Bloomberg News - German Economy Backbone Bending From Lost Russia Sales

Photographer: Sean Gallup/Getty Images

not allowed. Russia responded with import bans on an array of food stuffs from the U.S. and Europe, including fish, beef, pork, fruit, vegetables and dairy.

MWL Apparate Bau GmbH, based in the eastern German town of Grimma, has relied on strong ties with Russia to bolster business. Today, those links don’t mean much.

The maker of equipment such as pressure vessels and hot water tanks for the chemical and petrochemical industries has seen a “significant” decline in orders in the last six months due to the crisis, sales chief Reinhard Weber said. The company has annual revenue of about 20 million euros ($27 million).

“There are two contracts from Russia we didn’t get and we think that’s for political reasons,” Weber said in a telephone interview. “They’re afraid of sanctions being extended -- that they will make an order and that we won’t be able to fulfill it because of political decisions in Germany or Europe.”

MWL is one of many businesses in Germany’s Mittelstand, the thousands of small- and medium-sized companies that form the backbone of Europe’s largest economy, that are already getting pinched as Russian customers put off purchases. With the crisis now intensifying through deeper European Union and U.S. sanctions and retaliatory measures from Russia banning EU and U.S. food imports, they’re preparing for an even bigger hit.

Take Amandus Kahl GmbH. The maker of food processing and recycling machinery near Hamburg had expected to bring in about 10 million euros in revenue this year from Russia.

Sales to the country “have pretty much evaporated because our clients can’t get financing,” Rochus Mecke, a Kahl’s sales director, said in an interview. “We still get inquiries, but it’s only inquiries.”

Worsening Situation

Even before the confrontation deepened with the July 17 downing of MH17 over territory held by pro-Russian separatists in eastern Ukraine, German business was being impacted. Factory orders in June dropped the most in more than 2 1/2 years.

With the escalating measures from both sides, executives are bracing for the situation to worsen. German business sentiment fell for a third straight month in July to the lowest since October, according to the Munich-based Ifo institute.

The Mittelstand, which accounts for 52 percent of Germany’s economic output, is made up of businesses that generally have a focused product offering and more regional sales. That means those reliant on Russia are less able to shift output to other areas of the world in the way global companies like Bayerische Motoren Werke AG and Siemens AG can.

“The Mittelstand largely has a less diversified business,” said Tobias Baumann, an economist responsible for Russia at the German Chambers of Commerce and Industry in Berlin. “The biggest danger is that highly specialized companies with a high share of exports to eastern Europe are deliberately let be run into the ground and that technical skills are lost as a result.”

Escalating Sanctions

EU sanctions announced last month restrict the export to Russia of equipment to modernize the oil industry and forbid the sale of machinery, electronics and other civilian products with potential military uses. New arms contracts with Russia are also not allowed. Russia responded with import bans on an array of food stuffs from the U.S. and Europe, including fish, beef, pork, fruit, vegetables and dairy.

While most attention has been focused on the impact to big companies in industries such as finance and defense, the deeper pain will be felt by these small businesses in Germany, which is Russia’s biggest EU trading partner. Their health is critical to Europe’s biggest economy and so Europe as a whole.

“The slowing impact of increasing sanctions is now having an effect on company order books and threatening business expectations for the year,” Mario Ohoven, head of the Federal Mittelstand Association, said in an e-mail.

Government Aid

The political tensions with Russia stunted German industry in June, when production fell 0.5 percent from the previous year after adjustments for working days. The country’s economy probably contracted in the three months through June, according to a Bloomberg News survey. GDP data will be released this week.

German Economy Minister and Vice Chancellor Sigmar Gabriel said the government is examining whether it might offer aid to companies hurt by sanctions and which aren’t covered by existing export guarantee legislation.

“First we need to get an overview about which companies are affected and how they are impacted,” Gabriel told journalists last week in Bad Lauchstaedt. “Despite all the economic difficulties, political considerations should take precedence.”

Kueberit Profile Systems GmbH, a flooring supplier based 45 miles to the northeast of Cologne, is experiencing a drop in profit as Russian customers opt for less expensive products, said Maxim Poteraylo, the company’s Russian sales manager. That’s in part because of the ruble’s decline against the euro since the crisis began earlier this year, he said.

Paying More

“Our end-consumers have to pay more,” Poteraylo said by telephone from his office near Moscow. “The cost of borrowing money has also increased 14 percent. That means they don’t have enough money to pay for renovations.”

The standoff is especially hurting companies in eastern Germany, according to local business leaders. The region’s past in the Soviet bloc means Russian ties are tighter, according to Reinhard Paetz, the head of the eastern arm of Germany’s machine makers association.

“If the crisis lasts any longer, there is a great danger that many of our Russian customers will turn towards countries which are not taking part in the sanctions,” Paetz said. “Some companies do 30 percent to 50 percent of their business in Russia or Ukraine.”

UNION Werkzeugmaschinen GmbH Chemnitz, a machine-tool manufacturer in eastern Germany with 180 employees founded in 1852, already has workers on shortened hours as a result of slack demand. Russia is the company’s third-biggest market.

“We’re significantly impacted by the situation,” said Christina Debus, a company spokeswoman. “During East German times, we sold a lot of machinery to Russia, and we still have close business ties with Russia. We notice that there aren’t projects anymore as clients there don’t make any investments.”

To contact the reporters on this story: Elisabeth Behrmann in Munich atebehrmann1@bloomberg.net; Alex Webb in Munich at awebb25@bloomberg.net; Birgit Jennen in Berlin at bjennen1@bloomberg.net

Reuters News - China posts record trade surplus, but domestic economy may lag

Trucks drive past piles of shipping containers at the Qingdao port in Qingdao, Shandong province June 8, 2014.

CREDIT: REUTERS/CHINA STRINGER NETWORK

(Reuters) - China's buoyant exports pushed its trade surplus to a record in July, fuelling optimism global demand will help counter pressure on the domestic economy from a weakening property sector.

While manufacturing appears to have picked up in the world's second-largest economy, unexpected weakness in the services sector this week has renewed concerns about the growth outlook. The weak housing market remains China's biggest risk, posing a drag on the broader economy and investor confidence.

Recovering global demand may not be enough to bolster a weak internal economy weighed by a cooling property sector and Beijing's anti-corruption drive, suggesting policy support will likely continue to keep economic growth on track, analysts say.

Exports in July jumped 14.5 percent from a year earlier - the fastest pace in 15 months, the General Administration of Customs said on Friday, doubling from 7.2 percent in June and roundly beating market expectations. Exports were stronger than expected even after pricing in inflated export data in early 2013, when firms falsified invoices to skirt capital curbs.

Some analysts attributed the export spurt to delayed shipments caused by recent volatility in the yuan which may not sustain. Meanwhile, imports fell 1.6 percent versus a rise of 5.5 percent in June, leaving the country with a record trade surplus of $47.3 billion for the month.

"The (export) data indicates very strong demand externally and less need for a weak currency," said Dariusz Kowalczyk, senior economist at Credit Agricole CIB in Hong Kong.

"However, imports contracted 1.6 percent year-on-year, indicating soft domestic demand and a downward pressure on growth. Policymakers are likely to do more to support the domestic economy."

A Reuters poll had predicted a 7.5 percent rise in exports, a 3 percent increase in imports and a trade surplus of $27 billion.

Financial markets firmed on the data with the Shanghai Composite Index rebounding. It rose 0.25 percent by midday from its intraday low, when it was down 0.32 percent.

STRONG EXPORTS, WEAK IMPORTS

After a weak start this year, China's exports have shown signs of improvement helped by stronger global growth as well as supportive domestic policies and the effects of a weakeryuan.

Exports to the United States, China's top export destination, rose 12.3 percent in June, quickening from a rise of 7.5 percent in June, while those to the European Union, the second-biggest market, grew 17 percent, compared with 13.1 percent in June.

Exports to ASEAN countries rose 11.9 percent in July, accelerating from 9.7 percent in June, the customs data showed.

Customs spokesman Zheng Yuesheng told state television that China exports are likely to stay strong in the coming months.

"The external demand is improving as a recovery in major developed countries underpins the global economy," he said.

Imports from China's largest source for resources, Australia, dropped 5.7 percent, partly due to softer commodity prices but the fall adds to questions over the health of domestic demand.

Some analysts attributed weak imports to the crackdown on commodity financingfollowing the Qingdao port fraud probe.

Combined exports and imports grew 2 percent in the first seven months from a year earlier, trailing far behind the government's full-year target of 7.5 percent.

The record trade surplus and pressure from capital inflows were seen renewing pressure on the yuan. The currency is poised for its third consecutive day of gains as the central bank signaled it was comfortable with stronger levels as the economy was improving.

"With Chinese economic activity improving, we believe that there is scope for RMB to further appreciate, driven by conversion of onshore FX deposits and increased foreign portfolio inflows," analysts at ANZ said in a note.

That could create a fresh headache for China's central bank, which intervened to weaken the currency earlier this year when it punished speculators betting on one-way yuan appreciation.

Chinese leaders have pledged to maintain pro-growth policies to help achieve the annual growth target of 7.5 percent.

The government unveiled a burst of "targeted" policy stimulus since April, including cutting reserve requirements for some banks, hastening construction of railways and public housing and allowing local governments to loosen property curbs.

The Politburo, a top decision-making body of the ruling Communist Party, said last month that China must maintain a "certain speed" in its development over the long term to help resolve problems in the economy

The government is due to release inflation data on Saturday, and industrial output, retailsales and fixed-asset investment on Aug. 13. New loan and money supply data will be issued between Aug. 10-15.

(Reporting by China economics team; Editing by Jacqueline Wong)

BBC News - Italy falls back into recession

Italy's economy has fallen back into recession, latest official figures show, after contracting for two quarters in a row.

Italy's economy shrinks - the latest figures were weaker than expected

GDP, the value of all the country's goods and services, shrank 0.2% in the second quarter of the year.

The surprisingly weak number follows a 0.1% contraction in the first quarter.

Economists consider two quarters of shrinking GDP means a country is in recession.

At the end of last year the country appeared to be emerging from recession, growing fractionally in the last three months.

But since then the numbers have been getting worse.

Speaking before the release of the latest figures, Hetal Mehta, European economist with Legal & General Investment Management, told the BBC: "Italy has a huge pile of government debt and they need growth to bring that debt stock down, so having such weak growth figures is a major setback."

But the Bank of Italy said last month that GDP had contracted by 9% since the global financial crisis began in 2007.

Separate figures showed industrial output increased by 0.9% from May to June, the biggest increase in five months.

Reforms

This latest unexpected contraction in GDP is a blow to Prime Minister Matteo Renzi, who came to power in February promising to reform and revive the economy.

But the reforms have so far been limited to a tax break for low income workers.

Ms Mehta said: "If you compare it to a country like Spain, which underwent a huge amount of austerity but at the same time carried out labour market reforms, Italy ... hasn't done as much and you see the difference in growth rates that are starting to come through."

The Spanish government last month raised its estimate for 2014 growth to 1.5%.

Italy's projections for 2014 put economic growth at 0.8% this year, with a deficit of 2.6% of GDP.

And without a recovery, there is speculation the government may need another budget to keep the deficit below the European Union's ceiling of 3% of GDP.

BBC News - US-Africa Summit: US firms to invest $14bn in Africa

US companies have pledged $14bn (£8.3bn) of investment in Africa in areas such as energy and infrastructure, US President Barack Obama has said.

The US-Africa summit is intended to strengthen ties as China ramps up its investment in the continent

The announcement came at the first US-Africa Leaders' Summit, attended by over 40 African heads of state.

The summit is an effort to strengthen US ties with Africa as China increases its African investments.

Mr Obama also hosted a dinner for African leaders at the White House.

The deals announced on Tuesday included a $5bn partnership between private-equity firm Blackstone and Aliko Dangote, Africa's richest businessman, for energy infrastructure projects in sub-Saharan Africa, as well as more investments in Mr Obama's Power Africa initiative.

According to the White House, Power Africa received an additional $12bn in pledges towards its effort to develop energy supplies on Africa through a mix of investment and state involvement.

President Obama toasting his guests at a White House dinner

Malawi's President Mr Mutharika and his wife were among Mr Obama's guests

President of the Ivory Coast, Daniel Kablan Duncan also attended the White House dinner

'Unlocking growth'

The World Bank announced a $5bn investment in Power Africa and General Electric said it had committed $2bn to help boost infrastructure and access to energy.

"We gave it to the Europeans first and to the Chinese later, but today it's wide open for us," said General Electric chief executive Jeff Immelt.

Mr Obama also said that the US would offer an additional $7bn of financing through the Doing Business in Africa (DBIA) Campaign, bringing the total new US commitments to investment in Africa announced on Tuesday to $33bn.

"Up to tens of thousands of American jobs are supported every time we expand trade with Africa", said Mr Obama.

"As critical as all these investments are, the key to unlocking the next era of African growth is not going to be here in the US, it is going to be in Africa, " he added.

The three-day summit ends on Wednesday.

Reuters News - Fed says U.S. banks easing loan standards, credit demand rising

(Reuters) - Banks made it easier for Americans to get loans in recent months and demand for credit also increased, signs that the U.S. economic recovery is gaining steam.

The U.S. Federal Reserve said on Monday that banks eased their lending standards "for many types of loan categories amid a broad-based pickup in loan demand."

The assessment was part of the Fed's quarterly survey of senior loan officers, and was based on the responses gathered in the first two weeks of July from 75 U.S. banks and 23 U.S. branches of foreign banks.

The results are a positive signal for both the U.S. housing market and for business investment.

Many banks eased standards for mortgages lending, and domestic lenders were also making it easier for businesses to qualify for loans, the Fed said.

Economic growth in the United States surged between April and June, and most analysts expect the economy will keep growing at brisk rates during the rest of this year.

The survey of loan officers showed demand for credit rose for "many more loan categories" than in the Fed's April survey.

(Reporting by Jason Lange; Editing by Andrea Ricci)

Bloomberg News - Portugal Announces $6.6 Billion Espirito Santo Rescue

Photographer: Mario Proenca/Bloomberg

Bank of Portugal Governor Carlos Costa had sought to find private investors to inject the cash, and said government funds would only be a last resort.

Portugal’s central bank took control of Banco Espirito Santo SA, once the country’s largest lender by market value, in a 4.9 billion-euro ($6.6 billion) bailout that will leave junior bondholders with losses.

The Bank of Portugal’s Resolution Fund will move Banco Espirito Santo’s deposit-taking operations and most of its assets to a new company, Novo Banco, which it will own outright. The fund will finance the rescue with a Treasury loan to be repaid by Novo Banco’s eventual sale. Subordinated debt plunged today as junior bondholders and shareholders will be left with the most “problematic” assets, including loans to other parts of the Espirito Santo Group and the lender’s stake in its Angolan operation, the central bank said yesterday.

Banco Espirito Santo, which tapped shareholders for funds less than two months ago, has been forced to take public money after regulators uncovered potential losses on loans to other companies tied to Portugal’s Espirito Santo family. Bank of Portugal Governor Carlos Costa had sought to find private investors to inject cash, and said government funds would only be a last resort. The Portuguese government has about 6.4 billion euros remaining from its European Union-led bailout in 2011 to fund the injection.

“I was very surprised that they went down the route of a state bailout so quickly,” said Lutz Roehmeyer, who helps manage 10 billion euros including senior bonds of Banco Espirito Santo at Landesbank Berlin Investment. “That suggests that the bank’s situation was much worse than described.”

Bailing in “is the route the EU will take from now on,” he said.

‘Full Contribution’

The bank’s 750 million euros of 7.125 percent subordinated bonds fell 15.3 cents on the euro to 20.5 cents to yield 40.7 percent at 10:07 a.m. in Lisbon, according to data compiled by Bloomberg. Its senior, unsecured 4 percent notes surged 10.8 cents to 99.8 cents on the euro, to yield 4.06 percent.

“Shareholders, subordinated debt holders, as well as board members or former board members directly involved in the more recent events, and not the taxpayers, will be called to shoulder the losses incurred by a banking business they failed to adequately oversee,” the Finance Ministrysaid in a statement.

Portugal’s benchmark PSI-20 stock index rose 0.3 percent as of 10:01 a.m. in Lisbon, after declining in the last four trading days. Banco Comercial Portugues SA, the country’s biggest bank by market value, rose 3.3 percent.

Portugal’s 10-year bond yield fell eight basis points, or 0.08 percentage point, to 3.63 percent. Two-year yields fell to the lowest level since 1999.

“The government has been prompt in acting and that’s certainly a positive, that there’s quick intervention without much disruption,” David Costa, dean of faculty at Robert Kennedy College in Zurich, said in an interview with Bloomberg Television’s Mark Barton. Still, “the evolution of the banking sector isn’t over yet, there may be some other surprises.”

Shares of the lender plunged 73 percent in Lisbon last week to 12 euro cents, for a market value of 675 million euros, before the stock was suspended on Aug. 1.

“The full contribution of shareholders and of subordinated debt holders to the losses of Banco Espirito Santo will be ensured in accordance with the burden-sharing rules” set out in 2013, the European Commission said in a statement yesterday as it approved the plan.

Family Companies

Subordinated bonds have been hit by European regulators seeking to share the cost of resolving distressed banks with bondholders, with losses inflicted on holders of junior debt of lenders including Britain’s Co-Operative Bank Plc and Spain’s Bankia SA. (BKIA)

Banco Espirito Santo has 457 million euros of Tier 1 bonds, its most junior debt securities, and 853 million euros of more-senior Tier 2 bonds, making a total of about 1.3 billion euros, according to data compiled by Bloomberg. The lender has 13.5 billion euros of senior bonds and 4.63 billion euros of secured notes outstanding. All in all, it has 20.4 billion euros of bond debt outstanding, the data show.

Portugal accepted a bailout by the European Union and International Monetary Fund in 2011 as it lost access to market funding, and the country’s financial institutions faced a similar squeeze, though Banco Espirito Santo had returned to the bond market in November 2012.

The financial crisis took a toll on the lender as well as its competitors. It posted losses in 2011 and 2013, with a 517.6 million-euro loss last year. Shareholders hadn’t received dividends in three years.

Banco Espirito Santo is 20 percent owned by Espirito Santo Financial Group, part of a chain of companies linked to the bank’s founding family. The lender’s largest outside shareholders includeFrance’s Credit Agricole SA (ACA), owner of a 14.6 percent stake, as well as Brazil’sBanco Bradesco SA (BBDC4), which has a 3.9 percent holding.

Banco Espirito Santo shares slumped 67 percent in July as three parent companies linked to the Espirito Santo family requested protection from creditors and concern grew that the bank may have to inject additional capital into its Angola unit.

Novo Banco’s managers, led by Chief Executive Officer Vitor Bento, will seek to find private investors to buy “significant” stakes in the bank in “an adequate time horizon,” according to the central bank.

Bento said in a statement that yesterday’s move removes key uncertainties around the bank and the lender is now stronger and safer than before.

To contact the reporters on this story: Joao Lima in Lisbon at jlima1@bloomberg.net; Anabela Reis in Lisbon at areis1@bloomberg.net

BBC News - WTO members fail to agree global trade deal

The World Trade Organization says its 160 members have failed to agree a global customs pact drawn up in meetings in Bali last December.

The WTO had seemed on the verge of reaching its first major agreement

The Trade Facilitation Agreement would have streamlined global customs procedures, and should have been finalised by Thursday.

But it was blocked over a number of rifts, including India's demands for concessions on the stockpiling of food.

The WTO said it had not been possible to find a breakthrough.

'Uncertain ground'

"We have not been able to find a solution that would allow us to bridge the gap," WTO director-general Roberto Azevedo said.

He asked WTO members "to reflect long and hard on the ramifications of this setback".

And US ambassador to the WTO, Michael Punke, said that the failure to agree a deal had "put this institution on very uncertain new ground".

The WTO had seemed to be on the verge of reaching its first comprehensive agreement since it was founded in 1995.

But India vetoed the proposal at a late stage, demanding greater concessions over farm subsidies and agricultural stockpiles.