Greek Rail System’s Debt Adds to Economic Woes

ATHENS — In 2009, bankers for Goldman Sachs and Morgan Stanley pitched the Greek government on a plan to overhaul its money-losing railway system. Among the ideas was to lay off half of the system’s 7,000 workers and have the government take on roughly half of the company’s 8 billion euros in debt.

The suggestion did not fly. It was an election year in Greece, after all, and the country was already struggling to keep up the payments on its debt, which is higher in proportion to economic output than in any other nation in the European Union.

The plan was shelved, soon to be overshadowed by the country’s close brush with bankruptcy.

Losses at Hellenic Railways, however, continue to mount — at the rate of 3 million euros ($3.8 million) a day. Its total debt has increased to $13 billion, or about 5 percent of Greece’s gross domestic product.

Now, as a condition of Greece’s financial rescue, the International Monetary Fund is demanding that a solution be found. The fund and the European Union, which also chipped in to provide the bailout, are requiring that the debt of Hellenic Railways, as well as the off-balance-sheet obligations of other state-owned enterprises, be counted toward Greece’s official debt — which Greece has agreed to do.

Analysts estimate the total to be around $33.6 billion, a sum that would add another 11 percentage points to Greece’s current debt level of about 120 percent of gross domestic product. It would also surely raise questions for many investors about the government’s ability to repay ever-increasing amounts as the overall economy contracts.

Some have argued that Hellenic Railways should shut down the majority of its routes, especially in the mountainous Peloponnese region where trains manned by drivers being paid as much as $130,000 a year frequently run empty.

The government, perhaps optimistically, is advocating the sale of a 49 percent stake to the French, who said this year that they would take a look. But it remains unclear how the French rail network, already burdened with its own high levels of debt, would be able to assume Hellenic’s liabilities and losses.

The debate, a longstanding one in Greece, has taken on new urgency of late. For the better part of a decade, Greece has provided sovereign backing to Hellenic Railways, thus allowing it to borrow billions from accommodating foreigners even though the company’s finances are so skewed that it pays three times as much on interest expenses than it collects in revenue.

The precarious nature of euro zone finances has made it increasingly difficult for state rail companies to raise capital throughout Europe. Standard & Poor’s recently downgraded the debt of the French and Portuguese national rail operators, and earlier this month Moody’s placed the Spanish train operator on review for a possible downgrade.

Until now, Greece has been able to use its rail system as a means to support employment while not adding to its official debt number.

“This was an accounting trick, another good way for the government to hide its debt,” said John C. Mourmouris, a former chief executive of the railway who is now an economics professor here. “But a company with 100 million euros in revenue can no longer borrow 1 billion euros a year.”

In the latest annual figures available, Hellenic Railways reported a loss of more than $1 billion in 2008, on sales of about $253 million. Of course, shaky finances are not uncommon among rail operators in Europe. Many are poor cash generators. Their prices are kept low as a matter of social policy, forcing the companies to become heavy state-backed borrowers to finance upkeep and expansion.

Even so, the Greek railway is in a category by itself. According to an analysis by Mr. Mourmouris, for Hellenic Railways to just break even, it would need to increase passenger traffic by a factor of 10, an outcome that seems unlikely. Greece has a well-developed road network, a relatively short distance separates its main cities and the railway’s shabby reputation makes it an unpopular travel option for most Greeks.

In spite of about $3.2 billion of investment since 1997, outside of the main route between Athens and Thessaloniki, the network seems in many respects patchwork and at times chaotic.

Earlier this month, for example, a trip from Athens to Diakopto, a seaside town on the northern coast of the Peloponnese, took more than four hours. The journey required train passengers to complete a second leg by transferring to an overcrowded bus that was delayed for an hour. The result was a near riot as enraged passengers hurled abuse at overwhelmed train officials.

The same trip by car would take less than two hours.

“It is crazy,” said Nikolaos Kioutsoukis, the union chief for the railway. “It’s not surprising that people prefer to go by car.”

Even he accepts that train travel in Greece is not financially viable on many routes. He blames low prices, misguided investment and political meddling for the railway’s poor condition, and says the government should make new investments to modernize the network. He opposes privatization and says that if jobs and benefits are threatened, the union will strike.

Haris Tsiokas, the general secretary for the Greek Transport Ministry, contends that the government’s plan to close at least 35 loss-making routes and cut 2,500 jobs (1,000 via mandatory retirement, with the rest being moved to other government jobs) will make Hellenic Railways attractive to foreign investors. But he concedes that the pressure is building for the railway, which, for now at least, does not have access to debt markets.

“We are struggling to avert the closure” of the rail system, he said in response to questions sent by e-mail. “We want Greece’s future railway to be competitive with road transport services.”

But reaching such a goal may be impossible, especially when the average salary of a rail employee is over $78,000. Employees benefited from politically inspired pay increases over the last decade. Between 2000 and 2009, the cost of the company’s payroll soared by 50 percent even as overall personnel decreased by 30 percent.

In the eyes of Costis Hatzidakis, the former transportation minister, talk of streamlining, reform and the search for a foreign investor is mere cosmetics when compared with the weight of the rail system’s debts — the bulk of which will mature in 2014.

“When I was minister I said I was not going to privatize” Hellenic Railways, he said, “because I knew I couldn’t find an investor silly enough to invest in a company with so much debt.”

Computer and Mobile Sales Lift Apple Net 78%

SAN FRANCISCO — The iPhone 4 antenna may be causing static for some Apple investors, but the company is showing no signs of slowing down.

Apple said on Tuesday that its net income rose 78 percent last quarter, driven by strong sales of the iPhone, the iPad and the Macintosh line of computers.

The results show that Apple is continuing to outpace its competitors in its three major lines of business: computers, phones and tablets. And Apple would be selling even more iPhones and iPads if it could keep up with demand.

“More and more, people’s lives are dependent on desktop and mobile computing,” said Gene Munster, an analyst with Piper Jaffray. “People realize that and are willing to pay up for it, and Apple is capitalizing on that.”

Apple executives said they were pleased with the results, which topped Wall Street’s forecasts.

“IPad is off to a terrific start, more people are buying Macs than ever before, and we have amazing new products still to come this year,” Steven P. Jobs, Apple’s chief executive, said in a news release.

Apple sold nearly 3.3 million iPads in the quarter. Consumers gravitated to higher-priced models of the tablet, helping to create a new segment of Apple’s business that generated revenue of $2.1 billion.

With 8.4 million units sold, the iPhone remains Apple’s biggest and most profitable business, generating $5.3 billion in revenue in the quarter. Most of the sales were of the iPhone 3G and 3GS, since the iPhone 4 went on sale June 24, just three days before the quarter’s end.

And Apple sold 3.47 million Macintosh computers, the most ever in a quarter, dispelling fears that the iPad would hurt those sales.

“Apple was scared that the iPad would cannibalize sales of Macintosh computers,” Mr. Munster said. “That’s not happening.”

Apple said its net income rose to $3.25 billion, or $3.51 a share, a 78 percent jump from a year earlier. Revenue rose 61 percent, to $15.7 billion.

On average, Wall Street analysts had expected Apple to report net income of $3.12 a share on revenue of $14.75 billion.

Investors were watching for the effect of the iPad on Apple’s profit margins; the company had warned earlier that the iPad’s margins would be lower than those of products like the iPhone. But in a conference call with investors, Apple executives said that the drop was less than expected, in part because of brisk sales of highly profitable iPhones.

Over all, Apple’s gross margin was 39.1 in the most recent quarter, down from 40.9 percent in the period a year earlier. The company also gave a bullish forecast for the current quarter.

“Apple is now a multifaceted company, and it continues to defy the economy,” said Shaw Wu, an analyst with Kaufman Brothers.

Shares of Apple had fallen nearly 9 percent since the introduction of the iPhone 4, but they rebounded 2.57 percent on Tuesday to close at $251.89. Apple released its financial results after the close of regular trading, and its shares rose an additional 3.1 percent in after-hours trading.

Problems surrounding the iPhone 4’s antenna reception made headlines in recent weeks. Shortly after the release of the device, users began to complain of weak reception and dropped calls when they touched the lower left portion of the antenna, which is built into a steel band that encases the phone.

On Friday, Apple gave its most detailed and forceful defense of the iPhone 4’s ability to receive and hold calls. In a news conference at Apple’s headquarters in Cupertino, Calif., Mr. Jobs said the reception problems were common ones that affected most smartphones, an assertion that several competitors rejected.

Mr. Jobs also said the iPhone’s antenna problems had been blown out of proportion by the media. But to end the controversy, he said, Apple would give customers free bumper cases that insulate the antenna from human touch.

Apple executives dismissed concerns that worries about the antenna were affecting sales.

“We are selling every unit we can make currently,” said Tim Cook, Apple’s chief operating officer, during the conference call. Mr. Cook also said Apple was working hard to increase the supply of iPhones and iPads to catch up with consumer demand.

Apple did not give precise numbers for the cost of the free bumpers, but some analysts said they expected it to be about $178 million.



Goldman Earnings and Revenue Fall

Those master traders at Goldman Sachs didn’t see it coming, either.
The “flash crash” and the rest of the stock market madness in May and June, as well as the cost of settling an embarrassing civil fraud suit, hammered Goldman’s second-quarter profits. Earnings plunged 82 percent.

The results were Goldman’s worst quarterly performance since the depths of the financial crisis in late 2008, and the first time that it had missed analysts’ estimates in five years.

“It’s rare for them to miss, but it does happen,” said Guy Moszkowski, an analyst with Bank of America Merrill Lynch. “It was a very, very bad operating environment.”

But at $613 million, the investment bank’s quarterly profit was well above the $550 million that Goldman agreed to pay last week to settle fraud claims brought by the Securities and Exchange Commission.

The agency had accused Goldman of misleading institutional investors who bought financial products linked to subprime mortgages that ultimately defaulted. Goldman did not admit wrongdoing but agreed to provide better disclosure to investors in mortgage securities as part of the settlement, one of the largest ever for a Wall Street firm.

On a conference call with reporters Tuesday, the focus remained on the S.E.C’s suit and the after-effects of the settlement. Goldman’s chief financial officer, David A. Viniar, struck an apologetic tone when it came it to the case but insisted Goldman’s sterling image had not been tarnished.

“We acknowledge that we made a mistake, we regret that we made a mistake and we know it was not good for us,” he said. “I can’t tell you if there were calls that we didn’t get; that’s impossible to measure. We feel that our clients have been pretty supportive of us, so far as we can tell.”

Besides the weak trading results, the lackluster numbers also reflected weakness across a range of businesses, including its investment banking unit. “It was really driven by lack of client activity and lack of revenue,” said Mr. Viniar.

In a sign of just how unpredictable investors can be, Goldman’s stock jumped despite the disappointing results, as investors concluded the worst was behind the 141-year old firm. Shares of Goldman rose $3.23, to close at $148.91.

What’s more, Goldman’s employees are on track for what could still turn out to be a very good year. Goldman has set aside $9.3 billion for bonuses and other compensation so far this year — down 18 percent from the first half of 2009 — but enough to equal more than $500,000 per employee at the firm, which has a work force of 34,100.

Goldman’s traders have long aroused envy across Wall Street for their ability to prosper in markets good and bad, but they lost the Midas touch in the spring, especially when it came to trading stocks. As clients bet on rising volatility, Goldman took the other side of the trade, leaving it on the losing end when volatility did in fact surge.

“We didn’t hedge it fast enough,” Mr. Viniar said in a conference call with analysts after the earnings announcement. “Things spiked really dramatically, really fast.”

Mr. Viniar said he did not foresee any changes in Goldman’s top ranks as a result of the settlement. Nor did he foresee the firm giving up the bank status it hastily received after the collapse of Lehman Brothers. As a result of the financial regulatory reform legislation approved by Congress last week, banks will face new restrictions on trading as well as investing in private equity and hedge funds.

The new rules will still permit the kind of trades on which Goldman was caught by surprise, however, because they were done on behalf of clients, underscoring how difficult it will be for regulators to distinguish between proprietary trading and serving customers. Other financial giants, like JPMorgan Chase, Bank of America and Citigroup, also reported disappointing results from their trading operations when they announced second-quarter results last week. Morgan Stanley, Goldman’s longtime rival, is to report its results on Wednesday.

In addition to the $550 million S.E.C. penalty, Goldman also had a one-time charge of $600 million for a tax on industry bonuses that was imposed in Britain.

In the second quarter, net income totaled $613 million, or 78 cents a share, down from $3.43 billion or $4.93 a share, in the same period a year ago. Revenue fell 36 percent, to $8.84 billion from $13.76 billion.

Analysts had been expecting net income of $1.23 billion, or $2.08 a share, on revenue of $8.98 billion, according to Thomson Reuters.

“It’s a weak quarter, that happens,” said Roger Freeman, an analyst with Barclays. “But I wonder to some extent whether any of this quarter’s trading results could be attributed to distractions that management was facing, both around financial reform legislation and the S.E.C. investigation. I wonder if that took away from their focus on markets.”

Japan Training Program Is Said to Exploit Workers

HIROSHIMA, Japan — Six young Chinese women arrived in this historic city three summers ago, among the tens of thousands of apprentices brought to Japan each year on the promise of job training, good pay and a chance at a better life back home.

Instead, the women say, they were subjected to 16-hour workdays assembling cellphones at below the minimum wage, with little training of any sort, all under the auspices of a government-approved “foreign trainee” program that critics call industrial Japan’s dirty secret.

“My head hurt, my throat stung,” said Zhang Yuwei, 23, who operated a machine that printed cellphone keypads, battling fumes that she said made the air so noxious that managers would tell Japanese employees to avoid her work area.

Ms. Zhang says she was let go last month after her employer found that she and five compatriots had complained to a social worker about their work conditions. A Japanese lawyer is now helping the group sue their former employer, seeking back pay and damages totaling $207,000.

Critics say foreign trainees have become an exploited source of cheap labor in a country with one of the world’s most rapidly aging populations and lowest birthrates. All but closed to immigration, Japan faces an acute labor shortage, especially for jobs at the country’s hardscrabble farms or small family-run factories.

“The mistreatment of trainees appears to be widespread,” said Shoichi Ibusuki, a human rights lawyer based in Tokyo.

From across Asia, about 190,000 trainees — migrant workers in their late teens to early 30s — now toil in factories and farms in Japan. They have been brought to the country, in theory, to learn technical expertise under an international aid program started by the Japanese government in the 1990s.

For businesses, the government-sponsored trainee program has offered a loophole to hiring foreign workers. But with little legal protection, the indentured work force is exposed to substandard, sometimes even deadly, working conditions, critics say.

Government records show that at least 127 of the trainees have died since 2005 — or one of about every 2,600 trainees, which experts say is a high death rate for young people who must pass stringent physicals to enter the program. Many deaths involved strokes or heart failure that worker rights groups attribute to the strain of excessive labor.

The Justice Ministry found more than 400 cases of mistreatment of trainees at companies across Japan in 2009, including failing to pay legal wages and exposing trainees to dangerous work conditions. This month, labor inspectors in central Japan ruled that a 31-year-old Chinese trainee, Jiang Xiaodong, had died from heart failure induced by overwork.

Under pressure by human rights groups and a string of court cases, the government has begun to address some of the program’s worst abuses. The United Nations has urged Japan to scrap it altogether.

After one year of training, during which the migrant workers receive subsistence pay below the minimum wage, trainees are allowed to work for two more years in their area of expertise at legal wage levels. But interviews with labor experts and a dozen trainees indicate that the foreign workers seldom achieve those pay rates.

On paper, the promised pay still sounds alluring to the migrant workers. Many are from rural China, where per-capita disposable income can be as low as $750 a year. To secure a spot in the program, would-be trainees pay many times that amount in fees and deposits to local brokers, sometimes putting up their homes as collateral — which can be confiscated if trainees quit early or cause trouble.

The Japan International Training Cooperation Organization, or Jitco, which operates the program, said it was aware some companies had abused the system and that it was taking steps to crack down on the worst cases. The organization plans to ensure that “trainees receive legal protection, and that cases of fraud are eliminated,” Jitco said in a written response to questions.

Ms. Zhang says she paid $8,860 to a broker in her native Hebei Province for a spot in the program. She was assigned to a workshop run by Modex-Alpha, which assembles cellphones sold by Sharp and other electronics makers. Ms. Zhang said her employer demanded her passport and housed her in a cramped apartment with no heat, alongside five other trainees.

In her first year, Ms. Zhang worked eight-hour days and received $660 a month after various deductions, according to her court filing — about $3.77 an hour, or less than half the minimum wage level in Hiroshima. Moreover, all but $170 a month was forcibly withheld by the company as savings, and paid out only after Ms. Zhang pushed the company for the full amount, she said.

UK retail sales fall in September

UK retail sales fell again September, the second month in succession they have declined, official data has shown.

Sales last month were 0.2% lower than August, led by falls in clothing and car fuel sales, said the Office for National Statistics (ONS).

The ONS also revised down August's decline, saying sales that month slipped by 0.7% compared with its original calculation of 0.5%.

The data comes as a number of retailers have warned of weak trading conditions.

Three such warnings have come this week from Debenhams, Argos-owner Home Retail Group, and sportswear chain Sports Direct.

The ONS said that compared with the same month last year sales in September were 0.5% higher. However, this was below analysts' expectations of a 1% rise.

BAE faces 'modest' hit from UK defence cuts

BAE Systems has said that the impact on its business of the UK government's defence cuts will only be "modest".

While the defence group has been hit by some cuts - such as the retirement of the Harrier jet - a number of its manufacturing contracts will continue.

These include the two new aircraft carriers for the Royal Navy, of which BAE is a lead member of the consortium that is building them.

Outside of the UK, BAE said it was enjoying strong business in the US.

Credit Suisse profits hurt by weak market

Credit Suisse's profits fell 74% in the third quarter, thanks to choppy stock markets hitting its investment bank.

The Swiss bank earned 609m Swiss francs ($630m, £400m) during the three months, down from 2.4bn francs a year ago.

Investment banking revenues fell by 30%, mainly because of low client activity in the group's equity advisory and underwriting businesses.

Stock markets took a battering over the summer because of fears over eurozone debt and a US double-dip recession.

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As a result, fewer companies paid the bank to arrange share offerings, advise on mergers and acquisitions, or provide other such services during the quarter.

Toyota to recall over a million cars in US and Japan

Toyota has announced a recall of more than 1.5 million cars worldwide over brake and fuel pump defects.

The carmaker said the decision affected certain Avalon, Highlander and Lexus cars, including 740,000 cars in the US, 600,000 in Japan and 17,000 in the UK.

It wants to ensure that fluid does not leak from the brake master cylinder, causing the warning light to turn on.

The fault could cause the brake pedal to feel spongy, and braking performance to "gradually decline".

China's rapid economic growth slows in third quarter

China says its economy has maintained robust growth in the third quarter of 2010, but at a slightly lower rate.

Official figures show a drop from just over 10% growth to 9.6%.

This leaves China still far ahead of any major economy, but experts fear the slowdown will reduce the contribution China can make to a global recovery.

The Chinese government has recently taken measures to cool a credit boom in order to achieve more sustainable growth levels.

Spending Review: Osborne defends 'fairness' of cuts

Chancellor George Osborne has defended the "fairness" of his UK spending cuts after Labour claims they were reckless and would hit the poorest hardest.

He told the BBC that including Budget measures, the top 10% of earners would be hit hardest but everyone was making a contribution to cutting the deficit.

He said "the path to economic ruin" lay ahead if the deficit was not tackled.

Labour called the £81bn cuts - the biggest since the 1970s - a "reckless gamble" with the economy.