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Cityam 2012-05-15_withOLDsheet_woEGGAdv

Cityam 2012-05-15_withOLDsheet_woEGGAdv

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Greek stocks dropped 4.56 per cent
4.30pm8.00am
580590600610
584.04
14 May
BUSINESS WITH PERSONALITY
 JP MORGAN cleared out the entiresenior team in its chief investmentoffice (CIO) last night after Ina Drew,one of Wall Street’s most powerful women, quit the bank over $2bn(£1.24bn) in hedging losses. According to an internal memoseen by 
City A.M.
, Achilles Macris, wholed the trading desk that placed the bank’s disastrous hedges, will “transi-tion his CIO responsibilities” –mean-ing he will be effectively removedfrom day-to-day responsibilities,although it is not clear if he willimmediately quit the bank. And three new executives will jointhe CIO, including Rob O’Rahilly ashead of CIO in Europe, the MiddleEast and Africa. The news came after Ina Drew, who was chief investment officer, quit overthe losses and was replaced by MattZames, known as the bank’s “Mr Fix-It” after taking on JP Morgan’s USmortgages portfolio post-2008.Zames sent the memo last night, in which he also tried to rally staff: “I amproud of the firm’s efforts over thepast several days to address our mis-takes and pleased to join the dedicat-ed employees in our CIO today,” he wrote, promising “a sharp, renewedfocus on our hedging strategies, risk management and execution”.He added: “JPMorgan Chase willcome out of this experience as astronger firm.”
JP Morgan’s chief investment officer Ina Drew tried to resign repeatedly over the huge trading losses
MARKETS plummeted across Europe yesterday as fears mounted thatGreece may leave the Eurozone, driv-ing a mass sell-off as investors fledrisky assets.Shares dropped sharply, whileperipheral governments saw borrow-ing costs jump. European leaders open-ly acknowledged the prospect of thecountry leaving the euro, whileGreece’s political leaders failed even tomeet last night to continue negotia-tions over forming a government.German finance minister WolfgangSchauble said the Eurozone is “ready for every eventuality,” while an ECspokeswoman said “We hope Greece will remain in the euro –but it mustrespect its commitments.”Greek stocks led the rout, plummet-ing 4.56 per cent to a fresh 20-year low. Worries over Spanish banks also hitmarkets, as the country’s top fivelenders announced plans to set asidean extra
 €
15bn (£11.97bn) in provisionsto cover risky property deals, heapingpressure on their finances as the coun-try battles to restore confidence in theindustry. Italy was also in the spot-light, after rating agency Moody’s
www.cityam.com
FREE
downgraded the long-term debt ratingof 26 of the country’s banks, includingUnicredit and Intesa Sanpaolo. As concerns escalated, Spain’s IBEXfell 2.66 per cent, Italy’s FTSE MIB slid2.74 per cent, France’s CAC declined2.29 per cent and the German DAX fell1.94 per cent. The FTSE 100 also joinedthe collapse, falling 1.97 per cent. The euro fell 0.55 per cent againstthe dollar to $1.28, and 0.8 per centagainst the pound to 79.81p. The sell-off also hit peripheral govern-ments’ bonds, while the UK andGermany benefited from their “safehaven” status, attracting investors andpushing down borrowing costs further.Credit default swaps (CDS) on key European governments leapt, under-lining fears over the region, withSpain’s five-year CDS at a record high of 540 basis points, according to Markit.Meanwhile industrial production inthe Eurozone continued to fall inMarch, official data showed yesterday,demonstrating the impact of ongoingmarket chaos on the “real economy.”Eurostat’s data showed output fell2.2 per cent in the year to March forthe area as a whole. Production fell 8.5per cent in Greece, 7.5 per cent inSpain and 5.8 per cent in Italy. Lesshigh-profile countries also suffered –industrial production dropped 11.3 percent in Luxembourg and 6.1 per centin both Estonia and Finland.
FTSE 100
M
5,465.52 -110.00DOW
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12,695.35 -125.25NASDAQ
M
2,902.58 -31.24£/$1.61 unc£/€
1.25 +0.01€/$
M
1.28 -0.02
THE APPLE TV DRE AM
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Certified Distribution02/04/2012 till 29/04/2012 is 100,668
BY JULIET SAMUELBY TIM WALLACE
The FTSE fell 1.97per cent
4.30pm8.00am
5450550055505600
5,465.52
14 May
EURO FEARS
SPARK ROUT
IN MARKETS
Queen of Wall Street quits asJP Morgan clears the decks
 ALL YOU NEED IS CASH
ISSUE 1,632 TUESDAY 15 MAY 2012
SHOULD FOOTBALL TEAMS BE ALLOWED TO BUY SUCCESS?
 
allister.heath@cityam.comFollow me on Twitter: @allisterheath
IN BRIEF
Rush to safety as worriedinvestors flee periphery
BORROWING costs jumped again yesterday in peripheral Eurozoneas fears grew that Greece is on its way out of the currency union.Investors piled cash into “safehaven” countries, driving down borrowing costs in the UK andGermany and fleeing riskier assets.German backing for bailouts andausterity took a beating as AngelaMerkel’s CDU party lost a majorregional election over the week-end, while Greek politicians againfailed to agree on a new govern-ment, hitting confidence acrossthe continent.Italy’s 10-year borrowing costsrose 18.8 basis points (bp) to 5.697per cent yesterday, while Spain’s jumped 22bp to 6.227 per cent andGreece’s increased by 283.2bp to27.584 per cent.Meanwhile the UK saw 10-yeargilt yields drop to a record low of 1.861 per cent, before rising to1.877 per cent by the end of theday.German yields fell 5.9bp over theday to 1.457 per cent, and 10-yearUS Treasury yields dropped 5.3bpto 1.78 per cent.Stocks also fell hard over the day as investors sought safer locationsfor their cash.“Event risk and political uncer-
GM unveils Europe restructuringplan
The head of General Motors’ Europe armtold anxious German workers on Mondaythat he would have to restructureproduction of a key model in order to helpreturn the European operation toprofitability.
Paul Smith plans fresh move intoChina
British fashion brand Paul Smith plans toopen a 5,000 sq ft flagship store inShanghai as part of its second attempt tocrack the Chinese market, five years afterlosses forced it to retreat from thecountry.
LightSquared files for bankruptcyprotection
LightSquared, the satellite venture ofPhilip Falcone, has filed for bankruptcyprotection after the billionaire investorwas unable to reach agreement withcreditors. The company faced a 5pmdeadline yesterday before a covenantwaiver agreed by holders ofLightSquared’s $1.6bn of debt expired.
Recovery expert charges £6,000 a dayto axe jobs
Turnaround expert Donald Muir stands toearn £470,000 for six months’ part-timework while the accountancy firm he wasbrought in to save cuts a tenth of itsworkforce, it has emerged. Muir wasparachuted in to help RSM Tenon.
New lease of life for bank
The 105-year-old banking name of Singer &Friedlander has returned to the City after itwas bought out of administration by a groupof former staff.
Sir John Peace calls on cavalry to haltbonus cap
Sir John Peace, chairman of StandardChartered, has called on the political“cavalry” to lead the charge againstEuropean plans for a bonus cap that couldcripple Britain's financial services industry.
Banks changes to SME loans“unlawful”
Banks are “unlawfully” changing loanterms and refusing to negotiate with smallbusinesses, a law firm has claimed.
Cash crisis hits aerospace
A Spanish manufacturer of critical aircraftcomponents for major aircraft makersincluding Airbus, Boeing and Embraer isslowing production and struggling to payits bills. Alestis Aerospace is facing a cashcrunch because of Spain’s banking crisis.
 Activision reaches into its gamevault to rev up revenue
Activision Blizzard, the world’s biggestvideogame maker, is banking its future ongames that go back more than a decade.
WHAT THE OTHER PAPERS SAY THIS MORNING
CREDIT rating agency Moody’s lastnight downgraded its long-term debtand deposit ratings on 26 Italianfinancial institutions, blaming thecountry’s return to recession andlimited funding opportunities.Unicredit and Intesa Sanpaolo, which together account for almost athird of Italy’s banking market by assets, were among those hit by thedowngrades, three months afterMoody’s put more than 100 banksacross the Eurozone on negativereview due to their exposure to theregion’s economic crisis.“The ratings for Italian banks arenow amongst the lowest withinadvanced European countries,reflecting these banks’ susceptibility to the adverse operatingenvironments in Italy and Europe,”Moody’s said in a statement. The downgrades are expected toherald the start of a fresh round of rating reassessments, with Spain’sstruggling financial institutionsseen as the most likely candidates to be hit next.Unicredit’s standalone creditrating was lowered by one notch to A3, while Intesa Sanpaolo’s wasdowngraded from A3 to A2.Moody’s said that in most cases,the downgrades were not based onchanges to its assumptions aboutsupport available from third-parties,including the Italian government.
Moody’s cutsthe ratings of26 Italian banks
2
NEWS
BY ELIZABETH FOURNIERBY TIM WALLACE
To contact the newsdesk email news@cityam.com
I
 T has long been a theme of thiscolumn that the government andits critics alike have exaggeratedthe extent of the government’s belt-tightening. The coalition is doingthis to try and reassure the bondmarkets while seeking to minimisethe hit to the public sector; theopposition because it wants to blamethe recession on “the cuts.” But thereare two kinds of austerity:governments can either hike taxes orcut spending. Britain is definitely getting plenty of the first kind – but itis getting far less and far too little of the second kind than is usually understood.Millions of people are suffering butthat is because they, rather than thestate, are being forced to tighten their belts – they are being hit by higher Vat, national insurance, capital gainstax, transport taxes, pasty taxes and
EDITOR’SLETTER
ALLISTER HEATH
It’s austerity all right –but not of the kind we actually need
TUESDAY 15 MAY 2012
the like. On top of that, inflation isgobbling up pay rises and slowly butsurely eroding the purchasing powerof whatever is left in workers’ pocketsonce the state has grabbed its share.Even a cursory analysis of the Treasury’s Budget projections revealsthat state spending is still going up incash terms. After adjusting for infla-tion, it is only falling slightly. Theproblem is that some areas of thepublic sector are suffering heavily –libraries, for example, or infrastruc-ture projects – while the governmentis still spending more and more inother areas, and not only on debtinterest and unemployment benefits.So why all the misleading rhetoric? As an excellent report from TullettPrebon points out, the UK has beentrying to placate (or as it bluntly putsit “dupe”) the bond markets by com- bining maximum spin with mini-mum substance. The report’s author, Tim Morgan, goes as far as to describe what passes for the debate on publicspending in the UK as a “Big Lie”,“phoney austerity”, a “bare-faceddeception”, “mendacious” and muchelse besides. It is good to see an econ-omist at a City firm actually telling ithow it is, rather than buying themainstream, wishy-washy consensus;in fact, I cannot recall ever reading apiece of research from the City thatcontained so many insults. Great fun£161bn (at 2010-11 values) in 2009-10to £123bn in 2011-12. But the infla-tion-adjusted deficit remains higherthan it was in 2008-09 (£100bn), the year before the Labour government’spre-election spending spree. Of the£38bn deficit reduction achievedsince 2009-10, three-quarters hasresulted from higher taxes and only one quarter (£8bn) from spendingcuts. Again using constant (2010-11) values, taxes have increased by £30bnsince 2009-10, absorbing three quar-ters of the entire increase in GDP of £40bn over that period. Astonishingly,therefore, the private sector has kept just one quarter of the already tiny increase in GDP of the past three years. It’s austerity all right – but of the wrong kind.– but also deadly serious.Morgan’s statistics are illuminating.In 2009-10, a combination of automat-ic stabiliser costs and a pre-electionspree sent spending rocketing by 4.6per cent in real terms, equivalent toan extra £31bn. During the coalitiongovernment’s first year in office(2010-11), spending increased again,albeit by just £2.4bn. Public spendingfinally fell in 2011-12, but only by £10.3bn, or 1.5 per cent. Total spend-ing in 2011-12 was £7.9bn (1.1 per cent)lower than in 2009-10 but £22.6bn (3.4per cent) higher than in 2008-09. At best, the supposedly huge cuts inspending delivered by the coalitionamount to only a little more than £1in every £100. Any well-run householdor company would be able to cope; why can’t the British state? The figures make grim reading. Thedeficit has been reduced, fromtainty in Eurozone appear too highto be ignored,” said JP Morgan.“Buying the dips might be tempt-ing, but in the event of a country leaving Eurozone, markets wouldcare about only one question: who isnext?”Even traditional safe haven goldfell another 1.58 per cent to $1563.5. Analysts blamed the increasingly strong US dollar, as the market ispriced in the currency, hittingdemand from other countries. The continued pressure on govern-ments’ debts means leaders areshowing few signs of backing downover austerity measures.Spanish leader Mariano Rajoy yes-terday restated his belief that spend-ing cuts and tax rises are needed toreduce the country’s debts, whichhis economic reforms will helprestore growth in the medium term.However, new French presidentFrancois Hollande takes office today and will meet German chancellorMerkel. The two are expected to seek common ground after Hollande’sprevious rejection of Merkel’s plansfor fiscal discipline for the Eurozone.
Investors flocked to safe German debt
MarAprMay
2.1%2.0%1.9%1.8%1.7%1.6%1.5%1.4%
1.457%
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The new jobs website for London professionals
CITYAMCAREERS.com
Q
Wouldn’t this be adisaster for Greece?
A
 The country’sGDP would takea big hit; UBSestimates that up to 50 per centcould be lost. Yet a currency devaluation may help the recovery,and debts could be written off.
Q
How would it actually work?
A
 The Greek government wouldlegally establish a new currency. Authorities may introduce strictcurrency controls and managementof the banking system, to prevent arun on the banks.
Q
Surely there would be problems though...
A
Undoubtedly. Disputes over dealsmade in euros would drag on andon. “Legal battles would keep lawyers busy for years,” said Deloitteeconomist Ian Stewart.
Q
And what about the Eurozone?
A
It’s unclear how damaging aGreek exit would be. Someeconomists fear the risk of contagioncould be huge to the single currency.
Q
Has anything happened before?
A
 Yes, Argentina defaulted and brought in a new currency. A change also happened whenCzechoslovakia broke up.
 
and
What next if Greeceleaves the euro?
Spanish borrowing costs jumped again
MarAprMay
6.5%6.0%5.5%5.0%
6.227%
Yields on 10-year Italian debt shot up
MarAprMay
5.8%5.4%5.6%5.2%5.0%
5.697%
The UK’s 10-year yields fell to record lows
MarAprMay
2.5%2.4%2.3%2.2%2.1%2.0%1.9%1.8%
1.877%
Borrowing costs rose in peripheral Eurozone countries and dropped for “safe havens”
 
      G      E      T      T      Y
SPAIN’S banks are expected to kick off a new round of mergers following thegovernment’s demand that they putaside billions more to provide for loss-es on property lending. As banks shares across Europe tum- bled three to nine per cent (see below),the Bank of Spain revealed thatSpanish lenders’ use of its emergency  borrowing facility jumped by 16 percent last month to
 €
317bn (£253bn). The banks’ heavy dependence onpublic finding makes the need to cutdown their balance sheets moreurgent, meaning they will have totake heavy losses on billions of proper-ty assets that they have been holdingin the hope that values will rise. The government’s move on Friday is meant to force banks to tackle ahuge overhang of dodgy loans madeduring the housing bubble. BBVA saidthe new rules will force it to put
 €
1.8bn aside for losses, compared toSantander’s extra provision of 
 €
2.7bn.
BY JULIET SAMUEL
But ratings agency Fitch said thatlarge banks like Santander and BBVA are not as badly hit as small and mid-sized lenders because the new provi-sions are only 20-43 per cent of theirprofits versus “nearly three times theiroperating profit” for smaller banks. Therefore, Fitch says: “The govern-ment has incentivised banks tomerge.” Lenders have just under amonth to present plans for how they  will find the money, which couldprompt a frantic round of deal talks. The preparations will be doubly dif-ficult because not only will they needto cover a higher proportion of thelosses with capital that is on standby, but their estimate of the losses willhave to become more realistic. Ratherthan expecting a 25 per cent write-down, they might have to factor in aloss of more than 60 per cent on many of property assets, according to Fitch.Estimates for the size of the totalcapital hole in Spanish banks’ balancesheets range from the government’s
 €
30bn to UBS’s
 €
150bn.
Greek leaders reject president’scall for new technocratic regime
GREEK leaders again failed to forma government last night, as radicalleft wing party Syriza rejected thepresident’s plan to install a new technocratic prime minister.Conservative leader AntonisSamaras accused Syriza leader Alexis Tsipras of being “arrogant”in refusing to join a coalition withthe pro-bailout parties.Meanwhile Evangelos Venizelos,former finance minister and leaderof PASOK, said he was notoptimistic a coalition could be
BY TIM WALLACE
formed, meaning new elections arelikely to be held next month. The technocratic approach has been tried before – unelectedformer central banker LucasPapademos became primeminister late last year, backed by MPs to negotiate the government’s bail out. As politicians have failed toform a government after theelection nine days ago, PresidentKarolos Papoulias suggestedrepeating the process.However Syriza objected, with aspokesman explaining: “We don’t want to consent to any kind of  bailout policies even if they areimplemented by non-politicalpersonalities.”“The fact that it’s going to beimplemented by non-politicalpeople doesn’t change the purposeof this (proposed) government, which is to implement the bailout.”If an anti-bailout government isformed, it could mean the country leaving the Eurozone –Germanchancellor Angela Merkel yesterday said support for Greece wouldcontinue only as long as it kept toits agreements on spending.
PASOK’s Evangelos Venizelos (right) left negotiations last night without forming a governmentTUESDAY 15 MAY 2012
3
NEWS
cityam.com
DeutsheBan-4.1%oiétéGénéale4.2%Llods-5.5%RB-4.8%Bania-8.%antande-3%BBA-3.%
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ditAgiole-5.5%
Bank shares tumbled across Europe yesterday
Funding gap toprompt Spanishbank mergers

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