Standard & Poor's downgrades Greece, Portugal

Wed Mar30, 2011

LISBON/ATHENS (Reuters) - Standard & Poor's downgraded Greece and Portugal on Tuesday, citing risks that the countries' debts to a new European bailout fund would be repaid before bond investors, sending their borrowing costs sharply higher.

The downgrades left Portugal one notch above junk and Greece's creditworthiness below that of Egypt, deepening the debt troubles for two of the weakest countries in the euro zone.

The bonds of both countries were hit, with Portuguese 10- and 2-year yields jumping to euro lifetime highs and Greek 2-year yields rising 10 basis points to 15.46 percent.

"Our view is that this really is a game changer," S&P analyst Frank Gill told journalists, referring to the European Stability Mechanism, which European leaders agreed last week will replace the European Union's bailout fund in 2013.

"We do think it is clearly negative for holders of commercial debt, that is our view, that it will weigh on countries' capacity to serve their commercial debt," he said.

The downgrade of Portugal added to Lisbon's woes, coming after the Bank of Portugal warned on Tuesday the country may need substantial new austerity measures to ensure it can meet budget goals.

Lisbon is grappling with how to regain investor confidence following the minority government's resignation last week after the opposition rejected its austerity plan in parliament, prompting many economists to predict the country will need a bailout soon like Greece and Ireland.

"Given Portugal's weakened capital market access and its likely considerable external financing needs in the next few years, it is our view that Portugal will likely access the EFSF and thereafter the ESM," Standard & Poor's said.

European leaders agreed a new package of anti-crisis measures at a two-day summit last week but delayed an increase in the size of the euro zone's rescue fund, known as the European Financial Stability Facility. However, they sealed a deal on funding the ESM, a new, permanent safety net that will become operational in mid-2013.

Silvio Peruzzo, an economist at RBS, said S&P sees a possibility that bond holders could be at risk under the new mechanism.

"If a country defaults, the ESM, as a senior creditor, gets the money before investors and investors may take a loss," he said.

Standard & Poor's downgraded Portugal by one notch to BBB-, adding to a two-notch cut last Thursday. Still, the S&P's Gill said Portugal was still highly creditworthy and the market was exaggerating default concerns.

"The rating cut has been mostly priced in, but it's not just that. I think it's in Portugal's best interests to take a bailout soon rather than continue raising debt at much too high interest rates," said Deutsche Bank economist Gilles Moec.

The agency downgraded Greece by one notch to BB-, deeper into junk territory, and below Turkey and Egypt which are at BB.

"It is not a surprise as Greece was on negative watch," said analyst Ben May at Capital Economics. "Obviously, it is a reminder that Greece has lots of problems. We continue to think that a debt restructuring is likely."

Gill of the S&P said the new bailout mechanism was also likely to impact the rating of Ireland, which has a grade A-, three levels above Portugal.

The Athens bourse's general index fell 0.4 percent, with Greek banks among the worst performers, losing 3.66 percent, after the downgrade. Portuguese stocks fell slightly, with banks falling more than two percent.

The Greek finance ministry said S&P's downgrade was based on an erroneous evaluation of last week's EU summit decisions.

"It does not reflect the effort and success of the Greek economic policy programme or Greece's economic prospects," the ministry said in a statement.

Earlier on Tuesday, in its spring economic report, the Bank of Portugal said there were risks of the country missing budget goals this year, adding that in 2012 the pressure for more measures could be greater, depressing the economy.

"In 2012 the additional, permanent measures necessary to reach the goal promised by the authorities reach a very substantial size," the bank said.

The report forecast economic contraction of 1.4 percent this year and growth of 0.3 percent in 2012 but it said those projections did not include likely additional austerity measures and deleveraging in the economy. Last year the economy grew an estimated 1.4 percent.

Adding to Lisbon's and Athens' troubles, there were further signs pointing to an increase by the European Central Bank in its main interest rate next month from a record low as the rest of Europe's recovery gathers steam and peripheral economies suffer.

"It is highly probable that there will be a change in interest rates in April, but it is not certain," said ECB Governing Council member Jozef Makuch.

Japan overtaken by China as No. 2 economy

By David Watkins

Feb14,2011

Japan (NYSE: MCO - news) lost its 42-year ranking as the world's second-biggest economy to China in 2010, with data out Monday showing a contraction in the last quarter due to weak consumer spending and a strong yen.

While Japan was expected to fall behind a surging China in the year, the data underlined the weak state of a Japanese economy burdened by deflation, soft domestic demand and pressured by the industrialised world's biggest debt.

"It is difficult for the deflation-plagued Japanese economy to achieve self-sustained growth," said Naoki Murakami, chief economist at Monex Securities.

While China's leap forward reflects a shift in economic power as the country transforms itself from poverty-hit communist state to global heavyweight, it highlights the need for shrinking Japan to energise its economy, analysts said.

Japan's post-war "economic miracle" put it at number two behind the United States for more than four decades, but stagnation after the Japanese property bubble burst in the 1990s helped put China on course to supplant its neighbour.

However, Japan remains around 10 times richer on a per-capita basis, noted top government spokesman Yukio Edano. GDP per head in Japan is around $42,000, say economists.

Predictions vary as to when China may overtake the United States as number one economy, but it should happen by 2025, according to estimates by the World Bank, Goldman Sachs (NYSE: GS - news) and others.

Japan's real gross domestic product slipped by an annualised 1.1 percent in the October-December quarter as the expiration of auto subsidies hit car sales, a new tobacco tax sapped cigarette demand and a strong yen hurt exports.

In contrast, China grew nearly 10 percent in the same period.

While Japan's first contraction in five quarters was not as severe as forecasts of a 2.4 percent slide, the data is subject to constant revision.

The economy grew 3.9 percent in 2010, its first annual growth in three years. But this was not enough to keep it ahead of surging China.

Nominal GDP of $5.474 trillion in 2010 put Japan behind China's $5.879 trillion, the data showed. China first eclipsed Japan in the second quarter.

Despite Japan crawling out of a severe year-long recession in 2009, its recovery remains fragile with deflation, high public debt, an ageing population and a strong yen all concerns for policymakers.

Pressure is on Prime Minister Naoto Kan, who has seen his approval ratings tumble as his government looks to boost the economy without deepening the debt amid a legislative impasse over a $1.1 trillion budget for next fiscal year.

Last month Standard & Poor's cut Japan's credit rating one notch to "AA-" from "AA", saying the government lacked a "coherent strategy" to ease a debt running near 200 percent of GDP, the highest of any developed nation.

Nearly a third of government spending is being swallowed up by a social security system catering to a rapidly greying society, Standard & Poor's warned, with that ratio set to rise without reforms as Japan continues to age.

Kan's centre-left government has prioritised social security reform and a tax system overhaul, but the opposition has so far refused to begin talks on the issue.

Private consumption, accounting for about 60 percent of Japan's GDP, slid by 0.7 percent quarter-on-quarter in October-December as subsidies for green car purchases expired and as cigarette sales were dented by Japan's biggest ever tobacco tax hike.

Exports slipped in the quarter as the yen surged to 15-year highs against the dollar, making Japanese goods more expensive overseas and eroding repatriated profits.

But many analysts expect the economy to rebound in the January-March quarter as the rising tide of global recovery lifts Japan, amid a recent pick-up in corporate spending and exports.

"The contraction will not last long," said Murakami. "Companies' manufacturing activities are recovering rapidly in January-March this year from their bottom in October 2010."

The government played down Japan's slide to third biggest economy and said it would benefit from having a booming neighbour.

"We welcome, as a neighbouring nation, that China's economy is advancing rapidly," said Kaoru Yosano, minister for fiscal policy. (sourced:AFP)

Tags:Japan, biggest economy, China, economist, Monex Securities, GDP, credit rating one notch to "AA-", export data, Market analyst

Steel deal sets example for Japan Inc say analysts

By David Watkins (AFP)
Monday,14 Feb'2011

TOKYO — The proposed merger of two Japanese steel giants is a sign of an industry looking to reassert itself and an example to Japan Inc. that restructuring is crucial to take on competition, say analysts.

Japan's biggest steelmaker Nippon Steel and third-ranked rival Sumitomo Metal Industries are working towards a merger that would create the world's second-largest steel firm by 2012, behind Luxembourg-based ArcelorMittal.

The agreement is the first steel industry merger in a decade in the country, and analysts say the move sets an example to the rest of Japan Inc. as it grapples with a weak home economy, a strong yen and rising overseas rivals.

"There is a desperate need for mergers and acquisitions to stitch together Japan's diffuse corporate base," said Nicholas Smith, director of equity research with MFGlobal in Tokyo.

The Nippon Steel-Sumitomo Metal move is seen as indicative of the growing need for steelmakers to gain leverage as prices for coal, iron ore and other raw materials of steel touch record levels.

"Increased scale will make them stronger in negotiating with raw material suppliers -- the rapid run-up in material prices had really hammered profitability," said Smith.

"The merger will give Nippon Steel the scale to consider acquisitions of raw material suppliers, like the Chinese steelmakers have done," he said, noting Chinese crude steel production has more than quadrupled in the last 10 years.

The deal also serves as an example to the rest of corporate Japan.

Many see consolidation in Japan's corporate space as essential to taking on overseas competition, with too many companies making the same products compared with the likes of South Korea and industrial champions such as Samsung.

"Often in comparison with South Korea, Japan is said to have too many players in such markets as autos and electrical machinery," added Hideyuki Araki, economist at Resona Research Institute.

"They vie for the same pie and can be worn out in domestic competition. There is no doubt that a single company that has a strong grip on the industry can better compete in international markets," he said.

Sony partly blamed a fall in third quarter profit on falling TV prices amid heavy competition in a sector where it is up against compatriots such as Toshiba, Panasonic and Sharp.

"Japanese companies are forced to cut prices and have only slim margins amid too much competition," said Hiroshi Watanabe, economist at Daiwa Institute of Research.

The Japanese government has recognised the need for consolidation and is promoting M&As because it sees the need for more reorganisation in a wide range of domestic industries, including materials and electrical machinery.

Tokyo is looking to encourage more mergers and acquisitions by simplifying the tender offer process, speeding up anti-monopoly vetting of merger plans and providing loans for deals, Japanese media reports said this week.

The number of mergers and acquisitions by Japanese firms tumbled 13 percent on-year to 1,707 in 2010, slipping far below a recent peak of 2,775 in 2006, according to M&A advisory firm Recof Corp, the Nikkei business daily reported.

But merger efforts have met with failure in the past year, with executives on both sides unable to iron out integration problems.

Shinsei Bank and Aozora Bank last year scrapped a merger plan because they could not agree on a business strategy.

Japanese drink giants Kirin Holding Co. and Suntory Holdings Ltd. last year abandoned ambitious plans to merge and create one of the world's biggest brewers, unable to overcome differences over who would own and manage the future company.

However, on Thursday drinks maker Sapporo announced it would boost its stake in soft drink firm Pokka, the latest in a series of deals in a shrinking market where players are searching for growth.

While it is important to expand scale in the way Nippon Steel and Sumitomo Metal plan to as they seek more control over prices, a balance needs to be struck to retain enough domestic competition to drive innovation, analysts say.

In particular, Japan must not risk ceding its advantage in high-end products where it still has a commanding share, analysts say. Its steel is seen a symbol of its manufacturing expertise.

Toyota buys nearly 60 percent of its sheet steel for auto bodies from Nippon Steel and Sumitomo, analysts say, and Mazda and Honda buy around 70 percent.

On the other hand, "anybody can make construction steel, and a dizzying array of companies do," said Smith.

(sourced:AFP)