On Wednesday the European Commission will present a giant stimulus package to meet the looming economic downturn — with an estimated €130 billion in initiatives. But Brussels has neither the money nor the ability to forge an economic program.

By Hans-Jürgen Schlamp in Brussels

The situation is getting serious. Europe’s industries are running out of contracts. Economists predict that next year will bring reduced working hours and layoffs and that times will get bleak. The US Federal Reserve and Treasury Department on Tuesday announced a new package totalling $800 billion to make it easier for small businesses, students and home buyers to borrow money. And in Europe, state economic stabilization policies that fell out of favor long ago have suddenly found many new backers.

On the European Commission, where European President José Manuel Barrosa and 26 other commissioners direct the business of the European Union and where “the market” has been viewed as the best force to steer the economy for a long time, “the state” was supposed to keep its fingers out of everything. Now it’s all different.

The states — or, more precisely, their taxpayers — have just been forced to rescue the global banking system because its leaders proved to be little more than incompetent gamblers. Now more tax revenues are supposed to avert — or cushion — a threatening crisis in the global economy. Taking their places at the head of this phalanx in the fight of “politics against recession” are Barroso and his commissioners. They plan to bring forward an enormous economic program on Wednesday full of prescription for battling the crisis.

“Temporary cuts in value-added (or sales) tax” is one of the proposals that could be “quickly implemented to give a strong fiscal impulse to promote consumption,” reads one of the proposals. Additional caps should also be placed on the value-added taxes for certain labor-intensive services, like those performed by tradesmen, cooks or waiters. The Commission also intends to give tax concessions to especially climate-friendly products and to lower income taxes on low-income earners.

But that’s still not enough. The Commission will also call on EU member states — especially those that are not deep in debt — to use national spending packages to “quickly stimulate demand and to lift consumer confidence.” According to the plan, the European Central Bank (ECB) should lower interest rates even further and the European Investment Bank (EIB) should offer cheap credit for measures meant to conserve energy and for the production of climate-friendly automobiles. In all, Brussels wants a package worth 1 percent of Europe’s economic output — the equivalent of roughly €130 billion.

The problem, though, is that Brussels has neither the money nor the ability to shape a European economic program. Money and ability lie with the member states themselves, and — as usual — they can’t agree on a strategy. Every government does as it sees fit. Brussels’ super crisis-rescue package is not just a package of well-meaning yet unbinding suggestions; it’s also the simple sum of previously announced national measures. Barroso, nevertheless, can distribute research subsidies or infrastructure aid within the EU’s budget faster than previously thought. But he has no other means, and won’t be given any. Elmar Brok, a German member of the European Parliament, has unsurprisingly spoke of “false labeling” in Brussels.

Barroso says the package is based on a “groundwork of coordinated measures by member states, which are tailored to each specific situation.” The head of the EU’s largest economy, Chancellor Angela Merkel, liked the sound of that and proceeded to do just what Germany’s “specific situation” required. Her government has approved injections of capital which over the next two years will total €32 billion. She refuses to do more, and she’s said nothing about a quick reduction in taxes.

French President Nicolas Sarkozy could not talk her out of this strategy on Monday in Paris. The British example doesn’t interest her, either. Prime Minister Gordon Brown’s government wants to lower its value-added tax (or VAT) for 13 months, from 17.5 to 15 percent, starting in December, and demand even lower rates in some instances, such as restaurant bills. To balance these cuts the government wants to raise income tax at very top of the scale, and skim more from sales of alcohol, tobacco and gasoline.

All European governments are currently facing the same task of building crisis packages. Most choose from a menu that includes public works expenditures, tax cuts, monetary handouts, benefits for the poor or for families with children — the kinds of things that can be pushed through quickly. more

More than 1.5 million workers in Germany depend on the automobile industry for their jobs. But that industry is now facing one of its worst crises ever. Respected giants BMW and Mercedes are particularly exposed as sales plummet.

By Dietmar Hawranek

It was time for Martin Winterkorn to relax. The exhausted chairman of the VW Group was sitting in a leather seat on the company jet, coming from a conference in Berlin where he warned attendees of the consequences of the financial crisis. It had been a long day. It was 9 p.m. and he was still in the air.

“We have never before seen this kind of a crisis,” Winterkorn, 61, said at the conference. The German auto industry, he told his audience, must prepare itself for a “tough, prolonged dry spell.” It would not be possible to avoid “difficult cuts” and “painful” measures, Winterkorn said.

Even after the conference, sitting in the company jet, the head of VW was still preoccupied with the question: “How bad is it really?” Winterkorn has been in the industry for decades, and he has weathered many a crisis. But now he too is baffled. “I don’t know what else is going to happen,” he said.

According to Dieter Zetsche, the CEO of Daimler, there are those in the industry who believe that “up to 100,000 jobs will be lost in the German auto industry in the next 10 years.” Some, says Zetsche, are even suggesting that this is “the worst crisis since World War II.”

The Daimler CEO has already concluded that Mercedes-Benz will produce more than 150,000 fewer cars than planned in 2009. Management is negotiating with labor representatives over the possibility of Mercedes reducing the workweek to 30 hours, with a corresponding wage cut for workers, or introducing part-time work at the company. Daimler may have to cut several thousand jobs. How many? Zetsche, 55, is not even willing to venture a guess.

Sharp Decline in Sales

Norbert Reithofer, the 52-year-old chief executive of BMW, is similarly baffled. He believes the company is “in the biggest crisis in its history.” BMW has already cut more than 8,000 jobs this year. Production in its plants is shut down for several weeks at a time, a step that Volkswagen and Mercedes-Benz have also taken. But this will not be enough to offset the sharp decline in sales. In some markets, auto sales have not dropped by this much since the 1973 oil crisis.

In October, car sales dropped by 32 percent in the United States and close to 15 percent in Europe. Sales are also down in former growth markets India and Brazil, while economic growth in China is weakening.

This crisis is different from the ones before it. Opel is fighting for its survival, because its parent company, General Motors, is on the brink of bankruptcy. Mismanagement at Ford and Chrysler has driven the two companies into similarly dire straits. This was predictable.

But now even VW, Mercedes-Benz and BMW are at risk, companies that were considered the most stabile in their industry. Even executives at Japanese carmaker Toyota are worried. According to Executive Vice President Mitsuo Kinoshita, “the current situation is an emergency, of a magnitude we have never seen before.”

There is reason for this massive, general uncertainty: The auto industry is being assaulted on several fronts.

Sales are declining rapidly worldwide. If there is one thing anxious consumers can postpone, it is the purchase of a car. Economic crises normally affect one major market, which allows large car companies to make up for the difference in other countries. But this time the financial crisis is shaking North America, Asia and Europe at the same time.

Suppliers are likewise threatened. Banks have cut off funding for necessary investments. Some suppliers are already on the verge of bankruptcy. If the biggest manufacturer of rear-view mirrors or door locks fails, carmakers will be forced to stop production, and it will be difficult to quickly find replacements.

Tens of Thousands of Jobs at Risk

Providing consumers with financing is also becoming more difficult. Part of the reason VW, Audi, Mercedes-Benz, BMW and Porsche have enjoyed such phenomenal sales growth in recent years is that they have offered customers attractive leasing and financing packages. Now the carmakers’ lending divisions must pay high interest rates to obtain the necessary funds on the capital markets, if they can borrow at all. As a result, they can no longer attract customers with low-interest car loans. more

Congress wants the Big Three to produce a plan for profitability before it will approve a bailout. This could be within reach…but not until 2010.

By Chris Isidore, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) — A profitable U.S. auto industry just around the corner? Given the crisis hitting the industry, it sounds about as realistic as flying cars.

Congressional leaders are demanding to see details by Dec. 2 about how U.S. automakers will start making money again before they’ll agree to even have a vote on the $25 billion federal loan package the industry is seeking.

Many critics of the bailout suggest that automakers have shown no indication of how they’ll return to profitability. Some argue the Big Three U.S. automakers are doomed to fail even if they get loans from the government.

But General Motors, Ford Motor and Chrysler have already made sizable cuts in production and staffing throughout the year. Additional cuts will come in the next few months, and some as soon as later this week.

While it’s tough to offer guarantees of profitability with so much uncertainty about the economy, if the automakers get the federal help they are asking for, the Big Three could be back in the black as soon as 2010.

With that in mind, here’s what GM, Ford and Chrysler are likely to point out in their business plan to Congress.
Lower employment costs

GM (GM, Fortune 500), Ford (F, Fortune 500) and Chrysler have been downsizing for years and have all continued to make even deeper cuts this year which will save them billions of dollars.

GM plans to cut more than 7,000 salaried and contract employees this year as it aims to trim nonunion labor costs by 30%, or about $2 billion annually.

Those departures did not begin until this quarter and most of the remaining employees should leave by the end of the year. So some of the savings won’t take effect until next year. And the cost of the severance and retirement packages is causing steeper losses in this year.

Ford and Chrysler plan similar size cuts in their non-union staff. Chrysler plans to identify by Wednesday 5,000 salaried and contract staff who will leave the company, about 25% of that remaining workforce.more

Toyota Motor Corp.’s debt rating was cut by Fitch Ratings, the automaker’s first downgrade in 10 years, as the slump in U.S. car sales drags down earnings at the company with the industry’s best credit.

By Makiko Kitamura and Tetsuya Komatsu

Nov. 26 (Bloomberg) — Toyota Motor Corp.’s debt rating was cut by Fitch Ratings, the automaker’s first downgrade in 10 years, as the slump in U.S. car sales drags down earnings at the company with the industry’s best credit.

Fitch cut Toyota’s senior unsecured debt rating two levels to AA from AAA with a negative outlook on the company, it said in a report today. The shares dropped 4.6 percent, the most in two weeks, to close at 2,985 yen on the Tokyo Stock Exchange.

A lower debt rating raises borrowing costs for Toyota, potentially hindering its ability to offer interest-free loans to boost sales in the U.S. Toyota, set to topple General Motors Corp.’s 77-year reign as the world’s largest automaker this year, may also have its worst share performance since at least 1975.

“Toyota is suffering severely from the ongoing turmoil in the global automotive sector,” said Tatsuya Mizuno, director at Fitch Ratings, in the report. “The negative developments in the industry are so substantial and fundamental that even the strongest player — Toyota — can no longer support a `AAA’ rating.”

The rating cut is the company’s first since Moody’s Investors Service reduced its long-term debt rating from Aaa to Aa1 in 1998. Moody’s raised the company back up to Aaa in 2003. Standard & Poor’s has rated the carmaker AAA since 1985.

“We are closely monitoring Toyota and especially the U.S. market,” Moody’s analyst Junichi Yamaki said. He declined to say whether the rating may be revised. S & P analyst Osamu Kobayashi couldn’t be reached at his office.

Cash on Hand

Toyota had 1.85 trillion yen ($19.5 billion) in cash and near cash as of Sept. 30 and earned 169.5 billion yen ($1.79 billion) in operating profit in the three months ended Sept. 30. That compares with a $4.2 billion operating loss for GM, which said it may run out of cash by the end of the year.

“Toyota’s financial foundation is solid, and I don’t think there has been such a drastic change to warrant a two-level downgrade,” said Yasuhiro Matsumoto, senior credit analyst at Shinsei Securities Co. in Tokyo. “I don’t see an impact on the company’s new bond issues.”

Toyota has 289 billion yen in debt coming due this year, and owes 2.52 trillion yen next year, according to Bloomberg data.

Toyota’s 150 billion yen 1.33 percent bonds maturing in 2012 traded at 28 basis points above Japanese government debt yesterday, up from 20 basis points at the beginning of 2008, data compiled by Bloomberg show.

Share Performance

Toyota’s stock has dropped 51 percent this year, set for the worst annual performance since at least 1975. The company is still valued at 18 times GM and Ford Motor Co. combined. Toyota spokesman Hideaki Homma declined to comment on the rating change. more

Japanese and Thai stocks fell in Asia after Toyota Motor Corp.’s debt rating was cut and anti- government protesters shut Bangkok’s main airport. South Korean banks gained after regulators said risks are being controlled.

By Patrick Rial and Shani Raja

Nov. 26 (Bloomberg) — Japanese and Thai stocks fell in Asia after Toyota Motor Corp.’s debt rating was cut and anti- government protesters shut Bangkok’s main airport. South Korean banks gained after regulators said risks are being controlled.

Toyota dropped 4.6 percent after Fitch Ratings lowered the world’s second-largest automaker’s debt to AA. Thai Airways International PCL sank 5.8 percent. Rio Tinto Group slumped 34 percent, leading Australian shares lower, after BHP Billiton Ltd. dropped its takeover bid for the rival miner. Woori Finance Holdings Co. surged 15 percent in Seoul.

“Companies that have kept their balance sheets in order and have stronger business models will get through this better,” said Hugh Dive, Who helps manage about $3 billion at Sydney-based Investors Mutual Ltd.

The MSCI Asia Pacific Index lost 0.3 percent to 79.77 at 3:58 p.m. in Tokyo. About eight stocks fell for every seven that gained. The measure surged 4.1 percent yesterday, the biggest in three weeks, fueled by a surge in commodity prices and the U.S. government’s rescue of Citigroup Inc.

Japan’s Nikkei 225 Stock Average dropped 1.3 percent to 8,213.22 on the lightest trading day of the year for Japan in terms of value. Other Asian benchmark indexes were mixed.

U.S. stocks advanced for a third day yesterday as the Federal Reserve committed an additional $800 billion to unlocking credit markets. The Standard & Poor’s 500 Index swung between gains and losses more than 20 times before closing 0.7 percent higher. Futures on the index lost 0.4 percent in trading today.

Fed Assistance

The Fed said yesterday it will purchase as much as $600 billion of debt issued or backed by government-chartered housing- finance companies and establish a $200 billion program to shore up consumer and small-business loans.

More than half of stocks in Asia have sunk below their book value as the collapse of the U.S. housing market curbed consumer spending on Asian-made goods and reduced demand for fuel and other commodities. MSCI’s Asian index has tumbled by 49 percent this year as the global economy slipped into recession.

Toyota slumped 4.6 percent to 2,985 yen. Fitch lowered its rating on the company and added that the weak auto market could trigger additional downgrades. The company has slashed production and sales forecasts in recent months to cope with a global recession that has eroded demand for expensive items such as cars.

Honda Motor Co. fell 1.9 percent to 2,050 yen. Denso Corp., the world’s largest listed auto-parts maker, slumped 5.5 percent to 1,519 yen.

OECD Forecast

The Organization for Economic Cooperation and Development cut its 2009 growth forecast for its 30 members yesterday to a 0.4 percent contraction, from a previous estimat of 0.3 percent, and called on governments to use fiscal and monetary policy to ease the worst recession since the early 1980s. more

The yen rose against the euro and the dollar as speculation a global recession will deepen prompted investors to pare holdings of higher-yielding assets funded in Japan.

By Ron Harui and Stanley White

Nov. 26 (Bloomberg) — The yen rose against the euro and the dollar as speculation a global recession will deepen prompted investors to pare holdings of higher-yielding assets funded in Japan.

The currency also gained versus the Australian dollar and the British pound on concern the Federal Reserve’s $800 billion plan to unfreeze credit markets will fail to prevent a protracted economic slump. The U.S. economy, the world’s biggest, shrank in the third quarter as consumer spending plunged the most in almost three decades, government data showed yesterday.

“The yen should remain supported,” said Osao Iizuka, head of foreign-exchange trading at Sumitomo Trust & Banking Co. in Tokyo. “There was a bounce in sentiment after the Fed’s announcement of its latest measures. This has faded because there are still a lot of problems to work out.”

The yen rose to 123.05 per euro as of 7:21 a.m. in London from 124.43 late yesterday in New York. It advanced to 94.84 versus the U.S. dollar from 95.22. The euro fell to $1.2977 from $1.3064. The pound declined to $1.5348 from $1.5472. The yen may rise to 94.80 per dollar today, Iizuka said.

Thailand’s baht slid as low as 35.35 per dollar, the weakest level since February 2007, as anti-government protesters stormed the main terminal at Bangkok’s international airport.

Australia’s dollar fell to 61.35 yen from 61.82 yen in New York late yesterday. The pound dropped 0.9 percent to 145.99 yen. Japan’s benchmark interest rate of 0.3 percent compares with 3 percent in the U.K. and 5.25 percent in Australia.

Higher Forecast

In a carry trade, investors get funds in a country with low borrowing costs and invest in another with higher interest rates, earning the spread between the two. The risk is currency market moves can erase those profits.

Bank of America Corp. raised its forecast for the yen against the dollar on expectations the Bank of Japan will delay cutting interest rates and Japanese investors may refrain from funneling funds into overseas assets offering higher returns.

“We have pushed back our BOJ rate-cut forecast from December to February and narrower interest-rate differentials should raise hurdles to Japanese investors’ foreign asset investment over the next several months,” said Tomoko Fujii, head of economics and strategy for Japan at Bank of America in Tokyo, confirming a research note dated yesterday. “We have revised down our dollar-yen forecasts over the next year.”

The yen will trade at 97 per dollar at year-end and 100 at the end of March, compared with previous forecasts of 101 and 105, respectively, Fujii said.

Fed Action

The Fed will buy as much as $600 billion in debt issued or backed by government-chartered housing-finance companies. It will also set up a $200 billion program to support consumer and small-business loans, the central bank said in statements yesterday in Washington.

The Organization for Economic Cooperation and Development cut its forecast for global growth in 2009. The economies of the organization’s 30 members will contract 0.4 percent next year, after expanding 1.4 percent this year. Gross domestic product in the U.S. shrank at a 0.5 percent annual rate from July through September, the most since the 2001 recession, according to revised figures from the Commerce Department in Washington. more

Stock dividends are disappearing at the fastest rate in 50 years as the worsening recession forces U.S. companies to conserve cash.

By Lynn Thomasson and Eric Martin

Nov. 26 (Bloomberg) — Stock dividends are disappearing at the fastest rate in 50 years as the worsening recession forces U.S. companies to conserve cash.

Citigroup Inc., Genworth Financial Inc. and New York Times Co. are leading 91 companies listed on the biggest U.S. exchanges in reducing or suspending payouts to shareholders this month, the most since May 1958, when 113 companies slashed dividends, according to data compiled by Standard & Poor’s. The reductions in November exceeded the 81 dividend cuts in October and 60 in September.

“Until we start to see the economy turn around, you have to assume broadly that dividends could be at risk in many sectors of the economy, especially among financials,” said Fritz Meyer, the Denver-based senior market strategist at Invesco Aim Advisors Inc., which manages about $358 billion.

The recession and global credit crunch are reducing profits for the fifth straight quarter and leaving less spare cash for quarterly payments to shareholders. Curtailing dividends adds more injury to investors battered by this year’s 42 percent decline in the S&P 500 Index, the worst performance since 1931.

Financial companies accounted for six of the eight dividend cuts or suspensions in the S&P 500 this month through Nov. 24, based on data from S&P index analyst Howard Silverblatt. The industry has lost $972 billion worldwide from the subprime mortgage market collapse and raised $880 billion to replace it.

Higher Yield

Tumbling stock prices are also increasing the dividend yield for S&P 500 companies to the highest level in at least 15 years. The 3.8 percent yield, on a weekly basis, is greater than the 3.6 percent return from a 30-year U.S. Treasury.

Options prices, earnings growth and industry trends suggest that 83 companies may boost their dividend, according to data compiled by Bloomberg. 3M Co., Eli Lilly & Co. and Coca-Cola Co., each yielding more than 3.1 percent, have increased their payout for the past 25 years and likely will do so again, data from S&P and Bloomberg show.

“We’re looking for companies that have the balance sheet and cash flow in this environment to maintain their dividend,” said Brad Evans, a fund manager at Milwaukee-based Heartland Advisors Inc., which manages $2.5 billion. “When things settle down, the wheat will be separated from the chaff.”

Citigroup, which lost 69 percent of its market value in the past two months, said it would pay a quarterly dividend of no more than 1 cent a share over the next three years after receiving a $20 billion cash injection from the government this week. The New York-based lender, which paid 54 cents a share last year, has reduced its payment three times in 2008.

Suspending Payouts

Genworth, the insurer spun off by General Electric Co., suspended its 10-cent quarterly payout earlier this month. Shares of the Richmond, Virginia-based company plunged 43 percent in New York Stock Exchange composite trading a day after it reported a $258 million third-quarter loss. more

The Federal Reserve’s new $800 billion effort to combat the financial crisis is designed to make credit more accessible to shaken consumers who aren’t sure they want more debt.

Nov. 26 (Bloomberg) — The Federal Reserve’s new $800 billion effort to combat the financial crisis is designed to make credit more accessible to shaken consumers who aren’t sure they want more debt.

Households and lenders may not respond much because of the wealth destruction from plunging property and stock values, and the deepening economic slump, economists say. That means banks may end up returning the Fed’s new liquidity through deposits at the central bank.

“We are sort of spitting in the wind,” said Michael Darda, chief economist at MKM Partners LP in Greenwich, Connecticut. “Banks won’t be throwing a lot of loans out there when they fear — rationally — those loans may not be paid back.”

Policy makers aim to kick-start markets for loans to students, car buyers, credit-card borrowers and small businesses with a new $200 billion program. Backed in part by the Treasury, the Fed will become a new buyer in the market for consumer loans at a time when many traditional holders of the assets, such as off-balance sheet bank units, have collapsed or been dissolved.

The announcement of the new efforts yesterday came amid rising criticism that officials were excessively focused on saving Wall Street firms, with the Citigroup Inc. rescue Nov. 23 the latest example. President-elect Barack Obama said repeatedly in the past two days he’ll compose a plan to help “Main Street” as well as the financial industry.

1966 Powers

Obama and congressional Democrats have also pushed for a stronger response to the housing crisis. The Fed responded yesterday, invoking authority first granted in 1966 to buy $500 billion of mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae.

Along with a $100 billion plan to buy the corporate debt of Fannie, Freddie and federal home loan banks, the step marks the central bank’s biggest foray into a type of quantitative easing. That’s an unorthodox monetary policy tool that goes beyond setting short-term interest rates. The central bank has already cut its benchmark rate to 1 percent. more

Standard Chartered has announced plans to raise £1.78 billion in a rights issue.

Existing shareholders will be able to buy 30 shares for every 91 shares held at a price of 390 pence a share, representing a 48.7% discount on the company’s closing price on Friday 21st November.

According to the emerging markets bank, the fundraising will strengthen its position in the current economic uncertainty and allow it take advantage of opportunities that may present themselves in the global financial services sector.

The group, which is listed in London and Hong Kong, has reported that existing shareholder, Temasek, will be subscribing in full to the issue of new shares. The Singaporean sovereign wealth fund already holds a 19% stake in the business. more

The Bank of Japan’s Monetary Policy Meeting last Friday has yielded a unanimous vote to retain its present interest rate at 0.3%.

The central bank has stated that economic activity remains stilted due to the continuing effects of energy and materials rising in price earlier in the year coupled with a decline in export activity.

CPI (minus fresh food) is at 2.5%, and is likely to be moderated by less volatile food prices and the falling cost of petrol and related products.

The Japanese economy is forecast to return to the path of sustainable growth in the long-term, but the Bank of Japan has stated that the immediate economic future is more difficult to predict and more comfortable economic conditions may take some time to arrive.

The central bank has pledged to continue careful monitoring of the global situation, with a view to utilising monetary policy effectively to ensure Japanese economic stability. more