Finance & Business World

Finance ministers from Europe’s largest economies said they are ready to hand the International Monetary Fund more money than they previously pledged to assist poorer countries through the global financial crisis.

Four days before a meeting in London of the Group of 20 nations, the governments of Germany, the U.K. and France said the 27 European Union nations should provide about $75 billion more on top of the $100 billion they’ve already committed. The G-20 said in April it would triple the Washington-based lender’s resources to $750 billion.

“Europe should set an example and do more to meet the target,” U.K. Chancellor of the Exchequer Alistair Darling said today in a column published in the Guardian. The IMF needs cash “to support those emerging markets and low-income countries most affected by the crisis,” he said.

The 186-member IMF has sought extra backing from its shareholders after the banking crisis and subsequent global recession forced it to mount financial rescues from Hungary to Pakistan. European finance officials meet in Brussels on Sept. 2 to discuss their agenda for the subsequent conference of G-20 finance ministers and central bankers.

The U.K., which already promised $15 billion, is ready to provide up to $11 billion more, he said. Germany is ready to contribute 25.03 billion euros ($35.7 billion) and France is willing to give 18.45 billion euros, according to a letter to EU counterparts from Germany’s Peer Steinbrueck and France’s Christine Lagarde.

Below Quota

The letter urged emerging markets such as India and Saudi Arabia to say how much they will provide. “Europe should not wait for these pledges and should announce rapidly the amount of its own contributions,” the two finance ministers said. “We call on our EU partners to join us.”

Europe’s current commitment is “quite a bit under” its so-called allocation of “quotas,” which determine a country’s voting rights, John Lipsky, the IMF’s No. 2 official, told Bloomberg Radio today. ‘If the EU wished to participate in a manner consistent with their current quotas, it would imply a need to increase that commitment.”

The European call for added aid follows the lender’s Aug. 28 announcement that it had pumped about $250 billion into foreign-exchange reserves worldwide, acting on another effort by the G-20 to boost global liquidity. Lipsky said today that economic data are “turning positive” and that the fund expects the world economy to expand next year.

‘First Signs’

The G-20 finance officials will meet before a summit of leaders in Pittsburgh on Sept. 24-25 amid the “first signs” that their economies are emerging from recessions, Darling said. Its governments “will step up their efforts to secure the economic recovery and repair the world’s financial system.”

The group is concerned that credit supply may tighten further, a German official told reporters on condition of anonymity. Steinbrueck wants to use this week’s talks to discuss how governments will roll back their budget deficits and improve the regulation of global finance, his aide said.

Darling said G-20 governments should not allow “any letup in the reform of the financial sector,” pressing each country to return their banks to a sound-footing, restore confidence in the financial industry and go further to ensure pay and bonuses are restrained. He demanded nations cooperate in ensuring new financial rules are evenly applied.

“Neither the economy nor the banking system can flourish efficiently without international cooperation,” Darling said. “In this global world our markets are interdependent, and without strong international financial regulation one country’s financial system can be played off against another.”

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Bank of Japan Governor Masaaki Shirakawa said any recovery in the world’s second-largest economy is likely to be weak because there’s no guarantee that demand will gain momentum once global stimulus programs fade.

“Even if we have a recovery, I don’t think its strength will be impressive,” Shirakawa told reporters in Tokyo today after his board kept the key interest rate at 0.1 percent. “I can’t be confident about the strength of final demand after inventory adjustments and policy measures run their course.”

The Bank of Japan said it remains concerned about “downside risks to economic activity and prices” even as the country’s deepest postwar recession abates. While exports and production are improving, spending by companies and consumers remains sluggish and the outlook is “attended by a significant level of uncertainty,” the central bank said.

“The decision to keep the current rate reflects how careful and conservative the central bank remains about the economic recovery,” said Susumu Kato, chief economist in Tokyo at Calyon Securities, the investment banking unit of Credit Agricole SA. “The bank won’t likely raise the rate at least until late 2010.”

The yen rose to 96.79 per dollar at 6 p.m. in Tokyo from 97.15 yesterday after reports showed Chinese industrial output grew less than expected and exports fell, spurring demand for the relative safety of Japan’s currency. The yield on 10-year government bonds fell one basis point to 1.445 percent.

No New Steps

Shirakawa and his colleagues refrained from unveiling new measures a month after they extended credit-easing programs until the end of 2009. The central bank’s rate decision was expected by all 22 economists surveyed by Bloomberg News.

The policy board said the economy has “stopped worsening,” leaving its view unchanged from a month ago. Investment by companies is “declining sharply” and household consumption “remains generally weak amid the worsening employment and income situation,” it said in a statement.

The government also left its monthly economic assessment unchanged today, saying it’s “picking up recently,” yet conditions are still “difficult.” Prime Minister Taro Aso’s ruling Liberal Democratic Party trails the opposition Democratic Party of Japan in polls ahead of an Aug. 30 election.

Aso’s 25 trillion yen ($262 billion) in stimulus measures helped consumer confidence climb for a seventh month in July, a Cabinet Office report showed today no fax payday loans. More than $2 trillion in government spending worldwide have helped to ease the worst global recession since the Great Depression.

Return to Growth

Japan’s economy probably expanded 3.9 percent in the three months ended June 30 after contracting for four quarters, analysts predict a report will show next week.

Even so, growth may not be sustained because companies still have spare capacity and employees.

“These excesses will continue to weigh on consumer spending and capital investment,” said Seiji Shiraishi, chief economist at HSBC Securities Japan Ltd. in Tokyo. Japan’s jobless rate climbed to a six-year high of 5.4 percent in June.

Shirakawa said that while consumer prices are falling at a faster pace, that’s unlikely to snowball.

“We don’t see a risk of a deflationary spiral now, however price declines have accelerated in recent months, and that warrants close and careful monitoring,” he said.

Deflation Forecasts

Policy makers may forecast later this year that deflation will extend into 2011, and economists say that will force them to prolong their policy of keeping rates near zero. Consumer prices excluding fresh food slid a record 1.7 percent in June.

Shirakawa said prices are falling worldwide because of a dearth of demand and excess supply in the wake of the global economic crisis. It will take “considerable time” before price drops moderate, he said.

China’s exports slumped 23 percent in July from a year earlier and factory output grew a less-than-expected 10.8 percent, government reports showed. Elsewhere in Asia, the Bank of Korea left its benchmark rate at a record low of 2 percent on signs of a recovery. Singapore’s economy expanded at an annual 20.7 percent pace last quarter, revised figures showed.

Japan’s key rate will stay unchanged at least through 2010, according to 12 of 16 economists surveyed by Bloomberg News. The Bank of Japan last lowered the rate in December and has since begun purchasing corporate debt and providing unlimited loans backed by collateral to lenders. The central bank last month extended the credit programs by three months to Dec. 31.

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Just as banks from JPMorgan Chase & Co. to Deutsche Bank Securities Inc. rushed to raise their forecasts for U.S. growth in coming quarters, Nobel laureate Edmund Phelps warned the economy is in for a “long slog.”

The divergence emerged after the Commerce Department said July 31 the economy has now contracted the most since the 1940s. Benchmark revisions to the department’s National Income and Product Accounts also showed consumer spending has tumbled 2 percent since the end of 2007, a magnitude unseen since the 1980 slump that ushered President Jimmy Carter out of office.

The deeper decline sets the stage for a faster recovery in the second half of the year, said Bruce Kasman at JPMorgan and Joseph LaVorgna at Deutsche Bank. It’s what comes later that worries Phelps and others, including Mark Gertler, the New York University economist who was a research partner of Ben S. Bernanke before he became Federal Reserve chairman.

“I’m not convinced that there’s going to be another wave of innovation in the offing” to propel growth, leaving the economy facing a “long slog,” said Phelps, a professor at Columbia University in New York. Gertler said “financial headwinds” will restrain growth by limiting credit to households and companies.

Phelps foresees real, or inflation-adjusted, gains in gross domestic product of 2.5 percent in the years following the current slump. That’s weaker than the average expansion rate during any postwar decade except the current one, in which growth has been pulled down by two recessions. Growth averaged better than 3 percent in the 1990s, 1980s and 1970s, and exceeded 4 percent in the 1960s.

Jobs Outlook

“Employment is going to be on the weak side” for several years, added Phelps, who won the 2006 Nobel economics prize for his theories on the interplay between inflation expectations and joblessness.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said last week that corporate profits will be depressed because GDP, unadjusted for inflation, will grow at a 3 percent pace in coming years, compared with a 5 percent to 7 percent average the past 15 years. He cited “massive overcapacity” — from retail shopping outlets to automobile production volume — as a legacy of the downturn.

Some analysts countered that the recession, caused by a bust in homebuilding and a credit crunch that has seen financial institutions lose or write down $1.5 trillion so far, hasn’t hurt the economy’s underlying potential.

‘Robust’ Recovery

“Nothing here changes our view that the economy is set to recover in a pretty robust way,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York, who previously researched consumer spending at the Fed in Washington. Maki’s colleague Tim Bond, head of global asset allocation in London, said in a report last week the “prevailing consensus forecast of a very weak recovery is at odds with history.”

Maki said U unique business cards.S. GDP will increase 3.4 percent in the fourth quarter of 2010 from 2009. Deutsche Bank, on the same basis, predicts 3.2 percent growth next year.

Gary Becker, another Nobel laureate in economics, counted himself among those “a little more optimistic” about the outlook. Demand from China, Brazil and other emerging markets will help aid U.S. growth, and credit flows are poised to recover because of the Fed’s actions, he said. Hundreds of billions of dollars in so-called excess reserves that banks have on deposit at the Fed give lenders fuel to extend lending.

Becker’s Worry

“If the economy picks up as I expect it will” there will be “a big inflationary potential,” said Becker, who won the Nobel economics prize in 1992 for applying economic principles beyond markets. “We will see considerable inflation,” he warned, and said he’s skeptical whether the central bank will be able to address the threat adequately, given likely “political pressure” to hold off.

Kasman, chief economist at JPMorgan in New York, raised his estimate for the expansion in the current quarter to 3 percent — the best performance in two years, and up from a prior estimate of 2.5 percent. LaVorgna, chief U.S. economist at Deutsche Bank in New York, lifted his average growth forecast for the second half of 2009 to 2.25 percent from 0.5 percent.

Some economy-watchers warned that weaker growth is poised to undermine the nation’s long-term fiscal health.

“It is worrisome how we can finance the deficit without having inflation,” said Allan Meltzer, a Fed historian and economics professor at Carnegie Mellon University in Pittsburgh.

Budget Deficit

Bernanke, in congressional testimony last month, urged Congress and the Obama administration to lay out a plan that would bring the budget deficit down to a “sustainable” level of 2 percent to 3 percent of GDP.

The International Monetary Fund predicted last week that the U.S. will fall short of that goal for at least five years, forecasting a ratio of 4.7 percent of GDP in 2014.

Another threat to the U.S. outlook is that the slump is in danger of returning next year, according to some economy- watchers.

Former Fed Chairman Alan Greenspan, speaking on ABC’s “This Week” program yesterday, warned that a “double dip” — or return to contraction — is a risk because house prices have yet to stabilize. A further decline of 10 percent in home values may trigger another wave of mortgage foreclosures, he said.

Treasury Secretary Timothy Geithner, also speaking on ABC, said the threat of a double dip is “something we’re very focused on.” The Obama administration is committed to maintain its stimulus and credit-providing programs “until we’re very confident we have a strong, private sector-led recovery in place.”

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Mexico’s economy probably shrank the most in three decades last quarter as the global recession and the outbreak of swine flu curbed industrial output and fueled job losses, the finance ministry said.

Gross domestic product may have contracted 10.4 percent in the second quarter from a year earlier after declining 8.2 percent in the previous three months, the ministry said in an e- mailed report yesterday. The government is due to release last quarter’s GDP figures on Aug. 20.

“In the second quarter of 2009, the external environment continued to be adverse,” the ministry said. “The flu outbreak temporarily affected activity in several sectors and regions, particularly in those related to tourism and leisure.”

Mexican job losses have accelerated this year as the recession in the U.S., which buys about 80 percent of the nation’s exports, saps demand for products. The central bank said this week the economy will shrink in 2009 at almost double the pace it previously forecast, predicting a contraction of 6 first cash advance.5 percent to 7.5 percent.

A contraction of 10.4 percent in the three months to June 30 would be the biggest decline in GDP since at least 1980, according to Bloomberg quarterly data that starts from the first three months of 1981.

Industrial production plunged 12.1 percent in April and May from a year earlier, while formal jobs declined 4.1 percent in June compared with the same month in 2008, according to the ministry’s report. Mexico had a budget deficit of 94.6 billion pesos ($7.1 billion) in the first half of the year, it said.

Public revenue fell 7.8 percent in the first half of the year compared with the same period last year as oil and tax revenue dropped, the ministry’s report said.

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Former Bank of England policy maker David Blanchflower said the central bank risks cutting the economic recovery short and should expand the program to buy bonds with newly created money.

Any growth in the economy will be “pretty anemic, pretty slow for a year or two,” said Blanchflower in an interview with Bloomberg Television yesterday from Dartmouth College in Hanover, New Hampshire, where he is professor of economics. “My worry is that the tightening comes too soon and people kill off any recovery that’s coming.”

The pound rose and bonds fell after policy maker Andrew Sentance said the Bank of England will consider pausing the 125- billion pound ($207 billion) bond-purchase program next month. The British economy will show signs of recovery in the second half of 2009 after contracting for a year, Sentance said payday loan.

“It’s very early days to say that you know the endgame is even in sight,” Blanchflower said. The bank should consider spending as much as 300 billion pounds in newly printed money, twice as much as the current total authorized by the government, he said.

U.K. gross domestic product fell 0.8 percent in the second quarter from the first three months of the year, the Office for National Statistics said today in London. That’s more than twice the 0.3 percent median forecast in a Bloomberg News survey of 32 economists.

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Indonesia’s economy may double in the next six years as the world’s biggest exporter of power- station coal and largest producer of palm oil taps surging demand from India and China, CLSA Asia-Pacific Markets said.

China, India and Indonesia will generate $10 trillion of wealth for investors by 2015, Nicholas Cashmore, head of Indonesia research at CLSA Asia-Pacific Markets, said in a note titled “Chindonesia: Enter the Komodo,” a reference to the reptile found only in eastern Indonesia. The three economies are Asia’s “next growth triangle,” he said.

Feeding the needs of the world’s two most-populated nations as demand from Western countries slows may help President Susilo Bambang Yudhoyono meet his target of boosting growth to 7 percent in his second term. Indonesia wants be included among the so-called BRIC nations of Brazil, Russia, India and China, Emil Salim, a presidential adviser, said.

“Together, China and India are increasingly becoming the biggest marketplace for almost everything sold on the planet,” Cashmore said in the report published yesterday. Indonesia plays a symbiotic role in the emergence of China and India and “as this role becomes more pronounced in years to come, it will boost growth, investment and consumption.”

India’s industrial production increased at the fastest pace in eight months in May, the statistics agency said yesterday. The South Asian nation, the biggest buyer of Indonesia’s palm oil and cashew, may overtake China next year as the world’s fastest growing major economy, according to the World Bank.

BRIC Membership

China’s economy will expand 7.2 percent in 2009 from a year earlier, the Washington-based lender said. Indonesia’s exports to China grew 16 percent last year, compared with a 10.7 percent expansion in demand from the U.S., the second-largest buyer of Indonesian products.

Indonesia’s economic acceleration provides a case for its inclusion among the BRIC economies, Morgan Stanley said in a report to clients last month.

The $433 billion economy can expand “significantly” more than 7 percent once Yudhoyono fixes the nation’s congested roads, neglected ports and ageing power plants, according to Joachim von Amsberg, the World Bank’s representative in Jakarta unique business cards.

Yudhoyono is set to win a second term after presidential elections this week, providing the 59-year-old former general with a mandate to double spending on roads and power to $140 billion by 2014.

Congested Roads

Fixing Indonesia’s congested roads, neglected ports and ageing power plants needs to be among Yudhoyono’s top priorities for him to achieve his goal of boosting growth and reducing poverty, according to nine of 11 chief executive officers contacted in the past month by Bloomberg News.

He also needs to improve transparency in Indonesia’s legal system and reduce corruption to attract global investors, the survey found.

“Keeping the drive for fair and transparent practices and processes, which helps secure a level playing field for all,” will help business in Indonesia, Stuart Dean, Southeast Asia president of General Electric Co. said in a response to the survey last month.

In 2007, Tata Power Co., which is building a 4,000-megawatt plant in western India, bought a 30 percent stake in two coal mining units owned by Indonesia’s PT Bumi Resources. The $4.14 billion plant will run on coal from the Indonesian mines.

India’s coal imports will more than double to 100 million tons by 2012 from 40 million tons, estimates Kaamil Fareed, a senior trading manager at the Coal & Oil Group, which supplies coal in India and Pakistan. That’s about 40 percent of Indonesia’s estimated coal production for this year.

“As a leading supplier of commodities, Indonesia is leveraged to the growth of Chindia,” Cashmore said referring to China and India. “Indonesia is ready to rise in the world economic hierarchy and take its place alongside China and India.”

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New Zealand businesses were more optimistic in June amid a drop in borrowing costs and signs of a global recovery that may bolster exports.

A net 8.3 percent of companies surveyed expect sales and profit will rise over the next 12 months compared with 5.5 percent in May, according to a report released by ANZ National Bank Ltd. in Wellington today. The net figure subtracts the number of pessimists from optimists.

More businesses say exports will improve while profit expectations are up among retailers and manufacturers, adding to signs the economy may recover later this year from the worst recession in more than three decades. Reserve Bank Governor Alan Bollard said on June 11 he expects to keep the benchmark interest rate at a record low of 2.5 percent until late 2010.

“The economy continues to contract, but the positive spin is that the pace of contraction is occurring at a slower rate,” said Cameron Bagrie, chief economist at ANZ National Bank.

A net 5.5 percent of the 402 companies surveyed expect the broader economy will improve compared with 1 cheapest personal loan rates.9 percent in the April survey.

Eleven percent of firms say exports will pickup compared with 5.8 percent in April amid signs of a recovery in global markets. Japan’s industrial production climbed 5.9 percent in May, matching a gain in April that was the fastest since 1953, a report yesterday showed.

Still, New Zealand firms remain pessimistic about profits, investment and the labor market, today’s survey showed.

Seventeen percent of companies plan to fire workers this year, compared with 16 percent in May. The ratio of companies expecting reduced profits was unchanged at 24 percent. A net 5.6 percent expect to cut investment over the next year.

ANZ said its composite growth indicator based on profit, hiring and investment intentions remains negative and the labor market outlook is “particularly poor.”

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Home resales in the U.S. probably advanced for a second month in May as record foreclosures caused prices to drop, economists said before a report today.

Purchases of existing homes rose 3 percent to a 4.82 million annual pace, the highest level since October, from 4.68 million in April, according to the median of 74 forecasts in a Bloomberg News survey. It would mark the first back-to-back increase since 2005.

Tax breaks for first-time buyers in the Obama administration’s stimulus plan, falling property values and lower mortgage rates have helped support the market. At the same time, any recovery is likely to be limited with unemployment rising and borrowing costs shooting back up.

“We’re seeing some early signs of stabilization in home demand but it’s important to emphasize the level of sales remains extraordinarily low,” said Zach Pandl, an economist at Nomura Securities International Inc. in New York. “Housing investment is likely to stop being a drag on growth some time this year but, given the weakness in sales, it’s unlikely to give positive contributions any time soon.”

The National Association of Realtors is scheduled to release the report at 10 a.m. in Washington. Estimates in the Bloomberg News survey ranged from 4.6 million to 5 million.

May traditionally is one of the top three sales months of the year as the weather turns warmer and families prepare to move before the start of the next school year, according to the NAR. The group adjusts the figures for these seasonal variations in order to facilitate month-to-month comparisons.

Record Foreclosures

Foreclosure filings in the U.S. surpassed 300,000 for a third straight month in May and may reach a record 1.8 million by the first half of the year, RealtyTrac Inc. said June 11.

The median price of an existing home has fallen 26 percent from the peak reached in July 2006 as sales slumped and financial institutions auctioned off foreclosed properties. While the loss has devastated some families, others were able to buy a house for the first time because of the drop in values.

The federal government is trying to stabilize the market by offering lenders incentives to modify the terms of delinquent mortgages and the Federal Reserve has pledged to buy mortgage- backed securities to free up funding for home loans.

The Realtors’ group affordability index was at 174 no fax cash advances.8 in April compared with a record high of 176.9 reached in January. A reading of 100 means a household earning the median income could afford the median-priced home at current mortgage rates.

Tax Credit

In addition, the Obama administration’s stimulus plan provided an $8,000 tax credit for first-time home buyers for purchases completed before Dec. 1. About 40 percent of purchases in April were by people buying a home for the first time, the NAR said last month.

Still, soaring unemployment and high levels of debt will put home ownership beyond the reach of would-be buyers even as home prices fall, according to a report yesterday by Harvard University’s Joint Center for Housing Studies.

Mortgage borrowing costs are also starting to climb. The rate on a 30-year fixed loan has averaged 5.42 percent so far this month, up from 4.86 percent in May, according to figures from Freddie Mac. The rate reached 4.78 percent in April, the lowest level since records began in 1972.

The Standard & Poor’s homebuilder supercomposite index has retreated 24 percent since reaching a seven-month high on May 4 as concern mounted that the backup in interest rates will choke off any recovery before it develops.

Construction Steadies

Recent increases in home construction are a sign the market is starting to stabilize, helped by government programs such as the tax credits for first-time homebuyers, Shaun Donovan, secretary of Housing and Urban Development, said June 18.

Housing starts increased 17 percent in May, the Commerce Department said last week.

The Fed is buying as much as $1.75 trillion of housing debt and Treasuries this year in a bid to lower borrowing costs. Total assets on the balance sheet have expanded by $1.18 trillion over the past year to $2 trillion.

The central bank is scheduled to hold its policy meeting today and tomorrow. It has held the benchmark interest rate near zero since December.

Builders are seeing some signs of improvement. While Toll Brothers Inc. and Hovnanian Enterprises Inc. reported second- quarter losses that exceeded analysts’ forecasts, they both noted there were signs of stability in the housing market.

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Japan’s retail sales fell for an eighth month in April as worsening job prospects and declining wages deterred shoppers.

Sales slid 2.9 percent from a year earlier after decreasing a revised 3.8 percent in March, the Trade Ministry said today in Tokyo. Economists surveyed by Bloomberg News predicted a 3.3 percent drop.

The worst postwar recession is spreading to households, whose outlays account for more than half of the economy. Japan may struggle to return to a sustainable growth path as long as companies from Toyota Motor Corp. to Panasonic Corp. keep cutting jobs to minimize losses.

“Consumer spending is too weak to support a recovery, given the deterioration in the job market,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo. “Japan’s economy will remain fragile in the absence of stronger domestic demand.”

The yen traded at 95.79 per dollar as of 9:37 a.m. in Tokyo from 95.63 before the report. The Nikkei 225 Stock Average fell 0.1 percent.

Sales at large retailers tumbled 6.7 percent as operators of department stores and supermarkets discounted to attract customers, said Shinichiro Kobayashi, director of statistics at the Trade Ministry.

Isetan Mitsukoshi

Isetan Mitsukoshi Holdings, Japan’s biggest department store operator, forecasts a 90 percent decline in profit this fiscal year.

From a month earlier, sales climbed 0.6 percent, the first gain in eight months, as the government began distributing 12,000 yen ($125 to each resident as part of its efforts to stimulate the world’s second-largest economy. Taro Aso’s administration has also slashed highway tolls and on May 15 started to offer incentives for purchasers of environment- friendly televisions, refrigerators and air-conditioners online payday advance.

The unemployment rate surged 0.4 percentage point to 4.8 percent in March, the biggest increase since 1967, and analysts expect a report this week will show it rose to a five-year high of 5 percent in April. Nikon Corp., the world’s second-biggest maker of cameras used by hobbyists and professionals, will eliminate 1,000 jobs, the company said this week.

The Bank of Japan and the government raised their assessments of the economy for the first time since 2006 this week on signs that exports and production are starting to stabilize. Both pointed to weakness in consumer spending and rising unemployment as risks to a recovery.

Lower Bonuses

Workers at the country’s biggest businesses will have their mid-year bonuses cut by a record 19.4 percent, according to a survey published last week by the Keidanren business group.

Still, consumer confidence rose to a 10-month high in April on optimism that the worst of the recession is over. The $25 trillion yen in stimulus spending and the Nikkei’s 33 percent rebound from a 26-year low in March may also be helping sentiment.

“The mist of uncertainty over Japanese private consumption is thick,” said Masayuki Kichikawa, chief Japan economist at Merrill Lynch & Co. in Tokyo. “It will be tug of war between fiscal stimulus and the deteriorating labor market.”

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Argentine President Cristina Fernandez de Kirchner is using her country’s nationalized pension funds to offer low-cost mortgages and spur construction in an effort to ward off the first recession since 2002.

Fernandez said last night that the government will use as much as 5 percent of the funds held by the country’s social security agency, known as Anses, to help Argentines buy new homes or build their own over the next two years. The loans will be issued through state-controlled Banco Hipotecario SA.

“This is a great day for Argentines — our workers’ retirement funds will be used to generate more jobs,” Fernandez said. “The key to the economy is to generate more and better- paid jobs so that those funds keep growing.”

Fernandez is trying to revive a slumping economy by bolstering the construction industry and increasing home ownership. She also has announced plans to encourage purchases of goods ranging from washing machines to cars. A 13.2 billion peso ($3.5 billion) stimulus was unveiled Dec. 4, followed by a 300 million peso effort to spur tourism.

Eduardo Elsztain, president of Banco Hipotecario, said the lender will offer 20-year mortgages of as much as 300,000 pesos for new homes. The loans would carry interest of as little as 10 percent, said Elsztain, who was with Fernandez when she spoke at the bank’s headquarters in Buenos Aires.

South America’s second-biggest economy nationalized 10 private pension companies holding about $24 billion last year, a measure that Fernandez described as a “rescue” for 9 million Argentines who maintained the accounts.

Pension Spending

As of April 30, the government had directed about 3 percent of the social security agency’s 102 billion pesos in savings toward projects designed to boost the economy, according to a report on the agency’s Web site.

“They are using our funds, the funds of future pensioners to conduct this investment,” said Fernando Marengo, an economist at the Estudio Arriazu & Asociados research company in Buenos Aires. “It’s not clear if it will have a positive return for us in the future.”

The number of home sales in Buenos Aires fell 39 percent in the first quarter from the same period a year earlier, according to the Association of Notaries Public of Buenos Aires fast cash personal loan. Construction activity in Argentina declined 1.3 percent in the first three months of the year from the same period last year, according to the National Statistics Institute.

“This measure will barely reactivate construction and doesn’t solve the housing deficit that Argentina has,” Marengo said in a telephone interview. “The government seeks to prevent the economy from falling or falling further but this measure won’t change anything.”

Mortgage Funding

Mortgages funded about half the total value of new construction in 2003, and that percentage fell to 18.5 percent in the first quarter of this year, Marengo said.

Fernandez introduced a 3.1 billion peso plan to help finance auto sales in December. Vehicle sales fell 35 percent in the first four months of the year from the same period a year earlier, the country’s automakers association said.

“Taking in mind what happened with the last measures announced, I think this will be another announcement that will result in nothing,” said Guido Bizzozero, an analyst at the Allaria Ledesma y Cia brokerage in Buenos Aires.

After expanding at least 7 percent a year each of the past six years, Argentina’s economy will contract 3 percent this year amid lower prices for agricultural commodities and slowing demand for exports such as automobiles, according to the median estimate of five economists surveyed by Bloomberg.

Recession

Fernandez said Dec. 15 that she wants to double employment in the construction industry to about 800,000 people. At a May 15 news conference at the presidential palace, Fernandez rejected estimates that the economy will shrink this year.

“We are going to keep growing in Argentina and in no way are we going to enter a recession,” Fernandez said.

Banco Hipotecario fell for a fourth day yesterday in Buenos Aires trading, losing 3.2 percent to 0.91 peso, the lowest price since May 15.

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