Month: June 2010

Shipping sails out of the storm

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As the companies – the container lines in particular – count the cost of the total $20bn in red ink that nearly sank some of them, they have emerged from the industry’s most severe downturn in more than half a century in a much more sea-worthy state than before the fall of Lehman Brothers triggered a collapse in sea-hauled freight.

And the global shipping industry is already learning from the storms that ripped through it over the last eighteen months. As the companies – the container lines in particular – count the cost of the total $20bn in red ink that nearly sank some of them, they have emerged from the industry’s most severe downturn in more than half a century in a much more sea-worthy state than before the fall of Lehman Brothers triggered a collapse in sea-hauled freight.

Although some lines still struggle with high debt, idled ships, and nearly-completed orders for new ships they no longer want, others have used the crisis to shed unwanted subsidiaries, scout for distressed assets and streamline businesses that grew fat in the boom years.

And in general management has used the turmoil to reflect on how best to set sail again. Summing up the attitude of many a storm-weary shipping company management hoping for fairer weather, Akimitsu Ashida, chairman of Japan’s MOL (Mitsui OSK Line), told staff in late April in a spirited call to arms: “I believe that we will not fail to achieve success if we positively address our difficulties and fearlessly meet our challenges. Let us all unite and strive to reach high ground again.”

As global trade slowly recovers, Gianluigi Aponte, chief executive of Mediterranean Shipping, second-largest of the world’s container shipping lines, believes the industry giants will bounce back fastest. “I think that the big operators will all come out very strong, and I think that we will all recover our losses in 2010.”

Pick-up in Europe
Not everybody agrees with so upbeat a forecast. Although the industry is sharply divided over how exactly the rest of the year will work out, the consensus view is that things are definitely looking up. In Europe’s hard-hit container ports, for example, there was a surge in traffic between January and March that not even the optimists predicted.

Singapore-based Neptune Orient Lines, with the fourth-largest container fleet, posted a 60 percent-plus jump in cargo volumes in just the first six weeks over the same month in 2008. As a result it plans to charter another ten ships this year and take ten of its own ships out of mothballs.

In common with others, industry leaders such as Neptune Orient chief executive Ron Widdows attribute the bounce-back to a realisation among retailers and manufacturers alike that it’s time to invest rather than cut back through de-stocking. Thus they are rapidly buying in raw material and products.

Loss-making rates
Whatever the reason, the increase in business has translated rapidly into higher rates. According to industry insiders, the cost to shippers of freighting a 20-foot container from Asia to Europe has more than quadrupled, from $350 to $1,500 after a long period of under-charging to keep fleets afloat. At the lower figure, say sources, most box-carriers were losing money.

For industry leaders such as Widdows, the price hikes have come just in time. Many lines are “no longer burning cash,” he told Bloomberg in an interview in late March. “That’s a wonderful thing compared to last year.”
Another sure sign of the recovery is that companies are putting ships back to work. In just the first quarter of this year, the amount of idle capacity in the container industry fell by 18 percent, according to Paris-based shipping consultancy AXS-Alphaliner.

In beleaguered Greece, battling its public debt crisis, the recovery is particularly good news because of its heavy dependence on shipping. Indeed Navios Maritime Holdings, a company specialising in the acquisition of shipping and logistics assets, has announced it would invest nearly $458m in thirteen ships including product and oil tankers. Main shareholder and chief executive Angeliki Frangou cited “attractive market dynamics” for boosting the fleet.

New orders for Asian yards
Meantime ship-building yards, which in the long run depend on freight volumes for the strength of their order book, are signing new contracts at a rapid rate. In Japan, orders jumped 70 percent in March compared with the same month last year. In 2009 Japan saw a devastating slump in orders to a 17-year low, according to Japan’s Ship Exporters Association.

Similarly China’s yards, which have a disproportionately large share of the more profitable dry-bulk carriers, are claiming a quarter of new orders while South Korea booked a 195 percent jump in newbuilds. Korean giants like Samsung Heavy and Daewoo Shipbuilding are planning for between $8bn-$10bn each in new orders over the full year while rival Hyundai Heavy, which didn’t get one contract in 2009, is already working on a $1.6bn oil platform for Norway. According to the Korean government, its shipbuilders will this year share over half of all new orders of all types of vessels.

The ports were the first sector of the industry to feel the more favourable winds. Shanghai International Port has reported a nearly 40 percent rise in net profits between January and March for its second straight quarter of black ink after a loss-making 2009. The port’s revenue flowed from a 35 percent increase in total cargo. However container traffic – the jewel in the global industry’s crown – rose by only 15.5 percent.

Buoyed by a steady increase in spot prices, a profitable oil and gas industry is doing its bit for shipping’s turnaround. Average shipping rates for a very large crude carrier (VLCC), which can carry over 1.46m barrels, have jumped dramatically. In late April they were running at around $37,500 a day, up from $14,760 in the last three months of 2009.

Repair work needed
The storms have however taken their toll. According to Drewry Shipping Consultants, which covers the global industry, container lines lost about $20bn last year. One of the biggest loss-makers was Denmark’s APM-Maersk, which alone ran up $2.09bn of the total. Other lines such as Hapag-Lloyd, Israel’s Zim and Chile’s CSAV, tenth-biggest container company, required emergency injections of funds.

But every company suffered a battering. China Cosco Holdings’ container fleet reported a 39 percent collapse in sales, pushing the firm to a $1.09bn loss. And Neptune Orient posted losses of $741m, representing an $820m turnaround on 2008. And even that wasn’t a particularly good year because trade slowed in the run-up to the crisis.

As Neptune Orient’s chairman, Cheng Wai Keung, summed it up: “We witnessed a worldwide economic downturn of unprecedented scale.”

The car-carrier sector, which transports new and used vehicles, is another barometer of the industry’s health. In more normal times it is one of the most lucrative businesses but, with US automotive giants GM and Chrysler in taxpayers’ hands and other brands running down existing stocks, the sector fell by a catastrophic 60 percent. Some 100 car-carriers out of a global fleet of 560 vessels were tied up.

To describe the general chaos, MOL chairman Ashida uses a nautical metaphor: “The collapse of Lehman Brothers dramatically slowed our company’s business to one or two knots.”

The ports suffered along with everybody else. Not even the substantial emerging-market business of diversified DP World, the world’s fourth-biggest container terminal operator, could protect it from the storm. Last year it posted a 30 percent fall in profits, down to $370m.

Slow ships
The industry generally gets high marks for being quick to take evasive action when the storms hit. Most companies laid up ships as soon as they could. Others invested in IT systems to handle the ocean-going fleets more cost-effectively. As cargo volumes plummeted, ships deemed surplus to requirements were scrapped and charter vessels returned to their owners.

And many container lines literally slowed down their ships to cut fuel costs in what is known as slow steaming. According to shipping consultancy Det Norske Veritas, which measures the sea-worthiness of ships, even a ten percent reduction in speed can cut fuel consumption by up to 30 percent.

That’s why APL, the container division of Neptune Orient, is running three-quarters of its fleet on reduced speeds.

As well as saving fuel, the strategy also has the merit of reducing capacity because there’s more time between loading and unloading. It also keeps ships out of mothballs because extra vessels are required on standard routes to make up for the slower voyage times.

Although it may seem contradictory that the world’s container fleet is on a go-slow while land-based forms of freight transport are speeding up, the benefits are easily measureable. According to Jay Ryu, an analyst at Hong Kong’s Mirae Asset Securities, slow steaming has saved between two percent to three percent of the industry’s current active fleet from being tied up.

And there’s no immediate prospect of ships’ captains calling for full steam ahead. Until and unless volumes grow back to something like their pre-crisis level, much of the world’s container fleet will be crossing the oceans at less than designed speed. As Neptune Orient chief executive Widdows predicts, “Slow-steaming is going to be with us for a very long time.”

Apart from slow boats to China and elsewhere, one of the most successful crisis strategies was implemented by Japan’s MOL. It was already a highly diversified shipping company through what chairman Ashida describes as a “centipede” system of management that gives the business numerous robust divisions – or “legs” – that support each other through hard times.

However MOL is also structured as a sakaro – that is, like a double-ended boat that can go forwards or backwards according to the prevailing conditions. Surely food for students of management in times of turbulence, sakaro strategy is based on a 1300 year-old wartime tactic. In a clever example of foresight, MOL pushed it through the company five years ago when the shipping market was still booming.

Chairman Ashida told divisional managers to put plans in place for hostile weather such as a sharp decline in cargo volume, higher bunker prices, stronger yen or other setbacks beyond the line’s control. When the crisis hit, MOL was quicker off the mark than most, for instance cutting its fleet by ten percent. Thus MOL was the only one of Japan’s big-three shipping companies to post a profit.

However the setback was so severe, the chairman admits, that MOL has run up against the limits of its sakaro strategy and can’t back up any further. The new recovery plan is known as “Gear up! MOL”. Under this, says Ashida, the line will accelerate “from two to ten knots”.

Idle ships
The $20bn question is how robust is the recovery. CC Tung, chairman of Orient Overseas International remains gloomy. Having posted $401m in losses last year, he fears the big risk lies in bringing idle ships, currently accounting for ten percent of the global container fleet, back into service too quickly.

“An imprudent reintroduction of capacity currently idling or laid up, if mismatched to demand, could see fresh rounds of rate cutting,” he warns.

There’s also a number of new ships in the pipeline, which will only serve to increase capacity beyond demand. As Nils Andersen, chief executive of APM-Maersk, explains, recovery all depends on improvement in the US and western European economies. “Until that happens, I think it’s hard to accept the tough time’s over”, he regrets. Meantime he’s allocated substantial funds to buy distressed assets, of which there are plenty. The industry has taken a severe battering across all sectors and repairs will take time. According to Divay Goel, head of Asia operations at consultants Drewry. “The industry may take at least two to three years to recover to pre-crisis levels.”

The worst may be over but the mid-year negotiations over container rates will answer a lot of questions. The annual contracts are settled from May onwards and, among other negotiations, lines are asking for another $800 per 40-feet container on benchmark US west coast routes. If they get that, it really does look like calmer waters.

Rebuilding Wall Street

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Easily the most significant of a mountain of laws now being drawn up in the backrooms of Congress and the Senate with the vigorous intervention of the White House is one that decrees no bank will be so big that it will not be allowed to fail. In short, no more bail-outs.

The so-called “resolution authority” described in the banking reforms working their way through the Senate will see to that. As the US Treasury’s trouble-shooter on banking reform, deputy secretary Neal S Wolin, said late April, this authority means: “No firm will be insulated from the consequences of its action, no firm will be protected from failure, and taxpayers will never [again] foot the bill for Wall Street’s mistakes.”

Here’s the future scenario for firms that get themselves into trouble, as described by Wolin. They will be shut down or broken up and sold to competitors. Management will be kicked out. Creditors and shareholders will suffer losses, just like in a normal commercial failure. And the average citizen will hardly notice a thing.
Given the determination of the White House, Treasury, Fed Res and every other relevant authority to make this happen, it’s a done deal that the Obama financial-sector reforms will go through in the US and that they will set the model for the rest of the world.

The process for the euthanasia of troubled firms is only part of the reform process that will surely reshape big, interconnected firms. Also in the legislative pipeline are specific procedures for the regulation of derivatives – the credit default swaps that nearly brought down AIG, for the management of systemic risk through a council of regulators, for much higher capital and liquidity standards especially for the biggest firms, and for the prohibition against banks investing in hedge or private equity funds.

Not much, if anything, is left out. On top of all this, there will be obligatory provisions allowing shareholders to claw back bonuses deemed to be unjustified. The credit rating agencies will have their very own watchdog in the form of a special division inside a much more aggressive SEC.

Although the big picture won’t change, negotiations are still going on over the detail as the reform package enters the final stretch. Wolin, a veteran Treasury official and former CIA staffer, is monitoring every meeting, every objection and every move by Wall Street.

“I think this is picking up momentum,” he told reporters in April. “There’s a clear understanding of the importance of enacting legislation sooner rather than later.”

Loose ends tying nooses
Actually, there are two separate legislative packages. The House of Representatives version known as the Wall Street Reform Act is already done and dusted while the Senate is refining its Restoring American Financial Stability Act that runs to over 1,300 pages. The debate is occurring along party lines, with Obama’s Democrats in one corner and the Republicans in the other. The main sticking point, especially with the Republicans, is whether big firms should be reduced to a size that doesn’t threaten innocent parties. Namely, whether banks should be shrunk under law before they turn into King Kongs that can destabilise an entire economy.

The next stage is for the two versions have to be harmonised. A highly symbolic date for the president to put his signature to the laws would be around the time of the collapse of Lehman Brother in October 2008.

Meantime Wolin is very much on a mission, reminding audiences of the damage done far beyond Wall Street.

When Obama took office in January 2009, he pointed out: “Americans were losing jobs at a rate of 750,000 a month. Home prices were plummeting. Businesses large and small were closing their doors. At the height of the crisis, American families had lost trillions of dollars in household wealth. Median losses at public and corporate pension funds in 2008 exceeded 25 percent. “He’s been hitting key constituencies with the message: “I believe we have an historic opportunity to fix the broken rules that govern our financial system,” he says.

Balancing books
As the figures come in, the true and staggering cost of supporting the financial sector becomes clearer. The bill will run to nearly $3.5trn over the next three fiscal years, according to Treasury’s office of debt management which has had to be extremely nimble-footed to find the funds. Last year, for example, it had to raise nearly six times the sovereign debt of 2008 in order to keep the economy going and to stabilise the banks.

And this came at a time of collapsing government receipts, with corporate taxes slumping by 55 percent, and fast-rising welfare costs. As Treasury points out, it “had to manage a $950bn financing swing in just one year.”

As the laws take shape, Wall Street is mounting an unprecedented offensive. According to Treasury sources, there are four lobbyists walking the corridors of Capitol Hill for every Congressman while the trade associations are spending $1.5m a day in lobbying costs to thwart, block or at least soften the terms of the legislation. The big-banking sector has not invested so much money, time and resources on legislation since the Gramm-Wiley laws of just over a decade ago that effectively annulled the 50 year-old Glass-Steagall Act and made it legal once again to combine commercial (retail) and investment-banking activities under the one roof.

Wall Street’s main fear is that the big firms will be reduced to the equivalent of boutique operations specialising either in plain-vanilla deposits and lending, or in investment banking’s M&A, non-proprietary trading, securities and other fee-building business. And if this were to happen, America would lose its banking dominance and may be destabilised all over again.

Regulators take a different view, pointing out that big firms can’t be trusted not to get themselves into trouble. Indeed before the crisis the average capital to assets ratio of the world’s 50 biggest institutions was a skimpy four percent. None had a ratio above eight percent. This, they argue, is manifestly too low.

Shapiro Shapiro
While the Treasury leads the charge, the SEC under tough-minded Mary Schapiro is very much on song as its recent bombshell action against Goldman Sachs process. The case alleges the firm deliberately designed a mortgage-based product – a synthetic CDO or collateralised debt obligation – so that it would fall to the benefit of third parties that wanted to short it. Whatever the merits of the case (and Goldman Sachs is vigorously defending it), it came as a shock to Wall Street and can safely be seen as the White House firing a shot across the bows of the big banks in the run-up to the reforms.

And clearly the SEC under Schapiro, who’s only been in the job a year, is on the warpath. New York-born Schapiro is a regulatory veteran who has served on the SEC commission under three presidents. Although Bernard Madoff once described her as a “dear friend”, the feeling isn’t mutual. In just one year at the helm, she has turned the commission into an offensive weapon. For instance, she strengthened the investigative division that was so infamously hoodwinked by one of the oldest tricks in the investment book – the $50bn Ponzi scheme run by Madoff Securities and the $7bn one of the Stanford Financial Group. Among other reforms considered overdue, the SEC has also proposed specific rules for credit rating agencies – another White House target because of their indiscriminate use of triple-A credit ratings.

Outside Wall Street, the new-look SEC gets high marks. “We’re seeing a resolve in the enforcement division that was lacking a year and a half or two years ago, and even 10 years ago,’’ says James D Cox, a Duke University law professor.

Behind all these offensives by the White House, Treasury and SEC is the conviction that the financial sector can’t be trusted to regulate itself. The guiding light of earlier administrations when Alan Greenspan was chairman of the US Fed, “regulation lite” has gone the way of toxic assets.

As Schapiro observed: “I think everybody a few years ago got caught up in the idea that the markets are self-correcting and self-disciplined, and that the people in Wall Street will do a better job protecting the financial system than the regulators would,’’ she said. “I do think the SEC got diverted by that philosophy.’’

One new face that Wall Street can expect to see a lot is Robert Khuzami, the SEC’s director of enforcement. A former federal prosecutor, he was parachuted into the commission in January from a top position at Deutsche Bank and he clearly means business. In his first speech to a packed Bar Association of New York, he dropped a number of bombshells, among them the revelation that his division will henceforth have the power to subpoena documents without the consent of the SEC’s five commissioners, a long-standing inhibition to the agency’s nimble-footedness.

Khuzami clearly wants to speed up the search process. If defence counsels aren’t “complete and timely in responses [to SEC requests for information]”, he warned, “there will likely be a subpoena on your desk in the morning.”  

Right on cue, skeletons keep coming out of the cupboard. According to yet another congressional investigation issued in April, this time into Washington Mutual, the firm continued to hustle high-risk mortgages despite its own reports showing that many of these securities were “likely to fail”. One internal probe estimates fraud rates of up to 83 percent in these securities – and WaMu and its affiliates securitised over $190bn of these loans in various forms.

The investigating committee is also on the warpath as it continues a round of hearings on the role of investment banks, regulators and credit rating agencies in the crisis. We must “hold perpetrators accountable,” insists its spokesman. So far, he lamented, blame had been attached to “very few people”.

Mainly behind the scenes, legendary central banker Paul Volcker has emerged as the president’s big thinker on banking reform. It was Volcker who first raised the “too big to fail” issue when he addressed the House of Representatives banking and financial services committee last September with the ominous observation:

“As a general matter, I would exclude from commercial banking institutions, which are potential beneficiaries of official (i.e., taxpayer) financial support, certain risky activities entirely suitable for our capital markets.

Ownership or sponsorship of hedge funds and private equity funds should be among those prohibited activities. There are deep-seated, almost unmanageable, conflicts of interest with normal banking relationships.”
In so many words he was foreshadowing the repeal of Gramm-Wiley and a new era in big banking.

The president is determined to set the global agenda for banking reform and the new rules are certain to trickle down to other nations in the dollar zone as well into western Europe where regulatory thinking broadly coincides with that of US Treasury secretary Tim Geithner.

There’s no doubt this is a sea-change, as UK regulatory specialist and academic Peter Hahn points out. “This [reform process] is no longer a technocratic exercise. By proposing legislation, the American authorities and government are taking an axe to everything that has gone before,” he explains. “The discussion about the future look of global banking has been brought out of the closet.”

The last time this debate raged was in 1933 when Glass-Steagall split the banks in two. Oddly enough, for the next 50 years the US banking sector as a whole never performed better. And apart from occasional lapses like the savings and loan debacle, it stayed honest.

Eurobond listing in a highly influential community

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As a country, the grand duchy of Luxembourg is a distinctly unusual case, and the same is true of its stock exchange.

Luxembourg was founded in AD 963 by Siegfried, Count of Ardennes, who made a canny exchange of his lands for a small, formerly Roman castle, then known as Lucilinburhuc (‘little fortress’) lying along the Alzette River. Siegfried’s move to this castle marked the beginnings of what became Luxembourg, and the little fortress gave Luxembourg its name.

Until the 1870s Luxembourg was primarily an agricultural country, but technological progress during that decade allowed the grand duchy to begin exploiting its iron reserves, in those days substantial. Luxembourg soon became a major producer of steel. Today Luxembourg, which covers an area of only 998 sq miles (2,586 sq km) and has a population of just under 500,000, enjoys one of the world’s highest GNPs, deriving substantially from its heavy industry and its financial services sector.

As for the Luxembourg Stock Exchange (LuxSE), this is itself something of a little fortress even today, having successfully retained its independence despite most of the world’s smaller exchanges succumbing to being part of the major stock exchange conglomerates.

How has the LuxSE achieved this feat? Mainly through continuing the same tradition of canny exchanges that Siegfried started. The LuxSE was the first exchange to list a Eurobond, with the issue of Italian Autostrade bonds in July 1963. The legendary banker and Eurobond pioneer SJ Warburg was behind that issue; he had asked both the London Stock Exchange and the LuxSE whether he could start listing his new type of bonds at their exchanges; the LuxSE was more helpful and co-operative than London, so it got the business.

Ever since, the LuxSE has been one of Europe’s foremost exchanges for listing Eurobonds, and has often in fact ranked first. Today, the vast bulk of the LuxSE’s activity consists of its work as a listing exchange.
As of the end of March 2010 it listed 30,232 bonds, 6,981 warrants and 7,165 investment funds. Of those investment funds, 7,008 are based in Luxembourg and 157 based abroad, an indication of the scale of the Luxembourg investment industry: the figure represents a fairly astonishing one investment fund per 71 members of the population.

LuxSE listings also include equities, but here the figures are much smaller, with just 34 equity issues originating from Luxembourg and 268 from abroad. The total number of listings on the LuxSE as of March 31 was consequently 44,680, with these listings stemming from issuers in more than 100 countries. In fact, the number of securities listed has decreased over the past year or so due to the economic recession; it was around 49,000 until the onset of the credit crunch.

Historically sound
The substantial listings business that the LuxSE has won due to its historical and current expertise in this area is reflected in that 135 staff work at the exchange: a much higher figure than at exchanges in other countries (such as Malta, say) that are of comparable size. Prior to a listing being granted, the LuxSE checks that all the prerequisites that will allow a secondary market to develop are fulfilled. Listed securities are registered with an ICSD and have access to the NYSE Euronext’s UTP trading platform. This means that listed securities are not simply listed but are also tradable.

Since 2000, the LuxSE has co-operated with Euronext N.V., now a subsidiary of NYSE Euronext, with the co-operation including a cross-membership agreement. Under the terms of this agreement, members of the LuxSE may access the Euronext trading system, while Euronext members who qualify for a European passport may access the markets of the LuxSE.

As well as this, the co-operation has involved the migration in May 2007 of all Luxembourg securities to the NYSE Euronext’s Universal Trading Platform (UTP). The co-operation has additionally led to the adoption in February 2008 by Euronext of the SAGE application for the listing of corporate bond issues. SAGE (no relation to the famous software system) has been developed by the LuxSE.

Altogether, these changes led to the launch of the Luxnext standard for corporate bonds. Luxnext is a European Economic Interest Grouping between the LuxSE and Euronext. It aims to offer a European standard for the listing and trading of corporate bonds.

Clearing and settlement at the LuxSE are carried out in conjunction with LCH Clearnet S.A. for clearing and with Euroclear Bank and Clearstream Banking Luxembourg for settlement.

The LuxSE differs from most other stock exchanges in the world in that around 75 percent of its revenue is derived from its listing activities and its trading volumes are quite low. For comparison, NYSE Euronext had, in 2008, just eight percent of its revenue from listings and 52 percent from trading. [Source: Federation of European Securities Exchanges].

A law establishing a stock exchange in Luxembourg was passed on January 30, 1927. The stock exchange, which has always had a corporate status, was incorporated as the Société Anonyme de la Bourse de Luxembourg on April 5, 1928.

The LuxSE began operations in May 1929: on the brink of the global depression and so hardly an auspicious time for a stock exchange to get going. Progress was slow during the difficult economic conditions of the 1930s, and the German occupation of the grand duchy during WWII put a stranglehold on the LuxSE just as it did on the rest of Luxembourg and all of occupied Europe. But with the Nazi defeat, Luxembourg at once started to play a role as an expert and adept facilitator of international networking and co-operation.

Luxembourg’s unusual geographical location, bordered by Belgium to the north and west, France to the south and Germany to the east, helped to further its reputation in this respect. Luxembourg was a founding member of the Benelux Economic Union in 1944, of the European Coal and Steel Community in 1952 and of what was then called the European Economic Community (now the European Union) in 1957. The LuxSE began to expand after the war, but only came into its own with its pioneering activities in Eurobond listings in the early 1960s.

Today, around 60 percent of all European cross-border securities are listed at the LuxSE, with about fifty countries listing at least some of their sovereign debt in the grand duchy. The LuxSE also takes part in the market for debt from the EBRD, the European Commission, the European Investment Bank and the World Bank.

What exactly does the LuxSE offers investors today? A source at the LuxSE was bullish about this and about the exchange’s track record generally.

‘Not only were we the first stock exchange to list Eurobonds but we’ve also been pioneers in listing depository receipts, investment funds and – more recently – sukuk: securities compliant with Shariah law. Also, we were operating an English-language protocol for documentation even back in the 1960s: the Paris Bourse, for example, has only switched over to English in this respect comparatively recently. It’s fair to say that we’ve been a major catalyst for the enormous growth in the Luxembourg banking and financial sector that has led to this industry today being such a vital part of the Luxembourg economy: the LuxSE has inspired the growth in that sector, rather than the other way round.’

The source adds: ‘The LuxSE is today one of Europe’s very top players in bond listings if not the top one. We offer an effective and tried and tested service for bond listings that benefits from our close to fifty years of experience. Our brand is one we’re proud of and we nurture it. Bond issuers going with us know that they can also benefit from our international infrastructure and from the breadth and strength of our associations, such as with Euronext. Bond issuers can in addition enjoy being involved with Luxembourg’s highly developed and immensely experienced banking and financial services community, our multi-lingual business community – with its English, French, German and Luxembourgish – and our global outlook. We are well regulated by the Commission de Surveillance du Secteur Financier (CSSF) and have created a listings environment that facilitates the bond industry’s preferred methodology where listings take place immediately once deals are signed.’

Ultimately, what bond issuers and investors think of the listing and trading opportunities available at the LuxSE are of course a matter of personal choice. But certainly, bond issuers and investors choosing to do business in Luxembourg and benefit from the LuxSE’s experience in listings are in good company.

‘When Manchester United Football Club wanted to tap the market recently, they chose us to handle the listing of their bonds,’ the LuxSE source explains.

Luxembourg, prosperous, glamorous, international and with a history of being at the centre of things, is the sort of place where you might expect James Bond to carry out a mission. But if he did, there’d be other bonds with whom he would have to contend.

More than thirty thousand of them.

Investors enter African courtship

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Eighteen months after the onset of the US-led financial crisis and economic downturn – events which had appeared to shatter more than a decade of uninterrupted growth on the world’s poorest continent – Africa is bouncing back.

Not only have African economies weathered the downturn better than anticipated, they are now promising growth rates to rival those of their Asian counterparts, making the performance of developed economies still largely reliant on fiscal stimulus programmes look decidedly anaemic by comparison.

“All across the continent,” Dominique Strauss-Kahn, the Managing Director of the IMF told a panel discussion at the University of Nairobi, Kenya, in March, “we can see signs of life, with rebounds in trade, export earnings, bank credit and commercial activity. A lot depends on what happens to the global recovery that is still in its early stages. But I think Africa is back.”

African economies south of the Sahara are projected to grow by an average of 4.5 percent in 2010, growth rates which are expected to accelerate in 2011 – up sharply from the less than two percent experienced in 2009 as global trade and capital flows shut down in the wake of the Lehman Brothers collapse, which had brought an abrupt end to Africa’s unprecedented decade-long growth spurt of five to seven percent.

The strength and speed of Africa’s economic recovery has taken most analysts and observers by surprise. “Usually,” Strauss-Kahn said, “there is always a rather long delay between the recovery from crisis in the rest of the world, and the time when African economies begin to catch up,” he added. “This time it is not the case.”

Strauss-Kahn attributed the swift upturn to the ability of many African countries to increase their budget deficits and boost government expenditure, having introduced more disciplined macro-economic and fiscal policies in the years leading up to the downturn. “For the first time in its history, maybe, Africa was able to implement the same kind of policies that the IMF had advised for the rest of the world – and they have done it very effectively.”

Asian economies are in the vanguard of the upturn but African economies “are recovering at the same speed, sometimes faster than many others, especially when you look at Japan or the European economies,” Strauss-Kahn said.

Africa’s lack of integration into the world economy, particularly its lack of exposure to the subprime assets which brought many western financial institutions to their knees, had enabled the continent to largely escape the primary impact of the financial crisis. But Africa’s heavy reliance on earnings from oil and commodities meant that it could not escape the secondary impact of the financial meltdown on global trade.

Preparation for the inevitable
As earnings from commodities contracted and economic growth rates fell, African governments found that they were able to expand their budget deficits to lessen the impact of the downturn. Ten years of prudent macro-economic and fiscal management had given many African governments the luxury of fiscal room for manoeuvre never before experienced.

In addition, the IMF and World Bank were able to reassure African leaders that, given the cyclical rather than structural nature of the crisis, their lending policies would be targeted on meeting short-term financing needs rather than on imposing long-term structural reforms.

During 2009-10, the IMF signed financial support programmes with 28 African countries – up from six in 2006, and its lending exceeded $3.5bn – more than the three previous years combined. At the same time, the World Bank extended more than $21bn in concessionary loans and grants to the world’s poorest countries – most of them in Africa – compared to $12bn the year previous.

But while the IMF and World Bank were rallying to provide Africa with a financial lifeline, the response of private sector investors to the crisis – the now notorious flight to safety – had become a source of considerable alarm.

In 2008, prior to the impact of the downturn, Africa had attracted a record $88bn in FDI. In September 2009, however, the United Nations Conference on Trade and Development’s (UNCTAD) annual World Investment Report, a leading authority on global trade and investment flows, forecast that global FDI would fall from around $1.7trn to $1.2trn for 2009. It also estimated that FDI into Africa in the first three months of 2009 had plunged a staggering 67 percent.

With the benefit of hindsight that estimate was unduly pessimistic. Lenders facing liquidity constraints had greatly scaled back their African exposure in the early part of 2009. But UNCTAD’s mistake was to assume that the first quarter figures would set the trend for the remainder of the year. In fact, the opposite happened.

Early caution eased considerably as the year wore on. Not only were fresh sources of investment forthcoming from new emerging market lenders such as China and India, bolstering the lifeline thrown to emerging market and developing economies by the IMF and World Bank, but other sources of FDI started to recover too, as western private capital began flowing back into Africa in search of higher returns that were now largely unobtainable in most developed economies.

Despite facing the most challenging market conditions in decades, the number and value of African project finance deals began to register a marked increase. EDFR Global, the Washington-based emerging market fund analyst, had by August detected a reversal of the panic sell-off that had hit African markets during the 2008-09 flight to safety, highlighting what it called the “underlying logic of investing in a continent which remains host to about a third of the world’s known mineral resources”.

By October Standard Chartered Bank had reinforced this analysis by suggesting that the resurgence of interest in frontier African assets was less attributable to a recovery of investor appetite for risk than in a growing recognition “of the compelling economic argument for investing in Africa”, which had not only survived the downturn, but was no likely to recover faster than anyone had hitherto anticipated.

At the same time, the Washington-based Emerging Market Private Equity Association (EMPEA) reported that the six-month upturn in global markets had reignited private equity investment in Africa. Private equity investment in Africa, valued at around $5bn or 0.5 percent of African GDP in 2008, had taken a knock in 2009, but EMPEA reported a sharp upsurge in investors seeking to raise fresh funds for a new wave of private equity investment in the continent in 2010.

Done deals
By the end of 2009 Dealogic, the investment banking and capital market analyst, reported that in the face of the worst economic and financial climate since the Great Depression no less than 31 project finance deals were signed in Africa valued at $12bn – less than the all-time record of $18.4bn agreed in 2007 but more than the $10.7bn recorded in 2008 – making 2009 the second best year for African project finance this decade.

Dealogic’s data reflects only syndicated loans. It does not include private equity deals, bilateral bank-project loans or government investment commitments, and so significantly underestimates the value and volume of project finance deals in Africa during the so-called “great slowdown of 2009”.

Contrary to all expectations, African fundamentals remained largely immune from the downturn. It took a while for investors to realise this. When they did, they began returning to Africa in ever greater numbers. Africa, hitherto seen as the laggard of world economic growth, has now become an important source of growth for developed economies.

The transformation in the fortunes of the developing and developed world prompted Robert Zoellick, the president of the World Bank, to suggest in April that the world’s “economic and political tectonic plates are shifting.” The old concept of a Third World was now obsolete, he said. Developed countries would no longer be able to impose their will on developing countries. Developing countries have now become “major sources of global growth” in their own right.

The significance of this development lies less in the recovery of oil and commodity prices than the fact that Africa is shifting from being a source of global supply to a source of global demand.

Private equity investors such as Actis, Aureos, African Capital Alliance, AfricInvest and Citadel Capital, have been attracted to Africa – where private equity is still a relatively novel asset class – by the prospect of 4.5 percent growth rates in 2010, 6.5 percent in 2011, and the lure of considerable growth year after year thereafter. All are acutely aware of the demand transition that is currently sweeping the African continent.

Emerging market private equity investor Actis, for example, raised around $3bn in 2009, and is planning to deploy about a third of it in Africa. Ngozi Edoziem, the firm’s West African head, points to countries like Nigeria, which has a population of around 150 million, a growing percentage of which is moving into what western economists would recognise as the middle classes, and they are fuelling demand for banking services, food and retail outlets, telecoms and information technology, and a host of other services and sectors.

“We’ve seen over the past five years that you pretty much have something like ten million people that have moved from a low income and are getting into that middle class bracket,” she said. “Demand across all areas is strong. There is growing income and wealth, and we are beginning to have the infrastructural support, as well as the government and regulatory support that creates the foundation for growth in many of these businesses,” she added.

Actis teamed up with South Africa’s Rand Merchant Bank to help finance the construction of a $100m shopping complex in Ikeja, the middle income neighbourhood of Lagos, where it estimated that there are 3.9 million people living within an eight kilometre radius of the new complex with an income of $1,500 a month.

When completed, the shopping complex will be the largest of its kind anywhere in Nigeria. But it is only the beginning. Johannesburg, which has a population of around four million, supports no less than 70 big retail complexes. Lagos, with a population of around 16 million, has one.

Actis is not alone in basing its investments on Nigeria’s changing demographics. Shoprite, the South African supermarket chain, has seen the same opportunity, and is currently planning to open up 70 retail outlets in Nigeria over the next decade, and 20 of those are destined for Lagos. Wal-Mart, the world’s biggest retailer, hinted in April that it might even buy out Shoprite, as it scourers the world – especially China, India and Africa – for new expansion opportunities to offset stalled or declining sales in the US.

Nigeria is Africa’s most populous country, and despite the considerable everyday challenges of operating there – from incessant power shortages to widespread corruption – it is increasingly being seen as the potential motor of resurgent African economy – offering the same growth opportunities that China presented two decades ago.

Nigeria’s political elites, as is the case in many other parts of the African continent, are struggling to solve the power generation crisis, the lack of the regulatory frameworks that are so vital for businesses to function effectively, the delays in the judicial system – and a host of other obstacles that have been an impediment to private investment for decades. Progress is painfully slow. But progress there is. Nigeria has been moving ahead far faster than most westerners have given it credit for.

Nor is it the only one. Continental Africa now has a population in excess of one billion people, and while substantial pockets of poverty and conflict remain, there are vast areas from the Cape to Cairo, and from Luanda to Lusaka, where a middle class has now emerged that is demanding the same kind of banking, retailing, property, telecommunications, and leisure services that are available in most other parts of the world. For investors with a tolerance of risk – and the risks remain considerable – African frontier markets are the place to be.

Is the euro here to stay?

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Even before the recent well publicised economic difficulties experienced by some members of the eurozone – in fact, since it was first launched as a currency – questions had been raised about the long term viability of the euro.  
In 2005 the US economist Milton Friedman warned: “The euro is going to be a big source of problems, not a source of help. The euro has no precedent. To the best of my knowledge, there has never been a monetary union, putting out a fiat currency, composed of independent states. There have been unions based on gold or silver, but not on fiat money – money tempted to inflate – put out by politically independent entities.”

Whether you agree with all Friedman’s monetarist views, he was certainly right to highlight the apparent oddness of imposing a common currency on those countries who opted for joining the EU for its many benefits: countries with very different cultures, political systems and levels of economic development.  How could the euro have the same value in each of those member states and how could it remain constant when each of those states was, and is, responsible for its own economy and self interest, but without the ability to take corrective action when troubles arise: for instance, through devaluation of its currency in relation to its neighbours?

So why have so many countries opted to join the eurozone?  The answer lies, to a very large extent, in the many benefits that the eurozone presents to its members – and the breaking down of barriers to – and complications of – international trade are undoubtedly high on the list:  no more worries about fluctuations in the exchange rate that might eat into the value of a sale, simplified billing, price transparency and competitive pricing for the potential purchaser.  And the EU’s convergence criteria ensured that those bidding to join whip their economies into shape beforehand – although, as we’ve seen recently, some member countries have ‘let themselves go’ a little since the honeymoon.

The economic problems of those struggling member states serve to highlight the main issue concerning all the member states, because all those states are affected, as the value of the euro drops against other currencies, and tough decisions have to be made about effectively bailing out the ailing members. Opponents of the euro jump on this as a reason for it to be scrapped and for members to revert to their former currencies.  But those same opponents have been opposing the euro – and predicting its downfall – for many years, and still it survives, albeit largely due to political will.  Why? The easing of trade between member states must be the prime reason, as must the relative stability provided by a single currency when elsewhere capital flows lead to extreme currency movements that can seriously upset trading patterns. Even the UK, as an EU member but outside the ‘euro zone’, feels the pinch when the GBP/EUR exchange rate moves in the wrong direction.

A gauge of whether the euro will survive may be to imagine what trade throughout Europe would be like if each member state reverted to its former currency.  The eye-watering cost of doing so apart, the immediate outcome would be the return of all those impediments to open trade, touched on earlier and the frustrations they would bring – not least, unclear price comparisons between competing suppliers, increased chances of adverse exchange rate fluctuations between contract and payment and more restrictions on the transfer of goods across borders of the ex-eurozone states. All in all this could result in a reduction in international trade if buyers revert to the easy option of domestic trade. 

The euro is essentially the product of an idea – and an ideal. The ideal that, among other things, opens up new opportunities for successful international trade across Europe.  Even if, in the longer term, the EU and its politicians have to find new ways to prevent member states from getting into financial trouble, whatever that takes, they – and we – should always keep this ideal in mind, as it surely provides the raison d’etre of the euro. And that is what will keep the euro alive.

Peter Ingenlath is Vice Chairman and Chief Risk Officer at Atradius

Egypt mobilises corporate sector

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Combining tradition and modern banking, Arab African International Bank (AAIB), established in 1964, is Egypt’s fastest growing bank in terms of size and profitability. This growth rate substantiates AAIB’s vision to be the leading financial group in Egypt, providing innovative services with a strong regional presence, being the gateway for international business into the region.

The bank’s growth was given further momentum in 2008 with the establishment of new subsidiaries: Arab African Investment Holding (AAIH), Arab African Investment Management (AAIM), and Arab African International Securities (AAIS).

AAIH is AAIB’s main investment arm.  It’s main operations are: Arab African Investment Management (AAIM) and Arab African International Securities (AAIS). With the vision of being one of Egypt’s leading investment institutions that incorporates companies covering various sectors, AAIH sets a keen eye on the region as a possible field of activity.

AAIM is the bank’s first company established in late 2006, AAIM currently manages three funds in addition to investment portfolios related to individuals and entities. Furthermore, AAIB’s Shield Equity Fund has been recognised as the best performing open end equity fund by the Egyptian Investment Management Association in 2009 achieving 33 percent growth over the year. Juman Money Market Fund was launched in April 2009 and has currently a NAV exceeding EGP 600 MM.

AAIS was acquired by AAIB in 2008 whereby a complete revamp took place including Management, HR, location, branding and logo. Accordingly, AAIS’ ranking has improved impressively from 94th place in December 2008 to be placed in the 37th rank in 2009. The company offers a full-range of brokerage activities including same
day trading, online trading and margin lending.

Arab African International Bank is a major contributor to the Egyptian debt capital market with a powerful role in structuring, managing, book-running and successfully closing syndicated loans. The bank is a high-end service provider of innovative and customised solutions to leading local and regional corporates and international investors.

AAIB has commercial banking operations in the United Arab Emirates (UAE), with branches in Dubai and Abu Dhabi.  The regional office in Dubai acts as the focal hub for the group’s corporate business across GCC countries and is the launch pad for the future expansion of branch network, within the Gulf countries. The principal focus of our business in UAE and across the Gulf remains corporate banking and trade finance activities.

With only 20 percent of Egypt’s population dealing with banks, AAIB sees retail as a viable growth area and a fertile field for introducing innovative products and services to the market. AAIB is the first to introduce credit cards to Egypt in the eighties and the chip technology in 2003 through its capacity as both issuer and acquirer. In 2007, AAIB launched a variety of innovative products and services. With the Visa Mini Card, it introduced the smallest credit card to the Egyptian market following its earlier introduction of smart technology cards.

Merchants also benefited from technology enhancement as AAIB introduced GPRS points of sales where the bank maintains its leading market share through the migration of all its merchants POS to accept cutting edge smart card technology at highest security standards. The bank also strengthened its Merchant Program by launching merchant loans availing optimal financing to expand size and scope of their business activities guaranteed by the value of total electronic payment transactions settled between the bank and the merchants, thus eliminating the need for collaterals or personal guarantees.

Along with this, Click2Shop complements AAIB’s merchant portfolio, being an internet payment gateway enabling merchants to accept online payments via their websites.

In 2007, and with a track record at the Cairo Pediatrics specialized hospital since 2004, AAIB launched its foundation for social development, “We Owe it to Egypt”. Although established by the bank, its scope and objectives extend far beyond the bank’s identity with its primary goal to enact a nation-wide initiative that inspires and mobilizes the corporate sector towards making a fundamental and positive difference in the fields of public health and education in Egypt. In 2009, and in cooperation with another local foundation, We Owe it to Egypt donated a piece of land to the Cairo University Specialized Pediatric hospital – a public facility treating more than 1 million children every year, the newly donated land is to witness a day care annex that will be built by the Japan International Cooperation Agency (JICA) as a subsidiary of the already existing hospital. The foundation currently takes part in renovating two other public health institutions: The National Cancer Institute and Mansoura University’s Urology and Nephrology Centre.

In 2008, AAIB’s mandate to add value to stakeholders was institutionalised through establishing a CSR Unit with the objective of enacting professional adherence to codes of conducts and ethics in dealing with stakeholders. This is enforced through AAIB’s engagement within international organizations that enlighten and substantiate its CSR policies. AAIB is a member of the UN Global Compact which focuses on human rights, labour standards, the environment, and anti-corruption. AAIB has also joined London Benchmark Group (LBG), a London-based organisation that provides standard parameters measuring the effectiveness of corporate contribution to community development.

In January 2009, AAIB announced its adoption of the Equator Principles, to be Egypt’s first bank to sign the agreement. A leader in corporate finance in Egypt’s growing and well diversified economy, AAIB has vested interest in adopting Equator Principles to further substantiate social, environmental, and moral considerations across different sectors of the economy, particularly through its vast network of corporate clients.

Climate chief: EU must fight for green-tech jobs

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European Climate Commissioner Connie Hedegaard observed the fine balance Europe must strike with China and other swiftly developing regions, sometimes as trade rivals and other times as partners in tackling climate change.

“Europe must do whatever we can to protect and develop our stronghold within the energy-efficient and renewables sectors,” she told reporters in an interview.

“There’s a growing recognition that our strong position is not automatic in the next decade,” she added. “We must fight for it.”

Hedegaard spoke amid a tense European debate over whether to deepen planned cuts to carbon dioxide emissions over the next decade to 30 percent below 1990 levels, compared to current plans for a 20 percent cut.

Europe’s powerful business lobby has successfully fought off the prospect of deeper cuts, saying they would make traditional heavy industries such as steel and cement lose market share to less-regulated overseas rivals – so-called “carbon leakage”.

But many of Europe’s greener governments are starting to worry that staying at 20 percent would undermine the EU carbon market, which makes industry pay for permits to pollute and provides the main incentive for green innovation.

France, Britain and Spain are among them.

“Yes, there can be carbon leakage if you are too ambitious, but you can also lose jobs if you are standing still while your competitors are moving … if you are not innovating enough,” Hedegaard said. “We must find the right balance point.”

Border tariffs
She declined to speculate on whether Europe would deepen emissions cuts on its own if international climate talks fail again to reach a deal in Cancun, Mexico in December.

But she raised the difficult question of Europe’s growth prospects if it does not increase the pressure for innovation in the face of strong competition from China, Japan, Brazil and South Korea.

“What are we going to live from in Europe?” she said. “There are so many things we cannot compete on. We cannot compete on taxes, wages or pension ages. Here we have one area where we still have a worldwide front-runner position and we should take care to keep that.”

Some European countries, notably France and Italy, have raised the prospect of protecting European industries by placing border tariffs on imports from bigger polluters. But Hedegaard said premature action could damage global talks and the threat was enough in itself.

“Border tax could be one of the tools in the toolbox,” she said. “I think it should stay there. If we did it right now, how likely is it we could get a result around the negotiating table? It’s difficult already.”

Technology transfer
An alternative is to pursue sectoral agreements on cutting greenhouse gases, and Hedegaard said China was proving to be a valuable partner in this area.

“They know they particularly have to address the challenges within cement, aluminium and steel,” she said. “They mentioned these sectors. And where do we have the biggest threats of carbon leakage in Europe? Cement, aluminium and steel. We could cooperate in finding solutions.”

Sectoral crediting would allow European companies to offset their emissions by funding cuts in developing countries, focused on sectors rather than individual companies.

“Some experts from my services will go to Beijing and work with Chinese experts,” she added. “This is really happening. Just two years back it would have been unthinkable.”

But while China is a partner in some areas, it is clearly also a competitor in manufacturing.

So-called “technology transfer” has become a mantra in international climate talks for poor nations, which say they need technical help to cut emissions. The latest UN negotiating text lists it as a top priority.

But Hedegaard described a more nuanced approach.

“Technology cooperation has been more in focus in recent years, and technology dissemination,” she said. “Nobody foresees we should just give away our technology and make it even easier for China or others to compete with us.”

GKN eyes growth in offshore wind, high-speed rail

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Land Systems, which will focus on power management, will seek to take advantage of improvements seen in its mining, agricultural and construction markets alongside newer sectors, Andy Reynolds-Smith, head of the new division, told reporters.

“We’re taking a close look at some new and very attractive long-term markets such as rail, especially the high-speed sector, wind power, in particular UK offshore, and also military vehicles which are getting more and more demanding in terms of technology.”

GKN is best known for its airframes, engine structures and parts for planemakers such as Airbus and Boeing.

Reynolds Smith said the division – which comprises its off-road, autostructures and industrial and distribution services units – would be looking to take on more people in Britain, where it now employs around 800-900 staff.

The division, which has about 5,000 staff worldwide, is planning to double revenues to £1.5bn over the next five years and will achieve this via a mixture of organic growth and acquisitions, Reynolds-Smith added.

Bank of England pushes for more ABS transparency

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Britain’s central bank proposed these changes in March 2010 and aims to begin a phased introduction of the new criteria in 2011. There will be no grandfathering.

“The feedback is supportive in principle,” said Sarah Breeden, head of special projects, markets at the Bank. “There were some particular issues including concerns about consistency with other initiatives,” she told a conference in London.

“Our intention is to be complementary not competing.”

The bank has been accepting asset-backed securities (ABS) as collateral in its efforts to provide banks with liquidity during and after the credit crisis.

Now it wants to improve the transparency of these assets as part of its own risk management, but also to help enhance the resilience of the ABS markets.

Breeden said the bank had become one of the largest investors in ABS in just a few years and had learned a lot about what makes for a more transparent and robust market.

The ABS markets seized up during the credit crisis and have only partially reopened. Banks have continued to securitise mortgages and credit cards but have used these assets as collateral to get liquidity from the Bank of England and the ECB.

Banks have deposited about £290bn ($429.9bn) of assets with the Bank of England, which set up a Special Liquidity Scheme in 2008 to help ease liquidity strains caused by the crisis.

This scheme is due to end in 2011. But the bank has introduced a discount window banks can use instead if they need liquidity.

“The SLS will close as planned,” Breeden said, adding that she was aware of “chatter” in the market about a possible extension.

The proposed changes to ABS eligibility criteria include standardised documentation that is to be publicly available and more detailed and transparent information about the assets via so-called loan-level data in a standardised format.

Breeden said the Bank would undertake more “constructive engagement” with the industry and aimed to respond soon to the feedback it had received via the consultation process.

The next step will be to make an announcement of the final plans, she said.

Germany appeals to EU neighbours to back bank levy

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Merkel made her pitch ahead of a meeting of EU leaders to discuss tightening controls on spending by the bloc’s 27 countries and how charges against the banking industry should be structured.

“We will prepare for the G20 and G8 meeting so that we can go with as united a European position as possible that also covers a bank levy and taxation of financial markets,” said Merkel.

“Germany and France … are in favour of calling more on those who caused the crisis to pay up.”

But doubts persist as to whether Europe can agree a code for a levy.

Britain, which will introduce its own bank charge, is opposed to pan-European rules, and Ireland is nervous that an extra charge on its banks could exacerbate their difficulties.

“I want to push it through on a European level but there are many countries that do not think this,” Austrian chancellor Werner Faymann said of a levy.

Early in June, finance ministers from the Group of 20 countries ditched plans for a global bank levy in the face of opposition from Japan, Canada and Brazil, whose lenders came through the credit storm relatively unscathed.

This throws down the gauntlet to the EU to go it alone. “It is fair to say that a fairly substantial majority would be in favour but there are many, many issues to be resolved,” said one diplomat.

Britain and France would use the money raised for public spending, while Germany wants it ring-fenced for future crises.

A financial transaction tax, recently introduced to the debate by Germany, is even more controversial because many believe such curbs in Europe would drive trading to other continents. Britain is opposed to the measure.

Fairfield to raise $450-$500m in London IPO

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Fairfield has not yet decided on the proportion of its shares to be sold, but a banking source familiar with the matter told reporters the stake floated was likely to be more than 25 percent but less than half of the firm.

The initial public offering could value the company at more than $1bn, the Financial Times reported, a figure on which Fairfield declined to comment.

Fairfield, founded in 2005 and controlled by private equity firms led by Warburg Pincus, is one of several independent explorers that have been extending their grip on the North Sea in recent years, buying assets from oil majors focusing on larger reserves elsewhere.

British oil and gas output peaked in 1999 and is in decline, but up to 25 billion barrels of oil equivalent are thought to remain in fields too small for oil majors but which independent companies are looking to develop.

Fairfield will join Abu Dhabi National Energy Company TAQA and London-listed Enquest as one of the bigger independent North Sea-focused companies.

Like Enquest, Fairfield’s producing assets are also based in the northern North Sea and both companies are interested in acquiring assets from majors and smaller companies.

“We definitely do see the bulk of the best quality reserves still definitely being in the hands of the majors, that’s our main target area,” chief executive Mark McAllister said in a telephone interview with reporters.

Fairfield said it would use around 80 percent of the proceeds from the float to boost production from its producing oil fields, which it acquired in 2008 from Shell, and to bring other redevelopment projects into production.

“We’ve reached a stage where we need significant capital for the big capex programme we’ve got over the next three or four years to bring these assets on stream,” said McAllister.

The remaining 20 percent of the proceeds would be used to pursue acquisitions and for exploration and appraisal.

He added that current market volatility had not deterred the company from pressing ahead with its flotation. Fund manager Jupiter priced its listing on June 16, despite ongoing weakness in the IPO market. “We went out and did some pre-market research and received a very, very positive response which has encouraged the board to move forward to IPO,” McAllister said.

Fairfield posted total production of 4,600 barrels of oil equivalent per day (boed) in 2009, and has forecast that will grow to 34,400 boed in 2014. The company has “proved plus probable” reserves of 94.1 million barrels of oil equivalent.

Hawkpoint is acting as financial adviser and joint sponsor on the IPO, while Goldman Sachs and Credit Suisse are acting as joint global coordinators, joint sponsors and bookrunners.

US jobless claims, price data back low rates policy

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Fears that growth could be slowing were heightened by a report showing factory activity in the country’s Mid-Atlantic region braked to its slowest pace in 10 months in June. The employment gauge fell to its lowest level since November.

“I don’t know if this is temporary, related to everything that has been going on in the markets, or if this means that the recovery is slowing,” said Alan Lancz, president of Alan B Lancz & Associates in Toledo, Ohio.

Financial markets have been worried that a debt crisis that started in Greece could spread. Belt-tightening by European governments already looks set to slow economies there and take a small bite out of US growth.

For a labour market that is struggling to recover from the deepest recession since the 1930s, the head winds are proving problematic.

Initial claims for state unemployment benefits increased 12,000 to a seasonally adjusted 472,000 as manufacturing, construction and education sectors shed workers, the Labour Department said.

Financial markets had expected claims to fall to 450,000. The data was in the survey period for the government’s closely monitored employment report for June. A Labour Department official said states had reported claims in manufacturing, construction and education sectors.

In a second report, the department said its seasonally adjusted Consumer Price Index fell 0.2 percent in May, the largest decline since December 2008, after dipping 0.1 percent in April.

Moderate recovery
“The rise in jobless claims is consistent with the view that the recovery is going to be fairly moderate. We are not going to get the kind of job growth and therefore GDP growth, which is going to generate inflation,” said Jim Demasi, chief fixed income strategist at Stifel Nicolaus & Co in Baltimore.

The Philadelphia Federal Reserve Bank’s business activity index dropped to eight in June from 21.4 in May. That was well below economists’ expectations for 20.9. A reading above zero indicates expansion in the region’s manufacturing.

Stocks on Wall Street fell on the claims and factory data, brushing aside Spain’s auction of government bonds, which attracted strong demand. US government debt prices rose, while the dollar fell to three-week lows against the euro.

Though the recovery is showing some weakness, expansion continues at a moderate pace.

The Conference Board’s leading index, which tries to predict future levels of economic activity, rose 0.4 percent to a record 109.9 in May, after stagnating in April, another report showed.

After falling rapidly last year, jobless claims have made little progress in 2010.

Analysts see this as a sign that while layoffs have abated, companies are still not confident enough to add to payrolls, indicating unemployment will remain uncomfortably high for sometime.

Japan PM eyes 10% sales tax in party policy shift

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Kan, who has made fiscal reform a top priority since taking office, also said he would map out the size of a future sales tax hike by the end of the fiscal year to March 31, 2011.

The premier declined comment on when a tax rise might be implemented, but Democratic Party policy chief Koichiro Genba said the earliest timing technically would be autumn 2012, adding corporate tax cuts to boost competitiveness could come first.

The Democrats ousted their long-dominant conservative rivals in a historic general election last year, promising to cut waste and focus spending on households to spur growth.

But Europe’s debt woes have fanned concern about a Japanese public debt already twice the size of the economy, and voters, worried about creaking pension and health care systems, have become less resistant to a sales tax rise.

“To be honest, we as politicians wish we could avoid asking the people to shoulder more of a tax burden,” Kan told a news conference.

“Jitters in Europe stemming from the financial collapse of Greece are no longer somebody else’s problem.”

 He added that an opposition proposal to raise the tax to 10 percent was “one major reference point”.

In a manifesto for the upper house election, the Democrats called for multi-party debate on drastic tax reform including the five percent sales tax, opening the door to a future tax hike the Democrats are betting worried voters will accept, if not welcome.

“Public opinion is in favour of changing the manifesto to make it more practical,” DPJ senior lawmaker Hajime Ishii told reporters. “I think what the people want is to achieve healthy finances in the next five to 10 years.”

Supoort rebounds
Voter support for the Democrats has rebounded since Kan took over from his unpopular predecessor, Yukio Hatoyama, improving the party’s chances in the upper house election.

The Democrats will stay in power regardless of the outcome in July given their huge majority in the lower house, but need to control the upper house to pass legislation easily.

The opposition Liberal Democrats have said Japan’s sales tax – low by global standards – should be raised to around 10 percent. Some economists say it should be as high as 20 percent.

A one percentage point increase in the sales tax would boost revenues by about 2.5 trillion yen, according to Seiji Shiraishi, chief economist for Japan at HSBC Securities.

The DPJ’s Ishii said the government would not raise the sales tax before the next election for parliament’s lower house, which must be held by late 2013 but could come sooner.

“Tax hikes often don’t proceed as planned. Expectations towards fiscal restructuring are there because a new prime minister came into office, but such expectations may be dented once tax hike plans run into difficulties.” said Koichi Ono, senior strategist at Daiwa Securities Capital Markets.

The Democrats vowed to seek an early end to deflation through cooperation between the government and the Bank of Japan.

They also pledged to do their best to keep fresh government bond issuance in the fiscal year starting next April from exceeding the “level for fiscal 2010”.

But they did not specify the level of a Japanese government bonds (JGBs) cap, which might worry bond market investors.

“Our basic stance is to compile (next fiscal year’s) budget while keeping new JGB issuance from topping the amount planned in the initial budget (for this fiscal year),” said Goshi Hosono, acting secretary general of the party.

But he added that the economy was a “living thing” and the government might need to act flexibly.

The government planned to issue new JGBs worth 44.3 trillion yen ($485bn) in its initial budget for the current fiscal year, but that could change.

The rebound in voter support for the DPJ since pragmatist Kan took over means the party now has a shot at winning an outright majority in the upper house, the DPJ’s Ishii said.

“If a vote were held now, we’d get around 50 seats or so, but over the next month, if we appeal as the ruling party with proper policies and fight in the districts, attaining an outright majority is not impossible,” he said.

The party needs to win 60 of the 121 seats up for grabs in the 242-member chamber to take a majority without relying on current or new coalition partners to pass bills smoothly.

EU leaders sanction Iranian oil and gas sector

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The measures go substantially beyond the sanctions the UN agreed on June 10 and are designed to pressure Tehran to return to talks over an uranium enrichment programme Western powers believe is designed to produce nuclear weapons.

The steps, which could come into force within weeks, will focus on trade, including dual-use items, banking and insurance, Iran’s transport sector, including shipping and air cargo, and key sectors of the gas and oil industry.

The energy sector sanctions will prohibit “new investment, technical assistance and transfers of technologies, equipment and services related to these areas, in particular related to refining, liquefaction and Liquefied Natural Gas technology”, the heads of state and government said in their conclusions.

The measures go beyond what some diplomats had foreseen and are likely to put strong financial pressure on Iran, which is the world’s fifth largest crude oil exporter but has little refining capability.

“The European Council deeply regrets that Iran has not taken the many opportunities which have been offered to it to remove the concerns of the international community over the nature of the Iranian nuclear programme,” the EU leaders said.

“Under these circumstances, new restrictive measures have become inevitable.”

Diplomats said some EU states, notably Germany, which has large investments in Iran’s oil and gas sector, had concerns about strengthening the sanctions, but in the event all EU Member States moved quickly behind a strongly worded statement.

Iran denies its nuclear programme is aimed at producing weapons, saying it is for energy and other peaceful purposes.

The EU steps coincide with efforts by the US Congress to draw up its own set of additional measures against Iran designed to add bite to a recent UN sanctions package, parts of which were watered down by Russian and Chinese opposition.

The political impact of the UN steps was also undermined by Turkish and Brazilian votes against the package.

Russia criticised the EU for planning sanctions on top of the UN measures.

“We are extremely disappointed that neither the US nor the EU is heeding our calls to refrain from such steps,” Russian news agencies quoted Deputy Foreign Minister Sergei Ryabkov as saying.

The US Treasury blacklisted another state-controlled Iranian bank and targeted companies that it says are fronts for Iran’s state shipping company IRISL as it looked to coordinate the tighter sanctions net with the EU.

It also took separate steps to squeeze Iran’s energy sector by identifying 20 petroleum and petrochemical companies as being under Iranian government control – which puts them off limits to US businesses under a general trade embargo.

Japan ruling party vows to tackle debt, sales tax

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Japan’s ruling Democratic Party has vowed to fix the country’s tattered finances and pledged to seek a decision on tax reform quickly, paving the way for a likely hike in a politically sensitive consumption tax.

In their campaign platform for a July 11 upper house election, the Democrats also vowed to do their best to keep fresh government bond issuance in the fiscal year starting next April from exceeding the “level for fiscal 2010”.

“We will launch a multiparty discussion on the overhaul of tax systems, including consumption tax, with the aim of reaching a conclusion early,” the party’s manifesto said.

It gave no hint of the timing or extent of a sales tax hike.

The government planned to issue new Japanese government bonds (JGBs) worth 44.3 trillion yen ($485bn) in its initial budget for the current fiscal year. The amount will change if the government crafts an extra budget to raise or cut the amount of debt issuance later.

The Democrats did not specify the level of a JGB cap.

That may worry investors who are concerned about Japan’s bulging debt, which is about twice the size of GDP, the worst among developed countries.

“Our basic stance is to compile (next fiscal year’s) budget while keeping new JGB issuance from topping the amount planned in the initial budget (for this fiscal year),” Goshi Hosono, acting secretary general of the party, said.

“But the economy is a living thing and I don’t deny that there could be a need to respond flexibly to situations that could emerge as Japan tends to be significantly affected by the world economy.”