Finance Blog number 1

Ford reported its best annual earnings since 1998 on Friday, making 2011 the second most profitable year in the company’s 109-year history.

But much of the profit was attributed to a non-cash gain, as it put a large tax credit from past losses on its balance sheet that will shield it from taxes in the future. Excluding that credit, the automaker posted full-year and quarterly earnings that fell short of last year’s profit as well as analysts’ forecasts.

Shares of Ford (, Fortune 500) tumbled as much as 7.4% in early trading on the earnings miss before recouping about half the lost ground after assurances on an investors’ call about earnings guidance moving forward. Shares were down 3.1% in midday trading.

The company’s 2011 net income of $20.2 billion, up from $6.6 billion in 2010, was the best since 1998, when it received a large one-time gain from the sale of The Associates financial unit. About $12.4 billion of the latest profit came from the accounting gain.

Excluding special items, Ford reported operating income of $6.1 billion, or $1.51 a share, down from the $7.6 billion, or $1.91 a share, it earned on that basis in 2010.

Fourth-quarter operating earnings of $787 million, or 20 cents a share, were down from $1.2 billion, or 30 cents, a year earlier. Analysts surveyed by Thomson Reuters had forecast earnings of 25 cents a share.

Pretax earnings for the quarter and full year improved in Ford’s home North American market due to increases in both the pricing and the volume of vehicles sold. The company’s profit margin in the region also improved.

The strong North American results mean that the 41,600 members of the United Auto Workers union will be getting larger profit-sharing payments for 2011.

Full-year payments to the factory workers will average $6,200, up from $5,000 in 2010. But the workers already received more than half of that money in December due to the new labor deal reached in the fall.

The company announced earlier this month that its white-collar workers would get both bonus payments and merit raises for 2011, the first time in four years they’ve received both.

Cool cars from Detroit auto show

Profit fell in Ford’s South American unit and the quarterly loss increased in Europe. The Asia-Pacific region tipped from a fourth-quarter profit a year earlier to a loss this time due to the flooding, but the company had already warned of that loss.

Revenue for the year reached $136.3 billion, up from $120.9 billion in 2010, as it sold 5.7 million cars and trucks worldwide, up 7% from its 2010 total.

Ford Chief Financial Officer Lewis Booth said that the accounting gain was significant for the company because it was a sign that the company is back to making regular profits. It had stopped booking the tax credits back in 2006, despite ongoing losses at that time, because of doubts that Ford would once again be able to make the kind of profits that would allow it to use those credits.

CEO Alan Mulally said he considered the results to be strong, and that Ford missed its profits targets in the quarter due to external factors outside of North America, such as the economic slowdown in Europe and flooding in Thailand that shut factories and affected its supply chain.

He said the company expects Ford’s overall pre-tax operating profit in 2012 to be roughly the same as last year, as better auto profits will be offset by lower earnings from its finance arm.

And he said the company is still well on track to hit the mid-decade target it set last year of significantly better profits and global sales of about 8 million vehicles, an increase of about 40% from 2011 levels.

Van Conway, president of Michigan turnaround consultant Conway MacKenzie, said Ford’s results for the year were good, not great, and management really can’t be blamed for problems such as the downturn in Europe.

"The old line used to be when the economy got a cold, Detroit got pneumonia," he said. "They’re clearly position to weather a storm far better than they did before."

Adam Jonas, analyst with Morgan Stanley, said some of the earnings miss was due to higher engineering and other costs associated with development of new vehicles. He said the outlook remains good for the company.

"2012 may be shaping up to be a very good year for Ford," he wrote in a note Friday.

Ford is the first of the Big Three U.S. automakers to report results. General Motors (, Fortune 500) and Chrysler Group will report next month. But all are expected to post profits, the first time all will be in the black at the same time since 2004. All gained U.S. market share for the first time since 1988. 

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Greece and its private investors are close to a deal that will significantly reduce the country’s debt and pave the way for it to receive a much-needed euro130 billion bailout.

Negotiators for the investors announced the tentative agreement Saturday and said it could become final next week.

Under the agreement, the investors would take a hit of more than 60 percent on the euro206 billion of Greek debt they own.

Here’s how it would work: private investors would receive new bonds whose face value is half of the existing bonds. The new bonds would have a longer maturity and pay an average interest rate of slightly less than 4 percent (compared with an estimated 5 percent on the existing bonds).

Without the deal, which would reduce Greece’s debt load by at least euro120 billion, the private investors’ bonds would likely become worthless. Many of these investors also hold debt from other eurozone countries, which could also lose value in the event of a Greek default.

The agreement taking shape is a key step before Greece can get a second, euro130 billion bailout from its European Union partners and the International Monetary Fund, although there are other issues involved before Greece can get that aid. This would be Greece’s second bailout. The EU and the IMF signed off on a euro110 billion aid package for Greece in May 2010, most of which has already been disbursed.

Greece faces a euro14.5 billion bond repayment on March 20, which it cannot afford without additional help.

Private investors hold roughly two-thirds of Greece’s debt, which has reached an unsustainable level _ nearly 200 percent of the country’s economic output. By restructuring the debt held by private investors, Greece and its EU partners are hoping to bring that ratio closer to 120 percent by the end of this decade.

In return for the first bailout, Greece’s public creditors _ the International Monetary Fund, the European Union and the European Central Bank _ have unprecedented powers over Greek spending. However, austerity alone will not fix Greece’s problem. The country must also find ways boost its economic output, which at the moment is shrinking.

If no debt-exchange deal is reached with private creditors and Greece is forced to default, it would very likely spook Europe’s _ and possibly the world’s _ financial markets. It could even lead Greece to withdraw from the euro.

The banks, insurance companies and other private holders of Greek bonds are being represented by Charles Dallara, managing director of the Washington-based Institute of International Finance, and Jean Lemierre, senior adviser to the chairman of the French bank BNP Paribas.

The main creditor negotiators will leave Greece on Sunday and will remain in close consultation with Greek and other authorities.

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The U.S. bond market is neutralizing budget deficits as an election-year campaign weapon.

Interest payments will cost the government 3.1 percent of gross domestic product this year, according to Office of Management and Budget and International Monetary Fund data compiled by Bloomberg. That

Strikes and demonstrations against Greek austerity measures hit the capital Athens on Tuesday, as international debt inspectors returned to decide whether the country’s reforms are strong enough for it to secure a vital bailout.

The officials from the European Union, European Central Bank and International Monetary Fund, which are lending money to Greece to keep it from bankruptcy, are expected to press the government for faster cost-cutting reforms.

Greece’s continued access to bailout loans depends not only on delivery on its austerity promises but also on negotiations with private creditors on a bond swap deal aiming to cut its debt by euro100 billion ($127 billion). It needs to get an agreement soon if it is to secure more rescue loans, with a bond repayment of euro14.5 billion due in late March.

Some 10,000 protesters took part in rallies in central Athens over potential pay cuts in the recession-battered private sector. Anti-austerity strikes in the capital disrupted public transport and other services. Journalist unions also launched a 48-hour strike.

Police said a plain-clothed officer from the anti-terrorism division was beaten and seriously injured by a group of some 30 protesters who took his handgun. The rally was otherwise peaceful.

Under government pressure, unions and employers are due to launch talks Wednesday to explore ways of slashing labor costs. Lower-level members of the debt of the debt inspection team started the talks in Athens on Tuesday, with the mission chiefs due Friday.

Meanwhile, Greece saw its borrowing rates ease marginally in a bill auction on Tuesday. Unable to issue long-term debt due to untenably high borrowing interest rates of 33 percent, the country maintains a market presence through regular treasury bill auctions.

The public debt agency said it raised euro1.625 billion ($2.06 billion) in a sale of 13-week treasury bills, an interest rate of 4.64 percent, compared with 4.68 percent in the last such auction in December.

Demand for the bills was 2.90 times the amount on offer, roughly the same as last month.

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%26quot%3Blargest+quarterly+earnings+loss+ever%2C%26quot%3B+said+Baxter.+At+that+point%2C+he+said+the+Fed+blocked+MF+Global+from+dealing+securities.%26nbsp%3B+%3C%2Fp%3E++%3Cp%3E%3Ca+href%3D%27http%3A%2F%2Fmoney.cnn.com%2F2011%2F12%2F15%2Fnews%2Fcompanies%2Fmf_global_fed%2Findex.htm%27+rel%3D%27nofollow%27%3ESource%3C%2Fa%3E%3C%2Fp%3E+

The financial world initial rejoiced Friday when word came of a deal by most European countries _ including all 17 that use the euro _ to allow the European Commission to oversee national budgets and impose penalties if a country’s debt grows too much.

Since then questions have emerged about the willingness of each individual country to ratify the agreement, the lack of a short-term solution to high debt in Greece, Italy and Spain, and what the future monetary policy of the European Central Bank will be.

The Associated Press spoke with four experts Sunday about the deal and what implications it will have for the markets. Here are their thoughts, edited for clarity.

Peter Tchir, founder of TF Market Advisors: It has to go and be ratified. They’re talking about doing balanced budget amendments in each of the countries. It seems like this was done very last minute. I’m highly suspicious that there’s really a full buy in. I think some of these balanced budget acts are going to take a while to implement. There was also more document space talking about being able to waive penalties than what the penalties would be.

How serious are those punishments going to be and will they ever be enforced? If you look at monetary punishments, where there’s a fine, the country already believes it’s necessary to run a deficit in the current year because their economy is stagnating, are they going to get afraid because of the fine or just lump that into part of the cost? Will they get kicked out of the euro? Clearly at this point the EU has shown anything but a willingness to kick somebody out. They became so scared of that, that they cobbled out bailout after bailout.

On Monday and Tuesday the stock market is going to be looking for the ECB to come in and say, “We can buy as much sovereign debt as we want now.” I don’t think we are going to get that statement and that’s going to put downward pressure on the stock market. It’s going to finally hit home in the U.S. that the ECB does not believe in quantitative easing in the same way that the U.S. does and they’re not going to view this pact as a reason to change their view. That is going to disappoint the market.

Brian Gendreau, market strategist at Cetera Financial Group: There’s a long-term solution in place but there’s no solution to the current crisis. There’s still the prospect of default on Greek bonds and there’s still problems faced by Italy meeting the financing obligations moving forward. It is a welcome first step. I think there’s widespread recognition that it’s going to be a long process one way or another. There were compromises in the agreement.

There are a lot of questions that still remain. One of them is the role of the European Central Bank as a lender of last resort. The ECB has made it clear that they are willing to undertake the role of lender of last resort to banks but there’s a question of to what extent will the ECB be lender of last resort to countries.

This is going to set a better tone for the market going forward. There is a lot of repressed demand for stocks. There are a lot of people who have moved into CDs and Treasurys. People are going to be looking for the green light to move out of those funds. When they do, they’re going to move into stocks. Ultimately, the big beneficiary might be stock markets, including the U.S. stock market.

Paul Zemsky, chief investment officer for multi-asset strategies for ING Investment Management: Overall, it was a very positive step in the right direction but it wasn’t this grand bargain that I was hoping for and others were hoping for earlier last week. But some very good things did happen. The member states did agree to some legislation that would be more binding in terms of the deficits and debt. It would be overseen by the European courts.

I see two problems. One is that overall growth is slowing throughout the region. Germany is the bright spot. Most economists, including ourselves, have (forecast) a mild recession for next year. With slowing growth, it’s hard to get good budget numbers. Second, the agreement has been made but the laws haven’t been passed and signed.

There’s going to need to be pressure kept on these peripheral countries to go through with this. That means you are going to have to keep walking close to the edge in terms of the markets and the threat of the euro region breaking up if these guys don’t come through. We’re still not done with this dance with death. Until these laws are passed, there are going to be scares. There’s going to continue to be volatility coming from this region.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman: On the eve of the European summit, the ECB provided an incredible amount of liquidity to the market. I don’t know if the market fully appreciates that yet. They were willing to loan money to banks for three years. We’re not talking about a short-term, one-week loan. This is a three-year loan essentially. As much as they want, provided they have the collateral, which they also liberalized the definition of.

The take-away point is that the euro and eurozone survives without the ECB being a backstop for the sovereigns and without European bonds being issued. They live to fight another day. But it doesn’t change things. They’re still heading toward a recession. The ECB is still going to have to ease policy. They still have something on the magnitude of 1.8 trillion euros ($2.41 trillion) of bonds maturing, concentrated in the first half of next year.

____

Scott Mayerowitz can be reached at http://twitter.com/GlobeTrotScott.

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Students clashed with police across Italy in protests against budget cuts, while transport strikes idled buses and trains Thursday, as Italian Premier Mario Monti prepared to unveil his anti-crisis strategy ahead of a confidence vote in his day-old government.

Police in riot gear scuffled with students in Milan, where they planned to march to Bocconi University, which forms Italy’s business elite. Monti, an economist and former European Union competition comissioner, is Bocconi’s president.

Monti formed his government Wednesday, shunning politicians and turning to fellow professors, bankers and other business figures to fill key cabinet posts. His administration is tasked with restoring confidence in the country’s financial future and avoiding a worsening in the eurozone’s debt crisis.

But his choice of unelected experts to lead the government and the prospect of tough reforms have fueled unrest among some Italians.

“The government of the banks,” read one placard held by a youth marching in the protest in Milan.

In Palermo, Sicily, demonstrators hurled eggs and smoke bombs at a bank, and protesters threw rocks at police who battled back with pepper sprays, the Italian news agency ANSA said. One protester was injured in the head in Palermo, where police charged demonstrators who were trying to occupy another bank, it said.

In Rome, hundreds of students gathered outside Sapienza University, while others assembled near the main train station. They planned to march to the Senate, where Monti was scheduled to speak ahead of an evening confidence vote on the new government.

Monti’s cabinet took the place of the center-right government led for 3 1/2 years by media mogul Silvio Berlusconi, stepped down last week, the victim of markets punishing Italy for its escalating public debt and stubbornly stagnant economy.

As Berlusconi’s squabbling coalition argued for months over how to attack the crisis, Italian unions and industrialists pressed for measures to encourage job creation and revive the economy.

Parliament gave final approval Saturday to a package that will reform pensions, slash state spending and open up the economy guaranteed cash advance. Hours later, Berlusconi resigned, paving the way for Italy’s president to ask Monti, a former European Union competition commissioner, to form a government that could tackle the crisis.

But many Italians are expecting to swallow harsher medicine, including a possible return of home property taxes which Berlusconi abolished, a special tax on wealth, and a faster increase in the retirement age.

Antonio Romano, who was distributing leaflets to protesters, said the government’s strategy was to “make the workers and retired people pay for the crisis, not those who provoked the crisis, I mean big business, bankers.”

“Income for all, debt for none,” read the spray-painted letters on a white sheet affixed to a fence in Palermo. University and high school students, as well as young people unable to find full-time jobs joined the protest.

In Rome, marcher Titti Mazzacane said she was skeptical about the new government. While Monti chose “decent and competent people,” the government … “is a little bit too free-market liberal. I am a bit scared,” said the 53-year-old elementary school teacher.

A transit strike of several hours idled the subway system and many buses in Rome. A similar walkout in Milan to press for better work contracts was also called.

State railways said a 24-hour nationwide train strike, which was called by one small union affected only 5 percent of the train rains. Train workers have been pushing for better work rules.

Alitalia warned that a four-hour strike, from noon to 4 p.m. (1100 GMT-1500 GMT) in the air travel sector could cause flight delays, and said it was reducing the number of flights as a precaution during the four-hour window. It noted that the walkout mainly involved air traffic controllers and airport workers and not Alitalia personnel.

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Markets plunged Tuesday on fears that Europe’s plan to save the euro was already unraveling after the shock decision by Greek Prime Minister to call a referendum on the country’s latest rescue.

Stock markets plunged across Europe on Tuesday, with the Athens exchange losing almost 7 percent, while the euro fell another 1.2 percent, on worries the Greek government could lose the referendum vote with the potentially devastating consequence of a disorderly debt default and Greece’s exit from the common currency.

George Papandreou stunned investors, as well as his own citizens and his partners in the eurozone, by announcing late Monday that a plebiscite will be held in what he called “a supreme act of democracy and of patriotism for the people to make their own decision.” A confidence vote in the Socialist government will also take place at the end of this week.

The referendum _ the country’s first since 1974 _ is expected to be held early next year. The renewed uncertainty it creates deflated any remnants of optimism over last week’s grand European plan to contain the debt crisis. After weeks of complex negotiations, eurozone leaders agreed last Thursday that private holders of Greek bonds should take a 50 percent loss on their holdings, reducing Greece’s debt burden to 120 percent of national income by 2020 from around 180 percent at present.

“While it may be the democratic thing to do … what happen if Greece votes ‘no’, which is possible given how unpopular the bailout plan appears to be amongst Greece’s voters,” said Michael Hewson, markets analyst at CMC Markets. “The resulting fallout could well result in a complete meltdown of the European banking system and throw Europe into turmoil.”

News that Greece’s Finance Minister Evangelos Venizelos went to a clinic after suffering stomach pains added to the renewed bout of fears in the markets.

Unsurprisingly, Greek shares led the retreat. The Athens Stock Exchange’s benchmark General Index fell 6.8 percent just after trading started Tuesday, with the bank index losing more than 13 percent.

All other markets were sharply lower too. Germany’s DAX was 3.6 percent lower, while France’s CAC-40 dropped 3.2 percent. The euro fell to a daily low of 1.37 while borrowing rates jumped higher for Italy and Spain, considered the next weakest links in the crisis.

A recent opinion poll suggested that 60 percent of Greeks were against the austerity measures that have been required by international creditors from the eurozone and the International Monetary Fund in return for crucial bailout loans bad credit pay day loans. However, other polls show broad support for remaining in the eurozone.

Given that Greece is heading for its fourth year of recession next year, investors aren’t hopeful that Papandreou will be able to pull off a victory. Success in the referendum, however, could shore up Europe’s battle to contain its crippling debt crisis.

Even before Papandreou’s pledge, the shine from last week’s three-pronged plan to contain the crisis was wearing off. As well as increasing the private sector involvement in the Greek bailout, eurozone leaders agreed to boost the firepower of the bailout fund to euro1 trillion ($1.37 trillion) and a recapitalization of the banking sector.

Jacques Cailloux, an analyst at Royal Bank of Scotland, noted that Papandreou’s referendum pledge is likely to derail any hopes that the international community will contribute to the plan to boost Europe’s bailout fund, the European Financial Stability Facility, at the upcoming summit of the Group of 20 leaders in Cannes, France.

“The added uncertainty surrounding a potential referendum in Greece will likely block any new potential financial support from countries outside the monetary union given the potential implications for the future of the Union,” Cailloux said. “We thus view this as a major negative for Greece and the rest of the momentary union.”

Greece’s main opposition conservatives called for Papandreou’s resignation, accusing him of incompetence and blackmail.

“Mr Papandreou is unscrupulous and dangerous,” party spokesman Yiannis Michelakis said late Monday. “He has tossed Greece’s participation in Europe into the air like a coin. … Instead of seeking ways to extract us from our impasse, he is presenting the Greek people with the ultimate blackmail.”

Respected conservative Kathimerini daily called Papandreou’s announcement “a high-risk initiative” that further dents the country’s international image and will accelerate the country’s return to its old national currency, the drachma.

“The last thing Greece needs right now is additional uncertainty,” the paper said. “It is certain that the country will be paralyzed and will be caught in an endless debate lasting weeks, during which obviously neither the state nor the government nor any other institution will function.”

____

Pylas contributed from London

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Europe’s financial fire brigade is hiring.

Successful candidates should have the “ability to develop innovative legal solutions,” an “eye for detail,” and the “ability to argue convincingly and achieve a consensus among colleagues and third parties,” proclaims the website of the European Financial Stability Facility.

And those skills could come in handy pretty quickly.

After this Sunday’s summit of EU leaders, the EFSF will wield massive financial power to contain the eurozone’s debt troubles and keep them from plunging the global economy into another recession and putting thousands of people out of a job.

And yet the bailout fund, backed by euro780 billion ($1.1 trillion) in financial guarantees from the 17 euro states, has a tiny staff _ 18, counting two secretaries. That is expected to increase slightly in coming months, taking the core team behind Europe’s main anti-crisis weapon to 25.

After already funding large parts of the bailouts for Ireland and Portugal, the EFSF will soon take over the emergency loans to Greece _ some euro27 billion ($37 billion) left over from the first rescue package with several tens of billions expected to come through a second loan program.

More importantly, the fund is now the number one institution charged with stopping the debt crisis from engulfing large economies like Italy and Spain, helping to stabilize wobbling banks across the continent and protect the future of the euro.

That role could turn it into a bond insurer or see it manipulate government bond prices like a central bank.

The fund’s headquarters, in a nondescript office block on the outskirts of Luxembourg city, look a lot less spectacular than one may expect. Apart from the blue and yellow EFSF labels on the mail boxes, there is nothing to suggest that actions taken within the building could determine the fortunes of the 330 million citizens of the eurozone.

The fund was hastily set up in the summer of 2010, when the currency union’s leaders realized that their initial euro110 billion ($152 billion) bailout of Greece was not enough to stem market panic over high debt in several euro countries.

Because creating an international institution would have taken too much time, the EFSF was registered as a private company under Luxembourg law, taking over an empty suite of offices from the European Investment Bank.

More than a year later, the premises haven’t changed much _ dark blue carpet, gray hallways and papers piled high in offices. In expectation of the new staff and responsibilities, the EFSF recently took over another corner of the EIB’s office space that still stands empty.

Presiding over the whole thing is Chief Executive Klaus Regling, a gray-haired EU veteran who helped set up the single currency in the 1990s and then unsuccessfully fought to protect the union’s rules on government spending a decade later.

It was the limitations of those rules that allowed countries like Greece to run up massive debts and failed to counteract Ireland’s property bubble and Portugal’s pervasively low growth _ the very problems Regling is now trying to solve.

“It was totally unpredictable how this would evolve,” says Regling, as he thinks back to June 8, 2010, when he interviewed for, was offered and accepted the job at the helm of a yet-to-be-created institution within less than 24 hours quick payday loans. “I was actually worried that it may become too boring.”

No such luck.

Instead, the fund has seen its role evolve from acting as a financial backstop so big that its mere presence would prevent it from ever having to be used _ that hope was disappointed when Ireland asked for a bailout last November _ to essentially turning into a European Monetary Fund, the eurozone’s lender of last resort for cash-strapped governments.

“Of course it’s exciting to be in the middle of the storm,” says Juha Kilponen, one of the EFSF’s finance experts who came on board just as Ireland asked for help. “But of course the problems are very big.”

At their summit this Sunday, eurozone leaders are expected to set up a complicated scheme that could increase the EFSF’s firing power so it is fit for the next hot phase in the fight against the crisis.

It’s in moments like these that the staff’s legal and financial expertise will come into play. The EFSF has to operate through a complicated web of European rules and treaties where 17 governments, central banks and bureaucracies in Brussels each have a say _ and often widely divergent opinions.

The fund’s euro780 billion in guarantees translate into euro440 billion ($608 billion) it can actually give out in loans, since it needs extra guarantees to obtain the AAA-rating that allows it to raise money at low interest rates.

Of those euro440 billion, euro43.7 billion have already been promised to Ireland and Portugal. Some euro100 billion will likely go to Greece, leaving the EFSF with just under euro300 billion to contain the crisis.

That’s way too little to recapitalize ailing banks across Europe, get them ready for a potential default of Greece, and buy up Spanish and Italian bonds to keep the countries’ funding rates down.

Instead, the EFSF could start acting as an insurer for bond issues from those countries, using its guarantees as protection for banks and other investors against a first round of potential losses. That could theoretically multiply the fund’s financial impact up to around euro1 trillion, analysts say.

Such a sum was unimaginable when Kalin Anev was asked in May 2010 to help set up the EFSF. Originally an employee at the EIB, Anev was the one who registered the bailout fund with the Luxembourg chamber of commerce, organized phone lines and computers and helped hire the rest of the staff.

“It shows how fast Europe also can act, if they want to do something,” Anev, now the EFSF’s secretary general and institutional memory, says not without pride. “In a month’s time we were able to set up this very complex organization.”

And that organization is proving to be an attractive place to work. For each job ad, the EFSF receives 200 to 400 applicants.

By now, the fund has employees from Germany, Finland, France and the Netherlands, but also from Portugal, Italy and Spain.

And although resistance to the bailouts has been growing both in rich and poor countries, Kilponen and Anev insist that the reaction they get to their job is mostly positive.

“A lot of people have trust and hope that we do the right job,” says Anev. “So most people, they wish you the best and good luck.”

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