ECB faces massive liquidity challenge

LONDON (MarketWatch) -- The looming due date for repayment of the European Central Bank's 442 billion euro ($543 billion) in one-year loans to banks is stoking renewed fears over liquidity in the 16-nation euro zone.

Banks on Thursday must repay the loans, which were taken out a year ago in the central bank's largest-ever long-term repo operation. The massive operation, which allotted loans in return for collateral at a fixed rate of 1%, was a central part of the ECB's effort to ease a liquidity crunch across the region.

But banks continue to struggle to meet financing needs, with Spanish banks seen as a particular source of concern amid reports many institutions are unable to tap capital markets.

Markets Hub: Growth fears slam markets

Treasurys rally sharply, with the 10-year yield falling below 3%, while stocks and commodities fall as investors grow more nervous about global growth. Worries about the recovery in China, weakness in Japan and the looming expiry of a key ECB bank-lending program are all fueling jitters ahead of the end of the quarter.

Strategists said nervousness ahead of the expiration contributed to a round of risk aversion that put pressure on European and global equities and weakened the euro, while traditional safe-haven currencies such as the U.S. dollar, the Japanese yen and the Swiss franc rallied on Tuesday. Read Currencies.

"Though commodities are proving resilient, the scale of the rallies in bonds and Swiss franc and Japanese yen in currencies is worrying and suggests participants could be preparing for a proper rout in risk assets as EU banks scramble for funds and worries mount over the U.S. economy," said Kenneth Broux, market economist at Lloyds TSB.

The ECB doesn't plan to offer another fixed-rate one-year repo. That will put additional focus on a fixed-rate three-month tender, also at 1%, set for Wednesday, strategists said. A six-day bridge from Thursday's expiration will also be offered, though strategists said banks are likely to focus on the three-month operation.

Barclays Capital estimated that €250 billion to €300 billion of the one-year facility will be rolled over into three-month loans.

A smaller number would likely be seen as "good news" for the European banking sector, while a bigger number would likely be perceived as "bad news," wrote Simon Samuels and Mike Harrison, European bank analysts at Barclays Capital, in a note to clients outdoor fireplace designs.

"So the test for European bank funding seems clear: borrowing less than (say) €250 billion might be seen as a bullish signal for the market, because banks are finding it easier to fund themselves," they said. Borrowing more than €300 billion "could be a negative signal because banks are more reliant on the ECB than we thought."

Spanish banks Santander , BBVA and Italy's UBI are the most sensitive to central bank funding news, the analysts said, while Britain's Lloyds Banking Group and Royal Bank of Scotland could also react given their reliance on the Bank of England's special liquidity program.

Luca Cazulanni, deputy head of fixed-income strategy at UniCredit Bank in Milan, predicted that a rollover of around €250 billion would create conditions, in terms of liquidity, comparable to what was seen last November before the Greek debt crisis took hold. A rollover of more than €350 billion would create an environment similar to that seen in the first months of this year, just before the euro-zone debt crisis escalated.

A low rollover would likely put pressure on short-term funding rates. It would also rob German bunds of the safe-haven flows that have sent yields on German bunds to record lows, Cazulanni said, while a high figure would likely drive up yields of countries, such as Spain and Portugal, that have been more reliant on ECB funding.

Matt Spick, a strategist at Deutsche Bank, said the ECB will likely be able to manage liquidity issues through the use of the three-month facility and its ongoing weekly operations.

But the fact that the ECB is obliged to continue refinancing the banks "is a reminder that they are not funding themselves," he said, in a research note.

Deutsche Bank estimates current refinancing requirements at around €700 billion a year.

The third-quarter funding period will be crucial as banks seek to complete their funding programs early, which runs the risk of creating a glut of supply in September, Spick said. Secondly, issuance is likely to remain dominated by "national champion" names, especially in Northern Europe, leaving "second-tier" banks weak and dependent on the ECB for the foreseeable future.

ECB faces massive liquidity challenge

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Austrian Banks That Profited in Eastern Europe Now Share Region’s Problems

FRANKFURT — The financial services version of the Hapsburg Empire is looking tattered these days.

Austrian banks, which became some of the most profitable in Europe by expanding east of the Danube after the end of the Cold War, now reflect the economic problems that Eastern Europe faces as it slowly recovers from a sharp economic downturn and tries to pay down a pile of private-sector debt.

Bad loans Austrian banks made to Eastern Europe are rising, albeit at a more moderate pace than a few months ago. Profits are down, and even the healthier Austrian banks like Erste Group and Raiffeisen International may be facing years of high uncertainty and slow growth.

The climate for the Vienna banks is vastly better than last year, when Eastern Europe was on the verge of a financial meltdown caused by an excess of foreign-currency debt that became unaffordable after local currencies plunged in value. Some analysts said the crisis could have rivaled the Asian financial crisis of the late 1990s. Disaster was prevented only after the International Monetary Fund and the European Union orchestrated the rescues of Hungary, Romania and Latvia, and foreign banks agreed not to desert the region.

But, as the Austrian central bank warned Friday, many banks owe their recent improvements in profit to trading results and central bank support, rather than from solid loans.

“The risks in the region will remain elevated with the possible unwinding of international support measures,” the National Bank of Austria said in a statement as it released a subdued assessment of prospects for the country’s banks.

“There is still probably a lot of bad news to come for the banking sector in Eastern Europe,” said Marie Diron, an economic forecaster for the consulting firm Ernst & Young. That, she added, “is bad news for Western Europe because banks, especially Austrian banks, have large exposure to Eastern Europe.”

The Austrian banks’ expansion into Eastern Europe was one of the big success stories of the post-Cold War era. It made Vienna, whose palaces and boulevards still convey a sense of imperial grandeur left over from the heyday of the Hapsburg dynasty, more relevant to the region than it had been since the collapse of the Austro-Hungarian empire at the end of World War I.

Eastern European economies offered growth rates two or three times that of Western Europe. The region’s banking markets were wide open, full of customers who had never had access to credit before and were anxious to buy cars and homes. In countries like the Czech Republic and Romania, Austrian banks could buy existing banking networks from government control and instantly acquire huge market share.

Today, Erste Group owns the largest banks in the Czech Republic, Slovakia and Romania. Raiffeisen International was a pioneer in bringing modern banking services to riskier markets like Serbia, Kosovo and Albania.

Bank Austria and its parent company, UniCredit, based in Milan, have the largest market share overall in Eastern Europe. It has holdings across the region, including the second-largest bank in Poland.

Thanks largely to their holdings in Eastern Europe, Austria’s largest banks were more profitable than their peers in any other European country except Spain, which boasts the international giant Santander.

But in 2009, profit from Eastern Europe for all Austrian banks plunged by more than half, to €1.8 billion, or $2.2 billion, according to the National Bank of Austria. Austrian banks had to almost double the amount of money they set aside to cover bad loans, to €11 billion. Much of the credit problem stemmed from excessive lending in euros and Swiss francs, which customers in countries like Romania and Hungary could no longer pay after their own currencies lost value.

The financial crisis last year exposed the degree to which East European countries like Romania, the Baltics and Serbia owed their rapid growth in recent years to easy credit. Too much of the easy money was invested in real estate and not enough in creating a modern economy. Now the countries, and the Austrian banks that serve them, in effect need a new business model based on competitiveness and productivity, analysts say.

“Deflating a credit bubble will take years,” Ms. Diron said. “There is no painless way out.”

Hungarian politicians this month offered a reminder of how volatile the situation in Eastern Europe remains. The Hungarian currency, the forint, plunged after several government leaders warned that the Hungarian economy was in bad shape and that debt default was a possibility. With many residents and businesses struggling to pay off debts denominated in euros, any decline in the value of the local currency can lead to a surge in bad loans payday loan lenders.

The Hungarian furor died down, but “it is an indication how vulnerable some of the countries are,” said Erik Berglof, chief economist of the European Bank for Reconstruction and Development in London.

The three biggest Vienna banks are still profitable but have had to massively increase the amount of money they set aside for bad loans after economic output in Eastern Europe sank 4 percent last year. At the end of the first quarter of 2010, Raiffeisen International classified nearly 10 percent of its loans as nonperforming. Over all, the bank deems €3.4 billion in assets as impaired.

In some countries, the bad loan numbers are even more alarming. Erste Group reported at the end of the first quarter that nonperforming loans at its Romanian unit were 14 percent of the total, while in Ukraine bad loans were an astronomical 27 percent of the total. Overall, Erste Group’s nonperforming loans amount to a more modest 6.9 percent, still up from 5.2 percent a year earlier.

And those are the relatively healthy Austrian banks. The most problematic among them is Hypo Alpe Adria, which had close ties to the right-wing politician Jörg Haider before his death in 2008 and holds a portfolio full of money-losing investments in Croatia and elsewhere. The Austrian government last year took over Hypo Alpe Adria, the country’s sixth-largest bank, rather than let it go bankrupt.

Executives at the Austrian commercial banks point out that some countries in Eastern Europe have continued to perform well. In the Czech Republic, unlike Hungary or Romania, few residents took out loans in euros or Swiss francs. Poland has one of the fastest-growing economies in the European Union. Slovakia, a member of the euro zone, boasts the world’s highest per capita production of automobiles, with modern plants operated by Volkswagen, PSA Peugeot Citroën and Kia.

In addition, banks like Erste Group still earn much of their profit in Eastern Europe by following a conservative business model that would be regarded as almost quaint in the United States. Erste Group’s East European subsidiaries, for example, take deposits from retail customers and lend the money to other customers for mortgages or car loans, or to small businesses for investment. In the Czech Republic, Erste Bank’s deposits from individual customers are still greater than its outstanding loans. Because few customers in the Czech Republic hold loans in foreign currencies, bad loans make up only 5 percent of the total.

While Eastern Europe is not likely to return to the Asia-style growth rates seen in some countries up until 2008, the region will grow faster than Western Europe in coming years, bankers say.

“The underlying trend of faster growth than Western Europe is still there,” said Gernot Mittendorfer, chief executive of Erste Group’s Czech unit, Ceska sporitelna. “It might be a little bit slower, but it’s still an intact trend. This was the main reason to invest in the region and the reason is still there.”

The downside of the East European banking model is that bank loans, rather than corporate bonds or stock issues, are still the way most East European companies raise money. So bank problems easily become general economic problems.

Amplifying the fragility, lending in Eastern Europe is dominated by foreign banks, which also include institutions like Société Générale of France and KBC of Belgium. Any instability in the global banking system spreads quickly to Eastern Europe via the foreign parent companies.

“The banking sector is key to these economies,” said Ms. Diron of Ernst & Young. “Problems with the banks have immediate and drastic effects.”

Even though Austrian banks don’t own large numbers of Greek bonds, there is still a risk that Western Europe’s sovereign debt crisis could affect their investments in Eastern Europe. As the recent episode in Hungary showed, jittery markets react sharply to any signs of instability.

And there will be direct effects on Eastern European countries that border on Greece.

Many Albanians and Bulgarians work in Greece and send their earnings home, but may lose their jobs as the Greek economy slips into a recession that could last years.

“Greece looms large for southeastern Europe,” said Mary Stokes, an analyst for Roubini Global Economics who follows the region. “Contagion is a very real threat.”

Austrian Banks That Profited in Eastern Europe Now Share Region’s Problems

Market Snapshot: U.S. stocks move higher on financial-reform deal

NEW YORK (MarketWatch) -- U.S. stocks edged up Friday, wiping out only a portion of the week's heavy losses, as relief over a deal on new financial-regulation overhaul helped push stocks modestly higher.

The Dow Jones Industrial Average recently rose 21 points, or 0.2%, to 10,174. The measure was led by its financial components, with Bank of America up 3.6% and J.P. Morgan Chase up 3.5%.

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Easing investors' anxiety over the bill, House and Senate lawmakers reached agreement on a landmark package of financial regulations in the early morning hours on Friday.

While the legislation will impose new capital requirements on banks and for the first time extend comprehensive regulation to the over-the-counter derivatives market, banks will be required to spin off only their riskiest swap-trading operations.

Investors said the bill's passage through Congress eventually watered down some of the most severe provisions. Read about bank-reform efforts in Washington.

"The [lawmakers'] saber-rattling came out very strong and after everything is said and done, it [the bill] comes out in a more muted form," said Russell Croft, co-manager of the Croft Value Fund. "It doesn't seem as draconian as people feared it could be. People can feel like 'ok, they got their licks in on the financial system' and hopefully we can move on now."

Declines in the Dow's consumer components kept its gains in check as investors grew worried about how those sectors could be impacted by a slump in consumer spending. The government cited weaker consumer spending in a downward revision to the government's estimate of first-quarter economic growth.

Coca-Cola dropped 1.6% and Wal-Mart Stores slid 1 no fax needed payday loans.7%.

The Nasdaq Composite climbed 0.6% to 2,232. The Standard & Poor's 500-stock index climbed 0.7% to 1,081. The financial sector led the measure's gains while the consumer-staples sector lagged.

G-20 on radar and BP shares slide

Leaders from the Group of 20 are gathering in Toronto to discuss the state of the global economy as markets have begun reassessing the growth outlook. Markets are also focusing again on BP, whose shares are getting another hammering as the costs of the spill continue to increase.

The dollar fell against the euro and the yen, with the U.S. Dollar Index , reflecting the U.S. currency against a basket of six others, down 0.5% recently.

But demand for safe-haven Treasurys rose, with the 10-year note up to push its yield down to 3.11%. Crude-oil prices jumped to nearly $79 a barrel, while gold futures slipped.

Among stocks in focus, KB Home slid 8.4% after the home builder posted a 23% drop in second-quarter orders, providing further proof of a softening U.S. housing market.

In the tech sector, Research In Motion dropped 9.6% after the company reported a 20% rise in fiscal first-quarter profit but didn't ship as many BlackBerrys as analysts had anticipated. See more about RIM's results.

However, business-software giant Oracle climbed 4.3% after the company reported a 25% rise in fiscal fourth-quarter profit and said new software license sales rose 14%.

American depositary shares of BP dropped to a 14-year low and were recently trading down 6.2%. The oil giant said total costs of cleaning the Gulf of Mexico oil spill reached $2.35 billion.

BP took additional steps to bolster its cash and available credit, adding roughly $5 billion more to its war chest than previously disclosed, a person familiar with the matter told The Wall Street Journal.

After the market closes Friday, the Russell Indexes will post final lists of its re-balanced indexes in its annual re-shuffling of stocks.

Market Snapshot: U.S. stocks move higher on financial-reform deal

World stocks retreat on growth fears

LONDON (Reuters) – European and Asian stocks fell on Wednesday as poor U.S. home sales added to fears about the global economic recovery and optimism over China's new flexible yuan policy faded.

The euro held steady against the dollar but sentiment was fragile as concerns over Europe's banking system undermined flows into risky assets, giving support for safe-haven government bonds.

"With advanced economies tightening their fiscal policies, the risks of economic slowdown are rising," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.

European shares fell for a second day with pan-European FTSEurofirst 300 index (.FTEU3) shedding 0.8 percent by 0746 GMT.

Financial stocks were among the top losers on concerns about the European banking sector after French bank Credit Agricole (CAGR.PA) pushed back profit targets for its struggling Greek unit Emporiki (CBGr.AT) and said it would take a 400 million euro ($536.7 million) write-down as Greece fights its debt load.

The benchmark European index is up more than 62 percent from its lifetime low of March 9, 2009, as major economies return to growth. But it is only up 0.5 percent for 2010, having stumbled in April and May when worries about debt levels in Europe escalated.

Japan's Nikkei share average (.N225) closed down almost 2 percent, sliding to a one-week low and back toward a key support level. World stocks as measured by MSCI (.MIWD00000PUS) were 0.5 percent down.

U.S. stock futures rose 0.5 percent on some bargain-hunting after the previous session's falls.

U.S. stock indexes fell as much as 1.6 percent on Tuesday, hit by the poor housing data and the S&P 500 (.SPX) moving below its 200 day-moving average, which has been seen as a key technical support level for the markets' recent rally. (.N)

U.S. RATES TO STAY NEAR ZERO PERCENT

Sales of U fast cash advance.S. existing homes unexpectedly fell in May, sparking worries that the Federal Open Market Committee may offer a less upbeat economic outlook after a two-day meeting ends on Wednesday.

"That is a very sensitive area because don't forget that the whole financial crisis started with the U.S. housing market and the last thing we want to see is a renewed weakness in the U.S. housing market," said Mike Lenhoff, chief strategist at Brewin Dolphin.

The Federal Reserve, in a statement due at 1815 GMT, is widely expected to hold rates near zero and reiterate its commitment to keeping interest rates "exceptionally low" for an "extended period."

The dollar (.DXY) and the yen edged higher while the euro and high-yielding currencies like the Australian dollar were on the defensive as a recent risk rally appeared to have run its course and the euphoria from China's new yuan policy waned.

The euro was up 0.2 percent against the dollar at $1.2290, having dipped to as low as $1.2244 earlier.

The fall in equities helped spur demand for U.S. Treasuries and euro zone government bonds. Benchmark 10-year German Bund yields was down almost four basis points at 2.660 percent while the benchmark 10-year U.S. Treasury yield was about one basis point lower at 3.159 percent.

Energy shares (.GSPE) were also hit as oil prices fell on higher U.S. inventories, and after the Obama administration said it would appeal a court decision which overturned its moratorium on deepwater drilling in the wake of the Gulf of Mexico spill.

U.S. crude for August delivery slid 30 cents to $77.55 a barrel.

(Additional reporting by Tamawa Desai and Atul Prakash; Editing by Toby Chopra)

World stocks retreat on growth fears

Oil falls to near $77 as 4-week rally stalls

SINGAPORE – Oil prices fell to near $77 a barrel Tuesday in Asia as investors mulled whether the global economy is strong enough to justify extending a four-week rally.

Benchmark crude for July delivery was down 80 cents to $77.02 a barrel at midday Singapore time in electronic trading on the New York Mercantile Exchange. The contract gained 64 cents to settle at $77.82 on Monday.

Oil has jumped from $64 a barrel on May 25 on optimism Europe's debt crisis won't stymie the global economic recovery.

Goldman Sachs cut its crude forecasts, but still expects prices to rise this year as the global economy grows an estimated 4.9 percent in 2010. Goldman now expects prices to rise to $87 a barrel in three months, down from last month's forecast of $96.

Prices advanced to as high as $78.92 a barrel Monday on investor expectations China's move over the weekend to strengthen its currency would boost crude demand.

Societe Generale said it expects the yuan to gain between 3 percent and 5 percent by the end of the year, not enough to spark significant new consumption in China guaranteed personal loan approval.

"Chinese demand has already exceeded expectations; it has been strong and we had already forecast it to continue that way," the firm said in a report. "We simply do not expect a modest appreciation in the yuan to make any appreciable difference in demand."

Societe Generale forecasts crude will average $80 a barrel in the third quarter and $85 in the fourth.

In other Nymex trading, heating oil fell 1 cent to $2.1355 a gallon, gasoline was steady at $2.1430 a gallon and natural gas was up 0.4 cent at $4.877 per 1,000 cubic feet.

Brent crude was down 84 cents at $77.98 on the ICE futures exchange.

Oil falls to near $77 as 4-week rally stalls

Traders go World Cup crazy as markets languish

NEW YORK (Reuters) – With the U.S. team playing in the World Cup tournament, Wall Street traders are taking advantage of mediocre volume to focus on the games, with trading floor atmosphere anything but dull.

U.S. equity markets and indexes have churned excruciatingly around the break-even mark, with the S&P 500 index struggling to move in either direction for the last three days. After stronger volume in late April and May, trading activity this week has tapered off significantly.

But that hasn't lowered the level of excitement in trading rooms.

"A lot of people are following the game and rooting hard," said Gordon Charlop, managing director at Rosenblatt Securities from the floor of the New York Stock Exchange.

Traders around him roared as the USA neared Slovenia's goal in their nail-biting 2-2 tie on Friday.

Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey said the World Cup has become a permanent fixture in the office.

"These games are really getting everybody fixated," he said. "We still have three other networks on but we now have football as one of the four options."

But some employers would prefer their traders focused on the stock market rather than the World Cup. "We tried (to watch the games) once and the boss got angry so we're keeping tabs on it on the Internet," said one trader.

Still, signs are many traders are thinking about their bets on football just as much as their stock market bets.

"We're part of a pool and I drew England in the pool and shorted everyone else," said Tom Schrader, managing director of U.S. equity trading at Stifel Nicolaus Capital Markets in Baltimore, who seemed confident with his draw free business cards.

Schrader quipped that a joke currently doing the rounds in his office is that America's new favorite color is green, a reference to England goal keeper Robert Green, who gifted the USA its "1-1 win" in a howling error on Saturday.

Kevin Kruszenski, head of listed trading at KeyBanc Capital Markets in Cleveland, whose children are keen football fans, was more sympathetic.

"Poor goalie, it looked like a fluke," he said. "My son plays soccer and he plays goalie and that's a tough thing to watch. Sometimes things just get by you."

Kruszenski said the buzz around the World Cup is greater than he's ever seen it as "the beautiful game" conquers the world's last great holdout. Even the name "football" is gradually gaining traction here for the game commonly known as "soccer," but it's unlikely to be confused with the popular American game of the same name.

"I've seen some gambling sheets floating around here, guys making some bets, more so then I've ever seen," he said. "Just about everybody I work with here (have) kids (who) play, whereas when I grew up nobody played, we all played baseball."

Kruszenski attributes the low volume to a seasonal lull and expects a flurry of activity in markets when corporate earnings season begins in early July. That may depend on how far team USA advances in the tournament.

(Reporting by Edward Krudy; Additional reporting by Rodrigo Campos; Editing by Dan Grebler)

Traders go World Cup crazy as markets languish

EU leaders try to fix long-term economy problems

BRUSSELS – European Union leaders are using a Thursday summit to try to fix deep, long-standing problems with their economy by forging tougher rules to rein in government overspending — and prevent another debt crisis.

Though the summit's formal focus is on long-term solutions, the 27 EU leaders also face more immediate worries about potential losses hitting European banks and continuing speculation about market pressure pushing Spain to seek financial help.

Spain has said it will soon publish results of a review of how much its banks could lose if the economy worsens and house prices tumble further, in an effort to calm market worries that the government may ultimately have to rescue local banks.

Diplomats say most European governments — except Britain and the Czech Republic — are also in favor of publishing banking "stress tests" for the first time, as the U.S. did in 2009 to show how much capital the country's 19 biggest banks needed to raise to cope with more losses.

"We see that the markets are unsettled and that confidence between banks is tattered," German Finance Ministry spokesman Michael Offer told DAPD news agency personal loans for bad credit. "Transparency could be helpful as a stabilizing factor."

He said EU finance ministers would decide the details on how and when the tests would be done by national bank supervisors.

EU nations are trying to calm volatile markets worried about Europe's soaring debts — both public and private. Greece needed a bailout from EU governments and the International Monetary Fund to avoid an embarrassing default in May.

A massive "shock and awe" euro750 billion ($1 trillion) financial rescue package for other indebted countries has failed to halt the euro's slide in recent weeks as markets eye wider problems across Europe: a banking system that may not have fully owned up to losses from the 2008 crisis and the prospect of slow economic growth for years ahead.

EU leaders try to fix long-term economy problems

FedEx issues conservative outlook, 4Q income up

NEW YORK – FedEx is offering a conservative prediction for net income this quarter and the next fiscal year, despite strong fourth-quarter results.

The Memphis, Tenn., company expects to earn 85 cents to $1.05 per share for the quarter ending in August. Analysts are expecting $1.03 per share.

FedEx Corp. sees net income of $4.40 to $5 per share for fiscal 2011. Shares fell 2.8 percent in premarket trading.

In the quarter ended in May, the company earned $419 million, or $1 payday loan lenders.33 per share. It lost $876 million, or $2.82 per share a year earlier.

Revenue jumped 20 percent to $9.43 billion.

FedEx said international express shipments jumped and its Ground division improved. But its freight unit lost money and employee costs rose.

FedEx issues conservative outlook, 4Q income up

Senators call on BP to set up $20B special account

WASHINGTON – Democratic senators want BP to set aside $20 billion to pay for cleanup and other costs from the Gulf oil spill.

Senate Majority Leader Harry Reid, D-Nev., plans to send BP a letter on Monday proposing the account. That's two days before BP executives meet with President Barack Obama and three days before chief executive Tony Hayward testifies at a House hearing guaranteed payday loan.

A copy of the letter was released Sunday by Reid's office.

BP has promised to pay for damages. But Obama also wants BP to create a special escrow account, though he hasn't suggested an initial amount.

Senators call on BP to set up $20B special account

Geithner says world economy needs China yuan reform

WASHINGTON (Reuters) – Treasury Secretary Timothy Geithner, delivering his sharpest criticism of China's exchange rate policies in months, said on Thursday the yuan's value was "critically important" for the world economy.

But Geithner, testifying before the U.S. Senate Finance Committee, confessed that he didn't know when China would allow the yuan to rise again.

"I, to be honest, do not know, whether we're at the point now when we're going to see meaningful progress in the near term," Geithner said.

The U.S. Treasury chief said Beijing's shackling of the yuan to the dollar for the past two years was causing other Asian countries to intervene in foreign exchange markets at record levels.

"The distortions caused by China's exchange rate spread far beyond China's borders and are an impediment to the global rebalancing we need," Geithner said. "A more flexible RMB (yuan) will allow market forces to play a more active role over time in facilitating strong, balanced and sustainable growth globally."

Geithner's remarks struck a more critical tone than he has used for the past two months, and were made at a hearing attended by a number of senators who have proposed punitive trade legislation aimed at China.

The U.S. Treasury secretary since early April had taken a softer approach toward China, delaying a much-anticipated report on whether Beijing manipulates the value of its yuan.

Instead, Geithner, who said the decision was "the right thing to do," chose to wait for a series of international meetings, including U.S.-China bilateral talks in Beijing at the end of May, and a Group of 20 leaders summit in Toronto later this month.

Lawmakers have become increasingly impatient with the lack of movement and have called for a tougher line on the yuan paydayloans. China had allowed the yuan to rise gradually from mid-2005 to mid-2008, but had kept it unchanged since then, when the financial crisis worsened.

"America can no longer afford to be complacent. We no longer have the luxury of pursuing failed approaches," said Senate Finance Committee Chairman Max Baucus, a Montana Democrat. "We must rethink the U.S.-China economic relationship. We must act, not just talk."

CHINA EXPORTS JUMP

But new Chinese data released on Thursday showed a big jump in exports in May, putting pressure on President Barack Obama to placate critics.

In his testimony, Geithner said the Obama administration wanted China to change policies that disadvantage American companies and to provide a more level playing field for U.S. products and investments.

He vowed the administration would "apply forcefully" all remedies available under U.S. law to curb China's unfair trade practices, including anti-dumping and countervailing duty complaints.

But, echoing a refrain he has used since April, he said Beijing would find it in its own interest to have a more flexible yuan, also known as the renminbi.

"A stronger renminbi would benefit China because it would boost the purchasing power of households and encourage firms to shift production for domestic demand, rather than for export," he said. "A more market-determined exchange rate also means that China will be able to pursue a more effective, independent monetary policy, which is particularly important now, with China's economy facing a risk of inflation in goods and in asset prices."

(Reporting by David Lawder, Editing by Chizu Nomiyama)

Geithner says world economy needs China yuan reform

Reports find widespread failure in Irish crisis

LONDON (MarketWatch) -- Two reports into Ireland's banking crisis have found that the government, financial regulator and banks must all shoulder some of the blame for the country's predicament.

Patrick Honohan, governor of the Central Bank of Ireland, said there was "comprehensive failure" among bank's management.

He said bankers "ignored sound business practices, instead incurring huge external liabilities in order to support a credit-fuelled property market and construction frenzy."

Government policy, on the other hand, encouraged the property boom, with politicians relying too heavily on unsustainable growth in construction to fund spending, Honohan said.

"This helped create a climate of public opinion which was led to believe that the party could last forever," he added.

However, the central banks and Financial Services Authority also came in for heavy criticism for being "too deferential and accommodating" to banks and for spending too much time reviewing firms' risk-management procedures and governance, and not enough time looking at the actual figures and capital levels.

Once the banks have transferred their property-related loans to the National Asset Management Agency -- the Irish bad bank -- the government will have issued 40 billion euros or more in guaranteed NAMA bonds and written off around €25 billion in unrecoverable capital injections into Anglo Irish Banks and Irish Nationwide Building Society no fax cash advance.

"Apart from the experience of Iceland, this has turned out to have been the poorest performance of any banking system during the current global downturn," said Honohan.

In a separate government-commissioned report, economic consultants Klaus Regling and Max Watson said the financial crisis was clearly influenced by the global credit crunch, but in the most crucial ways was "home-made."

"Official policies and banking practices in some cases added fuel to the fire," the report found.

"Fiscal policy, bank governance and financial supervision left the economy vulnerable to a deep crisis, with costly and extended social fallout."

Reports find widespread failure in Irish crisis

Financial Stocks: Financials may stretch three-day losing streak

BOSTON (MarketWatch) -- The U.S. financial sector slipped into negative territory Tuesday, taking its week-to-date loss to about 3% as investors remain cautious on riskier assets.

The Financial Select Sector SPDR Fund rose at Tuesday's open after falling the three previous sessions on worries over Europe's debt problems and a slowdown in the U.S. economy. However, the sector turned red along with the overall market in late-morning trade.

Bank stocks failed to get a lift from Federal Reserve Chairman Ben Bernanke saying he doesn't envision a double-dip recession. See full story on the Fed chief's statements.

Goldman Sachs Group Inc. shares continued to lose ground Tuesday in the wake of the bank receiving a subpoena from the Financial Crisis Inquiry Commission. The stock is down nearly 20% so far in 2010.

Conversely, Ambac Financial Group Inc. shares were up more than 10% in morning action after the bond insurer said it has commuted all of its remaining $16 payday loans with no fax.4 billion of exposure to collateralized debt obligations of asset-backed securities.

Elsewhere in the financial sector, a pair of stocks was boosted by upgrades at Stifel Nicolaus. MPG Office Trust Inc. and SunTrust Banks Inc. were both upgraded to hold from sell.

"We are upgrading our rating on SunTrust to hold from sell in the face of the recent and significant share price weakness," the analysts wrote in a research note Tuesday. "As such, we no longer have any sell ratings within our large-cap bank coverage."

Visa Inc. shares were slightly negative Tuesday. The credit-card network in a filing said U.S. aggregate payments volume growth rose 15% in May from the year-ago period.

Financial Stocks: Financials may stretch three-day losing streak

Hot News: Businesses, homeowners appeal Michigan tax bills

Growing ranks of long-term jobless face tough odds

WASHINGTON – If you lose your job these days, it's worth scrambling to find a new one — fast. After six months of unemployment, your chances of landing work dwindle.

The proportion of people jobless for six months or more has accelerated in the past year and now makes up 46 percent of the unemployed. That's the highest percentage on records dating to 1948. By late summer or early fall, they are expected to make up half of all jobless Americans.

Economists say those out of work for six months or more risk becoming less and less employable. Their skills can erode, their confidence falter, their contacts dry up. Their growing ranks also will keep pressure on Congress to keep extending jobless benefits, which now run for up to 99 weeks.

Overall, the economy has created a net 982,000 jobs this year. But for Jeff Martinez and the record 6.76 million others who have struck out for six months or more, their struggles are getting worse, not better.

Martinez, 40, a salesman in Washington, D.C., says he's logged more than 200 interviews in the past three years. Decked out in a dark navy suit and Burberry tie, Martinez projects drive and a zest for deal-making. And yet the most urgent deal of his career — finding a job — eludes him.

"You have days where you feel motivated and hopeful and optimistic," he says. "Then there are other days, you really lose the faith and think, `I'm never going to get another job. Ever.'"

What's causing the rising ranks of the long-term jobless to exceed the pace of other recessions?

Mainly, it's the depth and duration of the job-slashing this time. Since the recession began in December 2007 through May this year, a net 7.4 million jobs have vanished. The unemployment rate has surged nearly 5 percentage points: From 5 percent in December 2007 to 9.7 percent in May.

By contrast, in the last severe recession, the rate rose less sharply over a shorter period: From 7.2 percent in July 1981 to 10.8 percent at the end of 1982.

Lawrence Mishel, president of the Economic Policy Institute, points to the "sheer scale of the falloff in demand for workers" this time. It's left more people out of work for longer stretches. And it's intensified competition for each opening.

"It's a cruel game of musical chairs," Mishel says.

To lower the unemployment rate from the current 9.7 percent to a more normal 6 percent would require roughly a net 15 million new jobs by the end of 2016, estimates Brian Bethune, chief U.S. financial economist at IHS Global Insight.

Few think that's likely.

One factor behind the growing proportion of the long-term unemployed is the erosion of their workplace skills — or employers' perception of it. It's hard to find work in a tight job market when your skills are seen as stale pay day loans.

For some occupations in particular, such as computer technicians or accountants, people jobless for many months can lose pace with technological changes or federal rules.

Among those who fear losing their edge is Stephan Azor, 30. He's looking for information technology work, perhaps overseeing a company's computer system. He was laid off eight months ago as a system administrator for a defense contractor.

"Technology changes every six months, so there are things I have to look up and learn," says Azor, who lives in Washington.

Other reasons for the growing proportion of the long-term unemployed:

• Jobs wiped out by the Great Recession that aren't coming back. In industries like home construction, manufacturing and retail, fewer workers will be needed even after the economy has fully recovered. One reason is higher productivity: Companies have managed to produce the same level of goods or services with fewer workers. Economist Marisa DiNatale of Moody's Economy.com notes that people out of work in those industries may lack the skills for other jobs that are becoming available.

• The breadth of the recession, which struck every area of the country, makes it harder for job hunters to move to another region in expectation of finding a job. Complicating the matter, the housing bust made it difficult for people to sell their homes and move elsewhere to take a job, economists say.

A study by the National Employment Law Project found that older workers — those 45 and up — make up the largest slice of the long-term unemployed. African-Americans make up 20.8 percent. And men account for six out of 10.

Martinez was living in Los Angeles and pulling in $200,000 a year from a media sales job. Three years ago, he lost it.

Burning through cash, Martinez had to move back home with his parents in Sterling, Va., outside Washington. He landed another media sales job in the area in 2008, at the height of the financial crisis. But four weeks later, he was laid off.

By his count, Martinez has sent out 2,500 resumes in the past year. He's researched would-be employers and written personalized cover letters. He hit a dry spell at the start of this year. Since then, Martinez says the job climate seems to have improved. He's interviewing again. But it's emotionally draining.

"It's tough not to have an interview, and it's just as tough to go on five or six or seven interviews and not get hired," he says.

___

AP Business Writer Christopher Leonard in St. Louis contributed to this report.

Growing ranks of long-term jobless face tough odds

ALL BUSINESS: Stock analysts often miss the mark

NEW YORK – The story of corporate America's comeback has a nice ring to it. That is, if it can last.

Wall Street stock analysts think it will. They're almost chirpy the way they keep pumping up their earnings estimates and dismissing the stock market's volatility, the financial crisis in Europe and risks to the U.S. economic recovery.

But their track record shouldn't give anyone confidence. History shows analysts rarely get it right when it comes to predicting how much companies will earn.

"Analysts almost never see a recession coming," says Ed Yardeni, who runs his own investment and economics consulting firm.

Yardeni says the problem is that analysts get most their information from the companies they cover. Corporate managers have every incentive to stay positive for as long as they can.

Analysts then use what they're told to advise investors on whether to buy or sell stocks, and forecast corporate earnings, which are closely followed by investors to see if companies meet, beat or miss analysts' estimates.

New research from the consulting firm McKinsey & Co. found analysts tend to be overoptimistic, slow to revise their forecasts to reflect new economic conditions and prone to making inaccurate predictions especially when economic growth declines.

Looking at data from the last 25 years, McKinsey found analysts have estimated annual earnings growth to be about 10 percent to 12 percent for Standard and Poor's 500 companies, but actual growth has only been about 6 percent.

Analysts only seem to hit the mark with their estimates in the strongest economic times. That happened during 2003 to 2006, when the economy was raging and the stock market set off on a record-setting run.

Yardeni isn't betting on a return of the recession, but he's increasingly concerned about the state of the global economy. "Every day for the last month I've been losing confidence," says the one-time bull.

He worries that the European debt crisis could be a catalyst for a return of financial market contagion. If that causes credit markets to freeze up like they did in the fall of 2008, Yardeni thinks that could hit U.S. companies hard because it would constrain their ability to borrow.

On top of that, the strong dollar could hurt U fast cash advance loan.S. exports by making American goods more expensive abroad. U.S. consumers are still watching their spending amid high unemployment rates and a weak housing market.

Analysts seem willing to look beyond those headwinds. Even as investors bailed out of the stock market at a ferocious pace in May, analysts reacted in the opposite way. Earnings estimates rose by 0.7 percent last month for 1,647 public companies tracked by Thomson Reuters. Stock prices for that sample dropped by 8 percent over the same time period.

It's unusual for analysts to keep raising their earnings estimates. Typically forecasts start high at the beginning of the year, and are reduced and refined as analysts get more clarity on current conditions.

Analysts generally believe the earnings boom will continue. However, many of them are likely taking their cues from upbeat corporate leaders, who say problems abroad aren't hurting their businesses. As Yardeni and other cautious observers say, it's hardly clear that booming growth will go on.

During the first quarter, corporate profits as measured by the government rose 31 percent over the same period a year ago, the biggest gain since 1984, according to Barclays Capital.

That jump was fed in part by improved productivity, but that can't last forever because companies will struggle to squeeze more work out of their lean staffs. Ultra-low interest rates have also bolstered earnings by making borrowing cheap. That benefit will eventually run out as rates begin to rise.

Maybe the good times will go on, but analysts will likely be the last to acknowledge if they don't.

"There are reasons for analysts to be optimistic," says Kent Womack, a finance professor at Dartmouth College's business school who has studied stock analysts' work extensively. "They haven't seemed to figure out why they should be skeptical."

In the meantime, the rest of us had better be careful.

___

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org

ALL BUSINESS: Stock analysts often miss the mark

French Trial Begins for Former Vivendi Chief

PARIS (Reuters) — Jean-Marie Messier, the emblematic entrepreneur who created the media group Vivendi out of a water company through a spate of leveraged acquisitions that nearly choked the company, admitted in court Wednesday that he had made strategic errors.

The 53-year-old Frenchman, ousted from Vivendi in 2002, is standing trial, accused of giving out misleading information, manipulating stock prices and misappropriating company funds between 2000 and 2002, when the group bought Universal Studios, USA Networks and other telecommunications assets.

If convicted, he could face a sentence of up to five years in jail and a fine of as much as 375,000 euros (about $457,000).

On the first day of his trial, which is set to last three weeks, Mr. Messier said his idea to create a global group based on the expected convergence between communication channels and content had been good but premature.

“Did we make errors? Yes,” he said. “As chairman I take responsibility for that, especially a lack in foresight.” But he also blamed financial analysts for the buzz around the merger activities under his stewardship as he turned the Générale des Eaux water and waste treatment conglomerate between 1996 and 2002 into a $51 billion global media empire at its high point.

Vivendi shares traded at 138 euros in the first quarter of 2000 and fell to below 10 euros in the first half of 2002.

“You can be proud without being arrogant,” Mr. Messier told the court, at times his voice breaking with emotion. “At that time, I gave an image of arrogance and not of pride.”

Mr. Messier said the board did not function well.

“One of the failures, in relation to the ambitions that we could have had, was that the events turned the board meetings into a clash of clans,” he said.

The man who once branded himself “J6M,” for “Jean-Marie Messier me myself master of the world” in French, told the court he has a monthly income of 25,000 euros from his consulting company where he employs 20 people paydayloans.

The plaintiffs, small investors who are asking for combined 10 million euros in compensation, called the court case a model trial.

“Directors of listed companies have duties and obligations toward us — to tell us the truth, all the truth and nothing but the truth, even if it is not pleasant to hear,” Didier Cornardeau, chairman of a shareholders’ lobbying group, told reporters at the court.

Mr. Messier was ousted in 2002 after the finances of the group deteriorated heavily. His successor has sold off assets in a restructuring deal and the firm is profitable again.

Vivendi is a co-plaintiff, and its lawyers can ask questions.

Mr. Messier stands accused of having tried to hide the pending catastrophe in the company’s communications, of influencing the stock price by a massive buy-back of shares in the aftermath of the Sept. 11, 2001, attacks to stem a steep share slide, and of having put in place a golden parachute of 20 million euros.

Four other former executives are also standing trial — including an ex-chief financial officer. Guillaume Hannezo — as well as two other people, including the Canadian billionaire Edgar Bronfman Jr., the chief executive of Warner Music group, who was deputy chairman of the board at Vivendi.

All are pleading not guilty.

If found guilty, they are unlikely to face actual imprisonment but could get suspended sentences, a kind of probation under French law. The court can also order them to compensate shareholders hurt by any fraud.

The French criminal case is separate from a United States class action lawsuit also under way. An American jury in January found Vivendi — but not Mr. Messier and Mr. Hannezo — liable for misleading investors about its financial condition from October 2000 to August 2002. The company is appealing the ruling.

French Trial Begins for Former Vivendi Chief