World growth ‘worst for 60 years’

Developed economies such as Japan, the US and UK are in recession

World economic growth is set to fall to just 0.5% this year, its lowest rate since World War II, warns the International Monetary Fund (IMF).

In October, the IMF had predicted world output would increase by 2.2% in 2009.

It now projects the UK, which recently entered recession, will see its economy shrink by 2.8% next year, the worst contraction among advanced nations.

The IMF says financial markets remain under stress and the global economy has taken a “sharp turn for the worse”.

In another gloomy view of the UK economy, the Institute for Fiscal Studies (IFS) said Britain would be saddled with government debt for more than 20 years.

IFS director Robert Chote warned that spending would have to be cut or taxes raised by more than planned to allow public finances to recover.

The predictions came as Pascal Lamy, the director general of the World Trade Organization, urged countries not to react to the global economic crisis by resorting to protectionism.

Speaking from the World Economic Forum in Davos, Mr Lamy said such a move would be “a big mistake”.

‘Virtual halt’

According to the IMF, the outcome of the economic slowdown has been to send global output and trade plummeting.

“We now expect the global economy to come to a virtual halt,” said IMF chief economist Olivier Blanchard in a statement.

The IMF says that despite a number of policy moves, which have been carried out by many states, financial strains remain.

International co-operation is needed now to draw up new policy initiatives, and for capital injections to support “viable financial institutions”.

Meanwhile, it predicts that the eurozone economy is poised to shrink by 2.0% in 2009 and the US economy by 1.6%.

Banking crisis

The report comes on the same day the International Labour Organization said that as many as 51 million jobs worldwide could be lost this year because of the global economic crisis.

It had been hoped that growth in developing nations would continue at a steady pace and help offset the recession in developed nations such as the US and UK.

But the seemingly endless crisis in the banking system has put paid to that notion.

Countries such as China are now struggling with a collapse in demand from their primary export markets.

Meanwhile, developed economies such as Japan, Spain, the US and UK are in recession, with new job losses being announced on a daily basis.

‘Uncertainty’

The IMF says that growth in emerging and developing economies is expected to slow sharply, from 6.25% in 2008 to 3.25% in 2009.

It cites the main reasons for the drop as being falling export demand, lower commodity prices and much tighter external financing constraints.

The IMF points out that policy efforts to tackle the downturn so far – such as liquidity support, deposit insurance and recapitalisation – have been drawn up to address the immediate threats to financial stability.

However, it says that these emergency measures “have done little to resolve the uncertainty about the long-term solvency of financial institutions”.

“The process of loss recognition and restructuring of bad loans is still incomplete,” says the IMF’s World Economic Outlook Update.

‘Bad bank’

The IMF says future co-ordinated financial policies should concentrate on recognising the scale of financial institutions’ losses and on providing public support to those institutions that are viable.

“Such policies should be supported by measures to resolve insolvent banks and set up public agencies to dispose of the bad debts, including possibly through a ‘bad bank’ approach, while safeguarding public resources.”

The IMF says the global economy is projected to experience a gradual recovery in 2010, with growth picking up to 3%.

“However, the outlook is highly uncertain, and the timing and pace of the recovery depend critically on strong policy actions,” it warns.

Bank of America Receives $138 Billion of Rescue Funds

Bank of America Receives $138 Billion of Rescue Funds

Bank of America Corp., the largest U.S. bank by assets, received a $138 billion emergency lifeline from the government to support its acquisition of Merrill Lynch & Co. and prevent the global financial crisis from deepening.

The U.S. will invest $20 billion in Bank of America and guarantee $118 billion of assets “as part of its commitment to support financial-market stability,” the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. said in a joint statement shortly after midnight in Washington.

The bailout raises doubts about the future of Chief Executive Officer Kenneth D. Lewis, who engineered the takeovers of New York-based brokerage Merrill Lynch and mortgage lender Countrywide Financial Corp. during the worst market slump since the Great Depression. Bank of America has plummeted 75 percent in New York trading since the Merrill acquisition was announced in September, falling to the lowest level in almost two decades.

“This thing is unraveling so fast Lewis may know his job is lost,” said Paul Miller, an analyst at Friedman Billings Ramsey Group Inc. in Arlington, Virginia, who has an “underperform” rating on Bank of America. The management team has “lost credibility” after spending more than $20 billion in the past year to buy unprofitable Merrill and ailing mortgage lender Countrywide Financial Corp. of Calabasas, California, he said.

Robert Stickler, a spokesman at Charlotte, North Carolina- based Bank of America, said the company doesn’t comment on “uninformed gossip.”

Possible Dividend Cut

Bank of America plunged 18 percent yesterday to $8.32 in New York Stock Exchange composite trading after hitting $7.35, its lowest level since February 1991. The stock was up $1.12 at $9.46 in German trading today.

The bank plans to announce fourth-quarter results at 7 a.m. New York time, about an hour after Citigroup Inc. publishes its latest figures. Bank of America may post a $3.6 billion loss and reduce its quarterly dividend, Citigroup analyst Keith Horowitz estimated on Jan. 12.

“The motivation is to try and basically get information to the market sooner rather than later because of all the anxiety that’s out there,” said Bert Ely, chief executive officer of Ely & Co., a bank consulting firm in Alexandria, Virginia. It’s a “very tense situation now,” he said.

Talks between the government and Bank of America have been under way for the past couple of weeks, a government official said. The bank told regulators in December it might abandon the Merrill takeover because of worse-than-expected results, three people familiar with the matter said on Jan. 14.

Emergency Steps

The government insisted the Merrill deal proceed because its collapse would renew turmoil in the financial system, said the people, who declined to be identified as the talks were private.

Today’s emergency action shows how government officials, led by U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke, have failed to quell concerns about the viability of the nation’s biggest banks, even after deploying $350 billion of financial-rescue funds. Financial companies have disclosed more than $1 trillion of writedowns and credit market losses since 2007 linked to the collapse in subprime mortgages, according to data compiled by Bloomberg.

The Bank of America plan mirrors the emergency actions taken in November for New York-based Citigroup, when the government explicitly insured the bank against losses on toxic assets with taxpayers footing the bill. The U.S. backed up $306 billion of Citigroup real-estate loans and securities, sharing losses beyond $29 billion for what may be some of the company’s worst holdings.

TARP Funds

In the latest Bank of America deal, the government will protect a $118 billion pool of assets that a U.S. official said includes residential and commercial real-estate holdings and credit-default swaps. The official spoke to reporters on a conference call on condition of anonymity.

The $20 billion purchase of preferred shares, which carry an 8 percent dividend, will be made later today. The funds come from the first half of the Treasury’s Troubled Asset Relief Program. The U.S. Senate voted yesterday to allow the release of the next $350 billion of the program.

The U.S. had already injected $15 billion into Bank of America and $10 billion into Merrill to bolster the combined company against the credit crunch.

“This is more short-term fire-fighting tactics,” said Ed Rogers, chief executive officer of Tokyo-based hedge-fund adviser Rogers Investment Advisors Y.K.

Thain Negotiations

Lewis, 61, has spent $129 billion on acquisitions, including regional lenders FleetBoston Financial Corp. and LaSalle Bank, credit-card issuer MBNA and investment manager U.S. Trust Co.

Bank of America agreed Sept. 15 to buy Merrill, the world’s largest brokerage firm, after a weekend of negotiations between Lewis and Merrill CEO John Thain. The $19.4 billion transaction occurred at the same time as Lehman Brothers Holdings Inc. went bankrupt, crippled by the frozen credit markets.

“Bank of America has all kinds of problems with its acquisitions,” said Gary Townsend, a former bank analyst and president of Hill-Townsend Capital LLC in Chevy Chase, Maryland. “They’ve been so acquisitive, they find themselves with very little in tangible equity.”

Bank of America became aware of Merrill’s fourth-quarter losses after shareholders approved the takeover on Dec. 5, the Wall Street Journal reported earlier today, quoting a statement from the company. After the vote, Paulson and Bernanke warned Lewis about the risks to the financial system if the deal was scrapped, the Journal said, citing unidentified people familiar with the matter.

Eliminating Jobs

Bank of America shares have dropped 42 percent since Jan. 6 when Lewis told employees he expected the company’s performance to fall short of earlier estimates. The company is cutting as many as 35,000 jobs to reduce annual costs by about $7 billion. Bank of America also has taken steps to counter loan losses by selling a $2.8 billion share of its China Construction Bank stake.

The agreement with the Treasury, the Fed and FDIC calls on Bank of America to absorb the first $10 billion of losses from its pool of assets, the “large majority” of which were assumed with the Merrill purchase, according to the government’s statement. The company will absorb 10 percent of any additional losses, with the government on the hook for the remainder.

The Fed will backstop assets with a loan, after the government’s first $10 billion in losses, shared by the Treasury and the FDIC. The asset pool includes cash assets with a current book value of as much as $37 billion and derivatives with maximum potential future losses of as much as $81 billion, according to the term sheet provided by the government.

FDIC Guarantee

Separately, the FDIC said today it plans to propose changing its bond-guarantee program for banks to cover debt as long as 10 years, up from the current three-year maturity. The FDIC also plans to propose rule changes to the Temporary Liquidity Guarantee Program.

The U.S. government will use all of its resources “to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks,” the joint statement said.

Bernanke said earlier this week that troubled assets remain a “continuing barrier to private investment” in financial institutions and recommended that they be extracted with government help. He urged a “comprehensive plan,” with one possibility being to erect a so-called bad bank to purchase and administer the troubled loans and securities.

Treasuries Fall as U.S. Invests $20 Billion in Bank of America

Treasuries Fall as U.S. Invests $20 Billion in Bank of America

Treasuries dropped, with 10-year notes ending a six-day rally, after the U.S. agreed to invest $20 billion in Bank of America Corp. and lawmakers unveiled an $825 billion plan to snap the recession.

Benchmark securities fell the most in almost two weeks, pushing yields to about a quarter percentage point more than the record low set last month, on speculation President-elect Barack Obama will increase borrowing to record levels to pay for the stimulus packages. The latest proposal would add to a budget deficit the Congressional Budget Office says will more than double this year to $1.18 trillion.

“We’re not in Treasuries,” said Hans Goetti, who oversees $10 billion in Asia as chief investment officer at LGT Bank in Liechtenstein (Singapore) Ltd., part of the bank for the wealthy owned by Liechtenstein’s royal family. “If you have $2 trillion deficits, and it might be even more, there will be a lot of supply.”

The 10-year yield rose 11 basis points to 2.31 percent as of 9:10 a.m. in London, according to BGCantor Market Data. The price of the 3.75 percent security maturing in November 2018 fell 1 2/32, or $10.63 per $1,000 face amount, to 112 18/32. A basis point is 0.01 percentage point.

Two-year yields increased seven basis points to 0.77 percent.

Treasury notes still headed for a weekly gain after the Commerce Department on Jan. 14 said U.S. retail sales fell for a sixth straight month in December, feeding demand for the relative safety of government debt as the economy shrinks. Ten- year yields declined eight basis points since Jan. 9.

Credit Markets

As part of efforts to support Bank of America, the U.S. also agreed to backstop a $118 billion asset pool to help the lender absorb Merrill Lynch & Co. The U.S. already invested $15 billion in Bank of America, the country’s biggest lender, and another $10 billion in Merrill.

Yields suggest efforts to revive credit markets that froze last year are working.

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed to 0.98 percentage points from 2008’s high of 4.64 percentage points in October.

The three-month London interbank offered rate for loans in dollars was 1.09 percent as of yesterday. It slid to 1.08 percent the day before, a level not seen since 2003.

Higher Borrowing

McDonald’s Corp., the world’s largest restaurant company, and Wal-Mart Stores Inc., the biggest discount chain, both sold bonds this week. Bond markets in the Asia-Pacific region are having their busiest January for at least a decade, with $32.3 billion in sales.

The decline in Treasuries will increase in the second half of 2009 as efforts to end the U.S. recession take hold and the demand for safety abates, LGT’s Goetti said.

Mitsubishi UFJ Asset Management Co., part of Japan’s largest bank, is taking the same view for 2009, saying yields will rise in the second half because of increased government borrowing, according to Chief Fund Manager Hideo Shimomura.

Net purchases of U.S. long-term bonds, notes and stocks by investors from outside the nation probably rose to $15 billion in November from $1.5 billion the month before, based on a Bloomberg survey of economists. The Treasury Department report is scheduled for 9 a.m. in Washington. The monthly average since the start of 2007 is $61.1 billion.

Government Plan

The $825 billion economic plan unveiled yesterday by House Democrats and being assembled with Obama’s transition team comes after the U.S. budget deficit soared to a record $485.2 billion in the first three months of the fiscal year that started Oct. 1.

Obama’s advisers see an increasingly grave banking crisis and are considering proposals far more sweeping than any steps that have been taken so far, according to people who’ve discussed the outlook with them.

The U.S. Senate voted yesterday to release $350 billion in financial-rescue funds, the second half of the $700 billion in the Troubled Asset Relief Program enacted last year.

Government borrowing pushed U.S. marketable debt to a record $5.82 trillion in November, from $4.54 trillion at the end of 2007.

Bond Bulls

Bond bulls say the deepening recession means Treasuries will gain.

“U.S. consumer spending is slowing. The risk of deflation is rising,” said Hiromasa Nakamura, senior investor in Tokyo at Mizuho Asset Management Co., which has $44.4 billion in assets. “Yields will decline.”

Ten-year yields may fall below 2 percent this month, he said, surpassing the record of 2.04 percent set Dec. 18.

The worst holiday shopping season in at least four decades is forcing retailers such as J.Crew Group Inc. to cut prices. Toyota Motor Corp., which posted its biggest decline in U.S. sales in more than three decades last year, plans to cut North American vehicle production further in 2009.

The cost of living dropped 0.2 percent for all of 2008, the first annual decline since 1954, according to the median estimate in a Bloomberg News survey of economists before the Labor Department issues the figure today.

Consumer Prices

Consumer prices probably dropped 0.9 percent in December, a third straight monthly slide, the survey showed. The report is scheduled for 8:30 a.m. in Washington.

Treasuries surged after the last consumer-price report on Dec. 16 showed the index fell by 1.7 percent in November, the most ever. The Federal Reserve cut its target for overnight loans between banks the same day to a range of zero percent to 0.25 percent, from 1 percent, to battle the recession.

Ten-year yields fell to 2.26 percent, a record at the time.

The difference between rates on 10-year Treasury Inflation Protected Securities and conventional notes, which reflects the outlook among traders for consumer prices, narrowed to 50 basis points from 2.45 percentage points six months ago.

The bulls are in the minority. A Bloomberg survey of banks and securities companies projects the 10-year yield will rise to 3.07 percent and two-year rates will increase to 1.44 percent by the end of the year, with the most recent forecasts given the heaviest weightings.