World trade
Defrosting Doha
Within a week the Doha round of trade talks could be ready to serve or left to rot
FROM hope to acrimony; from acrimony to apathy; and now back towards hope again: the Doha round of world trade talks has almost come full circle. Launching the round in Qatar’s capital city in November 2001, as the world reeled from terrorist outrages and the dotcom bust, trade ministers declared their determination to liberalise trade so that “the system plays its full part in promoting recovery, growth and development.” By 2003 the hope had gone: a ministerial meeting in Cancún, a Mexican resort, broke up early amid angry recriminations. Two years ago progress was so feeble that Pascal Lamy, director-general of the World Trade Organisation (WTO), suspended negotiations.
Many wrote the round off at that point. Yet for the past year or so trade negotiators in Geneva have been chiselling away at the areas of disagreement. They have sculpted enough, Mr Lamy believes, for him to gather a group of around 40 ministers at the WTO’s lakeside headquarters to try to shape a deal. Their deliberations, which are due to last a week, begin on July 21st. Success would mean that a conclusion to the round the world forgot could at last be contemplated. At the core of an agreement would be cuts in allowable subsidies to farmers and lower tariff ceilings for both agricultural and industrial goods.
Mr Lamy’s invitation is something of a gamble, but he attaches great importance to reaching agreement in 2008. Early in the year, some trade officials hoped for a ministerial meeting in April, then the talk turned to May, then June. Mr Lamy could not have left it much later. The timetable is getting tight. European officialdom is about to enter its summer lull, India’s minority government is in a precarious position and America’s presidential and congressional elections are looming.
Details, details
Even if ministers reach agreement in Geneva, officials will still have lots to sort out. The deal’s basic formulae will have to be converted into tariff schedules for thousands of products, controversial rules on anti-dumping must be thrashed out, and the services negotiations must catch up. And success is far from guaranteed. Talks have centred on two main areas: trade in farm goods and industrial products (non-agricultural market access, or NAMA, in WTO jargon). The ambassadors who chair the WTO’s agriculture and NAMA negotiations have smoothed out a lot of rough areas, but would still have liked to leave ministers with less work to do. Talks on NAMA have continued this week.
Broadly speaking, Europe and India are under attack for wanting to spare too many farm products from deeper tariff cuts; some developing countries are being asked to reduce industrial tariffs further and faster; and America is under pressure to do more to cap trade-distorting subsidies to its farmers.
This last issue, in particular, could be a deal-breaker. India’s commerce minister, Kamal Nath, wants America to cap its farm spending at last year’s total minus one dollar. The draft agreement suggests limits much higher than this ($13 billion-16.4 billion). That would do little to constrain America’s potential spending, except perhaps on cotton and sugar.
The chief reason for urgency is to complete a deal before George Bush leaves office. This may seem curious, because he is in no position to get a Doha deal through Congress. He lacks “trade promotion authority” (TPA)—the right to negotiate a trade agreement and present a bill to lawmakers for a straight yes-or-no vote without amendment—and will not get it now. Congress is in no mood to give it to him, and time is running out.
The best hope instead is to pass a finished, or nearly finished, agreement on to John McCain or Barack Obama. It is possible that the new president may dislike the deal so much that he seeks to renegotiate it or rejects it altogether. But renegotiation would be time-consuming at best, impossible at worst. Rejection would wreck the WTO for years, perhaps for good.
If he were to inherit a package that is complete or close to it, President McCain or President Obama would have something to press on the new Congress, perhaps after asking for TPA to wrap up the remaining details. He could even sell it as much-needed balm for an ailing global economy. Craig VanGrasstek, of the Kennedy School of Government at Harvard and Washington Trade Report, a newsletter, points to a precedent: when Bill Clinton took office in 1993, he asked Congress for a brief extension of fast-track authority, as TPA was then known, to complete the Uruguay round of world trade talks. Mr Clinton used this to get the round through in 1994 with relatively little fuss; he also secured the North American Free Trade Agreement (NAFTA), although with rather more.
But if Mr Bush leaves him with a lot of work still to finish, the new president may well conclude that he has better things to do. By 2010 such momentum as there is for a Doha round agreement may have been lost. “If it’s not concluded this year, it won’t be concluded next year and by 2010 the caravans will have moved on elsewhere,” said Peter Mandelson, the European Union’s trade commissioner, at the World Economic Forum in January. “Not only will the caravans have moved on in different directions of trade negotiations, but what has already been on the table…will have been put into deep freeze.”
Back into the fridge
The consequences of putting the Doha round into cold storage come in two parts. The more nebulous, but arguably more important, is the long-term effect on the future of trade and the world economy.
You might suppose that it would not matter much. Despite all Doha’s difficulties, world trade has been growing nicely without it (see chart). Developed countries’ tariffs on industrial goods, at least, are already low. Developing countries have been opening up too, cutting tariffs to levels well below the ceilings negotiated at the WTO. Trade in services has been getting freer, although many countries’ WTO commitments are still patchy. And countries have become much more welcoming to foreign investment, which the Doha round does not even address.
Look beyond the formalities of tariffs and investment agreements, to the nuts and bolts of modern commerce, and you may even conclude that it had become irreversibly integrated. Time was when almost every bit of a car, say, was made in one country, from the steel that formed its body to the leather on its seats. Now a supply chain of myriad links runs all around the world, connecting designers, chipmakers, car-parts firms and assembly lines.
Granted, if the Doha round fails, the world will not end. Nevertheless, it would be wrong—and complacent—to suppose that failure would be costless. For a start, the world economy is troubled. Doha will not repair housing markets or ease credit constraints. But in difficult times calls for trade protection get louder, and may be heard favourably by politicians. This would be a bad moment, therefore, to turn away from further liberalisation. And the WTO as an institution would be damaged. The chances of another go at liberalisation soon, after an abject failure, would be slim.
Already there are some signs of rising hostility to trade. The plainest are the taxes or bans imposed by some countries on food exports in response to the rapid increase in prices. This is not protection as usually practised—in the Doha round, countries have been negotiating to end subsidies, not taxes, on farm exports. But had the negotiations been starting now, such gross impediments to trade might well have been on the agenda.
Another straw in the wind is the difficult progress of some regional trade agreements. Last year America’s Congress passed a free-trade deal with Peru; this year it has stalled on one with Colombia. Any misgivings in Washington about an agreement with South Korea have been more than matched on the streets of Seoul, where thousands have protested against the prospect of American beef imports. Economists view bilateral and regional deals as a mixed blessing. But if hostility towards such agreements denotes unease about trade in general, it is a worrying sign.
And it is possible to imagine the world economy becoming less integrated. It has happened before: the fairly free world economy of the late 19th century was riddled with protectionism by the 1930s. Then, says Jeffry Frieden, a political scientist at Harvard, trading powers turned towards their empires; nowadays they would be more likely to turn towards regional blocks, such as the EU and NAFTA. An unwinding of globalisation, he thinks, is not likely but not implausible either. “The picture of an irreversibly integrated and globalised international economy is overdrawn,” he says.
The second lot of costs is more direct. If there is no agreement, what will the WTO’s members leave on the table? Measuring this is hard, partly because members of the WTO negotiate over “bound” (maximum) tariffs and ceilings on agricultural subsidies. Much of the deal would lower these ceilings rather than produce true cuts. For example, the latest text implies that Chile would cut its bound industrial duties from 25% to around 12%; its applied rate is only 6%. This is still worth doing because it limits backsliding.
Another reason is the sheer complexity of any likely deal. In NAMA, the basis of the draft text is a formula connecting new tariffs to old ones. But there are different parameters for developed and developing countries. Developing countries will be able to choose between shallower cuts across the board and exempting some goods from the formula in return for deeper cuts on the rest. Some have additional exceptions. In agriculture, there are similar complications. For instance, countries can declare some goods to be “sensitive” products. They will be permitted to cut their tariffs on these goods by less, in exchange for letting in larger amounts at lower rates of duty.
Even so, despite all the exemptions and wiggle room, the deal contains the promise of real liberalisation. Cuts in some bound tariffs will bite into applied rates too. The EU’s duty on cars would come down from 10% to about 4.5%; its rate on canned tuna would tumble from 24% to about 6%. China’s tariff on cars could come down from 25% to 18% even if it takes advantage of the exemptions to the NAMA formula.
Importantly for developing countries, tariff escalation—the levying of higher tariffs on processed goods than on raw materials—would be scaled back. Tariff escalation is, in effect, a tax on every step a country takes along the value chain. For instance, coffee that has been neither roasted nor decaffeinated enters the EU duty-free; decaffeinated and roasted, it incurs a tariff of 7.5%. Under the latest draft, the duty would be cut by half.
What does all this amount to? The WTO’s staff reckon that consumers and firms will pay around $125 billion less in tariffs if a deal is struck. Yvan Decreux and Lionel Fontagné, of CEPII, a French economic research institute, have tried to measure the effect on global growth. They estimate that the world economy would eventually be $43 billion a year better off. Throw in some liberalisation of services too, and the sum rises by $30 billion.
Set against the scale of the world economy, these are not vast gains—around 0.1% of global GDP. But they are gains nonetheless, and they are probably an understatement: no one knows the value of the likely scale economies, productivity gains and extra variety that freer trade brings. Add to that the value of lowering bound tariffs and avoiding the institutional damage of failure, and the benefits do not look so puny after all. Will ministers grab them? Time to find out.
Argentina
Losing friends fast
Argentina’s president suffers a painful blow to her credibility
WHEN Cristina Fernández de Kirchner selected a turncoat member of the opposition Radical party as her running mate in her successful campaign for Argentina’s presidency last year, the choice looked like a canny ploy to win voters outside her Peronist party’s working-class base. But now, Ms Fernández’s assumption that her vice-president, Julio Cobos, would show more loyalty to her than he did to the Radicals appears to have been an act of near-suicidal hubris. On Thursday July 17th, Mr Cobos cast his tie-breaking vote in the Senate against a crucial tax bill backed by Ms Fernández, dealing what looks like a crippling blow to her presidency.
Ms Fernández has spent the past four months in a fierce battle with Argentina’s farmers. They launched a massive protest campaign of strikes and roadblocks after the government raised taxes on soya-bean exports to nearly 40%. The public backed the farmers, and the president’s approval ratings tumbled. But Ms Fernández and her combative husband, Néstor Kirchner, who preceded her as president and now runs the Peronist party, refused to lower the taxes in order to reach a compromise deal.
The two sides were locked in stalemate until the Supreme Court—where a majority of the judges were put in place by Mr Kirchner—announced it would take a case addressing the constitutionality of the taxes. Their legality was in question because the taxes were implemented via an economy-ministry resolution rather than by the legislature. To avoid a potential judicial rebuke, Ms Fernández, a former senator, asked Congress to ratify the levies last month.
Ms Fernández clearly underestimated the pressures on her party’s legislators from Argentina’s interior provinces, whose districts were staunchly opposed to the taxes. Despite holding comfortable majorities in both houses, her Congressional block had to establish a costly rebate scheme for small farmers in order to win a very close vote in the lower house. The bill then passed to the Senate, where a torrent of defections from Ms Fernández’s supporters produced a 36-36 draw.
The decision thus fell to Mr Cobos, whose relationship with the president has become frosty. Ms Fernández had barely spoken to him in a month, presumably because she felt he had acted too independently during the conflict. The beleaguered vice-president all but apologised to her as he cast his deciding vote. “The Argentine president will understand me,” he said, “because I don’t think a law that doesn’t provide a solution to the conflict will achieve anything…I ask forgiveness if I'm wrong.” When Ms Fernández spoke the following evening, forgiveness was not on the agenda: “Let’s hope that those who didn’t understand what we said to the people in October [when the election was held] understand some day,” she said, leaving little doubt about to whom her words were addressed.
Ms Fernández’s stunning defeat shatters the aura of invincibility that she inherited from her husband, who won a series of contentious political battles during his four years in office. Mr Kirchner regarded dissent as virtual treason, and used his control over spending to keep legislators and local officials in line. But while his approval ratings reached 70%, his wife’s are barely above 20%. And while he enjoyed an ample budget surplus, her treasury has been depleted by last year’s pre-election spending binge and by rising costs for fuel and transport subsidies. Ms Fernández actually campaigned as a moderate consensus-seeker; she will have to start governing like one if she hopes to salvage her presidency.
Ms Fernández has a number of options to restore her credibility with voters. For a start, she could reduce the export taxes herself, rather than waiting for the courts to strike them down now that Congress has rejected them. Additional popular moves would include fixing the official inflation index, which her husband manipulated to reflect less than half the true rate, and replacing some of the pliant ministers she inherited from Mr Kirchner with additional independent technocrats.
Ms Fernández has three and a half years left of her term, and it is far too early to write her political obituary. But if she fails to learn from her mistakes, she may go down as one of the longest-serving lame ducks in recent democratic history.
July 18 (Bloomberg) -- The U.K. budget deficit ballooned to the widest since records started in 1946, adding pressure on Prime Minister Gordon Brown to ease his decade-old borrowing rules.
The shortfall was 24.4 billion pounds ($49 billion) in the three months through June, the Office for National Statistics said today. Last month, the deficit expanded to 9.2 billion pounds, more than the median forecast of 7.4 billion pounds in a Bloomberg News survey of 17 economists.
Brown's pledge to hold debt below 40 percent of gross domestic product is under threat as the economy edges towards its first recession since the early 1990s. The government, which has already cut taxes, may find it hard to meet its March forecast of a 43 billion-pound deficit this year as the slowdown saps revenues. Government bond yields soared today.
Relaxing the rules ``would in essence offer scope for more spending and lower tax revenues, a larger budget shortfall in the years ahead and more gilt issuance, and it deals a major blow to the credibility of macroeconomic policy making in the U.K.,'' said Russell Jones, the head of global fixed-income and currency research in London at RBC Capital Markets.
Chancellor of the Exchequer Alistair Darling may change the rules on borrowing later this year, a Treasury spokesman said yesterday. He dismissed a Financial Times report that the exercise would initially result in higher borrowing as ``pure speculation.''
Higher Yields
The yield on the two-year note rose 11 basis points to 5.07 percent as of 12:52 p.m. in London, after climbing to as high as 5.08 percent. It was the biggest increase in the yield since June 19. The pound dropped 0.5 percent to $1.9942, from $2.0038 yesterday. Against the euro, it lost 0.4 percent to 79.31 pence.
Darling today said no decision had been made, promising to keep the public finances on a ``sustainable'' footing. It is right to help the economy ``in a difficult time,'' he said in an interview with BBC radio.
The deterioration in the public finances reflects wider economic woes. Growth will slow to 1.5 percent this year, the least since 1992 as house prices fall, banks restrict lending and soaring food and fuel prices erode living standards, the average forecast in a Treasury survey this month shows.
In a speech in London today, Bank of England Deputy Governor John Gieve said the economy is ``slowing fast'' and that he ``can't rule out'' the U.K. will go into its first recession since 1991.
Fiscal Rules
The slowdown puts Brown at risk of breaching the two fiscal rules he created as finance minister in 1997, when he promised to borrow only for investment over the economic cycle and keep debt below 40 percent of economic output.
Net debt stood at 38.3 percent of GDP in June, up from 37.3 percent a year earlier and the highest since July 1999, the statistics office said. Including the liabilities of Northern Rock, the mortgage lender taken into temporary state ownership in February after its funding dried up, debt was 44.2 percent of GDP.
The quarterly deficit was at least the worst since the aftermath of World War II, when the country, its resources depleted by the six-year military effort, was forced to borrow $4.34 billion from the U.S. to stave off bankruptcy.
Brown ``staked his credibility on the fiscal rules,'' said George Osborne, who speaks for the opposition Conservative Party on finance. ``The public finances are in a mess and the rules are being ditched. It's like giving the prisoners the keys to their own cell.''
Taxes Wane
The slowdown is cutting revenue from sales tax, housing transactions and company profits. In June alone, taxes increased just 2.5 percent, with receipts of value-added tax falling 4.6 percent. Corporation tax rose 0.3 percent and income tax gained 1.7 percent. Spending rose 6.9 percent.
In May, Darling announced a 2.7 billion-pound emergency tax for 22 million people, and this week he postponed for six months an increase in fuel duty to cushion motorists from the surge in oil prices. The delay will cost the Treasury 550 million pounds this year.
With an election due by June 2010 and Labour lagging behind the Conservatives by around 20 points in recent opinion polls, Brown is under pressure to deliver further giveways, said Robert Chote, director of the Institute for Fiscal Studies in London.
Brown can ``raise the money in taxation, cut spending or change the rules,'' he said in an interview. ``It looks today like it's going to be the third of those that takes place.''
`Absolutely Horrific'
A cash-based measure of the total budget deficit was 15.5 billion pounds in June, the highest for the month since records started in 1984, compared with 10 billion pounds a year earlier. Economists forecast a shortfall of 12.6 billion pounds.
The U.K. budget deficit will reach 3.3 percent of GDP this year and next, the European Commission, the European Union's executive agency, forecast in April. In the 27-nation EU, only Hungary faces a bigger shortfall this year at 4 percent of GDP. The deficit in the U.S. is forecast at 5 percent of GDP and 1.9 percent in Japan.
``The figures were horrific, absolutely horrific,'' said Philip Shaw, chief economist at Investec Securities in London.
July 18 (Bloomberg) -- After years of trading insults with Iran, the Bush administration is trying a gentler approach, a tack that produced results in dealings with two longtime U.S. adversaries, North Korea and Libya.
President George W. Bush is sending a top envoy to multinational talks in Geneva tomorrow that will include Iran, the highest-level discussions between the two countries since Iran's Islamic revolution in 1979. The administration is also considering stationing diplomats in Tehran for the first time since then.
The presence of the State Department's third-ranking official, Undersecretary for Political Affairs William Burns, in Geneva is intended to shore up a ``two-track policy'' to reward Iran for suspending uranium enrichment and impose penalties if it doesn't, Secretary of State Condoleezza Rice said yesterday.
``Obviously, the decision to send a U.S. representative is a major step forward, and it's a gesture of good faith,'' said Suzanne Maloney, a former State Department policy adviser. The U.S. has ``always said this is a two-track policy, and yet one track has always been more robust than the other.''
The Bush administration hasn't sent representatives to prior meetings with Iranian officials, saying it won't negotiate until Iran suspends enrichment.
A combination of talks, incentives and penalties ultimately prompted Libya to renounce terrorism and nuclear weapons, and persuaded North Korea to hand over an inventory of its plutonium program last month.
No Major Expectations
The U.S. doesn't have major expectations for the Geneva meeting, an administration official said on condition of anonymity.
Iranian Foreign Minister Manouchehr Mottaki welcomed the U.S. decision to attend the talks as ``positive,'' adding that the negotiations leading to tomorrow's meeting took place in an improved atmosphere.
``In terms of form, this is a step forward,'' Mottaki said at a news conference in Ankara today. ``I hope that this improvement in form will also be reflected in the content.''
In Geneva, Iranian negotiator Saeed Jalili is to respond to the incentives offered a second time by the U.S. and five other nations.
At the State Department today, Secretary of State Condoleezza Rice said the decision to dispatch Burns signals that the U.S. ``will remain very serious about this diplomacy.''
She also said it should ``be very clear to everyone'' that the U.S. continues to insist on the verifiable suspension of Iran's enrichment and reprocessing activities as a precondition for beginning formal negotiations with Iran.
Nuclear Energy Offer
The nations are working to persuade Iran to give up uranium enrichment, a process that can lead to power generation or a bomb. Iran, the Middle East's second-biggest oil producer, says it wants to meet its energy needs and isn't developing nuclear weapons. The U.S. and its partners offered to help Iran with nuclear energy in exchange for its abandonment of uranium enrichment.
A negative response from Iran might put the U.S. in a stronger position to demand a fourth round of sanctions at the United Nations Security Council, said the administration official who spoke on condition of anonymity. European nations also might be more persuaded to impose further sanctions on their own, the official said.
Oil Prices
A week ago, oil prices shot up after an Iranian missile test and speculation that an Israeli military exercise last month was a prelude to a strike on Iran.
The State Department also is considering opening an interests section that would place diplomats in Tehran for the first time since the 1979 hostage crisis.
The administration official said no decision has been made on whether to proceed with the interests section. The U.K.'s Guardian newspaper reported yesterday, without citing anyone, that the administration will make the announcement in the next month.
Switzerland, which acts as an intermediary for the U.S. in Iran, said it has talked about the possibility with the Bush administration.
U.S. State Department spokesman Sean McCormack wouldn't comment on administration deliberations on setting up an interests section. Even so, he said, ``It is quite apparent from our efforts over the past several years that we have a real interest in reaching out to the Iranian people.''
Iranian Basketball Team
He cited a State Department office set up in Dubai to deal with Iran-related matters in the region, U.S. offers of disaster aid to Iran, and U.S. visits by Iranian artists. The Iranian Olympic basketball team will come to the U.S. to play in the National Basketball Association summer league, McCormack said.
``The request of the United States has been made via the media in a non-official fashion,'' Iran's Mottaki said earlier in Damascus. ``The opening of an American interests office is the object of a study and an examination in Iran.''
Burns won't raise the issue in Geneva, McCormack said. Burns will join Jalili at the meeting with European Union foreign policy chief Javier Solana and officials from France, Germany, the U.K., China and Russia.
Burns's presence is a low-risk venture for Bush, who approved the move, said Edward Walker, a former U.S. ambassador to Israel and Egypt who once served as assistant secretary of state for Near Eastern affairs.
As a career diplomat, Burns ``does not commit the political side at the White House,'' said Walker, an adjunct scholar with the Middle East Institute in Washington. ``Yet he gives encouragement to our partners in the coalition and sends a hint to the Iranians that there may be more if they reciprocate.''
The odds are slim that the Geneva meeting would produce dramatic results, based on comments by Iranian President Mahmoud Ahmadinejad and on Jalili's previous meetings with Solana, said Maloney, now a senior fellow at the Brookings Institution in Washington.
``Anything that produces successor meetings would be considered a huge victory,'' she said.
July 18 (Bloomberg) -- Citigroup Inc. rose in New York trading, heading for a record weekly increase, after reporting a smaller-than-estimated loss on fewer mortgage-bond writedowns, lower borrowing costs and job cuts.
Led by Chief Executive Officer Vikram Pandit, a former investment banker with a Ph.D. in finance, Citigroup joined JPMorgan Chase & Co. and Wells Fargo & Co. in beating analysts' predictions this week. Pandit, who succeeded onetime corporate lawyer Charles O. Prince at the New York-based bank in December, reduced assets by $99 billion during the quarter, making progress on the $400 billion he has targeted.
Citigroup, the biggest U.S. bank by assets, rose as much as 14 percent in New York trading after reporting results that exceeded estimates for the first time since last October. The company's second-quarter net loss was $2.5 billion, or 54 cents a share, because of $12 billion in writedowns and increased bad- loan reserves. Analysts predicted a loss of $3.67 billion.
``Conditions have eased a little bit and at the same time they have been able to grow their top line,'' William Fitzpatrick, an equity analyst at Optique Capital Management Inc. in Milwaukee, which manages $1.4 billion, said in a Bloomberg Television interview. ``They haven't had a lot of clients run out the door. They have been able to maintain relationships. Now it's just a matter of being more profitable.''
Weekly Surge
Citigroup rose $1.82, or 10 percent, to a four-week high of $19.79 at 12:33 p.m. in composite trading on the New York Stock Exchange, after reaching $20.48. For the week, the shares are up 22 percent, the best performance since the company was formed in 1998.
Deutsche Bank AG analyst Mike Mayo changed his recommendation to ``hold'' from ``sell,'' saying the results ease concern the bank will have to raise more capital right away.
``All things considered, it was a decent quarter,'' Goldman Sachs analyst William Tanona, who has a ``sell'' rating on the shares, wrote in a note today. ``The consumer businesses continued to show deterioration in credit statistics, as expected. However, results were not as bad as investors had expected.''
Writedowns for subprime-related assets, leveraged loans and bond insurance contracts totaled $7.2 billion, down from about $12 billion in the first quarter and $18 billion in the fourth quarter of 2007. The bank's costs for loan write-offs and higher credit reserves increased $4.5 billion from the second quarter of last year, mainly because of rising delinquencies in North America and the company's credit-card business.
Writedown Estimate
Credit Suisse Group analyst Susan Roth Katzke predicted in a June 24 note that the company would have as much as $10 billion of writedowns.
Second-quarter revenue dropped 29 percent to $18.7 billion, compared with the average estimate of $17.3 billion among analysts surveyed by Bloomberg. Earnings in the same quarter last year were $6.23 billion, or $1.24 a share.
The U.S. consumer unit, which includes retail banking and loans to individuals and small businesses, had revenue of $7.89 billion, virtually unchanged from a year earlier. Credit-card fees and other revenue rose 3 percent to $5.47 billion.
Mortgage losses may be ``well in excess'' of the previous peak in 2003, Chief Executive Officer Gary Crittenden said on a conference call with analysts after earnings were released. The bank is recovering less on delinquent credit cards and expects higher charge-offs, Crittenden said.
Fed Rate Cuts
The bank's net interest margin, the difference between the rates it earns on loans and securities and what it pays on deposits, expanded 0.34 percentage point from the first quarter, to 3.18 percent. Much of that expansion stemmed from seven interest-rate cuts by the Federal Reserve in the past year, which have reduced the bank's borrowing costs and allowed it to trim the rates it pays depositors.
Increasing the lending margin is ``a big thing for Citi, it's such a big entity,'' said David Hendler, an analyst at CreditSights Inc. in New York. ``Managements can control their margins fairly well, but you've got to be set up to do it. Most analysts thought the margin would be flatter than that.''
Citigroup's Tier 1 capital ratio, a measure regulators use to monitor a bank's ability to withstand loan losses, rose to 8.7 percent at the end of the quarter from 7.7 percent in the first quarter and 7.1 percent at the end of 2007. The minimum for a ``well-capitalized'' rating from U.S. regulators is 6 percent. Citigroup sets its own target at 7.5 percent, partly to assure its AA- rating from Standard & Poor's.
Lower Borrowing Costs
Revenue at Citigroup's corporate and investment bank plunged 71 percent to $2.94 billion because of the writedowns. The wealth management division, which includes the Smith Barney brokerage, gained 4 percent to $3.32 billion.
Pandit, 51, put former Morgan Stanley colleague John Havens in charge of trading and investment banking, moved U.S. consumer head Steve Freiberg to oversee a new credit-card division and recruited former Wells Fargo executive Terri Dial to oversee consumer banking in the U.S.
Pandit, who has a Ph.D. from New York's Columbia University, worked as an investment banker and trading manager at Morgan Stanley for 22 years before quitting in 2005 amid a power struggle with then-CEO Philip Purcell.
He founded his own hedge fund, Old Lane LP, in 2006, and then sold it for $800 million a year later to Citigroup, where he took a job reporting to Prince.
Under Prince, Citigroup's balance sheet swelled by $689 billion, an amount larger than the entire balance sheet of San Francisco-based Wells Fargo, the fifth-biggest U.S. bank by assets. Citigroup's total assets stood at $2.2 trillion at the end of last year. With the second-quarter reductions, that dropped to $2.1 trillion.
Market Value
Before today, Citigroup had slumped 39 percent this year, reaching the lowest point since the bank was created a decade ago from the merger of Citicorp and Travelers Group Inc. The decline led to the ouster of Prince as credit-market losses piled up and Citigroup's market value fell below those of Bank of America Corp. and JPMorgan. New York-based JPMorgan reported second- quarter earnings yesterday of $2 billion. Wells Fargo's profit was $1.75 billion.
The bank slashed the quarterly dividend by 41 percent in January to 32 cents a share, the first drop since the early 1990s. Analysts including Oppenheimer & Co.'s Meredith Whitney have said the bank may have to cut the dividend again to bolster capital as losses escalate.
``They did not cut the dividend and many analysts were concerned that they might,'' David Dietze, president of Point View Financial Services, said in a Bloomberg Radio interview. ``They made some nice improvements in terms of cost cutting.''
`Legacy Assets'
Pandit said in May that Citigroup will shed ``legacy assets,'' including real estate holdings and collateralized debt obligations, such as bonds backed by pools of subprime mortgages. Of the $400 billion targeted, the bank eliminated about $67 billion in the second quarter, according to today's statement.
Merrill Lynch & Co., the third-biggest U.S. securities firm, yesterday posted a loss of $4.65 billion, or $4.97 a share, on a $9.7 billion of credit-market writedowns, more than analysts' had expected.
Merrill Chief Executive John Thain, who took over from former executive Stan O'Neal in December, hasn't fared as well as Pandit. Thain, 53, joined Merrill from NYSE Euronext, where he was CEO since 2004. Before that, he worked for 25 years at Goldman Sachs Group Inc.
Citigroup shares have fallen 43 percent since Pandit started and Merrill has slumped 50 percent since Thain began on Dec. 1.
Revenue Target
Citigroup plans to cut $15 billion in costs in the next two to three years, while aiming for revenue growth of 9 percent, Pandit said.
Citigroup agreed to sell its German consumer banking unit to France's Credit Mutuel Group last week for 4.9 billion euros ($7.7 billion). Capital freed up by that sale will boost Citigroup's Tier 1 ratio by another 0.6 percentage points, the company said.
The company said today it will eliminate 7,000 jobs through the CitiStreet and German unit sales. It reduced headcount by 6,000 jobs in the second quarter and about 14,000 in the first half of the year, Crittenden said on the call.
July 18 (Bloomberg) -- Mexico's central bank raised its benchmark interest rate for the second straight month to curb the highest inflation rate in more than three years.
The bank's five-member board, led by Governor Guillermo Ortiz, raised the key lending rate by a quarter percentage point to 8 percent today, the highest since December 2005. Policy makers said the inflation outlook has worsened and they will raise their forecasts by an average of about half a percentage point in a quarterly report this month.
The peso surged to a five-year high on speculation the central bank may further increase interest rates, which would widen the yield advantage Mexico has compared with the U.S. The Mexican peso is up 6.8 percent this year against the dollar.
``The statement is very hawkish,'' said Alfredo Thorne, head of Latin America research for JPMorgan Chase & Co. in Mexico City. ``As long as inflation expectations remain high and there are risks, then they will keep on hiking.''
Thorne said he expects a rate increase to 8.25 percent in August and possibly another one in September.
Inflation in Latin America's second-biggest economy has accelerated for five straight months on rising food and energy costs.
Consumer prices rose 5.26 percent in June, the first month that inflation exceeded the bank's forecast of no more than 5 percent in the second and third quarters of this year. The central bank targets inflation of 3 percent, plus or minus one percentage point.
`Anchored' Expectations
``It is indispensable to keep inflation expectations well anchored,'' the bank said in its statement today. ``Monetary policy plays a fundamental role in this.''
The decision matched the forecast of 21 of 28 economists surveyed by Bloomberg. Seven others said the rate would stay unchanged. The bank released its report 22 minutes earlier than scheduled today because of a technical failure, according to its press office.
``The scenario is worse than expected,'' said Luis Flores, economist at IXE Grupo Financiero SA in Mexico City. ``Food and energy prices will continue to exert pressure. The central bank is looking at this and decided to raise rates so inflation doesn't get out of control.''
The peso gained 0.3 percent to 10.2048 to the dollar at 12:38 p.m. New York time from 10.2354 yesterday, and earlier it reached a high of 10.1987. The yield on the government's benchmark 10 percent bond due December 2024 rose 14.7 basis points, or 0.147 percentage point, to 9.23 percent, according to Banco Santander SA.
Mexico's Bolsa index has gained 2.4 percent this year in dollar terms, compared with a decline of 14 percent by the Standard & Poor's 500 Index, the benchmark for U.S. stocks.
`No Choice'
Policy makers were forced to raise borrowing costs as annual inflation exceeds the bank's target of no more than 4 percent, said Bartosz Pawlowski, a strategist at TD Securities Ltd. in London.
``It had no other choice but to act,'' Pawlowski said. ``The bank has to tackle inflation expectations and do something about the current situation.''
The bank surprised analysts last month by raising borrowing costs for the first time in eight months.
Gray Newman, chief Latin America economist at Morgan Stanley in New York, said the bank's statement today didn't clarify whether policy makers are likely to further increase rates. Newman said Banco de Mexico may give a clearer indication in its July 30 report, he said.
``They didn't send a signal that they're through for the time being,'' Newman said.
Economy
Mexico's government says the economy is less vulnerable to a slowdown in the U.S. than it was during the U.S. recession of 2001. Still, Mexican consumer confidence fell more than economists estimated in June to the lowest since January 2002.
The bank said today it estimates the economy expanded less in the second quarter than it did in the first. Gross domestic product grew 2.6 percent in the first quarter, or 3.7 percent when seasonally adjusted.
President Felipe Calderon on June 18 announced an accord with industry groups to freeze the price of canned tuna, coffee, beans and about 150 other items in a bid to hold down inflation. Wheat, corn and rice have risen to records this year because of shrinking global stockpiles and more demand.
Calderon has also tried to fight higher food prices by lifting import tariffs on corn, wheat, rice and beans in May. He eliminated import taxes on nitrogen-based fertilizer, and cut in half the tax on imported powdered milk.
July 18 (Bloomberg) -- U.S. stocks fell, led by technology shares, as disappointing results at Google Inc. and Microsoft Corp. overshadowed Citigroup Inc.'s smaller-than-estimated loss, extending the yearlong earnings slump.
Google posted the steepest drop since the most-used Internet search engine went public in 2004 and Microsoft declined the most in two years after their profit reports raised concern the slowing economy has reduced demand for computer-related products. Citigroup surged the most in the Dow Jones Industrial Average after joining JPMorgan Chase & Co. and Wells Fargo & Co. in beating forecasts this week.
The S&P 500 lost 7.04 points, or 0.6 percent, to 1,253.28 at 1 p.m. in New York, paring its gain this week to 1.1 percent. The Dow Jones Industrial Average declined 19.79, or 0.2 percent, to 11,426.87. The Nasdaq Composite Index fell 39.11, or 1.7 percent, to 2,273.19. Almost two stocks retreated for each that advanced on the New York Stock Exchange.
``Investor pessimism is about as thick as it gets,'' Bruce Bittles, Nashville-based chief investment strategist at Robert W. Baird & Co., which manages $15 billion, said in an interview with Bloomberg Television. ``Until we find a real bottom in this market, which we think will probably occur early in the fourth quarter, we think being defensive is the way to go.''
Sixty-seven S&P 500 companies that reported second-quarter earnings missed the average analyst estimate by 0.9 percent, according to data compiled by Bloomberg. Analysts project profits fell 16 percent during the period, the fourth consecutive decline. That would be the longest streak in six years, Bloomberg data show.
$13.5 Trillion Lost
About $13.5 trillion has been wiped off the value of global equities since October as more than $435 billion in credit- related losses prolong the global economy's slump and rising commodity prices stoke inflation. Among the 23 industrialized nations in the MSCI World Index, only Canada has averted a bear- market decline of 20 percent.
Google fell $53.24, or 10 percent, to $480.20. The company posted second-quarter profit of $3.92 a share, excluding costs such as stock compensation. Analysts estimated $4.73 on average in a Bloomberg survey.
Microsoft retreated $2.02, or 7.3 percent, to $25.50. The world's biggest software maker reported 2.3 percent less fourth- quarter profit than analysts estimated. The company, whose shares have fallen 26 percent this year, predicted first-quarter earnings as low as 47 cents a share. Analysts polled by Bloomberg anticipated 49 cents a share, on average.
The S&P 500 Information Technology Index slumped 1.9 percent, its first retreat in four days.
Smaller Loss
Citigroup gained $1.64, or 9.1 percent, to $19.61. The bank, which has tumbled 34 percent this year, posted a loss of 49 cents a share from continuing operations. That was less than the 60- cent loss analysts estimated on average in a Bloomberg survey. Citigroup took about $7.2 billion of credit-market writedowns.
IBM raised its full-year forecast to at least $8.75 a share from $8.50. Nine analysts in the Bloomberg survey had predicted 2008 earnings of $8.54, on average. The world's largest computer- services provider reported a 22 percent increase in second- quarter profit, fueled by sales in emerging markets. IBM shares rose $2.89 to $129.41.
Gilead Sciences Inc. lost 8.8 percent to $50.53. The drugmaker reported 2.2 percent less second-quarter profit than analysts estimated, the first profit miss since at least 2004, according to Bloomberg data.
Barr Pharmaceuticals Inc. gained 11 percent to $63.26. Teva Pharmaceutical Industries Ltd., the world's biggest maker of generic drugs, agreed to buy rival Barr for $7.46 billion to expand into new markets and widen its lead in copying brand-name medicines. Teva's American depositary receipts rose 5.4 percent to $43.28.
Mattel Inc. rose 12 percent to $20.49. The world's largest toymaker reported second-quarter profit that declined less than analysts estimated after international sales increased and kids bought Batman action figures.
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