Spain confronts crisis, questions remain

Spain, striving to bring its economy out of the doldrums, this week sought to front-foot its financial problems by revealing the extent of its banking needs while pushing spending cuts and tax increases.

But the two-pronged offensive on the country's financial problems -- through Thursday's 2013 budget and Friday's banking audit -- are yet to prove they can stave off a sovereign bailout.

Thursday's cuts, showing the budgets of all ministries will be reduced by an average 12%, failed to stem the country's rising borrowing costs.

Friday's banking audit, which revealed the sector needs almost 60 billion euros in capital, was as expected and is "unlikely to agitate markets," according to Daiwa credit analyst Michael Symonds.

Nicholas Spiro, managing director of Spiro Sovereign Strategy, said the "stage-managed attempt" from Spain's Prime Minister Mariano Rajoy to control the reform agenda is made difficult by the "moving target" of the country's downturn.

And while the banking audit returned an unsurprising figure, "There's nothing positive about a 60 billion euro shortfall which, even several months ago, was at the low end of most estimates," Spiro said.

Spain is the eurozone bloc's fourth largest economy but is laboring under the collapse of its real estate market, unemployment at a record 25% and looming debt repayments.

The country now faces the "heavy lifting," Symonds noted. "Over the coming months, restructuring plans will need to be finished-off and approved, the architecture of the bad bank finalized, and the delicate task of haircutting subordinated creditors -- many of which are retail investors -- carried out," he said.

Spain already has 100 billion euros available to tap after the Eurogroup in July agreed to assist the country recapitalize its banks. According to Symonds, 35 billion euros to 40 billions euros was likely to be sought in aid.

Focus, meanwhile, has turned to the country's potential for a wider sovereign bailout. Spain has long been regarded as "too big to fail" but analysts increasingly expect it to follow the path of its much smaller peers -- Greece, Ireland and Portugal -- in seeking further aid to pull it through the crisis.

According to Symonds, a request from Spain for broader support from the European Central Bank's bond buying program and the eurozone bailout funds now appears "inevitable."

By Irene Chapple, CNN September 28, 2012

France's tough budget: Could this spark financial war?

The announcement was carefully staged and the tone decidedly solemn. When French Prime Minister Jean-Marc Ayrault faced the cameras on Friday morning in Paris, at the Elysee Palace, to divulge President Francois Hollande's first budget, he appropriately talked of a "combat" budget.

The French daily newspaper Libération even commented that "a state of (financial) war had been declared." Having had to find an extra 30 billion euros, notably from the wealthiest taxpayers' pockets, the 2013 French budget has been heralded as the tightest since the Second World War.

France is not used to tightening its belt and this is perhaps precisely why the country is to face a national debt of 91.3% of GDP next year, and why it feels like war today.

Since his election in May, Hollande has repeatedly said that he would break the spiral of debt while safeguarding benefits for those who need it most. A delicate balance, to say the least.

For the last four months, France's budget minister, Jerome Cahuzac, has audited every ministry and interviewed every minister. He has asked every one of them to state their priorities and explain how they would finance them.

A pragmatist, he has carefully refused to discuss politics, and only focus on figures. His attitude didn't go down well with a few key government figures such as the culture minister Aurelie Filippetti.

Culture and the arts in France, a sacred domain always generously endowed, is facing, for the first time in decades, a 4.3% cut to its annual budget, which Filippetti eventually had to swallow.

Indeed, the budget minister, "guillotine man" as some have nicknamed him, has won on all accounts. Apart from three key ministries, education, interior and justice, which have been spared, the French state is cutting its spending by 10 billion euros in 2013.

This is nothing short of a revolution for the second most prodigal state in the OECD countries group, after Denmark (France's public spending is indeed around 56% of GDP).

However, and this is how Hollande counteracts the argument from the left of the French left that his budget is in fact all about austerity, the other 20 billion euro savings in his budget will come from the wealthiest taxpayers with a string of new taxes.

It is interesting to note that the most controversial of his measures, which provided headlines all over the world, his famous 75% tax for the over one million euro incomes, will only reap 210 million euros. Only 2,000 to 3,000 French taxpayers are actually thought to be concerned by this new and highly symbolic tax which Hollande said would only be implemented for two years.

In fact, the lowering in the wealth tax's threshold should bring in almost five times as much. As for the new 45% tax on incomes above 150,000 euros a year, this should raise 320 million euros, while a new tax on share dividends will bring 2 billion euros.

As for taxing the business sector, Hollande has tried to spare small enterprises by focusing on big businesses but this has inevitably triggered the very vocal anger of France's entrepreneurs who accuse Hollande's government of being "anti-business."

France's 2013 budget may be a juggling act; however, Hollande's first budget certainly delivers on the president's promises to get the country's richest to fully contribute to the national effort.

To the risk, as Sarkozy's party straight away argues, of making them flee to more rich-friendly neighbouring countries such as Belgium, Switzerland and Britain.

A few weeks ago, news that LVMH's mogul and Europe's richest man, Bernard Arnault, was seeking Belgian nationality, triggered accusations of betrayal from the French left and of vindication and "I told you so" comments from the French right.

Hollande hopes his budget will cut public deficit by 3% of GDP next year and that by 2015, structural deficit is simply eliminated. Now that the budget has been agreed, announced and is about to be implemented, the central issue is growth.

Can France rely on the International Monetary Fund's forecast of 0.8% growth next year? If, as some observers predict, there is no growth next year, Hollande will have to find another 15 billion euros. And this would really mean war.

By Agnes C. Poirier, Special to CNN September 28, 2012

France raises taxes on rich, cuts spending in 2013 budget

French Prime Minister Jean-Marc Ayrault said Friday that the government's newly unveiled spending plans for 2013 are a "combat budget" that will tackle debt and bring much needed growth to the nation.

About 30 billion euros ($39 billion) in savings are needed to reach President Francois Hollande's ambitious target of lowering the deficit to 3% of gross domestic product by the end of 2013, from a forecast of 4.5% this year.

A third of the savings will come from cuts to public spending, the president's office said, while an additional 10 billion euros will come from a tax on companies.

The remainder will be raised through tax increases on high-earning individuals, including a 75% levy on incomes higher than 1 million euros ($1.26 million) and a new 45% tax bracket affecting 6.2 million households.

However, nine out of 10 earners will not see income tax increases, the government said.

The 2013 budget is viewed as a test of confidence for Hollande, who was elected in May on a pro-growth and anti-austerity platform, and his Socialist government.

Addressing reporters after a meeting of ministers Friday morning, Ayrault sought to stress that the tough measures were necessary -- and that most of the burden would fall on those best able to pay.

"It's a combat budget to fight against a debt that only continues to increase and that rests on the shoulders of French taxpayers and generations to come," he said, adding that it was "a courageous and responsible budget."

Ayrault said the French national debt had increased from 64% of GDP to more than 90% in five years -- and that's why the government's deficit reduction target must be met. "The 3% is a realistic objective, it is an indispensable objective," he said.

Ayrault also said that the budget, while cutting public spending, is one "which made choices" in favor of lower-wage earners.

"The working and middle classes have been exempted from the revenue tax. Nine households out of 10 ... will not be taxed further, this is the guarantee that we are giving to the French people," he said.

Speaking this month in front of the Cour des Comptes, a government financial body, Hollande said the reduction of public debt was going to be "the most important effort in 30 years."

However, some economists, including those at Citigroup, anticipate that the government's deficit reduction target will be missed, with Citi forecasting a deficit for the year of 3.7% of GDP.

Political analyst Christian Malard, of broadcaster France 3, told CNN that the French public was also skeptical about the government's ability to reduce the deficit without raising taxes more widely.

"A majority of the French know that 2013 is going to be for them a very terrible year," he said, citing tax hikes, continued high unemployment and difficult times for entrepreneurs as among the challenges they face.

"The French are very aware of the fact that everyone will have to pay."

The government's move to raise an extra 10 billion euros from taxes on businesses could further stifle growth and force companies to move overseas, Malard said.

Many people in France now fear that France could join other southern European nations such as Spain, Greece and Italy, whose ailing economies have prompted wider fears about the stability of the eurozone group of nations, he added.

As the fifth-largest economy in the world and the second-largest in Europe, France is a major concern to global investors. It's also the United States' third-largest trading partner in Europe, after Germany and the United Kingdom, the U.S. State Department says.

Analysts had predicted that Hollande would have to present a harsher budget than first expected because of fears that otherwise, France's cost of borrowing will spike, and any savings made will have to be spent on increased interest payments.

Since his election in May, the French president has been under growing pressure to reduce the national debt, boost growth and create new jobs, while seeking to avoid angering the public with big cuts in public spending.

But his popularity has already taken a knock since he beat the incumbent, Nicolas Sarkozy, to the top job.

A survey conducted by polling firm IFOP for the Journal du Dimanche last Sunday suggested that four months into his presidency, only 43% of French people are satisfied with Hollande. This was an 11% drop in his satisfaction rating, compared with August.

The figure represents one of the worst popularity plunges for a French leader in decades, the newspaper said.

By comparison, Sarkozy's satisfaction rating at the same point in his presidency, surveyed by IFOP in September 2007, was 61%, Le Monde reports.

Figures released Friday by the country's national statistics institute reveal zero growth in France in the second quarter of 2012, compared with the first quarter, CNN affiliate BFM-TV reports. However, individual spending power increased slightly over the same period, after several quarters of decline.

Speaking Thursday on public television station France 2, Ayrault said that the government was aware of the gravity of its mission and that it has a long-term plan for the country's future.

The prime minister defended the government's forecast 0.8% growth rate for 2013 as "realistic," rejecting doubts about the figure as "defeatist."

He also said it was important to set ambitious targets to tackle rising unemployment. The country's unemployment rate stood at 10.2% at the end of June this year, according to the national statistics institute.

France's budget announcement comes against a backdrop of unease in the 17-nation eurozone, where many governments are plagued by high debt and low growth.

Neighboring Spain announced its own budget Thursday, outlining new spending cuts, tax increases and structural adjustments aimed at bringing down its huge deficit.

The government's efforts have proved unpopular with many Spaniards,who have taken to the streets in large numbers to demonstrate against austerity measures.

By Laura Smith-Spark, CNN September 28, 2012

Apple CEO: "We are extremely sorry" for Maps frustration

 In a rare public apology, Apple CEO Tim Cook on Friday wrote an open letter to customers that acknowledged widespread complaints about the company's new Maps application.

"At Apple, we strive to make world-class products that deliver the best experience possible to our customers," Cook wrote. "With the launch of our new Maps last week, we fell short on this commitment. We are extremely sorry for the frustration this has caused our customers and we are doing everything we can to make Maps better." (Click here to view the full letter).

After using Google's (GOOG,Fortune 500) mapping data for five years, Apple (AAPL, Fortune 500) went in a new direction with the iOS 6 update to its mobile operating system, which rolled out to millions of iPhones, iPads and iPod Touch devices on Sept. 19. The new Apple Maps is also built into all iPhone 5s, which went on sale a week ago.

Apple Maps is powered by significantly less data than its predecessor. Google's enormous database of geographical points has been replaced by Yelp's far less substantial list, as well as Apple's own compiled "places of interest" database. In other words, good luck searching for your favorite off-the-beaten-path restaurant if it's not on Yelp. Spelling variations also seem to trip up the new Maps app.

Beyond search, iPhone users have already found some giant goofs in Apple's data. The info on some well-known landmarks is comically off target or woefully incomplete.

The tech giant partnered with TomTom, Waze, Yelp (YELP) and others to create its own map, complete with turn-by-turn navigation, voice integration and a cool new 3D "Flyover" feature. In his letter of apology, Cook noted that Apple "had to create a new version of Maps from the ground up" in order to offer these new features. It has been widely reported that Google, which includes most of those features in its Android smartphone software, refused to hand those features over to Apple.

Apple has preached patience in its earlier comments about Maps. Cook reiterated that, noting that "the more our customers use our Maps the better it will get." He said more than 100 million Apple devices are using the new Maps, and customers have used the app to search for nearly 500 million locations so far. Apple engineers will continue "working non-stop" until Maps reaches the "high standard" Apple customers have grown to expect from the company, he said.

In the meantime, the CEO made a surprising move: He recommended alternatives to Apple's app, including Microsoft (MSFT, Fortune 500)Bing, AOL's (AOL) MapQuest, Nokia (NOK), Waze -- and yes, even Google.

By David Goldman @CNNMoneyTech September 28, 2012

Commission: Reform, but don't kill, Libor

A new report by British authorities released Friday recommends that Libor, a key benchmark for interest rates worldwide, should be changed but not tossed out. The highly anticipated report comes after a massive scandal in which banks rigged the rate for their own benefit.

"The system is broken and needs a complete overhaul," Martin Wheatley, the managing director of Britain's Financial Services Authority, said Friday. "The disturbing events we have uncovered in the manipulation of Libor have severely damaged our confidence and our trust -- it has torn the very fabric that our financial system is built on. "

Libor is short for the London Interbank Offered Rate, a measure of the cost of borrowing between banks and a crucial benchmark for interest rates worldwide. It's actually a collection of rates generated for 10 currencies across 15 different time periods, ranging from one day to one year.

The rate-setting process has enormous implications for global financial markets -- and consumers. Roughly $10 trillion in loans worldwide -- including credit card rates, car loans, student loans and adjustable-rate mortgages -- are tied to Libor.

he future of Libor was cast into doubt earlier this year, when U.K.-based investment bank Barclays Capital paid $453 million in a settlement with U.S. and U.K. regulators, admitting that it lied in its Libor submissions about its cost of borrowing.

It's not just Barclays, however -- suspicion has now fallen on all the banks that participate in the Libor process. Deutsche Bank (DB), Royal Bank of Scotland (RBS), Credit Suisse (CCRSX), Citigroup (C, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) are among the institutions that have acknowledged they are being investigated by regulators.

In the wake of the scandal, some observers suggested dropping the rate altogether, while others favored a modified rate-setting process designed with transparency and accountability in mind.

Wheatley's report Friday advocated for reform, saying there is a "clear case in favor of comprehensively reforming Libor, rather than replacing the benchmark."

The report cited the number of contracts currently tied to the rate -- estimated to represent $300 trillion in derivatives -- as a reason the rate must not be abandoned. "A transition to a new benchmark or benchmarks would pose an unacceptably high risk of significant financial instability," the report said.

Still, there will be changes. Foremost among them is a recommendation that the British Bankers Association end its role of overseeing how Libor rates are set each day.

"The BBA clearly failed to properly oversee the Libor setting process and should take no further role in the administration or governance of Libor," Wheatley said. "Responsibility should be transferred to a new administrator." Earlier this week, the BBA said it would support Wheatley's recommendations, including its removal from the process.

The report also said that future rates must be tied to observable market and transaction data that allow for verification.

In an effort to discourage future manipulation of the rate, Wheatley also proposes a delay in the publication of individual submissions by at least three months and possibly expanding the pool of banks used to set the rate. Individuals who manipulate rates would face criminal and civil action.

Wheatley's report also recommends streamlining the number of reference points used to set Libor. Currently, rates are set by asking between seven and 18 large banks what interest rate they would have to pay to borrow money.

The report also recommends the elimination of some of the maturities and currencies that "lack a sufficient amount of trade data to corroborate submissions." That would reduce the number of Libor reference rates from 150 to about 20, said Wheatley.

Wheatley also suggested bringing on the FSA, his own agency, as the Libor regulator so that it can supervise the firms and individuals involved in the Libor process and take action against misconduct.

Regulators in the United States have taken a keen interest in Libor developments. Gary Gensler, the chairman of the Commodity Futures Trading Commission, raised questions before the European Parliament earlier this week about the continued relative stability of Libor, a phenomenon seemingly at odds with observable market data -- which suggest Libor rates should be more volatile.

By Charles Riley @CNNMoneyInvest September 28, 2012

Spain's next crisis: Regional splits?

Spain faces a test of unity over the coming months as regional elections in Catalonia and Galicia threaten to destabilize the debt-ridden nation.

With unemployment at a record 25%, borrowing costs spiraling and debt repayments looming, Spain is emerging as the possible next candidate to tap its eurozone peers for financial help.

But Spain stands apart from other nations forced to seek aid. As the eurozone's fourth largest economy -- making up around 11% of the currency bloc's gross domestic product -- its financial problems are now being exacerbated by defiance from some of its 17 disparate regions.

Catalonia, a semi-autonomous region in the Northeast, represents one fifth of Spain's economy and the protestors are now actively calling for a split from central government.

Such agitations -- coming as they are in the midst of thecountry's debt crisis -- threaten to undermine Rajoy's attempts to pull Spain from its financial mire.

Nicholas Spiro, managing director of Spiro Sovereign Strategy told CNN that the sub sovereign debt problems are a "hot button issue."

For Rajoy, the push back "accentuates [the problems], making it more likely Spain will be forced to call on the European Stability Mechanism [Europe's permanent bailout fund]," Spiro said.

But Antonio Barroso, a Europe analyst at Eurasia Group, told CNN that despite the protests the likelihood of a Catalan separation is "extremely low."

According to Barroso, the ruling political party in Catalonia, Convergence and Union (CiU) led by Catalan President Artur Mas, has used the eurozone debt crisis and regional elections set for November 25 to openly call for sovereignty.

Barroso said: "It is true that public support for independence has been on the rise. But the Catalan government is implementing very tough financial adjustments and therefore the [Catalan] President, Artur Mas, is capitalizing on nationalist sentiments to shift the burden of responsibility onto the central government."

Last week Mas met with the Rajoy in Madrid to try and negotiate a new fiscal arrangement, whereby Catalonia would manage its own taxes and transfer less money to other regions in Spain. But talks stalled.

Even as Catalonia -- with its own language and culture -- strives for autonomy, in August, the CiU requested a 5 billion euro ($6.3 billion) bailout from the Spanish government. The request came after Rajoy announced plans for a credit line to be extended to Spain's 17 regions.

But, according to Barroso, Catalonia is not Rajoy's main concern. Instead Spain's leader is focusing on regional elections in Galicia in October -- a region in North-western Spain -- where his party is likely to win and where the policies could create a model for the rest of Spain.

Barroso said: "The key area for Rajoy is Galicia because his party has an absolute majority. He wants to use Galicia as an example of how his policies are working because it is one of the healthiest region in fiscal terms."

Spain has already requested up to a 100 billion euro ($128 billion) aid package for its ailing banks, which are still struggling to grapple with the property collapse in 2008.

Pressure from European partners and investor fear over further credit downgrades for Spain could undo the calming effect of European Central Bank President Mario Draghi's announcement on September 6. Draghi said the bank would be willing to purchase sovereign bonds of fiscally-frail countries such as Spain and Italy, if these indebted nations request a bailout.

But Barroso noted it was difficult to place a time frame on Spain seeking any external aid. He added: "For Rajoy, he has said 'only if market pressure increases' and you see how yields are going up again. I think market pressure is the ultimate factor that would cause Rajoy to apply."

By Oliver Joy, CNN September 28, 2012

Bonnie and Clyde's guns are up for auction

The guns of Bonnie and Clyde -- the gangster love birds who were killed in a hail of gunfire nearly 80 years ago -- are hitting the auction block.

RR Auction is coordinating the auction of a snub-nosed .38 revolver that was found taped to Bonnie Parker's inner thigh and the Colt .45 semiautomatic pistol that was in Clyde Barrow's waistband after they were ambushed and fatally shot by a police posse in Louisiana in 1934.

"These guns are well known in the marketplace, well known to Bonnie and Clyde collectors, well known to have belonged to Frank Hamer," said RR Auction vice president Bobby Livingston. Hamer was one of the officers who killed the gangster duo.

The pistols are a small part of the arsenal that was found in Barrow and Parker's stolen car. Livingston said the posse officers were allowed to keep firearms and other possessions from the bullet-ridden vehicle, including the Colt that Barrow might have stolen from a federal armory in Texas.

Livingston said the starting bids are $75,000 and his auction house is hoping to bring in $150,000 for each of the guns, which can be authenticated through a provenance paper trail.

RR Auction is holding the sale Sunday in Nashua, N.H. and is putting other items from the car up for bid -- including blood-stained silk stockings, a makeup kit, a gold pocket watch and a silver dollar that was later owned by Mafia boss Paul Castellano. Livingston said Castellano considered it his lucky coin, but gave it away before the night in 1985 when he was shot dead in front of Sparks Steak House in New York.

The auctioneer is keeping the sellers' names confidential.

Parker and Barrow's death car items have fetched impressive bids in the past, including $85,000 for Barrow's bloodstained shirt. A submachine gun from one of their hideouts sold for $130,000 earlier this year, and a shotgun went for $80,000.

Barrow and Parker were wanted for kidnapping, auto theft, robbery, burglary and 13 murders nationwide, including the killings of two police officers, according to the Federal Bureau of Investigation. The FBI was a fledgling agency at the time of the couple's nationwide crime spree, and tracked them down through its sole area of jurisdiction: interstate auto theft.

        By Aaron Smith @CNNMoney September 28, 2012