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E U R O P E Wednesday October 22 2008

‘A long and deep global slowdown is

Now the real struggle starts
still likely’ Martin Wolf Comment Page 13

Oh, the indignity The sad downfall of the failed titan Luke Johnson Page 14
World Business Newspaper

Newspaper of the year

News Briefing
Berlin calls for Swiss to be on tax blacklist
Switzerland should be placed on a blacklist of tax havens, Germany said as it joined
a dozen other countries in turning up the heat on territories that profit from evasion.
Page 5;
World View, Page 20

Kerkorian blow for Ford
Ford Motor was hit by a fresh blow as the investor Kirk Kerkorian began to sell his
stake in the lossmaking US carmaker, saying he saw more value in his gambling and
other interests. Page 17; Lex, Page 16;
Little room, Page 20

UK admits recession
The UK is entering a recession, Mervyn King, head of the Bank of England, admitted
in his gloomiest assessment of economic prospects since becoming governor in 2003.
Page 2; www.ft.com/centralbanks

Fed offers $540bn to prop up mutuals
Help for key pillar of US financial system Move shows concern over money markets
By James Politi and Michael Mackenzie in Washington The US Federal Reserve yesterday
said it would finance up to $540bn (€410bn) in purchases of short-term debt from
money market mutual funds to shore up a key pillar of the US financial system. Money
market funds have faced severe redemption pressures since the financial crisis deepened
last month, forcing them to raise cash by scaling back their short-term lending to
banks and selling their holdings of commercial paper. This retreat has contributed
both to a freeze in the interbank market and a steep decline in activity in the commercial
paper market, which has made it difficult for banks and companies to raise short-term
funds. The Fed move highlights the extent to which policymakers are concerned about
US money markets, even as conditions have improved, with interbank rates dropping.
Policymakers are also worried that moves to prop up US banks may have undermined
money funds, which compete with bank savings accounts. “The short-term debt markets
have been under considerable stress in recent weeks as money market mutual funds
and other investors have had difficulty selling assets to satisfy redemption requests
and meet portfolio rebalancing needs,” the Fed said. Lawrence Fink, chief executive
of BlackRock, the asset management group, said: “This is a very big event. This
is the first thawing that I really see in terms of helping the commercial paper market
unravel itself.” Under the scheme the US central bank will lend money to five special
purpose vehicles, to be managed by JPMorgan Chase, tasked with purchasing assets
from money market funds. These assets are low-risk paper, including certificates
of deposit, bank notes and commercial paper with three-month maturities or less.
The creation of an extra liquidity facility yesterday was seen as complementing a
move the Fed announced two weeks ago to create a vehicle aimed at purchasing potentially
unlimited amounts of three-month debt from banks and non-financial companies. The
size of the Fed’s balance sheet has nearly doubled. Each of the five vehicles may
purchase paper from 10 financial institutions. The overall size of the programme
is capped at $600bn – with the Fed funding 90 per cent and the funds, which sell
assets, taking the first 10 per cent of losses. The Fed announced its plan as money
markets thawed. Overnight dollar Libor declined 23 basis points to 1.28 per cent,
below the Fed’s target rate of 1.5 per cent. Three-month dollar Libor eased to
3.83 per cent, its lowest fix in nearly a month. Three-month Libor was fixing about
2.80 per cent prior to upheavals and has yet to reflect the Fed’s rate cut of 50bp.
Global Crisis, Pages 2­4 & 18 Martin Wolf, Page 13 Markets, Pages 30­32 www.ft.com/crisis

Feud Osborne’s defence

Investors suffer as US ethanol boom dries up
By Kevin Allison in San Francisco and Stephanie Kirchgaessner in Washington Investors,
such as Microsoft’s Bill Gates, are sitting on billions of dollars in losses after
buying into the corn-based ethanol industry that George W. Bush embraced as the answer
to US energy woes. Six of the biggest publicly traded US ethanol producers have lost
more than $8.7bn (€6.6bn) in market value since the peak of the boom in mid-2006
and the beginning of this month, according to an analysis by the Financial Times.
The boom followed a 2005 law requiring refiners to mix billions of gallons of the
biofuel with petrol. Investors who bought and held shares in hotly anticipated market
listings of Aventine Renewable Energy, VeraSun Energy and other ethanol producers
that have gone public since 2005, have seen the value of their holdings plummet as
much as 90 per cent from their flotation price, in spite of billions of dollars of
government support for the industry. The losers in the ethanol investment frenzy,
which some have compared to the dotcom mania of the late 1990s, include famous names,
such as Mr Gates, Microsoft founder. His private investment firm has lost millions
on its 2005 investment in a company called Pacific Ethanol. Mr Gates’s firm, Cascade
Investments, did not return calls seeking comment. Other private equity firms and
hedge funds that piled into the ethanol industry in the boom years of 2005 and 2006
have put in a mixed performance. Those who bought into ethanol and sold out at the
earliest stages made substantial sums. Metalmark, the former private equity arm of
Morgan Stanley, the US bank, reaped a 10-fold return on its 2003 purchase of Aventine
when it went public in 2006. Meanwhile, Thomas H. Lee Partners, a Boston-based private
equity group, was forced to pull its planned float of Hawkeye Renewables, an ethanol
producer it bought at the height of the ethanol boom. One person close to Thomas
H. Lee defended the group’s investment, arguing that Hawkeye was producing strong
cash flow in spite of a difficult business environment that has dragged down the
share prices of publicly traded rivals. Both Metalmark and Thomas H. Lee Partners
declined to comment. Investor losses come as taxpayers have paid billions to support
the ethanol industry. More than $11.2bn has been spent since 2005 on tax breaks for
companies that blend ethanol into petrol. Billions more have been spent on direct
state and federal subsidies for US ethanol production. “We’re looking at an industry
that’s cost $80bn to get to this

Big test for Opec
On Friday Opec is expected to slash production as it faces its biggest test in a
decade. Data suggest the oil cartel’s divergent economic circumstances will make
it difficult to decide how much output to cut. Page 3;
Lex, Page 16

Arcadia chief bullish
Sir Philip Green said his Arcadia Group, the UK’s biggest fashion retailer, was
well placed to ride out a retail downturn and could use its strong balance sheet
to buy weaker competitors. Page 17

Losers in the ethanol investment frenzy include famous names such as Microsoft’s
Bill Gates
point,” said Bob Starkey, a fuels analyst at Jim Jordan & Associates, a research
group in Houston. However, ethanol has disappointed many who saw it as a wonder product
that could reduce the US’s dependence on foreign oil while cutting down on pollution.
Worse, a growing number of influential critics now say ethanol is helping raise the
price of food. The industry’s supporters still defend ethanol. Bob Dinneen, head
of the Renewable Fuels Association, the industry’s main lobbying group in Washington,
said the fuel represented an opportunity for Americans to invest “here at home”
rather than continue to “haemorrhage money ... to the Middle East”. “I’d
challenge you to find any energy resource today that isn’t dependent on government
support,” Mr Dinneen said. “If domestically produced energy is something that
you want to have, then some of these subsidies are going to be necessary.” Hope
to husk, Page 11 www.ft.com/ethanol

European SWFs urged
Nicolas Sarkozy, France’s president, called for the creation of European sovereign
wealth funds to buy stakes in companies with low share prices and protect them from
nonEuropean predators. Page 2

Rich­poor rift widens
The gap between rich and poor has widened in most developed countries over the past
two decades as economic growth has benefited the wealthy more than the poor, said
the OECD. Page 6;
Editorial Comment, Page 12

IMF predicts squeeze
European businesses will suffer a contraction in credit next year as the consequences
of the global crisis unfold for non-financial companies, the IMF predicted. Page
2

George Osborne, the UK’s opposition Conservative party Treasury spokesman and a
close ally of party leader David Cameron, was yesterday forced to defend himself
over allegations he solicited funds from Oleg Deripaska, the Russian oligarch, at
a sumptuous summer party in Corfu. The allegations surfaced as part of an increasingly
bitter political dispute between Mr Osborne and Peter Mandelson, another guest at
the party Report, Page 6 PA

UK­Iceland loan plan
The UK and Iceland are hoping to agree a loan of up to £3bn (€3.86bn) to cover
British depositors in Icesave, the online banking unit of Landsbanki, the collapsed
Icelandic bank. Page 4

Russian stakes

Singapore oil setback
Oil trading in Singapore almost halved last month as the financial crisis and slowing
demand drove speculators from the energy trading hub. The drop came amid slowing
growth in Asia, the world’s engine of commodities demand. Page 17;
Trading hub necessity, Page 31

Airbus props up sales with €2bn plan to double vendor financing
Customers struggle to find funding elsewhere
By Kevin Done in London and Justin Baer in New York Airbus is preparing to double
the amount of vendor financing it offers to about €2bn next year to support commercial
aircraft sales and maintain deliveries as its customers struggle to obtain funding
from traditional sources. Airlines are finding growing difficulties in obtaining
funding from banks and lessors. Boeing also said it was preparing more support for
customers. “This is the single worst credit environment we’ve seen,” Patrick
Käufer, a managing director at Morgan Stanley, said yesterday during the Aviation
Finance Summit 2008 conference in New York. “A lot is driven by lenders’ unwillingness
to provide liquidity.” A leading European aviation banker said the number of institutions
offering finance for new commercial jet deliveries had fallen by between a half and
twothirds from the level of six months ago to only 20-25. “A lot of Asia is still
open for business and broadly active but there are relatively few in Europe and almost
none in North America.” Banks that were lending were demanding “better quality
credits and much higher margins for smaller risks”, said the banker. Industry leaders
are concerned about the impact the credit crunch and the economic downturn could
have, in particular on the thousands of small and medium-sized manufacturers in the
industry’s supply chain. Airbus, its Franco-German parent company, EADS, and a
clutch of other European aerospace groups have written to European governments to
stress the role that export credit agencies must play in ensuring the availability
of funding for new jet deliveries. Klaus Heinemann, chief executive of AerCap, an
aircraft leasing company, said the deepening credit crisis might take a greater toll
on the aviation finance industry than the September 2001 terrorist attacks. “This
will be worse than post 9/11,” he said. “There are too many open-ended questions.”
Kostya Zolotusky, managing director of capital markets development at Boeing Capital,
said the US aircraft maker was prepared to step in to help customers secure financing
for 2009 deliveries should other sources fall through. Airbus reduced its gross customer
financing exposure from a peak of $6.1bn in 1998 to €990m at the end of 2007, as
airlines and jet makers took advantage of cheap finance. Last week, Airbus said it
was halting for the moment further planned increases in production of its A320 short-haul
jets.

Thaksin extradition bid
Thai prosecutors say they will request the extradition of former premier Thaksin
Shinawatra after the Supreme Court found him guilty of abuse of office and sentenced
him to two years’ jail. He fled to the UK in August and says he will not return
to answer charges he believes are politically motivated. Page 5

Separate section
Digital Business IT purchasers are focused more on technology that does not need
endless updates than on price

The Russian state could wind up owning huge chunks of formerly private companies
as a result of the bail­out measures it is implementing amid the country’s financial
turmoil. However, Igor Shuvalov, the first deputy prime minister and head of a recently
created emergency council set up to manage the crisis, said the government had no
plans to “nationalise” forfeited shares. Report, Page 2

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World Markets
STOCK MARKETS
Oct 21 Dow Jones Ind Nasdaq Comp S&P 500 FTSEurofirst 300 DJ Euro Sto 50 FTSE 100
9176.86 1705.49 973.66 920.63 2598.97 4215.1 2123.15 3459.76 4762.06 9306.25 15041.17
158.5 prev 9265.43 1770.03 985.40 928.29 2613.68 4282.7 2150.06 3448.51 4835.01 9005.59
15323.01 159.9 %chg -0.96 -3.65 -1.19 -0.83 -0.56 -1.58 -1.25 +0.33 -1.51 +3.34 -1.84
-0.9 Oil Brent $Dec Oil WTI $Nov Gold $ $ per Û $ per £ £ per Û ´ per $ ´ per
£ $ inde

Cover price
CURRENCIES
Oct 21 1.319 1.696 0.778 101.0 171.2 90.6 prev 1.331 1.713 0.777 101.6 174.0 90.1
1.532 Û per $ £ per $ Û per £ ´ per Û £ inde Û inde Oct 21 0.760 0.589
1.286 133.2 90.4 97.2 prev 0.749 0.583 1.288 135.2 90.7 97.6 1.973 Fed Funds Eff
Oct 21 68.60 70.45 773.55 prev 72.03 74.25 786.05 chg -3.43 -3.80 -12.50 US 3m Bills
Euro Libor 3m UK 3m Prices are latest for edition US Gov 10 yr UK Gov 10 yr Ger Gov
10 yr Jpn Gov 10 yr US Gov 30 yr Ger Gov 2 yr

INTEREST RATES
price 101.94 102.96 102.30 99.31 105.19 101.98 Oct 21 0.70 1.25 4.96 6.10 yield 3.76
4.61 3.96 1.58 4.19 2.90 prev 0.60 1.15 4.99 6.20 chg -0.12 Ð -0.05 -0.02 -0.09
-0.07 chg +0.10 +0.10 -0.03 -0.10


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