Finance news. My opinion.

Greek Finance Minister George Papaconstantinou began the week with his office protected by baton-wielding riot police taming student protests. Now, investors have him under siege as the country’s bonds tumble.

“Things are difficult, there’s no question about it,” he said in an interview yesterday in his office overlooking Syntagma Square, the hub of downtown Athens. “It’s a very hard fiscal situation. It’s not one that’s not reversible.”

Papaconstantinou, 48, has spent much of the past week reassuring investors and European leaders that Greece won’t default on its $350 billion in debt, its banks will keep access to European Central Bank financing and Prime Minister George Papandreou understands the worst fiscal crisis in 15 years.

Greek bonds plunged to their lowest in seven months on Dec. 9 and stocks slumped after Fitch Ratings cut Greece one step to BBB+, saying Papandreou’s two-month-old government isn’t doing enough to tame a deficit of 12.7 percent of output, the highest in the European Union. A day earlier, Standard & Poor’s put its A- rating on watch for downgrade.

The yield on Greece’s 2-year bond has surged 127 basis points to 3.15 percent this week, driving it above Turkey’s for the first time.

Situation ‘Severe’

“I spent two hours on the phone with the finance minister a couple of days ago, and he understands the position they’re in,” Fitch analyst Christopher Pryce said in an interview on Dec. 9. “I am not convinced that the cabinet, even the prime minister, understand just how severe the situation is.”

European officials added to pressure on Greece. ECB President Jean-Claude Trichet said today that “courageous” action is needed to close the budget gap. Economists pointed to Ireland’s decision to cut wages for public servants, compared with Greece’s 1.5 percent pay increase for most workers.

Papandreou appointed Papaconstantinou, who holds a doctorate from the London School of Economics, after he led the socialists to victory in October elections, winning a 10-seat majority in parliament. While the party won on a platform of higher wages that contrasted with Karamanlis’s pledges for a pay freeze, Papaconstantinou was within weeks forced to publish revised figures that cast doubt over Greece’s fiscal health.

Recession

Data showed Greece’s deficit this year would be more than twice the previous government’s forecasts and four times the EU limit. Other revisions showed that, rather than being one of the few European economies still growing amid the worst global slump since World War II, Greece had been in a recession for a year.

Papaconstantinou defends his government’s strategy to reduce the deficit by more than 3 percentage points of GDP to 9.1 percent next year.

“What exactly has changed in the last 40 days to justify a downgrade?” he said of the Fitch decision installment payday loans.

Greece needs to show that it will do more than rely on optimistic revenue forecasts and one-time measures to achieve those gains, economists say.

“Political pressure is mounting for the government to start taking bold action,” Giada Giani, an economist at Citigroup Inc. in London wrote in a note to investors.

About 75 percent of the current deficit reduction plan comes from raising revenue rather than cutting spending, Deutsche Bank AG estimates. Much of that will come from a crackdown on tax evasion, a chronic problem in Greece that a series of governments have pledged to combat.

New Plan

Now after just two months as finance minister and with the rating companies circling, Papaconstantinou must design a new plan due in January to convince EU leaders that Greece is serious about cutting the deficit and deserves an extension of the 2010 deadline to get its shortfall back within the EU limit.

“Rating agencies and EU institutions will probably want to see much more structural measures than currently announced to tackle the deficit, aimed at permanently and credibly increasing tax revenues and tackling age-related soaring public spending,” Giani said.

The government will announce further deficit measures next week and is committed to cutting spending by 10 percent next year to control the shortfall, Papandreou said in an interview with CNBC in Brussels before a summit of EU leaders today. “There will be some more changes that will make this sustainable so that it’s not a one-off deal,” he said.

Risk Overblown

Nevertheless, talk of a default may be overblown because the rest of the EU would probably help Greece, says the head of the Organization for Economic Cooperation and Development.

“The question of the ratings is perhaps of less consequence than one should think,” said Secretary General Angel Gurria in an interview yesterday.

Papaconstantinou, married with two sons aged 14 and 11, says 10 years as an economist at the OECD will help him argue his case in Europe.

“You have to be able to have a presence around the Eurogroup table; you need to know what you’re talking about,” he said. “Especially because the issues have become infinitely more complicated than they have been in the past.

For now, Papaconstantinou says the force of the bond market isn’t disrupting his life as it might other people.

‘‘Actually I sleep quite well,’’ he said. ‘‘I think that’s one of the big advantages I have. I’m fairly level-headed in general and even though I do worry about things they don’t keep me up at night.”

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Staples Inc reported third-quarter results that topped analyst estimates and forecast higher sales in the current quarter as trends improve at its North American retail business.

The results, which sent Staples shares to their highest level since September 2008, contrasted those reported by smaller rivals Office Depot Inc and OfficeMax Inc, who both posted sharply lower quarterly sales in October.

Staples continues to gain market share against those two rivals in North America, Sanford Bernstein analyst Colin McGranahan said in a research note.

Traffic in the company’s North American stores rose for the first time in nine quarters. Sales at North American stores open at least a year, or same-store sales, were flat in the third quarter after posting declines since last December.

CEO Ron Sargent said initiatives to boost its business in core areas like ink and paper during the recession were paying off with higher same-store sales.

“The North American retail and Staples business delivery (sales) trajectory are encouraging,” J.P. Morgan analyst Christopher Horvers said in a note to clients. He added that the profit outlook for the current quarter seems low compared with the company’s sales view.

The company also said it had a good start to the holiday shopping season over Thanksgiving weekend, and would ratchet up efforts to lure customers this year with promotions on items like printer ink. Staples cut back on marketing and promotional spending in 2008 in response to a bleak retail environment.

“I think it probably will be a pretty promotional holiday season,” Sargent said during a conference call.

Q4 FORECAST IN LINE

Office-supply retailers have suffered in the tough economy as both corporate customers and other shoppers have curbed their appetite for nonessential items, especially expensive goods like furniture and business machines.

Staples said it expects fourth-quarter earnings of 36 cents to 38 cents a share before one-time items, and a sales rise of 1 percent to 3 percent.

Analysts on average were expecting Staples to earn 37 cents a share, according to Thomson Reuters I/B/E/S. They had forecast sales of $6.14 billion, a decline from last year’s fourth-quarter tally of $6.17 billion.

Third-quarter net earnings rose to $269.4 million, or 37 cents a share, from $156.7 million, or 22 cents a share, a year earlier.

Excluding one-time items, it earned 39 cents a share in the quarter, which ended on October 31, beating analysts’ average forecast of 38 cents.

Sales fell 6 percent to $6.52 billion but beat analysts’ average estimate of $6.45 billion. 

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Current valuations of waste managers such as Waste Connections Inc, Waste Management Inc and Republic Services Inc give the company’s shares a lot of room to rise, according to a Barron’s story.

In its November 23 edition, Barron’s said Waste Connections shares could rise to $37.50 in a year, citing Raymond James analyst William Fisher’s price target for the stock, which closed at $31.79 on the New York Stock Exchange Friday.

According to Barron’s, investor Todd Lowenstein of Highmark Value Momentum Fund sees Waste Management shares rising as high as $40 from their Friday NYSE close at $32.30.

Republic Service’s Chairman Jim O’Connor has said that analysts’ discounted cash-flow analysis pegs his company’s value in the mid $30s range, according to the story low fee payday loans. This compares to Republic Services NYSE close of $27.40 on Friday.

The story also noted that Warren Buffett has bought 1 percent of Republic Services, based on Berkshire Hathaway Inc filings.

It said that Bill Gates investment vehicle had doubled its shares in Waste Management, giving it a 15 percent stake.

(Reporting by Sinead Carew; Editing Bernard Orr)

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Federal Finance Minister Jim Flaherty warned card companies and banks if they don’t comply with a proposed voluntary code of conduct for the multibillion-dollar credit and debit markets he would bring down the hammer of regulation.

The code, which was designed to address merchants’ claims they’re being gouged, won high praise from retailers and small business owners but drew more cautious response from credit card companies and banks.

While critics worry that a voluntary code would not be enforceable, Flaherty said Thursday he would not hesitate to get tough.

"If we are unsuccessful … with the voluntary code, then we can create an involuntary code," Flaherty said in Ottawa. "We have that power to do that.

"But we’d rather do it in concert with the important stakeholders and arrive at a conclusion that will work for everybody rather than use the heavy hand of regulation. But if we have to, we would, of course."

The long-awaited code contains proposals that would give merchants more clout in dealing with global credit card giants, payment processors and big banks over card fees.

The Retail Council of Canada estimates such fees cost $4.5 billion a year and lead to higher prices for consumers.

Among other things, the code would give merchants the ability to cancel contracts without penalty following notification of a fee change, to offer a variety of discounts for different payment options – and control how debit transactions are processed. Additionally, banks could only issue premium credit cards to consumers on consent or request.

"This is the first time the card companies, the banks and their processors are going to have to compete for the merchants’ business. We’re no longer the milk cows. We’re the customer," said Diane Brisebois, president of the Retail Council of Canada.

However, critics say Flaherty missed an opportunity to go further by making the code mandatory and they’re worried the measures could get watered down during the 60-day public consultation period.

Liberal Senator Pierrette Ringuette said without enforcement, fines or penalties, Visa and MasterCard will be able to cherry-pick which measures to follow. "`Pretty please,’ will not make them abide," Ringuette said.

Liberal MP Dan McTeague said many merchants wouldn’t be able to opt out of their contracts for fear of losing customers. He was also disappointed consumers were not given the same opportunity to cancel their card contracts without penalty.

MP Glenn Thibeault, the NDP’s consumer protection critic, agreed that consumers have no one to complain to if provisions of the code are breached. "With this government, big business is the one that ends up always being on the winning end of any type of voluntary code of conduct."

Credit card companies expressed concern about the impact of the code on market competition.

This "should resolve a commercial dispute for which the global retail lobby operating in Canada has sought government intervention over private negotiation," said Kevin Stanton, president of MasterCard Canada. In particular, he noted the code "could alter the competitive landscape."

Visa said it was "disappointed that the code would allow merchants to supersede consumer choice at the point of sale," adding the announcement "significantly undermines" the introduction of competition in debit.

The proposed code could mean Visa’s new chip card readers, which accept its debit cards, may have to be reprogrammed and 2.5 million Bank of Montreal MasterCard Maestro debit cards already on the market may have to be reissued, a source said. It was not immediately clear who would bear those costs.

The Canadian Federation of Independent Business, which had lobbied for a voluntary code, called it "an early Christmas present."

The Interac Association welcomed the code but said it would work with government to "fill in" the details.

The Canadian Bankers Association said most of the measures don’t apply to banks. Still, it cautioned "customers are best served by an open, competitive marketplace."

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A stronger Chinese yuan is part of the reforms that Beijing needs to implement to increase domestic consumption and help ease global imbalances, the head of the International Monetary Fund said on Monday.

IMF managing director Dominique Strauss-Kahn said that the global economy appeared to have turned a corner toward recovery but that the biggest risk to the global outlook was a premature removal of stimulus measures.

In prepared remarks to a financial conference in Beijing, he added that, despite strains on the current global monetary system, he still expected the dollar to remain the principle reserve currency “for some time.”

(Reporting by Jason Subler; Editing by Ken Wills)

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Treasury Secretary Timothy Geithner on Saturday stressed the necessity of keeping global economic stimulus in place until recovery is assured and opposed the utility of a tax on financial transactions as a way to dampen risky bank behavior.

Speaking at the conclusion of a two-day meeting of Group of 20 finance minister and central bankers, Geithner said there was broad agreement that “growth remains the dominant policy imperative across our economies.”

He said high U.S. unemployment, which hit a 26-1/2-year high at 10.2 percent of the civilian workforce in October, highlighted a “very tough economic environment” that will a period of sustained growth to correct.

Earlier, British Prime Minister Gordon Brown had suggested that the G20 should levy on banks — blamed for the excessive risk-taking that led the world into a now-easing financial crisis — and used the proceeds to fund future bailouts.

Geithner played down that idea, noting that the Obama administration was already pushing an overhaul of financial market rules in Congress that would ensure that banks pay the costs of their failures in future from their own pocket.

“A day-by-day financial transaction tax is not something we are prepared to support,” Geithner said in an interview with Sky News. In his concluding press conference, Geithner was asked repeatedly to say why he opposed such a tax on banks and indicated he doubted its effectiveness.

“This idea (of a bank transaction tax) has been around for a long time…I think frankly the experiences are mixed,” he said, expressing an American view that there was no widespread backing for such a tax.

Canadian Finance Minister Jim Flaherty was similarly skeptical.

“It’s one of the ideas that’s on the table, but is not particularly attractive to me as finance minister of Canada. We have been a government that has been reducing taxes,” Flaherty said.

ON DANGEROUS GROUND

Geithner’s key message was that recovery still remains on perilous ground and that it was too soon to discuss the timing for removing the massive fiscal and monetary stimulus that countries around the world have poured into their economies.

“Government policy has to provide a bridge to growth led by the private sector,” he said. “We’re now in the middle span of that bridge.”

That meant policymakers must move cautiously in trying to bring down huge budget deficits without choking off chances for growth led by consumer spending and business investment.

“If we put the brakes on too quickly we will weaken the economy and the financial system, unemployment will rise, more businesses will fail, budget deficits will rise, and the ultimate cost of the crisis will be greater,” Geithner said.

“It’s too early to start to lean against recovery.” 

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Home values in the U.S. kept stabilizing and consumer confidence rose, bolstering the case that an economic recovery is at hand, economists said before reports today.

The S&P/Case-Shiller index covering home prices in 20 cities fell 11.9 percent in August from a year earlier, the smallest drop in 19 months, according to the median forecast of economists surveyed by Bloomberg News. Sentiment this month climbed, a report from the Conference Board may show, even as Americans continue to fret over employment prospects.

Rising home sales, due in part to government programs including the first-time buyer credit and efforts to lower borrowing costs, have helped stem the slump in property values that precipitated the worst recession since the 1930s. Sustained gains in household spending, the biggest part of the economy, may be harder to come by as joblessness mounts.

“Home prices are clearly in a bottoming-out process and we’ll be at much more comfortable levels by next year,” said Mike Englund, chief economist at Action Economics LLC in Boulder, Colorado. “Consumers still face headwinds. The panic is over, but people need to see outright positive news on the horizon before we’ll get a big jump in confidence.”

The S&P/Case-Shiller figures, due at 9 a.m., would follow a 13.3 percent drop in the year ended July. Projections in the survey ranged from declines of 11 percent to 13.3 percent. Year-over-year records began in 2001. The gauge rose in June and July on a monthly seasonally adjusted basis.

Monthly Gain

Englund is among economists predicting the S&P/Case- Shiller report will show prices kept climbing in August compared with a month earlier. In July, the home-price index rose 1.2 percent from the prior month, the biggest gain since October 2005.

At 10 a.m., the New York-based Conference Board may report that its sentiment index rose in September to 53.5 from 53.1. Estimates in the Bloomberg survey ranged from 48 to 57.

In the latest evidence of rising demand, existing home sales in September jumped to a 5.57 million annual rate, more than economists forecast and the highest in more than two years, according to data from the National Association of Realtors issued last week.

Housing and manufacturing are leading the stabilization in the economy, the Federal Reserve said in the Beige Book survey of conditions in its 12 district banks during September and early October.

Fed Observation

“Most districts reported that housing market conditions improved in recent weeks, primarily from a pickup in sales of low- to middle-priced houses,” the Fed said.

One risk to the emerging stabilization is foreclosures, which worsen the property glut. Foreclosure rates will climb through late 2010, peaking only after the unemployment rate reaches 10.2 percent in the second quarter, Jay Brinkmann, chief economist at the Mortgage Bankers Association, said this month.

Unemployment, which is projected to exceed 10 percent by early 2010, according to the median estimate in a Bloomberg survey earlier this month, will also limit demand. Economists and industry groups are among those projecting home sales will also cool in the absence of the $8,000 credit for first-time buyers, due to expire Nov. 30. Lawmakers are debating extending the credit.

The Standard & Poor’s Supercomposite Homebuilding Index has climbed 22 percent since the beginning of July on the improving outlook for housing, compared with a 16 percent increase in the S&P 500 index. The builder index fell yesterday on concern that the tax-credit program may not be extended.

‘Low Level’

“The residential housing market appears to have stabilized, but it has done so at a very low level,” William Foote, chief executive officer of USG Corp., North America’s largest maker of gypsum wallboard, said Oct. 21 on a conference call. The Chicago-based company posted its eighth straight net loss last quarter as sales dropped 32 percent from a year ago.

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Taiwan’s central bank kept its benchmark interest rate unchanged on signs the export-dependent economy will recover as the global recession abates.

Governor Perng Fai-nan and his board held the discount rate on 10-day loans to banks at a record-low 1.25 percent, the central bank said in a statement. That was in line with the estimate of all 12 economists surveyed by Bloomberg News.

Taiwan, like its Asian neighbors, has slashed borrowing costs to help the island recover from its first recession since 2001. The stock index has risen 60 percent this year on optimism overseas demand for electronics products will revive an economy that shrank 7.54 percent in the second quarter after contracting 10.1 percent the previous three months.

“Policy makers during the last quarterly meeting reiterated they would stay with the current pro-growth monetary policy until the economy, inflation and job market return to pre-Lehman crisis levels,” said Tony Phoo, a Taipei-based economist at Standard Chartered Bank Plc.

Central banks across the region have stopped cutting interest rates as they gauge signs of recovery. Japan’s central bank on Sept. 17 kept the benchmark overnight lending rate at 0.1 percent, while the Bank of Korea held its rate at a record- low 2 percent on Sept. 10 for a seventh month.

Taiwan’s central bank said its current monetary policy is appropriate and the growth in money supply has been “reasonable.” The bank will intervene to keep the island’s currency stable and respond to “hot money inflows,” it said.

Stocks Fall

Taiwan’s rate decision was released after the close of trading on the island’s stock exchange. The Taiex stock index fell 0.7 percent to close at 7,324.22. The Taiwan dollar weakened 0.1 percent to NT$32.395 against its U.S. counterpart as of 4 p.m. local time, according to Taipei Forex Inc. It touched NT$32.315 yesterday, the highest level since June 2.

Taiwan had cut rates by 2.375 percentage points in seven reductions since late September 2008. That, combined with the government’s planned stimulus of NT$858.5 billion ($27 billion) over four years, have helped boost the island’s recovery.

Shipments to China, Taiwan’s biggest overseas market, are improving as the mainland implements a 4 trillion yuan ($586 billion) stimulus package. Exports, accounting for 70 percent of gross domestic product, declined 24.6 percent in August, less than economists forecast and easing from a record 41.9 percent drop in January.

“We expect the central bank to keep interest rates steady for the rest of the year as there is no inflationary pressure,” said Cheng Cheng-mount, an economist at Citibank Taiwan Ltd.

South Korea, Singapore

Central banks in South Korea, Singapore and Taiwan will likely start to tighten monetary policy early next year as Asian economies show signs of picking up, Barclays Capital economists Wai Ho Leong and Matthew Huang said in a Sept. 22 report.

“Even as deflationary risks subside with higher oil and food prices, the central bank may be inclined to remain on hold, given the amount of slack in the economy,” Leong said, adding Taiwan is unlikely to raise rates before the second quarter of 2010.

The Asian Development Bank on Sept. 22 increased its economic growth forecast for the region on strengthening expansions in China, India and Indonesia, and said it’s too early for governments to withdraw stimulus policies.

Policy makers globally remain on guard about the world economy. Federal Reserve Chairman Ben S. Bernanke said on Sept. 16 U.S. growth may not be strong enough to quickly reduce the jobless rate.

Jobless Rate

Taiwan’s unemployment rate climbed to a record 6.07 percent in August and consumer prices fell even as food costs rose after crops were damaged by the island’s deadliest typhoon in half a century.

The statistics bureau said on Sept. 7 “mild” inflation will return at the start of 2010 as the economy recovers from its deepest recession on record.

Typhoon Morakot dumped record rainfall between Aug. 6 and 9, killing more than 600 people as landslides buried villages and destroyed bridges and roads.

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The Treasury Department and a committee of major bondholders at General Motors have reached a deal that could give creditors a larger stake in GM than previously offered. But bankruptcy is still likely in the next few days despite the deal.

The agreement, revealed in a Securities and Exchange Commission filing by GM (GM, Fortune 500) early Thursday, would essentially give the bondholders 10% of the company but also give them the rights to buy an additional 15% of the company’s stock at a low price.

The deal is unlikely to allow GM to avoid bankruptcy, however. If anything, it might clear potential obstacles to the government’s plans to use bankruptcy as a way to turn around the nation’s largest automaker. That’s because bondholders accepting the new offer agreed not to fight the government’s plans for a quick bankruptcy at GM.

As part of such a filing, GM would emerge with only its more profitable plants, brands, dealerships and contracts. GM’s unprofitable plants, contracts and other liabilities that the company can no longer afford would be left behind in bankruptcy court.

According to Thursday’s filing, the new offer is structured so that the portion of GM that would remain in bankruptcy would receive a 10% stake in a "new GM" that would be used to pay bondholders. The old GM would also receive the right to buy the 15% stake in the new company that emerges from bankruptcy.

The bondholders would likely receive the overwhelming majority of the old company’s assets, including the shares in the new company, as part of the bankruptcy process.

In the original offer to bondholders, creditors would only receive a 10% stake in a new GM.

The filing also disclosed that GM will not repay the loans it has already received from the government or much of the additional federal aid it will get as part of the bankruptcy.

The government has already given GM $19.4 billion to fund operations and cover losses this year, and total help is expected to exceed $50 billion.

GM will pay back $8 billion of that sum. The government will also receive $2.5 billion in preferred shares of GM that pay a dividend and are more similar to a loan than stock.

But more than $40 billion of federal help to GM will be converted into a 72.5% stake in the new company. This means that for taxpayers to make back any of the money loaned to GM, it will have to be because shares of the new GM increase dramatically in value following an exit from bankruptcy.

A senior administration official conceded Thursday that while the Treasury Department hopes the new GM will be financially viable even if auto sales remain weak, it will be difficult for taxpayers to recover its full investment in GM.

"I don’t know how much we’re going to recover," he said.

A trust fund run by the United Auto Workers union would also have a 17.5% stake in the new GM, as well as the right to buy an additional 2.5% stake. UAW President Ron Gettelfinger said earlier this month the company hopes to sell its stake in GM as soon as possible.

But the administration official said that it is unlikely GM’s stock will be publicly traded while the company is in bankruptcy. Even though the "new GM" could emerge from bankruptcy in two to three months, the process for the assets remaining in bankruptcy could last between 6 and 18 months.

That will make it difficult for the government and the union trust fund to quickly sell their shares in GM.

Bondholders blink

According to GM’s filing, advisors to the unofficial committee of major bondholders which accepted the deal hold about 20% of $27 billion in unsecured bonds cheap payday loans.

The administration official said that about 15% of the bondholders not represented by the committee accepted the original deal. The official added it will now be up to the committee to round up additional support from other bondholders.

The remaining bondholders have until Saturday afternoon to indicate whether they support the new offer. But the administration official said there is no particular threshold of support for the new deal that needs to be achieved.

The official said Treasury will look at which bondholders have accepted the deal and which different classes of investors they represent to determine whether there is "sufficient" support. GM had previously said it needs approval from 90% of these creditors in order for any offer to take effect.

About 20% of the bonds are held by individual investors, with the rest owned by institutional investors, including pension funds, endowments and bond funds. A group representing some of the individual investors issued a statement Thursday afternoon saying the deal was still not fair, and vowed to fight the reorganization plan in bankruptcy court.

But the bondholders’ committee said in its own statement that the government’s decision to convert more of its debt into equity was one of the factors that led it to endorse this new deal, along with the chance to have a larger stake in the company.

GM is expected to have about $17 billion in debt following bankruptcy, significantly less than the $54.4 billion it owed as of March 31.

The committee said the reduced debt burden on the new GM "gives the bondholders the opportunity to recover a greater portion of their original investment than was previously offered." But the committee also acknowledged that bondholders, who hold debt that is not backed by company assets, had little choice but to accept the deal.

"Rejecting this offer in the expectation that the bondholders will do better [in bankruptcy court] was a risk the committee is unwilling to take," the committee said in its statement.

In its own statement, GM said it "appreciates the unwavering support of the U.S. Treasury and the President’s Task Force on Autos and thanks the unofficial committee of bondholders for their support of the proposal."

GM faces a June 1 deadline to make $1 billion in interest payments to its bondholders, money the company says it does not have.

The company also faces a government-imposed deadline on that day to reach a restructuring plan or file for bankruptcy. While the company has continued to insist it hopes to avoid bankruptcy, a filing is still widely believed to be inevitable — even with Thursday’s agreement with bondholders.

The plan to have the healthy parts of GM leave the bankruptcy process quickly as a slimmed down entity is similar to what is now taking place with GM rival Chrysler LLC, which was pushed into bankruptcy by the government last month. The judge overseeing that case is hearing motions on that plan this week.

Bob Schulz, senior auto credit analyst for rating agency Standard & Poor’s, said that if GM follows Chrysler into bankruptcy, the new company will clearly emerge with a more manageable debt level. Still, he said it is too soon to say just how a new GM will do going forward.

"We’ll have to see the whole plan of reorganization, what exactly gets left behind," he said, adding that the outlook for auto sales remains uncertain. 

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German exports and company spending plunged in the first quarter, dragging Europe’s largest economy into its deepest slump on record.

Exports dropped 9.7 percent from the fourth quarter and company investment declined 7.9 percent, the Federal Statistics Office in Wiesbaden said today. Gross domestic product fell a seasonally adjusted 3.8 percent from the previous three months, the office said, confirming an initial estimate from May 15. That’s the steepest drop since quarterly data were first compiled in 1970.

The worst global recession since World War II has exposed Germany’s reliance on exports as an Achilles Heel, forcing companies to slash output and cut jobs. Chancellor Angela Merkel’s government, which expects the economy to contract 6 percent this year, will spend about 82 billion euros ($115 billion) to fight the crisis. German business confidence rose for a second month in May and investors also grew more optimistic, suggesting the economic slump is bottoming out.

“The year’s first three months were certainly the worst,” said Ralph Solveen, an economist at Commerzbank AG in Frankfurt. “The economy probably continued to shrink in the current quarter but that should be followed by a stabilization in the second half.”

Consumer spending rose 0.5 percent in the first quarter from the fourth, even as households’ disposable incomes declined 0.9 percent, the statistics office said.

‘A Winner’

Eckhard Cordes, chief executive officer of Metro AG, said on May 13 that Germany’s largest retailer “is not part of the economic downturn.” The Dusseldorf-based company will emerge as “a winner” from the recession, he said.

Still, company investment in machinery and equipment slumped 16.2 percent and construction spending declined 2.6 percent, today’s report showed. Imports fell 5.4 percent in the three months through March, almost half the slump in exports, so that net trade reduced GDP by 2.2 percentage points.

Bayerische Motoren Werke AG, the world’s largest maker of luxury cars based in Munich, said on May 14 that 2009 will be a “challenging” year payday loans. Schaeffler Group, the ball-bearing maker that owns Continental AG, said earlier this month it plans to cut labor costs by 250 million euros on declining orders.

‘Ongoing Recession’

“We expect an ongoing recession in the rest of 2009,” said Stefan Bielmeier, an economist at Deutsche Bank AG in Frankfurt. “However, the speed of the deterioration should at least decelerate. This also seems true for foreign demand, thus the export sector should hardly give impulses for the German economy in the next few months but the drag should be smaller.”

The first-quarter drop in GDP marked an unprecedented fourth successive quarterly contraction for Germany’s economy.

In the economy of the 16 euro nations, Germany’s largest export market, GDP declined 2.5 percent in the first quarter from the previous three months. That’s the biggest drop since the data were first compiled in 1995.

While policy makers have expressed optimism that the world recession may be easing, any recovery is likely to be slow. The global economy will shrink 1.3 percent this year and only return to growth in 2010, the International Monetary Fund says.

There are signs of stabilization. European confidence in the economic outlook increased for the first time in 11 months in April and the recession in the region’s manufacturing industry eased for a third month in May.

Germany’s benchmark DAX Index has gained 18 percent since the beginning of the second quarter after declining 15 percent over the previous three months, reflecting increasing optimism among investors and executives.

European Central Bank council member Axel Weber said yesterday that while “rays of light” are positive, there’s “no reliable indication that the global economy is past the worst.” The euro-region economy may only “gradually stabilize during the latter part of 2009,” he said.

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