AIG Said to Mull Leaving Maiden Lane Headquarters

American International Group Inc. (AIG), the insurer rescued by U.S. taxpayers, is weighing a move from its headquarters at 180 Maiden Lane in lower Manhattan, said two people with knowledge of the company’s planning.

The approximately 2,000 employees there may be transferred to other locations as part of a cost-saving consolidation, said one of the people, who asked not to be identified because the deliberations are private. An AIG-owned property at 175 Water St., within walking distance from Maiden Lane, is among the buildings that may absorb the workers, the person said.

AIG’s departure would add to vacancies in lower Manhattan, including space in the World Trade Center and World Financial Center. The Maiden Lane property is co-owned by SL Green Realty Corp. (SLG) and Moinian Group, which have listed about 850,000 square feet (79,000 square meters) in the building as available in May 2014, according to CoStar Group Inc. (CSGP)

“The downtown market is facing an absolute glut of space,” said Aaron Jodka, manager of U.S. market research at CoStar, a Washington-based real estate data service. “Tenants are going to have their choice of space, and it’s going to be very challenging in that environment for landlords to be aggressively pushing rents.”

AIG has less need for space as Chief Executive Officer Robert Benmosche shrinks the company and sells units to pay back a U.S. bailout that swelled to $182.3 billion. The New York- based insurer had 57,000 employees worldwide as of Dec. 31, down from 116,000 three years earlier.
AIG’s Commitment

“No final decisions have been made regarding the 180 Maiden Lane lease,” Jim Ankner, a spokesman for AIG, said in a phone interview today. “We are committed to preserving AIG’s presence in New York City.”

Lower Manhattan’s class A office vacancy rate may climb to 17.4 percent by the end of next year from 8.8 percent at the end of June, according to data from Cassidy Turley, a commercial property brokerage with offices in New York.

One World Trade Center, which the Durst Organization is leasing on behalf of owner Port Authority of New York and New Jersey, has about 45 percent of its 3 million square feet still unrented, according to its developers. Larry Silverstein’s 4 World Trade Center has 1.2 million square feet available, and Brookfield Office Properties’s World Financial Center has about 3 million square feet up for lease after former Merrill Lynch & Co. leases expire next year, according to CoStar.
‘Actively Exploring’

AIG leased more than 800,000 square feet at 180 Maiden Lane as of Dec. 31, SL Green, New York’s largest office landlord, said in its annual report. When SL Green bought its 49.9 percent stake in 180 Maiden last year, it underwrote the deal as if AIG wasn’t going to stay, Andrew Mathias, president of New York- based SL Green, said yesterday on a conference call discussing second-quarter results.

“We’re actively exploring the possibilities of both a redevelopment of the asset and bringing it to the market for new tenants,” Mathias said.

“If there’s any management team out there that will lease up their space, I have more confidence in SL Green,” said Mitchell Germain, an analyst at JMP Securities LLC in New York. “They recognize the market on a positive and on a negative. They see the deficiencies in the market, and they clearly will make sure their product is priced accordingly.”
Tokyo Property

The Maiden Lane property became AIG’s principal office after the company struck a deal in 2009 to sell its previous headquarters at 70 Pine St. to Kumho Investment Bank, a South Korean firm, and Youngwoo & Associates, a Manhattan-based developer. AIG also sold a Tokyo office property to Nippon Life Insurance Co. for about $1.2 billion.

Eric Gerard, a spokesman for Moinian, referred questions regarding the AIG lease to SL Green. Heidi Gillette, an SL Green spokeswoman, didn’t respond to a voice mail.

AIG has said it’s working to cut general and administrative expenses by about $1 billion from 2010 levels by the end of 2015. That’s part of aspirational goals AIG laid out in a 2011 filing, which include increasing its return on equity to at least 10 percent.

S&P 500 Has Longest Weekly Rally Since March on Europe

U.S. stocks rose this week, giving the Standard & Poor’s 500 Index the longest rally since March, amid optimism Europe’s policy makers will act to ease the region’s debt crisis and better-than-expected earnings from Caterpillar Inc. (CAT) to Moody’s (MCO) Corp.

Financial and industrial shares in the S&P 500 climbed at least 2.5 percent as a group, as Caterpillar advanced 6.4 percent and Moody’s jumped 13 percent. Phone stocks surged 3.9 percent, the most among 10 industries, as Sprint Nextel Corp. (S) and MetroPCS Communications Inc. (PCS) beat sales estimates. Apple Inc. (AAPL) and United Parcel Service Inc. (UPS) fell at least 3.1 percent amid disappointing earnings. Facebook (FB) Inc. lost 18 percent after reporting its first results since its initial public offering.

The S&P 500 advanced 1.7 percent to 1,385.97 for the week, rising the most since June and extended its gain for the year to 10 percent. The Dow Jones Industrial Average climbed 253.09 points, or 2 percent, to 13,075.66. Its three-week rally was the longest streak since January.

“There is hope that policy makers will do what they need to do to ease the debt crisis,” said Michelle Clayman, chief investment officer at New Amsterdam Partners in New York, which manages $2.5 billion. “Whenever that happens, the market cheers up again. I’m not sure that it’s an issue of people being so happy. It’s more that things aren’t going to get worse and maybe they will stabilize.”
Lowered Outlooks

Equities slumped in the first three days of the week amid concern more of Spain’s regions will seek aid, while Moody’s Investors Service lowered outlooks for Germany, the Netherlands and Luxembourg. The S&P 500 then posted the biggest two-day rally since December, surging 3.6 percent, after speculation grew that the European Central Bank would buy bonds to ease borrowing costs for Spain and Italy.

ECB President Mario Draghi will hold talks with Bundesbank President Jens Weidmann in an effort to overcome the biggest stumbling block to a new raft of measures including bond purchases, two central bank officials said on condition of anonymity because the talks are private. German Chancellor Angela Merkel, French President Francois Hollande and Draghi pledged to do everything to protect the euro.

Economic reports showed the U.S. economy expanded at a slower pace in the second quarter as a softening job market prompted Americans to curb spending. Consumer confidence in July dropped to the lowest this year, new home sales unexpectedly fell from a two-year high while orders for equipment slumped.
Fed Speculation

Concern about a global economic slowdown and a worsening crisis in Europe sent the S&P 500 down 9.9 percent from its 2012 high in April through June 1. The index has since climbed 8.4 percent after central banks in Europe and China cut interest rates and weaker-than-expected economic data fueled speculation that the Federal Reserve may be close to adding more stimulus. The Federal Open Market Committee meets next week.

“The occurrence of real significant weaknesses will be less and less, unless you have some catastrophic failure in the banking system in Europe,” David Steinberg, who manages about $250 million as founder of Chicago-based DLS Capital Management LLC, said in a phone interview. “Many of the people that want to be out are already out. They’re going to open up their eyes and see that the world is going to continue to go on, and assets are going to go higher.”

An S&P index of financial shares jumped 2.8 percent during the week. JPMorgan Chase & Co. (JPM) climbed 8.8 percent, the most in the Dow, to $36.89, while Goldman Sachs Group Inc. (GS) gained 7.9 percent to $101.64.
Credit Ratings

Moody’s surged 13 percent, the most since October, to $40.91. The second-largest provider of credit ratings reported second-quarter profit that beat analyst estimates as demand rose for its financial information.

Regions Financial Corp. (RF) rose 11 percent to $7.10. The 10th- largest U.S. bank by deposits exceeded estimates for a fourth straight quarter as provisions for loan losses declined.

Caterpillar led industrial companies to a 2.5 percent increase. The largest maker of construction and mining equipment added 6.4 percent to $86.16 after raising its full-year profit forecast. The company, considered a U.S. economic bellwether, is selling more excavators, scrapers and dozers even as it sees a slowdown in some of its largest markets. Machinery sales are climbing as developed countries replace aging equipment and U.S. construction spending gains.

PulteGroup Inc. (PHM), the largest U.S. homebuilder by revenue, climbed 11 percent to $12.01 after reporting better-than- estimated earnings amid a jump in orders. U.S. homebuilders are becoming more profitable as record-low mortgage rates and stabilizing prices lure buyers to new houses.
IPhone Demand

The S&P 500 index of phone companies rallied to the highest level since 2008. Sprint, the third-largest U.S. wireless carrier, jumped 18 percent to $4.31 after iPhone demand helped bolster spending on data plans, lifting the company’s sales above analysts’ estimates.

MetroPCS soared 41 percent, the most since it went public in 2007, to $9.04. The pay-as-you-go wireless carrier reported second-quarter earnings that beat estimates amid a decrease in promotional costs.

While cost cuts helped 72 percent of S&P 500 companies that have reported quarterly results so far exceed analysts’ estimates, sales topped at only 41 percent of companies, according to data compiled by Bloomberg.

Analysts ratcheted down their projections for second- quarter profits at the start of earnings season, forecasting a decrease of 2.1 percent, compared with an increase of 4.4 percent at the beginning of this year, data compiled by Bloomberg show. By the end of the latest week, their outlook improved and they now estimate a 0.8 percent drop.
‘Definitely Suffer’

The earnings beat “shows you that companies are running their business very well and they’re mindful of expenses,” E. William Stone, chief investment strategist at PNC Wealth Management in Philadelphia, said in a phone interview. His firm manages about $112 billion. Their sales picture “does underline that the macro environment is becoming more and more challenging. If it continues to deteriorate, at some point earnings will most definitely suffer.”

UPS, the world’s largest package-delivery company, cut its full-year forecast after a drop in international package sales dragged quarterly profit below analysts’ estimates. The stock declined 3.1 percent to $76.

Apple slipped 3.2 percent to $585.16 after quarterly sales and profit missed analysts’ estimates for the second time since 2003. Customers delayed purchases of existing iPhone versions while awaiting the next model.
Narrower Margins

Facebook plunged 18 percent to a record $23.71 after reporting a slower sales gain and narrower profit margins. Executives led by Chief Executive Officer Mark Zuckerberg, addressing analysts for the first time since the company’s May 17 initial public offering, issued no growth forecasts and said little else to reassure investors who fret that the company is overvalued. The largest social network is down 38 percent from its $38 IPO price.

Raw-material producers posted the only retreat among 10 S&P 500 groups, falling 0.8 percent. Cliffs Natural Resources Inc. (CLF), the largest U.S. iron-ore producer, tumbled 14 percent to $39.39 after the company forecast higher costs and lower prices.

McDonald’s Corp. (MCD) reported second-quarter profit that trailed analysts’ estimates amid slowing U.S. same-store sales and said the restaurant chain may miss its full-year operating income growth target. The shares slipped 2.6 percent to $89.19.

Spain Jobless Reaches Post-Franco Record Amid Austerity: Economy

Spanish unemployment rose to the highest on record after Prime Minister Mariano Rajoy made it easier to fire workers while implementing the steepest budget cuts in the country’s recent democratic history.

Unemployment, already the highest in the European Union, rose to 24.6 percent in the second quarter from 24.4 percent in the prior three months, the National Statistics Institute said in Madrid today. That was the largest proportion since at least 1976, the year after dictator Francisco Franco died, prompting the transition to democracy. The median forecast in a Bloomberg survey of nine economists was 24.7 percent.


The Bank of Spain said this week that the nation’s recession deepened in the second quarter as the government intensified efforts to reduce a budget deficit almost as large as Greece’s. Spanish ministers are focusing on reducing the nation’s debt burden while arguing that the euro area’s monetary policy isn’t helping them to revive its fourth-largest economy.

“We are pessimistic,” said Jose Antonio Herce, a Madrid- based economist at Analistas Financieros Internacionales. “There is every reason to believe activity will contract 2 percent this year and push unemployment to 26 percent.”

Rajoy’s seven-month-old People’s Party government last week gave up on its forecast for the economy to return to expansion next year, replacing a 0.2 percent growth estimate with a prediction for a 0.5 percent contraction. Officials anticipate the economy will shrink 1.5 percent this year while unemployment will peak at 24.6 percent.
No Breadwinners

Today’s jobs data were in line with government forecasts, Deputy Economy Minister Fernando Jimenez Latorre said in Parliament.

More than 50 percent of under 25 year-olds are already jobless in Spain and overall unemployment is as high as 33.9 percent in the southern region of Andalusia, the third-biggest contributor to the nation’s gross domestic product. The number of homes with all breadwinners unemployed has reached 1.7 million, up 27 percent from a year ago.

“The prospect of further employment losses and the end of the tourism season is likely to push the unemployment rate above 25 percent,” Raj Badiani, an economist at IHS Global Insight in London, said in an e-mailed note. “This presents a significant obstacle to any recovery impetus as Spain is set for a deep and prolonged recession.”
Room for Maneuver

Ministers have bemoaned Spain’s lack of room for manoeuver within the single currency to fight its second recession since 2009. The country is experiencing its first major crisis without being able to devalue or increase the amount of money circulating, Economy Minister Luis de Guindos said July 17.

Budget Minister Cristobal Montoro said yesterday the European Central Bank lacked commitment to the monetary union even as its president, Mario Draghi, pledged to do whatever is necessary to defend it. The yield on Spain’s 10-year benchmark bond dropped after the comments and fell further today. It was down 23 basis points at 6.7 percent at 1:32 p.m. in Madrid.

Support for the ruling PP has declined in opinion polls amid spending cuts. A 65 billion-euro ($80 billion) austerity package announced this month, the PP’s fourth since coming to power, has increased to 10 percent of annual GDP the total amount of tax increases and spending cuts the government is trying to implement through 2014.
Labor Overhaul

A labor rule overhaul approved in February made it easier and cheaper to fire workers, leading companies including fashion retailer Adolfo Dominguez SA (ADZ) and cement-maker Cementos Portland SA (CPL) to shed staff. The government needs to step up such measures to overhaul the economy as key energy or public administration reforms have not yet been tackled, Herce said.

“They should’ve been ready to be implemented from day one,” he said. “The PP knew for more than one year before the election that it would come to power.”

Elsewhere today, Japan’s consumer prices unexpectedly fell and retail sales missed analysts’ forecasts, adding to evidence that the economy’s expansion is faltering as gains in the yen and austerity measures in Europe hit exports. In Thailand, industrial output shrank more than economists anticipated in June, sliding 9.6 percent from a year earlier.

The U.S. Commerce Department will release growth figures later today. The data may show that the economy expanded in the second quarter at the slowest pace in ayear. GDP rose at a 1.4 percent annual rate after a 1.9 percent gain in the prior quarter, according to the median forecast of economists surveyed by Bloomberg News.

Barclays’s Lucas Probed in U.K. on Capital-Raise Fee Disclosure

Barclays Plc (BARC) is being investigated over whether it adequately disclosed fees it agreed to pay to the Qatar Investment Authority as it sought to raise money from investors including the sovereign wealth fund, according to a person with knowledge of the situation.

“The bank entered into an agreement for the provision of advisory services by Qatar Investment Authority to Barclays in the Middle East,” the lender said in a June 2008 statement detailing the fundraising. Britain’s Financial Services Authority is probing whether that disclosure was adequate, said the person, who declined to be identified because the terms of the investigation are private.

Barclays’s attempts to put its regulatory troubles behind it in the wake of last month’s record fine for manipulating Libor were complicated today by its disclosure that four current and former senior employees, including Finance Director Chris Lucas, were being probed by the FSA. The bank made the disclosure today as it reported first-half profit that beat analyst estimates.

“We are sorry for what has happened,” Chairman Marcus Agius said in a statement. “However, our leadership continues to focus on the delivery of our financial performance targets.”

Barclays stock jumped 8.7 percent to 167 pence today in London trading, the steepest increase since January. Pretax profit excluding one-time items rose 13 percent to 4.23 billion pounds ($6.6 billion), helped by fewer bad loans at the consumer unit and market-share gains at the investment bank. The result beat the 3.9 billion-pound median prediction of eight analysts surveyed by Bloomberg.
Libor Lawsuits

The shares are still about 13 percent below their June 26 close, the day before the record Libor fines were disclosed. Criticism from lawmakers and the Bank of England forced the resignation of the bank’s top three executives, including former Chief Executive Officer Robert Diamond. Barclays also said today it was the target of more lawsuits linked to claims it rigged the London interbank offered rate. The bank didn’t give an estimate of how much the suits may cost.

Barclays raised 7 billion pounds of capital from investors including the Abu Dhabi and Qatar sovereign wealth funds as the financial crisis worsened in 2008. The move allowed the bank to avoid a government bailout, unlike Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc.
Deliberately Disclosed

“The FSA is investigating the sufficiency of disclosure in relation to fees payable under certain commercial agreements and whether these may have related to Barclays capital raisings in June and November 2008,” the lender said in today’s statement.

Stephen Benzikie, an external spokesman for Qatar Holding, part of the Qatar Investment Authority, and Liam Parker, an FSA spokesman, declined to comment.

Barclays Chairman Marcus Agius said on a call with journalists today that Lucas’s name was deliberately disclosed by the bank as the information was potentially market-moving, and said investigations such as this occur “routinely.” He said the board retained “full confidence” in Lucas.

Roger Jenkins, former head of Barclays’s structured capital markets unit, received a bonus of more than 30 million pounds for helping to broker the investments, while Amanda Staveley of PCP Capital Partners was paid a 40 million-pound commission for her advice, the New York Times reported in November 2008.

“Barclays considers that it satisfied its disclosure obligations and confirms that it will cooperate fully with the FSA’s investigation,” the bank said today.
Investment Banking

Spokesmen for Staveley and Jenkins weren’t immediately available to comment today.

Profit at the retail and business banking unit, overseen by Anthony Jenkins, climbed to 1.7 billion pounds from 1.5 billion pounds in the year-earlier period as provisions for bad loans and costs fell.

Total revenue at the investment bank increased 4 percent in the first half from the year-earlier period to 5 billion pounds, as revenue from fixed income, currency and commodities, known as FICC, jumped 11 percent. The division’s adjusted pretax profit rose to 2.6 billion pounds in the half from 2.4 billion pounds.

Rich Ricci, who runs the investment bank Diamond had built from the 1990s, said the business was gaining market share from rivals.

“In FICC, nobody has done better,” said Christopher Wheeler, a banking analyst at Mediobanca SpA. “The Lehman footprint is very powerful,” he said, referring to the London- based lender’s purchase of Lehman Brothers Holdings Inc.’s U.S. operations out of bankruptcy in 2008.
Wall Street

By contrast, Wall Street’s five biggest banks, including JPMorgan Chase & Co. and Goldman Sachs Group Inc., posted the lowest first-half revenue since 2008 in the first half of 2012 as trading and deal-making dried up.

Total staff costs, including pay and bonuses, fell 8.4 percent to 5.15 billion pounds. The bank isn’t preparing any reductions in headcount, Ricci said.

Ricci is the most prominent Diamond lieutenant left at the bank after Chief Operating Officer Jerry Del Missier and Agius said they would step down after the 290 million-pound Libor fine. The bank has also faced criticism from lawmakers and has been forced to make provisions after regulators ordered it to compensate clients mis-sold payment-protection insurance as well as interest-rate hedging products.

Barclays today said it set aside an extra 450 million pounds during the half to compensate customers who were mis-sold derivatives. The lender has opened an internal review into its business practices, led by Anthony Salz, an executive vice chairman at Rothschild and former corporate lawyer.

Orders Signal Slowdown in U.S. Business Spending: Economy

A slump in June orders for equipment such as computers and machinery signals U.S. business investment will probably cool in the second half of the year and contribute less to the economic expansion.

Bookings for non-defense capital goods excluding aircraft, a proxy for future corporate spending, dropped 1.4 percent, the third decrease in the past four months, according to Commerce Department data issued today in Washington. Another report showed claims for unemployment benefits declined more than forecast last week, which may have resulted from difficulty adjusting data for seasonal shutdowns of auto factories.

Softening overseas demand, slowing U.S. consumer spending and gridlock in Washington over fiscal policy may prompt businesses to put off replacing old equipment, hurting profits at companies like Xerox Corp. (XRX) A report tomorrow is projected to show the world’s largest economy expanded in the second quarter at the weakest pace in a year.

“Business investment has definitely shifted lower,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York. The European debt crisis and fiscal cliff “will put downward pressure on orders, which will translate into weaker growth in the U.S.”

Stocks jumped today as European Central Bank President Mario Draghi said the central bank will do whatever it takes to preserve the euro. The Standard & Poor’s 500 Index climbed 1.7 percent to 1,360.02 at the 4 p.m. close in New York. Treasury securities fell, sending the yield on the benchmark 10-year note up to 1.43 percent from 1.40 percent late yesterday.
Draghi’s Statement

Draghi’s statement at the Global Investment Conference in London today suggested the ECB may intervene in bond markets after a surge in yields of Spanish and Italian securities threatened the existence of the 17-nation currency union.

The U.S. Commerce Department’s report showed total orders for durable goods, those meant to last at least three years, climbed 1.6 percent for a second month, exceeding the median forecast of economists surveyed by Bloomberg News that called for a 0.3 percent gain. The increase was paced by bookings for civilian aircraft and military hardware that are often volatile.

Orders excluding the volatile transportation category unexpectedly dropped 1.1 percent in June, the most in five months. Demand for computers and communications equipment slumped 4.9 percent last month, while orders for machinery decreased 1.1 percent.

Bookings for non-military capital goods excluding aircraft fell at a 3.1 percent annual rate in the second quarter, the first decrease since the same period in 2009, when the U.S. was still in a recession.
Little Momentum

“Global activity has shifted lower,” said Porcelli, who correctly projected the gain in total orders. “It is difficult for demand to gather much momentum at this stage.”

The report contained better news for estimates of business investment last quarter. Shipments of non-military capital goods excluding aircraft, used in calculating gross domestic product, increased 1.2 percent in June after rising 1.1 percent the prior month.

“The strength in underlying shipments bodes well for business investment in Q2, although the weakness of orders suggests that firms have become more uncertain about the outlook for demand,” Peter Newland, an economist at Barclays Capital in New York, said in a note to clients.

Xerox, the Norwalk, Connecticut-based provider of printers and business services, cut its full-year profit forecast as the economic slump in Europe crimped demand for technology.
‘Economic Uncertainty’

“The economic uncertainty has created more pressure especially in Europe and especially in our technology business,” Ursula Burns, chief executive officer, said on a July 20 conference call with analysts.

The economy grew at a 1.4 percent annual rate, down from a 1.9 percent rate in the first quarter, economists forecast a Commerce Department report tomorrow will show, according to the median estimate in a Bloomberg survey. Consumer spending probably rose at a 1.3 percent pace following a 2.5 percent gain in the first three months of the year.

First-time applications for jobless benefits fell 35,000 in the period ended July 21 to 353,000, the Labor Department said. Economists forecast 380,000 claims, according to the median estimate in a Bloomberg survey.

The report extended a period of volatility typically seen in July. Changes in the annual auto plant shutdowns that occur this time of year have made it difficult to adjust the data for seasonal variations, the Labor Department has said.
Employment Outlook

Statistical noise aside, slowing economies in Europe and China, which have reduced global demand for goods, may continue to curb employment. The U.S. presidential election and a looming battle over tax cuts and government spending may also be making businesses reluctant to hire.

“All in all, the labor market is gradually healing,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “We’ve got to take this report with a grain of salt. The jobs market is still tough and we’re setting ourselves up for a soft second half of the year.”

Other reports today showed consumer sentiment fell last week and Americans signed fewer contracts last month to buy previously owned homes.

The Bloomberg Consumer Comfort Index fell to minus 38.5 in the week ended July 22, the lowest level in two months, from minus 37.9 in the previous period. An index of the buying climate, one of the three components of the index, fell to minus 44.7, its lowest reading since May.
‘Deep Funk’

“Household opinion on the state of the American economy remains mired in a deep funk that does not bode well for the spending outlook for the remainder of the year,” said Joseph Brusuelas, a senior economist at Bloomberg LP in New York. “A further deterioration in the BCCI buying index suggests a soft labor market and tepid income gains point to a further loss of momentum in the household sector early in the third quarter.”

The index of pending purchases of existing homes decreased 1.4 percent in June to 99.3 after a revised 5.4 percent gain in May that was less than initially reported, figures from the National Association of Realtors showed.

A lack of inventory may be hurting the market even as record-low mortgage rates make buying a home more affordable.

U.S. Stocks, Commodities Gain on Draghi Pledge as Euro Advances

U.S. stocks snapped four days of losses and commodities rallied after European Central Bank President Mario Draghi pledged to preserve the euro. The 17- nation currency strengthened against the dollar by the most in almost a month.

The Standard & Poor’s 500 Index climbed 1.7 percent at 4 p.m. in New York for the biggest gain in almost two weeks. S&P 500 futures added 0.1 percent as of 5:38 p.m. The Stoxx Europe 600 Index (SXXP) jumped 2.5 percent. The euro appreciated 1 percent to $1.2282 as the dollar weakened against 15 of its 16 major peers. The S&P GSCI gauge of 24 raw materials rose 0.2 percent and oil advanced for a third day. Spain’s 10-year bond yield tumbled 45 basis points to 6.93 percent after reaching the highest in the euro era yesterday.


Draghi suggested policy makers may intervene in bond markets as surging yields in Spain and Italy threaten the existence of the currency bloc. 3M Co., Visa Inc. and Sprint Nextel Corp. gained after posting better-than-estimated quarterly results.

Draghi “dampened some of the fears that something was going to come apart imminently,” said James Paulsen, the chief investment strategist at Minneapolis-based Wells Capital Management. His firm oversees about $320 billion. “He’s basically saying there’s still a lot of will of the ECB leadership to do whatever it takes to keep this thing together.”
Euro Climbs

The euro rose as much as 1.4 percent, the most since June 29, after touching $1.2043 on July 24, the lowest since June 2010. The dollar was little changed at 78.21 yen and higher- yielding currencies including the New Zealand dollar strengthened most against their major peers.

Italy’s two-year note yield fell 88 basis points to 4.06 percent. Rates on Germany’s 10-year bonds climbed six basis points to 1.32 percent, and yields on similar-maturity Treasuries increased three basis points to 1.43 percent.

3M, the maker of products ranging from dental braces to commercial sealants, rose 2.1 percent. Second-quarter profit beat analysts’ estimates as gains in efficiency helped trump a drag from foreign-exchange rates. Visa (V) advanced 3.7 percent. The company has benefited from a consumer shift from cash to electronic payments that shows no signs of abating.

Sprint Nextel rallied 20 percent. Sales at the wireless carrier were bolstered by customers spending more on data plans. Zynga Inc., the biggest developer of games played on Facebook (FB) Inc., plunged 37 percent on disappointing profit.

Facebook slumped 8.5 percent ahead of its first quarterly results since selling shares to the public. After the market closed, it tumbled 9.5 percent at 5:38 p.m. in New York as the company posted a narrower profit margin amid surging costs.
Earnings Season

More than 60 companies in the S&P 500 reported results today. Of the 278 index members to have reported results this quarter, 72 percent have topped analysts’ projections, according to data compiled by Bloomberg.

Applications for jobless benefits decreased by 35,000 in the week ended July 21 to 353,000, Labor Department figures showed. Economists forecast 380,000 claims, according to the median estimate in a Bloomberg survey. Bookings for goods meant to last at least three years rose 1.6 percent for a second month, a report from the Commerce Department showed. The median forecast of economists surveyed by Bloomberg News called for a 0.3 percent gain.

A gauge of U.S. speculative-grade corporate debt risk fell the most in almost a month. The Markit CDX North America High Yield Index, a credit-default swaps benchmark used to hedge against losses on high-yield debt or to speculate on creditworthiness, fell 15.8 basis points, the biggest drop since June 29, to a mid-price of 597.1 basis points, according to prices compiled by Bloomberg.
Sugar, Copper

Oil added 0.5 percent to $89.39 in New York. Copper advanced 0.5 percent and gold rose 0.4 percent. Raw sugar fell the most in more than four weeks in New York as dry weather at top producer Brazil helped accelerate harvesting and boost output this month.

European stocks rose for the first time in five days. Unilever (UNA), the world’s second-largest consumer-goods maker, rallied 5.6 percent in Amsterdam as sales growth beat analysts’ estimates. Rolls-Royce Holdings Plc, the world’s second-largest maker of aircraft engines, rose 6.7 percent as underlying pretax profit topped forecasts.

Royal Dutch Shell Plc, Europe’s biggest oil company, dropped 2.3 percent in London after reporting a bigger decline than projected in second-quarter earnings. Siemens AG, the region’s largest engineering company, slid 1.2 percent after saying its full-year earnings goal has become harder to reach.

The MSCI Emerging Markets Index added 1.3 percent. China’s Shanghai Composite Index fell 0.5 percent, the lowest level since March 2009 as speculation the government will maintain real-estate curbs overshadowed a State Council plan to develop the nation’s central provinces.

VW Calls for Marchionne to Quit as Head of Auto Group

Volkswagen AG (VOW) threatened to leave the ACEA European automakers association in response to comments by Fiat SpA (F) Chief Executive Officer Sergio Marchionne, a measure of rising tensions in the industry as sales slump.

According to a report in the New York Times published yesterday, Marchionne suggested VW’s pricing strategy was creating a “bloodbath.” The newspaper said that Marchionne, who is also president of the ACEA group, and other auto executives accuse the German carmaker of exploiting the debt crisis to expand its market share.

The comments “show once again that Marchionne is not qualified to be ACEA president,” VW’s chief spokesman, Stephan Gruehsem, said in an e-mailed statement, calling for his resignation from the post. VW is also considering leaving the association itself, he said.

The spat highlights the strained relationships in the European auto industry, itself a microcosm of the region’s debt crisis. Wolfsburg, Germany-based VW yesterday reported record first-half profit, while Fiat of Italy and PSA Peugeot Citroen of France contend with widening losses in Europe.

Richard Gadeselli, a spokesman for Fiat, didn’t immediately respond to messages left outside of normal business hours.
Capacity Conflict

Marchionne has needled Volkswagen before, by suggesting German carmakers should do their share in closing excess capacity in Europe. VW, Bayerische Motoren Werke AG (BMW) and Daimler AG (DAI) resisted. Their factories are running at more than 90 percent capacity, versus rates of 60 to 75 percent for other carmakers in the region, according to UBS analyst Philippe Houchois.

European carmakers are extending discounts to attract dwindling buyers, with ACEA predicting sales will fall to a 17- year low this year. Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg- Essen, cited price cuts of about 24 percent on VW’s Golf model in Germany.

The European auto market faces an “elevated risk,” as competition has increased “significantly,” Christian Klingler, VW’s sales chief, said on a conference call yesterday. Auto pricing in Europe is “tense” and “pressure” will continue in the coming months, he said.

IMF Urges Hungarian Overhaul to Spark Growth as Aid Talks Resume

The International Monetary Fund urged Hungary to make the economy more “business friendly” after a week of “constructive” bailout talks as the government said it may alter a tax that’s threatening negotiations.

Hungary “faces a series of interconnected challenges related to high public and external indebtedness, strained bank balance sheets, weak confidence, and elevated risk perceptions,” the Washington-based IMF said yesterday in an e- mailed statement. “The key near-term challenge is to maintain macroeconomic and financial stability.”

Hungary resumed negotiations with the IMF and the European Union last week after an eight-month delay as it seeks about 15 billion euros ($18.2 billion) in aid. A plan to extend a financial transaction tax, which the European Central Bank has criticized, to central bank operations is an issue of contention.

Hungary may be ready to alter the tax if requested by the EU, Mihaly Varga, the government’s chief negotiator in the talks, told Budapest-based HirTV yesterday in an interview. The government will first assess objections from the ECB, he said.

The forint strengthened 1.7 percent against the euro to 283.82 by 7:50 p.m. in Budapest. After plunging 15 percent in the second half of last year, the most in the world, the currency has gained 11 percent in 2012 as investors bet Hungary will obtain an IMF loan.
Weaken ‘Suspicions’

The first round of talks with the IMF and EU served to weaken the lenders’ “suspicions” about Hungary’s economic- policy track record and increased the chance of a deal, Varga said.

Still, “generating higher and more inclusive growth will require more emphasis on structural reforms,” according to the IMF, which said talks will continue.

The government’s economic policy should avoid “ad hoc charges on various sectors of the economy, including the central bank,” the European Commission said in an e-mailed statement.

An IMF loan may help reduce financing costs, Prime Minister Viktor Orban told entrepreneurs yesterday in Budapest. On the other hand, the government must consider what the lender may ask in return and whether the costs outweigh the benefits, he said.

The two sides will discuss the potential size and type of a credit line when talks resume from September, before concluding a deal “by the end of the autumn,” Varga said.
‘Impairs’ Independence

The extension of the transaction tax to include the central bank “impairs” the Magyar Nemzeti Bank’s independence, the ECB said this week in a legal opinion. The levy, which the government expects to introduce in 2013, is projected to cost the banking industry 123 billion forint ($518 million) annually.

The banking industry turned unprofitable for the first time in 13 years in 2011 after Orban forced domestic lenders to swallow losses on Swiss franc mortgages and levied a special tax on commercial banks.

“There was a difference of opinion regarding the transaction tax -- the IMF and EU both put forward an opinion that’s close to the ECB’s stance,” Varga told MR1 radio yesterday in an interview.

Aside from the tax, differences remain between the Cabinet and the lenders over next year’s budget and macroeconomic outlook, while the IMF and EU have called for the number of public employees to be cut, Varga said.

Gross domestic product will expand 0.1 percent this year, Varga said June 13. It will then grow 1.6 percent in 2013, according to estimates approved this month by Parliament. The IMF forecasts output will contract in 2012 and then “recover modestly” next year.

The Cabinet is ready to take further measures to make revenue and spending plans more “well-founded”, Varga told HirTV.

Libor Criminal Probe in U.K. Starts as U.S. Readies Indictments

The U.S. Justice Department is preparing to file charges this fall against traders from several banks in the global probe of interest rate-rigging. Meanwhile, U.K. prosecutors haven’t even decided whether they have a case.

The U.K. Serious Fraud Office opened a criminal investigation this month after Barclays Plc (BARC) was fined a record 290 million pounds ($450 million) by U.K. and U.S. authorities. Politicians including U.K. Chancellor of the Exchequer George Osborne and Ed Miliband, leader of the opposition Labour Party, called for a criminal probe, and the agency was told it would be given a budget to take on the case.

The SFO had declined to get involved in the investigation for more than a year, despite briefings with the U.K. Financial Services Authority and a compilation of findings from U.S. enforcement agents. The U.S. evidence was provided as early as late last year, according to a person familiar with the case who wasn’t authorized to discuss it.

“It’s partly the difference in culture,” said Andrew Haynes, a law professor at the University of Wolverhampton in England. “In America, economic crime is something that’s regarded as desperately serious. In this country it is regarded as a problem, but there’s sometimes a slothful response.”
Dozen Banks

The U.K. joins the U.S. in criminally investigating how derivatives traders and rate submitters colluded to rig the London Interbank Offered Rate, or Libor, and other interest rates. At least a dozen banks are being probed by regulators worldwide.

Royal Bank of Scotland Group Plc, UBS AG (UBSN), Deutsche Bank AG (DBK) and Credit Suisse Group AG (CSGN) are among banks awaiting their fate as regulators from Tokyo to London to New York investigate.

“Now the priority is to come to an assessment whether the available offenses are there for us to prosecute in a criminal court,” SFO spokesman David Jones said. If “the answer to that is yes we can, then we start going hell for leather and putting together a formal investigation team,” he said.

Regardless of the detailed findings involving manipulation of Libor, the SFO didn’t express any interest in the matter until recently, the person said. The agency appointed a new director, David Green, in late April.

“We were in constant liaison with the SFO, and have been throughout, but ultimately the SFO’s decisions as to what they do are matters for the SFO,” Tracey McDermott, the FSA’s acting head of enforcement, told British lawmakers July 16.
Low Submissions

Barclays employees tried to manipulate Euribor and Libor for profit, while managers instructed rate-setters to make artificially low submissions to avoid the perception the lender was under stress amid turmoil in credit markets in 2007 and 2008, according to the settlement.

As part of the U.S. and U.K. settlements, Barclays admitted rigging rates as early as 2005. Chief Executive Officer Robert Diamond and Chief Operating Officer Jerry Del Missier resigned over the scandal.

The U.S. charges against individuals, which would probably be filed by October, center on alleged rate-fixing activity that goes beyond the conduct described in last month’s settlement between Barclays and regulators, according to the person familiar with the case.

Initially prosecutors aimed to bring charges as soon as Labor Day, the U.S. holiday on Sept. 3, against traders who illegally manipulated Libor rates. The eruption of political and public anger following the Barclays settlement captured the attention of other regulators in the U.S. and U.K., as well as lawmakers in Congress and Parliament.
Wider Interest

The wider interest in the Libor case in turn has altered the trajectory of the criminal probe, changing the timetable of criminal charges, the person said.

The Justice Department investigation of criminal activity related to Libor is moving on a parallel course with civil probes of the banks being conducted by the U.S. Commodity Futures Trading Commission, the U.S. Securities and Exchange Commission and U.K. regulators, including the Serious Fraud Office.

The Barclays settlement required approval of the CFTC, the Justice Department and the U.K.’s Financial Services Authority. Future civil settlements will also require agreement from the SEC and the Serious Fraud Office.

U.S. prosecutors have been criticized for failing to bring any “meaningful” cases against individuals stemming from the financial crisis, said Michael Perino, a law professor at St. John’s University in New York.
‘Pent-Up Anger’

“A lot of what led to the financial crisis was reckless behavior that might not have been criminal,” Perino said. “There is this remaining pent-up anger that a different set of rules seems to apply to banks and Wall Street.”

Barclays is assisting the investigation into other firms and individuals and was the first to provide “extensive and meaningful cooperation,” the Justice Department said.

The SFO is likely to hire outside investigators to assist with the case if they decide it’s likely they’ll be able to bring charges, Jones said. They may ask the FSA for two or three secondees to help them, and the Treasury may provide more than 3 million pounds.

The case is currently being handled by division heads Satnam Tumani and Jane de Lozey, and the agency has hired the senior barrister Mukul Chawla to be their lead external lawyer on the investigation.

“Has the Serious Fraud Office got the message loud and clear that if it is possible to get a charge on these people, the public want that?” Andrew Tyrie, the chair of the U.K. Parliament’s Treasury Select Committee, asked the FSA’s McDermott at the hearing on the Libor case.
Lack of Evidence

The SFO was criticized under its previous director, Richard Alderman, for taking on high-profile investigations, including ones into American International Group Inc.’s Financial Products unit and convicted swindler Bernard Madoff’s London operations, only to close them later without charges, citing a lack of evidence. The agency has also faced a shrinking budget, a fight with the Home Office to save it from dissolution, and a staff exodus prior to Green’s arrival.

“They don’t have a glorious history in terms of getting on top of these things,” Wolverhampton’s Haynes said. “It could be partly that it falls into the cracks between the SFO and the FSA, and doesn’t clearly land on anyone’s lap.”

Analysis: Hollande's growth drive dogged by reality of austerity

The champion of a moderate stimulus plan for Europe, at home French President Francois Hollande is turning his back on the sort of infrastructure investment he hopes will revive European growth.

His cash-strapped Socialist government is considering scrapping all but the most needed projects as it is forced to weigh questionable economic benefits in an era of belt-tightening.

Yet, more investment in infrastructure lies at the centre of the 120 billion ($145 billion) European financing package that the French leader spearheaded in his first months in office.

In a country already crisscrossed with high-speed trains and world-class motorways, the national audit office said many of France's highest-profile projects in the pipeline were incompatible with a push to rein in the deficit.

Its call has not fallen on deaf ears in the government, which has pledged to be pickier about projects and is even considering ditching some planned high-speed rail lines.

Not only is the utility of more infrastructure an open question, but some economists say the knock-on boost to jobs and consumer spending hoped for may well not materialize.

"A stimulus plan focused on infrastructure projects that only makes the deficit worse bears medium-term risks that outweigh the weak boost to growth in the short-term," said economist Denis Ferrand at think-tank Coe-Rexecode.

BELT-TIGHTENING

Hollande rode to power in May, pledging to shift Europe's focus away from austerity towards boosting growth with a strategy for firing up investment mainly in infrastructure and increasing lending to smaller companies.

Having pledged during the campaign to decimate France's public deficit and debt, Hollande counted on pro-growth rhetoric to make his belt-tightening plans more palatable to voters.

At a June summit, European leaders signed up to jointly-underwritten project bonds aimed at financing transport, energy and broadband and for mobilizing billions of unused EU funds earmarked for developing poor regions.

In addition, there are plans to ramp up the European Investment Bank's capital by 10 billion euros so that it could increase its lending capacity by 60 billion euros.

Prime Minister Jean-Marc Ayrault has urged ministries to come forward with project proposals so that France gets a share of the cash. But while the government has its eye on the new money, it is also planning stiffer controls on its own public investment and is charging former EADS CEO Louis Gallois to vet projects in the works.

"Only the most pertinent projects will be retained," said a finance ministry document drafted to prepare debate in parliament on the 2012 budget.

Hollande's government has embarked on one of the biggest reductions in the deficit that modern France has ever seen as the government struggles to cut the budget gap to 3 percent of GDP next year from 4.5 percent this year despite a deteriorating growth outlook.

In a sign of greater caution towards spending, Budget Minister Jerome Cahuzac said last week that the government may axe plans for a major, but costly extension of the high-speed train network.

"It's fair to ask whether we should extend this or that TGV line for marginal time gains," Cahuzac said.

The state auditor estimates public investment in transport, including 14 TGV lines due to be built by 2020, would top 150 billion euros for the central government and local authorities.

The minister in charge of urban planning, Cecile Duflot, said last month that plans should be reconsidered for a major overhaul of infrastructure around Paris that Hollande's conservative predecessor Nicolas Sarkozy had championed.

Also, at a European level, Hollande advisor Philippe Aghion said there should be less focus on grand infrastructure projects.

"The EIB invests too much in infrastructure and transport and not enough in energy and growth enhancing sectors," said Aghion, who is a teacher at Harvard.

FLAWED ECONOMIC LOGIC?

France already ploughs more money into investment than most other EU countries with gross capital formation in the public sector standing at 3.1 percent of GDP last year, a level that has varied little over the past 30 years.

One of the main arguments in favor is that it generates further spending and activity, boosting growth as the injection of public funds filters through the economy.

However, economists warn that such a boost may prove more muted than in the past because over-stretched consumers and companies not only in France but across southern Europe are more likely to be frugal with any spare cash that comes their way.

"If you're a borrower and you have taken on too much debt and you get additional income, what do you do? You try to repay your debt, you're not going to spend it," said economist Claudio Borio.

"The multiplier effect is very low," said Borio, who is deputy head of the monetary and economic department at the Bank for International Settlements.

In France, strained corporate balance sheets make it more likely that companies benefiting from an increase in public investment will reduce debt rather than take on staff and make investments. Corporate debt is running at a record 66 percent of GDP while profits are at their lowest level since 1985, which is weighing on investment.

Households' balance sheets are faring little better, which means extra cash that trickles down to them risks being saved rather than spent. Household debt is also running at a record 55 percent of GDP and they are already saving record amounts.

With little scope for more public investment, the government is counting on the private sector to spend more with financing from a new public investment bank, which is supposed to consolidate various existing state-backed financing bodies.

It would focus in particular on small and mid-sized companies, which are having the most trouble raising funds.

However, Ferrand at Coe-Rexecode said the best way to fix the growth outlook was to stick to the government's deficit targets and carry out reforms to make companies more competitive internationally.

"A real, economically pertinent stimulus plan is one that allows us to get back on track and restore our competitiveness, which has been the French economy's weak spot," Ferrand said.

"A classic Keynesian stimulus plan does not seem to us to be the best way forward," he said. ($1 = 0.8253 euros)

Spain, France want single bank mechanism by end 2012

The finance ministers of France and Spain called on Wednesday for common euro zone bank supervision to be put in place by the end of the year, as fears grow over soaring borrowing costs in Spain that are pushing the country towards needing a bailout.

French President Francois Hollande also said that measures decided at a European Union summit late last month needed to be implemented quickly, as Spain battles to put its finances right.

The joint call for bank supervision by Spanish Economy Minister Luis de Guindos and French Finance Minister Pierre Moscovici after a meeting in Paris echoed remarks made by de Guindos and German Finance Minister Wolfgang Schaeuble after they met on Tuesday.

"Our common strategy for the stability of the euro area includes the adoption, by the end of this year, of a single supervisory mechanism for banks of the euro area, involving the ECB," de Guindos and Moscovici said in a joint statement.

"We expect proposals by the Commission by September and commit to a swift negotiation. This supervisory mechanism will open the way for direct recapitalizations with appropriate conditionality," they said.

They said Spanish debt yields, which have surged above 7 percent, do not reflect Spain's economic fundamentals, its growth potential and the sustainability of its public debt.

The proposed banking union needs to be in place before the euro zone's permanent ESM rescue fund can provide aid directly to banks, under measures agreed at the June 28-29 summit to make the EFSF/ESM rescue funds more flexible and efficient.

Hollande discussed the worsening crisis at a cabinet meeting on Wednesday, including Moody's new negative credit rating outlooks on German and Dutch debt, and talked about the need for the European Union to be able to respond to developments as fast as markets do, government spokeswoman Najat Vallaud-Belkacem said.

Hollande told his ministers it was "absolutely necessary to implement decisions made at the June European Summit quickly and firmly," Vallaud-Belkacem said, when asked what the president had said about the risks of Spain needing a bailout.

Spain and Italy have called for more to be done to ward off market pressure. The ECB has cut interest rates but has shown marked reluctance to revive its bond-buying program to lower borrowing costs.

De Guindos told a Reuters reporter as he left the French finance meeting that his meeting with Moscovici had gone "very well" but did not expand.

Moscovici told parliament he had assured de Guindos of France's support for Spain during a banking crisis there that is affecting the whole euro bloc. "You can count on our determination to get the euro zone back on its feet," he said.

Vallaud-Belkacem and a second government official said Hollande's other concern was to get moving with applications for project bonds and other investment financing made available under a 120 billion euro growth package for the bloc.

Spain and Italy also called for a swift implementation of the EU summit decisions during a meeting in Brussels on Tuesday of their and France's European affairs ministers, according to a statement by the Spanish government.

Senate panel clears intel bill with tight curbs on leaks

Budget legislation passed by the U.S. Senate intelligence committee authorizes a crackdown on security leaks, including curbs on how many officials can talk to the media and steps to punish unauthorized disclosures, lawmakers said on Wednesday.

The Intelligence Authorization Act for Fiscal Year 2013, passed the Democratic Party-controlled committee by a 14-1 vote on Tuesday, Chairman Dianne Feinstein and Vice Chairman Saxby Chambliss said in a statement.

Media reports in recent months based on high-profile leaks about U.S. cyber-warfare against Iran, procedures for targeting militants with drones and a double agent who penetrated a militant group in Yemen have angered U.S. lawmakers.

The vote came five days after Defense Secretary Leon Panetta ordered senior Pentagon officials to begin monitoring major U.S. news media for disclosures of classified information in an effort to stop the release of government secrets.

"Leaks of classified information regarding intelligence sources and methods can disrupt intelligence operations, threaten the lives of intelligence officers and assets, and make foreign partners less likely to work with us," said Feinstein, a Democrat from California.

"The culture of leaks has to change," she said in a joint statement with Chambliss, a Georgia Republican.

According to their statement, key provisions aimed at stemming leaks include requirement that the executive branch notify Congress when disclosing intelligence information to the public.

The legislation restricts the number of intelligence community employees authorized to communicate with the media and prohibits current and former intelligence officials from signing certain contracts with media organizations.

The bill, which requires passage by both chambers of Congress to become law, also requires the director of national intelligence to beef up its system for investigating leaks and to strengthen intelligence agencies non-disclosure agreements and penalties for unauthorized leaks.

Chambliss called the leaks provision a "strong step toward stemming the torrent of leaks" and said it was negotiated with the House of Representatives.

"I urge the administration to reject the status quo and work with Congress to pass these and any other needed changes into law," he said.

Attorney General Eric Holder appointed two chief federal prosecutors last month to spearhead an investigation into suspected leaks of classified information amid allegations the White House made the disclosures to boost President Barack Obama's re-election chances.

Republican presidential candidate Mitt Romney on Tuesday blamed the White House for leaks to the media about the raid that killed al Qaeda leader Osama bin Laden and cyber-warfare aimed at slowing Iran's nuclear program.

"This conduct is contemptible," Romney said. "It betrays our national interest. It compromises our men and women in the field. And it demands a full and prompt investigation, with explanation and consequence," Romney told a convention of the Veterans of Foreign Wars.

Visa Profit Beats Estimates as Credit-Card Spending Climbs

Visa Inc. (V), the world’s biggest bank- card network, posted a fiscal third-quarter profit that beat analysts’ estimates as credit- and debit-card spending rose.

Adjusted net income for the three months ended June 30 climbed to $1.06 billion, or $1.56 a share, from $883 million, or $1.26, a year earlier, the San Francisco-based company said today in a statement. The average estimate of 34 analysts surveyed by Bloomberg was $1.45 a share. Adjusted profit excludes a $4.1 billion provision tied to the company’s settlement of a U.S. antitrust lawsuit.

Visa, led by Chief Executive Officer Joseph W. Saunders, 66, has benefitted from a consumer shift from cash to electronic payments that shows no signs of abating, while parrying challenges to its business model. Visa, MasterCard Inc. (MA) and some of the biggest U.S. banks agreed this month to settle the lawsuit brought by merchants who accused the financial firms of rigging credit-card fees.

“Visa once again reported solid global growth in payments volume, cross-border transactions and processed transactions outside the U.S.,” Saunders said in the statement. “We are pleased that we were able to come to a resolution in the merchant litigation.”
Temporary Cut

The accord includes $6.6 billion in payments to retailers and a temporary cut in fees that banks earn on each transaction. Visa’s $4.4 billion share of the settlement would be covered by an escrow account established in cooperation with U.S. banks that owned the company before its 2008 initial public offering. Purchase, New York-based MasterCard, which reports results next week, said the settlement would cost it $790 million.

Visa reported a net loss including the litigation provision of $1.84 billion, or $2.74 a share, compared with net income of $1.01 billion, or $1.43, a year earlier.

Visa climbed 2.2 percent to $124.91 at 5 p.m. in extended trading in New York. The shares have climbed 37 percent in the past 12 months, the third-best performance in the 71-company Standard & Poor’s 500 Information Technology Index after Seagate Technology Plc and Apple Inc. MasterCard’s 30 percent gain ranks fourth.
Profit Outlook

The company updated its profit outlook, saying annual earnings-per-share growth would be in the “low twenties,” up from a May forecast of “high teens to low twenties,” according to the statement.

Saunders also overhauled Visa’s fee structure on debit cards after new U.S. rules took effect in October. The limits on debt-card fees and processing, mandated by the Dodd-Frank Act, may have helped MasterCard wrest market share from Visa, which handled about triple the amount of such purchases than its smaller rival in the fiscal year ended Sept. 30.

The U.S. Justice Department’s antitrust division issued a civil investigative demand on March 13 asking Visa for information about the new strategy, Saunders said in May.

Saunders has said he intends to generate more than half of Visa’s revenue from outside the U.S. by 2015, up from 44 percent in fiscal 2011.

Visa’s share of worldwide purchase transactions on credit and debit cards, including those processed by Visa Europe Ltd., fell 1.1 percentage points last year to 64.67 percent as MasterCard’s share grew by almost 0.5 percentage point to 25.57 percent, according to the Nilson Report, an industry newsletter based in Carpinteria, California.

Caterpillar Echoing Wall Street Rebuts Gross’s Pessimism

Caterpillar Inc. (CAT), among the first companies to ring warning bells about the recession in 2007, isn’t subscribing to the pessimism of investors such as Bill Gross even while moderating its global growth projections.

A U.S. recession this year is unlikely and the economy will probably grow slightly more than 2 percent, down from an April forecast for about 3 percent, Caterpillar said yesterday in its second-quarter earnings statement. The climate is different than in 2008 because short-term interest rates are lower, central banks are prepared to inject more liquidity and the U.S. housing market is slowly improving rather than falling off a cliff, the company said.

“The good news is, this doesn’t feel like 2008,” Chief Executive Officer Doug Oberhelman said in the statement.

Caterpillar has a track record of accurate forecasts. In October 2007 it said the U.S. may fall into a recession, in contrast to the outlook of companies including Ford Motor Co., DuPont Co. and Intel Corp. at the time. Caterpillar, considered a U.S. bellwether because it’s the world’s largest maker of construction and mining equipment, proved to be correct as the economy experienced a slump that began in December 2007 and ended in June 2009.

Caterpillar’s projections this year are more in sync with the majority view of economists and contrast with comments made by Gross in a July 16 Twitter post. Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the U.S. is “approaching recession when measured by employment, retail sales, investment and corporate profits.”
‘Muddle Through’

Improvement in the U.S. economy, a “muddle through” scenario for Europe and China trying to ramp up investments with its slowdown bottoming will produce a pickup in world growth later this year and into 2013, Bob Baur, chief global economist for Principal Global Investors, which manages about $260 billion, said in a telephone interview.

Caterpillar, while lowering the upper end of its sales forecast partly on a “weaker” global economy, raised its 2012 profit outlook and said actions to spur growth have begun in several countries.

Brazil late last year began lowering interest rates and China’s investment initiatives should help growth later this year and into 2013, the company said. In Europe, the central bank’s monetary easing and a commitment to solving the debt crisis are improving the euro zone’s long-term outlook, the company said.
‘Growth Prospects’

“We understand the world economic horizon is hazy,” Ed Rapp, chief financial officer of Peoria, Illinois-based Caterpillar, said in a video posted on the company’s website. “We are encouraged by the pro-growth actions by governments and central bankers throughout the world that are intended to stimulate world economic growth prospects moving forward and out into 2013.”

Prospects for growth in the U.S. likely will improve next year if there is more clarity on issues such as taxes and health care, Rapp said yesterday in an telephone interview.

Global growth will average 2.5 percent this year, lower than the expansion of more than 3 percent it forecast in April, Caterpillar said.

“We are planning for a world that is growing anemically in the next 24 months,” Oberhelman said yesterday on a conference call to discuss his company’s earnings. “We are not planning for an implosion.”
‘Modest Signs’

A majority of economists forecast the world’s largest economy may avoid a recession even as growth decelerates amid a cooling job market.

Federal Reserve officials predict a U.S. expansion of 1.9 percent to 2.4 percent this year, with unemployment stuck in a range of 8 percent to 8.2 percent. The probability of a U.S. recession within the next 12 months held at 20 percent this month, according to the median forecast of economists in a Bloomberg News survey taken from July 6 to 10.

“We should see a little faster growth in the second half,” said Baur, who is based in Des Moines, Iowa. “The U.S. is still on a healing path. I don’t see a recession imminent on the horizon.”

U.S. housing, the industry that helped trigger the recession, is stabilizing. Fed Chairman Ben S. Bernanke, in testimony to Congress last week, said growth in construction and historically low mortgage rates are among “modest signs” of a housing recovery, even as some buyers show concern about personal finances and the broader economy and have difficulty meeting lending standards.
Bright Spot

Caterpillar forecast housing starts will exceed 750,000 units this year. While down from its prior forecast of 800,000 units, the prediction represents the best level since 2008.

The auto industry remains a bright spot in the U.S. Economic growth is helping drive sales for Ford as more consumers trade in their older vehicles for newer models, said Alan Mulally, chief executive officer of the Dearborn, Michigan- based carmaker. In the first half of the year, annualized U.S. vehicle sales rose to 14.6 million from 12.8 million a year ago, according to Ford (F), which includes medium- and heavy-duty trucks.

“Even though it’s a slower recovery than we’ve had from past recessions, we’re seeing that expansion of around 2 percent to 2.5 percent,” Mulally said of the U.S economy on a conference call yesterday.
‘Fragile’ World

FedEx Corp. (FDX), the world’s largest cargo airline, last month forecast 2.2 percent U.S. economic growth this year, up from a projection of 2.1 percent in March. The company, which carries everything from mobile devices to pharmaceuticals, said it expects the economy to accelerate to 2.4 percent in 2013, contingent on the U.S. avoiding a significant tax increase.

Boeing Co. (BA) Chief Executive Officer and Chairman Jim McNerney said yesterday “the world is a fragile one economically.”

“Despite slower global economic growth and a range of uncertainties, including the European sovereign debt crisis, we continue to see positive worldwide expansion in air traffic,” McNerney said on an earnings call with analysts.

Not all companies are sanguine. United Parcel Service Inc. (UPS), the world’s largest package-delivery company, said on July 24 that a gradual deceleration of business-to-business shipments reflects a softening of the U.S. economy in the second half of 2012 from earlier this year. UPS predicted the U.S. economy will slow to 1 percent growth in the last six months of the year.
‘Too Optimistic’

“Right now, the estimates are a little too optimistic,” UPS Chief Financial Officer Kurt Kuehn said July 24 in a telephone interview. “We’re not trying to ring the alarm bell, but we do think that there’s probably a little more likelihood that the numbers will turn lower than estimates.”

Caterpillar climbed as much as 4.9 percent earlier yesterday in New York trading after it posted record profit and sales in the second quarter.

Still, the stock dropped as much as 1.4 percent midday because investors were concerned about macroeconomic risks and that rising inventories may hurt the company if the situation worsens, Larry De Maria, a New York-based analyst for William Blair & Co. who has a buy rating on the company, said in an e- mail yesterday.

At the close yesterday, Caterpillar rose 1.4 percent to $82.60.

“Although we think that macroeconomic concerns could continue to be a driver of the stock in the near term, we think today’s results demonstrate the company’s ability to execute at a high level,” Barclays Capital analysts led by Andy Kaplowitz said yesterday in a note.
Slower Growth

Kaplowitz, based in New York, said in a telephone interview that Caterpillar has “tended to err on the side of optimism in its recent forecasts,” which has worried investors.

“The expectations around the U.S. economy were for slower growth and Caterpillar was going to have to moderate its comments,” said Kaplowitz, who has a buy rating on the shares. “That’s what Caterpillar has done.”

“Investors believe the U.S. economy is choppy and slower growing than we believed a few months ago,” Kaplowitz said. “But growth is not stopping. There are still some drivers of growth.”

Worse Euro Crisis Needed for Germany to Yield: Tom Keene

Europe won’t be able to resolve its debt crisis until the economy worsens, pushing Germany to allow support for Spain and Italy, said Julian Callow, chief international economist at Barclays Plc in London.

“We’re going to see Spain and Italy arguing more and more forcefully to Germany that the current strategy is not working,” Callow said today in a radio interview on “Bloomberg Surveillance” with Tom Keene. “These economies are just sinking here, putting the pressure on Germany.”

German Chancellor Angela Merkel’s ability to offer support to other European nations may be curbed by voter opposition before federal elections in Europe’s largest economy next year, Callow said. A worsening economic outlook would increase pressure for action, he said.

“It only really gets addressed as the economy gets worse and worse, and, moreover, as the pressures build up,” Callow said. “There’s an election in Germany scheduled for September next year and Chancellor Merkel has her eye on that.”

He said German public opinion is “turning quite significantly against” providing more financing.

Europe’s debt crisis intensified this week as Moody’s Investors Service cut the outlooks on the Aaa credit ratings of Germany, the Netherlands and Luxembourg to negative.
Euro Exit

The risk that Greece will leave the euro area and “increasing likelihood” of collective support for countries in debt such as Spain and Italy were among reasons for the change, Moody’s said in a statement on July 23.

Spain’s two-year note yield fell from a euro-era record after European Central Bank council member Ewald Nowotny said there are arguments in favor of giving the European Stability Mechanism, the permanent bailout fund, a banking license. Callow did not predict that the ECB will support Nowotny’s proposal under current conditions.

“The ECB has made it very plain,” Callow said. “Its interpretation of the EU Treaty is that it’s not authorized to be able to lend to this new fund, the ESM.”

Granting a banking license to Europe’s permanent bailout fund would give it access to ECB lending, easing concerns that its 500 billion-euro ($608 billion) cash pot won’t be enough if Spain or Italy requires aid. Callow said that Chancellor Merkel would have to find a way to give an opinion or revise the treaty if the banking license were to come to fruition.

“That, therefore, is going to be some way off,” he said.

European Stocks Drop as U.K. GDP Shrinks

European (SXXP) stocks retreated for a fourth day as reports showed the U.K. economy shrank the most in three years last quarter and U.S. new-house sales unexpectedly dropped last month.

BT Group Plc (BT/A) slid 3.3 percent after the U.K.’s largest fixed-line phone company posted falling sales. Drax Group Plc (DRX) tumbled 15 percent after the U.K. government revised its subsidies for renewable energy. Daimler AG (DAI) jumped 4.1 percent after forecasting that operating profit will not drop in 2012.


The Stoxx Europe 600 Index slid 0.1 percent to 250.39 at the close of trading. The benchmark measure has slipped 4.4 percent over the last four days on concern that Greece will default and more Spanish regions will follow Valencia in seeking a bailout from the central government.

“The U.K. gross domestic product number was a bit of a startler,” said Mike Lenhoff, chief strategist at Brewin Dolphin Securities Ltd. in London. “After three quarters of negative growth, the U.K.’s now firmly in the European camp of stagnation. Decent earnings results, particularly from the big international companies, are providing some support.”

In the U.K., the economy shrank the most since 2009 in the second quarter, deepening the country’s double-dip recession. Gross domestic product fell 0.7 percent from the first quarter, the Office for National Statistics said today. Economists had forecast a 0.2 percent drop, according to the median of 36 estimates in a Bloomberg News survey.
Business Confidence

In Germany, a gauge of business confidence slipped in July to the lowest level since March 2010. The Ifo institute’s business climate index, based on a survey of 7,000 executives, dropped to 103.3 from 105.2 in June.

Greece’s Prime Minister, Antonis Samaras, will meet with representatives of the European Commission, the European Central Bank and the International Monetary Fund -- the so-called troika -- on July 27, amid concern the country will fail to abide by the commitments needed to obtain continued financial aid.

Yields on Spain’s two-year notes rose to as much as 7.15 percent earlier today, climbing above 7 percent for the first time since the single currency came into being.

In the U.S., sales of new houses dropped in June from a two-year high. Purchases decreased to a 350,000 annual rate, down 8.4 percent from May and the weakest since January, the Commerce Department reported today in Washington. The median estimate in a Bloomberg survey of 74 economists was 372,000.
China Economy

China’s slowing economy faces significant risks and relies too much on investment, the IMF said in an annual review. The Washington-based lender repeated an assessment that the yuan is “moderately” undervalued, and urged leaders to increase consumption and channel citizens’ savings away from housing.

National benchmark indexes rose in 14 of the 18 western- European markets. The U.K.’s FTSE 100 Index fell less than 0.1 percent, while France’s CAC 40 Index gained 0.2 percent. Germany’s DAX Index climbed 0.3 percent.

BT slid 3.3 percent to 210.2 pence, its biggest retreat in six weeks, after reporting fiscal first-quarter sales of 4.48 billion pounds ($6.9 billion). That missed the average analyst estimate of 4.58 billion pounds in a Bloomberg News survey.

Drax Group, the owner of the U.K.’s largest coal-fired electricity plant, tumbled 15 percent to 442 pence, its biggest plunge since at least 2005. The Department of Energy and Climate Change revised its subsidies for renewable energy, offering less financial support than predicted for generators planning to switch to burning low-carbon fuel.
GlaxoSmithKline

GlaxoSmithKline Plc (GSK) slid 1.3 percent to 1,426.5 pence after cutting its sales forecast for the year. The London-based company reported second-quarter core earnings per share of 26.4 pence, lower than the average analyst estimate of 26.8 pence.

Informa Plc fell 5.3 percent to 350.4 pence. The publisher of Lloyd’s List posted a first-half loss compared with a profit a year earlier as it sold events businesses in Hungary, Austria, the Czech Republic and parts of Germany.

Daimler advanced 4.1 percent to 37.62 euros after saying second-quarter sales increased 10 percent to 28.9 billion euros ($35 billion). The world’s third-largest maker of luxury cars also posted earnings before interest and taxes of 2.24 billion euros, in line with the 2.2 billion-euro average of analyst estimates compiled by Bloomberg.

Lonza Group AG (LONN) jumped 3.7 percent to 45.50 Swiss francs after saying first-half Ebit increased 24 percent to 168 million francs ($170 million), beating the 154.6 million-franc average estimate in a Bloomberg survey of analysts.

The volume of shares changing hands in companies listed on the Stoxx 600 was 23 percent lower than the average of the last 30 days, according to data compiled by Bloomberg.

The VStoxx Index, which tracks Euro Stoxx 50 Index option prices, sank 4.5 percent to 27.18.

ECB’s Nowotny Sees Some Arguments for ESM Banking License

European Central Bank council member Ewald Nowotny said there are arguments in favor of giving Europe’s rescue fund a banking license, reviving the debate on bolstering its firepower as leaders face the prospect of a full- scale Spanish bailout.

“I think there are pro arguments for this,” Nowotny, who heads Austria’s central bank, said in an interview in his office in Vienna yesterday. “There are also other arguments, but I would see this as an ongoing discussion,” he said, adding he’s “not aware of specific discussions within the ECB at this point.”

Granting a banking license to Europe’s permanent bailout fund, the European Stability Mechanism, would give it access to ECB lending, easing concerns that its 500 billion-euro ($602.5 billion) cash pot won’t be enough if Spain or Italy require aid. While ECB President Mario Draghi said on May 24 that such a move amounts to the central bank financing governments, which is prohibited by European Union law, publicly-owned credit institutions such as the European Investment Bank are exempt.

“It is not something that is only in the field of monetary policy, so this is part of a broad discussion,” Nowotny said. He declined to elaborate.

The euro rose for the first time in six days against the dollar and the yen after the comments were published, jumping more than half a cent to $1.2127 at 11:10 a.m. in Frankfurt. Yields on Spanish and Italian bonds declined while German bund yields rose.
EIB License

The EIB, which was founded in 1958 and is owned by the member states of the EU, was granted access to ECB refinancing in July 2009. Nowotny said the fact that the ESM has missed a July deadline to become operational is a “weakness that has to be overcome.”

“Nowotny’s comments indicate that there is a debate, but they do not necessarily signal how that debate will be resolved,” said David Mackie, chief European economist at JPMorgan Chase Bank in London. If Spain and Italy lose market access, “the liquidity hospital would need to be redesigned, in terms of size, seniority and funding,” he said.

Spanish 10-year bond yields this week surged to a euro-era record above 7.6 percent, fueling speculation it may require a full-scale bailout. The ECB this month cut its benchmark rate to a record low of 0.75 percent and took its deposit rate to zero as the worsening economic outlook damps inflation pressures.
Growth Dynamics

“Growth dynamics for the euro zone as such are tending to be lower than we had been expecting at the start of the year,” Nowotny said. “Inflation also tends to be lower, and what we see is that divergences in the economic dynamics between member countries of the euro zone unfortunately have a tendency to increase.”

While Nowotny didn’t rule out further downward moves in interest rates, which could involve lowering the deposit rate into negative territory, he said this “has to be decided at a later stage.”

“We do not have experience of course with negative deposit rates,” he said. “Some central banks are experimenting with this, for instance the Danish central bank. There might be some technical problems to applying negative rates for the deposit rate. For the time being this is not a practical aspect that is being discussed.”

Inflation will come down, Nowotny said, adding in a separate interview with Bloomberg Television that the ECB sees “no deflation perspective.”
Bank Supervisor

Nowotny urged European leaders not to rush plans to construct a single European bank supervisor, which will likely result in the ECB assuming greater powers as the euro area attempts to break the link between failing banks and sovereigns. The European Commission is due to present proposals in September.

“I personally very strongly advocate that our first priority should be to build a high-quality, stable system,” he said. “Quality is more important than velocity.”

Nowotny said while he doesn’t consider that all of the EU’s 27 members would submit to the new single supervisor -- the U.K. being the most likely outsider -- large, cross-border institutions and smaller local banks should be overseen by the same regulator with powers to intervene when needed.

“For the smaller banks the prime operational side for technical reasons has to be with the national supervisors,” he said. “Only they have the manpower, the local knowledge, the direct access.”

At the same time, the ECB should have “the right to intervene in specific cases,” Nowotny said. “It is possible to have supervision out of Frankfurt, but you have to work with the local supervisors.”

U.S. Stocks, Commodities Drop on Greece Concern, Profits

U.S. stocks dropped for a third day and commodities slid as speculation increased that Greece may miss debt reduction targets and United Parcel Service Inc. cut its profit forecast. German bonds fell after Moody’s Investors Service lowered the outlook on the nation’s Aaa rating.

The Standard & Poor’s 500 Index (SPX) sank 0.9 percent to 1,338.31 at 4 p.m. New York time. Futures on the equity gauge retreated 0.5 percent after regular trading as Apple Inc. (AAPL)’s profit missed analysts’ projections. The euro depreciated 0.4 percent to $1.2069 and slid for a fifth day against the yen. The yield on the 10-year German bund climbed six basis points to 1.24 percent after matching the record low of 1.127 percent yesterday. A gauge of U.S. company debt risk rose for a third day. S&P’s GSCI gauge of 24 raw materials fell 0.5 percent.

UPS, the world’s largest package-delivery company, and Whirlpool Corp., the biggest appliance maker, declined after reporting quarterly profit that trailed analysts’ estimates. Moody’s lowered the outlooks on the Aaa credit ratings of Germany, the Netherlands and Luxembourg yesterday, citing the “rising uncertainty” about Europe’s debt crisis.

“Europe continues to be less than positive,” Stephen Auth, the New York-based chief investment officer for equities at Federated Investors Inc., which manages $363.6 billion, said in a telephone interview. “People are looking at UPS as another sign the global economy is in a soft patch.”
Apple Misses

Apple sank 4.8 percent after the close of U.S. exchanges. The world’s largest company by market value posted profit and sales that fell short of analysts’ projections for only the second time since 2003 as customers held off on iPhone purchases while waiting for a new model to be introduced later in the year.

Moody’s left Finland as the only country in the 17-nation euro region with a stable outlook for its top ranking. Chancellor Angela Merkel’s government said Germany will remain Europe’s haven during the financial crisis, pushing back against Moody’s decision. The risks in the euro zone are “not new” and Germany remains “in a very sound economic and financial situation,” the Finance Ministry said.

The euro area is ready to act to help Spain as the country’s borrowing costs soar, Luxembourg Finance Minister Luc Frieden said. While Frieden said no work is being done for a bailout of the Spanish government, policy makers in the 17- country euro area must be prepared to move quickly.
Spanish Bonds

Spain’s benchmark 10-year bond yield reached a euro-era record of 7.625 percent earlier. Italy’s 10-year bonds fell for a third day after a report showed services and manufacturing in the euro region shrank in July. Government debt from the Netherlands dropped as its outlook was also lowered by Moody’s. Ten-year Treasury yields slipped two basis points to 1.40 percent.

“Europe’s recession is deepening and spreading to the core, including Germany,” said Kit Juckes, head of currency research at Societe Generale SA in London. “For investors, fearful of downgrades even to core debt, the path of least resistance will be to look outside Europe and hope that the U.S. data is a little stronger.”

Stocks extended losses after a Reuters report cited European Union officials saying Greece was seen missing targets for reducing debt. German Vice Chancellor Philipp Roesler said over the weekend that Greece was unlikely to be able to meet its obligations under the bailout program.

The S&P 500 pared losses in the final hour of trading after the Wall Street Journal said the U.S. Federal Reserve is moving closer to taking steps that may support economic growth. Fed Chairman Ben S. Bernanke told senators last week that the central bank is prepared to act to boost growth if the labor market doesn’t improve.
Euro, Yen

The euro weakened 0.7 percent to 94.34 yen. The Japanese currency rose versus all of its major peers as investors sought safety even as the nation’s government said it’s ready to combat its strength.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark used to hedge against losses on corporate debt or to speculate on creditworthiness, increased 2.3 basis points to a mid-price of 115.7 basis points, according to prices compiled by Bloomberg.

Investors watched second-quarter corporate results. Sales rose an average 2.9 percent in the second quarter among 147 companies in the S&P 500 that have reported results so far, according to data compiled by Bloomberg. Only 40 percent of the reported companies have topped analysts’ estimates on sales, while 73 percent have beaten on profit, the data show.
UPS, Whirlpool

UPS (UPS) slumped 4.6 percent. The company is seeing revenue decline as it seeks to expand in Europe with the $6.5 billion acquisition of TNT Express NV. Whirlpool retreated 7.5 percent. The home appliance maker reported second-quarter earnings excluding some items of $1.55 a share, missing the average analyst estimate in a Bloomberg survey of $1.69.

DeVry Inc., a provider of education services, tumbled 25 percent after saying it plans to cut 570 jobs amid declining enrollment.

The Chicago Board Options Exchange Volatility Index, also known as the VIX, gained 8.8 percent to 20.26, the highest level since June 15.

The Stoxx 600 lost 0.5 percent. Elan Corp. sank 12 percent in Dublin after an experimental Alzheimer’s treatment developed with Pfizer Inc. and Johnson & Johnson failed to improve symptoms of dementia in a study.

Corn futures fell 0.9 percent, soybeans slumped 3.3 percent and wheat lost 3.7 percent. Rain may fall in parts of Iowa and Illinois this week and next, and the Midwest might get showers in the next 11 to 15 days, reducing severe moisture deficits, Commodity Weather Group LLC in Bethesda, Maryland, said in a report.

Oil rose for the first time in three days as clashes in Syria raised tension in the Middle East and a preliminary reading of a Chinese purchasing managers’ index showed it would be at the highest level since February. Crude futures gained 0.4 percent to settle at $88.50 a barrel on the New York Mercantile Exchange.

DBRS warns on Spain "tipping point" ahead of rating cut deadline

Spain is nearing a tipping point in which the euro zone country needs to restore investor faith or potentially be prompted to ask for a bailout in the face of unsustainable debt costs, credit rating agency DBRS said on Tuesday.

The agency warned that four factors could push Spain and the euro zone deeper into crisis: a sharper recession as stressed economy-wide financing conditions persist, an insufficient backstop of capital, external shocks, and setbacks to fiscal and structural adjustment.

"In the immediate future, if investor confidence is not restored, financial stabilization and economic recovery are likely to be delayed, increasing the difficulty of the fiscal adjustment and the need for bank recapitalization," wrote analysts Fergus McCormick and Alan G. Reid.

"Furthermore, if the stress on Spanish bond yields were to persist, it could call into question the affordability of sovereign debt. In this event, Spain may need to turn to official creditors" for help beyond its request for aid to the ailing banking sector.

DBRS said last month it would decide by late August whether to cut its ratings of Spain and Ireland below the crucial A threshold, a move that could substantially raise the cost of funding for the two countries' hard hit banks.

A downgrade from the A (high) rating DBRS now has for Spain and A (low) for Ireland, to triple-B or lower would -- under current European Central Bank rules -- trigger the ECB to charge commercial banks an additional 5 percent penalty for using Spain's bonds as collateral in its lending operations.

DBRS is one of four rating firms the ECB uses to rate collateral and, following Moody's three-notch downgrade of Spain in June, is the only one saving both Spanish and Irish bonds from the extra charge.

"Given its size as the fourth-largest economy in the euro zone, the stability of Spain is critical to the stability of Italy and the rest of the euro zone," McCormick and Reid wrote in Tuesday's report.

UK, east Europe most at risk from euro zone crisis: survey

Britain tops the list of outside economies most at risk from any worsening of the euro zone crisis because of its trade and banking links with the single currency bloc, a study by political risk think-tank Maplecroft showed on Wednesday.

The study ranked 169 countries according to their business with the debt-choked currency bloc as well as domestic resilience to a slowdown.

"Impacts for these economies include lowered industrial output, competitiveness loss and sovereign debts that could raise unsustainable levels due to rising yields," Maplecroft said.

EU member Britain's fiscal woes combined with strong trade links with the euro zone make its capacity for a response to further economic crises in the bloc "severely limited," the study said.

A collapse of large euro zone economies would cut Britain's trade by 7 percent and prompt losses equivalent to 7 percent of GDP for Britain's banks due to their exposure to the euro zone banks and sovereign bonds, Maplecroft added.

Countries in central Europe and Scandinavia as well as commodity-exporting African countries Ivory Coast and Mozambique are also among the 17 economies classed as being at "extreme risk", while the BRICs quartet of big emerging market nations Brazil, Russia, India and China is also highly exposed, the survey showed.

Fellow EU members Poland, Hungary and Czech Republic ranked second, third and fourth in terms of risk while Sweden and Denmark were placed eighth and ninth.

Many African countries, largely dependent on their strong trade and business links with the euro zone, made it to the top of the list, with Mauritania, Mozambique, Morocco and Ivory Coast part of the 17 countries with "extreme" exposure to the euro zone crisis.

Arab Spring countries Tunisia, Egypt and Libya follow closely behind, while Russia, Brazil and India were also tagged with a high exposure to the euro zone crisis.

Of the BRIC group of major emerging countries only China was ranked with no more than a medium exposure to the euro zone.

"These (BRIC) economies are not fully insulated from the slowdown themselves due to trade and investment relations with Europe and an escalating Eurozone crisis could further exacerbate current domestic slowdown in growth forecasts across the BRICS," the study said.

The study weighed trade links with the euro zone, foreign direct investments, euro area bank exposure, as well as debt, deficit and inflation.

"Both economies and business may seek to manage this risk by diversifying trading patterns to account for lower demand, either in third countries or by concentrating on domestic markets," said Mandy Kirby, an associate Director at the company.

Analysis: Euro exit talk risks self-fulfilling prophecy

To understand the impact of a potential Greek exit from the euro zone, imagine an operating theater inside a betting shop.

As surgeons prepare to amputate a gangrened foot to prevent infection spreading to healthier parts of the body, gamblers on the sidelines lay bets on which limb will be next for the chop.

Talk of a possible Greek exit has already sapped investors' confidence in the 17-nation single currency area and contributed to higher borrowing costs for Spain and Italy. It is making a planned return to market funding next year harder for Ireland and Portugal, which are implementing tough bailout programs.

Some European politicians and central bankers clearly see jettisoning a delinquent member as a salutory lesson to others not to abuse club privileges. Like the English in Voltaire's philosophical novel Candide, they believe "it's a good thing to execute an admiral from time to time, to encourage the others".

Other policymakers and market participants fear that pushing Greece towards the exit would start a chain reaction, materializing huge costs for investors and taxpayers and perhaps triggering a break-up of the euro.

German Chancellor Angela Merkel, Europe's most powerful political leader, has appeared to be on both sides of the argument at different times.

She said last November that ensuring the stability of the euro was a bigger priority than guaranteeing Greece's continued membership. But she has also said a Greek exit would cause a disastrous "domino effect", scaring investors away from Europe.

The election last month of a Greek government committed to sticking to an adjustment program agreed with the euro zone and the International Monetary Fund in exchange for some 240 billion euros in loans has brought only a temporary respite.

Greece has slid further off course from its fiscal and economic reform targets, the man in charge of privatizing state enterprises resigned last week in despair at delays, and the European Central Bank stopped accepting Athens' bonds as collateral for lending to Greek banks.

Pundits are now vying to forecast which country may have an interest in leaving first - EU paymaster Germany or Greece, creditors states or debtors.

U.S. economist Nouriel Roubini, a regular doomsayer on Europe, has suggested that Finland, a triple-A rated fiscally prudent northern state, might be first out the door due to anxiety about ever growing liabilities for euro zone weaklings.

"If Greece moves closer to exit and Italy and Spain end up on the verge of losing market access and requiring even more risky financial support from the euro zone core, Finland may decide that the additional credit risk is not worth the benefit," Roubini wrote on his EconoMonitor website.

Regardless of their accuracy, such prophecies highlight how European governments and lawmakers are coming to see membership of the euro area as a zero-sum game, in which each state feels like a victim of its partners' actions and decisions.

Foreign exchange strategists at Bank of America Merrill Lynch enlisted game theory to analyze which euro zone country might see an economic interest in jumping ship.

Put simply, game theory states that players may not trust each other enough to cooperate or may see greater gains for themselves in non-cooperation, even though the outcome would be better for all players if they did cooperate.

Hence, while Germany and Greece would both stand to gain if Greece carried out its austerity program and German accepted common euro zone bonds, neither is likely to choose that course because each would be better off without making a sacrifice.

Applying the same techniques to the economics of a voluntary exit from the euro, strategists David Woo and Athanasios Vamvakidis concluded that Italy and Ireland both had a greater interest in leaving than Greece.

By contrast, Germany had the lowest incentive of any country to leave, despite its economic power and strong fiscal position, because it would suffer lower growth, possibly higher borrowing costs and a negative balance sheet effect, they said.

Italy had a relatively high chance of achieving an orderly exit and could make significant gains in competitiveness and growth with a weaker currency, they argued.

Former Italian Prime Minister Silvio Berlusconi, who is pondering a political comeback in a general election next year, has said that leaving the euro would be "no blasphemy".

European monetary union was officially declared to be irrevocable and irreversible. The Maastricht Treaty provides no exit clause once countries join the euro, although the 2009 Lisbon Treaty did for the first time make it legally possible for a country to leave the European Union.

An EU official involved in crisis management, speaking on condition of anonymity due to the sensitivity of the issue, said it would be fatal for confidence if the euro area came to look "like a hotel lobby with a revolving door".

Yet some outside experts say the absence of an exit clause is one of the design flaws of the euro that should be fixed now.

U.S. Federal Reserve policymaker James Bullard said this month the possibility of an exit from Economic and Monetary Union was one of the principal issues facing EU policymakers.

"The common refrain that no country can ever be allowed to leave the EMU is altering the incentives for nations to take the actions necessary to maintain membership," he argued in a speech in London.

"The incentive effects for a member country to remain in the EMU must be considered very carefully going forward. Policies should be designed with an eye toward these incentives, and can no longer assume that the political processes will back the EMU in all circumstances," he said in a speech in London.

Bullard cited the work of economist Russell Cooper of the European University Institute, who has proposed creating a penalty called "Euroisation" in which a delinquent state would stay in the euro but lose its voting rights and its access to the ECB's lending window until its fiscal behavior improved.

That might satisfy the creditors' wish to see fiscal "sinners" pay a penalty, but it will not hold the euro zone together.