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Moody’s eyes downgrade of top U.S. banks

These are stories Report on Business is following Friday, Aug. 23, 2013.

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Moody's weighs banks downgrade

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Moody's Investors Service said it might cut the credit ratings of major U.S. bank holding companies, including JPMorgan Chase & Co. and Goldman Sachs Group Inc., citing reduced chances that the government will fully bail out bond investors if the companies run into financial distress.

The announcement shows that regulators are making progress toward convincing financial markets that big banks may not be too big to fail.

Moody's said in the announcement that it may also downgrade bonds of Wells Fargo & Co., and Morgan Stanley. The bonds of Bank of America Corp. and Citigroup Inc. may be downgraded for the same reasons, but they may also be upgraded because the banks' operations are improving.

Ratings downgrades can increase a bank's borrowing costs and force it to post more collateral in derivative trades, weighing on its profitability and draining its cash.

Over the last year, regulators have proposed forcing debt investors to rescue tottering banks, instead of taxpayers – when a bank starts to falter, some of its debt would be turned into equity under the proposed rules. Regulators at the Federal Deposit Insurance Corp. and the Federal Reserve are expected this fall to announce minimum amounts of bond financing for bank holding companies to ensure the so-called resolution plans would work.

With bondholders potentially bearing more of the burden of rescuing banks, the banks' debt may be less creditworthy, Moody's said. Two more banks, Bank of New York Mellon Corp. and State Street Corp., had already been placed under review for downgrade by Moody's because of its reassessment of likely government support for bondholders.

The ratings agency generally announces results of its formal reviews of ratings within 90 days.

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Moody's added that even if the proposed new rules increase the chance of banks defaulting, they may also decrease the losses to investors when the bank defaults.

A clear plan for handling tottering banks means that the companies could get back on their feet faster and lose less business, making them better able to ultimate repay creditors, Moody's senior vice president David Fanger said in an interview.


Microsoft's Steve Ballmer to retire

Microsoft Corp. announced on Friday that chief executive officer Steve Ballmer would retire within the next 12 months after a replacement has been selected.

The company's shares shot in the wake of the news.

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Reuters reports that Ballmer said in a statement that he would have timed his retirement in the middle of Microsoft's announced transformation to a devices and services company. But he said: "We need a CEO who will be here longer term for this new direction."

Read the full story here: Microsoft CEO Steve Ballmer to retire within 12 months, shares surge

Canada's inflation rate edges higher

Canada's annual rate of inflation edged up to 1.3 per cent in July, from 1.2 per cent a month earlier.

Statistics Canada said the increase was due mostly to a 6.1-per-cent increase in gasoline costs, which led to a broader increase in prices in the transportation sector.

Food prices, meanwhile, rose 0.8 per cent, compared with the same month a year earlier.

Economists had been expecting the annual rate to rise by about 1.4 per cent. The latest report suggests few inflationary pressures in the Canadian economy.

"Overall, the data release, though slightly softer than the printed consensus, may not cause too much of a market reaction, with the annual rates still moving up gradually following very subdued readings earlier this year," CIBC World Markets economist Emanuella Enenajor said in a morning commentary.

Read the full story here: Inflation rate edges higher fuelled by rising gasoline costs

Brazil launches currency intervention

Brazil's central bank moved to bolster the real, the country's currency, as it nears a five-year low against the U.S. dollar with word that it would provide $60-billion (U.S.) worth of cash and insurance to the foreign-exchange market by year-end.

Reuters reports that the bank said it will sell, on Mondays through Thursdays, $500-million worth of currency swaps, derivative contracts designed to provide investors with insurance against a weaker real. On Fridays, it will offer $1-billion on the spot market through repurchase agreements.

Read the full story here: Brazil central bank launches $60-billion currency intervention

Toyota Canada to settle recall claims

Toyota Canada says it will settle consumer's claims stemming from recalls in 2009 and 2010.

The recalls were part of the 1.4 million vehicles recalled by the auto maker over a number of concerns, including issues with gas pedals and floor mats.

The Canadian Press reports that eligible owners will receive an enhanced warranty for a minimum of three years to cover repairs and to have their vehicles equipped with a brake override system. If their vehicle is ineligible for the free system, owners will get cash instead. Toyota has also agreed to fund scholarships at four Canadian engineering schools totalling $600,000.

Read the full story here: Toyota Canada agrees to settle claims from large recalls in 2009-2010

Solid Asia, Europe data take focus off tapering

Solid data from Asia and Europe is giving markets a chance to focus on growth rather than the timing of the Federal Reserves pull back of its massive bond buying program, Michael Hewson, senior market analyst at CMC Markets U.K., says.

U.S. stocks opened higher Friday.

The Dow Jones industrial average rose 10.75 points or 0.07 per cent, to 14,974.49, the S&P 500 gained 3.25 points or 0.20 per cent, to 1,660.21 and the Nasdaq Composite added 11.13 points or 0.31 per cent, to 3,649.84.

In Toronto, the S&P/TSX was up 89.41 points or 0.71 per cent at 12,763.76 at midday.

"Promising data from both China and Europe have again given financial markets reasons for optimism, and this has allowed traders to focus on growth rather than tapering, for the moment at least," Mr. Hewson said in a morning note.

"The strong PMI numbers from these two key regions has allowed risk assets to recover ground lost after the release of the Fed Minutes, with equity markets across Asia posting healthy gains overnight."

For more market coverage, click here: Market Updates

More from Friday's Globe

With Reuters, The Associated Press and The Canadian Press

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