ECB tells banks to lend, Geithner hopes for growth

U.S. Treasury Secretary Timothy Geithner said on Monday he was optimistic some leading economies could grow this year, but the European Central Bank urged banks to resume lending to secure a recovery.

ECB President Jean-Claude Trichet criticised banks for simply returning much of the vast sums it has supplied to them, instead of lending the money on to firms and households to secure a recovery from Europe's worst recession in decades.

"We remind banks of their responsibility to continue to lend to firms and households at appropriate rates and in suitable volumes," he said in Munich. "It may take some time, however, for the extra liquidity to be transformed into credit."

Last month the ECB injected 442 billion euros ($620 billion) of 12-month funds into the banking system to encourage them to finance the real economy. But, worried about their own health, the banks parked much of that money in the safest place they could find -- back at the ECB -- potentially delaying recovery.

Evidence began emerging around late March that the global recession was starting to bottom out, driving a second-quarter rally in share markets. But weak data in recent weeks has boosted fears that stock prices had run ahead of the prospects of a solid recovery in the second half of this year.

Such doubts hit Asian and European markets. [nLD67974] Shares fell as investors fretted about a coming wave of company earning reports, and oil dipped briefly below $59 a barrel on fears that demand will tail off if the economy stutters. CLc1

JAPAN, CHINA GIVE HOPE

Despite fears that the worst may not be over, Geithner said there was a good chance the United States and other leading economies would resume growth, though uncertainty remained.

"In my view there are still significant risks and challenges ahead," he told reporters in London when asked if he feared a possible double-dip recession. [nLAK000461]

"We have a very powerful set of policies in place, coming on stream. I think there is a very good chance we will see the U.S. economy and the world economy get back to recovery, get growing again, over the next few quarters."

That positive outlook was supported by evidence from Japan, the world's second-biggest economy, and China.

Industrial output in Japan, which is deep in recession, rose 5.7 percent in May from April, revised data showed, and a measure of companies' capacity utilisation rose. [ID:nT184581]

In contrast to ECB concerns over sluggish lending, China is worried that a boom in lending as its strives to achieve eight percent GDP growth this year will cause new speculative bubbles.

Li Dongrong, an assistant governor of the People's Bank of China, said Beijing would strengthen oversight of lending to ensure credit is reasonably controlled and properly channelled.

"We are experiencing many complicated, unprecedented changes in economic and financial conditions, both at home and abroad, which have created new challenges for monetary and credit policy," he said in comments on the PBOC website.[ID:nPEK368921]

Chinese banks extended a massive 1.53 trillion yuan ($223.9 billion) in new loans in June in a fresh show of support for the government's drive to hit eight percent growth in 2009.

Concern is growing that this credit is inflating new stock and property bubbles and could sow the seeds of a new crop of bad loans at mostly state-controlled banks.[ID:nPEK122994]

MARKETS NERVOUS

In the United States, stocks fell as caution about an upcoming spate of earnings remained.

A number of major U.S. firms including Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz), Intel (INTC.O: Quote, Profile, Research, Stock Buzz), JP Morgan Chase (JPM.N: Quote, Profile, Research, Stock Buzz) and Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz) are due to report earnings this week. [ID:nN12536585]

Earlier, Dutch conglomerate Philips Electronics (PHG.AS: Quote, Profile, Research, Stock Buzz) surprised the market with a return to profit in the second quarter and said it was hopeful of an upturn in business in the second half of 2009.

But that did not stop world stocks as measured by MSCI .MIWD00000PUS from losing close to 0.2 percent on Monday, down from earlier losses of three quarters of a percent.

The FTSEurofirst 300 index of top European shares rose more than 1 percent, but only after hitting an 11-week low earlier in the day.

"I don't think we will see an economic recovery this year and ... earnings estimates are still too high, so there is room for disappointment," said Philippe Gijsels, senior equity strategist at Fortis Bank, in Brussels.

In Tokyo the Nikkei .N225 fell 2.6 percent to its lowest close in eight weeks, hurt by growing political uncertainty after news that embattled Prime Minister Taro Aso was set to call a general election for Aug. 30. [.T] [ID:nT353403]

Oil dipped briefly below $59 a barrel but rallied later to stand above $60.50.

CardioNet shares sink on reimbursement rate cut

Shares of CardioNet Inc (BEAT.O: Quote, Profile, Research, Stock Buzz) fell as much as 36 percent Monday, a day after the company withdrew its 2009 outlook as Pennsylvania Medicare carrier Highmark cut the reimbursement rate for mobile cardiac outpatient telemetry (MCOT) services.

On Sunday, CardioNet -- a maker of technology to diagnose and monitor heart rhythm disorders -- said Highmark Medicare Services was adjusting its reimbursement rate for MCOT services to $754 per service, effective September 1.

Highmark had posted a reimbursement rate of $1,123.07 in May.

"We believe CardioNet will need to restructure as the Highmark cut creates significant margin compression and renders the company's current cost structure incompatible with profitability in 2010," Jefferies & Co analyst Joshua Jennings said and cut his price target on the stock to $5 from $17.

CardioNet said it had previously indicated that it had been aware that Highmark was conducting a normal review of the reimbursement rate for MCOT.

Analyst Jennings said the review process had been comprehensive and Highmark's decision was unlikely to be reversed.

CardioNet shares fell 36 percent to $5.63 Monday morning, making them the top percentage losers on Nasdaq.

Kellwood: Still Negotiating With Deutsche Bank On Debt Swap

Kellwood Co. said Monday it is disappointed in the change of heart by bondholder Deutsche Bank AG (DB), which it said had supported a debt exchange before changing its mind on Friday, but Kellwood said it is still negotiating with the bank to try to get breathing room on a rapidly approaching debt maturity.

The company, one of the U.S.'s largest apparel manufacturers, could be forced to file for bankruptcy after it failed to reach an agreement with its bondholders, people familiar with the situation told The Wall Street Journal last week.

Kellwood, which employs about 2,000 people and owns such popular clothing brands as Phat Farm, Sag Harbor and Vince, was taken private in February 2008 by buyout firm Sun Capital Partners Inc. for $542 million. The effects of a heavy debt load and a sharp drop in consumer spending have slammed its financial results.

The company has a $140 million bond issue maturing Wednesday. Unable to refinance the bonds with the tight credit markets, Kellwood hired financial advisers to restructure its debt. It has tried to defer the payment through a so-called exchange offer, in which it would swap the bonds for ones with sweetened terms expiring in 2014. Deutsche Bank, the largest holder of the bonds, elected not to tender to the offer.

Kellwood Chief Executive Michael Kramer said Monday the company was "surprised and disappointed by Deutsche Bank's current position as they were on our bondholder steering committee, helped structure the deal and told us all along that they supported it."

Kramer added the proposed swap comes at a time when the company is performing well, is profitable and has positive cash flow. He said Kellwood is continuing to negotiate with Deutsche Bank and the rest of its bondholders and is looking at other alternatives, but didn't elaborate.

EU not ready to sign South Korea free trade pact

The European Union is not yet ready to sign a free-trade agreement with South Korea because there could still be "outstanding questions" from some EU members, Sweden's prime minister said Monday.

South Korea's President Lee Myung-bak had hoped to announce the conclusion of the free-trade talks during a visit to Sweden, which currently holds the rotating six-month EU presidency.

But Swedish Prime Minister Fredrik Reinfeldt suggested some EU capitals were not prepared to OK the agreement, despite a "breakthrough" in talks on Friday.

"When you finalize this kind of agreement with the European Union, we need to also finalize it with our different member countries," Reinfeldt said. "There might still be some outstanding questions, and we need to follow up on them before we could say that it's absolutely all clear and all ready to sign."

Reinfeldt said he had "good hope" to complete the agreement during Sweden's EU presidency.

South Korea and the EU began negotiating the accord to slash tariffs and other barriers to trade in May 2007.

Bilateral trade reached $98.4 billion in 2008. The EU is South Korea's second-largest trading partner after China and its largest foreign investor.

Lee said he was "happy with the results" of his visit to Europe but stopped short of declaring that talks on a free trade deal had been completed.

"I am very much aware that the European Union is composed of 27 individual countries. Dialogue, cooperation and also trying to convince and encourage those members with different views is very important," he said through a translator.

Earlier Monday, Lee had told South Koreans in a nationwide radio broadcast that he expected to "declare the conclusion of negotiations."

The talks have dragged out longer than both sides had hoped, however, amid difficulty bridging differences over refunds South Korea pays to local companies for tariffs incurred on imported parts used in exported goods.

Opposition by EU automakers to the deal has also been a sticking point. South Korea enjoys a big surplus in vehicle trade.

South Korea is aggressively pursuing free trade agreements. It reached one with the United States in April 2007, but the deal has since languished in political limbo in both countries and remains unratified.

UBS in Talks to Settle Case on 52,000 Accounts

UBS AG, the largest Swiss bank by assets, is in talks with the U.S. government to settle a lawsuit seeking the names of 52,000 American account holders suspected of using Swiss secrecy laws to evade taxes.

A judge in Miami today granted a postponement of an evidentiary hearing while the bank works with the U.S. and Swiss governments on a settlement. The U.S. sued UBS on Feb. 19, a day after the bank agreed to pay $780 million to defer prosecution for helping wealthy Americans evade taxes.

Under that agreement, UBS agreed to an unprecedented breach of Swiss secrecy laws by giving the Internal Revenue Service data on more than 250 accounts. Switzerland, which supports UBS in the case, said the U.S. push for data on 52,000 other accounts is a threat to its sovereignty and would force the bank to violate Swiss criminal laws protecting bank secrecy.

“Over the last week or so, there have been high-level officials from the two governments meeting, trying to narrow the issues and bring about a resolution,” Stuart Gibson, a Justice Department senior litigation counsel, told U.S. District Judge Alan Gold today at a hearing.

UBS attorney Eugene Stearns said the bank learned on July 11 about discussions between the Swiss and U.S. governments.

“We are anxious for the governments of these two democracies to resolve these issues,” said Stearns. “It’s a minefield trying to resolve these issues.”

Hearing Reset

Gold reset an evidentiary hearing from today to Aug. 3 and 4. He said he may extend the date if talks are unfinished.

“This adjournment gives people at very high levels of both governments time to get involved and consider the implications of this litigation,” said Bryan Skarlatos, a tax lawyer at Kostelanetz & Fink LLP in New York. “The symbolic value of this case is huge. It’s King Kong versus Godzilla. It’s the IRS versus bank secrecy jurisdictions.”

The Justice Department said in a statement yesterday that any settlement “would necessarily include a provision requiring UBS to provide the Internal Revenue Service information on a significant number of individuals with UBS accounts.”

UBS rose 40 centimes, or 3.1 percent, to 13.03 Swiss francs at 4:24 p.m. in Zurich trading.

“An out of court settlement in the near future would be positive for UBS,” Teresa Nielsen, an analyst at Vontobel in Zurich with a “hold” rating on UBS, said in a note to clients. “The terms of a possible settlement will be decisive.”

Confidential Negotiations

The postponement request by UBS and the U.S. was backed by the Swiss Federal Department of Justice and Federal Department for Foreign Affairs, according to a Swiss statement. The Swiss declined further comment, citing confidential “ongoing settlement negotiations” between the governments.

UBS called the postponement of the U.S. litigation a positive step.

“The governments will now engage in intensive discussions over the next two weeks and attempt to negotiate a resolution,” the bank said today in a statement.

Switzerland had hardened its public posture on the case, saying in a July 7 court filing it “will use its legal authority to ensure that the bank cannot be pressured to transmit the information illegally, including if necessary by issuing an order taking effective control of the data at UBS.”

On July 8, Gold directed the Justice Department to consult the government’s executive branch, including the State Department, before responding by yesterday to the Swiss threat.

U.S. Intentions

Gold directed the government to say by yesterday “how far it intends to proceed,” including the possibility of seizing UBS assets in the U.S. and imposing a receivership.

In a July 9 memo, UBS Chief Executive Officer Oswald Gruebel said: “The core of the dispute turns on a conflict between the Swiss banking confidentiality laws, to which we are bound, and the U.S. objective to collect taxes owed by its citizens. Honoring the IRS summons would require UBS to violate Swiss criminal law, and we simply cannot comply.”

In its response to Gold yesterday, the Justice Department said it was “premature” to respond to “the question of whether UBS will be able to comply” with any court order.

“To the best of our knowledge the Swiss government has not yet taken such action, nor has it made clear what it means when it suggests that it will issue an order ‘taking effective control’ of the UBS records,” according to the filing.

“The fact that UBS finds itself in a difficult position is completely the result of its own conduct,” according to the filing. It urged Judge Gold to rule on the merits of the case, not on whether “UBS may or may not comply.”

Higher Stakes

The Gold order directing the U.S. to comment on possible seizure of UBS assets in the U.S. raised the stakes in the case, according to Skarlatos, whose firm represents bank clients.

“The judge said, ‘If you think that’s going to carry the day or scare me off, I still have power and authority over all your assets in the United States and I’m still going to exercise it,’” Skarlatos said.

“The real problem is that UBS came to the United States and actively engaged in a business plan to violate the laws in the United States,” he said. “Swiss laws don’t apply when you actively violate the laws of the United States.”

Swiss law recognizes tax fraud and not tax evasion as a crime. Any settlement would probably require a revision to the current tax treaty between the U.S. and Switzerland, said Lawrence Horn, a tax attorney at Sills Cummis & Gross in Newark, New Jersey.

Saving Face

“Someone is going to have to come up with a new definition of tax fraud to be more expansive to allow the Swiss government to save face,” Horn said.

As part of its deferred-prosecution agreement, UBS admitted Feb. 18 that from 2000 to 2007 its Swiss private bankers helped Americans evade U.S. taxes through sham offshore companies in tax havens including Panama, Hong Kong and the British Virgin Islands. UBS said it created misleading forms saying those companies, not taxpayers, were the beneficial account owners.

UBS also said its private bankers marketed securities and banking services in the U.S., even though it didn’t have the required license from the U.S. Securities and Exchange Commission. Those bankers, UBS said, met with clients in the U.S. and communicated with them regularly as they traded securities in their accounts or transferred assets.

The case is U.S. v. UBS AG, 09-cv-20423, U.S. District Court, Southern District of Florida (Miami).

Russian Gas: Black Hats and White Hats in a World of Gray

The fellow on the horse, according to this scenario, is Joschka Fischer, the former German foreign minister, who’s just been hired by two of the members of the consortium backing the projected Nabucco natural gas pipeline. His job: to make the case that Nabucco is vitally needed to rescue Europe from a crippling dependency on Russia for its energy supply.

Lurking in a nearby saloon: Gerhard Schröder, the former Social Democratic chancellor and once Mr. Fischer’s boss, who now functions as point man in Germany for Gazprom, the Russian energy monopoly. Gazprom has spiced the script with a plan to build a pipeline called South Stream that’s clearly meant to thwart Nabucco, supported cautiously by the European Union and the United States.

In truth, the plot’s socko, big-star confrontation bears the weight of a back story about bringing gas from the Caspian region and the Middle East to Europe that is full of gray zones and caveats, nuance and private deals. Nothing dictates, of course, that a direct Fischer-Schröder matchup will take place.

But no matter, the editorial page of the left-of-center Süddeutsche Zeitung is presenting “Nabucco versus South Stream as something akin in the view of Europeans to the struggle between good and evil.”

(This much is sure: its potential actors make for a much more interesting face-off than the September election between Chancellor Angela Merkel and her foreign minister, Frank-Walter Steinmeier, both stuck with defending the same Grand Coalition economic policies that the International Monetary Fund projects will keep Germany in recession into 2011.)

While Mr. Schröder turned east in 2005 — he rushed through a Russia-to-Germany pipeline project called Nord Stream that detours around Poland a few weeks before his election defeat, and just afterward grabbed Vladimir V. Putin’s offer to run Gazprom’s German operation — Mr. Fischer, the former Greens party chief, headed for the United States to teach at Princeton.

Two weeks ago, Mr. Fischer signed a year’s contract as a political and diplomatic adviser with RWE of Germany and OMV of Austria, members of the Nabucco investor group that also includes firms from Turkey, Bulgaria, Romania and Hungary.

The easy assumption about Mr. Fischer’s job is that it involves smoothing relations with Turkey, whose full membership in the European Union has his backing, but which continues to maintain demanding terms for Nabucco to actually come on line in 2014.

In talking to him last week, I got the sense he feels his mission involves a lot more.

Very particularly, convincing his own country, with its very lukewarm feelings about Nabucco because of how it could affect relations with Russia, that Germany must not be perceived as protecting its sweetheart deals in a way that reinforces Europe’s dependent energy status.

Mr. Fischer said, “Nabucco is not against Russia. But the Russians give the impression that they think they have been given a monopoly. Nobody who’s concerned about our national interests can want this monopoly.”

In the context of German debate, numbed by the collusive fog of four years of the Grand Coalition and its in-house arrangements — Mrs. Merkel expressed reservations about Nord Stream during the 2005 election campaign then quickly approved it once chancellor — Mr. Fischer’s words represent strong, independent language.

This year, at the annual meeting on international security in Munich in February, Mrs. Merkel talked about energy without ever mentioning Nabucco.

In April, according to two U.S. officials, Germany (with France), apparently acting out of concern for sounding confrontational to Russian ears, went so far as to resist juxtaposing the words energy and security in a declaration coming out of the NATO summit meeting in Brussels.

One of the officials said that by way of an explanation he was offered “the convoluted logic that being dependent on Russia for energy actually made the Russians dependent on the West for cash.”

More: A former American diplomat, in a conversation, asserted recently that Russian officials have told Germans that Nabucco’s effect would be to cannibalize the Russian plans for supplying Germany with gas via Nord Stream.

He also said Germany brushed aside a discussion, backed by the European Commission, on whether the European Union should take Gazprom to court as a monopoly in the manner of its successful suit against Microsoft.

Although the Obama administration has assumed a softly-softly approach in its support of Nabucco, its concerns about Europe’s energy dependency hardly appear to have diminished.

Secretary of State Hillary Rodham Clinton has said Russia was “attempting to create a gas equivalent” of OPEC, and that this, alongside the pattern of Russian cutoffs of European gas supply “is certainly a significant security challenge that we ignore at our peril.” Senator Richard Lugar, a senior Republican member lof the Senate Foreign Relations Committee, refers to “Europeans who have not dealt very positively” with energy security.

The Americans, perish the thought, don’t name names, perhaps thinking Berlin’s position has become more flexible, now that Russia is again threatening Ukraine with cuts in its gas supply. Just perhaps, though, because in this capital you can’t miss the considerable sentiment to portray Ukraine as the ultimate culprit.

I asked Mr. Fischer, who’s amused about being cast as the man in the white hat, about his relations with Gazprom’s top gunslinger in Europe.

Referring to how the old chancellor landed in Mr. Putin’s lap in exchange for big bucks (and only limited opprobrium at home), he said of Mr. Schröder, “He’s not an evil guy, but I am unable to explain it to you. I didn’t understand it, and I don’t understand it now.

“We talk, but not about Russia.”