Debt Rattle, July 6 2008: The return of Oliver Twist

Roman Polanski's Oliver Twist

Ilargi: Even though we have paid a lot of attention to the troubles in the English markets in the past, I must say a thought is now taking shape that is still somewhat surprising.

That is, it’s starting to look as if England is falling so much deeper and faster than the US at the moment, that it could actually become the first to really crash. It may have something to do with different business laws, or a more focused media, but despite these possible factors, I’d say it’s the plain economic data that are in the driver’s seat. And they are ugly.

Still, there’s more than enough people left with blinders on to rake up a lively, albeit completely braindead, discussion about doubling airport capacity. I guess that’s called the almost funny category. I don’t think Oliver Twist was ever on a plane, so that’ll be a first. Good on you, mate!


After 63 consecutive quarters of growth, is the party over?

One of the most remarkable things about Britain’s economy in recent years has been its ability to keep growing. Through thick and thin, even at times when the battery threatened to give up entirely, the long expansion has continued.

Millions of children have never known anything other than rising national income. Today’s 16-year-olds were emerging blinking into the sunlight last time real gross domestic product showed a single quarterly fall.

Now, however, after 63 consecutive quarters of growth, is the party over? There have been close calls along the way — in the spring quarter of 2001 GDP rose a mere 0.1% in spite of a big public spending boost — but avoiding at least a quarter of falling GDP looks like an enormous challenge. How much of a challenge has only just become clear. It started with the downward revision of first-quarter growth to 0.3%, half its rate in the final quarter of 2007 and a third of its rate a year earlier.

The quarterly numbers suggested a sharper slowdown than had been thought. They were followed by a series of very weak survey numbers and some high-profile corporate woe. With half the year gone, the gloom threatens to become all-enveloping. Will we even get to the end of the year with the growth record intact? The question is, where will the growth come from? In a clutch of nasty numbers last week, some of the nastiest were the purchasing managers’ surveys.

The survey for manufacturing reported that, with continuing price pressures, the index recorded its largest monthly decline since January 2000 and was at its weakest since December 2001, with output, new orders and employment all declining. You may say we have become used to gloom from Britain’s factories over the years. This year, though, it was supposed to be different, with the economy “rebalancing” towards Britain’s factories, helped by sterling’s fall against the euro.

Instead, manufacturing appears to be suffering from the credit crunch and soaring commodity prices along with the rest of the economy. The Engineering Employers’ Federation said the survey may have overstated the gloom. However, hopes that industry would keep the rest of the economy afloat are fading.

If manufacturing is disappointing, construction is looking like a demolition site. The purchasing managers’ index (PMI) for construction dropped to 38.8 last month. Last summer it was running at 64.8. The housebuilders’ intense pain is being reflected in the numbers. Bad news comes in threes, and the third was the PMI for services, the biggest contributor to economic activity.

We know financial services are in trouble — you certainly would not want to be a mortgage broker these days — and the sector’s woes are serious enough to push overall service activity down; to 47.1 from 49.8. The service sector, of course, includes retailing and last week we had a 21-gun warning from Sir Stuart Rose, chairman of Marks & Spencer.

We heard much the same from him in early January, since when consumer spending has surprised on the upside, including that spectacular, though disputed, 3.5% jump in retail sales in May. If you believe the official numbers, sales volume in May was up 8% on a year earlier. Even if you take them with a large pinch of salt, Rose’s retailing recession must have started after May.

There is no doubt, however, that times should be getting much tougher for consumers and retailers and will do so over the second half. The squeeze is on.

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Ilargi: Once the latest oil price rise is reflected in prices at the pump, English motorists will pay 140 pence per liter. At present currency conversion rates, that would mean $10.50 per gallon in the US. With further increases already in the pipeline.

We could make a good case that the US is heavily subsidizing its fuel. We could also argue that that cannot continue much longer; there are huge US price hikes coming, simply because Americans will be outbid on world markets.

And that 20 pence increase per liter? It translates to a $1.53 price hike, overnight.

UK: Latest oil price surge 'could add 20 pence' at the pumps within weeks

Motorists are facing further pain after a new warning that the latest surge in crude oil prices to record highs could add another 20p to a litre at the pumps within weeks. The forecast, from the Institute of Advanced Motorists (IAM) came as new figures showed car sales wilting in the face of sky high fuel prices and collapsing consumer confidence.

Fuel prices set yet another record today at the pumps, rising to an average of 119p for unleaded petrol and 132.4p for diesel, according to the IAM Motoring Trust, which monitors pump prices daily. Technical director Tim Shallcross said that the surge in oil prices in recent days to fresh records above $146 a barrel had yet to feed through to the pumps.

"If crude prices stay around their current level, we could well see another 20p on a litre over the coming month," he said. But he added that petrol retailers had not passed on the full cost of the 100% rise in crude prices over the 12 months to the end of June. If they had, he said, unleaded would already be at 140p a litre on average and diesel 150p, with further rises to come.

Meanwhile, the Society of Motor Manufacturers and Traders (SMMT) said car sales totalled 209,000 last month, a fall 6.1% from May - the steepest decline so far this year. Private (non-fleet) sales suffered much worse, tumbling by 12%. "We are now seeing concerns about rising fuel bills and household costs dampening consumer confidence, leading to slower demand for new cars," said Paul Everitt, SMMT chief executive.

He said that the sharp fall brought sales, which had been doing well in the spring, back into line with the SMMT's forecast that sales would continue to slow and total around 2.35 million cars this year. The SMMT said that the rising price of fuel had encouraged people to change to smaller cars.

"Cost pressures, environmental concerns and technological advances have ensured consumers have taken the choice of buying more efficient vehicles, and record numbers of cars are now in the lowest CO2 vehicle excise duty bands. The share of cars in the A band has increased more than tenfold in the past year," said Everitt.

Band A cars, however, still only account for 0.13% of the new car market because there are so few cars available which emit less than 100g of CO2 per kilometre. The SMMT figures showed big increases in bands B and C sales but falls in bands D to G, which include cars with higher emissions. The SMMT figures showed diesel cars continued to grow in popularity last month in spite of the widening divergence in price between petrol and diesel.

It said this was because its greater economy and lower CO2 emissions and tax bands outweighed the pump price disadvantage. Diesel cars accounted for almost 43% of the market last month. Despite growing environmental concerns, the number of alternatively fuelled vehicles such as the G-Wiz electric car decreased for the second successive month - down 6.7% to 1,447 vehicles.

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Recession threat as UK jobs vanish

The threat of rising unemployment in Britain will be driven home this week by news that the number of permanent jobs available has fallen for the first time in five years. This is one of several findings in a survey of employment agencies that also reveals that the number of people looking for work rose in June and the growth in demand for temporary staff is easing.

City economists say that the risk of the current slowdown escalating into Britain's first recession in almost 20 years will be determined by how aggressively companies cut staff to shield profits from a painful mix of slowing demand and rising costs. "It has become much more likely that the UK will endure a sustained period of very weak activity," said Roger Bootle of Capital Economics. "There appears to be very little for companies to be cheerful about."

KPMG-REC's monthly survey, to be released on Tuesday, will also show that the number of permanent placements dropped in June for the fourth month in five and are now falling at their fastest pace since 2003. This snapshot of the labour market follows hot on the heels of a warning from the Organisation for Economic Co-operation and Development that unemployment in Britain will rise by 100,000 over the next two years.

As unemployment climbs in the US and across large parts of western Europe, it is likely to be on the agenda when leaders of the G8 meet tomorrow in Japan. Companies at the sharp end of the Britain's housing-led slowdown are already wielding the axe. Troubled housebuilder Barratt last week announced plans to cut 1,000 of its 6,700-strong workforce while Pendragon, the country's biggest car dealer, laid off 500 workers.
 
It is not only chief executives who are worried. Shares in Hays, Britain's biggest employment agency, ended last week 14 per cent lower as investors called time on the health of the once-buoyant labour market. The trading update this week from Hays will be widely watched by nervous traders as the FTSE 100 index stands on the edge of a bear market.

Howard Archer, an economist at Global Insight, predicts investment by businesses to be "markedly weaker in 2008 and 2009, in the face of tight lending conditions, markedly softer final demand, weakening profitability and lower business confidence." The Bank of England's survey of credit conditions last week showed that Britain's cash-strapped banks plan to scale back the amount of credit available to companies over the next three months.

Despite the outlook darkening - activity in the service sector fell to its lowest level since the 9/11 terrorist attacks - economists do not expect the Bank of England's Monetary Policy Committee to provide any relief when they announce their interest rate decision on Thursday.

With oil prices surging and food costs rising steadily, Governor Mervyn King has warned that inflation may top 4 per cent by the end of the year and made plain that his focus remains on reining in prices. "The Bank needs a slowdown to bring inflation under control," said George Buckley, an economist at Deutsche Bank. "But the question is how much of a slowdown?"

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Falling into the abyss?

In the old days the bellwether of the British economy was ICI, then the country’s biggest industrial company. If ICI was hurting, so was the rest of the economy. Now the role of bellwether in a consumer-driven economy has been taken by Marks & Spencer. If M&S is hurting, it seems, so must the rest of the economy.

Last week’s profit warning from Sir Stuart Rose, its chairman, knocked already gloomy City sentiment down several notches and raised the spectre of recession. Nearly a year after the credit crunch broke, its tentacles are spreading. First the banks suffered; then housebuilders reeled under the sharpest downturn since the inter-war years. Now the fear is that consumer spending is wilting fast as worried households cut back.

For those with long memories, the parallels with Britain’s last recession are troubling. In the first half of 1990, the economy appeared to be coping well with sky-high interest rates and a rapidly weakening housing market. Then, in the words of analysts at the time, the economy “fell off a cliff”. Could history be repeating itself, with the credit crunch and record oil prices, which hit $146 a barrel last week, doing for the economy this time what high interest rates did 18 years ago?

“There is a high risk of recession,” said David Owen, an economist with Dresdner Kleinwort. “The housing-market deterioration has been sudden and spectacular and the worry is that other sectors are following suit. Suddenly things do start to look as if they’re falling off a cliff again.”

Lehman Brothers revised down its forecasts last week. A recession is normally defined as two consecutive quarters of falling GDP, or “negative growth”. Lehman expects three, beginning in this quarter and lasting until next spring.

“There’s increasing evidence that a downward spiral between tightening credit conditions and falling demand is now a reality,” said Peter Newland, UK economist at Lehman. We’ve taken a knife to our medium-term projections for growth.” The firm expects consumers to wilt under the impact of falling real wages and a drop in housing and financial wealth. “The Achilles heel for the UK economy is the consumer,” said Newland.

That is the worry in the stock market, where share prices have dived in the past few weeks. “It’s ugly and it’s going to get uglier,” said Oliver Hemsley, chief executive of the stockbroker Numis. Graham Secker, UK equity strategist at Morgan Stanley, said the market was likely to fall a further 7% or 8% but there was a risk the gloom was overdone.

“There is a lot of hysteria and negative views on the UK economy, from all sorts of parties,” he said. “It’s not necessarily wrong, but one should always be a bit more rational about these things. “There’s a 50-50 chance the UK will have a technical recession. That doesn’t mean we will have a really bad recession as we did in the early 1990s.”

Graham Ashby, head of UK retail equities at Credit Suisse Asset Management, said: “The market is at that point where it could go one way and it could go the other. The bears have been winning the argument up to now. While stocks are beginning to look cheap on a number of measures, every day more bad news comes out, and the bears look right.”

Rose’s warning of a “seismic shift” in the consumer environment came as he announced a 5.3% drop in like-for-like sales in the 13 weeks to June 28 and sacked Steven Esom, the firm’s recently appointed director of food sales. “We have had 10 years of boom time,” Rose said. “Everyone is now going to have to swallow hard and cut their cloth to suit their needs.”

If Marks & Spencer is suffering, so is John Lewis, middle England’s other store of choice. It announced on Friday that sales at its 26 department stores in the week to June 28 fell by 8.3% on a year earlier to £53m, with sales of electrical and electronic products down nearly 16% and sales of products for the home 13% lower. Those looking for evidence that high petrol prices are having an impact on the wider economy can find it in the John Lewis figures.

Britain’s housebuilders are reeling under a 64% collapse in mortgage approvals to a record low of 42,000 in May. Following the failed £500m capital-raising exercise last week by Taylor Wimpey, Britain’s biggest housebuilder, shares in the sector tumbled again, a fall braked only by the promise of government money to buy some unsold properties for social housing.

Next to their house, the main big-ticket item for consumers is a car. New-car sales have been holding up surprising well in the face of soaring petrol prices. Last month, however, they also showed a sharp fall. The Society of Motor Manufacturers and Traders said June sales were down by 6.1% on a year earlier, with registrations to private buyers 8% down.

Dealers called for action from the government, which has been heavily criticised for proposals to increase road tax for new and used vehicles, a move that has hit secondhand values hard. Trevor Finn, chief executive of Pendragon, Britain’s largest car retailer, which cut 500 jobs last week, urged ministers to restore consumer confidence. “They have clearly made a bad decision with the new vehicle excise duties,” he said. “But instead of just saying they won’t do it, they have said they will review it later in the year. That doesn’t take away the threat, and doesn’t help consumer confidence in the least.”

For some, conditions are the worst since the 1920s
Britain’s housebuilders are suffering a worse downturn than in the early 1990s recession, or in the recessions of the 1970s and early 1980s. Conditions are probably at their worst since the 1920s. The last recession to hit Britain, from 1990 to 1992, came as the result of high inflation, which was followed by a sharp rise in interest rates in response. The present downturn has been brought about by a sudden tightening of credit.

With the cost of oil, the greatest shock today is that prices per barrel have risen sevenfold in only five years. That can be compared with the first great oil-price increases of the 1970s. Those increases contributed to two deep recessions, in 1974-75 and 1980-81.

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UK plc faces bear market as downturn deepens

As the sun valiantly tried to shine over the Suffolk coast yesterday, lunchtime customers were coming and going at the Lord Nelson pub in Southwold. Its walls, laden with reminders of Trafalgar, welcome both locals and visitors to a town that has done much to boost the local East Anglian economy.

Among the pub's most ardent admirers is Andy Wood, who runs Adnams, the local brewing and hotels business. While the Lord Nelson has been doing a roaring trade in the brewer's Broadside ale for years, Wood has now started to see things alter rapidly in Constable country and beyond.
 
"I think people's moods have changed," says Wood. "I think they are becoming more concerned about how they provide the basics in their lives. East Anglia, and Suffolk in particular, are very rural economies. We have lots of businesses in rural situations, and throughout East Anglia we are seeing fewer cars on the roads, for instance. That's just one example. There are fewer people going to pubs and they are also spending on different things."

Costs are rising fast for small businesses like the Lord Nelson while takings are under pressure, but although rural economies are beginning to slow, towns and cities are no different. In London, the rising cost of everyday life is changing people's behaviour. Outside Marks & Spencer's Victoria branch on Thursday shoppers were clearly anxious.

Sarah Ramsay, 23, a PA from Croydon, says: "I'm worried about how expensive my sandwiches are. I've definitely noticed a difference in food prices. I'm making my own sandwiches now or going to a supermarket like Sainsbury's down the road. "

"I think it's good quality stuff in Marks & Spencer, the sandwiches are a lot better than the big four supermarkets. But I'd rather bring stuff from home for lunch to save money," says Will Dawson, 24, from London. Elsewhere in the UK the picture is the same. In Liverpool, whose city centre has recently been transformed into a retail Mecca thanks to the Duke of Westminster's Liverpool ONE development, people are still spending but on different things.

"You're seeing the 'lipstick effect' taking place," says Alastair Machray, editor of the Liverpool Echo. "People are spending on small purchases, on themselves and having fun rather than on homes, cars and expensive holidays." Simple acts of thrift are commonplace and growing.

A year ago shoppers were still wallowing in a debt-fuelled spending binge on the back of rising house prices, which this time last year were going up at an annual rate of 10.7 per cent. Now, house prices are falling at a rate of 3.7 per cent but household debts are still just as high at £1,350bn compared to an economy, now slowing, with an annual output £1,330bn.


UK householders were last week warned, by the Bank of England no less, that living standards will have to fall for at least a year and by the Organisation for Economic Co-operation and Development (OECD) that redundancies will grow by 100,000 over the next two years. Oil on Friday hit yet another high at $145.85 a barrel, adding to inflation and squeezing incomes further. Not surprisingly they're now asking just how long will this slowdown last and how bad will things get?

Whether you're Adnams, Marks & Spencer or even a newspaper publisher such as Trinity Mirror, which owns the Liverpool Echo, the answer is much, much worse. All three companies are among a raft of businesses to have issued profit warnings since last Monday, making the past seven days the week that the wheels came off the UK economy.
 
Things started badly and got steadily worse. On Monday, Trinity Mirror, publisher of the Daily Mirror and Sunday People, set the early pace with a 25 per cent fall in its stock market value, equal to £100m lost in eight-and-a-half hours of frenzied trading. It is now worth just £280m, compared to £1.3bn a year ago.

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Ilargi: No matter how bad the economy, there’s always enough fools to go around. Including in the government. Have they nothing better to do than to discuss nonsense?

Stansted airport given permission to double passengers numbers to 40 million

BAA’s controversial plans for a second runway at Stansted will be sent to a public inquiry by ministers this week - but the company will at the same time be given permission for a big increase in passenger numbers at the Essex airport. Numbers could rise from the present 23.5m to as many as 40m following ministers’ decision to scrap current restrictions and allow an increase in flights.

The move to a public inquiry on the £2.3 billion second runway means a final decision on whether it can go ahead is now not likely before 2011 at the earliest. Ruth Kelly, the transport secretary, is expected to announce the two Stansted decisions this week. Supporters of airport expansion say the moves represent a significant step in implementing the government’s 2003 aviation white paper, which said congestion at southeast airports should be relieved by new runways at Stansted and Heathrow, with the Essex airport coming first.

Even if objections can be overcome, a new runway at Stansted is not likely to open before the middle of the next decade. In the meantime, BAA has pushed to have the current limits on passenger numbers lifted. The Essex airport is at present limited to 25m passengers a year. Last year it handled 23.5m. BAA wants the limit on passenger numbers scrapped, and replaced by a limit on the number of flights.

The airports group wants this increased from 241,000 a year to 261,000 a year. It says this should see Stansted grow to handle 35m passengers a year, while antiexpansion campaigners maintain that it will mean as many as 40m. Uttlesford district council rejected the plan last year. It went to a public inquiry, which finished in October. A decision from the government has been expected since Christmas.

The inquiry on the new runway - which could eventually take Stansted up to 80m passengers - is expected to start next spring, and take up to a year. A final decision from the government could take another year. Stop Stansted Expansion, a lobby group opposed to the new runway, said it was confident of winning the public inquiry.

“The final decision on this project will be taken not by this government but by the next one, and the Conservatives have long realised there is no economic case for doubling the size of Stansted,” a spokesman said. “It also makes no sense as an investment for the owner of the airport, particularly when the owner is strapped for cash, as BAA is.”

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Between the lines of the Declaration

On July Fourth, Americans celebrate the ideals of the Declaration of Independence – life, liberty and the pursuit of happiness. But these three principles aside, we often forget the underlying, truly radical ideas the Declaration is built upon. The Fourth of July isn’t just about feel-good words and ideas that politicians invoke to gain the “consent of the governed.”

Independence Day is about the freedom and duty of citizens to assert our natural or God-given rights – rights that are ours because we are human beings, not privileges bestowed upon us by the authorities. It’s easy to forget that radical notion, that governments derive “their just powers from the consent of the governed.”

The Declaration also warned that “whenever any form of government becomes destructive of these ends, it is the right of the people to alter or abolish it, and to institute new government.” The Declaration was a call to a revolution against a regime that repeatedly violated these core rights. Modern politicians and perhaps even most Americans are confused about the concept of rights.

They believe that “positive” rights – such as the “right” to health care or education – are of the same kind as those “negative” rights – essentially, the right to be left alone – defended by the founders. For instance, the right to free speech is the classic negative right that the founders sought to uphold. We, as Americans, have a right to air our grievances and criticize our government.

While we can huff and puff endlessly about unchecked government power, not unless we air our grievances in the public sphere can we expect any satisfactory resolution or redress. We fail as citizens when we passively allow government to abridge our rights, restrict our freedom or inhibit our pursuit of happiness. In our euphoric celebrations, we may forget that the Fourth isn’t about guaranteeing our happiness.

The government’s purpose, rather, is ensure that we have the opportunity and ability to pursue whatever form of happiness we choose as long as we do not violate another citizen’s rights. Nor is the Fourth about assuring equality. To the founders, freedom was the crux of independence – not equality. The idea of equality was peripheral and only received a six-word blurb in the Declaration: “that all men are created equal.”

By equal, the founders meant that we are equal before the law, not equal in our talents and material blessings. Nineteenth-century French political philosopher Alexis de Tocqueville posed freedom and equality in opposition to one another, predicting that Americans’ love for equality would ultimately undermine and eclipse their freedom. That, unfortunately, was among Tocqueville’s many prescient observations.

Similarly, the Fourth isn’t about the triumph of democracy. To the founders, democratic government could be just as damaging to individual rights as monarchies. Just because we elect our leaders doesn’t make them less likely to trample on our natural rights. Freedom is best protected through limits on governments, the rule of law and the separation of powers.

Ponder that as the barbecues blaze, and the fireworks fill the air.

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Renault CEO Sees Carmaker Consolidation as Stocks Decline

Renault SA Chief Executive Officer Carlos Ghosn said he expects mergers among automakers because car companies' stocks are "undervalued." "When you've got General Motors Inc., the world's biggest carmaker, worth $6 billion, or 3 percent of its revenue, that is about two weeks of revenue, you know very well that something is going to happen," Ghosn said today during the Economic Forum of Aix-en-Provence in southern France.

In Europe, the Dow Jones Auto & Parts Index is trading at 8.3 times earnings, less than half the level four years ago. The Dow Jones Utilities Index, including companies such as E.ON AG and Centrica Plc, trades at a multiple of 13 and has held above 10 times earnings since 2004.

Automakers from Renault, France's second-largest, to GM face pressure on profit margins as an increase in steel costs reduces profitability and record crude oil prices damp consumer demand. GM shares have fallen to their lowest since 1954 adjusted for stock splits, according to Global Financial Data in Los Angeles. Renault shares have slumped 55 percent from their peak last year, valuing the company at 14.9 billion euros ($23 billion).

Renault's revenue is about 2.7 times its market value. The company, based in Boulogne-Billancourt, expects steel costs to rise 1 billion euros ($1.6 billion) next year and plans to pass on some of that increase to consumers, Ghosn said. Costs for the metal will rise as much within the next year as they did between 2006 and 2008, he said.

"So far consumers haven't seen much of it," he said. "They will see more of it gradually." Steel prices remaining at current levels would cause costs to rise 200 euros ($314) per car, on top of a 100-euro increase last year, Citigroup Inc. analyst John Lawson said in a research note this past week.

The price of steel sheet, used in cars and appliances, rose to a record $1,052 a ton in June, up 3.1 percent from the previous high in May, according to Purchasing magazine. Oil reached a record $145.85 a barrel this week. Renault is preparing to mass produce electric cars, as it seeks to offset the effect of record oil prices, Ghosn also said today.
PSA Peugeot Citroen SA is France's largest carmaker.

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France's Sarkozy Questions ECB Rate Increase, Wants G8 Expansion

French President Nicolas Sarkozy recommenced his criticism of the European Central Bank today, asking it was "reasonable" for it to have raised the region's key interest rate this past week. The ECB lifted its benchmark rate to 4.25 percent, its highest in seven years, on July 3 after inflation accelerated to a 16 year high in the 15 nations that use the euro.

Sarkozy, who has repeatedly attacked the Frankfurt-based bank for focusing too much on inflation and not enough on growth, asked delegates at a Paris meeting of his Union for a Popular Movement party "if it was reasonable to raise rates, while the Americans have rates at 2 percent." The U.S. Federal Reserve has cut its key rate seven times since September to 2 percent in a bid to avert recession, while the ECB left its unchanged until the past week amid surging consumer prices.

Sarkozy's comments carry greater weight after France on July 1 became the president of the 27-nation European Union, meaning it will help shape the EU's agenda and policies for the rest of this year. ECB President Jean-Claude Trichet has brushed aside the criticism, telling reporters on July 3 that his central bank is "an independent institution."

The French president repeated his call for the Group of Eight nations to increase its ranks to include China and India. He and other leaders from the group are scheduled to meet in the coming week for their annual summit, this year in Japan. "It's not reasonable to continue to meet as eight to solve the big questions of the world," he said.

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France’s Lagarde Calls ECB Rate Outlook 'Encouraging'

French Finance Minister Christine Lagarde welcomed as "encouraging" comments by European Central Bank President Jean-Claude Trichet this week playing down prospects of further interest-rate increases. Speaking a day after French President Nicolas Sarkozy asked if it was "reasonable" for the ECB to have raised its benchmark rate, Lagarde said it was vital European policy makers "be attentive to the economic growth situation."

The ECB raised its benchmark rate to 4.25 percent, the highest in seven years, on July 3 after inflation accelerated to a 16-year high in the 15 euro nations. With growth slowing, Trichet today repeated he has "no bias" on further moves. "What seems encouraging to me are the comments of Trichet," Lagarde said in an interview with Bloomberg Television at an economic forum in Aix-en-Provence, southern France. "He has said clearly that with the rate as it is he thinks the goal of price stabilization can be attained."

Sarkozy, who has repeatedly attacked the Frankfurt-based bank for focusing too much on inflation and not enough on growth, yesterday asked delegates at a Paris meeting of his Union for a Popular Movement party "if it was reasonable to raise rates while the Americans have rates at 2 percent." The U.S. Federal Reserve has cut its key rate seven times since September to 2 percent in a bid to avert recession, while the ECB left its unchanged until the past week amid surging consumer prices.

Lagarde today called the gap "considerable" and blamed it for leaving the euro "overvalued" against the dollar. The euro has climbed 8 percent against the dollar this year. The comments of French officials carry greater weight after France on July 1 took over the presidency of the 27-nation European Union, meaning it will help shape the EU's agenda and policies for the rest of this year.

Speaking at the same forum as Lagarde, ECB President Jean- Claude Trichet today rebuffed the criticism of politicians and said the bank would do what is necessary to control prices and anchor inflation expectations. "We're not pre-committed and will do what is necessary to ensure price stability," he said. "We have a mandate that was given to us by European democracies, of price stability."

Still, Lagarde noted German Finance Minister Peer Steinbrueck's July 1 comment that the ECB should consider the effect on growth of higher interest rates. "I rejoice that my German counterpart, who was considered an apostle of the orthodoxy of monetary policy, also started believe that the risk to growth of too-high interest rates has to be taken into account," she said.

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UBS: The crisis at the heart of the Swiss bank

On Tuesday Peter Kurer, the new UBS chairman, fulfilled his first promise. The 59-year-old former company lawyer drew a line under the era of Marcel Ospel, who resigned as head of the Swiss bank in April after seven years in office. Four veteran directors were forced to resign after the bank lost billions of dollars in the US mortgage market.

But restoring confidence in this once impregnable financial powerhouse will take more than management change. An investigation into the cause of the losses at UBS shows how repeated warnings were ignored throughout the company, its culture and reputation for prudence corroded by the short-term riches on offer during the good times.

And the pain goes on. On Friday UBS warned of more write-offs to come on top of the $37bn already put aside to cover losses in the US sub-prime debacle and subsequent credit crisis. Meanwhile, the bank is also involved in a dispute with the American tax authorities that threatens the future of Swiss banking secrecy. The damage to its reputation for prudence is such that even the fabled private banking arm is suffering, seeing a net outflow of deposits from the world's super rich.

No wonder many investors are pulling out too. Last week the share price plunged to just 19.81 Swiss francs, breaking the previous low set when the bank lost 1bn francs following the collapse of Long Term Capital Management, the hedge fund. Discounting inflation, the UBS share price has fallen by more than 10 per cent since its defining merger with Swiss rival SBC in 1998.

The component parts read like a Who's Who of international banking: Union Bank of Switzerland, Swiss Bank Corporation, Paine Webber, Dillon Read, SG Warburg. From offices in midtown Manhattan and London's Broadgate Centre, its investment bankers had a swagger all of their own. But no other major European bank has suffered from the credit crunch quite as much as UBS.

Over the past 12 months, what was once the epitome of a serious, solid Swiss banking house has turned into a symbol of greed and excess and become a byword for hubris in the world of fast money. The collapse of UBS has little to do with bad luck and the mistakes of traders. It is rather the result of a banking culture that managed to combine a predilection for risk-taking with an overestimation of its own ability.

"Above a certain level, every loss points to a fundamental problem of banking culture and competence," wrote Markus Granziol, the former UBS investment bank director. He was right. UBS senior management was warned early enough. From April 29 to May 7 2002, risk managers at its Zurich headquarters studied the bank's mounting trades in US mortgage securities.

They went to New York and consulted the highly paid traders of the principal finance credit arbitrage (PFCA) and commercial real estate (CRE) arms. On their return to Switzerland, they compiled a report that was designed to wake up UBS senior management to reality. "PFCA and CRE have built a large real-estate position and now probably hold one of the largest books on the Street," was the risk managers' verdict.

Even at this early stage, they had put the bank's involvement in these still little-known mortgage securities at around $25bn. At the exchange rate of the time, this amounted to almost the bank's entire capital of 44bn Swiss francs. Read on...

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CDO Creators Seek Redemption, and Profits, From Mortgage Market

Money managers including TCW Group Inc. and Harding Advisory LLC that topped the list of firms behind the most toxic mortgage securities have raised more than $4.3 billion to invest in home-loan debt. At least half of the 20 top managers of collateralized debt obligations tied to subprime-mortgage securities have funds seeking to profit from home loans. They are targeting twice what they've already raised, data compiled by Bloomberg show.

"CDO managers may be seen as guys who created garbage and now want more money to sort out their own junk," said Roy Smith, a former Goldman Sachs Group Inc. partner who now teaches finance at New York University's Stern School of Business. Issuance of CDOs more than doubled from 2000 to 2005, outpacing the 9.6 percent annual growth rate of U.S. corporate bonds, and then accelerated through mid-2007. That was before record home foreclosures marred mortgage-linked securities, causing some AAA-rated CDOs to lose all their value.

The CDO managers, who join more than 80 competitors now targeting distressed mortgage assets, tout their experience, relationships and databases to pension funds and wealthy individuals. They include firms such as Cohen & Co., GSC Group and Harding, as well as TCW, the former Trust Company of the West now owned by Paris-based Societe Generale SA, and BlackRock Inc., the largest publicly traded U.S. fund manager.

Joseph Patterson, president of Patterson Capital Corp., the Los Angeles-based bond fund manager founded in 1977, said it's surprising that a CDO manager can maintain a reputation for being a "wonderful mortgage manager."

Bankers and managers create CDOs by bundling together assets such as mortgage bonds, buyout loans or preferred shares, with income from those holdings used to repay investors. Issuance of mortgage-tied CDOs jumped to $227 billion last year before plunging to less than $1 billion this year, according to JPMorgan Chase & Co. data.

So-called events of default have occurred on $217 billion of mortgage-bond CDOs since October, indicating even their senior-most investors probably won't be repaid in full and other classes may be erased, according to data compiled by Charlotte, North Carolina-based Wachovia Corp. "Despite what's been said about CDOs, having a background with the securities is a positive," said Munish Sood, president of Princeton Advisory Group, the 12th-largest manager of CDOs composed of mortgage bonds in 2007 according to Standard & Poor's. "We have experience managing the underlying mortgage assets, which is where we are seeing the opportunities."

A $490 million Princeton Advisory CDO called Ivy Lane has had more than 85 percent of its collateral downgraded, according to Wachovia data. The CDO, underwritten in 2006 by Citigroup Inc., is making payments only to holders of its senior-most classes, Wachovia says. TCW, the largest manager of CDOs composed of mortgage bonds, and BlackRock, the fifth largest, have raised at least $3.6 billion for mortgage opportunity funds.

That doesn't include a $3.75 billion BlackRock fund that bought debt from UBS AG. New York-based BlackRock also manages $30 billion of Bear Stearns Cos. assets for the Federal Reserve and JPMorgan Chase. "This is the best time that we've ever been in to add value to a portfolio," BlackRock President Robert Kapito said in a speech last month. Kapito, BlackRock spokesman Brian Beades and Michael Utley, a spokesman for Societe Generale's Los Angeles-based TCW unit, declined to comment their CDO businesses.

New York-based Harding Advisory, the CDO specialist founded by President Wing Chau that last year hired Merrill Lynch & Co. executive Kenneth Margolis, has raised $75 million for a fund that hopes to collect $500 million, Hedge Fund Alert reported last month. Chau, who together with Margolis has committed to invest as much as $10 million, declined to comment. Opportunity fund managers tell investors that they won't be able to withdraw their money for several years because of uncertainty about when markets will recover or their holdings will pay off.

The Princeton ABS Distressed Fund carries a "three-year investment period," a marketing letter says. Philadelphia-based Cohen, headed by former Merrill Lynch structured-products chief Chris Ricciardi, has raised about $100 million for a planned $1 billion fund, Hedge Fund Alert reported in June. The company is the sixth-largest manager of mortgage- tied CDOs.

Mortgage specialists including Cohen's Frederick Horton compare the current round of fundraising to the aftermath of the collapse of Drexel Burnham Lambert Inc. Bankers tainted by working at Drexel, or funds that bought "junk" corporate-bonds from it, proved worth betting on after the debt helped cause hundreds of U.S. savings and loans to collapse in the 1980s. Leon Black, Drexel's former chief of mergers, later founded Apollo Management LP. He acquired big stakes in many of the companies Drexel had helped finance by buying their junk bonds from failed thrifts.

Junk, or non-investment-grade, company bonds returned a record 39 percent in 1991, the year after Michael Milken's Drexel filed for bankruptcy, Merrill Lynch index data show. "The guys who were most successful at making money in that cycle were former Drexel guys or former high-yield managers," Horton, a senior managing director at Cohen, said in a telephone interview last month. "The same thing will happen here, I think.'

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Maple Bond Market Plunges as Investors Avoid Foreign Debt

Canadian Maple bonds, the fastest- growing market for international borrowers a year ago, have almost disappeared this year as the credit crisis prompts Canadian investors to stay away from debt sold by foreign companies. Four banks outside Canada raised just C$500 million ($492 million) selling Maple bonds, or foreign debt denominated in Canadian dollars, according to Bloomberg data. That compares with C$20.6 billion from 55 issues in the first half of 2007.

"Investors are having a preference for well-known, well- understood companies, and they have a home-market bias," said Chris Seip, head of Canadian debt capital markets at RBC Capital Markets in Toronto. Demand for Maple bonds soared in the past three years as companies as diverse as New Zealand's Telecom Corp. and Iceland's Kaupthing Bank hf were drawn to low interest rates, a sinking currency against the euro and a new law that let Canadian pension funds own as much foreign debt as they want without a tax penalty.

Sales soared to C$25.5 billion last year, from C$20.9 billion in 2006 and C$9.1 billion the previous year. Sales slumped this year, eroding fees for RBC Capital and other investment banks, as the credit crisis and more than $400 billion in writedowns by the world's biggest lenders reduce demand for risky credit. About 74 percent of the Maple bond sales last year were by financial firms such as New York-based investment bank Morgan Stanley and Royal Bank of Scotland Group Plc. of Edinburgh.

"The concern in this credit crunch has been around the financial sector in the U.S. and in Europe," said Robert Follis, director of corporate bond research at Scotia Capital Inc. "Canadian investors feel more comfortable owning a Canadian bank." Foreign borrowers kept to their home markets to reduce risk and sought funding in euros and U.S. dollars, according to Seip. Canadian investors have sought domestic bonds from companies such as oil and gas firm EnCana Corp. and Shoppers Drug Mart Corp., Canada's biggest pharmacy chain.

RBC Capital Markets, the investment banking unit of Royal Bank of Canada, led a C$300 million Maple sale for the Tunis- based African Development Bank. Merrill Lynch & Co., the third- largest U.S. securities firm, raised a combined C$200 million for Rabobank Nederland NV, Westpac Banking Corp. and Metropolitan Life Insurance Co. By contrast, bond sales by Canadian governments rose 19 percent in the first half of the year, to C$40.5 billion. Corporate bond sales rose 1.4 percent to C$45.3 billion, according to Bloomberg data.

Seip said the Maple market may rebound this year as debt sales by Canadian firms slow. "The second half is going to be about lack of supply from corporates, and investors who are getting more comfortable with the price for financials and other non-financial names that aren't Canadian," he said.

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Italians Shun Alitalia, Ignoring Berlusconi Plea for Patriotism

Lorenzo Schapira tries to avoid flying Italy's near-bankrupt flagship carrier, Alitalia SpA. The planes are run-down and the service is "appalling," he says. "The government should let Alitalia go bust," a 52-year- old who runs a disco and a sports club near Milan, said on board an Air One SpA flight home from Rome.

He's not alone. Travelers interviewed last week at Milan's Linate and Rome's Fiumicino airports said they'd given up on Alitalia and politicians should too. About three-quarters of Italians disapprove of the government's 300 million-euro ($473 million) bailout for the carrier, according to a June 5 online poll published by daily newspaper Corriere della Sera.

"Airlines go bankrupt all over the world," said Alessandro Rovere, who works in the computer industry in Milan. "I don't see why Italy shouldn't do the same for Alitalia." State-controlled Alitalia posts losses of about 3 million euros a day. No buyer has surfaced for the carrier since Prime Minister Silvio Berlusconi said during his election campaign in April that a "huge" number of buyers had answered his appeal to keep Alitalia in Italian hands.

It's "a question not only of pride but of national security," he said April 9 on RAI state radio in Rome. The emergency loan, the equivalent of more than 5 euros per taxpayer, is buying little more than three month's worth of oil. "I hoped Berlusconi would stop pouring money into Alitalia," said Sara Chiappara, 33, a textbook editor for a Milan publisher. "It's unbelievable. We've done our part for Alitalia. It's enough."

Alitalia Chairman Aristide Police told shareholders on June 28 in Rome that the airline faces its "last chance" to avoid bankruptcy. The stock lost almost half of its value this year before it was suspended June 4 pending a sale. The government has given Intesa Sanpaolo SpA, Italy's second-biggest bank, until the end of July to come up with a plan to improve the airline's finances.

Former Chairman Maurizio Prato told labor unions the only thing that could save the airline was an "exorcist" after worker opposition to job cuts scuttled takeover talks with Air France-KLM Group in April. Even Alitalia's largest labor union, Filt-Cgil, says the current bailout is useless without clear measures to boost market share and make money. Italy has injected about 3 billion euros into Alitalia in the past decade.

"The emergency loan is like a drop in the ocean of Alitalia's losses without a relaunch plan," said Mauro Rossi, Filt-Cgil's national secretary. "Alitalia has always been used and abused by politicians for electoral purposes."

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Argentine Lower House Passes Grain Export-Tax Plan

Argentina's lower house of congress approved the government's plan to increase taxes on exports of grains and oilseeds, risking a resumption of three months of strikes by farmers. The measure, passed by a vote of 128 to 122 after 17 hours of debate, requires Senate approval to become law.

It ratifies a March 11 government decree that sparked protests among farmers in Argentina, the world's second-largest exporter of corn and third-largest of soybeans. President Cristina Fernandez de Kirchner imposed the variable levies for grains and oilseeds to keep domestic food prices from rising. She asked Congress to approve the increases reckoning that enacting them into law would quell protests that resulted in food shortages.

"If this bill is finally approved by the Senate, the damage to farmers will continue," Hugo Biolcati, vice president of the Argentine Rural Society, told reporters at Congress today. "We have hope in the senators' responsibility regarding the people who voted for them." The sliding-scale system, pegged to Chicago exchange prices, boosted soybean levies to more than 40 percent from a fixed 35 percent rate.

"The decision to set a variable export tax was right and will make the sector more predictable," said Agustin Rossi, a lawmaker for the ruling Peronist Party. The lower house introduced some changes to the government plan, making more farmers eligible for soybean-levy refunds in a bid to benefit small- and medium-size farms, Rossi said. The senate is scheduled to discuss the bill next week.

"This project doesn't solve the problem, and if it doesn't solve the problem, this isn't a good exit," said Daniel Katz, a lawmaker from the Concertacion Party, which is a member of the government coalition party. Striking farmers withheld their harvests and blocked highways, choking off supplies to grain crushers and ports on Argentina's Parana River operated by food-trading companies including Cargill Inc. and Bunge Ltd.

Last month, truck drivers blocked roads to protest the loss of business and demanded that the government come to terms with farmers. The protests have prompted institutions including Barclay's Capital to trim forecasts for growth in Latin America's third-largest economy.

The farm protests have also taken a toll on Fernandez's popularity, which fell to 19 percent in June from 23 percent in May, according to a poll last month by Buenos Aires-based Giacobbe & Asociados.

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Wildlife extinction rates 'seriously underestimated'

Endangered species may become extinct 100 times faster than previously thought, scientists warned today, in a bleak re-assessment of the threat to global biodiversity.

Writing in the journal Nature, leading ecologists claim that methods used to predict when species will die out are seriously flawed, and dramatically underestimate the speed at which some plants and animals will be wiped out. The findings suggest that animals such as the western gorilla, the Sumatran tiger and the Malayan sun bear, the smallest of the bear family, may become extinct much sooner than conservationists feared.

Ecologists Brett Melbourne at the University of Colorado at Boulder and Alan Hastings at the University of California, Davis, said conservation organisations should use updated extinction models to urgently re-evaluate the risks to wildlife. "Some species could have months instead of years left, while other species that haven't even been identified as under threat yet should be listed as endangered," said Melbourne.

The warning has particular implications for the International Union for the Conservation of Nature, which compiles an annual "red list" of endangered species. Last year, the list upgraded western gorillas to critically endangered, after populations of a subspecies were found to be decimated by Ebola virus and commercial trade in bush meat. The Yangtze river dolphin was listed as critically endangered, but is possibly already extinct.

The researchers analysed mathematical models used to predict extinction risks and found that while they included some factors that are crucial to predicting a species' survival, they overlooked others. For example, models took into account that some animals might die from rare accidents, such as falling out of a tree. They also included chance environmental threats, such as sudden heatwaves or rain storms that could kill animals off.

But Melbourne and Hastings highlighted two other factors that extinction models fail to include, the first being the proportion of males to females in a population, the second the difference in reproductive success between individuals in the group. When they factored these into risk assessments for species, they found the danger of them becoming extinct rose substantially.

"The older models could be severely overestimating the time to extinction. Some species could go extinct 100 times sooner than we expect," Melbourne said. The researchers showed that the missing factors - the number of males to females, and variations in the number of offspring - were capable of causing unexpected, large swings in the size of a population, sometimes causing it to grow, but also increasing the risk that a population could crash and become extinct.

To test the new models, Melbourne's team studied populations of beetles in the laboratory. "The results showed the old models misdiagnosed the importance of different types of randomness, much like miscalculating the odds in an unfamiliar game of cards because you didn't know the rules," he said.

For some endangered species, such as mountain gorillas, conservationists could collect data on specific individuals and plug them into models to predict their chances of survival. "For many other species, like stocks of marine fish, the best biologists can do is to measure abundances and population fluctuations," Melbourne added.

Craig Hilton-Taylor, who manages the IUCN red list in Cambridge, said extinction estimates are often inadequate. "We are certainly underestimating the number of species that are in danger of becoming extinct, because there are around 1.8 million described species and we've only been able to assess 41,000 of those," he said.

The latest study could help refine models used to decide which species are put on the red list, he said. "We are constantly looking at how we evaluate extinction risk, and it may be they have hit on something that can help us," he said.

More than 16,000 species worldwide are currently threatened with extinction, according to a 2007 report from the IUCN. One in four mammal species, one in eight bird species and one in three amphibian species are on the organisation's red list. An updated list is due to be published in October.

Next week, the IUCN is expected to highlight the dire state of the world's corals after surveying the condition of more than 1,000 species around the world.

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