Finance news

Thailand’s central bank will probably increase interest rates for the fourth time this year, as rising food and fuel prices become a pivotal issue for the July 3 general election.

The Bank of Thailand will boost its benchmark one-day bond repurchase rate by a quarter of a percentage point to 3 percent, according to all 16 economists surveyed by Bloomberg News, adding to increases of the same amount each in January, March and April. The decision is due at 2:30 p.m. in Bangkok tomorrow.

Prime Minister Abhisit Vejjajiva has pledged higher wages and capped food and diesel costs ahead of the poll, as the opposition faults his Democrat party for jumps in the cost of living. The central bank has said inflation risks exceed threats to growth, and predicts the economy will weather disruption from Japan’s earthquake to grow 4.1 percent this year.

“The monetary authority will continue to fight price pressures, which still appear to be rising,” said Benjarong Suwankiri, an economist at TMB Bank Pcl in Bangkok. Populist policies promising extra spending may add to the challenge of containing inflation, he said.

The Thai baht has declined about 1 percent against the dollar this year, according to data compiled by Bloomberg, aiding exports while providing less of a damper against a surge in global commodity costs. The benchmark SET Index of stocks has climbed 4.2 percent in the same period, more than any other Southeast Asian market, as trade gains and consumer spending boosted corporate earnings.

General Election

The forthcoming election in Southeast Asia’s second-largest economy will pit Abhisit’s Democrat party against allies of fugitive ex-Premier Thaksin Shinawatra, who was ousted in a 2006 coup and lives overseas. About 100 people have been killed following disputes over the last election in 2007.

The opposition Pheu Thai Party, led by Thaksin’s sister, Yingluck Shinawatra, has used billboard advertisements to blame Abhisit for rising costs. The prime minister pledged in February to boost the minimum wage by 25 percent over two years to help the public cope, while Pheu Thai has promised a larger increase as the parties vie for votes.

“We foresee risks that some populist policies promised by the political parties may instigate additional pressures on inflation,” Standard Chartered Plc analysts including Tai Hui wrote in a May 19 note.

Neighboring Asian central banks from the Philippines to China are also raising rates or allowing currency appreciation to fight inflation. The Philippines has lifted borrowing costs twice this year and yesterday reported 4.9 percent economic growth last quarter from a year earlier.

Economic Growth

Thailand’s gross domestic product climbed 2 percent in the first quarter from the previous three months, the fastest pace in a year. Bank of Thailand Governor Prasarn Trairatvorakul said last week the expansion was “better than expected,” adding inflation pressure remains “high.”

Consumer prices advanced 4.04 percent in April from a year earlier, the fastest pace in 15 months. The nation may need to curb diesel subsidies as funding runs out, according to Finance Minister Korn Chatikavanij, pointing to a future shift that could stoke inflation.

Core prices, which exclude fresh food and fuel, rose 2.07 percent last month from a year earlier, accelerating from a 1.62 percent pace in March. The central bank uses the core figure to guide policy and aims to keep it below 3 percent. It may rise to that level by September, Deputy Governor Atchana Waiquamdee said May 27.

Thailand’s manufacturing output declined the most in 20 months in April after the March 11 disaster in Japan, its largest trading partner, disrupted supply chains.

Local companies such as Aapico Hitech Pcl (AH), an auto parts maker, have cut revenue forecasts as the interruptions reduce vehicle production in Southeast Asia’s second-largest economy.

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Bank stocks favored by investors are few and far between these days.

Despite improved earnings and more stringent safety requirements, the stocks of financial institutions have lagged behind the broader market in 2011. Weighing down their prospects are a slowly recovering economy and limited loan growth.

Many corporations that turned frugal during recession don’t need loans because they are flush with cash, while a high unemployment rate means fewer consumers are in a position to qualify for loans.

Disturbing news about banking practices over the past three years also sapped the confidence that conservative investors once had in bank stocks.

“Banks are safer now than they’ve been in the past 75 years, with loan-to-deposit ratios in the best shape in 35 years,” observed Richard Bove, banking analyst for Rochdale Securities LLC of Stamford, Conn. “At the same time, the probability of interest rates’ moving up would drive the value of bank assets lower no checking account payday advance.”

In the wake of a huge first-quarter jump in earnings that was based on improved balance sheets, bank earnings should be extraordinarily strong for the next 12 to 18 months, he said. None of that improvement is reflected in share prices.

“For investors in large-cap bank stocks, the biggest frustration has been the banks’ inability to return meaningful capital to shareholders,” acknowledged David Honold, financial services analyst with Turner Investments in Berwyn, Pa. “Very important components of total return in the banking industry throughout the years had been dividends and share repurchases.”

That’s why Honold favors the stock of U.S. banks with unique niches or connections to overseas markets that are stronger than our own domestic market.

East West Bancorp Inc. (EWBC)

Russia offered Friday to mediate the exit of Libya’s longtime leader, cranking up pressure on Moammar Gadhafi as France and Britain seek to intensify their bombing campaign.

“He should leave,” Russian President Dmitry Medvedev said of Gadhafi.

Frustration is mounting in Moscow and Western capitals that the NATO campaign has dragged into its third month with no obvious end in sight. Analysts are skeptical as to whether Russia would have any leverage over Gadhafi, and the leaders of France, Britain and Germany said there’s no point in negotiating directly with Gadhafi himself.

Medvedev, speaking at a news conference at the Group of Eight summit in Deauville, France, said he is sending envoy Mikhail Margelov to the rebel stronghold of Benghazi, Libya, immediately to start negotiating. Medvedev said talks with the Libyan government could take place later.

Medvedev said Russia will use its contacts with both Gadhafi’s government and the rebels to try to negotiate a peaceful end to the conflict.

Russian officials have been critical of Gadhafi but also complain about what they called an excessive use of force by NATO and have urged a quick end to hostilities. Russian Foreign Minister Sergey Lavrov recently held talks in Moscow with representatives of both Gadhafi’s government and the rebels.

Asked whether Russia could offer Gadhafi asylum, Medvedev gave a firm negative answer. He added that a place for Gadhafi to stay and other details could be discussed after he steps down.

Margelov told reporters earlier Friday that it’s necessary to negotiate with all “reasonable” representatives of the Libyan government, including Gadhafi’s sons.

A Libyan rebel spokesman, Abdel-Hafidh Ghoga, said Friday that Russia’s moves to persuade Gadhafi to leave power were too little, too late.

“It’s too late, and it’s not a big deal,” Ghoga, the vice-chairman of the opposition National Transitional Council, told a rally in the eastern city of Benghazi.

A Moscow-based Middle East expert expressed doubt that Gadhafi will agree to step down after Benghazi-based opposition leaders rejected a cease-fire agreement proposed by the leaders of the African Union in late March.

Gadhafi “will fight to the end with unpredictable consequences for everyone involved,” Yevgeny Satanovsky, head of the Moscow-based Middle East Institute, told The Associated Press. “He already agreed to leave, but Benghazi needs his scalp.” Satanovsky said that Gadhafi’s unpredictability leaves little room for a tangible prediction of what will happen if Russia steps in as a mediator.

Rebel fighters clashed with government forces to the south and west of the rebel-held city of Misrata on Friday. Dr. Mustafa Omar of Hikma hospital said five rebels were killed and 26 wounded. It was unclear if any government soldiers were killed.

While rebel fighters have pushed Gadhafi’s troops to the city’s outskirts, the city, Libya’s third largest, has been under siege for months, receiving food and medical supplies only by sea payday loans.

U.S. National Security Council spokesman Tommy Vietor said Russia’s suggestion that it could help mediate Gadhafi’s exit is “a positive development and further proof that the international community is becoming more united in its belief that Gadhafi must go.”

French President Nicolas Sarkozy, hosting the G-8 summit, said Friday there is “great unanimity” about an “intensification of the military intervention” to protect civilians from Gadhafi’s forces. He did not say how, but France and Britain said this week they are ready to deploy attack helicopters in the campaign.

British Prime Minister David Cameron told reporters in Deauville that the deployment of helicopters was “part of the process of turning up the pressure,” on Gadhafi. He said the campaign is entering a “new phase.”

“Now there are signs that the momentum against Gaddafi is really building,” Cameron said. “We know that we’re on the right side, we’re doing the right thing, the pressure is telling.”

On Thursday, Libya’s government for the first time said it is prepared to speak with its rebel adversaries, signaling that months of fighting and NATO bombardment may be closer to forcing some concessions. At the same time, it insisted that Gadhafi would not relinquish power.

In response, NATO spokeswoman Oana Lungescu said “words are not enough.”

The commander of NATO’s operations in Libya said Friday that French and British attack helicopters will operate in Libya under NATO’s command, rather than under separate national command.

Canadian Lt. Gen. Charles Bouchard, speaking by video link from Naples, Italy, would not say how or where the helicopters would be used, saying only that he wanted to develop “an effective, aggressive but safe” operation. He said they could help target military vehicles that are difficult to identify from higher altitudes.

So far, the NATO campaign has relied largely on strike jets dropping munitions from an altitude of about 15,000 feet (4,600 meters). The helicopters, flying much lower and slower, could more accurately identify targets in densely populated areas while risking fewer civilian lives. But such flights would also expose the helicopter crews to greater risks.

Since March 31, NATO has commanded an international operation to protect civilians and enforce a no-fly zone, as Gadhafi has sought to put down a rebellion against his rule.

Bouchard said Friday that forces loyal to Gadhafi have laid land mines near the rebel-held city of Misrata. Previously, NATO had accused the Gadhafi regime of mining the waters off the Libyan coast.

He defended the efficacy of the NATO operation against critics who believe the conflict has become a stalemate, saying that humanitarian aid is moving more freely and many civilian lives have been saved.

“I believe today that Libya is a much safer place than it was on” March 31, Bouchard said.

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Reinsurance Group selling notes

Prime Minister George Papandreou is meeting opposition party leaders in an effort to seek consensus on extra austerity measures being taken to deal with Greece’s crippling debt crisis.

Papandreou met Tuesday morning with conservative party leader Antonis Samaras, and was to meet with another four party leaders later in the day. The head of the Communist party, which is influential with trade unions, has refused to meet.

The talks come amid increasing pressure from the European Union, which has called for cross-party support in Greece for a midterm austerity program, arguing that political bickering could derail the struggling country’s fiscal efforts.

Greece is currently dependent on a euro110 billion ($154 billion) bailout from the EU and International Monetary Fund.

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Iceland closed its main international airport Sunday as a volcanic eruption sent a plume of ash, smoke and steam 12 miles (20 kilometers) into the air.

Airport and air traffic control operator ISAVIA said Keflavik airport was closed at 0830 GMT (4:30 a.m. EDT), and no flights were taking off or landing.

Spokeswoman Hjordis Gudmundsdottir said the ash plume was covering Iceland, but “the good news is that it is not heading to Europe.”

She said the ash was blowing west toward Greenland instead.

She said officials were investigating whether Iceland’s other airports could take Keflavik-bound flights.

Trans-Atlantic flights were being diverted away from Iceland, and there was no sign yet that the eruption would cause the widespread travel disruption triggered last year by ash from the Eyjafjallajokull volcano.

In April 2010, officials closed the continent’s air space for five days, fearing the ash could harm jet engines. Some 10 million travelers were stranded.

The Grimsvotn volcano, which lies under the uninhabited Vatnajokull glacier, began erupting Saturday for the first time since 2004.

Pall Einarsson, a geophysicist at the University of Iceland, said last year’s eruption was a rare event and Grimsvotn would likely have much less effect on international air traffic.

“The ash in Eyjafjallajokull was persistent or unremitting and fine-grained,” Einarsson said. “The ash in Grimsvotn is more coarse and not as likely to cause danger as it falls to the ground faster and doesn’t stay as long in the air as in the Eyjafjallajokull eruption.”

Sparsely populated Iceland is one of the world’s most volcanically active countries and eruptions are frequent.

Eruptions often cause local flooding from melting glacier ice, but rarely cause deaths. Police closed a main road near the volcano Sunday as heavy ash fell.

The Grimsvotn volcano also erupted in 1998, 1996 and 1993. The eruptions have lasted between a day and several weeks.

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Fewer people purchased previously occupied homes in April, a troubling sign that the weak housing market remains a drag on the economy.

Sales fell 0.8 percent in April to a seasonally adjusted annual rate of 5.05 million units, the National Association of Realtors said Thursday. That’s far below the 6 million homes a year that economists say represents a healthy market.

Purchases made by first-time homebuyers did increase but not nearly enough to signal a housing recovery is on the way. First-time buyers are critical because they typically improve their properties and invest in their communities, a combination that helps home values rise.

Foreclosures, on the other hand, force prices down. They represented more than a third of all sales in April and more are expected in the months ahead.

Since the housing boom went bust, sales have fallen in four of the past five years and hit a 13-year low last year. Declining home prices and low mortgage rates haven’t been enough to boost sales this year.

Some who want to buy can’t, mostly because banks have tightened lending requirements and are insisting on larger down payments. Many buyers who can qualify for loans are holding off. They are worried that home prices have yet to bottom out.

Economists say it could be years before the housing market fully recovers.

A growing problem is that some sales that are under contract are falling apart. A separate survey from the trade group found 11 percent of Realtors said a contract was canceled because an appraisal came in below the negotiated price. And 14 percent said a contract was renegotiated to a lower price because of a low appraisal.

The median sales price in April was $163,700. That’s down 5 percent from the same month one year ago. The median price of a new home is now nearly 31 percent higher than the median price for a previously occupied home _ or twice the normal markup.

The gap is largely because of the flood of foreclosures or short sales _ when the lender accepts less than what is owed on the mortgage. Those sales are forcing down prices.

Sales of homes at risk of foreclosure fell in April. But they still made up 37 percent of all purchases. And a large number of pending foreclosures are backlogged in the courts or held up by state and federal probes into troubled foreclosure practices by lenders.

A record 1 million homes were lost to foreclosures last year and foreclosure tracker RealtyTrac Inc. expects 1.2 million more will be lost this year.

Another problem for the housing market is the glut of unsold homes. In April, the supply rose to nearly 3.9 million. At last month’s sales pace, it would take more than 9 months to clear those homes. Analysts say a healthy supply can be cleared in six months.

The increase in unsold inventory “should continue to weigh on prices,” said Dan Greenhaus, chief economic strategist at Miller Tabak + Co.

The situation is much worse when taking into account the “shadow inventory” of homes, economists say. These are homes that are in the early stages of the foreclosure process but, because of backlogged courts or the government probes, have not hit the market for re-sale.

The Mortgage Bankers Association said Monday that about 8.3 percent of homeowners missed at least one mortgage payment in the January-March quarter when adjusted for seasonal factors. That’s up 0.7 percent from the previous quarter.

Sales fell across most regions of the country. In April, sales declined 7.5 percent in the Northeast, 1.6 percent in the West and 1 percent in the South. But they rose 5.7 percent in the Midwest.

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Europe’s top officials closed ranks Thursday to demand that the IMF’s next leader be one of their own, someone with enough technical expertise and political savvy to handle the continent’s relentless debt crisis.

Frenchman Dominique Strauss-Kahn, who has been widely praised for his leadership of the Intentional Monetary Fund and its involvement in solving Europe’s woes, resigned Wednesday to devote “all his energy” to fighting sexual assault charges in New York.

The move heated up simmering debate over his successor, with Europe aggressively staking its traditional claim to the post even as fast-growing nations like China and Brazil say it’s time to break that monopoly and seek an IMF chief from a developing nation. The Washington, D.C-based organization is empowered to direct billions of dollars to stabilize the global economy.

Hours after Strauss-Kahn’s resignation, everyone from the European Commission to the German chancellor to the French finance minister _ herself a potential candidate _ said the replacement should come from Europe. Not because of any tradition, they insisted, but because intimate knowledge of Europe’s debt crisis should be a critical element of any candidate’s portfolio.

“From a European point of view, it is essential that the appointment will be merit-based, where competence and economic and political experience play the key role,” said Olli Rehn, European Commissioner for Monetary and Economic Affairs. “And in this current juncture it is a merit if the person has quite solid knowledge of the European economy and decision making.”

France’s Finance Minister Christine Lagarde has in recent days been touted in many European capitals as a good choice. A sharp, articulate negotiator, she has a strong international reputation and impeccable English after living in the United States for many years.

“I am convinced that she is a good candidate. I made a few trips with her to Asia. I was able to verify her popularity among ministers of large emerging countries,” France’s transport minister, Thierry Mariani, told France-Info radio Thursday.

Despite Lagarde’s popularity, Mariani was the first member of the French government to speak about her publicly.

That’s partly because she is a member of French President Nicolas Sarkozy’s conservative UMP party, and if Sarkozy openly pushes for her candidacy, that could fuel the widespread belief in France that the accusations against Strauss-Kahn were part of a conspiracy to knock him off what appeared to be his march toward the French presidency.

Lagarde herself mentioned no names but said she too supported a European for the job.

“I’m a true European and I’m convinced that Europe is the way to go, as far as we are concerned,” she told reporters on a visit to a French supermarket. “I am a convinced European and I think that for such a candidacy, the Europeans must be united.”

In Berlin, German Chancellor Angela Merkel pushed for a quick decision on a successor to Strauss-Kahn and underlined her hopes for another European.

“It is of great significance, of course, that we find a quick solution,” she said in Berlin Thursday, without naming specific candidates.

The IMF’s executive board released a letter from Strauss-Kahn on Wednesday in which he denied the allegations against him but said he felt he must resign to protect his family and the IMF.

Strauss-Kahn is facing a bail hearing Thursday in New York that could have spelled the end of his leadership of the IMF anyway. He faces charges of assaulting a maid in a New York hotel room and has been jailed in New York since Monday.

The maid, a 32-year-old immigrant from the West African nation of Guinea, told police the 62-year-old Strauss-Kahn came out of the bathroom naked, chased her down, forced her to perform oral sex on him and tried to remove her underwear before she broke free and fled.

The IMF’s statement said the process of choosing a new leader would begin, but in the meantime John Lipsky would remain its acting managing director.

Europeans have led the IMF since its inception after World War II. Americans have occupied both the No. 2 position at the IMF and the top post at its sister institution, the World Bank. The World Bank funds projects in developing countries.

Developing nations see Europe’s stranglehold on the position as increasingly out of touch with the world economy. China’s is now the world’s second largest economy. India’s and Brazil’s have cracked the top 10. Many emerging economies have become forces of financial stability, while rich countries have become weighed down by debt.

“We must establish meritocracy, so that the person leading the IMF is selected for their merits and not for being European,” Brazilian Finance Minister Guido Mantega said Wednesday. “You can have a competent European … but you can have a representative from an emerging nation who is competent as well.”

China suggested it was time to shake things up at the IMF, with Foreign Ministry spokeswoman Jiang Yu saying the leadership “should be based on fairness, transparency and merit.”

The United States has a major say in determining who will head the fund, in part because it holds the largest number of votes. The prevailing view among analysts and former Treasury officials appears to be that Washington would back a strong European candidate who could be approved in a smooth process.

Other potential European candidates include Germany’s former central bank chief, Axel Weber; the head of Europe’s bailout fund, Klaus Regling; and Peer Steinbrueck, a former German finance minister.

Candidates from elsewhere include Turkey’s former finance minister, Kemal Dervis; Singapore’s finance chief, Tharman Shanmugaratnam; and Indian economist Montek Singh Ahluwalia.

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India’s inflation was faster than estimated in April, adding pressure on the central bank to extend interest-rate increases as the biggest rise in gasoline tariffs in three years threatens to intensify price gains.

The wholesale-price index rose 8.66 percent in April from a year earlier, the commerce ministry said in a statement in New Delhi today. The median of 19 estimates in a Bloomberg News survey was for an 8.5 percent climb. Prices advanced a revised 9.1 percent in March, according to data compiled by Bloomberg.

The Reserve Bank of India pledged to maintain the fight against inflation after boosting borrowing costs this month for the ninth time since mid-March 2010, the fastest pace of rate rises among major Asian economies. The nation increased the cost of gasoline as much as 8.5 percent yesterday, triggering protests by the main opposition party.

“Inflation will further accelerate after hikes in oil prices, meaning the central bank’s focus will have to be on tightening to control inflation,” said Rupa Rege Nitsure, a Mumbai-based economist at Bank of Baroda. “There is going to be no respite from inflation this year.”

The Bombay Stock Exchange’s Sensitive Index fell 0.9 percent as of 1:42 p.m. in Mumbai after the inflation report. The rupee weakened 0.4 percent to 45.07 against the dollar, while the yield on the 7.8 percent note due April 2021 was up five basis points from 8.25 percent before the report.

‘Elevated’ Inflation

The ministry announced March’s revision after the release, saying the wholesale-price index has been adjusted from April 2004 after errors were discovered.

Governor Duvvuri Subbarao said on May 3 inflation will stay at an “elevated level” until September as he raised the central bank’s repurchase rate by half a percentage point to 7.25 percent. Counterparts from China to South Korea have also extended rate increases as Asia fights prices pressures spurred by elevated oil and food costs.

Monetary tightening in India will slow growth this year and help ease inflation to 6 percent “with an upward bias” by March 31, 2012, Subbarao said. India’s economy may expand “around 8 percent” in the year through March from 8.6 percent in the previous 12 months, he estimated.

For now, indicators such as industrial production and credit expansion show that consumer demand is holding up fast cash without a hassle.

Industrial Output

Industrial output grew 7.3 percent in March from a year earlier, the fastest pace in five months, the commerce ministry said May 12. Commercial credit given by lenders including ICICI Bank Ltd., the nation’s biggest private bank, rose 22 percent from the previous year as of April 22, more than the 19 percent rate prescribed by the Reserve Bank.

Stronger consumer demand is giving companies scope to charge more for their products.

Maruti Suzuki India Ltd. (MSIL), India’s largest carmaker, boosted the prices of its vehicles by as much as 9,000 rupees ($200) last month, Mayank Pareek, the automaker’s head of sales, said April 5.

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