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Exclusive: EU calls emergency meeting as crisis stalks Italy

European Council President Herman Van Rompuy has called an emergency meeting of top officials dealing with the euro zone debt crisis for Monday morning, reflecting concern that the crisis could spread to Italy, the region's third largest economy.

European Central Bank President Jean-Claude Trichet will attend the meeting along with Jean-Claude Juncker, chairman of the region's finance ministers, European Commission President Jose Manuel Barroso and Olli Rehn, the economic and monetary affairs commissioner, three official sources told Reuters.

Van Rompuy's spokesman Dirk De Backer said: "It's a coordination, not a crisis meeting." He added that Italy would not be on the agenda and declined to say what would be discussed.

However, two official sources told Reuters that the situation in Italy would be discussed. The talks were organized after a sharp sell-off in Italian assets on Friday, which has increased fears that Italy, with the highest sovereign debt ratio relative to its economy in the euro zone after Greece, could be next to suffer in the crisis. A second international bailout of Greece will also be discussed, the sources said.

The spread of the Italian 10-year government bond yield over benchmark German Bunds hit euro lifetime highs around 2.45 percentage points on Friday, raising the Italian yield to 5.28 percent, close to the 5.5-5.7 percent area which some bankers think could start putting heavy pressure on Italy's finances.

Shares in Italy's biggest bank, Unicredit Spa, fell 7.9 percent on Friday, partly because of worries about the results of stress tests of the health of European banks that will be released on July 15. The leading Italian stock index sank 3.5 percent.

The market pressure is due partly to Italy's high sovereign debt and sluggish economy, but also to concern that Prime Minister Silvio Berlusconi may be trying to undermine and even push out Finance Minister Giulio Tremonti, who has promoted deep spending cuts to control the budget deficit.

"We can't go on for many more days like Friday," a senior ECB official said. "We're very worried about Italy."

Monday's emergency meeting will precede a previously scheduled gathering of the euro zone's 17 finance ministers to discuss how to secure a contribution of private sector investors to the second bailout of Greece, as well as the results of the stress tests of 91 European banks.

GREECE

Greece is already receiving 110 billion euros ($157 billion) of international loans under a rescue scheme launched in May last year but this has failed to change market expectations that it will eventually default on its debt.

Senior euro zone officials worry that progress toward a second Greek bailout, which would also total around 110 billion euros, is not being made quickly enough and that the delay is poisoning investors' confidence in weak economies around the region.

"We need to move on this in the next couple of weeks. It's not a case of waiting until late August or early September as Germany is saying. That's too late and markets will make us pay for it," a top euro zone official told Reuters on Saturday.

German officials insist they too want to put together the second Greek bailout as quickly as possible, but the private sector's contribution is proving to be a major sticking point.

Germany, the Netherlands, Austria and Finland are determined that banks, insurers and other private holders of Greek government bonds should bear some of the costs of helping Athens. But more than two weeks of negotiations with bankers represented by the Institute of International Finance (IIF), a lobby group, have made next to no progress on agreeing a formula acceptable to all sides.

Initially talks focused on a complex French plan for private creditors to roll over up to 30 billion euros of Greek debt, buying new bonds as their existing ones matured. Around half of proceeds from Greek bonds maturing before the end of 2014 would be rolled over into very long-term debt while 20 percent would be put into a "guarantee fund" of AAA-rated securities.

But as that plan has floundered, Berlin has revived a proposal to swap Greek bonds for longer-dated debt that would extend maturities by seven years. Proposals to buy back Greek bonds and retire them have also been floated.

In a buy-back, the euro zone's bailout fund, the European Financial Stability Facility, might buy Greek bonds from the market, or the EFSF might lend Greece money to buy bonds. However, these schemes would require further changes to the EFSF's rules and would therefore have to go through national parliaments, an official source said.

 

[EmpireGlobalfx]

Global stocks, euro fall on Italy debt contagion woes

World stocks hit one-week lows and the euro slid across the board on Monday as intensifying concerns that Italy could be the next victim of the euro zone debt crisis prompted an emergency meeting of top European officials.

Fresh signs of tension in Italy's government and problems for Economy Minister Giulio Tremonti -- trusted by financial markets to cut spending -- prompted a sell-off in the country's government bonds. Italy has the euro zone's highest sovereign debt ratio relative to its economy after Greece.

A weaker-than-expected U.S. jobs report on Friday and data showing China's import growth fell to its slowest pace in 20 months also encouraged investors to sell their risky assets.

"Investor sentiment is on the back foot this morning. Nobody knows where this is going to stop and when the next domino will fall," said Jeremy Batstone-Carr, strategist at Charles Stanley.

"Italy is in a different order of magnitude from Greece, Portugal and Ireland and takes the crisis to a whole new level."

The MSCI world equity index .MIWD00000PUS fell 0.7 percent to a one-week low.

European stocks markets/index?symbol=gb%21FTPP">.FTEU3 fell 0.7 percent while emerging stocks .MSCIEF lost 1 percent. U.S. stock futures fell almost 1 percent, pointing to a weaker open on Wall Street later.

The Euro STOXX 50 volatility index .V2TX rose 7.9 percent, its highest in nearly two weeks.

JP Morgan says Italian banks are vulnerable because of their high reliance on wholesale funding. Their loan-to-deposit ratio stands at 1.42 -- higher than that of Spanish banks and above the average of 0.9 for French and German banks.

Moreover, their government bond holdings stand at 6.33 percent of assets, higher than those of Spanish banks.

"The higher the market pressure on BTPs, the lower the appetite of Italian banks to sponsor their domestic government bond market for fear of raising their sensitivity to the sovereign even further," the bank said in a note to clients.

Bund futures rose 50 ticks. The Italian/German 10-year yield spread widened by 14 basis points to 258 bps, as BTP futures tumbled more than 100 ticks to 103.29.

Herman Van Rompuy, the president of the European Council, will meet European Central Bank President Jean-Claude Trichet and Jean-Claude Juncker, the chairman of the Eurogroup, ahead of a meeting of the 17 euro zone finance ministers later.

"Concerns over Italy show contagion risks in the euro zone are increasing. Investor confidence remains low and will limit demand for euro denominated assets," said Manuel Oliveri, currency analyst at UBS in Zurich.

The dollar .DXY rose 0.7 percent against a basket of major currencies. The euro extended earlier losses to lose 0.7 percent on the day to $1.4113.

A Financial Times report saying some EU leaders were considering allowing a selective default by Athens to put its debt on a more sustainable footing also dented the single currency, traders said.

Data last Friday showed U.S. jobs growth nearly halted in June, adding to concerns about the health of the world's biggest economy.

The dismal jobs report was also seen complicating efforts to avert a looming U.S. debt default. President Barack Obama and congressional leaders of both parties were in high-stakes talks to break the impasse over raising the debt ceiling.

 

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Gold kept steady by euro worries while dollar rises
Gold steadied on Monday, having risen for five days in a row, supported by investor concerns over the spread of the euro zone debt crisis, although gains were tempered by the dollar's strength.

The euro fell 1 percent against the dollar, which hit two-week highs against a basket of currencies .DXY, as European Union officials held an emergency meeting to discuss whether the troubles that have plagued Greece, Portugal and Ireland could spread to Italy.

Italian bonds and stocks tumbled, while perceived safe-haven instruments such as German Bunds and the Swiss franc gained, along with euro-denominated gold, which hit record highs above 1,091 euros ($1,583) an ounce.

Friday's U.S. non-farm payrolls data, which showed job creation had virtually ground to a halt, dampened hopes that the world's largest economy would bounce back from its slowdown in the first half of this year and helped gold stage a 3.9 percent weekly rise in its best week since November 2009.

Spot gold rose to a 2-1/2-week high of $1,547.56, before trading at $1,543.96 an ounce, unchanged on the day, at 1100 GMT. U.S. gold August futures were up 0.2 percent at $1,544.70 an ounce.

"There's some lingering reaction to the poor U.S. jobs data ... but this morning has mostly been about Europe and this emergency meeting called today to discuss Italy," said Credit Suisse analyst Tom Kendall.

"As this European crisis develops further, you would expect to see, and we are already seeing, people coming into gold on the physical side, not necessarily through ETFs but through other avenues, and you will see some defensive positioning from investors on the institutional side," he said.

Euro-priced gold rose to an all-time high of 1,095.02 euros an ounce earlier in the day.

 

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Obama increases pressure on Republicans on debt

"If not now, when?" Obama said as he prepared to meet top U.S. lawmakers at 2 p.m. EDT, searching for a way to break a budget impasse that is holding up a vote on raising the $14.3 trillion debt ceiling.

The Treasury Department has warned it will run out of money to cover the country's bills if Congress does not raise the debt limit by August 2.

Failure to act could push the United States back into recession, send shock waves through global markets and threaten the dollar's reserve status.

The lack of progress in debt talks was cited as a factor for a more than 1 percent decline in U.S. stocks on Monday.

"The closer we get to the deadline, the more problematic it becomes," said Walter Todd, who helps manage $950 million at Greenwood Capital in Greenwood, South Carolina.

Obama used the latest in a series of White House news conferences to urge lawmakers on both sides to stop putting off the inevitable and agree to tax increases and cuts in popular entitlement programs, trying to persuade Americans he is the grownup in a bitter summer battle over spending and taxes.

"What I've said to the leaders is, bring back to me some ideas that you think can get the necessary number of votes in the House and in the Senate. I'm happy to consider all options, all alternatives that they're looking at," Obama said.

Republicans are adamantly opposed to raising taxes while Obama's Democrats are equally determined to protect Social Security, Medicare and Medicaid, the sacred cow pension and healthcare programs for the poor and elderly.

 

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Euro sinks to record low vs Swiss franc as debt concerns spread

The euro was beaten down further in Asia on Tuesday, plunging to a record low versus the Swiss franc and sinking to a four-month trough against the dollar on growing concerns that the euro zone's sovereign debt crisis was spreading.

The single currency fell as low as $1.3932 -- its lowest since March 17 -- after a slew of stop-loss orders were triggered below $1.3980. The euro fell broadly, dropping to an all-time low of 1.1660 Swiss franc.

The euro was on the defensive as an emergency meeting by European financial officials failed to offer fresh measures to tackle the region's debt problems, dealers said.

Market participants were especially concerned about the debt of countries such as Spain and Italy, which came under strong selling pressure the day before.

"The market has become particularly concerned due to the sell-off in Italian bonds. A steep widening of the spread between Italian and German bonds is making the market worried," said Osamu Takashima, chief forex strategist at Citibank in Tokyo.

"The market was to a certain extent expecting the problems in Greece to spread to Spain, but this drastic move in Italian bonds was very surprising."

The spread on the 10-year Italian bond yield over that of German bonds widened to above 300 basis points the previous day from about 180 bps at the start of the month.

The euro was trading at 1.1690 Swiss francs, down 0.3 percent from the day before.

Against the yen, the euro was down 0.6 percent at 111.86 after falling as far as 111.67 -- the lowest since March 18.

Against the dollar, the single currency dropped 0.5 percent to $1.3962.

Support is seen around $1.3905/10, a 50 percent retracement of the January-May rally as well as the 200-day moving average.

Weakness in the euro helped push the dollar up against a basket of major currencies. The dollar index .DXY climbed as high as 76.370 -- its highest since April 1.

"I feel that the euro zone debt situation particularly deteriorated after Portugal was downgraded to junk status last week. The market again started to focus on the debt problem as being a problem for the whole region," said Kimihiko Tomita, head of foreign exchange at State Street and Trust.

"The fact that the euro broke decisively below $1.4 is significant. The most recent selling appears to be a bit too rapid, but the market could test the euro further in the short term given current sentiment," Tomita said.

In a bid to stop financial contagion engulfing Italy and Spain, officials promised to provide cheaper loans, longer maturities and a more flexible rescue fund to help Greece and other EU debtors.

They declined to rule out the possibility of a selective default by Greece, a move officials said bolstered Germany's push to involve investors in easing Greece's debt despite the concerns of the European Central Bank.

European Union finance ministers meet later on Tuesday and are under the cosh to soothe market nerves ahead of Thursday's Italian bond auctions. Italy is aiming to raise 7.75 billion euros in the debt market, according to estimates from Barclays Capital.

 

[market_bull]

Wow! What depressing news!

 

[EmpireGlobalfx]

Latest House debt plan may lead to compromise

The latest Republican plan to avert a looming U.S. default is a fierce statement of conservative principles that pushes the party's negotiating position farther to the right.

That's why it may be the first step on the road to compromise.

By giving Tea Party conservatives in the House of Representatives a chance to take their favored legislation as far as it will go, House Speaker John Boehner may buy himself some needed goodwill from a vocal segment of his party that has sometimes viewed his deal-making efforts with suspicion.

That could make it easier for Boehner to eventually pass legislation that could be acceptable to President Barack Obama and the Democratic-controlled Senate, clearing the way for an increase in the debt ceiling before August 2 when the federal government faces a default on its financial obligations.

Even as Boehner touted his party's latest plan at a news conference on Friday, he left open the possibility that the House may take up a compromise being shaped in the Senate that so far has failed to catch on with junior lawmakers.

"The cut, cap and balance plan that the House will vote on next week is a solid plan for moving forward. Let's get through that vote, and then we'll make decisions about what will come after," he said at a news conference.

The cut, cap and balance bill conditions a debt-limit increase on passage of a constitutional amendment that would require the federal government to balance its books each year.

Constitutional amendments require a two-thirds vote. That's not likely in the Democratic-controlled Senate, and may even be a stretch in the House.

Even if it were to pass Congress, the amendment would not take effect until at least 38 of the 50 state legislatures ratify it.

Economists say a balanced-budget requirement would tie the federal government's hands during a recession, when tax revenues plummet and welfare costs rise, by forcing it to slash spending or raise taxes.

"That would make a recession worse," said Dan Seiver, a professor of finance at San Diego State. "It's exactly the opposite of what intelligent fiscal policy should do."

SMART POLITICS

But it's smart politics. Polls show that the public, and especially Republican voters, favor a balanced-budget requirement by wide margins.

"This is a vote where ... the House Republican majority gets to align itself with the American public at large," said Kevin Madden, a Republican strategist and former Boehner spokesman.

Some Democrats have lined up behind a balanced-budget amendment, but few are expected to back the Republican version, which also limits spending to 18 percent of gross domestic product and requires a two-thirds vote for tax increases.

The House is expected to vote on the cut, cap and balance plan on Tuesday, but has not yet set a vote for the balanced-budget amendment.

The Senate could vote on several balanced-budget amendments next week, a Democratic aide said. All are expected to fail.

That would clear the way for a so-called "Plan B" introduced last week by Senate Republican Leader Mitch McConnell, which would essentially pin the onus for a debt-ceiling increase on Obama and his Democrats.

Senate Democratic Leader Harry Reid is currently working with McConnell to make the plan more palatable to his party.

Democrats want to include about $1.5 trillion in spending cuts, including military cuts, along with a payroll tax-cut extension to boost the economy and an agreement on funding levels for the coming two fiscal years to avoid further budget showdowns, aides said.

The plan would also include a special deficit-reduction committee, made up of equal numbers of Republicans and Democrats, that would examine more sensitive budget topics like taxes and benefits. The panel would be guaranteed a vote on its findings, due by the end of the year.

House Republicans and outside conservative groups have been cool or hostile to the plan so far. While McConnell hopes to win control of the Senate in the 2012 elections by embarrassing Democrats, House Republicans are focused on delivering the deep spending cuts they promised voters last fall.

They might warm to McConnell's plan if they are allowed input on the spending cuts, as a Democratic aide suggests.

The failure of cut, cap and balance, coupled with an increasingly frantic lobbying campaign by business allies, could soften their opposition as August 2 approaches.

A sharp drop in the markets could change minds as well.

"What may look like something less than optimal today, if we're unable to get to an agreement might look pretty good a couple of weeks from now," Boehner said at a news conference on Thursday. "I think it's an option that may be worthy at some point."

 

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Pressure rises for Greek debt buy-back, swap

German Chancellor Angela Merkel called on Sunday for private investors to make a major contribution to bailing out Greece, as pressure rose for radical action to cut the country's debt burden.
Officials proposed a range of schemes for Europe's bailout fund, the European Financial Stability Facility, to finance a buy-back or a swap in which private owners of Greek government bonds -- banks, insurers and other investors -- would accept cuts in the face value of their holdings.

European Central Bank Executive Board member Lorenzo Bini Smaghi suggested the EFSF be allowed to provide funds for a buy-back of bonds from the market, where prices have in some cases fallen 50 percent from levels at which the debt was issued.

"This would allow the private sector to sell bonds at market prices, which are currently below nominal value. At the same time, the public sector could benefit monetarily," Bini Smaghi told Sunday's To Vima newspaper in an interview.

Wolfgang Franz, head of Germany's "wise men" economic advisers to the government, said the huge size of Greece's 340 billion euro ($480 billion) debt pile meant it was "inevitable and justified" for the private sector to accept losses.

"One possibility would be that the current EFSF euro rescue mechanism swaps -- at a significant discount -- Greek bonds into bonds it issues and guarantees," Franz was quoted as telling Focus magazine at the weekend.

Alarmed by the spread of market jitters over Greece to Italy and Spain, where bond yields have surged in the past 10 days, European governments are struggling to put together a second bailout of Greece that would supplement a 110 billion euro rescue launched in May last year.

Germany is insisting private investors be involved in the second bailout, and Merkel indicated on Sunday that if they did not voluntarily agree to a major contribution now, they might eventually be forced into a more costly solution to the crisis.

"The more we can involve private creditors now on a voluntary basis, the less likely it is that we will have to take next steps," Merkel told public broadcaster ARD without elaborating on what those steps might be.

Three weeks of talks between European officials and the private sector have failed to reach a deal on the second bailout of Greece, but the lobby group representing commercial banks said on Sunday that some progress had been made.

"Progress has been made and the discussions are continuing," the Institute of International Finance said in a brief statement. It said the talks were focusing on "several options related to Greece's financing needs and longer-term debt sustainability.

Last week, European Council President Herman Van Rompuy announced that euro zone leaders would hold a summit in Brussels on Thursday this week to discuss the rescue of Greece.

But Merkel, while describing the summit as "urgently necessary," said she would only attend if lower-ranking officials had already prepared a clear rescue plan. "I will only go there if there is a result," she said.

BUY-BACK

Other options on the table include an extension of the maturities of Greek bonds. But German weekly magazine Der Spiegel, citing finance ministry sources, reported at the weekend that a debt buy-back had become the option most likely to attract a consensus.

Greece could cut its public debt by 20 billion euros if it bought back its sovereign bonds at market prices as part of a rescue deal, the magazine said.

Legal and technical obstacles may lie in the way of any step to involve the private sector in helping Greece. Bini Smaghi acknowledged, for example, that current EFSF rules did not provide for it to buy bonds from the secondary market; changing the rules might require approval by national parliaments.

Another potential obstacle is the ECB, since the central bank's president Jean-Claude Trichet has opposed any measure that would cause credit rating agencies to declare Greece in default, even on a limited basis.

But in an interview to be published on Monday, Trichet held out the possibility that a default could be managed smoothly. He said the ECB would stop accepting defaulted bonds as collateral in its money market operations -- a blow to Greek banks which depend on the operations for funding -- but suggested governments might provide other collateral.

"The governments would then have to step in themselves to put things right...The governments would have to take care the Eurosystem is presented with collateral that it could accept," Trichet told the Financial Times Deutschland without elaborating.

A deal on a private sector contribution to Greece would probably not by itself come close to solving the problem; officials and private economists estimate the country's debt would have to be cut by about half, to 80 percent of gross domestic product, to make it manageable in the long-term.

As part of the second bailout, officials are also looking at other measures to help Greece including up to 60 billion euros of additional emergency loans from European governments and the International Monetary Fund; steps to recapitalise Greek and European banks; and ways to stimulate economic growth in Greece.

As a key shareholder in the IMF, the United States is important to continued IMF support of Greece. U.S. Secretary of State Hillary Clinton, visiting Athens on Sunday, voiced strong support for Greece's effort to overcome its crisis, saying it was taking the hard steps needed for future growth.

 

[EmpireGlobalfx]

Gold rises above $1,600/oz as debt fears simmer

Gold prices rallied to record highs above $1,600 an ounce in Europe on Monday as investors spooked by the euro zone debt crisis and the threat of a U.S. default bought into the metal as a haven from risk.

Spot gold rose as high as $1,600.40 an ounce and was up 0.4 percent at $1,598.76 an ounce at 0845 GMT. Gold rose more than 3 percent for a second straight week to Friday, a feat it has not achieved since February 2009.

Data from U.S. futures regulator the Commodity Futures Trading Commission showed on Friday that managed money sharply raised bullish bets in U.S. gold futures and options in the week ended July 12 as bullion prices rallied.

"CFTC data shows a surge into gold, so despite the higher levels the professionals have returned to gold with a vengeance," said Saxo Bank analyst Ole Hansen.

"The stress test result was met with a lukewarm response with focus again switching back to Europe. When that happens gold is often allowed to perform despite the dollar strengthening at the same time."

Sovereign default fears are growing in both Europe and the United States. The United States is struggling with deficit reduction talks ahead of the White House's July 22 deadline on a deal to raise the $14.3 trillion debt ceiling.

Euro zone ministers will meanwhile meet on Thursday to discuss the financial stability of the euro area.

German Chancellor Angela Merkel called on Sunday for private investors to make a major contribution to bailing out Greece, as pressure rose for radical action to cut the country's debt burden.

On the foreign exchange markets, the euro slid 0.7 percent against the dollar. Sovereign debt worries led investors to shift funds into safe-haven currencies like the Swiss franc and cut exposure to riskier assets.

Gold rallied across a number of major currencies, also hitting record highs in euro, sterling, South African rand and Canadian dollar terms.

"Investors are increasingly looking to gold as a safe haven as the U.S. dollar, pound sterling and the euro continue to devalue against stronger currencies such as those of Canada, Australia, Norway and Switzerland," said Angelos Damaskos, chief executive of Sector Investment Managers.

"Sovereign debt problems in the developed world persist and continue to hamper economic growth. Quantitative easing is the easy solution but rising inflation creates a headache for central bankers."

STOCKS UNDER PRESSURE

Stock markets fell in Europe as bank stocks came under pressure after a capital stress test failed to dispel fears about the regional debt crisis, while Bund futures opened higher as uncertainty ahead of a euro zone meeting this week underpinned appetite for safe-haven assets.

U.S. 10-year Treasury notes fell in Asian trade on Monday, with intraday moves set to stay choppy in the near-term due to uncertainty about the fate of U.S. debt talks and worries over the euro zone's sovereign debt crisis.

U.S. gold futures for August delivery were up $9.50 an ounce at $1,599.60, having peaked at $1,601.20.

Other commodities appeared lackluster, meanwhile, with Brent crude oil easing 0.6 percent and U.S. crude futures 0.2 percent. Industrial metals like nickel and aluminum eased, while bellwether copper was little changed.

Growing worries of a possible sovereign debt default on either side of the Atlantic are also weighing on oil prices.

Other precious metals tracked gold higher, meanwhile, with silver rising above $40 an ounce for the first time since early May. The grey metal rallied to a record $49.51 an ounce in April before correcting sharply.

It has rallied more than 15 percent in the last two weeks, however, as gold prices have risen.

"Toward the end of the summer, an expected pick-up in interest in silver could take the gold/silver ratio lower for the rest of 2011," said BNP Paribas in a report released Friday. "In 2012, the silver price may in turn weaken as the outlook for gold turns more negative."

Silver peaked at $40.15 an ounce and was later bid at $39.95 an ounce against $39.27. Spot platinum was bid at $1,759.50 an ounce versus $1,748, while spot palladium was at $782.72 an ounce against $771.

 

[EmpireGlobalfx]

No consensus as Europe limps toward Greece summit

Confusion over competing policy proposals reigned among officials and bankers on Monday as Europe struggled to put together a second bailout of Greece and prevent the region's debt crisis from spreading.

French government spokeswoman Valerie Pecresse said she believed a summit of the euro zone's 17 national leaders scheduled for Thursday in Brussels would agree on a rescue of Greece, supplementing a 110 billion euro ($154 billion) bailout launched in May last year.

But after three weeks of preparatory talks, it remained unclear whether government officials and commercial bankers could agree on a way for private owners of Greek government bonds -- banks, insurers and other investors -- to contribute to the bailout by taking cuts in the face value of their holdings.

The uncertainty pushed the euro down against other currencies on Monday and the government bond yields of indebted euro zone states rose, with Italy's 10-year yield climbing more than 0.2 percentage point to a euro-era high.

Paul de Grauwe, a professor of international economics at Leuven University in Belgium who has informally advised European Commission President Jose Manuel Barroso, said politicians had delayed taking decisive action on Greece for so long that their options were narrowing fast.

"I'm afraid to hope. I still hope, yes, but I'm not optimistic," he said.

"We've had solutions in the past, but we haven't grasped them. Now it's too late for some of those solutions to work anymore; the opportunity has been lost."

"CANNOT RULE OUT ANYTHING"

Officials are wrestling with a range of schemes for Europe's bailout fund, the European Financial Stability Facility, to finance a voluntary buy-back or swap of Greek debt that would be conducted at a discount to face value, helping to reduce Greece's 340 billion euro mountain of sovereign debt.

But all of the schemes could face major technical and legal obstacles, in some cases requiring the approval of national parliaments in the euro zone. Other proposals still appear to be on the table; Germany's Die Welt newspaper reported on Monday that governments were considering a levy on banks as a way to involve private creditors in rescuing Greece.

An official of a major euro zone government who is familiar with the talks said he had not heard of a proposal for a bank levy, but added: "There are at the moment so many proposals that you cannot rule out anything."

If a deal on private creditor participation is reached, it may cut Greece's debt by just 20 or 30 billion euros, not nearly enough by itself to solve the problem. Analysts have estimated the debt would have to be roughly halved, to 80 percent of gross domestic product, to make it manageable in the long run.

German Chancellor Angela Merkel said on Sunday that while this week's summit was "urgently necessary," she would only attend if lower-ranking officials had already prepared a clear rescue plan. "I will only go there if there is a result."

BAILOUT

As part of the second bailout, officials have also been looking at other measures to help Greece including up to 60 billion euros of additional emergency loans from European governments and the International Monetary Fund; steps to recapitalize Greek and European banks; and ways to stimulate Greek economic growth.

Some official sources have said interest rates on bailout loans extended to Greece, Ireland and Portugal may be cut and maturities on those loans extended drastically, perhaps to 30 years.

There has also been talk of expanding the 750 billion euro bailout facility which the European Union and the IMF jointly created last year as the debt crisis erupted.

But de Grauwe said financial markets were now putting so much pressure on weak euro zone states that it was unclear whether cutting interest and extending maturities on their emergency loans would help them regain access to the markets.

"If that was to be a solution, it's a solution we should have implemented months ago, when it would have worked."

Another source of concern is signs that the IMF and other major governments around the world, which want to prevent the European crisis from poisoning debt markets globally, may lose patience with Europe's handling of the problem.

Die Welt quoted unnamed diplomatic sources as saying the IMF was angered by Europe's crisis management and that "influential parties" in the Fund wished not to take part in further bailouts of Greece. It did not elaborate.

Former U.S. Treasury Secretary and White House adviser Lawrence Summers, writing in a column contributed to Reuters on Sunday, said Europe needed to act much more aggressively than it had done so far to prevent the Greek crisis from damaging both the region's single currency and the global economic recovery.

He recommended steps including sharp cuts in interest paid on bailout loans, allowing countries to buy European Union guarantees for their issues of new debt, and a menu of options for private investors to become involved.

"It is to be hoped that European officials can engineer a decisive change in direction but if not, the world can no longer afford the deference that the IMF and non-European G20 officials have shown toward European policymakers over the last 15 months," Summers wrote.

Many private economists think some form of regional guarantee for countries' debt along the lines suggested by Summers -- or perhaps even the issuance of joint euro zone bonds -- may ultimately be the only way to emerge from the crisis without one or more weak states being forced out of the zone.

But Germany has shown no appetite for such a sweeping solution, which in any case would require a complex and time-consuming revision of the EU treaty.

"We are against euro bonds," German government spokesman Steffen Seibert said on Friday, repeating Berlin's concern that a common bond for the single currency area would provide no meaningful incentives for national governments to pursue prudent budget policies.

 

[EmpireGlobalfx]

Gold eases from record highs, eyes euro summit

Gold prices eased a touch on Tuesday after earlier hitting record highs, as a rebound in assets seen as higher risk, such as shares and the euro, took some of the heat out of appetite for safe havens.

Gold prices remained elevated, however, as investors continued to favor the metal amid heightened concerns that the debt crisis engulfing Greece may ensnare Italy and Spain, and as time grew short for raising the U.S. debt ceiling.

Spot gold hit a peak of $1,609.51 an ounce and edged down 0.1 percent to $1,601.96 an ounce at 1125 GMT. It is up 13 percent so far this year.

"In Europe we've seen huge demand for metal in some areas, and huge amounts of scrap coming in others, but demand seems to be winning the day," said Simon Weeks, head of precious metals at the Bank of Nova Scotia.

"Exchange-traded funds in the last five sessions have gained just over 50 tonnes, so there is clearly money coming back in," he added. "It's not going to be one-way traffic, but the fundamental issues and concerns haven't gone away.... and people have realized that gold is important as a currency."

The euro rose broadly on Tuesday as debt yields of some weaker euro zone countries retreated, taking a breather after sliding to record lows against the Swiss franc -- which is commonly seen as a safe store of value -- on Monday.

German government bond prices fell as lower-rated euro zone debt stabilized slightly, prompting investors to book profits in Bunds after their rally to near 8-month highs, while European shares rose after a sharp fall in the previous session.

But jitters remained in the financial markets given divisions among policymakers ahead of Thursday's euro zone summit, with few expecting a permanent solution to the region's debt crisis.

U.S. President Barack Obama and top lawmakers are also facing more pressure for a debt deal amid a growing sense that a last-ditch plan taking shape in Congress may be the only way to avoid a devastating U.S. default.

"Although the challenges facing the EU and U.S. are different, they share some common themes in that they are both based on sovereign debt issues and are seen as being political as well as economic in nature," said HSBC in a note.

"Taken together, the combined effect on gold prices is... bullish, as investors wary of dollar and euro assets, seek a safe alternative. Based on this, we believe at least one of these dilemmas has to be resolved or at the least some tangible progress made on a solution before gold is likely to retrace."

ETF HOLDINGS RISE

Holdings of precious metals-backed exchange-traded funds rose on Monday, with the amount of gold held by the largest gold ETF, New York's SPDR Gold Trust rising by 13.3 tonnes after a 10-tonne inflow the previous day.

The largest silver-backed ETF, the iShares Silver Trust said its holdings rose 39.4 tonnes on Monday.

The gold: silver ratio -- the amount of silver needed to buy an ounce of gold -- dipped under 40 this week for the first time since early May as silver outperformed gold in a rising market, a common phenomenon given its lower liquidity.

"Silver is clearly benefiting from its greater affordability, attracting investors who are keen on hard assets during these uncertain times," said UBS in a note. " (Its ratio to gold) looks poised to fall further in the near term, particularly if risk aversion continues to dominate."

Silver was bid at $40.23 an ounce against $40.51. Spot platinum was bid at $1,769.74 an ounce versus $1,769.98, while spot palladium was at $791.22 an ounce against $792.57.

U.S. gold futures for August delivery were up 10 cents to $1,602.50. Gold also held close to the record highs it hit in euro, sterling, Canadian dollar and South African rand terms on Monday as investors sought an alternative to some paper currencies.

 

[EmpireGlobalfx]

Wall Street rebounds on profits; IBM, Coke lead

Stocks jumped about 1 percent on Tuesday on strong earnings from IBM and Coca-Cola, offsetting investor disappointment in results from big financial firms.

The turnaround from Monday's losses over debt concerns also received a boost from unexpectedly strong housing data.

Dow component International Business Machines Corp (IBM.N) added 3.2 percent to $180.80 a day after it said new business at its services division was up more than expected, raising hopes for the technology sector.

The S&P information technology sector .GSPT gained 1.8 percent, the top gainer among S&P sectors. Shares of Apple (AAPL.O) hit a 52-week high ahead of its report due after the closing bell.

"The market is focused once again on corporate earnings, taking over for the debt talks," said Rob McIver, co-portfolio manager of the Jensen Portfolio in Portland, Oregon.

The market has been preoccupied with wrangling in Washington over a deal to raise the debt ceiling. There is a growing sense that a last-ditch plan taking shape in Congress may be the only way to avoid a U.S. default.

However, all 10 S&P 500 sectors rose on Tuesday, even financials, which were hit by declines in Goldman Sachs Group Inc (GS.N) and Bank of America following their results. After advancing in the morning, Bank of America (BAC.N) fell 2.5 percent to $9.48. Goldman lost 1.2 percent, to $127.82.

"Goldman is a bellwether of the rest of the banks, and it should set the tone for the rest of them, but I wouldn't be too pessimistic," said Robert Francello, head of equity trading for Apex in San Francisco.

Those losses were offset by a 4 percent rise in shares of Wells Fargo (WFC.N) to $27.99 after it said profit rose 30 percent.

The Dow Jones industrial average .DJI was up 121.40 points, or 0.98 percent, at 12,506.56. The Standard & Poor's 500 Index .SPX was up 12.80 points, or 0.98 percent, at 1,318.24. The Nasdaq Composite Index .IXIC was up 44.45 points, or 1.61 percent, at 2,809.56.

Housing starts topped forecasts in June to touch a six-month high, and permits for future construction unexpectedly increased, the government reported. Homebuilder D.R. Horton Inc (DHI.N) climbed 3.6 percent to $11.90 and the PHLX Housing Index .HGX rose 2 percent.

Goldman's second-quarter net income fell short of lowered expectations as fixed income trading revenue dropped sharply. Bank of America recorded a second-quarter net loss of $8.8 billion after a big settlement with mortgage bond investors.

Coca-Cola Co (KO.N) posted slightly higher-than-expected profit on strength in emerging markets. Johnson & Johnson's (JNJ.N) earnings topped estimates on a turnaround in its prescription medicines and stabilizing sales of over-the-counter medicines.

Coke rose 3 percent to $69.12, while J&J was 0.7 percent lower at $66.63. Both stocks are Dow components.

 

[EmpireGlobalfx]

Merkel: no spectacular solution for Greece at summit

Merkel dampens expectations ahead of key euro zone summit

HANOVER, Germany, July 19 (Reuters) - A meeting of euro zone leaders on Thursday will not be the final step in the resolution of Greece's debt crisis, Chancellor Angela Merkel said on Tuesday, dampening expectations ahead of the summit.

Euro zone leaders will try to agree on a second rescue package for Greece in Brussels but Merkel warned it was not politically responsible to agree a hasty solution -- comments which sent the euro lower against the dollar.

"Further steps will be necessary and not just one spectacular event which solves everything," she told a joint news conference with Russian President Dmitry Medvedev.

"Whoever takes political responsibility seriously knows that such a spectacular step won't happen."

In order to solve Greece's problems once and for all, the euro zone needed to consider the options for reducing its indebtedness and raising its competitiveness, she said.

"Europe is unthinkable without the euro and therefore it is worth making every responsible effort to really solve the problems at the very root," she said.

Euro zone financial woes are not a fault of the euro itself but a result of it being used by countries with uneven economics, said the Russian president.

"The euro's main problem today is that quite a strong and respectable currency serves countries with very different levels of economics," Medvedev said. "It never happened in the history of the mankind."

 

[EmpireGlobalfx]

Apple smashes Street views, shares soar

Blockbuster sales of the iPhone and strong Asian business again helped Apple Inc crush Wall Street's expectations, driving its shares up more than 7 percent to a record high and boosting Asian stocks.

Sales of its iconic products far outpaced forecasts, helping drive a near-doubling of revenue in the fiscal third quarter. Its shares leapt to a high of $405 after a brief after-hours trading suspension.

Apple sold 20.34 million iPhones during the quarter versus an expected 17 million to 18 million, which analysts say helped it vault past Nokia and Samsung Electronics to become the world's biggest smartphone maker.

That "figure may indeed make them the largest smartphone maker by volume, which is somewhat ironic in a quarter that many thought would be about the Mac," said CCS Insight analyst John Jackson. "That they accomplished this without a new model speaks volumes about both their strength and the relative challenges facing competitors."

Apple's earnings beat was spectacular even by its own lofty track record. Its quarterly EPS beat the average forecast by 33 percent, versus beats of about 20 percent in the past two quarters.

The stellar results came as concern over iPad 2 supply constraints eased, with Chief Financial Officer Peter Oppenheimer saying more than 1 million iPads remained in stock at the end of June but demand was still overstripping supply in some markets.

Oppenheimer hinted at an upcoming product launch, saying it would impact the September quarter, but he gave no details.

In coming months, Apple is expected to roll out a new iPhone, which is likely to give the world's most valuable technology company another shot in the arm and offer a stiff challenge to rivals such as Google Inc and Research in Motion.

"They never cease to amaze me, these guys," YCMNET Advisors Chief Executive Michael Yoshikami said. "The numbers are obviously very strong and they seem to be accelerating earnings on all fronts."

ASIA ON FIRE

The Cupertino, California company said its fiscal third-quarter revenue climbed 82 percent to $28.57 billion, trouncing the average analyst estimate of $24.99 billion, according to Thomson Reuters I/B/E/S.

The company posted net income for the fiscal third quarter ended June 25 of $7.31 billion, or $7.79 per share, up from $3.25 billion, or $3.51 per share. Analysts on average had expected Apple to report $5.85 per share, according to Thomson Reuters I/B/E/S.

Oppenheimer attributed the big margin boost to higher sales of the iPhone, particularly in Asia. International sales accounted for 62 percent of the quarter's revenue.

Shares in Apple's Asian suppliers including Taiwan's Hon Hai Precision and Largan Precision jumped 2.6 percent and 3.2 percent respectively, while Japan's Foster Electric, which makes headphones for smartphones, rose 1.7 percent by 0015 GMT.

In Korea, top chipmaker Samsung Electronics Co rose 2.9 percent, while LG Display jumped 4.1 percent, and Hynix Semiconductor were up 2.8 percent by 0015 GMT.

"Apple is doing well, but this does not mean other tech companies are doing well. Tech shares are rising after their recent sharp falls and on expectations that their earnings may not be as bad as previously concerned," said Lee Seon-yeob, an analyst at Shinhan Investment Corp in Seoul.

Apple Chief Executive Tim Cook told analysts they were particularly optimistic about Greater China, which includes mainland China, Hong Kong and Taiwan, where Apple's year-over-year revenue was up sixfold at $3.8 billion. Overall, Asia Pacific revenue more than tripled to $6.3 billion in the quarter.

"I firmly believe that we are just scratching the surface right now," Cook said of China. "I think there is an incredible opportunity for Apple there."

Cooks also remarked on Apple TV, one of the few Apple products that has not really connected with consumers, saying it still had a "hobby status" within the company.

Apple sold 9.25 million iPads and 3.95 million Mac computers. Gross margin for the quarter came to 41.7 percent.

Shares of Apple have emerged from the limbo they had fallen into after Chief Executive Steve Jobs took leave last January for unspecified medical reasons.

Based on a price of $400, Apple would have a market capitalization of $369.90 billion, putting it close to Exxon Mobil, the largest company in the Standard & Poor's 500 index, which has a $411.97 billion market value.

The stock has gained 16.8 percent so far this year and has had only two "down" years in the last 10: in 2002, when it lost 35 percent, and in 2008, when it dropped 57 percent.

On Tuesday, Jobs' health again came to the forefront after the Wall Street Journal reported that several Apple board members had discussed a successor to the Silicon Valley icon, and talked it over with at least one head of a high-profile tech company.

Succession planning at Apple has been a hot topic since Jobs announced his medical leave, with many not expecting him to return to lead the company he founded in 1976.

The fate of Apple is tied to how the iPhone and iPad maker handles the eventual departure of its iconic chief. Chief Operating Officer Tim Cook is overseeing day-to-day operations.

Shareholders representing almost a third of Apple's stock voted in February in favor of a proposal to disclose a succession plan for Jobs, underscoring worries over who will replace the visionary leader at the helm.

Apple, notorious for its conservative forecasts, estimated earnings for the September quarter of $5.50 a share on revenue of $25 billion, below analysts' average estimate of $6.45 a share on revenue of $27.7 billion.

 

[EmpireGlobalfx]

Yahoo revenue dips in Q2, shares fall 2 percent

Yahoo Inc plugged some of the holes that were weakening its Internet search business in the second quarter, but revealed new challenges that hurt its display advertising business.

The Internet company reported a slight decline in net revenue in the second quarter, as efforts to restructure its sales force caused disruptions that crimped revenue.

Shares of Yahoo, which are down more than 20 percent since their 52-week high of $18.84 in mid-May, were down 2.3 percent at $14.26 in after hours trading.

"They're trying to fix a lot of problems that do need to be fixed, but unfortunately as they're fixing those problems, new ones are popping up," said Macquarie Research analyst Ben Schachter.

"At the end of the day it's another disappointment," he said of the company's second quarter results.

Chief Executive Officer Carol Bartz, who is halfway through a four-year contract, is confronting a number of challenges in her quest to revitalize the Internet pioneer, including setbacks in a search partnership with Microsoft and tensions with Chinese partner Alibaba Group.

Meanwhile, the company is facing tough competition from social networking giant Facebook. A recent report by research firm eMarketer predicted that Facebook will displace Yahoo this year and collect the biggest slice of online display advertising dollars in the United States.

In a conference call with analysts on Thursday, Bartz said the shortfall in its display advertising business was not due to changes in the competitive landscape or to worsening business conditions.

A restructuring of the sales force - aimed at positioning Yahoo for more robust growth in the future - led to greater than anticipated employee turnover and left Yahoo under-equipped to meet demand, she said.

"The issue was we did not have enough sales people in front of the big clients," said Bartz.

The company forecast third-quarter net revenue, which excludes the fees that Yahoo pays to partner websites, of between $1.05 billion and $1.1 billion.

Yahoo executives said the company continued to make progress in efforts to unlock value from its Asian assets, which include a roughly 40 percent stake in China's Alibaba Group.

Yahoo's rocky relationship with Alibaba has raised questions about the extent to which it could profit from those assets. In May it was revealed that Alibaba had abruptly handed Alipay -- one of Alibaba's crown jewels -- to a company controlled by Alibaba founder Jack Ma.

Alibaba has said the transfer was necessary to comply with new Chinese regulations that restrict foreign ownership in e-payment companies.

"We've been working on this negotiation continuously, in fact daily," said Bartz.

But, she added, "until every word is finalized and every document is signed we're simply not done."

THE SEARCH GAP

Yahoo reported net income of $237 million, or 18 cents a share, compared with $213 million, or 15 cents a share, in the year-earlier quarter. Analysts polled by Thomson Reuters I/B/E/S, on average, were looking for 18 cents.

Yahoo's results come a few days after Google, the world's No.1 Internet search engine, reported better-than-expected profit and revenue.

Yahoo Chief Financial Officer Tim Morse told Reuters that the company was making progress in rectifying some of the problems in its search partnership with Microsoft, which had hurt Yahoo's revenue per search.

Last quarter, Yahoo said its search partnership with Microsoft was taking longer than expected to pay off due to technical imperfections in the search advertising system. As a result, Yahoo said its revenue per search won't rise to levels it experienced pre-Microsoft until the end of the year.

"Of the gap that we identified as of the April call, we closed about 20 percent of it in this quarter," said Morse.

Search revenue declined 45 percent year-over-year to $467 million.

Yahoo said net revenue in the second quarter was roughly $1.1 billion, compared with $1.13 billion in the year-earlier period and in line with Wall Street expectations.

ThinkEquity analyst Aaron Kessler said the signs of progress on search were encouraging, but said the market would be watching what happens with the company's display business in the months ahead.

"It makes for a little more caution on the core business," he said.

 

[EmpireGlobalfx]

Euro climbs on Greece hope; contagion fears linger

The euro rose against the dollar on Wednesday on hopes euro-zone leaders would reach a deal to ease Greece's debt burden, though concerns about contagion to other European economies should keep the single currency vulnerable.

French ministers said European leaders were less divided than the media was reporting and were likely to reach an accord at Thursday's summit to help Greece avert a potential default that could roil financial markets.

Analysts cautioned, however, that fears remained Greece's crisis will spread to bigger economies in the region such as Italy and Spain. Yields on the two countries' bonds jumped above 6 percent earlier this week before easing back.

"We expect a new framework for Greece to be agreed, involving the first real efforts to reduce Greece's debt burden. But we expect little concrete in terms of measures to reduce contagion more broadly," said Jens Nordvig, global head of G10 FX strategy at Nomura in New York.

"Hence, bond markets in Spain and Italy will largely remain 'on their own' in coming weeks. We continue to trade the euro from the short side in the current environment."

The euro was last up 0.4 percent at $1.4217. Initial resistance is seen around $1.4282, the euro's high on July 14, according to Commerzbank technical analyst Karen Jones. Support lies around $1.3915, the 200-day moving average.

Euro-zone sources said a summit of euro-zone leaders would be delayed slightly to allow time for a deal to be reached on private-sector involvement in shouldering the costs of a Greek debt resolution.

While an agreement on Greece would be welcomed by investors, the success of the summit would be better judged by the performance of Italian and Spanish bonds, analysts said.

Spain will auction 10- and 15-year bonds on Thursday ahead of the EU leaders' meeting. Investors will closely watch the costs of funding to gauge the stress level on peripheral debt markets.

U.S. DEBT PROGRESS

Signs of progress on a U.S. budget deal also prompted a rise in risk tolerance. A group of Democratic and Republican senators, dubbed the "Gang of Six," presented a new plan late on Tuesday that could revive stalled U.S. debt talks and avert a default by the world's biggest economy.

Alan Ruskin, global head of G10 currency strategy at Deutsche Bank in New York, in a note said a striking feature of the more favorable news on U.S. fiscal development was how short-lived the U.S. dollar gains were.

"It is worth considering, whether the U.S. dollar can benefit from the budget," he said. Negative debt ceiling news is a clear dollar negative, but while positive news on U.S. debt discussions is good for the dollar, it's also likely to boost risk appetite, which would largely negate any positive dollar reaction, he said.

The dollar fell 0.4 percent to 78.76 yen, while against a basket of major currencies, the dollar index slipped 0.5 percent to 74.828 .DXY.

Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey, said the dollar's only real chance at a rally would probably come if the EU meeting fails to ease euro-zone debt fears and the euro sells off.

The New Zealand dollar gained 0.1 percent to $0.8562, near Tuesday's post-float high of $0.8573. The Canadian dollar reached its highest since early May, helped by Chinese oil producer CNOOC Ltd's (0883.HK) saying it would buy Canada's Opti Canada Inc. (OPC.TO).

 

[EmpireGlobalfx]

Morgan Stanley stuns market with second-quarter beat

Morgan Stanley stunned investors with better-than-expected second-quarter results, outperforming Goldman Sachs and other rivals as it gained market share in tough trading conditions.

The bottom line was helped by strong equity and sales trading, surprisingly resilient fixed income, currency and commodities (FICC) trading, and a lead underwriting position on several big technology IPOs. Morgan Stanley shares rose as much as 7 percent in premarket trading to $23.17.

Asked about the market's reaction to the bank's results, Chief Financial Officer Ruth Porat told Reuters, "I like that phrase 'knock-the-socks-off results.' We're pleased in particular because it's the breadth across the businesses."

The bank reported a quarterly loss of 38 cents per share, weighed down by a big one-time charge and a weak trading environment that swept across Wall Street.

But the loss was much smaller than analysts expected. The average Wall Street forecast was a loss of 62 cents a share, according to Thomson Reuters I/B/E/S.

The loss included a charge of $1.02 per share and a dilution of the bank's share base from the conversion of a $7.8 billion preferred stock investment by Japan's Mitsubishi UFJ Financial Group. The conversion allows Morgan Stanley to avoid expensive dividends to the Japanese bank in the future.

In FICC, a traditionally lucrative area that has come under pressure in recent quarters, Morgan Stanley's revenue dropped just 9 percent to $2.1 billion. Chief rival Goldman Sachs Group Inc reported a stunning 53 percent decline in that area on Tuesday.

"Morgan Stanley is the new Goldman Sachs," said Richard Bove, a bank analyst at the brokerage Rochdale Securities. "Every one of their divisions shows an improvement, and the improvement in trading operations is especially impressive."

Chief Executive James Gorman has been on an aggressive campaign to increase market share in FICC trading, trying to woo clients away from competitors and getting existing customers to trade more on Morgan Stanley's platform. He reinstalled Ken deRegt, a former head of FICC trading, back into that position in January to revitalize the business.

Porat said the bank's management is not yet thrilled with its FICC performance, since it is still coming from a small base. "It's progress against a level that we thought was too low for this franchise," she said.

RARE SYMMETRY

In a rare symmetry, both net revenue and total noninterest expenses at the company grew 17 percent from a year earlier, signaling that Morgan Stanley is keeping its cost growth in check.

Compensation, traditionally the biggest part of an investment bank's expenses, totaled $4.7 billion, or 50 percent of Morgan Stanley's net revenue. That compares with 57 percent in the first quarter and 49 percent a year earlier.

Second-quarter results were boosted by a strong increase in equity sales and trading revenue, up by more than a third from a year ago at $1.9 billion. Investment banking revenue surged 57 percent to $1.7 billion.

Revenues in another key division, wealth management, rose 13 percent, and earnings in that segment rose by almost two-thirds. Morgan Stanley is in the process of acquiring the giant Smith Barney wealth management franchise from Citigroup Inc, and the business now contributes about one-third of its revenue.

Gorman has targeted a pretax operating margin of 20 percent for the business, but high costs have kept profits in check. The wealth management business posted a 9 percent margin in the second quarter.

Porat said management is pleased with the integration of the wealth management business so far but is cutting lower-performing financial advisers in an effort to trim costs and boost profits. At the end of June, the bank's brokerage force stood at 17,638, down from 18,087 at the end of the first quarter.

 

[EmpireGlobalfx]

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[EmpireGlobalfx]

Euro soars after Europe eyes solutions for Greece

The euro rallied to a two-week high against the dollar on Thursday after a draft plan by European officials to provide cheap loans to Greece and other heavily indebted euro zone countries eased fears of contagion.

They were considering a sweeping expansion of the role of the European Financial Stability Facility rescue fund to help states sooner, recapitalize banks and intervene in the secondary bond market, a draft summit statement obtained by Reuters showed.

"The fact that the EU has thrown everything including the kitchen sink into this is very comforting for investors and unless the rating agencies say this is not enough for Greece to avoid a default, the euro should hold onto its gains," said Kathy Lien, director of currency research at GFT in New York.

The euro climbed as high as $1.4402 on trading platform EBS, the highest level since July 6, before easing slightly to $1.4371, up 1.1 percent on the day. It also rose about 0.8 percent to 1.1744 Swiss francs.

According to the draft, the EFSF will provide loans to Greece, Ireland and Portugal at a lower interest rate and for longer maturities.

In a policy reversal, the European Central Bank signaled that it is willing to let Greece default temporarily under the crisis response that would also involve a bond buyback and a debt swap, but no new tax on banks.

Slow progress on resolving Greece's debt crisis has been a major headwind for the euro. Investors fear Europe's debt crisis, which has also engulfed Portugal and Ireland, could spread to the much bigger economies of Spain and Italy.

"If the ECB was not able to accept Greek bonds as a collateral, the financing for Greek banks would stop and that would pull down the whole European banking system," said Vassili Serebriakov, currency strategist at Wells Fargo in New York. "That's where the biggest worry was before the meeting."

Peripheral debt rallied after news of the draft documents. Yields tumbled on short-dated Greek debt, down more than 4.5 percent in the two-year segment, while the more liquid Italian and Spanish debt markets also showed substantial relief.

CONCERNS REMAIN

Some key questions remained, analysts said, such as the total cost of the program, whether it can win the backing of member nations, and how weaker economies can reduce their debt burdens to sustainable levels over the long term.

"The ultimate success of the new EU crisis management program will be determined not by its ability to halt the market contagion of recent weeks but by its ability to halt the fundamental deterioration of EU sovereign credits. The total cost of stabilizing the EU's weakest link has yet to become clear," said Lena Komileva, global head of G10 strategy at Brown Brothers Harriman in London.

In contrast to the optimism on Europe, investors remained wary ahead of an August 2 deadline for raising the U.S. public debt ceiling to avoid a default, and the threat of a downgrade to the United States' triple-A credit rating.

Ratings agency Standard & Poor's said on Thursday there was a 50-50 chance it would lower the long-term U.S. credit rating within the next three months.

The White House said there was growing momentum toward a significant deficit reduction plan that would include both spending cuts and tax increases. Congressional aides, however, said the parameters of any potential agreement remained fluid.

The dollar hit a four-month low against the yen of 78.31, according to Reuters data, the lowest since joint G7 intervention in mid-March to stem a rise in the Japanese currency. The dollar was last down 0.3 percent at 78.55 yen.

"The pendulum is clearly swinging ... toward Europe right now, whereas the U.S. is a little bit trailing behind in terms of waiting for positive news," Wells Fargo's Serebriakov said.

 

[EmpireGlobalfx]

Greece defaults - By Felix Salmon.

The latest Greek bailout is done — the official statement is here — and it involves Greece going into “selective default,” which is, yes, a kind of default.

I can’t remember a major financial story which has been covered so inadequately by the financial press. All the incomprehensible eurospeak seems to have worked, along with the fact that the deal was announced in Brussels, where the general level of journalistic financial literacy is substantially lower than it is in London or New York or Frankfurt. On top of that, statements are coming from so many different directions — Eurocrats, heads of state, the Institute of International Finance, Greek officials, Portuguese and Irish officials, you name it — that it’s extremely hard to put it all together into one coherent whole.

Oh, and to complicate things even further, most of the day’s discussion was based on various widely-disseminated draft documents which differed substantially from the final statement.

This is a bail-in as well as a bail-out: while Greece is getting the €109 billion it needs to cover its fiscal deficit, both the official sector and the private sector are going to take losses on their loans to the country.

As such, it sets at least two hugely important precedents. Firstly, eurozone countries will be allowed to default on their debt. Secondly, a whole new financing architecture is being built for Greece; French president Nicolas Sarkozy called it “the beginnings of a European Monetary Fund.”

The nature of massive precedent-setting international financing deals is that they never happen only once. There’s lots of talk today that this deal is for Greece and for Greece only, but some of the more explicit language to that effect was excised from the final statement. On thing is for sure: these tools will be used again, in future. They will be used again in Greece, since this deal is not enough on its own to bring Greece into solvency; and they will be used in other countries on Europe’s periphery too, with Portugal and/or Ireland probably coming next.

As far as the public sector is concerned, the European Union will do four main things. First, it will extend the maturities on Greece’s debt from the current 7.5 years to somewhere between 15 years and 30 years: the loans that the EU is currently giving Greece aren’t designed to be repaid, in some instances, until 2041.

Second, the interest rate on those loans will be extremely low — essentially, Greece is getting those EU funds at cost, currently about 3.5%. The EU is also extending these ultra-low financing rates to Portugal and Ireland, so as not to implicitly punish countries which don’t default.

Third, the EU will put together its own stimulus plan for Greece. The phrase “Marshall Plan” was taken out of the final statement, but there’s still talk of “mobilizing EU funds” and building “a comprehensive strategy for growth and investment.” This is vague, of course, but it does at least constitute an attempt to help Greece through a period of very painful austerity.

Fourth, the Maastricht treaty will get resuscitated, with all eurozone countries except Greece, Ireland and Portugal committing to bring their deficit down to less than 3% of GDP by 2013. Paul Krugman is screaming about this, but this was a central part of the eurozone project from the get-go, and clearly the eurozone needs some kind of fiscal straitjacket for its constituent members to prevent the rest of them from running up enormous deficits and then getting bailed out by Germany.

Finally, the EU will provide “credit enhancement” for Greece’s private-sector bonds. This is a central part of the default plan, and it looks a lot like the Brady plan of the late 1980s. The official statement from the IIF, which is representing private-sector creditors in this matter, is a little vague, but essentially if you’re a holder of Greek bonds right now, you have three choices.

1. You can do nothing, and hope that Greece pays you in full and on time.
2. You can extend your maturities out to 30 years, and accept a modest coupon of 4.5%; in return, your principal will be guaranteed with an embedded zero-coupon bond from an impeccable triple-A-rated EU institution, probably the EFSF.
3. You can extend your maturities out to 30 years, take a 20% haircut, and get a higher coupon of 6.42%; again, the principal is guaranteed with zero-coupon collateral.
4. You can extend your maturities out to 15 years, take a 20% haircut, get a coupon of 5.9%, and have only a partial principal guarantee through funds held in an escrow account.

The first option is by far the most interesting. No one has come out and said that Greece is going to default on bondholders who don’t exchange their bonds; instead, there’s just a lot of arm-twisting of big banks to do all this “voluntarily.” But that won’t stop the credit rating agencies giving Greece’s bonds a default rating — this is a coercive deal, which clearly reduces the value of banks’ Greek debt. (After all, just look at those haircuts.)

Is it possible for other bondholders — those who haven’t had their arms twisted — to free-ride on the back of this deal and continue to get paid in full? I suspect that it probably is. Which is one reason why this Greek restructuring won’t be the last.

Overall, this looks like a deal which can quite easily be scaled up and used as a framework for future default/restructurings. I don’t know if that’s the intent. But there’s nothing here to reassure holders of Portuguese and Irish bonds — or even Spanish and Italian bonds, for that matter — that they’re home safe. Greece will be the first EU country to default on its debt. But I doubt it’ll be the last.