The Irish Independent reports that the European Central Bank (ECB) will have to start raising interest rates before employment picks up in the eurozone, in order to prevent inflation, German Bundesbank president and council member Axel Weber said yesterday.
But a rise in borrowing costs is still some way off, Mr Weber signalled, in one of the most detailed comments so far on the difficult task of withdrawing central bank stimulus to banks and the economy.
He indicated that the first step would be to start scaling back long-term ECB loans to the banks, which are part of the emergency stimulus measures.
The ECB has been lending banks as much money as they want for up to 12 months since the collapse of Lehman Bros last October.
Mr Weber said the withdrawal of emergency liquidity was likely to play an important role next year and indicated it may precede interest-rate increases, which will come when the ECB sees risks to price stability.
"We won't wait until employment picks up or unemployment rates fall to tighten," Mr Weber said.
"That would definitely be too late. Our monetary policy must be ahead of the curve, not behind."
Interest rates on German two-year loans rose after Mr Weber's remarks, indicating that traders thought they indicated a longer period of low interest rates than they had been betting on.
Risk
Analysts at Capital Economics said yesterday that deflation, not inflation, remained a threat to the euro-area economy and a particular risk in Ireland and Spain.
Germany and France appeared to be in the least danger of deflation, Capital's European economist Ben May said. "There is a significant chance that the region may suffer from large and prolonged divergences in economic performance.
"Not only would this provide the ECB with an additional headache over the timing of the withdrawal of its stimulus measures, but it could even prompt the worst affected currencies to consider abandoning the single currency," he said.
There were signs of that divergence yesterday as the Bank of Spain estimated that the country's GDP fell 0.4pc in the third quarter, leaving it 4.1pc down in the year.
But other figures showed European factories increased capacity usage for the first time in two years; confidence in the economic outlook rose to the highest in 12 months; and German unemployment showed a surprise drop to 8.1pc.
The Irish Independent also reports that developer Bernard McNamara will begin a legal action against the Dublin Docklands Development Authority (DDDA) on Monday, pitting one of the State's biggest property developers against one of our most controversial semi-state bodies, and shining a bright light on what was once the most expensive property deal in Irish history.
The case will centre on a 2006 deal to buy the 24-acre Irish Glass Bottle site in the Dublin suburb of Ringsend for €412m.
Through the deal, Mr McNamara teamed up with financier Derek Quinlan and the DDDA to spend around €150m and borrow a further €295m to buy the site, which the DDDA now values at just €60m
Obligations
Mr McNamara's lawyers argue that the DDDA failed to fulfil its obligations under the agreement to jointly develop the site.
Mr McNamara, who is seeking the return of €62.5m invested by a company he heads called Donatex, will also argue that the DDDA failed to get planning permission for the site.
The Ailesbury Road resident and former Fianna Fail election candidate bought the stake in the Ringsend site with a €58.5m loan from Davy Stockbrokers clients at a time when he had been aggressively extending his portfolio, which included everything from the €450m Elm Park development in Dublin 4 to the €60m buyout of Champion Sports and a stake in the Superquinn chain, which he has since sold.
He is taking on the DDDA, which lost both a chief executive and chairman earlier this year, and has been unable to fill the chief executive post since it became vacant in July.
Last year, the High Court ruled that the authority had "acted outside its powers" in granting 'fast-track' permission to developer Liam Carroll to build a €200m new headquarters for Anglo Irish on the north quays.
A further finding against the DDDA could be the death knell for the organisation, which had been set up to regenerate one of the capital's poorest areas.
Environment Minister John Gormley admitted earlier this month that the DDDA's €107m debt and equity investment in the bottle site was now worth just €16m.
"We are in extraordinary times and this site was bought at the very height of the boom. We are now at the lowest end of the market," Mr Gormley told the Dail.
"I have heard from my officials and I will say that as I understand it, the value of this site has depreciated by up to 85pc. That is my information and it is accurate," he added.
Although the DDDA got a valuation report on the site from auctioneers Lisney some time ago, it has not yet published the valuation.
Mr McNamara will be represented by Kilroy Solicitors, while the DDDA will be represented by A&L Goodbody.
The Irish Times reports that Minister for Finance Brian Lenihan has moved to allay fears that the establishment of the National Asset Management Agency (Nama) could be delayed, saying it should proceed as timetabled unless it is bogged down by a lengthy Dáil debate.
Shares in the two main banks, which fell heavily on Wednesday, recovered some ground yesterday.
AIB closed up 10 cent at €1.95 and Bank of Ireland was 18 cent stronger at €1.83. Their falls on Wednesday – of 20 per cent and 25 per cent respectively – had been attributed in part to Mr Lenihan’s flagging of possible delays in the establishment of Nama.
But Mr Lenihan changed tack yesterday when speaking to journalists ahead of an address to an Irish Banking Federation conference in Dublin. “We plan to complete this legislation as quickly as possible,” he said. “The legislation can be enacted by the middle of November. There is no difficulty. It’s a matter of weeks.
“The Government has made it clear that this debate will be closed next week. We will move into the next stage of the debate in the Dáil and then to the Seanad.”
Mr Lenihan also said he believed Nama could meet a deadline to start transferring the biggest loans from the banks by the end of the year.
He said too much had been read into his comments, and he did not believe there was a “direct linkage” between the performance of Irish financial stocks and what he had said.
“If you look at what happened to bank shares yesterday [Wednesday], it was part of a worldwide trend,” he said.
“There were very poor results at Santander, a very important Spanish bank . . . In general, as we know, bank shares tend to move because of international events and this is no exception.”
In his address to the conference on rebuilding confidence in the banking system, Mr Lenihan said three issues the Government considered fundamental to ensuring Ireland’s economic recovery – the ratification of the Lisbon Treaty, Nama and a strong December budget – were well on course.
He said the decisive Yes vote in the Lisbon referendum had instilled a measure of confidence in Ireland and its significance could be seen by the fact that the National Treasury Management Agency floated a 15-year bond issue worth €7 billion just days after its ratification.
AIB chairman Dan O’Connor said the lender could face “serious consequences” from negotiations with the EU over the Government’s capital injection in the bank earlier this year.
“We have seen what’s happened this week in terms of ING,” Mr O’Connor told reporters at the conference, referring to EU demands on the Dutch financial-services company. “Draconian measures have been taken.”
ING agreed earlier this week to EU demands that it sell its insurance units to secure approval for a state bailout.
The European Commission is reviewing bailouts to ensure banks that get government money do not have an unfair advantage.
Mr O’Connor said AIB, which received €3.5 billion from the Government this year, expects three to six months of active negotiations with EU authorities once it submits its restructuring plan.
Mr O’Connor said the sale of assets, strategic shareholding, public markets and Government support would be used to generate adequate capital levels. “We don’t know what’s going to happen to our organisation but certainly it’s going to have serious consequences.”
Mr O’Connor declined to comment on the potential consequences, adding that markets were “surprised” by the ING decision.
The Irish Times also reports that the Irish Hotels Federation (IHF) has called on the Government to impose a blanket 30 per cent reduction in local authority rates to help stave off a crisis in the tourism industry.
In its pre-budget submission, the IHF said hotels and guesthouses across the country were saddled with excessive public sector and local authority charges, and that reducing these charges was the only way to ensure a return to profitability and competitiveness for the sector.
Chief executive of the IHF, John Power, said: “Hotels and guesthouses are struggling to deal with excessive rates imposed by local authorities that have little regard to the disastrous conditions facing these businesses.
“So far, the Governments approach to tourism has shown inaction and an unwillingness to adapt policy to address the needs of tourism businesses which are struggling for survival.”
The Valuation Act provided for a revaluation of the rateable valuations of all commercial premises across the country when it came in to effect in April 2002.
However, just one revaluation appraisal, for South Dublin County Council, has been completed in the seven years since the inception of the Act.
According to the IHF, the Valuation Office reduced the rates liability of hotels in South Dublin County Council by an average of 30 per cent. This was in sharp contrast to the marked increase in annual rates on valuation imposed by two-thirds of county and city councils in 2009,
A Fáilte Ireland report showed that overseas tourist visits to Ireland decreased by 4 per cent to 7.4 million in 2008.
To reverse the fall-off in numbers, the IHF has also recommended abolishing the €10 air travel tax, extending the employment subsidy scheme to the tourism sector, removing the seven-year exit barrier for investors who provided capital for hotels under the capital allowances scheme, and extending the State’s over-66 free travel provisions to all EU citizens.
The IHF said that tourism is Irelands largest indigenous industry, employing over 200,000 people across the country and making a direct contribution of €6.3 billion to the Irish economy in 2008.
The Irish Examiner reports that Environment Minister John Gormley has been criticised for "extreme irresponsibility" after suggesting "a type of civil war" existed between workers in the public and private sectors.
The Green Party leader made the comments in response to questions relating to the ongoing social partnership talks between the Government and trade unions.
At the heart of the talks is the need to axe €4 billion from Exchequer spending.
Commenting on the talks Mr Gormley said he did not want to get into a divisive row with the trade unions, but suggested the country already had "a type of civil war... between the private and public sectors".
"I don’t want to exacerbate that any further. But it is clear now that we are coming into a difficult budget. We have to make difficult decisions. I hope, I genuinely hope, that we can continue with social partnership.
"I would say to people who are representing the public sector, do we take cuts or is it a case of having your cheques bounce because we’ve nearly got to that stage and those people who believe that it’s impossible, that we could go on, that we could continue to borrow that amount of money and not face dire consequences down the road, are not living in the real world, I’m afraid," said Mr Gormley.
On his perceived gap between the private and public sectors the minister said he had never seen such divisiveness in his time in politics and it was "very regrettable".
"You’re getting this clear break down the middle," he said in an interview on Newstalk radio.
"I don’t believe, frankly, it’s healthy. I don’t believe we have a public sector Ireland and a private sector Ireland: we have one Ireland where we need to work together, all of us," he said.
"If we go down this particular route and say, well, we’re looking after our section of society, it becomes a sectoral war and it’s not going to lead to the sort of consensus that is now required.
"That’s what partnership was originally about, getting that consensus. That consensus seems to be gone out the window at this stage."
Responding to the comments, Bernard Harbor of the country’s largest solely public sector union said the comments from a Government minister were extremely irresponsible.
"There is no civil war between the public and private sectors," said Mr Harbor.
"The only divide is between those who have caused the recession, the bankers and the speculators, and those who are suffering as a result of it."
Joe O’Flynn of SIPTU, which represents both public and private sector workers, said much of the information being put into the public domain on the perceived gap between the two sectors was instituted by organisations of the state.
"The Economic and Social Research Institute (which found pay gaps of 26% between the two sectors) has been the master of it in the past few months," said Mr O’Flynn.
"They are trying to drive a rift between the two sets of workers. We have been working on the basis that all workers, whether public or private, have all been affected by the downturn," he said.
The Financial Times reports that Eurozone economic confidence rose for the seventh consecutive month, beating market expectations and rising to its highest level in more than a year.
The European Commission’s “economic sentiment” indicator jumped from 82.8 in September to 86.2 this month, an unexpectedly large increase after sluggish growth last month.
The indicator remains below long-term averages but has now surged by 22 points since its March trough, the largest half-year rise since the series began in 1985.
Most eurozone states contributed to the improvement, notably Italy (up 3.8 per cent), Germany (3.4 per cent) and France (3 per cent). Separately, the UK rose 3.2 per cent.
The bulk of the improvement came from bullish sentiment in industry, with production expectations much higher than in previous months. Factory utilisation rates, which had declined for six consecutive quarters, were slightly higher.
Consumer confidence also improved, albeit more modestly, as worries about future employment prospects remained.
Martin van Vliet, analyst at ING, commented: “All in all, despite the strong further improvement in economic sentiment, it remains well below it long-term average [of 100], which also happened to be the level seen at the onset of the ECB’s previous rate hiking cycle in December 2005.”
A separate EU survey pointed to a continuing increase in households’ saving rates and a continuing decline in investment rates for both households and businesses in the second quarter.
Eurozone households are now saving 16.5 per cent of their disposable income, the highest figure in more than a decade.
A survey of eurozone retailers also pointed to a rosier economic outlook, outlining flat like-for-like store sales compared with September.
The month-on-month purchasing managers’ index rose from 48.6 to 50.0 in October – the “no change” mark – breaking 16 months of uninterrupted falls. However, year-on-year expectations remain well below long-term trends.
Chris Williamson, chief economist at Markit, which compiled the survey, said: “The October retail PMI points to a stabilisation of euro area retail sales. But this masks very divergent patterns within the primary member countries, as robust growth in France contrasted with falling sales in Germany and Italy.
“Price trends also varied markedly, with record price discounting by wholesalers pointing to a heightened risk of deflation in Germany, while accelerating growth of prices was evident in France.”
The FT also reports that US financial groups with operations in London are increasingly concerned that British regulators’ tough stance on pay could create a two-tier system in which UK bankers’ bonuses are smaller and spread over a longer period than those of American colleagues.
Wall Street executives say the line taken by the UK’s Financial Services Authority contrasts with the more flexible approach of the Federal Reserve and could lead to uneven pay scales for bankers in similar jobs on opposite sides of the Atlantic.
“We have legitimate concerns on how we can pay our people fairly,” said a senior banker at a big US bank. “The FSA appears to be more heavy-handed than the Fed so which guidelines should we be following?”
Profits at many financial groups have rebounded sharply of late, heralding the promise of big pay-outs at US and European banks such as Goldman Sachs, Morgan Stanley, Credit Suisse and Deutsche Bank.
The Fed and the FSA have issued compensation guidelines in an effort to clamp down on lucrative pay structures widely blamed as one of the causes of the financial crisis.
While the Fed proposals steered clear of a benchmark – instead asking the top 28 banks in the US to show their pay schemes did not encourage excessive risk-taking – the FSA code requires banks to comply with specific principles by January, or face enforcement action.
The UK has also already forced Britain’s top five lenders – HSBC, Barclays, Standard Chartered, Lloyds Banking Group and Royal Bank of Scotland – and 11 foreign banks – Deutsche, JPMorgan Chase, Goldman, Citigroup, Bank of America, Morgan Stanley, Société Générale, BNP Paribas, Nomura, UBS and Credit Suisse – to sign up to pay reforms agreed at the G20 meeting in Pittsburgh last month.
Key elements of those include deferring 40-60 per cent of bonuses over three years, potentially reducing the total level of cash awards paid out for 2009, and outlawing so-called “multi-year” guaranteed bonuses.
“The FSA is trying to legislate through the back door,” said a senior London-based banker. “Unless they find common ground with the US, it will cause problems for most banks.”
People close to the FSA say it will press on with compensation reform even in the absence of international consensus.
The New York Times reports that the United States has emerged from the longest economic contraction since World War II.
The nation’s gross domestic product expanded at an annual rate of 3.5 percent in the quarter that ended in September, matching its average growth rate of the last 80 years, according to the Commerce Department. But government programs to encourage consumer spending on things like cars and houses are expiring, and employers remain reluctant to hire more workers, suggesting the recovery may not last, economists say.
“The big-picture perspective is that things have improved,” said Jan Hatzius, chief United States economist at Goldman Sachs. “The question is, how sustainable is this growth going forward?”
For most people, the recovery will not feel real until jobs are more plentiful and the housing market improves. Jobs may still be hard to find well into 2010, economists say. A government report to be released next week is expected to show that unemployment rose again this month.
Still, Wall Street welcomed the news of renewed economic growth, with major stock indexes ending the day about 2 percent higher. The Dow Jones industrial average soared 200 points, to close at 9,962.58.
Before the third quarter, the gross domestic product — the broadest measure of the government’s total goods and services produced — had been shrinking for a year. It bottomed out with a 6.4 percent rate of decline in the first three months of this year, the steepest fall since 1982.
The trend was halted last quarter primarily because of consumers, who drove most of the economic gains.
The government’s cash-for-clunkers program spurred consumers to spend more on durable goods, orders of which grew at an annual rate of 22.3 percent in the third quarter after a decline in the previous quarter. Similarly, the $8,000 federal tax credit for first-time home buyers helped revive housing sales, which rose at an annual rate of 23.4 percent in the third quarter. Housing sales had actually fallen by a comparable amount in the previous three months.
The $787 billion stimulus package, which was passed last winter and is still being distributed, is also credited with strengthening economic activity, although the precise contribution is contested.
Many economists worry that the effects of these government initiatives will be short-lived and that the next few quarters may show sluggish growth or even a second dip.
The Obama administration has argued that even temporary government programs may make families feel more comfortable with spending and business more comfortable with making bigger investments for the longer term.
Still, withering consumer confidence and concerns about a weak recovery have left companies wary of hiring more employees. The jobless rate reached 9.8 percent in September, its highest in 26 years.
Initial jobless claims fell by 1,000 in the latest week, to 530,000, according to a Labor Department report also released on Thursday. The number has been heading down but is still well above the levels historically associated with job creation, according to John Ryding, chief economist at RDQ Economics.
Concerns about rising unemployment may pressure the administration to look for additional ways to stimulate the economy. Proposals include another extension in unemployment benefits and various job creation programs.
“It’s all in the hopper,” said Christina D. Romer, chairwoman of the president’s Council of Economic Advisers. “It would be irresponsible if we weren’t thinking about these kinds of programs.”
Businesses are drawing down their inventories more slowly, possibly because they anticipate more demand in the future, economists said. The businesses have largely sold out their current stock, Thursday’s report showed. This means they will increase orders in the coming months to replenish supplies.
“Everybody had been dealing with a just-in-time status quo,” said Sandra Westlund-Deenihan, president and design engineer for Quality Float Works, a company in Schaumburg, Ill., that makes valve assemblies. She said companies might be growing tired of building new products as orders rolled in one by one, and are now ready to have stock back on the shelves again.
Like many American manufacturers, Ms. Westlund-Deenihan says that international business has helped keep her company afloat. The country’s overall exports grew at an annual rate of 14.7 percent, and imports at 16.4 percent, in the latest quarter.
While these numbers mean the United States’ trade gap has widened, they also provide hope that the global economy may finally be recovering from a collapse in activity earlier this year.
“When the economy gets fully back on track in the latter half of next year, the recovery is likely to be stronger than the recovery following the 2001 recession, when exports were anemic due to an overvalued dollar and weak growth abroad,” said David Huether, chief economist at the National Association of Manufacturers.
The official end of the recession will be determined by the National Bureau of Economic Research. Its business cycle dating committee looks at output as well as other indicators like employment to make that call. The group spent a year examining data before declaring that the recession had begun in December 2007.
Some economists say they expect the panel will eventually decide that the recovery began sometime this summer.
The third-quarter economic growthcame without a major surge in inflation.
The price index for gross domestic purchases, a measure of prices that United States residents pay for goods and services, increased at an annual rate of 1.6 percent in the third quarter, compared with a small increase in the second.
Excluding food and energy prices, the inflation index rose 0.5 percent in the third quarter, compared with an increase of 0.8 percent in the second.
The NYT also reports that the first tip from inside Intel reached Raj Rajaratnam more than a decade ago — from the same source who has now turned against him in the biggest insider-trading case in a generation.
As far back as 1998, before he rose to prominence in the rarefied world of hedge funds, Mr. Rajaratnam was passed confidential information from an Intel employee who, the authorities now say, went on to play a crucial role in a vast insider-trading scheme involving some of the nation’s largest technology companies. That source, Roomy Khan, is a central government witness in the case against Mr. Rajaratnam, who maintains his innocence.
But years before the current case erupted, Ms. Khan was caught passing information to a representative of the Galleon hedge fund, who, according to a person with knowledge of the case, was Mr. Rajaratnam. Ms. Khan was prosecuted in federal court in 2000, but the authorities did not pursue Mr. Rajaratnam or his firm, Galleon, in connection with that case.
On the surface, it would seem to be another example of a missed opportunity by authorities to break up a nascent insider trading ring. Jack Gillund, a spokesman for the United States attorney’s office in San Francisco, declined to answer questions about why the Galleon representative’s identity has remained a secret or if prosecutors ever considered a case against Galleon or its employees in the matter. A spokesman for the Securities and Exchange Commission declined to answer the same questions.
A spokeswoman for the United States attorney’s office in the Southern District of New York, which is handling the prosecution of Mr. Rajaratnam, also declined to comment.
A spokesman for Mr. Rajaratnam declined to comment, as did an Intel spokesman. Neither Mr. Rajaratnam nor anyone else at Galleon was contacted by the authorities regarding the events in 1998, according to a person briefed on the matter. Ms. Khan’s lawyer has yet to be identified.
Mr. Rajaratnam has been charged with running the insider trading scheme involving Galleon. He and five others are accused by the Justice Department and the S.E.C. of relying on a vast network of company insiders and consultants to make more than $20 million in profit from 2006 to 2009. In the government’s recently filed insider trading charges against Mr. Rajaratnam, prosecutors identify Ms. Khan as Tipper A and say they had exchanged insider information on Google, Polycom and Hilton.
Mr. Rajaratnam’s lawyer has said his client is innocent. He is free on $100 million bail, though his lawyers moved on Thursday to reduce that amount to $25 million.
Prosecutors have established that Ms. Khan and Mr. Rajaratnam most likely met in 1996 when Ms. Khan worked at Intel as a product marketing engineer. Mr. Rajaratnam followed Intel as a securities analyst for Needham & Company, an investment bank.
Their relationship appears to have progressed quickly, because by early 1998, Ms. Khan started faxing information about Intel’s chip sales to Mr. Rajaratnam, according to court documents and the person with knowledge of the case who has requested anonymity because court documents tied to the case remain sealed under court order.
Only a two-page summary of that 2000 case, filed in United States District Court in Northern California, is public. In it, prosecutors describe a “Galleon representative” who asked Ms. Khan to send the information about Intel. Two people with knowledge of the case say extensive surveillance was undertaken linking the two individuals.
Ms. Khan resigned from Intel before she was charged. She then went to work for Mr. Rajaratnam at Galleon in 1999, the hedge fund he created after leaving Needham. Ms. Khan was fired from Galleon the next year for violating company policy by trading options in her own account on the side, according to a person briefed on the matter, adding that she had boasted of making millions through the trades.
It was not until 2001 that Ms. Khan pleaded guilty to wire fraud. A year later, she received a sentence of six months of home detention in Atherton, Calif., and a $150,000 charge covering fines and restitution, the Federal Bureau of Investigation has confirmed.
Around 2005, Ms. Khan again asked Mr. Rajaratnam for a position at Galleon, according to the recent court filings, as she faced financial problems. While she did not secure that job at Galleon, Ms. Khan continued to trade insider information with Mr. Rajaratnam, according to federal prosecutors.
Press representatives for federal prosecutors say details of the case remain sealed because the government lawyer handling the case did not ask the court to unseal the records before he left his job. They said they did not intend to ask for the case to be unsealed. (In the documents, Ms. Khan’s named is misspelled Kahn and the documents were misfiled under that name. )
There are reasons Mr. Rajaratnam would remain unidentified in the court documents. “The two dominant explanations for not naming the individual at Galleon would be either that the individual cooperated with the government or that the investigation is continuing,” said Joseph A. Grundfest, the co-director of the Rock Center for Corporate Governance at Stanford University.
Statute-of-limitations provisions prevent prosecutors from charging the parties with a substantive insider trading violation for the 2000 case as part of the current case. However, evidence from cases older than five years may be used if prosecutors can establish that the behavior was part of a continuing conspiracy, according to Christopher P. Conniff, a partner in Ropes & Gray’s government enforcement group.
Ms. Khan’s central role in a pair of insider trading cases matches with a career that appeared anything but typical. While her roots trace back to New Delhi, Ms. Khan lived in Silicon Valley for decades with her husband, Sakhawat Khan, a chip engineer who profited from the sale of at least two start-ups.
When she was about 35, Ms. Khan obtained a master’s degree in business administration from the University of California, Berkeley. According to friends, acquaintances and family, Ms. Khan’s true passion lay with following the financial markets and trading stocks. When she left Galleon, Ms. Khan set up her own stock trading operation inside the family’s home in Atherton, one of the most exclusive Silicon Valley neighborhoods.
Ms. Khan spoke openly about her stock-picking skills and the fact that she supported the family by managing their money, said a Silicon Valley technology executive who was friendly with the couple and a relative. Mr. Khan was not working during this time and “joked about being the bum in the family,” the friend said. Ms. Khan would wake up early each morning and go to the pool house, which she had converted into her home office, log on to her computer and spend the day trading.
“She was very open about managing their own money from the house,” the friend said. “One assumed she had certain skills she had learned earlier, and was applying them.”
The Khans would often throw parties at their estate and have been described by friends and acquaintances as a charming pair.
But by 2005, the couple’s financial situation seems to have worsened as they struggled to pay debts.
Friends were puzzled when the Khans seemed to fall off the radar socially. The couple sold their house in Atherton this year and moved to Florida, said a relative.
