13 March 2010 - Global Markets Review

Good Morning Ladies & Gentlemen,

China has once again been in the news this week and I'd like to walk you through a few of the newsworthy issues stirring sentiment both here in China and where the currency is concerned, globally.

The first is that China plans to nullify all guarantees local governments have provided for loans taken by their financing vehicles as concerns about credit risks on such debt increases.

The Ministry of Finance will also ban all future guarantees by local governments and legislatures in rules that may be issued as early as this month, Yan Qingmin, head of the banking regulator's Shanghai branch, said in an interview. The ministry held meetings on the rules on Feb. 25 with regulators including the China Banking Regulatory Commission and the People's Bank of China, Yan said on 5 March.

China's local governments are raising funds through investment vehicles to circumvent regulations that prevent them from borrowing directly. A crackdown on such loans, estimated at about 11.4 trillion RMB ($1.7 trillion) at the end of 2009, could trigger a gigantic wave of bad debts as projects are left without funding.

By striking the fear of God into lenders, regulators hope to get them to turn off the tap. Banks have lent on the assumption that a lot of these infrastructure projects are risk-free, but many had no creditworthiness beside the guarantees.

The Hang Seng Finance Index, which tracks Hong Kong-traded shares of banks including Industrial & Commercial Bank of China Ltd., closed 2 percent higher Tuesday.

Su Ning, a deputy governor at China's central bank, said Wednesday that a "fairly high proportion" of total lending last year went to the funding vehicles. Chinese banks extended a record 9.59 trillion RMB of new loans in 2009. Su sees "a big risk" from local-government guarantees for money borrowed to fund infrastructure projects that may not generate returns, he said at a press briefing in Beijing.

China's sending a very strong signal that this kind of financing is over. It raises the spectre that China's banking system has a lot more risk in it than people previously thought.

Central bank governor Zhou Xiaochuan said March 6 during the National People's Congress that while "many" local financing vehicles have the ability to repay, two types cause concern.

One uses land as collateral, while the other can't fully repay borrowings, meaning local governments may be liable, leading to "fiscal risks," he said.

A few cities and counties may struggle with repayments in coming years because of debt ratios already exceeding 400 percent, a person with knowledge of the matter said in January. The ratio is of year-end outstanding debt to annual disposable fiscal income.

The financing vehicles of large coastal cities are well- funded as most have publicly traded subsidiaries that can raise capital from the markets and rely less on bank loans. Entities in northern and western China are of particular concern, the banking regulator's Yan said while attending annual parliamentary meetings.

The 1998 collapse of Guangdong International Trust & Investment Corp., which borrowed domestically and overseas on behalf of southern China's Guangdong province, left creditors including Dresdner Bank AG of Germany and Bank One Corp. in the U.S. with $3 billion of unpaid bonds. It marked the first time that Chinese authorities failed to bail out one of the nation's state-owned trusts.

Commercial banks have been told to assess the size of such lending and stop providing further credit if they find problems, Yan said.

Bank of China Ltd. President Li Lihui said in an interview last week that the nation's third-largest lender has reviewed loans to local governments and identified some financing vehicles that didn't have adequate liquidity to make payment. The bank plans to exit projects without proper collateral and reduce new advances to local governments this year, Li said.

ICBC Chairman Jiang Jianqing said the lender found some risks in such borrowing arms. Those situations aren't yet widespread, Jiang said. The bank inspected its loans extended to local government financing vehicles in 2008 and 2009 and "so far didn't find many big problems," ICBC President Yang Kaisheng said Tuesday.

Some economists see a "classic red herring" in arguments that "enormous, hidden off-balance-sheet liabilities" among China's local governments could precipitate a debt crisis.

The use of local-government financing vehicles is a "micro-level" issue, not one that affects judgments on the strength of a Chinese economy which is "nowhere near to a crisis or implosion," some economists argue.

It is estimated that borrowing by China's 8,000 local-government entities may have totaled 11.429 trillion RMB in outstanding debt by the end of last year and they had credit lines with banks for an additional 12.767 trillion RMB. That may result in bad loans of up to 3 trillion RMB even if the government cracks down on funding.

China's banks had 497 billion RMB of non-performing loans as of 31 December, accounting for 1.58 percent the nation's total advances, according to the banking regulator.

I remember 18 months ago saying in this very Newsletter how I applauded President Obama's stance on not pushing China over the RMB and its potential for revaluation.

Oh how 18 months is a very short time in politics and how political stances can change!

China and the US traded barbs on Friday over the economy and human rights, raising the temperature ahead of what could be a crucial showdown over currency policy next month.

Su Ning, a deputy governor of the Chinese central bank, said the US should not "politicise" China's currency policy, a day after President Barack Obama urged China to adopt a "more market-oriented exchange rate".

"We always refuse to politicise the RMB exchange rate issue and we never think that one country should ask another for help in solving its own problems," said Mr Su.

Mr Obama's comments on Thursday came ahead of a decision the US Treasury department has to make by April 15 on whether to label China as a "currency manipulator".

Political pressure is beginning to mount again in the US to take action against China if it does not abandon the peg to the US dollar it has held to since mid-2008.

China had appeared to signal it was considering a shift in policy when the head of the central bank said last weekend that the currency peg was a "special" policy for the financial crisis and that it would be abandoned "sooner or later".

Romano Prodi, the former president of the European Commission and Italian prime minister, said the US and Europe were wrong to openly criticise China over its currency because this would be counterproductive.

"The west must not teach the Chinese what they have to do with the RMB because otherwise they will never do it. It's so clear," he said in an interview with the Financial Times.

China also on Friday rejected US criticisms of its human rights record as hypocritical and published its own damning report about human rights in the US.

The report, issued by the State Council Information Office, was a response to the State Department's annual assessment of human rights released on Thursday, which criticised Chinese internet restrictions and treatment of dissidents.

"The United States not only has a terrible domestic human rights record, it is also the main source of human rights disasters worldwide," the Chinese report said. "The United States monopolises the strategic resources of the global internet, and has been retaining a tight grip over the internet ever since its first appearance."

The two governments have issued parallel reports on human rights for several years.

So we are seeing a ramping up of rhetoric from the US as once again, their domestic problems seem to be increasing and they are looking at who to blame for their own shortcomings.

China's a perfect scapegoat here - let's blame them!

But I would urge the US not to directly label China as a currency manipulator as that could open a pandora's box of problems in the near and longer terms.

If a country has lent you 3 trillion US Dollars, I would say you don't need to be Tim Geithner or Barrack Obama to work out that crossing them over the RMB issue at this moment in America's unstable fiscal times, is not a prudent move.

But then again, America is hardly known for its tact and diplomacy!

If the US starts levying more duties on Chinese products, we could be entering a new 'trade war' and given the trade imbalance and capital in the bank, there is only going to be one winner!

On to those numbers for the week that was:

US Markets

How the US did this week .....

US Summary Most US stocks fell, pulling the Standard & Poor's 500 Index down from a 17-month high, as a drop in consumer confidence overshadowed an unexpected increase in retail sales

Citigroup Inc. and Bank of America Corp. fell more than 1.5% and S&P 500 financial shares ended the longest streak of gains since at least 1989. Pfizer Inc. slid 1.2% as its drug failed to halt the progression of advanced breast tumors. Caterpillar Inc. helped lead the Dow Jones Industrial Average higher on signs of growing Chinese demand for construction machinery. Even with Friday's drop in the S&P 500, futures on the index rose for an 11th day, the longest streak ever.

About 10 stocks declined for every nine that rose on the New York Stock Exchange and Nasdaq Stock Market. The S&P 500 fell less than 0.1% to 1,149.99 at 4:08 p.m. in New York, erasing an early gain of 0.3% after a decrease in the Reuters/ University of Michigan preliminary consumer sentiment index signaled continuing concern over the job market. The Dow rose 12.85 points, or 0.1%, to 10,624.69.

US stocks rose for a third day Thursday, sending the S&P 500 Index to the highest level since October 2008, as Citigroup Inc. led a rally in bank shares. The S&P 500 gained 1% this week and the Dow climbed 0.6%.

Futures on the S&P 500 expiring this month climbed 0.7 point to 1,151.3 Friday amid growing speculation the economic recovery will be sustained. That's the longest streak since they were created in 1982.

The S&P 500 closed at a 15-month high of 1,150.23 on Jan. 19, and then plunged 8.1% through Feb. 8 on concern that European nations including Greece will fail to pay back debt and speculation that the Fed will need to rein in emergency stimulus measures as the economy improves. The index has since erased that loss to extend its rebound since March 9, 2009, to 70%.

Financial shares in the S&P 500 retreated for the first time in 11 sessions, losing 0.4% as a group.

Citigroup Inc. fell for the first time in nine days after Oppenheimer & Co. said the stock is fairly valued and under a "cloud" as long as the US government remains a major shareholder. Citigroup dropped 5% to $3.97 after Thursday rising to the highest since November.

Charles Schwab Corp. sank 3.5% to $18.43 after saying it expects first-quarter earnings to be as much as 4 cents a share lower than its fourth-quarter results. Fourth-quarter net income was 14 cents. The average estimate of analysts surveyed by Bloomberg was for a first-quarter profit of 15 cents a share.

Bank of America had the biggest decline in the Dow, dropping 1.6% to $16.85.

Health-care stocks dropped 0.4% collectively.

Pfizer retreated 1.2% to $17.08. The world's largest drugmaker said the cancer drug Sutent failed to halt the progression of advanced breast tumors in two studies. The company also stopped a trial of an experimental medicine to treat lung malignancy.

Abbott Laboratories fell 1.8% to $54.52. The maker of the arthritis medicine Humira was cut to "sell" from "hold" at Citigroup Inc., which said the company may face "underlying profitability trouble" this year.

United Technologies Corp. slipped 0.7% to $71.53. The maker of Pratt & Whitney jet engines said it expects 2010 earnings per share of $4.40 to $4.65. The average estimate of analysts surveyed by Bloomberg was $4.64 a share.

Pall Corp. slumped 4.8% to $38.87. The producer of filters for drugmakers and refineries forecast 2010 earnings excluding some items of $2.05 a share at most. On average, the analysts surveyed by Bloomberg estimated profit of $2.07.

CF Industries Holdings Inc. lost 3.9% to $96.73 after Agrium Inc. said it will let its $5.43 billion offer for the fertilizer producer expire and won't try to elect nominees to CF's board.

Separately, Yara International ASA declined to raise its $4.1 billion offer for Terra Industries Inc., leaving the way open for rival suitor CF Industries. Terra said March 10 it favored a $4.71 billion offer from CF Industries and planned to terminate an earlier agreement with Yara unless the Norwegian company counterbid. Terra's shares fell 1.2% to $46.33.

Bets against smaller US stocks have reached the highest level in seven months as traders speculate the group's record valuation will lead to declines.

Investors boosted bearish bets in 2010 even as the shares rallied on signs the US economy is strengthening. More than 8% of shares among companies in the Russell 2000 Index have been sold short, the highest level in at least a year.

Benchmark indexes advanced at the start of trading after the Commerce Department said purchases at US retailers increased 0.3% last month, compared with a 0.2% drop forecast in a Bloomberg survey of economists.

A gauge of S&P 500 retailers advanced 0.6%.

Sears Holdings Corp. and Macy's Inc, the largest US department-store companies, gained at least 1.7%.

Makers of construction machinery rallied after Komatsu Ltd. of Japan, the world's second-largest seller of large dump trucks and excavators, said it expects sales in China to increase 40% to 50% in the year starting April 1.

Caterpillar Inc., the world's largest maker of bulldozers, gained 2.5% to $60.36, the second-biggest gain in the Dow. Paccar Inc., a maker of Kenworth, Peterbilt and DAF trucks, rose 3.9% to $41.35, the highest since September 2008.

Monsanto Co. rose 1% to $72.35. The company, facing antitrust probes into its genetically modified seeds, may benefit from previous court rulings in which intellectual property rights trumped competition concerns, according to antitrust lawyers.

Supervalu Inc. surged 6.6% to $17.13 on speculation the second-largest grocery chain will be acquired. Steve Bloomquist, a Supervalu spokesman, said the company wouldn't comment on market rumor or speculation.

RF Micro Devices Inc. advanced 3.8% to $4.91. The maker of semiconductor products rose after it was picked by CNBC's "Mad Money" television show host Jim Cramer on potential growth and market-share gains.

European Markets

What has been happening in Europe this week .....

Europe Summary European stocks advanced, extending the Stoxx Europe 600 Index's second consecutive weekly gain, on speculation the European Union may offer to bail out Greece and an unexpected increase in US retail sales.

Siemens, Europe's largest engineering company, climbed to a five-month high as the region's industrial output jumped. Yara International ASA rallied the most since April after saying it won't increase its offer for US rival Terra Industries Inc. British Sky Broadcasting Plc surged the most in almost eight months on a report that Rupert Murdoch's News Corp. may bid for the shares it doesn't own.

The Stoxx 600 rose 0.3% to 258.4, a seven-week high. The measure has gained 0.5% this week, extending its advance since this year's low on Feb. 5 to 8.8% amid speculation the European Union will support Greece if needed as it struggles to reduce the region's biggest budget deficit.

Greece may get a 55 billion-Euro ($76 billion) bailout from the EU, Kurier newspaper reported Friday, without saying where it got the information. EU finance ministers will discuss next week whether any Greek bailout should be funded by issuing EU bonds guaranteed by Euro region governments, said three people briefed on preparations for March 15-16 meetings.

National benchmark indexes climbed in 14 of the 18 western European markets. The UK's FTSE 100 rose 0.2% and Germany's DAX gained 0.3%. France's CAC 40 slipped less than 0.1%.

A measure of industrial goods and services shares posted the biggest gain among 19 industry groups in the Stoxx 600 as data from the EU statistics office showed industrial output jumped the most in more than two decades in January.

GERMANY

German stocks advanced, gaining for a second week, as bank stocks benefitted from speculation that the European Union will offer Greece a bailout and Deutsche Post AG rose.

Commerzbank AG and Deutsche Bank AG gained 2.9% and 1.3%, respectively, while Deutsche Post AG advanced 2% as UniCredit Research advised investors to "buy" the stock. Preferred shares of Volkswagen AG rose 1.9% after the stock's price estimate was raised at Nomura Holdings Inc., and K+S AG increased 1.6% as Independent Research GmbH lifted its recommendation. Infineon Technologies AG rose 1.6%, and Siemens AG gained 1.7%.

The DAX Index rose 0.3% to 5,945.11 in Frankfurt. The gauge has rebounded 62% since March 6, 2009, amid record-low interest rates and as governments worldwide committed more than $12 trillion to stimulate the economy. The broader HDAX Index advanced 0.3% Friday.

European industrial output rose the most in more than two decades in January as the reviving global economy prompted companies to boost production.

Output in the economy of the 16 nations using the Euro jumped 1.7% from December, when it rose a revised 0.6%, the European Union's statistics office in Luxembourg said Friday. The January increase was the biggest since August 1989 and was more than double the 0.7% gain projected by economists, according to the median of 34 forecasts in a Bloomberg survey.

Commerzbank AG gained 2.9% to 6.09 Euros, a fourth straight gain. Germany's second-biggest lender said it placed a 1 billion-Euro benchmark bond with a maturity of seven years.

Deutsche Bank AG, Germany's largest bank, advanced 1.3%, to 52.88 Euros, the highest in more than two months. Greece may get a 55 billion-Euro ($75 billion) bailout from the EU, Kurier newspaper reported, without saying where it got the information. EU finance ministers will discuss next week whether any Greek bailout should be funded by issuing EU bonds guaranteed by Euro region governments, said three people briefed on preparations for March 15-16 meetings.

Deutsche Post rose 2% to 13.13 Euros, ending two days of losses after UniCredit Research upgraded Europe's biggest mail carrier to "buy" from "hold."

Deutsche Post "put its reputation as a stable dividend stock in question in 2009 with the decision to cut its dividend by 33%," the brokerage said in a note. "Therefore, this area of disappointment in 2009 should be a source of relief and support for the stock early in 2010."

Preferred shares of Volkswagen rose 1.9% to 69.99 Euros, extending gains of 7.7% Thursday, as Nomura lifted its price estimate to 89 Euros from 82 Euros, reiterating a "buy" rating. The shares also benefitted from speculation Thursday's announcement of a convertible-bond sale reduces the likelihood of a rights offer.

Porsche, maker of the 911, Cayman and Boxster sports cars, gained for a third session, advancing 1.6% to 43.03 Euros. MAN SE, Europe's third-biggest truckmaker, rose 1.4% to 58 Euros, an 11th straight advance.

K+S increased 1.6% to 46.37 Euros, paring a 2.7% loss Thursday. Independent Research GmbH upgraded Europe's biggest potash producer to "hold" from "sell."

Shares of the German chipmaker Infineon Technologies increased 1.6% to 4.44 Euros. National Semiconductor Corp., the US maker of chips that control power in electronic devices, forecast fourth-quarter sales of at least $375 million. On average, the analysts surveyed by Bloomberg estimated revenue of $359.9 million.

Siemens, Europe's largest engineering company, rose 1.7% to 68.38 Euros.

Fraport AG rose 1.8% to 39.47 Euros. Royal Bank of Scotland Group Plc initiated coverage of the stock with a "hold" recommendation, saying it sees "a good future for the core Frankfurt Airport asset and earnings growth at Antalya."

Sky Deutschland AG climbed 4.5% to 2.10 Euros, erasing Thursday's decline. British Sky Broadcasting Plc, the UK's biggest pay-television provider, rose the most since October in London trading on a report that Rupert Murdoch's News Corp. may bid for the shares it doesn't own. Sky Deutschland is Germany's biggest pay-TV broadcaster, in which News Corp. owns 45.4%. BSkyB spokesman Robert Fraser and News Corp. spokeswoman Alice Macandrew declined to comment Friday.

Kontron AG lost 3.9% to 7.80 Euros after Berenberg Bank downgraded the maker of miniature computers for slot machines and drone aircraft to "hold" from "buy." The brokerage, which cited a one-on-one with Chief Executive Officer Ulrich Gehrmann last week, said in a note that it "got the impression that Kontron is faced again with a difficult year that may result in no growth on both the top and bottom lines."

FRANCE

France's CAC 40 Index slid 1.55, or less than 0.1%, to 3,927.4 in Paris Friday. The SBF 120 Index was also little changed.

Areva jumped 11.8 Euros, or 3.2%, to 382.95. CA Cheuvreux upgraded the world's biggest nuclear reactor builder to "outperform" from "underperform."

Carrefour lost 1.12 Euros, or 3%, to 35.86 Euros. Credit Suisse Group AG downgraded the French supermarket operator to "underperform" from "neutral" saying the company will need to cut prices to avoid losing market share.

EDF Energies Nouvelles sank 1.15 Euros, or 3.1%, to 36.05 Euros after the company said Indianapolis Power & Light Co. terminated an accord to buy power from a planned wind farm. The shares were cut to "accumulate" from "buy" at Gilbert Dupont after the news.

Esker rallied 30 cents, or 5.1%, to 6.17 Euros. The software company reported net income of 1.16 million Euros in 2009. That compares with 1.11 million Euros a year earlier.

Gemalto dropped 95.5 cents, or 2.9%, to 31.69 Euros after TPG Capital sold 5.7 million of shares in the world's biggest smartcard maker, Goldman Sachs Group Inc. said. The stock was placed at 31.5 Euros apiece.

Cie. Parisienne de Chauffage Urbain jumped 9.48 Euros, or 10%, to 104.37 Euros after the company reported 2009 net income more than doubled to 24 million Euros.

BELGIUM

The Bel 20 in Brussels brought the week to a close on 2,625.28, up 0.45%.

Belgian metals producer Nyrstar said Friday it's lifted its bid for Australia's CBH Resources. The Belgian group said it's offering 0.195 Australian Dollars ($0.179) per ordinary share and A$750 per convertible note. The offer values the ordinary shares and convertible notes of the group at a total of A$290 million, compared to the previous bid value of A$220 million.

Belgian insurer Fortis Holding said Wednesday that Dutch regulators fined it Euro576,000 ($781,000) for giving incorrect information about the financial situation of Fortis bank, months before it nearly collapsed and sought government rescue.

Fortis has the name and some of the assets and liabilities of what was once the largest bank in Belgium, the Netherlands and Luxembourg. It ran into funding problems in September 2008 and got a bailout from the three governments after piling on debt from a massive banking takeover.

Belgium sold Fortis' core Belgian banking operations to France's BNP Paribas in 2008, leaving Fortis shareholders with the far smaller insurance operations, a host of legal liabilities and shares that had lost most of their value.

The company said it would appeal a Feb. 5 ruling from the Netherlands' AFM that said Fortis made "incorrect or misleading" statements about its financial situation in June 2008 and should have gone public about its deteriorating finances to avoid shareholder harm.

Fortis also said it was facing shareholder lawsuits and administrative and criminal investigations in Belgium the Netherlands and the United States, "some of which could result in substantial but currently unquantifiable future liabilities."

It said Belgian and Dutch court-appointed experts are examining Fortis' 2007 offer to buy part of ABN Amro - part of the biggest banking takeover ever - and how the bank financed the deal and informed shareholders about it.

Shareholders in Belgium and the Netherlands are suing to demand the annulment of decisions Fortis made surrounding the government rescue of the bank in 2008 that saw the value of their shares tumble. They are also seeking compensation for alleged miscommunication or market abuse committed by Fortis from May 2007 and October 2008, it said.

The company also said it was checking if it was liable for legal expenses and compensation for former Fortis executives who left the company and are now being sued individually for their actions at the bank. Some received generous handouts widely criticized in Belgium.

Fortis reported its 2009 results on Wednesday, returning to profit after a disastrous loss in 2008 - and announced that it would change its name to ageas to give the business a fresh start.

Fortis made a profit of Euro1.192 billion last year from expanding its life insurance activities in Europe and Asia. It posted a Euro28 billion loss in 2008.

It said its new name comes from the Latin verb "agere," meaning action, drive and a conviction to forge ahead. The previous name, Fortis, was Latin for strong.

Franco-Belgian bank Dexia said Thursday it would sell its entire stake of 10.9% in Bermuda's financial holding company Assured Guaranty.

Dexia expects to book a gross gain of USD225m (Eur164.9m) on the sale of all the 21.85 million shares, which will be offered at a price of USD22.66 apiece, or USD495m in total.

The bank announced last Tuesday plans to sell 16.4 million shares in Assured Guaranty but decided later to dispose of the entire stake.

Dexia acquired the stake in November 2008 when the company sold its US bond insurer FSA to Assured Guaranty.

Belgian seed company Devgen predicted 35-40% revenue growth for 2010, boosted by favourable weather conditions and after 2009 revenues almost doubled thanks to the performance of some of its hybrid seed products.

The company, which is developing rice seeds which promise increased tolerance to drought and higher yields, said revenues for 2009 rose to 18.4 million Euros ($25 million)

Devgen, which is in a developmental stage and spends a large chunk of its money on research and development, said its full-year net loss narrowed by 66% to 8.7 million Euros, leaving it with 46 million Euros in cash at the end of 2009.

It said for 2010 it plans to increase sales of hybrid seeds in India and southeast Asia and predicted its cash burn for the year including planned investments would be about 15 million Euros.

THE NETHERLANDS

In Amsterdam, the AEX headed into the weekend at 339.57, a gain of 0.16% for the day.

Dutch merchant bank NIBC Bank NV Tuesday swung to a fourth-quarter net profit from a year-earlier loss on lower impairments, and said that although business conditions improved in the past six months the economic situation remains uncertain.

NIBC, an unlisted investment bank that focuses on the mid-cap segment in Northwestern Europe, posted a net profit of Eur16 million from a Eur65 million net loss in the same period a year earlier, when it was hurt by impairments on equity and mezzanine investments.

The bottom line was hit by a Eur6 million charge related to the deposit guarantee scheme covering the bankruptcy of Dutch DSB Bank, and Eur8 million worth of impairments on corporate loans.

NIBC's merchant banking unit reported a Eur17 million profit after tax from a Eur87 million loss a year earlier. Its specialized finance business, which provides corporate lending and leveraged finance, managed only to break even, down from a Eur26 million profit a year earlier.

NIBC said its Tier-1 ratio, an indication of its financial health, stood at 16.2% at the end of 2009.

In the past year and a half, NIBC has raised more than Eur6 billion through issuing government guaranteed bonds to bolster its capital position. It also raised Eur3.7 billion through its online retail savings bank NIBC Direct, which was launched at the height of the financial crisis and is assisted directly the Dutch government's deposit guarantee scheme.

NIBC is owned by a consortium of international financial institutions, such as Netherlands-based insurer Delta Lloyd and Spain's Banco Santander. The consortium is led by US-based private-equity firm J.C. Flowers & Co.

The Icesave dispute was discussed at the Dutch parliament Thursday, during which Minister of Finance Jan Kees de Jager indicated that the next step was in the hands of Iceland. Other parliamentarians called for blocking Iceland's loan from the IMF.

"This is what we knew. The situation in the Netherlands is difficult," Icelandic Finance Minister Steingrímur J. Sigfússon told Morgunbladid in response to the Icesave discussions in the Netherlands, adding that he doesn't interpret his counterpart's words as if the situation has toughened.

"They are in a tight position because in the Netherlands there are influential powers who are not friendly towards us, to put it mildly. But it hasn't kept them from participating in talks," Sigfússon said. He added that it doesn't help that an interim government is currently at the helm and that parliamentary elections are coming up in the Netherlands.

The House of Representatives agreed to demand a quick solution to the dispute and to increase pressure on Iceland. Moreover, the majority of MPs agreed that Iceland's application for the EU would be out of the question during the current circumstances, Morgunbladid reports.

"If Iceland doesn't honor its international obligations we don't know why we would give Iceland a positive review when the country applies for membership to the European Union. That is the first issue," said Frans de Nerée tot Babberich, spokesperson on economic affairs for the political party Christian Democratic Appeal (CDA).

"The second issue is that we don't know why we should review Iceland's application for a loan from the International Monetary Fund favorably," de Nerée added.

However, it was also agreed that the Dutch state should not profit from the loan deal with Iceland, which could be considered as an offer of lower interest.

Dutch news web Z24 reported that the People's Party for Freedom and Democracy (VVD) would like the dispute to take a legal course and to submit a claim on Iceland.

Former Dutch Finance Minister Frans Andriessen and Sylvester Eijffinger, the advisor of Dutch Prime Minister Jan Peter Balkenende, believes there is flexibility for concession in the Icesave dispute.

A Dutch company earning capital gains by selling shares in its Indian subsidiary does not need to pay tax in India if it offloads the shares to a non-resident entity, according to authority for advance ruling (AAR), the quasi-judicial body that decides on tax matters involving overseas firms. The AAR came out with the order last week after a Dutch company KSPG sought ruling on its proposed divestment of shares in its Indian arm.

In its application, the foreign company asked AAR for two clarifications: One, whether it is subject to pay capital gains tax if it sells shares of its Indian subsidiary and two, whether it would need to pay tax in the event of buy back of shares of its local subsidiary. KSPG has also sought exemption from AAR on payment of capital gains tax, citing the India-Netherlands Double Taxation Avoidance Agreement (DTAA), which provides for exemption if the gains earned from India arise from a transfer of shares of an Indian company to a non-resident firm.

The AAR held that tax is not payable in India on the sale of shares of an Indian company by a non-resident entity to another non-resident firm. AAR said the issue of payment of tax in India in the event of the buy back of these shares can be dealt in a separate application.

A few years ago, KSPG had bought 100% stake of German firm Pierburg in Pierburg India. KSPG had made further investment in Pierburg India, post the transaction. In the course of its argument at AAR, the Income-Tax department said that the transaction was carried out for the purpose of avoiding tax in India and therefore it does not merit tax exemption. It said the Indo-German tax treaty should be applicable in this case, as it the German firm Pierburg that gained from the transaction. Under the Indo-German tax treaty, tax is payable in India for such transactions, the I-T department said. The AAR did not agree with the department's view. It pointed out that the Dutch company was a distinct legal entity with separate board of directors.

A new trend among Dutch companies is intriguing - sustainability-based pay bonuses for corporate executives.

AkzoNobel, a Netherlands-based paint and chemical company, has embraced this new trend. "The 600 top managers at the company now have to take into consideration whether they have done enough to reduce greenhouse gas emissions and whether they have developed more innovative, environmentally friendly products than the competition. If they fail to do so, their remuneration is reduced."

SWITZERLAND

The SMI in Zurich rounded out the week on 6,836.60, a dip of 0.22% on the Friday session.

Switzerland's central bank on Thursday said it would hold its official lending rate near zero and renewed a pledge to battle an "excessive" rise by the Swiss franc against the Euro.

In a statement issued at the conclusion of its quarterly policy meeting, the Swiss National Bank said signs of an economic recovery are becoming more apparent, boosting the Swiss export sector and aiding the domestic sector. Swiss gross domestic product is now expected to grow by 1.5% in 2010, up from its December forecast of 0.5% to 1%, according to the statement.

However, recovery remains in a fragile state with prospects clouded by uncertainty, the statement said.

Accordingly, the Swiss National Bank plans to hold its official Libor target range between 0% and 0.75%, targeting the lower end of the range near 0.25%, where it's been for a year.

And on the currency front, the central bank said it would continue to "act decisively to prevent an excessive appreciation of the Swiss franc against the Euro."

Last March, the Swiss National Bank announced it would intervene in currency markets as needed to slow the rise of the franc -- a key part of its expansive monetary policy.

Suspected intervention and the SNB's tough stance were credited with driving the Euro to above 1.5400 francs last spring. Since then, the Euro has drifted back down despite several reported bouts of further intervention, to trade near levels seen spring.

The Swiss franc weakened slightly in Thursday's foreign-exchange dealings.

The Euro rose to 1.4619 francs, up from around 1.4610 francs ahead of the announcement. The US Dollar was little changed at 1.0690 francs.

Kenneth Broux, market economist at Lloyds TSB, said a bigger Euro rise was expected given signs that the market was betting the SNB would soften its stance against a stronger franc.

The Swiss National Bank also left its inflation outlook virtually unchanged.

Switzerland's consumer price index, or CPI, rose 0.9% on an annual basis in February, the Federal Statistical Office said Tuesday. Economists had forecast a rate of 1%, the same as in January. A year ago, inflation was 0.2% in February.

The CPI recorded a slight increase of 0.1% on a monthly basis. It was expected to rise by 0.2%.

Monday, the same office announced that the residential construction activity remained unchanged on an annual basis in the fourth quarter. The number of new dwellings totaled 11,120.

In the fourth quarter, the number of dwellings with planning permission rose by 19% annually to 13,250 units, while the dwellings under construction increased 12% to 63,540.

AUSTRIA

Vienna's AEX ended the trading session Friday on 2,538.39, up 0.80%.

The independence of the Austrian central bank will not be affected by its full nationalization, the bank's Governor Ewald Nowotny said on Wednesday.

Austrian daily Der Standard on Tuesday said the Austrian state was considering selling off the bank's reserves to raise funds.

But Nowotny said: "Any such specualtion is completely unfounded.

"The independence of the national bank has both a monetary and financial side. Reserves of the bank are not at disposal."

The Austrian government is planning to buy-out the outstanding 30% stake in the central bank.

Austria's wholesale price index rose 1.2% year-on-year in February following the 0.3% increase in the previous month, Statistics Austria reported on Friday.

Significant price increases were recorded in the wholesale prices of flowers & plants, fruits & vegetables, fertilizer & agricultural chemical products, and artificial resins in February, the statistical agency said.

On a monthly basis, wholesale prices climbed 0.4% in February.

SWEDEN

The OMX in Stockholm completed a tight trading range for the week Friday, closing on 1,018.15, gaining 0.91% in the process.

The total output of Sweden's services sector increased a working day adjusted 2.4% year-on-year in January, Statistics Sweden said on Thursday.

Output in motor vehicle trade increased 12.8% annually in January, while that in professional, scientific & technical activities rose 7.7%.

Service production for the three months ended January increased by a seasonally adjusted 0.9% compared to the preceding three month period.

Consumer prices in Sweden spiked 1.2% year-on-year in February, faster than the 0.6% increase in January, the same office said on Thursday.

On a monthly basis, consumer prices increased 0.6%. Increased prices of electricity, clothing, furnishings & household goods, transport, and recreation & culture contributed to the upswing, the statistical agency said.

Meanwhile, the underlying CPIF inflation rate stood at 2.7%. Compared to January, the CPIF inflation rate stood at 0.6%.

The country's harmonized index of consumer prices increased by 2.8% on a yearly basis and by 0.6% on a monthly basis.

Sweden's industrial new orders increased 3.7% in January from December, the Statistics Sweden said in a report on Wednesday. The increase in January reflected a 4.1% growth in the domestic market and a 3.5% rise in the export market. In December, new orders decreased 0.9%.

Compared with January 2009, total volume of new orders grew 4%, down from a revised 7.5% in December. Growth in domestic market was 0.5% and that in export market came in at 6.8%.

FINLAND

Helsinki's OMX drew a line under the week on 7,177.47, up 1.64%.

Wednesday, the Statistics Finland announced that the industrial production remained unchanged on an annual basis in January, compared to the 5.9% fall in the previous month.

On a monthly basis, industrial output was down a seasonally adjusted 1.8% in January, after a 0.8% increase in December. A year earlier, industrial output was down 8.5%.

Finland's private sector labor costs increased 2% on an annual basis in the October to December period, compared to the 5.6% growth in the previous quarter, the Statistics Finland said on Wednesday.

Meanwhile, labor costs excluding one-off items, such as performance bonuses, rose by 1.8% in the fourth quarter.

The labor cost of an hour worked in industry rose by 1.6% in the fourth quarter, while labor costs for manufacturing sector increased 1.8%. Labor costs for construction grew 2.3%.

In the whole year of 2009, labor costs increased 4.9% from the previous year and the labor costs excluding one-off items increased 5%.

Thursday, the Statistics Finland announced that the number of overnight stays by foreign tourists at accommodation establishments dropped 9% year-on-year in January, compared to the 12% fall in the previous month.

The number of overnight stays by foreign tourists totaled 492,000 in January, larger than the 444,000 in the previous month.

The total number of overnight stays decreased by 6% on an annual basis to 1.2 million in January, compared to the 4% fall in the preceding month. At the same time, overnight stays by resident tourists declined 3%.

Overnight stays by visitors from almost all the most important countries of inbound tourism to Finland decreased in January, the statistical office said. The number of overnight stays by Russians dropped 9% to 233,000 in January, while overnight stays of Britain fell 25% to 41,000. German visitors made up the third largest group with 28,000 overnight stays, which was 15% lower than the previous year.

DENMARK

Copenhagen's OMX finished trading Friday on 372.34, up 0.08%.

Denmark's seasonally adjusted trade surplus narrowed to DKK 4 billion in January from DKK 6.4 billion in the previous month, the Statistics Denmark said on Thursday.

Exports dropped 0.5% on a monthly basis to DKK 40.7 billion in January, compared to the 1.6% growth in the previous month. At the same time, imports rose 6.5% to DKK 36.7 billion.

On an annual basis, exports decreased 2.5% in January, while imports slipped 2.8%.

The trade surplus, including ships and aircraft stood at DKK 3.5 billion in January, narrowing from DKK 5.9 billion surplus in the previous month. On a monthly basis, exports fell 0.9% and imports rose 5.6%.

Denmark's consumer price index, or CPI, rose 1.9% year-on-year in February, slightly slower than January's 2% rise, Statistics Denmark said Wednesday. Economists had forecast the CPI to increase by 1.7%.

Consumer prices grew 1.2% on a monthly basis, faster than the 0.9% increase predicted.

The harmonized index of consumer prices, or HICP, was up 1.8% annually in February. It follows 1.9% increase in January. The HICP was forecast to rise by 1.5%. Compared to January, the HICP climbed 0.9%.

NORWAY

The OBX in Oslo completed the week on 337.11, up 0.42%.

Consumer sentiment in Norway improved in the first quarter, a report said Tuesday.

The consumer confidence indicator rose to 18.5 in the first quarter from 17.8 in the previous three months, a report by the Finance Norway and survey group TNS Gallup showed on Tuesday. Economists expected a reading of 17. A year earlier, the indicator stood at minus 8.5.

Consumer confidence improved for the fourth straight quarter. The latest reading is the highest since the first quarter of 2008.

Finance Norway is the trade organisation for banks, insurance companies and other financial institutions in Norway.

Wednesday, the Statistics Norway announced that the consumer price index or CPI rose 3% year-on-year in February, faster than the 2.5% growth in the previous month. Economists were looking for an increase of 2.6%.

Food and non-alcoholic beverages prices rose 0.5% on an annual basis in February, while clothing and footwear prices fell 2.9%. Transport charges were up 3%.

On a monthly basis, the CPI rose 1.3% in February, faster than the 0.8% increase expected by economists.

The CPI-ATE was 1.9% in February, compared to the 2.3% in the previous month, the statistical office said. Month-on-month, the seasonally adjusted CPI-ATE was 0.1%.

Separately, the statistical office said the harmonized index of consumer prices or HICP increased 3.1% on an annual basis in February, faster than the 2.7% increase in the preceding month. The HICP was up 1.5% compared to the previous month.

Norwegian households expect the inflation rate to ease to 3.2% in the next 12 months from 3.5%, a quarterly survey by Perduco for the country's central bank showed on Monday.

Norway's business leaders expect an inflation rate of 2.4% over the next 12 months, unchanged from the previous quarter.

Economists who participated in the survey, meanwhile, expect the inflation rate to hit 2.3%, up from 2.1% in the previous survey.

Further, the survey revealed that four out of ten business leaders believe that the profitability of their businesses will improve in the next 12 months.

SPAIN

In Madrid the IBEX closed out the week at 11,077.00, up 0.29%.

Home sales in Spain grew 2.1% year-on-year to about 38,000 in January, the National Statistics Institute said on Thursday.

On a monthly basis, home sales surged 19%.

The total number of property transfers decreased 5.7% from the previous year to 157,000. Property transfers were up 14.4% compared to December.

The total number of property transfers per 100,000 inhabitants were the highest in La Rioja, Castilla-La Mancha and Cantabria, the statistical office said.

Retail sales volume in Spain dropped 4.5% year-on-year in January after the 1.2% decrease in the previous month, the Madrid-based National Statistics Institute reported on Wednesday.

Adjusting for working days, retail sales fell 2.8% annually.

Sales were down across the Iberian nation, with the largest declines witnessed in Andalusia, the Balearic Islands, and Basque Country. The slowest rate of decline was recorded in Galicia.

Spanish house sales rose for the first time since the fourth quarter of 2006 on an annual basis, data released by the Ministry of Housing showed Friday.

House sales rose 4.1% year-on-year in the fourth quarter following a 12.5% decline in the third quarter. That was the first increase since 2006.

Compared to the third quarter of 2009, house sales surged 21.4% to 130,572 in the fourth quarter.

In 2009 as a whole, 462,747 houses were sold, a decline of 18% compared to 2008.

PORTUGAL

Lisbon's PSI General finished Friday's session on 2,737.45, a gain of 0.01%.

Wednesday, the Organisation for Economic Co-operation and Development said it stands ready to support the Portuguese authorities in their efforts to bring down budget deficit under the EU ceiling.

The Paris-based OECD said Portugal's austerity measures would help to maintain market confidence, support growth and ensure fiscal sustainability.

It said efforts to make the tax system more broad-based and to minimize any negative impact of fiscal consolidation on potential economic growth are welcomed.

On Monday, the Portuguese authorities unveiled a combination of expenditure restraint and revenue-raising initiatives to bring the budget deficit below 3% of GDP by 2013 from 9.3% of GDP in 2009.

Wednesday, the Statistics Portugal announced that the consumer price index or CPI rose 0.2% year-on-year in February, faster than the 0.1% growth in the previous month. A year earlier, the CPI was up 0.2%.

The annual core CPI, which excludes energy components and fresh unprocessed food products, dropped 0.4% in February, compared to the 0.6% fall in January.

On a monthly basis, the CPI increased 0.1% in February, compared to the 0.5% fall in the previous month.

Meanwhile, the harmonized index of consumer prices or HICP rose 0.2% on an annual basis in February, faster than the 0.1% growth in the previous month. The HICP remained unchanged compared to the preceding month.

Portugal has unveiled a series of budget cuts as it seeks to avoid the kind of debt crisis currently engulfing Greece.

The Portuguese government plans to cut investment and cap public sector wage growth and is also to raise taxes for high earners as it bids to bring its budget deficit within E.U. limits.

Finance Minister Fernando Teixeira dos Santos said the income tax rate will be raised to 45% for those earning over Eur 150,000 per year.

In addition, the government is to slash military investments by 40% during the period, and postpone plans to build high-speed train links that would connect Lisbon and Porto to Spain.

The government also aims to raise Eur 6 billion over the period by selling off various state-owned stakes in the private sector.

The plan, which is yet to considered by the Portuguese parliament, will be submitted to Brussels before the end of the month.

The country is seeking to cut its budget deficit to 2.8% of gross domestic product by 2013 from the current 8.3%.

The austerity measures come after Greece's woes raised fresh concerns about whether Portugal and Spain can repay their debts.

There are fears that Greece's troubles in the international financial markets will trigger a ripple effect, affecting other debt-ridden Eurozone members such as Portugal, Ireland, Italy and Spain.

ITALY

Italy's benchmark FTSE MIB Index gained 24.34, or 0.1%, to 22,565.19 in Milan. The gauge rose 1.3% this week.

Aeffe dropped 1.05 cents, or 2.4%, to 43.4 cents, snapping a two-day increase. The owner of the Moschino fashion label reported a 2009 net loss of 20.1 million Euros ($27.7 million) compared with a profit of 7.7 million Euros a year earlier, according to a statement.

Arnoldo Mondadori Editore retreated for a third day, losing 5 cents, or 1.7%, to 2.89 Euros. The publisher will exit the benchmark FTSE MIB Index after the market closes on March 19. The shares will enter the FTSE Italian Mid-Cap Index.

Assicurazioni Generali rose 21 cents, or 1.2%, to 17.94 Euros, erasing Thursday's decline. ING Groep NV, which has a "buy" rating on Italy's biggest insurer, said in a note that while "2009 has been a difficult year for Generali with Property and Casualty profits impacted by difficult conditions in its domestic market," the second half "should have seen a strong recovery in Life earnings and increasing profits from the financial services businesses." The brokerage also said that "the re-election of the board in April and the likely appointment of a new chairman could be a trigger for the stock."

Azimut Holding advanced 27 cents, or 2.9%, to 9.45 Euros, a fourth gain this week. Italy's largest independent fund manager had its price estimate increased to 12.9 Euros from 12.8 Euros at Cheuvreux, which noted that "fourth-quarter results exceeded guidance." Cheuvreux kept the stock on its "selected list."

Banca Profilo increased 0.8 cents, or 1.3%, to 62.3 cents. The bank posted full-year net income of 3.1 million Euros compared with a net loss of 77.9 million Euros a year earlier.

Banco Popolare gained 8.5 cents, or 1.7%, to 5.05 Euros, a third increase this week. Greece may get a 55 billion-Euro bailout from the EU, Kurier newspaper reported, without saying where it got the information. EU finance ministers will discuss next week whether any Greek bailout should be funded by issuing EU bonds guaranteed by Euro-region governments, said three people briefed on preparations for March 15-16 meetings. Intesa Sanpaolo SpA (ISP IM) advanced 1.4% to 2.85 Euros.

Buzzi Unicem lost 12 cents, or 1.2%, to 9.95 Euros, snapping a two-day increase. Dyckerhoff AG, the German cement maker owned by Buzzi, said full-year net income declined.

Eni dropped for a second day, falling 33 cents, or 1.9%, to 17.46 Euros as Italy's largest energy company cut production growth guidance. Eni said in a statement Friday that its 2010-2013 strategic plan includes production growth of over 2.5% through 2013.

Still, "a downward revision of the production guidance was already discounted by the market," Cheuvreux said in a note. The brokerage has an "outperform" rating on the stock.

Italcementi retreated 14 cents, or 1.6%, to 8.78 Euros, a first loss in 11 sessions. Citigroup Inc. trimmed its price estimate on Italy's largest cement maker to 9.5 Euros from 10 Euros. The brokerage, which cited " the lower sector rating which has been driven by a slower expectation of recovery," kept a "hold" rating.

Snam Rete Gas gained 4.25 cents, or 1.2%, to 3.64 Euros, a second consecutive increase. Italy's gas-distribution network operator had its price estimate lifted to 3.75 Euros from 3.7 Euros at Kepler Capital Markets, which reiterated a "buy" recommendation.

GREECE

In Athens the Athex Composite ended the Friday session on 2,115.65, a drop of 0.42% for the session Friday.

Formation of a rescue fund for Europe would not be a solution for Greece's budget crisis, Jean-Claude Juncker, head of the group of Euro area finance ministers, said Tuesday.

The Eurogroup chief reportedly questioned the need to add an 'additional pillar' for Euro instruments beyond the Greek crisis. He was speaking to reporters after a meeting with German Chancellor Angela Merkel. He said both of them were convinced that the European version of the International Monetary Fund is not a solution for the debt-stricken Greece.

Juncker said it is necessary to avoid a notion that the proposal of a European Monetary Fund should give possibility for countries which do not take budgetary discipline seriously. Meanwhile, Merkel said the fund must not clash with the European Union's Stability and Growth Pact. Elsewhere, French Economy Minister Christine Lagarde said the EMF should not be the current priority.

Last week German Finance Minister Wolfgang Schaeuble proposed setting up the EMF, which became a hot topic for discussion among European policymakers.

Tuesday, the General Secretariat of the National Statistical Service of Greece announced that the consumer price index or CPI rose 2.8% year-on-year in February, faster than the 2.4% growth in the previous month. A year earlier, the CPI was up 1.6%.

Food and non-alcoholic beverages prices fell 1.7% on an annual basis in February, while clothing and footwear prices dropped 1.5%. Transport charges were up 11.4%.

On a monthly basis, the CPI was down 0.5% in February, after falling 0.7% in January.

Meanwhile, the harmonized index of consumer prices or HICP rose 2.9% year-on-year in February, faster than the 2.3% growth in the prior month. The HICP was down 0.6% compared to the preceding month.

Shares of Greek shipping giant DryShips, spiked sharply Monday buoyed by market rumors that Denmark's Maersk was considering to purchase it. The stock closed the regular trade higher over 7% on volumes four-times higher than the average volume in the past three months.

Rumor mill has it that Maersk is interested in the offshore drilling-platform assets of the Greek dry bulk carrier. DryShips reportedly has several anti-takeover measures in place, which would make any hostile takeover difficult.

DryShips last month reported a profit in the fourth quarter compared to a loss last year, on lower expenses. The company's net profit attributable to common shareholders was $1.3 million compared to a loss of $1 billion in the same quarter last year. On a per share basis, net loss narrowed to $0.01 from $18.42 in the year-ago period. Revenues for the fourth quarter decreased to $193.4 million from $210.6 million in the year-ago period.