Year: 2010

The pressure on Prudential chief Tidjane Thiam to quit in the wake of the insurer’s failed bid for Asian rival AIA has eased, with big investors refusing to put their weight behind an attempt to remove him.

Both Thiam and Pru chairman Harvey McGrath faced calls to step down after the insurer’s $35.5bn bid for AIG’s Asian arm hit the rocks in early June, leaving the company to pay out £450m in fees.

Some smaller shareholders have campaigned for Thiam or McGrath to go, but the firm’s biggest investors have not so far taken the bait.

One of the insurer’s top investors told reporters: “I do not think there is any catalyst for (the debate) carrying on because there isn’t an annual general meeting to vote on management for another 10 months.”

“I think it has died down,” the shareholder said. Asked whether he felt the CEO and chairman would be allowed to stay on, the shareholder said: “I think so.”

A second large shareholder said it had taken no action against the senior executives.

A third investor, familiar with moves to remove either Thiam or McGrath, said that while some shareholders would still like a head to roll, they do not have enough support from more influential Pru owners.

“The very largest shareholders are reluctant to participate in anything that would initiate that…(it’s) sort of stuck,” the investor said.

Other large investors declined to comment.

Speculation on possible candidates to replace McGrath has included former city minister Paul Myners.

Shares in Prudential, which is issuing its first-half results on August 12, fell by as much as 20 percent immediately after it announced the deal in early March.

The stock rallied following the failed takeover, but is still down around seven percent compared with the pre-deal price of 602p per share.

Prudential declined to comment.

The International Monetary Fund has chosen not to call the yuan “substantially” undervalued, a move that recognises China’s efforts to free up its exchange rate and avoids friction with an increasingly influential shareholder.

The summary of an annual review of China’s policies omitted the contentious word, used by IMF Managing Director Dominique Strauss-Kahn as recently as June, which has long riled Beijing.

Several members of the IMF’s 24-member executive board believed the Chinese currency was too cheap, the fund said.

But others said a structural reduction in the balance of payments surplus was already unfolding thanks to past steps to boost consumption, while others took issue with an assessment by IMF staffers that the yuan was substantially undervalued.

“This does reflect a softening in the board’s position about the degree of adjustment that is needed in the Chinese exchange rate regime,” said Eswar Prasad, a senior fellow at the Washington-based Brookings Institution and a former IMF official.

He said this was reflected in statements to the IMF board, that China had already made a big move towards greater currency flexibility and progress in rebalancing demand.

Beijing dropped the yuan’s 23-month-old peg to the dollar and reverted to a managed float on June 19. China’s trade surplus has also shrunk considerably as government efforts to pump up the economy have sucked in imports of commodities and capital goods.

“On both counts this conciliatory tone is a little premature, because despite the announcement there hasn’t been that much movement of the Chinese currency. Any notion that they have in fact successfully started rebalancing their economy is also quite premature,” Prasad said.

Staff still undervalued
The yuan has risen 0.7 percent against the dollar since it was unshackled from the US currency.

Prasad said IMF economists reckoned the yuan was still between five percent and 27 percent undervalued depending on the methodologies used. A diplomat in Beijing confirmed the range.

“Several directors agreed that the exchange rate is undervalued. However, a number of others disagreed with the staff’s assessment of the level of the exchange rate, noting that it is based on uncertain forecasts of the current account surplus,” the IMF said.

Prasad said IMF economists are projecting a big rebound in the current account surplus, which has fallen to around four percent of GDP, whereas China is contending that it will stay at the new, lower level.

People familiar with the board’s deliberations said representatives of the Group of Seven rich nations supported the IMF staff’s conclusions but did not specifically call the yuan “substantially” undervalued.

Reflecting the discussion, the board’s concluding statement omitted the disputed phrase.

China was so angry with the fund’s exchange rate views that it withheld cooperation on the annual review from 2007 to 2009.

Beijing, though, has gradually been gaining clout in the IMF. Last year it bought $50bn worth of notes to beef up the fund’s capital and a deputy governor of China’s central bank, Zhu Min, has started work as a special assistant to Strauss-Kahn.

Resource shift
The IMF’s choice of words is the second qualified recognition in July of the progress China is making in liberalising its exchange rate.

On July 8, the administration of President Obama said the yuan remained undervalued but declined to designate China a currency manipulator.

That finding angered US lawmakers, many of whom argue that China is unfairly holding down its currency to favour its exporters and are threatening punitive action.

But a Chinese academic rejected US criticism and said the yuan, also known as the renminbi, was not too cheap.

“The US trade deficit with China has nothing to do with the yuan’s exchange rate,” He Weiwen, a professor at the University of International Business and Economics, wrote in the People’s Daily.

The IMF said the scrapping of the dollar peg would increase the central bank’s flexibility to tighten monetary conditions.

A stronger yuan rate would also be good for the rebalancing of the domestic and global economies by shifting China’s growth from exports and investment to private consumption, it said.

On other issues, the board supported a gradual phase-out of China’s massive fiscal stimulus in 2011, provided the current trajectory for the economy – the IMF expects continued robust growth with benign inflation – is maintained.

Directors commended the slower pace of money growth that China is targeting this year but urged it to raise interest rates. Unlike many other Asian countries, including India, China has not increased borrowing costs in 2010.

BP Plc has named American Bob Dudley as its next CEO, saying Tony Hayward would stand down after his gaffe-prone handling of the worst oil spill in US history that triggered a $17bn quarterly loss.

Dudley, the US executive managing BP’s response to the spill in the Gulf of Mexico, will get the top job on October 1, a move that could soften US criticism of the British oil major.

“I believe that it is not possible for the company to move on in the US with me remaining as the face to BP,” Hayward told reporters on a conference call. “So I think that for the good of BP, and particularly for the good of BP in the United States, it is right for me to… step down.”

BP said it planned to sell assets worth up to $30bn over the next 18 months and would cut its net debt to between $10bn and $15bn in that period.

The company said it would consider its position on future dividend payments at the time of its fourth-quarter results.

Analysts had expected BP to set aside tens of billions of dollars to cover the cost of the April 20 oil rig explosion that killed 11 people, ruined the Gulf’s fishing and tourism industries, and polluted the Gulf shoreline with slimy goo.

BP Chairman Carl-Henric Svanberg said the company would take a “hard look” at itself in the aftermath of the spill: “BP… will be a different company going forward”.

However, Dudley denied BP’s culture, which investors and analysts say encourages greater risk taking than some rivals, contributed to the disaster in the Gulf of Mexico.

Excluding a $32.2bn charge for the oil spill and other non-operating costs, the replacement cost profit was $4.98bn, in line with the average forecast from a poll of 11 analysts and up 77 percent on the same period of 2009.

Replacement cost profit strips out gains or losses related to changes in the value of fuel inventories and as such is comparable with net income under US accounting rules.

“It’s basically a kitchen sink job and we’ve got the way forward,” said Panmure analyst Peter Hitchens.

“They’ve taken all the charges at once and we’re seeing the first way forward – how they’re going to deal with the balance sheet – which is the key thing … I think it’s the board trying to wipe the slate clean.”

“Not be missed”
BP could begin the final procedure to kill its leaking well shortly, the top US spill response official said. That will involve pumping mud and cement through a relief well that has been drilled since May 2 to a spot close to the bottom of the damaged well.

“The next thing that we need to do is get this well in the position where we can make the intercept and kill this well from the bottom,” retired Coast Guard Admiral Thad Allen told reporters in Washington.

More than five million barrels of oil have spilled into the Gulf of Mexico since the undersea leak began, according to US government estimates. Some Gulf Coast residents, seething about damage from the spill and BP’s compensation process, said they would be happy to see Hayward go.

“He will not be missed,” said Larry Hooper of Empire, Louisiana, who runs an offshore fishing charter business.

Hayward, a 53-year-old geologist, has described Dudley as BP’s “secretary of state” for his role overseeing the cleanup.

Dudley, who was raised in Mississippi, would be the first non-Briton to become chief executive of BP. He was previously head of BP’s Russian joint venture, TNK-BP, until he was forced to flee the country amid a spat between BP and its partners.

Hayward will receive one year’s salary or £1.045m and be appointed a non-executive director at TNK-BP as part of his departure deal. He will also keep his pension pot of around £11m.

BP has lost 40 percent of its market value since the spill that has hit about 39 percent of the coast stretching from Brownsville, Texas, to the Florida Keys.

Analysts said Hayward’s exit was good for the stock because he had become an easy target for angry US lawmakers and Gulf residents. Hayward was pilloried in the US for complaining he wanted his “life back” weeks after the deadly rig explosion and start of the spill.

“It is customary that when things don’t go right, you are going to chop heads and usually that starts at the top,” said Steve Goldman, a market strategist with money manager Weeden & Co in Greenwich, Connecticut.

Hayward may still not escape another round of testimony before the U.S. Congress. Senator Robert Menendez said he wants Hayward to testify on whether BP influenced the release of the convicted Lockerbie bomber to aid the firm’s business interests.

“Tony Hayward, regardless of his status whether he is going to be the CEO tomorrow or not, we believe that he was in the midst of the negotiations with the Libyans as it related to this oil deal,” Menendez, a Democrat, said in New York.

Hayward is the third of the last four BP chief executives forced into an early exit. John Browne left after lying in court papers about a gay love affair and Bob Horton was pushed out over strategic disagreements in 1992.

Spain’s smaller regional lenders, or cajas, will start a roadshow aimed at reassuring investors after the test results showed five of their peers among the seven banks that failed, and several more close to failing.

Problems among the cajas have long been flagged, however, and are being remedied.

The euro was little changed in the absence of any real shocks in the test of whether 91 banks in 20 countries could withstand another recession in the next two years.

Critics said the test was too soft – shown by the banks that failed needing just 3.5bn euros ($4.5bn).

However, “most people are going to be absolutely fine,” said Ian Henderson, who runs a global financials fund for JP Morgan. “We’ve already recapitalised most of the European banks anyway with huge amounts of money. Let’s get on with life.”

With so few banks failing, attention was on 17 who only scraped a pass, some of whom may opt to raise cash if the test fails to reduce their funding costs or soothe worries about risks, analysts said.

“Those that are at the margin may as well raise equity to dampen down fears … The sums of money involved are really relatively small,” Henderson said.

German banks, including Deutsche Bank, were criticised for not providing as much information as rivals about their exposure to sovereign debt in the eurozone – the major worry that prompted the tests.

“You have to take these tests with a pinch of salt,” said Jonathan Cavenagh, currency strategist at Westpac, Sydney. “Sovereign debt problems remain, funding constraints for their banks are still there and these have the potential to weigh on the euro.”

Sources familiar with the discussions said Germany fought hard behind closed doors to limit the extent of disclosure.

Even so, investors now have more detail on banks’ holdings of sovereign debt than they had before.

Avoiding double-dip
If the minimum for banks to pass the test had been set at a Tier 1 capital ratio of eight percent, rather than ix percent, an extra 27 billion euros ($35bn) of capital would have been needed, analysts at Morgan Stanley estimated.

About 40 percent of that would have been needed from German and Italian banks, it said.

Some of those banks are already making strides to raise capital, including Italy’s Banca Monte dei Paschi di Siena and Banco Popolare, so they are unlikely to need more government aid. Deutsche Postbank, Germany’s largest retail bank by clients, said it will continue with a plan to rebuild capital, included halting dividends.

The subdued response to the tests in Europe was a far cry from early May when global markets feared Greece’s debt crisis might spread like wildfire through Europe and beyond.

Stronger-than-expected economic data suggesting the eurozone will avoid a double-dip recession, despite fiscal austerity measures, have also helped revive investor confidence in Europe.

The details from the tests should enable investors critical of the official results to run their own risk simulations to gauge a counterparty’s solidity.

That should help reopen the interbank lending market, which partially froze at the height of the euro zone debt crisis and has remained tight on fears banks have been hiding exposures.

Credit markets showed a small improvement in banks’ funding costs, but the real test will come when second and third tier banks try to move away from dependency on central bank funding.

Europe is aiming to repeat the boost given to US banks early last year from a health check on that sector, although the European test has been conducted much later in the cycle.

European banks have already raised about 300 billion euros since the start of the crisis – including 34 banks taking 170 billion euros from governments – whereas the US tests kick-started the fundraising.

Investors chastised EU authorities for refusing to test the impact of a debt default by Greece. But European Central Bank governing council member Christian Noyer said eurozone states “have put several hundreds of billions of euros on the table with the support of the IMF to make this hypothesis completely excluded”.

Britain’s economy grew almost twice as fast as expected in the second
quarter of this year, buoyed by a sharp pick-up in services output and
the fastest rise in construction output in almost 50 years, according to
official data.

The Office for National Statistics said GDP
jumped 1.1 percent on the quarter, the fastest rise in four years, and
rose by 1.6 percent on the year – the highest in two years.

The
figures may raise doubts over how long the Bank of England will keep
interest rates at their record low, particularly with inflation running
so far above target.

Britain’s services sector enjoyed its
fastest growth in three years, expanding by 0.9 percent on the quarter –
three times as fast as in Q1 and contributing 0.7 percentage points to
growth.

Manufacturing grew 1.6 percent, its biggest rise in more than 10 years.

Construction, meanwhile, leapt by 6.6 percent on the quarter – its
fastest rate since 1963. The construction data was based for the first
time on a new monthly survey, rather than estimates which used to be
used at this stage.

The ONS said the rebound in construction
output in Q2 came after a fall of 1.6 percent in Q1 which was due to the
poor weather. Construction output contributed 0.4 percentage points to
growth between April and June.