Trichet, Juncker to Press China on Faster Appreciation of Yuan

Nov. 27 -- Europe's finance chiefs arrive in Beijing today with the warning that China must let its currency strengthen against the euro or risk sparking a trade war.

European Central Bank President Jean-Claude Trichet, Luxembourg Prime Minister Jean-Claude Juncker and European Union Monetary Affairs Commissioner Joaquin Almunia will argue that an undervalued yuan is ``triggering protectionist tendencies,'' according to a briefing document obtained by Bloomberg News.

The visit signals European policy makers' mounting impatience as their trade deficit with the world's fastest- growing economy swells by $20 million an hour. It follows French President Nicolas Sarkozy's own trip to Beijing. Europe's complaint is that while the yuan has risen almost 3 percent against the dollar since mid-August, it has weakened 7 percent against the euro.

``The message from the Europeans is that it's growing increasingly difficult for them to counter protectionist sentiment at home and that the Chinese must help them,'' said Gilles Moec, a senior economist at Bank of America Corp. in London.

The European officials meet today with Central Bank Governor Zhou Xiaochuan and tomorrow with Finance Minister Xie Xuren and Prime Minister Wen Jiabao. Currencies are also on the agenda for tomorrow's separate summit in Beijing of political leaders from China and Europe.

The yuan is undervalued as much as 25 percent against the euro, hurting Europe's export competitiveness, according to Juncker. Trichet said Nov. 22 the currency's appreciation ``should accelerate.''

`Life Threatening'

The decline in the dollar has become ``life threatening'' for Airbus SAS, the world's largest planemaker, Chief Executive Officer Tom Enders said Nov. 22.

Economic growth in China, India and Russia is helping sustain a global expansion as the U.S. economy, the world's largest, slows, the International Monetary Fund said Oct. 17. The fund expects China's gross domestic product to expand 10 percent next year as growth in Europe slows to 2.1 percent from 2.5 percent.

The trade gap of the 13 euro nations with China ballooned 25 percent to a record 70 billion euros in the eight months through August. China is now the EU's second-biggest trading partner after the U.S. and accounts for 5.5 percent of the region's exports and 14 percent of imports. That is prompting European governments to become more outspoken on the yuan.

``A great country must have a strong currency,'' Sarkozy said in Beijing on Nov. 25. ``China has a great role to play, in concert with other players, not to let imbalances accumulate to a point where we wouldn't be able to get out of them.''

Tougher Line

The warnings mark a tougher line after EU leaders previously pledged not to follow the U.S. in publicly prodding China.

Some have said Europe's stepped-up campaign may backfire by irritating the Chinese. ``Crying out loud is not the best way forward,'' Gerrit Zalm, a former Dutch finance minister, said in an interview. ``The Chinese will take their own time.''

Prompting the reversal is the worry that the yuan's inflexibility means the euro is bearing the brunt of the dollar's slide to its weakest on a trade-weighted basis since the early 1970s. The dollar reached a record low of $1.4967 against the euro on Nov. 23.

Fruit, Bolts

The European Commission is already probing whether to impose tariffs on Chinese exports ranging from mandarin oranges to bolts because of accusations they are being sold in Europe below domestic prices or production costs, a practice known as dumping. European steel makers are also asking regulators to tax steel imports from China.

EU Trade Commissioner Peter Mandelson said in Shanghai on Nov. 23 that China is the ``rawest nerve'' in his region's trade policies.

The European officials will also stress that a stronger yuan would be in China's own interest as it tries to cool inflation, which is running at its highest in a decade as its exports flood its economy with cash.

``Chinese authorities see they must be more ambitious in dealing with inflationary trends, which are risking ongoing growth,'' Almunia told the European Parliament's international trade committee on Nov. 21.

Zhou said Nov. 18 that China would consider widening the currency's trading band ``if necessary,'' though he gave no timeframe and said he's comfortable with current policy. In anticipation of the European delegation's visit, the yuan also rose last week to its strongest since its peg to the dollar was scrapped in July 2005.

``The day of reckoning for the yuan is getting closer,'' said Hong Liang, an economist at Goldman Sachs Group Inc. in Hong Kong, who expects the yuan will soon be allowed to trade more freely and predicts it will reach 6.78 per dollar in a year's time from about 7.40 yesterday.

Citigroup shares below $30

NEW YORK - Citigroup Inc (C.N: ) shares fell below $30 for the first time in more than five years on Monday, amid mounting concern about mortgage losses and possible further job cuts at the largest U.S. bank by assets.

The shares fell for the sixth time in seven sessions, closing down $1.90, or 6 percent, at $29.80 on the New York Stock Exchange.

Monday's drop coincided with a broad decline in shares of financial services companies and contributed to a 237-point decline in the Dow Jones industrial average (.DJI: ).

Citigroup's shares have fallen 46 percent this year, wiping out roughly $129 billion of market value.

"Today, Citigroup's stock level is 100 percent based on fear," said Ganesh Rathnam, an equity analyst at Morningstar Inc in Chicago who has a "buy" rating on the bank. "The market is saying Citigroup needs a big capital infusion that would dilute current shareholders."

The 24-member Philadelphia KBW Bank Index (.BKX: ), which includes Citigroup, fell 4.5 percent on Monday. It is down 25 percent this year.

Citigroup is considering "massive" layoffs that may result in a loss of 17,000 to 45,000 jobs, although no precise number has been set, CNBC television said on Monday.

The bank in April announced 17,000 job cuts, equal to about 5 percent of its work force, as part of a restructuring plan to save $4.58 billion a year by 2009.

"Our business heads are planning ways in which we can be more efficient and cost-effective to position our businesses in line with economic realities," Spokesman Mike Hanretta said.

He added that "any reports on specific numbers (of job cuts) are not factual."

Rathnam estimated that further job cuts could result in $2 billion to $3 billion of annual savings, provided they do not erode revenue.

Citigroup has also said it expects an $8 billion to $11 billion fourth-quarter write-down for losses tied to mortgages, possibly resulting in a quarterly loss.

Some analysts have said larger write-downs may be needed and that Citigroup may cut its dividend, a prospect the bank has rejected. Others have called for the bank to be broken up. Rathnam estimates Citigroup's pieces are worth $56 per share.

Citigroup also has exposure to tens of billions of dollars of structured investment vehicles, or SIVs, whose holdings have become difficult to value as investors shy away from mortgage- related debt they consider too risky.

The bank is working with Bank of America Corp (BAC.N: ) and JPMorgan Chase & Co (JPM.N: ) to create a "super-SIV" to support ailing SIVs.

Citigroup faces these challenges as it hunts for a chief executive to replace Charles Prince, who resigned on November 4.

Former U.S. Treasury Secretary Robert Rubin, a top Citigroup executive since 1999, replaced Prince as chairman. Sir Win Bischoff, who led the bank's European operations, was named interim chief executive.

Citigroup shares last traded below $30 on October 14, 2002, roughly coinciding with the bottom of a three-year bear market in U.S. stocks.

Now, What's Bad for GMAC Is Bad for the U.S.A.

THE BUSINESS OF AMERICA, Calvin Coolidge famously insisted, was business. But now, even Silent Cal would have to agree that's all changed. The business of America today is finance.

If you don't believe that the lending and borrowing of money has superseded the production and sale of goods, consider Monday's stock market. It's not that the Dow Jones Industrial Average shed another 218 points, or 1.7%, to drop back below the 13,000 mark. Or that the overall market was dragged down yet again by woes in the credit sector, with Dow component Citigroup's 6% swoon only the latest symptom of the worsening wheeze in the financials.

Nor that Countrywide Credit, the poster child for the subprime collapse, or E*Trade Financial, the subprime lender in online-broker drag, posted double-digit percentage declines.

But relatively less attention was given to the 8.5% plunge in General Motors, which some accounts laid to the beginning of the automaker's Red Tag incentive program, which it does every year. A more plausible reason is the continuing -- and deepening -- woes in its credit units.

GM still retains 49% of GMAC Financial Services after spinning off the majority stake to a group led by private-equity powerhouse Cerberus Capital Management. Even so, the credit squeeze is a vise pressuring both housing and automotive debt.

Last week, the Wall Street Journal reported GMAC's ResCap mortgage unit could be in violation of its loan covenants. Moreover, Kathleen Shanley, the finance analyst at the perspicacious Gimme Credit advisory service, pointed out in a research report that "ResCap is already reeling from massive losses in its subprime and warehouse lending portfolios, and now a large spike in watch list loans in the business capital group suggests another round of losses may be waiting on deck."

On the auto-loan front, Lehman Brothers' analyst Brian Sharp wrote in a separate note that GMAC is experiencing a "sharp" jump in delinquencies since July. Given that the unemployment rate remains low, "the deterioration in auto [asset-backed securities] credit conditions may be evidence of a likely spillover of the mortgage woes into the auto-credit world."

Reflecting these untoward turns of events, the price of GM common tumbled some 37% since Oct. 12, to the lowest level in nearly 17 months. Meanwhile, prices of GM and GMAC debt securities also have taken a big hit.

GM and GMAC have a large number of debt securities tailored for individual investors with $25 par values that trade on the New York Stock Exchange, which is unusual in the corporate bond market. Barron's magazine has written positively about these exchange-traded bonds ("Bonding With the General," Jan. 9, 2006), which can be found in the preferred-stock listings even though they are actually senior debt.

These NYSE-listed GMAC bonds (tickers: GJM, GKM, GMA and GOM) fell Monday to around 52-week lows, about 17 and change, from 24-ish back in the spring. In bond terms, these issues have fallen from just under par to about 70. As a result, these GMAC bonds yield in excess of 10%, which are rated one notch below investment grade by Standard & Poor's and Fitch Investors, and two grades lower by Moody's Investors Service.

Gimme Credit nevertheless has a sell recommendation on the bonds of GMAC's ResCap unit, which faces losses on loans on model homes leased to builders and lots contracted under options to builders that could become "impaired at any time," Shanley notes in ResCap's 8-K SEC filing late Friday. ResCap also has equity investments of $539 million in two regional homebuilders and $366 million in mezzanine debt for residential construction and manufactured housing projects.

Shanley thinks that despite GMAC's $1 billion capital infusion into ResCap in the third quarter, GM and Cerberus may opt to put the unit into bankruptcy. Recoveries in bankruptcy may be lower than even the depressed prices of its securities indicate.

KDP Investment Advisors' Thomas Ferguson agrees that ResCap and GMAC are separate entities but he thinks it's possible Cerberus could pump additional capital into ResCap via GMAC. In any case, the yields offered (in the institutional market) adequately compensates for the risks -- but only for a one-year note.

And what sort of yield does it take to provide that margin of safety? That would be nearly 60% for the next 12 months, reckons Lehman Brothers. ResCap's 6.125% due Nov. 21, 2008, traded Monday at a dollar price of 64.50, which translates into a yield to maturity in a year and a day of, believe or not, 59%. That depressed price would compensate for the default risk and would be roughly equal to the likely 60% recovery rate on the defaulted assets, according to Lehman's analysts, Jonathan Glionna, Marin Fayerber and Priyanka Bakaya.

In other words, the 35% haircut on one-year ResCap bonds would just about cover the potential credit losses in the next 12 months, according to the market. Or maybe not. Which would mean a bond with a putative 59% yield could wind up a loser. That's how dire our straits may be.

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