Britain Tries for a Second Industrial Revolution

Mark Stein, manager of General Motors’ (GM) Vauxhall van plant in Luton, 29 miles north of London, starts presentations with an aerial photo of the site in 1965. It shows a vast complex of buildings that employed more than 35,000 workers. He points to a small red circle in the picture. That’s where GM’s current factory is. It employs 1,500.

Making stuff has dwindled from nearly 40 percent of Britain’s gross domestic product in the late 1950s to not much more than 10 percent now. What remains survives for a reason. GM’s Luton factory this year will produce 70,000 Vauxhall Vivaro vans and other vehicles, more than 60 percent for export. Manufacturing productivity grew 4.4 percent in the first quarter.

Prime Minister David Cameron has latched on to manufacturing as a cure for Britain’s economic hangover and its 7.9 percent jobless rate. “If you’re trying to make the economy grow long term on a sustainable basis, manufacturing is where we need to be,’’ says Vince Cable, U.K. Business Secretary. “One of the main growth sectors of the economy in recent years has been banking. For reasons that are blindingly obvious, that’s not going to be so important in future.’’

Starting a new Industrial Revolution will be hard. Government efforts to cut red tape produce plenty of their own. “If you were to write on a board how many agencies and support schemes there are, you would be amazed,” says Bill Parfitt, GM U.K.’s chairman.

Economists and some manufacturing executives also say that boosting manufacturing may be unwise. British manufacturing as a share of GDP is smaller than Germany’s 20 percent, yet it is similar to the U.S. and France, which have big service sectors. Britain may have reached an equilibrium between the two sectors. “I don’t think any economist believes that growth in the next five to 20 years will be driven by manufacturing,” says Jonathan Portes, director of the National Institute of Economic and Social Research.

British manufacturing lacks Germany’s advantages. Germany has long had industrial apprenticeships for young adults: Cable is trying to launch an apprenticeship program in Britain as well. In Germany, robust midsize companies supply big companies and export on their own. In contrast, consider the state of GM’s supply chain in Britain. Only 10 percent of the value of parts used at its main U.K. plant at Ellesmere Port are made domestically. The pound’s 25 percent drop since 2007 against a basket of currencies drives up the cost of imported parts even as it makes exports cheaper.

U.K. producers do excel at making goods where technology counts for more than the cost of labor, says Lee Hopley, chief economist at the Engineering Employers’ Federation. Revenue for Vitec, a high-tech maker of gear for the broadcast, military, and photographic markets, grew in the first half to $282 million from $250 million. “We do make some products in China,’’ says Chief Executive Officer Stephen Bird. “But my intention is that we will continue to manufacture in both the U.K. and Italy because we have great engineers.” A secret to survival is “not competing with cheap Chinese goods,” says Mark Henderson, CEO of MSE UK, which makes blood centrifuges.

Yet after a promising post-recession start, U.K. manufacturing shrank 0.5 percent in the quarter ended in June. The trade gap in June for goods was £8.9 billion ($14.5 billion). Business Secretary Cable says the weaker pound will help the U.K. gain share even in markets where growth is slow, and commercial diplomacy will sell more goods to developing countries. “The problem always has been that our export markets, particularly the euro zone and the U.S., are facing challenges of their own,” says Jonathan Loynes, chief European economist at Capital Economics in London. “The idea that we were going to get a helpfully timed export boom was always a bit optimistic.”

Hacking Troubleshooter Worked With Arrested Reporter

News Corp.’s Simon Greenberg, a member of an internal panel tasked with reviewing phone hacking at the News of the World and the company’s other U.K. newspapers, once oversaw a reporter at another publication arrested last week in a police probe.

Greenberg, 42, was the associate editor for sports at the Evening Standard until 2004 when Raoul Simons worked there as a soccer reporter. Simons, who is heard discussing phone hacking on a 2005 tape recording, was arrested by London police Sept. 7, a person familiar with the matter said. Simons moved to News Corp.’s Times in 2009.

While there is no implication Greenberg was involved in any wrongdoing, Simons’s arrest shows phone hacking may have spread beyond the News of the World and emphasises the difficulties associated with investigating it. The failure of News Corp.’s previous attempts to determine the extent of phone hacking puts a higher standard on the current investigation, said Martin Moore, director of the Media Standards Trust in London.

Any investigation that News Corp.’s News International unit “does now or in the future has to be both transparent and rigorous and have high levels of accountability or else people are going to have a lot of trouble regarding it as credible,” Moore said. Media Standards Trust is a non-profit organization that focuses on transparency in the press and has made recommendations to Prime Minister David Cameron’s media inquiry.

News International and Greenberg declined to comment.

16th Arrest

Simons was the 16th person arrested in connection with the scandal this year, including Rebekah Brooks, the chief executive officer of the company’s U.K. publishing unit. Brooks and Les Hinton, who was running News Corp.’s Dow Jones & CO. unit in New York, were forced to resign after revelations that News of the World hacked into the phone of a murdered schoolgirl in 2002.

News Corp.’s management and standards committee, which Greenberg is on, was given the mandate to conduct internal inquiries. The company said in August that its primary objective has been providing information to police and other government investigations.

Greenberg was sports editor of the Evening Standard, overseeing as many as 35 editors and reporters, until he took a public relations position with the Chelsea Football Club in 2004. Greenberg was chief of staff for England’s unsuccessful bid to host the 2018 soccer World Cup. He joined News International in January as director of corporate affairs.

A recording of Simons speaking with a private investigator about how to hack into voicemails was made at least six months after Greenberg had left the paper, according to two people at the company who declined to be identified because the matter is confidential.

Simons Suspended

In the tape, Simons is heard in a recording being instructed by private detective Glenn Mulcaire about how to hack into a mobile phone, the person said. Mulcaire worked for the News of the World before being jailed in 2007 after pleading guilty to phone hacking related charges.

The police, who didn’t confirm the identity of the arrested 35-year-old man, said last week that he was detained and released on bail. The tape was made in 2005, at least six months after Greenberg left the Evening Standard, the people said.

By the time Greenberg was appointed to the management and standards committee, the News Corp. publication had suspended Simons following the release of the recording online, the people said.

Simons was deputy football editor at the Times when he was suspended last year, one of the people said. Simons is still employed by the newspaper and is on extended leave pending a review of his conduct, the person said.

The Times didn’t respond to requests to provide contact information for Simons.

Murdered Schoolgirl

News Corp.’s U.K. publishing unit shut down the News of the World tabloid in July after reports surfaced that reporters had hacked into the voicemail of murdered schoolgirl Milly Dowler. Clive Goodman, a former reporter at the tabloid, had been jailed along with Mulcaire in 2007 for admitting to listening to messages sent by the royal family.

In addition to Greenberg, the management and standards committee is comprised of attorney Anthony Grabiner, William Lewis, a former general manager at the company’s U.K. newspaper unit, and Jeff Palker, News Corp.’s general counsel for Europe and Asia.

Previous Probes

U.K. lawmakers last week criticized News Corp.’s previous probes into phone hacking at News of the World, which were touted by News Corp. Chairman Rupert Murdoch at hearings in July. The probes by two law firms later turned out to be a limited inquiry into Goodman’s wrongful termination case and another effort to coordinate police requests during their initial investigation.

Greenberg was praised by Sue Akers, who is heading the investigation by the police force, for cooperating with the probe in a July 12 meeting at the U.K. Parliament’s Home Affairs select committee.

News Corp. “is going to be very sensitive to any potential conflict of interest given the nature and the high stakes,” said Niri Shan, a media lawyer at Taylor Wessing LLP in London. “Having said that, the fact that they worked together so long ago may reassure them that a conflict does not actually arise.”

The arrest of Simons also potentially widens the scandal to other newspapers. The Evening Standard, sold in 2009 to Russian billionaire Alexander Lebedev, belonged to the Daily Mail and General Trust Plc when Simons worked there.

Daily Mail spokesman Oliver Lloyd didn’t return a two calls seeking comment.

Other Papers

Other newspapers have been implicated in a study by the Information Commissioner’s Office, a U.K. group tasked with monitoring data privacy and information rights, called “Operation Motorman.” The report, published in December 2006 found evidence that 305 journalists working for 32 newspapers and magazines bought illegally obtained information.

Cameron has appointed Lord Justice Brian Leveson to investigate the country’s media in the wake of the scandal. A seven-member panel has asked for responses from newspapers, including the Daily Mail, and will call witnesses from the media as it investigates the press, its ethics and the relationship with politicians and police.

News Corp.’s own investigations, started after Goodman pled guilty to hacking in 2006, failed to indicate widespread hacking at the News of the World. The law firm Harbottle & Lewis LLP and the company’s legal manager Tom Crone looked through 2,500 e- mails from employees Goodman had identified as being involved with the voicemail scheme and said they found no evidence that reporters were getting information illegally.

Law firm BCL Burton Copeland, which worked for News International when the scandal erupted in 2006 and 2007, said its role was limited to providing documents to the police and wasn’t asked to carry out an investigation into phone hacking.

Bloomberg LP, the parent of Bloomberg News, competes with units of News Corp. in providing financial news and information.

Exit the Euro Zone? Think Before You Leap

Greece’s departure from the monetary union would be legally difficult and financially ruinous

“The euro area is a community that shares the same destiny” —ECB chief Jean-Claude Trichet Chris Ratcliffe/Bloomberg; Trichet quote: Aachener Zeitung, May 27, 2011

By Carol Matlack and Jeff Black
This Week

September 19, 2011
America Isn't Working
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“Everything must be done to keep the euro zone together.” That was Chancellor Angela Merkel speaking on German radio on Sept. 13 as she denied reports that Germany was preparing for Greece’s exit from the monetary union.

That the leader of Europe’s biggest economy must dampen speculation of a breakup shows the rising unease about the common currency. Two years ago most politicians and investors believed firmly that the euro area was indivisible. As the finances of Greece, Portugal, Ireland, Spain, and Italy have fallen into crisis, that has changed. It’s still unlikely that any member state will bolt or be banished. Greek Prime Minister George Papandreou, for one, vows to keep Greece in the euro zone. Still, a growing number of policymakers and analysts are talking seriously about an exit.

In Greece, the issue is enmeshed with a possible default on its sovereign debt. Yields on credit default swaps on its short-term debt are at 98 percent, a sign that investors consider default inevitable. “If the Greeks don’t make it despite all of their efforts, you can’t rule out” their leaving the currency union, Horst Seehofer, chairman of Germany’s CSU party, a coalition partner of Merkel’s ruling CDU, said on Sept. 11.

Any country that dropped out of the euro would regain control over its monetary policy. Its central bank could set interest rates and would not be controlled by the European Central Bank in Frankfurt. It could reinstate and devalue its own currency, making exports more competitive. An exit would probably lead to sovereign debt restructuring or default, since the country couldn’t repay all its euro-denominated debt with a cheaper currency. Economists reckon that a reintroduced Greek drachma, for example, would be worth only half as much as a euro. Yet Greece seems likely to default anyway, so what’s the difference?

In reality, leaving could be a lot messier. The treaties that created the euro provide no opt-out mechanism. Legally, an exit would require a unanimous vote by euro member states to change the treaties, says Peter Becker, a researcher at the German Institute for International and Security Affairs. Expelling a country against its will is effectively impossible. A voluntary exit could be negotiated, but could take months.

What spooks Merkel and other leaders is that a Greek exit could unleash a chain reaction of departures from the euro by other weaker members. Also, an inside-the-euro default by Greece would be less complicated and costly than a default outside the zone, because the ECB and other European bodies could help reach a deal with creditors.

Quitting the euro looks even scarier for the Greeks. Their economy would shrink by at least 40 percent after an exit, predicts Stephane Deo, chief European economist at UBS (UBS). The banks and stock market would collapse, government and businesses would be frozen out of global credit markets, and corporate balance sheets and individual savings would be reset in a devalued currency. Devaluation wouldn’t help exports much, Deo wrote in a Sept. 6 note: Other countries would likely raise tariffs to protect, say, Spanish olive oil against cheaper Greek oil. Social turmoil would probably increase. “Greece is going to go decades back” if it leaves the euro, says Vassilis Korkidis, president of the National Confederation of Hellenic Commerce, “This is going to be a disaster.”

Greece spent many decades under foreign rule or domestic dictatorship, including a junta that imprisoned Papandreou’s father and exiled his family. The political class sees membership in the European Union and euro as a sign of how far Greece has come, and as a guarantee against slipping back. With Turkey growing powerful, Greece doesn’t want to be cut loose from its economic and political moorings. Moreover, Greece experienced devaluation and inflation in the 1980s that “not only failed to improve competitiveness but also eroded the value of people’s savings,” says Miranda Xafa, a senior investment strategist at Geneva-based IJ Partners and ex-board member for Greece at the International Monetary Fund.

So if no one wants an exit, how could it happen? Willem Buiter, chief economist for Citigroup (C) in London, offers a scenario in a Sept. 13 report: As Greece resists EU, ECB, and IMF demands for more austerity, the exasperated troika cuts off funding. Greek banks can no longer post Greek debt as collateral for loans from various EU agencies. With no funding available from the euro area, writes Buiter, “Greece could blunder into exiting.”

The default feared by investors would then occur. European banks—which according to the Bank for International Settlements hold a total of $128.8 billion in Greek debt, including $42.9 billion in public debt—would take a hit. Investors would push up the cost of government borrowing in Ireland, Portugal, Spain, and Italy, and funding for those countries’ banks would dry up, predicts Nick Kounis, head of macro research at ABN Amro Bank. “You’d wonder,” he says, “if the euro zone would fall apart.”

SNB Stresses Resolve on Franc as Interest Rate Stays at Zero

The Swiss central bank said it’s ready to take “further measures” if needed to stem gains in the franc against the euro as it left its benchmark interest rate at zero to ward off the threat of a recession.

The Swiss National Bank, led by Philipp Hildebrand, kept its three-month Libor target rate at zero after unexpectedly lowering the benchmark from 0.25 percent last month. That’s in line with the forecasts of all 21 economists in a Bloomberg News survey. The Zurich-based central bank also reiterated it will defend its currency ceiling with the “utmost determination” and forecast economic growth to come to a halt in the second half with consumer prices falling in 2012.

The SNB imposed ceiling of 1.20 against the euro on Sept. 6 and pledged to purchase foreign currencies in “unlimited quantities” to protect the economy. The franc’s ascent to a record last month has hurt some of the country’s largest companies including foodmaker Nestle SA and sparked an economic slowdown in the second quarter.

“They are very, very pessimistic,” said Ulrike Rondorf, an economist at Commerzbank AG in Frankfurt. “Forecasting deflation for next year seems far-fetched to me. It might merely serve as a justification for introducing a cap.”

The Swiss currency, which is considered a haven in times of turmoil, reached a record of 1.0075 against the euro on Aug. 9 on investor concern that European governments may be unable to contain the region’s debt crisis. The franc has remained above 1.20 versus the single currency since the SNB imposed the cap, and was little changed at 1.2079 at 11:05 a.m. in Zurich today.

‘Acute Threat’

“With these measures, the SNB is taking a stand against the acute threat to the Swiss economy and the risk of deflationary development that spring from massive overvaluation of the Swiss franc,” the central bank said. “If the economic outlook and deflation risks so require, the SNB will take further measures,” it said without elaborating.

With the franc’s ascent hurting exports, the economy may expand between 1.5 percent and 2 percent this year, the SNB said. It had previously forecast economic growth of about 2 percent. Inflation may average 0.4 percent in 2011, down from a previous forecast of 0.9 percent, it said. In 2012, consumer prices may drop 0.3 percent before rising 0.5 percent in 2013.

‘Downside Risks’

The SNB, which aims to keep inflation below 2 percent, forecast annual consumer-price growth to reach 1 percent in the second quarter of 2014. In June, it had estimated inflation at 2.6 percent in the first quarter of that year.

“In the foreseeable future, there is no risk of inflation in Switzerland,” the central bank said. “There are, however downside risks for price stability, should the Swiss franc not weaken further.”

With exports accounting for about half of gross domestic product, the Swiss economy may fail to gather strength after expanding 0.4 percent in the second quarter. That’s the weakest since a 2009 recession. The KOF economic indicator dropped to the lowest in almost two years last month and manufacturing growth weakened. Investor confidence also slumped in August.

“The SNB expects growth to come to a halt in the second half of the year,” it said in the statement. “Without the stabilizing effect of the minimum exchange rate, there would be a substantial threat of recession.”

SNB Rates

Nestle, the world’s largest foodmaker, said on Sept. 1 it will seek to offset the franc’s impact through productivity gains. Holcim AG, the world’s second-biggest cement maker, said on Aug. 18 that currency effects shaved 203 million francs ($231 million) off operating profit in the second quarter and Swiss chemicals maker Clariant AG cut its full-year earnings targets on Sept. 5 partly on a stronger currency.

SNB policy makers unexpectedly cut borrowing costs last month and boosted liquidity to money markets to help weaken the franc. Hildebrand said on Sept. 6 that while costs of the currency ceiling may be “very high,” doing nothing “would almost certainly inflict tremendous long-term damage” to the economy.

“The SNB will do whatever it costs to fulfil its commitment,” said Julien Manceaux, an economist at ING Group in Brussels in an e-mailed note. “It becomes very unlikely to see any rate hike in Switzerland any time soon.”

The central bank last introduced a currency cap in 1978 to stem gains versus the Deutsche mark.

Singapore Air May Buy Airbus’s Improved A350-1000, CEO Says

Singapore Airlines Ltd., the world’s second-largest carrier by market value, said it may order Airbus SAS’s A350-1000 wide-body jet as the European planemaker plans improvements in range and payload.

The airline is also awaiting details of enhancements to Boeing Co.’s competing 777-300ER before deciding which model to purchase, Chief Executive Officer Goh Choon Phong said yesterday in a briefing at Airbus’s headquarters in Toulouse, France. He declined to discuss how many planes the carrier may buy.

Airbus in June said it would delay the introduction of the A350-1000 so it could make changes including the use of improved Rolls-Royce Holdings Plc Trent XWB engines. Singapore Air has 20 of the smaller -900 variants on order and also signed a deal for eight 777-300ERs in August to tap demand for long-haul travel.

Goh also said the carrier was concerned about a potential economic slowdown and the possibility of tighter credit after Moody’s Investors Service Inc. downgraded Credit Agricole SA and Societe Generale SA, France’s second- and third-largest banks.

“The most strategic concern is how the economy is going to go,” he said. “The recent downgrade of banks in France is a concern: the impact, if any, on the liquidity of banks, and whether there’s a contagious effect on the rest of the economy.”

A380 Handover

Goh was in Toulouse as Singapore Air took delivery of its 13th double-decker A380. The carrier will get another next month and expects to have received all 19 of the planes it has ordered by mid-2014.

The Asia airline is reducing the number of seats on later A380s in the fleet to carry more business-class passengers. The first 11 planes had 471 seats, while the final eight will have 409. That includes an all-business class top floor fitted with 86 seats. The carrier also has options for six more superjumbos.

Airbus is due to begin deliveries of the A350-900, the most popular of the A350’s three versions, around the end of 2013. Singapore Airlines will be the second carrier to receive an A350 after Qatar Airways Ltd., Goh said.

Changes to the A350-1000 variant include work on the landing gear and the outer part of the wing, Airbus said. The improved performance will allow the aircraft to service routes such as Shanghai to Boston. The planemaker has also delayed the smallest version of the A350, the -800, to focus on developing the -900 variant and revamping its single-aisle A320.

Dreamliner Crossover

Boeing’s plans to upgrade the 777 include the adaptation of technology used on the new 787 Dreamliner, Marc Birtel, a spokesman, said by e-mail. He didn’t elaborate and said Boeing doesn’t comment on discussions with customers.

According to a report yesterday on the Flight Global website, conceptual studies at Boeing for the 777 upgrade show a massive new carbon fiber wing, 99,500lb thrust engine and other improvements including a 787-style interior.

Newer 777s could get a carbon-fiber wing measuring as much as 234 feet (71.3 meters), 21 feet more than the current all- metal version and 10 feet wider than Boeing’s latest 747-8, Flight Global said. The plane might also offer 15 percent more economy seating than on the existing aircraft.

Hedging Policy

Goh also said that Singapore Airlines, which closed up 3 percent today and has a value of S$13.4 billion ($11 billion), is particularly concerned about the volatility of fuel prices.

“Fuel prices are 40 percent of our costs,” he said. “It’s huge, and to a large extent it’s outside our control. Hedging is only really delaying the impact.”

Singapore Air currently has hedging contracts to cover about 30 percent of fuel purchases for the remainder of the year through next March, the CEO said, a figure that’s below the proportion generally hedged at the bigger European carriers.

The airline’s board has mandated that management generally hedge between 30 percent and 60 percent of fuel costs, depending on what’s driving prices, he said, adding that increases since late last year have been spurred by geopolitical events in the Middle East and Africa, not necessarily economic fundamentals.

“In times when we feel there’s market risk, we’ll tune it to the lower end of the band,” Goh said. “In more normal times, we tweak it back upward.”

Russia Tycoon Prokhorov Quits Party After Kremlin ‘Takeover’

Mikhail Prokhorov, the Russian billionaire who owns the New Jersey Nets, may form a new political movement after what he called a “hostile takeover” of his Pravoye Delo party by the Kremlin.

“To all followers who supported me, I call on you to quit this party bought by the Kremlin,” Prokhorov, Russia’s third- richest man, told a meeting of his Pravoye Delo followers in Moscow today.

The pro-business Pravoye Delo, or Right Cause, discredited itself after “fake” candidates took power, hijacking a congress yesterday, Prokhorov said. He warned on Sept. 13 that the party was fighting presidential administration attempts to destroy its independence and install a new leader.

Prime Minister Vladimir Putin centralized power and sidelined opposition after becoming president in 2000, with pro- government parties controlling 87 percent of seats in parliament and the Communist Party holding the rest. Prokhorov, 46, whose fortune Forbes estimates at about $18 billion, has grown increasingly critical of government policies since being elected head of Pravoye Delo in June.

Prokhorov said today he’s not afraid of suffering the same fate as imprisoned former Yukos Oil Co. owner Mikhail Khodorkovsky. Once Russia’s richest man, Khodorkovsky was convicted of fraud and tax evasion in 2005 and oil embezzlement in December 2010, charges he says were linked to his financing of opposition parties.

Business Activities

While the billionaire has steered clear of criticizing Putin or his successor as president, Dmitry Medvedev, his open attack on the political system may affect his business activities, Masha Lipman, an analyst at the Carnegie Moscow Center research group, said today in a phone interview.

“I don’t think he risks ending up in jail, but he’s still got business in Russia and he may find some obstacles,” Lipman said. “Something that was smooth before could become difficult.”

Prokhorov is one of the owners of Polyus Gold International Ltd., Russia’s top producer of the precious metal, and the second-largest investor in United Rusal Co., the world’s biggest aluminum producer. The billionaire said in December that he planned to merge Polyus with a global rival as early as in 2011 to join the world’s top three miners of the commodity.

Surkov Resignation

Prokhorov said he discussed the development of Pravoye Delo with Vladislav Surkov, the first deputy chief of staff of President Dmitry Medvedev’s administration, earlier this week. Showing that the party is not a “puppet” project and has its own voice must have annoyed the Kremlin administration, he said.

Prokhorov reaped a round of applause when he said his main political task was to do everything possible to have Surkov resign.

“There is a puppeteer in the country who long ago privatized the political system and who has long misinformed the country’s leadership,” Prokhorov said referring to Surkov. “As long as such people regulate the political process, no real politics are possible in the country.”

The Kremlin press service declined to comment when contacted today by phone.

‘Tight Leash’

After securing Kremlin backing for his political project, Prokhorov ran up against efforts to keep him on a tight leash, according to Lipman.

“He complied, he never criticized Putin or Medvedev, he said he wasn’t an opposition force, but apparently as the game went on, he acted more independently and he defied some of their recommendations and gradually antagonized those who thought they were his minders, that is how the scandal ensued.”

Prokhorov met Medvedev shortly after being elected chairman of Pravoye Delo. Medvedev said he supports Prokhorov’s idea of decentralizing Russian power, adding that some his proposals were “revolutionary” and need to be thought over.

Prokhorov, who had said he was seeking to become prime minister and may also run for president next March, committed to spend 2.7 billion rubles ($89 million) of his personal wealth on campaigning for December legislative elections. Right Cause was seeking to win more than the 7 percent of votes needed to gain seats in the lower house of parliament, or State Duma.

‘Soviet Parody’

The billionaire said Aug. 26 that Russia is becoming a “farce and parody of the Soviet Union,” stifled by bureaucracy and authoritarian rule.

Putin, 58, a former officer in the Soviet-era KGB, hasn’t ruled out returning to the presidency next year, which could give him a quarter of a century in power under new six-year mandates. Putin handed the president’s job to his protégé, Medvedev, 46, in 2008, after serving the maximum two consecutive terms allowed by the constitution.

“I call on people who are not indifferent to this country, who want to live here, who want it to develop,” Prokhorov said. “I propose to create a new political movement and win in honest and fair elections.” He said he would seek a meeting with Medvedev and Putin to discuss this.

The authorities won’t allow Prokhorov to register a new party, said Dmitry Oreshkin, an independent political analyst.

“This affair is just another confirmation that Russia has an imitation of democracy in which the parliament is not a means to balance various political interests but an instrument for the ruling elite,” Moscow-based Oreshkin said today by phone.

Mikhail Kasyanov, a prime minister under Putin who is now an opposition figure, said he felt “genuinely sorry” for Prokhorov.

“He agreed to be a puppet and at last realized that he can’t go through with it and is now getting out of a very unpleasant situation,” Kasyanov said today by phone.

Deutsche Post to Spend EU750 Million Upgrading Parcels Unit

Deutsche Post AG, the world’s biggest carrier of air and sea freight by volume, said it will spend 750 million euros ($1 billion) on upgrading its German consumer parcel delivery unit to boost quality and reliability.

The investment, to be injected over the next two years, is Deutsche Post’s biggest in parcels since the 1990s, according to the Bonn-based company, whose DHL unit carries more than 2.6 million packages a day, on average.

“It’s one of the growth pockets within the German and European parcels market, so it’s definitely a good idea,” said Axel Funhoff, an analyst at ING Group in Brussels who recommends buying Deutsche Post shares. “The business is good, no doubt about it, but the price tag is questionable.”

DHL handled 199 million parcels within Germany in the second quarter, up 9.9 percent from a year earlier, with revenue climbing 7.8 percent to 667 million euros, buoyed by a trend toward transactions over the internet rather than in shops.

“We think that this segment of the business both has room to grow and that it will do so,” Deutsche Post’s head of mail, Juergen Gerdes, said at a press conference in Hamburg. “The aim is that a parcel will in future be delivered throughout Germany at the same speed as a letter currently is.”

With Deutsche Post aiming to deliver at least 95 percent of parcels the next day, from 90 percent, the faster process should aid an expansion into areas such as drug and food delivery, according to the company, which plans to increase its overall share of the consumer market to 15 percent from 8 percent.

Deutsche Post shares rose as much as 3.8 percent and were trading 3.2 percent higher as of 3:23 p.m. in Frankfurt, paring the declining this year to 19 percent and valuing the company at 12.5 billion euros.

ECB Coordinates With Fed to Lend Dollars to Euro-Area Banks

The European Central Bank said it will lend dollars to euro-area banks in a series of three-month loans as the region’s debt crisis limits market access to the U.S. currency.

The Frankfurt-based ECB said it will coordinate with the Federal Reserve and other central banks to conduct three separate dollar liquidity operations to ensure banks have enough of the currency through the end of the year. The three-month loans are in addition to the bank’s regular seven-day dollar offerings and will be fixed-rate tenders with full allotment, the ECB said in a statement today. They will be offered on Oct. 12, Nov. 9 and Dec. 7.

The euro jumped more than a cent against dollar after the announcement and traded at $1.3854 at 5:14 p.m. in Frankfurt. Stocks rose and Treasuries fell, pushing 10-year yields up the most in more than three weeks.

“The market focus on this as a problem is way over the top,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “This is not a Lehman event. Extending the term to three months today is a clever way to show the central bank authorities are on the case.”

Two Banks

Two banks this week borrowed dollars from the ECB in its seven-day operation, a sign they are finding it difficult to access the U.S. currency in markets as the debt crisis makes financial institutions more wary of lending. The premium European banks pay to borrow in dollars through the swaps market is close to the highest level in almost three years. It declined after the ECB’s announcement today.

The cost of converting euro-based payments into dollars, as measured by the one-year cross-currency basis swap, was 80.25 basis points below the euro interbank offered rate, or Euribor, at 4:15 p.m. in Frankfurt. It widened to as much as 112.6 basis points earlier this week, the most since Dec. 2, 2008, according to data compiled by Bloomberg.

“The ECB is seeing the stress in the dollar markets right now,” said Benjamin Schroeder, a rate strategist at Commerzbank AG in Frankfurt. “If there was really a big problem you’d see more demand in the seven-day tender. The ECB is trying to prevent things from getting out of hand.”

BNP Paribas Surges

The ECB yesterday allotted $575 million in its seven-day dollar operation, without naming the banks it lent to. French banks Societe Generale SA and BNP Paribas SA said yesterday they didn’t borrow dollars from the ECB.

BNP Paribas, France’s biggest lender, rose as much as 22 percent in Paris trading after today’s ECB announcement. BNP Paribas shares were up 5.57 euros, or 21 percent, to 32.47 euros as of 3:18 p.m.

Moody’s Investors Service yesterday cut the long-term credit ratings of Credit Agricole SA and Societe Generale, France’s second- and third-largest banks, and put BNP Paribas on review for a possible downgrade, citing the risks posed by their investments in Greece. Moody’s also said it will evaluate the impact of tighter financing markets on French banks.

While the ECB’s provision of liquidity helps to ease tensions in money markets, “the root is the debt crisis, and that will remain on the table for a long time,” said Marco Valli, chief euro-area economist at UniCredit Group in Milan. “The ECB could decide to extend refinancing operations to 12 months or resume the covered-bond purchase program.”

Strains Continue

The ECB last introduced a three-month dollar loan in May 2010 to calm markets roiled by the threat of a Greek default.

The ECB has been lending banks as much euro cash as they need at its benchmark rate since October 2008, when the collapse of Lehman Brothers Holdings Inc. triggered a global recession. It has been forced by the debt crisis to extend those measures and last month reintroduced an unlimited six-month euro loan.

The ECB’s dollar loans tackle “one small problem in the market at the moment,” said Chris Scicluna, deputy head of economic research at Daiwa Capital Markets Europe in London. “Ultimately, until there’s a more comprehensive response to the sovereign debt crisis, which has been feeding into concerns about the health of European banks, the strains in Europe’s banking sector will continue.”

Resistant Tuberculosis Sweeps Across Europe at ‘Alarming Rate’

Drug-resistant tuberculosis is spreading at an “alarming rate” in Europe, the World Health Organization said as it introduced a plan to fight the disease that may save 120,000 lives and as much as $12 billion.

Reported cases of extensively drug-resistant tuberculosis in the region tripled in 2009 from 2008 levels, and the six countries with the world’s highest rates of patients with the most dangerous drug-evading form are all in Europe, the WHO said in a statement yesterday.

The London borough of Brent, home to Wembley Stadium and the headquarters of brewer Diageo Plc, has become western Europe’s tuberculosis capital, with more new cases each year than Karonga district in Malawi, a rural area still battling leprosy, according to the U.K.’s Health Protection Agency.

“This problem is a man-made phenomenon resulting from inadequate treatment or poor airborne infection control,” Hans Kluge, a special representative on drug-resistant tuberculosis in the WHO’s European region, said in the statement. “We need wide involvement to tackle the damage that humankind has done.”

European nations aim to diagnose at least 85 percent of patients with multidrug-resistant TB in Europe, and treat at least 75 percent of them by 2015, the Geneva-based WHO said. They will commit to national action plans that include dedicated facilities and improved public awareness, according to the agency. Of about 81,000 cases in 2009, the WHO estimates 34 percent were diagnosed and 22 percent were treated adequately.

Achieving the goals may prevent as many as 263,000 cases of drug-resistant TB, saving 120,000 lives and $5 billion in lost productivity. A further $7 billion may be saved by averting future cases, the WHO said.

Libya Council Forces Attack Sirte as U.K., France Pledge Aid

Libyan opposition forces battled for control of Sirte, Muammar Qaddafi’s birthplace, as the leaders of the U.K. and France pledged aid to the country’s new rulers during a visit to Tripoli.

Anti-Qaddafi forces withdrew to the outskirts of Sirte, one of the last holdout cities, after a day of fighting, Al Jazeera television reported today, citing Yousif bin Yousif, an opposition commander. The Misrata Military Council said earlier its forces took control of the entrances to the city and units started searching for officials loyal to Qaddafi.

The withdrawal is to “prepare for an invasion of the city in the next few hours,” bin Yousif told Al Jazeera. “It’s a military tactic.”

U.K. Prime Minister David Cameron and French President Nicolas Sarkozy became the first foreign leaders to visit Tripoli since helping opposition forces oust Qaddafi last month. They said they would push at the United Nations Security Council today for the adoption of a resolution releasing more Libyan assets frozen under sanctions against Qaddafi.

“This is not finished, this is not done, this is not over; there are still parts of Libya under Qaddafi’s control,” Cameron told a joint news conference in the Libyan capital yesterday. “We will help you to find Qaddafi and bring him to justice.”

Leaders Cheered

Television pictures showed Cameron and Sarkozy being cheered as they visited a Tripoli hospital. They later addressed a crowd on Freedom Square in Benghazi, Libya’s second city. Britain is unfreezing 600 million pounds ($950 million) of Libyan assets, Cameron’s spokesman, Steve Field, told reporters in London.

The Misrata council said earlier yesterday that Qaddafi loyalists were surrounded in an insurance building in Sirte’s city center.

Elements of the 32nd Brigade -- the special forces unit commanded by Qaddafi’s son Khamis and tasked in the past with protecting the former Libyan dictator -- were trapped in beachfront villas, it said.

The Misrata council said the Sirte attack was carried out with 900 technicals, the pickup trucks carrying machine guns or rocket launchers.

‘It’s Over’

“The message to Qaddafi and all those still holding arms on his behalf is that it’s over, give up, the mercenaries should go home,” Cameron said. “It’s time for him to give himself up. It’s time for the Libyan people to get the justice they deserve.”

“People have constantly underrated and underestimated the National Transitional Council; people said they couldn’t unite Libya, they were too tribal,” Cameron said, speaking alongside NTC Chairman Mustafa Abdel Jalil and Prime Minister Mahmoud Jibril. “It has been an impressive transformation. The roads are full, your water is flowing and your hospitals are working.”

Sarkozy said airstrikes against pro-Qaddafi forces “will continue as long as Libyan leaders think Libyan people are in danger.”

The new leaders of Libya are seeking to build a country where there is a “rotation of power and the abandoning of terrorism,” Abdel Jalil said. “We aspire for freedom to prevail over all Libyan soil and for the arrest of Muammar Qaddafi alive and his trial.”

‘No Kickbacks’

Asked whether their intervention had been influenced by a desire to get at Libya’s oil wealth, Sarkozy said “there were no kickbacks, no hidden agreements to access Libya’s resources. We did what we thought was fair.”

If Libya’s new leadership chooses to work with French companies, “it will be good. But it has to be done according to the rule of law, through tenders,” he said.

Giving details of the U.K. aid, Cameron’s spokesman said Britain will send two soldiers to work with the U.S. and Libyans on securing weapons belonging to the Qaddafi regime. Their focus will be “small surface-to-air missiles,” Field said.

Britain is also sending 1 million pounds ($1.6 million) to agencies working on weapons decommissioning and 600,000 pounds ($950,000) to the Mines Advisory Group to support its work disposing of explosives and land mines. Police in Benghazi will get communications equipment valued at 60,000 pounds ($95,000), and the U.K. is offering forensics advice to those looking for evidence of human-rights abuses.

‘Courage of Lions’

In Benghazi, the initial center of the rebel movement, Cameron told cheering crowds that they had inspired the world.

“Your city was an inspiration to the world as it threw off a dictator and chose freedom,” he said. “Colonel Qaddafi said he would hunt you down like rats, but you showed the courage of lions, and we salute you.”

Sarkozy said that “the future of Libya resides in a united Libya and not a divided Libya.”

Libya said 18 out of 19 ports were now “operational,” according to a notice to the UN’s shipping agency from the NTC about the ports’ status was published on the website of Inchcape Shipping Services yesterday.

The North African country will resume crude exports within three or four days, the nation’s representative to a meeting of Arab central bank governors in Doha said yesterday. Output will be about 700,000 barrels a day by the end of this year and an estimated 1.6 million barrels a day by the end of 2012, Abdulla Saudi told reporters in the Qatari capital.

Draft Resolution

The U.K. has put forward a draft resolution to the UN Security Council to end an asset freeze on Libyan National Oil Corp. and Zueitina Oil Co., according to a Western diplomat who spoke on condition of not being identified. The 15-member body may vote on the measure today.

The resolution also would authorize the Central Bank of Libya, the Libyan Foreign Bank, the Libyan Investment Authority and the Libyan Africa Investment Portfolio to use their assets for specified purposes. Those include purchases of humanitarian aid; fuel, electricity and water for civilian use; and the strengthening of Libya’s government and economy.

Ferrari Proves Recession Proof as Ultra-Luxury Sells Out: Cars

Maserati SpA’s new sport-utility vehicle was one of the most sought-after models at the Frankfurt car show this week and Ferrari SpA predicted record sales as executives said ultra-luxury remains recession-proof.

“If you go to the Ferrari stand, there aren’t any customers worried about the recession,” Fiat Chief Executive Officer Sergio Marchionne said at the International Motor Show. “The last Ferrari customers I saw at the show weren’t crying.”

Fiat’s two upscale brands may help the Turin, Italy-based carmaker weather a decline at its main business as Europe’s credit crisis worsens. Even without the Kubang SUV, Maserati aims to boost deliveries by almost eightfold to 45,000 cars in 2014 as it increases dealers by 150 percent worldwide. Lamborghini SpA’s new Aventador model is sold out for 18 months and Rolls-Royce Cars announced a 10 million-pound ($15.8 million) expansion at its Goodwood, England plant.

Ferrari expects to deliver 7,000 cars in 2011 on demand for its first family car, the $356,000 four-seat FF that came to market this year. Fiat’s most profitable unit plans to cap sales at 7,000 going forward to maintain exclusivity. Ferrari targets “significant” results this year after earnings before interest and taxes rose 23 percent in 2010 to 302 million euros ($414 million) on revenue of 1.92 billion euros, Chairman Luca Cordero di Montezemolo said.

“I’m not worried because we have quality, exclusivity, a strong brand and innovative technology,” Montezemolo said in an interview when asked about the effect of the economic slowdown.

Mixed Fortunes

The ultra-luxury optimism stands in contrast to concern voiced from volume carmakers that a worsening debt crisis in Europe is prompting consumers to rein in spending. PSA Peugeot Citroen CEO Philippe Varin said this week that Europe is facing a possible recession, while Ford Motor Co. said sales in the region next year will be little changed.

Bayerische Motoren Werke AG, the world’s biggest maker of luxury cars, is the best performer in the Stoxx 600 Automobiles & Parts Index this year. BMW stock has slipped 6.4 percent, compared with a 24 percent loss for the index. Fiat, which also owns Chrysler Group LLC in the U.S., is the worst performer on the index, with a 42 percent decline.

Sales of the main high-end European luxury brands -- Maserati, Lamborghini, Ferrari, Bentley, Rolls-Royce and Aston Martin -- will rise 19 percent this year to 28,090 vehicles, and gain another 13 percent in 2012, according to a forecast from industry analyst IHS Automotive.

“The rich have gotten richer and the number of millionaires in emerging countries is really growing so the demographic trend is very positive” for the ultra-luxury carmakers, said Erich Hauser, a London-based Credit Suisse automotive analyst. “Things would have to get very nasty before they face a problem.”

Rolls-Royce Record

Rolls-Royce, owned by BMW, expects in 2011 to break last year’s sales record of 2,711 cars, Chief Executive Torsten Mueller-Oetvoes said, adding that China may overtake the U.S. as its top market.

The German executive said he’s ”optimistic” about the prospects for the super-luxury segment and that his company so far has not been affected by the slowdown. The ultra-premium segment is likely to weather this downturn better than the previous crisis, Mueller-Oetvoes said.

Along with the factory expansion, Rolls-Royce may boost its dealerships to 100 from the current 85 and add a coupe version of its best-selling Ghost model, he said. The carmaker debuted an extended-wheelbase version of the Ghost in Frankfurt.

Lamborghini, owned by Volkswagen AG, unveiled the 189,000- euro Gallardo LP 570-4 Super Trofeo Stradale at the show, the most powerful addition to the Gallardo series. The 570- horsepower vehicle comes with matte black finish on the large rear spoiler, engine hood and front air intakes and surges to 100 kilometers (62 miles) in 3.4 seconds.

Limited Edition

Deliveries of the model, which has a top speed of 320 kilometers per hour, will be confined to 150 and start in December, Chief Executive Officer Stephan Winkelmann said in an interview. The Volkswagen division also announced production of the 1.6 million-euro Sesto Elemento. No more than 20 will be built with deliveries due in early 2013.

Lamborghini sales may advance from last year’s 1,302 on the back of the Aventador LP 700-4, which will hit showrooms in October and is sold out for 18 months, Winkelmann said.

“The super-luxury market has been in steady recovery from its low in 2009,” Winkelmann said in an interview, adding that order books at Lamborghini are showing no declines. “We’re aware that there are risks.”

Bentley Motors Ltd., whose customers include Queen Elizabeth II and the Sultan of Brunei, rolled out an updated version of the Continental GTC convertible with deliveries of the 575-horsepower model starting before the end of the year.

Powered by revamps of the Mulsanne and Continental models announced over the past year, full-year deliveries may top the 7,000 mark which would mark a 40-percent gain on 2010, CEO Wolfgang Duerheimer said in an interview.

An SUV that the Crewe, England-based VW unit is considering may help more than double sales to 15,000 by about 2018, he said.

“We’re very optimistic, our business is developing extremely soundly and the order situation is looking good,” Duerheimer said. “We mustn’t talk up a crisis. Growing debt problems in Europe and the U.S. are giving enough reason for concern, but the underlying economic picture remains positive.”

Sarkozy, Merkel Say Greece’s Future Is in the Euro Region

French President Nicolas Sarkozy and German Chancellor Angela Merkel said they are “convinced” Greece will stay in the euro area as they faced international calls to step up efforts in fighting the region’s debt crisis.

The euro rose after the leaders of Europe’s two biggest economies issued a statement yesterday following a telephone conversation with Greek Prime Minister George Papandreou. It erased most of those gains today. Papandreou committed to meet deficit-reduction targets demanded as a condition for an international bailout, according to statements from governments in Berlin, Athens and Paris.

European governments are aiming to ratify a July 21 agreement to bolster the euro region’s bailout fund and extend a second rescue to Greece. Investor skittishness over the spread of the debt crisis has raised banks’ funding costs and roiled markets worldwide.

“I am skeptical that this will help to reassure markets,” Tullia Bucco, an economist at UniCredit Global Research in Milan, said of the leaders’ statement. “The road to the implementation of the second aid package is still quite long and may prove bumpy.”

The euro was up 0.1 percent to $1.3731 at 8:43 a.m. in Berlin, as futures on the Euro Stoxx 50 Index added 1.2 percent.

Geithner’s Travels

Treasury Secretary Timothy F. Geithner will travel to Wroclaw, Poland, to attend a session for the first time of the European Union’s Economic and Financial Affairs Council that begins tomorrow. Chinese Premier Wen Jiabao yesterday called on other countries to “put their houses in order.”

Underscoring divisions in Europe, European Commission President Jose Barroso said he was close to proposing options on joint euro-area bond sales, putting officials in Brussels on a collision course with Germany over steps to contain the sovereign debt crisis.

“The commission will soon present options for the introduction of euro bonds,” Barroso told the European Parliament yesterday in Strasbourg, France, prompting applause from lawmakers who have backed the idea and a swift rejection from officials in Berlin. “Some of these options could be implemented within the terms of the current treaty; others would require treaty change.”

In the three-way telephone call, Papandreou committed to enacting policies demanded by the EU and International Monetary fund to keep the bailout funds flowing. Sarkozy and Merkel “are convinced that the future of Greece is in the euro zone,” the French statement said.

Greek Steps

The Greek Cabinet this month endorsed measures to help meet deficit targets of 17.1 billion euros ($23.6 billion) in 2011 and 14.9 billion euros in 2012, covering a 2 billion-euro shortfall for this year that has been exacerbated by a deepening recession.

The fulfillment of Greece’s adjustment program is “more than ever” essential and is a condition for the payment of further aid tranches, Merkel said in the call, according to an e-mailed statement from her chief spokesman, Steffen Seibert.

Papandreou said Sept. 10 that the government’s top priority is “to save the country from bankruptcy” and said he would do whatever is necessary to meet targets.

Putting austerity programs into place “is indispensable to establish sustainable and balanced growth in Greece,” according to the statement issued in Paris. “The success of the Greek plan will provide stability to the euro zone.”

Flick warns of “fatal” situation at Latvia’s airBaltic

What feels like the endgame at Latvian airline airBaltic appeared one step closer on September 12 when president and main minority shareholder Bertolt Flick launched a blistering attack on the majority shareholder, the Latvian government.

Flick – who has refused to even visit Latvia since June over fears that he will be arrested as part of a corruption investigation as soon as he lands – claims the government of Prime Minister Valdis Dombrovskis had turned the airline into a "hostage" to elections due to take place on September 17, creating "a crisis of confidence in customers and partners alike" and warned that unless a planned increase in airBaltic's share capital takes place pronto, the situation "may become fatal to the airline."

The German who has been with the company since its founding in 1995 and owns 47%, also took the opportunity to break his recent silence to refute allegations made on an investigative TV show on September 11 that there was anything dodgy about an attempt by a mystery investor the previous week to acquire nearly 60,000 shares in airBaltic for €9.6m.

According to Flick, the attempted purchase was an attempt to tidy up a discrepancy between airBaltic's registered and paid-up share capital which dates as far back as 2002, and that the Transport Ministry had actually asked for the situation to be sorted out before any fresh investment in the company could be made. Attracting an investor willing to pay over the odds for shares was a practical measure to maintain liquidity while the government dithers over making good on a promise to increase the airline's share capital by up to €100m, Flick claimed. "Thus arises the strange situation in which on the one hand the government of Valdis Dombrovskis undertakes to invest LVL50m-70m, but the Finance Minister [Andris Vilks] claims that there is no money, and he obviously does not support the decision," says Flick, who delivered similarly withering broadsides against Transport Minister Uldis Augulis and his long-term hate figure Economy Minister Artis Kampars.

From the other side of the chess board, the appearance of the mystery investor looks suspiciously like a gambit by Flick's Bahamas-registered company Baltic Aviation System (BAS) to increase its holding by acquiring what a spokesman for PM Dombrovskis described as "non-existent" shares. It wouldn't be the first time BAS had done deals of questionable propriety while forgetting to mention them to anyone else, for example selling itself exclusive rights to the "airBaltic" brand in December 2010 for a cool €13m then charging the airline a monthly fee to use its own name.

A Parex in the making

While Flick is right that the fate of airBaltic has become a hot pre-election topic - the state owns 52% of it - it's not as simple as the government wanting to make it so, because the way the whole affair has been handled undermines confidence in the Dombrovskis coalition at least as much as it boosts it.

Opposition MP Nikita Nikiforov, whose Harmony Centre party could emerge as the largest single party after the September 17 vote summed up the pubic mood well on September 8 when he said: "The situation with airBaltic is absolutely absurd."

Comparing the airline's perilous current liquidity (it lost €47m in 2010 according to unaudited accounts signed only by Flick, with rumours abounding that the real losses are bigger) with the notorious Parex Bank, whose near-collapse brought the Latvian state to the edge of bankruptcy, Nikiforov said: "I cannot understand how government officials did not know about this until the last moment – it's a state-owned company!"

While Dombrovskis has shown some willingness to get to the bottom of what is actually happening at airBaltic, the pace of the investigation has been painfully slow and lacked decisiveness. Following a cabinet meeting on September 6 that seemed to back the share capital increase plan, his office back-pedalled rapidly once newswires started to report that a deal had been agreed, talking instead of a "conceptual decision" and "possible government investment if a solution on the deal's structure that is acceptable for the state is reached."

Meanwhile, employees of the airline are left in the least enviable position of all. Workers that bne spoke to said they had been told nothing about their future despite rumours that the airline's 10 Fokker aircraft (of a total fleet of 34 planes) will be imminently retired from service.

While they read slick press releases about August being "the best month in [the airline's] history" and, with a certain irony, an international award for being "one of the top six airlines in the world for innovations in generating ancillary revenue," they are left to wonder which political party is most likely to ensure they still have a job to go to in six months' time.

Cash-strapped in Slovenia

Slovenia's leading lender Nova Ljubljanska Banka (NLB) faces a challenging few months as it looks to raise fresh capital as part of a restructuring plan designed to repair its crisis-ravaged finances.

The bank, which just scraped through the latest financial stress test conducted by the European Central Bank (ECB) in July, is hoping that a shareholder meeting on October 27 will approve a second capital hike of at least €250m demanded by the country's central bank Banka Slovenije. NLB is also looking to issue new bonds potentially worth €1bn to help refinance existing debt and enable it to boost lending. NLB was recently sharply criticised by Development and EU Affairs Minister Mitja Gaspari for failing to support Slovenian corporates with fresh lending.

NLB has already raised €250m in March though a capital increase that boosted its Tier 1 capital ratio to 7.8 % from around 6% - just above the minimum 5% level required by the ECB. That fundraising was almost entirely supported by the Slovenian government, which has a 55% stake in the lender that has been struggling with non-performing loans – running at 16.5% of total lending at end-2010 – which led to a €183.4m loss in 2010.

According to Slovenian economist Joze Damijan Slovenian, taxpayers have already supported NLB to the tune of €1.54bn in net terms in the last two decades, but at its current valuation the bank is worth less than €850m.

For his part, NLB's chief executive, Bozo Jasovic, drafted into the bank in September 2009 to turn around the bank's faltering financial fortunes, has acknowledged that in addition to the global economic slowdown, part of the blame for the 2010 loss lay with the bank's rapid regional expansion in recent years. This led to poor management oversight over the bank's lending practices and a loss of trust by the general public.

In July, Jasovic claimed that the worst may be over for NLB after it reported a small after-tax profit of €1.2m in the first half of the year on the back of lower bad loan charges, which fell roughly 17% to €91m. Although Jasovic forecast in July that NLB would end 2011 in the black, he admitted: "The positive result will be weak and subject to many uncertainties."

The latest predictions from analysts suggest that the bank could actually rack up an €80m loss this year, meaning the bank might need to raise as much as €400m through the capital hike to enable it to meaningfully boost its lending activities.

Friends with benefits

With regard to the forthcoming capital increase, which would boost NLB's Tier 1 capital ratio to 9.5% - 0.5% above the level required by Banka Slovenije – the hope is that the bank's other major shareholder Belgian banking and insurance group KBC, which has a 25% plus one share blocking minority stake, will cough up some much-needed cash. Two development agencies – the European Bank for Reconstruction and Development and the International Finance Corporation — are also understood to have been sounded out about helping NLB.

Whether these potential investors will be willing to participate in the capital hike will largely centre on a question of price. The March increase was transacted at €116 per share and the Slovenian government is reportedly insisting on a similar valuation this time around. However, given NLB's ongoing struggle with NPLs, would-be investors are reported to be demanding guarantees that €116 would also be the minimum price if they decided to exit the bank.

Another possibility for the capital increase is an IPO, although given current turbulent market conditions any potential share offering would likely to have to be completed at a much lower valuation than €116 per share.

Although Banka Slovenije Governor Marko Kranjec has said that he wants the capital increase to be completed by the end of the year, protracted talks over the fundraising may mean it is not carried out until the first quarter of 2012. "The various parties involved in the capital increase discussions make the process more complicated," says Lindsey Liddell, a director at Fitch Ratings in London.

NLB is also said to be mulling a €300m-€400m unsecured bond and a pioneering covered bond issue backed by public sector loans of up to €600m, which would be the first ever such bond issued in Slovenia. Proceeds from the two transactions would help NLB to repay an outstanding €1.5bn issue which matures in 2012. The bank has also been active in the international syndicated loan market, securing a €350m two-year credit from a syndicate of 16 banks. "The recent syndicated loan showed that NLB still has relationship banking ties it can call on," says Liddell.

Meanwhile, after its latest meeting with NLB, Slovenia's Capital Assets Management Agency (AUKN), which manages the government's corporate shareholdings, has outlined the future steps it wants the bank to take. These include a comprehensive audit of NLB's operations in recent years to identify and prosecute those individuals responsible for questionable lending decisions and to introduce measures to help to prevent any reoccurrence. AUKN also stated that it wants NLB to accelerate and strengthen cost-cutting measures, which it claims have been too slow and too weak so far, in a bid to improve the bank's return on equity to 10% by 2013.