Finance & Business World

Gulf Arab leaders approved a monetary union agreement that aims to create a central bank and single currency for the region that will help boost trade and strengthen monetary policy.

The agreement must now be approved by the national governments of all six members of the Gulf Cooperation Council, the group said in a statement after its leaders met today in Muscat, Oman’s capital.

The accord should go into effect by Dec. 12 next year, Kuwait’s Finance Minister Mustafa al-Shimali was cited as saying by the official KUNA news agency. The Gulf states are looking to issue a unified currency by 2010.

A single currency would allow the Gulf states to stop pegging their currencies to the dollar and implement independent monetary policy. All of the GCC states except Kuwait peg their currencies to the dollar and tend to follow the U payday cash advance.S. Federal Reserve when setting interest rates.

GCC states came under pressure this year to drop their currency pegs as inflation accelerated to records above 10 percent in five of the six countries while the Fed slashed rates to help revive the slumping U.S. economy.

Kuwait dropped the dinar’s peg to the dollar in May 2007, linking it instead to a basket of currencies including the euro, the yen and the British pound, citing inflationary pressures.

The GCC members are Saudi Arabia, Kuwait, Oman, Bahrain, Qatar and the United Arab Emirates.

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The U.S. dollar fell against its major trading partners Wednesday as investors digested a barrage of economic data ahead of the holiday.

The euro edged higher against the dollar to trade at $1.4006, from $1.3950 late Tuesday in New York.

The British pound remained weak against the dollar at $1.4752 from $1.4759. The pound fell sharply in the previous session after the U.K. government reported that the country’s gross domestic product contracted by 0.6% in the third quarter.

Against the Japanese yen, the dollar dipped to ¥90.50 from ¥90.89.

"Markets are looking relatively quiet ahead of the holiday with the U.S. dollar generally weaker," said Steve Malyon, currency strategist at Scotia Capital in Toronto. He added that currency traders will be focused on economic data released earlier.

Trading is expected to be light with many market participants on vacation. U.S. stock markets will close early at 1 p.m. ET and remain shut on Thursday for the Christmas holiday.

Markets in Germany are closed Wednesday and Thursday. Most other European markets will also stop trading early Wednesday.

In addition to light participation, many investors have closed their books for the year and are not planning to make any large moves until 2009.

Still, the currency market will have to make sense of a flurry of economic data released early Wednesday.

In another sign of deterioration in the job market, the Department of Labor said the number of people filing initial unemployment insurance claims rose more than expected last week payday loans.

New jobless claims rose to 586,000 in the week ended Dec. 20. That’s an increase of 30,000 from the previous week’s revised figure of 556,000, and is more than the 558,000 total forecast by economists.

Wednesday’s report revealed the highest number of jobless claims since Nov. 27, 1982, when initial filings hit 612,000,

Meanwhile, new orders of durable manufactured goods fell for the fourth month in a row, according to the Census Bureau.

Durable goods orders fell 1% to $1.9 billion in November. Excluding orders related to transportation, new orders increased 1.2%.

Still, the decline was not as sharp as expected. Economists had forecast goods orders to sink 3.1% after plummeting 6.2% in October - the biggest decline since 2006.

Separately, the Commerce Department said both personal income and spending decreased in November.

Personal income dipped 0.2% after a modest 0.3% increase in October. The reading was expected to be flat.

Personal spending fell 0.6% versus a decline of 1% the month before. But the figure was better than the 0.8% decline that economists were expecting.

Markets in Asia ended lower with the Hang Seng in Hong Kong falling 0.26%. Major indexes in Europe were lower near the close of trading.  

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Russia devalued the ruble for the third time in a week, sending the currency to its lowest level against the dollar since January 2006, as oil’s drop below $37 a barrel dimmed the outlook for growth.

The ruble, down 18 percent against the dollar since the beginning of August, weakened 0.9 percent against the U.S. currency to 28.6905 and 1.4 percent versus the euro to 40.1773, near an all-time low.

The central bank allowed the ruble to fall about 1 percent against a basket of dollars and euros, accelerating the slide after spending 27 percent of reserves, or $162.7 billion, trying to defend the currency over four months. Oil, Russia’s biggest export earner, lost 4 percent to $37.43 on the New York Mercantile Exchange and is down nearly 75 percent since the July high. The government requires oil to average $70 to balance its 2009 budget.

“As long as oil remains depressed and at many year lows the central bank has no other choice but to carry on with its devaluation,” said Mikhail Galkin, head of fixed income research at MDM Bank in Moscow.

The currency has fallen 14 percent against the dollar and 11 percent versus the euro this year amid the plunge in oil, international condemnation of the country’s war with Georgia and the spreading global credit crisis. BNP Paribas SA estimates investors withdrew $211 billion from Russia since August. The nation’s oligarchs, who and took over assets of the biggest companies after the collapse of the Soviet Union in 1991, are vying for $78 billion of Kremlin loans to meet debt payments.

Recession

The economy, which recovered from the government’s 1998 debt default to expand an average 7 percent in the eight years to 2007, may slip into a recession in the first half of 2009, Kremlin economic adviser Arkady Dvorkovich told Bloomberg Television on Dec pay day loan. 19.

The government will post a budget deficit next year for the first time in a decade and will use its $132.6 billion reserve fund, or extra oil revenue the government has set aside, to cover the financing gap, Dvorkovich told reporters in Moscow today.

An “accelerating” ruble devaluation is “detrimental” to economic growth because it stimulates currency speculation and limits new lending, Evgeny Gavrilenkov, chief economist at Troika Dialog in Moscow, wrote in a research note today. Troika Dialog earlier called for a one-time depreciation of as much as 20 percent.

“If in 2009 the oil price is between $30 and $40 and the state carries on with its strange policies on the money market, the possibility of an economic downturn will rise,” Gavrilenkov said.

Currency Basket

The ruble fell 1.2 percent against the basket of dollars and euros that the central bank uses to manage its fluctuations, and traded at 33.86 at 5:02 p.m. in Moscow.

Bank Rossii allowed the ruble to decline against its currency basket for the third time in four working days and the 10th time since Nov. 11, according to a central bank official who declined to be identified.

The Micex stock index fell for the first time in four days to 654.29, a drop of 1.1 percent.

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Cash-strapped shoppers were searching for bargains in the final weekend before Christmas and some were limiting their gift-giving to children in what may have been a make-or-break two-day period for U.S. retailers.

“We’re buying less stuff for each other and just overall,” Dennis Decker, a 47-year-old landscape architect, said Dec. 20 outside a Kohl’s in Douglasville, Georgia. “Usually I buy stuff for my sisters. This year I’m just going to make them some Christmas ornaments.”

Sales figures for the weekend will be released later this week. Consumers who waited for deeper discounts probably were rewarded as retailers sought to clear inventory and salvage what may be the worst holiday season in 40 years, even though their fourth-quarter profits may suffer as a result.

Gap Inc.’s Banana Republic chain advertised clothing for as much as 60 percent off. A $2,100 Marc Jacobs dress was listed at $629.95 on Saks Inc.’s Web site. Macy’s Inc., the second-largest U.S. department-store chain, offered $800 sapphire or ruby and diamond rings for $249 Dec. 20.

Online spending at U.S. retailers dipped 1 percent in the holiday season so far this year, research firm ComScore Inc. said.

Consumers spent $24 billion over the Internet from Nov. 1 to Dec. 19, compared with $24.2 billion in the same period a year earlier, the Reston, Virginia-based research firm said yesterday in a statement on its Web site.

Pent-Up Demand

The Standard & Poor’s 500 Retailing Index has shed 31 percent this year, with only two of its 27 companies gaining. The index doesn’t include Wal-Mart Stores Inc., the world’s largest retailer, which rose 33 cents to $55.74 Dec. 19 in New York Stock Exchange composite trading. The stock has gained 17 percent this year.

Toys “R” Us is cutting the price of Mattel Inc health insurance quotes.’s Elmo Live furry red Muppet through Dec. 24 by $10 to $49.99 and reducing Jakks Pacific Inc.’s EyeClops Night Vision Infrared Stealth Goggles by $20 to $59.99.

“I do believe this is going to be one of the largest weekends in retail history,” Toys “R” Us Chief Executive Officer Gerald Storch said in an interview Dec. 19. “There’s a lot of pent-up demand, and there’s going to be fantastic deals.”

Shoppers grappling with shrinking housing prices and rising unemployment have cut back on non-necessities, pushing the U.S. economy into a recession. Consumer spending accounts for more than two-thirds of gross domestic product, and 81 percent of consumers plan to spend less this holiday season, according to a study by NPD Group Inc. released on Dec. 19.

Just for the Kids

Alex Galvez, 28, an automotive technician who works in Long Beach, California, said he lost half his income this year as the auto industry neared collapse. He was shopping for his nephews Dec. 20 at the Westfield Santa Anita mall, in Arcadia, California.

“In past years, we’d probably get 10 gifts for each of our nephews,” he said. “This year it’s probably one.”

The International Council of Shopping Centers has estimated that in November and December, sales at stores open at least a year may decline as much as 1 percent. That would be the largest drop since at least 1969, when the New York-based trade group starting tracking data.

“It’s sad for the kids,” said Galvez. “They’re used to getting a ton of gifts.”

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The Philippine government posted its third straight monthly budget deficit in November as it boosted spending to counter the global recession.

The shortfall was 4.3 billion pesos ($92 million) last month, Finance Secretary Gary Teves said in Manila today. That compares with an 8.96 billion-peso deficit in October and a 54.1 billion-peso surplus a year earlier, when the government sold geothermal producer PNOC Energy Development Corp.

President Gloria Arroyo in May scrapped her plan to end 10 years of annual budget deficits this year, estimating a 75 billion-peso shortfall as she boosted spending to help Filipinos cope with inflation and slowing economic growth. Economic Planning Secretary Ralph Recto said last month the budget may only be balanced in 2011.

“They are supposed to be spending,” said Song Seng Wun, an economist at CIMB-GK Securities Pte in Singapore. “It’s probably the appropriate policy stance for governments looking to cushion the domestic economy from the effects of the global slowdown, as private-sector spending declines.”

Philippine economic growth unexpectedly accelerated in the third quarter as remittances from overseas nationals climbed at the fastest pace in seven years. Still, the government predicts expansion in 2009 may cool to the slowest pace in eight years as the global recession damps demand for Philippine goods, workers and services.

Spending rose 20 percent to 113.4 billion pesos in November. In the first 11 months of the year, the government outlay increased 11.3 percent.

‘On Track’

Revenue fell 27 percent to 109 billion pesos last month from a year earlier, when income was boosted by the government’s sale of PNOC Energy for 58 pay day loan lenders.5 billion pesos. For the first 11 months, revenue rose 3.6 percent.

The Philippines is “on track” to ensure this year’s budget deficit doesn’t exceed 75 billion pesos, Teves said. The government is scheduled to sign an agreement to sell its Petron Corp. stake this afternoon and expects the 25.7 billion-peso payment on or before Dec. 24, the last business day of the year, he said.

The government plans to “sustain the improvement” in spending and will review next year’s 102 billion-peso deficit ceiling in the next few months, Teves said. It may borrow more than planned if the 2009 deficit exceeds targets, he said.

The Philippines exempted more workers from income taxes starting July, a move estimated to cut revenue by 10 billion pesos this year and twice that amount next year. Corporate income taxes will fall to 30 percent next year from 35 percent.

Still, the Philippines plans to sell natural-gas producer PNOC Exploration Corp. and the government’s Food Terminal Inc. property for 10 billion pesos each in the first half of next year, Teves said.

The government had a budget deficit of 66.7 billion pesos in the first 11 months compared with a surplus of 12.6 billion pesos a year earlier.

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Europe’s trade gap narrowed for a third month in October as the slumping economy damped imports.

The 15-nation euro area had a seasonally adjusted deficit of 1.3 billion euros ($1.9 billion), down from 4.4 billion euros in September, the European Union’s statistics office in Luxembourg said today. The deficit reached a record 6.1 billion euros in July.

Domestic demand is flagging across Europe as the economy falls deeper into a recession. Business confidence in Germany , the region’s largest economy, dropped to the lowest since 1982 in December, while euro-area unemployment rose to the highest level in 21 months in October and retail sales fell.

The euro region faces its worst slump since the Second World War next year, Julian Callow, chief European economist at Barclays Capital in London, said in an e-mailed note today. The global slowdown is curtailing orders for Europe’s exports just as the credit shortage curbs spending by companies and consumers.

Daimler AG, the world’s biggest maker of heavy trucks, said the recession may be “deep” and the European Central Bank this month delivered the biggest interest-rate cut in its 10-year history easy pay day loans.

Euro-area imports declined to 132.1 billion euros in October, down 4.6 percent from the previous month, outpacing the 2.5 percent drop in exports. Shipments abroad from Germany grew 0.8 percent on the month, while its imports fell 0.6 percent.

Detailed Figures

The statistics office publishes detailed figures with a one- month lag. The data show that Europe’s trade deficit with China widened to a 84.2 billion euros in the first nine months of the year. Exports to China increases 12 percent to 49 billion euros, while imports from the Asian nation grew 6 percent to 133.2 billion euros.

The January-September figures also show that the euro area’s energy deficit widened to 235.5 billion euros from 164.6 billion euros in the year-earlier period. Europe’s deficit with Russia, the world second-biggest oil producer, surged 40 percent to 31.3 billion euros.

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European Central Bank President Jean- Claude Trichet said there’s a limit to how far the bank can cut interest rates and signaled policy makers may pause in January.

“Do we have a feeling there is a limit to the decrease in rates? At this stage certainly yes,” Trichet told journalists in Frankfurt late yesterday. The comments were embargoed until today. Asked whether the ECB will refrain from a further rate reduction next month, Trichet said it wants to “concentrate at this stage on getting what we already decided to be really operational.”

With risk-averse banks still refusing to lend to each other after monetary policy was loosened at an historic pace, Trichet’s ECB is more reluctant than the Federal Reserve and the Bank of England to fight the financial crisis with more rate cuts. The Fed may lower its benchmark rate to the lowest on record later today, and Bank of England Governor Mervyn King indicated U.K. policy makers are likely to keep reducing rates.

“The message from Trichet is that there is some caution at the ECB about cutting interest rates too far,” said Klaus Baader, chief European economist at Merrill Lynch & Co. in London. “The ECB is going to focus more on making sure previous rate cuts are passed on to money markets, so we don’t see them cutting as soon as January. There will be more cuts later.”

Deepening Recession

The ECB has lowered its benchmark rate by 175 basis points since October to 2.5 percent, the most aggressive reduction in its 10-year history. Europe’s manufacturing and services industries contracted in December at the fastest pace in at least a decade, data showed today, indicating the economy is falling deeper into recession.

Investors are betting the slump will force the ECB to slice at least another 25 basis points off its key rate at its next policy meeting on Jan. 15, Eonia forward contracts show. Before Trichet’s comments were published today, a 50-point cut had been fully priced in for January. The euro rose and the yield on the two-year note, the most sensitive to interest-rate expectations, pared gains.

“We have to beware of being trapped at nominal rates that would be much too low,” Trichet said. “It seems to me that it is certainly something we have in mind and we will have to examine that and reflect on that. But as you know, we never pre- commit.”

“The ECB is taking an isolationist stance to differentiate itself from the Fed and the BOE,” said Julian Callow, chief European economist at Barclays Capital in London, who believes the bank will pause next month and then cut its key rate to 1 guaranteed payday loans.25 percent by May.

‘Free Riding’

“In a way it’s free riding on the U.S. fiscal stimulus plan, hoping it will help the global economy,” said Callow. “However, with the Fed embarking on quantitative easing, it will push up the euro, which would be another massive blow to Europe’s economy.”

The Fed may today halve its main interest rate to 0.5 percent and signal plans to channel credit to businesses and consumers by further enlarging its $2.26 trillion of assets. The policy, known as quantitative easing, was adopted by the Bank of Japan for five years through March 2006 to fight deflation.

While Trichet refused to rule out such measures given the “extraordinary” circumstances, he said it would “not be appropriate” at the moment for the ECB to start buying government bonds.

Deposit Rate Cut?

Instead he urged banks to lend to each other again and said the ECB is examining whether to cut its deposit rate further to discourage financial institutions from parking excess cash with it overnight. Banks deposited 178.4 billion euros ($244 billion) with the ECB yesterday. In the year to Sept. 15, deposits with the ECB averaged just 534 million euros a day.

The euro interbank offered rate, or Euribor, that banks say they charge each other for three-month loans fell 4 basis points to 3.20 percent today, European Banking Federation data showed. While the lowest since August 2006, that’s still 70 basis points more than the ECB’s benchmark. The gap averaged 15 basis points in the seven years to August 2007, before the credit crisis began.

Since lowering the benchmark rate on Dec. 4 by 75 basis points, the biggest-ever single reduction, some ECB officials have indicated they’re reluctant to cut borrowing costs much further. Executive Board member Juergen Stark said on Dec. 10 that the scope for further moves is “very limited” and Bundesbank President Axel Weber said the next day he “would like to avoid” the ECB’s key rate falling below 2 percent.

By contrast, Portugal’s Vitor Constancio said last week that policy makers still have a “margin of maneuver” on rates to fight the “risk of a significant recession.”

Trichet said it’s important to ensure that the ECB’s 175 basis points of monetary easing to date “is effective in terms of going through the various channels and into the real economy.”

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Bill Clinton was forced to abandon spending initiatives to boost the economy at the start of his presidency when advisers warned him that the borrowing needed to fund the programs would push interest rates higher. President- elect Barack Obama may not have the same problem.

While the total amount of U.S. government debt outstanding rose to $10.7 trillion in November from $9.15 trillion a year earlier, the amount of interest paid in the last two months fell by $10 billion, according to the Treasury Department.

Instead of shunning the U.S., where losses on subprime mortgages in 2007 triggered a global seizure in credit markets that led to the downfall of securities firms Bear Stearns Cos. and Lehman Brothers Holdings Inc., investors can’t get enough Treasuries. Even as estimates of Obama’s stimulus package and the budget deficit rise to a record $1 trillion, demand continues to increase as investors flee risky assets around the world and put their cash into U.S. bonds paying, in some cases, nothing in yield just to ensure the return of their principal.

“You still have a massive paranoia in the marketplace and you’ve got that safety-at-any-cost mentality,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “People are not buying Treasury bills because they think the yields are attractive. They are buying them because they are afraid to put money anywhere else.”

Foreign Demand

Foreign central banks and other institutions are accumulating Treasuries at the fastest pace since 1988, boosting their holdings 12 percent since September, compared with a 7.7 percent increase last quarter, according to the Federal Reserve.

Purchases accelerated even as the yield on the benchmark two-year Treasury note tumbled to 0.76 percent last week from this year’s peak of 3.11 percent on June 13. Rates on three- month bills turned negative on Dec. 9 for the first time. The same day, the U.S. sold $30 billion of four-week bills at a zero percent rate. Yields on two-, 10- and 30-year Treasuries last week all fell to lowest since the U.S. began regular sales of those securities.

The two-year note yielded 0.77 percent as of 9:12 a.m. in London today, according to BGCantor Market Data, after falling as low as 0.66 percent on Dec. 12.

The drop in yields drove bond prices higher, pushing returns to 12.4 percent on average this year, the best performance since they gained 13.4 percent in 2000, according to New York-based Merrill Lynch & Co.’s U.S. Treasury Master Index. The returns compare with a drop of 40 percent in the Standard & Poor’s 500 Index and average losses of 15 percent in Merrill Lynch’s broadest corporate bond index.

‘Raw Fear’

“This is not about return and yield and value; investors are functioning out of raw fear,” said Barr Segal, a managing director at Los Angeles-based TCW Group Inc., which oversees $90 billion in fixed-income assets. At the same time, “this is fabulous for the Treasury because they are borrowing at virtually nothing,” he said.

Japan’s bond market suggests that low yields may remain for a sustained period. In an effort to revive sagging growth in the 1990s, the world’s second largest economy ran its national debt to 1.5 times of gross domestic product. Yields on Japanese bonds are near the lowest in three years, with the country’s benchmark 10-year bond paying 1.40 percent, compared with 2.59 percent in the U.S. The national debt in the U.S. is 72 percent of GDP.

“It’s good news,” said James Horney, director of federal fiscal policy at the Center on Budget and Policy Priorities in Washington. “Even though we’re borrowing larger amounts of money, the total amount we’re going to pay in interest is going to be somewhat lower.”

Stimulus Package

Interest was $92.5 billion from August through November 2007 on the $9.15 trillion in total debt outstanding, resulting in interest expense of 1.01 percent. In the same period a year later, interest was $87.5 billion on $10.66 trillion in total debt, dropping the expense to 0.8 percent.

While the median estimate of 49 economists and strategists is for 10-year Treasury yields to end 2009 at 3.65 percent, that’s still below the average of 6.91 percent paid on the securities since 1962 cheap payday loan. The security helps determine corporate and consumer borrowing rates.

Obama plans an economic stimulus package that may approach $1 trillion, in addition to a middle-class tax cut and universal health care, which may add $4 trillion or more to the national debt over 10 years, according to the Tax Policy Center in Washington and health-care economists.

Record Shortfall

The U.S. already posted a record $401.6 billion budget shortfall for the first two months of fiscal 2009, which began Oct. 1, according to a Treasury report last week. The largest postwar budget deficit by the U.S. was $412.7 billion in 2004.

“The role of the deepening economic slump in this deterioration coupled with the escalating size of the likely fiscal stimulus puts the deficit on course to exceed $1 trillion,” Edward McKelvey, a senior economist in New York at Goldman Sachs Group Inc., wrote in a Dec. 8 report to clients. “This implies upside risk to our $2 trillion figure for Treasury supply.”

Clinton’s proposals to spur the economy early in his administration in 1993 were stymied by concern how bond investors would react, according to James Carville, a Clinton consultant during the 1992 presidential campaign.

Clinton Days

“Early in the Clinton days, the hallmark of policy was if you did this, how would it affect the bond market,” Carville said in an interview last year. “Every time I would talk to someone they would say ‘you can’t do that, it will freak the bond market out.’ I said ‘goddamn, whoever the bond market is, these bastards are powerful.’”

The potential for massive deficits has done nothing to damp demand for government debt as the U.S. prepares to spend $8.5 trillion to bailout financial institutions, homeowners and the economy. The biggest deficit as a percentage of the economy was 6 percent in 1983. A trillion-dollar 2009 gap would top that.

To prevent yields from rising, Fed policy makers indicated that the central bank may buy Treasuries. Fed Chairman Ben S. Bernanke suggested in a Dec. 1 speech that he would consider such a measure, saying one option is to buy “longer-term Treasury or agency securities on the open market in substantial quantities.”

‘Printing Press’

“If there is a whiff of anything getting worse, the Fed can just go downstairs and start that printing press,” said Kevin Gaynor, head of economics and interest-rate strategy at Royal Bank of Scotland Group Plc in London. “They can easily stop targeting the federal funds rate and start targeting a two- or five-year Treasury yield.”

Policy makers may also cut interest rates again, which may keep bond yields low. The Federal Open Market Committee will reduce its target rate for overnight loans between banks by a half-percentage point, to a record 0.50 percent, when it meets Dec. 15-16, according to the majority of economists surveyed by Bloomberg News.

The U.S. economy has been in a recession for a year, the National Bureau of Economic Research declared on Dec 1. The economy will continue to contract through June, with unemployment rising above 8 percent the end of 2009, from 6.7 percent last month and this year’s low of 4.8 percent in February, according to Bloomberg surveys of economists. That would make the current slump the longest since the Great Depression.

‘It’s Ironic’

“In some ways it’s ironic,” said Meg Browne, senior currency strategist at Brown Brothers Harriman & Co. in New York. “The U.S. turned down first and the crisis appeared first in the U.S., yet people continue to flock to the U.S. government debt market because it’s the biggest and deepest market in the world and still has a low risk.”

The U.S. will eventually have to commit to balanced budgets, said Alice Rivlin, former Fed vice chairman and founding director of the Congressional Budget office.

“We can’t press our luck,” said Rivlin, now a scholar at the Brookings Institution in Washington. “Eventually, we’ve got to show the world that we are fiscally responsible.”

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An oversight committee set up by Congress criticized the U.S. Treasury for not using the $700 billion financial bailout to help average Americans, and questioned its commitment to stem home foreclosures.

The panel, which met for the first time about two weeks ago, issued a report faulting the department for not having a comprehensive plan for stabilizing financial markets and urging it to more clearly explain its efforts. The group’s chairwoman, Harvard Law Professor Elizabeth Warren, is scheduled to testify before the House Financial Services Committee today.

“Households that are struggling with debts — mortgages, student loans, credit cards, car loans, payday loans and other credit devices — are at the center of the current crisis,” the report said. “For Treasury’s disbursements to be effective in the context of the broader economic downward spiral, Treasury must have a strategy that addresses this underlying problem.”

While the findings are likely to further inflame critics of Treasury Secretary Henry Paulson’s efforts to unfreeze credit markets, they have split the oversight panel along party lines, raising concerns about the group’s legitimacy and effectiveness. Paulson is under fire for abandoning his original plan to buy toxic mortgage assets, instead using most of the funds for boosting capital in banks.

Representative Jeb Hensarling of Texas, the lone Republican appointee on the four-member oversight committee, issued a statement saying he voted against the report. “The jury is still out” on whether the panel “will eventually be an effective vehicle” for monitoring the Troubled Asset Relief Program, Hensarling said yesterday.

Divided Panel

“I have to ensure that every panel member has the resources and the rights necessary to conduct effective oversight,” he said, adding that he had raised “concerns” with his fellow committee members that weren’t addressed.

Hensarling is also scheduled to appear at today’s hearing, along with Warren, Treasury Assistant Secretary Neel Kashkari and an official from the Government Accountability Office.

The congressional panel is one of several layers of oversight called for in the legislation car insurance. It is supposed to have five members, three named by Democratic lawmakers and two by Republicans. Earlier this month, Republican Senator Judd Gregg of New Hampshire quit the group, citing the pressure of his legislative activities.

The bailout already has its own inspector general, confirmed this week by the Senate, and is subject to GAO audits. A committee headed by Federal Reserve Chairman Ben S. Bernanke is also charged with watching over the TARP.

Finding a Role

Warren and some other members of the panel met recently with top staff at the Fed and Treasury in an effort to determine what role the group would have in watching over the rescue plan.

While officials who attended the sessions said the committee was struggling to define its mission, its new report paints its work broadly.

“Most importantly, we are here to ask the questions that we believe all Americans have a right to ask,” the panel said. “Who got the money, what have they done with it, how has it helped the country and how has it helped ordinary people?”

The report is required under the rescue law passed Oct. 3. The group’s criticism follows a GAO review last week that called for the Treasury to tighten its oversight of the program.

Paulson has allocated $335 billion of the funds so far. Lawmakers have said they may try to block the Treasury from using the second half of the $700 billion. Paulson hasn’t yet asked for the money and officials say it’s unclear whether he will do so before President George W. Bush’s second term ends next month.

“I would be a very hard person to convince that this crowd deserves to have their hands on the next $350 billion,” Senate Banking Committee Chairman Christopher Dodd told reporters on Dec. 4 in Washington. “I am through with giving this crowd money to play with.”

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Latvia’s International Monetary Fund- led bailout package will involve loans from other European governments and will maintain the country’s currency peg to the euro, the IMF said.

The program “maintains Latvia’s current exchange rate parity and band,” said Christoph Rosenberg, IMF mission chief for the Baltic nation, in an e-mailed statement yesterday. Latvian Finance Minister Atis Slakteris on Dec. 4 told lawmakers that some IMF officials were seeking a devaluation of the lats.

Latvia, which joins Hungary, Ukraine, Serbia and Belarus among eastern European states asking for IMF financial help, may need as much as 5 billion euros ($6.3 billion), Fitch Ratings predicts. The economy may shrink 5 percent next year and, without spending cuts, the budget deficit may swell to 10 percent of gross domestic product, Slakteris said in the parliament.

The IMF is working with the European Commission, some European governments and regional and multilateral institutions, Rosenberg said in the statement.

The rescue plan “will require agreement on exceptionally strong domestic adjustment policies and sizeable external financing, as well as broad political consensus in Latvia,” Rosenberg said. “All participants are working to bring these program discussions to a rapid conclusion.”

The country has run a fixed exchange rate since the lats was reintroduced in 1993, first pegging it to a basket of currencies, and then to the euro at the beginning of 2005. Latvia has a quasi- currency board system, where the lats is backed by foreign currency and allowed to rise and fall against a midpoint per euro.

‘Good News’

Slakteris had warned that some IMF experts sought a currency devaluation as a way to help the economy recover quick pay day loans.

It’s “good news” that the IMF does not favor a devaluation, said Lars Christensen, chief economist at Danske Bank A/S, by phone. “This will bring some comfort to the markets.”

The central bank said on Dec. 5 that its reserves fell about 30 percent in two months to $4.2 billion at the end of November as it defended the peg to the euro and the government took out money it kept in deposit. The bank bought 660.5 million lati ($1.2 billion) in the past nine weeks after the currency weakened to the limit of its band.

The government said on Dec. 3, it was increasing its stake in Parex Banka AS, the country’s second-biggest lender, to 85 percent from 51 percent as withdrawals mounted. The lender lost about 500 million lati in deposits since September and the government and banking regulator have imposed restrictions on withdrawals.

The economy of the former Soviet state that joined the European Union in 2004 contracted an annual 4.2 percent in the third quarter, the steepest drop since at least 1994. That compared with growth of 0.1 percent in the second quarter.

Industrial output fell for a sixth month in October, led by a decline in the production of furniture, paper and wood as the recession took hold. The unemployment rate rose to 6.1 percent in November, the highest level in 20 months.

Prime Minister Ivars Godmanis has said he will resign if lawmakers fail to approve his macroeconomic program, his spokesman Edgars Vaikulis said by telephone on Dec. 4.

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