Finance Blog number 1

Federal Reserve officials, after taking the historic step of cutting the benchmark interest rate to as low as zero, are calling for greater government spending to help revive the U.S. economy.

San Francisco Fed President Janet Yellen said yesterday at an economics conference in San Francisco that “it’s worth pulling out all the stops” with an economic recovery package. Charles Evans, president of the Chicago Fed, told the same gathering he believes a “big stimulus is appropriate.”

The remarks underscore the view of many economists that unprecedented fiscal measures are needed to combat the yearlong recession, and come ahead of meetings this week between President-elect Barack Obama and congressional leaders. They also reflect the failure of Fed efforts so far, including record rate cuts, emergency lending programs and backstops for debt markets, to halt the crisis.

Yellen, Evans and other officials at the conference didn’t specify their recommendations for the size of the stimulus. Obama is asking that tax cuts make up 40 percent of a package that may be worth as much as $775 billion, a Democratic aide said yesterday. Yellen said she favors a “diversified package of policies” that includes government spending.

“Fiscal stimulus has got to be an important part of the package” implemented by the federal government, Frederic Mishkin, a former Fed governor, said yesterday at the conference in San Francisco. The "$500 billion-plus question” is, “can they get it right?” he said.

Worst Shock

The “financial shock” that caused the current crisis is “worse than the one that happened during the Great Depression,” he said. Mishkin left the central bank in August and returned to his post as a professor of economics at Columbia University.

The stimulus that emerges from talks between Obama’s aides and Congress will be much larger than the $150 billion proposal from lawmakers in October, when Chairman Ben S. Bernanke endorsed the concept of such a program. He noted then that the impact of the $168 billion stimulus a year ago had waned.

Obama, who has picked New York Fed President Timothy Geithner as his Treasury secretary, is honing a combination of tax cuts and spending on roads, bridges and other infrastructure to create or save 3 million jobs. Economists and a group of Democratic governors led by New Jersey’s Jon Corzine have called for a $1 trillion program. Obama takes office Jan. 20.

Time ‘Is Now’

“The current downturn is likely to be far longer and deeper than the ‘garden-variety’ recession,” Yellen, who became chief of the San Francisco Fed in 2004, said in a speech. “If ever, in my professional career, there was a time for active, discretionary fiscal stimulus, it is now.”

Yellen was an adviser to the last Democratic president, Bill Clinton, serving as chairman of his Council of Economic Advisers from 1997 to 1999 after a stint as a Fed governor in Washington.

Last month, Fed policy makers reduced their target for the federal funds rate, or the rate banks charge one another for overnight loans, to as low as zero for the first time in an attempt to end the longest economic slump in a quarter-century no fax cash loans.

The central bank is also shifting its focus to the amount and type of debt it buys, with announcements of new lending programs or asset purchases serving as the principal signals of policy.

Economy Deteriorates

Economic data released last week show U.S. consumer confidence sinking to the lowest level in at least 41 years and home prices in 20 major cities declining at the fastest rate on record. Another report showed that the decline in U.S. manufacturing deepened in December.

“The current downturn is likely to last much longer than previous ones,” said Harvard University economics professor Martin Feldstein, former president of the National Bureau of Economic Research. “So, fiscal policy is likely to be useful.”

Still, such stimulus would increase the long-term burden on taxpayers, Evans said in his Jan. 3 speech.

“Federal debt held by the public is 38 percent of GDP, states have large unfunded liabilities and growing numbers of retiring baby-boomers will further pressure the unfunded liabilities for Social Security and Medicare,” Evans said.

University of Chicago professor Raghuram Rajan, former chief economist at the International Monetary Fund, said in an interview at the conference that he’s “in the crowd that is a little more skeptical” about a federal effort to rejuvenate the economy, especially a proposal to provide federal funds to states.

‘Clear Plan’

“The U.S. is of course central to the world economy, and so getting the U.S. back on track I think is very important,” Rajan said. “The real issue is cleaning up the financial sector,” he said, adding he wants to see from the Obama administration a “clear plan” of how to handle “weak” companies.

The outgoing Bush administration has thrown a lifeline to the troubled automobile industry, granting loans worth $13.4 billion to keep General Motors Corp. and Chrysler LLC from bankruptcy for now. The U.S. Treasury also threw the door open to taxpayer financing for a widening array of companies and industries last week, drafting broad guidelines on aid to the auto industry.

Treasury guidelines would let officials provide funds to any company they deem important to making or financing cars. That left room for the government to provide money from the $700 billion Troubled Asset Relief Program beyond loans already committed to GM, Chrysler and GMAC LLC.

Mishkin said working as a Fed policy maker during the credit crisis is similar to serving in a wartime Pentagon.

The central bank is “fighting a war,” he said. Instead of deploying “tanks and guns,” it’s “monetary policy, credit policy and liquidity policy.”

Source

Bank of Japan Governor Masaaki Shirakawa is preparing more measures to prevent the recession from deepening after the speed of the economy’s deterioration forced him to cut interest rates to near zero.

Shirakawa and six of his seven policy-making colleagues yesterday voted to reduce the overnight lending rate to 0.1 percent from 0.3 percent. The bank will also start purchases of commercial paper, taking on the risk of corporate default.

“I’ve never experienced such a sudden change in conditions,” Shirakawa said at a news conference yesterday. The bank’s staff will “investigate how other corporate financing instruments may be employed” and report their findings to the policy board “as swiftly as possible,” he said.

The central bank’s second reduction in two months came after the Federal Reserve this week cut its target rate as low as zero, driving the yen to a 13-year high against the dollar. Japan’s business confidence slumped the most in 34 years, the central bank’s quarterly Tankan survey showed this week, a sign companies are likely to cancel spending plans and cut more jobs.

“The Japanese economy will deteriorate at a drastic pace next year and the Bank of Japan is aware of it,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “The bank will have to cut rates to zero by the end of March and do more later on.”

The world’s second-largest economy is “deteriorating,” the bank said, lowering its assessment from “increasingly sluggish” in November.

Credit Crunch

Funding for Japanese companies dried up amid a global credit crunch. Japan’s interbank offered rate for three-month loans, Tibor, rose to the highest in a decade earlier this week before falling three straight days.

To help unfreeze the credit market, the bank will buy commercial paper from financial institutions for the first time, taking on the risk that some companies might default on their debt.

“The measure will have a sizeable impact, as corporations have acute short-term fundraising needs,” said Hironari Nozaki, an analyst at Nikko Citigroup Ltd companies making payday loans. in Tokyo.

The bank will also raise its monthly government bond purchases from lenders, its main tool for adding funds into the banking system, to 1.4 trillion yen ($15.6 billion) from 1.2 trillion and will broaden the range of debt it buys to include 30-year, floating-rate and inflation-indexed bonds.

Positive Message

“The Bank of Japan offered the fullest range of policy measures that it can afford at this stage,” said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo. “Though the steps may not give a big boost to the economy, they do send a positive message.”

Japanese bonds rose after the decision, pushing 10-year yields to the lowest level since July 2005. The Nikkei 225 Stock Average slipped 0.9 percent.

The rate cut failed to temper gains in the yen, which rose to 88.93 per dollar as of 7:30 p.m. in Tokyo yesterday from 89.28 shortly before the decision. The yen has climbed 25 percent against the dollar this year.

Shirakawa refrained from cutting the central bank’s overnight rate all the way to zero, arguing that even at 0.1 percent, preserving a positive rate will help the functioning of the money market.

Money-Market Trading

“Keeping positive interest rates can manage to maintain incentives for money-market trading and the market mechanism,” Shirakawa said. “We set the benchmark rate at 0.1 percent by very carefully balancing the impact on the market function and support for the economy.”

Bank of Japan policy makers pledged in today’s statement that they will do their “utmost” to return the economy to an expansionary path.

“The BOJ cannot solve all the problems that Japan is facing,” said Kirby Daley, senior strategist at Newedge Group in Hong Kong. “These are steps that need to be taken to try to buffer the troubles that they’re going to have in 2009, but they don’t have all the answers, just like the Fed doesn’t have all the answers.”

Source

East Asian economies will probably expand at the slowest pace in eight years in 2009 as easing export demand and declining investment and consumer spending portend “hard times” for the region, the World Bank said.

East Asia, which excludes Japan and the Indian subcontinent, will expand 5.3 percent next year, slower than the 7.4 percent rate the World Bank predicted in April. Growth will probably be 7 percent this year, the Washington-based lender said its semi- annual report today.

Fiscal stimulus and coordinated interest-rate cuts by governments and central banks around the world have failed to reverse a worldwide economic slump and the worst credit crunch in seven decades. The World Bank yesterday lowered its global growth projections, and predicted international trade will shrink in 2009 for the first time in more than 25 years.

“The contraction of output in the developed economies may well last longer and run deeper, delaying a recovery in growth in East Asia,” the bank said. “In the near term, downside risks are substantial.”

The World Bank in April said inflation will pose a greater threat to the East Asia region than the global slowdown this year. As crude oil and commodity prices fall from record levels, and consumer price gains peaked, it is now pointing to a worsening economic outlook.

Weaker Exports

“Prospects for weaker exports, together with a projected decline in capital inflows, will constrain investment spending,” it said. “Private consumption is likely to be hit by more sluggish earnings, higher levels of unemployment, the reduction in household and corporate wealth, and an increased desire to save in uncertain times.”

Asian governments and their counterparts around the world are spending hundreds of billions of dollars to protect their economies from the global financial crisis. Slowing inflation will allow the governments to boost growth through expansionary fiscal measures, the World Bank said affordable car insurance.

China last month announced a $582 billion economic stimulus plan, while South Korea unveiled a 14 trillion won ($9.7 billion) package of extra spending and corporate tax breaks, adding to almost $20 billion in income-tax reductions announced in September.

“A number of countries in East Asia have some room to loosen policy, as fiscal positions have generally improved in recent years,” it said. “To ensure fiscal stimulus packages achieve their objective of generating demand and jobs in the domestic economy, such packages will need to be well-targeted and temporary in duration.”

‘Do Better’

The World Bank said developing East Asian economies will be more resilient during the slowdown compared with other emerging- market regions such as Latin America, which it projects will grow 2.1 percent next year.

“East Asia is expected to do better than the other developing regions in the world” by growing 4 percent to 5 percent in the next year, Vikram Nehru, the World Bank’s chief economist for East Asia, said in an interview with Bloomberg Television on Dec. 8. “That’s not spectacular, but still reasonably good.”

East Asia probably contributed to a quarter of global growth this year, and that may rise to a third next year, the World Bank said.

“The countries in the region will be better positioned to deal with the crisis to the extent that they are able to maintain macroeconomic stability, shift exports to faster growing regions in the world, substitute external with domestic demand, and continue with their structural reforms to strengthen competitiveness,” the report said.

Source

The Serbian government adopted a draft 2009 budget that projects a deficit equivalent to 1.5 percent of gross domestic product, in line with recommendations from the International Monetary Fund and narrower than this year.

“The government has adopted a budget that makes no one happy,” Finance MinisterDiana Dragutinovic said at the press conference in Belgrade today. “This is a restrictive budget, and the government has acted responsibly.”

GDP growth is forecast at 3.5 percent, about half the pace of 2008. Inflation is projected at 8 percent, or 1.5 percentage points less than this year. The budget deficit this year is predicted to be 2.7 percent of GDP.

The cabinet’s approval came after a month-long delay, as the parties in Mirko Cvetkovic coalition government argued over distribution of cuts through ministries.

Parliament is scheduled to debate the proposed budget in the coming week online pay day loan.

The draft budget projects the current account deficit at 16.3 percent of GDP in 2009, 2.2 percentage points less than in 2008. State revenue is projected at 698.7 billion dinars ($10.2 billion) and expenditure at 748.3 billion dinars.

Serbia secured a $516 million standby loan on Nov. 14 from the International Monetary Fund, the fourth eastern European nation to tap the institution for funds, to help stabilize the economy during the global financial crisis.

The IMF warned that government overspending may push the current-account deficit in 2008 above 18 percent of GDP, which it must cover through increased borrowing.

Source

The one thing that isn’t shrinking in the U.S. economy these days is the size of the stimulus package that financial experts say is needed to turn it around.

With automobile sales dropping, payrolls plunging and manufacturing contracting, economists from across the political spectrum are raising the ante on how much the government should lay out. Some are now calling for at least a $1 trillion boost.

Kenneth Rogoff, a Harvard University professor who was an adviser to Republican presidential candidate John McCain, and Joseph Stiglitz, a Nobel Prize winner who served in President Bill Clinton’s White House, are among those who say President- elect Barack Obama should push for a package of that size.

“They need a stimulus of $500-to-$600 billion a year for at least two years to counter what is going to be a collapse in consumption,” said Rogoff, a former chief economist at the International Monetary Fund.

That number may grow. This week brought news that the economy has been in recession for a year. Tomorrow the government will release November employment data, which economists say will show another 330,000 jobs lost, the most in seven years.

“Every day it looks like the stimulus package needs to be bigger,” said Bill Samuel, the lead lobbyist for the AFL-CIO, the largest U.S. labor federation. “You’re talking $500, $600, $700 billion or even more” for a year.

‘Things Are Evolving’

Obama, who has said that enacting a stimulus plan will be his top priority once he takes office on Jan. 20, has himself been steadily increasing the amount he thinks is needed.

Earlier in the presidential campaign, he proposed a package worth $50 billion, then raised that to $175 billion as the election approached. Advisers have since said the program may total as much as $700 billion, although that number, too, may rise.

“Congress should think in terms of $900 billion in 2009, with possibly more in 2010,” said James Galbraith, a self-styled liberal economics professor at the University of Texas in Austin who has talked with the Obama transition team about the issue. “I may be higher than they are at this point,” he said, “but things are evolving.”

Whatever its size, the package is likely to include tax cuts, aid to the states, higher unemployment benefits and increased spending on infrastructure such as roads and bridges.

‘Liquidity Trap’

New Jersey Governor Jon Corzine said Washington needs to step in because the U.S. is caught in a “liquidity trap,” where repeated interest-rate cuts by the Federal Reserve fail to boost the economy because banks don’t want to lend and skittish consumers and companies don’t want to borrow.

“If the government doesn’t operate to fill that gap, we are going to see not only rising unemployment but a shockingly high level of unemployment over the next 12 to 24 months,” Corzine said in Bloomberg Television interview yesterday. He called for a stimulus of “overwhelming force.”

Adam Posen, a former New York Fed official, agreed that’s the lesson to take from Japan’s experience during the 1990s, when it faced a similar situation cash advance loan.

“The stimulus has to come through the fiscal side,” said Posen, who has written about Japan and who’s now deputy director at the Peterson Institute for International Economics in Washington. “A package of 4 percent of GDP, even 5 percent of GDP is not unreasonable over one year.” That would equate to about $500 billion to $700 billion.

Posen said Japan’s economic-recovery packages at times didn’t seem to work because they turned out to be smaller than first announced and were slow in coming.

All About Speed

The Obama team is aware of that problem. “We hear that Japan invested over a trillion dollars in infrastructure and nothing happened,” Vice President-elect Joe Biden told a meeting of state governors on Dec. 2. “Well, it’s all about how rapidly we can get these projects up and running.”

While some conservative economists agree that a big stimulus package is needed, they argue that it should focus on tax cuts, not on increased government spending on infrastructure.

John Makin, a visiting scholar at the American Enterprise Institute in Washington, has advocated a temporary cut in the payroll taxes that help finance Social Security. So, too, has Stanford University Professor Robert Hall, the chairman of the National Bureau of Economic Research committee that calls the beginnings and ends of recessions.

Love That Pork

“Politicians love pork, but maybe they can be pushed toward something better,” Hall said in an e-mail message.

Because the payroll tax is paid by employees and businesses, reducing it would both give consumers more money to spend and businesses more incentive to retain staff, said Mark Bils of the University of Rochester.

Not all economists think fiscal stimulus is the answer to the economy’s ills. “There are other choices,” said Greg Mankiw, a Harvard professor who served as President George W. Bush’s chief economic adviser. Foremost among the alternatives is monetary policy, said Mankiw. The Fed can act to bring down long- term interest rates as well as short-term ones, he said.

Some bond-market investors are also worried about the swelling stimulus and the impact it will have on the budget deficit and ultimately the economy.

“A stimulus of this magnitude helps push government debt as a percentage of GDP closer to dangerous levels, when inflation and interest rates start to rise,” said Thomas Atteberry, who manages $3.5 billion in fixed-income assets at First Pacific Advisors in Los Angeles.

‘Enormous Amounts’

Regardless of the risks, that’s where policy makers are heading, said David Rubenstein, co-founder of the Carlyle Group.

“Congress is going to spend enormous amounts of money,” he told reporters in Washington on Dec. 2. “Initially, people were talking about $150 billion, then $300 billion, then $500 billion then $800 billion. Now people are talking about a trillion-dollar stimulus package.”

Source

Fidelity Investments announced plans to lay-off 2.9 percent of its employees later this month. The financial giant employs 44,400 employees in its business units.

A second lay-off is scheduled for early next year, but how many jobs will be shed in that round has not been finalized. Fidelity is one of Greater Cincinnati’s largest employers, with several offices in the area. The company didn’t specify where the cuts would come from.

Fidelity executives attribute the cutbacks to global economic conditions, the unsettled stock markets, and the need to position the company to better take advantage of opportunities in a rebounding business climate companies making payday loans.

Fidelity Investments is the largest provider of workplace retirement savings plans with custody of $3.0 trillion in assets. The company also provides benefits outsourcing services to 24 million employees and is the largest purveyor of mutual funds in the United States.

Source

German Chancellor Angela Merkel's Cabinet agreed on a package of measures aimed at unlocking 50 billion euros ($65 billion) of investment to shore up the economy amid a global slowdown.

The two-year program ranges from tax breaks for buyers of new cars to greater financial help for improving buildings' energy efficiency. The measures will cost 23 billion euros in the four years through 2012, of which 10.9 billion euros will come out of the federal budget, the Finance Ministry said.

The government aims to “avert a credit squeeze for small and medium-sized companies,'' Economy Minister Michael Glos told a news conference in Berlin today after the Cabinet met. “It's a tailored economic growth package, not a classic stimulus program — we want to strengthen the power of the economy to resist the impact of the crisis.''

The government program for the economy, Europe's biggest, comes two days after the European Commission forecast stagnation in Germany in 2009, an election year. The government last month slashed its own forecast for 2009 growth to 0.2 percent from 1.2 percent, citing weakening demand for exports as the financial crisis feeds into the global economy.

`Bold and Targeted'

“We will have difficulties in 2009,'' Merkel told reporters today. “We want to do something to counter this with investment incentives.'' The program, which also includes increased tax relief on household repairs, loans to small and medium-sized businesses and money for roads and railways, is “bold and targeted'' and will act as a bridge to revive economic growth in 2010, she said.

Even so, the package “is too small and is designed mainly for capital spending instead of consumer spending,'' Stefan Bielmeier, an economist with Deutsche Bank AG in Frankfurt, said in a Nov. 3 note. “We believe that the growth impulses will be smaller than expected by the government. But it could help to shorten the period of negative GDP growth in Germany.''

Germany follows the U.S. in attempting to prime the wider economy after the financial crisis triggered the collapse of Lehman Brothers Holdings Inc. in September, forcing government bank bailout programs. Germany rushed a 500 billion-euro bank- rescue plan through parliament Oct pay day loan lenders. 17.

U.S. Comparison

President George W. Bush signed a $168 billion economic stimulus package into law in February that sent tax rebates of as much as $600 to individuals and $1,200 to couples. The package is equivalent to about 1.2 percent of gross domestic product, according to Bloomberg calculations.

U.S. lawmakers are moving toward a second fiscal-stimulus bill after Federal Reserve Chairman Ben S. Bernanke endorsed the idea. Democratic President-elect Barack Obama has called for a measure worth $175 billion.

The German steps, equivalent to about 2 percent of gross domestic product, will have “double the effect of the Bush program,'' Jens Ehrhardt, who oversees $12 billion at Munich- based Dr. Jens Ehrhardt Kapital AG, told yesterday's edition of Handelsblatt newspaper.

The measures will hurt attempts to balance the federal budget by 2011, which will remain a “goal'' for the government in the next legislative period after the election, Merkel said in a speech to the BDA employers' federation yesterday.

National Elections

Finance Minister Peer Steinbrueck, a Social Democrat, told reporters today that the budget may be balanced by the end of the next legislative period, in 2013. Merkel's Christian Democrats and her Social Democrat coalition partners will contest national elections in September next year.

In a related development, a panel of fiscal experts meeting in Hildesheim, about 140 kilometers (90 miles) south of Hamburg, gave new estimates for tax revenue showing that total revenue will hold up next year in the face of the economic slowdown.

Revenue at federal, state and municipal level next year will be 572 billion euros compared with a May estimate of 571 billion euros, the Finance Ministry said, citing the panel's findings.

“Merkel needs every cent of tax revenue she can get next year — the crisis rescue packages are a huge burden on the budget,'' Rainer Kambeck, a fiscal policy specialist at the Essen-based RWI economic institute, said in an interview. “The forecast is surely a relief.'' RWI is a member of the tax panel.

Source

LinkedIn Corp. has raised $22.7 million in funding from Goldman Sachs, The McGraw-Hill Cos., and SAP Ventures, along with a reinvestment by Bessemer Venture Partners, the company said Thursday.

The new investment is a follow-on from a Series D round of funding in June that raised $53 million, led by Bain Capital Ventures.

LinkedIn says its valuation for the round was just over $1 billion.

The Mountain View-based business social networking service says more than 30 million professionals have joined guaranteed cash advance. LinkedIn backers include Sequoia Capital, Greylock Partners, the European Founders Fund, Bessemer Venture Partners, Bain Capital Ventures and now Goldman Sachs, The McGraw-Hill Co. and SAP Ventures.

Source

South Korea's won and stocks rose after the government announced Asia's biggest financial rescue package to open access to overseas credit markets and allay concern of a recession.

The won climbed 2.7 percent to 1,299 per dollar at 1:41 p.m. in Seoul. The currency has risen 6 percent since Oct. 16, when it suffered its biggest one-day decline since South Korea required a bailout from the International Monetary Fund in 1997. The benchmark Kospi stock index gained 1.3 percent.

South Korea, struggling with Asia's worst-performing currency and a stock market that has lost 37 percent this year, guaranteed $100 billion of lenders' foreign-currency debt and said it will provide $30 billion in dollars to banks. The plan, equal to about 14 percent of gross domestic product, was mapped out in an emergency meeting after Standard & Poor's said the nation's banks may have difficulty securing overseas funds.

“We can expect to see a significant stabilization of the financial markets,'' said Kim Young Il, who oversees the equivalent of $6.5 billion as head of equities at Korea Investment Trust Management Co. in Seoul. “But it will take time for the real economy to improve, and that means investor sentiment won't immediately show a turn for the better.''

The currency gained as much as 8 percent before trimming its advance, according to Seoul Money Brokerage Services Ltd. The won plunged 9.7 percent Oct. 16 after S&P said there's a greater than 50 percent chance banks won't be able to find foreign funding, threatening their ability to repay short-term debt.

Kospi Gains

The benchmark Kospi stock index gained 17.52 to 1,197.9, led by exporters Samsung Electronics Co. and Posco, Asia's third-biggest steelmaker. Hana Financial Group Inc., which controls South Korea's fourth-largest bank, rose 9.1 percent.

Some banks and brokerages fell. Mirae Asset Securities Co., the brokerage affiliate of the nation's biggest asset manager, fell the daily 15 percent limit. JPMorgan Chase & Co. said the Government's plan to provide tax benefits to investors who hold shares for more than three years isn't enough to attract money to the market.

Industrial Bank of Korea, the nation's largest lender to small and medium-sized companies, slumped 6.2 percent on concern the government's plan to inject capital into the company may dilute the value of its stock.

Bank of Korea Governor Lee Seong Tae today told lawmakers the worsening economic outlook and market turmoil had made setting interest-rate policy difficult and economic growth this year will be “low.'' Lee this month cut the benchmark interest rate for the first time in four years, to 5 percent.

`Solid' Fundamentals

South Korea, hampered by a record current-account deficit and shrinking currency reserves, joins Europe, Australia and Hong Kong in providing banks with state backing to ease a global lending drought. Korean banks get as much as 12 percent of their funding from international markets, according to Moody's Investors Service cash advance loans.

The government will guarantee local banks' new foreign debt taken out between today and June 30, 2009. The protection is valid for three years. To boost dollar liquidity, the government will provide the banking industry with $30 billion from its foreign-exchange reserves.

The support package should boost confidence in the banking system and return attention to “Korea's solid macroeconomic fundamentals,'' the IMF said in a statement.

Hana Financial climbed 9.1 percent. Shinhan Financial Group Co., which operates the nation's third-largest bank, rose 2.1 percent.

Fundamentals 'Sound'

“They did the best they can do to contain the spread of the crisis on their home turf,'' said Oh Suk Tae, an economist at Citigroup Inc. in Seoul. “But the measures could fizzle out if banks can't borrow from abroad because the external environment isn't making much headway.''

The won should rebound as falling oil prices cut the nation's import bill and the government taps its $239 billion of foreign-exchange reserves to boost dollar supplies, said Kwon Goohoon, an economist with Goldman Sachs in Seoul.

“Korea isn't facing an issue of solvency,'' Kwon said. “Its fundamentals are sound and reserves are not a problem.''

The won was Asia's best-performing currency in the four years ended Oct. 31, 2007, soaring 31 percent to a decade high of 899.60 per dollar. That encouraged companies including Ulsan- based Hyundai Heavy and Daewoo Shipbuilding & Marine Engineering Co. of Seoul, the world's biggest and third-largest shipyards, to buy contracts that lock in an exchange rate or profit from a drop in the dollar.

Hedges Gone Awry

South Korea's banks were the main sellers of the hedging contracts. They borrowed dollars and converted them to won because they also wanted to fix a price for the U.S. currency to limit their exposure to its declines. That contributed to an almost tripling of the nation's external debt due in a year to $176 billion between the end of 2005 and June 30 this year.

Short-term debt is equal to 76 percent of Korea's currency reserves, which is “the most vulnerable in Asia,'' Brown Brothers Harriman & Co.'s strategist Win Thin wrote in a note to clients. The ratio topped 250 percent during the 1997-98 crisis.

Government bonds rose with the yield on the 5.75 percent bond maturing in October 2008 falling 9 basis points to 5.50 percent.

Investors bid for only 80 percent of the 800 billion won of debt offered in a 10-year bond auction. South Korea sold 543 billion won ($414 million) of the bonds at an average yield of 5.50 percent, the finance ministry said today, compared with a Sept. 16 auction that attracted bids for 1.7 times the amount on offer.

Source

German Finance Minister Peer Steinbrueck said Europe's biggest economy will struggle to grow next year amid the fallout from the financial crisis.

“We'll be entering an extremely difficult year in 2009,'' Steinbrueck told reporters in Washington today after a meeting of Group of Seven finance ministers and central bank governors. “The crisis is already spilling over into the real economy.''

Chancellor Angela Merkel's government will accept tax revenue shortfalls and higher spending for unemployment benefits to cushion the slowdown, and will resist cutting spending, Steinbrueck said. After posting a small budget surplus in 2008, the slowdown will squeeze public coffers next year, he said.

The comments suggest Steinbrueck may have to abandon his goal of eliminating by 2011 the federal budget deficit, the only component of Germany's overall budget that's still in the red. Putting public finances in order has been the hallmark of Merkel's ruling coalition, which faces a federal election in 2009.

Still, unlike other economies, Germany is facing only a worsening of financing conditions and not a credit crunch, Steinbrueck said. There's been no property-market bubble that might aggravate the economic downturn and the labor market remains solid, he said.

German unemployment fell more than economists forecast in September as machine makers hired people to work off an order backlog, the Federal Labor Agency said Sept. 30. Consumer confidence unexpectedly rose for the first time in five months after falling fuel prices left people with more to spend on food and clothing, GfK AG said Sept. 25.

The Sueddeutsche Zeitung newspaper today reported the government will cut its 2009 economic growth forecast to zero or slightly above zero next week. Economy Minister Michael Glos will present new forecasts for 2008 and 2009 on Oct. 16.

Source