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.

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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.

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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.

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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.

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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.

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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.”

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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)

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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.

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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.

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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.

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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.”

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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.

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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.

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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.

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Greece now in "Great Depression", PM says

Greece is in a "Great Depression" similar to the American one in the 1930s, the country's Prime Minister Antonis Samaras told former U.S. President Bill Clinton on Sunday.

Samaras was speaking two days before a team of Greece's international lenders arrive in Athens to push for further cuts needed for the debt-laden country to qualify for further rescue payments and avoid a chaotic default.

Athens wants to soften the terms of a 130-billion euro bailout agreed last March with the European Union and the International Monetary Fund, to soften their impact on an economy going through its worst post-war recession.

By the end of this year Greek GDP is expected to have shrunk by about a fifth in five consecutive years of recession since 2008, hammered by tax hikes, spending cuts and wage reductions required by two EU/IMF bailouts. Unemployment climbed to a record 22.6 percent in the first quarter.

"You had the Great Depression in the United States," Samaras told Clinton, who was visiting Greece as part of a delegation of Greek-American businessmen. "This is exactly what we're going through in Greece - it's our version of the Great Depression."

Athens must reduce its budget deficit below 3 percent of GDP by the end of 2014, from 9.3 percent of GDP in 2011 - requiring almost another 12 billion euros in cuts and higher taxes on top of the 17 billion successive governments have cut from the budget shortfall.

Greece wants its lenders to give it two more years to achieve the budget goal to avoid an even deeper economic slump but its lenders have opposed the idea because it would imply even more financial aid.

Highlighting growing frustration with Athens, German magazine "Der Spiegel" reported on Sunday, citing high-ranking representatives in Brussels, that the IMF may not take part in any additional financing for Greece.

The German and Greek finance ministries declined to comment on the report, which suggested additional support required for Athens could range from 10-50 billion euros.

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Officials have already indicated there would be a shortfall on the current bailout. How much is likely to depend on the extent by much Greece continues to miss its fiscal targets and the extent of support needed to keep its major banks afloat.

German economy minister Philipp Roesler told ARD public television he did not expect Greece could fulfill its requirements and that that would mean no more money to Athens.

"I am more than skeptical," Roesler, who is the head of the junior party in Germany's ruling coalition and often outspoken on euro zone issues, said in an interview.

"If Greece does not fulfill its requirements, there cannot be any more payments to Greece," added Roesler, whose views often do not reflect those of Chancellor Angela Merkel or Finance Minister Wolfgang Schaeuble.

The inspection team of the international "troika" of the EU Commission, the IMF and the ECB will focus on the 11.7 billion euros of spending cuts Athens needs to take in 2013 and 2014.

Clinton criticized Greece's lenders for focusing excessively on austerity, saying Athens will be more likely to repay its debt if its manages economic recovery first.

"(It) is self-defeating... if every day people are saying this may or may not work to give us back 100 cents on the dollar, so give us more austerity today," he told Samaras.

"People need something to look forward to when they get up in the morning - young Greeks need something to believe in so they can stake their future out here," Clinton said.

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ECB's Coeure warns against betting on euro collapse

The euro zone political commitment to the euro should not be underestimated, European Central Bank Executive Board member Benoit Coeure said on Friday in a warning to those doubting the single currency's survival.

In a speech in Mexico City, Coeure said there was a lack of understanding about the euro zone's approach to tackling the debt crisis and that he disagreed with those who said the bloc did not have the right tools to fix the situation.

"I would caution those who have doubts about the euro, that they underestimate the political commitment to it at their own risk," Coeure said.

"The ambition to provide long-term foundations for EMU in less than a decade is a historical step of great significance," he added.

He added that the euro zone would remain a cornerstone of the international economy and that euro zone leaders had "clearly understood that the time of partial solutions and piecemeal reform is over".

He underscored the bloc's decision to give the ESM permanent bailout fund the ability to capitalize banks directly, a move he described as "crucial to break the vicious circle between banks and sovereigns that is at the heart of the crisis".

In addition he said short-term measures were clearly needed to help growth and soften the blow from austerity.

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IMF economist accuses Fund of suppressing information

A veteran economist at the International Monetary Fund has accused the global lender of suppressing information on difficulties in dealing with the global financial meltdown and euro zone crisis.

In a resignation letter to the IMF's board and senior staff, dated June 18, Peter Doyle said the IMF's failures in issuing timely warnings for both the 2007-2009 global financial crisis and the euro zone crisis were a "failing in the first order" and "are, if anything, becoming more deeply entrenched."

His letter, a copy of which was seen by Reuters, has brought to light simmering tensions within the IMF over the Fund's credibility, which many worry is threatened by its role in the euro zone crisis.

IMF insiders, who asked not to be identified, told Reuters the concerns are that the Fund has over-stretched by lending to Europe without exercising the same level of independence it would normally apply in bailouts to emerging economies.

Doyle, a division chief for Sweden, Denmark and Israel in the IMF's European Department when he resigned, also accused the Fund's leadership of being "tainted" by a selection process which always ensures that a European is at the helm.

He said the IMF had been "playing catch-up and reactive roles in the last-ditch efforts to save" the euro zone from the "brink." The IMF is part of a "troika" of international lenders, including the European Commission and European Central Bank, involved in rescue loans to Greece, Ireland and Portugal.

Doyle, who has worked for the IMF for 20 years, said the appointments of the Fund's heads over the past decade "have all-too-evidently been disastrous."

"Even the current incumbent is tainted, as neither her gender, integrity or élan can make up for the fundamental illegitimacy of the selection process," Doyle said of Christine Lagarde's appointment last year as first female head of the IMF.

To be fair, the IMF has acknowledged some of the failures cited by Doyle in reports in 2009 and in 2011 that honed in on mistakes in spotting the roots of the global financial crisis and for not going far enough in warnings to policymakers of the impending crisis.

"Peter's remarks are well documented in the public record, including reports issued by the Independent Evaluation Office, via the triennial review of surveillance, and in many statements by the managing director, including on the findings in these various reports," said IMF spokesman William Murray.

"We have no evidence his views were suppressed, nor (that) any views were suppressed," he added.

The last three heads of the IMF have all resigned before the end of their terms. Horst Koehler stepped down suddenly in 2004 to run for president of Germany. His successor and former Spanish finance minister Rodrigo Rato unexpectedly resigned halfway through his term in 2007 to return to Spain.

Dominique Strauss-Kahn, the former French finance minister, quit last year after he was arrested in May 2011 for alleged criminal sexual assault and attempted rape of a hotel maid, which he denied. Charges have since been dropped.

Strauss-Kahn's push for an IMF role in the euro zone, including approval of big bailouts for Greece and Ireland, and more flexible IMF conditions, caused tensions with some members of the IMF board.

Despite their concerns, many acknowledged that the IMF's involvement was necessary to ensure stability of the global financial system.

Lagarde's appointment just over a year ago followed a hard-fought battle between Europe and emerging economies fed up with the tradition of the head of the IMF always being a European, while the top job at the World Bank has gone to Americans.

"There is certainly a concern that the MD is more a politician than an economist and that she can be swayed by those close to her," one insider said. "But she is certainly seen as a powerful messenger for the Fund's position."

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ECB's Coeure says negative bank deposit rate an option

Cutting the deposit rate the European Central Bank offers lenders in the euro zone below zero is an option, ECB Executive Board Member Benoit Coeure said on Friday.

The ECB cut its main interest rate early this month by a quarter percentage point to a record low of 0.75 percent and reduced the deposit rate it pays banks for parking money with it overnight to zero in an effort to boost the flagging euro zone economy.

Speaking in Mexico, Coeure said the bank needed to take the rate down 25 basis points to zero to match its cut in the reference rate.

He said policymakers would need to consider whether it could take the deposit rate below zero, which would mean the central bank would start charging banks for the privilege of parking spare cash in the ECB.

"It's still possible," Coeure told students at an event in Mexico City. "It's true that we are hitting a psychological limit at zero. And it's unclear whether markets can function at negative interest rates. Some of them can."

"Some of them apparently can't. So before making the next step, which would be moving the deposit facility to a negative yield, we'll reflect about it," he added.

Denmark introduced a negative interest rate this month and the ECB is watching closely how the move plays out.

Global markets were roiled on Friday by concerns Spain may need a full-blown sovereign bailout after its heavily indebted eastern region of Valencia said it would need financial help from Madrid.

The euro slumped broadly on Friday, setting a two-year low against the dollar while weakening to record levels against other currencies.

NO SUPER STATE

Asked how far the euro zone would integrate its finances to defend the single currency, Coeure said the bloc would have "more shared sovereignty" in future but would not go all the way toward creating what he termed a "kind of super state."

Coeure was also asked how he regarded the global economic outlook, and offered a downbeat view of events. Europe may be sliding back into its second recession since 2009 and growth is also slowing in the United States and China.

"I don't think we are moving toward a global recession; we are moving toward very low growth or no growth at all," he said.

In an earlier event on Friday, Coeure said there was a lack of understanding about the euro zone's approach to tackling the region's debt crisis and that he disagreed with those who said the bloc did not have the right tools to fix the situation.

"I would caution those who have doubts about the euro, that they underestimate the political commitment to it at their own risk," he said. "The ambition to provide long-term foundations for (the monetary union) in less than a decade is a historical step of great significance."

He added that the euro zone would remain a cornerstone of the international economy and that euro zone leaders had "clearly understood that the time of partial solutions and piecemeal reform is over".

He underscored the bloc's decision to give the region's permanent bailout fund the ability to capitalize banks directly, a move he described as "crucial to break the vicious circle between banks and sovereigns that is at the heart of the crisis."

In addition he said short-term measures were clearly needed to help growth and soften the blow from austerity.

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Indebted Valencia asks Spain government for help, markets jolted

Spain's heavily indebted eastern region of Valencia said on Friday it would need financial help from Madrid, spooking financial markets and complicating central government efforts to stave off a full-blown sovereign bailout.

On a tumultuous afternoon, the government also cut its economic forecast for 2013, indicating the country would stay mired in recession well into next year after a contraction expected at 1.5 percent in 2012.

Valencia, Spain's most indebted region alongside its northern neighbor Catalonia, sought help under an 18-billion-euros ($22.1 billion) program passed on Thursday and aimed at helping the autonomous regions which, together with local authorities, account for around half of all public spending.

"Valencia, like in other autonomous regions, is suffering the consequences of the liquidity shortage in markets due to the economic crisis," the regional government said in a statement.

The program is funded by the Spanish Treasury but the regions keep full responsibility over the debt.

The troubled regions, as well as a banking sector beset by a burst property bubble, have pushed Spain's borrowing costs to record highs and pushed the country closer to requiring a full-scale bailout.

Euro zone finance ministers approved the terms of a loan of up to 100 billion euros ($123 billion) for Spain to recapitalize its banks on Friday. The exact size of the support will only be determined in September.

But the Valencia announcement sent the risk premium on Spanish government debt to a euro-era high on Friday as its borrowing costs climbed to a record 7.29 percent, a level considered unsustainable, with little relief likely soon.

The euro fell as low as $1.2175, just above a two-year low of $1.2162 hit last week, while U.S. and European stocks also slid.

Despite its downgraded GDP forecasts the government confirmed its deficit objectives for 2012 and 2013 but did not release the details on how the efforts would be split between the regions and the central government this year.

It will use the new forecasts as a base to draw up the 2013 budget, for which the ceiling has been set at 127 billion euros compared to 119 billion euros in 2012.

FUNDING PRESSURE

Spain's regions, currently shut out of international debt markets, have been pushing for months for a financing mechanism to help them meet their financial obligations.

Jose Ciscar, the deputy regional head who made public Valencia's request, said it would now be in position to meet its financial obligations.

"This liquidity fund thus brings confidence," he said.

Valencia, which already used several government credit lines in the first half of the year to meet debt repayments, still needs to repay 2.85 billion euros by the end of the year.

Treasury Minister Cristobal Montoro said after a weekly cabinet meeting that the regional funding plan carried strict fiscal conditions that beneficiaries must meet while providing regular updates on its finances.

"The Valencian government will have an obligation to meet new conditions to gain access to this liquidity," he said, after first showing his surprise when asked about the request.

Montoro also announced that the costs of funding the country's debt were set to rise by 9.1 billion euros in 2013.

Spain, which on Thursday adopted most of the measures of a new package of spending cuts and tax hikes worth 65 billion euros, will next tap the markets next Tuesday when it sells three- and six-month bills. It will also sell three- to five-year bonds on August 2.

Several Spanish regions - some of them governed by the ruling People's Party - have rebelled against the latest cuts.

Catalonia, the Basques and Andalucia have also said they would not implement all the cuts because it would end up killing the public education and health systems they control.

Analysts believe most of the autonomous regions will miss their deficit target of 1.5 percent of the economic output this year.

The government last week asked at least eight of the 17 to revise their budget plans for 2012 to meet tough deficit goals and is now threatening a handful of them to take over their finances.

There are signs of growing discontent at the economic pain being heaped on the Spanish public. Hundreds of thousands of Spaniards marched against the centre-right government's latest measures on Thursday evening, following more than a week of demonstrations across the country.

Spain has raised 69 percent of its original medium- and long-term debt target of 85 billion euros for the year.

But the new deficit goals and the burden from the regions is expected to increase it by around 20 billion euros, putting more pressure on the country's credit rating which is already just one step away from junk territory.

($1 = 0.8156 euros)

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Looming ECB rate cuts drive Euribor rates to new lows

Euro zone bank-to-bank lending rates fell to new all-time lows on Friday, driven down by record low European Central Bank interest rates and the view it could take them even lower in the coming months.

The ECB's overnight deposit rate, which it cut to zero on July 5, acts as a floor for money market rates as banks only lend to rival banks if they are able to earn a better rate of interest than at the central bank.

The ECB hopes its unprecedented move, which means banks now get nothing if they park their spare cash there, will nurture a return of more significant interbank lending by forcing banks to look for more profitable options.

Although some money market experts fear the cut could backfire and kill off parts of the market, the move, plus a growing belief the ECB could continue to cut rates, has had an immediate impact on bank-to-bank rates.

Three-month Euribor rates, traditionally the main gauge of unsecured bank-to-bank lending, hit a new all-time low of 0.451 percent from 0.458 percent.

Other key rates saw similar drops. Six-month Euribor rates fell to 0.735 percent from 0.743 percent. Shorter-term one week rates dipped to 0.113 percent from 0.115 percent while overnight rates ticked up to 0.120 percent from 0.119 percent.

Euribor rates, like counterpart Libor bank-to-bank rates, are currently at the center of a manipulation scandal after it emerged a number of banks were falsely submitting the Libor rates they pay.

Dollar-priced three-month bank-to-bank Euribor lending rates fixed lower at 0.912 percent from 0.919 percent, while overnight dollar rates were more-or-less flat at 0.339 percent.

The ECB's move to stop paying interest on banks' deposits saw almost half a trillion euros transferred from the ECB's deposit facility to banks' current accounts last week.

But with the monthly reserves cycle now in its stride and fewer options available for banks to juggle their funding, the money has started to stabilize.

A total of 357 billion euros was parked in the ECB's deposit facility overnight. Banks' current account deposits at the ECB dipped to 489 billion euros.

Euribor rates are fixed daily by the Banking Federation of the European Union (FBE) shortly after 5 a.m. EDT.

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