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Rating agencies, euro leaders fast approaching all-out war

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The battle rages The world's major credit rating agencies and European leaders are fast approaching all-out war.

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The agencies, which took it on the chin for their lack of action in the run-up to the financial crisis, are bombarding Europe's weaker nations with downgrade upon downgrade. European leaders, in turn, are parrying, slamming the agencies for the actions that drive up their borrowing costs.

Today alone, Moody's slashed Portugal's rating to junk status, while separately warning banks that they may take a hit if they agree to roll over Greek debts. That came just one day after Standard & Poor's said such a debt rollover would probably constitute a debt default. Fitch had already said much the same thing.

The agencies' moves have sparked a war of words. In March, for example, when Moody's slashed Greece's ratings, its finance minister complained that "ultimately, Moody's downgrading of Greece's debt reveals more about the misaligned incentives and the lack of accountability of credit rating agencies than the genuine state or prospects of the Greek economy."

And today, German Chancellor Angela Merkel was also somewhat dismissive, saying the three groups at the centre of the rescue plans, the EU, the European Central Bank and the International Monetary Fund, should trust their own views no matter what the agencies decide.

Where the rollover plan is concerned, the views of the agencies are crucial.

This began with an agreement among French banks to roll over some of their Greek debts, a move that would be followed by German banks, to help keep Athens afloat. It would be voluntary - as in, the French and German governments reached a deal with their banks to do it - a key point amid bickering over private debt holders sharing the pain.

While S&P and Fitch have been clear that they would treat this as a default, Moody's has not yet commented.

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It's important because it will help determine whether the ECB continues to support Athens by taking Greek debt as collateral from the country's banks. Today, The Financial Times reports, the ECB has decided to do just that unless S&P, Fitch and Moody's all find Athens in default.

So, the newspaper says, as long as one ratings agency doesn't declare a default, it's all good.

"Yesterday's comments by an ECB official that the central bank would ignore a default rating recommendation unless there was a consensus across the board from all ratings agencies could be seen as trying to drive a wedge, or delay the inevitable with Moody's declining to comment, while both S&P and Fitch have made their positions clear," said CMC Markets analyst Michael Hewson.

"There is a concern that such an action by the ECB would stretch their credibility to breaking point. For now however that is a decision they won't yet have to make."

Economists Derek Holt and Karen Cordes Woods said it's not likely Moody's would stand alone. There's also the question of the International Swaps and Derivatives Association, or ISDA, which oversees the credit default swaps, or the insurance against defaults. It, too, must decide when an insurer is liable, The Globe and Mail's Tim Kiladze writes. All of this is feeding into extreme uncertainty and confusion.

"It doesn't seem that the issues of 'voluntary' or collateralization matter in determining default given that ratings agencies have made it clear that anything that alters the original indenture terms for the worse or that is done to avoid what would have otherwise been a default would be met with a default rating in any event," said Mr. Holt and Ms. Woods.

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"Nevertheless, while the near-term outlook is uncertain enough, key questions concerning whether a default would be deemed a credit event by ISDA and whether or not Greece is still on the path toward ultimately defaulting remain in play."

Many of Europe's major banks plan to meet tomorrow in Paris to discuss rolling over some of the debt.

Bombardier slashes jobs Stung by the loss of a major contract, Bombardier Inc. today slashed almost 1,500 jobs at its historic Derby operation, the last of Britain's train factories.

More cuts are likely, The Globe and Mail's Eric Reguly reports from Derby, after the train and aerospace giant lost out on a £1.4-billion contract to supply rail cars to the mammoth Thameslink passenger rail system in south-east England. Germany's Siemens AG was the winner.

Derby is still Europe's top train-making centre, a status it will lose in the fall, when existing contracts wind down. Bombardier has said it does not expect to win enough new contracts in the next year or two to keep Derby fully utilized.

Toyota pumps money into Ontario Toyota Motor Manufacturing Canada Inc. is joining with the Ontario and federal governments to invest $545-million to upgrade the auto maker's operations in Cambridge and Woodstock, Ont. The two levels of government will invest $70-million each as part of a green initiative, Globe and Mail auto writer Greg Keenan reports today.

The government financing represents the first major financial contribution they have made to an auto maker since they spent about $13-billion to help bail out Chrysler LLC and General Motors Corp. during the recession that led to the auto industry crisis in 2008-09.

Project Greenlight will include a major upgrade of the paint shop at the auto maker's CambridgeN Ont plant , Toyota Canada chairman Ray Tanguay said.

Coutu profit climbs Jean Coutu Group (PJC) Inc. says it managed to have a decent first quarter despite the generic drug reforms in Quebec and Ontario.

Coutu earned $49.9-million or 22 cents a share in the quarter, up from $43.9-million or 19 cents a year earlier. Sales climbed to $593.9-million from $583-million.

"Despite the price reductions of generic drugs decreed by the provincial governments, we have posted a significant growth of our operational results, which demonstrates the relevance of our strategies and the strength of our organization," said chief executive officer Francois J. Coutu. "We have started fiscal 2012 with optimism and remain confident that we will be reaching the objectives that we have set."

That's not to say there wasn't an impact from the drug reforms.

"Following the introduction of the generic version of large volume drugs over the last 12 months, generic drugs reached 56.5 per cent of drugs prescriptions during the first quarter of fiscal year 2012 compared with 51.4 per cent during the same quarter of the previous fiscal year," the company said.

"The increase in the number of generic drugs prescriptions with lower selling prices than brand name drugs had a deflationary impact on the pharmacy's retail sales. Therefore, the introduction of new generic drugs reduced pharmacy's retail sales growth by 3.4 per cent and price reductions of generic drugs decreed by the Quebec government reduced the growth of those sales by 2.8 per cent during the first quarter of fiscal year 2012."

Soft numbers before ECB meets Some soft economic data from Europe this morning. Retail sales in the 17-member euro zone declined by 1.1 per cent in May, and growth in the services sector slowed in June, according to fresh readings.

The numbers come as the European Central Bank prepares to meet Thursday, and is expected to hike its benchmark interest rates.

Separately today, Australia's central bank held its key rate steady at 4.75 per cent, while Sweden's Riksbank boosted its by a quarter of a percentage point to 2 per cent.

Saks heads for Kazakhstan Sacha Baron Cohen's Borat character would be so proud: Kazakhstan will soon boast its own Saks Fifth Avenue.

Saks Inc. announced today plans for a licensed store in Almaty, Kazakhstan next summer. On three levels and at about 91,000 square feet, the store will be housed in the Esentai Shopping Mall, alongside other luxury retailers, Saks said. The mall, it added, will be part of Esentai Park, which will include luxury homes and offices, and a five-star hotel.

For Saks, it means expansion to a growing market with Almaty's "rapidly expanding affluent population." For VILED Group, a luxury retailer in Kazakhstan and licensee of the store, you'd be tempted to think it's trying to overcome the image of the country painted by Mr. Cohen's Borat character in his 2006 comedy Borat: Cultural Learnings of America for Make Benefit Globrious Nation of Kazakstan, based on the comments of its CEO, who said Saks Fifth Avenue will make a "terrific contribution to the citizens of Almaty and the entire country."

Almaty, the former capital, is a beautiful city that is rich in history and fast becoming a financial hub. Kazakhstan itself is a rapidly growing economy, central Asia's biggest, that is rich in resources.

In Economy Lab today You would never know it from all the hot air rising out of Washington, but President Barack Obama and congressional Republicans could easily reach a deal to raise the debt limit and avoid an early August default, Andy Sullivan of Reuters writes.

In International Business today China's local government debt may be 3.5-trillion yuan ($540-billion U.S.) larger than auditors estimated, potentially putting banks on the hook for deeper losses that could threaten their credit ratings, Moody's said today. Koh Gui Qing reports from Beijing.

In Personal Finance today How you claim children's activities has a big effect on your tax return. Child care expenses reduce taxable income and provide a better return than a tax credit.

Executors have to settle estates that are increasingly complex. Add bickering beneficiaries and you could find yourself being sued.

Here's how to get the kitchen you want - without spending a fortune.

From today's Report on Business

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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