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141
Thursday, August 18, 2011
Could Those Hours Online
Be Making Kids Nicer?
PERSONAL JOURNAL 29
U.S. and Brazil
Can Give Europe
ACrisis Lesson
DAVID WESSEL 7
EUROPE
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The obsessive federal
lawyer and the
seahorse ranch.
Off the Wall ............. 31
Syria in global threat
to dissidents, says U.S.
In Depth .............. 14-15
Merkel and Sarkozy
join the tea party.
Editorial ..................... 16
Inside
Fed Eyes Cash
Europe Banks
Have in U.S.
Federal regulators are in-
tensifying their scrutiny of the
U.S. arms of European banks
amid concerns about those in-
stitutions abilities to fund
themselves, according to peo-
ple familiar with the matter.
The Federal Reserve Bank
of New York, which oversees
the U.S. operations of many
large European banks, re-
cently has been demanding
more information from the
banks about whether they
have reliable access to the
funds needed to operate on a
day-to-day basis, these people
said.
The concerns come amid
turbulence in foreign banks
U.S. funding positions, which
have fluctuated wildly in re-
cent months, according to
Federal Reserve data. The
Feds goal is to avoid a repeat
of recent crises during which
banks were unable to gain ac-
cess to enough dollars to pay
maturing debts.
The regulators heightened
attention signals a growing
concern Europes financial cri-
sis could destabilize the U.S.
banking system.
Regulators would be on
watch because a danger
would be loss of liquidity for
certain large banks, particu-
larly in Europe, that depend
critically on access to large
quantities of dollars, said
Darrell Duffie, a derivatives
expert and finance professor
at Stanford University in Cali-
fornia. Mr. Duffie said that
could spill over into the cur-
rency markets and cause large
price movements.
While U.S. banks have rela-
tively small exposures to the
risky government and bank
debt that is at the heart of Eu-
ropes woes, some of the Con-
tinents biggest banks have
major operations in the U.S.
In particular, many European
banks run big trading busi-
nesses in the U.S. that use dol-
lars to fuel borrowing and
lending. Typically, the banks
try to match the flow of loans
to the flow of debt the banks
owe. Problems can occur if
banks cant renew the debt or
if money moves too fast to be
tracked.
Foreign banks that lack ex-
tensive U.S. branch networks
have a handful of ways to
bankroll U.S. operations. They
can borrow from money-mar-
ket funds, central banks or
other commercial banks. Or
they can swap their home cur-
rencies, such as euros, for dol-
lars in the foreign-exchange
market. The problem is, most
of those options can vanish in
Please turn to page 4
BY DAVID ENRICH
AND CARRICK MOLLENKAMP
Russias Vladimir Putin, center, watches a flight at the MAKS airshow in Moscow, which sprouted
more than $1 billion worth of deals. Mr. Putin promised more support for Russias aviation industry.
Meanwhile, as the new Russia marks its 20th anniversary, martyrs are forgotten. Article on page 6
Lift for Russian Aviation
Associated Press
Abercrombie Has Offer
For Star: Shop Elsewhere
With their quick rise to
fame, cast members of MTV
reality show Jersey Shore
have cashed in on a number
of endorsement deals, includ-
ing weight-loss supplements,
alcohol and bronzer.
But heres a first. Teen ap-
parel retailer Abercrombie &
Fitch Co. is offering to pay
Michael The Situation Sor-
rentino not to wear its mer-
chandise.
The New Albany, Ohio,
company released a statement
titled A Win-Win Situation,
in which it stated a deep
concern over the association
between Mr. Sorrentino and
the brand. A&F offered up a
substantial payment to Mr.
Sorrentino to wear an alter-
nate brand.
We understand that the
show is for entertainment
purposes, but believe this as-
sociation is contrary to the
aspirational nature of our
brand, and may be distressing
to many of our fans, the
statement, released late Tues-
day, read.
The company also ex-
tended the pay-to-not-play of-
fer to the other Jersey Shore
reality stars and said it was
urgently waiting a response.
About 45 minutes into the
A&F quarterly earnings call
Wednesday morning, after
Wall Street analysts peppered
executives with endless ques-
tions about inventory and
gross margins, A&F Chief Ex-
ecutive Mike Jeffries chuck-
led. Is no one going to ask
about The Situation? he said.
Please turn to page 24
BY ELIZABETH HOLMES
Michael Sorrentino
A
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France, Germany propose
sanctions using EU funds..... 5
Agenda: Latest European
plan is emotional at best...... 6
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2 THE WALL STREET JOURNAL. Thursday, August 18, 2011
PAGE TWO
i i i
Business & Finance
n The soaring Swiss franc is be-
ginning to nibble away at Switzer-
lands role as a favorite destina-
tion for foreign multinationals
even as the Swiss National Bank
sought again to temper the cur-
rencys rise. 4
n France and Germany increased
pressure on their euro-zone peers
to improve fiscal discipline in the
bloc with a proposal to cut off the
regions wayward spenders from
key EU transfer funds. 5
n Greece could be headed for a
fourth year of recession in 2012,
analysts warned, defying official
forecasts of a recovery and deal-
ing a further setback to the gov-
ernments deficit-cutting plans. 5
n German exchange operator
Deutsche Brse and several lobby
groups strongly rejected a pro-
posed tax on financial transac-
tions that is becoming more con-
crete in Europe. 26
n Maersk warned that new ship-
ping capacity and deteriorating
world economic prospects are
pressuring freight rates. 19
n SABMiller stepped up its pur-
suit of Fosters, announcing plans
to take a $9.97 billion bid for the
Australian beer maker directly to
shareholders, just two months af-
ter the Fosters board rejected the
same offer. 19
n Roche and Daiichi Sankyo won
approval from U.S. regulators for
a new skin-cancer treatment that
promises to shrink tumors and
prolong the lives of patients with
a particular genetic mutation. 19
n Shell said some 660 tons of oil
are still inside a leaking pipeline
in the U.K. North Sea, adding ef-
forts to stop the flow of crude are
taking considerable time in order
to minimize further leakage. 21
n McGraw-Hill is exploring a
separation of its education busi-
ness, which has been struggling
amid state budget cuts, people fa-
miliar with the matter said. 24
n U.S. producer prices rose 0.2%
in July, signaling that inflation
pressures may make it hard for
the Federal Reserve to lift the
economy by easing credit. 9
n Chinas struggle to meet the
growing demands of its middle
class is fueling a sudden surge in
demand for corn, sending vast rip-
ples across the U.S. farm belt and
potentially upending the grains
trade flows around the world. 23
n High levels of volatility in
stock markets last week, triggered
by Standard &Poors downgrade of
U.S. debt and concerns over the
euro zone, led to the third-highest
number of daily trades at the Lon-
don Stock Exchange since data
was made first public in 2006. 25
i i i
World-Wide
n The Vatican published a cache
of internal files documenting the
Catholic Churchs handling of alle-
gations of sexual abuse by a
priestan unusual attempt by the
Holy See to rebut claims it sought
to cover up the alleged abuse. 3
n Britains police watchdog
cleared four senior police officers
of misconduct over their role in
the London polices widely criti-
cized 2006 investigation into
phone hacking at the News of the
World tabloid. 7
n Spains football body said it
has failed to reach an agreement
with player representatives to
cancel a planned two-week strike
starting this weekend, which may
delay the start of the countrys La
Liga championship. 7
n The U.N.-backed tribunal inves-
tigating the assassination of for-
mer Lebanese Prime Minister
Rafik Hariri released the full in-
dictments of four suspects linked
to Hezbollah. 11
n Kurdistan guerillas killed eight
Turkish soldiers and a civilian in
one of the bloodiest days for the
Turkish army since violence in the
countrys restive southeast esca-
lated in July. 12
n Chvez said he plans to nation-
alize Venezuelas gold industry in
bid to take over production and
ramp up international reserves, a
day after plans to bring home bil-
lions in cash and bullion held
overseas were divulged. 12
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Most read in Europe
1. Franco-German Plan Disappoints
2. Ban Lifted on Samsung Tablet
3. Eurobond Debate Rises in
Germany, France
4. Fresh Plan for Europe Crisis
5. Verizon Hopes Google Deal
Calms Patent Spats
Most emailed in Europe
1. Chinese Jews Face Existential
Questions
2. Opinion: Stephens: Lesson From
Europe (Take 2)
3. How to Negotiate Your Salary
4. Mean People Earn More
5. Opinion: The Fall of the
Midwest Economic Model
The Source
bl;ogs.wsj.com/source
With the euro-zone
debt crisis dragging
on, the Swiss
currencys safe-haven
status will hardly be
dented.
Europe debt crisis
Follow the latest analysis
on Europes debt crisis
at wsj.com/europedebt
Question of the day
Vote and discuss: Should
the Swiss National Bank
intervene in the money
markets to weaken the
Swiss franc?
Vote online today at wsj.com/polls
Previous results
Q: Are euro-zone bonds
an effective way to deal
with Europes ongoing
debt crisis?
44%
56%
No
Yes
ONLINE TODAY
Men climb greased poles as part of a celebration on Indonesias independence day at Jakartas Ancol beach Wednesday.
Contestants race up to grab items ranging from buckets to bicycles hanging from the top of the poles as prizes.
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THE WALL STREET JOURNAL EUROPE
(ISSN 0921-99)
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32 THE WALL STREET JOURNAL. Thursday, August 18, 2011
HEARD ON THE STREET
Email: heard@wsj.com FINANCIAL ANALYSIS & COMMENTARY WSJ.com/Heard
Carlsberg Hurt
By Russians
Cutting Back
Carlsberg shareholders should
pour themselves a stiff drink. The
Danish brewers shares plunged 17%
Wednesday after it reported a 22%
drop in second-quarter earnings and
projected growth of between 5% and
10% for the full year versus 20%
guidance three months ago. What
has changed?
Last years 200% surge in excise
tax has hammered Russian beer. In
May, Carlsberg expected the Russian
beer market would grow between
2% and 4% this year in volume
terms. But facing inflation of 9%
year on year in July, consumers
have been slow to swallow the tax-
induced 30% rise in beer prices over
the past 18 months. Carlsbergs beer
shipments in Russia dropped 9% in
the second quarter.
There will likely be even more
pressure on beer volumes next year.
In July the Russian Duma passed a
bill to ban television, radio and bill-
board advertising for alcoholic
drinks in 2012. A year later sales of
all alcohol at popular kioskswhich
account for around 15% of beer vol-
umeswill be outlawed. Carlsberg
says it also will need to raise prices
by another 5% in 2012 to offset
higher taxes.
That is made even worse by
competitive pressures. Carlsberg,
which owns Russian biggest brewer
Baltika, has been losing share as
groups including Heineken have
pushed cheaper economy brands
harder. And vodka prices, while ris-
ing fast, havent kept up with beer.
Sure, Carlsberg is squeezing out
more cost savings in Northern and
Western Europe. It also is gaining
share in key markets like Poland,
despite tough price competition. But
that isnt enough to divert investors
attention from Russia, which ac-
counts for roughly 40% of Carls-
bergs operating profit. Trading on
just 8.1 times forecast 2012 earnings
based on consensus estimates,
Carlsbergs status as Europes low-
est-rated consumer goods group
looks hard to budge.
Rene Schultes
European Firms Face Cash Conundrum
During the latest stock market
slump, European companies could
at least draw comfort from one
thing: their high cash balances. But
the fears about growth and sover-
eign debt that are spooking markets
also are likely to make companies
even more risk averse. If that
means they continue to hoard cash,
it would help embed the weak
growth outlook.
Corporate-bond issuance has
ground to a halt this summer, while
the net proportion of euro-zone
banks reporting an increase in loan
demand slumped to 4% in the sec-
ond quarter from 19% in the previ-
ous three months, according to the
European Central Bank.
Many companies, meanwhile, are
targeting a higher credit rating
than pre-crisis to provide a buffer
against further economic stress. For
example, a credit rating of A-plus
or A should ensure a company re-
tains access to commercial-paper
markets, faces less onerous terms
on bond issuance and qualifies for
easier bank debt covenants.
That rating is several notches
higher than many might have tar-
geted during the boom when com-
panies were happy to operate with
higher leverage, taking advantage
of relatively cheap debt to reduce
their cost of capital.
This shift could prove durable.
Despite the nominal cost of debt
falling to ultralow levelsthe aver-
age yield on bonds issued by Euro-
pean industrial companies is now
3.16%, compared with around 4.5%
pre-crisiscompanies are reluctant
to invest when the outlook for de-
mand is so uncertain. While merg-
ers-and-acquisition activity has
picked up, it remains low. Caution
also may hold companies back from
reducing equity levels by returning
cash.
That suggests Europes corpo-
rate deleveraging may have further
to run. Average net debt-to-equity
ratios in nonfinancial European
companies could fall to 35.5% by
the end of 2012 from 55% at the
end of 2010, JPMorgan forecasts.
That would be a two-decade low
and down from 68.2% in 2007.
Anyone counting on corporate
cash piles to drive growth and in-
vestment returns is likely to be dis-
appointed.
Andrew Peaple
No Interest in Chinas Benchmark Rates
Rationing anything creates distor-
tions in the price. Chinas credit ra-
tioning creates distortions in the
price of capital.
In the 1980s, Chinas consumer
goods were in short supply. Every-
thing from a radio to a bicycle was
very cheap if it could be purchased
directly from the state, and very ex-
pensive if it had to be purchased in
the private market. Today, with quo-
tas rationing access to finance, there
is a flourishing informal market in
credit. That means watching the
benchmark interest rate set by the
Central Bank isnt the best way to
get a read on Chinas monetary pol-
icy conditions.
Credit rationing has implications
for all sectors of the economy. Even
the big state-owned firms served by
the big state-owned banks are af-
fected to a degree.
A reduction in the credit quota
this year means that interest rates
firms pay for bank loans have risen
by more than the benchmark rate.
The Peoples Bank of Chinas own
data show that in June 61% of short-
term loans were issued above the
benchmark interest rate, compared
with 49% in January.
Provincial firms served by the
smaller banks feel the pain more di-
rectly. And it may get more acute.
After seven weeks of stability, the
central bank has signaled a move to
money market interest rates higher.
If that happens, the result will be a
higher cost of capital for small banks
and their customerssome of whom
are already paying double the bench-
mark rate for short-term loans.
The real pinch comes, however,
for small private firms that are ex-
cluded from the formal banking sys-
tem. Data on loans in the informal fi-
nancial sector are hard to come by.
But one recent estimate by He
Zhicheng, an economist at Agricul-
tural Bank of China, put annualized
rates at 30% to 40% for credit from
loan guarantee companies, and 60%
or higher for black market loans.
With the credit quota remaining
relatively tight$75 billion in new
loans in July was the lowest monthly
rate so far this yearand an uncer-
tain outlook increasing the risk pre-
mium, the cost of credit for small
businesses is likely to stay high.
Turmoil in financial markets and
fears of a slowing global recovery
might mean Chinas benchmark lend-
ing rates stay on hold.
But in an economy where credit is
rationed, investors relying too heav-
ily on that for their view of mone-
tary conditions risk missing the big-
ger picture.
Tom Orlik
Stashing Cash
Average net debt-to-equity ratios in
non-nancial European companies
Source: J.P. Morgan
Note: Years 2011 and 2012 are forecast
30
40
50
60
70
00 05 10
Loan Range
Chinese loan rates* versus the
benchmark
Sources: People's Bank of China, He Zhicheng,
WSJ reporting
*Annualized lending rates
Note: Rates other than the benchmark are estimated
Benchmark rate
City Commercial
Banks
Trusts
Loan guarantee
companies
Black market
6.56%
12
20
30
60
Tech seems a great place for
second acts lately. Frank Quat-
trones career as an investment
banker stalled while he successfully
fought civil and criminal charges
that he offered shares of hot IPOs
like VA Linux to favored clients.
But he has come back with a ven-
geance. His latest big deal: advising
Motorola Mobility on its sale to
Google. That moves Mr. Quat-
trones small firm, Qatalyst Part-
ners, to 11th in Dealogics 2011
league table for U.S. tech M&A vol-
ume.
Meanwhile,Thomas M. Coughlin
is looking to resurrect his career
this time in tech. The former Wal-
Mart vice chairman, who resigned
before pleading guilty to federal
wire-fraud and tax-evasion charges,
has popped up on Geeknets board.
Geeknet, run by Home Depot
founder Ken Langone, is what is
left of the old VA Linux, and now
gets most of its revenue selling
geek-themed clothing. Mr. Cough-
lins retail experience should come
in handy.
OVERHEARD
Many companies are
targeting a higher credit
rating than pre-crisis to
provide a buffer against
further economic stress.
hotnpapers