What's Happening in the Financial World (12/5/2011) China AAA Rating, GM Volt Fire

A pact to save Europe. France’s president Sarkozy and Germany’s Angela Merkel will try to set a grand pact to save Europe. Germany wants strict adherence to austerity plans in nations that accept money. The terms would be similar to those imposed by the International Monetary Fund when it makes loans. France is less keen to lean on sovereigns and to sanction them severely when they miss targets. France’s position may be more realistic. A regional recession may make budgets hard to hold. The entire matter will be referred to eurozone  members, which means a decision could drag on for months. The IMF, in the meantime, has begun to set up its own mechanism to create a bailout fund, which might involve it providing capital to weak nations. That capital in turn would be loaned to the IMF by the region’s central banks.

Return of the Galaxy. Samsung won a court victory when an American judge said Apple (NASDAQ: AAPL) cannot block the shipment or sale of Samsung’s Galaxy products in the U.S. Galaxy tablets and smartphones are among the most competitive products to the iPad and iPhone. Apple said its concerns were that Samsung violated some of its patents. The use of the court system was a way for Apple to control the markets by blocking direct competition. It now faces one of its only formidable rivals in the broadband wireless product universe just as holiday sales begin to peak.

More trouble for GM. General Motors’ (NYSE: GM) problems with the Chevy Volt get worse by the day. Government safety inspectors found that three Volts had battery fires after crash tests. This has led to the question of whether the lithium-ion battery used in the car is safe. GM’s first action to address the concerns of Volt owners was to offer loaner cars. Now, the number one U.S. car company says it will buy some of the cars back. The buyback exposure is not very great. GM has only sold about 6,000 of the electric cars — a failure for the product that is GM’s alternative energy flagship. As long as the government is involved, GM has lost control over the Volt’s future.

China OK, says China. Beijing-based Dagong Global Credit Rating, a locally owned company, has kept its AAA rating on China, to no one’s surprise. The firm says China’s economy is headed for a soft landing. In a nation in which censorship and media control are part of the political fabric, the agency probably has no mind of its own.

Rising oil prices. Oil prices could spike soon, a realistic threat to the economic recovery in the U.S. and Europe. Sanctions on Iran due to its nuclear program could prompt shut downs some of its oil exports. It ships 2.2 million barrels a day and is the world’s third largest producer. One Iranian official said that if its production goes offline, oil prices would go to $250. There is no evidence for that exact figure. Other nations in OPEC, particularly Saudi Arabia, could increase exports. An increase, however, may not be enough to complete offset a shortfall from Iran. Oil at $100 is considered to be a modest block to a global recovery. If the price moves to $120, the cost of gas, oil and petrochemicals could rise to a critical level. Oil was not a threat to the recovery three months ago when crude fell to under $80. That could change quickly.

Douglas A. McIntyre