UPDATE 2-Washington state lawmakers pass tax breaks, aiming to win Boeing work

Sat Nov 9, 2013 8:24pm EST

By Jonathan Kaminsky

OLYMPIA, Wash. Nov 9 (Reuters) - The Washington state legislature on Saturday passed a measure to extend nearly $9 billion in tax breaks for Boeing through 2040 in an embattled effort to entice the company to locate production of its newest jet, the 777X, in the Seattle area.

Lawmakers acknowledged, however, that their efforts would likely be undermined if the airplane maker's key machinists union votes down a proposed labor contract due to go before the membership on Wednesday.

A contract locking in Boeing's labor costs, along with the tax incentives, is key to state officials' plan to keep the 777X production local. Boeing has said that barring a "yes" vote on the contract, it would be looking at other potential locations.

Industry experts say Washington faces competition from states including South Carolina, where Boeing assembles some of its 787 Dreamliners, as well as Texas and Utah.

Japan, whose heavy industry builds wings for the Dreamliner, is seen as a contender to build the wings for the 777X, the longest wings designed for a Boeing jetliner.

The tax measure passed the Washington state Senate by a vote of 42-2 on Saturday.

The $9 billion measure would extend aerospace tax breaks set to expire in 2024 through 2040 and enact incentives for building airplane factories on the condition that Boeing site its 777X wing fabrication and final assembly in Washington state.

"Our vote isn't near as important as theirs," Democratic state Senator Brian Hatfield of Raymond, Washington, said of the union vote.

"It's a big deal," he added. "It is your job and your family and your pension, but it also has lots to do with the future of the state."

Hours after the Senate action, the state House passed the measure by a vote of 75-11.

Lawmakers also passed a measure on Saturday to streamline permitting for the airplane maker and to commit more state funds to aerospace worker training programs.

After passing the measures, lawmakers adjourned the three-day special session called by Governor Jay Inslee, a Democrat.

SEATTLE AREA JOBS

Boeing's latest jet - the 777X, a successor to its most profitable long-haul aircraft - would secure tens of thousands of jobs in the Seattle area, which is competing with non-unionized workers in the U.S. South, where wages are lower.

Earlier this week, it appeared Boeing had little leverage over the legislature because building the jet next to the current 777 assembly would lead to cost savings and would not pose the risks associated with locating the work elsewhere.

Speaking at a news conference at the state capitol after passage of the measures on Saturday, Inslee told reporters he planned to sign the measures early next week.

"We want to make sure that the best aerospace workers in the world, which are Boeing machinists, know that they have a solid partner in the state of Washington," Inslee said.

On Tuesday, leaders of the International Association of Machinists stood alongside Inslee when he announced his tax and labor plans for Boeing.

But at a raucous union meeting Thursday night, IAM President Tom Wroblewski tore up the proposed contract and called it "a piece of crap."

Hours later Boeing said it was ready to look for another location.

Protest against the proposed contract continued on Friday, as union members rallied in Boeing's Everett factory.

Analysts reacted cautiously to the union opposition, saying a deal could still be reached, despite the heated rhetoric.

Boeing and IAM union leaders reached a tentative deal after confidential and exclusive talks that were first reported by Reuters.

The deal calls for lower healthcare benefits and a new retirement plan, and a separate draft agreement with state officials would provide for tax and other incentives.

The vote by 31,000 members is scheduled to go ahead on Wednesday, and there are no scheduled talks with Boeing about a different offer, said Jonathan Battaglia, a union spokesman.

The new standoff comes as Boeing prepares to launch the 777X with potentially record orders at the Dubai Airshow. But the discord is not expected to derail those plans, industry sources said.

The head of European airline group IAG said on Friday it was interested in the 777X for Iberia and British Airways.

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CORRECTED-Mexico has scope for further fiscal reform -S&P

Thomson Reuters is the world's largest international multimedia news agency, providing investing news, world news, business news, technology news, headline news, small business news, news alerts, personal finance, stock market, and mutual funds information available on Reuters.com, video, mobile, and interactive television platforms. Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests.

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RPT-Banks in tussle with UAE's Etisalat on $400 mln loan - sources

Sun Nov 10, 2013 12:03am EST

* Citi, StanChart in talks to recover about $400 mln - sources

* Loan tied to Etisalat's Indian unit

* StanChart has $300 mln exposure, Citi has rest - sources

* Etisalat says not liable for loans to its Indian arm

By Dinesh Nair and Matt Smith

DUBAI, Nov 7 (Reuters) - International banks Standard Chartered Plc and Citigroup Inc have fallen out with Abu Dhabi-based telecoms firm Etisalat over $400 million which they lent to Etisalat's now defunct Indian affiliate, according to three banking sources familiar with the matter.

As a result the banks, two of the most active global lenders in the region, did not participate in the $8 billion financing which was arranged in April to back Etisalat's successful bid for Vivendi's 53 percent stake in Maroc Telecom , the sources said.

Facing tougher capital rules since the financial crisis, banks have been getting tougher on trying to recover debts.

Reuters reported in August that lenders including Deutsche Bank and HSBC were involved in heated negotiations with Saudi Telecom (STC) over a $1.2 billion loan which the state-controlled company had informally backed for its Indonesian unit.

The issue was resolved after STC offered to repay about 90 percent of the loan, mainly through a sale of the arm.

The latest tussle concerns a loan made to Etisalat's Indian affiliate Etisalat DB (EDB), in which it held a 45 percent stake, which Etisalat backed through "a letter of support" - a lending practice where a parent company issues an acknowledgment of support to its subsidiary's loan proposal but does not have a legal obligation concerning the loan, the sources said.

In 2012 an Indian court cancelled EDB's wireless network operating licences along with those held by seven other companies due to a government scandal over how the 2008 licensing round was conducted. Etisalat consequently wrote off the 3.04 billion-dirham ($828 million) value of its Indian operations and Etisalat DB eventually closed.

The loan negotiations now revolve around whether the banks have a call on Etisalat to recover their money. However, Etisalat replaced much of its management team in 2011-2012, which makes the negotiations more complicated as the personalities involved in the original deal have left, the sources said.

StanChart has around $300 million exposure on the loan, while Citi has the rest, they said.

The loan value in dollar terms has fallen in recent months due to a sharp drop in India's currency, one of the sources said, declining to provide the exact amount.

"Etisalat DB is a separate legal entity incorporated in India, prior to Etisalat's investment in it," Etisalat's chief financial officer Serkan Okandan told Reuters by email when asked if his company had any liability for recovery of the debt.

"Etisalat is not and has not ever been liable for the debts and liabilities of EDB," Okandan said.

A spokesman for Standard Chartered in Dubai declined to comment, as did a spokesman for Citigroup.

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UPDATE 1-Bankruptcy was unavoidable, Detroit lawyer tells court

Fri Nov 8, 2013 9:40pm EST

By Joseph Lichterman

DETROIT Nov 8 (Reuters) - Detroit on Friday wrapped up its effort to prove that it is eligible for the largest municipal bankruptcy in U.S. history, clashing with unions, retirees and pension funds over whether good faith negotiations were feasible before the city filed for court protection on July 18.

During closing arguments of the nine-day eligibility trial, U.S. Bankruptcy Judge Steven Rhodes pressed city attorneys to show Detroit gave a good-faith effort to reach an out-of-court settlement with creditors. Rhodes also pushed lawyers for those opposing Detroit's bankruptcy to show they presented a viable alternative to bankruptcy.

Detroit's unions, government retirees and two pension funds are trying to keep the city out of bankruptcy and Detroit must prove to Rhodes that it meets the criteria for eligibility.

To declare Detroit eligible, Rhodes will need to decide that the city proved it is insolvent, and that it acted in good faith when it decided negotiations with creditors were impractical.

Rhodes asked attorneys on both sides to file papers by Wednesday regarding the definition of good-faith negotiations. He will rule sometime after receiving those briefs.

The closing arguments capped a trial that has stretched across three weeks and included rare testimony from a sitting governor, Michigan's Rick Snyder. Detroit Emergency Manager Kevyn Orr and a parade of other city and state officials, consultants, retirees and union leaders also testified.

City attorney Bruce Bennett argued on Friday that Detroit did negotiate in good faith even as it recognized that it was unlikely to reach an out-of-court agreement with creditors.

"I think what the city did was they said: 'This is extremely difficult to achieve, but we're going to try anyway,'" Bennett said in his closing argument.

"You absolutely can believe in your head that this is never going to work, but try anyway. And I think that is the situation in this case."

His remarks about Detroit's decision to forego further negotiations came in response to a question from Rhodes, who questioned whether the city's arguments were logically consistent.

"It strikes me as factually impossible for it to be impracticable for that party to negotiate with other parties in any circumstance, and to negotiate with them in good faith," Rhodes said.

Rhodes also pressed Bennett on whether Orr misled retirees during a June 10 public meeting by making statements that pensions were "sacrosanct" and that there was only a "50-50 chance" that the city would file for bankruptcy.

"Assuming both were misleading, what impact should that have on the court's analysis of good faith here?" Rhodes asked.

Bennett replied that Orr made a "mistake" and his comments should not impact the case, because the record was clarified only days later when the city released a report on June 14 that said pensions may be cut.

'THERE SIMPLY WAS NOT TIME'

Jennifer Green, who represents the city's two pension funds, said discussions about Detroit's possibly filing for bankruptcy dated as far back as March 2012. The city failed to make use of the time it had to offer alternatives to bankruptcy, she said.

"The city could have been negotiating since 2012, when it knew there was a financial crisis," Green said. "To argue it was impracticable when all along they had this time, was not good faith."

Detroit has $18.5 billion in debt and liabilities, about half of which come from retirement benefits, including $5.7 billion for healthcare and other obligations, and $3.5 billion involving pensions, the city says.

The city outlined its financial liabilities in the June 14 report, which offered unsecured creditors, including retirees, only pennies on the dollar to settle their claims.

Robert Gordon, another lawyer representing pension funds, said the city did not indicate that it wanted to cut pensions until June 14. "There simply was not time for good faith negotiations," he said.

In his argument, Bennett invoked testimony from earlier in the trial, when one of the city's top financial advisers testified that Detroit was operating on a "razor's edge" prior to the bankruptcy filing and ran the risk of running out of cash.

Detroit had little time for additional negotiations, and in any event creditors were not putting forward proposals that the city considered as viable alternatives to bankruptcy, he said.

"What would more time have led to? There was no evidence or any other indication that the city could have looked at and said there was a path to a deal," Bennett said.

Gordon said there were alternatives aside from slashing pensions, which are protected by Michigan's constitution.

But Rhodes interjected and asked what those other options were. "You did not submit any evidence that there was a viable alternative plan," he said.

Gordon responded that the city did not provide enough information on which the pension funds could have based a proposal.

"It is not clear that there needs to be an impairment or diminishment of the accrued pension benefits in order to restructure here," Gordon said. "We can't go farther than that because we don't have all the information here."

Matthew Schneider, who represents the state of Michigan in the case, argued during a closing statement on Friday morning that a "tremendous storm" was headed toward the city, and a bankruptcy was necessary to preserve order.

"The evidence shows the health, safety and welfare of the people of Detroit are at risk," he said.

Michigan Governor Snyder, who authorized Orr, the emergency manager, to file for bankruptcy, said in an interview with Reuters on Friday, that he expects the city to emerge from bankruptcy by September 2014, when Orr's term is scheduled to end.

"We are on a path to get it done within that time frame," Snyder said.

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China's leaders open key meeting to set reform agenda

By Kevin Yao and Ben Blanchard

BEIJING Fri Nov 8, 2013 10:35pm EST

BEIJING Nov 9 (Reuters) - Chinese leaders began a four-day secret meeting on Saturday to set a reform agenda for the next decade as they try to steer the giant economy towards more sustainable growth after three decades of breakneck expansion.

President Xi Jinping and Premier Li Keqiang must unleash new growth drivers as the world's second-largest economy loses steam, burdened by industrial overcapacity, piles of debt and soaring house prices.

The meeting will show just how committed the new leadership is to reform after formally taking power in March.

Economic reforms will dominate the meeting of the 205-member Central Committee of China's ruling Communist Party. Little if any news will be released during the secret gathering, although traditionally official news agency Xinhua releases a long dispatch on the last day.

State television's English-language news channel said the meeting had begun. It gave no other details.

Beijing has tightened security in the run-up to the meeting, and authorities have been more jittery than usual after a vehicle ploughed into a crowd last week on the northern end of Tiananmen Square, an event the government blamed on Islamist extremists.

While some social and political issues could be tackled, such as corruption and pollution, Western-style political reform is certainly not on the agenda.

Yu Zhengsheng, the fourth-ranked member in the elite Politburo Standing Committee of the Communist Party, said last month the meeting would deliver "unprecedented" economic and societal reforms.

Analysts have cautioned against high expectations as stability remains the watchword for the leadership, even amid media reports top policymakers could take bold steps to deal with entrenched vested interests, such as state monopolies.

The government has pledged to allow market forces to play a bigger role in setting the price of capital, energy and land, and to cut red-tape.

That suggests the biggest changes may be fresh measures to free up interest rates and fiscal changes to allow local governments to manage their debt better and move away from reliance on land sales for revenues.

The meeting may also decide to loosen the household registration system, which blocks migrant workers and their families from access to education and social welfare beyond their home villages.

The system is seen as an impediment to attracting more people to urban areas, a trend the government seeks to encourage to boost consumption.

The leaders may also push land reforms to allow farmers to sell land when they leave their villages. Currently, they cannot sell land freely and many do not leave their farms for fear local governments could grab them for development.

Historically, third plenums in China have served as a springboard for key economic reforms. New leaderships usually spend the first few months in office getting familiar with issues, building consensus before unveiling policy initiatives.

Former leader Deng Xiaoping launched historic reforms to open the economy to the outside world at a third plenum in 1978.

That was followed by a third plenum in 1993 that endorsed the "socialist" market economy, paving the way for sweeping reforms spearheaded by then Premier Zhu Rongji, which led to China's entry into the World Trade Organization.

But the third plenum, in 2003, under Hu Jintao and Wen Jiabao - predecessors of Xi and Li - failed to yield key reforms. In 2008, they unveiled a 4 trillion yuan ($656 billion) stimulus package, which fuelled a property frenzy and saddled local governments with debt of more than 10 trillion yuan that the economy is still trying to absorb today.

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UPDATE 1-China opens key meeting to set reform agenda

Sat Nov 9, 2013 1:00am EST

By Benjamin Kang Lim and Ben Blanchard

BEIJING Nov 9 (Reuters) - Chinese leaders began a four-day secret meeting on Saturday to set a reform agenda for the next decade as they try to push more sustainable growth after three decades of breakneck expansion, amid signs of continuing debate on how to implement the reforms.

President Xi Jinping and Premier Li Keqiang must unleash new growth drivers as the world's second-largest economy loses steam, burdened by industrial overcapacity, piles of debt and soaring house prices.

The meeting - held under tight security at a Soviet-era hotel in western Beijing - will show just how committed the new leadership is to reform after formally taking power in March.

Economic reforms will dominate the meeting of the 205-member Central Committee of China's ruling Communist Party. Little if any news will be released during the event, but official news agency Xinhua traditionally issues a dispatch on the last day.

Xinhua confirmed in an English-language dispatch that the meeting had begun, with the agenda led by a discussion over a draft document on deepening reform, "which pools the wisdom of the whole Party and from all aspects".

It added, "Comprehensively deepening reform means the reform will be more systematic, integrated and coordinated," but gave no other details.

Analysts have cautioned against high expectations as stability remains the watchword for the leadership, even amid media reports top policymakers could take bold steps to deal with entrenched vested interests, such as state monopolies.

The Development Research Centre, a think-tank for China's cabinet, set out last month eight key areas for reform at the plenum - finance, taxation, land, state assets, social welfare, innovation, foreign investment and governance.

"These are just recommendations. There is still strong opposition" to the proposed reforms, a source with ties to the leadership told Reuters, requesting anonymity.

Powerful interest groups, including leftists or conservatives, local governments, state-owned enterprises and state banks, oppose some of the reforms such as freeing up interest rates, allowing private banks and turning Shanghai into a free trade zone, several sources say.

However, the party will put on a unified face once Xinhua issues its communique at the end of the plenum on Tuesday, pledging reform without providing too many details.

The People's Daily's influential tabloid, the Global Times, cautioned in an editorial on Saturday that the country's leaders would be unlikely to live up to the huge expectations.

"They can hardly be as ambitious as some sections of the public hope. The most ambitious government in terms of reforms would still be considered conservative when faced with these expectations," it wrote.

The government has pledged to let market forces play a bigger role in setting the price of capital, energy and land, and to cut red tape.

That suggests the biggest changes may be fresh measures to free up interest rates and fiscal changes to let local governments to manage their debt better and move away from reliance on land sales for revenues.

HAWKS AND DOVES

In a bid to end the debate between hawks and doves, Xi declared in January that the second 30 years of Communist rule, when reforms transformed China into an economic powerhouse, should not be used to "negate" the first 30 years under Mao Zedong when chaos, poverty and hunger prevailed.

Conservatives blame China's policy of reform during the second 30 years for a yawning wealth gap and other problems.

Liberals revile Mao not just for the chaos of the 1966-76 Cultural Revolution, but also the tens of millions who died in a man-made famine in the years after the 1958 Great Leap Forward.

On the eve of the plenum, the party's history research office published a full-page article in the official People's Daily, repeating the warning against "negating" the two periods, a sign that debate still simmers.

Adding to Xi's troubles, the political fallout from the downfall of Bo Xilai, a former contender for a seat at the apex of power, still haunts the party.

A party document circulated this week urged officials to toe the line and learn from Bo's mistakes, sources said.

They were told to fully conform with the party's decision to expel and prosecute Bo, a second source said.

Bo, disgraced party boss of the southwestern city of Chongqing, was jailed for life in September on charges of accepting bribes, corruption and abuse of power, but still has many supporters and sympathizers with his pro-Mao policies.

SOCIAL REFORMS

The meeting may also decide to loosen the household registration system, which blocks migrant workers and their families from access to education and social welfare beyond their home villages.

The system is seen as a hurdle to attracting more people to urban areas, a social equality trend the government seeks to promote as it looks to boost domestic consumption.

The leaders may also push land reforms to allow farmers to sell land when they leave their villages. Currently, they cannot sell land freely and many do not leave their farms for fear local governments could grab them for development.

While some social and political issues could be tackled, such as corruption and pollution, Western-style political reform is certainly not on the agenda.

Historically, third plenums in China have served as a springboard for key economic reforms.

Former leader Deng Xiaoping launched historic reforms to open the economy to the outside world at a third plenum in 1978.

That was followed by a third plenum in 1993 that endorsed the "socialist" market economy, paving the way for sweeping reforms spearheaded by then Premier Zhu Rongji, which led to China's entry into the World Trade Organization.

But the third plenum, in 2003, under Hu Jintao and Wen Jiabao - predecessors of Xi and Li - failed to yield key reforms. In 2008, they unveiled a 4 trillion yuan ($656 billion) stimulus package, which fuelled a property frenzy and saddled local governments with debt of more than 10 trillion yuan the economy is still trying to absorb.

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REFILE-GLOBAL MARKETS-Dollar firms against euro after ECB cut and U.S. jobs data ahead

Fri Nov 8, 2013 4:26am EST

* Fed tapering talk may gain momentum if payroll data strong

* Euro at 7-week low after surprise ECB rate cut, French downgrade

* European shares fall but stumble towards small weekly gain

By Marc Jones

LONDON, Nov 8 (Reuters) - The dollar was near a seven-week high on Friday as markets awaited their monthly serving of U.S. jobs data and reassessed the euro after the European Central Bank's surprise rate cut and S&P's rating downgrade for France.

The euro fell to $1.3410 following Standard & Poor's lowering late on Thursday of France's sovereign credit rating to AA from AA+. It was at its weakest level against sterling since January and hit multi-month lows against a crowd of other currencies.

Thursday's ECB rate cut came sooner than markets had anticipated and investors were bracing for further currency market volatility if U.S. non-farm payrolls come in strongly later in the day. A high reading for October could revive bets the Federal Reserve will start scaling back its stimulus this year, especially after Thursday's pacy growth data.

The U.S. economy expanded 2.8 percent in July-September, far more than the 2.0 percent economists had forecast. ID:nL2N0IS0VU]

Economists polled by Reuters expect 125,000 jobs to have been added in October, although last month's 16-day U.S. government shutdown may affect the figures.

"I don't think the non-farm payrolls are going to have a sustained market reaction," said Chris Turner, head of foreign exchange strategy at ING. "People understand there are going to be some distortions after the government shutdown."

"Were the dollar to sell off I don't think it would last too long. We are listening to the ECB with great respect now with regards to lower rates," he added.

Share markets in Asia had fallen after Wall Street suffered it worst day since August overnight and European bourses quickly went into reverse when they opened.

The pan-European FTSEurofirst 300 was down 0.6 percent in early trading as London's FTSE and Frankfurt's DAX fell 0.5 and 0.6 percent, and Paris's CAC 40 lost 0.8 percent as France's downgrade weighed.

PRESSURE MOUNTS

French government bonds were also hit by S&P's one-notch downgrade, although the ECB's cut in interest rates helped German Bunds keep up their strong run this week.

"S&P's decision reflects the worries over French growth, and the sentiment that government action is not enough," said Philippe Waechter, head of economic research at Natixis Asset Management in Paris.

Data showing China's exports rose more than expected in October hardly eased investors' cautious mood, with the CSI300 of the leading Shanghai and Shenzhen A-share listings falling to two-month lows.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.5 percent and looked set for a loss of 1.7 percent on the week, while Japan's Nikkei average dropped 0.9 percent. Both indexes hit their lowest levels in about four weeks.

Still, the dollar strengthened on the U.S. data, with the dollar's index against a basket of major currencies hitting an eight-week high of 81.46 on Thursday. It last stood flat on the day at 80.85 .

The dollar's strength suppressed oil prices, with Brent crude hitting a four-month low of $103.22 a barrel. Plentiful crude supplies, progress in talks over Iran's disputed nuclear programme and fall in China's crude imports all weighed on the prices.

U.S. Treasuries maintained gains made after the ECB's rate cut, with the 10-year bond yield standing at 2.6091 percent , near this week's low.

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CEE MARKETS 1-Czech crown steady at target after c.bank intervenes

Fri Nov 8, 2013 4:55am EST

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  By Jason Hovet      PRAGUE, Nov 8 (Reuters) - The Czech crown hung just on the  strong side of 27 to the euro on Friday, the target the  country's central bank set the day before when it launched  massive interventions to weaken the currency in a record drop.      The central bank, after mulling the use of interventions for  a year, took traders by surprise on Thursday with the launch of  crown sales on the open market for the first time in over a  decade.      The bank wants to keep the exchange rate close to 27 crowns  to the euro, it said, to help stem a slowdown in inflation.         By 0930 GMT, the crown was steady, bid at 26.964  per euro, after a nearly 5 percent drop on Thursday. Other  emerging European currencies were mostly firming, with Hungary's  forint up 0.3 percent.      Dealers and analysts said the Czech central bank's  intervention amounted to between 2 billion to 5 billion euros on  Thursday, several times higher than the daily spot average.         But the bank was not in the market on Friday, they said.      "I haven't seen them," said one Prague dealer that had done  deals with the central bank on Thursday.      Czech Governor Miroslav Singer told a news conference on  Thursday that the bank had unlimited means to intervene against  its own currency and would not end the campaign until it was  very confident it would not have to start intervening again.       "It is absolutely clear to us that we are in for the long  term," Singer said.      In a note on Thursday, RBS said Singer's intent was clear  and the crown would now likely fall into a tight range.      "Given the intent of Governor Singer, we find it unlikely  that the market will look to test his desired "close to 27"  EURCZK level and therefore anticipate that the cross will now  trade in a new, much higher and tighter range," RBS said.       "We therefore think that any significant moves away from the  27.0 level in either direction are moves to be faded."      KBC said the "following days and weeks will show how  tolerant the (central bank) will be to any eventual crown  strengthening."                    CEE MARKETS SNAPSHOT AT 1034 CET   ************************** CURRENCIES ************************                               Latest  Previous   Daily   Change                               bid     close      change  in 2013   Czech crown                 26.964    26.972  +0.03%  -7.11%   Hungarian forint           295.800   296.620  +0.28%  -1.64%   Polish zloty                 4.181     4.186   +0.11%  -2.56%   Romanian leu                 4.439     4.436   -0.07%  +0.09%   Croatian kuna                7.619     7.620   +0.02%  -0.89%   Serbian dinar              113.960   113.950    -0.01%   -1.46%   Note: daily change calculated from previous close at 1700 GMT   **************************** STOCKS **************************                               Latest  Previous   Daily   Change                                       close      change  in 2013   Prague                      1032.07    1041.39   -0.89%  -0.64%   Budapest                  18794.56  18897.17    -0.54%  +3.42%   Warsaw                     2511.18   2527.66    -0.65%  -2.78%   Bucharest                  6190.03   6234.28   -0.71%  +20.21%   ***************************** BONDS **************************                           Yield    Yield    Spread    Daily                           (bid)    change   vs Bund   change in   Czech Republic                                      spread     2-year                0.186    -0.029   +8bps     -5bps     5-year                1.016     -0.244   +36bps      -27bps    10-year                2.307    -0.022   +60bps     -4bps   ******************* FORWARD RATE AGREEMENTS ******************                                3x6     6x9    9x12  3M interbank   Czech Rep                    0.390   0.400  0.400   0.44   Hungary                      3.160   3.240  3.320   3.36   Poland                       2.680   2.700  2.780   2.66   Note: FRA quotes are for ask prices   **************************************************************     For related news and prices, click on the codes in brackets: All  emerging market news     Spot FX rates  Eastern Europe spot FX  Middle East spot FX Asia  spot FX          Latin America spot FX Other  news and reports  World central bank news Economic Data  Guide Official rates   Emerging Diary   Top events  Diaries Diaries Index  

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UPDATE 3-S&P lowers France credit rating, cites slow reform pace

Fri Nov 8, 2013 5:27am EST

* S&P says French reform efforts insufficient to raise growth

* Government committed to all possible budget savings-Hollande

* But president says he won't sacrifice welfare model

* Industrial output fall highlights economic weakness

By Nicholas Vinocur

PARIS, Nov 8 (Reuters) - Standard & Poor's cut France's sovereign credit rating on Friday by one notch to AA from AA+, giving a thumbs-down to President Francois Hollande's efforts to put the euro zone's second largest economy back on track.

All three major rating agencies had already stripped France of its top-grade triple-A status. But S&P was the first to downgrade it for a second time, warning that the economic reforms of the past year were not sufficient to lift growth.

The downgrade reflected fears that the government may struggle to push through further unpopular changes due to violent protests against its budget policy and record low opinion poll ratings for Hollande.

Hollande noted that market interest rates on French government debt, which are slightly less than half a percentage point higher than Germany's on the benchmark bond, remained low. His Socialist-led government was committed to making all possible budget savings measures but not at the price of sacrificing France's welfare model, he added.

"This policy... is the only one that can guarantee our credibility and we can judge that from the low interest rates on the markets," he said at a World Bank conference in Paris.

Data released on Friday showed a surprise drop in industrial production in September and a wider trade deficit, underscoring weakness in an economy where unemployment is stuck at around 11 percent.

S&P adjusted its outlook for French debt to stable from negative, citing Hollande's commitment to containing net debt, which it expects to peak at 86 percent of output in 2015.

Market reaction was muted with yields on France's 10-year bond rising slightly. The gap in yields between French and German debt - which is the euro zone benchmark - widened by three basis points to 48.5 bps from 45.2.

Shares in French banks fell at the market opening.

Hollande's government has enacted a modest reform of the rigid labour market and a review of its generous pension system aimed at narrowing funding shortfalls.

But the latter in particular was less than expected by the European Commission, which urged Paris this year to make structural reforms in return for giving it an extra two years to bring its public deficit within EU targets.

"If France does not change tack, it condemns itself to further long-term decline," Holger Schmieding, an economist at Berenberg Bank, wrote in a research note.

TAX REVOLT

Industrial output unexpectedly fell in September while the trade deficit worsened, highlighting a gulf with neighbouring Germany and raising the prospect that the French economy will have nearly stalled in the third quarter.

While Hollande has relied on tax increases to pursue budget consolidation this year, he faces virulent resistance and has already backed down on applying a tax on trucking in the face of violent protests in western France.

A survey released on Friday showed Hollande's popularity ratings were lower than any previous president's in the 55-year-old Fifth Republic, highlighting his limited room for manoeuvre. The CSA poll showed Hollande's approval rating at 25 percent, lower than a record of unpopularity held by former President Jacques Chirac.

"Germany's record trade surplus in September and France's downgrade by S&P once again highlight the frightening gap between Germany and other euro zone countries," said Vincent Ganne, an analyst at FXCM.

A separate survey from INSEE of executives at industrial firms indicated they planned on cutting their investments this year by 7 percent and 2 percent in 2014.

Philippe Waechter, head of economic research at Natixis Asset Management, said the downgrade reflected views that the French government was not implementing reforms needed to repair its economy and relying on hopes of cyclical upturn.

But, he said: "I don't think there will be a dramatic impact on French debt in the short term, because S&P is not expressing alarm and the outlook is stable."

The downgrade applies to France's long-term foreign and local currency debt ratings. S&P said the probability of a further rating action on France over the next two years was less than one in three.

Outspoken industry minister Arnaud Montebourg said credit rating agencies had "no credibility". "If we pushed this logic to its conclusion, I think states should start to grade the ratings agencies," he told reporters. "There would be many dunce's hats to distribute."

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REFILE-UPDATE 1-Ireland heads for end of bailout in final review

Thu Nov 7, 2013 4:29am EST

  * Lenders to give bailed-out country final green light      * Likely to go without precautionary line when aid ends      * Much needed austerity success for EU, limited parallels        By Sam Cage      DUBLIN, Nov 7 (Reuters) - Three years after going cap in  hand to international lenders for a bail out, Ireland is set to  step out on its own again.      The European Union and International Monetary Fund are due  to sign off later on Thursday on the last part of a 85 billion  euro ($114 billion) bailout, leaving Ireland to exit the process  by the end of the year, the first crisis-hit euro zone country  to do so.      Debts resulting from a rescue of its crashing bank sector in  2008 helped force Ireland into seeking aid from its EU partners  and the European Union two years later as the euro zone's debt  crisis deepened.      The official "troika" of lenders - the European Commission,  European Central Bank and IMF - are conducting their final  review of the bailout and given Ireland has met every major  target, are widely expected to release the final funds.      They are expected to release statements after about 1200  GMT.      The main issue remaining is whether the government will take  out an insurance policy of asking for a precautionary credit  line when the bail out ends. It has indicated in recent weeks it  may go it alone as it has funding into 2015.      "The assessment of the European Commission, the ECB and the  IMF is largely positive, though they remain wary of unresolved  problems in the banking sector," said Dermot O'Leary, economist  at Goodbody stockbrokers.      The process may also be complicated by German efforts to  form a new government given that Berlin is one of the main  contributors to aid programmes.      The country of 4.6 million has endured five years of  austerity with little of the unrest that has rocked Greece and  Spain and is now a much-needed success story for the EU, which  wants to show that the discipline of tax hikes and spending cuts  can work.      Irish debt yields have dropped from a 2011 peak of 15  percent to about 3.5 percent and the budget deficit has fallen  from nearly a third of gross domestic product in 2010 to an  estimated 7.3 percent this year.      That is still the highest deficit-to-GDP in the EU, partly  because Ireland's economy is barely growing and it needs growth  rates of 2-3 percent to make hefty national debt sustainable.      Unemployment, though falling, is above 13 percent and one in  five home loans, worth 25 billion euros, are not being fully  repaid. So all is not fixed.      The improvements have been enough to gain the government  some market access, highlighted by a 10-year bond issue in  March, but forgoing a precautionary line could leave it  vulnerable to future market shocks and unable to access the  ECB's government bond purchases scheme.Concerns also persist over the health of Ireland's banks and  the lenders are reviewing the quality of their assets - an  exercise conducted in advance of full Europe-wide stress tests  next year - before giving the final all clear to exit the  bailout.      But finances and commitment have improved enough to lift  Ireland to the brink of an exit.      "In Ireland, consumer confidence has improved and the  (building supplies) and DIY markets have stabilised at very low  levels of activity," said Gavin Slark, chief executive of  supplies group Grafton, which reported higher revenues  on Thursday.  

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