Spain's economy shrinks 0.3% in fourth quarter

The struggling Spanish economy shrank 0.3 percent in the fourth quarter of 2011, stoking concerns that a weak first quarter this year will see it back in recession, official data showed Thursday. For 2011 as a whole, the economy expanded a meagre 0.7 percent, according to the figures which confirm initial estimates given January 30.

The slump, in a country where unemployment runs at nearly 23 percent, reflected a continued slowdown in domestic demand which could not be offset by exports, the INE statistics office said.

The 0.3 percent fall in output compared with the third quarter was the same as reported for the wider eurozone on Wednesday but the bloc managed overall 2011 growth of 1.5 percent, compared with Spain's 0.7 percent.

If the Spanish economy shrinks again in the three months to March, it would be in recession, as defined by two consecutive quarters of negative figures.

The government last week said it expected another contraction in the first quarter which would be worse than the fourth.

Spain emerged only at the start of 2010 from an 18-month recession triggered by the global financial crisis and a property bubble collapse that destroyed millions of jobs and left behind huge bad loans and debts.

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Portugal’s Debt Efforts May Be Warning for Greece

LISBON — As debt-plagued Greece struggles to meet Europe’s strict terms for receiving its next round of bailout money, the lesson of Portugal might bear watching. Unlike Greece, Portugal is a debtor nation that has done everything that the European Union and the International Monetary Fund have asked it to, in exchange for the 78 billion euro (about $103 billion) bailout Lisbon received last May.

And yet, by the broadest measure of a country’s ability to repay its debts, Portugal is going deeper into the hole.

The ratio of Portugal’s debt to its overall economy, or gross domestic product, was 107 percent when it received the bailout. But the ratio has grown since then, and by next year is expected to reach 118 percent.

That’s not necessarily because Portugal’s overall debt is growing, but because its economy is shrinking. And economists say the same vicious circle could be taking hold elsewhere in Europe.

Two other closely watched countries on the debt list, Spain and Italy, also have rising debt-to-G.D.P. ratios — even though they, like Portugal, have adopted the budget-slashing and tax-raising measures that the European officials and the I.M.F. continue to prescribe.

And on Tuesday, new figures showed that the Greek economy shrank even more than expected last year, as Greece struggles under ever heavier austerity demands by its European lenders.

Without growth, reducing debt levels becomes nearly impossible. It is akin to trying to pay down a large credit card balance after taking a pay cut. You can slash expenses, but with lower earnings it is hard to set aside money to pay off debt.

Vitor Gaspar, the Portuguese finance minister who came to power as part of a new government last summer, is highly regarded by European economic and finance officials. He has reduced the government’s budget deficit by more than one-third so far, through tough measures that include cuts in spending and wages, pension rollbacks and tax increases.

But many economists say those moves are also a reason Portugal’s economy shrank by 1.5 percent in 2011 and is expected to contract by 3 percent this year.

“Portugal’s debt is just not sustainable,” said David Bencek, an analyst at the Kiel Institute for the World Economy, a research organization in Germany. “The real economy does not have the structure to grow in the future and thus will not be able to pay back its debt in the long run.” The Portuguese public has so far has generally gone along with the government’s policies without the violent demonstrations that have rocked Greece, but it is starting to lose patience.

On Saturday, more than 100,000 people assembled peacefully in Lisbon’s sprawling Palace Square to rally against the austerity measures and the nation’s 13 percent unemployment, while chanting “I.M.F. doesn’t call the shots here!” The head of Portugal’s largest labor union vowed to hold additional protest rallies around the country.

The I.M.F., for its part, predicts that Portugal will eventually grow enough to cut its debt to a manageable level. But even the I.M.F. warns in its recent economic review that if growth were to disappoint, Portugal’s debt “would not be sustainable.”

The finance minister, Mr. Gaspar, an economist who is a former research director at the European Central Bank and a disciple of the bank’s austerity-focused philosophy, insists that his country’s debt is manageable. And he has no plans to ease up. This year he intends to slash government pension payments by 1.2 billion euros (close to $1.6 billion) and cut the bonus payouts that public sector workers in this country have long earned.

In discussing his record, Mr. Gaspar prefers to focus on the effect his efforts have had on Portugal’s budget deficit — the difference between what it spends and what it takes in — which has fallen to 5.6 percent last year, from 9.1 percent in 2010. For this year, Mr. Gaspar forecasts a decline to 4.5 percent.

“We have delivered, and our adjustment program stands out in the euro area,” he said during an interview on Friday in the ornate surroundings of the finance ministry here.

Once Portugal’s budget reforms take hold, Mr. Gaspar predicts, the country’s economy will grow by more than 2 percent from 2014 on, and the debt will fall accordingly.

Mr. Gaspar has won plaudits from Europe’s leadership and the I.M.F., which are eager to champion an exemplar of economic revamping in contrast to Greece’s unspooling disaster. In fact, Portugal is deemed such a model of reform that the Europe Union and I.M.F. are widely expected to come up with more money for Portugal next year if necessary — as was suggested in an overheard exchange between Mr. Gaspar and the German finance minister at a meeting last week in Brussels.

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Greece Expected to Offer Debt Holders a Deal Soon

When the Greek government presents its debt relief proposal to bondholders in the next week, it could lead to one of the largest debt restructurings in history. It could also be the last one for a while, if European leaders have their way.

European officials want Greece to be seen as a special case, to assure global investors and lenders that other weak economies in the euro currency union will not eventually need their own debt write-downs. Otherwise, officials worry that fears of other debt renegotiations will prolong the sense of uncertainty and crisis that has plagued the euro zone financial system for nearly three years. If the majority of the Greek government’s private creditors accept the deal, 100 billion euros of debt (about $132 billion) will be struck from Athens’s pile of i.o.u.’s, which now total more than one and a half times the size of the Greek economy.

But if a large enough faction spurns the offer — a debt swap that would result in a nearly 70 percent loss for investors — the deal will fall apart.

That would jeopardize the 130 billion-euro bailout Athens hopes to receive from the European Union and the International Monetary Fund. And it would raise the prospect of default by Greece and could prompt its exit from the euro union — a departure whose regional consequences are hard to predict.

Euro zone finance ministers on Tuesday turned up the pressure on Greece to keep its budgetary promises, canceling a planned Wednesday meeting in Brussels and deciding instead to convene by teleconference.

Jean-Claude Juncker of Luxembourg, the chairman of the Eurogroup of euro zone finance ministers, said on Tuesday that the conference’s format had been changed because he was still waiting for assurances from Greek leaders about enacting budget cuts and other promised measures. Other technical work remains to be done before the next bailout can be released, Mr. Juncker said.

One unresolved issue is how the European Central Bank plans to handle its holdings of 55 billion euros in Greek bonds.

The working assumption is that the European bank, or possibly individual national central banks within the euro zone, might contribute to Greece’s debt relief by exchanging their current Greek bonds for new ones. Under that swap, the central bank or banks would forgo bond profits, but would not have any actual losses.

Complicating all this is the latest grim news on the Greek economy, which plunged 7 percent in the fourth quarter, according to data released Tuesday. That meant Greece’s economy shrank by 6.8 percent in 2011 — worse than the government’s previous estimate of 6 percent.

The new data is the latest sign that Greece may not be able to grow fast enough to pay down its debt, raising fears that even the latest terms won from investors will not be sufficient for its long-term recovery.

The final offer to Greece’s private creditors is expected to be a swap for bonds that have an interest rate of around 3.5 percent — down from the 4 percent or higher rate that investors originally demanded. Those bonds are expected to carry a “cash component” that actually would no longer be pure cash but, instead, involve less attractive short-term bonds issued by Europe’s bailout fund.

Through gritted teeth, most private creditors have said they are inclined to accept the offer.

They have little choice. Greece’s threat to attach so-called collective action clauses to the bonds they currently hold would force all investors to take a loss. Any holdouts on the deal would be stuck with nearly worthless bonds that offered no protection if Greece eventually needed to restructure its debt yet again.

“I think if there are no more changes, 75 to 80 percent of investors will participate,” said Hans Humes, president of Greylock Capital in New York, who is a member of the steering committee of the Institute of International Finance, the banking group that is representing bondholders in the talks.

But Mr. Humes warned that the number of potential holdouts had increased in the last few weeks, a response to the seeming take-it-or-leave-it attitude of the European leaders involved in the negotiations.

He also noted that he had been receiving calls from lawyers and bankers urging him to move from the conciliatory camp to the objecting group and fight the matter in court. He said he had declined those entreaties, on the grounds that such a strategy would be fruitless. But others, he said, might still be open to a legal fight.

“If you go too far on the coupon and fiddle too much with the cash component, it just won’t work,” he said. “The discontent on our side is growing.”

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Hip Implants U.S. Rejected Sold Overseas

The health care products giant Johnson & Johnson continued to market an artificial hip in Europe and elsewhere overseas after the Food and Drug Administration rejected its sale in the United States based on a review of company safety studies.

During that period, the company also continued to sell in this country a related model, which earlier went on the market using a regulatory loophole that did not require a similar safety review.

It is not known how many people overseas received the replacement hip after the agency decided in 2009 not to approve it, nor the number who received the closely linked implant sold in this country. During some eight years on the market, the two implants were used in about 93,000 patients worldwide, about one-third of them in the United States. Both models were based on the same component, an all-metal hip socket cup that experts say was faulty in design.

The DePuy orthopedic division of Johnson & Johnson, citing declining sales, began phasing out both models of the device — formally known as an articular surface replacement device, which DePuy marketed under the name ASR — in November 2009 and formally recalled them in August 2010 amid reports in databases of orthopedic patients abroad showing they were failing prematurely at high rates.

But in a confidential letter, the F.D.A. told Johnson & Johnson in August 2009 that company studies and clinical data submitted to gain approval in the United States to sell the model available overseas were inadequate to determine the implant’s safety and effectiveness, according to a summary of the letter reviewed by The New York Times.

The agency also told the company it would need added clinical data to pursue the application, a process that would probably have taken a year or more. DePuy’s receipt of the notice came as regulators and surgeons abroad as well as doctors in this country were raising serious questions about growing failures of both models of the implant.

A spokeswoman for DePuy confirmed that the company had received the agency’s so-called nonapproval letter. But the spokeswoman, Mindy Tinsley, declined to release the letter or to respond to questions about when, or if, DePuy disclosed the ruling to doctors, patients, investors or regulators abroad.

A principal researcher on the clinical studies submitted by the company to the F.D.A. said he was not informed of the agency’s decision. Also, a review of publicly available information indicates that the company did not discuss the agency’s nonapproval letter in financial reports or in presentations to analysts while the device remained on the market.

There is no suggestion that Johnson & Johnson broke the law. Regulatory standards in other countries, like those in Europe, for approving the sale of medical devices are typically lower than here. A spokeswoman for a British regulatory agency, the Medicines and Healthcare Products Regulatory Agency, said that companies like Johnson & Johnson were not required to notify it when the F.D.A. refused to approve a product that was used in patients there.

However, the F.D.A.’s rejection may further deepen the company’s legal and financial problems surrounding the ASR. Last month, the company took a special $3 billion charge, much of it related to anticipated legal and medical expenses associated with the recall. An estimated 5,000 lawsuits involving the device are pending, including some from patients crippled by tiny particles of metallic debris shed by the implants.

William Vodra, a lawyer who specializes in F.D.A. regulation, said that, in general, drug and medical device makers typically disclose nonapproval letters if they might have a material impact on a company’s finances. Mr. Vodra added that apart from that financial calculation, there was no hard-and-fast rule about making such rulings public.

Mr. Vodra said that if a company decided to withhold a nonapproval letter that contained important safety information about a device used by doctors, it could face damage to its brand. “They have to think long and hard of the reputational impact,” he said.

The handling of the ASR highlights how the F.D.A., by keeping its approval process confidential, may affect the health and safety of patients. An agency spokesman, Morgan Liscinsky, declined to disclose the letter on the ASR, saying the agency had a policy of not releasing such notices because they might contain confidential business information.

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F.C.C. Bars the Use of Airwaves for a Broadband Plan

WASHINGTON — A proposed wireless broadband network that would provide voice and Internet service using airwaves once reserved for satellite-telephone transmissions should be shelved because it interferes with GPS technology, the Federal Communications Commission said Tuesday.
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Kevin Wolf/Associated Press

Philip Falcone, a prominent New York hedge fund manager, is the majority owner of LightSquared.
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The F.C.C. statement revokes the conditional approval for the network given last year. It comes after an opinion by the National Telecommunications and Information Administration, which said that “there is no practical way to mitigate the potential interference at this time” with GPS devices. The telecommunications and information agency oversees telecommunications policy at the Commerce Department.

The news appears to squash the near-term hopes for the network pushed by LightSquared, a Virginia company that is majority-owned by Philip Falcone, a New York hedge fund manager.

LightSquared said on Tuesday that the testing of the network was “severely flawed.” It “remains committed to finding a resolution with the federal government and the GPS industry to resolve all remaining concerns,” the company said in a statement.

The company said it “profoundly disagrees” with the results of the testing, which was done by a national engineering group, and the telecommunication agency’s opinions, “which disregard more than a decade of regulatory orders, and in doing so, jeopardize private enterprise, jobs and investment in America’s future.”

The F.C.C., which had granted a conditional approval to LightSquared to go ahead with its network pending the results of more testing, will now propose barring near-term deployment of the LightSquared system, the F.C.C. said. The commission will issue a request for public comment on the proposed action on Wednesday.

LightSquared has argued that its network would have relieved a potential “spectrum crunch” and created billions of dollars of investment and thousands of jobs in support of President Obama’s push to expand wireless Internet access around the country.

The network has been opposed by organizations and industries that make heavy use of GPS systems, including the military, aviation, construction and agriculture.

After earlier negative test results, LightSquared had proposed using only land-based transmitters and receivers, rather than satellites, to transmit broadband signals over a narrow slice of the satellite airwaves. The company intended to build a wholesale network, selling access to other companies that provide broadband service directly to consumers.

The telecommunications and information agency said tests showed that even a scaled-back version of the company’s wireless network would interfere with GPS signals and systems.

Interference of LightSquared’s signals with GPS systems is a tricky issue for the F.C.C., telecommunications experts say, because the interference appears not to be the fault of LightSquared. The most commonly used GPS receivers tend to pick up signals from outside of the segment of spectrum designated for GPS.

Because the satellite-telephone segment of airwaves, used by LightSquared, is next to the GPS band on the electromagnetic spectrum, GPS devices will frequently hear those extraneous transmissions.

The F.C.C. could have told GPS users and systems manufacturers that they were at fault for letting their devices stray into nearby airwaves, but that would mean overhauling an industry now in widespread use.

Jeff Carlisle, LightSquared’s executive vice president for regulatory affairs and public policy, wrote on the company’s blog this week that the GPS industry had apparently become “too big to fail,” seeking protection from the federal government for its own mistakes.

“GPS manufacturers have been selling devices that listen into frequencies outside of their assigned spectrum band — namely into LightSquared’s licensed band,” Mr. Carlisle wrote. “The GPS industry has leveraged years of insider relationships and massive lobbying dollars to make sure that they don’t have to fix the problem they created.”

Opposition to LightSquared’s network has come from the Pentagon and military industries, as well as from commercial companies like John Deere, whose advanced farm equipment uses GPS systems.

Last July, the Federal Aviation Administration issued a report saying that it would take 10 years for the civil aviation industry to design, develop, certify and install modified GPS equipment in the nation’s fleet of commercial and private jets.

But in January, after initial results of the latest round of testing began to appear in the media, LightSquared conducted a conference call with reporters in which the company’s executives said the testing requirements were aimed at producing a failing result and that members of the advisory board overseeing the testing “have deep ties with the same GPS manufacturers who have sold poorly designed equipment to America’s farmers, public safety officials, military and government agencies.”

Mr. Falcone’s hedge fund, Harbinger Capital Partners, lost more than 46 percent of its value last year because of declines in the value of LightSquared, a private company whose shares do not actively trade.

Harbinger marked down the value of its LightSquared investment by 50 percent in December, a move that came after a 9 percent markdown earlier in the year. The New York Times reported earlier this month that LightSquared accounted for an estimated 60 percent of Mr. Falcone’s fund.

Late last year, Mr. Falcone received a Wells Notice from the Securities and Exchange Commission, an action the agency typically takes when it is planning enforcement proceedings against a firm or individual. The Times reported in December that the S.E.C was investigating whether Harbinger agreed in 2009 to allow Goldman Sachs to withdraw up to $50 million from the firm’s hedge funds, while not striking similar deals with other clients.

In a federal filing disclosing the issue, Harbinger said that it was “disappointed” about the notices, and that it would “vigorously defend against” any formal charges.

Mr. Falcone was part of an investment group that bought 19 percent of the common stock of The New York Times Company and in 2008 reached a deal to award the group two new seats on the company’s board. The group urged the company to begin selling assets to help increase the stock price. One of the two directors has since left the board.

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Yahoo’s Talks With Alibaba and Softbank Said to Have Collapsed

Yahoo‘s talks to sell back most of its stakes in Alibaba of China and Yahoo Japan to its Asian partners have collapsed, according to people briefed on the matter.

The sudden and unexpected development raises new questions about the future of Yahoo, which had counted on completing the deal to raise billions of dollars that the embattled online company could use to reshape its operations.

The talks to put together a tax-free transaction — known as a cash-rich split — ended on Monday after several days of negotiations in Hong Kong, said these people, who spoke on condition of anonymity. According to one of these people, Alibaba’s chief financial officer and lead negotiator, Joe Tsai, indicated to his Yahoo counterpart, Timothy Morse, that the two sides might need to seek an alternative deal.

It was unclear why the talks fell apart, although the pace of negotiations had been exceedingly slow. The two sides were still weeks away from being able to announce a deal, and Yahoo still needed to obtain formal assurances from the Internal Revenue Service that such a transaction would be tax-free.

Several issues appeared to crop up during the talks, including breakup fees payable to either side if the tax-free deal fell apart. One person also suggested that the value of Yahoo’s stake, which stood at about $12 billion as of December, may have been another factor.

As recently as a few days ago, both sides held out hope that Yahoo and its Asian partners could hammer out an agreement. Yahoo’s chairman, Roy J. Bostock, confirmed the negotiations in a public letter to shareholders, though he cautioned that he could not provide assurances that a deal would be struck.

Tensions between Yahoo and Alibaba have been high for some time. The two companies held negotiations for Yahoo to sell back its stake in Alibaba in late 2010, only for those talks to fall apart.
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Both sides held out hope that an alternative could be reached, and talks may still resume. Alibaba and Yahoo Japan’s majority stakeholder, Softbank, plan to reach out to Yahoo’s chief executive to discuss the possibility of an alternative transaction, including one that was not tax-free, said one of the people with knowledge of the matter.

Still, it is not clear whether a taxable transaction, which would be vastly less attractive to Yahoo, would be feasible.

Shares of Yahoo fell sharply after All Things Digital reported earlier that the discussions had reached an impasse.

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