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price yield chg
US Gov 10 yr 101.50 1.59 0.00
UK Gov 10 yr 120.77 1.68 0.00
Ger Gov 10 yr 102.95 1.43 -0.04
Jpn Gov 10 yr 100.60 0.84 -0.02
US Gov 30 yr 106.50 2.68 -0.01
Ger Gov 2 yr 99.95 0.03 -0.04
Jun 18 prev chg
Fed Funds Ef 0.18 0.17 0.01
US 3mBills 0.08 0.09 -0.01
Euro Libor 3m 0.57 0.57 0.00
UK 3m 0.94 0.94 -
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per $ 78.9 78.7
per 123.6 123.2
$ index 81.7 81.5
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Jun 18 prev
per $ 0.795 0.792
per $ 0.638 0.639
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index 83.4 83.1
index 88.35 88.58
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THE FINANCIAL TIMES
LIMITED 2012 No: 37,957

Printed in London, Liverpool, Dublin,

Frankfurt, Brussels, Stockholm, Milan,
Madrid, New York, Chicago, San Francisco,
Dallas, Orlando, Washington DC,
Johannesburg, Tokyo, Hong Kong,
Singapore, Seoul, Abu Dhabi, Sydney
Carrefour investors
block share plans
Shareholders at Carrefour
vented their anger at the
French retailers
underperformance by
blocking the allocation of
new share options to
directors at an annual
meeting in Paris. Page 15
EU banking push
A push by EU leaders to
create a single supervisor for
Europes largest banks is
rapidly gaining momentum
and could lead to an
agreement as soon as next
week. Page 2
Warships on alert
Russia is preparing two
warships to sail to Syria to
protect Russian citizens, in
a sign that it is taking
precautions against a
worsening of the security
situation there. Page 6;
www.ft.com/syria
Russian contingency
Russia is setting aside up to
$40bn to shore up the
economy in case the
eurozone crisis should
escalate and spread. Page 3
Hollandes challenge
Franois Hollande, Frances
president, will soon have to
take tough measures to
tackle the countrys public
finances. Page 2
Clean energy boost
Japan has revealed a plan to
boost investment in clean
energy sources, in a move
aimed at lowering dependence
on fossil fuels and nuclear
power. Page 7; Rich nations
must take a lead, Page 11
Fairfax to axe jobs
The Australian publisher
Fairfax Media is to cut about
a fifth of its workforce and
shrink its flagships Sydney
Morning Herald and The Age
to tabloid size as it seeks to
cut costs and halt a slide in
revenue. Page 15
Tehran talks tough
Iran engaged in intense and
tough exchanges with the
US and other world powers
as a third round of nuclear
talks began amid fears that a
peaceful resolution to the
stand-off over Tehrans
ambitions will prove elusive.
Page 6; Insurance ban, Page 26
India rejects rate cut
Indias central bank left
interest rates unchanged,
withstanding pressure from
big business and government
officials in New Delhi to give
the economy a boost. Page 3
Saudi heir apparent
King Abdullah of Saudi
Arabia has appointed his
half brother Prince Salman,
76, as the new heir apparent,
following the death of Crown
Prince Naif. Page 6
Credibility crisis
Alex Wynaendts, the chief
executive of life assurer
Aegon, has admitted that the
industry suffers from a
credibility problem because
it has sold over-complex
products to savers. Page 15
News Briefing
Separate section
Buying & investing in wine
Hopes rise again after correction
Just not cricket?
Learning from scams
Andrew Hill, Page 12
Banking union
A big but difficult eurozone fix. Analysis, Page 9
Tensions rise as MuslimBrotherhood
and old guard clash over Egypt election
By Borzou Daragahi in Cairo
Egypts Muslim Brotherhood
and the countrys old guard
stepped closer towards confron-
tation yesterday following
weekend presidential elections
and a flurry of manoeuvres by
the armed forces that appeared
to expand the militarys hold
over political life.
Although official results are
not due to be released until
Thursday, the Brotherhoods
Mohamed Morsi yesterday
claimed victory in the presiden-
tial poll, with 52 per cent of the
vote.
The announcement triggered
a heated exchange with rival
Ahmed Shafiq, former strong-
man Hosni Mubaraks last
prime minister, whose support-
ers accused the Brotherhood of
trying to steal the election.
The resulting uncertainty
alarmed investors and caused
the Egypt Stock Exchanges
benchmark EGX-30 index to
close down 3.42 per cent.
Egypts military leadership,
the Supreme Council of the
Armed Forces, insisted that it
would hand over power to civil-
ian rule at the end of June
despite recent moves that
seemed intended to consolidate
its hold on power.
The countrys Supreme Con-
stitutional Court, which
remains dominated by Mubarak
appointees, last week ordered
the dissolution of an elected
parliament controlled by the
Brotherhood and other Islam-
ists. On Sunday, after presiden-
tial polls closed, the military
issued a constitutional declara-
tion seeking to enshrine its
right to veto many presidential
decisions and maintain control
over the militarys own budget.
That declaration drew an
alarmed response from the US
defence department, which has
long had close ties to the Egyp-
tian armed forces.
We are deeply concerned
about the new amendments to
the constitutional declaration,
the Pentagon said. We support
the Egyptian people in their
expectation that the Supreme
Council of the Armed Forces
will transfer full power to a
democratically elected civilian
government.
In a televised press confer-
ence that appeared in part a
response to alarm over recent
developments among western
diplomats and domestic elites, a
spokesman for the military
leadership said it would not
interfere with the elected presi-
dents work. A new constitution
would be drafted by October
and new parliamentary elec-
tions held by December if
there are no obstacles or prob-
lems, the spokesman said.
The Brotherhood has refused
to recognise the constitutional
declaration, saying it is null
and void, and vowed to con-
vene the Islamist-dominated
constitutional assembly.
An administrative court was
scheduled to hold a hearing
yesterday on the legality of the
Brotherhood, which was out-
lawed under Mr Mubarak.
Military tightens grip, Page 4
We are deeply
concerned about the
new amendments to
the constitutional
declaration
Jubilant: supporters of the Muslim Brotherhood celebrate in Tahrir Square after Mohamed Morsi claimed victory yesterday Epa
By Robin Wigglesworth
in London, Chris Giles in
Los Cabos, Mexico and
Kerin Hope in Athens
The election victory for pro-
austerity parties in Greece
failed to assuage fears over the
eurozones future, as investors
ratcheted up the pressure on
policy makers by sending
Spains benchmark borrowing
costs to a new euro-era high.
Markets initially rallied on
news that New Democracy and
Pasok, two mainstream parties
that support the austerity condi-
tions of the eurozones bailout,
gained enough seats to form a
parliamentary majority in Ath-
ens. But the optimism was
swiftly deflated by dismal bad
bank loan figures in Spain that
underlined the countrys woes.
Data from the Bank of Spain
showed that the non-performing
loan ratio of Spanish banks rose
to 8.7 per cent of their outstand-
ing portfolios in April the
highest in almost two decades.
The eurozone has already
promised 100bn to help recapi-
talise Spains banks, but inves-
tors are concerned that it could
merely increase Madrids debt
burden and eventually lead to a
full sovereign rescue. Spains 10-
year bond yields, which move
inversely to prices, rose as high
as 7.28 per cent yesterday, while
the euro fell sharply against
most other key currencies.
Italys 10-year bond yields again
rose above the 6 per cent mark.
The Greek election merely
postpones a consideration of the
underlying problems, said
Sushil Wadhwani, a hedge fund
manager and former member of
the Bank of Englands Monetary
Policy Committee. The markets
are tiring of things that buy a
little time and do not deal with
the underlying issues.
At the start of the Group of 20
summit in Mexico, Jos Manuel
Barroso, European Commission
president, indicated that the
terms of Spains banking rescue
were still up for negotiation and
acknowledged fears that the
banking and fiscal crises are
increasingly intertwined: We
have been in favour, as far as
possible, in avoiding any kind of
contamination of financial debt
and sovereign debt.
While the commission and
many eurozone countries have
been in favour of using the con-
tinents rescue fund, the Euro-
pean Stability Mechanism, to
inject equity directly into failing
eurozone banks, Germany
remains opposed and has a
blocking vote on the ESM board.
Investors have begun to focus
their concerns on an EU summit
scheduled for the end of the
month, with many hoping pol-
icy makers will make progress
towards some form of banking
union to prevent the bloc from
unravelling. Hopes have centred
on proposals to create a com-
mon European bank supervisor
and rescue fund that would
shore up banks too big and too
weak to be rescued by their
national governments.
Eurozone woes, Page 2
Editorial Comment, Page 10
Comment, Page 11
Lex, Page 14
The Short View, Page 15
Markets, Pages 2628
www.ft.com/euro
Eurozones
Greek poll
honeymoon
shortlived
Spains borrowing costs at euroera high
Morgan Stanley discusses penance
with Irish nuns over bond lawsuit
By Jane Croft in London
A group of Irish nuns is close to
reaching a settlement with Mor-
gan Stanley after suing the US
bank in a dispute about losses
they incurred from an invest-
ment in euro-denominated
notes.
The Sisters of Charity of Jesus
and Mary, the Holy Faith Sisters
and the Irish Veterinary Benev-
olent Fund are among a group
of 132 Irish investors suing Mor-
gan Stanley and Saturns Invest-
ments Europe, a special-purpose
vehicle set up by the New York-
based bank.
The nuns and other investors
bought so-called Saturn notes
worth about 20m linked to
Dresdner Bank bonds in 2005
and 2006.
The lawsuit centres around
allegations that Morgan Stanley
failed to redeem the debt when
a mandatory redemption was
triggered in early 2009 after the
German banks credit rating
was cut below an agreed point.
The investors allege that Mor-
gan Stanley postponed redeem-
ing the notes until the value of
Dresdner Bank debt had recov-
ered to a level where the US
bank would incur no losses, but
caused the investors substan-
tial losses.
A trial was due to start at the
High Court in London yesterday
but was adjourned to allow both
parties more time for settlement
talks. Andrew Sutcliffe QC, rep-
resenting the claimants, told the
court the case has not yet set-
tled but we anticipate it may
and asked the judge to allow the
parties until later in the week to
resolve the terms.
Bloxham, the Irish stockbro-
ker that sold the notes to the
nuns and other investors, has
been added as a defendant.
The court heard that even if
the settlement was agreed, there
was still outstanding litigation
between Morgan Stanley and
Bloxham.
The US bank said in a filing
last year that it had no dealings
with any of the noteholders,
since it sold the notes directly to
Bloxham.
Morgan Stanley declined to
comment yesterday.
Bloxham, one of Irelands old-
est stockbrokers, was last
month forced to cease trading
after the Central Bank of Ire-
land discovered financial irregu-
larities. The Irish broker has
transferred its asset manage-
ment unit to Davy, Irelands
largest stockbroker.
Lawyers say that they expect
further litigation relating to
structured products sold at the
height of the economic boom,
because there is a six-year time
limit for starting such proceed-
ings in the UK.
Discord expected
Canada, the Holy See and
dozens of other countries have
raised pet objections before
this weeks Rio+20 sustainable
development conference, which
the UN says is the biggest
event it has organised. They
underline the doubts that many
have about what will be
achieved by the 100plus
leaders expected to fly in for
the meeting in Brazil by the
time it ends on Friday.
Report, Page 7
EUROPE Tuesday June 19 2012
JUNE 19 2012 Section:FrontBack Time: 18/6/2012 - 20:30 User: millern Page Name: 1FRONT EUR, Part,Page,Edition: EUR, 1, 1
2

FINANCIAL TIMES TUESDAY JUNE 19 2012
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A hungry bear will not
dance, says the Greek
proverb. Twenty-four
hours after national
elections that revealed a
deeply fractured political
landscape and a society
close to psychological
exhaustion, it is an image
Greeces foreign creditors
will need to keep in mind.
Temporarily, the victory
of the centre-right New
Democracy party will
keep at bay the forces of
Syriza, the radical leftist
party determined to break
the stranglehold that it
accuses the creditors of
imposing on Greece as
their price for emergency
financial help. In this
narrow sense, the
eurozone lives to breathe
another day.
But the sickness of the
Greek economy is so far
advanced that it is
inconceivable that the
next government will
meet the economic and
fiscal targets set by other
European countries and
the International
Monetary Fund. The
Greek state is within
weeks of running out of
cash to meet its wages
and pensions bills, tax
collection has slumped
and private sector
economic activity is
grinding to a halt.
The once well-fed Greek
bear cannot dance to the
eurozone-IMF tune
because it is lying on a
stretcher in the intensive
care ward. It is hungrier
than ever for jobs, living
wages, business credit,
medical supplies and
plain hope. Turnout in
Greek elections is usually
high by European
standards but on Sunday,
despite being warned that
the nations destiny hung
in the balance, barely
60 per cent of registered
voters cast ballots.
To satisfy its creditors,
Greece is required in
coming weeks to make
public spending cuts of
up to 11.5bn and
implement the bulk of
them by the end of 2013.
But the desperate
condition of Greeces
economy and the post-
election alignment of
political forces in
parliament make it an
open question whether
the next government will
be able or willing to
honour this commitment.
Like a previous,
inconclusive election on
May 6, Sundays vote did
nothing to resolve the
paradox at the heart of
Greeces plight: the nation
wants to stay in the
eurozone but bursts with
despair and resentment at
the terms demanded of it
to do so.
The two elections have
accelerated the
disintegration of the
political order established
in Greece after the fall of
the 1967-74 military junta.
But Sundays result left
little option but to
reinstall in power the two
parties New Democracy
and the socialist Pasok
party most closely
identified with that
discredited order. It is not
a recipe either for
resolute government or
for the general publics
readiness to accept more
economic ordeals.
Greece is not the only
eurozone country whose
political structures are
buckling under the
pressure of economic
recession, unemployment
and welfare state cuts.
Irelands leftwing Sinn
Fin party exploited a
referendum on a
European fiscal treaty
last month to strengthen
its position as the main
anti-government voice, at
the expense of the Fianna
Fil party.
Silvio Berlusconis
People of Freedom party
and Umberto Bossis
Northern League are
losing their grip on
conservative voters in
Italy, and Beppe Grillos
idiosyncratic Five Star
movement is climbing in
the polls. For seven
months Italy has been
under the rule of
non-party technocrats.
Populist and xenophobic
parties flourish. Apart
from Syriza and the
hardline Communist party
on the far left, Greeces
two elections catapulted
the neo-fascist Golden
Dawn into parliament.
If there is a crumb of
comfort for the starved
Greek bear, it lies in the
erosion of the corrupt
clientelism that was the
hallmark of politics and
state administration
under Pasok and New
Democracy. Economic
collapse dictates there are
fewer jobs and favours for
politicians to distribute in
exchange for votes.
So far, however, Syriza
the bte noire of
European governments
is the only political
movement to have truly
capitalised on the
implosion of the old
order. Syriza now waits
restlessly in the wings for
its chance. Without a
revision of Greeces
financial rescue terms, it
may be only a matter of
time before Syriza moves
to centre stage.
Few crumbs of
comfort left for
starved Greek
bear after vote
It is inconceivable
that the next
government will
meet economic
and fiscal targets
GLOBAL INSIGHT
Tony Barber
in Athens
By Alex Barker in Brussels
A push by EU leaders to
create a single supervisor
for Europes largest banks
is rapidly gaining momen-
tum as support builds for
giving the European Cen-
tral Bank fresh oversight
powers in a big step
towards banking union.
The leaders of France,
Germany, Italy, Spain and
Austria are willing to back
a powerful supranational
supervisor, and a decision
to relinquish national con-
trol over cross-border banks
is being prepared for next
weeks EU summit, accord-
ing to senior officials
involved. One said the new-
found political impetus was
astonishing.
But political obstacles
remain, including the cen-
tral supervisors remit over
smaller banks and its
ability to deploy the EUs
bailout fund to inject capi-
tal directly into failing
institutions.
Currently, EU bank res-
cue loans must go through
national governments, add-
ing to their sovereign debt.
The European Commis-
sion is pressing for the
banking union to be estab-
lished for all 27 member
states a push backed by
some smaller countries out-
side the euro, whose econo-
mies are dominated by
eurozone-based banks and
who worry about handing
more power to the ECB.
We are not there yet
where every member state
supports a single supervi-
sor, said an EU official.
Diplomats say in the
short term, progress is less
likely on moves towards
common deposit insurance,
where EU or eurozone
states would share the risks
of underwriting some 5tn
of household deposits.
Angela Merkel, the Ger-
man chancellor, has made
plain her objections to
apparently simple ideas
about mutualisation.
The potential for break-
through on bank supervi-
sion and bailout rules has
been partly spurred by neg-
ative market reaction to a
proposed 100bn bailout of
Spains banks.
Because the rescue will
add senior debt to Madrids
books, the bailout loans
have spooked the Spanish
bond market, pushing up
borrowing rates to euro-era
highs again yesterday. Offi-
cials believe the Spanish
rescue highlighted flaws in
the eurozones crisis fight-
ing tools. Franois Hol-
lande, the French president,
is leading calls for the ECB
to take oversight of banks
and, when necessary, use
the new 500bn eurozone
rescue fund, the European
Stability Mechanism, to buy
direct stakes in struggling
banks.
Several ECB officials have
backed the thrust of the pro-
posal. Benot Coeur, an
ECB executive board mem-
ber, this weekend said: If
the ESM could inject capital
directly into banks, with
strong conditionality and
control, this would also
help to break the bank-
sovereign loop.
Ms Merkel has said she
is open to pan-European
supervision of Germanys
two biggest banks but has
been resisting changes in
the bailout scheme. Berlin
has long insisted that bank
rescue funds are directed
via sovereign loans, so that
national governments can
be held responsible for the
rescues conditions.
But some officials believe
giving the ECB supervision
powers, which can be
enacted under the EU trea-
ties through a unanimous
vote of member states,
would establish the pan-Eu-
ropean control structure
needed to handle bailouts.
Additional reporting by
Ralph Atkins in Frankfurt
Antonis Samaras, Greeces
centre-right leader, was try-
ing last night to stitch
together a coalition govern-
ment out of three disparate
parties united only by their
determination to keep the
country in the euro.
Mr Samaras held back-to-
back meetings with party
leaders in an effort to wrap
up a coalition agreement in
principal by today, after his
New Democracy edged the
anti-austerity leftwing Syr-
iza party into second place
in Sundays election.
Greece needs to show its
renewed commitment by
having a cabinet, and espe-
cially a finance minister, in
place before the eurogroup
[of eurozone finance minis-
ters] meets this week, said
a New Democracy official.
Sundays vote, the second
in six weeks, produced
another stand-off, although
New Democracy increased
its share of the vote by
almost 12 percentage points
and Syriza made similar
gains. The once formidable
PanHellenic Socialist Move-
ment (Pasok) finished a dis-
tant third, after more than
a third of its voter base,
mainly public sector work-
ers and pensioners,
switched to Syriza.
Final results gave New
Democracy 29.7 per cent of
the vote to 26.9 per cent for
Syriza and 12.3 per cent for
Pasok. The conservatives
won by a bigger margin
than pollsters had forecast
but, with 129 seats, were
left well short of a majority
in the 300-member parlia-
ment, even after receiving a
50-seat bonus awarded to
the winning party.
The moderate Democratic
Left, a potential third part-
ner in a conservative-led
administration, won 6.3 per
cent and 17 seats.
Mr Samarass chances of
forming a viable govern-
ment to continue imple-
menting Greeces second
174bn bailout improved
after Evangelos Venizelos,
the Pasok leader, backed
him for prime minister in a
late-night telephone call,
according to a conservative
adviser.
Two popular socialist
former ministers, Michalis
Chrysohoides and Andreas
Loverdos, then made a sur-
prise pitch for cabinet jobs
in a New Democracy-Pasok
coalition, even though their
party leader had not agreed
to a deal, the adviser said.
In theory, New Democ-
racy and Pasoks combined
162 seats would be enough
to govern without another
party, but Mr Samaras has
made clear he wants
broader backing, including
from a leftwing party,
before he starts further
unpopular fiscal and struc-
tural reforms.
Alexis Tsipras, the Syriza
leader, yesterday rejected
Mr Samarass suggestion
that he join a government
of national salvation, say-
ing his party preferred to
serve as the official parlia-
mentary opposition.
The government must be
formed by New Democracy,
since that is what the peo-
ple chose . . . and history
will judge their choice, Mr
Tsipras said. Continuing
the bailout is not going to
work, either for Europe or
Greece.
Although Syriza officials
voiced disappointment over
finishing second, they were
the only party to make sig-
nificant gains.
While support for New
Democracy and Pasok col-
lapsed from the level of
only a few years ago, Syr-
izas has seen its popularity
soar, reflecting rising popu-
lar anger with the old politi-
cal system built on patron-
age relationships and a fail-
ure to prevent Greeces eco-
nomic collapse.
The political order is
crumbling . . . there is a vac-
uum and for the time being
it tends to be filled by popu-
lists, said Loukas Tsouka-
lis, head of Athens think-
tank Eliamep. There are
people who want a radical
change, and there is no
other vehicle [than Syriza].
Some observers believe
Syriza will now become
a government-in-waiting,
watching from the sidelines
as Mr Samaras takes his
turn at trying to crack
down on tax evasion,
relaunch a stalled privatisa-
tion programme and mod-
ernise the public adminis-
tration after the failed
attempts of two previous
governments.
Despite Mr Tsiprass
pledge that his party will
serve as a responsible oppo-
sition, he may have trouble
preventing Syrizas far-left
factions, including a small
minority of old-fashioned
revolutionaries, from taking
to the streets.
Syrizas capacity for stag-
ing demonstrations that can
bring Athens to a halt has
increased as a result of the
election, thanks to having
attracted a new following
from the Stalinist Greek
communist party (KKE).
The KKE saw its vote halve
after Aleka Paparriga, its
leader, rejected Mr Tsiprass
proposal that the two par-
ties co-operate in a future
government of the left.
Mr Tsoukalis remained
doubtful that Syriza would
make a positive contribu-
tion to solving Greeces
problems. Syriza has some
healthy elements in it but
the core is former dogmatic
communists. Can you rely
on them to change the
country?
Fresh from securing an
emphatic parliamentary
majority, Franois Hollande
will shortly face a decisive
moment in his young presi-
dency when he confronts
the state of Frances public
finances.
A report due in two
weeks by the Cour des
Comptes, the national audi-
tor, is set to lay bare the
large gap that will have to
be bridged for Mr Hollande
to meet his commitment to
reduce the budget deficit to
3 per cent of gross domestic
product next year and
eliminate it in 2017.
The challenge is particu-
larly acute for Mr Hollande,
who has laid so much store
by his calls for Europe to
shift from a German-led
emphasis on austerity to
generating growth as the
way out of the eurozone
crisis.
His Socialist government,
emboldened by achieving
an outright majority in the
National Assembly, was
pushing that agenda again
yesterday. We need to
mobilise our European part-
ners because piling more
austerity on top of austerity
will lead to tragedy and a
deep rift between the peo-
ples of Europe and their
politicians, said Manuel
Valls, interior minister.
Mr Hollandes potential
difficulty is that this anti-
austerity rhetoric, a con-
tributor to his victory in
the presidential and parlia-
mentary elections, will soon
have to be reconciled with
the need to take tough
measures at home to square
the budget deficit.
With the election over,
even his allies are demand-
ing clarity. Nicolas Demo-
rand, editor of the leftist
newspaper Liberation,
wrote: The commitment to
return the public accounts
to balance, taken in front of
our European partners,
leaves little doubt over the
destination. The fog starts
with the rest: the route, the
method, the means. The
moment has come to clear
it.
Tullia Bucco, economist
at UniCredit Research, said:
It will require cuts in
expenditure and that will
be the most tricky part.
There is no place to hide.
The size of Mr Hollandes
majority should give him
the room for manoeuvre he
needs. The Socialists won
314 seats in the 577-seat
assembly, with their Green
allies taking a further 17.
The anti-austerity Left
Front slipped back to 10
seats, undermining the
Communi s t - domi nat ed
groups ability to influence
the government.
The government has indi-
cated it will have to find
extra savings of 10bn just
to meet this years deficit
target of 4.5 per cent of
GDP, because the stalled
economy has hit receipts: a
supplementary budget is
due in July. But an even
bigger task looms in fram-
ing next years budget, due
in September, with savings
of 25bn or more required
to meet the 3 per cent goal
more if growth remains
weak.
Pierre Moscovici, finance
minister, said last week
that this years deficit
shortfall would mainly be
made up by raising taxes,
with savings for next year
shared between tax
increases and spending
cuts.
Jean-Marc Ayrault, prime
minister, warned on Sunday
of the immense task
ahead. But he has also said
much of the burden will be
borne by the wealthiest
households.
Mr Hollandes pledge to
raise marginal tax to 75 per
cent on incomes above 1m
a year is set to be deployed
later this year along with
increases in wealth and
inheritance taxes, sur-
charges on banks and
energy companies and
moves to raise taxes on cap-
ital earnings to match
income tax rates.
The government is also
set to target Frances abun-
dant tax spending end-
ing tax breaks that cost the
state dearly, such as the
exemptions on social
charges and income tax on
overtime introduced by
Nicolas Sarkozy, Mr Hol-
landes predecessor.
Mr Moscovici said: I
think we can reach our
objectives without auster-
ity. But with public
expenditure accounting for
56 per cent of GDP and the
tax burden at a high level,
independent economists
believe painful cuts are
inevitable, albeit not to the
extent suffered in stricken
economies such as Greece
and Ireland.
You cannot have no aus-
terity and reduce the deficit
to 3 per cent next year
and to zero in 2017 with-
out people feeling it. It
would be better to admit
it, said Laurence Boone,
Europe economist at Bank
of America Merrill Lynch.
EU banking push gains ground
Step towards
union expected
Political impetus
astonishing
Samaras scrambles to agree coalition pact
Postelection talks
Centreright victor
is keen to appoint
ministers before
eurozone finance
ministers meet,
writes Kerin Hope
Democratic Left
KKE
Golden
Dawn
Greek result
Source: Greek interior ministry
*
Includes 50 extra seats for coming first
Seats
20
17
18
12
Syriza
71
Pasok
33
New
Democracy
129*
Independents
Antonis Samaras (left) speaks to Alexis Tsipras, Syrizas leader, at the Greek parliament. Mr Tsipras rejected the New Democracy leaders call to join a government of national salvation AP
Hollande faces decisive moment with austerity challenge
On other pages and at FT.com
Analysis, Page 9
Editorial Comment, Page 10
Gideon Rachman, Lawrence
Summers, Aristides Hatzis,
Page 11
Greece video
Election fails to resolve the
eurozones deeper problems
www.ft.com/greece
Lex video
An opportunity for the rest
of the bloc to concentrate
on its real problems
www.ft.com/lexvideo
AList
Stephen King: Greek
relief but no answers
www.ft.com/alist
EUROZONE WOES
Source: Thomson Reuters Datastream
Government expenditure
(as a % of GDP, 2012)
0 20 40 60
Denmark
France
Finland
Belgium
Sweden
Netherlands
Italy
UK
Germany
OECD total
Spain
Big spenders
Public finances
French president
will have to take
tough measures
to square budget
deficit, writes
Hugh Carnegy
Franois Hollande has been
emboldened by poll results
JUNE 19 2012 Section:World Time: 18/6/2012 - 19:19 User: jamesa Page Name: WORLD1 USA, Part,Page,Edition: EUR, 2, 1
FINANCIAL TIMES TUESDAY JUNE 19 2012

3
By Catherine Belton
in Moscow
Russia is setting aside up to
$40bn for this year and next
to shore up the economy in
case the eurozone crisis
should escalate and spread.
At the same time, Mos-
cow is dusting off a plan
that would allow the gov-
ernment to recapitalise the
banking system.
In his first interview with
a foreign newspaper since
his appointment as finance
minister last year, Anton
Siluanov said the govern-
ment had agreed to create a
reserve mechanism worth
Rbs500bn ($15.4bn) for next
year for the direct financ-
ing of anti-crisis measures.
Those would include sup-
port for socially needy peo-
ple and systemically imp-
ortant enterprises, and the
revival of a scheme pro-
posed, but not imple-
mented, in 2009 to issue
government bonds to recap-
italise banks in exchange
for shares, he said.
This year, up to Rbs800bn
earmarked for one of Rus-
sias rainy day windfall
funds the Reserve Fund, a
repository for oil revenue
could be spent on meeting
any potential shortfall for
budget obligations should
the oil price stay below the
average $117 a barrel at
which the budget breaks
even.
Separately, up to $4.4bn
in state guarantees for
loans to enterprises has
already been earmarked for
this years budget, with
$800m already disbursed a
continuation of crisis meas-
ures introduced in 2009.
We have practically pre-
pared all the necessary
measures so we can quickly
implement them in case of
a worsening of the situa-
tion, Mr Siluanov said.
The problem with the
last crisis at the beginning
of 2009 was that we spent
time getting into the swing
of it . . . Because of this we
lost a significant amount of
speed in carrying out the
measures and we lost the
chance to react quickly.
Russias main stock mar-
kets are down more than 20
per cent since highs in
March. The rouble is down
13 per cent because of fears
over the eurozone crisis and
the drop in the oil price to
about $100, stoking jitters
that a further fall would
hurt the Russian economy.
Although Russia has debt
of a mere 10 per cent of
gross domestic product and
hard currency reserves of
$500bn, it is heavily depend-
ent on oil and gas revenues.
The crisis of 2008-09 saw it
lose $200bn of its reserves
in a matter of months as it
defended a run on the rou-
ble. Even as Russia is call-
ing on European countries
to stick to austerity meas-
ures, Mr Siluanov is facing
huge pressure to loosen
budget policy at home.
In the job for just over
eight months since his pred-
ecessor Alexei Kudrin
resigned, Mr Siluanov, a
career finance ministry offi-
cial, is battling on two
fronts. Not only must he set
aside funds in case of poten-
tial crisis but spending
promises made by Vladimir
Putin in the run-up to presi-
dential election in March
could also add significantly
to outlays.
The populist pledges,
including higher wages for
teachers and doctors, could
add an additional 2 per cent
of GDP to spending in the
medium term. But Mr Silu-
anov insisted that his min-
istry would keep the budget
deficit at 1.6 per cent of
GDP for 2013 and 0.7 per
cent in 2014 already fixed
under a three-year plan
and would compensate for
the spending rises proposed
by Mr Putin by saving else-
where.
Among the budget man-
oeuvres being plotted to
keep spending in line are
the delay of certain major
spending items, while
items of lesser priority
could be cut, he said. The
delays in spending could
include the $700bn military
spending programme that
Mr Kudrin cited as posing a
risk when he resigned, Mr
Siluanov said. Increasing
taxes is the worst thing we
could do, he added.
Speaking before the G20
meeting in Mexico, Mr Silu-
anov called on the group of
wealthy nations to make
faster progress on agreeing
International Monetary
Fund voting reform to
increase the power wielded
by the Bric group of emerg-
ing nations.
We, just like the other
Bric countries [Brazil, India
and China] are interested in
making sure the question of
reforming [voting] quotas is
not forgotten, he said.
[But] we dont want to tie
the question of aid and quo-
tas . . . No one is interested
in the crisis growing in the
eurozone. We will take part
in adding to the resources
of the fund. There is no talk
of conditionality.
Moscow sets
aside $40bn to
guard against
euro contagion
By Chris Giles and
George Parker in Los Cabos
Europes leaders came
under severe pressure from
the rest of the world to act
decisively to resolve the
eurozone crisis at the start
of the Group of 20 summit,
adding to tensions before a
meeting that is unlikely to
agree clear steps to ease the
crisis.
As leaders of the most
powerful countries gathered
in Los Cabos, Mexico, some
European leaders hit back
at criticism of their
response, saying that
Europe was not the cause of
the original crisis in 2008
and was making continuous
progress in dealing with
new issues.
Jose Manuel Barroso,
European Commission pres-
ident, was in defiant mood
when questioned on the
criticism of Europe by other
G20 countries some of
which, he noted, were not
democracies: We are not
coming here to take lessons
on democracy and how to
handle our economy. We
are not complacent about
our difficulties.
Mr Barroso was respond-
ing to a chorus of voices in
Los Cabos blaming Europe
for the deteriorating global
growth outlook.
Angel Gurria, secretary
general of the Organisation
for Economic Cooperation
and Development, accused
the eurozone of not using
its existing tools to the
fullest. The fire is in
Europe right now and it is
affecting the system as a
whole. It is no longer just a
European issue, he said.
Jim Flaherty, Canadian
finance minister, continued
to rile European leaders,
insisting there would be no
support for the eurozone
until it sorted out its own
problems.
The situation is not that
were dealing with impover-
ished countries here, he
told Canadian television.
The reality is that we have
non-European G20 coun-
tries that have a lot of hesi-
tation in dedicating
resources to the wealthy
European countries.
The election results in
Greece at least offered
world leaders the opportu-
nity to urge Europe to get
to grips with the crisis.
Barack Obama, the US pres-
ident, said there was now a
positive prospect of form-
ing a stable Greek govern-
ment and making progress.
But the G20 is not
expected to do more than
urge the eurozone to
resolve the crisis. A draft of
the communiqu, leaked to
the Reuters news agency,
suggested there would be
no specific new commit-
ments made this week, only
a renewed commitment to
ensure the crisis does not
spiral out of control. The
draft communiqu states:
The euro area member
states at the G20 will take
all necessary policy meas-
ures to safeguard the integ-
rity and stability of the
euro area, including the
functioning of financial
markets and breaking the
feedback loop between sov-
ereigns and banks.
These words, although
hinting at a banking union,
are not much different from
those of the Cannes G20
communiqu last Novem-
ber, when the leaders of
economies representing
almost 90 per cent of global
income welcomed the euro-
zones determination to
bring its full resources and
entire institutional capacity
to bear in restoring confi-
dence and financial stabil-
ity, and in ensuring the
proper functioning of
money and financial mar-
kets.
The G20 meeting is seen
by non-eurozone leaders as
a chance to put pressure on
Angela Merkel, the German
chancellor, to intervene
more decisively to resolve
the single currency crisis,
but there is also an accept-
ance among diplomats that
public criticism of Ms Mer-
kel is starting to become
counter-productive.
David Cameron, the UK
prime minister, said: Its
also very difficult for Ger-
many. We have to under-
stand the German difficul-
ties. It is very difficult polit-
ically to take the steps that
are required economi-
cally . . . But nonetheless if
you want a functioning sin-
gle currency you have to
take at least some of those
steps. You need to have ele-
ments of banking union, fis-
cal transfers and so on.
Comment, Page 11
G20 adds to pressure on Europes leaders
OECD chief blames
eurozones policies
Barroso defiant
in face of criticism
No one is
interested in the
crisis growing
in the eurozone
Anton Siluanov
Finance minister
$117
Price of oil at which Russian
budget breaks even
India resists
call to cut rates
Indias central bank opted
to leave interest rates
unchanged yesterday,
withstanding pressure
from big business and
government officials in
New Delhi to give the
slowing economy a boost,
writes Rahul Jacob in
New Delhi.
The Reserve Bank of
India in its monetary
policy review meeting left
the key interest rate
unchanged at 8 per cent,
pointing to a rise in
inflation in May as a key
constraint for the
economy. The bank had
cut interest rates by 50
basis points in April.
The government
announced last week that
the wholesale prices index
rose 7.55 per cent
annually in May, up from
7.23 per cent in April, as
food and fuel prices rose
10.74 per cent and 11.53
per cent respectively last
month.
Further reduction in the
policy interest rate at this
juncture, rather than
supporting growth, could
exacerbate inflationary
pressures, the RBI wrote
in its policy review.
In full: www.ft.com/india
Summit issues: activists urge world leaders to take action on global concerns as they meet in Los Cabos yesterday AFP
G20 SUMMIT
Russian economy
JUNE 19 2012 Section:World Time: 18/6/2012 - 19:41 User: powelln Page Name: WORLD2 USA, Part,Page,Edition: EUR, 3, 1
4

FINANCIAL TIMES TUESDAY JUNE 19 2012
By Roula Khalaf in London
The Egyptian daily
newspaper al-Masr
al-Youm summed up the
countrys predicament
brilliantly yesterday.
The military transfers
power to the military,
read the headline.
While Mohamed Morsi,
the Muslim Brotherhood
presidential candidate, and
Ahmed Shafiq, the
generals favourite, battled
it out all day, each
claiming to have won
the weekend presidential
vote, the ruling military
council had already
decided who would be the
real rulers: the generals
themselves.
Not even bothering to
wait for the outcome of the
election, they issued a
constitutional declaration
on Sunday night handing
the Supreme Council of the
Armed Forces (Scaf) all
legislative authority and
empowering it to set up a
constitutional panel to
draft the new constitution.
That came after parliament
was dissolved in a
dubiously timed legal
decision on the eve of the
presidential vote and after
the generals gave
themselves sweeping new
powers to arrest civilians.
The most outrageous
part of the new declaration
is that Scaf (which will
pick the members of the
constitutional panel) will
also have the right (along
with the president and the
prime minister) to object to
the draft if it is not in
accordance with the goals
of the revolution and the
principles safeguarding the
higher interests of the
country.
Presumably, protecting
the militarys interests
including its economic and
business empire and its
lack of accountability
will be deemed in the
higher interests of the
country.
Given the widening
gap between what the
military says and what it
does, the generals might
even proclaim that
enshrining a special status
for the army in the
constitution is in keeping
with the objectives of the
revolution.
Although Scafs moves
become more blatantly
counter-revolutionary by
the day, the generals are
maintaining the pretence.
Maj-Gen Mohammed al-
Assar, a senior member
of Scaf, held a press
conference to explain the
new declaration.
According to the
government news agency,
he said the generals would
transfer power to the
president, as promised, and
the handover would be
marked by a grand
ceremony at the end of
the month.
Generals put themselves in charge
A constitutional declaration
issued by Egypts military
has made it clear the gener-
als will continue to have
the biggest say in shaping
the political order before a
winner has even been
declared in the countrys
presidential election.
Both Mohamed Morsi, a
leader of the long-repressed
Muslim Brotherhood, and
Ahmed Shafiq, a military
man and insider of the
former regime, say they
have won Egypts first ever
free presidential election.
But the ruling military
councils move yesterday,
which gave the army broad
powers over the presidency,
appeared calculated to limit
the powers of a potential
Brotherhood president if
Mr Morsi is declared
the winner and to ensure
the army avoids civilian
control under any new
arrangement.
It sets the scene for a
power struggle between the
Islamists and the military,
which has ruled the coun-
try since 1952, opening up
the possibility of fresh tur-
moil in a country battered
by 16 months of a chaotic
transition that has brought
the economy to a halt and
increased already high lev-
els of poverty.
The military council will
maintain authority over its
own budget and broad pow-
ers over the country,
including veto power over
any new presidents ability
to declare war and over any
article in a future constitu-
tion it deems counter to the
countrys interests. It has
also empowered itself to
appoint a panel to draft the
constitution.
This comes after a court
ruling last week dissolved
the Brotherhood-dominated
parliament, placing legisla-
tive powers in the hands of
the military council until a
new assembly has been
elected in six months.
The largest political force
in Egypt, the Muslim Broth-
erhood has been preparing
itself to govern for decades.
But now the organisation
appears close to achieving
its ambition, the declara-
tion deals a blow to its
plans.
The dissolution of parlia-
ment is illegal, said
Mourad Ali, a spokesman
for Mr Morsi. The new con-
stitutional declaration is
also of dubious legality. The
military council is trying to
impose a fait accompli. How
can it give itself the right to
draft the constitution con-
fiscating the right of the
people to write their own
charter? We will defend the
rights of the people, he
said.
Saad al-Katatni, the
Brotherhood speaker of the
dissolved parliament, said
legislators would meet in
the assembly today, and if
prevented by the security
services blockading the
building, they would con-
vene elsewhere.
Brotherhood MPs also
insisted that the body that
they assembled to write a
new constitution will meet
and begin work this week,
despite being subject to a
legal challenge.
Shadi Hamid, director of
research at the Brookings
Institute in Doha, said the
Brotherhood and the mili-
tary were playing a fright-
ening game of brinkman-
ship.
The constitutional decla-
ration makes for a power
grab by the military, he
said. It does not get more
blatant than this, but [a
Morsi win would mean] the
Brotherhood and the young
revolutionary groups [who
supported it] will be
emboldened by defeating
the old regime in the elec-
tion. They can confront the
military now and they have
become more equal in any
new negotiations with the
army.
He added that if Mr Morsi
became president, he would
be able to leverage his posi-
tion to rally support domes-
tically and address the
international community to
put pressure on the mili-
tary, even with the limita-
tions on his power.
As the prospect of further
political turmoil looms,
business confidence has
again dropped.
The benchmark EGX-30
index fell by 3.42 per cent
last night, sending a nega-
tive signal about market
sentiment.
Investors want a govern-
ment and a parliament and
someone to lay down eco-
nomic policy, said
Mohamed Ebeid, head of
brokerage at EFG-Hermes,
the Cairo-based regional
investment bank. If the
military will legislate, at
the end of the day their
capability will be limited.
You cant tell equity inves-
tors that we wont be fully
stable for another six
months.
Commenting on the disso-
lution of parliament,
Moodys, the credit rating
agency, said last night that
heightened political uncer-
tainty will likely prove a
setback to the economy,
which was just regaining
domestic and foreign credi-
tor confidence.
It noted that foreign sup-
port for the Egyptian econ-
omy remained uncertain
because a much-needed
loan from the International
Monetary Fund was condi-
tional on the stabilisation of
domestic politics and the
formulation of an economic
reform plan.
Indepth
www.ft.com/egypt
Egypt risks turmoil as military tightens grip
Election aftermath
Move giving army
wide powers seems
calculated to curb a
potential Islamist
president, writes
Heba Saleh
Mohamed Morsi supporters in Cairo yesterday. The Muslim Brotherhood candidate and his opponent have both claimed victory in the presidential poll Reuters
WORLD NEWS
THE WORLD BLOG
For more posts from our
international affairs blog
www.ft.com/theworld
World blog
You cant tell
equity investors we
wont be stable for
another six months
Mohamed Ebeid
EFGHermes
JUNE 19 2012 Section:World Time: 18/6/2012 - 19:50 User: jonesl Page Name: WORLD3 USA, Part,Page,Edition: USA, 4, 1
6

FINANCIAL TIMES TUESDAY JUNE 19 2012
WORLD NEWS
By Abeer Allam
King Abdullah of Saudi
Arabia has appointed his
half-brother, Prince Salman,
76, as the heir apparent.
The announcement yes-
terday followed the death of
Crown Prince Naif on Sat-
urday, the Saudi press
agency reported, citing a
royal decree.
The appointment of
Prince Salman, one of the
most influential senior
members of the al-Saud
family, surprised few Saudi
observers. He becomes the
third crown prince since
King Abdullah ascended the
throne in 2005 and the sec-
ond in eight months, high-
lighting concern over the
line of succession in the
worlds biggest oil exporter.
Prince Salman was
appointed defence minister
in 2011 after the death of
Sultan bin Abdelaziz, the
former crown prince and
defence minister. Along
with Prince Naif, the power-
ful interior minister who
died in Geneva and was
buried in Mecca on Sunday,
Prince Salman is one of the
so-called Sudairi seven,
seven full brothers born of
the kingdoms founder,
Abdelaziz al-Saud, and his
wife Hussa al-Sudairi. They
formed a strong bloc within
the royal family, controlling
key ministerial posts.
Despite promoting him in
November, King Abdullah
had not appointed Prince
Salman as second deputy
prime minister, a post tradi-
tionally reserved for the
third in line. Some observ-
ers suggested that this sig-
nalled underlying tensions.
As governor of Riyadh
province since 1965, Prince
Salman oversaw the capi-
tals dramatic transforma-
tion from a mud-brick
desert town into a sprawl-
ing city with modern infra-
structure, manicured land-
scapes and high-rise towers.
Diplomats describe Prince
Salman as diligent and well
respected within Saudi Ara-
bia and hope his appoint-
ment will allow for a period
of stability at the highest
levels of Saudi decision
making.
They noted that Prince
Salman has had health con-
cerns but he can travel and
fulfil his duties and has a
conciliatory and diplomatic
nature. The prince enjoys
close ties with the religious
establishment and with
intellectuals and journal-
ists.
He is also well regarded
as father of Prince Sultan
bin Salman, who accompa-
nied a US space shuttle mis-
sion and now heads the
Saudi tourism and antiqui-
ties commission.
Prince Salman is also
regarded as potentially less
hostile to reform than his
brother, who had publicly
expressed reservations
about changes rights for
women. However, Prince
Salman is known as a
staunch supporter of the
Saudi interpretation of
Islam, Wahhabism. Many
Saudis regard Riyadh as
being unusually conserva-
tive compared with the cit-
ies of the eastern and west-
ern provinces.
King Abdullah also
appointed Prince Salmans
younger brother, Prince
Ahmed, to the position of
interior minister.
Salman named as Saudi
Arabias heir apparent
By Charles Clover in Moscow
and Abigail FieldingSmith
in Beirut
Russia has announced it is
preparing two warships to
sail to Syria to protect Rus-
sian citizens, in a sign that
it is taking precautions
against a worsening of secu-
rity there.
A spokesman for the
Black Sea fleet told Russias
Interfax news agency the
mission would be under-
taken in case of necessity.
His comments appeared
designed to clarify specula-
tion that warships had
already set sail for Syria.
Interfax had quoted an
anonymous official as say-
ing that was the case ear-
lier yesterday.
One of the warships, the
spokesman said, carries a
150-strong contingent of
marines, in addition to 25
tanks, but he did not give
details of the other ship.
Russia is taking the pre-
cautions as fresh fighting
across Syria killed 50 people
yesterday. Activists said
government forces were
continuing to pound opposi-
tion strongholds in various
parts of the country.
We are under siege,
said one activist in Homs,
who said some districts had
been cut off for 10 days by
intense bombardment. We
have not enough medical
equipment and medical
crew. Most are volunteers,
the activist said. We have
a lot of wounded people and
we dont know what to do
with them.
Heavy violence was also
reported in Damascus prov-
ince. According to the Syr-
ian Observatory for Human
Rights, an opposition-
affiliated monitoring group
based in the UK, the regime
launched mortars on the
Damascus suburb of Douma
yesterday, where rebels
have been clashing with
government forces.
At least 56 people were
killed throughout the coun-
try in yesterdays violence,
the Observatory said,
including 19 soldiers or
members of the security
forces.
Russias security relation-
ship with Syria has come
under scrutiny as Damas-
cus becomes ever more
dependent on Moscow fol-
lowing EU and US sanc-
tions. The port of Tartous
in Syria is a key Russian
naval base, which experts
estimate has about 50 Rus-
sian staff working there.
Meanwhile, Russian tech-
nicians continue to work in
Syria under contract to
maintain Russian arms pur-
chased by the regime.
Sergei Lavrov, Russias
foreign minister, has denied
that Russia is selling arms
to Syria that can be used
against civilians. Russia
says it is not violating any
UN sanctions or treaty obli-
gations in doing so. Last
year, Russia sold anti-
aircraft missiles to Syria, as
well as missile batteries
designed to fend off sea-
borne attacks. It also signed
a contract to supply 36 Yak-
130 trainer aircraft for
$550m. Recently it signed a
contract to supply 24
MiG-29 advanced fighter
bombers.
Russia has admitted it is
repairing a number of heli-
copter gunships for the Syr-
ian army that were origi-
nally sold in Soviet times.
According to news reports,
those helicopters are en
route to Syria from the Rus-
sian port of Kaliningrad,
though Russias defence
minister declined to com-
ment on the story yester-
day.
In addition, on May 26 a
Russian cargo ship called
the Professor Katsman
docked in Tartous harbour
in the face of allegations by
human rights agencies that
it was carrying a cargo of
arms for Syria.
Indepth, www.ft.com/syria
Russian
warships
made ready
for Syria
Move to protect
naval base and staff
Clashes kill 50
across country
Opposition fighters train near Homs, which was reported to be under siege yesterday Reuters
By Charles Clover
in Moscow, James Blitz
in London and Najmeh
Bozorgmehr in Tehran
Iran engaged in intense
and tough exchanges with
the US and other world
powers the 5+1 group as
a third round of negotia-
tions began yesterday amid
fears a peaceful resolution
to the stand-off over
Tehrans nuclear ambitions
will prove elusive.
Iran will meet senior dip-
lomats from the EU and six
world powers again today
to see if confidence-building
measures can be agreed to
avert a conflict over the
Iranian nuclear programme.
But last night the mood
among diplomats was
downbeat, after signs both
parties were unprepared to
make compromises on the
first day of two-day talks.
We had an intense and
tough exchange of views,
said Michael Mann, spokes-
man for EU policy chief
Lady Ashton, co-ordinating
the negotiations with Iran.
Mr Mann said discussions
were more substantive than
last month in Baghdad, add-
ing: Iran engaged in detail
on our proposal but not in a
way wed like them to.
His pessimism was ech-
oed by Sergei Ryabkov,
Russias deputy foreign
minister, who said after the
talks last night that he
hoped there would be a new
round, implying he did not
envisage a breakthrough.
Mr Ryabkov said the
main stumbling block had
been the complexity and
incompatibility of the
delegations positions. An
Iranian delegate added to
the grim mood, saying that
the talks do not have the
most positive atmosphere
and that the second day of
talks are likely to be the
most significant.
Saeed Jaleeli, the Iranian
chief negotiator, was due to
attend a dinner last night
with Nikolai Patrushev,
chairman of Russias
National Security Council
and a close confidant of
Vladimir Putin, president.
That prompted specula-
tion Mr Patrushev would
put fresh pressure on Mr
Jaleeli to accept a deal
before the negotiations
wind up today.
As diplomats met, a
report on Iranian TV said
Iran would not consider
curtailing the enrichment
of uranium to 20 per cent
a goal for international
mediators unless the six
powers acknowledged it had
the right to enrich uranium
and lifted sanctions.
Ayatollah Ali Khamenei,
Irans supreme leader, gave
a tacit warning to western
powers at the talks, declar-
ing in dealing with the Ira-
nian nation, stubbornness,
arrogance, self-conceit and
irrelevant expectations . . .
will go nowhere.
An EU diplomat said Iran
responded to our package
of proposals from Baghdad
but, in doing so, brought up
lots of questions and well-
known positions, including
past grievances. We agreed
to reflect overnight on each
others positions.
See Markets
Envoys downbeat
after Irans tough
nuclear stance
We have a lot of
wounded and we
dont know what
to do with them
Homs resident
JUNE 19 2012 Section:World Time: 18/6/2012 - 19:35 User: wayn Page Name: WORLD4 USA, Part,Page,Edition: USA, 6, 1
FINANCIAL TIMES TUESDAY JUNE 19 2012

7
Canada is worried about an
unconditional declaration
that access to safe drinking
water is a human right. The
Holy See is against using
family planning to advance
gender equality. And doz-
ens of countries are wary
about getting rid of fossil
fuel subsidies.
These are just some of the
objections negotiators have
raised ahead of this weeks
Rio+20 sustainable develop-
ment conference, which the
UN says is the biggest event
it has organised.
They underline the grow-
ing doubts many have
about what the 100-plus
leaders expected to fly in
for the meeting will
achieve by the time it ends
on Friday. Its like a rally
race of back seat drivers,
said Lasse Gustavsson,
head of the World Wildlife
Fund International delega-
tion. Everyone is sitting in
the back seat and no one is
taking responsibility.
The summit gets its name
from being held 20 years
after the 1992 Rio earth
summit that launched a
number of landmark trea-
ties, including ones to limit
the extinction of species
and climate change.
But progress has been so
slow that only four of the
worlds 90 most important
green goals and objectives
have seen significant
progress, a UN Environ-
ment Programme report
said this month, and there
has been little or no
improvement on goals to
address 24 problems includ-
ing decimated fish stocks,
climate change and deterio-
rating coral reefs.
Yet despite months of
negotiations leading up to
the summit, officials have
struggled even to finalise
the wording of a far less
ambitious final text docu-
ment on the eve of the for-
mal conference opening
tomorrow.
At other global green
summits, the US might
have been blamed. But this
year, Canada is under fire
for what environmental
campaigners like to call a
blocking mentality.
A commitment recognis-
ing the human right to safe
drinking water has sur-
vived to the latest draft
text, but only with the
added condition that it does
not relate to transbound-
ary water issues.
Water-rich Canada
insisted on this, say people
close to the negotiations,
adding it appeared Ottawa
was concerned about poten-
tial legal problems sur-
rounding any effort to
export water abroad.
Canadas environment
ministry told the Financial
Times that Canada sup-
ported the human right of
everyone to safe drinking
water. But it added: We
recognise that the right to
safe drinking water and
basic sanitation does not
encompass transboundary
water issues including bulk
water trade, nor any man-
datory allocation of interna-
tional development assist-
ance.
The Vaticans efforts to
influence negotiations at a
summit trying to address
the effect of forecast popu-
lation increases on pressed
natural resources and pov-
erty has also proved conten-
tious in some quarters.
I am baffled that the
Holy See is taken seriously
and allowed real influence
in this field, said Roger
Martin, a former British
diplomat who chairs the
Population Matters cam-
paign group. That a body
representing a group of old,
celibate men should set
themselves up as a
world authority on all mat-
ters sexual is surely ludi-
crous.
One of the most hotly
contested sections of the
summit text has been the
paragraph on phasing out
environmentally harmful
fossil fuels a move the G20
backed three years ago that
has proved difficult to
implement.
The latest draft Rio text
says the summit should
recognise the need for fur-
ther action on such subsi-
dies, taking fully into
account the specific condi-
tions and different levels of
development of individual
countries, but adds: Note:
placement of paragraph still
to be determined.
The EU, one of the pushi-
est advocates at global
green summits, has mean-
while been distracted by the
Greek elections impact on
the eurozone crisis, prompt-
ing something of a parlour
game about which of its
leaders will make it to
Rio+20.
Franois Hollande, the
newly elected French presi-
dent, is expected, as are the
leaders of Sweden and Den-
mark and Jos Manuel Bar-
roso, European Commission
president.
But Angela Merkel, Ger-
manys chancellor, and
David Cameron, the UK
prime minister, are among
those who have decided
that, like US president
Barack Obama, they are
better off staying at home.
Objections cloud prospects for Rio summit
Development
Drinking water and
family planning are
among issues taxing
negotiators ahead of
the green gathering,
writes Pilita Clark
Everyone is sitting
in the back seat and
no one is taking
responsibility
Lasse Gustavsson
World Wildlife Fund
By Michiyo Nakamoto
in Tokyo
The Japanese government
has unveiled a plan to boost
investment in clean energy
sources, in a move aimed at
lowering the countrys
dependence on fossil fuels
and nuclear power and
building up its fledgling
renewable energy market.
Under the feed-in-tariff
scheme approved yesterday,
electric power companies
will be required from July 1
to buy all renewable energy
generated by qualifying
suppliers, at a higher rate
than initially expected, pro-
viding a strong incentive
for businesses to invest in
clean energy facilities.
The government is abol-
ishing the ceiling on the
amount of energy from
renewable sources power
companies will be required
to buy, in a move that will
transform solar power gen-
eration from a side business
for companies generating
more electricity than they
can consume to a viable
business on its own. At
present, electric power com-
panies are only required to
buy excess electricity gener-
ated by renewable sources
and only up to a maximum
of 500 kilowatt hours.
The decision to create a
guaranteed market for
clean energy is expected to
make Japan a main market
for companies in the solar
power industry, including
panel makers such as
Chinas Suntech and
Japans Sharp.
Analysts at Nomura
expect the plan to add
2.4 gigawatts of solar
energy capacity this year,
or the equivalent of about 2
nuclear reactors. They fore-
cast an extra 3.4 gigawatts
of capacity in 2013 and
4 gigawatts in 2013 com-
pared with 1.3 gigawatts of
new solar energy capacity
introduced last year.
The push to encourage
clean energy highlights the
growing pressure on Japan
to reduce its dependence on
nuclear power, amid safety
concerns in the wake of the
March 11 nuclear disaster
in Fukushima.
The plan comes just days
after the government
announced the resumption
of two nuclear reactors in
western Japan, ending a
complete shutdown of the
countrys nuclear power
plants, which before the
shutdown provided nearly
30 per cent of its electricity.
But the Fukushima acci-
dent has forced the govern-
ment to rethink its energy
policy, which had been
based on a degree of
dependence on nuclear
power.
Japan which depends on
fossil fuels for 60 per cent of
its electricity, has lagged
behind other developed
countries in sourcing elec-
tricity from renewables,
which, excluding hydroelec-
tric power, provide less
than 1 per cent of its overall
energy consumption.
Widespread opposition to
the countrys dependence
on nuclear power and the
increasingly high costs of
conventional fossil fuels are
putting pressure on the gov-
ernment to spur investment
in clean energy.
Under the plan, power
companies will be required
to buy solar power at Y42
per kilowatt hour (53 US
cents) for 20 years, or about
double the tariff in Ger-
many, according to the min-
istry of economy, trade and
industry.
The costs of subsidising
clean energy will be passed
on to consumers. The price
of Y42 is quite expensive
and will encourage the
development of the mar-
ket, said Kyoichiro
Yokoyama, analyst at
Nomura Securities.
Companies have already
started investing in solar
power on expectations the
subsidies will make it an
attractive business.
Softbank Energy, a sub-
sidiary of Softbank, the tele-
coms group, is building
solar facilities throughout
Japan with a total capacity
of 200,000 kilowatt hours.
Japan unveils
plan to boost
clean energy
WORLD NEWS
Source: UNEP FT Graphic
Rio goals 20 years on
UN Environment Programme ratings for
progress made towards environmental goals
since 1992
More than 600m people
will still lack access to safe
drinking water in 2015
Greenhouse gases are
likely to push global
temperatures more
than 2C above the
pre-industrial
average
Lead in petrol
Indoor air pollution
Climate change
Water
Urban drinking
water
Rural drinking water
Sanitation
Disaster response
Disaster impact
Marine pollution
Groundwater pollution
Groundwater supply
Corals
Freshwater pollution
Stratospheric ozone
Outdoor air pollution
Signicant
progress
Some
progress
Little or
no progress
Further
deterioration
Insufcient
data to
assess
Atmosphere
More at FT.com
Lex comment
Just when the solar
subsidy gravy train
appeared to be ending,
along comes Japan
www.ft.com/lex
Hot property: solar panels on a building in Tokyo Bloomberg
60%
Percentage of Japans
electricity needs met
by fossil fuels
JUNE 19 2012 Section:World Time: 18/6/2012 - 19:34 User: wayn Page Name: WORLD5 USA, Part,Page,Edition: USA, 7, 1
FINANCIAL TIMES TUESDAY JUNE 19 2012

9
Finance
A bold plan for a
European banking
union is gaining
credibility, but
national interests
and technical
complexity risk
derailing the latest
proposal to stem
the eurozone crisis.
By Alex Barker
and George Parker
A union to bank on
N
ot so long ago, it was an
idea confined to the dreams
of policy makers: the unified
control of Europes financial
system and the public guarantees that
underpin it. All 27 EU countries
would surrender some of their sover-
eignty to create one banking author-
ity, one taxpayer-funded backstop
one banking union. Visionary stuff,
but politically improbable.
Even its advocates thought this
great leap towards European federal-
ism would take decades, if it came at
all, such were the political and techni-
cal obstacles. Yet now, amid ever
bleaker events in the eurozone, this is
precisely the option that EU leaders
have seized upon as a means to
address the crisis.
Their motivation is not high-minded
European federalism, however. It is
necessity. Labouring under the yoke
of indebted sovereigns and the banks
that finance them, the 17-member cur-
rency union is fighting a crisis that
could cripple its financial system.
Even positive events such as Sun-
days Greek election victory for a pro-
bailout party give little respite. Big
bang solutions from eurobonds
to bottomless bailout funds either
fizzle or emerge stillborn. Banking
union is the latest hope for a fix that
puts steel in the eurozone structure,
shares some financial risks but is, it
is hoped, acceptable to Germany, the
eurozones paymaster.
We urgently need to adopt a vision
for a fully developed economic and
monetary union. The moment of truth
has arrived, says Michel Barnier, the
EUs top financial regulator. In act-
ing on our vision we will no doubt
have to make a quantum leap to a
banking union.
The move started with Europes
central bankers, who in March began
publicly calling for integrated euro-
zone bank governance. Then it moved
to regulators and EU leaders, winning
enthusiastic backing from the Euro-
pean Commission, France, Italy and
even in parts Germany.
The politics is moving faster than
many expected, especially in the City
of London. Last week some thought
Jos Manuel Barroso, European Com-
mission president, over-optimistic
when he called for a union by the end
of next year. Now EU leaders are dis-
cussing bold political steps taking
Europe a good way towards a banking
union within weeks.
Finally there is a realisation that
the banking side of the crisis needs to
be addressed, that a banking union is
crucial to the sustainability of the
monetary union, says Andr Sapir, a
member of the European Systemic
Risk Board, the EUs financial stabil-
ity watchdog. That has taken a long,
long time. But it has come. This reali-
sation must be transformed into con-
crete actions, very soon.
Yet to give life to a such a federa-
tion requires even greater political
sacrifices than those made to create
the single currency in the 1990s. The
political fight is only beginning. And
the most difficult issue of all getting
wealthy countries to pay for this new
union is far from being resolved.
1 National tools,
continental problem
The sudden urgency is partly down to
the turmoil in Spain. A 100bn EU
bailout of its banks, proposed on June
11, appears to have backfired. Under
existing rules, the EU bank rescue
funds must be funnelled via loans to
Madrid a step that piles more debt
on to the Spanish government. This
helped push its already painfully high
borrowing costs to unsustainable lev-
els, dragging Spain a step closer to a
full sovereign bailout.
This has exposed structural flaws in
the eurozone. Banks operate across
borders. But when things go wrong
even in a multi-member single cur-
rency club it is national taxpayers
who foot the bill, and national author-
ities that are responsible. The for-
tunes of banks and their sovereigns
are tightly bound together and, in bad
times, that can be lethal.
During this financial crisis, EU tax-
payers discovered what it means to
underwrite these institutions: some
4.5tn of state aid has been approved
to European banks since 2008, equiva-
lent to more than one-third of EU eco-
nomic output.
Banks, in turn, discovered their
dependence on their home country. A
bank backed by a weak sovereign
pays more to raise money. When sov-
ereigns face fiscal troubles, banks also
suffer as they are big buyers of their
home governments debt last year
more than 60 per cent of Irish, Portu-
guese and Greek bonds were held by
domestic banks.
In the aftermath of the credit bub-
ble, these ties formed a destructive
loop that has bedevilled the eurozone,
describing a path to ruination where
cash strapped banks eventually drag
down the cash strapped sovereigns
that were supposed to rescue them.
These ties also hamper the solution.
National authorities can be too close
or proud to diagnose banking prob-
lems early, too reliant on banks as
customers of their debt, or too fond of
national champions.
Call it capture, economic national-
ism or financial repression, says
Nicolas Vron of the Bruegel think-
tank. It takes different forms in dif-
ferent countries. But in times of crisis
it makes it very hard for national poli-
ticians to take the necessary steps.
The result: confidence is shot.
Banks are refusing to lend to each
other and retrenching behind borders.
Bank customers are partaking in an
alarming slow motion bank run, shift-
ing deposits from Greece or Spain to
relative safer countries. Since 2009,
the deposit base of Greek banks has
shrunk by more than a third.
2 European banks,
European guarantees
In its purest form, a banking union
strips national governments of con-
trol. Federal EU authorities would
monitor bank operations, police rules
and step in when an institution is
struggling. At the same time, taxpay-
ers pool risk, so the burden of under-
writing a bank is spread across
Europe, rather than falling on those
taxpayers in a banks home country.
There are various institutional
designs for how this could be
achieved. But, in essence, it involves
sharing power and liabilities across
borders. National supervisors could
still play a role in monitoring banks,
especially smaller institutions. But
ultimate power would rest with the
federal body, which could be the
European Central Bank or the Euro-
pean Banking Authority, the London-
based pan-European supervisor. Mr
Barnier says this common supervision
is crucial for trust between coun-
tries so risks on resolution and
deposit insurance can be shared.
This new supervisor would need
clout to overrule elected governments.
With the powers envisaged, a single
EU resolution authority could decide
to windup an Austrian or French
bank, impose losses on its private
investors, and dismantle the institu-
tion all over a weekend and against
the wishes of national governments.
For a full-blown union there must
be a common backstop, to make good
on deposit guarantees and pay for
bank resolution. This is the hardest
part. Brussels is pressing for a single
fund, replenished through levies on
financial institutions. But even after
10 years of paying dues, this is
unlikely to cover the costs of a major
systemic crisis, or insure some 5tn of
eurozone household deposits. So-
called bail-in powers the ability to
write down unsecured creditors to
failed banks would reduce the bur-
den on taxpayers. But as proposed, it
would not be in place until 2018.
So an implicit public guarantee
would likely remain effectively an
open-ended commitment from taxpay-
ers in Germany and other creditor
countries to stand behind the banks
in Spain, Italy or Portugal. And pro-
posing that to German voters would
be political suicide, says one senior
European diplomat.
3 Share controls, then
share risk
The political obstacles are legion. But
the critical dispute is over sequenc-
ing. Before exposing German taxpay-
ers to foreign liabilities such as
deposit insurance or direct stakes in
banks Angela Merkel, German chan-
cellor, wants federal controls over
national banks and a fiscal union. In
other words, some shared control of
national tax and spending.
Banking union is not ruled out. But
Ms Merkel last week rejected appar-
ently simple ideas about mutualisa-
tion, warning that Germanys
strength is not infinite.
This takes too long for the vulnera-
ble periphery countries who want
Germanys heft deployed immediately.
Berlins demand to first establish con-
trols makes sense, say those working
on the blueprint, but you need some-
thing fast that my grandmother
would understand. My grandmother
doesnt understand supervision, adds
the official. She understands deposits
and whether hers are safe.
Money is not the only issue. Ceding
sovereign power over banks was once
unthinkable. Even if that political
step is taken, it will involve tremen-
dous cultural upheaval. You have
some very entrenched national
authorities which have no intention of
giving up power, says one senior
European regulator, specifically refer-
ring to the Dutch, French and Ger-
man regulators.
Others worry about the accountabil-
ity of concentrating such power with
the ECB. Do they seriously want to
make it even more powerful? says
one senior European official. Theyd
better think hard.
There are other wrinkles. Berlin is
open to EU supervision, on one condi-
tion: excluding its politically powerful
regional savings banks, arguing they
are not systemically important. Yet it
was exactly these kind of regional
banks in Spain that forced Madrid
into a bailout. Other countries will no
doubt be pressing for their champions
to receive special treatment.
ANALYSIS
On the web
Interactive map: Which European
banks hold the public and private sector
debt of other EU countries
www.ft.com/bankexposure
Speed read
Penny drops Many EU policy makers
now believe that a banking union is the
way to contain the eurozone crisis and
bring stability to the financial system
Power and responsibility A banking
union would have a common supervisor
with the clout to overrule elected
governments, and a shared backstop
Powerful reservation Germany fears
a union becoming a bottomless financial
pit and wants strict rules agreed first;
its partners say action is needed now
4 Longterm vision,
urgent crisis
Building a functioning banking and
fiscal union could take five to 10
years, much like the creation of the
euro. It is time policy makers do not
have. With Spanish banks threatening
to bring down the eurozones fourth-
largest economy, a summit of EU
leaders next week will need to demon-
strate decisive progress.
This could come, in part, with a
political declaration, setting a long
term path to banking union. More
contentious are the, still undecided,
concrete short-term steps.
France is proposing the most ambi-
tious plan, a crisis-fighting blueprint
that goes a significant way towards
banking union and one that has
already won the backing of Italy and
Spain. President Franois Hollande,
buoyed by securing a parliamentary
majority at the weekend for his
Socialist party, wants to charge the
ECB with supervision of large banks.
This would be a big sacrifice of sover-
eignty. But it is a political move that
could be enacted, under EU treaties,
with a unanimous vote. It could, in
theory, be done in an evening.
More difficult is the financial side.
Mr Hollande wants the European Sta-
bility Mechanism, the 500bn euro-
zone rescue fund due to come into
force next month, to recapitalise
banks directly, rather than via loans
to states. The ECB, as the eurozone
bank authority, or a related agency
would decide when to use funds, what
amount was required, and on what
terms stakes should be sold down.
Berlin is reluctant to support this.
In part, it fears the direct exposure to
financial risk that German taxpayers
would face and partly because of the
moral hazard of the EU offering a
safety net for banks, without tough
conditions imposed on the sovereign.
Those brokering the deal hope Ms
Merkel will be enticed by a pledge
that all countries including France
would first ratify the German-inspired
fiscal compact agreed last December
that would incorporate spending con-
trols in the constitutions of eurozone
member states. There would also be a
road-map to fiscal union, including
drawing up strict new EU laws before
the end of the year. Treaty change
would be Merkels Christmas present
to German voters, says one senior
European diplomat. Other senior offi-
cials are unconvinced this will be suf-
ficient, saying Berlins demands for
sweeping political reform may simply
mask an unwillingness to move.
There is even less hope for a deal on
the most sensitive issue: common
deposit insurance. Ms Merkels objec-
tions mean that, at least for now,
Europes main safety net would be
cheap ECB loans to suffering banks.
This would not cover losses after a
collapse, but would address a run on
solvent banks triggered by the weak-
ness of a country. Were the ECB
empowered to ensure banks are sol-
vent, it could take up this liquidity
provision role with more confidence.
5 Eurozone union,
British separation
The political troubles do not end at
the eurozone. George Osborne, chan-
cellor of the exchequer, supports the
urgent creation of a banking union
that is the natural consequence of a
single currency. The catch: the UK,
home to Europes most important
financial centre, would not take part.
To Mr Osborne, the banking union is
not the inevitable conclusion of
Europes single market.
Indeed, the chancellor is vowing to
obtain safeguards to stop eurozone
banking union countries laying down
terms to London. Should a fresh trea-
ty-change proposal emerge from Ber-
lin, it promises a repeat of the fruit-
less plea from David Cameron, prime
minister, for legal protections for the
City at last Decembers fractious EU
summit, which ended with Britain
refusing to sign the new fiscal treaty.
Mr Osborne said such safeguards
were now more relevant than ever.
This baffles officials in Brussels and
Berlin, who wonder why Britain
shows no interest in sharing the tax-
payer burden of underwriting some of
the worlds biggest banks, or in mutu-
alising its own deposit guarantee
scheme, which is some 20bn in debt.
The Brits have no leverage, said one
diplomat involved in the talks. Zero.
Others in the UK see new potential
threats to the City if eurozone integra-
tion continues. Andrew Tyrie, chair-
man of the House of Commons treas-
ury select committee, believes that
the single currency area could become
a more attractive destination if the
ECB were to operate as a powerful
lender of last resort, as the Bank of
England or the US Federal Reserve
do. Indeed, Mr Barnier argues that a
banking union of 27 states is ulti-
mately in the interest of the City.
A more short-term issue is that a
eurozone banking union would crys-
tallise the idea that power dynamics
in the EU are changing and fuel the
case for a British referendum on its
European future.
David Ruffley, a Conservative mem-
ber of the treasury select committee,
says: If anyone thinks there should
be a tightening of the noose of over-
prescriptive EU financial regulation
and that parliament should accept it
they have another thing coming.
Additional reporting by Patrick Jenkins
You have some very
entrenched national
authorities which
have no intention of
giving up power
FT graphic
JUNE 19 2012 Section:Features Time: 18/6/2012 - 19:01 User: mcadamd Page Name: BIG PAGE, Part,Page,Edition: USA, 9, 1
10

FINANCIAL TIMES TUESDAY JUNE 19 2012
Without fear and without favour
Tuesday June 19 2012
To contribute please email: letters.editor@ft.com or fax: +44 (0) 20 7873 5938 Include daytime telephone number and full address For corrections email: corrections@ft.com
LETTERS
Awful nature and quantity of evidence
is the only reason Leveson is in a spin
From Mr Michael Keaney,
Sir, Max Hastings, in his lament
over the Leveson inquiry, belittles its
significance in the wider context of
the storms battering Britain and the
world (The Leveson fandango is
spiralling out of control, June 14).
However, any rational person should
not regard the subject of the inquiry
as minuscule by comparison with
these. Indeed, Britain could have
been in a better state of
preparedness had it not been for the
cancerous culture oozing out of
Wapping.
First, it now seems to me firmly
established that a succession of
governments has traded significant
policy concessions in return for
political support. Especially, The
Sun newspaper has been employed
as a quasi-official propaganda
vehicle.
Second, from the invasion of Iraq
to light-touch regulation of the
financial sector via criminal justice
reform and the demonisation of the
European Union, the BBC and
immigrants, government policy has
been held hostage by ministers
fearful perception of News
Internationals political leverage.
Third, it appears that any elected
official willing to confront this has
had to face the kind of intimidation
reminiscent of cold war-era
blackmail tactics. Meanwhile, a
former home secretary, whose own
communications were allegedly
hacked, ended up as a columnist for
The Sun.
It is the appalling substance and
quantity of evidence that has
allowed, indeed driven, the inquiry
to spiral out of control, not the
judge entrusted with its
administration. And if Leveson were
to attempt to limit its scope, there
would be justifiable protests of a
cover-up.
Sir Max is disappointed by what he
sees as prime minister David
Camerons character failings,
specifically his lapses of judgment
regarding Andy Coulson, Rebekah
Brooks and culture secretary
Jeremy Hunt. But this is precisely
what he was praising when he
wrote in your columns two years
ago that Mr Cameron displays a
desire to think the best of mankind
(Why Cameron has the right
character to rule, Comment, April
15 2010).
As with Mr Cameron, Sir Max
went through a process of
enchantment and disillusion with
Tony Blair. In this respect he
betrays a similar tendency to
judgmental lapses as does his
erstwhile hero.
Michael Keaney,
Metropolia Business School,
Vantaa, Finland
Old and new have
a future together
From Mr Jason Nisse.
Sir, Tim Bradshaw has correctly
identified the hopes of Twitter to
kick start its advertising business at
this weeks Cannes Lions advertising
festival (Twitter to step into the
limelight at Cannes advertising
festival, June 18). But it is telling
that this campaign launches with a
big poster outside the Palais des
Festivals.
Given that Google recently turned
to press and out-of-home advertising
to promote itself, is this another
indicator of the fact that the so-
called new media recognises the
value of the old media, and in fact
the future promises to be of a close
and healthy relationship between the
two?
Jason Nisse,
Director,
Newgate Communications,
London EC3, UK
In reality, the people never get to decide about going to war
From Mr Boris Danik.
Sir, Michael Ignatieff writes:
When people get to decide whether
to go to war, they rarely do so
willingly (Drones give democracies
no reason to wage war, June 13).
When was the last time people
were asked to make such a decision?
The answer is that they are never
asked. Not even the Congress of the
US has been asked to declare war, in
my memory. Not for war in Korea,
Vietnam, Iraq, Afghanistan. Such
matters are decided by oligarchs
behind closed doors.
And then: Democracies may not
like fighting each other which is
why war has become unthinkable
between EU and Nato countries . . .
A much stronger reason for not
fighting each other is that these
countries are basically part of the
same geopolitical alliance, or US
hegemony if you will, at least until
now.
Boris Danik,
North Caldwell, NJ, US
Too much focus on fiscal consolidation
From Mr James Marshall.
Sir, There appears to be a broad
consensus that fiscal integration
within Europe is a necessary and
fundamental part of saving the euro.
Why so?
Surely one of the main faults
historically in the euro project
was allowing weak countries to
borrow at the same rates, or close to
the same rates, as strong ones.
For reasons that can be
discussed another time, the market
took a while to price in the different
risks of lending to Germany and
Greece; however the markets are
now beginning to do just this.
Had the financial markets been
efficient sooner, then you wouldnt
have had, to give another example,
such an extended Spanish
construction boom.
My point is that fiscal
consolidation is receiving too
great a focus and perhaps more
time should be spent debating why
financial market participants in
Europe failed to price risk and
how this can be corrected in the
future.
James Marshall,
Bangkok, Thailand
Correction
Citigroup will not be investing in
the new Portman Square Capital
fund, as incorrectly stated in some
editions of an article on June 18.
No more a corrupt ethnic tyranny than Serbia or Croatia
From Denis MacShane MP.
Sir, In the midst of good points on
democracies, drones and war Michael
Ignatieff makes the absurd statement
that Kosovo is still a corrupt ethnic
tyranny (Comment, June 13).
Kosovo has regular elections with
changes of government at national
and local level where Serb
communities choose their own
leaders. One Kosovo party leader
voluntarily went to the International
Criminal Court in The Hague even
though charges were never laid
against him. There is a free media,
vigorous opposition politics, and
good public and private universities.
Kosovo has many of the failings of
western Balkan states from
Macedonia to Bosnia but it is no
more an ethnic tyranny than Serbia
or Croatia. It is not helped by the
Russian-led policy of non-recognition,
but nearly 100 states and most
democracies now have diplomatic
and trade relations with Kosovo.
The 1999 intervention prevented a
second Srebrenica so it was
surprising to read Prof Ignatieff, of
all people, condemning what was
done. Having led the Canadian
Liberals to their worst ever defeat,
he has now returned to writing and
teaching. Good luck to him, but he
does his reputation no good with
wild inaccurate statements about a
region of Europe that needs help, not
insults.
Denis MacShane,
Labour, Rotherham,
UK House of Commons
Minister for the Balkans 2001-05
Kosovos huge contribution to peace and progress in the Balkans
From Mr Petrit Selimi.
Sir, I was very sorry to read
Michael Ignatieff making a reference
to Kosovo in a disparaging manner,
calling the young Balkan republic a
corrupt ethnic tyranny (Drones
give democracies no reason to wage
war, Comment, June 13). The
Republic of Kosovo is one of the
most important contributors to peace
and progress in the Balkans. It is the
country with the highest gross
domestic product growth in the
eurozone (5.5 per cent in 2011) and
the lowest debt in Europe (almost
none). There is local bipartisan and
multi-ethnic support for the
institutions established by former
Finnish president Martti Ahtisaaris
constitution.
Kosovo was destroyed in a
systematic campaign of terror in the
war of 1998-99, but has managed to
stage a remarkable recovery. The
European Union has noted the
progress and last week Kosovo
received the official roadmap to
enable visa-free travel from home
affairs commissioner Cecilia
Malmstrm. This year, the EU also
initiated Kosovos first independent
step towards EU integration by
endorsing a feasibility study for
Kosovo.
Prof Ignatieff doesnt seem to have
been to Kosovo since the liberation
from Slobodan Milosevic, hence we
hereby invite him with no strings
attached for a visit. We are
certain he will see the enormous
progress that all the people have
achieved in recent years, despite the
wounds of war, transitional woes
and devastating financial crisis
around us.
Petrit Selimi,
Deputy Foreign Minister,
Republic of Kosovo
Washington Notebook
The ultimate lesson
of Watergate
Watergate, the building, is growing
old, no longer a glittering address in
Washington, though some fixtures of
the nations capital, such as Bob and
Elizabeth Dole, still call it home. Its
smart hotel and restaurants are
defunct, as is its courtyard
supermarket. Across the street, the
Howard Johnson motel is now a
dormitory for university students,
further lowering the tone of the
neighbourhood.
But Watergate, the scandal that
brought down President Richard
Nixon, is ageless. It was journalisms
finest hour and a pretty good one for
principled politicians, judges and
lawyers who dug deep in the face of
much resistance. Together, they
showed that the system worked
and that not even a president was
above the law. The question now is
not only whether it could happen
again but if the system could work
as it once did. Last Sunday was the
40th anniversary of the original
Watergate break-in. That was when
Frank Wills, a security guard, caught
five men red-handed who, it
transpired, were working for the
committee to re-elect the president,
in the sixth-floor offices of the
Democratic partys headquarters,
where they did not exactly belong.
Wills is long dead and there were
no spring chickens among the
famous and the infamous who
gathered to talk about Watergate in
the Watergate recently. Ben Bradlee,
the great Washington Post editor, is
90 now but still rakishly handsome.
His ace reporters, Bob Woodward
and Carl Bernstein, are no longer
young and hungry. The dark-suited
Mr Woodward is a pillar of the
Washington establishment, to whom
the high and mighty must talk to get
their side of the story out in his
stream of books. Mr Bernstein, with
his multicoloured socks and flowing
white locks, seems comfortable in his
semi-retired skin.
There is still an unlined
boyishness to the face of John Dean,
Nixons legal counsel who spilt many
beans when he spoke of the cancer
on the presidency, and Egil Bud
Krogh, one of the original
plumbers, still has a wicked sense
of humour. Richard Ben-Veniste
remains the sleek lawyer he was
when, at 29, he worked for Watergate
special counsels. Other political
participants, Bill Cohen, Bill Weld
and Fred Thompson, then the young
congressman from Maine who broke
Republican ranks in voting for
impeachment, and the two junior
congressional staffers, are familiar
faces from their public lives.
It was Mr Cohen who pointed out
that Watergate had happened again,
in the Iran-Contra scandals of the
Reagan presidency, and could repeat
itself. Mr Thompson noted the
proliferation of the office of the
presidency, if anything, is worse
now than in Nixons time. He added
that without Deep Throat, the
Woodward and Bernstein source later
revealed to be Mark Felt of the FBI,
all the journalistic digging might
have gone nowhere.
Mr Ben-Veniste observed how
much luck had played a part in
unravelling Watergates tangled
skein, above all when Alexander
Butterfield, the White House aide
also present at the gathering,
disclosed the existence of the Oval
Office tapes. Their existence revealed
how much Nixon knew and when he
knew it, which removed, as Mr Dean
put it, the defence of plausible
deniability.
Mr Ben-Veniste also cited Judge
John J. Sirica, who refused to allow
James McCord, one of those caught
in the act, to cop a plea and stay
silent.
Mr Cohen and Mr Thompson gave
examples of how partisanship existed
on Capitol Hill 40 years ago, though
nothing like todays poisonous
rancour, with boasters, such as
Darrell Issa, the California
Republican, intent on finding dead
bodies under every administration
bed. The hearings of the judiciary
committees headed by Senator Sam
Ervin and Congressman Peter Rodino
at least had the virtue of being
dignified, indeed judicial.
Nobody would really say it at an
event staged by the Washington Post
but the sad fact is that the press is
not what it was 40 years ago. Brave
editors and publishers willing to
withstand the heat are an
endangered species and investigative
journalism, expensive and time
consuming, is in short supply. Also,
the rulings of this Supreme Court,
from Bush vs Gore to Citizens
United, call into question the
impartiality of the judicial system.
As Bill Weld put it, public
corruption is not a victimless crime.
The ultimate lesson of Watergate is
that the victims had better stay on
their guard.
comment@ft.com
I was going to vote for austerity
but I couldnt afford to get to
the polling station
Jurek Martin
Greece gains some
breathing space
Adjustment must be put on a track more likely to succeed
It is a measure of the shaky foun-
dations of eurozone policy towards
Greece that Antonis Samaras, who
was until recently seen as the big-
gest saboteur of the countrys
financial rescue, is being greeted
as its saviour after winning last
Sundays parliamentary election.
After an inconclusive May poll,
the new result offers some hope.
The campaign clarified that a vast
majority of Greeks wish to stay in
the euro, but disagree whether this
is compatible with unilaterally
rejecting policies imposed by the
International Monetary Fund and
the eurozone. Still, half those who
voted backed parties largely sup-
portive of the memorandum that
commits Greece to the conditions.
Mr Samaras seems in a position to
form a government that can finally
drag Athens out of paralysis.
But the election by itself solves
nothing, and the current course of
unending economic depression in
Greece and deep distrust between
Athens and its euro partners can-
not be sustained much longer.
Mr Samaras political support is
precarious. Many held their noses
voting for him, linked as he is with
the dysfunctional system that cre-
ated Greeces mess. Without a
sense of improvement soon, even
more Greeks may heed the siren
calls of extremist movements.
It is vital that Europe and Mr
Samaras reach an understanding
swiftly. His New Democracy party
wants to amend the memorandum.
Some eurozone politicians (includ-
ing the German foreign minister,
Guido Westerwelle) have hinted at
flexibility. They must together put
Greeces adjustment programme
back on track but on a track that
is more likely to lead to success.
Most urgently, the recapitalisa-
tion of Greek banks must be com-
pleted to lower the risk of a full-on
bank run which could spread to
countries such as Spain and save
the ECB from the ugly choice
between respecting its own rules
and sending Greece out of the euro
by bringing down its banks.
As for public finances, there is
no alternative for Athens to return
to living within its means. But the
timetable should be extended. The
ferocity of deficit cuts has become
self-destructive, and so far adjust-
ment has been all fiscal and not
structural. That balance needs to
be redressed. Spain set a precedent
for modifying excessively speedy
deficit cuts. Doing the same for
Greece could give Mr Samaras the
cover to dismantle the clientelism
built up over decades by his party
and his likely coalition partner.
For that, he must show state-
craft so far unseen in Greece. Nei-
ther the eurozone nor the Greeks
will give him another chance.
Feds next choice
Authorities should act now to preempt slowdown
We have seen this movie before.
As the American summer
progresses, growth prospects are
steadily downgraded and pressure
builds on the US Federal Reserve
to ease monetary policy further.
By September, the doves win out
and the Fed embarks on aggressive
easing. That is what happened in
2010 and 2011. The only question is
whether the Fed will move pre-
emptively at its open market com-
mittee meeting this week or
choose again to wait until autumn.
The arguments are finely poised.
The case for waiting has merit.
Ben Bernanke faces the familiar
law of diminishing returns. Having
pledged to maintain zero interest
rates until 2014, there is little left
to be squeezed from that lemon.
Extending the zero-bound pledge
to 2015, say, would have only mar-
ginal credibility. Mr Bernankes
term expires the previous year. In
addition, the Greek election out-
come raises hopes of a pause in
that other movie: the trials and
tribulations of the euro.
But the merits to the Fed acting
now are probably stronger. Many
forecasters project US growth will
drop below 2 per cent for the year
well below the level at which
unemployment would continue to
fall. Some fear the jobless rate
may even rise in the coming
months. At its last meeting in
April, the Fed projected 2.7 per
cent growth in gross domestic
product this year. After three
months of flat or falling retail
sales and manufacturing, the Fed
will almost certainly revise its
forecasts downwards. Inflation
also looks to be heading below the
Feds 2 per cent target.
The main question, therefore, is
whether it signals a willingness to
act at this meeting or whether it
does so pre-emptively to stave off
further deterioration.
Should it be the latter, there is a
choice between renewing Opera-
tion Twist or embarking on a QE3.
As Operation Twist expires, there
is probably a stronger case for
aggressive quantitative easing. As
Janet Yellen, Fed vice-chairman,
recently put it, should the US
economy head into a self-reinforc-
ing downward spiral of economic
activity, it may by then prove too
hard to arrest. The case for pre-
emptive QE3 is strong.
There is also the small matter of
the US fiscal cliff later this year.
This month Mr Bernanke again
cautioned Congress against plung-
ing the US into a self-induced
recession. But the manner in
which the taxmaggeddon sce-
nario will play out remains hard to
predict. Meanwhile, monetary pol-
icy remains the only tool at hand.
On balance, the Fed should use it.
Subsidising wind
UK should rethink its policy for backing renewables
The government has just pub-
lished its long-awaited draft
energy bill, which would see the
UK generate 15 per cent of its
energy from renewable sources by
2020, a third of it from wind. But
this has not silenced backbench
mutterings about the commitment
to renewables.
Oddly, some Tory MPs have cho-
sen to target just one bit of the
policy. They are unhappy about
the subsidies paid to onshore wind
operators. Although it is intended
that these should fall, reflecting
the fact that onshore wind farms
have become more competitive,
the politicians think that support
needs to come down faster. Indeed
they would like to see a cut of
closer to a quarter than the 10 per
cent fall the energy secretary, Ed
Davey, is proposing.
Onshore wind farms pose partic-
ular problems for politicians. They
are seen as unsightly and damag-
ing to property values by constitu-
ents. More important, they raise
electricity prices for the less well
off while directing subsidies at
wealthy landowners.
But onshore wind farms are far
less of a threat to Britains pros-
perity than the decision to focus
efforts on offshore wind a costlier
and less technologically proven
form of generation. The bill envis-
ages that this will account for a
fifth of renewable energy in just
eight years. Not only will costs rise
through the growing subsidy, but
it will also involve the country in
huge ancillary expenses, both to
graft offshore wind arrays on to
the grid and to build standby gen-
eration to cope with winds inter-
mittency. Seen in this light, tinker-
ing with onshore subsidies is just
whistling in the wind.
But the real problem is the elec-
tricity bill itself, which is simply
too dirigiste. It involves the gov-
ernment setting output targets for
power sources and, inevitably,
picking and subsidising winners.
This is a mugs game, particularly
in a sector undergoing rapid
change. Shale gas, for instance,
has dramatically lowered the cost
of gas-powered generation in the
US, and could cut UK prices in
coming years.
The MPs may be focusing on too
narrow a segment of the power
market. But they are right to ques-
tion the sense of entering into
long-term subsidy commitments
at a time of price uncertainty.
Rather than bucking the market,
the government should work with
it. The answer is to let investors
respond to the floor price already
mandated for carbon, which
should be broadened and properly
set. The market could then decide
which technologies to back.
Drone warfare out
of kilter with polls
From Mr David Tuckwell.
Sir, I read with interest Michael
Ignatieffs recent article (Drones
give democracies no reason to wage
war, June 13).
Prof Ignatieffs defence of
democracies using drones is out of
kilter with poll results. Poll results
show that large pluralities of
democratic societies oppose the
use of drones and oppose drone
warfare.
In a functioning democracy, there
should be a meaningful relationship
between public opinion and public
policy. As such, if drones are to be
used (under the terms described by
Prof Ignatieff) public opinion would
have to be ignored. Ignoring public
opinion in such a way hardly seems
in line with our democratic values
and therefore hardly seems advisable
in democratic societies.
David Tuckwell,
London EC1, UK
Dont be hasty to
berate economists
From Prof Ira Sohn.
Sir, John Paris (Letters, June 14)
unfairly criticises Luigi Zingales in
particular, and economists in
general, for their carelessness and
irresponsibility for espousing ideas
that make sense in theory but in
reality make no sense whatsoever.
Without intending to appear too
self-serving, economic ideas and
their adoption in the real world
have made a major contribution to
increased global living standards
over the past two centuries.
Examples abound: David Ricardos
impeccably logical theory of
comparative advantage in the early
19th century; the revolutionary
framework carefully constructed
by John Maynard Keynes in the
1930s; and the pioneering
architecture of a united Europe
after the second world war developed
by Jean Monnet and Robert
Schuman.
The errors and omissions that
occurred in the introduction of the
euro and the plan to rationalise
finance globally on a par with trade
are not the result of faulty logic or
flawed theory, but of political,
regulatory, and institutional failures
that have derailed temporarily, one
hopes these fundamentally sound
projects from achieving their noble
objectives.
Ira Sohn,
Professor of Economics and Finance,
Montclair State University,
Upper Montclair, NJ, US
Pyrrhus of Epirus
Victory of sorts for
New Democracy
From Mr Sasha Simic.
Sir, Being Greek, those partisans of
austerity New Democracy should
understand the meaning of the
phrase Pyrrhic victory.
Sasha Simic,
London N16, UK
COMMENT ON FT.COM
After Greece: all eyes on Spain
The election has eased fears of Greece
exiting the euro, so the focus is on Spain
www.ft.com/greece
JUNE 19 2012 Section:Features Time: 18/6/2012 - 23:02 User: wilsonn Page Name: LEADER-USA-02, Part,Page,Edition: USA, 10, 2
FINANCIAL TIMES TUESDAY JUNE 19 2012

11
COMMENT
A
s the UN conference on
sustainable development
begins it is the rich countries
that have the most to prove. The last
summit in Rio de Janeiro 20 years
ago provided the opportunity for
countries to sign the UN framework
convention on climate change, which
should have stabilised global annual
emissions of greenhouse gases at
1990 levels, and placed prime
responsibility on the industrialised
nations, who have done most to
pollute the atmosphere, to lead by
example.
But rich countries have not led
and annual global emissions have
continued to rise. Even taking into
account pledges by rich and poor
nations for action by 2020, the world
appears to be heading for likely
global warming of 3C or more, to a
temperature not seen on earth for
about 3m years.
Having witnessed, for instance,
failure by the US and Canada to
honour their signatures to the Kyoto
protocol, as we approach another
summit, poor countries are
understandably sceptical of the lofty
ambitions expressed by rich nations.
It will take more than words to
restore the confidence of poor
countries. Some richer ones are
dragging their feet on tackling
climate change, while unfairly
criticising the developing world,
apparently unaware of the strides
that these countries are making in
finding a new path. China, India,
Mexico, Brazil and other emerging
powers have laid out ambitious plans
to tackle deforestation and to reduce
radically their emissions to output
ratios. More importantly, they are
implementing those plans.
One of the biggest injustices of
climate change is that the poorest
countries are most exposed and
vulnerable to the impacts of climate
change even though they have done
least to raise atmospheric levels of
greenhouse gases. Now they must
contend with the brutal arithmetic of
a tight budget for global emissions
as they try to fight poverty, develop
and grow, while managing the
enormous risks of climate change.
Rich and poor countries agreed in
Cancn in December 2010 that global
emissions should be reduced to avoid
a rise in global average temperatures
of more than 2C. To have a
reasonable chance of this, global
average emissions have to be
reduced from the present level of
about 7 tonnes per capita of carbon-
dioxide-equivalent to about 2 tonnes
in 2050.
This is a huge challenge as
developing countries will be home to
8bn of the projected global
population in 2050 of 9bn. Even if the
rich countries reduce their emissions
to zero by 2030, developing nations
would need to hold their emissions
to about 5 tonnes per capita by 2030
and 2.5 tonnes by 2050. For
comparison, current per capita
emissions are 22 tonnes in the US,
over 9 tonnes in the EU, about 7
tonnes in China, and 2 tonnes in
India.
So rich countries not only have to
accelerate their actions, but must
also support the poor countries as
they make the transition to low-
carbon economic growth.
It would be morally unacceptable
to try to insist that developing
countries drop or scale back plans to
fight poverty and raise material
standards of living. The developing
world is understandably suspicious
that this is a hidden agenda. Yet it
is a fact that their growth is the
biggest source of the rise of
emissions. The answer is clear:
radical change in emissions per unit
of output. This revolution carries
many benefits: cleaner, quieter, safer,
more energy-secure, and more
biologically diverse energy. Rich
countries must support this with
technology and resources.
The developed world must not
attempt to preach to poorer nations.
As they deal with the largely self-
inflicted damage to their economies,
rich countries must show they
understand the dangers that arise
from hesitation in acting against
climate change. They will discover
by investing in the low-carbon
economy, adopting clear and credible
policies, and building new
technologies and markets, they will
help to create the only truly
sustainable growth path for the
future, and help find a way out of
the depression of their own making.
Nicholas Stern is I.G. Patel Professor
of Economics and Government and
chair of the Grantham Research
Institute at the London School of
Economics. Jos Antonio Ocampo is a
Professor at Columbia University and
former Minister of Finance in
Colombia
Jos Antonio Ocampo
and Nicholas Stern
Rich nations
must take
the lead in a
cleanenergy
revolution
Back to the 1930s: the hammer, sickle and swastika
politicians, journalists, liberal
intellectuals, even artists. Add to
this a surge in crime and rising
tolerance of violence and you have a
clearer picture of todays Athens.
Does it remind you of anything?
Thats right. Greeces situation
recalls the Weimar Republic.
Violence (and its banalisation), hate,
rage, polarisation, fear, despair and
resignation. As for the police, it has
already taken sides: neo-nazis won
by a landslide in polling stations
where officers were assigned to vote.
The electoral results demonstrate
the dangers to the Greek democracy.
The centre-right New Democracy
party may have edged ahead, but the
parliament, for the first time in
Greek history, will be full of
extremists. Besides the neo-nazis and
a Stalinist communist party there is
Syriza, whose leader is a fan of Mao
Zedong, Fidel Castro and Hugo
Chvez. It is difficult to find a
notable dictator, even among the
great butchers of the 20th century,
without a steady following in the
Greek parliament. The three
protagonists of the dreadful TV
incident were also elected. Imagine
them together in routine
parliamentary proceedings. Golden
Dawn members have already made
it clear they would come down hard
on any member of parliament
saying something they strongly
disapprove of.
How did Greece, the birthplace of
democracy, come to have a
parliament full of hammers, sickles
and swastikas? This is not how it
was ever meant to be. After winning
independence in the late 1820s,
Greece was attached to the west and
particularly to the UK, which
protected and patronised Greece
until it was replaced by the US in
the late 1940s. This patronage had
some beneficial side effects. Greece
was always on the winning side: in
the first world war, the second world
war, the cold war. From 1929 to 1980
Greece had an average growth rate
of 5.2 per cent and was admitted to
the European Community as early as
1981 partly as a reward.
The rest is history: welfare
populism, cronyism, statism and
corruption can describe the Greek
political system for most of the
period from 1981. This is why Greek
people have finally punished the two
former main parties (New Democracy
and the social-democratic Pasok
party) for leading Greece into a
horrible economic crisis with huge
debts and deficits and a corrupt,
inefficient state, unfit for reform and
captured by special interests.
This failure of the mainstream
political system and of the short-
sighted, growth-stifling austerity
policies enforced by the European
leadership led Greece to the
precipice. Greek people are
disillusioned, miserable, exasperated
and very frightened. They seem to be
falling into the same trap again, by
rewarding demagoguery, political
opportunism and arrogant ignorance.
Their knee-jerk reaction was to vote
for parties such as Syriza, the
rightwing nationalist and populist
Independent Greeks and the Golden
Dawn. These parties became vehicles
for a popular backlash, gathering
more than 41 per cent of the vote.
However, more than 50 per cent of
Greeks voted for parties strongly
committed to European unification.
These parties will probably form a
government that must achieve the
impossible: renegotiate better bailout
terms and enforce reforms in the
face of fierce opposition from Syriza.
Mario Vargas Llosa wrote recently
in El Pais that Greece is the symbol
of Europe and symbols cannot be
abolished without that which they
embody collapsing and degenerating
into the barbaric confusion of
irrationality and violence that Greek
civilization liberated us from.
Yet Greece is only a small step
away from civil unrest and total
collapse. It does not deserve this.
Europe has the power to push us off
the cliff but also the ability to hold
us back and save us. This is not just
an economic decision; it is largely a
political decision. A fatal mistake
will haunt Europe for ever.
The writer is an associate professor of
law and economics at the University
of Athens and runs the blog
GreekCrisis.net
Greece is only a small
step away from civil
unrest and total collapse.
Europe has the power to
pull us back from the cliff
Aristides Hatzis
It would be morally
unacceptable to insist
that developing countries
drop or scale back plans
to fight poverty
Listen to the private sector and plan for the worst
Lawrence Summers
economic insight or courage will
produce a communiqu expressing a
measure of satisfaction with the
steps under way, recognising the
need to do more and looking forward
to continued dialogue. The only good
thing is that expectations are so low
this will barely disappoint markets.
The truth is that Europes debtors
and creditors are both right. The
borrowers are right that austerity
and internal devaluation have never
been a successful growth strategy,
certainly not when major trading
partners are stagnating. In the few
cases where fiscal consolidations
have preceded growth, they have
either involved stagnation relative to
previous levels of income (as in
Ireland and the Baltics) or buoyant
demand associated with surging
exports, increasing competitiveness
and low borrowing costs (many euro
members in the early years). The
borrowers are also right to claim
that even a previously healthy
economy will quickly become very
sick if forced to operate for several
years with interest rates far above
growth rates, as is the case across
southern Europe. And experience
clearly shows that structural reform
is always harder when an economy
is contracting and there is no sector
to absorb those displaced by reform.
Those wary of institutionalising
financial integration without serious
political integration are right as well.
In a sound system, those with deep
pockets who act either as borrowers
or as guarantors must have control
over borrowing decisions. A system
where I borrow and you repay is a
prescription for profligacy. This is
why there is now so much discussion
of eurozone bonds and Europe-wide
deposit insurance being linked with
much deeper political integration.
But there are two problems lying
behind the soft references to greater
integration. The first is the question
of who really has control. If
decisions are genuinely to be made
at eurozone level, it is far from clear
that there is any majority or even
plurality support for responsible
policies. If the idea is that the
eurozone will be modelled on the
European Central Bank a European
facade behind which Teutonic
policies are pushed it is far from
clear that this will or should be
acceptable across the continent.
The second problem is the scale of
the transfers that could be involved.
A good guess would be that during
the US savings and loans crisis, the
American south-west received a
transfer from the rest of the country
equal to at least 20 per cent of its
gross domestic product. Is there a
real will to commit to potential
transfers of this scale in Europe?
Maybe all of this can be resolved but
it will surely not happen quickly.
Not all problems can be solved. It
is not certain that the full repayment
of all currently contracted sovereign
debts, sustainable growth for all, and
the eurozone retaining all its current
members will prove feasible. The
private sector is making clear that it
recognises this painful reality.
Official sector planning needs to
recognise it as well. Outside Europe,
even as leaders hope for the best
they need to plan for the worst,
ensuring adequate liquidity and
demand in their economies even if
Europes situation deteriorates
rapidly. The fortification of the
International Monetary Fund is a
start but policy makers need also to
consider national policies, trade,
finance and social safety nets.
But a eurozone collapse would be a
disaster that might define our era.
Its prospect must focus the minds of
all at the G20 summit on action.
Non-Europeans must persuade
Europeans that the rules change
when the stakes rise. The ECBs
credibility will mean little if there is
no longer a common currency.
Setting the right precedent seemed
far more important 24 hours before
Lehmans collapse than 24 hours
after it. Now is the time for radical
cuts in the rates charged by official
creditors to European sovereigns; for
a willingness to subordinate official
debts; and for expansionary
monetary policies in Europe that
prevent deflation and encourage the
growth that can create jobs and
reduce debts. Only if the system is
preserved can its future be debated.
The writer is a former US Treasury
secretary and Charles W. Eliot
university professor at Harvard
T
en days before Greeces
elections, a member of the
neo-nazi party, Golden Dawn,
repeatedly hit a female candidate of
the communist party while
appearing live on a television talk
show and threw water over a
female candidate of the radical left
Syriza. The communist had just
called him a bloody fascist and he
addressed her as a commie. Greek
elites (journalists, intellectuals,
politicians) condemned his violence
almost unequivocally. Yet the
ugliest part of this incident was the
readiness of many lay people to
defend him, even cheer him, while
the neo-nazis rose in the polls.
Unfortunately this episode was not
isolated. Despite the narrow victory
of a centrist party in Sundays vote,
almost every day extremist violence
breaks out in Athens and beyond.
Neo-nazis against immigrants,
anarchists and leftists. Anarchists,
ultra-leftists and other fringe groups
of the nationalist-populist camp
against riot police, mainstream
O
nce again good news has had
a half-life in the markets of
less than 24 hours. Just as
news of Spains bank bailout rallied
markets and sentiment for only a
few hours, a Greek election outcome
as good as could have been hoped
did not buoy markets for even a day.
There could be no clearer evidence
that the strategy of vowing that the
European system will hold together,
doing the minimum to address each
crisis as it comes and promising to
build a system that is sound in the
long run has run its course.
Nor is the Group of 20 leading
economies, whose leaders conclude
their meeting today, likely to change
anything soon. Europes troubled
economies will demand more
emphasis on growth, lower interest
rates on their official debts and more
transfers. The Germans will show
sympathy with the aim of reform but
will insist that financial integration
coincide with political integration.
The rest of the world will express
exasperation with Europes failures
and demand more be done. Officials
blessed with more diplomatic than
Setting the right
precedent seemed much
more important 24 hours
before Lehmans collapse
than 24 hours afterwards
Stephen King:
Greeces New
Democracy
partys electoral
win offers relief
but no answers
ft.com/alist
A
The list
Greece has
won Europe a
respite now
it must use it
They respond correctly that the
political and diplomatic conditions
are simply not in place to make such
a leap. However, in the meantime,
they face a rolling pan-European
financial crisis that promises to
make larger and larger demands on
their national budgets. If Europe
cannot solve this problem by
pressing on towards political union,
it needs to think much more
seriously about how to go backwards
and to return to national
currencies.
For the moment, however,
European leaders are still
concentrating on staving off the evil
moment when this problem has to be
confronted. This attitude means that
a break-up of the euro precipitated
by Greece was always unlikely
because it would essentially be a
voluntary crisis. The EU has the
money to keep Greece in the single
currency, if it wants to. By contrast,
if both Spain and Italy are unable to
fund themselves through the
markets, the EU may simply be
unable to assemble a bailout fund
large enough to save them. At that
point, the break-up of the euro
becomes likely.
The most significant event in the
euro crisis over the past seven days
was, therefore, not the Greek
election but the failure of the
bailout of the Spanish banks the
previous weekend. The Europeans
thought they had exceeded market
expectations by coming up with
100bn. In fact, the yield on Spanish
bonds actually rose after the bailout
was announced. Investors seem to
have concluded that if Spain cannot
borrow directly to bail out its banks,
it is perilously close to losing access
to the markets completely.
That raises the prospect that Spain
might need a full sovereign bailout,
which could cost 500bn or more
burning through almost the entire
financial firewall that the EU has
exposure to Greece. But more
cautious voices counsel that the
indirect effects of a Greek exit could
still be enormous. Once investors see
that countries can indeed leave the
euro, then they will inevitably re-
price risk in other eurozone
countries intensifying the pressure
on Italy and Spain.
For that reason, the European
authorities should be grateful that
the Greek election has produced an
outcome that makes a confrontation
less likely. By provoking a
showdown in Greece, the EU could
easily bring forward the moment
when Spain and Italys situation
becomes irretrievable.
Even if you believe, as I do, that
the euro will ultimately have to be
dismantled or shrunk to a smaller
core euro area it would be a
mistake to provoke the final crisis
now. For there is a very little sign
that the European authorities are
even close to working out the least
damaging ways of ending the single
currency experiment. Barack
Obamas old formula about the Iraq
war could also serve as a motto for
Europes efforts to deal with the
euro: We must be as careful getting
out of this, as we were careless
getting in.
gideon.rachman@ft.com
constructed to contain the crisis.
And where would that leave Italy?
The Italian budget deficit is now
pretty small as a percentage of gross
domestic product much smaller
than Britains, for example. But
Italys total public debt has recently
hit a new record of 1.95tn and is
well above 120 per cent of GDP. The
country must borrow hundreds of
billions in the markets this year,
simply to roll over its debt.
However, the International
Monetary Fund and the EU may well
be unable to mobilise the huge sums
of money that Italy the country
with the third-largest debt stock in
the world would need in a bailout.
As a result, the IMF has long
believed that it is imperative to
maintain Italys ability to borrow
from the markets. But Italian
borrowing costs are also creeping up.
We are getting perilously close to the
moment when Italy finds that it too
cannot access the bond markets.
There are those in Germany who
still think that a chaotic Greek exit
might have a salutary effect on the
rest of Europe, by making it clear
that there are worse options than
controlled austerity. And there are
some in the financial world who
argue that the direct effects of a
Grexit would now be limited because
banks have had the time to cut their
It is clear
the euros
fate will
be decided
in Spain
and, above
all, Italy
The night before the Greek elections,
Athens exploded in joy. The Greek
national team had won an
unexpected victory at the European
football championships. In the next
round, with delicious symbolism,
Greece will play Germany.
The main significance of the Greek
elections, however, is that it actually
avoids the need for a showdown
between Greece and Germany. A
clear victory for the far-left Syriza
party might have provoked a crisis,
by nullifying the Greek bailout deal.
Under a centrist coalition, Greece
will probably cut a deal that allows
the country to stay in the euro and
to limp on with a modified austerity
programme. The financial version of
the Greece-Germany match will
therefore go into extra time with
the hope that both sides will
ultimately settle for a face-saving
draw.
A respite in the Greek part of the
euro crisis does not mean that
Europe is off the hook, however. On
the contrary, it is increasingly clear
that Greece is no longer at the
centre of the problem. The fate of
the euro will be decided in Spain
and, above all, Italy.
Europe should be using the brief
respite brought by the Greek
elections to rethink its whole
approach to the euro crisis. At
present, the debate is stuck.
Politicians, particularly in Germany,
are being urged to take dramatic
steps towards banking, fiscal and
political union to save the single
currency.
Gideon Rachman
JUNE 19 2012 Section:Features Time: 18/6/2012 - 19:36 User: mcadamd Page Name: COMMENT USA, Part,Page,Edition: USA, 11, 1
12

FINANCIAL TIMES TUESDAY JUNE 19 2012
Twitter was an idea of Jack
Dorseys while working at Evan
Williams startup Odeo in late 2005.
The team at Odeo a consumer
podcasting company was asked to
come up with side ideas they would
like to work on. Inspired by his
fascination with the simplicity of SMS
text messages, Mr Dorsey conceived
Twtter as a messaging service that
was then spun out as a separate
business.
Groupon, the group discount
website offering daily deals on the
best stuff to do, see, eat, and buy,
was launched by chief executive
Andrew Mason as a side project to
The Point, his campaigning social
justice website.
The company leveraged The Points
framework for collective buying to
offer group deals on products and
experiences.
Craigslist famously started life as
a side project in 1995 when Craig
Newmark began an email newsletter
to friends about upcoming events in
the San Francisco Bay area.
Mr. Newmark later quit his job and
today Craigslist remains one of the
worlds mostvisited websites running
free classified ads on sites in
50 countries.
The public image
Client: Harvey Nichols
Agency: DDB UK
Territory: UK
Verdict: (zero)
Pantwettingly good may
be one of those comic
phrases that has seeped
into the English vernacular,
but does it work as a visual
joke? Not if the latest
Harvey Nichols summer
sale campaign is anything
to go by. The ads, which
appeared last week, show
models striking poses in the
latest fashions, each
sporting a telltale stain in
the groin area. Try to
contain your excitement,
advises the strapline.
The store says the ads
are a humorous reaction
to the oftenirrational
excitement sale time
engenders. But aside from
the fact that incontinence
doesnt obviously fit that
well with the cool and sexy
image that Harvey Nichols
seeks to project, there is a
basic problem: it just isnt
funny. This appears
belatedly to have occurred
to the retailer. It has
cropped the images on its
own website so that the
stains no longer appear
although it insists this is a
planned second phase of
the campaign.
Harvey Nichols has long
sought to affect an edgy
vulgarity in its ads. Using
shock in this way can work
if it gets you talked about
while also underscoring
your rebellious, impish
qualities in a positive way.
But this requires the ads in
question to be funny, clever
or both. The wet pants
campaign is neither.
Jonathan Ford
Ad deconstructed
Harvey Nichols summer sale campaign
Case study
How to expand into new markets
Quality is worth more than quick growth
The collaboration
with HFFIA allowed
Eurofragrance to gain
access to a bigger market,
but it also proved to be
more complicated and
costly than initially
assumed.
The organisations halal
certification process was
painstakingly slow. HFFIA
protocols required that, in
order to certify any product
as halal, a theoretical and
physical inspection had to
take place first. Meanwhile,
the difficult documentation
requirements frequently
prevented the certification
of certain flavours. At the
same time, some of
Eurofragrances suppliers
were sluggish when it came
to providing documentation.
A team of HFFIA halal
auditors inspected all areas
related to production
such as the processing and
packaging plants and even
how the company was
managed.
By May 2011, no new raw
materials had been halal
certified since the company
began the process in
The story. In 2009,
Eurofragrance, a Spanish
company specialising in the
design and production of
fragrances and flavours for
the food, perfumery and
personal hygiene industries,
had already achieved
success through market
diversification. About 80 per
cent of its annual
production was for export
outside Spain and 70 per
cent to outside EU.
But Eurofragrance was
eyeing the fast growing
Muslim market: 23 per cent
of the worlds population
was Muslim and, at 3 per
cent growth annually, Islam
was the worlds fastest
growing religion.
Combined with an
increase in living standards
in many Muslim countries
and the growth of Muslim
minority populations in
Europe, the market for halal
goods looked set to
explode.
After successfully
exporting to north African
Muslim countries such as
Egypt, Eurofragrances
flavours division was now
looking to expand into
Indonesia and Malaysia.
The challenge. Islamic law
determines what can be
classified as halal.
Eurofragrance needed to
ensure its meat flavours
were halal compliant for
sales in other Muslim
countries.
Indonesia and Malaysia
have much stricter halal
guidelines than other
Muslim countries in north
Africa or the Middle East,
which often only required
Eurofragrance to list that
pork and alcohol were not
present. In addition, there
was no single, universally
recognised halal certification
and the criteria varies
between different bodies.
Recognised, notforprofit
certifiers have complex
processes which slow down
production and increase
costs, while other certifiers
that operate on a purely
commercial basis are less
demanding.
The executives were
faced with the dilemma of
choosing between going for
a less complicated process
that would likely lead to
quick sales growth and a
longer, more demanding
system that would provide
a higher quality certification
(hoping that the investment
would pay off long term by
giving them an edge in
certain key Muslim
countries).
The strategy. Eurofragrance
opted for quality over quick
growth. It aligned itself with
the Halal Feed and Food
Inspection Authority
(HFFIA), a notforprofit
body based in The Hague
which had strict guidelines
and was recognised in
Indonesia and Malaysia.
September 2010.
Despite this slow process,
Eurofragrance persevered
and when the certifications
began to be approved, it
was in a strong position to
expand to Muslim countries
beyond north Africa. It
now has customers in
more than 60 markets and
the Middle East and Asia
account
for 60 per cent of its sales.
Eurofragrance also
decided to renew its halal
certificate in May, obtaining
strong praise from the
threestrong HFFIA auditor.
The lessons.
Eurofragrances success
shows that deciding to
focus on quality going
above and beyond the
minimum need for halal
certification despite
higher shortterm costs, can
pay off when expanding into
new markets.
By fully understanding the
market, Eurofragrance was
able to save time and effort
later on trying to adapt to
changing halal standards.
Professor Alberto Ribera
The writer is a senior
lecturer of managing people
in organisations and
business ethics at IESE
business school at the
University of Navarra
60
Number of markets where
Eurofragrance operates
60%
Proportion of sales from
Middle East and Asia
Reputation
depends on
the depth
of relations
I
f Ian Fleming had invented a
villain modelled on Sir Allen
Stanford, even James Bond fans
would have criticised him for going
too far. The Antigua-based Texan
ploughed the proceeds of his
fraudulent investment schemes into
an unlikely passion for cricket, koi
carp and tailored suits. Last week,
he was sentenced to 110 years in
prison. I only regret the judge didnt
add a year to the jail-term:
superstitious cricketers believe a
score of 111 attracts bad luck.
In 2008, the Stanford curse fell on
London when the businessman
whose Ponzi schemes, according to
the US case against him, were
already starting to crumble
helicoptered into Lords cricket
ground and shook hands on a $20m
deal to bring an England team to the
West Indies for a tournament. As an
illustration of the maxim if it looks
too good to be true, it probably is,
the launch, with its Stanford-centric
razzmatazz, could hardly have been
bettered. Within months, the US
Securities and Exchange Commission
had charged Mr Stanford with
conducting a massive, ongoing
fraud through his offshore bank.
The episode still evokes
embarrassment and perplexity in
equal measure. How did the bosses
of the England and Wales Cricket
Board (who are still in charge,
incidentally) fall for Mr Stanford?
How, more broadly, can businesses
spot bad apples before taking a bite?
The risk to a reputation depends
on the depth of the relationship, but
also on the nature of the partner and
their business. Where both are rotten
as in the cases of Mr Stanford,
Bernard Madoff and other Ponzi-
schemers the taint can extend to
customers. Likewise, if you purchase
items that fell off the back of the
proverbial lorry, or the reverse
sell goods that may end up in
dubious hands for dubious uses (see
arms-for-Iraq and related scandals),
expect to be fully exposed to any
ensuing scandal.
Where company-to-company
transactions remain straightforward
and businesslike, the chances of the
sins of a corrupt chief executive
being visited on you as a supplier or
customer are lower. Senior
executives of Enron, WorldCom and
Tyco went to jail, and creditors of
the first two suffered when the
companies went bust. But, although
auditors and advisers came in for
criticism, nobody seriously blamed
the scandal on the businesses that
dealt with the scandal-hit companies.
In a few such cases, the underlying
business and its network of
counterparties survive, even if the
executives go down. When B.
Ramalinga Raju, chairman of Satyam
Computer Services, confessed to
fabricating $1bn of income in 2009,
pundits predicted the reputational
stain would spread to the Indian
outsourcing groups many clients.
Yet the long-term damage was
limited and the Satyam name lives
on as part of the Mahindra Group.
As one of the directors brought in to
shore up the group told employees at
the time: Look, this is a scam, its a
huge scam but its not a Satyam
scam . . . its a Raju scam.
There was no such distinction
between a clean business and a dirty
businessman in the Stanford scam;
US prosecutors said the fraud had
overwhelmingly benefited one
person: Allen Stanford. English
cricket trusted the wrong man, even
if it did so for some of the right
reasons (to encourage cricket in the
Caribbean and reduce the risk that
its own stars might defect to more
lucrative tournaments).
It is tempting to assume that in a
networked world, such a gross
misreading of character will become
rarer. Businesses are able to refer to
multiple online recommendations
and red flags before signing the next
contract. But at the top, wrongdoers
have always used and will
doubtless continue to use powerful
networks to neutralise legitimate
suspicions. Mr Madoffs web of well-
known backers helped him
accumulate funds, for example, while
Mr Stanfords roster of other high-
profile sporting sponsorships helped
him expand his influence.
A sympathetic interpretation of the
story of English crickets black eye,
would say its administrators
accidentally fell in with thieves. But
the bald fact and lasting lesson for
other organisations is that they
were distracted from the obvious
risks by the rich rewards. The
enduring image of the flashy
Stanford sponsorship launch was not
the helicopter touching down at the
home of cricket, but the grandees
and stars of the English and West
Indian game posing with a fraudster
in front of a perspex box purportedly
containing that $20m in cash.
andrew.hill@ft.com
Andrew Hill blogs at
www.ft.com/businessblog
Andrew Hill
On management
How did the
bosses of
the England
and Wales
Cricket
Board fall
for Allen
Stanford?
he cofounded in 2000. Yet he is also
developing Gibli, a web-based service
where businesses and advisers can
trade knowledge.
Mr Joynson acknowledges that it
isnt easy focusing on two businesses
concurrently but admits he finds the
mental exercise of planning it all
pleasing. Its the excitement of creat-
ing something new which drives me.
The older business has to be run and
grown of course, but theres less
excitement in running than the crea-
tion, he says.
Whilst Mr Joynsons side business
is the deliberate result of a plan,
many other entrepreneurial side
projects are less strategic.
New York-based Tina Roth Eisen-
berg is the self-proclaimed queen of
accidental business. Whilst running
a successful design studio working for
clients including The Food Network
and The Museum Of Modern Art and
pregnant with her second child two
years ago, she decided on a career
change.
So she took a sabbatical in order to
develop two existing side projects
Creative Mornings, a breakfast lecture
series, and her blog SwissMiss and
stumbled upon new ones purely for
fun. This saw her create a number of
unintended businesses including
productivity tool TeuxDeux, a
Brooklyn co-working space
called StudioMates and Tattly, a
website selling temporary tat-
toos.
Her blog was profitable from
day one, Creative Mornings is
now established in 29 cities
around the world, the Teux-
Deux iPhone app is generat-
ing income, the coworking
space makes a small profit and
Tattly an idea that started as
a joke 10 months ago now
Innovation beyond the day job
increase when you are not driven
purely by making money. Side
projects are the playground where
ideas and execution meet, she says.
Theres a refreshing innocence and
appeal in projects that simply start
out of the love for it.
Where some executives are eschew-
ing a business school education for
the benefits of on-the-job experience,
the side project can provide a practi-
cal learning experience.
Mr Joynson, who has an MBA from
the University of Birmingham, says:
Side businesses allow you to learn
new stuff. Mostly these lessons make
you stronger and a better entrepre-
neur. There is risk of course, but with
the experience of running a successful
business the risk is likely to be less
than for a start-up.
F
or those executives in the job
market or seeking promotion,
the side project can prove
invaluable for career pros-
pects. Where the potential for self-de-
velopment in the day job may be lim-
ited by organisational structure and
corporate inexperience, side projects
can provide evidence of a candidates
entrepreneurial spirit and proactive
approach to work.
Ms Roth Eisenberg says her first
question to job applicants is to ask
what side projects they are working
on. She wants to see how driven
someone is, what ideas they have and
if they are able to execute them. I do
not care about anyones rsum or
portfolio, she says. The side-project
mentality is a clear indicator that I
am hiring someone with a hustler
attitude, and with an entrepreneurial
mind. My advice to all young folks out
there who will soon be applying for
jobs is to make sure you have inter-
esting side projects to show.
I
t is a sunny June morning in
central London and John Vin-
cent, co-founder of the fast-food
chain Leon Restaurants, is work-
ing from a caf just a few doors from
Leons Carnaby Street branch.
But he isnt just any executive
using the caf as a workspace this is
Flat Planet, his side project that is a
completely separate business from
Leon. He calls it his sand pit, a solo
operation where he can have fun
doing his own thing.
In a world where demands on execu-
tives time are greater than ever, the
proliferation of side projects may
seem surprising. But for a number of
executives, such projects can provide
fulfilment and opportunities for new
thinking. They can provide an outlet
for executives to experiment with an
idea, follow a passion, create addi-
tional revenues or just learn new
skills.
Some side businesses also turn into
much more than a hobby. Craigslist,
Twitter and Groupon, for example. all
started out as side projects.
Google famously encourages its
employees to develop side projects as
part of their day-to-day role. This
month 37 signals, a Chicago software
company, is taking this one step fur-
ther by encouraging all staff to take
the whole of June off to explore new
ideas away from non-essential sched-
uled work to explore new ideas away
from the core business.
In his book My Startup Life, San
Francisco-based entrepreneur Ben
Casnocha offers a 30-day plan for
becoming better at business, which
includes pursuing a side project.
Even if a side project doesnt work
out, it can still be a fruitful experi-
ence: by being something different
than what you work on most of the
time, the experiment can introduce
fresh ideas and energy into your
work, he says.
One reason is the role of technol-
ogy. Traditionally, the costs of launch-
ing a secondary business were often
prohibitive; now the internet has
made it faster, cheaper and easier
than ever to launch digital-based busi-
nesses where ideas can be prototyped
in an instant.
Another reason is that entrepre-
neurs invariably want to have
another try at launching a start up
using what they learnt the first time
round and free from the constraints of
the core business.
Mr Vincent says the freedom from
investors and partners most attracted
him to launch Flat Planet: In the
sand pit you can make your own mis-
takes, play around, employ who you
want, do what you want, screw things
up and not be accountable to anyone
else, he says.
However, developing a side
project when you head up a well-
staffed and established business
such as Leon may be easier than
for the owner-manager of a smaller
company who may struggle to dele-
gate responsibility. Charles Joynson
is managing director of Wavedata,
a UK pharmaceutical data business
Some executives find
fulfilment and fresh
inspiration working
on separate projects
from their main jobs,
writes Ian Sanders
The sidelines that
became mainstream
Side businesses allow
you to learn new stuff.
Mostly these lessons
make you stronger and
a better entrepreneur
Doing their own
things: John
Vincent calls Flat
Planet, his London
side project, a
sand pit where
he can experiment
while Tina Roth
Eisenberg (below),
has seen her
hobbies become
unexpected
businesses
Pascal Perich
BUSINESS LIFE
employs four people full time. These
multiple side projects generate suffi-
cient revenue for her to stop doing
her client work.
Ms Roth Eisenberg believes the
chances of entrepreneurial success
JUNE 19 2012 Section:Features Time: 18/6/2012 - 18:42 User: mossi Page Name: BizLife, Part,Page,Edition: USA, 12, 1
FINANCIAL TIMES TUESDAY JUNE 19 2012

13
ARTS
Boyish affability: Jim Parsons as Elwood P. Dowd in Harvey Charles Sykes
Enduring appetite for rabbit
THEATRE
Harvey
Studio 54, New York

Brendan Lemon
this story set in Denver, Colorado,
which concerns the attempts of Veta
Louise Simmons to commit Elwood,
her rabbit-loving brother, to a
sanatorium, the audience can feel
slightly, indulgently superior to each
gentle beat of benign confusion. The
plays characters may come to accept
the rabbit as real, but we of course
know better.
The physical production is polished
to a high sheen. David Rockwells
burled-brown set suggests the
fortune of a family that pioneered
the West. The house is as ornate in
its details as is the gently mannered
performance of Jessica Hecht as
Veta, the role that won Josephine
Hull an Oscar in the 1950 movie
version. Similarly filigreed are Jane
Greenwoods costumes; the lavender
coat worn by the daffy Betty
Chumley, portrayed by Carol Kane,
is stunning.
Even though it has been 62 years
since the movie adaptation starring
Jimmy Stewart, and 42 years since
he reprised his work on Broadway,
you would think that the actor
Elwooding it now would no longer
have to compete with memories of
the movie icon. But among matinee
audiences, memories linger. To his
credit, Jim Parsons, the TV-sitcom
star who plays Elwood here, does not
make the mistake of aping Stewart.
Parsons has a boyish affability, and
wonderful slow-burn timing, and the
audience adores him.
www.roundabouttheatre.org
Just how fervently one admires this
Harvey, the 1944 play by Mary Chase
now in revival at the Roundabout
Theatre Companys Studio 54
outpost, has a lot to do with ones
taste for the old-fashioned. I dont
doubt that the play, about an
invisible white rabbit of towering
height, should feel retro. I have held
this conviction ever since as a lad I
saw a version in which Harvey,
accompanied by a recording of
Jefferson Airplanes White Rabbit,
was presented as the product of his
human friend Elwood P. Dowds
ingestion of LSD, leaving me to
marvel that a psychedelic drug could
produce such an uninterrupted high.
Though directed with a loving
hand by Scott Ellis, the new
production is more creaky than
creative, and slightly too lagging in
pace, but I also must report that my
matinee audience lapped it up as
readily as ice cream at an interval. It
is not difficult to see why. Watching
Alighiero Boetti: Game Plan
Happening
What: Largest presentation
of the artists work outside
Italy to date transfers from
Londons Tate Modern
When: July 1October 1
Where: MoMA, New York
Details: Alighiero Boetti is an
elusive artist: in 1973 he split
himself in two Alighiero e
Boetti. His selfportraits give
humorous, poignant glimmers
of personality: Me
Sunbathing in Turin 19
January 1969 (1969) is a
featureless human form,
made up of 101 concrete
lumps and a yellow butterfly.
Selfportrait (1993) made
shortly before Boetti died of
cancer depicts a shabby,
pofaced man sprinkling
water on his head, which
steams the artist cooling a
brain boiling with ideas.
This retrospective presents
Boetti as a nomadic, lyrical
prankster. Annual lamp
(1966) is a light bulb inside a
wooden box that turns on for
11 seconds a year. Ping
Pong (1966) consists of
neon signs ping and
pong flicking off and on
in time with an invisible rally.
In 1969, Boetti started
posting envelopes to artists
and friends using imaginary
addresses; he forwarded each
returned missive to another
invented place, and so on,
making Viaggi Postali.
In the 1970s he travelled to
Afghanistan, yearning for a
place devoid of the
cacophony of capitalism and
set up the One Hotel in Kabul
(because creativity also
means opening a hotel). He
collaborated with craftsmen
to make his celebrated
Mappas exquisite
tapestries of the world, each
country coloured according to
its national flag. The
embroidered map couldnt be
more beautiful, said Boetti.
The world is shaped as it is,
I did not draw it, the flags
are what they are, I did not
design them. I created
absolutely nothing.
www.moma.org
Me
Sunbathing
in Turin 19
January
1969
(1969)
The sound of
transformation
Spirit of adventure at a California music festival;
theatre of meandering; Rattles Viennese night
Sylvan miracle:
Megan Shieh
performs in John
Luther Adams
Inuksuit at Ojai
North!; below,
Simon Rattle
conducts the
Vienna
Philharmonic at
the Barbican
Mark Allan
CLASSICAL MUSIC
Vienna Philharmonic/
Rattle
Barbican, London

Andrew Clark
The Simon Rattle brand has become
so identified with Berlin that it came
as a surprise to find him billed as
conductor of the Berliners arch-rival,
the Vienna Philharmonic Orchestra,
for his latest visit home. But Rattles
association with Vienna goes back
long before he took his job in Berlin,
and of his predecessors there, only
Claudio Abbado severed links with
the Vienna Philharmonic after moving
to Berlin.
A Rattle concert with the Viennese
is a different experience. There is no
symbiosis between conductor and
musicians of the type he has
developed with the Berlin
Philharmonic, no sense of a journey
undertaken on equal terms and
determined by a joint vision. Rattle
has always been one of the most
forward-looking conductors, whereas
the Vienna Philharmonic represents
the coagulation of tradition.
For this reunion of opposites they
joined in a dance of dissembling, each
side making superficial compromises
in order to maintain a show of
harmony. In Brahmss Third
Symphony, which opened the concert,
Rattle loved the music to pieces,
stringing it out longingly in homage
to the Vienna Philharmonics fuddy-
duddy sound Brahms as a bowl of
pasta, unlike the juicy steak of his
Berlin Brahms. There was ample
opportunity to admire the players
individual merits in the Poco
allegretto, but the closing bars of the
finale dissolved shapelessly.
Schumanns Third Symphony, by
contrast, was game to Rattle: he set
off at such a lick that he almost left
orchestra and music behind. That, and
his decision to play all five
movements continuously, denied the
music the monumental architecture
that an older generation gave it, but
at least the musicians looked
interested. Even if they didnt seem to
feel the music from within, there
was no sign of the auto-pilot they
usually offer on tour. Leonard
Bernstein is the only conductor in
my experience who has made them
truly loosen up.
The one work that found
conductor and players sparking
creatively was Weberns Six Pieces
for Orchestra Op. 6 Rattle divining
its Mahlerian angst, the
Philharmonic casting a rainbow of
timbres on its terse frame that was
quasi-impressionist in effect.
www.barbican.org.uk
ARTS
PODCAST
With the Stone
Roses reforming,
Blur playing at the
Olympics closing
ceremony and
Suede headlining a
summer festival,
FT pop critics
look back at the
age of Britpop and
ask: should it be
here now?
www.ft.com/arts
THEATRE
You Once Said Yes
Roundhouse, London

Sarah Hemming
CLASSICAL MUSIC
Ojai North!
Hertz Hall, Berkeley, California

Allan Ulrich
What distinguishes an ersatz music
festival from the genuine article?
Beyond thematic coherence and starry
talents, a zest for invention and a
sense of community should pervade
the music-making. That spirit
permeated the opening gambit last
week of the Berkeley version of the
venerable Ojai Festival, a staple of
Southern California alfresco cultural
life for 66 years.
No brass fanfares intruded on the
sylvan miracle that is the University
of Californias Faculty Glade. In their
place, 21 percussionists ringed the
site, as their banging, tinkling,
wheezing and chirping mingled
with the sounds of nature. So went
the local premiere of John Luther
Adams startling Inuksuit, composed
for a barren Alaskan landscape,
but uncommonly eloquent when
delivered in this sun-blessed
landscape under Steven Schicks
masterly direction. Hundreds of
listeners were invited to move about
at will, revelling in their unique sonic
perspectives.
The indoor events offered more
conventional but comparably
stirring fare. Cal Performances, the
presenter here, more than doubled the
number of concerts it staged in the
inaugural 2001 season. What makes
Ojai unique is its revolving music
directorship. Next year it will be
choreographer Mark Morris; this year
the honour fell to the Norwegian
pianist Leif Ove Andsnes, who
brought to the task an impeccable
technique, acute curiosity and some
extraordinary performing colleagues.
The festival, always oriented towards
the contemporary, scrutinised the
western musical tradition and the
manner in which it borrows from the
past, while advancing into the future.
Transformation was everywhere.
Nowhere did Andsness
programming prove as fascinating as
in Reinbert de Leeuws Im
wunderschnen Monat Mai, an
hour-long meditation on the classic
German Romantic Lied. The Dutch
musician has selected 21 iconic
songs by Schubert and Schumann,
provided an accompaniment for a
15-person instrumental consort
from the Norwegian Chamber
Orchestra and a single vocalist, the
redoubtable soprano Lucy Shelton,
who wandered the stage crooning,
growling, whispering and subtly
altering the rhythm of the verse
that inspired these effusions. De
Leeuw, who led from the keyboard,
departs from our shared musical
heritage to create a fantasy on the
song canon, which suggests Weill
and a host of others. If his
reimaginings sometimes go
overboard, they never leave us
desperate for the originals.
Schnittke also mined the past and
his 1976 Piano Quintet, with its
brooding Mahlerian harmonies and
sarcastic waltz, stands poised
between the tradition and a
contemporary sensibility; Andsness
brilliant pianism anchored the
contributions of the young Norwegian
players. Some entries stood outside
time: Andsnes proved a model
partner to the blazing Dutch
mezzo-soprano Christianne Stotijn in
an exemplary reading of
Shostakovichs intensely dour Six
Poems of Marina Tsvetaeva.
The transformational spirit worked
both ways. Andsnes and his
formidable colleague, Marc-Andr
Hamelin, collaborated on an
exhilarating performance of
Stravinskys own four-hand
reduction of his Sacre du printemps,
delivered here on two pianos,
allowing us to hear more of the
composers intricate detail. Both
the Jancek string quartets were
given in string orchestra
transcriptions that only enhanced the
NCOs reputation as one of the
sleekest bands around. The
performance of the Kreutzer began
An evening spent wandering the
streets of Camden in north London
would not normally warrant a review.
But You Once Said Yes, presented by
Look Left Look Right as part of LIFT
(London International Festival of
Theatre), is a meander with a purpose.
Audiences assemble at the
Roundhouse, are given a cagoule, a
backpack and a farewell speech by a
travel guide, and then tipped out, one
at a time, on to the back streets
behind the theatre. From then on you
travel alone, your path directed by
apparently random encounters with
strangers on the street, who engage
you in conversation, persuade you to
do little tasks for them, and send you
further on your way.
It is a little unnerving, and to begin
with you feel pretty conspicuous and
rather ridiculous, with your baggy
rainwear and your fluorescent bag. At
least two of the people who accost you
are so convincingly dramatised that at
first you are not sure whether they
are actors or real strangers. You have
to trust them; you have to say yes
even to the point of getting into a car
with a strange man. But once you do,
and once you let yourself engage with
them, the experience becomes a warm
and reassuring one.
Unlike You Me Bum Bum Train, a
similar interactive experience, you are
not expected to perform: rather you
need to listen and respond. And
gradually you realise that there is a
pattern to the journey: that each of
the people you meet people whom
you would probably usually ignore or
avoid are down on their luck,
struggling with their dreams of
making it, desperate in one way or
another. Most characters want
nothing from you but an ear and a
kind word; in return they cannily
coax details from you about your
own life and aspirations, which
they use, delightfully, in the final
encounter.
Written by Morgan Lloyd Malcolm
and Katie Lyons and directed by
Mimi Poskitt, this is one of several
interactive shows at this years LIFT
that focus on the gritty reality for
people whose lives have been upended
(theres also 66 Minutes in Damascus,
about Syrian detainees, and
Unfinished Dream, about refugees, for
example). Its perhaps not for
everyone, but this guided tour of the
back streets of big city life is, in the
end, a rather touching and revealing
exercise in empathy.
www.liftfestival.com
with a snippet of the original
Beethoven violin sonata and was
frequently interrupted by actor
Teodor Janson reading from the
Tolstoy novella inspired by the
Beethoven. These ears found it all a
mite intrusive, if not annoying.
A couple of intimate moments
were writ large. Hamelin burned his
way through Ivess Concord
Sonata, finding blessed introspection
amid the rhetoric, and then
accompanied Stotijn in a smattering
of William Bolcoms sassy cabaret
songs. The two pianists introduced a
dazzling transcription of Stravinskys
Circus Polka, but forgot to don the
clown noses they sported in Ojai.
Some things just cannot be
transplanted.
www.ojaifestival.org
JUNE 19 2012 Section:Features Time: 18/6/2012 - 17:06 User: cheald Page Name: ART USA, Part,Page,Edition: EUR, 13, 1
14

LEX ON THE WEB
For an additional Lex note on Melrose
go to www.ft.com/lex
For email, go to www.ft.com/nbe
CROSSWORD
No. 14,034 Set by PETO
1 2 3 4 5 6 7 8
9 10
11 12
13
14 15 16
17 18 19
20 21 22 23
24
25 26
27 28
JOTTER PAD
ACROSS
1 Will fnds time after trial to change
name (9)
6 It may appear after working with
type (5)
9 A carriage brought back in pieces
(5)
10 Indiscriminate strike before soldiers
pass by (3-2-4)
11 Drink with around nine grams of fat
(10)
12 Try speaking at this point (4)
14 Penny about to give up lead (7)
15 Struggle for Tory leader after
deception leads to downfall (7)
17 Staying power shown by the frst
military dictator in South America (7)
19 Tip of object coming round again (7)
20 Hotels in the centre of Barnsley (4)
22 Refusing to vote for German
graduate over earlier disgrace at
home (10)
25 Run into tackle (9)
26 Saw daughter after a time (5)
27 Letters from Goethe reporting on
that issue (5)
28 Feel anger over English priests
claim (9)
DOWN
1 Moves very quickly exuding drops
(5)
2 A dramatic broadcast by the Queen
acting after fattery gets to work
(4,5)
3 Slaughter is hesitant in opposition
(10)
4 Upgrade in French hotel one
around the west end of Nice (7)
5 Huge birds getting caught (7)
6 Go on at motorists about parking (4)
7 Wait for assistant to wrap book (5)
8 Struggling Spurs need support (9)
13 Suggest concealing identity of cow
(10)
14 Mischievous pet occupied by
shimmering tinsel (9)
16 Old stock including clubs available
at frst for free (9)
18 Judge oddly neglected genre after
piece on retired artist (7)
19 A supporter of mine gets shot
crossing river (7)
21 Some ethnic headdresses
discovered in an alcove (5)
23 City providing information about
home debut of Tevez (5)
24 Its grown by old people mostly (4)
Solution to Saturdays prize puzzle on Saturday June 30
Solution to yesterdays prize puzzle on Monday July 2
Crossword winners names will be printed in Weekend FT
Banking Weekly
Podcast: the team
discusses the UK
chancellors plans for
bank regulation, the
problems facing Credit
Suisse and free banking
www.ft.com/bankingweekly
Securing an
open Olympics
Video: with recent
Olympics having been
a focus for protest,
how will the London
games be policed
while allowing the right
to free speech?
www.ft.com/securegames
Most read
1
2
3
4
5
New Democracy ekes out win in
Greece
Finland on a plate
Speculation mounts over Microsoft
tablet
PostGreek vote rally fades
Wolfgang Mnchau: What happens if
Angela Merkel gets her way
TODAY ON FT.COM
THE LEX COLUMN
Tuesday June 19 2012
Losing its marbles
Sources: Thomson Reuters Datastream; IMF
Greece: net government debt (as % of GDP) Stock market indices (rebased)
May
2010
2011 Jun
2012
20
40
60
80
100
120
Athens
composite
FTSE Eurofirst 300
0
20
40
60
80
100
120
140
160
2008 09 10 11 12 13 14 15 16 17
Forecasts
Olive and kicking
It used to be Brussels and its
extemporising bailouts that bought
the eurozone some time. Now it is
Greeces turn. The weekend election
result has given proponents of the
countrys path of savage austerity
and adherence to the eurozone a
final opportunity to prove they are
credible. The danger of an
imminent, enforced expulsion from
the bloc has been lifted. But one
thing has changed: the election has
rendered Greece a sideshow in the
eurozone crisis, for a while. The real
action, unhappily, is elsewhere.
True, the election outcome sent
the bombed-out share prices of
Greek companies soaring: National
Bank of Greece was up 11 per cent
and lottery operator OPAP rose
12 per cent. But the result offers no
relief for Greek companies staring at
credit shortages and a frozen
banking system. When that starts to
feed through, Greek corporates could
take a more severe beating.
Still, the most worrying number
yesterday came not from Greece but
from Spain: the yield on 10-year
Spanish bonds rose nearly 30 basis
points to 7.1 per cent another
eurozone-era record. This months
100bn bailout for Spains banks is
proving a red herring. As investors
fret that Spain itself may need
recourse to the eurozones bailout
facility, it is clear that the eurozone
has bigger problems than who
governs for whatever length of
time in Athens.
Several things must now happen.
Greeces new government needs to
be created from a muddle of
fractious potential coalition allies.
Then it has to persuade its creditors
to extend and even soften the terms
of its second bailout. That involves
convincing Germany that it should
be cut some slack. If Athens cannot
do that, another election appears a
certainty within months. But that,
for now, is Greeces problem.
The viability of the euro remains
in question, whether or not Greece
is a member of the bloc. Athens
outsized problems tend to obscure
this reality. Greeks have voted to
give themselves a stay of execution.
Everybody else should keep focused
on the bigger picture.
Data prices
Fiddling with pricing is a game
telecommunications and cable
companies can never stop playing.
They plough fixed investment into
infrastructure and programming,
then charge for services with
vanishingly small incremental costs
of delivery. Consumers, for their
part, are always looking to pay the
incremental cost (roughly nothing)
for the services, rather than the total
cost. Finally, competitors want to
price below total cost to take share.
Last week Verizon made a
significant move, introducing
wireless plans that in essence
eliminated the longstanding practice
of charging separately for voice
minutes and data. Customers will
pay a fixed fee per device, and for
however many gigabytes they use.
So it will not be possible to arbitrage
cheap data against expensive
minutes by, say, using an unlimited
data plan and a Skype account to
talk on the cheap. Other telcos are
expected to follow Verizons lead.
In cable (TV and data), meanwhile,
Comcasts announcement last month
that it would charge overage fees to
customers who use masses of data,
rather than simply throttling back
their data connections, has been
widely seen as a step towards tiered
pricing based on volumes. This
would be a legitimate way for the
distributors to defuse another
consumer arbitrage: using a video-
streaming service, such as Netflix,
rather than their TV packages.
Verizon and Comcast both earn
single-digit returns on invested
capital. Companies that depend on
their networks, from Netflix to
Apple, make returns many times
higher. Surely rational pricing, based
on volume, can help close this gap?
Perhaps; but rational price plans are
transparent. Consumers paying as
they go may see little difference
between providers. The problem of
consumer price arbitrage might end
up being replaced by the problem of
cut-throat pricing.
Private jets
For four years the business jet
industry has had precious few
reasons for cheer. But last week
NetJets, the fractional jet company
owned by Berkshire Hathaway,
placed orders for up to 425 new
aircraft worth almost $10bn. After
sales slumped about 60 per cent
between 2008 and 2011, is the sector
finally on the up?
Certainly the order highlights
improvements at NetJets. During the
recession the company had it rough.
In 2009 it generated a pre-tax loss of
$710m and would have collapsed
without support from Berkshire. But
in 2011 NetJets made pre-tax profits
of $230m thanks to new management
and cost cutting.
The outlook for the market,
however, looks mixed. On the one
hand, companies purchase about
65 per cent of all business aircraft,
so corporate profits are a main
indicator of demand. And despite
economic uncertainty, earnings
continue to be strong. That bodes
well for the sector. On the other
hand, amid the eurozone crisis,
business jet traffic has flattened out
after a modest recovery in 2010 and
remains about 15 per cent below
pre-recession levels in Europe and
the US. Stocks of used aircraft for
sale also remain high, putting
pressure on jet prices.
Adding to the confusion, sales and
prices of large jets, such as those
built by Bombardier and Gulfstream,
part of General Dynamics, have held
up, but makers focused on small jets
have struggled. In May, Hawker
Beechcraft filed for Chapter 11. New
entrants such as Honda and Eclipse
Aerospace will only compound the
problem of overcapacity.
Even the NetJets order may be less
than meets the eye. Bombardier and
Cessna, part of Textron, won new
contracts, but a handful of long-time
suppliers lost out. And in the past
fractionals have proved fair-weather
friends, cutting orders as conditions
worsen. Stay seated Warren Buffett.
ItaUnibanco
Ita-Unibanco, Brazils largest bank
by market capitalisation, has been
trying since February to buy the half
of Redecard that it does not own for
R$11.8bn ($5.8bn) in cash. The card
payment operator is the countrys
second biggest after Cielo. But the
deal has not been as easy as flashing
the plastic.
Lazard Asset Management, the
largest minority with 10 per cent of
Redecard, said the first external
valuation of R$34.2-R$37.6 a share (by
NM Rothschild) undervalued the card
company. Now, Credit Suisse has
come in with a similar valuation and
thus Ita has stuck to its R$35 a
share offer. To an outsider the price
looks full, as the credit cycle heads
towards a peak. But there are some
mitigating factors in the longer run.
Sure, Brazils economy is coming
off the boil and credit indicators are
flashing. Banco Central do Brasil
data show credit extension running
at nearly 50 per cent of gross
domestic product, from about 46 per
cent a year ago. Market expectations
for 2012 GDP growth have contracted
nearly 70 basis points in a month to
2.3 per cent.
And, as a multiple of Redecards
R$1.8bn book value (adjusted for
dividends paid in April), Ita is
paying up. But the offer is only a
13 per cent premium to Redecards
undisturbed price, which has frankly
been no sparkler, returning less than
65 per cent since listing in July 2007
and underperforming Cielo by a
quarter in the past year.
What is more, while Ita does not
detail the benefits of full ownership,
it should be able to cut Redecards
funding costs. Ita will also avoid
capital penalties under Basel III. In
the longer term, the card deal takes
Ita deeper into a lower segment of
the market with strong growth
Japan solar
Just when the solar subsidy gravy
train appeared to be ending, along
comes Japan. Yesterdays expanded
backing for renewables is one of the
few certainties in the countrys post-
Fukushima energy policy. It should
be good news for solar-panel makers.
But that is not certain, either.
Generators of renewable power
will, from July, be able to sell all
their output to the power utilities for
a set rate and at a hefty premium to
conventional power. That cost,
however, which the government
estimates will be just Y87 ($1) per
household per month, will be passed
on to consumers. Even so, shares in
power utilities fell, in spite of the
ending of the nuclear shutdown.
Solar and renewables are not the
whole answer to Japans post-
Fukushima energy needs. Officials
are debating a far broader plan to
shape energy policy for the next two
decades. Only when that is known
can investors make long-term
choices. Some of the proposals call
for renewables to make up about
30 per cent of the energy mix by
2030. Japans existing six gigawatts
or so of solar and wind capacity
would need to increase 16 times to
meet that, according to Nomura
and that is before factoring in extra
capacity needed for cloudy and
windless days.
Nomura estimates that the scheme
could add 2.4GW of solar capacity
this year. Shares of Japans solar-
panel makers, including Panasonic
and Sharp, jumped on hopes that the
volume boost would make up for a
big fall in solar product prices. Good
luck: they face rivals such as Chinas
Suntech Power, which are equally
desperate to use quantity to boost
their top line. Yesterdays news,
although forecast, included better
prices than expected for solar and
wind power. Panasonic and Sharp
could do with any moment in the
sun they can get. But, unless they
prove they can beat the competition,
this one will be only too brief.
prospects and it can always tighten
credit limits. Ita has the insight to
make those judgments, even if, to
investors, the deal looks imprudent
right now.
JUNE 19 2012 Section:FrontBack Time: 18/6/2012 - 20:55 User: hayesj Page Name: 1BACK USA, Part,Page,Edition: EUR, 14, 1

15
Companies and sectors in this issue
Companies
3Legs Resources.......................19
AT&T.......................................17,28
Aegon...........................................15
Air FranceKLM..........................15
Alpha Natural Resources.. 26,28
Amrica Mvil.............................17
Anglo American.........................26
Apache........................................ 28
Apple..................................14,17,28
Arch Coal....................................26
BBVA........................................... 28
BNP Paribas.............................. 28
Banco Central do Brasil .......... 14
Bankia.................................... 16,28
Banque Postale..........................16
Barclays................................. 16,28
Berkshire Hathaway..................14
Bombardier.................................14
Bumi ............................................ 26
Burberry......................................28
C&W Worldwide................... 17,28
CVC.............................................. 19
Carrefour.....................................15
Cessna......................................... 14
Cielo............................................. 14
Citigroup......................................16
Comcast...................................... 14
Commerzbank........................... 28
Credit Suisse.........................14,16
Crdit Agricole...........................18
Deutsche Bank..................... 16,19
Deutsche Brse......................... 18
Deutsche Telekom.................... 17
eBay..............................................17
EuroBank.................................... 28
Everything Everywhere.............17
Evonik Industries.......................19
ExxonMobil..................................19
Facebook...........................16,17,28
Fairfax Media..............................15
France Telecom......................... 17
Gem Diamonds......................... 28
GenOn Energy........................... 26
General Dynamics.....................14
GlaxoSmithKline.........................16
Goldman Sachs......................... 19
Google..........................................17
Graff............................................. 19
Groupon......................................28
Gulfstream.................................. 14
HSBC........................................... 16
Haier.............................................19
Hawker Beechcraft ................... 14
HewlettPackard........................28
Home Retail Group.................. 28
Honda.......................................... 14
Hong Kong E&C........................ 18
IAG............................................... 28
ITV................................................28
ItaUnibanco............................. 14
Japan Tobacco.......................... 16
Johnson & Johnson..................16
JPMorgan Chase.......................28
KPN...............................................17
Lazard Asset Management.....14
Lend Lease................................. 16
Lloyds Banking Group..............18
London Metal Exchange.......... 18
MTN..............................................17
Man Group..................................18
Mediolanum................................28
Melrose....................................... 28
Merck...........................................16
Microsoft.....................................28
Morgan Stanley.........................28
NM Rothschild........................... 14
National Bank of Greece.........14
National Grid..............................28
NetJets........................................ 14
Netflix...........................................14
Nomura........................................16
Novartis....................................... 16
OPAP............................................14
Osram.......................................... 19
Panasonic...............................14,19
Peabody......................................26
PepsiCo........................................17
Publicis Groupe..........................16
Quintain Estates........................28
Redecard..................................... 14
RollsRoyce.................................28
Royal Bank of Scotland..... 18,28
Safran...........................................15
San Leon Energy.......................19
Santander...................................28
Satyam Computer Services....12
Sharp...................................... 14,19
Siemens.......................................19
Socit Gnrale..................18,28
Softbank........................................7
Suntech Power.......................... 14
Telefnica.................................... 17
Telekom Austria.........................17
Textron........................................ 14
Tyco..............................................12
Verizon.............................. 14,17,28
Virgin Media...............................28
Vodafone..................................... 17
WPP..............................................16
Wolseley......................................28
Xstrata.........................................26
YPF............................................... 17
Sectors
Aerospace................................... 14
Banks................................. 14,16,18
Chemicals....................................19
Electricity.....................................14
Food Producers......................... 17
Gen Financial....................14,18,19
Gen Retailers..............................15
Household Goods......................19
Media............................................17
Mobile & Telecoms...................14
Pharmaceuticals........................ 16
Travel & Leisure........................14
There are grudge matches and
then theres Fridays Greece v
Germany quarter-final of the
Euro football tournament. Back
in the real world, Germany is
winning on points. The Greek
electorate has backed down
and German chancellor Angela
Merkel still refused extra help.
Greek assets cheered the
election outcome, seeing it as a
vote for austerity.
The rest of the world was
unimpressed, and refocused on
Spain and Italy. The euro
dropped to $1.257, Spanish and
Italian shares fell almost 3 per
cent and their bonds tumbled.
Spain is in effect excluded
from the bond market now. The
10-year yield is above 7 per cent
with a spread over German
Bunds of 575bp. Almost as bad
is the two-year yield, now 542bp
above Germanys. Investors do
not want to lend to Spain even
for short periods.
Investor hope is pinned on
eurozone progress and central
bank action. Chinese and UK
central bank easing, and the
possibility of more from the US
Federal Reserve tomorrow,
have already supported a 5 per
cent equity rally this month.
But the Greek election result
means co-ordinated global
emergency intervention is
unlikely. The European Central
Bank will almost certainly do
nothing to ease the pressure
before European leaders meet
at the end of the month, either.
The past three years suggest
it is easy to predict the
outcome of the summit: it will
once again disappoint
investors, who are looking for
progress towards a European
fiscal and banking union.
The next fortnight will see
plenty of chatter about the
summit. But what really
matters is the ECB reaction.
If the ECB sees European
politicians moving the right
way, it might just be willing to
help. This could mean a rate
cut, more long-term bank loans
or the revival of peripheral
bond purchases. Some investors
are looking for ECB loans to
the eurozone rescue fund,
giving it unlimited firepower.
This seems a stretch, but even
lesser measures could keep the
European ball in the air.
www.ft.com/shortview
Fairfax to cut jobs by fifth and
shrink f lagship titles to tabloid
By Neil Hume in Sydney
Fairfax Media, Australias sec-
ond-biggest publisher by news-
papers sold, is to cut roughly a
fifth of its workforce and shrink
its flagships Sydney Morning
Herald and The Age to tabloid
size as it seeks to cut costs and
halt a slide in revenue.
Fairfax said that the restruc-
turing would give it flexibility
to move to a digital-only model
and end print editions if there
was a further material down-
turn in advertising revenues
and circulation.
The moves include the closure
of two printing plants and the
introduction of digital subscrip-
tions for The Age and Sydney
Morning Herald next year.
Twenty per cent of the
planned 1,900 job losses would
be in editorial and another 20
per cent in the printing busi-
ness, according to Goldman
Sachs analysts briefed by the
company.
No one should be in any
doubt that we are operating in
very challenging times, said
Greg Hywood, chief executive.
Readers behaviours have
changed and will not change
back.
However, the company ruled
out a demerger, citing the costs
involved in separating its trou-
bled metropolitan newspapers
from its profitable regional
titles.
The key question, said Gold-
man Sachs analysts, is whether
Fairfax can generate enough
cost savings to arrest the earn-
ings decline in its print busi-
nesses in the face of the current
tough cyclical environment and
the acute structural headwinds
it faces.
Shares in Fairfax have fallen
almost 90 per cent over the past
five years as it has struggled to
adapt. Fairfax shares closed up
7.4 per cent at A$0.65 yesterday.
Gina Rinehart, recently
described as the worlds richest
woman by a local magazine, has
built a near 19 per cent stake in
Fairfax and is pushing for
boardroom representation.
At group level Fairfax expects
underlying earnings before tax
to fall 18 per cent to A$500m in
the current financial year.
FINANCIAL TIMES
THE FINANCIAL TIMES LIMITED 2012 Week 25
News Briefing
Source: Markit
Spanish CDS
Five-year spread (basis points)
Mar 1 2012
356
Jun 18 2012
621
300
400
500
600
700
CDS on Spanish debt hits
record high. Page 23
Telecoms M&A activity
Trading pressures spur
Europes telecoms groups
into merger activity. Page 17
Nomura tobacco blow
Nomura excluded from
government sale of shares
in Japan Tobacco. Page 16
Facebook snaps up Face
Facebook buys Face.com,
maker of facial recognition
software. Page 17
Evonik IPO scuppered
The owners of chemical
company Evonik have put
IPO plans on hold. Page 19
HKEx treads fine line
Exchange has gone to great
lengths to show it is not a
Beijing stooge. Page 18
Bouton at Kerviel court
ExSocit Gnrale chief
Daniel Bouton to take
stand at appeal of Jrme
Kerviel (above). Page 18
Fund in Lloyds FSA call
Childrens Investment Fund
urges FSA to bolster bank
capital reserves. Page 18
Slump in ad spending
Fall in ad spending could
bring overall growth in
Western Europes media
market to a halt. Page 16
Man appoints Sorrell jnr
Jonathan Sorrell, son of
Sir Martin, made financial
director at group. Page 18
Spain fears end rally
The eurozone policy of
incremental steps fails to
convince markets. Page 27
Iran oil exports hit
Insurance ban on tankers
carrying Iranian crude is
putting off buyers. Page 26
US warms to gas
The mining industry fears
lasting crisis in US shale
gas revolution. Page 26
Insight
Eurobills could drive
through the German
roadblock. Page 26
Markets & Investing
Companies
Tuesday June 19 2012
Patrick Jenkins Banker pay, not bonuses, is the issue for regulators Page 16
The Short View
James Mackintosh
Carrefour
investors
block chiefs
share plans
By Scheherazade Daneshkhu
in Paris
Shareholders at Carrefour
vented their anger at the French
retailers underperformance by
yesterday blocking the alloca-
tion of new share options to
directors at an annual meeting
in Paris.
The protest overshadowed a
pitch to shareholders by Carre-
fours incoming chief executive
and chairman outlining a strat-
egy likely to result in the
retailer selling some of its inter-
national operations.
Georges Plassat, the retailers
new chairman and chief execu-
tive, said that it would take at
least three years to turn the
company round.
I cannot commit to short-
term promises, Mr Plassat, who
joined Carrefour in April, told
the meeting. It will take three
years to relaunch the engine.
Mr Plassat said that he felt no
threat and no constraint from
the biggest shareholder Blue
Capital which owns 16 per
cent of the shares. Blue Capital
is a joint venture vehicle of
Groupe Arnault, the investment
arm of luxury goods tycoon Ber-
nard Arnault, and Colony Capi-
tal, the US private equity group
Mr Plassat, a veteran retailer,
is Carrefours third chief execu-
tive since Blue Capital made its
initial investment now heavily
lossmaking, at least on paper
five years ago.
Four weeks ago he replaced
Lars Olofsson, who presided
over a share price fall of 43 per
cent in his three years at the
helm. The timing of his decision
to quit a month earlier than
planned deprived shareholders
of the opportunity to vent their
anger at him at the AGM.
Nevertheless, an ordinary res-
olution endorsing his much-
criticised 1.5m non-competition
pay-off and an annual pension
estimated by shareholder
groups at about 500,000 was
only narrowly passed by 51.3 per
cent of votes cast, with 48.1 per
cent opposed.
Two extraordinary resolutions
concerning the allocation of free
shares and stock options to
management and employees
were blocked after narrowly fail-
ing to obtain a two-thirds major-
ity.
Such shareholder revolts
especially in the private sector
are unusual in France but pub-
lic anger over executive pay
packages at a time of rising
unemployment has mounted.
Shareholders of Air France-
KLM and Safran recently pro-
tested against big pay-offs for
chief executives at the partly
state-owned groups.
Mr Plassat said that Carrefour
was too big and complicated. He
was convinced that its diffi-
culties stemmed from having
entered too many international
markets with insufficient finan-
cial backing. After selling Carre-
fours operations in Greece last
week to its domestic joint-ven-
ture partner, which will become
a Carrefour franchisee, he sig-
nalled a similar course for some
other countries.
We are not necessarily better
placed than our Turkish part-
ners in Turkey, he said, add-
ing: We dont necessarily need
to be 100 per cent in Indonesia.
Anger after retailers
poor performance
Protest overshadows
suggestion of selloffs
1.5m
Exchief executive
Lars Olofssons payoff
Poland blow Exxon ends shale exploration
Polands shale gas hopes have suffered a blow after ExxonMobil ended exploration for the fuel
following the failure of tests to find gas in commercial quantities Report, Page 19 AP
Insurance industrys products
too complex, says Aegon head
By Alistair Gray in London
The head of one of the worlds
biggest life assurers has admit-
ted his industry suffers from a
credibility problem because it
has sold over-complex products
to savers.
Alex Wynaendts, chief execu-
tive of Aegon, in effect said life
assurers had boosted profit mar-
gins by selling complex prod-
ucts, but that they risked becom-
ing irrelevant if they failed to
adjust to new realities.
Consumer groups in several
jurisdictions have long raised
concerns about opaque savings
and investment offerings from
insurance companies, but Mr
Wynaendts comments mark
one of the bluntest admissions
yet from an industry insider.
Sales of complex products
have created a sense of a lack
of credibility in the sector, said
the head of the Netherlands-
based insurer, which serves
nearly 47m customers in more
than 20 countries.
Customers need more simple
and transparent products, he
told the Financial Times. There
is this issue about . . . these com-
plex products, and nobody
knows exactly whats going on.
Mr Wynaendts also in effect
admitted that the companies
had benefited from the complex-
ity. Simplicity and transpar-
ency usually brings margin
pressure, he said.
Aegon has been working to
regain investors trust after tak-
ing a 3bn government capital
injection at the height of the
crisis in 2008.
The group, which owns the
Transamerica insurance busi-
ness in the US, repaid the Dutch
state in full a year ago.
Mr Wynaendts will tell inves-
tors and analysts at a confer-
ence today that Aegon plans to
double the percentage of sales it
makes directly to customers as
opposed to through advisers and
intermediaries to about a third
by 2015.
Shaun Crawford, global insur-
ance leader at Ernst & Young,
said: In mature markets like
the Americas and western
Europe, insurers have added
tweaks, bells and whistles. Its
been good margins but the cus-
tomers arent looking for the
over-complexity. Consumers
have been put off. Quite often
they havent really understood
what theyve bought in the
past.
However, Ned Cazalet, the
veteran financial services con-
sultant, said life assurers could
struggle to simplify many of
their products. Some particu-
larly those that offer guaranteed
returns even if the portfolios
invest in equities were inher-
ently complex, he said.
JUNE 19 2012 Section:2Front Time: 18/6/2012 - 20:25 User: pryorc Page Name: 2FRONT EUR, Part,Page,Edition: EUR, 15, 1
16

FINANCIAL TIMES TUESDAY JUNE 19 2012
Business For Sale
Legal Notices
COMPANIES
COMPANIES ROUNDUP
EU plan to cap bankers bonuses could easily backfire
When the chief executive of Deutsche
Bank calls the south-east of Englands
member of the European Parliament for a
chat, it is probably a sign of jitters.
In picking up the phone to Sharon
Bowles recently, Anshu Jain was reflecting
a widespread fear in the sector that the
European Parliaments plan to cap
bankers bonuses at the level of their base
salary will make the continents banks
uncompetitive.
The legal process, though, is starting to
look unstoppable, no matter how high-
ranking the lobbyists. The MEPs beef is
an obvious one echoing the gripes of
many of their constituents they hold
bankers responsible for the financial
crisis and believe they are overpaid.
Bankers have, of course, always been
well rewarded not only chief executives,
but also top traders and advisory
specialists within investment banking
divisions. What rankles now, after so
many banks have been bailed out by
governments, is that pay seems more
generous than ever.
Shareholders have been roused into
protest by a similar sense of being
cheated, staging rebellions against the
likes of Citigroup, Barclays and Credit
Suisse. After stomaching precipitous falls
in share prices over the past five years,
investors feel the share of spoils they are
receiving compared with the amounts
going to staff is too low. As the Financial
Times reported early this month, the
average proportion of profits plus pay
distributed in dividends has slumped by
two-thirds over the past five years, while
the proportion allocated to pay has jumped
by nearly half.
And while traders pay is not normally
disclosed, there are plenty of easy targets
among chief executives. Bob Diamond is
the most routinely cited. Last year the
Barclays chief executive received a salary
of 1.35m but total pay of 25m, despite
shrinking profits, a falling share price and
a tiny dividend.
In Spain, Rodrigo Rato, the former head
of the IMF who led Bankia until the
lenders nationalisation last month,
enjoyed a 2.3m package of salary and
bonuses last year even as the group was
sinking into crisis.
Spain, like Germany, has now tried to
head off populist anger by capping pay. In
February it set a 600,000 limit on total
executive remuneration for any bank that
had taken state aid.
Now the European Parliament is going
far further with its plan to impose a 1:1
ratio on pay and bonuses across all EU-
based banks and their senior bankers,
dubbed code staff in the jargon.
There are several reasons why it is
specifically seeking to limit bonuses. The
first is political bonuses are often big
numbers seized on by the media and
electorates. The second is economic
as Sony Kapoor, managing director of
European think-tank ReDefine, argues, by
paying people in the form of bonuses, you
are motivating excessive risk-taking.
But heres the snag. However resentful
you are of bankers pay levels and
whatever the justifications for wanting to
curb them, there is a real danger that
heavy-handed rule-making is either dodged
by clever arbitrageurs or else backfires to
everyones detriment. Look at the last
piece of European rule-making, when it
was decided that senior bankers would
have to have the bulk of bonuses deferred
over several years and paid in shares,
rather than cash. This is a fine idea on
paper, but the banks responded by raising
basic pay to offset the lost bonus.
Bankers say the same will simply
happen again now. If they are right, the
European rule changes could restrict
banks ability to keep costs flexible.
Instead of cutting bonuses in cyclical
downturns, they will have to go through
the disruptive and expensive process of
cutting more jobs.
The other outcome could be worse still.
If banks simply apply the European cap,
it will distort the market in several
undesirable ways. Non-European banks
will shift global business heads away from
the region to escape the rules. European
banks will have another reason to consider
shifting headquarters outside the EU.
And all the while, there would be a
dreadful disincentive for anyone to be
promoted into the code staff category
typically the top 100-200 employees in a
bank. The perversity of this is obvious.
By demotivating advancement, you are
incentivising second-rate people to run
high-risk institutions the perfect recipe
for another crisis.
Going after bankers bonuses is the
wrong target. Overall pay is the issue and
shareholders should step up the drive they
have already begun to be the instruments
of change.
Patrick Jenkins is the Financial Timess
Banking Editor
patrick.jenkins@ft.com
www.ft.com/insidebusiness
The French state-owned
postal bank has emerged as
one of the bidders for the
troubled mortgage lender
Crdit Immobilier de
France (CIF).
HSBC is advising CIF and
managing the sale of the
social housing lender after
months of talk on whether
it would be nationalised.
The government has been
taking an active part in try-
ing to find a partner, its
preferred solution. Banque
Postale confirmed yesterday
it had decided to take part
in the process and to exam-
ine the CIF dossier.
Last month Moodys
downgraded the financial
strength rating of CIFs
standalone bank, saying
that the lender was no
longer viable without ongo-
ing financial support. The
rating agency, noting that
the business was entirely
wholesale-funded, said the
groups policy of maintain-
ing a liquidity buffer of at
least six months of financ-
ing needs would see it
through to the autumn.
But it said CIFs signifi-
cant liquidity risks imply
that the group is likely to
become wholly reliant on
liquidity support from the
French public sector. It
said more permanent solu-
tions for CIF could include
a merger, strategic invest-
ment or other joint venture
with a third party facili-
tated by the government.
Banque Postale entered
the mortgage market in
2006 and an acquisition of
CIF would boost its size
from 41bn to 75bn of
loans. Analysts said there
were similarities between
the two groups, because
both of their sets of custom-
ers tend to be from modest
financial backgrounds.
Scheherazade Daneshkhu
Banque Postale to pitch
for mortgage lender CIF
GENERAL FINANCIAL
Drug companies are not
required to offer overtime
pay to their sales represent-
atives, the US Supreme
Court ruled yesterday, in a
decision that could save
pharmaceutical groups bil-
lions of dollars.
The ruling came ahead of
a widely anticipated land-
mark decision on the fate of
the Obama administrations
healthcare reform law,
which is expected to be
delivered by the end of the
month.
Yesterdays decision
broke down 5-4 along ideo-
logical lines, with the five
conservative judges decid-
ing that salespeople are
not protected under the US
Fair Labor Standards Act,
intended to protect low-
wage workers.
Petitioners each of
whom earned an average of
more than $70,000 per year
and spent 10 to 20 hours
outside normal business
hours each week perform-
ing work related to his
assigned portfolio of drugs
in his assigned sales terri-
tory are hardly the kind
of employees that the FLSA
was intended to protect,
Justice Samuel Alito wrote
in the courts majority
opinion.
There are approximately
90,000 drug representatives
in the US that earn a
median salary of $90,000,
according to industry data.
The salespeople, who were
backed by the US Depart-
ment of Labor, argued they
were unfairly compensated
for work done beyond the
standard 40 hours per week.
GlaxoSmithKline said the
ruling validated the way
the industry has paid drug
representatives over the
past 70 years.
Alan Rappeport and
Andrew Jack
US court rules against
overtime pay for drug reps
PHARMACEUTICALS
Slumping advertising
spending in Spain, Portugal
and Greece will almost bring
overall growth in western
Europes media market to a
halt this year, with eurozone
woes hitting marketing
budgets in April and May,
writes Tim Bradshaw.
ZenithOptimedia, part of
Publicis Groupe, has cut its
forecast for global
advertising growth by 0.5
percentage points to 4.3 per
cent as a result of the
depressed European outlook.
That will offset some of
the quadrennial effect of
the Olympics, Euro football
championships and US
presidential elections
events that occur every four
years and boost global ad
spend 1 per cent.
However, other global
markets are still rising fast,
with media spending in
Indonesia set to overtake
India this year, to enter the
worlds top 10 ad markets
by 2014. Brazil is also
expected to surpass the UK
as the fifth largest in the
next two years.
There was a slowdown in
April and May as advertisers
became more cautious
about the global economy,
said Jonathan Barnard, head
of publications at Zenith.
As is going on in most
industries at the moment,
there is a bit of a flight to
safety, said Mr Barnard.
Advertisers are withdrawing
from the riskier ends of their
investments and focusing on
where growth is coming
from . . . We dont think the
money [being pulled out]
from the eurozone is being
spent elsewhere.
Zeniths forecast for a
drop in Spanish advertising
spending has been increased
from a 5 per cent decline to
a 12 per cent fall for 2012,
meaning that the market is
expected to have fallen
more than a third since
2007.
Adspend in Greece has
more than halved in the
past five years, with Zenith
now expecting a 19.5 per
cent dive in marketing
budgets there.
As a result, ad spend in
eurozone countries is
expected to decline 1.1 per
cent this year, with western
Europe as a whole now
expected to grow by less
than half a per cent.
Zeniths report follows a
similarly gloomy European
outlook from Interpublics
Magnaglobal media agency,
which yesterday predicted a
0.2 per cent decline in
western Europe this year.
The forecasts may cast a
shadow over the advertising
industrys annual gathering
in Cannes this week.
However, Miles Young,
global chief executive of
Ogilvy & Mather, the WPP
agency, said that the
industrys mood remained
buoyant.
In most parts of the
world, we havent yet seen
the gloomy prognostications
turn into reality and bite,
he said.
German football fans at Euro 2012. The contest, along with other major events, boosts global ad spend 1 per cent AP
European ad spend off target
Patrick
Jenkins
INSIDE BUSINESS
on Finance
By Michiyo Nakamoto
in Tokyo
Nomura has been excluded
from the governments sale
of shares in Japan Tobacco,
one of the largest share
offerings in Japan this year,
a blow to the bank as it
struggles to maintain profit-
ability amid turbulent mar-
kets.
The finance ministry yes-
terday said it had chosen
Daiwa Securities and
Mizuho Securities as under-
writers for the domestic
tranche and Goldman Sachs
and JPMorgan for the inter-
national tranche of its
planned sale of about $6bn
of shares in JT.
The sale, which is
expected to come later this
year and is a rare privatisa-
tion by the Japanese gov-
ernment, is one in which
investment banks have vied
to participate.
The failure to win a role
in the JT share sale comes
as Nomura is under investi-
gation for its involvement
in insider trading allega-
tions on three separate
deals, which could lead to
sanctions and even a possi-
ble credit downgrade,
according to industry offi-
cials.
Sanctions would disqual-
ify the bank from partici-
pating in a government
mandate.
Japans largest invest-
ment bank by revenues
admitted that employees
had been the source of non-
public information used by
fund managers at Sumi-
tomo Mitsui Trust Bank to
benefit clients, who profited
by shorting the stocks of
companies planning new
share issues.
Nomura admitted to
being the source of informa-
tion used by Sumitomo Mit-
sui Trust in trades related
to Tokyo Electric Power,
while other allegations of
insider trading related to
Mizuho Financial Group
and Inpex have also been
linked to the bank. Nomura
has declined to confirm the
other incidents but has
apologised for the situation.
The bank is the subject of
a special investigation by
the Securities and
Exchange Surveillance
Commission into whether it
had adequate internal con-
trols to prevent the leaking
of non-public information.
Nomura is also conduct-
ing its own internal investi-
gation and plans to report
by the end of the month.
The suspicion of weak
Chinese walls between its
investment banking and
sales divisions comes just
four years after Nomura
was reprimanded for insider
trading by a former
employee.
The exclusion from the
JT share sale is likely to
have a significant impact
on Nomuras ranking in the
equity capital markets
league table.
Nomura was the top
bookrunner for equity capi-
tal raising in Japan, with 17
deals valued at a total of
nearly $2.4bn in the year to
date, according to Dealogic.
It is the global co-ordina-
tor for the scheduled
Y600bn ($7.6bn) initial pub-
lic offering of Japan Air-
lines, which plans to relist
after filing for bankruptcy
in 2010.
The bank has depended
on its Japanese operations
to make up for losses in its
overseas businesses.
Nomuras investment
banking division made a
Y23.3bn pre-tax loss last
year, following a Y12.8bn
pre-tax loss in the year to
March 2011.
Nomura misses out on
Japan Tobacco deal
BANKS
Rivals picked for
$6bn share sale
Exclusion likely to
hit global ranking
Nomura has depended on
its Japanese operations
More news at
FT.com
HK billionaire Cheng
moves on UK property
The Londonfocused
property developer
Quintain has paved the
way to complete one of
the citys most ambitious
housing projects after
teaming up with the Hong
Kong billionaire Henry
Cheng KarShun. The
company said yesterday
that Mr Chengs Knight
Dragon investment vehicle
had taken on a 60 per
cent stake in its 3bn
development on the
Greenwich peninsula.
Knight Dragon agreed to
buy out Australian
developer Lend Lease of
its 50 per cent stake in
the project and take over
10 per cent from
Quintains half share.
www.ft.com/property
Exchanges push for
more green disclosure
Nasdaq OMX has joined
forces with four other
stock exchange groups to
encourage companies
listing with them to
disclose more about their
environmental and social
performance. The five,
including Brazils Bovespa
and the Johannesburg,
Istanbul and Egyptian
stock exchanges, list more
than 4,600 companies.
www.ft.com/financials
JUNE 19 2012 Section:Companies Time: 18/6/2012 - 19:40 User: fitzgeraldi Page Name: CONEWS1, Part,Page,Edition: USA, 16, 1
FINANCIAL TIMES TUESDAY JUNE 19 2012

17
COMPANIES
Telecoms mergers and acquisitions
have been more rumoured than seen
in recent years, but financial and
trading pressures have conspired to
spur the industry into activity in
Europe.
Last week, Everything Everywhere,
the UK mobile operator, became a tar-
get for a private equity consortium
fronted by former boss Tom Alexan-
der . This was just the latest in a busy
month for the sector. Yesterday,
Vodafone received shareholder back-
ing for its 1bn bid for Cable & Wire-
less Worldwide, the UK fixed-line
operator.
Carlos Slim, the Mexican tycoon,
has also been active in European tele-
coms M&A. A hostile offer by Mr
Slims Amrica Mvil for 28 per cent
of KPN, the Dutch group, was fol-
lowed last week with the acquisition
of a fifth of Telekom Austria from a
group backed by Naguib Sawiris, the
telecoms magnate.
Mr Sawiris himself is also behind a
private equity fund being raised to
exploit low valuations as larger
groups sell non-domestic assets to
reduce high debts, with Telefnica, for
example, having flagged potential
sales in the past month that would
help cut its 57bn of net debt.
Of late, the valuations in Europe
are making a lot of sense to us, says
Carlos Garca Moreno, chief financial
officer of Amrica Mvil, pointing to
lower valuations caused by falling
revenue and competition in the indus-
try, as well as broader problems with
the European economy. In times of
crisis, people become much more
short-term focused. [We are taking] a
long-term view.
Mr Moreno added that it was taking
minority positions as it did not want
either to consolidate the debt or the
operational responsibility for the busi-
nesses. One private equity telecoms
investor says that next year will be
busy for M&A. The funding is there
[from private equity] and the opportu-
nities are there . . . Some of the big
guys lost half their operating cash
flow last year.
The emergence of corporate preda-
tors has added to pressure in the
industry to cut costs and raise profita-
bility.
Amrica Mvil could unlock other
deals, most notably a long rumoured
$20bn merger between Telefnicas O2
and KPN in Germany. Potential cost
savings of up to 5bn would help fend
off hostile intentions against KPN,
which is also looking at selling Base
in Belgium for up to 1.8bn.
There have already been other deals,
including the sale of Orange opera-
tions in Switzerland and Austria.
Berenberg Bank says that these
deals could spark others: Other oper-
ators that could get involved as preda-
tors are the Chinese, the Indian opera-
tors given the traumas in the domes-
tic market, MTN or even Oi (for Por-
tugal Telecom).
If we see a wave of corporate activ-
ity, could it also change the current
passive stance being taken by Verizon
and AT&T in the US? Alternatively,
could we see the likes of Google or
Apple starting to look at the infra-
structure-based operators?
There is more caution from M&A
advisers, who say there are still obsta-
cles to consolidation, not least a diffi-
cult funding market for larger
deals.
Few will want to sell assets whose
earnings are still growing. France Tel-
ecom and Deutsche Telekom, the own-
ers of Everything Everywhere, say
they have no interest in selling their
UK business. Even so, there are rea-
sons why both are likely to listen at
the right price, which mirror the
needs of the wider European telecoms
sector to raise funds and share costs.
European telecoms groups have
experienced a decline in revenues
over the past few years, even as they
face the need to spend more on fibre
cables and fourth-generation mobile
networks.
Arthur D Little and Exane BNP
Paribas forecast a 19bn decline in
revenues in European telecoms by
2015 to 208bn, in spite of a rapid rise
in demand for data that will require
greater network expenditure from the
operators.
The position has been exacerbated
by investors demands to maintain
high cash payouts. Some dividends
have been cut in recent months, as
most companies need to reduce debt
that was partly built up through
acquisitions.
The European sector carries 272bn
of debt, according to Deutsche Bank,
typically at a net debt to earnings
ratio of about 2 times. The acquisi-
tions have not always worked: Bern-
stein estimates cumulative M&A writ-
edowns of some 134bn across the sec-
tor since 2000. The main obstacle pre-
venting consolidation has been the
desire by regulators to maintain com-
petition to lower prices.
The industry has, however, found
other ways to share costs in the face
of regulatory obstacles to formal
mergers, however, such as the recent
agreement by Vodafone and O2 to
merge networks in the UK. This could
be worth between 1.2bn to 1.5bn for
each, according to Bernstein.
The need for proper consolidation
appears to be acknowledged even by
regulators, with Neelie Kroes,
Europes digital agenda commis-
sioner, saying recently that a few pan-
European operators would not neces-
sarily be bad for competition.
Additional reporting by David Gelles
European
operators
ready to talk
mergers
MOBILE & TELECOMS
News analysis
Financial pressures could
lead to a rise in deals
provided they are at
the right price, writes
Daniel Thomas
Beyond Brics
Blog
Carlos Slim, the worlds
richest man, is on a
shopping spree, writes
John Paul Rathbone.
Last week, the Mexican
telecoms magnate bought
a 21 per cent stake in
Telekom Austria, while
pursuing a bigger stake in
the Dutch telecoms
operator KPN. He also
emerged as the surprise
owner of an 8.4 per cent
stake in the Argentine oil
company YPF. Using
market prices, those two
deals alone are worth
about $1.3bn.
Mr Slim has always
been an astute buyer of
distressed assets: it is
integral to the valuebased
investment philosophy that
he shares with Warren
Buffett. It led Mr Slim, for
example, to invest in Brazil
in 2002, when fears of a
socialist government under
Luiz Incio Lula da Silva
crushed market prices.
His latest bets may be
risky Mr Slim acquired
the YPF stake in lieu of
a loan guarantee made
by his banking group,
Inbursa. Yet his buying
of hard assets at good
prices in sectors he
understands, offers a
good margin of safety.
In Europe, there is also
the prospect of growth
from Telekom Austrias
emergingmarket
operations. As for
Argentina, there may be
political synergies. Mr
Slims mobile telecoms
operation, Claro, has a
third of the Argentine
market, which is worth
protecting even if it
means stumping up to
keep Buenos Aires sweet.
Should others take Mr
Slims moves as a buy
signal? Not necessarily.
With a fortune of $67bn,
Mr Slim can ride out any
volatility in these
investments. He is also
suffering at home, owing
to increasing competition
for his mobile and fixed
line telecoms companies.
So it makes sense for Mr
Slim to reallocate into
assets elsewhere that have
a chance of better returns.
www.ft.com/bb
Of late, the
valuations in
Europe are making
a lot of sense to us
Carlos Garca Moreno,
Amrica Mvil CFO
ON FT.COM
For more on the
telecoms industry
www.ft.com/
telecoms
European telecoms
Share price (FTSE indices rebased)
Jan Jun 2012
70
80
90
100
110
Telecoms
European
market*
*
Eurofirst 300
Sources: Bernstein Research; Thomson Reuters Datastream FT Graphic
Shareholder returns
As % of capital expenditure
2010 2011
The wrong number
Writedowns on acquisitions
(cumulative since 2000, bn)
Revenue growth (annual % change)
2006 07 08 09 10 11
-5
0
5
Mobile
Fixed-line
France
Telecom
Deutsche
Telekom
BT Telefnica KPN
1
2000
52
2002
59
2004
107
2006
117
2008
134
2011
1
2000
52
2002
59
2004
107
122
62
84
56
67
64
43
47
28 29
Photo: Bloomberg
By Tim Bradshaw
in London and
Emily Steel in New York
Facebook has acquired
Face.com, an Israeli facial
recognition group, which
will provide the social net-
work with sophisticated
technology to identify peo-
ple from the millions of
photos uploaded to its site.
The acquisition values
three-year-old Face.com,
which has supplied its tech-
nology to Facebook for sev-
eral years, in the tens of
millions of dollars, accord-
ing to one person familiar
with the situation.
However, the deal could
reignite privacy concerns
about its use of the contro-
versial technology.
Gil Hirsch, Face.coms
chief executive, announced
the acquisition yesterday
on his companys blog.
Our mission is and has
always been to find new
and exciting ways to make
face recognition fun . . .
and incorporate remarkable
technology into everyday
consumer products, he
wrote.
Face.coms mobile app
Klik, which has been down-
loaded 125,000 times since
its release a few weeks ago,
allows people to be identi-
fied from a selection of
their Facebook friends as
the photograph is taken.
The company is based on
Tel Avivs Rothschild Boul-
evard, known locally as Sili-
con Boulevard for the clus-
ter of technology start-ups
in the area. Neighbours
include the Gifts Project,
acquired by eBay last year,
and Lab Pixies, acquired by
Google.
The acquisition will boost
Facebooks existing lead in
photo-sharing, one of the
most popular activities on
its site.
Facebook said: People
who use Facebook enjoy
sharing photos and memo-
ries with their friends, and
Face.coms technology has
helped to provide the best
photo experience. This
transaction simply brings a
world-class team and a
long-time technology ven-
dor in-house.
In December 2010, Face-
book introduced a feature
called tag suggest that
employed facial recognition
technology to suggest the
names of friends in a photo
uploaded to the site.
Acquiring Face.com, which
supplied some of the tech-
nology behind that feature,
could provide Facebook
with new capabilities, such
as the ability to tell if the
person photographed was
happy or sad.
However, the tag sug-
gest scheme sparked a
wave of negative reaction
among privacy advocates
last year when Facebook
began rolling out the tech-
nology.
Jeff Chester, executive
director of the Center for
Digital Democracy, a con-
sumer privacy group in
Washington, said in a
recent interview that Face-
book was a walking pri-
vacy time bomb and its
push into facial recognition
was cause for concern.
They want to know who
you are and what you look
like, Mr Chester said.
Frankly, it is too much
information in the hands of
a single company if they
expand further into facial
recognition.
Facebook buys Israeli maker of facial recognition software
MEDIA
By Joe Leahy in So Paulo
PepsiCos foods division is
looking to double its reve-
nue in the next three to
four years in Brazil in spite
of a recent slowdown in
Latin Americas largest
economy.
PepsiCos plan reflects
the belief of many local
groups and multinationals
that the longer-term struc-
tural source of economic
growth in Brazil, the rise of
its lower-middle class, espe-
cially in the traditionally
poorer north east, is intact.
We have been doubling
our business in [the richer
south of] Brazil every five
years and in the north east
every three years, said
Olivier Weber, PepsiCos
president of South America,
Caribbean and Central
America foods.
Economists characterise
Brazils economy as two-
speed, with headline growth
stalling amid a slowdown in
manufacturing and invest-
ment but consumption
remaining relatively solid.
Record low unemploy-
ment and pay rises this
year have ensured that con-
sumers, while less exuber-
ant than in the past, are
continuing to spend, partic-
ularly in the countrys
booming north-eastern
states, which feature a high
proportion of so-called
C-class lower-middle-income
earners.
Itu BBA, an investment
bank, defined the group as
people who earn between
R$291 (US$141) per month
and R$1,250.
Retailers and consumer
goods companies that better
understand the minds and
hearts of these consum-
ers . . . will hold an impor-
tant structural advantage
in the Brazilian consumer
space, the bank said in a
recent report.
Mr Weber said PepsiCos
foods division, which sells
brands ranging from Ruffles
and Doritos chips to Tod-
dynho, a popular chocolate
drink, had doubled its busi-
ness in the country between
2002 and 2006 and again
between 2006 and 2010. It
hoped to achieve the same
again by 2015 or 2016.
This would mean increas-
ing sales from about $2.5bn
now to $4bn-$5bn. Brazil is
the fifth-largest market in
the world for PepsiCo foods
and accounts for half of its
Latin American sales.
Mr Weber did not say
how much the company
planned to invest. However,
he pointed to its acquisition
last year of biscuit maker
Grupo Mabel, reported to
have cost R$800m, which
gave PepsiCo access to the
worlds second-largest mar-
ket for crackers in terms of
volume of goods sold.
The company is investing
in manufacturing plants
nearer to its markets in the
north east and centre west
to reduce its logistics costs.
Mr Weber said the poten-
tial of the market was
shown by the still low per
capita consumption of
savoury snacks in Brazil
about 1.2 kilos per person a
year, versus 8 kilos in
the US and 3.6 kilos in Mex-
ico.
Pepsi bets on Brazil with plan
to double food units revenues
FOOD PRODUCERS
Business in Brazil doubled
between 2006 and 2010
More news at
FT.com
Yahoo recruits online
advertising veteran
Yahoo has added a key
executive to the latest
management team to try
to revive the US internet
company, with the
appointment of a chief
revenue officer. The
recruitment of Michael
Barrett, a veteran online
advertising executive,
comes as chief executive
Ross Levinsohn seeks to
bring stable management
back after the hiring and
firing this year of former
CEO Scott Thompson, who
was forced out over an
exaggerated claim about
his education.
ft.com/media
JUNE 19 2012 Section:Companies Time: 18/6/2012 - 19:45 User: fitzgeraldi Page Name: CONEWS2, Part,Page,Edition: EUR, 17, 1
18

FINANCIAL TIMES TUESDAY JUNE 19 2012
COMPANIES
Property
In its campaign to win the
approval of members of the
London Metal Exchange for
its 1.4bn cash offer, Hong
Kong Exchanges & Clearing
went to great lengths to
convince them it was not a
stooge for Beijing.
At the same time, the
exchange argued that it
could convince the Chinese
government to make big
concessions, such as
approving LME warehouses
in China and allowing more
Chinese companies to trade
on the bourse.
Charles Li, HKEx chief
executive, has tried to
defend these two positions
being distant from Beijing
and close to it at the same
time in spite of the poten-
tial contradiction.
According to people famil-
iar with the process, Mr Li
made a huge effort to per-
suade the LME board it was
free from interference by
the Chinese Communist
party. We have been
issued with numerous
assurances that this is a
Hong Kong entity, not a
Chinese entity, a person
close to the LME says.
Some LME members
remain nervous about the
prospect of HKEx taking
control of the 135-year-old
venue at the heart of the
global metals market.
Six of HKExs 13 board
members are appointed by
the Hong Kong govern-
ment, also the bourses larg-
est shareholder.
After weeks of meetings,
however, the LME board
last week recommended its
bid over an offer from ICE,
a US rival in a vote of confi-
dence in the governance of
the Hong Kong group.
The UK government has
also indicated it has no
objections to the deal,
according to people familiar
with its thinking.
While part of China, Hong
Kong has an independent
judiciary and is autono-
mous in all areas except
defence and foreign affairs.
The deal will see the LME
remain in London, regu-
lated by the Financial Serv-
ices Authority.
Not one of the govern-
ment-appointed directors
has ever tried to use their
position to influence our
strategy or business by say-
ing, This is good for the
Hong Kong government
let alone Beijing, says
Romnesh Lamba, HKEx
head of market develop-
ment. The concern that
China controls us or is
encouraging us to buy is
completely unfounded.
HKEx shareholders, how-
ever, are unconcerned that
Beijing could somehow use
the LME to influence prices.
Rather, they worry that
as an independent Hong
Kong group, HKEx lacks
the political clout needed to
convince Beijing to give it
access to mainland China.
HKEx shares fell 4.5 per
cent yesterday as investors
judged the exchange to
have overpaid for LME,
partly because of overconfi-
dence in its ability to break
into the China market.
Hong Kongs independ-
ence from Beijing, they
fear, means the bourse is by
no means guaranteed to get
what it wants from China.
The LME has for years
vainly tried to convince Bei-
jing to let it deliver metals
to mainland warehouses, an
important requirement for
industrial customers.
Even the Hong Kong Mer-
cantile Exchange, a rival
backed by Chinese state
enterprises, failed to set up
mainland storage facilities
for fuel oil despite its links.
David Webb, a corporate
governance activist who sat
on the HKEx board for five
years until 2008, doubts it
can open doors into China
any faster than China is
willing to open doors to eve-
rybody.
Allowing Chinese groups
to trade directly on the
LME will represent a signif-
icant relaxation of the coun-
trys capital controls, a
move that the Communist
party will not take lightly.
Nonetheless, Mr Li told
the Financial Times on Fri-
day: Paying this price and
not having that fundamen-
tal box checked [approval
from Beijing to expand in
China] is not something
that anybody would do.
The HKEx is on a colli-
sion course with the Shang-
hai Futures Exchange,
which hosts base metals
contracts deliverable in the
domestic Chinese market
and is pushing to interna-
tionalise its business.
Chinas domestic futures
exchanges in Dalian,
Shanghai and Zhengzhou
vie with one another for
new commodities contracts
approvals from the China
Securities Regulatory Com-
mission. The Shanghai
Futures Exchange an
entity with strong relation-
ships with the CSRC will
not let its Hong Kong rival
muscle on to its turf with-
out a fight, a person close
to the exchange says.
HKEx, sensing the risks,
has recruited state-owned
traders, including Jiangxi
Copper and Minmetals, to
lobby the CSRC on its
behalf, people close to the
matter say. Jiangxi Copper
could not be reached for
comment, and Minmetals
declined to comment.
Mr Lamba at HKEx says
it must tread carefully to
avoid antagonising the
SHFE: If we walk in there
and try to eat their shirts,
well never get anywhere.
They have the power to eat
us and kill our strategy.
Additional reporting by
Jeremy Grant in Singapore
www.ft.com/lombard
By Sharlene Goff and
Patrick Jenkins in London
The Childrens Investment
Fund, an activist hedge
fund manager known for
aggressive tactics with com-
pany boards, has turned its
attention to Lloyds Banking
Group, urging regulators to
bolster the banks capital
reserves.
Christopher Hohn, the
funds chief executive, has
written to the UKs Finan-
cial Services Authority ask-
ing it to force Lloyds to
replace 10bn of contingent
convertible debt or cocos
with ordinary shares.
Mr Hohn, whose TCI fund
hastened the sale of ABN
Amro to Royal Bank of
Scotland and helped derail
a bid for the London Stock
Exchange, would not com-
ment on its holding in
either Lloyds equity or
debt. However, one person
close to the situation said
TCI owned about 1bn of
Lloyds cocos and a rival
fund manager said it had
held a bigger position for at
least the past year. It is
unclear whether TCI holds
any equity in the bank.
The Lloyds cocos have
performed poorly in recent
months, prompting hedge
fund managers to speculate
that TCI was publicising
the issue to inject investor
interest back into the very
illiquid instruments.
They noted that convert-
ing the cocos into equity,
while diluting ordinary
shareholders, would trigger
a windfall for bondholders
as the price would be likely
to exceed the market value
of the bonds.
In a letter to Andrew Bai-
ley, the UKs chief banking
regulator, Mr Hohn criti-
cised the effectiveness of
the Lloyds cocos as they
would only convert to
equity if the banks core
tier one capital ratio
dropped below 5 per cent
a sharp fall from the cur-
rent 11 per cent.
The FSA is taking steps
to restructure a similar
instrument at RBS, which
has an 8bn contingent debt
facility, also with a 5 per
cent trigger.
Mr Hohn calculated that
Lloyds would have to suffer
a 20bn post-tax loss before
the FSA could force it to
swap the existing cocos for
equity. He said the capital
instruments were also unat-
tractive for the bank as
they pay an average yield of
about 12 per cent. Mr Hohn
said this would cost Lloyds
about 1bn a year, which
could be used to support
lending.
However, he warned that
the government, which
owns 40 per cent of Lloyds,
would prefer to keep the
status quo to maximise its
possible equity value by
keeping leverage high at
the expense of the right reg-
ulatory decision.
TCI shot to prominence
eight years ago when it
opposed the planned take-
over by German exchanges
group Deutsche Brse of
the LSE.
TCI was also a key share-
holder in ABN ahead of the
takeover battle for the
Dutch bank and had
pressed management to
break up the group.
Activist investor in Lloyds push
BANKS
TCI calls on FSA to
forcibly convert debt
Plea to turn 10bn
of cocos to equity
Daniel Bouton, the former
chairman and chief execu-
tive of Socit Gnrale
who labelled Jrme Ker-
viel a terrorist because of
the former traders 50bn of
bets that cost the French
bank 4.9bn, is to take the
stand at the 35-year-olds
appeal court hearing on
Thursday.
Mr Bouton, who built Soc-
Gen into a global deriva-
tives powerhouse during
more than a decade at its
helm, stayed on for 15
months after the scandal
broke in 2008, finally step-
ping down after a public
outcry over a stock options
plan for directors. He has
since set up his own consul-
tancy.
Mr Kerviel is appealing
against the sentence
handed down to him by a
Paris court in 2010 when it
condemned him to five
years in prison two years
of which were suspended
and ordered him to repay
SocGen the 4.9bn.
Mr Kerviel, who traded
equity derivatives, has
claimed during his appeal
that he was the victim of a
conspiracy to hide losses
from the US subprime mort-
gage crisis. The claim was
dismissed by Jean Veil, one
of SocGens lawyers, as a
story from a detective
novel.
The French bank
announced a 2bn subprime
loss when it disclosed the
4.9bn loss resulting from
the unwinding of Mr Ker-
viels uncovered positions
in falling markets in Janu-
ary 2008.
My position was covered
by another desk, the
former trader said. The
subprime crisis had started.
There was already a big
latent loss; I think they
needed to pull out of the
hat a Jrme Kerviel.
The judge, Mireille Filip-
pini, demanded proof of the
conspiracy claim and David
Koubbi, Mr Kerviels
39-year-old lawyer, prom-
ised a new witness.
After much anticipation,
the mystery witness
appeared last Thursday.
In the splendour of the
19th-century courtroom, its
enormous windows facing
the medieval Sainte-
Chapelle in Pariss Palais de
la Justice, Philippe Houb
said he had come because
he could not bear to see an
injustice being committed.
The employee at Newedge
the broker that SocGen
now owns jointly with
Crdit Agricole, which proc-
essed many of Mr Kerviels
trades claimed it was
technically impossible
not to notice the size of Mr
Kerviels trades.
He said that he and oth-
ers at Newedge then
known as Fimat knew of a
big account with SocGen,
which turned out to be Mr
Kerviels.
The implication was that
if they knew it, others at
SocGen must have also
been aware.
Maxime Kahn, the top
trader who was told by his
superiors to unwind the
position for a client in
secret, said under question-
ing last week by Mr Koubbi
that he assumed it must be
linked to subprime losses.
It was the least improbable
theory, he said.
Asked why he unwound
the position so quickly
over three days Mr Kahn,
occasionally distracted by
the magnificence of the
courtroom, said it would
have been impossible for
the bank to have kept open
the surreal 50bn posi-
tion.
The exposure was equiva-
lent to 1.5 times its assets
and would have made the
bank insolvent had it not
been unwound.
Among the people I
know at SocGen, no one
believes in this theory of a
plot, he said.
But Mr Houbs opinion
was that it would have been
technically impossible for
the bank not to detect an
exposure of that size and
accused it of creating ficti-
tious transactions to bal-
ance the results. He said
there was an account that
took an opposite position to
Mr Kerviels.
However, Claire Dumas,
SocGens representative in
court, said that since Mr
Houb worked on the
broking side, he only had a
partial view of the opera-
tions.
The appeal continues
until June 28.
Jrme Kerviel is appealing against his sentence of five years imprisonment, two years of which were suspended AFP
Former SocGen
chief to appear
at Kerviel appeal
BANKS
News analysis
Jailed trader claims
the loss was part of
an internal plot,
says Scheherazade
Daneshkhu
4.9bn
Amount that the 50bn of
trades cost to unwind
By Sam Jones and
Duncan Robinson in London
Jonathan Sorrell, the son of
WPP chief executive Sir
Martin Sorrell, has replaced
Kevin Hayes as the finan-
cial director of the Man
Group.
The worlds second larg-
est hedge fund manager by
assets yesterday said that
the 34-year-old Mr Sorrell,
Mans former head of strat-
egy and corporate finance,
was to take over from Mr
Hayes with immediate
effect.
Mr Hayes, who at one
point was the most highly
paid finance director in the
FTSE 100, has long been
seen by many in the hedge
fund industry as a succes-
sor to Peter Clarke, Mans
chief executive.
A decision to replace Mr
Hayes was taken several
months ago, although his
departure is on amicable
terms, according to people
familiar with the boards
thinking. The decision in
part reflects an acknowledg-
ment of a need for the com-
pany to address its difficul-
ties in recent years more
radically, they said.
Under Mr Clarkes stew-
ardship, Man has been hit
hard by difficult and vola-
tile trading conditions,
which have seen assets
under management dwindle
and performance dip.
Although the companys
flagship fund, AHL, which
is automated and uses com-
plex computer models to
trade futures markets, expe-
rienced its best year of per-
formance in 2008, it has
struggled to gain traction
since.
Man executives have
come under pressure to
make their efforts to reposi-
tion and diversify the com-
panys business pay off.
The landmark 2010 acqui-
sition of rival GLG Partners
has yet to have an impact
on an ailing share price, up
1.6p at 74.4p.
The board most likely
determined that in light of
recent difficulties that the
company is experiencing a
change in a member of sen-
ior management was
needed, said analyst Peter
Lenardos, director of diver-
sified financials at RBC.
However, none of the
issues that the company is
experiencing are a result of
Mr Hayess tenure as CFO,
so I think this is a more a
cause for change than an
issue with Kevins abili-
ties, he added.
Jon Aisbitt, Mans chair-
man, praised Mr Hayess
tenure. I would like to
thank Kevin on behalf of
the board for his contribu-
tion as finance director over
the past five years and wish
him every success for the
future.
Jonathans appointment
follows a rigorous process
to identify the best possible
candidate. Since he joined
the company, he has dem-
onstrated the strong all
round financial and com-
mercial skills necessary for
the role. His promotion to
the board will bring new
talent and focus to the sen-
ior executive team.
Mr Sorrell joined Man in
August last year after more
than a decade at Goldman
Sachs.
Man appoints Sorrell junior as its new f inance director
GENERAL FINANCIAL
HKEx treads
fine line over
Beijing ties in
bid for LME
EXCHANGES
News analysis
Bourse stresses its
independence but
must show it has
clout with China,
Robert Cookson,
Jack Farchy and
Leslie Hook report
There are doubts it
can open doors to
China any faster
than China is willing
to open doors
The 1.4bn deal will see the LME remain in London Bloomberg
Advertise in
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JUNE 19 2012 Section:Companies Time: 18/6/2012 - 19:15 User: fitzgeraldi Page Name: CONEWS3, Part,Page,Edition: USA, 18, 1
FINANCIAL TIMES TUESDAY JUNE 19 2012

19
COMPANIES
By Chris Bryant in Frankfurt
The owners of Evonik
Industries, the speciality
chemical company, have
put plans for the biggest
German initial public offer-
ing in more than a decade
on hold because of investor
uncertainty arising from
the eurozone debt crisis.
The RAG Foundation, a
quasi-public entity that
owns 75 per cent of Evonik,
yesterday confirmed that it
would not pursue an IPO
until financial markets
returned to a state that
would make possible an
appropriate valuation.
A person close to the
foundation said that IPO
preparations would not be
restarted for at least a year.
Evonik, which is 25 per
cent owned by CVC, the pri-
vate equity group, had been
expected to raise a low to
middle single-digit billion
euro sum later this month
in a share sale co-ordinated
by Deutsche Bank and
Goldman Sachs.
The delay deals a confi-
dence blow to banks hoping
to make headway this year
with a long backlog of
potential German listings,
which include Osram, a
lighting company owned by
Siemens, and Talanx, the
insurer.
Turmoil in financial mar-
kets has already pushed the
owners of Formula One
which include CVC to
delay a $3bn share offering
in Singapore due later this
month. Graff, a British jew-
eller, shelved its plans for a
Hong Kong listing that was
to have raised $1bn.
Talks last week between
banks and investors
revealed a readiness to
invest, but not at a price
that reached the expecta-
tion of Evoniks owners.
A person close to the deal
said that, in light of market
conditions, investors had
sought a discount of about
25 per cent to buy shares,
compared with a typical dis-
count of about 10 per cent.
In view of the very high
level of uncertainty on the
markets, particularly with
regards to the eurozone, the
achievable price was a long
way from the appropriate
valuation of Evonik, RAG
said, adding: Evonik is still
in excellent shape, but a
stock market listing can
only be considered when
the situation in financial
markets would enable an
appropriate sum to be
raised.
CVC said: We are in
complete agreement with
the RAG Foundation that
we do not want to list an
excellent company like
Evonik under value . . . An
IPO at a later date remains
our expressed goal. How-
ever, we are not under time
pressure.
CVC acquired its Evonik
stake in 2008 for 2.4bn.
A previous attempt to list
Evonik was stopped last
autumn due to market
uncertainty. IPO prepara-
tions began again in March.
Eurozone
concerns
scupper
Evonik IPO
CHEMICALS
Investor uncertainty
leads to delay
Setback to backlog
of German listings
By Jan Cienski in Warsaw
Polands hopes of hitting a
shale gas bonanza have suf-
fered a blow as ExxonMobil
ended exploration for the
unconventional fuel after
tests failed to find gas in
commercial quantities.
The US oil major said
there had been no demon-
strated sustained commer-
cial hydrocarbon flow
rates in two test wells in
eastern Poland and added
that it had completed its
exploration operations in
Poland.
ExxonMobil has six con-
cessions in Poland and it
remains unclear what plans
the company has for them.
The decision by ExxonMo-
bil is the latest in a series of
disappointments over
Polands possible gas
reserves.
Energy companies and
the government were
enticed by an estimate last
year from the US Energy
Information Administra-
tion, which said Poland
might hold 5.3tn cubic
metres of shale gas the
largest reserves in Europe.
However, a newer esti-
mate by Polands govern-
ment geological institute
cut about 90 per cent off
that, suggesting reserves of
346bn-768bn cubic metres.
Although the lower
number is unlikely to turn
Poland into a gas exporter,
it would make it much less
dependent on gas imports
from Russia, which cur-
rently supplies about two-
thirds of the 14bn cubic
metres of gas the country
consumes annually.
Waldemar Pawlak,
Polands economy minister,
suggested that ExxonMobil
became less interested in its
Polish operations after
agreeing last week to
develop tight oil reserves in
Siberia together with Ros-
neft, the Russian state oil
group. With such pros-
pects, shale gas in Poland
did not have as much mean-
ing for [ExxonMobil], said
Mr Pawlak.
In 2009, ExxonMobil aban-
doned shale gas exploration
in Hungary after a disap-
pointing result from a test
well. The Polish govern-
ment has handed out 109
shale gas exploration con-
cessions round the country,
and the other companies
still looking for the fuel a
process that involves pump-
ing fluids at high pressure
deep underground to frac-
ture rock, releasing trapped
oil and gas are still opti-
mistic about Polands possi-
ble deposits.
Companies active in
Poland include Chevron,
ConocoPhillips and
Polands PGNiG, the former
gas monopoly, as well as
smaller groups specialised
in shale gas exploration.
Im a bit perplexed as to
why anyone would drill just
two wells and then leave,
said John Buggenhagen,
exploration director for
Aim-quoted San Leon
Energy, which has conces-
sions near the Baltic coast,
as well as in the west and
south of the country.
We believe it will take
dozens of wells to explore
just a small area. San Leon
believes Poland has huge
potential.
One of the earliest tests
came from 3Legs Resources,
the UK-based independent
that was the first operator
to drill and test two shale
wells near the Baltic coast
where it found encourag-
ing quantities of gas,
although the flow rates
were less than expected.
Mikolaj Budzanowski, the
treasury minister, estimates
that the first commercial
shale gas extraction should
begin in 2014-15, with about
0.5bn to 1bn cubic metres
coming to market initially,
with production eventually
ramping up to 5bn-10bn
cubic metres a year.
Poland has been one of
the most enthusiastic back-
ers of shale gas in the EU,
while other countries such
as France, Romania and
Bulgaria have instituted
moratoriums on shale
exploration.
Haier, the worlds leading
appliance maker by sales
volume and one of Chinas
most famous brands, plans
to expand in Europe by
acquiring or building pro-
duction facilities that will
bring it closer to EU con-
sumers.
For a Chinese mainland
brand that wants to make it
in Europe, it helps to have a
name that sounds European
which means Haier could
well realise that ambition.
The company has built a
successful presence in the
US, where 30 per cent of
households own a Haier
product. Overall, 26 per
cent of its $23bn global
turnover comes from over-
seas.
Now Haier wants to boost
sales in Europe, where it
has more than doubled mar-
ket share in the past five
years but still has only 1
per cent of the major appli-
ance market, a whisker
behind Japans Panasonic
and Sharp, which account
for just over 1 per cent
each. Haiers plan is to tar-
get the middle to upper end
of the appliance market,
rather than the low end tra-
ditionally associated with
Chinese companies that
compete mainly on price.
Haier, which has 25 per
cent of its home market, is
candid about the fact that
part of its success overseas
has been because most glo-
bal consumers do not know
it is Chinese.
We never emphasise that
point, says Li Pan, manag-
ing director of Haiers over-
seas division. We dont
deny it, but we dont
emphasise it.
Based in the seaside town
of Qingdao, Haier says it is
a coincidence that the
name, created from the Chi-
nese character for sea,
sounds German. But that is
the kind of happy coinci-
dence that can make or
break a brand. Companies
that sound Chinese start
out with a big handicap
overseas: whether they
make microwaves or micro-
chips, they are tarred with
the same brush as those
that made China infamous
for poisoning babies with
tainted milk powder.
But it has taken much
more than a few German-
sounding vowels to propel
the company a bankrupt
shell in 1984 to a top glo-
bal brand for major appli-
ances in less than 25 years.
Mr Li says Haier has set
itself apart from other Chi-
nese manufacturers by
focusing on building the
brand, not just selling prod-
ucts; competing on value
for money rather than just
low prices; and investing in
10 research and develop-
ment centres around the
world.
The company has also
tried to counter the impres-
sion that Chinese appli-
ances are substandard. Last
year Which?, the UK con-
sumer rights organisation,
rated one of Haiers fridges
a best buy.
Ren Aubertin, chief exec-
utive of Haier in Europe
and vice-president of the
company, says it will be
making a play for high-end
European consumers. Haier
is also aiming for younger
trendsetters and has won
design awards with which
to woo them.
Booz & Co, the manage-
ment consultancy, singled
it out as a leader in Chinese
innovation. From air-condi-
tioners that take pictures of
intruders to a fridge with a
pizza drawer for the US
market, Haier looks for
ways to stand out.
But it urgently needs
more production facilities
in Europe to reduce lead
times, counter currency
effects and avoid rising
transport costs.
Haier is not the only Chi-
nese company looking for
opportunities in Europe.
Chinese direct investment
in Europe tripled in 2011 to
$10bn, according to a study
published recently by Rho-
dium Group, an economic
consultancy, in partnership
with CICC, a Chinese
investment bank. The
report predicted Chinese
companies could spend
between $250bn and $500bn
in the region by 2020.
Zhang Ruimin, Haiers
founder and chief executive,
has won business school
fame around the world for
an incident when, as direc-
tor of the collective
Qingdao refrigerator factory
in 1984, he smashed faulty
models on the factory floor
with a sledgehammer to
dramatise his intolerance of
defects.
Steven Veldhoen of Booz
says Haiers success has
been its closeness to the
market and responsiveness
to consumers but adds
that, as the company
expands globally, holding
on to some of those ele-
ments will not be so easy.
So far, Haier has adapted
rapidly when difficulties
arise. Problems at its first
UK air-conditioning joint
venture forced a closure in
2006. Haier responded by
restructuring its European
business to bring in local
management and build
local R&D centres.
Haier could yet become a
household name in Europe
before most customers fig-
ure out it is Chinese.
Chinas Haier plans
to plug into Europe
HOUSEHOLD GOODS
News analysis
Appliance maker
has advantage of a
Germansounding
name, writes
Patti Waldmeir
It is aiming for
young trendsetters
and has won
design awards with
which to woo them
Global appliance manufacturers
Source: Euromonitor
Brand share by volume (%)
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
2006 07 08 09 10 11 0 2 4 6 8
Haier
LG
Whirlpool
Midea
Samsung
Electrolux
Panasonic
GE
Siemens
Bosch
Haier Electronics
Share price (HK$)
Jan 2011 Jun
2012
5
6
7
8
9
10
Haier wants to boost Europe sales where it has doubled market share in five years ImagineChina
Exxon move hits Poland shale hopes
OIL & GAS
Business Opportunities
Readers are strongly recommended to take appropriate professional advice before
entering into obligations.
Poland has been a keen
backer of shale gas
More news at FT.com
Beyond Brics on Polish
shale gas and ExxonMobil
Is ExxonMobil scared or
smart? Thats the question
Polish shale gas enthusiasts
are asking themselves after
the US energy group
announced that it was
halting work on looking for
shale gas on its Polish
concessions
Blog: www.ft.com/bb
FT Alphaville
What comes first: European
banking, political or fiscal
union?
Blog:
www.ft.com/alphaville
View from the top with
Eli Lilly chief executive
Eli Lilly chief executive John
Lechleiter tells Andrew Jack,
the FTs pharmaceutical
correspondent, that US
unemployment levels are
worrisome and that drugs
companies have to reach
out to academics and
biotech startups in order
to innovate
www.ft.com/vftt
Body armour and
ondemand manufacturing
As part of his global
journey, Peter Marsh, the
FTs manufacturing editor,
stopped in Phoenix, Arizona,
to visit a company at the
forefront of madetoorder
manufacturing. Armor
Designs can, within a few
hours, create custom
composites for body and
vehicle armour.
www.ft.com/vftt
JUNE 19 2012 Section:Companies Time: 18/6/2012 - 18:18 User: hendrym Page Name: CONEWS4, Part,Page,Edition: EUR, 19, 1
26

FINANCIAL TIMES TUESDAY JUNE 19 2012
MARKETS & INVESTING
Steven
Major
INSIGHT
In the absence of a miraculous recovery in
growth, the eurozone periphery desperately
needs lower funding costs and fast. How can
Spain pay interest of 7 per cent on its 10-year
bonds when its economy is set to shrink
during the next two years? One of the most
effective ways of doing it for Spain and
other countries is to mutualise eurozone
debt through common issuance.
Momentum is building for common issuance,
a broad term that embraces everything from
short-dated eurobills to eurobonds. The
International Monetary Fund and three of the
four biggest eurozone governments support it,
and this week common issuance is being
debated in the European parliament. A sign of
the momentum is that it will feature
prominently in discussions at the European
council meeting this month.
The biggest roadblock is Germany, which
until now has resolutely refused to consider
eurobonds outside broader moves towards
greater political and fiscal union.
In the language of the bond market, a
sticking point is moving from the current
preferred structure
of several liability,
which caps
each countrys
exposure, to joint
and several, where
countries can be
liable for the debts
of others.
So how can
Angela Merkel,
the German
chancellor, be won
over? Two ideas
should be explored
immediately:
eurobills, debt with maturity of less than one
year; and the European Redemption Fund,
which would finance any sovereign debt above
60 per cent of gross domestic product but
under strict conditions. Germany has never
explicitly ruled out the former, and the ERF
idea derives from Germanys own Council of
Economic Experts, or Five Wise Men.
Crucially, both eurobills and the ERF may get
round the requirement for European treaty
change and be acceptable to Germanys
constitutional court. Eurobills could even be
issued without the more controversial joint
and several guarantee.
Eurobills are relatively quick and easy to
implement. Their short maturity gives them
effective seniority over bonds and they have
never previously been restructured when
developed markets have defaulted. They
should be attractive to banks, which could
hold them as security against deposits,
providing much-needed bank deposit
insurance. Just as important, their renewal
can be made to depend on meeting agreed
conditions, just as countries in structural
adjustment programmes receive their funds.
Connecting the benefits of lower refinancing
rates with progress on reform is much more
likely to gain acceptance in Berlin.
German short-
term debt
currently yields
0 per cent so this
proposal would
increase the costs
of Germanys
funding, although
not significantly.
The real impact
would be on the
financing costs of
peripheral
countries. Based
on the weighted
average of existing
eligible bill markets, the yield on a one-year
eurobill would be 50 to 80 basis points, far
below the current 5 per cent being paid by
Spain and Italy for short-term debt.
The ERF, in essence a plan to mutualise
sovereign debt above 60 per cent of GDP,
would complement eurobills. As devised by
the German wise men, this would see the
issuance of about 2.3tn of triple A debt over
three to four years. Participating countries,
including all the big eurozone members
meeting eligibility criteria, would guarantee
the debt (jointly and severally) and agree to
pay it down over a 20 to 25-year period.
Joint and several guarantees are one of the
main reasons the German government has
opposed common issuance. The wise men
claim that this is technically a temporary
measure something Germany and other
creditor countries might not necessarily
accept. Hence, eurobills are the place to start.
Mutualisation of debt would force up
German bond yields from their current
extraordinarily low levels, especially at the
short end, if eurobills are introduced.
Although this involves a cost for Germany, it
may be extremely modest if longer-dated bond
yields stay low, because they remain the first
choice for high-quality duration.
And it should be remembered that if the
eurozone broke up, Germany would pay in
other ways. Institutions such as the ECB and
the European Financial Stability Facility have
several liability, which means that in a break-
up scenario Germany would be liable for up to
a third of losses. This could apply to the
ECBs securities markets programme and the
Target 2 balances, which means the bill for
Germany could be at least 400bn.
Common issuance is only one part of a
possible solution to the eurozone debt crisis. A
lasting fix will also require other moves
including bank recapitalisations, deposit
guarantees and a eurozone-wide banking
union. As we have seen many times during
this crisis, piecemeal moves the latest being
the Spanish banks bailout are quickly seen
by markets as inadequate if they are
implemented on their own.
Steven Major is global head of fixed income
research at HSBC
Momentum is
building for
common
issuance, which
would lower
funding costs
for countries on
the periphery
Piecemeal
moves are
quickly seen by
markets as
inadequate if
they are
implemented on
their own
Eurobills could
drive through
the German
roadblock
Insurance ban hits Iranian oil sales
By Javier Blas in New York
Iranian oil exports have
dropped sharply this month
as an imminent insurance
ban on tankers carrying the
countrys crude puts off
buyers.
An EU ban on the sale of
such insurance comes in on
July 1, with an embargo
on Iranian oil.
But the impact will be felt
widely, preventing Asian
refiners from purchasing
protection and indemnity,
known as P&I, in the Lon-
don insurance market.
Oil traders say the insur-
ance ban will force South
Korea, Singapore, Turkey,
South Africa and Taiwan
to all but stop buying Ira-
nian oil. India will also
face difficulties.
Traders and consultants
who monitor Iranian oil
exports estimate that sales
will drop by about 400,000
barrels a day by July 1, on
top of the approximately
600,000 b/d Iran has already
lost ahead of the forthcom-
ing EU embargo.
After July 1, Iran would
have lost effectively about
half of its pre-sanctions oil
income, said an official at
a large independent com-
modities trading house.
However, China and
Japan, the largest and
third-largest buyers of Iran
crude, are set to provide
sovereign insurance guar-
antees, allowing trade to
continue.
Oil traders and consult-
ants conceded that their
assessment was an approxi-
mation because Iran had
ordered its oil tankers to
switch off tracking beacons,
allowing the vessels to hide
from traders and shipping
brokers.
But anecdotal evidence
and comments from large
importers of Iranian oil
point to a sizeable impact.
S Jaipal Reddy, Indias oil
minister, last week hinted
that the worlds second-
largest buyer of Iranian oil
could stop imports because
of lack of insurance.
We are struggling to find
solutions, he said in
Vienna during an Opec
meeting. Hours later, New
Delhi announced a deal
with Saudi Arabia to buy
extra crude oil.
The drop in Iranian sup-
plies is providing support to
the oil market, although
prices were at an 18-month
low yesterday amid wider
unease in the financial mar-
kets over the eurozone debt
crisis and prospects for eco-
nomic growth.
ICE July Brent fell to a
session low of $95.38 a bar-
rel, the lowest since Janu-
ary 2010. It later traded
down $1.41 at $96.20 a bar-
rel. Nymex July WTI fell to
$83.26 a barrel.
Iran could bypass the
problem by using its
own vessels and insurance,
although traders remain
sceptical. NITC, the former
state-owned company that
is the largest owner of
crude oil tankers in Iran,
has told customers it will
continue shipping with
insurance provided by the
Iranian-owned Kish P&I
Club. But western traders
say a large proportion of
the NITC fleet of 25 super-
tankers (very large crude
carriers that can carry 2m
barrels apiece) and nine
Suezmax tankers (capable
of carrying 1m barrels) is
already in use providing
floating storage.
The International Energy
Agency estimates that Iran
is storing at least 40m-42m
barrels of crude oil in tank-
ers offshore, equal to about
two-thirds of the NITC fleet.
In addition, Iran is stor-
ing 20m-25m barrels of
crude in onshore facilities.
www.ft.com/commodities
Twitter: @ftcommodities
COMMODITIES
Investors demand big yield
premiums on corporate bonds
kets are from issuers who
absolutely need to raise the
money, said Tim Broad-
bent, head of leveraged loan
syndicate for the Americas
at Barclays.
The opportunistic bor-
rowers, or any other issuer
who is in position to wait a
bit, is standing on the side.
Average yields on US
investment grade bonds are
3.31 per cent, according to
Barclays. Overall risk pre-
miums or spreads on the
bonds over comparable US
Treasuries rose as high as
215 basis points this month,
By Vivianne Rodrigues
in New York
Investors are demanding
significant yield premiums
to buy new corporate debt
being sold in the US as com-
pensation for the rise in
market volatility stemming
from the worsening of the
debt crisis in Europe.
Bankers estimate that for
investment-grade bonds,
investors are asking for
yields that are on average
20-25 basis points higher
than where existing bonds
by the same issuer are trad-
ing in secondary markets.
That is the highest so-
called new issue concession
since the start of the year.
These concessions have
climbed in the past weeks.
Investors often seek incen-
tives to buy bonds in times
of turmoil, although levels
are lower than the full per-
centage point demanded in
the aftermath of the finan-
cial crisis and the collapse
of Lehman Brothers.
In a robust market, new
bonds are sold at a yield
close to where existing debt
trades or sometimes lower.
Market volatility has
increased and recently the
only issues coming to mar-
Barclays investment grade
corporate index
Source: Barclays
Yield (%)
2007 08 09 10 11 12
2
4
6
8
10
the highest level since Jan-
uary. The spread widening
becomes more significant
the lower the credit rating.
That means rock-bottom
corporate borrowing rates
are no longer available to a
broad swathe of companies
and many groups able to
take advantage of histori-
cally low rates have already
issued debt, say bankers.
In an environment
where spreads are widen-
ing, theres little incentive
for investors to step for-
ward and take new paper,
because it may lose ground
the next morning, said
Adrian Miller, a global mar-
ket strategist at GMP.
As long as there is this
overhang from Europe, the
calendar for new issuance
will be tight. As a borrower,
you really need to have
either a pristine balance
sheet or definitely be in
need to come to markets.
US-marketed investment
grade issuance is running
at just $28bn this month,
versus a monthly average
of $88bn this year, accord-
ing to Dealogic. Last week,
issuance was just $11bn, the
slowest week in a month.
Additional reporting by
Nicole Bullock
Default concerns grip munis
on California bond confusion
Understanding this
[issue] is like doing breast-
stroke in quicksand because
the information is so thick
and murky, said Marilyn
Cohen, founder of Los
Angeles-based Envision
Capital Management, a pri-
vate wealth advisory.
Moodys has said it may
stop rating this debt due to
insufficient information
to evaluate the probability
of default.
The rating agency also
recently stripped $11.6bn of
RDA debt of its investment
grade ratings, warning of
the potential for debt serv-
ice defaults.
In an example of the diffi-
culties, officials for San
Joses RDA, one of the larg-
est such agencies, and the
county of Santa Clara are
mired in a dispute over how
property tax revenue
should be divided among
By Nicole Bullock in
New York and Matt
Garrahan in Los Angeles
Default fears have gripped a
$20bn part of the US munic-
ipal bond market as the fall-
out from state budget cuts
in California may threaten
upcoming payments.
At issue are bonds sold by
so-called redevelopment
agencies, RDAs, in the
state.
The agencies were
designed to spur growth in
troubled local areas and
had borrowing power
backed by property tax rev-
enues. The RDAs were elim-
inated in state budget cuts
last year, a move that has
ushered in uncertainty.
The legislation calling for
the wind-down of RDAs
included provisions to
ensure their debt was
repaid, but the process has
proved tricky, creating
increasing confusion among
investors and squabbling in
California over how the tax
revenues will be divvied up.
The situation has left
investors, mostly wealthy
individuals who benefit
from tax breaks on munis,
with little insight as to how
to evaluate these bonds.
them, threatening a debt
payment in August.
According to the Califor-
nia state controllers office,
there is about $20bn of this
RDA debt outstanding.
Clearly, the legislative
intent was not to disadvan-
tage bondholders, but we
are very concerned with the
administrative risk associ-
ated with the wind-down
process, said Adam Ber-
gonzi, chief risk officer at
National Public Finance
Guarantee Corp, a unit of
MBIA, which insures $6.7bn
of this debt.
The problems that have
emerged with RDA debt,
though considered isolated
in a vast market that totals
about $4tn, are the latest
example of potential risks
in municipal bonds, an
investment traditionally
considered one of the safest.
In recent years, local fis-
cal strife stemming from
the recession and the col-
lapse of the bond insurance
industry, which once guar-
anteed many munis, have
weighed on the market.
Many observers have also
pointed to a lack of disclo-
sure and transparency, a
criticism supported by the
RDAs situation.
The arrival of US coal into Asia comes as regional producers such as in Australia, pictured, raise output Bloomberg
Surge in US coal exports have overwhelmed demand while prices have dropped sharply over the past year
Sources: US National Mining Association; Reuters
US coal net exports (m tonnes) US coal prices ($ per tonne)
May 2010 2011 Jun 2012
80
90
100
110
120
130
10
20
30
40
50
60
70
80
90
100
1995 98 2000 02 04 06 08 11
Miners hit
by coal glut
as prices
slide to lows
Edward Muller, chief execu-
tive of GenOn Energy, a
Houston-based utility, took
an unusual decision a few
weeks ago: he decided to
declare force majeure on
coal purchases.
The use of the force
majeure legal clause allows
companies to walk away
from contracted deliveries.
But its use by GenOn was
extremely atypical.
Force majeures are cus-
tomarily triggered by so-
called acts of God, such as
hurricanes or flooding.
But GenOns problem was
very different. We have
given force majeure because
our coal piles are full, Mr
Muller said. We just cant
physically take it right
now.
The coal glut that GenOn
faces is emblematic of the
state of the industry as US
utilities burn more natural
gas after the shale revolu-
tion sent its price to a
decade-low.
This coal-to-gas shift also
explains why coal prices
have fallen to a two-year
low, dragging down mining
shares.
Although overshadowed
by commodities such as
iron ore and copper, the
price of thermal coal, used
to fire power stations, and
coking coal, used in steel-
making, is crucial for the
profitability of the global
mining industry.
Coal accounted for nearly
a third of the operating
profit of London-listed blue-
chip miners Xstrata and
Anglo American last year.
For pure-play miners,
including London-listed
Bumi New York-listed Pea-
body, Arch Coal and Alpha
Natural Resources, the situ-
ation is even more extreme.
The share price of some of
them has plunged up to 90
per cent over the past year.
The coal mining industry
now fears a lasting crisis on
the back of cheap US gas
production. We face a
structural change, says a
senior mining executive.
The shift in the US from
coal to gas has forced US
miners to export a growing
share of their output, just
as other top producers
including Australia, Colom-
bia and Indonesia, the
worlds largest coal
exporter, ramp up output.
The share of electricity
generated by burning coal
in the US has fallen to its
lowest level in nearly 40
years, according to the US
Department of Energy.
Paolo Coghe, analyst at
Socit Gnrale in Paris,
says US exports are going
from strength to strength,
embodying the plight of the
US coal industry. US coal
net exports surged last year
to 94m tonnes, up 600 per
cent from five years ago
and the highest since 1991,
according to the National
Mining Association.
The surge in US exports,
initially into the Atlantic
but increasingly now into
the Asia-Pacific region, has
overwhelmed demand, even
if consumption in Asia
remains healthy.
Thermal coal for delivery
in three months in the
European hub of Amster-
dam- Rotterdam- Antwerp
fell last week to a two-year
low of $82 a tonne.
Coal prices hit a record
high of $220 in July 2008 but
plunged after the global
financial crisis to a low of
$61 in March 2009.
In Europe, coal demand is
weak due to the eurozone
debt crisis and substitution
for renewables in the power
sector, executives say.
Asia is at least offering a
counterweight with robust
imports. From January to
May, Chinese coal imports
rose above 90m tonnes,
almost 60 per cent higher
than in the same period of
last year. However, even in
China, low electricity pro-
duction, coupled with
strong hydroelectric genera-
tion, has led to a lower coal
burn and thus a dramatic
increase in inventories.
With stocks full and
prices down, local traders
have defaulted on contracts.
The arrival of US coal into
Asia also comes just as
regional producers ramp up
output. Indonesian supply
is heading towards a 10 per
cent jump from last years
level and Australian coal
production has recovered
from last years flooding
disruption.
The combination of sup-
ply and demand forces
means thermal coal prices
are unlikely to recover any
time soon, executives and
traders say. But they do
believe further downside is
limited as prices are below
the cost of production of
some collieries in the US,
Australia and Russia.
Traders estimate that in
the seaborne market of
roughly 850m tonnes, mines
accounting for about 90m
tonnes are losing money.
Indeed, the first signs of a
supply response are emerg-
ing as miners supplying US
utilities such as GenOn
start to cut back their pro-
duction.
News analysis
Shift to gas has
forced US miners to
export a growing
share of their
output as other big
groups raise output,
writes Javier Blas
1m b/d
Estimated drop in sales by
time of July 1 EU embargo
Understanding
this [issue] is
like doing
breaststroke
in quicksand
JUNE 19 2012 Section:Markets Time: 18/6/2012 - 19:29 User: kallmanng Page Name: LSE USA, Part,Page,Edition: EUR, 26, 1
FINANCIAL TIMES TUESDAY JUNE 19 2012

27
MARKETS & INVESTING
Fears over Spain
trump election
lift from Greece
Investors are getting used
to short lived rallies. The
relief that swept across
financial markets after
Greeces centre-right New
Democracy party narrowly
won Sundays election evap-
orated in less than an hour.
Athens stock market
hung on to a small rise yes-
terday, but most other
European equity markets
reversed their initial gains,
the euro lost further ground
versus the dollar, and Ital-
ian and Spanish bond mar-
kets tumbled.
Investors and economists
say that the eurozone crisis
has moved to an end-
game, where little less
than substantial central
bank intervention in the
short term and moves
towards a longer-term Euro-
pean fiscal union will
assuage markets.
Its not really about
countries any more, its
about trying to come to
terms with a deep systemic
issue and what Europe
should be doing about
it, says George Magnus,
senior economic adviser to
UBS.
The shortening length of
relief rallies the one that
followed last weeks
announcement of a bailout
for Spanish banks only
lasted slightly longer sug-
gest Europes policy of
incremental steps doesnt
pass muster in terms of
convincing the market that
the eurozone crisis is on the
way to being resolved, Mr
Magnus says.
Although investors say
Sundays election results
eased the risk that Greece
could leave the eurozone in
the near term, it did noth-
ing to ease mounting con-
cerns over Spain and Italy,
whose economies dwarf
Greece in size and systemic
importance.
Unease over Spains fiscal
woes intensified yesterday,
with Madrids 10-year
benchmark borrowing costs
rising to a new euro-era
high of 7.28 per cent and the
cost of insuring against
Spanish default hitting a
record high. Some analysts
and investors fear Spains
access to debt markets is
significantly impaired.
Madrid is due to sell bills
today and five-year bonds
on Thursday.
Spain can still issue
debt, but has lost access to
debt markets at economic
levels, says Nick Gartside,
international chief invest-
ment officer for JPMorgan
Asset Management.
Although borrowing at
current levels will weigh on
Spains fiscal position in the
long run, it also has a very
quick and corrosive effect
on the economy by pushing
up borrowing costs for
Spanish companies and
households, Mr Gartside
points out.
These borrowers are
already in a precarious posi-
tion. Data from the Bank of
Spain show Spanish banks
bad loans rose to 8.72 per
cent of their outstanding
portfolios in April, the high-
est since April 1994.
Greece continues to
unsettle investors: its eco-
nomic slump and high debt
load are considered unsus-
tainable, despite two inter-
national rescues. Some ana-
lysts cautioned, too, against
optimism over the election
results.
Political parties that sup-
port the austerity measures
required for Greece to con-
tinue to receive European
aid only won a parliamen-
tary majority thanks to
extra seats handed to the
party with the most votes.
In terms of overall votes
cast, parties opposed or
uncommitted to the latest
bailout and austerity pack-
age won more than 50 per
cent, says David Zervos,
senior strategist at Jeffer-
ies.
This means the possibility
of a Grexit, or Greek exit
from the common currency,
is likely to hang over
Europe for the foreseeable
future.
Speculation is growing
that the European Central
Bank will act to soothe
nerves. Last week Mario
Draghi, ECB president, indi-
cated it was on standby to
respond and would con-
tinue to supply liquidity to
solvent banks where
needed.
The ECB has not ruled
out offering banks a third
round of money under
its longer-term refinancing
operation. It could also
cut rates, and restart its
dormant securities mar-
kets programme, buying
the bonds of Spain and
Italy directly on the second-
ary market to drive
down their borrowing costs.
There are more unortho-
dox measures that could be
introduced. Mr Magnus
advocates policy makers
give the European Stability
Mechanism, the eurozones
permanent bailout fund and
successor to the European
Financial Stability Facility,
a bank licence that would
increase its firepower.
Mr Gartside argues a
bank licence would be
helpful, but direct bank
recapitalisations by the
ESM would be the bigger
boost, breaking the so-
called negative feedback
loop between weak govern-
ments and their banks.
Yet investors and ana-
lysts say these measures
would only be a short-term
solution. To reassure mar-
kets, they argue, EU leaders
will have to make progress
towards a fiscal union at
the summit scheduled later
this month.
We need action by the
ECB to turn this around in
the short run and incremen-
tal but clear steps towards
fiscal integration in the
eurozone in the longer
run, says Trevor Gree-
tham, director of asset allo-
cation at Fidelity.
These things dont hap-
pen overnight and periodic
bouts of market pressure
will ensure European policy
makers dont lose their
momentum.
Sushil Wadhwani, a
hedge fund manager and
former member of the Bank
of Englands Monetary Pol-
icy Committee, says the
summit on June 28 is now
critically important.
See Editorial Comment,
Comment and Lex
For all the market kerfuffle
about the Greek election,
rising Spanish bond yields
and secondguessing the
Federal Reserves policy
decision tomorrow, it is
possible the weeks most
important event will come
out of China.
Early on Thursday, the
flash estimate of China
manufacturing will be
released.
The point is, the market
depending on the outcome of
the Fed meeting may be
approaching this PMI survey
in a pretty sour mood.
The main index has been
below the 50 point
contraction level for seven
consecutive months a poor
trend that has reinforced
worries about global growth.
That could allow for a
pleasant surprise.
Capital Economics notes
that Beijings recent
monetary easing may show
up this month in stronger
orders a pickup in lending
was already [in] evidence by
the end of May, signalling
the state sector had begun
to respond.
The Shanghai Composite is
struggling to break out of its
current downtrend, however,
having three times this year
failed to breach its 200day
moving average.
Copper and the Aussie
may offer a better PMI play.
jamie.chisholm@ft.com
Rolling global overview at:
www.ft.com/markets
News analysis
Incremental policy
steps are not
convincing markets,
write Robin
Wigglesworth and
Mary Watkins
Greek aftermath: intraday market moves
Spanish government bonds
Source: Thomson Reuters FT Graphic
Italian government bonds
10-year yield
(%)
FTSE Eurofirst 300
Index
Greek equities
Time (GMT)
Athens
General
index
Euro against the dollar
($ per )
6.00 7.00 8.00 9.00 10.00 11.00 12.00 13.00 14.00 15.00 16.00
10-year yield
(%)
1.25
1.26
1.27
Latest
560
570
580
590
600
5.8
5.9
6.0
6.1
6.2
6.8
6.9
7.0
7.1
7.2
7.3
980
985
990
995
1000
1005
HungaryEU/IMF: a right old strudel
beyondbrics, the FTs emerging markets hub
In Hungarian, to drag ones
feet is nyjtja mint a
rtestsztt literally, to roll
out the dough for topquality
strudel by making it very
long and thin, and its a
timeconsuming process,
writes Kester Eddy.
If the current Hungarian
government of Viktor Orbn
ever entered an international
strudelmaking competition it
would surely win gold.
This is judging by the time
it is taking to meet the
conditions set by the EU and
International Monetary Fund
for a new line of credit,
needed to reduce borrowing
costs and bolster market
confidence after Hungary was
downgraded to junk status
last November.
But the talks, first
requested by Budapest last
November, might just be
getting close to starting.
Mihly Varga, the minister
in charge of negotiations,
said on Friday that the new
act on the Hungarian central
bank (MNB) would be 99
per cent compatible with
the conditions of the
international institutions and
would go before parliament
this week for ratification.
Yesterday, Mr Varga told
state radio that the
government had reached a
healthy compromise on the
planned amendments to the
central bank law, thus
removing the last serious
obstacle to starting formal
talks. So time to book a few
meeting rooms?
The problem with 99 per
cent compatibility is what is
in the 1 per cent.
There is still a big sticking
point: the prime minister can
appoint a third deputy bank
governor and enlarge the
membership of the monetary
council which the IMF and
European Central Bank says
threatens the independence
of the central bank.
Mr Orbns compromise is
that he will not exercise this
power while Andrs Simor
remains at the helm of the
MNB that is, until next
March, when his term expires.
Jnos Samu, economist at
Concorde Securities, said: It
wouldnt be the first time
that weve had a positive
tone from government
officials and eventually it has
turned out that some more
obstacles were in the way.
Quite. As Nomuras Peter
Attard Montalto puts it:
These [conditions] are the
core of what the IMF is after!
I do not believe the IMF is
concerned about threats to
independence only whilst
Simor is in office; they are
concerned with institutional
setup and longrun
independence.
However, for the time
being, it seems relief at the
outcome of the Greek
election is the biggest market
influence. The forint was
trading yesterday at about
Ft292.30 to the euro,
strengthening just less than
1 per cent on Fridays level.
On the Budapest bourse,
the Bux index had climbed
1.7 per cent (on top of a 2.4
per cent gain on Friday),
outperforming its regional
peers in Prague and Warsaw.
But for any such gains to
be longlasting, the markets
need the reassurance that a
start to EUIMF talks will
become a reality. Anything
less is just rolling out the
dough for gourmet strudel.
www.ft.com/beyondbrics
By Mary Watkins in London
Credit default swaps on
Spanish debt hit a record
high yesterday, underscor-
ing the level of nervousness
over the outlook for the
eurozones fourth largest
economy.
The cost of insuring
against a Spanish debt
default jumped 26 basis
points to 621bp, equating to
annual costs of $621,000 to
insure $10m of debt over
five years.
Italian CDSs, meanwhile,
rose sharply to 553bp, data
provider Markit said.
CDSs on banks, including
BBVA and Santander, also
traded wider, highlighting
how closely correlated
Spanish banking stocks
have become to the Spanish
sovereign.
News of the 100bn bail-
out for Spains banks failed
to calm markets last week
and despite a brief market
rally following Greeces
election results, yields on
Spains 10-year government
debt continued to rise.
Yesterday they hit a new
euro-era high.
As banks in the eurozone
have looked to shrink and
offload assets on the back of
regulatory and market pres-
sure, lenders have become
increasingly closely aligned
to their sovereign.
Analysts say those links
have been further rein-
forced in periphery coun-
tries by a recent 1tn-plus
capital injection into the
banking system by the
European Central Bank.
Many banks in Spain and
Italy borrowed heavily from
the ECB via its three-year
longer-term refinancing
operations, using the
money to buy their own
governments bonds.
The Markit iTraxx Europe
Senior Financials index,
which looks at CDS spreads
of a basket of big financial
institutions, yesterday
showed that the overall cost
of Europes big banks to
insure against default rose
7bp to 285bp.
The CDS market is
increasingly seen as a
proxy to measure the real
stresses in the eurozone
market.
The instruments are used
by investors to protect
against default or as a spec-
ulative device.
CDS prices rise as inves-
tor confidence deteriorates.
Saul Doctor of JPMorgan
says that when it comes to
corporates, generally what
we are seeing is that the
CDS market reacts first and
more vigorously than the
bond market because people
are not yet being forced to
close bond positions . . . the
CDS market is currently a
lot more liquid.
Analysts say the CDS
market can be more indica-
tive of sentiment than the
underlying bonds, but they
say it is one of a number of
barometers they use and
there are distortions.
Yields on German Bunds,
for example, have fallen as
investors have sought
haven assets.
However, the implied risk
of default is high relative to
Germanys bond market.
European politicians have
previously suggested that
short-selling by hedge funds
of CDSs linked to Greek
government debt may have
made the cost of putting
together a package to save
Greece more expensive.
However, a recent report
from the International
Organization of Securities
Commissions, the umbrella
body for the worlds market
regulators, found there was
no conclusive evidence that
CDS short-selling had exac-
erbated problems in the
Greek debt market.
CDS on Spanish debt hit highs
Hungarian forint
Source: Thomson Reuters Datastream
Against the euro (Ft per )
Jan Jun 2012
320
315
310
305
300
295
290
285
280
Trading post
Jamie Chisholm
Shanghai Composite
Source: Thomson Reuters Datastream
Index
Jun
2010
2011 Jun
2012
2000
2500
3000
3500 200-day
moving
average
More news at
FT.com
Fed ready to act
A further large bout of
unconventional easing is
now on the agenda as the
euro crisis has caused a
global slowdown
www.ft.com/gavyndavies
Bunds at risk
Video: The solution to the
problems in the eurozone
periphery may damage
bond yields at the core
www.ft.com/ftfm
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Eurozone crisis
JUNE 19 2012 Section:Markets Time: 18/6/2012 - 19:04 User: kallmanng Page Name: ICNCOMMS USA, Part,Page,Edition: EUR, 27, 1
28

MARKETS
Tuesday June 19 2012
Source: Thomson Reuters Datastream
German government bonds
10-year yield (%)
Dollar
Trade-weighted index
Apr Jun 2012
78
79
80
81
82
83
Mar Jun 2012
1.0
1.2
1.4
1.6
1.8
2.0
German government
bond yields ended the
day slightly lower, as an
initial rise following the
Greek election result was
reversed as concerns
about the outlook for
Spain resurfaced
The dollar rose 0.5 per
cent against a basket of
currencies as investors
opted for safety against a
backdrop of continued
uncertainty about the
eurozone debt crisis
Spains debt problems weigh on investors
By Dave Shellock
Early gains for European
equities and the euro
proved fleeting as any sense
of relief felt by market par-
ticipants over the Greek
election outcome quickly
evaporated in the face of a
fresh surge in Spanish bond
yields.
The Greek election
result averts the most
immediately alarming sce-
narios for the eurozone but
makes no fundamental
change in the medium-term
outlook, said Stephen
Lewis, economist at Monu-
ment Securities. The suc-
cess of a nominally pro-bail-
out party in securing top
spot in the voting does not
remove the uncertainties.
Doubts persist whether any
administration now formed
will be able to meet the stiff
legislative tasks that are
likely to lie ahead of it.
As the initially positive
impact of the election result
faded, the chief focus of
market concerns returned
to Spain.
The problems facing the
countrys banking sector
were highlighted by data
showing that bad loans as a
percentage of total lending
by Spanish banks had
reached an 18-year high in
April.
The yield on Spains 10-
year government bond
touched a fresh euro-era
high of 7.28 per cent,
according to Reuters data,
before finishing the session
at 7.17 per cent, up 11 basis
points on the day fuelling
worries about Madrids abil-
ity to access the markets.
Furthermore, the cost of
insuring against a Spanish
sovereign default, as meas-
ured by credit default swap
spreads, reached a record.
It is difficult to see how
Spain will be able to avoid a
full-blown bailout pro-
gramme without the Euro-
pean Central Bank re-
launching its bond pur-
chase programme soon,
said Chris Scicluna at
Daiwa Capital Markets.
And, if and when we see
renewed full-blown market
turmoil, there will also be a
compelling case for more
longer-term refinancing
operations, and given the
significant deterioration in
recent euro area sentiment
surveys and economic data
a rate cut too.
All eyes later this week
will be on the Federal
Reserve as it concludes a
two-day policy meeting
tomorrow against a back-
drop of mounting expecta-
tions for further policy eas-
ing.
The dramatic slowing in
US economic data has
forced us to scale back our
already soft growth expecta-
tions for the second quar-
ter, said Tom Porcelli,
chief US economist at RBC
Capital Markets. Our long-
standing call is that the Fed
would be forced to ease pol-
icy further in the second
half of the year. And while
a third round of quantita-
tive easing clearly has a
shot come Wednesday, we
are keenly aware that the
only thing holding back the
Fed from rolling out a new
large-scale asset purchase
programme is a still buoy-
ant equity market.
However, US equities
showed few signs of buoy-
ancy yesterday as Wall
Street saw extremely
choppy trading.
At midday in New York,
the S&P 500 was marginally
lower after swinging in and
out of positive territory,
although the Vix volatility
index the so-called equity
fear gauge was down
8 per cent.
In Europe, the FTSE
Eurofirst 300 index pared an
early 1.1 per cent rise to end
just fractionally higher.
Asian stocks had a more
positive session with the
Nikkei 225 Average in
Tokyo and the Hang Seng
index in Hong Kong both
hitting one-month highs.
The euro had a volatile
time. The single currency
touched a one-month high
of $1.2747 in early trade
before sliding back below
$1.26.
German government
bonds, meanwhile, inched
higher but yields remained
well clear of recent record
lows. The 10-year Bund
yield edged down 1bp to
1.42 per cent while the 10-
year US Treasury yield was
flat at 1.59 per cent.
In commodities, Brent oil
fell $1.41 to $96.20 a barrel
and copper retreated from a
three-week high to end flat.
Gold also ended little
changed at $1,625 an ounce.
GLOBAL OVERVIEW
Yield on 10year
bond reaches 7.28%
Volatile trade for
Wall Street equities
Source: Thomson Reuters Datastream Markets updated at www.ft.com/markets
FTSE 100 index FTSE Eurofirst 300 index S&P 500 index Nikkei 225 Average
2012 May Jun 2012 May Jun 2012 May Jun 2012 May Jun
Latest
1250
1300
1350
1400
5200
5300
5400
5500
5600
950
1000
1050
8000
8500
9000
Change
on day
-0.11%
Change
on day
+0.22%
Change
on day
+0.04%
Change
on day
+0.00%
Euro falls as Greek lift fades
CURRENCIES
By Alice Ross
A relief rally in the euro
following the emergence of
pro-austerity party New
Democracy as the winner of
elections in Greece proved
short-lived, with the single
currency sliding amid ris-
ing concerns over Spanish
debt.
The euro moved as high
as $1.2747 in early trading
yesterday following an elec-
tion result widely seen as
positive for markets, jump-
ing to its strongest level in
nearly a month.
However, it soon gave up
its gains amid a fresh rise
in Spanish bond yields.
The euro hit fresh lows of
$1.2560 later in the day, a
fall of more than 1 per cent,
after Angela Merkel, Ger-
man chancellor, said Greece
had to fulfil its reform com-
mitments in return for fur-
ther aid.
Jane Foley at Rabobank
said: The Greek election
may have returned a best-
case scenario for the mar-
kets in so far as there may
now be a conservative gov-
ernment with a workable
majority but clearly this is
no panacea when it comes
to either the problems of
Greece or those of the rest
of EMU.
Other risk-related curren-
cies lost ground yesterday
amid investor caution on
the eurozone. The Austral-
ian dollar lost 0.5 per cent
to $1.0076 while the pound
lost 0.5 per cent to $1.5652.
Along with the dollar, the
yen was also stronger
against other big currencies
amid the risk-averse mood
in the currency markets.
The euro lost 1.2 per cent to
Y99.21 while sterling was
down 0.5 per cent to
Y123.52. While the dollar
outperformed the yen, ris-
ing 0.1 per cent to Y78.93, it
pared many of its gains dur-
ing the day.
Currency analysts were
also awaiting the outcome
of the G20 meeting in Mex-
ico, at which leaders dis-
cussed funding solutions for
the eurozone crisis.
Analysts at Citigroup
warned that any disappoint-
ment from the meeting
could see investors selling
into rallies in the euro.
A meeting of the Federal
Reserve this week is also
seen as crucial for the euro
with some expecting the US
central bank to announce
extra monetary easing to
boost the economy.
Such a move is widely
expected to cause the dollar
to weaken and the euro to
rally.
www.ft.com/currencies
Energy sector is S&Ps weak link
as crude prices sink further
By Kandy Wong
in New York
Shares in Apache, one of
the largest independent oil
companies, dropped 2.2 per
cent to $85.83 as further
weakness in crude oil prices
sent energy stocks lower.
The S&P energy sector
was a notable area of weak-
ness, down more than 1 per
cent at midday.
That pushed the sector to
a loss of more than 5 per
cent in the year to date,
with energy the only major
S&P industry group in neg-
ative territory for the year.
The price of crude
dropped to $82.69 yesterday,
down from a high of $110.94
in February, weighing on
the prospects for energy
companies.
Chesapeake Energy
moved down 1.4 per cent to
$17.85, while Alpha Natural
Resources lost 5.3 per cent
to $8.35.
Overall, US equities were
mixed yesterday, as higher
Spanish bond yields under-
scored concerns over the
eurozone in the wake of the
Greek election result over
the weekend.
The benchmark S&P 500
index dropped fractionally
to 1,342.25. The Dow Jones
Industrial Average declined
0.2 per cent to 12,740.19.
Tobias Levkovich, chief
US equity strategist at Citi-
group, said: Stock prices
jumped on Thursday and
Friday, partially anticipat-
ing the election news [from
Greece], despite less than
encouraging US economic
data. Hence, we believe one
might see the old Wall
Street adage of buy the
rumour, sell the news
emerge in the next few
days.
The difficulty [for the
incoming Greek govern-
ment] in arranging a coali-
tion and satisfying con-
cerned voters, as well as
finding areas of compro-
mise with lenders, could
weigh on markets.
The tech-heavy Nasdaq
Composite index edged up
0.4 per cent to 2,884.99.
Apple, the most heavily
weighted stock in the index,
reversed gains in the morn-
ing session. The stock
moved up 1.4 per cent to
$582.01 after Topeka Capital
Markets gave the iPad and
iPhone maker a buy rat-
ing with a target price at
$1,111.
Microsoft was expected to
introduce its own tablet
computer yesterday in Los
Angeles, designed to com-
pete with Apples iPad. The
stock, however, lost 0.7 per
cent to $29.80.
Facebook rose 4.9 per
cent to $31.49. The social
networking company had
managed to record its first
week of positive gains since
its debut last week by ris-
ing almost 11 per cent.
Groupon surged 12 per
cent to $11.25, after Morgan
Stanley lifted the com-
panys rating to buy.
Defensive sectors, which
have been favoured by
investors for the past
weeks, continued to lead
gains. The telecom index
increased 0.6 per cent, while
utilities moved up 0.4 per
cent and the consumer dis-
cretionary group ticked up
0.2 per cent.
AT&T moved up 0.3 per
cent to $35.82 and Verizon
gained 1 per cent to $43.97.
American exporters were,
however, hit by continued
uncertainty in Europe.
General Electric lost 1 per
cent to $19.81, while
Hewlett-Packard declined 3
per cent to $20.99.
In addition to eurozone
financial woes, investors
were also displaying cau-
tion ahead of the Federal
Reserves policy meeting on
Wednesday. Economists are
unsure whether policy mak-
ers will extend Operation
Twist, the Feds $400bn
bond-buying policy funded
by sales of short-dated
Treasuries, which is set to
end this month.
John Hussman, a fund
manager at Hussman
Funds, said that the market
was vulnerable to a larger
sell-off, based on the
companys estimate of pro-
spective return versus risk
scenarios.
But he added: That said
and this is important if
market internals improve
meaningfully over the next
few weeks, [and] this would
require a solid rebound,
that sort of outcome might
accompany a Fed easing or
other event.
For now, we dont have
the evidence to take any-
thing but a very defensive
stance, but well take
changes in the evidence as
they arrive.
Financials, which have
overcome several volatile
sessions, lost 0.3 per cent at
midday. Bank of America
dropped 1.1 per cent to
$7.81. Morgan Stanley lost 2
per cent to $14.01, while
JPMorgan Chase traded at
$34.79, down 0.7 per cent.
John Praveen, chief
investment strategist at
Prudential International
Investments Advisers, gave
the financial sector a neu-
tral rating.
[The] recent spike in
eurozone worries has hob-
bled the sector, he said.
Easing by global central
banks both in developed
and emerging economies is
a positive. Sector valuations
are attractive, trading at a
discount relative to own
history and market.
WALL STREET
Source: Thomson Reuters Datastream
Key indicators
Share price ($)
Apache Corp
Jun 2011 Jun 2012
60
80
100
120
140
Days
Indices Close change
S & P 500 1342.36 -0.48
DJ Industrials 12739.89 -27.28
Nasdaq Comp 2883.96 +11.16
Russell 2000 769.97 -1.35
VIX 19.40 -1.71
US 10 yr Treas Bd 1.58 -0.01
US 2 yr Treas Bd 0.29 +0.01
US equities
Wall Street had a volatile
session as investors digested
the latest eurozone
developments and waited for
policy news from the Federal
Reserve later this week.
Energy stocks lost ground as
crude prices retreated
UK equities
Bank stocks came under
renewed pressure from
eurozone sovereign debt
worries. But Burberry was
helped by positive broker
comment while Wolseley
gained amid hopes it would
return cash to shareholders
European equities
The Eurofirst 300 gave back
most of an early rise as a
positive response to the
election result in Athens gave
way to renewed worries
about the outlook for Spain.
Greek stocks, however, rose
3.6 per cent
Asian equities
The Nikkei closed above
8,700 for the first time in a
month as the Greek election
result soothed worries about
the eurozone. Hong Kong
also reached a onemonth
high, while Australian stocks
jumped 2 per cent
Markets update
By Alexandra Stevenson
An early rally across Euro-
pean stock markets yester-
day proved short lived as
indices later headed into
negative territory.
The New Democracy
partys Greek election vic-
tory provided only a tempo-
rary boost for markets.
The FTSE Eurofirst 300
ended almost unchanged at
993.67 after earlier climbing
as much as 1.2 per cent.
Investors have decided
they arent willing to invest
in any rally until all skele-
tons come out of the
closet, said Karen Olney,
Europe strategist at UBS.
A surge in Greek bank
stocks helped to lift the
Athens General index 3.6
per cent to 580.67.
EuroBank led the rally,
up 14.7 per cent to 0.80.
National Bank of Greece
rose 11.1 per cent to 1.50.
Elsewhere, sentiment
turned and investors turned
their focus to banking
stocks outside Greece, send-
ing the FTSE Eurofirst 300
banks sub-index down
1.7 per cent to 356.38.
Santander suffered steep
falls as investors focused
their attention on Spanish
banks after data revealed
that bad loans held by the
sector rose to an 18-year
high in April.
Shares in Spains biggest
lender by market value fell
4.6 per cent to 4.70.
Greece is out of the
closet and so we turn our
attention to more skeletons
in Spain. The good news is
they are coming out, Ms
Olney added.
BBVA, Spains second
largest lender, fell 4.2 per
cent to 5.03. Bankia, the
part-nationalised bank at
the heart of Spains finan-
cial crisis, declined 9 per
cent to 0.84.
The wider Ibex 35 index
fell 3 per cent to 6,519.9.
In Paris, where the Social-
ist government won a
majority in a final round of
parliamentary elections on
Sunday, the CAC 40 index
dropped 0.7 per cent to
3,066.19.
French banks BNP Pari-
bas and Socit Gnrale
weighed on the index.
Shares in BNP Paribas
slid 4.4 per cent to 28.17,
while Socit Gnrale fell
4.3 per cent to 17.02.
Bancassurer Mediolanum
led falls on Italys bench-
mark index, sliding 5.5 per
cent to 2.36.
Shares in UniCredit were
down 4.3 per cent to 2.47.
The wider FTSE MIB
index slipped 2.9 per cent to
13,009.63.
In Germany, shares in the
lender Commerzbank slid
4.4 per cent to 1.36, while
the broader Xetra Dax
index increased 0.3 per cent
to 6,248.2.
LONDON
Strong gains for Greek banks
help to lift Athens index
EUROPE
Santander
Source: Thomson Reuters Datastream
Share price ()
Jan Jun 2012
4
5
6
7
Wolseley rallies on
cash return hopes
1.9 per cent to 150.2p,
helped by a Barclays over-
weight recommendation.
Burberry rose 2.9 per cent
to 13.46 as Deutsche Bank
said the luxury goods
maker was well positioned
for further growth.
Vague hopes of a bid from
Tom Alexander saw cable
broadcaster Virgin Media
rally 4.3 per cent to 14.86.
ITV slid 1.2 per cent to
72.3p on a downgrade from
Goldman Sachs, which said
ad sales were disappointing.
C&W Worldwide leapt 7.8
per cent to 37.8p after Orbis
Investment Management,
its 16 per cent shareholder,
dropped opposition to Voda-
fones 38p takeover offer.
National Grid edged 0.6
per cent higher to 653.5p.
Gem Diamonds fell 3.7 per
cent to 201.2p after it
delayed production in Bot-
swana. Engineer Melrose,
fell 3.1 per cent to 370.6p
after confirming interest in
German metermaker Elster.
Property group Quintain
Estates leapt 15.2 per cent
to 149.2p on news of a ven-
ture with Hong Kong inves-
tor Henry Cheng Kar-Shun.
By Bryce Elder
Hopes of a cash return of
up to 1.5bn put Wolseley
among the FTSE 100 gain-
ers with resilient US trad-
ing putting the builders
merchant on course to be
debt-free by year-end, Jef-
feries analysts said.
The stock ended 2.6 per
cent higher at 22.33.
The wider market swung
between gains and losses as
sovereign debt markets con-
tinued to define sentiment.
The FTSE 100 ended up
0.2 per cent, or 12.28 points,
at 5,491.09. Banks pared last
weeks gains after a Greek
poll result that offered reas-
surance but little certainty.
Royal Bank of Scotland
fell 5 per cent to 235.3p,
Lloyds Banking Group 3.6
per cent to 30.2p and Bar-
clays 2.4 per cent to 196.1p.
Rolls-Royce rose 2.1 per
cent to 839.5p as the engine
maker secured a deal worth
more than 1bn to deliver
reactor cores for UK
nuclear submarines. British
Airways owner IAG gained
JUNE 19 2012 Section:Markets Time: 18/6/2012 - 19:16 User: kallmanng Page Name: WSM2 ASI, Part,Page,Edition: EUR, 28, 1
FINANCIAL TIMES SPECIAL REPORT | Tuesday June 19 2012
The FT wine expert
looks at the
difference between
youth and age one
of the most absurd
aspects of the
current fine
wine market
Buying &Investing in
WINE
Inside this issue
Matter of
taste
Robert M
Parker Jr,
inventor of
the rating
scale, is
still a
centre of controversy, says
Maggie Rosen Page 2
What goes up Ella Lister
says that 2011 saw a
muchneeded correction in
the price of Bordeaux
Page 2
Older the better
Mature vintages can be
surprisingly affordable,
writes Jancis Robinson
Page 3
That
bianco
Italian
producers
are waking
up to their
heritage
whites,
says Walter Speller Page 4
On FT.com
Maggie Rosen looks at
the burgundy fraud case
Yquem is in a class of
its own, says Stephen
Brook
Guy Woodward maps
Australias wine tourism
Margaret Rand on the
best virtual communities
Geraint Carter considers
the prospects for investors
Richard Hemming looks
at glasswear
Chris Smith examines
forex rates
Tom
Cannavan on
BYO politics
www.ft.com/reports/wineinvestment2012 | twitter.com/ftreports
A
sense of dj vu has
been the overriding
feeling for wine inves-
tors over the past 12
months. This has been largely
thanks to last years sharp cor-
rection in fine wine prices,
which sent the Liv-ex 100 Fine
Wine Index plunging a fifth in
the second half of 2011.
To many, it was a virtual
rerun of what happened in 2008.
Once again, the causes of the
correction were not difficult to
dissect. On the macro front,
recession, stock market volatil-
ity and the eurozone sovereign
debt crisis were all factors. But
the final tipping point was First
Growth prices, which had shot
out of control after a two-year
bull run, during which the
Liv-ex 100 index had risen by a
staggering 76 per cent.
Much of this price increase
had been driven by soaring Chi-
nese demand, led by Chteau
Lafite. But by the middle of
2011, the slowdown in the Chi-
nese economy coincided with
concerns that prices had already
overshot demand. This was
especially true in Hong Kong,
where the retail and auction
markets for First Growth claret
had become saturated.
A mishandled and aggres-
sively priced 2010 primeur cam-
paign also did the bordeaux
market no favours. Instead, it
only fuelled resentment and
accelerated a feeling of First
Growth fatigue. As the market
turned from July onwards,
investors and collectors became
increasingly spooked; the only
question then was how quickly
and by how much prices and the
Liv-ex Index would recoil.
Inevitably, recent vintages of
Lafite took the biggest hits.
Having traded at a premium of
129 per cent to its fellow First
Growths, some vintages, such as
the 2008, slumped by 45 per
cent. Latour, Haut-Brion, Mar-
gaux and Mouton fared less
badly, but they too suffered
dents to their pride and prices.
Some had seen the writing on
the wall. Most obviously, sev-
eral funds had already quietly
moved out of Lafite. Merchants
also sought to reduce stock lev-
els from the late summer. But
many newer and more specula-
tive investors were caught un-
awares. After two years snap-
ping up First Growths in a rap-
idly rising market, many were
now equally keen to offload
them as the waters subsided.
Fortunately, the market had
learnt some lessons from 2008.
This time, many investors, trad-
ers and fund managers kept
their nerve and the sell-off was
nothing like as disorderly and
panic-stricken as before. Nor
was there the same level of
redemptions from funds.
But the correction was serious
and prolonged. In the final six
months of 2011, the Liv-ex 100
fell 21.5 per cent to end the year
on 286 points a year-on-year
drop of 15 per cent. As Liv-exs
Justin Gibbs pointed out: With
a weighting of 68 per cent in the
100 Index, the decline in the
First Growths cast a long
shadow on the market.
It wasnt all bad. Some sec-
ond-line chteaux benefited
from a flight to value and per-
formed extremely well, even
managing to finish the year on a
positive note. These included
the increasingly fashionable
Pontet-Canet, Beychevelle,
Lynch-Bages and Pichon Baron.
However, if bordeaux took a
step back in 2011, ultra-fine bur-
gundy took a huge stride for-
ward. As seems to be the case
these days, this latest phenome-
non was almost entirely due to
new demand from China
driven mainly by a few super-
rich buyers who had developed
a powerful thirst for the regions
greatest names. Inevitably, top
of their shopping lists was the
Domaine de la Romane-Conti
(DRC), which quickly took over
Lafites mantle as the darling of
the secondary market.
Given DRCs legendary qual-
ity and scarcity, prices rocketed
causing the Liv-ex DRC Index to
hit record highs from 2011
onwards. In May 2012, it rose
another 2 per cent and is now
up 19 per cent on this time last
year.
Other Burgundy domaines
were also swept up in the
frenzy, including de Vogue,
Leflaive, Roumier and Rous-
seau. To some this was further
evidence of a Bordeaux backlash
and a broadening of the market.
The same was true of a price
rise for top Italian wines. Here,
the leading contenders were the
likes of Sassicaia, Ornellaia,
Masseto and Solaia.
However, both Burgundy and
Tuscany are simply too small
and modish to satisfy the
demands of the global market
over the long term. Equally, it
would be foolhardy to write off
Bordeaux for too long. Great
bordeaux is a like the timeless
little black dress which never
goes out of fashion. Ultimately,
bordeaux is all about price. If
Hopes rise again after correction
It is a year since the
First Growth bubble
burst but the market
learnt from 2008 and
is keeping its nerve,
says John Stimpfig
Continued on Page 2
On the rack: recent vintages were hit hard by the slowdown in the Chinese market but some fund managers now predict doubledigit growth in the market this year Dreamstime
Jancis Robinson
JUNE 19 2012 Section:Reports Time: 15/6/2012 - 16:50 User: bricem Page Name: HIC1, Part,Page,Edition: HIC, 1, 1
2

FINANCIAL TIMES TUESDAY JUNE 19 2012
Buying & Investing in Wine
the wines are perceived as offer-
ing value, they will sell.
By January, many believed
bordeaux prices were back in
the buy zone and that the
recovery was only a matter of
time. IG Wines reported Euro-
pean buyers returning to the
market and First Growth off
vintages starting to pick up at
300 a bottle. It also noted bid
offer spreads were tightening, as
buyers began to exceed sellers
by two to one. By the end of
January, the Liv-ex 100 Index
had recorded its first positive
month since June 2011.
Fund managers became
increasingly optimistic as the
Chinese year of the Rabbit gave
way to the Dragon. Andrew
della Casa of The Wine Invest-
ment Fund predicted the market
would grow by a steady 10 per
cent by the year end.
Falls such as those in 2011
have generally been followed by
strong returns for those invest-
ing at the right time, he said.
We believe this could be the
right time and predict double-
digit growth this year.
Much of this cautious opti-
mism was predicated on new
money flowing into the market,
and on two other factors. The
first was Robert Parkers latest
revised scores for the highly
regarded 2009 vintage, which
provided a timely fillip to prices.
The second was a quick and
well-priced en primeur cam-
paign, though this had yet to
happen by the middle of May.
Since Januarys initial rise of
1.4 per cent, the Liv-ex 100 Index
continued to climb closing the
first quarter up 2.5 per cent.
But after disappointing early
en primeur release prices, it fell
in April by 1.2 per cent. So far,
the recovery has been pretty
anaemic at best, says Mike
Laing, managing director of
Armit, the London-based fine
wine merchant. Im not sure
where the game-changer is
going to come from.
Its a very tricky market,
says Gary Boom, managing
director of Bordeaux Indexs.
There is still a fair amount of
stock around and returns
havent been great. Thats
partly because the big redemp-
tions that took place three years
ago have yet to be matched by
new money flowing in. I think
that will continue for some
time.
Mr Booms view is that the
main indices will only do plus
or minus 3 per cent to the end of
the year. After that, its diffi-
cult to predict, he says. But he
is confident that the market
will resume its upward trend at
some future point.
Mr Boom is launching his own
small First Growth Wine
Fund this month. I think the
time is right for certain stocks,
including a limited number of
high-scoring First Growths from
the 1990, 1996 and 2000 vintages.
At the moment though, its very
much a stock pickers market.
Nevertheless, there are some
short-term bulls. One is Peter
Lunzer, manager of Lunzer
Wine Investments. Lunzers fig-
ures suggest to him that a lot of
mature wines are slightly
behind their natural price curve
and will benefit from an expen-
sive en primeur campaign.
He predicts the market will
put on between 14 and 18 per
cent by the end of the year.
Such a recovery would cer-
tainly be celebrated by inves-
tors. But, in the world of wine
investing, only time will tell.
Hopes rise
after last
years
correction
Continued from Page 1
Robert M Parker Jr, the influen-
tial US wine critic, has been
called guru, emperor, pope, and
other names not all of them so
reverent.
Since the late 1970s, when he
began publishing his tasting
notes and launched a 100-point
ratings scale, he has redefined
the role of wine reviewer.
Through the pages of his
newsletter The Wine Advocate,
Parker has influenced not only
his readers preferences, but
many aspects of the fine wine
industry from vinification
techniques and wine styles to
pricing.
His name is now a verb (Park-
erise) used for the creation of a
style of wine that pleases his
taste: invoking it can transform
a roomful of convivial wine
geeks into a verbal mosh pit.
Yet he is now 64, and the wine
world has grown beyond his
capacity to cover even the very
top end by himself.
In the past few years, he has
expanded his team, ceding
regions to new tasters; he has
also been embroiled in allega-
tions of impropriety involving
trusted associates.
Both the world of communica-
tion and taste-formation have
changed all of which fuels the
ever-lively debate, among
Parker followers, about whether
he still sways palates and
prices.
Jaime Araujo, founder of Ter-
ravina, the wine marketing con-
sultancy, says: He is not as rel-
evant to the younger generation
of high-end buyers, who dont
collect in the traditional way, by
finding a few sure values, get-
ting on the distribution list and
repeating each year.
This reflects the luxury sec-
tor in general, whether you are
talking about young Chinese,
young Americans, young
French. They all want the top
brands, but its rare to find a
Chanel and nothing else buyer.
They want some Chanel, some
Dior and some vintage that no
one else has.
For a certain type of fine wine
buyer, one who is just starting
or who prefers to rely on num-
bers rather than experiment
and certainly for regions such
as Bordeaux (which Parker still
covers) and California (which he
has delegated) Parker points
remain the bellwether of a
wines taste and traceability.
He still sets the bar in Bor-
deaux, says Chris Adams, chief
executive of Sherry-Lehmann,
the New York wine merchant.
Positive comments on a wine
that has been released will
cause an increase in price and
negative comments will cause
prices to stagnate.
The Wine Advocate also
remains the benchmark for Cali-
fornian wines.
Sometimes, if The Wine Spec-
tator gives a very high rating,
well get a few calls, but Parker
steers sales, says James Hock-
ing, director of The Vineyard
Cellars, an importer, distributor
and retailer of Californian wines
based in Newbury, UK.
But really no one else comes
close. If Parker gives 95 points
or more, the phones dont stop,
says Mr Hocking. Many of his
clients follow Parker slav-
ishly, delaying purchases until
he pronounces, he adds. When
a new container arrives and I
call my private clients, I know
the conversation will start with
what are the scores?
Calculating the impact of
Parker points on futures and
bottled wine is a popular game,
made more challenging by fac-
toring in vintage, economic cli-
mate and especially, rescoring.
You cant really quantify the
correlation in dollars but you
can in percentage points, says
Adams, citing Parkers recent
upgrade to 100 points of numer-
ous 2009 Bordeaux (more than
he gave to any other vintage).
To compare, Chteau Latour
first growth was released at
about 540 and the far less
famous Chteau Smith Haut
Lafitte, a Graves classified
growth was released at 62.
When they both got 100
points, the price increase for
both was around 100 but, obvi-
ously, for Smith Haut Lafitte,
the percentage increase was
astronomical, says Mr Adams
But for Henning Thoresen,
chief executive of Bordeaux
Winebank Group, which sells
futures, ex-cellar Bordeaux and
manages wine investment
funds, it is precisely the possi-
bility that Parker may change
his mind that reduces his relia-
bility for long-term investment
purposes, as opposed to specula-
tion. For me, his influence is
declining, says Mr Thoresen.
One key reason was how he
handled the 2005 vintage. He
hyped the vintage, but none of
the numbers lived up to the
expectations.
When he released his final
scores after retasting in 2008, all
the potential 100-pointers were
downgraded, which caused a lot
of jaws to drop.
Mr Thoresen also says that
this year many chteaux
released their prices ahead of
Parkers pronouncements indi-
cating his diminishing rele-
vance. Some observers say it
reflects producers attempting to
exert control over prices in a
lesser vintage.
Determining the impact of
Parker points on auction prices
is harder, because of issues of
provenance and condition.
I really dont think there is a
correlation, says Charles Curtis
MW, Christies head of sales for
Asia. This is strictly anecdotal,
but intuitively Id say there are
big swings in price for the same
wine from auction to auction
independent of his scores.
A sceptic of the 100-point pro-
tocol, Mr Curtis says results for
the same wine in two auctions
may reveal a trend, but dont
tell all. Its not as simple as
saying Parker moved it up a
point and therefore in bidding,
it went two increments more.
In the same way that I dont
think its possible to quantify
the beauty of a wine on a scale
of 1-100, I dont think its possi-
ble to track the price.
There are so many factors
that go into a price at auction,
its hard to tease them apart.
Parkers nose is not as big a pointer as it was
Critics and pricing
The inventor of the
rating scale is still
controversial, says
Maggie Rosen
There is a fair
amount of
stock and
returns havent
been great
Gary Boom
Robert M Parker
T
he world of wine auctions
underwent big shifts in 2011.
Many in the trade believed the
sudden turnround in fortunes
midyear was a necessary even wel-
come rationalisation. With some
wines prices more inflated than others,
the correction brought a reassessment
of their relative value and desirability.
For the first half of 2011, auction rev-
enues continued the unwavering
ascent seen the year before, and by
June were up 58 per cent year on year.
July and August are traditionally
quiet months but, as the autumn sea-
son began it became clear that auctions
were not impervious to the wider cor-
rection in wine prices.
With a two-month delay, the Wine
Market Journal (WMJ) 150 index
which tracks prices at auction began
its descent in September. By year-end
the index had dropped 5.8 percentage
points.
Global auction revenues in the sec-
ond half were down 7 per cent on the
same period in 2010, bringing the 2011
total to $467.3m. This figure nonethe-
less represents a 20 per cent increase
on the previous year, because of a
stronger-than-ever first half.
The number of auctions remained
high, at 73 from July to December,
exactly the same as in the first half of
2011. However, sell-through rates were
down in the second half, averaging 90
per cent of lots offered compared with
94.2 per cent up to June. Subsequently,
each sale was worth less, grossing
$2.86m on average, down from $3.54m
in the first half.
More often than not, unsold lots con-
sisted of commodity Bordeaux bottles
of recent vintages, widely available
and, crucially, not yet ready to drink.
Prices for these wines had reached
untenable heights, overtaking those of
rarer, more mature equivalents.
Robert Sleigh, Sothebys head of wine
in Asia, confirmed that younger Bor-
deaux is what has suffered, but really
only the first growths. That first
growths led the downhill charge is
clear. The WMJ First Growth Bordeaux
index fell 16.3 per cent from July to
December, and a further 6.8 per cent in
the first quarter of 2012.
Buyers first-growth fatigue was par-
ticularly apparent in Asia, where the
market was flooded with Bordeaux,
according to David Wainwright, man-
aging director of Zachys Asia. There
remains ample demand for rare stuff,
he countered.
Auction houses were quick to cater
to the broadening vinous horizons of
local collectors, with a series of more
adventurous sales in Hong Kong.
In early November, Acker Merrall &
Condit held a two-day sale dedicated
almost entirely to Burgundy from a
single-owner collection. Hong Kong
buyers snapped up 98 per cent of the
1,342 lots, which together brought in
$14.5m the highest total for any auc-
tion in 2011. This helped Acker to
retain its top spot, as the only house to
bring in live wine auction revenues of
more than $100m to December, more
than two-thirds of which were gener-
ated in Hong Kong.
Christies all but caught up with
Sothebys in the race for second place,
with revenues up 34 per cent on 2010.
In another Burgundy success story,
Christies brought the private cellar of
Henri Jayer under the hammer in
Hong Kong on 10th February this year.
At the once-in-a-lifetime opportunity to
procure the fabled wines of the late
grower, all bottles on offer were sold.
Other wine regions are also shining
brightly, with the Rhne, Champagne
and Italy also performing well at auc-
tion, but Burgundy has been the pri-
mary beneficiary of the shift away
from Bordeaux. Domaine de la
Romane-Conti has replaced Chteau
Lafite as Asias darling, and therefore
everyone elses. Asia in general and
China in particular is still very much
driving the wine auction market,
despite the slowdown.
Hong Kong is outpacing rival mar-
kets in New York and London, with
growth of 40.9 per cent year on year. In
proportional terms, Hong Kong was
able to move ahead of a flat US market,
while Europes 21.6 per cent growth for
the year allowed it to retain its 19 per
cent share.
But the city lost some ground in the
last quarter, accounting for just under
half of global revenues during 2011, at
48.5 per cent. In the third quarter,
Hong Kong fleetingly crossed the half-
way mark. To April of this year, Hong
Kongs share had dropped to 44.6 per
cent.
Respective sell-through rates suggest
that the increasing focus by US auction
houses on China could be excessive.
Sell-through rates at Hong Kong auc-
2011 was a good year with a slow finish
Auctions
Ella Lister says that prices
for commodity Bordeaux,
not ready to drink, had
reached untenable heights
Fine growth: an auction in April this year in Hong Kong, which is outpacing rivals New York and London with a rise of 40.9 per cent year on year
The Asian market was
flooded with young
Bordeaux but demand
remains strong
for rare vintages
tions have gradually decreased since
peaking near 98 per cent in 2010. The
percentage of lots sold there averaged
94 per cent in 2011, and was 90.2 per
cent from January to April this year.
In the US, on the other hand, sell-
through rates rose to 95.6 per cent by
the end of last year, with auctions in
New York and Chicago easily soaking
up supply.
As prices stabilise this year, there
are signs that Hong Kong buyers are
being tempted back into the saleroom.
For private collectors Sam Lin and
Anna Lau, the auction frenzy in Hong
Kong had become off-putting. But in
March this year, they dipped their toes
back in the water, spending a total of
HK$250,000 ($32,200) at one sale.
We got some bargains, said Ms
Lau.
With a more cautious and exacting
pool of buyers, Hong Kong will not
generate the stupendous growth this
year that it has done since duty on
wine was lifted in 2008. Global auction
revenues in 2012 will be lower than last
year, with results from the first four
months of the year suggesting a total
of about $400m.
With a steady stream of buyers from
mainland China and a widening spec-
trum of wine in their sights Hong
Kong will continue to play a central
role in world wine auctions, ahead of
western counterparts.
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FINANCIAL TIMES TUESDAY JUNE 19 2012

3
One of the most absurd
aspects of the current fine
wine market is how
expensive young wine is by
comparison with mature
vintages.
While too many
Bordeaux proprietors seem
to be tempted, regrettably,
to price their non-stellar
2011 above their non-stellar
2008, it is perhaps
appropriate to turn ones
back on this unsavoury
spectacle and turn the
observation on its head.
One of the most
attractive aspects of the
current fine wine market is
how inexpensive mature
Buying & Investing in Wine
Contributors
John Stimpfig
Contributing Editor
Jancis Robinson
FT Wine Correspondent
Maggie Rosen
Ella Lister
Walter Speller
FT Contributors
Martin Brice
Commissioning Editor
Steven Bird
Designer
Andy Mears
Picture Editor
For advertising, contact:
Mark C Howarth
+44 020 7873 4885
mark.c.howarth@ft.com
or your usual representative
FT Reports are on FT.com.
www.ft.com/reports
Mature vintages can be
surprisingly affordable
Jancis
Robinson
Wine
vintages are by comparison
with their callow,
unformed infant
counterparts.
This is particularly true
of serious, classic wines
such as classed growth
bordeaux and burgundies
carrying a Grand Cru or
superior Premier Cru
classification. There is
simply no point in paying
the prices asked for such
wines unless you give
them the opportunity to
attain their full splendour
and nuance by ageing
them for many years in
bottle. You want all the
youthful elements to knit
together to form much
more complex compounds,
with flavours that are
never found in young wine
under 10 years old, say.
But the pleasure of
drinking much older wines
is huge. This is what
distinguishes wine from
other drinks: its ability to
last partly because of its
alcohol content, and partly
because its charge of
tartaric acidity helps
protect it from harmful
bacteria and thanks to
the complexity of its make-
up, to do more than that
improve with age.
A fine wine from the
1980s or older will offer a
much, much wider array of
scents than the simpler,
more brutal appeal of a
young wine and it is
likely to change
considerably in the
decanter or glass, so that
the experience of drinking
mature wine is one of the
most intellectually and
sensually rewarding acts of
consumption that I can
think of akin to
experiencing a particularly
entrancing painting or
musical performance.
But, unlike a work of
art, a bottle of wine has
necessarily to be destroyed
to be enjoyed, so we owe
venerable examples
alertness and due
attention.
As I have written,
perhaps ad nauseam, the
most glamorous and
expensive vintages of the
most famous wines that
proliferate in the market
place are extremely
expensive, and great care
is needed to ensure their
authenticity. If you want
to minimise the chances of
encountering a fake, and
maximise the chances of
securing a bargain, head
for second-tier wines and
second-division vintages.
In Bordeaux, for
example, the second-
division vintages I would
recommend for current
drinking of fully mature
wine at classed growth a
good-value notch below
first-growth level are 1996,
1995, 1994, 1993 (right
bank), 1988, 1986, 1985,
1983, 1981, 1978, 1975, 1971,
1964, 1962 and 1952. Other
vintages in the second half
of the 20th century tend to
be either too expensive, too
disappointing or too young.
Because most bordeaux
is made in such quantity,
it is not too difficult to
find mature vintages still
lurking on wine lists
around the world. The
brilliant and improving
wine search engine, wine-
searcher.com, is an
invaluable aid to locating
old wines. You can refine
your search by bottle size,
location, whether you are
prepared to buy at auction,
name of the wine or
appellation, and even the
sort of price you are
prepared to pay.
I recently listed some of
my favourite suppliers of
fine wine, and you can
check up on how a
particular wine is tasting
at present by checking
out the free
cellartracker.com or
subscription websites such
as erobertparker.com,
winespectator.com and,
ahem, jancisrobinson.com
all of which have tens of
thousands of tasting notes.
The grander the wine,
the longer it is likely to be
able to last, although some
generalisations may be in
order, such as that Saint-
Estphes tend to be
particularly slow to unfurl,
Margaux and lesser Saint-
Emilions much quicker.
Sauternes and Barsac, the
great sweet white wines of
Bordeaux, are practically
indestructible.
There is another sort of
wine that it is crazy to
broach too young, and
which can last even longer
than a classed growth
bordeaux, and that is
vintage port. Drinking
young vintage port is
really no more fun than
drinking a much cheaper
single quinta port of
roughly the same age. But
a fully mature vintage port
is a miraculous thing, with
every bit as much nuance
as the finest mature table
wine.
Sadly for those dedicated
some would say
demented individuals
who spend their lives
making the rich, fortified
wines of Portugals Douro
Valley, in the past few
decades vintage port has
not appreciated in value
nearly as much as the
most respected table wines,
nor as much as it deserves.
And, because vintage
port is, alas, not
fashionable, there is plenty
of it on the market not
least because Oxbridge
colleges and gentlemens
clubs have been divesting
themselves of their
holdings of it.
So, if you are seeking a
fine 1983, for example, you
could get a bottle of 1983
vintage port, already
drinking well but nowhere
near its peak, from a top
supplier for about 50 a
bottle, whereas that sum
would get you only the
most modest 1983 red
bordeaux.
Other fine wines
particularly burgundy, and
to a certain extent rhne
tend to be made in smaller
quantities, so locating fully
mature examples of good
provenance is much more
difficult. But at least the
secondary market for all
but a handful of names is
virtually non-existent, so it
is possible to pick up
bottles bought from private
cellars where they have
spent most of their days.
Generalising about
burgundy vintages is a
mugs game, which I am
loath to play. Suffice it to
say that superior burgundy
tends to have two periods
of drinkability: one in its
youth (youthful charm is a
more common attribute in
a burgundy than in the
more obviously tannic
wines of Bordeaux); and
one in grand old age. You
might strike lucky and find
a delicious example of the
latter.
See more than
68,000 tasting notes
on Purple Pages of
JancisRobinson.com
Because most bordeaux is made in such quantity, it is not too difficult to find mature vintages lurking on wine lists Reuters
JUNE 19 2012 Section:Reports Time: 15/6/2012 - 16:50 User: bricem Page Name: HIC3, Part,Page,Edition: HIC, 3, 1
4

FINANCIAL TIMES TUESDAY JUNE 19 2012
Buying & Investing in Wine
Passion play Investing for the love of it
In wine terms, passion and
investment are not a classic
pairing. The words wine
investment, uttered in the
presence of any wine critic or
producer, will be met with a
look of practised disgust.
Speculation is widely viewed as
a negative force in the wine
market. But why?
Because it pushes up prices,
of course, but also because
oenophiles dont see wine as a
product. Wines are individual,
reflecting soil, climate, and craft,
and consumers should have a
passionate response when not
if they drink it.
The whole point of wine
investment originally was to fund
your cellar; to drink great wines
for nothing, says Jo Purcell, MD
of Farr Vintners in Hong Kong.
Hong Kong buyer George
Tong sees his collection as
pure passion, and will not
purchase a wine he doesnt
want to drink himself, however
highly rated. Mr Tong is not
exceptional. Purcell is convinced
none of her clients buys wine
purely for investment.
For Pierre Lurton, general
manager of Chteau Cheval
Blanc and Chteau
dYquem, collecting wine
should be all about the
desire to obtain a certain
bottle for love and for
pleasure.
This doesnt mean
passionate collectors are
not also investors. Asian
buyers are investors in
everything, says David
Wainwright, managing
director of Zachys
Asia, adding that
every one of his
clients has an
interest in wine,
and starts out
loving wine, tasting
wine.
Frdric Engerer,
Chteau Latours
general manager,
finds the debate a
bit useless, as an
investor may
become a drinker
one day, and
sometimes drinkers
resell some cases.
Accidental
investment in wine
is an ageold
phenomenon. Only
recently have the
pros turned their hand to wine
investment. Since the advent of
wine funds, the Livex 50 Index
has increased by 290 per cent.
In other words, prices of the
Bordeaux first growths which
make up the index have risen at
a compound annual rate of 12
per cent. The argument that
speculation pushes up prices
seems irrefutable.
By June last year, prices had
reached an alltime high. The
market reacted to unsustainably
and undrinkably expensive
first growths, and by yearend
they lost a quarter of their
value. This year, prices seem to
have reached a plateau.
Wine funds adopt two broad
approaches to investing: strictly
financial or passionbased. Ex
finance types swear by a
rigorous analytical approach,
usually resulting in risk averse,
Bordeauxonly portfolios.
Miles Davis, director of Wine
Asset Managers, believes it is all
too easy for a wine lover to
cloud the difference between
an investment and something
theyd like to drink.
Other funds are happy to let a
passion for wine influence
strategy. Luxembourg fund
Nobles Crus allows for
significant holdings in
Burgundy and also some
Italian wines.
Christian Roger, the
investment manager,
believes you can decide to
invest in a wine only if you
understand it and for that
you must have passion,
you must taste again
and again, you must
love this particular
wine.
These less
restrictive funds
have prospered in
recent months
because of their
diversified portfolios.
Burgundys stability
while Bordeaux
prices plunged
allowed Nobles Crus
to buck the trend
with an 11.25 per
cent gain for 2011.
Passion can pay.
Ella Lister
Some go for
riskaverse,
Bordeaux only
portfolios
I
talys vinous reputation
may be firmly based on its
reds, which come in an
astonishing variety of
styles, but its whites deserve
attention too.
The reason they have been
relatively unnoticed has, in
part, to do with Pinot Grigios
worldwide success. Although a
useful grape, the bland
offerings channelled through
supermarkets, neither offend,
nor beguile, anyone.
Unfortunately, it is still Italys
signature white, if only by
sheer volume.
The consumer is not to
blame. The fault lies with Italy,
which has only recently begun
to reappraise its indigenous
varieties after years of neglect.
Before that, the wine sector
was driven by technology,
generous yields and bestsellers
(that Pinot Grigio again) and
internationally appealing styles,
such as Chardonnay and
Sauvignon Blanc.
It also encouraged merciless
capitalisation on well-known
names by enlarging famous
regions ad absurdum and
allowing sky high yields, Soave
Classico being just one victim
of this policy.
But, from the 1990s, a sense
of tradition and identity started
to reassert itself. This triggered
renewed interest from a new
generation in local varieties,
which only 20 years ago were
considered average, at most.
The first step this generation
took was to reduce yields.
Quality shot up, and the
previously scorned local
varieties proved to have bags
of personalty and style.
Italy, with its wide range of
soil compositions, altitudes and
climates can produce any wine
style the world desires. But its
identity and originality is
determined by its indigenous
varieties, cultivated for
hundreds, if not thousands, of
years. It is a heritage that
cannot be copied, and just the
thing for palates jaded with a
handful of international
varieties.
Arneis Although red wine
territory, Piemonte is home to
several whites. But it is Arneis,
with its subtle almond and
white fruit nose, which has the
edge over Cortese (or Gavi), the
regions bestseller. Because of
its low yields, Arneis almost
disappeared in the 1970s, but a
few producers, including Bruno
Giacosa, clung to it. Top
producers today are Matteo
Correggia, and Angelo Negro
&Figli (single vineyard Arneis
Pernaudin and Arneis Sette
Anni).
Garganega One of Venetos
most characterful whites and
main ingredient in Gambellara
and Soave. But while enormous
yields often result in vapid
wines, Garganega, in the right
hands, can be a true expression
of terroir, showing chamomile,
pear and mineral notes carried
by fine acidity. Top producers
include Pieropan, Angiolino
Maule (cask-aged Pico) and
PRA (Soave Classico Staforte).
Ribolla Gialla Friuli may be
famous for its international
whites, but the trend for all
things indigenous proves to be
the wind in Ribolla Giallas
sails. Confined to the Collio
hills near Oslavia, it used to be
fermented on the skin long
before this technique became
fashionable with the natural
wine movement, giving it
almost a red wine quality.
Ribolla comes in fresh, spritzy
versions as well as serious,
cask-aged ones. Highly
recommended are Primocic,
Dario Princic, Radikon and La
Castellada, each producing a
modern as well as a skin
fermented version.
Verdicchio The perception of
Verdicchio has been shaped by
one of Italys great marketing
successes: Fazi-Battaglias
green amphora bottle, produced
by the millions, reaches every
corner of the world, putting
Verdicchio on the international
map. But perhaps it doesnt do
justice to Verdicchios
versatility, or its fabled ageing
capacity, which turns it into a
nutty, lemony and minerally
wine. Top producers include
Bucci, Collestefano, La
Monacesca and Sartarelli.
Fiano Campania, one of Italys
most promising yet inert
regions, is home to several
great whites. Considered a sun-
drenched corner of the
peninsula, its mountainous
centre is actually quite cool,
and ideal for slow ripening
whites such as the charismatic
Fiano. Redolent of peach and
lemon it turns minerally and
smoky with age. Fiano comes
in several styles, from
commercial, spritzy, tropical
fruit quaffables to fine
examples, which can stand the
test of time. Top producers are
Pietracupa, Feudi di San
Gregorio and Il Tufiello.
Carricante While Etna Rosso
is taking its rightful place
within the ranks of Italys fine
wines, Etna Bianco, made of
the local Carricante, is at least
as great. It can be found in
some of Europes highest
vineyards, 900m or more,
where, during a long, cool
ripening season, Carricante
develops fine scents of white
flowers, lemon and peach. Its
high acidity makes it a perfect
candidate for bottle ageing,
which it needs to show its best.
Benantis Pietramarina proves
patience pays off. Other
overachievers are Graci,
Fessina, Barone Villagrande
and Biondi.
Future of
whites lies
in the past
Profile
Italian whites
Producers are waking
up to their rich store
of heritage varieties,
as are the consumers,
says Walter Speller
Let us spray: work on the vines in a modern Italian vineyard at Barolo, Piedmont Zoonar
JUNE 19 2012 Section:Reports Time: 15/6/2012 - 16:50 User: bricem Page Name: HIC4, Part,Page,Edition: HIC, 4, 1