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Manufacturing in the U.S. shrank at the slowest pace since August 2008 and pending sales of existing homes advanced for a fourth month, underscoring signs the economy began to stabilize in the second quarter.

The Institute for Supply Management’s factory index rose in June for a sixth straight month, to 44.8; readings less than 50 signal contraction. The National Association of Realtors said the number of Americans signing contracts for existing homes increased 0.1 percent in May after a 7.1 percent gain.

“We’re going to see a temporary substantial improvement” in the economy, said Martin Feldstein, the Harvard University economist and former Reagan administration adviser who is a member of the U.S. recession-dating panel. “It’s a bounce that is coming from the beginning of the fiscal stimulus,” he said in an interview with Bloomberg Radio.

Still, Feldstein warned that the economy will be “going down again” into 2010. Underscoring that danger was a survey issued today by ADP Employer Services that showed U.S. companies eliminated 473,000 jobs in June after a 485,000 drop the previous month. The report also foreshadowed a jump in the unemployment rate in tomorrow’s Labor Department report that will temper any rebound in consumer spending.

Stocks advanced on optimism the worst of the recession, the deepest in half a century, is over. The Standard & Poor’s 500 Stock Index gained 0.4 percent to 923.33 at 4:16 p.m. in New York. Yields on benchmark 10-year notes were little changed, increasing to 3.544 percent from 3.535 percent late yesterday.

Construction Slump

Spending on construction projects dropped 0.9 percent in May after increasing in April for the first time in seven months, a report from the Commerce Department also showed.

The gain in the ISM factory index was paced by improvements in production, which expanded for the first time since August, and employment. A gauge of export orders also increased, almost reaching the breakeven level of 50.

“Things are starting to look up,” Norbert Ore, chairman of the ISM’s manufacturing survey, said on a conference call with reporters. “With the exception of inventories, which were still hitting a bottom in terms of rate of decline, all of the other indexes have moved in the right direction and should get us to 50 in the next few months.”

One disappointing reading was in new orders, where the index fell to 49.2 from a reading of 51.1 in May that showed the first expansion in bookings in more than a year.

Auto Shutdowns

Bankruptcies at General Motors Corp. and Chrysler LLC have rippled through the auto industry and have also caused some suppliers to file for protection from creditors no teletrack payday loans.

“The next three months are going to be critical,” Tony Brown, purchasing chief for Ford Motor Co., said June 24 in an interview. “The Chapter 11 filings have increased the cash-flow pressure on the supply base.”

Even so, government efforts to revive auto sales may give manufacturing and the economy a boost in the third quarter. The “cash for clunkers” bill that passed Congress in June gives consumers as much as $4,500 to trade in their old cars for more fuel-efficient vehicles.

An increase in auto sales will come as automakers slashed inventories to get rid of unwanted stocks, meaning manufacturers will need to crank up production again to meet the new demand, according to Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York.

Maki last week boosted his forecast for economic growth in the second half of 2009 by half a percentage point to 3 percent.

Crisis ‘Behind Us’

Other companies are already seeing an improvement.

The period of crisis management at General Electric Co. is “behind us” and some level of economic growth will take place next year, Chief Executive Officer Jeffrey Immelt said earlier this week.

“In some way, shape or form, 2010 and beyond will see economic growth,” Immelt said at the London School of Business on June 29. “How positive it is remains to be seen.”

One reason for concern is mounting unemployment. A Labor Department report tomorrow may show employers cut 363,000 workers from payrolls in June and unemployment rose to a 26-year high of 9.6 percent. Still, following May’s 9.4 percent jobless rate, the increase would be the smallest since November.

The housing market is stabilizing after a collapse in prices, historically low mortgage rates and tax incentives made properties more affordable for Americans. Still, with unemployment forecast to reach 10 percent this year, home purchases may languish at low levels for months before a recovery emerges.

Pending resales are considered a leading indicator because they track contract signings. The National Association of Realtors’ existing-home sales report tallies closings, which typically occur a month or two later.

The agents’ association reported last week that home resales increased 2.4 percent in May, a second consecutive gain that reinforced the case that the slump in home sales may level out this year. The median price dropped 17 percent from a year earlier, the third-biggest decline on record.

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South Korea’s exports are likely to return to growth from October as the won’s drop helps companies win market share and global demand recovers, a government official said.

“Exports will narrow their declines in July to September, and post positive growth in October,” Lee Dong Geun, deputy minister for trade and investment policy at the Ministry of Knowledge Economy, said in an interview yesterday in Gwacheon. “A weaker won benefited us, and we tried to diversify our markets as well as our export products.”

A pickup in overseas shipments, which are equivalent to about half of gross domestic product, will revive an economy that has been supported by government spending and record interest-rate cuts. LG Display Co., the world’s second-biggest maker of liquid-crystal displays, said last week it can’t keep up with demand for its screens as orders surge.

“Our export outlook looks bright,” Lee, 52, said from his sixth-floor office at the ministry on the outskirts of Seoul.

Overseas shipments probably fell 18.7 percent in June from a year earlier, easing from May’s 28.5 percent drop, according to the median estimate in a Bloomberg News survey of eight economists. Export declined a record 34.5 percent in January.

The Ministry of Knowledge Economy is scheduled to release the June trade report at 10 a.m. local time tomorrow.

Shares Rise

The Kospi stock index is headed for its best quarter since the three months ended June 2007 amid optimism of a global recovery. The index has risen 16 percent this quarter, extending this year’s gain to 24 percent after tumbling 41 percent in 2008.

South Korea’s trade surplus may exceed the government’s forecast this year as export declines moderate and cheaper oil costs reduce the nation’s import bill, Lee also said. In its semiannual outlook last week, the finance ministry predicted a 2009 trade surplus of $26 billion.

“There’s a possibility the trade surplus may top $30 billion,” Lee said. “It may be more than that if oil prices stabilize at below $70 per barrel.”

South Korea buys almost all its fuel overseas, making it the world’s fifth-biggest importer personal loans. The price of Dubai crude, a regional benchmark, has fallen by half in the past 12 months to about $69 a barrel.

The currency’s declines helped boost price competitiveness for Korean-made goods, Lee said. “A weaker currency helped, while our companies have strengthened technology and competitiveness.”

The won has drop 27 percent against the dollar since the beginning of 2008.

Developing Nations

South Korea sells about 69 percent of its exports developing nations, more than twice the amount destined for developed countries. That has cushioned the nation against fallout from the global financial crisis which has been more severe on industrialized economies, the deputy minister said.

China buys about 22 percent of South Korea’s exports, while the U.S. takes about 11 percent, Japan receives 6.7 percent of shipments and the Middle East 6.3 percent, according to government data.

Industrial output advanced a more-than-expected 1.6 percent in May from April, the fifth straight gain, as exporters ramped up production to meet increased orders, the government reported today.

Export Demand

Hyundai Heavy Industries Co., the world’s largest shipbuilder, said last week that sales climbed about 9 percent in May as it built vessels at higher prices. Samsung Electronics Co., the world’s second-largest maker of mobile phones, said today the global handset market in the second half of 2009 should be better than in the first six months.

South Korea’s government last week raised its GDP forecast for 2009, saying the economy will shrink 1.5 percent this year, less than a previous prediction of a 2 percent decline. It expects growth of 4 percent next year.

Overseas shipments will fall 18 percent in the three months ending Sept. 30, moderating from a 25 percent drop in the first quarter and an estimated 22 percent fall in the second quarter, the state-run Export-Import Bank of Korea said in a report today.

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U.K. houses held their value for a second month in June as increased demand and a lack of supply supported residential prices, Hometrack Ltd. said.

The average cost of a home in England and Wales was 155,600 pounds ($257,000), the London-based property researcher said in an e-mailed statement today. They stopped falling in May on Hometrack’s measure for the first time in 20 months. From a year earlier, values fell 8.7 percent in June.

“A lack of supply and rising demand have combined to prop up house prices in the last two months,” Richard Donnell, director of research at Hometrack, said in the statement. “It is the demand side where the greatest risk lies as many would-be buyers continue to remain cautious or are unable to obtain sufficient equity or finance to access the market.”

Bank of England policy maker Kate Barker said last week the housing market is still “some way away from normal” and the central bank said banks have curbed mortgage lending to all but the safest borrowers. That may hamper a recovery in the economy from its worst recession in a generation.

The number of new buyers has risen by 36 percent in the past six months, outpacing a 6 cheap car insurance.4 percent gain in the number of properties for sale, Hometrack said. It based its survey on 6,160 responses from real-estate agents and property surveyors.

In London, demand for housing has exceeded the increase in the number of homes on the market tenfold, Donnell said. The increase in buyer registrations across the U.K. was 4.6 percent in June, compared with 6 percent in May, today’s report showed. The number of agreed sales rose 6.4 percent, compared with 9.4 percent the previous month.

Barker, speaking in testimony to Parliament’s Treasury Committee on June 24, said she would “be cautious about the scale of activity in the next year to 18 months.” The central bank said in a report last week that mortgage lending is now “focused almost entirely” on borrowers with clean credit histories.

U.K. banks probably approved 46,000 mortgages in May, the most since April 2008, according to a survey of 22 economists by Bloomberg News. The Bank of England will release those figures at 9:30 a.m. today in London.

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Smartphone maker Palm Inc posted a narrower-than-expected quarterly loss Thursday, sending its shares up more than 14%.

The results come as the company’s turnaround effort, led by the just-unveiled Pre handset, picks up steam. The device, which was launched at the beginning of June, has been well- received by reviewers and saw strong demand in the weeks following the release.

The Pre’s impact will be more fully reflected in the current quarter, because of its June launch date. Analysts estimate around 150,000 units have shipped so far.

"Such significant growth means there is room for three to five players to win in this space. We don’t have to beat each other to prosper," Jon Rubinstein, the company’s new chief executive, said on a conference call with analysts.

Palm posted a net loss applicable to common shareholders of $105 million, or 78 cents a share, in the fiscal fourth-quarter ended May 29, compared with a loss of $43 payday advance lenders.4 million, or 40 cents a share, in the year-ago period.

Excluding items, Palm’s loss was 40 cents a share, compared with an average analyst estimate of 65 cents a share, according to Reuters Estimates.

Revenue fell more than 70% to $86.8 million, compared with a Wall Street estimate of $80.3 million.

The company’s shares closed at $14.02 on the Nasdaq and were up to $16.07 in extended trading. Palm’s (PALM) shares have more than quadrupled this year. 

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New Zealand’s economy shrank for a fifth straight quarter as consumers and businesses cut spending, extending the worst recession in more than three decades.

Gross domestic product fell 1 percent in the three months to March 31, matching the revised fourth-quarter decline, Statistics New Zealand said in Wellington today. The drop exceeds the 0.7 percent median estimate in a Bloomberg survey of 11 economists.

New Zealand’s economy began contracting in the first quarter of last year and is unlikely to grow until the final three months of 2009 as the worst global slump since the Great Depression curbs exports and damps investment, Reserve Bank Governor Alan Bollard said June 11. Interest rates may stay at record lows until late next year to kick-start spending, he said.

“The world was a hostile environment for growth,” said Bernard Doyle, economist at Goldman Sachs JBWere Ltd. in Auckland. “We doubt today’s print will markedly change the Reserve Bank’s view of where the economy sits.”

New Zealand’s dollar traded at 64.44 U.S. cents at 12.35 p.m. in Wellington from 64.55 cents before the report was released.

The currency has gained 12 percent in the past three months, which “risks derailing” the economy’s recovery because it is cutting export income, Prime Minister John Key said this week.

The 1 percent contractions in the past two quarters are the largest in 18 years, the statistics agency said.

‘Multiple Blows’

The economy shrank 2.7 percent from a year earlier. In the year ended March 31, gross domestic product declined 1 percent, the first annual-average contraction since 1992.

New Zealand’s economy began shrinking last year as Bollard raised interest rates to counter a housing boom and consumer spending that was being fanned by excessive borrowing.

The economy then faced “multiple blows” from collapsing world trade and tight credit conditions, the Organization for Economic Cooperation and Development said in a report this week.

Business investment slumped, companies began firing workers, exports slowed and tourist arrivals declined. Exports make up about 30 percent of the economy and the tourism industry contributes another 10 percent.

New Zealand’s economy will probably contract 2.9 percent this year before growing 0.6 percent in 2010, the OECD said. The jobless rate, which was 5 percent in the first quarter, may surge beyond 8 percent by next year, it said.

Household Spending

Households are constrained by high debt and workers are worried they may lose their jobs payday loans. A net 28 percent of consumers expect the economy will worsen this year, according to a Westpac Banking Corp./McDermott Miller survey published on June 24. The net figure subtracts optimists from pessimists and has fallen from 57 percent in the first quarter.

Household spending, which makes up 60 percent of the economy, fell 1.4 percent in the first quarter, the most in 18 years, today’s report showed. Purchases of durable items such as cars, furniture and home appliances dropped 2.5 percent while spending on services also decreased. Sales of food and other so- called non-durable goods gained.

Retailer Smiths City Group yesterday said net income fell 72 percent profit in the year ended April 30 as demand dropped at its appliance and furniture stores. Furniture and carpet sales have declined every month since January 2008, Chairman Craig Boyce said in a statement sent to the stock exchange.

Warehouse Group Ltd., New Zealand’s biggest discount retailer, said last month sales in the three months to April 26 dropped 2.8 percent as the recession slashed demand for office goods and the company shut liquor and food outlets.

Business Investment

Business investment plunged 7.3 percent as companies purchased fewer vehicles, plant and machinery, the statistics agency said today. Commercial construction fell.

Business confidence slumped to a record low in the first quarter, according to a survey by the New Zealand Institute of Economic Research Inc. Investment intentions fell to the lowest on record, the Wellington-based institute said.

Contact Energy Ltd., the nation’s biggest publicly traded electricity company, last month said it will delay a new geothermal power station investment amid declining demand and increased funding costs.

Total investment fell 6.1 percent led by business spending. Investment in new housing, dropped 0.3 percent in the first quarter, the seventh straight decline. Inventories decreased.

Exports of goods and services increased 0.6 percent in the quarter amid rising shipments of dairy products. Import volumes slumped 8.6 percent led by machinery and passenger cars.

Output from goods-producing industries slipped, led by a 7.2 percent drop in manufacturing. Primary production was unchanged as increased output from mining offset declines by logging and fishing. Service industries output fell 0.1 percent led by transport, while real estate activity increased.

The GDP deflator, a measure of prices, rose 2.6 percent in the year ended March 31.

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Oil prices fell sharply Monday as investors looked past tense geopolitical situations to focus on the weak outlook for the global economy.

Light, sweet crude for July delivery fell $2.62, or 3.8%, to settle at $66.93 a barrel in New York. It was the lowest closing price since June 3, when crude settled at $66.12 a barrel.

Oil for August delivery, which replaces July as the active contract Monday, fell $2.52 to $67.50 a barrel.

The retreat comes despite ongoing political unrest in Iran, militant attacks on oil installations in Nigeria and escalating tensions with North Korea.

Geopolitics: Demonstrations continued in Iran Monday after at least 19 people were killed Saturday during street protests over the results of the country’s June 12 presidential election.

Such unrest in the world’s No. 4 oil producer would normally raise concerns about possible supply disruptions and drive oil prices higher. However, the market is looking past the volatile geopolitical backdrop because the world’s supplies of oil are already brimming, said Phil Flynn, an energy analyst at Alaron Trading in Chicago.

"We have a world with a lot of spare production capacity," Flynn said. "Geopolitical threats don’t rattle the market as much as they did last year."

In Nigeria, Africa’s largest oil exporter, militants attacked an oil and gas pipeline operated by Italian oil company Agip on Friday, Reuters reported. The attack widened a campaign which has so far targeted Chevron (CVX, Fortune 500) and Shell, halting a further 33,000 barrels per day of oil production.

Meanwhile, North Korea is reportedly preparing to test-fire another missile after conducting a nuclear test and launching missiles into the sea last month.

Economy: Crude prices had nearly doubled from the lows of late last year as investors bet the world’s demand for energy was poised to rebound as the global economy showed signs of stabilization affordable group health insurance.

However, recent U.S. government data have shown that demand for oil and gasoline remains weak, said Andrew Lebow, an energy trader at MF Global in New York.

"The rally was based on improving economic conditions in the second half of the year," he said. "But current demand numbers were disappointing."

Highlighting the dour outlook for the global economy: The World Bank said Monday that global trade will plummet by nearly 10% this year, and output will fall by 2.9%.

The report cast a pall over Wall Street, with stock prices falling sharply in afternoon trading. Many oil traders view the stock market as a leading economic indicator. As a result, oil prices often rise and fall in tandem with the major stock indexes.

At the same time, the U.S. dollar regained ground against rival currencies as investors looked to preserve capital in cash. A stronger greenback often pushes oil prices lower since crude is priced in dollars.

"We’re entering a multi-day correction with some geopolitical worry in the background," Lebow said.

Gasoline: Meanwhile, retail gas prices eased Monday, halting a 54 day surge.

Nationwide, the average price for a gallon of regular unleaded gasoline edged down to $2.69, shaving just three-tenths of a cent from the previous day’s average of $2.693, according to motorist group AAA. 

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Federal Reserve Chairman Ben S. Bernanke will defend his unprecedented actions to prevent a financial collapse as debate on whether he should be reappointed begins.

Bernanke, whose term expires Jan. 31, faces lawmakers at a hearing this week on steps to aid Bank of America Corp.’s takeover of Merrill Lynch & Co. as Congress increasingly questions the Fed’s interventions. The session comes after a two-day meeting on monetary policy that starts today.

President Barack Obama has said the Fed chief has done an “extraordinary job” without committing to reappoint him. Treasury Secretary Timothy Geithner, in reference to a possible candidacy for Obama economic official Lawrence Summers, told a lawmaker last week it wasn’t “appropriate” to pledge that top advisers weren’t in the running for the job.

“The vultures are circling,” said David M. Jones, a former Fed economist who is president of DMJ Advisors LLC in Denver. Bernanke is “going to be on the defensive,” even after “turning confidence around” since the depths of the crisis, he predicted.

At stake is whether Bernanke, 55, pilots the Fed into an expanded financial-supervision role after overseeing the most aggressive use of the Fed’s powers since the Great Depression.

Odds for Bernanke

Through doubling the central bank’s balance sheet to $2.1 trillion, Bernanke has helped thaw credit markets and put the economy on a path toward recovery. Odds favor the former Princeton University economist, a Republican: Reappointment may be less disruptive to investors, and no first-term president has replaced a sitting chairman in 30 years. Many on Wall Street and in Washington view it as likely Bernanke will be reappointed.

“There’s a very strong case for reappointment,” said Douglas Lee, who runs Economics from Washington in Potomac, Maryland, and worked on Capitol Hill in the 1970s. “Removing a Fed chairman who is generally perceived to have done an outstanding job would be an enormous problem.”

Traders on online exchange Intrade place 65 percent odds on Bernanke’s renomination.

Still, any Obama decision may be half a year away, and the economy and financial markets could shift again. The jobless rate is still rising, and economists anticipate it will reach a quarter-century high of 10 percent at year-end. The Fed is mandated by Congress to achieve maximum employment as well as stable prices.

Summers, Yellen

Besides keeping Bernanke, Obama’s options include appointing Summers or Janet Yellen, both among the most prominent Democratic economists and veterans of the Clinton administration, Jones said. Bill Burton, a White House spokesman, declined to comment.

Summers, 54, a former Treasury secretary who heads Obama’s National Economic Council, is considered the front-runner should the president want a change. San Francisco Fed President Yellen, 62, was previously a Fed governor and chairman of the Council of Economic Advisers and would be the first female Fed chief.

Summers wants the job, Senator Robert Bennett of Utah, the No. 2 Republican on the Banking Committee, said in an interview. Asked if he would support Summers for Fed chairman, Bennett said: “I am told that Larry would very much like me to cashadvance. I would have no objection to Larry.”

Bernanke has “done a good job under very difficult conditions,” Bennett also said. “Whether the president feels that way or not is another question.”

Frank Won’t Commit

House Financial Services Committee Chairman Barney Frank said he’s “very pleased” with Bernanke. “Beyond that I wouldn’t say” anything about a renomination, the Massachusetts Democrat said in an interview.

Bernanke took office in February 2006 with an agenda to make the Fed more transparent in setting monetary policy and to depersonalize the institution from its chairman, conferring weight to the views of other top officials. In 2007, his term became engulfed by the biggest financial crisis since the 1930s.

His record includes preventing the collapse of Bear Stearns Cos., extending emergency loans to investment banks, financing purchases of corporate debt, bailing out American International Group Inc. and shoring up consumer-credit markets.

Some signs have emerged that the crisis is waning. U.S. companies have sold at least $698 billion of debt this year, 24 percent more than the same period of 2008, Bloomberg data show. The Libor-OIS spread, which measures banks’ willingness to lend, has narrowed to 0.37 percentage point, from a record 3.64 points in October.

FOMC Meeting

The policy-setting Federal Open Market Committee gathers today in Washington to consider any change to its pledges to purchase as much as $300 billion of Treasuries and $1.45 trillion of housing debt and keep its benchmark interest rate near zero. The FOMC statement is expected about 2:15 p.m. tomorrow.

Among Bernanke’s most controversial steps have been allowing Lehman Brothers Holdings Inc. to fail and his discussions regarding Bank of America’s acquisition of Merrill Lynch.

His role in that takeover will be examined in a House Oversight Committee hearing June 25, when lawmakers plan to question whether he applied inappropriate pressure to Bank of America to complete the purchase of Merrill Lynch after the company discovered mounting losses.

At a June 11 hearing with Bank of America Chief Executive Officer Kenneth Lewis, the committee released internal Fed e- mails, some from Bernanke, obtained by subpoena. One missive from the Fed chairman indicated he saw Lewis’s threat to scuttle the deal as a “bargaining chip.”

House Subpoena

Republicans on the committee used the e-mails to argue the government overstepped its authority. Last week, the panel issued another subpoena for more Fed documents.

Bernanke has recent history on his side: Presidents Ronald Reagan, George H.W. Bush, Clinton and George W. Bush all reappointed Fed chairmen in their first terms. “He’s still got at least a decent chance,” said Jones, putting the odds at about 60-40 in Bernanke’s favor.

“His record has not been perfect, but it’s been pretty good,” said Senator Sherrod Brown, an Ohio Democrat on the Banking Committee, which will vet the nomination. On whether to keep Bernanke, “I leave that to the president,” he said.

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Mexico will probably boost debt sales 46 percent in the third quarter to finance a budget deficit that is widening as the U.S. recession throttles exports and oil production slumps, according to Metanalisis SA.

The Finance Ministry will issue 455 billion pesos ($34 billion) of bills and bonds in the quarter, up from 312 billion pesos a year earlier, said Manuel Galvan, a fixed-income strategist at the Mexico City-based firm that provides economic analysis to the government. The jump in issuance follows a 30 percent increase in the first half.

Mexico’s peso bond yields are rising even as the central bank reduces the benchmark overnight lending rate to a five-year low amid speculation Standard & Poor’s may cut the country’s credit rating after changing the outlook to negative in May. The budget deficit may grow to 4 percent of gross domestic product this year from 2.1 percent in 2008, S&P says.

“There is this looming threat that rating agencies may cut the credit rating,” Galvan said in a telephone interview. “This concern has prevented a decline in long-term bond yields.”

The Finance Ministry is scheduled to publish its third- quarter debt sale plan on June 25.

The deficit in Mexico, while less than half the gap in neighboring U.S. as a percentage of GDP, is more of a concern because 37 percent of the budget is funded by oil, a revenue source that “is very volatile,” Galvan said.

‘Binding’ Problems

Crude, Mexico’s biggest export, has tumbled over the past year while output at Petroleos Mexicanos, the state-owned oil monopoly, has declined. The price of oil is down 52 percent from a record high in July. Production dropped 6.5 percent in May from a year earlier after falling 9.2 percent in 2008, the fastest drop since World War II.

Mexican exports to the U.S. fell 9.8 percent to $211 billion in the 12 months through April, according to the nation’s statistics agency. The U.S. buys 80 percent of Mexico’s exports and is the biggest source of foreign direct investment, migrant worker remittances and tourism revenue.

Mexico’s “structural vulnerabilities are not new, but they are more binding now than they were before,” Lisa Schineller, an analyst in New York at S&P, said in a telephone interview.

S&P rates Mexico BBB+, the third-lowest investment grade rating and seven levels below the U.S.’s AAA rating. The U.S. budget gap is projected to swell to $1.85 trillion in the year ending Sept. 30, equal to 13 percent of GDP, according to the nonpartisan Congressional Budget Office. The deficit equaled 3 business cards sale.2 percent of GDP in the 12 months through September.

‘Huge Differential’

Mexico forecasts its public sector deficit, which includes debt from a 1990s bank bailout, will reach 3 percent of GDP this year.

“There is a huge differential with the U.S. deficit,” Galvan said. “But we have to remember that Mexico is a small country in a global context. It’s a developing country with elements of risk.”

While Mexico collected 5.7 percent of its revenue from income taxes in 2007, the second-lowest rate among members of the Organization for Economic Cooperation and Development after Turkey, the U.S. took in 13.9 percent, an October report shows.

Mexican Finance Minister Agustin Carstens said last week that the country needs a “sense of urgency” to approve legislation that will shore up the government’s finances.

“Mexico has never considered, and will never consider, exceeding the prudent limits of a temporary fiscal deficit,” Carstens said at a Mexico City conference.

Recession

Yields on Mexico’s peso bonds due in 2024, the country’s benchmark securities, have risen 0.71 percentage point in the past nine weeks, staunching a rally that had sent them to a two- month low in April. Banco de Mexico cut its key lending rate half a percentage point on June 19 to 4.75 percent, bringing it down 3.5 points this year.

Latin America’s second-biggest economy will shrink 5.5 percent in 2009, according to the government, the first decline since 2001 and the biggest since 1995, following a peso devaluation that sparked capital outflows throughout the region.

Galvan said the rise in Mexican bond yields may be overdone and that the securities are “attractive” because slowing inflation will preserve the value of their fixed payments. He predicts yields on Mexican bonds maturing in more than 10 years will fall by 1 percentage point by September.

Markets Last Week

Mexico’s Bolsa index fell 4.7 percent last week, its first decline in five weeks. Cemex SAB led declines, dropping 17 percent. Bank of America Corp. last week cut its rating on the stock of the largest cement maker in the Americas to “underperform” from “neutral.”

The peso gained 0.3 percent to 13.3604 per U.S. dollar, from 13.4037 percent on June 12. Yields on the government’s bonds due in 2024 rose 11 basis points, or 0.11 percentage point, to 8.5 percent, according to Banco Santander SA.

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Bank of England Governor Mervyn King said Britain’s banking system may need to raise more capital to finance the economic recovery as officials keep printing money.

“It may take further additions to equity capital before the banking system will be able to supply credit at a price and on a scale to finance a sustained recovery,” King said in a speech at the Mansion House in London yesterday. “It is too soon to reverse the extraordinary policy stimulus that has been injected into the U.K. economy through monetary policy.”

The Bank of England plans to spend 125 billion pounds ($204 billion) of new money on assets to kick-start economic growth, and Gordon Brown’s government has propped up some of the nation’s biggest banks with taxpayer funds. King, speaking alongside finance minister Alistair Darling, said both monetary and fiscal policy will have to change as the economy stabilizes.

“When appropriate the Monetary Policy Committee will raise bank rate” from the current 0.5 percent “and gradually run down its portfolio of assets in a manner consistent with maintaining orderly markets,” King said. “It is also necessary to produce a clear plan to show how prospective deficits will be reduced during the next Parliament.”

Dividing lines for the next election, which must be held within a year, sharpened this month. The opposition Conservatives have accused Brown of misleading voters after the prime minister denied most ministries face deep spending cuts. A mix of spending restraint and tax increases is inevitable, whichever party takes office, economists say.

‘Tough Choices’

“Support for the economy now must be matched by action to ensure we live within our means,” Darling said in his speech. “There are tough choices ahead. I will continue to do whatever is necessary to ensure sustainable public finances.”

The government has nationalized banks and invested billions of pounds in Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc. U.K. banks have already raised $158 billion in capital to shore up their balance sheets, Bloomberg data show.

While the current crisis still has “some way to run” and banks have more work to do in reducing leverage, investors have continued to perceive greater risk in the industry, King said paydayloans.

“Put bluntly, market data on credit spreads imply that some banks are viewed as a worse credit risk than some of their customers,” he said. “Companies that can bypass the banks to access capital markets directly are doing so.”

Investors are demanding extra returns to hold bonds issued by banks. The spread between the yields of sterling-denominated bonds issued by financial companies and benchmark government debt averages 619 basis points, according to Merrill Lynch & Co. data. That compares to an average spread of 289 basis points for non-financial companies. A basis point is 0.01 percentage point.

Money Supply

King said there are “tentative signs” the central bank’s asset purchase program is starting to work as money supply is “picking up.” Policy makers this month reiterated their plan to keep buying government and corporate bonds.

While full economic recovery may be “protracted,” King said “there are some signs that the British economy is beginning to stabilize, and financial markets have improved markedly.”

The British Chambers of Commerce today cut its forecast for U.K. economic growth, saying the outlook “remains very precarious.” Gross domestic product will shrink 3.8 percent this year, compared with a forecast in March for a contraction of 2.8 percent, the BCC said. Unemployment will rise to a peak of 3.2 million in the second half of next year, the group said.

King said new regulation on the banking sector should eliminate an implicit state guarantee for firms that combine household services with risky investment banking or funding strategies. He suggested banks which pose greater risks to taxpayers should face higher capital requirements or be prevented from offering services to consumers.

Any regulated bank should also be required to produce a plan for it to be wound down in the event of failure.

“Making a will should be as much a part of good housekeeping for banks as it is for the rest of us,” he said.

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Bank of England Governor Mervyn King said Britain’s banking system may need to raise more capital to finance the economic recovery as officials keep printing money.

“It may take further additions to equity capital before the banking system will be able to supply credit at a price and on a scale to finance a sustained recovery,” King said in a speech at the Mansion House in London yesterday. “It is too soon to reverse the extraordinary policy stimulus that has been injected into the U.K. economy through monetary policy.”

The Bank of England plans to spend 125 billion pounds ($204 billion) of new money on assets to kick-start economic growth, and Gordon Brown’s government has propped up some of the nation’s biggest banks with taxpayer funds. King, speaking alongside finance minister Alistair Darling, said both monetary and fiscal policy will have to change as the economy stabilizes.

“When appropriate the Monetary Policy Committee will raise bank rate” from the current 0.5 percent “and gradually run down its portfolio of assets in a manner consistent with maintaining orderly markets,” King said. “It is also necessary to produce a clear plan to show how prospective deficits will be reduced during the next Parliament.”

Dividing lines for the next election, which must be held within a year, sharpened this month. The opposition Conservatives have accused Brown of misleading voters after the prime minister denied most ministries face deep spending cuts. A mix of spending restraint and tax increases is inevitable, whichever party takes office, economists say.

‘Tough Choices’

“Support for the economy now must be matched by action to ensure we live within our means,” Darling said in his speech. “There are tough choices ahead. I will continue to do whatever is necessary to ensure sustainable public finances.”

The government has nationalized banks and invested billions of pounds in Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc. U.K. banks have already raised $158 billion in capital to shore up their balance sheets, Bloomberg data show.

While the current crisis still has “some way to run” and banks have more work to do in reducing leverage, investors have continued to perceive greater risk in the industry, King said cash advance no fax.

“Put bluntly, market data on credit spreads imply that some banks are viewed as a worse credit risk than some of their customers,” he said. “Companies that can bypass the banks to access capital markets directly are doing so.”

Investors are demanding extra returns to hold bonds issued by banks. The spread between the yields of sterling-denominated bonds issued by financial companies and benchmark government debt averages 619 basis points, according to Merrill Lynch & Co. data. That compares to an average spread of 289 basis points for non-financial companies. A basis point is 0.01 percentage point.

Money Supply

King said there are “tentative signs” the central bank’s asset purchase program is starting to work as money supply is “picking up.” Policy makers this month reiterated their plan to keep buying government and corporate bonds.

While full economic recovery may be “protracted,” King said “there are some signs that the British economy is beginning to stabilize, and financial markets have improved markedly.”

The British Chambers of Commerce today cut its forecast for U.K. economic growth, saying the outlook “remains very precarious.” Gross domestic product will shrink 3.8 percent this year, compared with a forecast in March for a contraction of 2.8 percent, the BCC said. Unemployment will rise to a peak of 3.2 million in the second half of next year, the group said.

King said new regulation on the banking sector should eliminate an implicit state guarantee for firms that combine household services with risky investment banking or funding strategies. He suggested banks which pose greater risks to taxpayers should face higher capital requirements or be prevented from offering services to consumers.

Any regulated bank should also be required to produce a plan for it to be wound down in the event of failure.

“Making a will should be as much a part of good housekeeping for banks as it is for the rest of us,” he said.

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