European Markets Fall; Telefonica and PT Agree

Arthi Gupta
28 Jul, 2010
New York City

The European markets pare early gains after weak durable goods orders in the U.S. Euro-zone banks tighten credit standards. Moody

[R]4:00 PM Frankfurt – The European markets pare early gains after weak durable goods orders in the U.S. Euro-zone banks tighten credit standards. Moody’s emphasizes stress test results will have no impact on the ratings of European banks. Telefónica and Portugal Telecom reach agreement for stake in Brasilcel.[/R]

U.S. stocks decline and Asian markets traded higher. Spanish retail sales increase in June and German CPI rises and credit constraints ease in July.

In Paris CAC 40 Index increased 3.98 or 0.11% to close at 3,670.38 and in Frankfurt DAX Index edged lower 32.47 or 0.52% to close at 6174.84.

Moody''s Investors Service said today that results of the stress tests, conducted by the Committee of European Banking Supervisors among 91 banks across Europe will not affect ratings on the region''s banks. However, the rating agency said it will continue to closely monitor how the failed banks intend to raise capital.

The rating agency expects greater transparency will contribute to restoring investor confidence in EU bank debt and equity in the near term. It also believes greater selectivity in investors'' investment decisions, particularly as investors begin to anticipate a stabilization of economic conditions and, more importantly, a reduction in government support.

""This may be credit-enhancing for some, but could also continue to be a source of pressure for others, especially for those banks that passed the test by a small margin and have no specific plan to positively alter their risk profile,"" the rating agency said.

Euro-zone banks increased the net tightening of credit standards for loans to households and enterprises more than expected in the second quarter, according to results of the latest bank lending survey released by the European Central Bank released today.

In the second quarter, the degree of net tightening of credit standards on loans to households for house purchase was unchanged at 10%, the ECB said.

For the third quarter, banks expect further tightening in credit rules for enterprises, but credit standards for loans to households are expected to decrease. ""Renewed constraints in banks'' access to funding and liquidity management are reported as key factors underlying the tighter credit policy,"" the ECB said.

Germany''s consumer price inflation grew in July. The consumer price index rose 1.1% year-on-year in July compared to a 0.9% growth in the previous month, according to a flash report by the Federal Statistics Office published today. On a monthly basis, consumer prices increased 0.2% in July.

Credit constraints for German industry and trade eased for the seventh straight month in July, according to the Ifo Institute for Economic Research report released today.

In July, 31.6% of the surveyed firms complained of restrictive bank lending policies, compared with 34% in June, the Munich-based think tank said. The Ifo added that the credit hurdle fell in all surveyed sectors.

The credit hurdle for large companies fell by 2.8 percentage points to 36.7% and for mid-sized companies by 2.9 percentage points to 30.0% and for small manufacturers the credit constraints weakened by 5.2 percentage points to 30.5%. In the distributive trade, the credit constraints fell by 1.5 percentage points to 28.5%.

Retail sales in Spain increased in June largely due to a steep rise in spending on household goods ahead of the increase in the value added tax. Retail sales rose a price-adjusted 0.9% year-on-year in June, following a revised 1.7% decline in May, according to data released by the statistics agency INE today.

The Spanish telecom company Telefónica, S.A. said that it reached an initial agreement with Portugal Telecom SG SGPS, S.A. for the acquisition of 50% of the capital stock of Brasilcel, N.V. directly or through any of the companies within its group.

The Wall Street Journal reported that Telefonica raised the offer to €7.5 billion or $ 9.75 billion and the payment will be in installments.

Telefónica first offered to buy Portugal Telecom''s 50% stake in Brasilcel for €5.7 billion on May 6. Portugal Telecom''s Board rejected the offer stating that the sale of Vivo’s stake would be against the long term growth prospects of Portugal Telecom.

Telefónica later increased its offer to €6.5 billion but Portugal Telecom''s board refused to accept the revised offer stating that it does not reflect the strategic value of its asset. Later, Telefónica boosted the offer price to €7.15 billion or $ 9.3 billion and extended the offer deadline to July 16 from the earlier date of June 6.

Telefónica said last week that it abandoned the €7.15 billion offer after Portugal Telecom''s Board did not accept the offer within its deadline.

Moreover, Portugal used its golden share on June 30 to bar Telefónica''s offer to buy Portugal Telecom''s stake in Brasilcel. In early July, European Union court ruled that the Portuguese government''s golden share in Portugal Telecom is illegal as it restricts the free movement of capital, boosting Telefonica''s chances to acquire Vivo.