Oct. 5 (Bloomberg) — Asian stocks dropped, led by exporters, as a downgrade of Italys credit rating overshadowed signs that Europe may reach consensus on measures to shield its banks from the sovereign-debt crisis.

Toyota Motor Corp., the worlds biggest carmaker, fell 2 percent in Tokyo. Japanese utilities slumped on speculation the government will change the framework for pricing electricity. BHP Billiton Ltd., the largest mining company, gained 3.8 percent in Sydney as commodity prices rallied after the Financial Times reported Europe is nearing a plan to recapitalize its banks.

The MSCI Asia Pacific Index fell 0.2 percent to 107.44 as of 6:13 pm in Tokyo. Almost two stocks fell for each that advanced. The gauge tumbled 16 percent in the third quarter, the biggest drop since 2008, amid concern that Europes debt crisis and a US economic slowdown will drag the world back into recession.

There still remains considerable work to be done to stabilize both the sovereign debt and banking sector in Europe,” said Stephen Halmarick, Sydney-based head of investment markets research at Colonial First State Global Asset Management, which oversees about $150 billion. Stocks in Asia remain vulnerable to further disappointments.”

Japans Nikkei 225 Stock Average fell 0.9 percent. South Koreas Kospi Index slumped 2.3 percent. Australias Samp;P/ASX 200 advanced 1.4 percent. The Hong Kong stock exchange is closed today for a public holiday.

‘Increasingly Shared View

Futures on the Standard amp; Poors 500 Index gained 0.4 percent today. The index finished up 2.3 percent yesterday in New York, reversing a loss in the final 50 minutes of trading, after the Financial Times quoted Olli Rehn, European Union commissioner for economic affairs, as saying theres an increasingly shared view” that the region needs a coordinated approach to halt the sovereign debt crisis.

Markets from Tokyo to Taiwan dropped after Italys credit rating was cut by Moodys Investors Service after US markets closed. The downgrade, the first in almost two decades, came on concern Prime Minister Silvio Berlusconis government wont be able to cut the regions second-largest debt amid weak growth.

Moodys lowered Italys rating three levels to A2 from Aa2, with a negative outlook, the New York-based agency said in a statement yesterday. The action followed a ratings cut by Standard amp; Poors on Sept. 20.

‘No Concrete Measures

Exporters to Europe dropped. Toyota fell 2 percent to 2,517 yen in Tokyo. Sony Corp., Japans No. 1 exporter of consumer electronics that depends on Europe for 22 percent of its sales, slid 1.8 percent to 1,404 yen. Brambles Ltd., a supplier of warehousing pallets, sank 0.5 percent to A$6.17 in Sydney.

No concrete measures on solving Europes crisis have come out,” said Hitoshi Asaoka, a senior strategist in Tokyo at Mizuho Trust amp; Banking Co., a unit of Japans third-largest listed bank. There wont be an end to the markets volatility until we see something that will calm the situation.”

Tokyo Electric Power Co., the utility known as Tepco, plunged 12 percent to 203 yen. Kansai Electric Power Co. dropped 4.2 percent to 1,239.

Utility Firms

Trade Minister Yukio Edano said the government will review the current electricity price framework, the Asahi newspaper reported. Edano indicated he will start reforms, including requesting utilities to review costs used to determine electricity tariffs, according to the paper.

GS Engineering amp; Construction Corp. slumped 15 percent to 74,100 won in Seoul and Daelim Industrial Co. sank 14 percent to 70,500 won. The builders dropped amid speculation that recent oil price declines will damp plant construction demand in the Middle East, according to Im Jeong Jae, a fund manager at Shinhan BNP Paribas Asset Management Co.

Among stocks that rose today, Australian resources companies advanced after crude oil prices surged as much as 3.7 percent today and the price of copper rose.

BHP Billiton gained 3.8 percent to A$35.13 in Sydney. Rival Rio Tinto Group climbed 2.2 percent to A$60.30. Lynas Corp., an Australian rare-earths producer, surged 6.9 percent to 1.005 Australian cents.

iPhone Upgrade

Samsung Electronics Co., the worlds second-largest maker of mobile phones, added 1.7 percent to 842,000 won in Seoul after Apple Inc. unveiled an upgrade to the iPhone 4, short of an overhaul of the model. LG Electronics Inc., the worlds third-largest, advanced 0.4 percent to 69,500 won.

LG has been the biggest victim of the iPhone,” Kang Yoon Hum, an analyst at NH Investment amp; Securities Co., said by phone. If Apple shows a crack, people in the market seem to think LG might be able to squeeze in.”

The MSCI Asia Pacific Index declined 22 percent this year through yesterday, compared with an 11 percent drop by the Samp;P 500 and a 21 percent loss by the Stoxx Europe 600 Index. Stocks in the Asian benchmark were valued at 11 times estimated earnings on average, compared with 11.2 times for the Samp;P 500 and 9 times for the Stoxx 600.

–Editors: John McCluskey, Jason Clenfield, Jim Powell.

MEXICO CITY (Reuters) – Shares of Mexican cement maker Cemex (CMXCPO.MX) (CX.N) slumped to a 13-year low on Tuesday on concerns that slowing growth in key markets and a weaker peso will stymie its ability to meet debt obligations.

Cemex shares have lost almost 70 percent of their value so far this year as investors fret about its debt load. After hitting their lowest level since September 1998 in intraday trade, the shares bounced back more than 6 percent but remain at their weakest since early 1999.

Analysts said Cemex would probably miss key debt targets agreed with creditors for the end of the year. The company would probably have to renegotiate, potentially pushing up debt-servicing costs, analysts said.

Yields on the companys bonds soared to more than 20 percent and the price fell to around half its original level — meaning investors are so concerned that they would rather sell the bonds at a loss than keep them.

The ongoing issue is the covenants, said Benjamin Theurer, an analyst at Barclays Capital in Mexico. The company still does not take even into consideration that maybe renegotiation is something they should consider.

The 105-year-old company, once the poster child for the thriving economy of industrial city Monterrey, ran into trouble in 2007 when it bought rival Rinker just before the US housing market collapsed and a global recession began.

Credit rating agencies slashed Cemex debt to junk status in 2009 and the company teetered close to a default on $15 billion in debt.

Investors now fear another global economic downturn and steep losses in the Mexican currency could keep Cemex from meeting debt covenants that were renegotiated in 2010.

Cemexs debt is now worth $17.3 billion, equivalent to the annual economic output of Honduras, and was 7.16 times the companys earnings before interest, tax, depreciation and amortization (EBITDA) at the end of June. Cemex has pledged to cut this to no more than seven times EBITDA by end-2011.

But four of six analysts surveyed by Reuters expected the company would just miss its goal as it struggles to generate enough cash, ending the year with debt 7.04 times earnings.

CREDIT CONSEQUENCES

If Cemex misses its debt-to-earnings ratio goal, it could try to renegotiate the targets — at a cost — or accelerate asset sales to pay down debt. Analysts say bankruptcy is not a concern, as the company is generating enough cash to meet debt obligations this year and next.

Chief Executive Lorenzo Zambrano, grandson of the companys founder and a collector of vintage cars, insisted last week the company would meet targets and laid out a plan to sell $1 billion in noncore assets.

But the company has been criticized for glossing over potential hurdles. On Monday, after Cemex shares fell as much as 19 percent on the Mexican stock exchange, Zambrano, 66, wished his 65,000 Twitter followers a productive week.

Cemex, which produces more than 95 million tonnes of cement a year, reports in US dollars and earns the bulk of its income in Mexico and Europe. Analysts are concerned its earnings will be affected by a stronger dollar.

This downturn in global markets is really complicating their situation, said Gerardo Roman, head of stock trading at brokerage Actinver in Mexico City.

All the heavily indebted companies are getting hit, and they are going to keep getting hit, Roman said.

Another analyst, who was not authorized to speak to the media, said the mood of uncertainty also raised doubts about Cemexs plan to pay down its debt by selling assets.

I dont know if there is demand for these type of assets, especially now. The $1 billion target has a downside: if things get worse they wont get paid what they are expecting, the analyst said.

But others say the company has time to straighten out.

There is still time to get back in line, they have assets they can sell, said Heiner Skaliks, portfolio manager of the Strategic Latin America Fund, which had about 5.6 percent of its $27 million under management invested in Cemex at the end of June. Cemex is such an important player in infrastructure that this is more of an overreaction.

Dario Celis, a business columnist for daily Excelsior, on Tuesday cited talk that Cemex had been in touch with Lazard (LAZ.N), which was a consultant for Cemex during its 2009 refinancing deal. A Cemex spokesman said the company is not talking to banks or looking for a new waiver on the covenants.

Cemex shares (CMXCPO.MX) closed up 6.45 percent at 3.96 pesos and were 11.5 percent higher at $2.90 in New York (CX.N).

(Additional reporting by Michael OBoyle, Elinor Comlay and Krista Hughes in Mexico City, writing by Krista Hughes; Editing by Matthew Lewis, Gary Hill and Bernard Orr)

Good ends do not justify bad means. That philosophical observation applies to proposals for a big American debt jubilee that are now doing the rounds. The basic idea is to slash consumer debt, which is an admirable aim for an overleveraged nation. Household debt is still 90 percent of gross domestic product, down only modestly from the 2008 peak of 100 percent. But even bank-haters should recognize that this cure might be worse than the disease.

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To start, writing off debts would not necessarily increase economic growth. Every liability is also an asset, so while a dollar that is no longer required for debt repayment might add some cents to consumer spending, it is also a dollar cut out of a bank’s capital or of an investor’s net worth — subtracting from resources and confidence.

And write-offs big enough to change consumer behavior would probably be big enough to destabilize banks. The Federal Reserve or the government would need to help, presumably by injecting newly printed money as capital. Such government control is usually inefficient, and abundant printing of money increases the risk of uncontrolled inflation, which has its own way of making people feel poorer.

The issue of moral hazard also cannot be ignored. Much of the excess debt was incurred through irresponsible mortgage refinancing, which peaked in 2006 at $322 billion, representing 2.4 percent of G.D.P. The reckless use of houses as A.T.M.’s was a major factor in decapitalizing and destabilizing the American economy. Forgiving such debts will teach the wrong lesson: borrow in haste, repent never.

Finally, investors would rightly see a jubilee as an attack on property rights. That runs the risk of throwing markets into disarray and discouraging foreign investors from buying assets in the United States. Risk premiums on both debt and equity capital would increase.

There are better ways to deleverage. Higher inflation does the job more naturally, without invidious choices about whose debt got reduced. But inflation also discourages savers, weakening capital formation. The best way to get debts under control is the hard slog of paying some back and writing the rest off.

Sound money, including interest rates above inflation, would help by preserving existing capital and promoting savings. After all, capital creation, not its destruction through debt forgiveness, is what makes capitalism work.

Apple’s New Victims

Apple has an astonishing ability to casually unleash creative destruction. Its latest iPhone, the 4S, offers faster data processing and downloads as well as voice-powered software. The phone, released Tuesday, may not have lived up to the most feverish expectations of investors. Apple shares fell while the market rallied. But it will do more than enough to create headaches for companies ranging from Research in Motion to American Greetings.

Smartphones started by devouring the personal digital assistant, as any former Palm Pilot aficionado can testify. Wristwatch sales declined. They terrorized the market for fixed-line phones, which are now in sharp decline. Apple’s newest gadget shows just how hungry smartphone makers, and Apple in particular, are to eat the lunches of all sorts of rivals.

For instance, the new iPhone offers an improved video camera. That will further hurt sales of digital still and video cameras. Its software allows easy and free texting to other Apple devices. That’s bad news for telephone operators, who make fat margins on such services. Instant messaging has also been the killer app for BlackBerry users.

Apple also unveiled a function that lets users digitally create their own greeting cards and send them in physical form. That may not excite Apple’s most ardent fans, but it was enough to send shares of the card makers American Greetings and the British company International Greetings reeling. Oh, and the new iPod Nano allows runners to track their performance, which will take a chunk out of the market for personal fitness monitors and shoes with sensors.

In a sense, though, these are the easily quantifiable effects of the new iPhone. The device also comes with software allowing users to search the Internet, answer queries, take dictation or set up phone commands using their voice. It’s hard to judge how effective this software is until the 4S hits the shelves. But investors on the lookout for Apple’s creative/destructive impact should be drawing up a new list of victims.

MARTIN HUTCHINSON and ROBERT CYRAN

For more independent financial commentary and analysis, visit www.breakingviews.com.

Latest

23.30 Thats it from our Live Blog for today. Visit our Finance
page for the latest on the eurozone debt crisis. Well be back
tomorrow.

Two months after Standard amp; Poor’s
said the US was becoming less creditworthy, the market value
of assets denominated in dollars is surging.

While about $6 trillion has been erased from the market
value of global equities since Aug. 5, when the New York-based
unit of McGraw-Hill Cos. cut America’s credit rating to AA+ from
AAA, the dollar has appreciated 8.1 percent against the world’s
most-traded currencies, according to data compiled by Bloomberg.
Instead of depreciating, Treasuries returned 6.4 percent last
quarter, the most since the three months ended December 2008.

“The US dollar is the only relevant reserve currency and
bastion of safety,” Matt Toms, the head of U.S public fixed-
income investments at Atlanta-based ING Investment Management,
which oversees more than $500 billion, said Sept. 28 in a
telephone interview. “The market views the risk of not being
paid back as miniscule.”

When Samp;P lowered its outlook for the nation in April, it
cited the “dollar’s preeminent place among world currencies”
as a reason for keeping the AAA rating, mentioning the word
“dollar” four times in a statement. When it downgraded the
US in August, the company all but disregarded the dollar,
mentioning it once in the announcement in the 15th paragraph.

Markets are saying Samp;P was right the first time. The dollar
beat stocks, bonds and commodities last month for the first time
since May, showing that in times of turmoil, there are no safer
assets than those denominated in the world’s reserve currency.
Central banks have 60 percent of their foreign-exchange holdings
in the US currency, compared with the euro’s 27 percent, the
next highest.

Best to Own

The dollar was the best performing developed-nation
currency besides the yen, gaining 7.4 percent in the past month
next to nine peers tracked by Bloomberg Correlation-Weighted
Currency Indexes. It strengthened 5.5 percent against the euro,
9.2 percent versus the Australian dollar and 17 percent compared
with the Swiss franc.

Europe’s sovereign debt crisis and falling interest rates
from Brazil to Turkey helped the dollar rally as investors
retreated from riskier assets. The weakening US economy has
also contributed to the currency’s strength.

The gap between the cost of insuring German and US debt
against default rose to the highest on record amid growing
concerns that a default by Greece would drag the 17-nation euro
region into another recession, according to data compiled by
Bloomberg going back to 2008. Greek two-year note yields have
climbed to 62 percent from 12.6 percent in January.

Not Positive

“Things in Europe are likely to drive the rest of the
world at this point and not in a positive way,” Brian Schneider, senior portfolio manager and head of US rates in
Louisville, Kentucky, for Invesco Fixed-Income, at Invesco Ltd.,
which oversees $653 billion, said Sept. 27 in an interview.

Brazil’s central bank cut its so-called Selic target to 12
percent from 12.5 percent at the end of August. Turkey reduced
its key rate to 5.75 percent in August from 7 percent last year.

US unemployment has hovered at about 9 percent for the
past two years, prompting the Federal Reserve to take
unprecedented steps to reduce borrowing costs and President
Barack Obama to propose a $447 billion stimulus plan. The
economy grew 1.3 percent in the second quarter according to
revised government figures released Sept. 29.

Auction Demand

Even with market rates near the lowest on record, demand at
US government debt auctions surged last week. Treasuries
outperformed three of the five biggest AAA economies since the
downgrade, trailing UK gilts and German bunds, according to
Bank of America Merrill Lynch index data. Yields on benchmark
10-year Treasuries fell to a record 1.67 percent on Sept. 23
from 3 percent in July.

“You saw the market buying Treasuries hand over fist while
trying to get out of other assets” right after the ratings
move, Invesco’s Schneider said. “If the US was only AA+, what
did that make the rest of the world?”

Samp;P announced the change after weeks of disagreement
between the Obama administration and Congress over raising the
nation’s borrowing limit to avoid a government default. On Aug.
2, they reached an agreement to increase the $14.3 trillion debt
ceiling and put in place a plan to enforce $2.4 trillion in
spending reductions over the next 10 years, less than the $4
trillion Samp;P had said was needed to keep the AAA ranking.

The ratings cut after markets closed on a Friday drew
criticism from Obama and from billionaire Warren Buffett, who
said the US should be “quadruple-A.” John Bellows, acting
assistant Treasury secretary for economic policy, said Samp;P had
made a $2 trillion “mistake” in its math and then changed the
rationale for its decision to politics instead of financial
metrics.

Stable Outlook

Moody’s Investors Service affirmed its top US ranking on
Aug. 8 and has a negative view of the debt. Fitch Ratings kept
its AAA credit rating on Aug. 16 and said the outlook is stable,
citing the nation’s central role in the global financial system
and the flexible, diverse economy.

Samp;P on Aug. 22 named Citibank NA Chief Operating Officer
Douglas Peterson as president, replacing Deven Sharma who will
leave at the end of the year to “pursue other opportunities.”

Among AAA countries, “there should be no genuine question
within policy makers’ circles of the paramount importance of
honoring the government’s market debt obligations in full, on
time, and unconditionally,” Samp;P said Sept. 15 in a report. The
US political process contrasts “unfavorably and
increasingly” with top-ranked nations, Samp;P said.

A survey of 1,031 Bloomberg subscribers showed that 67
percent backed the downgrade, though 35 percent also said grades
given by rating firms aren’t reliable.

‘Too Political’

“Their action was too political,” Chris Rupkey, chief
financial economist of Bank of Tokyo-Mitsubishi UFJ Ltd. in New
York, said in a telephone interview on Oct. 3. “Normally if
there’s a downgrade, yields on the sovereign debt tend to go up.
Just the opposite happened in this case. I don’t know if people
are taking the downgrade seriously.”

The US has shown willingness in the past to raise taxes
and cut expenditures to reduce deficits. President Bill Clinton
signed a law in August 1993 that increased the top individual
tax rate to 36 percent from 31 percent, and a 10 percent surtax
on those who make $250,000 a year or more boosted the top
effective tax rate to 39.6 percent, paving the way for a budget
surplus in 1998.

“It’s the depth, the liquidity and the ability to pay that
matters, is what the market said” after the Samp;P downgrade, Mark Luschini, chief investment strategist at Philadelphia-based
Janney Montgomery Scott LLC, which manages $54 billion, said
yesterday in New York. “The Samp;P approach was subjective.”

Overseas Holdings

The US sold five-year debt on Sept. 28 at yield of 1.015
percent, the lowest ever. Two-year Treasuries were auctioned at
a yield of 0.249 percent, compared with a record low 0.22
percent on Aug. 23. The bid-to-cover ratio, which gauges demand
by comparing bids with the amount of securities offered, was
3.76 in last week’s two-year sale, the most since September
2010.

While total overseas holdings of Treasuries fell to $4.48
trillion in July from a record $4.51 trillion in May, China
increased its US debt securities to $1.17 trillion, the
highest ever.

Treasury yields have also been kept down by the Federal
Reserve, which has left its target rate for overnight loans
between banks at a record low since December 2008 and last month
said it will extend the maturities of its $2.64 trillion of
securities holdings to reduce longer-term borrowing costs. In
August, the central bank promised to keep its target rate for
overnight loans between banks near zero through mid-2013.

Fed Measures

The Fed’s measures are “having some impact” on yields,
Tom Higgins, global macro strategist in Boston at Standish
Mellon Asset Management Co., which oversees about $85 billion in
fixed-income assets, said Sept. 28 in a telephone interview.
“Even with the downgrade, Treasuries are deemed the safest
place to put your money.”

The dollar’s share of global currency reserves dropped to
60.2 percent in the period ended June 30, the least since March
31, 1999, as far back as the IMF provides data. That compared
with 61.5 percent in the fourth quarter, according to the IMF’s
quarterly Composition of Official Foreign Exchange Reserves
report on Sept. 30. The euro’s share rose to 26.7 percent, from
26.6 percent, while the yen rose to 3.9 percent of the total.

Samp;P may downgrade the US in the coming year. There is a
one-in-three chance of another rating cut, though a change may
not occur until late 2012 or 2013, John Chambers, a managing
director of Samp;P, said Sept. 15 at the Bloomberg Markets 50
Summit in New York.

Though he didn’t disagree with the August Samp;P downgrade,
Higgins of Standish Mellon said he still views the US as AAA
because it’s the reserve currency. “Right now there’s no
alternative to the US dollar.”

To contact the reporter on this story:
John Detrixhe in New York at
jdetrixhe1@bloomberg.net

To contact the editor responsible for this story:
Dave Liedtka at dliedtka@bloomberg.net

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(See EXT4 for more on the European debt crisis.)

Oct. 5 (Bloomberg) — German Chancellor Angela Merkel stiffened her resistance to joint euro-area bond sales, saying that investors yearning for a single gesture that can end Europes sovereign debt crisis now will be disappointed.

The euro area has to resolve that the time of living above our means is over once and for all and pursue debt reduction that will stretch over many years, Merkel said in a speech to members of her Christian Democratic Union late yesterday in Magdeburg, eastern Germany.

While stepping up her rejection of a Greek default, she said that issuance of shared debt by euro countries isnt the solution to the problem spilling from Greece, even though some may long for the big bang to end the debt crisis. Whoever believes that has no clue about the economy, she said.

Merkel stuck to her positions as she prepares for talks in Brussels today with European Commission President Jose Barroso before hosting French President Nicolas Sarkozy in Berlin on Oct. 9. The leaders of Europes two biggest economies will get together after the regions finance ministers failed to quell market jitters that a second aid package for Greece aimed at stemming the crisis might unravel.

A Greek default would have unpredictable consequences, lead to speculative attacks on other highly indebted euro countries and risk sending German economic growth into reverse, Merkel said. Letting Greece default would trigger a gigantic loss of confidence in euro-area sovereign bonds.

No Adventure

No one can say with certainty what would happen if Greece defaults, she said. Before I make a nifty step into an adventure, I have to ask whether we can really handle this and can we oversee what we are doing?

Merkel said that her entire council of economic advisers says Greek debt should be restructured, advice that she is not prepared to take.

If we tell a country We cancel half of your debt, thats a great deal, she said. Then the next guy will immediately show up and say he wants the same.

You can open any newspaper and see theres a broad international debate, she said. Im not an economist or a theorist. I and the German government have to consider the consequences of what we do.

Merkel, speaking to the last of six regional conferences of her Christian Democrats before the party holds a national convention next month, said that she was deeply convinced that Europes problems can only be solved jointly.

Solidarity is always cheaper than if we were to go it alone and wind up with the problem Switzerland has — that the currency level is so high that you cant export any products anymore. Today, going it alone is no path to a better future.

We must press ahead with the task begun by former Chancellor Helmut Kohl when he made the political decision in favor of the euro after German reunification in 1990, she said.

–Editors: Alan Crawford, Kevin Costelloe

To contact the reporter on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

The Daily Reveille

gt;

News

Treasuries Fall on Bets European Debt Turmoil Will Be Resolved
October 05, 2011, 5:32 PM EDT

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More From Businessweek

• Treasuries Fail to Recoup Losses as Bernanke Is Ready to Act
• Treasuries Decline on Bets Europeans Will Contain Debt Turmoil
• Treasury 30-Year Bonds Erase Drop Before Bernanke’s Testimony
• U.S. 30-Year Yields Fall to Lowest Since 2009 on Fed Debt Buying
• Bond Bears Snap Up Treasuries as Bets Cut by Most Since ’09

By Susanne Walker

Oct. 5 (Bloomberg) — Treasuries dropped, with 30-year bond yields extending their advance from a two-year low, as optimism European leaders are stepping up efforts to resolve the region’s debt crisis sapped demand for the safest assets.

U.S. debt securities extended their slide after a private report two days before the Labor Department’s payrolls figures showed companies added more jobs in September than economists forecast. European Union officials are working on plans to boost bank capital, the International Monetary Fund said.

“There’s hope that the European situation will get better and there will be some kind of backstop,” said Jeffry Feigenwinter, head of Treasury trading in New York at Societe Generale SA, one of the 22 primary dealers that trade government securities with the Federal Reserve. “We are at extreme levels in the market, and people are unwinding some trades.”

Yields on 30-year bonds increased five basis points, or 0.05 percentage point, to 2.85 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.75 percent securities maturing in August 2041 dropped 1 2/32, or $10.63 per $1,000 face amount, to 117 31/32. The yields fell yesterday to 2.69 percent, the lowest level since January 2009, before advancing eight basis points.

Rally in Stocks

The Standard & Poor’s 500 Index gained 1.8 percent after rallying yesterday. Crude oil futures surged 2 percent to $79.80 a barrel.

Benchmark 10-year note yields advanced seven basis points to 1.89 percent, compared with the record low 1.6714 percent reached on Sept. 23. Two-year note yields were little changed at 0.26 percent.

Government debt securities surged last quarter on speculation Greece is heading for a default and as the U.S. central bank prepared to buy longer-term Treasuries to counter an economic slowdown.

Yields on 30-year bonds decreased 146 basis points in the third quarter, the most since falling 164 basis points in the last three months of December 2008.

The Fed purchased $1.369 billion of Treasury Inflation Protected Securities maturing from January 2018 to February 2041 today as part of its effort to support the economy by keeping borrowing costs low.

Rehn’s View

Bonds slid yesterday after the Financial Times cited European Union Economic and Monetary Commissioner Olli Rehn as saying finance ministers recognize the need for a “concerted, coordinated approach.” A spokesman for Rehn told reporters today there is no concrete plan to recapitalize banks.

“There is no secret at all that European authorities and the European Commission are all working together on a plan to bring more official capital, more public-sector capital, into the banking sector,” Antonio Borges, the IMF’s European department head, said today in Brussels.

Moody’s Investors Service followed its three-level downgrade of Italy by warning yesterday that euro-area nations rated below the top Aaa level may see their rankings cut.

Greeks walked off their jobs and as many as 20,000 marched through Athens’ central square to protest Prime Minister George Papandreou’s 6.6 billion-euro ($8.7 billion) austerity plan, challenging a government seeking European bailout funds to stave off default.

‘Primary Drivers’

“The issues in Europe are the primary drivers,” said Dan Greenhaus, chief global strategist at BTIG LLC in New York. “The news that we are starting to inch closer to bank recapitalization suggests that from a positioning standpoint, reducing your portfolio duration isn’t the worst thing in the world.”

In the U.S., companies added 91,000 workers to payrolls in September after a revised increase of 89,000 in the previous month, ADP Employer Services said. The median forecast of 39 economists in a Bloomberg News survey was for a gain of 75,000.

“It’s encouraging to see jobs increase 90,000, but there’s an element of stagnation,” said Thomas Simons, a government debt economist in New York at Jefferies Group Inc., a primary dealer.

U.S. Payrolls

The Labor Department is projected to report on Oct. 7 that nonfarm employers added 60,000 workers last month after zero growth in August. The unemployment rate stayed at 9.1 percent, a separate survey showed.

Growth in services industries in the U.S. slowed in September less than forecast. The Institute for Supply Management’s non-manufacturing index fell to 53 from 53.3 in August, the Tempe, Arizona, group reported. The median forecast of 75 economists in a Bloomberg News survey was for a drop to 52.8. A reading of 50 is the dividing line between expansion and contraction in services, the largest part of the economy.

Fed Chairman Ben S. Bernanke told U.S. lawmakers in Washington yesterday he’ll push forward with further expansion of monetary stimulus if needed, resisting pressure from Republicans concerned that he’s fanning inflation.

The central bank announced on Sept. 21 its plan to purchase $400 billion of U.S. debt with maturities of six to 30 years through June while selling an equal amount of securities due in three years or less.

–Editors: Dennis Fitzgerald

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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READER DISCUSSION

  Canada’s Finance Minister Jim Flaherty gives the thumbs up as he prepares to deliver his budget in the House of Commons on Parliament Hill in Ottawa June 6, 2011.Photograph by: Chris Wattie, Reuters

MARSEILLE, France — World financial leaders say a consensus can be reached to resolve Europe’s debt crisis and lessen the threat of another global recession.

But for now, that remains a work in progress.

Following talks Friday between Group of Seven finance ministers and central bankers in the French seaport of Marseille, French Finance Minister Francois Baroin told reporters: &"There is no one silver bullet for all countries.&"

Baroin acknowledged the &"heightened tensions in financial markets&" as concerns over a possible debt default in Greece grow.

&"We met at a time of new challenges to global economic recovery, with significant challenges to growth, fiscal deficits and sovereign debt stemming from past accumulated imbalances,&" he said.

&"There are now clear signs of a slowdown in global growth. We are committed to a strong and co-ordinated international response to these challenges.&"

Among the biggest immediate concerns is the sad state of Greece’s finances. As talks continued Friday, the markets recoiled as the prospect of dealing with the Greek debt appeared to fade.

Earlier on Friday, Canadian Finance Minister Jim Flaherty suggested that Greece might opt out of the 17-nation eurozone if the country fails to resolve its crippling debt crisis.

&"No doubt it’s a possibility,&" Flaherty told reporters.

But he said &"it’s necessary for the Greek government to stay the course. . . . Portugal, Ireland are going through difficult times, as well, but they are weathering the storm. That will be difficult in some countries like Greece. But there’s no choice.

&"The alternative is probably that they leave the euro. . . . Given those two choices, I would assume that the Greek government would continue with their consolidation plan.&"

Flaherty admitted Greece’s membership in the euro is &"actually none of my business.

&"I don’t suggest to my European colleagues about precise steps to take.&"

The minister acknowledged there is &"hesitancy&" among some countries to meet the &"carefully calibrated&" goals for fiscal consolidation reached at previous international summits — cutting deficits in half by 2013 and improving the debt-to-GDP ratio by 2016.

&"That’s what we all agreed to (at the G20 meeting in Toronto),&" he said. &"We can’t change the goal of fiscal consolidation.&"

On the other hand, he noted some decisions may be made for less than purely economic reasons. There are &"political choices that have to be made . . . choices that may affect their chances for re-election.&"

Earlier on Friday, Flaherty played down what might be accomplished by the G7, which groups Canada with the U.S., Japan, Germany, France, Britain and Italy.

&"I don’t expect any dramatic results here,&" he said.

Flaherty, who has warned his G7 counterparts not to ease up on their deficit-cutting efforts in an effort to avoid double-dip downturns in their economies, said little about U.S. President Barack Obama’s proposal for a $450-billion U.S. plan aimed at creating new jobs.

In a speech to Congress Thursday night, Obama appealed to lawmakers to back his plan, intended to encourage employers to create new jobs and help spur the country’s faltering economy by cutting payroll taxes for workers and employers, providing tax breaks for companies that hire new workers and funding repairs to transportation infrastructure.

Flaherty said Friday the elements of the U.S. plan are similar to Canada’s stimulus program launched in January 2009, namely infrastructure spending, tax breaks and hiring incentives.

&"I wish the Americans well in their program,&" he said. &"The key is to create jobs now.&"

U.S. Treasury Secretary William Geithner was among the authorities meeting separately in Marseille on Friday.

Benjamin Reitzes, senior economist at BMO Capital Markets, said financial reform &"remain(s) a key element of the G7 strategy, as well it should to ensure the crisis of 2008-09 doesn’t repeat itself.

&"Sovereign tax cuts don’t seem to be a reasonable strategy, considering the massive deficit governments currently face,&" he said. &"Countries with fiscal flexibility should use it to boost growth, while those facing potentially unsustainable situations or lack market access should focus on lowering their deficit/debt.&"

Earlier this week, the Bank of Canada — headed by governor Mark Carney — kept its key lending rate on hold at a near-record low one per cent, where it has been for the past year, due to a &"diminishing&" need to raise borrowing costs against the backdrop of a slowing global economy that has also cut Canada’s growth outlook.

The Organization for Economic Co-operation and Development has forecast that growth in the G7 economies will slow to 0.2 per cent in the last quarter of 2011.

While the Canadian economy contracted 0.4 per cent in the second quarter of this year, the Bank of Canada said in statement this week that &"growth will resume in the second half of this year.&"

The central bank has also forecast economic growth in Canada of 2.9 per cent in 2011 and 2.6 per cent in 2012.

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5 days ago 

DAVENPORT, Iowa (AP) — Lee Enterprises Inc., publisher of the St. Louis Post-Dispatch and other newspapers, said Thursday that it had reached a deal with most of its lenders to give the company more time to pay back its debt.

Uncertainty about whether Lee would be able to repay about $1 billion in debt due in April had raised fears that the company might have to seek bankruptcy protection. More than a dozen other U.S. newspaper publishers have turned to that refuge to reorganize their finances since 2008.

Lee said it had an agreement to refinance $864.5 million of its debt, under which it would pay steep interest rates to extend the repayment dates to 2015 and 2017.

Although Lee still needs to refinance another $175 million, CEO Mary Junck said in a letter to shareholders and employees that the agreement “will remove a cloud” hanging over the company.

Lee’s stock increased 10 cents, or 16.7 percent, to 70 cents a share in extended trading Thursday after the announcement was made.

The deal pushes the due date on a $689.5 million first-lien loan to December 2015 and a $175 million second-lien loan to April 2017.

Buying more time to repay the money wasn’t cheap.

As of June, Lee had been paying an interest rate averaging 5.07 percent on about $1 billion in debt, primarily from a 2005 acquisition that included the Post-Dispatch, the largest of the company’s newspapers.

For the first-tier loan, the interest rate would increase to 6.25 percentage points above a benchmark known as London Interbank Offered Rate. LIBOR is the average rate at which large international banks are willing to lend to each other on a short-term basis. The benchmark rate, set daily in London, is used as a basis for many corporate loans and mortgages. The loan has a floor on LIBOR of 1.25 percent, meaning Lee would pay a rate of at least 7.5 percent.

The second-lien loan would have an interest rate of 15 percent. Those lenders would also get about 6.7 million new shares of Lee’s common stock. Lee had 45 million shares outstanding as of June 26, so the new stock would represent an increase of 15 percent.

Refinancing of the final $175 million, which is in Pulitzer Notes that mature in April, is a condition of the deal.

The company, based in Davenport, Iowa, had set out to refinance the debt in April, only to back off a month later after meeting with about 150 investors and lenders across the country. Junck told shareholders in a May letter that she was unwilling to agree to refinancing terms that she considered unreasonable. Junck is on the board of directors of The Associated Press.

More than 90 percent of the company’s creditors have agreed to the deal announced Thursday, Lee said.

Chief Financial Officer Carl Schmidt said that if the company can refinance its Pulitzer Notes, it hopes to get the backing of 95 percent of its creditors and be able to implement the transaction out of court. Otherwise, Lee would make a prepackaged Chapter 11 bankruptcy filing, during which the company would expect to operate normally.

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