Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


Editorial: Thinking the unthinkable
Copyright The Financial Times Limited 2010
Published: September 19 2010 19:56 | Last updated: September 19 2010 19:56
http://www.ft.com/cms/s/0/1c408d68-c40d-11df-b827-00144feab49a.html


Last week’s successful auctions of Greek and Spanish government bonds provide some hope the waters may be calming in the eurozone sovereign debt market. But that does not mean policymakers should relax. It is precisely when the spectre of default recedes that we should think about ways to deal with it when it re-emerges.

Preventing a market panic from forcing Greece into default was the right thing for the eurozone to do as was establishing the European Financial Stability Facility. But the rationale for the decision was not always sound: European leaders, almost without exception, declared a eurozone sovereign default unthinkable under any circumstances. This should not be the case. Though Athens has made progress, default should not be off the table if it does not manage to bring its house decisively in order. To prepare for cases where debts are too much for a country to bear, the eurozone needs a plan B: a way of restructuring sovereign debt in an orderly and predictable way.

Preventing taxpayer bail-outs of creditors is not the only consideration. A sovereign restructuring process is also necessary for effective market discipline. In a union so clearly unable to control the fiscal habits of its member states, the threat of default would be a powerful check on excessive borrowing and irresponsible lending. Creditors who cannot rely on public largesse to preserve the value of their claims will make their debtors pay the real price for risk.

Debtors have in the past warned that a restructuring regime would raise the cost of capital. Creditors have complained it would reduce the amount they can recover in a default. Even if these claims are correct, that is no justification for bailing out sovereigns. If debts cannot be repaid, an orderly process is better for all than a disorderly one. It limits the costly uncertainties and delays that usually accompany sovereign defaults, boosting recovery values on bonds. This would also reduce the dislocation of the underlying economy.

Two approaches to designing a restructuring regime were debated after the last round of sovereign defaults a decade ago. One is a statutory framework, overseen by a supranational body, for modifying the rights of creditors. This was the idea behind the International Monetary Fund’s ill-fated Sovereign Debt Restructuring Mechanism. The second is to insert “collective action clauses” into sovereign bond contracts to make recalcitrant creditors agree to a negotiated restructuring. But these ideas were tailored to emerging countries, whose debt is generally issued in foreign jurisdictions and currencies. Most eurozone sovereign debt is domestic.

That means a eurozone restructuring regime would face an immense challenge. Much legal groundwork would be needed to make such a regime comply with national laws, and the political will would have to be found to establish it. But this task must start. The first step in preparing for any sovereign default is for eurozone leaders to contemplate the possibility.




Emerging markets M&A outstrips Europe
By Lina Saigol in London and Helen Thomas in New York
Copyright The Financial Times Limited 2010
Published: September 19 2010 20:54 | Last updated: September 19 2010 20:54
http://www.ft.com/cms/s/0/e45fb68e-c421-11df-b827-00144feab49a.html


Global companies seeking a foothold in fast-growing countries such as China and Brazil have pushed deal-making in emerging markets above that of Europe for the first time.

So far this year, emerging market targeted M&A volume is up by more two-thirds to $575.7bn (€441bn), while European volume has increased by barely 20 per cent to $550.2bn, according to data from Dealogic.

Deals by companies in emerging markets now account for 30 per cent of global M&A activity, while Europe’s share has fallen to 29 per cent – the lowest level in 12 years.

Carlo Calabria, vice-chairman of Bank of America Merrill Lynch, said emerging market players are becoming acutely aware of the global competitive dynamics affecting them.

“M&A is proving essential to control intellectual property and process technology, access developed markets and secure sources of raw materials and commodities,” Mr Calabria said.

China, with about $133bn in deals, has attracted most interest this year from acquirers. Brazil, India and Russia follow, with the four Bric countries together accounting for more than half of emerging markets activity.

The race to secure global energy resources has seen some of these companies use increasingly aggressive bidding tactics. This summer, Korea National Oil Corp, the state-owned energy explorer, launched the country’s first cross-border hostile takeover to try to win control of UK oil group Dana Petroleum. The deal is being financed by five local banks.

US companies however have been more cautious in seeking growth in emerging economies. The largest such deal this year was Abbott Laboratories’ agreement to buy the healthcare solutions business of Piramal, the Indian conglomerate, for $3.8bn.

Paul Parker, the head of global M&A at Barclays Capital, said that US companies were very active in looking at emerging market opportunities. But he added: “The [valuation] multiples tend to be relatively higher and the target universe more fragmented, so you have to be very thoughtful before moving. There is no question that the erratic direction of the US economy has been a drag on outbound cross-border activity.”

However, emerging market transactions can face higher hurdles to overcome than their international counterparts when closing deals.

“Complex financings, cultural differences, uncertain regulatory environments and a lack of experience in cross-border transactions can make the process more difficult,” said Henrik Aslaksen, global head of M&A at Deutsche Bank.

Credit Suisse leads the announced emerging market advisor ranking with about $103bn in deals so far this year, followed by Morgan Stanley and Bank of America Merrill Lynch.




Centrists team up to fight the Tea Party
By Tom Braithwaite in Washington
Copyright The Financial Times Limited 2010
Published: September 19 2010 20:32 | Last updated: September 20 2010 02:44
http://www.ft.com/cms/s/0/0e913fc8-c421-11df-b827-00144feab49a.html


Republican and Democratic centrists fought back against the conservative “Tea Party” movement as lurid comments from Christine O’Donnell, its latest champion, threatened her chances of victory in November’s congressional elections.

Colin Powell, former secretary of state under George W. Bush, said it was time to argue over policy rather than “nonsense” and argued for liberalising immigration law. Mr Powell, a Republican, said he would not rule out endorsing President Barack Obama for a second term. “[The Tea Party] may well be a fad unless it converts itself from a movement into something that is a real political organisation that takes stands on positions. Right now what do they really believe in?” Mr Powell told NBC’s Meet the Press.

Ms O’Donnell, who won the Republican primary for a Delaware Senate seat, pulled out of appearances on the Sunday television talk show circuit after the emergence of an interview in 1999 when she said she had “dabbled into witchcraft”. The comments met immediate criticism from religious conservatives.

Meanwhile, Michael Bloomberg, the mayor of New York and another centrist Republican, told the New York Times that the Tea Party’s anger was “not a way to govern” and he would back centrist Democrats and Republicans. to take on the movement’s candidates for the November elections.

The Tea Party’s rise has been fuelled partly by the bail-outs of banks and carmakers that have driven its loose platform of lower taxes and less government intervention.

From among Democratic supporters, Steven Rattner, the Obama administration’s former “car tsar”, said he feared an “ugly” post-election situation for Democrats, defended the rescues of General Motors and Chrysler and said President Obama was a centrist, not the radical portrayed by the Tea Party and increasing swaths of corporate America.

“In my view the problem is not that the administration doesn’t appreciate business. It’s that business doesn’t appreciate the mood of the country at all times,” Mr Rattner said.