European Austerity Measures; Nervous Markets

Arthi Gupta, Mayank Mehta and Sanjay Barot
21 May, 2010
New York City

The European indices fell to an eight-month low as euro-zone financial crisis slowly migrates to fiscal crisis. Spain approved austerity measures and German lawmakers passed their share of $1 trillion of bailout package. Statoil agrees to sell its stake in a Brazil based field to Sinochem.

[R]5:30 PM Frankfurt, Paris; 11:30 PM New York – The European indices fell to an eight-month low as euro-zone financial crisis slowly migrates to fiscal crisis. Spain approved austerity measures and German lawmakers passed their share of $1 trillion of bailout package. Statoil agrees to sell its stake in a Brazil based field to Sinochem.[/R]

The European indices fell to an eight-month low as growing concerns about the region''s debt crisis haunted investor sentiment. German Bundestag approves bailout bill. Euro-zone private sector activity growth weakens. German business confidence drops. Statoil agreed to sell 40% stake in Brazil oil field to China''s Sinochem.

The euro advanced 0.3% to $1.2525 before EU task force of ministers is scheduled to meet in Brussels later to suggest changes to budget rules to ensure fool-proof regulation.

German lawmakers have given the go-ahead for the country''s contribution to a €750 billion or $938 billion rescue plan for the euro-zone.

Following the passage of the bill in the Bundestag (Lower House of Parliament) today, the Bundesrat (Upper House) too is expected to give its approval for Berlin''s contribution of €148 billion or $185 billion.

Chancellor Angela Merkel defended the plan saying that euro itself would be ""in danger"" in the absence of approval.

Merkel has also urged tougher regulation of banks and financial markets and analysts view this as a counter-strategy on her part to deflect criticism over mishandling the financial crisis.

Spanish government on Thursday approved a €15 billion or $19 billion austerity plan aimed at reducing the country''s large fiscal deficit and easing concerns that Spain could follow Greece into a debt crisis.

The tough austerity package, which was announced by Prime Minister Jose Luis Rodriguez Zapatero last week, was approved during a Cabinet meeting on Thursday. The cost cutting measures are expected to save the Spanish government €15 billion in 2010 and 2011.

The plan is expected to reduce Spain''s deficit from its current level of more than 11% of gross domestic product to 6% of GDP by 2011 and to 3% by 2013. The plan calls for slashing salaries of Cabinet ministers and other senior officials by 15%.

The measures include an average 5% pay cut for public sector workers from June, and a pay freeze from 2011. The latest austerity plan is over and above a €50-billion austerity package announced in January to reduce Spain''s budget deficit from the 11.2% of GDP posted last year to the euro-zone limit of 3% by 2013.

Euro-zone recorded a seasonally adjusted current account surplus of €1.7 billion in March compared to the revised €4.5 billion deficit in February, the European Central Bank said today.

The flash composite output index dropped to 56.2 in May from April''s post-recession peak of 57.3, according to a survey conducted by Markit Economics.

The Purchasing Managers'' Index for manufacturing dropped to a 3-month low of 55.9, from 57.6 in April.

Among the major EA16 economies, Germany''s private sector activity in May showed the slowest expansion in four months. The Composite Output Index fell to 55.5 in May from a three-year high of 59.3 in April.

The Germany''s PMI for manufacturing stood at a 3-month low of 58.3 compared to 61.5 in April. At 53.7, the indicator for services also dropped to a 3-month low in May. Economists were expecting the manufacturing PMI to fall to 61.1 and services PMI to rise to 55.4.

Separately, a report by Munich-based Ifo Institute showed that Germany''s business climate index fell to 101.5 in May from a reading of 101.6 in April. Analysts had forecast the indicator to rise to 101.9.

Statoil to Sell Stake to Sinochem

The Norway based oil and gas explorer Statoil ASA said it has signed a deal with China based Sinochem Group to sell its 40% stake in Peregrino field offshore Brazil to Sinochem for a total of $3.07 billion in cash.

The consideration is based on an effective date of January 1, 2010, and the deal is subject to government approvals in Brazil and China.

Statoil will maintains 60% ownership and operate the field, which is set to start production in early 2011.

The first phase of the development includes two drilling and wellhead platforms and a ship-shaped floating production, storage and offload unit.

The shallow-water oil field, which was discovered in 1994, is located 85 kilometers offshore Brazil in Campos basin at nearly 100 meters of water depth in BMC-7 and BMC-47. Peregrino is anticipated to hold recoverable reserves of approximately 500 million barrels of heavy oil.

It was in 2005, Statoil, then called Norsk Hydro, acquired a 50% stake in the discovery. Later in 2008, the group purchased the remaining 50% and the field''s operatorship.

Commenting on the sale, Statoil''s chief executive officer Helge Lund said, ""The transaction demonstrates Statoil''s ability to leverage its industrial competence developed at the Norwegian Continental Shelf, and realise value for our shareholders. The divestment is a natural step in our continuous effort to optimize our portfolio.""

""I am pleased that we also have agreed to sign an agreement to jointly investigate further opportunities in Brazil and elsewhere,"" added Lund.

Statoil is currently trading on the New York Stock Exchange at $18.89 per share, down $0.39 or 2.02%, on a volume of 193,297 shares.

Germany''s auction of radio spectrum auction ended Thursday netting a total of €4.38 billion for the government. Deutsche Telekom AG, Vodafone Group Plc and Telefonica SA have secured the most coveted spectrum frequencies.

Defense electronics maker Thales SA bagged an order from Qatar Airways to provide in-flight entertainment and communication systems for the airline''s Boeing 787 aircraft.

Real estate developer Orco Property Group SA narrowed its first- quarter net loss to 15.6 million euros from €45.7 million a year ago.

National benchmark indexes fell in all of the 18 western European markets today, except Luxembourg.

In London FTSE 100 Index closed lower 19.83 or 0.39% to 5,053.30, in Paris CAC 40 Index decreased 8.18 or 0.24% to close at 3,424.34, in Frankfurt DAX index lower 63.33 or 1.08% to close at 5,804.55. In Zurich trading SMI decreased 71.25 or 1.14% to close at 6,191.17.

Gainers & Losers

GDF Suez SA rose 0.1% to €24.78 after the natural-gas and electricity supplier was upgraded to “buy” from “neutral” at UBS AG.

Kontron AG rose 2.1% to €6.54 after the maker of miniature computers for slot machines and drone aircraft announced that through its subsidiary, it has acquired AP Labs-Group based in San Diego, California.

K+S AG fell 2.1% to €37.59 after the potash producer was downgraded to “underperform” from “outperform” at CA Cheuvreux.

MAN SE fell 1.3% to €65.11 after the truckmaker was downgraded to “sell” from “neutral” at Goldman Sachs Group Inc.

Orco Property Group SA added 3.6% to €6.53. The airline company said first quarter revenues fell 6% to €51.5 million from €54.8 million a year ago. Net loss for the quarter was €15.6 million compared to net loss of €45.7 million a year ago.

Pfeiffer Vacuum Technology AG, the vacuum pump maker fell 0.2% to €56.88.

PSA Peugeot Citroen S.A rose 1.4% to €19.11 after the automaker was upgraded to “buy” from “neutral” at Goldman Sachs Group Inc.