How to Buy Gold Stocks

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Aussie Rallies on Talk of Super Tax Retreat

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Stocks Rebound as April Data Show Strong Improvement

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German Stocks Rebound From 3-Month Low; Deutsche Bank Advances

May 26 (Bloomberg) — German stocks gained, with the benchmark DAX Index rebounding from a three-month low, as carmakers and steelmakers rallied.

Volkswagen AG and Daimler AG climbed more than 3 percent. ThyssenKrupp AG and Salzgitter AG followed metal prices higher. Aixtron AG rose 6.9 percent as Equinet AG recommended buying the shares.

The DAX rallied 2.2 percent to 5,791.92 as of 2:09 p.m. in Frankfurt, ending the longest losing streak since October. The gauge is still 8.5 percent below its April 26 high on concern the sovereign-debt crisis in Europe will grow. The broader HDAX Index rose 2.3 percent today.

“The environment is not as bad as the market seems to have believed it was in the last couple of days,” said Raimund Saxinger, a Frankfurt-based fund manager at Frankfurt Trust, which oversees about $22 billion. “The retreat was overdone.”

The Organization for Economic Cooperation and Development raised its growth forecasts for this year and next as emerging economies such as China outpace debt-burdened developed countries to drive the global expansion.

The economy of the OECD’s 30 members will grow 2.7 percent this year, more than the 1.9 percent predicted in November, the Paris-based group said today. Including non-members such as China, the global economy will expand 4.6 percent this year and 4.5 percent in 2011, compared with an average of 3.7 percent during the decade through 2006.

VW Gains

Volkswagen’s preferred shares increased 4.2 percent to 68.80 euros. Volkswagen’s joint ventures in China with PSA Peugeot Citroen will benefit as a weaker euro reduces the cost of components imported from Europe, Nomura Holdings Inc. analysts said.

The euro weakened to $1.2321 at 7:03 a.m. in New York, from $1.2345 yesterday. It touched $1.2144 on May 19, the lowest since April 2006. Europe’s currency dropped to 111.19 yen, from 111.39. It slid to 108.84 yen yesterday, the least since November 2001.

Daimler, the world’s second-biggest maker of luxury cars, rose 3.5 percent to 38.48 euros. The Stoxx 600 Automobiles & Parts Index advanced as much as 3.7 percent, among the best performers in the benchmark Stoxx Europe 600 Index.

ThyssenKrupp gained 4.4 percent to 21.25 euros as aluminum, copper, lead, nickel, tin and zinc all rose on the London Metal Exchange. Salzgitter advanced 4.6 percent to 51.35 euros as ING Group NV raised its recommendation on the stock to “hold” from “sell.”

Aixtron rallied 6.9 percent to 20.95 euros after yesterday plunging the most since October 2008. The maker of equipment used to produce LED screens was raised to “buy” from “accumulate” at Equinet, which said “China still seeks to build a LED industry.”

Deutsche Telekom, Q-Cells

Deutsche Telekom AG advanced 1.8 percent to 8.95 euros, the first advance in four trading sessions. Europe’s biggest phone company was raised to “overweight” from “neutral” at JPMorgan Chase & Co.

Q-Cells SE rose 4.7 percent to 4.85 euros. The solar company has started selling solar-power systems at lower prices than rivals Solarworld AG and Conergy AG, the Financial Times Deutschland reported, citing an interview with Chief Financial Officer Nedim Cen.

Consumer confidence in Europe’s largest economy declined after the Greek debt crisis raised concern about the region’s growth outlook. The GfK AG market research company in Nuremberg said its sentiment index, based on a survey of about 2,000 people, will slide to 3.5 points in June from a revised 3.7 points this month.

To contact the reporter on this story: Julie Cruz in Frankfurt at jcruz6@bloomberg.net .

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Spain Rush to Repair Savings Banks Risks Leaving Job Half Done

May 26 (Bloomberg) — In the rush to fix its struggling savings banks, Spain risks leaving the job half finished.

Case in point: Caja de Ahorros del Mediterraneo’s proposal to merge with three smaller savings banks, creating a lender with 135 billion euros ($167 billion) in assets. The combination would let them keep separate branches and workforces.

“It’s a halfway house that creates some savings but not enough,” said Inigo Lecubarri, who manages about $170 million at Abaco Financials Fund in London. “If you’re going to do these mergers, you should aim to cut costs.”

Spain is pushing for mergers between “cajas,” lenders run as foundations that helped fund the country’s property boom and account for about half of its loans. By melding ailing lenders with stronger partners, the central bank aims to purge bad loans and lay the groundwork for economic recovery as the government tackles its budget deficit. Lumping lenders together without reducing staff and closing branches isn’t likely to accomplish those aims, Lecubarri said.

The state of Spain’s banks has taken on global significance since Greece’s sovereign debt crisis focused attention on the nation’s public finances. Spain forecasts its budget deficit will amount to 9.3 percent of gross domestic product this year, equal to the shortfall projected for Greece by the European Commission.

Concern that Greece’s budget woes will spread to nations such as Portugal and Spain prompted the European Union and International Monetary Fund to pledge almost $1 trillion earlier this month to backstop the debt of member nations.

CajaSur Seizure

The Bank of Spain seized CajaSur on May 22 after the bank, based in the city of Cordoba and controlled by the city’s Roman Catholic cathedral, decided against a merger with Unicaja, a bigger, profitable lender.

The regulator removed management and placed CajaSur under the control of a government fund that has the authority to spend as much as 99 billion euros on bank rescues. Crippled by loans for property development, CajaSur’s proportion of defaults to overall lending had soared to 8.3 percent from 1.9 percent in 2007, rendering it insolvent.

The seizure inflamed concern about the health of Spain’s banks and the government’s finances, weighing on the euro and financial shares across Europe. The 52-company Bloomberg Banks and Financial Services Index dropped 3.9 percent yesterday.

Banco Santander SA, the largest Spanish bank, fell 3.9 percent, while Banco Bilbao Vizcaya Argentaria SA, the second biggest, slid 4.5 percent.

‘Dirty Linen’

“Everyone knew the restructuring had to happen, but when the dirty linen starts being laundered in public, it brings it back to the front of people’s minds,” said Andrew Lynch, who manages about 1.5 billion euros at Schroder Investment Management in London.

The four-way combination announced on May 24 would create the fifth-biggest banking group in Spain by assets, with 2,300 offices and 14,000 employees. The cajas chose to be required to monitor solvency and liquidity centrally, under a single management. Their brands, local branch networks and spending on social programs would remain independent.

The deal, which would involve an injection of cash from the rescue fund, hasn’t been signed off by regulators. To tap the fund, the banks may have to agree to additional restructuring measures.

The Bank of Spain has approved the model for such mergers, dubbed “cold fusions” by the Spanish press. A central bank spokesman declined to comment.

‘Better Than Nothing’

Three savings banks — Caja Navarra, Caja Canarias and Caja de Burgos — agreed to a similar combination in April.

“It’s better than nothing, but worse than a full merger,” because the savings would be less, said Jordi Fabregat, a professor of management and financial control at Esade, a Barcelona business school.

The new bank springing from the combination of Caja de Ahorros del Mediterraneo with Grupo Cajastur, Caja de Ahorros de Santander y Cantabria and Caja de Ahorros y Monte de Piedad de Extremadura, will have costs amounting to 47.6 percent of revenue, the lender said.

That compares with 31 percent at Madrid-based Banco Popular Espanol SA, a commercial bank that cut its Spanish workforce by 4.5 percent in the year through March as it closed 100 branches.

Santander, based in the northern Spanish town of the same name, shed 1,600 branches following its acquisition of Banco Central Hispano in 1999. Enrique Candelas, head of the bank’s branch network in Spain, later said the bank shut too many.

‘Supercaja’ Model

The model chosen for what Fabregat termed the “Supercaja” avoids conflicts over job losses. CajaSur’s attempt to merge with Unicaja failed because unions wouldn’t endorse jobs cuts resulting from combining two lenders with overlapping branch networks, said Andres Hens, a member of the Cordoba lender’s board.

Spain’s 20 percent unemployment rate means job cuts are a tough option for savings banks, said Lecubarri. “You do mergers to cut costs, and in the financial industry that means firing people,” he said.

In a speech in April, Bank of Spain Governor Miguel Angel Fernandez Ordonez said most banks had understood the need for restructuring and mergers. The criteria that “should prevail” was the sufficient reduction of capacity, the soundness of the resulting banks and the minimal use of public funds, he said.

“The weakness of the cajas has played on Spain’s financial system for some time,” said Matthew Maxwell, a credit analyst at Societe Generale in London, who added that some of the lenders are healthy. “It all depends how quickly the real restructuring begins.”

To contact the reporter on this story: Charles Penty in Madrid at cpenty@bloomberg.net

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Deutsche Telekom Names Humm as Chief of T-Mobile USA

May 26 (Bloomberg) — Deutsche Telekom AG, Europe’s biggest phone company, named Philipp Humm as the new chief executive officer of T-Mobile USA Inc. to replace Robert Dotson.

Humm is currently responsible for sales and service in Europe as chief regional officer for the region, the Bonn-based company said in a statement today. Humm will take over in February, while Dotson will remain on as a T-Mobile USA non- executive board member until May 2011.

T-Mobile USA is the fourth-largest mobile U.S. operator behind Verizon Wireless, AT&T Inc., and Sprint Nextel Corp. It fell behind its rivals as it was late in starting the build-out of a high-speed third-generation network that could handle increased data traffic, and because of a lack of attractive handsets. Deutsche Telekom CEO Rene Obermann said this month he will keep T-Mobile USA as the division is a “cash cow.”

“Dotson was the right man to grow T-Mobile USA and having got the company to its inflection point will now pass over to Philipp Humm who is a very strong replacement,” Saeed Baradar, Societe Generale SA’s telecommunications sales specialist, said today. Humm has a “track record in cost cutting and improving margins — exactly what T-Mobile USA needs,” he said. Societe Generale reiterated its “buy” rating on the stock.

Deutsche Telekom shares rose 1.7 percent to 8.94 euros in Frankfurt trading today.

Humm, 50, worked for 10 years for a number of U.S.-based companies including McKinsey & Co and Procter & Gamble Co., in senior positions before joining Deutsche Telekom, the company said. Humm was CEO of T-Mobile’s German unit from 2005 to 2008.

Losing Clients

Analysts including Execution Noble’s Will Draper have said that Deutsche Telekom’s U.S. business needs to be fixed as average revenue per user is declining and the unit is losing customers.

In the first quarter, T-Mobile USA’s operating income before depreciation and amortization rose 0.8 percent to $1.39 billion while sales fell 2.2 percent to $5.28 billion, the company said May 12.

The company is increasing the speed of its third-generation network in the U.S. to get more than half the customers of its T-Mobile USA unit to use smartphones.

In the first quarter, the number of U.S. customers using such phones increased by 33 percent to 5.2 million, compared with the previous three months. By year end, the unit is aiming for 8 million smartphone users. In total, T-Mobile USA had 33.7 million customers at the end of the first quarter, down from 33.8 million at the end of the fourth quarter.

“The challenge is to find a way to expand our coverage not our speed,” Deutsche Telekom Chief Technology Officer Olivier Baujard said in an interview in London today. “That’s what Philipp will need to find a solution for.”

To contact the reporter on this story: Jonathan Browning in London jbrowning9@bloomberg.net .

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Naked-Swap Ban Is Misinformed Assault on Markets: Eraj Shirvani

May 26 (Bloomberg) — Last week, Germany’s Federal Financial Supervisory Authority (BaFin) took several extraordinary measures and temporarily prohibited certain short- selling transactions. One of these bans relates to credit default swaps that aren’t used to hedge default risk on holdings of underlying euro-area sovereign debt. These are naked swaps.

Yesterday, the German Finance Ministry proposed extending the ban to the naked short selling of all shares in local companies listed on the country’s exchanges. It would also apply to certain euro-area bonds and euro-denominated derivatives.

European Union regulators have indicated there are no plans to impose the naked CDS ban more broadly across Europe. Finance officials in countries such as France, the Netherlands, Spain and Finland have also suggested they don’t intend to implement such a prohibition within their borders.

The impact of this ban has already had negative consequences. The naked CDS issue is an unwarranted distraction that is based on misinformation and misperception. It comes at a time of critical importance in the drive for financial regulatory reform across global markets.

The facts regarding naked sovereign CDS and their impact on the broader market are clear. Today, there is roughly $102.1 billion in net notional outstanding of CDS on euro-area sovereign reference entities. Most of this represents hedges on investors’ holdings of sovereign debt. A minority reflects naked CDS positions. The size of the euro-zone government-bond market, by contrast, is roughly $7.1 trillion. It is difficult to imagine that one market can unduly influence a far larger market that is 70 times its size.

No Material Impact

It isn’t immediately obvious why the German government took steps to ban naked CDS even after a statement by BaFin that the CDS market had no material impact on the Greek bond markets.

Politicians and regulators everywhere should exercise restraint in order to ensure a considered and thoughtful approach to regulation and legislation. The stability of the markets must be safeguarded and the provision of credit and liquidity should be assured.

Another important misperception concerns the CDS market’s transparency. Today, regulators around the world have unfettered access to CDS trading and they have an unprecedented level of granularity to that activity. They can easily see whether trading in particular sovereign reference entities has increased — and the evidence indicates that it hasn’t. This would suggest that there is currently no widespread support for a broader ban.

Risk Protection

While there’s little data to support a ban on any sovereign CDS transactions, evidence of the benefits of such swaps is growing. In addition to providing basic credit-risk protection, sovereign CDS have become more widely used in recent years because they can provide significant value to hedgers of country-specific risk and increase liquidity in underlying debt.

As the International Monetary Fund noted recently, “Sovereign CDS is not only ‘credit insurance,’ but another tradable instrument in the risk-management toolkit.”

International banks; debt, equity and real-estate investors; and portfolio managers may use sovereign CDS regardless of whether they hold underlying sovereign debt in order to hedge or diversify their risk, and as a “proxy hedge” against potential systemic shocks that would reduce the value of their positions. In fact, proxy hedgers were believed to be significant buyers of Greek sovereign CDS earlier this year because individual Greek bank CDS were much less liquid.

Overpriced Credit

Sovereign CDS have often been the best way to express a view on credit in troubled times when cash and securities markets have seized up. When credit is perceived to be overpriced, investors may buy protection. Conversely, when credit is thought to be underpriced, they might sell protection.

The ban on naked short-selling of euro-area government and sovereign CDS, as well as shares of large German financial firms, has contributed to financial-market turmoil, affecting the price of credit globally. It also means German companies will find it harder to hedge economic exposure, or express a view on the creditworthiness of a particular reference entity.

New York Federal Reserve President William Dudley recently offered these thoughts regarding the positive benefits of short- selling: “Asset bubbles occur more frequently when it is difficult to short the asset.” Speculation may have an important role to play in the functioning of markets, though it doesn’t seem to have been prevalent in sovereign CDS trading.

The need for financial regulatory reform to ensure the stability of global markets has never been greater. The over- the-counter derivatives industry is joining with policy makers in jurisdictions around the world to address the key issues driving reform efforts. The industry is embracing the use of clearinghouses to mitigate the risks of interconnectedness in global markets. It also provides complete transparency to regulators of OTC derivatives trading and is working to make infrastructure more robust and resilient.

During this critical time, it’s vital that reform efforts stay focused on providing real solutions to real challenges.

(Eraj Shirvani is chairman of the International Swaps and Derivatives Association. The opinions expressed are his own.)

To contact the writer of this column: Eraj Shirvani at eraj.shirvani@credit-suisse.com

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U.S. Stocks Gain on Strong Economic Data, Continuing Rebound

May 26 (Bloomberg) — U.S. stocks advanced for a second day as sales of new homes rose to the highest level in two years and stronger-than-estimated growth in durable-goods orders bolstered confidence the economy will weather the European debt crisis.

Bank of America Corp. and Walt Disney Co. rallied after the Commerce Department said new home sales climbed 15 percent to an annual pace of 504,000, the most since May 2008. Schlumberger Ltd. and Freeport-McMoRan Copper & Gold Inc. surged as oil traded above $70 a barrel and metals prices rose. Citigroup Inc. surged 4.9 percent after being upgraded at Oppenheimer & Co. MEMC Electronic Materials Inc. jumped 5 percent after the maker of silicon wafers reinstated its share repurchase program.

The Standard & Poor’s 500 Index rose 1.3 percent to 1,088.12 as of 10:16 a.m. in New York. The Dow Jones Industrial Average gained 108.83 points, or 1.1 percent, to 10,152.58. About 10 stocks gained for each that fell on U.S. exchanges.

“There are bargains out there,” said Tom Wirth, senior investment officer for Chemung Canal Trust Co., which manages $1.6 billion in Elmira, New York. “The economy is doing a lot better than two years ago” and “chances are the stock market will be up for several weeks.”

Concern the European debt crisis will spread, prompted by credit-rating downgrades of Greece, Spain and Portugal, has driven the MSCI World Index down 14 percent from this year’s high. The S&P 500 has slumped 8.5 percent so far this month, on course for the biggest drop since February 2009.

Erasing Losses

U.S. stocks erased losses in the final minutes of trading yesterday, with the S&P 500 wiping out a 3.1 percent drop, as the gauge rebounded from its 2010 low.

“The rally yesterday was very encouraging,” said Hugh Johnson, who oversees $1.85 billion as chairman of Albany, New York-based Johnson Illington. “The market had reached technical support levels and in the minds of many institutional investors the market had become arguably undervalued.”

Stock-index futures gained today after the Commerce Department said orders for durable goods rose in April for the fourth time in five months, pointing to strength in U.S. manufacturing at the start of the second quarter. The 2.9 percent increase in bookings for goods meant to last at least three years was the biggest in three months and followed little change in March, figures from the Commerce Department showed today in Washington. Orders excluding transportation unexpectedly fell after revisions showed even bigger increases in prior months.

‘Ex-Transport’

“We are not much concerned by the drop in orders ex- transport,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York, in an e-mailed note. “The February and March numbers were very robust and a correction was due. The underlying trend is still strongly upwards.”

The number of mortgage applications in the U.S. rose last week by the most in a month as homeowners took advantage of borrowing costs close to a record low to refinance.

The 11.3 percent increase in the Mortgage Bankers Association’s applications index for the week ended May 21 followed a 1.5 percent drop the previous week, the Washington- based group said today. Refinancing surged 17 percent, the most since February. Purchase applications fell to the lowest level since 1997.

The U.S. economy will grow 3.2 percent in 2010 and next year instead of the 2.5 percent predicted in November, and the euro region will advance 1.2 percent compared with the previous forecast of 0.9 percent, the Organization for Economic Cooperation and Development said today in a report. Japan’s economy will expand 3 percent instead of 1.8 percent.

‘Calming Down’

“The economic data are consistently pointing toward a v- shaped recovery, which is very supportive for equities and credit,” said Thomas Sowanick, co-president of Omnivest Group LLC, which manages $1 billion in Princeton, New Jersey.

Exxon Mobil advanced 0.7 percent to $60.13. Crude oil for July delivery rose as much as $2.15 to $70.90 a barrel on the New York Mercantile Exchange after an industry report showed a decline in U.S. gasoline inventories, drawing investors back to crude.

Separately, aluminum, copper, lead, nickel, tin and zinc all gained on the London Metal Exchange today.

Freeport McMoRan gained 1.9 percent to $68.89.

Alcoa Inc. rallied 2.3 percent to $11.56 as the largest U.S. aluminum producer was raised to “outperform” from “neutral” at Macquarie Group Ltd.

Citigroup

Citigroup rose 4.9 percent to $3.97 after being raised to “outperform” from “market perform” at Oppenheimer, which said the bank is well-positioned for a credit quality recovery and its international businesses will grant better-than-average growth.

MEMC Electronic Materials Inc. rallied 5 percent to $11.43 after saying its board reinstated a share-repurchase program with about $550 million of capacity remaining.

Fidelity National Information Services Inc. gained 5.4 percent to $28. The payment-processor said it plans to repurchase as much as $2.5 billion of its common stock at a price range of $29 to $31 a through a modified “Dutch auction” tender offer. The company expects to incur about $2.5 billion of debt tied to the offer.

AIG

American International Group Inc. rallied 1 percent to $34.85. The insurer was said to be weighing the sale of its stake in a portfolio of about 17,000 apartments. AIG’s real estate arm and Morgan Properties agreed in June 2007 to buy 86 apartment complexes, mostly in New Jersey and Pennsylvania, from Kushner Cos. for about $1.9 billion, including debt. Morgan may buy the majority of the bailed-out insurer’s interest in the joint venture, said two people with knowledge of the discussions, who asked not to be identified because talks are private. The people said they didn’t know what price New York- based AIG is seeking.

Vertex Pharmaceuticals Inc. surged 5.2 percent to $35.71. The hepatitis C virus was undetectable in 75 percent of patients given 12 weeks of Vertex’s medicine, called telaprevir, along with a combination therapy normally used to treat the infection, the company said. About 69 percent of patients treated for 8 weeks with the telaprevir regimen were hepatitis-free after 48 weeks, compared with 44 percent of those given the standard therapy alone.

To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net ; Esmé E. Deprez in New York at edeprez@bloomberg.net .

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Emerging Stocks Rally Most in 2 Weeks; Bonds, Currencies Gain

May 26 (Bloomberg) — Emerging-market stocks rallied the most in two weeks, bonds surged and currencies strengthened on speculation valuations are attractive given prospects for accelerating economic growth.

The MSCI Emerging Markets Index rose 2.7 percent to 878.42 at 9:10 a.m. in New York after the gauge closed yesterday at the lowest level since September. South Africa’s rand, Russia’s ruble and the Malaysian ringgit gained more than 1 percent versus the dollar. The extra yield on emerging-market debt over U.S. Treasuries fell 21 basis points, the most in two weeks, to 3.33 percentage points, according to JPMorgan Chase & Co.

The Organization for Economic Cooperation and Development raised its growth forecasts for this year on expectations developing economies will drive the global expansion. Morgan Stanley advised investors to boost holdings of emerging-market stocks on attractive valuations and “strong” economic expansion. The MSCI emerging gauge traded yesterday at about 11 times analysts’ profit estimates for this year, the lowest level since March 2009, according to data compiled by Bloomberg.

“Now is probably an opportune time to pick up some of the bargains,” Donald Gimbel, senior managing director at New York- based Carret Asset Management LLC, said in a Bloomberg Television interview. “We’ve got bad news just about every place you can look, but on the other hand we have rising earnings, we have better economic conditions in most of the world.”

OECD Boosts Outlook

The MSCI gauge sank 4 percent yesterday, the most since March 2009, on a report that North Korea ordered its military to prepare for combat and concern that Europe’s debt crisis will hamper the global recovery.

The economy of the OECD’s 30 members will grow 2.7 percent this year, more than the 1.9 percent predicted in November, the Paris-based group said today in a report. Including non-members such as China, the global economy will expand 4.6 percent this year and 4.5 percent in 2011, compared with an average of 3.7 percent during the decade through 2006.

New York University professor Nouriel Roubini told a conference in Bucharest today that he expects emerging-market economies to have “more robust” recoveries than developed nations.

The MSCI China Index of Hong Kong-traded shares climbed 2.5 percent as resource companies rallied on a prediction from Rio Tinto Group, the world’s third-largest mining company, that China’s demand for commodities will grow over the next 15 years. Indonesia’s Jakarta Composite Index surged 7.3 percent, the most since December 2008, as PT Astra International jumped on its prediction for record motorcycle sales this year.

Commodity Rally

Rising oil and metals prices lifted shares of energy and raw-materials producers. The Micex Index in Russia, the world’s largest energy exporter, jumped 3.3 percent and the ruble strengthened 1.4 percent against the dollar. Brazil’s Bovespa index climbed 1.7 percent as state-owned oil company Petroleo Brasileiro SA increased 2.2 percent.

Crude for July delivery gained as much as 3.1 percent to $70.87 a barrel in New York, while copper increased 1.4 percent in London and lead advanced 2.4 percent.

South Korea’s won stabilized as the government pledged to intervene in markets amid tensions with the North. The won was little changed at 1,252.28 per dollar. Vice Finance Minister Yim Jong Yong said today that “authorities will supply sufficient foreign currency liquidity if needed.”

The currency yesterday plunged 3 percent after a report by a defector group based in Seoul said North Korea’s military was ordered to prepare for combat on May 20, when South Korea said its communist neighbor was responsible for the sinking of a warship.

‘Safest’ Investments

Morgan Stanley raised its recommendation on emerging-market equities to a 6 percent “overweight” position from 4 percent overweight, according to a research report today from London- based chief Asia and emerging-market strategist Jonathan Garner.

Money managers seeking the world’s “safest” investments should buy the local-currency debt of developing nations instead of U.S. Treasuries and gold, Ashmore Investment Management Ltd.’s Jerome Booth said in an interview yesterday.

The short-term obligations of developing countries are more attractive investments because debt levels are low, currencies are undervalued, banking systems are healthy and foreign- exchange reserves are high, said Booth, who helps oversee about $33 billion in emerging markets as head of research at Ashmore in London.

To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net .

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Bernanke Says Central Banks Must Be Free of Pressure

May 26 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke said central banks must be free from political pressure as they bolster regulation and try to prevent future financial crises.

“In undertaking financial reforms, it is important that we maintain and protect the aspects of central banking that proved to be strengths during the crisis and that will remain essential to the future stability and prosperity of the global economy,” Bernanke said today in a speech at the Bank of Japan in Tokyo.

Bernanke and other central bank chiefs have faced mounting political threats to policy independence while combating the worst financial crisis since the Great Depression.

In the U.S., Bernanke is trying to beat back legislation he says may reduce economic and financial stability by impinging on policy makers’ autonomy in setting borrowing costs. European Central Bank officials are defending their independence after the institution backed financial support for countries including Greece. In Japan, the government has pressured the central bank to help spur the economy and eradicate deflation.

Bernanke highlighted the benefits of autonomy rather than discussing recent threats.

“In exchange for this independence, central banks must meet their responsibilities for transparency and accountability,” Bernanke said to a conference hosted by Japan’s central bank.

The Fed is “committed to exploring new ways” to increase transparency, Bernanke said. He didn’t identify such initiatives beyond central bank efforts in recent years including expanded reports on its balance sheet.

Visiting Japan

Bernanke, 56, visiting Japan after economic talks with China in Beijing, didn’t discuss the near-term outlook for the U.S. economy or monetary policy in the speech.

Responding to questions afterward with Bank of Japan Governor Masaaki Shirakawa, Bernanke said central banks should hold to a 2 percent target for inflation.

“Central banks of the world have over many years now established a great deal of credibility for inflation rates in the vicinity of about 2 percent, and there would be a very risky transition if we in any way reduced our commitment to a 2 percent inflation target,” Bernanke said. “We’re not sure how expectations would react.”

The Fed chief and his colleagues are trying to head off potential political pressure on their internal debates over when and how fast to raise interest rates from a record low and sell $1.1 trillion of mortgage-backed securities that were purchased to reduce home-loan costs and revive growth.

Last Resort

A central bank needs protection from political interference in setting interest rates, buying or selling securities and serving as a lender of last resort, Bernanke said.

“Policy makers in a central bank subject to short-term political influence may face pressures to overstimulate the economy to achieve short-term output and employment gains that exceed the economy’s underlying potential,” Bernanke said. That may “generate undesirable boom-bust cycles that ultimately lead to both a less stable economy and higher inflation,” he said.

A 1997 change to Japanese law bolstered the Bank of Japan’s autonomy for setting monetary policy by “significantly” reducing the scope for the Ministry of Finance to influence the central bank’s decisions, Bernanke said.

After a March report that Japan’s consumer prices fell for a 12th month in February, Japanese Finance Minister Naoto Kan said that “more efforts are needed to beat deflation.”

Current Crisis

Bernanke mentioned the ECB without discussing the current sovereign-debt crisis, saying the institution’s independence “has helped to keep euro-area inflation expectations firmly anchored.”

The ECB this month started a program of purchasing government bonds in the secondary market to help push down borrowing costs for Greek, Spanish and Portuguese governments and lend support to a European Union rescue plan totaling 750 billion euros, or about $930 billion. The euro has plunged about 14 percent against the dollar this year on concern that some countries in the euro area are at risk of default.

Earlier this month, ECB President Jean-Claude Trichet rejected the suggestion that his institution gave up its independence when it agreed to buy bonds.

“Just who has been weak over the past few months?” Trichet said in an interview with Der Spiegel, a German news weekly, published May 17. “It was not the ECB. The governments with their high debts were weak.”

Open Fed

The U.S. Senate approved regulatory-overhaul legislation last week that would open the Fed to a one-time audit of its emergency loans and other actions to combat the financial crisis starting in December 2007.

The measure, while requiring the release of more data than Bernanke said in February the central bank was willing to provide, keeps in place a 1978 shield from congressional audits of Fed interest-rate decisions. The Senate defeated another proposal, opposed by the Fed, that would have removed the shield. Bernanke and other Fed officials have said that would risk politicizing monetary policy.

The language to eliminate the exemption was passed by the House in December. Legislators from both chambers are preparing to reconcile the two bills.

Bernanke, while advocating increased transparency for Fed policies and decisions, has held firm against other changes such as identifying banks that borrow from the Fed’s discount window. The central bank is contesting a U.S. appeals court decision from March in a case launched by Bloomberg LP, the parent of Bloomberg News, that the Fed must identify firms that borrowed from four lending programs.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net .

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