Finance & Business World

It is the most prestigious job that nobody wants.

Bank of America is searching for a new chief executive, and by all accounts, it is having a tough time finding someone for the job.

Heading up Bank of America, an appealing task in better times, has become unpalatable to potential candidates from outside the bank amid a bevy of operational, regulatory and political challenges.

“This job doesn’t have all the advantages it would normally have,” said Anthony Polini, an analyst with Raymond James Financial Services.

The bank is struggling to staunch real estate and consumer credit losses, while simultaneously integrating two large businesses– mortgage lender Countrywide Financial and brokerage Merrill Lynch & Co.

On top of that, government regulators are bearing down hard on Bank of America, issuing a secret regulatory oversight agreement, overhauling the company’s board and mandating pay cuts for some top employees. The bank needs to not only maximize shareholder profit, it must also placate regulators and politicians.

As a result, high profile external candidates linked with the job — like Bank of New York Mellon’s CEO Bob Kelly and BlackRock CEO Laurence Fink — have either declined the post, or denied any interest in the position to begin with easy payday loans.

“Who wants this headache right now? Nobody,” said Paul Miller, a bank analyst with FBR Capital Markets.

Some internal candidates are still expressing interest. Brian Moynihan, head of the bank’s consumer unit, told Reuters on November 4 he would take the top job if offered it.

“Anybody would want this job, it’s one of the best jobs in the business,” he said before a speaking engagement in Los Angeles.

A CNBC report on Monday said Moynihan and Greg Curl, Chief Risk Officer, were two finalists for the position, and the board was divided on them.

Although some investors would like to see the bank pick a CEO as soon as possible, others recognize that the process will take time.

“A 90-120 day period would not be unusual in a search like this,” said Dan Genter, CEO of RNC Genter Capital, which owns 400,000 shares. “There’s a significant amount of searching and its very difficult to find a candidate for this job.”

The bank has until the end of the year to replace outgoing chief Kenneth Lewis, scheduled to retire on December 31.

CREDIT LOSSES 

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The U.S. dollar may come under renewed pressure from emerging market currencies and the euro after a meeting of the world’s top finance officials failed to take concrete action on rebalancing global money flows.

Finance ministers and central bank governors of the Group of 20 major countries, meeting in Scotland at the weekend, launched a “framework” in which they will discuss how to reduce trade and savings imbalances between nations.

But their communique talked only in general terms about rebalancing economies, and implied they might not agree on specific policies for individual countries to adopt before the end of next year at the earliest.

The result may be a continuation of heavy fund flows into emerging markets, boosting currencies there. And central banks intervening to slow currency appreciation may keep investing much of the money they obtain in the euro, pushing up that currency too.

“We’re probably looking at fresh dollar weakness in the short term” in the wake of the G20 meeting, said Kenneth Broux, senior markets economist at Lloyds TSB.

CHINA, BRAZIL

At the center of the currency issue is China’s reluctance to permit appreciation of its tightly controlled yuan, which it has kept flat against the dollar since mid-2008.

That has prompted additional fund flows into emerging market currencies that do trade freely, such as the Brazilian real, which has soared over 30 percent this year. Last month, Brazil slapped a 2 percent tax on foreign investments in fixed income and stocks in an effort to slow the real’s rise.

Last week, Brazilian officials said they would discuss this problem at the G20 meeting. But the G20 communique made no reference to the issue, and Brazil appeared to get little sympathy from a senior official of the International Monetary Fund, which is a key player in the global rebalancing campaign.

Youssef Boutros-Ghali, who chairs the International Monetary and Financial Committee, the IMF’s policy steering committee, told Reuters that Brazil’s tax was unlikely to work and that “we should not be fixated on currencies.

Officials from several countries, including Brazil, Japan and Indonesia, urged China on the sidelines of the meeting to let the yuan move more flexibly.

But as a group, the G20 did not press China on the sensitive issue, G20 sources said. British finance minister Alistair Darling told reporters: “We didn’t discuss the renminbi. I think that’s a question for China rather than us.”

In fact, China appeared in a combative mood. Finance Minister Xie Xuren and central bank governor Zhou Xiaochuan, speaking to the official Xinhua news agency after the meeting, made no mention of the yuan and instead warned developed countries to focus on the quality of their own policies.

Xie said countries with global reserve currencies should work to maintain the currencies’ value, to avoid destabilizing the global economy — implying it was up to Washington, not Beijing, to resolve the issue of the weak dollar.

The silence on the yuan in Scotland suggested countries accepted the G20 was not a forum in which to press China. The other main global economic forum, the Group of Seven nations, last met in October; it did mention the yuan, but only in the softest terms, “welcoming China’s continued commitment” to free up the yuan without referring to a timetable. 

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The dollar’s edge as the world’s leading reserve currency will be chipped away only slowly, and it is likely to remain dominant for many years, a Reuters poll of foreign exchange strategists showed.

The dollar makes up an estimated 63 percent of central banks’ global exchange reserves at present. The ratio has been falling gradually from above 70 percent in 1999, when the euro was introduced.

The Reuters poll of 34 strategists shows them giving a median forecast for the dollar to make up 60 percent of reserves five years from now, 55 percent in ten years, and 48 percent after 20 years.

That is in line with a Reuters poll in April which saw the dollar making up around 55 percent of reserves in 2020.

Some central banks have been putting a larger fraction of incoming reserves into currencies other than the dollar partly because of concern about the dollar’s long-term stability. China has suggested that the dollar eventually be replaced as the main currency for global reserves.

But the unmatched depth and liquidity of U.S. financial markets means the shift away from the dollar will remain very slow, strategists in the poll said.

“It will take decades for another capital market to be built as deep as is currently available in the U.S. Accordingly, this is a slow trend that will play out over many years,” said Camilla Sutton at Scotia Capital.

YUAN

The survey also suggested that despite China’s growing economic power, the yuan is still a long way from becoming a major reserve currency.

Of 35 strategists who discussed the yuan, 15 said the yuan would not reach this status for five to ten years, while 13 said it would take more than ten years.

Two predicted the yuan would become a reserve currency in just two years, while five estimated between two and five years.

Central banks appear unlikely to embrace the yuan unless China eases capital controls and makes its currency more freely tradable.

“China still has to deliver another revaluation of about 2 to 3 percent and extend the period of yuan-based payments with its trading partners before easing FX controls,” said Ashraf Laidi at CMC Markets.

(Polling by Bangalore Polling Unit; Editing by Victoria Main)

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The Senate on Tuesday finally began considering a bill to extend unemployment benefits by up to 20 weeks.

The legislation would lengthen benefits in all states by 14 weeks. Plus, those that live in states with unemployment greater than 8.5% would receive an additional six weeks. The proposal would be funded by extending a longstanding federal unemployment tax on employers through June 30, 2011.

The extension has been stalled in the Senate as Democratic and Republican leaders try to reach a compromise over several amendments, including extending the $8,000 homebuyer tax credit beyond Nov. 30.

A final vote may not happen until early next week.

The move comes more than a month after the House passed legislation that extends benefits by 13 weeks in high-unemployment states. If the Senate passes its bill, the two must then be reconciled.

Lawmakers have twice lengthened the time people can receive checks to as much as 79 weeks, depending on the state. The average weekly benefit ranges from $197 in Mississippi to $427 in Massachusetts.

Unemployment last month hit a 26-year high of 9 low fee payday advance.8%. Experts expect the rate to top 10%, and are divided over when companies will start hiring again.

Act soon

Pressure is mounting on lawmakers to act soon. Some 7,000 people a day are running out of benefits, according to the National Employment Law Project. Some 1.3 million will exhaust their benefits by year’s end unless an extension is passed.

The White House weighed in on the issue Tuesday, saying that helping unemployed workers also boosts the economy.

"The administration supports providing additional weeks of unemployment benefits to Americans who are suffering from long-term joblessness due to the economic downturn," the White House said in a policy statement. "Millions of Americans want employment but cannot find it, and the administration is committed to supporting these Americans as they look for work and struggle to raise their families and pay their bills." 

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New Zealand Prime Minister John Key said the nation’s currency is overvalued and the central bank is unlikely to raise interest rates this year because inflation is contained.

“The very high exchange rate is helping offset any imported inflation concerns,” Key said in an interview yesterday in Kuala Lumpur. “I would personally be surprised if they raise rates in 2009.”

New Zealand’s central bank, which acts independently of the government, will leave rates unchanged at its review on Oct. 29, according to all eleven economists in a Bloomberg survey. Consumer prices rose 1.3 percent in the third quarter, within the bank’s 1 percent to 3 percent target band. The benchmark rate is already “well above” most of its trading partners, said Key, former head of foreign exchange at Merrill Lynch & Co.

The so-called kiwi’s strength “is a really effective buffer against inflation,” said Dominick Stephens, research economist with Westpac Banking Corp. in Wellington. “That’s the key reason that the Reserve Bank is going to stay on hold over the next few meetings. The hikes will come later than they would have if the exchange rate hadn’t risen so far.”

New Zealand’s official cash rate is 2.5 percent compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nation’s higher- yielding assets and driving up its currency. Key said the New Zealand dollar, which rose to a 15-month high of 76.35 cents last week, is too strong.

Exchange Rate

“We would prefer a lower exchange rate and that would help our exports,” Key said after signing a free trade agreement with Malaysia. “It would certainly help in terms of rebalancing our economy.” He declined to give a New Zealand dollar forecast.

The currency, the best performer among 16 major currencies the past six months, traded at 74.79 U.S. cents at 5:41 p.m. in Wellington, from 74.77 cents in New York yesterday.

“His comments may bolster U.S. dollar buybacks as the New Zealand currency has risen too far and needs adjustment,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA.

Australia’s central bank unexpectedly raised its key lending rate a quarter-point to 3.25 percent on Oct. 6.

New Zealand central bank Governor Alan Bollard, who has kept the official cash rate at a record low since April, last week said a strong currency isn’t an impediment to raising borrowing costs. Rate rises were not likely until ‘the latter part of 2010,” he said Sept. 10.

Trading Bets

Traders are betting Bollard will increase rates by 2.35 percentage points over 12 months, according to a Credit Suisse Group AG index based on swaps trading. The bank may raise rates as early as March, according to two of the economists surveyed by Bloomberg. Nine expect rates will be higher by June 30.

Key, 48, graduated from the University of Canterbury in 1982 and traded currencies for Elderbank and Bankers Trust Corp. before joining Merrill Lynch in Singapore in 1995. He ran the bank’s global foreign exchange trading from London until he returned to New Zealand in 2001.

Historically, the currency has never been “sustainable in the long-term” in the 75 to 80 cent range, Key said. The “difficult, unusual circumstances” make it impossible to predict a level for the currency, he said.

Climb

The kiwi dollar reached 82.13 U.S. cents in February, 2008, the highest since it started trading freely 23 years earlier. It has climbed 50 percent since reaching a six-year low of 48.97 cents on March 4 this year.

“It is not just the New Zealand dollar that is appreciating. You are seeing the same for the Australian dollar, South African rand, Swiss franc,” Key said. “In that regard, it is very difficult for New Zealand to do a lot actually to see our currency trade at lower levels against the U.S. dollar.”

While the New Zealand dollar is “a little bit overvalued” against the U.S. unit, it is undervalued against the currencies of all the country’s major trading partners other than the U.K., Westpac’s Stephens said.

The currency is gaining with global commodity prices and will improve its performance against the Australian dollar, he said. Concerns about U.S. inflation appear overdone and a “bounce upwards” for that currency is also possible next year, he said.

Tackling Deficits

Key, sworn in as New Zealand’s 38th prime minister in November 2008, said he believes his government will be more successful in reducing the country’s deficit. The government’s cash deficit was NZ$8.64 billion ($6.4 billion) in the year ended June 30, its first budget gap in nine years.

“The Treasury in New Zealand would tell you that we’re in for a decade of deficits, but the government is working quite hard to get on top of that,” he said, citing efforts to contain spending and boost public sector efficiency.

Key’s Nationals won New Zealand’s general election last November pledging tax cuts to revive the economy, which grew 0.1 percent in the second quarter, ending the country’s worst recession in three decades. His government is not now proposing any tax increases to plug the deficit. A technical group will present the government with a range of working papers, Key said.

“Whether any will be adopted, it is too early to tell,” he said. “We are at least looking at making sure the base of our tax system is sound.”

The economy began shrinking in the first quarter of last year, curbing company profits and increasing the cost of welfare and unemployment payments.

Net debt increased to NZ$43.36 billion, or 24.1 percent of gross domestic product, as of June 30. By 2014, debt servicing costs will double from 2008 levels to NZ$5 billion and will keep rising, Finance Minister Bill English said on Oct. 17.

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India should maintain an “accommodative” monetary policy until the economy recovers and inflation flares up, a top aide to the prime minister said, highlighting political pressures on the central bank to keep interest rates unchanged next week.

“The stance of monetary policy will have to change from its highly accommodative position,” said Chakravarthy Rangarajan, economic adviser to Prime Minister Manmohan Singh. “But that has to wait and that will depend on the growth performance of the economy and also inflationary pressures.”

Governor Duvvuri Subbarao said earlier this month that there is consensus within the Reserve Bank of India on the need to boost policy rates, while there is no agreement on the timing of such a move. The central bank’s next monetary policy statement is due to be released on Oct. 27 in Mumbai.

“Given the present signs of inflationary pressures, we have to act earlier than the U.S. and European economies” on interest rates, Rangarajan said today.

The Reserve Bank has kept borrowing costs at record lows after cutting its repurchase rate six times between October 2008 and April 2009 to help shield the economy from the global recession. The central bank left its key rates unchanged in July’s policy statement.

“In the short-term, managing inflationary risks, particularly food-price inflation, is the biggest challenge to be faced by our policy makers,” Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said at a news conference in New Delhi today.

Faster Inflation

The Economic Advisory Council forecast inflation to accelerate to around 6 percent by March 2010, more than the central bank’s 5 percent year-end estimate payday loans. The council also said India’s economy may expand 6.5 percent in the year through March, slower than the 8.7 percent average growth of the previous four years.

India’s economic growth is likely to slow in the current fiscal year due to the impact of the global recession and a reduction in farm output due to the weakest rains in almost four decades, Rangarajan said.

Total food grain production is likely to decline by 11 million tons in the current year to 223 million tons, compared with 234 million tons last year, the council said in a report. That will put pressure on food supplies, it said.

Rangarajan said stimulus measures introduced to protect India’s $1.2 trillion economy from the impact of the global recession must continue until the end of March 2010.

Interest-rate cuts and government tax reductions have together provided a stimulus worth more than 12 percent of India’s gross domestic product, according to central bank estimates.

“The stance of monetary policy will have to be calibrated taking into account growth prospects and the inflationary pressures,” Rangarajan said.

Overseas inflows into stocks may rise to $24.1 billion in the year to March and India may get foreign direct investment worth $36.9 billion. The council expects export orders worth $188.9 billion in the current year.

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European consumer prices fell for a fourth month in September as energy prices dropped and companies cut jobs and reduced costs to weather the global economic slump.

Prices in the 16-nation euro region declined 0.3 percent from a year earlier after falling 0.2 percent in August, the European Union statistics office in Luxembourg said today. The September drop matched an initial estimate released on Sept. 30.

Lower energy costs have helped to push down consumer prices just as companies are reducing spending to survive the worst recession in at least six decades. Job cuts have pushed Europe’s unemployment rate to a 10-year high. European Central Bank President Jean-Claude Trichet said on Oct. 8 that the economy will recover “at a gradual pace” with inflation seen turning positive “in the coming months.”

“Economic activity is unlikely to be strong enough to generate significant inflationary pressures for some considerable time,” said Howard Archer, chief European economist at IHS Global Insight in London. “There is a compelling case for the ECB to retain an accommodative stance for many months to come.”

Energy prices slid 11 percent in September from a year earlier, according to today’s report, while the transport industry showed a 3.7 percent drop. Housing prices declined 1.6 percent, while food dropped 1.3 percent in the year.

Core Inflation

The core inflation rate, which excludes volatile energy and food costs, fell to 1.2 percent in September from 1.3 percent in the previous month, the report showed. That was the lowest since February 2006.

The ECB expects euro-area inflation to average about 0.4 percent this year and around 1.2 percent in 2010. The Frankfurt- based central bank aims to keep inflation just below 2 percent over the medium term.

Companies may gain more leeway to pass on costs with the economy gathering strength. European confidence in the economic outlook increased to a one-year high last month and a gauge of euro-area manufacturing and services industries showed a stronger expansion than initially estimated.

Confidence in the world economy increased for a third month in October, a Bloomberg survey of users on six continents showed yesterday. The Bloomberg Professional Global Confidence Index rose to a record 61.7. In Germany, Europe’s largest economy, business sentiment is at a 12-month high.

Consumer-Electronics Maker

Royal Philips Electronics NV, Europe’s largest consumer- electronics maker, yesterday unexpectedly reported a profit for the latest quarter after the Amsterdam-based company eliminated jobs and lowered costs. Rome-based Bulgari SpA, the world’s third-largest jeweler, said on Oct. 9 that sales improved over the past three to four months.

The ECB has purchased covered bonds, provided banks with unlimited cash over 12 months and earlier this month kept its benchmark rate at a record low of 1 percent to stimulate lending. The central bank last month raised its economic forecasts to predict a contraction of around 4.1 percent this year and an expansion of about 0.2 percent in 2010.

With some of the region’s largest companies including Royal Dutch Shell Plc and Bayerische Motoren Werke AG cutting jobs, consumers may remain reluctant to boost spending, which could curb the recovery. The jobless rate is currently at 9.6 percent, the highest in a decade.

“Companies are still cutting costs and are not yet able to push through higher prices,” said Christoph Weil, an economist at Commerzbank AG in Frankfurt. “There’s no inflation pressure anytime soon.”

ECB council member Christian Noyer said on Oct. 13 that the “moment hasn’t arrived” for the ECB to start withdrawing unconventional measures. Trichet said earlier this month that it would be “premature today to think that the crisis has been overcome and conquered in a sustainable manner.”

The statistics office will publish an estimate for October consumer prices on Oct. 30.

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Henderson Land Development Co. said it sold a duplex apartment in Hong Kong for a record price, hours after city Chief Executive Donald Tsang signaled the government may release more land to deflate a property bubble.

The apartment, on the 68th floor of Henderson’s 39 Conduit Road development, fetched HK$439 million ($57 million), or HK$88,000 a square foot excluding parts of the building shared by all residents, the company controlled by billionaire Lee Shau-kee said today. Henderson said it may ask HK$100,000 per square foot for two penthouses on the 88th floor.

Last year, the fewest apartments were completed since at least 1972. Prices, especially for luxury homes, have rallied in 2009 on record-low interest rates and an influx of money from China. The government is Hong Kong’s biggest provider of land and has altered supply to support or depress prices.

“The relatively small number of residential units completed and the record prices attained in certain transactions this year have caused concern about the supply of flats, difficulty in purchasing a home and the possibility of a property bubble,” Tsang said in his annual policy address.

Tsang, 65, said his administration will closely monitor “market changes” and may direct the Urban Renewal Authority and subway operator MTR Corp., both controlled by the government, to bring readily-available building sites to market.

Tsang, Hong Kong’s leader since 2005, may be concerned the luxury-market boom will fuel wider price increases, Centaline Property Agency Ltd. analyst Wong Leung-sing said.

‘Social Issue’

“He’s more concerned whether mass-market housing prices would get pulled up by the momentum in the luxury market,” Wong said. “If that happens, it’ll become a social issue.”

Instead of changing the government’s land-sales system, Tsang is more likely to have the MTR speed up the sale of suburban land, Wong said. The MTR develops sites around its stations in ventures with developers and uses the proceeds to help pay railway construction costs.

The city’s Hang Seng Property Index, which includes six companies, climbed 1.6 percent today, taking this year’s gain to 66 percent. The benchmark Hang Seng Index rose almost 2 percent and has advanced 52 percent this year to a 14-month high.

Billionaire Owners

Hong Kong, where property companies owned by billionaires including Henderson’s Lee and Cheung Kong (Holdings) Ltd.’s Li Ka-shing account for about 10 percent of the benchmark stock index, stopped supplying new land in 2002 during a seven-year property rout. The government started a new system of land auctions in 2004, after prices stabilized.

Hong Kong brokers typically count a portion of the common areas when they price properties. On that basis, the price for the 6,158 square-foot (572 square-meter) home on Conduit Road came to the equivalent of HK$71,280 a square foot, according to Thomas Lam, Henderson’s general manager for sales.

One Hyde Park in London set the previous record of 6,000 pounds (HK$74,318 or $9,590) a square foot, Lam said at a press conference in Hong Kong today.

Sun Hung Kai Properties Ltd., the world’s largest developer by market value, last month raised the asking price of two penthouses in Hong Kong by 50 percent to a record HK$75,000 a square foot, including a share of common areas in the building, as demand surges for luxury apartments.

Housing completions in Hong Kong have been lower than initial government projections in the past two years. Builders finished 8,780 units, fewer than the forecast 10,980 last year, and 10,470 in 2007 against the forecast 12,740, the Rating and Valuation Department said in March. It then estimated completions at 14,740 for this year.

Policy Changes

Tsang announced policy changes aimed at promoting the redevelopment of old industrial buildings, which have fallen into disuse as companies use cheaper factories in China instead.

Hong Kong is determined to improve air quality and will promote the use of electric cars and energy-saving light bulbs, according to Tsang.

While Shanghai has been designated by China as a center for financial services and trade — two of Hong Kong’s main industries — the development of the two cities can be cooperative, Tsang said. For example, Hong Kong can help China develop its offshore yuan business.

Hong Kong’s economy will keep improving this year, Tsang said.

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Peru’s central bank will probably keep its benchmark lending rate at a record low as policy makers evaluate signs that an economic recovery has taken hold.

The seven-member board, led by bank President Julio Velarde, will keep its reference rate at 1.25 percent, according to 11 of 12 economists surveyed by Bloomberg. The bank is scheduled to announce its decision after 7 p.m. New York time.

Velarde will pause for a second month, after seven straight cuts earlier this year, to measure the effect of lower borrowing costs on the country’s economy, said Pablo Secada, an economist at the Peruvian Economy Institute. Growth is showing signs of rebounding after the economy stalled in the first half of the year on falling export demand and weaker domestic spending.

“The central bank is aware that the economic recovery has begun, even if it’s moderate,” Secada said in an interview from Lima. “We’re seeing growth in consumer demand, so they have cause not to be pessimistic.”

Brazil, Mexico and Chile have all held their benchmark rates unchanged since August, citing improving economic growth. Peru cut the overnight rate by 5.25 points this year to spur consumer spending after six increases in 2008 pushed borrowing costs up to the highest since 2001.

Peru’s metals output, agriculture and cement sales all increased in August, and unemployment was 8.3 percent that month, down from an almost two-year high of 9.3 percent in March. The improved numbers came after the economy shrank for the first time in eight years in the second quarter.

Metals Pricing

Prices of copper, zinc, lead, tin and silver, which account for 60 percent of Peru’s export revenue, have all gained at least 35 percent this year as increases in U.S. and Chinese manufacturing signal rising demand for industrial materials.

“The market is very promising for business in general,” said Norberto Lassner, president of Neogas Peru, a compressed natural gas distributor that inaugurated a $5 million filling station outside Lima last week. “There’s a great deal of repressed demand.”

Bank loans grew 15 percent this year through September from a year earlier spurred by mortgages and car loans, according to Peru’s banking regulator. Corporate debt offerings totaled 400 million soles ($140 million) in September, the highest monthly figure in two years, securities regulator Conasev said.

Peru’s foreign debt rating was put on review for an increase to investment grade by Moody’s Investors Service last week, citing the country’s “stable” economic policies.

Slowing inflation

The bank may cut the rate by 0.25 point as inflation hovers at a two-year low and Peru’s currency strengthens, said Kathryn Rooney, an emerging-market analyst at Bulltick Securities Corp. The Peruvian sol has advanced 9.5 percent this year, the seventh-best performance against the dollar among 26 emerging- market currencies tracked by Bloomberg.

The country’s annual inflation rate fell in September to 1.2 percent from 1.87 percent through August as food and transport costs declined.

The inflation rate will be lower than policy makers’ target of 1 percent to 3 percent this year on declining consumer demand, Velarde said last month.

Still, after expanding 9.8 percent in 2008, the fastest pace in 14 years, Peru’s economic growth may slow to 1.8 percent in 2009, the slowest pace since 2001, Velarde told reporters in Lima on Sept. 18.

“Domestic demand is taking longer to pick up than expected,” Rooney said in a telephone interview from Miami. “Data shows growth woefully below potential.”

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Turkish Prime Minister Recep Tayyip Erdogan, who hosts the International Monetary Fund’s main annual meeting next week, wants to show that his $600 billion economy can survive the global crisis without new money from the lender.

Turkey has been the fund’s biggest borrower this decade, drawing about $43 billion to help recapitalize more than 20 failed banks. Erdogan, who heads an Islamist-rooted government that has been entrenching its power since a 2007 re-election, has resisted taking on new loans in more than a year of talks with the fund, even as the EU membership candidate sank into its deepest recession.

“Erdogan consistently said ‘no’ to the IMF, despite pressures from both the domestic and the overseas business community,” said Ahmet Akarli, an economist for Goldman Sachs Group Inc. in London. He likely saw dependency on IMF loans as incompatible with his “strategy of transforming Turkey into a leading global player and a heavyweight in its immediate region,” Akarli said.

Istanbul, a city of 12 million that straddles the two continents, will welcome about 15,000 delegates including finance ministers of the G-7 countries. They’re here to attend the annual meetings of the IMF and World Bank, the institutions set up after World War II to ensure financial stability and reduce poverty.

Turkish financial markets backed Erdogan’s go-it-alone strategy, posting gains even as Turkey refused IMF requests to reduce spending on local government and improve the country’s tax collection system.

Growing Power

Turkey’s benchmark ISE-100 stock index has added about 80 percent this year, exceeding the 57 percent gain on the benchmark MSCI Emerging Markets index. Yields on the country’s benchmark bonds have fallen by almost half, to a record low of 8.6 percent.

Erdogan, 55, is seeking to promote Turkey as a growing economic power and also a regional dealmaker. He’s mediated indirect peace talks between Syria and Israel, acted as a go- between in international talks with Iran over its nuclear program, and offered his country as a conduit to bring central Asian oil and gas to Europe.

The IMF and World Bank meetings are only held outside Washington once every three years and Turkey, venue for the 1955 summit, becomes the first country to host them twice — a publicity coup for Erdogan and his Justice and Development Party.

The IMF meetings “will take Turkey’s visibility to new levels,” Deputy Prime Minister Ali Babacan said on Sept 30.

No Walking Stick

Erdogan inherited an IMF program of spending cuts and state asset sales when he came to power in 2003, and stuck with it for five years. Now he’s balking at the fund’s demands for tighter budgets, and says Turkey no longer needs IMF cash.

“We’ve shown we can overcome crisis without the IMF,” he said on Sept. 17 in Istanbul, the city he ran as mayor between 1994 and 1998. “We’re trying to stand on our own two feet and move forward without a walking stick.”

Talks will resume once the annual meetings end, “and we’ll see what is needed,” fund Managing Director Dominique Strauss- Kahn said yesterday in Istanbul. “There’s no rush and no tension between Turkey and the IMF.”

The country’s banking system has weathered the global crisis without the need for government bailouts, after a decade of IMF-ordered changes to tighten regulation and risk management. Akbank TAS, the lender part-owned by Citigroup Inc., stayed profitable throughout the crisis and posted second-quarter net of $494 million, up 44 percent from a year earlier.

Limping Economy

Turkey’s manufacturing economy, though, is limping its way through the global slowdown, as European demand for Turkish-made cars, fridges and washing machines slumps. Net income at Ford Otomotiv Sanayi AS, the local unit of Ford Motor Co., fell 35 percent in the second quarter as exports slumped.

Gross domestic product dropped an annual 14.3 percent in the first quarter, the deepest contraction since quarterly records began in 1987. Unemployment among people under 24 jumped to 29 percent in February from 22 percent a year earlier.

The economy would have performed better if Erdogan had agreed IMF loans, Mustafa Koc, chairman of the country’s biggest industrial group Koc Holding AS, which is Ford’s local partner, said in Istanbul yesterday.

Ballooning Deficit

Higher spending to support the jobless, combined with lower tax revenue, is forcing the government to borrow more to fund a budget deficit forecast at 63 billion liras ($43 billion) this year, six times the target drawn up before the crisis struck.

That means Erdogan can’t cut off talks with the fund altogether. The country still owes about $8 billion to the IMF from earlier programs.

“They’ll keep the IMF talks in limbo for a while longer because that’s worked so far,” said Tevfik Aksoy, an economist at Morgan Stanley in London. “If global conditions worsen and it looks like there may be a need for money after all, then they’ll be able to announce it.”

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