Business Week

Monday, October 31

France, Belgium, Luxembourg agree on Dexia plan

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BRUSSELS — The governments of France, Belgium and Luxembourg said Sunday they have approved a plan for the future of embattled bank Dexia after shares tanked last week amid fears it could go bankrupt.

In a three-sentence statement issued by the Belgian prime minister's office, they said they support a proposal by the bank's management that will be submitted to its board of directors, but offered few details. The board was holding a crisis meeting late Sunday in Brussels amid reports that the bank might be split up.

A spokesman said a bank officials would hold a news conference Sunday evening or Monday morning.

Late Sunday, the Belgian newspaper Le Soir, citing no sources, reported on its website that the Belgian government had agreed to buy Dexia Bank Belgium from Dexia SA, the French-Belgian banking group, for €4 billion ($5.37 billion). The Belgian government would be the sole shareholder, the newspaper reported.

Asked about the report, Dominique Dehaene, a spokesman for the Belgian prime minister, declined comment. Dehaene confirmed that government officials planned to hold a meeting late Sunday after the conclusion of the meeting of the bank's board of directors.

Finding a solution is particularly urgent for Belgium because on Friday Moody's Investors Service placed the country's Aa1 rating on review for possible downgrade, due in part to the expected expense of guaranteeing that Dexia's depositors will lose no money.

The French government, too, is under acute pressure to save Dexia as the bank is one of the country's largest lenders to towns and cities.

The government statement, while giving no details, said the "suggested solution" had been "the result of intense consultations with all partners involved" — which would include the three countries. France and Belgium became part owners of the bank during a €6 billion ($7.8 billion) 2008 bailout. They have promised to ensure that no Dexia depositors lose money. Luxembourg holds a smaller stake.

The terse government statement followed a meeting in Brussels attended by Belgium's caretaker prime minister, Yves Leterme, French Prime Minister Francois Fillon, and Luxembourg Finance Minister Luc Frieden.

Asked whether a resolution would be achieved Sunday, Leterme replied, "It will depend on the board," the Belgian newspaper La Capitale reported on its website. Leterme's spokesman could not be reached Sunday evening.

After Dexia's shares plunged last week, the French and Belgian governments stepped in and guaranteed its financing and deposits. The bank said in a statement Friday that trading in its shares would remain frozen until it could "communicate more precisely on the various choices and options concerning the future of the group."

The bank has significant exposure to Greek debt, and there are fears Greece may default in some fashion. French and Belgian governments have said in recent days that they would step in and guarantee the bank's financing and deposits.

There was speculation last week that one way forward would be to break up the bank and isolate Dexia's toxic assets — totaling €100 billion ($132 billion) — in a "bad bank" while its healthy parts would be sold individually.

Speaking on Belgium's VRT network, Leterme did not want to use the label "bad bank" to describe where the toxic assets may be parked, and voiced his hope that in the long-term they could earn "good money."

If the bank were to break up, it would be the first such casualty of the euro crisis, which has bedeviled European Union officials for nearly two years.

However, there was no confirmation Sunday from either government or bank officials that breaking up the bank was part of the proposed solution.

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Don Melvin can be reached at http://twitter.com/Don_Melvin.

'This has destroyed us': Protests cripple Greece

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ATHENS, Greece — With no warning, a few dozen students blocked a major avenue in central Athens, marching slowly up the middle of the street to make sure motorists couldn't get through. Tempers frayed, horns honked.

A driver revved his engine, swerved suddenly and charged up the sidewalk, narrowly missing a woman who jumped out of the way in alarm.

The scene during a student demonstration this week reflected the increasing irritation and despair felt by many Greeks, weighed down by a financial crisis that has led to repeated strikes and demonstrations as the government desperately tries to avoid a default.

"It's a catastrophe. This has destroyed us," said Nikos Trovas, who runs a parking garage just off Syntagma, the large square outside Parliament that has become the focus of protests. "The roads shut every day. So we just sit around here with the employees, looking at each other with no work to do."

It is a curse for those who live or commute to the center of the Greek capital, once a vibrant showcase of what many hoped was a dawn of economic prosperity.

As the chanted slogans faded and the last shreds of stinging tear gas wafted away Wednesday after a demonstration during a civil servants' strike, business owners took stock of the damage to their operations — and wondered how much longer they could keep going.

'Long-term' consequences
Trovas said his monthly turnover was down 40 percent compared to last year — when the financial crisis had already begun to bite in Greece. The main problem, he said, was that demonstrations were often marred by clashes between rock-throwing youths and riot police.

"The consequences are long term. When people see the violence they're afraid to come into the city center with their cars," he said.

The Greeks whose livelihoods lie downtown don't know who to blame: the government, which says there is no option but to cut spending and raise taxes to secure international loans, or the protesters, who can't stand their leaders.

Stores and coffee shops hastily roll down steel shutters — installed over the last few years after repeated riots saw storefronts smashed again and again — for every large demonstration.

"You lose euro1,000 ($1,300) a day on a strike or demonstration day. We soldier on without hope," said Constantinos, opening the doors of his coffee shop just off Syntagma Square after the main demonstration. He asked that his surname not be used out of concern that his cafe could be targeted.

And it's not just motorists who are avoiding the center. In the popular shopping district behind Syntagma, more and more shops now stand vacant, "to let" signs plastered across their windows.

"For 200 days out of 365, we can't work," said clothes shop owner Georgia Brezati, whose store stands near the popular tourist area of Plaka. "The center shuts down all the time, and nobody's doing anything about it. I can't be taxed for 365 days a year but only work for 100."

'Neighborhood of devils'
As shops and restaurants stand vacant, Brezati said she has seen a steady decline in the area she has worked in for the past 30 years.

"There's terrible insecurity. And we have a huge problem near Syntagma now. A place that used to be known as the 'neighborhood of angels' has turned into the 'neighborhood of devils," she said, noting the general decline of the area, with petty criminals, beggars, homeless people and drug addicts increasingly apparent as businesses shut down.

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Customers are scarce. Brezati sat at a table outside her shop slowly sipping a small coffee as passers-by glanced at the leather jackets and fur coats in her storefront, but didn't stop in.

"Our clients don't come to buy any more," she said. "They come to sell their furs and leather coats, because they need the money to pay their electricity and water bills."

Since May 2010, Greece has been dependent on a euro110 billion ($146 billion) international bailout from other eurozone countries and the International Monetary Fund to remain solvent and the government has struggled to meet the conditions of the rescue funds.

Several rounds of spending cuts and tax hikes have cut deep into the incomes of average Greeks as the country struggles through its third year of recession, with the economy projected to contract 5.5 percent of gross domestic product this year.

Unemployment has spiraled to above 16 percent, with the young most severely affected.

European leaders agreed in July on a second euro109 billion ($145 billion) bailout as it became increasingly clear that the measures weren't working as well as had been expected.

But now the Socialist government and international creditors are disputing the details of that bailout.

And each quarterly review of the country's reforms — required for Greece to get the next installment of bailout loans — invariably comes with yet more austerity measures. Many blame the government for failing to tackle the problems effectively.

"This government doesn't work," said Brezati. "It's like they sold us a fur and we found out it was a fake."

Tributes to Jobs pour in from around the world

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From the titans of high technology to teenagers armed with iPads, millions of people around the world mourned digital-gadget genius Steve Jobs as a man whose wizardry transformed their lives in big ways and small.

Computer fans in China, one of Apple's fastest growing markets, seemed particularly moved.

"I came here to see how they'll operate on the first day after they had lost Steve Jobs," Jin Yi said in China's biggest Apple store in Shanghai, which opened last month.

"I also came here to mourn in my own way. It is such a pity today. He created these gadgets that changed people's perceptions of machines," the 27-year-old said. "But he did not manage to witness the last step in which, through his gadgets, people's lives can be effectively fused with these machines." Apple co-founder Steve Jobs dies at 56 The Jobs legacy: Ease, elegance in technology Apple co-founder reacts to Jobs’ death The Internet mourns, celebrates Steve Jobs What Steve Jobs taught us about failure Jobs on biography: ‘I wanted my kids to know me’ How will you remember Steve Jobs? 'Be like Steve'
Henry Men Youngfan said he was shocked by the news that his hero had died, remembering how he felt when he entered graduate school at Peking University's college of engineering.

"My teachers asked me what kind of person I wanted to be and I told them I wanted to be like Steve," Men said in Beijing.

Related: Apple-cofounder Steve Jobs dies at 56

Li Zilong, who was listening to his iPod in front of a Beijing Apple store, worried that Apple's innovation may have died along with its co-founder.

"Jobs was a legendary figure; every company needs a spiritual leader," said the 20-year-old university student. "Without Jobs, I don't know if Apple can give us more classic products, like the iPhone 4."

PhotoBlog: Pictures of worldwide tributes to Steve Jobs

In other parts of Asia, fans for whom the Apple brand became a near-religion grasped for comparisons to history's great innovators, as well as its celebrities, to honor the man they credit with putting 1,000 songs and the Internet in their pockets.

The Internet mourns, celebrates Steve Jobs

In Hong Kong, Charanchee Chiu laid a single sunflower and white rose in front of the city center Apple store.

"I am sad. I think he should have lived longer," he said, acknowledging that he had sent messages to Jobs to advise him on health and Tai Chi, the Chinese form of martial arts reputed to improve practitioners' well-being.

Amalia Sari in Jakarta, Indonesia, said when her mother was diagnosed with terminal cancer just over a year ago, she decided to go on a monthlong pilgrimage to Mecca, Saudi Arabia. She bought an iPad for her mom to look at photos sent home and to keep in touch via Apple video conference.

"Without Steve Jobs and his crazy inventions, that kind of thing would never have been possible," she said, adding that after getting the first tweet about Job's death she logged off because she couldn't bear to hear more about it.

"I was really sobbing. It is great loss for me, and for the world as well," she said.

Chinese Apple fans say farewell to 'Master Jobs'

Stephen Jarjoura, 43, said at the flagship Apple store in Australia's biggest city, Sydney, that Jobs' legacy would surpass that of even Albert Einstein and Thomas Edison.

"I was so saddened. For me it was like Michael Jackson or Princess Diana — that magnitude," he said.

Australia's Prime Minister Julia Gillard said Jobs had affected many around the world.

"All of us would be touched every day by products that he was the creative genius behind, so this is very sad news and my condolences go to his family and friends," she said, according to the BBC.

Shares plunge
Apples shares on the stock exchange in Frankfurt, Germany, took a hit after after the news was announced.

At 2:16 a.m. ET, the company's shares listed on the Frankfurt stock exchange were 3.3 percent lower.

The death of the man behind iconic products that define his generation — iPod, the iPhone, the iPad — overshadowed concerns about the European economic crisis, at least momentarily, market insiders said.

"This news shrouds even the ongoing discussions on the financial crisis, at least for today," said Roger Peeters, board member at Close Brothers Seydler.

Corporate giants that have all been bruised in dustups with Apple put their rivalries aside to remember Jobs.

Few companies felt Apple's rise more than Japan's Sony, whose iconic Walkman transformed the music listening experience in the 1980s but which proved no match for Apple's iPod after it launched in 2001.

"The digital age has lost its leading light, but Steve's innovation and creativity will inspire dreamers and thinkers for generations," Sony Corp. President and Chief Executive Howard Stringer said in a statement.

Competing companies that watched as Apple's sales — and its stock price — took off over the past decade posted messages of admiration.

Samsung is calling rival Steve Jobs an "innovative spirit" who will be remembered forever.

Samsung Electronics CEO G.S. Choi said Thursday that Jobs "introduced numerous revolutionary changes to the information technology industry."

The announcement of Jobs' death came a day after Samsung said it would file court injunctions in France and Italy seeking to block the sale of Apple's latest iPhone.

The smartphone giants are locked in an intensifying patent fight.

Choi says Jobs' "innovative spirit and remarkable accomplishments will forever be remembered by people around the world."

The companies have been at odds since April when Apple took legal actions claiming Samsung's Galaxy line of smartphones and tablet computers copy the iPhone and iPad.

"I wouldn't be able to run my business without Apple, without its software," said David Chiverton, who was leaving Apple's flagship Regent Street store in London. "I run a video production company. It's allowed me to have my dream business."

News Corp CEO Rupert Murdoch said, "Steve Jobs was simply the greatest CEO of his generation."

At an Apple store in Sydney, lawyer George Raptis, who was five years old when he first used a Macintosh computer, spoke for almost everyone who has come into contact with Apple. "He's changed the face of computing," he said. "There will only ever be one Steve Jobs."

ECB opens cash taps to avoid new credit crunch

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BERLIN — The European Central Bank is opening its money taps wide to prop up an increasingly shaky banking sector and keep the region's debt crisis from spawning the type of credit crunch that plunged the global economy into recession two years ago.

In the move announced Thursday, the top monetary authority for the 17 euro nations offered to flood banks with any amount of one-year loans through 2013. The hope is that will shield them from malfunctioning credit markets, in which banks are becoming too worried to lend to each other, and keep loans flowing to businesses and households.

But outgoing ECB President Jean-Claude Trichet resisted calls for an interest rate cut to spur growth despite fears that the eurozone economy is sinking toward a renewed recession. The bank's main mandate is fighting inflation, which can be worsened by rate cuts.

The ECB's caution over inflation contrasted with a move by the Bank of England, which reopened a securities purchase program that essentially prints new money to boost Britain's stagnant economy — despite an inflation rate of 4.5 percent.

Trichet, holding his last news conference before retiring at month's end, did not even indicate that a rate cut was possible at the next month's meeting, as many economists expected because of signs the eurozone economy is grinding to a halt.

"The economic outlook remains subject to particularly high uncertainty and intensified downside risks," Trichet said, adding however that "interest rates remain low" and inflation will likely remain well above target for months.

Analysts said that a rate cut was probably postponed, not canceled, and that Trichet may simply have been leaving successor Mario Draghi maximum room to maneuver.

"Falling leading indicators suggest that the ECB will lower its expectations for economic activity considerably," said economist Joerg Kraemer at Commerzbank. "The ECB will presumably cut its key rate towards year-end and again next spring."

That would bring the benchmark refinance rate to 1.0 percent from its current 1.5 percent.

Instead of cutting rates, Trichet focused on emergency credit measures to keep the financial system working properly.

Many European banks are exposed to losses on government debt from Greece and other countries with shaky finances. That has made borrowing between banks, crucial for their daily functioning, increasingly difficult because of fears the money might not be repaid.

Those jitters have intensified in recent weeks and threaten to claim their first victim since the 2007-2009 financial crisis, Franco-Belgian bank Dexia. Dexia was already bailed out in the earlier phase of the crisis and now is struggling again to raise funding.

To help, the ECB will offer an unlimited amount of 12-month and 13-month loans to banks. That will provide them financing for a longer period — into 2013 in the case of the 13-month offering — and shield them from turbulence in borrowing markets.

The ECB will also keep offering unlimited amounts of shorter-term loans, with maturities of up to 3 months, through the first half of next year and buy up to €40 billion ($53 billion) in covered bonds, a type of security used by banks to raise funding.

Trichet said that the 23-member rate-setting council made its interest rate decision by consensus, not by unanimity, suggesting there were voices calling for a cut — voices that might gain the majority in coming weeks if signs of a downturn increase.

The eurozone economy grew only 0.2 percent in the second quarter. Business and consumer optimism is suffering due to the financial market turmoil over fears that some governments have too much debt and might not pay it all back.

Trichet, who will be succeed by Bank of Italy head Draghi at the end of the month, leaves office with his typical stance — as a strict inflation fighter. Under his tenure the ECB resisted widespread calls to lower rates in 2004 and to not increase them in 2005, calls it ignored.

Lower rates can mean a short-term boost to growth and jobs. But rates that are too low can cause inflation over the longer term and undermine the value of the currency.

The ECB's main role under the EU treaty is defending against inflation, which unexpectedly spiked to 3.0 percent in the eurozone in September from 2.5 percent the month before. The ECB expects inflation to fall below 2 percent by next year.

It was that role that Trichet focused on as he reminisced briefly about his eight years in office, pointing to both the bank's record at keeping inflation close to its goal of just under 2 percent over the nearly 13 years of its existence, and at keeping inflation expectations in line with that.

"Have we delivered price stability? Yes, we have delivered price stability," he said. "Are we credible in delivering price stability over the next 10 years? Yes. These are not words, these are deeds."

"On top of that we have to cope with the worst crisis since World War II," he said.

Chinese company interested in buying Yahoo

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NEW YORK — The CEO of the Chinese Internet company Alibaba Group Holding Ltd. says he would be "very interested" in buying Yahoo Inc.

Jack Ma made the statement in response to a question during a speaking engagement at Stanford University on Friday, said John Spelich, a spokesman for Alibaba. Ma also told the audience that prospective buyers had approached Alibaba to discuss a possible purchase for Yahoo, Spelich said late Saturday. The spokesman did not identify the prospective buyers.

Yahoo is trying to decide whether to sell part or all of itself following the firing last month of Carol Bartz as CEO. Employees were told in an e-mail in late September that the process could take several months. In the meantime, there will be much speculation about who might be interested in the company.

Dana Lengkeek, a Yahoo spokeswoman, said the company had no comment on Ma's remarks.

Yahoo owns about 40 percent of Alibaba.

Bartz was fired because she was unable to boost Yahoo's advertising revenue and make the company more competitive with Google Inc. and Facebook. Yahoo's net revenue — the amount the company keeps after paying advertising commissions— fell 5 percent in the second quarter. Google's revenue soared 36 percent.

The company is also searching for a new CEO while also considering whether to sell itself. Chief Financial Officer Tim Morse is serving as interim CEO while the search for a successor to Bartz continues.

Currency spat: China threatens trade war with US

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BEIJING — China warned Washington it is adamantly opposed to a proposed U.S. bill aimed at forcing Beijing to let its currency rise, saying its passage could lead to a trade war between the world's top two economies.

In a coordinated response, the Chinese central bank and the ministries of commerce and foreign affairs accused Washington of "politicizing" global currency issues.

The bill to be debated in the United States this week violates World Trade Organization rules and forcing the yuan to appreciate would weaken joint efforts to revive the global economy, the foreign ministry said.

"By using the excuse of a so-called 'currency imbalance', this will escalate the exchange rate issue, adopting a protectionist measure that gravely violates WTO rules and seriously upsets Sino-U.S. trade and economic relations," foreign ministry spokesman Ma Zhaoxu said in a statement posted on China's official government website on Tuesday. "China expresses its adamant opposition to this."

U.S. senators voted on Monday to open a week of debate on the Currency Exchange Rate Oversight Reform Act of 2011, which would allow the U.S. government to slap countervailing duties on products from countries found to be subsidizing their exports by undervaluing their currencies.

U.S. lawmakers, eyeing 2012 elections, said the undervaluing of China's currency had cost American jobs and that a fairer exchange rate would help cut an annual trade gap of $250 billion.

A top U.S. official said Tuesday the Obama administration has begun discussions with the Senate about whether a bill aimed at forcing China to let its currency rise is "the right approach."

Acting U.S. Commerce Secretary Rebecca Blank told CNBC that the best solution to what American officials view as an undervalued Chinese currency remains "an open question."

"The administration is talking with people in the Senate about whether this bill is the right approach or whether there are other approaches to take," she said. "Those conversations are under way."

Supporters of the bill say that the value of the yuan is still as much as 40 percent below what it should be, keeping the prices of Chinese goods artificially low and U.S. products excessively high. They say that's a major factor in a trade deficit with China that hit $273 billion last year.

Gradual reform
Ma urged U.S. legislators to "proceed from the broader picture of Sino-U.S. trade and economic cooperation" and "forsake protectionism."

He repeated Beijing's position that it will continue to gradually reform its currency policy, "strengthening the flexibility of the renminbi exchange rate."

Monday's vote bolsters prospects for the bill to clear the Senate later this week, but prospects for action in the House of Representatives are murky.

If the bill did clear both chambers, it would present President Barack Obama with a tough decision on whether to sign the popular legislation into law and risk a trade war with Beijing, or veto it to pursue a more diplomatic approach.

"My colleagues, both Democrats and Republicans, agree that China's deliberate actions to devalue its currency give its goods an unfair competitive advantage in the marketplace," said Senate Majority Leader Harry Reid.

The legislation "will even the playing field and help American goods compete in a global market — and keep American jobs here at home," he said.

China has routinely denied claims that its policies are responsible for trade imbalances and a high rate of unemployment in the United States, saying that structural problems were to blame.

"It is widely understand that the renminbi exchange rate is not the cause of China-U.S. trade imbalances," Ma said.

China's central bank said in a statement that the bill failed to address the underlying issues in the U.S. economy.

"The yuan bill passed by the U.S. senate will not solve its problems, such as insufficient savings, high trade deficit and high unemployment rate, but it may seriously affect the whole progress of China's reform of its yuan exchange rate regime and may also lead to a trade war which we would not like to see."

'Unfair'
China's currency has appreciated 7 percent since June 2010, when the central bank decided to adopt a more flexible exchange rate, said foreign minister spokesman Ma, adding that Beijing would continue "proactive" and "gradual" reform.

The central bank added that Chinese inflation had already pushed the real yuan exchange rate further "toward the equilibrium."

Ministry of Commerce spokesman Shen Danyang said the United States was trying to pass on the blame for its own failings.

"Trying to turn domestic disputes onto another country is both unfair and in violation of standard international rules, and China expresses its concern," he said in a statement issued on the ministry's website.

Shen said any move by the United States to force the yuan to appreciate would undermine joint efforts to revive global economic growth, which took another blow on Monday with data showing that global manufacturing shrank in September for the first time in over two years.

"It will weaken China-U.S. efforts to join hands and together promote global economic recovery," he said. "The global economic is in a complex, sensitive and changeable period, and so even more needs a stable international monetary environment."

U.S. critics of China's currency policy have gained some traction as a weak economy keeps U.S. unemployment stuck above 9 percent and as 2012 presidential elections draw near.

Sen. Chuck Schumer, D-N.Y., who has been sponsoring currency legislation for the past six years, said China's "predatory currency practices" were "undermining the economic health of American manufacturers and their ability to compete at home and around the globe."

It's time, said Sen. Bob Casey, D-Pa., to "let the officials in China know that there are consequences to cheating."

Passage of the bill by the Democratic-controlled Senate would send it to the House, which is run by traditionally free-trade-friendly Republicans.

House expected to pass bill
A China currency bill passed the House last year with 99 Republican votes, but lapsed because the Senate took no action. This year, the bill already has more than 200 House co-sponsors and this week supporters expect to reach 218, the number needed to pass it.

However, House Republican leaders have not shown a great appetite to pursue currency legislation, and it is unclear if the bill would ever face a vote in that chamber.

As with similar legislation in the past, the Obama administration has not taken a public stance on the bill, although White House spokesman Jay Carney said on Monday that the president shares "the goal it represents."

U.S. critics of the bill also warned of the risk of a trade war with China — one of the fastest-growing markets for U.S. goods — just when a weak global economy can least afford it.

The Emergency Committee for American Trade called the bill "a highly damaging unilateral approach that will undermine broader efforts to address China's currency undervaluation."

It also said the bill was unlikely to pass muster at the World Trade Organization and would open the door to Chinese retaliation "to the detriment of U.S. exports and jobs."

The Senate decision was a sign that China was being made a scapegoat by struggling western economies, said Wang Jun, a researcher at the China Center for International Economic Exchanges.

"Maybe the United States will not be the only and last country to do so. With the worsening of the European sovereign debt crisis, we must also be on high alert that euro zone countries could also press China on the exchange rate issue. We need to launch some pre-emptive measures to hit back against any more attacks," Wang said.

Reuters and The Associated Pres contributed to this report.

European bank Dexia teeters at the brink

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As France and Belgium fight to prevent European bank Dexia from going under, could the institution’s troubles herald the beginning of a new and more calamitous phase for Europe’s debt crisis?

The two countries promised Tuesday to insure the bank’s deposits after its stock price was brutalized amid investors’ concerns about its exposure to potentially bad debt from Europe’s most debt-laden economies. Shares of the Franco-Belgian bank were down some 40 percent at one point Tuesday.

Many in Europe expect a Greek debt default to happen soon. The greater concern for market participants is what bonds European banks are holding. Fears that banks could face large losses on their holdings of euro zone sovereign debt have made financial institutions in Europe reluctant to lend to one another and have led other creditors to limit their exposure to Europe. The situation, coupled with a regional economic slowdown, threatens to morph into a full-blown banking crisis. The fear is that more banks like Dexia are yet to be exposed.

There’s a worrying parallel here too. The Financial Times points out Tuesday that, like U.S. bank Bear Stearns, which heralded the financial crisis of 2008, Dexia “may be sending a warning that we should be more worried.” Columnist James Mackintosh notes that Bear, destroyed over fears of its unsellable toxic subprime mortgage investments, was “an ex-canary on the dirty coalface of Wall Street.” Dexia may be taken down by its unsellable toxic subprime sovereign debt, particularly from Greece, and herald a more severe financial crisis in Europe.

Europe's economic medicine is killing the patient

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Riot policemen try to avoid an exploding petrol bomb thrown by protesters during a demonstration in Athens' Syntagma (Constitution) square October 5, 2011. Police fired tear gas at stone-throwing youths in central Athens, where thousands of striking state sector workers marched against cuts the government says are needed to save the nation from bankruptcy.

By John W. Schoen, Senior Producer

The medicine being used to cure the financial contagion spreading throughout Europe is killing the patient.

For nearly two years, the richer countries of the region have pressed harder for spending cuts and tax hikes from poorer countries like Greece, already struggling under a crushing debt accumulated when the global economy was booming.

Those measures have sent the entire euro zone sliding into recession, pushing Greece’s neighbors closer to default and European banks that are holding that shaky debt closer to insolvency.

Now, after years of debate and multiple failed efforts, the downward spiral may be impossible to break. By not acting quickly, Europe may have missed its chance to cure the disease, according to Mohamed A. El-Erian, CEO of PIMCO, one of the world's largest bond funds.

“You have an infection,” he said. “You leave it alone. You don't treat it. You diagnose it badly. Guess what? Even the strongest parts of the body will get infected. That's what's happening in Europe today.”

Since July, European Union leaders have been working out details of a broad plan to force tax increases and budget cuts on Greece in return for the latest $11 billion payment that would head off the country defaulting on its debt. Without that aid, Athens is expected to run out of cash in a few weeks.

Greek officials said this week that they would not meet the targets imposed as part of the deal, throwing the entire bailout plan into doubt. While its European benefactors argue that Greece simply needs to try harder, austerity measures already have sent the country’s economy into a deep recession.

“The capacity of the Greek people to pay taxes is really, believe me, exhausted,” said Petros Doukas, a former Greek deputy finance minister. “People like myself are paying taxes out of our savings and by selling our assets. We’re not paying taxes by generating new income, unfortunately. And that’s a very, very dire development.”

Government spending in Greece now accounts for roughly 40 cents of every dollar of gross domestic product. That means that every fresh round of spending cuts pushes Greece deeper into recession, further sapping its capacity to repay its debt.

As a result, the disease is now spreading to the continent’s banks, which hold large chunks of European government debt on their books. As the threat of default rises, the value of those bonds falls. For a time, it appeared that Greece was the only country in trouble. But on Monday, credit rating agency Moody’s downgraded debt issued by Italy, the region’s third largest economy.

For over a year, European bank regulators have assured the financial markets that the banking system there was strong enough to withstand the spreading contagion. In the past few months, though, it’s become clear that Europe's bailout fund, cobbled together last year, is nowhere near large enough to backstop debt defaults and bank failures beyond Greece.

“From Day One, people knew this program would not deliver outcomes,” said El-Erian. “This was not about Greece. This was about keeping Greece somewhat stable in order to strengthen the fire walls.”

Now, those firewalls appear to have failed. On Tuesday, France and Belgium moved to bail out Dexia, Europe’s 20th-largest bank by assets. The bank was teetering on the brink of insolvency.

Other European banks are also having trouble raising cash from investors, who worry that they may be the next to go belly up. They have reason for concern. On Wednesday, officials at the International Monetary Fund, a major player in the Greek bailout, repeated warnings that European banks don’t have enough capital to survive a credit squeeze. To compound that problem, European bank regulators this week suggested that bankers may need to take a bigger “haircut” on their debt holdings as the risk of bond default rises.

A year ago, raising capital by selling more stock would have been a relatively easy proposition. But in just the last eight months, European bank stocks have lost 40 percent of their value. Today, investors are much less willing to provide capital — in part because European bank financial statements are much more opaque than their American counterparts.

“At least with Morgan Stanley and Bank of America you can look at the balance sheet, look at the numbers, and have some sense that you know what you're looking at,” said Mark Grant, a managing director at Southwest Securities. “The problem with the European banks is you have no idea what you're looking at. They categorize things. They put things in drawers. They tell you, ‘Here’s the drawer’ and you have no idea what's in it.”

Sharing an update on the European protestors outside the Greek Capital today, with CNBC's Steve Sedgwick. Also, CNBC's Simon Hobbs, Michelle Caruso-Cabrera weigh in on whether a resolution to the European economic crisis is in sight.

Moody's cuts Italy credit rating three notches

12:23 PM Credit, Italy, Moodys, notches, rating, three No Comments

NEW YORK/ROME — Moody's Investors Service cut Italy's bond ratings by three notches on Tuesday, saying it saw a "material increase" in funding risks for euro zone countries with high levels of debt.

Moody's downgraded Italy's ratings to A2 from Aa2, a lower rating than that of Estonia, and kept a negative outlook on the rating, a sign that further downgrades are possible within the next few years.

The move comes after Standard and Poor's cut its rating on Italy to A/A-1 from A+/A-1+ on September 19 and underlines growing investor uncertainty about the euro zone's third largest economy, which is now firmly at the center of the debt crisis.

"The negative outlook reflects ongoing economic and financial risks in Italy and in the euro area," Moody's said in a statement.

"The uncertain market environment and the risk of further deterioration in investor sentiment could constrain the country's access to the public debt markets," it said.

Moody's also said that Italy's rating could "transition to substantially lower rating levels" if there were long-term uncertainty over the availability of external sources of liquidity support.

Italy's mix of chronically low growth, a huge public debt amounting to 120 percent of gross domestic product and a struggling government coalition has caused mounting alarm in financial markets.

The Moody's decision came as little surprise after the agency said on September 17 that it would finish a review for possible downgrade of its rating on Italy within a month.

"It's not that it was unexpected, but it doesn't help the situation at all," said Robbert Van Batenburg, Head of Equity Research, at Louis Capital in New York.

"They have already traded as if there was somewhat of a downgrade in the works, so it will probably force Italian policymakers to embark on more austerity programs. It will put another fiscal straitjacket on them," he said.

Moody's said the likelihood of a default by Italy was "remote," but the overall shift in sentiment on the euro area funding market implied a greater vulnerability to a loss of market access at affordable interest rates.

Italy's borrowing costs have soared over the past three months and have only been kept under control by the European Central Bank's purchase of its government bonds on secondary markets.

An auction of long-term bonds last month saw yields on 10 year BTPs rise to 5.86 percent, their highest level since the introduction of the euro more than a decade ago.

The center-right government of Prime Minister Silvio Berlusconi has been under heavy pressure over its handling of the escalating crisis and recently cut its growth forecasts through 2013.

It is now expecting the economy to expand by just 0.6 percent next year, down from a previous projection of 1.3 percent.

The government last month pushed through a 60 billion euro austerity package -- bringing forward by one year to 2013 a goal to balance its budget — in return for support for its battered government bonds from the ECB.

Greece to miss deficit target imposed by lenders

2:22 PM deficit, Greece, imposed, lenders, target No Comments

ATHENS, Greece — Greece won't meet 2011-2012 deficit targets imposed by international lenders as part of the country's bailout, the Finance Ministry said Sunday.

The country's deficit this year is expected to reach 8.5 percent of gross domestic product, or €18.69 billion ($25.2 billion) — higher than the targeted €17.1 billion ($23.1 billion), which would have been 7.8 percent of GDP, the ministry said.

Greece has been reliant since May 2010 on regular payouts of loans from a €110 billion ($150 billion) bailout from other eurozone countries and the International Monetary Fund. It was granted a second €109 billion package in July, but details of that deal remain to be worked out.

The Finance Ministry said the missed target was because of a deeper-than-expected recession, with the economy contracting by 5.5 percent instead of the 3.8 percent estimate made in May. It implied the deficit could even exceed this level by the end of the year unless all new austerity measures were implemented.

"The final estimate for a deficit equal to 8.5 percent of GDP can be achieved, if there is a proper response by the state authorities and the citizens themselves, on whose stance the country's financial ... and social future depends," the announcement said.

Story: Stocks get brief US relief but Greece fears linger

The announcement reflects the government's frustration with tax collection, which they blame on tax inspectors' lax performance, and its fear that citizens, angry at seeing their wages shrink and, at the same time, having to pay an increasing amount of one-off taxes, would refuse to pay.

There are already widespread calls not to pay a property surcharge, to be included in the next batch of state electricity company bills, despite the fact that delinquent payers are threatened with having their houses disconnected from the grid. The government hopes that revenue from the property levy will raise about €2 billion ($2.7 billion) in 2011 and a similar amount in 2012.

The 2012 budget is projected to reduce the deficit to €14.68 billion ($19.82 billion), or 6.8 percent of GDP, up from the 6.5 percent target agreed with Greece's lenders. Excluding serving Greece's debt, the budget is projected to have a primary surplus of €3.2 billion, or 1.5 percent of GDP, meaning that Greece's debt will stop growing, as a percentage of GDP.

The Cabinet also decided up to 28,000 public sector employees will be placed on "reserve" — that is, suspended with reduced pay, by the end of 2011.

The program falls short of the 30,000 reduction demanded by Greece's creditors and, with few exceptions, it is actually an early retirement program on full pensions. Those affected will be paid a fraction of their actual salary for a period of one to two years, but will be able, at the same time, to hold jobs in the private sector, if they can find them.

"The approved proposal is the result of lengthy and difficult negotiations with (the lenders) who insisted that placing employees on reserve should have been a step towards firing them and not an early retirement" program, government spokesman Elias Mossialos said.

The government expects savings of €300 million from the plan in 2012.

The cabinet committed itself to reducing civil service jobs by 150,000 within four years.

Samsung seeks Dutch iPhone, iPad sale ban

4:14 PM Dutch, iPhone, Samsung, seeks No Comments

THE HAGUE, Netherlands — Samsung asked a Dutch court Monday to slap an injunction on Apple Inc. to prevent it from selling iPhones and iPad tablets in the Netherlands, saying Apple does not have licenses to use 3G mobile technology in the devices.

The legal battle is the latest round in a series of claims and counterclaims of patent breaches by the rival technology heavyweights playing out in courtrooms around the world.

Samsung Electronics Co. lawyer Bas Berghuis told a civil judge at The Hague District Court that Apple "never bothered to ask about licenses" before it started selling 3G-enabled iPhones.

Apple lawyer Rutger Kleemans hit back by accusing Samsung of using the patent dispute to "hold Apple hostage" because of Apple's legal battles accusing Samsung of copying its iPhone and iPad designs.

"It's a holdup," Kleemans said. "Because Apple dared to take action against Samsung's copycat tactics."

Kleemans urged the court to reject the injunction request, saying the patents involved "are not designed to be used as a weapon against Apple."

No date was immediately given for a ruling.

Living in poverty Cartoons: Poverty is no laughing matter, but these cartoons may help ease the pain. Extreme couponing sparks backlash Maybe we should be working longer The economic toll of single parenthood USPS needs to act more like a business

Earlier this month, a court in Duesseldorf, Germany, ruled that Samsung cannot sell its Galaxy Tab 10.1 in Germany because its design too closely resembled the iPad2. The ruling only applied to direct sales from the Samsung, meaning distributors who acquire the Tab 10.1 from abroad could resell them in Germany. Samsung said it would appeal that judgment.

Other court battles are taking place in the U.S., South Korea and Australia.

A Samsung executive told The Associated Press last week in Seoul that the South Korean company would be taking a bolder stance in battling Apple in courts.

"We'll be pursuing our rights for this in a more aggressive way from now on," said Lee Younghee, head of global marketing for mobile communications.

Lee said that Samsung holds numerous patents covering wireless telecommunications technology.

"We believe Apple is free riding" on such Samsung patents, Lee said.

Finance ministers want Europen crisis resolved

6:33 PM crisis, Europen, finance, ministers, resolved No Comments

WASHINGTON — Finance ministers, seeking to prevent another global recession, increased pressure on European countries to resolve their debt crisis by coming up with a bold rescue plan, but there were indications of further divisions ahead over what new actions to take.

Officials from the U.S. and other countries outside of Europe, concerned at the impact the crisis is having on their own economies and jittery financial markets, told their European counterparts time is running short to prevent potential domino-style defaults in Europe.

"The threat of cascading default, bank runs and catastrophic risk must be taken off the table," U.S. Treasury Secretary Timothy Geithner told his colleagues Saturday at the annual meeting of the International Monetary Fund. "Decisions as to how to conclusively address the region's problems cannot wait until the crisis gets more severe."

He said European governments needed to join with the European Central Bank to provide stronger support to calm market fears and not work at cross purposes.

Mark Carney, the head of Canada's central bank, suggested "overwhelming" the problem by more than doubling the current euro rescue fund, increasing its size to 1 trillion euros, an amount that would equal $1.35 trillion. German Finance Minister Wolfgang Schaeuble, who leads the eurozone's largest economy, and British treasury chief George Osborne also indicated they favor boosting the rescue fund's firepower.

U.S. and global financial markets have experienced intense volatility in recent days over concerns that Greece is in danger of defaulting on its debt and that this would put further strains on major European banks that carry large Greek debt in their books.

The crisis could then drag in other heavily indebted European nations, including Portugal and Ireland, and even bigger economies such as Italy and Spain.

The IMF panel, which sets policy for the 187-nation financial institution, ended its discussions Saturday with a pledge to work decisively and in a coordinated way to deal with Europe's debt crisis.

The IMF statement echoed pledges of increased support made Thursday by the finance ministers of the Group of 20 major economies. But both statements were vague on what form additional support would take.

"Today, we agreed to act decisively to tackle the dangers confronting the global economy," new IMF Managing Director Christine Lagarde told reporters at a closing news conference.

The European debt crisis was the first challenge Lagarde faced as she took over the IMF job in June, but she had grappled with it before when serving as France's finance minister and thus knows the intricacies.

Lagarde refused to comment on reports that holders of Greek bonds may be forced to accept bigger losses on their holdings as a condition by other governments if they are to supply further support to Greece to meet its debt payments.

She said it was important for the 17 governments that use the euro to meet the commitments they made in July, when they decided to give the eurozone bailout fund new pre-emptive powers and reached a deal on a second bailout for Greece

"It's implementation first and foremost," Lagarde said. "No qualification."

Greek Finance Minister Evangelos Venizelos also ruled out a debt default, saying Saturday that his country was working hard on implementing the July decisions.

"Greece is never going to default because that would have been catastrophic for the euro area and for many other countries beyond the euro area," he said in a statement.

The three days of discussions wrapped up late Saturday with a meeting of the Development Committee, which sets policy for the World Bank.

World Bank President Robert Zoellick announced at a final news conference that the World Bank planned to triple to $1.88 billion the amount of humanitarian support the bank is providing to countries in drought-ravaged areas of the Horn of Africa. The World Bank has estimated that more 13 million people in the region are in need of humanitarian assistance. Zoellick said the increased support was aimed at trying to prevent the current humanitarian crisis "should not and need not be a perpetual crisis."

_____

Associated Press writer Martin Crutsinger contributed to this report.

UBS CEO quits over rogue trader scandal

8:24 PM quits, Rogue, scandal, trader No Comments

ZURICH, Switzerland — Oswald Gruebel resigned on Saturday as chief executive of troubled Swiss bank UBS, saying he took the blame for the $2.3 billion loss run up in alleged rogue trading in its investment banking division.

The bank, which said it would beef up risk controls under an accelerated restructuring of that part of its business, named its Europe, Middle East and Africa head Sergio Ermotti -- only at UBS since April -- to replace Gruebel on an interim basis.

Gruebel, appointed in 2009 to rebuild Switzerland's flagship bank after a near collapse, said in a message to staff that the trading loss announced last week had shocked him deeply.

"I did not take the step of resigning lightly. I am convinced that it is in the best interests of UBS to approach the future with a new leader at the top," he said.

Gruebel, a 67-year-old banking veteran who helped turn around rival Credit Suisse last decade, was brought out of retirement to try to revamp UBS after it almost collapsed in 2008 under the weight of more than $50 billion lost on toxic assets.

UBS Chairman Kaspar Villiger said the board of directors, who met in Singapore this week, had not lost confidence in Gruebel despite the scandal and had tried to convince him to stay on to allow a more orderly succession next year.

Rogue UBS trader is 'sorry beyond words'

Chris Wheeler, analyst at Mediobanca said he was "very surprised" the board had agreed to let Gruebel go given the restructuring already under way at the investment bank.

"It certainly puts at risk what they were trying to achieve, given it's a recovery stock and it has had four CEOs now since 2007. It could see a lot of people capitulate on their hope for an early recovery for the stock," he said.

UBS shares fell more than 10 percent since the scandal broke on September 15, trading at their lowest level since shortly after Gruebel took over in early 2009, but they rose 4.8 percent on Friday on hopes the board would agree a major restructuring.

Ermotti, who Villiger said was a strong candidate to replace Gruebel permanently, told a conference call with journalists the bank would review its risk controls at group level, and an internal investigation of what went wrong at the investment bank should conclude in 10 to 14 days.

Opportunity out of disaster
A 51-year-old from Switzerland's Italian-speaking region of Ticino, he was already being groomed as a possible successor since he joined UBS in April from UniCredit after he was passed over in a management reshuffle at the Italian bank following the departure of CEO Alessandro Profumo.

Villiger said he had no doubts about the future of investment bank head Carsten Kengeter, whose fate had also hung in the balance, saying he and his team had done an "excellent job" to limit losses from the unauthorized trades by quickly closing the positions.

He contrasted their actions with hesitation that caused Societe Generale to run up a 4.9 billion euros ($6.6 billion) loss on rogue trades by Jerome Kerviel three years ago that felled that bank's then-chairman and CEO Daniel Bouton.

Villiger declined to comment on whether Kengeter could still be a candidate to take over as CEO, saying only the board was looking at both internal and external candidates and should decide on a permanent replacement within six months.

Villiger, a former Swiss finance minister who also faced calls to resign over the scandal, said the bank was sticking to plans for former Bundesbank chief Axel Weber to join the board next year and take over as chairman in 2013, adding Weber would be involved in the choice of a new CEO.

He said he did not favor splitting off investment banking from the rest of the bank, but said the board wanted Ermotti to speed up an overhaul of the division to better align it with UBS's core business of managing wealthy clients' money.

"We want to turn this disaster into an opportunity," he said.

Ermotti said more details of changes at the division, which would scale back but not exit its fixed income business and could see limited extra job cuts, would be revealed at an investor day already planned for November 17 in New York.

UBS had already said in August it would axe 3,500 more jobs to shave 2 billion Swiss francs off annual costs, with almost half from the investment bank, which had grown to almost 18,000 staff as Kengeter tried to rebuild the battered franchise.

'Turnaround' legacy
The alleged rogue trader, Kweku Adoboli, was "sorry beyond words for what had happened" and was "appalled at the scale of the consequences of his disastrous miscalculations," his lawyer Patrick Gibb said at a court hearing in London on Thursday.

The 31-year old did not enter a plea and was remanded in custody until a further hearing next month.

Clients pulled nearly 400 billion Swiss francs ($442 billion) -- almost a fifth of client assets -- from UBS after the bank was battered in the financial crisis to post the biggest annual corporate loss in Swiss history and as it fourght a prolonged dispute with the U.S. tax authorities.

Villiger said Gruebel had achieved an "impressive turnaround and strengthened UBS fundamentally," but admitted that clients had been scared off by the rogue trading affair.

Gruebel, who had already foregone his bonus for the last two years, would get no severance package as he had resigned.

UBS's largest shareholder, Singapore sovereign wealth fund GIC, met the bank's management earlier in the week and in a rare statement expressed its disappointment. It demanded firm action to restore confidence and details of how the bank would tighten risk controls. It declined to comment on Gruebel's resignation.

GIC had not been consulted over Saturday's management change, Villiger said.

UBS's board meeting, one of four regular ones per year, took place in Singapore ahead of the UBS-sponsored Singapore Formula One motor racing Grand Prix on Sunday, when executives will be trying to reassure big clients.

Asked whether UBS might reconsider its Formula One sponsorship now motor racing fan Gruebel is gone, Ermotti, who flew back to Zurich overnight, said the deal was a long-term commitment so he could not review it even if he wanted to.

In 2007, former UBS CEO Peter Wuffli was ousted at a board meeting in Spain to coincide with the America's Cup yachting event there, in which UBS was sponsoring a team.

Lawyer: News Corp to be sued in US for hacking

10:11 PM hacking, Lawyer No Comments

LONDON — A group of British phone-hacking victims plan to ask U.S. courts to look into possible "corrupt practices" at Rupert Murdoch's News Corp., a lawyer said Friday. The move could broaden the scope of a scandal that has shaken the mogul's international media empire.

British attorney Mark Lewis told The Associated Press that he had retained American lawyer Norman Siegel, who represents the families of many of those killed on Sept. 11, 2001, to take on News Corp. in the United States.

Lewis predicted that the first hearing could occur within two or three months. But Siegel downplayed the prospect of immediate action, telling AP that he'd only been asked "to explore whether there's legal options that can be brought."

Lewis "asked us to do the research, that's what we're doing," Siegel said.

The high-profile announcement — Lewis appeared on Sky News and BBC television around the same time that he spoke to the AP — seemed designed to instill fear in News Corp. shareholders. Lewis took care to note that damages awarded in the United States were "far higher" than anything than he might win in the English court system.

News Corp. declined comment.

Lewis revealed few details of his planned legal action, though he did say the case being pursued was not related to rumors that Sept. 11 victims were hacked by reporters at the News of the World tabloid, which was shut by News Corp. in July.

The now-defunct tabloid is accused of systematically intercepting private voice mail of Britons in the public eye, including, most notoriously, a teenage murder victim whose family Lewis now represents.

Lewis suggested that legal action might begin by taking depositions from various News Corp. officials.

"They will be looking at News Corp.'s liability for actions by its subsidiaries," he told Sky News television. "It will raise issues of corporate governance and control by the parent company over its subsidiaries."

In the U.S., Murdoch's News Corp. is best known for owning media properties such as Fox News Channel, The New York Post and The Wall Street Journal. The New York-based company declined to comment Friday.

Britain has been inflamed by allegations that the News of the World hacked people's phones in its quest for scoops.

Along with spurring the closure of the 168-year-old tabloid, the growing scandal has prompted the resignations of two of Scotland Yard's most senior officers and the prime minister's top media aide.

Murdoch's planned multibillion pound (dollar) takeover deal for satellite broadcaster BSkyB Ltd. was scuppered by the scandal, and his company faces millions in damages as those who've been spied upon continue to come forward.

The scandal has spurred outrage on the other side of the Atlantic as well, particularly after the Daily Mirror, a rival to Murdoch's The Sun, alleged that Sept. 11 victims may have been among the News of the World's targets.

No evidence to support the claim has yet been produced, and News Corp. has dismissed it as "anonymous speculation."

In the U.K., which Bud's for you?

12:00 AM which No Comments

Kirsty Wigglesworth / AP

If you’re ordering a beer in the U.K., make sure to ask for the right Budweiser.

A British court has ruled that both the well-known American beer and the lesser-known Czech beer of the same name can use the name “Budweiser,” according to a Reuters report.

The ruling marks the latest chapter in a decades-long spat between Anheuser-Busch, now a part of Belgian beer giant InBev, and Czech brewer Budejovicky Budvar.

Despite the name confusion, the court ruled that customers know the difference.

"United Kingdom consumers are well aware of the difference between Budvar's beers and those of Anheuser-Busch, since their tastes, prices and get-ups have always been different," the court said, according to Reuters.

Boeing finally gets first 787 to customer

2:20 AM Boeing, customer, finally, first No Comments

John Froschauer / AP

The second Boeing Co. 787 to be delivered to All Nippon Airways sits outside the assembly plant in Everett, Wash., on Sunday.

Boeing officially delivered its first 787 jet to All Nippon Airways on Sunday, more than three years after the airplane maker originally promised to get the new model to its Japanese customer.

“It’s been just one problem after another,” said Scott Hamilton, a longtime aerospace analyst with Leeham Co. “It’s been the Murphy’s law of airplanes.”

The delays, caused by design and manufacturing snafus related to the company’s decision to outsource large chunks of work to others, have been a huge and costly headache for Boeing.

Mike Boyd, an aerospace analyst with Boyd Group International, said the problems not only delayed the 787 but also tied up engineers who otherwise could have been working to modernize other airplane models to better compete against archrival Airbus and other up-and-comers.

Still, in the long run, many expect the airplane to pay off for Boeing.

“It’s still going to be several years before Boeing works its way through the effects of this, but when they do it’s going to be a good airplane,” Hamilton said.

The airplane, which relies largely on lightweight composite materials instead of aluminum, promises to use less fuel and require less maintenance than comparable planes. The twin-engine airplane will seat 200 to 300 passengers, depending on configuration, and boasts new comforts such as a more humid cabin.

“It’s a superb airplane,” Boyd said.

The fuel and maintenance savings should be attractive to cash-strapped airlines trying to control costs despite economic uncertainty and big fluctuations in fuel costs. The company currently has 821 orders from 56 customers, including United Airlines, British Airways and Air India.

That should keep Boeing production lines rolling for years. Boeing has not said how long it will take to work through all the orders, but it has said that it hopes to be churning out 10 planes a month by the end of 2013.

The delivery Sunday is scheduled to be followed by celebrations Monday before the airplane flies away Tuesday to enter commercial service. The delivery ceremonies will be held at the company’s sprawling manufacturing facility in Everett, Wash., north of Seattle.

ANA said it plans to use the first plane for a few special flights in late October before beginning regular commercial service Nov. 1. It is slated to fly both domestic and international routes.

The 787 program, sometimes dubbed the Dreamliner, was launched in 2004, and the first plane originally was scheduled to be delivered in mid-2008. For the 787 more than any previous model, Boeing relied heavily on other companies to design and manufacture the airplane, as well as share part of the big financial burden. That made sense in theory, but in reality some of the outsourcing turned out to be costly and often disappointing, analysts said.

The delays may have been a big benefit for rival Airbus, which is developing a rival A350 model that Boyd thinks has a lot of promise. The long-range airplane, which is slated to seat more than 400 passengers depending on configuration, also promises lower operating costs than its current competitors.

“It has given Airbus a chance to get out from behind the 8-ball,” Boyd said.

Even after it delivers the first 787, Boeing still faces challenges related to the model.

For one, Boeing is battling the National Labor Relations Board over its decision to build a second 787 production line in South Carolina in addition to the production facility it has in Everett. In a case that has attracted a lot of attention on Capitol Hill, the NLRB has accused Boeing of violating labor law by saying it was adding the production line there because of recent union strikes in Washington state.

Boeing is undoubtedly hoping the 787 delivery goes better than efforts to deliver the first 747-8 Freighter to Cargolux last week. In a highly unusual move, the airplane company refused to take delivery of the new plane as scheduled after the two sides were unable to work out last-minute contractual issues.

Slide show: see images of the 787

Boeing delivered its first 787 aircraft – known as the Dreamliner -- over the weekend, and the company says the new jumbo jet will revolutionize the way we fly. CNBC's Phil LeBeau reports.

Rogue UBS trader is 'sorry beyond words'

4:09 AM beyond, Rogue, sorry, trader, words No Comments

Oli Scarff / Getty Images

Kweku Adoboli arrives at the City of London Magistrates Court on Thursday.

The rogue UBS trader who allegedly lost $2.3 billion singlehandedly in unauthorized trades will be held in custody for an additional month, news reports said Thursday.

Kweku Adoboli, 31, appeared in a packed London courtroom on Thursday, where he did not enter a plea, and spoke only to confirm his name and address, reports Reuters. Lawyer Patrick Gibbs did most of the talking, saying Adoboli was “sorry beyond words for what happened.”

"He stands now appalled at the scale of the consequences of his disastrous miscalculations," Gibbs said, according to the BBC.

Adoboli was there to face an additional count of fraud beyond the initial charges of falsified records and fraud that lead to some $1.5 billion in trading losses for UBS. The newest charge, according to prosecutor David Levy, is for offenses that allegedly took place between October 1, 2008 and December 31, 2010, Reuters said. The preliminary fraud charges are for offenses that are alleged to have taken place between January 1 and September 14 of 2011.

Chief magistrate Alison Gowan said that Mr. Adoboli would return to the court on October 20 for a committal hearing, according to Reuters.

Mr. Adoboli’s losses are among the highest ever recorded among so-called rogue traders. He was trumped by French trader Jerome Kerviel, who in 2008 lost $6 billion for Societe General, and also by Yasuo Hamanaka, who lost $2.6 billion for Sumitomo Corporation in the 1990s.

China might not be able to help U.S., Europe

6:17 AM China, Europe, might No Comments

The U.S. and European economies are teetering on the edge of recession, but at least the Chinese economy is growing strongly, right?

Not necessarily.

Worrying investors Thursday is news that China’s manufacturing sector contracted for a third consecutive month in September while a measure of inflation picked up, according to Reuters, suggesting the world’s second-largest economy may not be able to provide much of a counterweight to flagging U.S. and European growth.

Reuters reports that “economists and Chinese officials have widely predicted China's growth will slow, largely because of waning exports. The country, known as the factory to the world, is especially vulnerable to fading demand from the United States and Europe, its two biggest export markets.”

Reuters also notes that domestic demand in China is still robust, and “that should keep China's economic growth securely above 8 percent, the level that many economists see as the minimum required to generate enough jobs for the country's rapidly urbanizing population.”

How did Europe get into its debt mess?

8:26 AM Europe No Comments

BRUSSELS — The 17 nations sharing the euro are in deep crisis, saddled with massive debts and dangerously weakened by political division over how to find a way out, just as the world economy flirts with another downturn.

Growing alarm that Greece may default or even leave the euro, potentially triggering contagion in the much larger economies of Italy and Spain, puts the debt crisis at the heart of IMF, World Bank and G20 meetings in Washington this week.

Investors and top officials, including U.S. Treasury Secretary Timothy Geithner, are urging European politicians to act and say a failure to do so could provoke a crippling recession and even the break-up of the European Union itself.

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Following is a look at how the euro zone got into debt, possible scenarios and how it might end the crisis.

Heavy borrowing
With the euro's introduction in 1999, unified interest rates allowed members to borrow heavily. Bonds issued by southern European nations were taken to be as safe as German ones. Money flowed into Greece. Spain and Ireland had real estate booms.

The bursting of the housing bubble in the United States and Europe in late 2007 dealt the first blow to the euro zone's aura of invincibility. Then in late 2009, when a new Greek government found that its predecessor lied about its borrowings and had run up huge debts, the revelation provoked a drastic loss in investor confidence that spread across the currency bloc.

In a recurring theme of the debt crisis, euro zone politicians were slow to react, calling for an investigation into Greece's financial dishonesty rather than trying to reassure nervous investors who began pulling their money out of the country and demanding punitive interest rates on its debt.

Larger euro zone economies and the International Monetary Fund extended Athens an emergency credit line in May 2010, but by then Greece's finances had destroyed the illusion that all euro zone members were equal. Investors quickly turned on the weaker economies of Portugal and Spain, driving up their borrowing costs.

Massive losses at Irish banks stemming from the housing bubble forced Ireland to take a bailout six months after Greece; uncompetitive Portugal then followed in May this year.

Still, euro zone leaders missed another chance to reassure markets. Reluctance in Germany, the region's biggest economy, to fully commit to helping wayward member states meant the rescues did not constitute an effective firewall -- markets continue to be difficult for Spain and Italy, which have a combined debt of about 2.5 trillion euros.

Meanwhile, the strict austerity measures imposed on Greece in return for its financial aid have led to a deep contraction in growth, and debilitating spending cuts and tax increases, further undermining confidence.

Adding to the difficulty, Athens is dragging its feet over privatisations and reforms it promised in return for help, putting its next aid disbursement at risk and possibly leaving the government without money for salaries and pensions next month. The liquidity of the sovereign is now in question.

Worst-case scenarios of Greek default
Hyperinflation, a run on Greek banks, violence, economic depression, international isolation and investor panic spreading to Italy and Spain make up the worst-case scenario if Greece were to default on its 370 billion euro debts.

Europe braces for impact of Greek default

European banks that lent to Greece at the height of the borrowing binge would certainly be hit; French banks have been particularly under pressure in recent days for their Greek exposure.

A Greek default would also likely set off a domino effect. Since investors would no longer believe the euro zone protects its own members, they would sell off Spanish and Italian paper, possibly sparking more defaults. Banks and governments around the world holding euro assets would take major losses.

Given those costs, euro zone leaders are adamant that Greece will not default. Some privately like to talk of an "orderly" Greek default: bank deposits would be protected, bankrupt banks would be kept functioning to keep the economy running and other euro zone governments' bonds would be protected from contagion.

A default could allow Greece to restructure its debt and force creditors to take a 60- to 80-percent loss on their bonds, perhaps providing a chance to return more quickly to economic growth, although some reforms would probably still be necessary.

But if Argentina's default a decade ago is anything to go by, Greece would likely be forced to devalue by leaving the euro and taking back the old drachma, making imports prohibitive. Credit would dry up, demand would shrivel and the country would be plunged into a prolonged depression.

If Spain and Italy were subsequently forced to leave the euro, some economists estimate it could cost them anywhere between 25 and 50 percent of their annual output, while the break-up of the currency bloc could cost trillions of euros.

What is to be done?
Some European politicians and economists say euro zone states should consider issuing bonds jointly underwritten by all countries in the bloc -- euro zone bonds.

The bonds would create a common interest rate for the bloc and allow weaker states to access markets at reasonable rates.

But the implementation of such an idea could take years and currently there is fierce opposition to the idea in Germany.

Washington has suggested the euro zone should leverage its rescue fund to increase its lending capacity beyond its current 440 billion euros, giving it ammunition to help Spain and Italy, if needed.

More immediate solutions include sorting out weak banks and helping economies where growth has been hit by budget-cutting measures, weakening government finances.

The ECB could also increase its programme of buying Italian debt to contain the widening spreads over German benchmark bonds, but the bank is divided and the scheme has already prompted ECB chief economist Juergen Stark to resign in protest.

Ultimately, Europe's politicians must convince markets that they stand completely behind the sovereign debt of euro zone members to avoid any further investor panic.

Can governments agree?
The risk of a collapse of the euro or even of the European Union itself could eventually force Germany, the EU's paymaster, to do whatever it takes to back weaker euro zone nations, whether it be with the ECB intervening in markets to buy riskier debt or providing more funding to recapitalise European banks.

But for now, European politicians seem more divided than ever, particularly on issues such as budget sovereignty. Even countries central to the European project, such as the Netherlands, are increasingly wary.

That division was underscored by last week's meeting of finance ministers in Poland, who agreed no new action, despite the critical hour.

Swedish Finance Minister Anders Borg, whose country stands within the European Union but outside the single currency, put it politely: "There are different voices in the debate."

IMF slashes outlook for the US economy

10:23 AM economy, outlook, slashes No Comments

AppId is over the quota
AppId is over the quota

The International Monetary Fund has slashed its outlook for the U.S. economy and global growth through 2012.

In its September 2011 World Economic Outlook, released Tuesday, the international lending organization said it now expects the U.S. economy to grow just 1.5 percent this year and 1.8 percent in 2012, down from its June forecast of 2.5 percent in 2011 and 2.7 percent in 2012.

Overall, advanced economies are facing anemic growth of only 1.6 percent in 2011, the IMF said in its latest forecast, adding that the global economic recovery is slowing, with world growth projected at 4 percent in both 2011 and 2012, down from over 5 percent in 2010.

“The global economy is in a dangerous new phase,” the IMF said. “Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing.”

The IMF foresaw a slowdown this year after strong growth in 2010 as fiscal stimulus packages in response to the global financial crisis began to wind down. But a barrage of economic shocks in 2011 has combined with other factors for a worse than anticipated outcome, the IMF said.

The potentially destabilizing effect on the euro zone of a sovereign debt default in Greece led the IMF to offer a gloomier forecast for growth in Europe too.

The 17 countries that use the euro will see growth of 1.6 percent this year and 1.1 percent next year, the IMF said -- that’s down from earlier projections of 2 percent and 1.7 percent growth, respectively.

S&P adds to euro stress with Italy cut

12:22 PM Italy, stress No Comments

ROME (Reuters) - Standard and Poor's rocked the euro and bond markets on Tuesday with a one-notch cut in Italy's credit rating that added fuel to opposition calls for Prime Minister Silvio Berlusconi to resign and increased pressure on the debt-stressed euro zone.

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S&P's cut its ratings on the euro zone's third largest economy to A/A-1 from A+/A-1+, judging it less creditworthy than Slovakia, and kept its outlook on negative, warning of a deteriorating growth outlook and damaging political uncertainty.

The euro fell more than half a cent against the dollar before picking up following some reassuring signs from Greece, but bond yields hovered within sight of levels which prompted the European Central Bank to step into the market and buy Italian bonds.

"This is not just more negative news coming out of the euro zone," said Nicholas Spiro, managing director of London-based consultancy Spiro Sovereign Strategy. "This is a confirmation that the world's third-largest bond market, and the euro zone's third-largest economy, is in danger of succumbing to a self-fulfilling loss of confidence."

S&P, which put Italy on review for downgrade in May, said that the outlook for growth was worsening and Prime Minister Silvio Berlusconi's fractious center-right government had not shown it could respond effectively.

Under mounting pressure to cut its 1.9 trillion euro debt pile -- 120 percent of gross domestic product -- the government pushed a 59.8 billion euro austerity plan through parliament last week, pledging to balance its budget by 2013.

But there has been little confidence that the much-revised package of tax hikes and spending cuts, agreed only after repeated chopping and changing, will do anything to address Italy's underlying problem of persistent stagnant growth.

"We believe the reduced pace of Italy's economic activity to date will make the government's revised fiscal targets difficult to achieve," S&P's said in a statement.

"Furthermore, what we view as the Italian government's tentative policy response to recent market pressures suggests continuing future political uncertainty about the means of addressing Italy's economic challenges," it said.

Italy has had one of the euro zone's most sluggish economies for a decade and sources said on Monday the government was preparing to cut its growth forecast to 0.7 percent in 2011 from a previous 1.1 percent and for 2012 to "1 percent or below."

"POLITICAL CONSIDERATIONS"

Berlusconi's coalition has been plagued by infighting and policy disagreements and the prime minister himself has been battling a widening prostitution scandal which has distracted the government and badly damaged his personal credibility.

But he lashed out at S&P, saying its move seemed influenced by "political considerations." He said his government had a secure parliamentary majority and was preparing measures to boost growth which would bear fruit in the short to medium term.

"The assessments by Standard & Poor's seem dictated more by newspaper stories than by reality," he said in a statement.

S&P rejected the suggestion that its decision was politically motivated, saying it was based on a detailed analysis of the economy.

The agency said budgetary savings may not be possible because the government is relying heavily on revenue increases in a country that already has a high tax burden and is facing weakening economic growth prospects. In addition, market interest rates are expected to rise, it said.

Berlusconi has been under increasing pressure as the crisis has intensified with groups ranging from business associations to mainstream newspapers and the center-left opposition saying he must act immediately or step down.

Emma Marcegaglia, head of Confindustria, Italy's main employers federation, said business was tired of being treated as an "international laughing stock."

"The government must either adopt immediate, serious and also unpopular reforms or else, I am not afraid to say it, it must pack its bags and resign," she said.

Italy's Economy Minister Giulio Tremonti was holding talks at the treasury following the agency's decision. S&P will host a conference call to explain the move later on Tuesday.

RATINGS "DICTATORSHIP"

S&P's move drew a mixed response from Italy's European partners with French Foreign Minister Alain Juppe repeating longstanding criticisms of the international ratings agencies.

"We should not cave in under this dictatorship of ratings agencies, whose transparency is in serious need of improvement," he told Europe 1 radio.

However, Peter Altmaier, a senior parliamentarian in Chancellor Angela Merkel's center-right coalition saying it demonstrated the need for governments to show responsibility.

Financial markets had been expecting rival agency Moody's to move first, after it put Italy on review in June. It said last week it would decide within a month whether to cut its rating but declined to comment on Tuesday.

S&P's rating is now three notches below Moody's and puts Italy below Slovakia and level with Malta.

"The rating downgrade was not totally unexpected, even though it came from the agency we didn't expect," said Paola Biraschi, banking analyst at RBS in London.

"To me it seems like a competition between rating agencies to publish the downgrade first," she said.

Italy's stock market weakened initially but turned positive as other European markets headed higher on short-covering after heavy losses on Monday and as some dealers said markets had already priced in the downgrade.

Italian 10-year government bond yields rose to more than 5.6 percent while spreads over German bunds widened to more than 386 basis points.

The cost of insuring against an Italian default has also risen sharply, with Italian 5-year credit default swaps above the psychologically important 500 level at 508 basis points on Tuesday morning, according to monitor Markit.

Only the European Central Bank, which has been buying Italian bonds to prop up the market, has kept Rome's borrowing costs from spiraling out of control, but yields have crept back up steadily since the ECB stepped into the market in August.

"Italy is now struck in a self-fulfilling downward spiral from which it is unlikely to be able to extract itself without external help," said Sony Kapoor, of Brussels-based think tank Re-Define.

"Without full confidence in the credit-worthiness of Italy, it's impossible to have full confidence in the solvency of the European banking system," he said.

(Additional reporting by Wayne Cole in Sydney, Daniel Bases and Burton Frierson in New York, Michel Rose in Milan and Giuseppe Fonte in Rome; editing by Ron Askew)

EU officials to warn of another credit crunch

12:20 AM another, Credit, crunch, officials No Comments

The EU's most senior finance officials will warn ministers this week about the threat of a renewed credit crunch as a "systemic" crisis in sovereign debt spills over to banks, according to EU documents.

In one a series of bluntly worded reports prepared by officials for a meeting of EU ministers on Sep. 16 and 17, they warn: "While tensions in sovereign debt markets have intensified and bank funding risks have increased over the summer, contagion has spread across markets and countries and the crisis has become systemic."

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This highlights a "risk of a vicious circle between sovereign debt, bank funding and negative growth".

In the documents, the influential Economic and Financial Committee, which prepares the agenda for discussion among ministers, levels harsh criticism at countries including Spain for not doing enough to reinforce its banks following dismal results in stress tests.

One of the reports, dated Sep. 13, cautions that the "spill-over effects" could feed "a dangerous negative loop between the financial and the real sectors (of the economy), whereby funding problems and ... risk aversion ... may lead to ... deleveraging by banks, thereby generating a credit crunch, in some Member States".

Outlining what they describe as spreading contagion and a sovereign debt crisis which they say has "entered a new phase", officials highlight the difficulties experienced by European banks in borrowing.

"Despite the considerable strengthening of capital positions compared to the levels of 2008-2009, European banks have recently experienced market funding difficulties resulting amongst others from stress on wholesale liquidity markets, high spreads in secondary markets, and, for some EU banks, growing difficulties in accessing funding from U.S. counterparties," one of the reports says.

Europe's woes raise global recession risk

To counteract dwindling confidence in EU banks, officials recommend to ministers that "a further reinforcement of bank resources is advisable at this juncture".

They criticise some countries for not taking such measures -- which would include state-backed capital injections in flagging lenders -- after recent stress tests.

"This is important for banks that have failed the stress test, but also for those that have passed the test but with capital levels close to the relevant threshold."

Italy criticizes S&P downgrade as political

2:14 PM criticizes, downgrade, Italy, political No Comments

ROME — Italy's government has criticized Standard & Poor's for downgrading Italy's credit rating, saying the decision is out of touch with reality and pledging that the country's austerity measures will soon show fruit.

S&P cut Italy's long- and short-term sovereign credit ratings to "A/A-1" from "A+/A-1+" Monday, saying it sees weakening economic growth prospects and higher-than-expected levels of government debt. The rating is still five steps above junk status,

In a statement Tuesday, Premier Silvio Berlusconi's government said it had a solid majority in parliament, which recently passed measures to balance the budget by 2013 and shave its debt through tax hikes and budget cuts.

It said the downgrade seemed "contaminated" by political considerations.

NYU's Roubini: Greece should default, leave euro

4:18 PM default, Greece, leave, Roubini, should No Comments

Luca Bruno / AP

Greece should start an orderly default, voluntarily leave the euro zone and return to its former currency the drachma in order to avoid a “vicious cycle of insolvency, low competitiveness and ever-deepening depression,” economist Nouriel Roubini said in a column published in the Financial Times Monday.

Roubini, a professor at New York University’s Stern School of Business who gained renown for accurately calling the housing bubble, said other potential options for helping the debt-stricken country -- including a weakening of the euro, a reduction in Greek unit labor costs or a rapid deflation in prices and wages -- are impractical and likely won’t work.

The process of defaulting and leaving the euro zone would be “traumatic,” Roubini said, but “a return to a national currency and a sharp depreciation would quickly restore competitiveness and growth, as it did in Argentina and many other emerging markets which abandoned their currency pegs.”

Fears that Greece may default on its sovereign debt and leave the euro zone have grown in recent days. Euro zone countries are becoming frustrated that the nation appears unable to meet the fiscal targets set out under its international bailout.

A poll of economists released by Reuters Friday showed that, while Greece will likely default on its debt within a year, there is only a one-in-five chance it will leave the euro zone.

The Reuters poll of more than 50 economists across Europe gave a 65 percent chance Greece would default. Half of the poll’s respondents said Greece would likely default within 12 months.

Stocks hit as Greece tries to convince creditors

6:37 PM convince, creditors, Greece, stocks, tries No Comments

LONDON — Stocks took a hammering Monday as Greece struggled to convince international creditors that it can meet its debt obligations in return for more bailout cash to avoid running out of funds as soon as next month.

Even though Prime Minister George Papandreou canceled a trip to the United States and the Greek cabinet came up with fresh austerity measures over the weekend, investors remain concerned that Greece will not get its hands on the €8 billion ($11 billion) due from last year's€110 billion ($150 billion) bailout.

On Friday, eurozone finance ministers in Poland decided to delay authorizing the payout to Greece until early October. At risk is not only the installment from the 2010 rescue package but also a second bailout for Greece worth €109 billion ($149 billion).

"(The Poland meeting) seemed to highlight the level of disunity amongst those that have the authority to deal with the problem," said Louise Cooper, markets analyst at BGC Partners. "The slow machinations of the political class are just not keeping up with the economic and financial reality on the ground."

Greece's finance minister, Evangelos Venizelos, is due to host a teleconference later Monday with the country's international creditors: the European Commission, the European Central Bank and the International Monetary Fund. His task is to convince them that Greece is doing enough to warrant the release of the next batch of bailout cash.

While investors keep a close watch on the internal debate in Greece, they are also monitoring developments in Germany after Chancellor Angela Merkel's government suffered a big electoral defeat in Berlin, which shut out her Free Democratic party coalition partners from a regional parliament.

Amid the uncertainty and after strong gains last week, stocks started the week in retreat.

In Europe, Germany's DAX closed down 2.8 percent at 5,415.91 while France's CAC-40 fell 3.0 percent to 2,940. The FTSE 100 index of leading British shares ended 2.0 percent lower at 5,259.56.

In the U.S., the Dow Jones industrial average was down 1.5 percent at 11,342.09 while the broader Standard & Poor's 500 index fell 1.4 percent to 1,199.46.

Aside from Greece, the other main focus in the markets this week is Wednesday's monetary policy decision from the U.S. Federal Reserve. There are growing expectations that the central bank will introduce some new measures to help boost the U.S. economy, which has seen growth slow down sharply this year. However, most analysts think the Fed will fall short of announcing another monetary stimulus program, given that inflation levels remain relatively elevated.

"Many still expect some sort of central bank assistance to be announced at this week's Federal Reserve meeting, but the ongoing concerns over a Greek default are likely to overshadow this unless there is some sort of firm reassurance that this can be avoided," said Ben Critchley, a sales trader at IG Index.

With stocks under pressure, the dollar garnered some support against the euro through its supposed status as a safe haven asset in times of financial volatility. The euro, which has shed a large chunk of last week's gains after the failure of European finance ministers to unveil anything dramatic with Greece, was 0.3 percent lower at $1.3647.

"The dollar has started the new week on a firm footing, with financial markets somewhat uncertain about the next steps in the European debt market crisis," said Nick Bennenbroek, head of currency strategy at Wells Fargo Bank.

Earlier in Asia, Hong Kong's Hang Seng index plunged 2.8 percent to 18,917.90, while South Korea's Kospi index fell 1 percent at 1,820.94. China's main index in Shanghai ended 1.8 percent lower at 2,437.79.

Japanese financial markets were closed Monday for a national holiday.

In the oil markets, prices tracked equities lower — benchmark oil for October delivery was down $2.17 at $85.79 in electronic trading on the New York Mercantile Exchange.

Iran nabs 19 suspects in $2.6 billion bank fraud

8:28 PM billion, fraud, suspects No Comments

TEHRAN, Iran — Iran's state prosecutor says authorities have arrested 19 suspects in a $2.6 billion bank fraud described as the biggest financial corruption scam in Iran's history.

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Several newspapers, including the pro-reform Shargh daily, quote Gholam Hossein Mohseni Ejehei as saying more people will be arrested.

Parliament summoned the finance minister and the central bank governor to discuss the case on Monday.

Officials say the fraud involved the use of forged documents to get credit at one of Iran's top financial institutions to purchase assets including major state-owned companies.

The first details in the case became public early this month.

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