Business Blog Posts

Oil slipped further, after tumbling on Monday on concerns the economic damage wreaked by the euro zone crisis would hurt industrial demand.

The dollar firmed as investors sought safety in the U.S. currency despite expectations of further easing steps by the Federal Reserve this week.

Standard and Poor's cut its unsolicited ratings on Italy by one notch to A/A-1 and kept its outlook on negative, a move that took markets by surprise, warning of a deteriorating growth outlook and damaging political uncertainty.

"It only adds to the contagion risk over Greece and has encouraged the flight to safety in markets here," said Stephen Roberts, a senior economist at Nomura in Sydney, pointing to a sharp fall in the Australian dollar on the news.

Japan's Nikkei share average .N225 fell 1.4 percent, partly catching up with falls elsewhere on Monday when Tokyo markets were closed, while MSCI's broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS fell 1.3 percent. .T

The MSCI index is in bear market territory -- traditionally defined as a fall of 20 percent or more -- after sliding 22.3 percent from its 2011 high in April.

S&P 500 index futures fell 0.8 percent, pointing to a weaker start on Wall Street after U.S. stocks fell around 1 percent on Monday. .N

Global markets have been haunted since late July by the twin concerns of the intractable euro zone crisis and worries that the United States is slipping back into recession.

GREEK TALKS

International lenders told Greece on Monday it must shrink its public sector to avoid running out of money within weeks.

Telephone talks will resume later on Tuesday between Greek Finance Minister Evangelos Venizelos and European Union and International Monetary Fund officials.

The finance ministry in Athens said the talks were close to agreement on the steps Greece must take to secure the next installment of aid, worth about 8 billion euros, it needs to pay salaries and pensions next month.

"In the near term, it comes down to whether Greece will get the next tranche as strains in the interbank market are easing a bit," said Koji Fukaya, chief currency strategist at Credit Suisse in Tokyo.

The euro fell 0.5 percent after the Italy downgrade to trade around $1.3615, while the Australian dollar -- which is influenced by expectations for commodity prices and so sensitive to the outlook for global demand -- slid to a one-month low of $1.0166. <FRX/>

The dollar rose 0.3 percent against a basket of major currencies .DXY and the 10-year U.S. Treasury yield was steady around 1.956 percent, not far off the 1.879 level reached last week that was its lowest in 60 years.

Long-dated Treasuries have been outperforming on expectations the Federal Reserve, which begins a two-day policy meeting later on Tuesday, will try to push down already low long-term interest rates by tilting its portfolio toward longer-dated bonds.

A flight to safety also boosted Japanese government bonds, with the benchmark 10-year yield falling 2 basis points to 0.985 percent. <JP/>

Oil has weathered much of the turmoil in financial markets over the past month thanks to supportive fundamentals, such as diminished North Sea production and healthy Chinese demand, but succumbed to broader macroeconomic pressures on Monday, when Brent crude dropped more than $3 a barrel. <O/R>

Brent eased 0.3 percent to $108.88 a barrel on Tuesday, while U.S. crude fell 0.4 percent to $85.40.

Copper was steady around $8,359 a tonne, after tumbling 3.8 percent on Monday, its biggest one-day loss since March, to a nine-month low.

Gold edged up a touch, but remained below $1,800 an ounce after tumbling nearly 2 percent in the previous session as investors favoured Treasuries and the dollar over the precious metal as their safe-haven assets of choice.

(Editing by Kavita Chandran)

The single currency skidded over half a cent to $1.3606 after S&P said the cut reflected its view of Italy's weakening economic growth prospects.

Italy's fragile governing coalition and policy differences within parliament will likely limit the government's ability to respond decisively to the challenging domestic and external macroeconomic environment, the agency said.

"In our opinion, the measures included in and the implementation timeline of Italy's National Reform Plan will likely do little to boost Italy's economic performance, particularly against the backdrop of tightening financial conditions and the government's fiscal austerity program," said S&P.

The move from S&P came as a surprise as the market had thought Moody's was more likely to downgrade Italy first. Moody's last week said it would take another month to decide on its action.

The downgrade came as Greece struggles to meet demands from lenders for yet more austerity measures.

"It's just more of the same negative news," said Stephen Roberts, a senior economist at Nomura in Sydney.

"It only adds to the contagion risk over Greece and has encouraged the flight to safety in markets here," he added, pointing to a sharp fall in the Australian dollar on the news.

S&P 500 futures also dropped 0.7 percent and early hopes for a bounce in Asian shares on Tuesday looked to be still-born now.

European stocks had already slid on Monday, while yields on Italian and Spanish bonds rose sharply on fears of a Greek default, compounded by the failure of EU finance ministers to agree new steps to resolve Europe's debt crisis at weekend talks.

International lenders told Greece on Monday it must shrink its public sector and improve tax collection to avoid running out of money within weeks as investors spooked by political setbacks in Europe dumped risky euro zone assets.

Finance Minister Evangelos Venizelos held what Greece termed "productive and substantive" talks by telephone with senior officials of the European Union and International Monetary Fund after promising as much austerity as necessary to win a vital next instalment of aid.

Before the talks, which will resume on Tuesday evening after meetings of experts through the day, the IMF representative in Greece spelled out steps Athens must take to secure the 8 billion euro loan payment it needs to pay salaries and pensions next month.

(Reporting by Wayne Cole in Sydney; Editing by Balazs Koranyi and Ed Davies)

Hours before a telephone conference between the Greek Finance Minister and senior officials of the European Union and the International Monetary Fund, the IMF representative in Greece spelled out steps Athens must take to secure a vital 8 billion euro rescue payment next month.

"The ball is in the Greek court. Implementation is of the essence," Bob Traa told an economic conference.

Additional savings measures were needed to cut the public deficit to a sustainable level and reduce the public sector's claim on resources -- code for axing jobs and cutting pay and pensions -- while improving tax collection rather than adding further taxes, he said.

European stocks and the euro fell sharply on fears of an early Greek default, the failure of EU finance ministers to agree new steps to resolve Europe's debt crisis at weekend talks, and another regional election defeat for German Chancellor Angela Merkel.

In signs of mounting stress, market yields on Italian and Spanish bonds rose further above 5 percent despite six weeks of European Central Bank buying in an effort to hold them down. The cost of insuring peripheral euro zone debt against default also rose.

The Greek cabinet was due to meet after the teleconference with the IMF/ECB/EU "troika," pushed back to 1600 GMT (12 p.m. EDT), to discuss further austerity measures to make up for a fiscal shortfall.

Prime Minister George Papandreou canceled a planned trip to Washington and the United Nations at the last minute and returned home on Saturday in response to the crisis.

Greek media published a list of 15 austerity measures it said the troika was demanding the Socialist government implement to receive the next tranche of aid.

They included firing another 20,000 state workers, cutting or freezing state salaries and pensions, increasing heating oil tax, shutting down loss-making state organizations, cutting health spending and speeding up privatizations.

PUBLIC SUPPORT LACKING

The IMF's Traa acknowledged that the IMF/EU bailout program lacked public support and said there was plenty of goodwill to give Greece more time for its adjustment program in a weaker than expected economy.

Finance Minister Evangelos Venizelos said the economy was set to contract by 5.5 percent this year after 4 percent in 2010. Cutting spending would be a priority of the 2012 budget, he said.

Asked whether Greece would get the next installment crucial to pay salaries and pensions in October, Venizelos told Reuters: "Yes, of course."

Even if it does, many economists and investors believe Athens will have to default on its debt mountain -- more than 150 percent of gross national product -- within months.

Former IMF managing-director Dominique Strauss-Kahn joined this chorus on Sunday, saying in a French TV interview that Greece's debt must be reduced, and government and private creditors should take losses now rather than playing for time.

"(EU) governments are not solving things, they are kicking the problem down the road, and the snowball is growing and making the problem bigger and bigger," he told TF1 television.

Uncertainty over Greece was compounded by another political shock in Germany at the weekend.

The sixth regional election defeat this year for Merkel's center-right coalition on Sunday raised questions about the stability of her government and her ability to push through more euro zone rescue measures.

Her Free Democratic (FDP) junior coalition partners crashed out of the Berlin regional assembly with just 1.8 percent of the vote, raising pressure from some party activists to take a more Eurosceptical line.

Although the Berlin regional vote ended a cycle of seven state elections this year, it appeared to leave the cautious Merkel with less room for maneuver to take bold action in defense of the euro.

Leaders of both the Bavarian Christian Social Union (CSU) and the FDP have raised the prospect of Greece defaulting and having to leave the 17-nation single currency area, ignoring rebukes from the chancellor for alarming markets.

U.S. Treasury Secretary Timothy Geithner pressed euro zone finance ministers apparently in vain at a meeting in Wroclaw, Poland, to take stronger action to stop the sovereign debt crisis spreading.

One of his predecessors, Lawrence Summers, said in a Reuters column on Sunday that all nations should pressure Europe to go beyond "grudging incrementalism" to recapitalize banks, and revive economic growth.

"In normal circumstances comity would require deference by others to European authorities on the resolution of European problems. Now when these problems have the potential to disrupt growth around the world all nations have an obligation to insist that Europe find a viable way forward," Summers wrote.

(Additional reporting by Erik Kirschbaum in Berlin, Catherine Bremer in Paris, William James and Natsuko Waki in London; Writing by Paul Taylor; editing by Janet McBride)

(This story corrects the sixth paragraph of previous story to show Italian and Spanish yields, not their risk premiums over Bunds, rose above 5 percent)

* At 0900 GMT, futures for the S&P 500 were down 2 percent, Dow Jones futures down 1.7 percent, and Nasdaq 100 futures down 1.8 percent.

* European stocks were down 2 percent in morning trade, led by banking shares such as Deutsche Bank (DBKGn.DE) and Societe Generale (SOGN.PA) on renewed fears euro zone leaders won't be able to prevent a default by debt-stricken Greece.

* At meetings ending on Saturday, EU finance ministers broke no new ground in dealing with the crisis and made no decision on whether to give more firepower to the 440 billion euro ($607 billion) bailout fund, suggested by Treasury Secretary Timothy Geithner.

* Investors' risk aversion also rose after news Greece's Prime Minister George Papandreou canceled a visit to the United States to chair a cabinet meeting on Sunday, a day before European Union and International Monetary Fund inspectors hold a conference call with Finance Minister Evangelos Venizelos to hear how Greece will plug this year's budget shortfall.

* A regional election defeat for German Chancellor Angela Merkel on Sunday, her sixth election defeat this year, also kept investors on edge.

* Investors awaited U.S. President Barack Obama's deficit-reduction plan on Monday, ahead of the Federal Open Market Committee meeting later in the week.

* Swiss bank UBS (UBSN.VX) increased the amount it said it had lost on rogue equity trades to $2.3 billion on Sunday and Chief Executive Oswald Gruebel said the alleged fraud would have consequences for strategy and possibly also for himself.

* Netflix Inc (NFLX.O) is separating its movie streaming business and its DVD by mail service, which will be called Qwikster, Chief Executive Reed Hastings said in a company blog post.

* U.S. stocks rose for a fifth day in a row on Friday and the S&P 500 scored its best week since early July on signs euro zone leaders were acting together to limit any damage from its sovereign debt crisis.

* The Dow Jones industrial average .DJI ended up 75.91 points, or 0.66 percent, at 11,509.09. The Standard & Poor's 500 Index .SPX was up 6.90 points, or 0.57 percent, at 1,216.01. The Nasdaq Composite Index .IXIC was up 15.24 points, or 0.58 percent, at 2,622.31. ($1 = 0.725 Euros)

(Reporting by Blaise Robinson; Editing by Jon Loades-Carter)