lenders off the ECB’s liquidity support and could spark a major banking crisis in the country.

But the EU and the ECB have warned that a negative rating could also cause investors to pull money out of other vulnerable eurozone states, such as already bailed-out Portugal and Ireland as well as much larger Spain and Italy.

Another concern is credit default swaps, insurance contracts that banks and other investment funds have taken out for Greek bonds. Whether those contracts have to be paid out is not decided by rating agencies, but by a separate institution, the International Swaps and Derivatives Association, which is controlled by the world’s biggest investment banks and funds.

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A report that manufacturing rebounded in June prolonged a weeklong rally in the stock market Friday. The Dow Jones industrial average is on track to have its best week in a year.

The Institute for Supply Management’s manufacturing index rose to 55.3 from 53.5 in May. The index had its sharpest one-month drop since 1984 in May as a shortage of auto parts from Japan and high gasoline prices cut into spending.

Stock indexes jumped following the report. The Dow Jones industrial average rose 90 points, or 0.7 percent, to 12,507 in morning trading. The S&P 500 gained 9, or 0.7 percent, to 1,330. The Nasdaq composite rose 19, or 0.7 percent, to 2,793.

Stock indexes are on pace for their best week since July of last year. The Dow Jones industrial average gained nearly 480 points over the last 4 days.

The weeklong rally began Monday after Nike Inc. reported surprisingly strong quarterly results. That led investors to believe that shoppers are continuing to splurge on sneakers and sportswear despite the recent run-up in gas prices. The Dow added more than 150 points Thursday after Greece cleared its final hurdle before it receives its next round of loans and a report found that manufacturing in the Chicago region picked up unexpectedly.

The for-profit education company Apollo Group rose 7 percent despite a steep drop in students after beating analyst’s profit estimates. Darden Restaurants, the parent company of Red Lobster and the Olive Garden, rose nearly 3 percent after reporting that sales rose at all of its divisions. And Eastman Kodak lost nearly 12 percent after a judge threw out some of its claims in a trade dispute with Apple Inc. and Research in Motion Ltd.

The Dow eked out a small gain for the quarter that ended Thursday. The S&P 500 and Nasdaq each fell less than 0.4 percent.

No major corporate earnings reports are expected Friday. The next major round of earnings announcements begins July 11 when aluminum-maker Alcoa Inc. releases its results.

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China’s surging inflation should rise again this month after flooding damaged crops and pushed up food costs, the government said Wednesday.

Communist leaders have declared taming soaring living costs their priority this year and have been frustrated as inflation climbed steadily, hitting a 34-month high of 5.5 percent in May. Inflation is especially dangerous for the ruling party because it erodes economic gains on which the communists base their claim to power.

“The estimate is that the overall price increase in June will be higher than May,” said a statement by the National Development and Reform Commission, the Cabinet’s economic planning agency. It gave no specific June target.

In the second half of the year, “new price increases should decline and prices for the full year can be controlled,” the statement said.

The agency said floods in eastern and southern China that damaged crops were partly to blame totally free credit score. The May price rises were driven by an 11.7 percent jump in food costs.

Earlier reports by state media cited farmers who said vegetable output in some areas was down 20 percent. The official Xinhua News Agency said prices of green vegetables were up 40 percent in some areas.

Private sector analysts blame China’s inflation on the dual factors of demand fueled by higher incomes that is outstripping food supplies and the effects of a bank lending boom that helped the country ward off the 2008 global crisis.

Beijing is trying to cool an overheated economy that grew at a sizzling 9.7 percent rate in the first quarter of the year.

The government has raised interest rates four times since October and has told banks to increase their reserves to limit lending.

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As its strike against local building contractors moves into its fourth week, the St. Louis Bricklayers union plans to ask a federal mediator to step in if the contentious impasse continues when the two sides reconvene on Monday.

Business Manager Don Brown of the bricklayers’ Local 1 blames the stalemate on the St. Louis Mason Contractors Association, which Brown accuses of trying to use the economic downturn to loosen the unions’ grip on local construction projects.

“It’s a tactic that hasn’t been tried here before,” Brown said. “They’re trying to get members to resign from the union. It’s telling guys, ‘You can scab on your own union.’”

Association Executive Director David Gillick denies any attempt to bust the union, citing an alliance between the bricklayers and union contractors dating back a century. At issue, Gillick said, is the association’s belief that the future success of regional construction rests on a fundamental shift in the way unions and contractors do business.

“We choose to be union contractors. They choose to be union bricklayers. But if we don’t change the path we’ve been on, the marketplace will change it for us. It won’t be our choice anymore,” said Gillick.

Len Toenjes, president of the Associated General Contractors of St. Louis, said the split between the two parties exemplified a failed reliance on short-term fixes to the complex task of positioning the region to compete in the post-recession economy.

“In order to attract development, we need to be competitive,” Toenjes said. “But striking a reasonable balance is difficult for everybody. And it’s especially hard when two (organizations) that have been doing business for 100 years are suddenly thrust into the global marketplace.”

The public bickering marks an end to a pledge by the union not to negotiate the terms of its next contract in public. Brown said he broke that agreement in response to remarks Gillick made in an interview ten days ago with Charlie Brennan on KMOX radio.

The bricklayers walked off the job when the five-year contract they agreed to in 2006 expired at midnight, June 1. Approximately 500 members of Local 1 haven’t worked since.

Another 200 have remained on projects, part of an “interim agreement” with a handful of contractors who agreed to honor the terms of a new contract retroactively, assuming a settlement can be reached.

Local 1 also hit the pavement five years ago when talks faltered in a resolution of the 2006 pact. That strike lasted only five days.

What separates the tone of the negotiations in 2006 from 2011, said Brown, is the economic climate.

Compensation and work rules are the primary negotiating points separating the two parties. The association is asking for concessions that would peel back salary and benefits by four percent. Local 1 has balked at the proposal, noting that economy-induced declines in construction already slashed the average annual bricklayer salary to $30,702 in 2010.

The hours worked by bricklayers this year have already dropped 38 percent, Brown said. To the union, taking a salary reduction in a depleted construction market makes no sense.

“Even if we agreed to (a pay cut), there still won’t be any residential work out there, because they just aren’t building homes right now, and they won’t start until the banks start releasing money,” said Brown.

The two sides also can’t get together on a rule change that would increase the allowable weight of bricks lifted by workers from 30- to 40-pound masonry blocks.

Brown, citing a study, said a bricklayer hoisting 40-pound blocks 200 times a day would lift the equivalent of five pickup trucks a week or 2 1/2 fully loaded 747 jetliners over the course of a year.

Gillick maintains the 40-pound lift is consistent with union-regulated rules in other jurisdictions, including those in Illinois.

The union and the contractors are in accord on one aspect of the strike: Without an expedited agreement, current projects throughout the region will soon suffer the consequences of the labor stoppage.

Toenjes says some construction sites are already ’seeing an impact.”

And Gillick cautions the situation is “hitting a critical point” as bricklayers are needed to complement the work of carpenters, ironworkers, sheet metal workers and other tradesmen.

“Their patience is running thin, and they won’t be able to let a project dwindle,” Gillick said of general contractors and clients in the region. “They are going to have to make a decision about whether to bring in a union guy or a non-union guy. And in some cases that is already happening.”

On Friday, Day 17 of the strike, neither Gillick nor Brown was optimistic that an agreement might be imminent.

One measure of the distance separating the two men was Gillick’s reaction when asked if he’d agree with Brown to turning negotiations over to a federal mediator.

His answer: Probably not.

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Italian voters turned out in large numbers to deal Premier Silvio Berlusconi his latest blow at the ballot box Monday, overturning laws passed by his government to revive nuclear energy, privatize the water supply _ and help him avoid prosecution.

The defeat on four referendums on the ballot Sunday and Monday was Berlusconi’s second in as many weeks, after his candidates lost mayoral races in his stronghold Milan and trash-choked Naples in a vote the billionaire media mogul himself had billed as a referendum on his government.

Center-left opposition leader Pier Luigi Bersani said referendum results were tantamount to “a divorce between the government and the country.”

Activists for the “yes” vote on four referendums erupted in cheers in the capital Rome when it became clear that voter turnout, topping 57 percent, had surpassed the quorum needed to validate the vote. It was the first time since 1995 that the quorum of more than 50 percent was reached.

Final results showed clear overwhelming majorities of those casting ballots chose to throw out two laws to privatize the water supply, kill a law reviving nuclear energy and undo the so-called “legitimate impediment” law offering the Italian leader a partial legal shield in criminal prosecutions. Each referendum passed with around 95 percent.

Italy becomes the second Group of Eight country after Germany to ditch nuclear energy following the nuclear disaster in Japan triggered by the March 11 quake and tsunami. Germany announced last month plans to abandon its nuclear program by 2022.

It is the second time Italy has said no to nuclear power. The first time was a 1987 referendum, the year after the Chernobyl disaster in Ukraine.

“The high turnout for the referendums demonstrates that the desire of citizens to participate in the decisions about our future cannot be ignored,” Berlusconi said in a statement. “The government has the duty to fully take into account the response to the four referendums.”

Berlusconi’s majority in Parliament will be tested next week during a vote on the new government appointments. Insisting upon the vote was President Giorgio Napolitano, who decides whether coalitions command enough loyalty in the legislature to effectively govern.

The vote will give the restive allies in the Northern League an opportunity to demonstrate whether they will still stick with Berlusconi, or jump ship.

One prominent Northern League leader as well as minister, Roberto Calderoli, said the League was tired “of being slapped in the face.”

Political analyst James Watson said that Berlusconi’s parliamentary majority, which depends on the Northern League, “is very much at risk at the moment payday loans for bad credit.

“Berlusconi is clearly out of favor with the majority of Italians for one reason or another,” said Watson, a political scientist at American University of Rome, adding that the premier “pretends that everything is all right.”

Berlusconi and many of his allies abstained from voting on the ballot questions that were direct challenges to both his coalition’s policies and his legal tactics in criminal cases in Milan.

The government tried to block the nuclear referendum, abrogating its own law relaunching nuclear power to give the country time for reflection. However, the country’s highest court said the referendum, backed by 750,000 signatures, could go ahead.

Berlusconi’s conservative government had also passed a law mandating that the water supply be privatized by the end of 2011, saying the step was needed to aging delivery systems and cut waste, and another law imposing market rules on water pricing. Roman Catholic nuns and priests joined the campaign to revoke the law, saying that water was a human right that should not be subject to market rules.

But the referendum on whether top government officials could continue to enjoy a “legitimate impediment” from defending themselves in court due to official business was the most direct swipe at Berlusconi. Italy’s highest court already weakened the law, unfreezing criminal prosecutions in Milan earlier this year. The court said, however, that Berlusconi’s lawyers could cite official engagements on a hearing-by-hearing basis as reason that the premier couldn’t show up in court.

Stretching out the hearings could play out in Berlusconi’s favor by eroding the statute of limitations. Berlusconi’s lawyers have been seeking to schedule court appearances in four cases based on the premier’s official duties.

Berlusconi, who for years exercised his right not to attend his own trial, now says he wants to defend himself in court.

Among the criminal cases he is facing in Milan is his trial on charges of having paid for sex with an underage teen and then using his influence to cover it up. That trial continues Tuesday, although Berlusconi is not expected to attend the hearing, which is due to take up technical matters.

Berlusconi denies the accusations in that trial as well as in all the other cases. He insists he is the innocent victim of prosecutors he claims sympathize with the left.

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Debt rating agency Moody

If it succeeds, the rival bid for TMX Group Inc., owner of the Toronto Stock Exchange, will make history far beyond derailing a takeover offer for TMX made by London Stock Exchange PLC in February, supported by Royal Bank of Canada and Bank of Montreal.

The nine-member Maple Group Acquisition Corp., a consortium of four Canadian banks and five pension funds, seeks to further strengthen a TMX already regarded by investors worldwide as the

Finance ministers sought to bolster confidence in the International Monetary Fund as they began discussing a successor to Managing Director Dominique Strauss- Kahn, who was jailed on charges including attempted rape.

Canadian Finance Minister Jim Flaherty said he is “absolutely confident” the IMF will “carry on with its business” under Acting Managing Director John Lipsky. French Finance Minister Christine Lagarde said the 187-member lender to governments is “solid.” Kaoru Yosano, Japan’s economy minister, said the flap won’t compromise the fund’s mission.

Germany and Belgium said they prefer another European as head of the agency, responding to a push by developing countries to throw open its leadership. There are “good reasons” for Europe to keep the post amid the euro area’s debt crisis, German Chancellor Angela Merkel told reporters in Berlin. A European has always run the lender, which has helped bail out Portugal, Greece and Ireland, while an American heads the World Bank.

The IMF’s executive board, meeting in Washington, agreed to seek contact with Strauss-Kahn about his intentions, according to an official briefed on the deliberations. Strauss-Kahn, a 62- year-old former French finance minister accused of sexually assaulting a hotel housekeeper, was sent to New York’s Riker’s Island prison yesterday after being denied bail.

Emerging Markets

The choice of the next IMF leader “should be absolutely merit-based,” said former Bank of Canada Governor David Dodge. “I would argue that, all other things being equal, it would be very nice to have someone who has at least deep roots in, if not necessarily a current representative of, one of the major emerging-market countries.”

The process to select Strauss-Kahn’s replacement should be “fair, transparent” and aimed at finding the best person for the job, China’s Foreign Ministry spokeswoman Jiang Yu said at a regular briefing in Beijing today.

Strauss-Kahn would have been the overwhelming favorite if he had chosen to enter next year’s French presidential race, public opinion polls say. He was taken off an Air France flight about to leave John F. Kennedy International Airport for Paris on May 14. He will plead not guilty, his lawyer Benjamin Brafman has said. He faces as long as 25 years in prison if convicted of the most serious charges pay day loans.

IMF spokeswoman Caroline Atkinson told reporters yesterday that the fund is “fully operational” and working on matters for its member countries around the world. She said IMF business is continuing “uninterrupted.”

Potential Successor

Still, much of the talk in Washington and in European capitals focused on who would replace Strauss-Kahn if he leaves office before the scheduled end of his term more than 17 months from now.

Belgian Finance Minister Didier Reynders said Europe and the U.S. should maintain the arrangement, dating to the end of World War II, of dividing the IMF and World Bank leadership between them.

“It would be preferable if we continued to hold these posts in the future,” Reynders told reporters in Brussels. Robert Zoellick, a former U.S. deputy secretary of state, is the World Bank’s president.

Policy makers such as Brazilian Finance Minister Guido Mantega say the choice should be based on merit, and that candidates from developing economies should also be considered for the posts.

Potential candidates to succeed Strauss-Kahn include Singapore Finance Minister Tharman Shanmugaratnam, former South African Finance Minister Trevor Manuel and Kemal Dervis, who was Turkey’s minister of economic affairs at a time his country got IMF aid, according to Eswar Prasad, a senior fellow at the Brookings Institution in Washington and a former IMF official.

Brown Support

Former U.K. Prime Minister Gordon Brown has told friends that he has global support for his candidacy for the top job at the IMF that could prevail over Prime Minister David Cameron’s opposition, the Financial Times reported, citing unidentified colleagues.

France’s Lagarde, speaking to reporters in Brussels yesterday after a meeting of European Union finance ministers, said the events surrounding Strauss-Kahn’s arrest were “painful,” and she declined to comment on speculation that she may be a candidate to succeed him.

“To see Dominique Strauss-Kahn in handcuffs on television this morning has deeply saddened me,” Luxembourg Prime Minister Jean-Claude Juncker told reporters in Brussels. “It was deeply sad and traumatic.”

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European industrial production unexpectedly declined in March, led by a drop in output of capital goods such as machines.

Production in the 17-member euro area slipped 0.2 percent from February, when it advanced 0.6 percent, the European Union’s statistics office in Luxembourg said today. Economists had forecast a gain of 0.3 percent, the median of 25 estimates in a Bloomberg News survey showed. Production rose 5.3 from March 2010 after increasing an annual 7.7 percent in February.

European manufacturers have fueled the region’s economic recovery as companies boost spending and hiring to meet global export demand, helping shield the economy from the impact of a spreading debt crisis. Continental AG (CON), Europe’s second-largest auto-parts maker, on May 5 reported its highest profit in more than three years and Siemens AG (SIE), Europe’s biggest engineering company, earlier this month forecast surging full-year profit.

In Germany, which has powered European growth, industrial output rose 0.4 percent in March from the previous month, when it gained 1 fast cash advance.6 percent, today’s report showed. In France, production slipped 0.9 percent. It also declined in Ireland, Greece and Spain, the statistics office said.

Euro-region companies have relied on export demand to bolster sales as tougher austerity measures at home eroded consumers’ willingness to spend. Siemens on May 4 forecast full- year profit to jump at least 75 percent, more than previously projected, after orders in India and China surged 58 percent and 15 percent respectively in the quarter ended March 31. Emerging- market orders rose 52 percent, the Munich-based company said.

Record Profit

Energy production dropped 0.7 percent from February, when it slipped 0.2 percent, today’s report showed. Output of intermediate goods remained unchanged and production of capital goods fell 0.9 percent. Output of non-durable consumer goods declined 0.7 percent from the previous month.

Continental, based in Hanover, Germany, said on May 5 that first-quarter sales rose 23 percent as a global recovery fueled demand for tires and car components. Bayerische Motoren Werke AG, the world’s largest maker of luxury vehicles, last week reported record profit per car on surging orders.

The euro-region economy may struggle to gather strength as rising energy costs threaten to hurt earnings and sap household demand. European economic confidence weakened in April and German executives also grew less optimistic. BASF SE, the world’s largest chemical maker, is among companies that raised prices to offset spiraling raw-material costs.

While European Central Bank President Jean-Claude Trichet has signaled concern about surging costs feeding into wage demands and sparking more persistent inflation, the central bank last week kept borrowing costs at 1.25 percent. Trichet said in an interview with Bloomberg Television on May 6 that policy makers remain “extremely alert” on developments.

“It’s clear that the risks to the inflation outlook have shifted to the upside,” ECB council member Luc Coene said at a conference in Brussels yesterday. “The Governing Council has shown that it will do whatever is necessary to deliver price stability.”

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