European Indexes Fall; Euro-zone Deficit Widens

Arthi Gupta
19 Jul, 2010
New York City

European stocks fall after International Power and GDF Suez SA renews negotiations for a combination of certain assets. Euro-zone construction output declines and current account deficit widens in May. The IMF rejects Hungary

[R]4:30 PM Frankfurt – European stocks fall after International Power and GDF Suez SA renews negotiations for a combination of certain assets. Euro-zone construction output declines and current account deficit widens in May. The IMF rejects Hungary’s plea for a higher budget deficit for 2011.[/R]

U.S. equities traded higher and Asian markets traded lower. The IMF plans to raise lending resources to $1 trillion. Hungary maintains key policy rate flat at 5.25%. Portugal PPI slows in June. Moody's downgrades the Ireland sovereign debt.

Nokia Siemens agreed to acquire wireless network infrastructure assets of Motorola for $1.2 billion. Telefónica ends bid for Portugal Telecom's stake in Brasilcel.

Moody's Investor Services downgraded the credit rating of Ireland from Aa2 to Aa1, citing significant loss of financial strength as the primary reason. However, the outlook was upgraded from 'stable' to 'negative.'

""Today's downgrade is primarily driven by the Irish government's gradual but significant loss of financial strength, as reflected by its deteriorating debt affordability,"" said Dietmar Hornung, Moody's lead analyst for Ireland. The general government debt-to-GDP ratio was at 64% at the end of 2009, up from 25% pre-crisis, and is continuing to rise.

The Magyar Nemzeti Bank, the Hungarian central bank announced its decision to leave the base rate unchanged at the record low of 5.25% after its monetary policy council meeting on Monday.

Hungary's annual consumer price inflation rose to 5.3% in June from 5.1% in May and month-on-month, the index increased 0.2%, slower than the 0.9% rise in May.

Senior European bankers as well as regulators are concerned over the results of stress tests of 91 banks, the Financial Times reported on Monday. The results will be published on Friday.

Quoting anonymous board members at four of the continent's biggest banks, the Financial Times said members had grave reservations about the way in which the exercise had been conducted and were worried the markets would misinterpret the outcome. The sources cited from banks that are estimated to have passed the stress test, the newspaper said.

""It is not a question of whether we will pass,"" one finance director told FT. ""It is that the market will compare our stressed capital ratio with others that have been calculated in an entirely different but untransparent way.""

""You need some consistency across the stress scenarios, particularly on the treatment of sovereign debt, but it is unclear whether that is the case,"" another bank chief executive said. ""Without transparency, the whole exercise loses credibility.""

The producer price index, or PPI, rose 3.7% year-on-year in June, but slower than a 4.2% growth in the previous month, according to a report by the Statistics Portugal released today. On a monthly basis, the Portugal’s PPI remained unchanged in June, compared to a 0.5% growth in the preceding month.

The construction output dropped a seasonally adjusted 1% on a monthly basis in May, compared to a 0.3% fall in the previous month, according to a report released by the Eurostat today. Year-on-year, the construction production decreased 6.3% in May, faster than a 5.7% fall in the preceding month.

In EU27, the construction output fell a seasonally adjusted 0.6% month-on-month in May, compared to a 0.5% rise in the previous month, which was revised from a flat reading reported initially. Annually, the construction output dropped 2.4% in May, after falling a revised 2.9% in April.

The euro area current account deficit widened in May to €5.8 billion from €5.6 billion in April, according to data from the European Central Bank released today.

The surplus in goods account rose to €3.1 billion, while that in services edged lower to €3.1 billion from €4 billion. Deficits in current transfers and income widened to €7.6 billion and €4.4 billion, respectively.

The 12-month cumulated seasonally adjusted current account recorded a deficit of €43.9 billion in May, around 0.5% of euro area GDP.

Hungary’s disagreement with the International Monetary Fund and the European Union on its economic plans will deny the country access to funds from an existing €20 billion aid package.

The Hungarian government wanted a higher budget deficit target for 2011 for the implementation of major structural reforms. The IMF mission head to Hungary, Christoph Rosenberg said Hungary needs to take additional measures to achieve its budget objectives.

""In an environment of heightened market scrutiny of government deficits and debt levels, the fiscal deficit targets previously announced — 3.8% of GDP in 2010 and below 3% of GDP in 2011 — remain an appropriate anchor for the necessary consolidation process and debt sustainability, and should be adhered to, but additional measures will need to be taken to achieve these objectives,"" Rosenberg said.

""In this context of fiscal adjustment, it is important that the vulnerable continue to be protected from the impact of the weak economy, although any further support should be provided in a targeted and transparent manner,"" Rosenberg said.

The International Monetary Fund is planning to increase its lending resources to $1 trillion from $750 billion to improve its measures to prevent financial crises, the Financial Times reported today.

The IMF Managing Director Dominique Strauss-Kahn told the newspaper that boosting the lending to $1 trillion is a ""correct forecast"". ""Even when not in a time of crisis, a big fund, likely to intervene massively, is something that can help prevent crises,"" he said.

Germany's macroeconomic recovery is continuing and consolidating, the Federal Ministry of Economics and Technology said on Sunday.

The ministry said the economic development is still exposed to risks, as signaled by the sharp fall in the ZEW Indicator of Economic Sentiment, although the figures remain positive.

Nokia Siemens Networks and Motorola, Inc. today jointly announced that the companies have entered into an agreement under which Nokia Siemens Networks will acquire the majority of Motorola's wireless network infrastructure assets for $1.2 billion in cash. The companies expect to complete closing activities by the end of 2010, subject to customary closing conditions including regulatory approvals.

As part of the transaction, Nokia Siemens Networks expects to gain incumbent relationships with more than 50 operators and to strengthen its position with China Mobile, Clearwire, KDDI, Sprint, Verizon Wireless and Vodafone.

The Board of International Power announced that it is in preliminary discussions with GDF Suez SA regarding a possible combination of International Power and GDF Suez’s Energy International Business Areas and certain assets in the UK and Turkey to create an enlarged International Power which would be listed in London.

The Board of International Power believes that the possible combination warrants consideration given the strategic rationale and potential for synergies as a result of the combination and discussions are continuing between the two parties regarding the terms of the proposed combination.

If the combination were to be completed, it is expected that shares in International Power would be issued to GDF Suez and that, as a result, GDF Suez would be the majority shareholder in the enlarged International Power.

Telefónica, S.A., the Spanish telecom company ended its €7.15 billion or $9.2 billion offer for Portugal Telecom SGPS SA's 50% stake in the Dutch company Brasilcel NV, since the Board of Portugal Telecom has not accepted the offer within its deadline. The offer expired on July 16.

Portugal Telecom requested on Saturday for a final extension of the validity of the offer until July 28, but Telefonica turned down the request. Brasilcel, a holding company that owns about 60% of Brazilian operator Vivo Participacoes SA is a joint venture 50-50 owned by Telefónica and PT.