CORRECTED-UPDATE 2-California lawmakers pass budget, set aside rainy day funds

California lawmakers passed a $96.3 billion budget on Friday that would spend more on education, health care and other services while setting aside $1.1 billion for the state's first rainy day fund in years.

The spending plan makes changes to the way the state funds education, increasing the base amount spent on all students while funneling more money to districts with children who live in poverty or who do not speak fluent English.

 

It also restores funds that had been cut from dental programs for the poor, mental health services and assistance for veterans.

The $1.1 billion reserve was part of a deal negotiated with Governor Jerry Brown, who pressed fiscal restraint on the Democratic legislature. It marks a dramatic turnaround from four years ago, when the state was in the red by $16 billion.

"This was the first year in many that we weren't negotiating how deep to cut and what to cut," Darrell Steinberg, president pro tem of the state senate, said in an interview. "Instead, we were negotiating about restorations, and I think the biggest debate was how fast and how much."

After some arm-twisting from fellow Democrat Brown, including a threat to veto excessive spending measures, the lawmakers refrained from spending all of the money that the improved economy and a voter-approved tax increase provided.

Under the budget, due to take effect on July 1, California will spend $55.3 billion in state money on education, and repay $2.3 billion in debt. The state will also hand out about $1 million in so-called middle class scholarships for students in its public universities.

The budget, passed along party lines, must still be signed by Brown, and a spokesman said he might exercise his line-item veto on some provisions.

REPUBLICAN COMPLAINTS

The 2013-2014 budget wrangling marked the first time in years that one party - the Democrats - held a two-thirds majority in both houses, along with the governorship. California Republicans complained that their voices had not been given sufficient weight as the budget was crafted.

"To not even be involved in the process of the budget, to not even know what's in it  I have a problem with that," said Republican state Assemblyman Rocky Chavez, who represents the Southern California community of Carlsbad.

Republican state Senator Jim Nielsen, who represents a mostly rural district in the northern part of the state, said Democrats spent too much despite efforts at restraint.

"We have not gotten control of the out-of-control agencies and their spending," he said during debate on the measure.

Democratic assembly member Nancy Skinner, who represents Berkeley and other communities east of San Francisco, said Brown pushed hard to hold down spending - to the frustration of some in his own party.

_0">

"Many of us felt in the legislature a little more spending on a couple of areas that really had devastating cuts might have been justified," Skinner said.

In the end, Brown agreed to an additional $200 million in spending over an earlier proposal, Skinner said, which the legislature allocated to mental health, veteran services, the middle class scholarships, dental care and a few other areas.

_2">

The budget's biggest impact will be on public schools. Under a new formula backed by Brown and education reform advocates, the state will pay school districts extra money to educate children who live in poverty or do not speak English fluently.

_3">

In a compromise, Brown backed off on a version that would have provided some school districts less money than they would have received under the state's old system for allocating funds.

_4">

The new system would also transfer control over the money to local school districts - a change strongly supported by some school reform advocates. (Reporting by Sharon Bernstein; Editing by Cynthia Johnston, Toni Reinhold and Dan Grebler)

_5">

UPDATE 3-California lawmakers pass budget, set aside rainy day funds

California lawmakers passed a $96.3 billion budget on Friday that would spend more on education, health care and other services while setting aside $1.1 billion from the first surplus in years for a rainy day fund.

The spending plan makes changes to the way the state funds education, increasing the base amount spent on all students while funneling more money to districts with children who live in poverty or who do not speak fluent English.

It also restores funds that had been cut from dental programs for the poor in the most populous U.S. state, and for mental health services and assistance for veterans.

 

The $1.1 billion reserve was part of a deal negotiated with Governor Jerry Brown, who pressed fiscal restraint on the Democratic legislature. It marks a dramatic turnaround from four years ago, when the state was in the red by $16 billion.

"This was the first year in many that we weren't negotiating how deep to cut and what to cut," Darrell Steinberg, president pro tem of the state senate, said in an interview. "Instead, we were negotiating about restorations, and I think the biggest debate was how fast and how much."

After some arm-twisting from fellow Democrat Brown, including a threat to veto excessive spending measures, the lawmakers refrained from spending all of the money that the improved economy and a voter-approved tax increase provided.

Under the budget, due to take effect on July 1, California will spend $55.3 billion in state money on education, and repay $2.3 billion in debt. The state will also hand out about $1 million in so-called middle class scholarships for students in its public universities.

The budget increases general fund expenditures for the state by more than $10 billion over the 2011-2012 fiscal year, and about $5 billion over the amount initially allocated for 2012-2013.

The budget, passed along party lines, must still be signed by Brown, and a spokesman said he might exercise his line-item veto on some provisions.

REPUBLICAN COMPLAINTS

The 2013-2014 budget wrangling marked the first time in years that one party - the Democrats - held a two-thirds majority in both houses, along with the governorship. California Republicans complained that their voices had not been given sufficient weight as the budget was crafted.

"To not even be involved in the process of the budget, to not even know what's in it  I have a problem with that," said Republican state Assemblyman Rocky Chavez, who represents the Southern California community of Carlsbad.

Republican state Senator Jim Nielsen, who represents a mostly rural district in the northern part of the state, said Democrats spent too much despite efforts at restraint.

"We have not gotten control of the out-of-control agencies and their spending," he said during debate on the measure.

_0">

California political scientist Raphael Sonenshein said the Democrats - aware that their hold on power could be swept away if they overreach - were deliberately moderating their spending.

"There is a really strong feeling of not wanting to blow it," said Sonenshein, who heads the Edmund G. "Pat" Brown Institute for Public Affairs at Cal State Los Angeles.

_2">

Democratic assembly member Nancy Skinner, who represents Berkeley and other communities to the eastern part of the San Francisco Bay Area, said Brown pushed hard to hold down spending - to the frustration of some in his own party.

_3">

"Many of us felt in the legislature a little more spending on a couple of areas that really had devastating cuts might have been justified," Skinner said.

_4">

In the end, Brown agreed to an additional $200 million in spending over an earlier proposal, Skinner said, which the legislature allocated to mental health, veteran services, the middle class scholarships, dental care and a few other areas.

_5">

The budget's biggest impact will be on public schools. Under a new formula backed by Brown and education reform advocates, the state will pay school districts extra money to educate children who live in poverty or do not speak English fluently.

_6">

In a compromise, Brown backed off on a version that would have provided some school districts less money than they would have received under the state's old system for allocating funds.

_7">

The new system would also transfer control over the money to local school districts - a change strongly supported by some school reform advocates.

_8">

UPDATE 3-Colombia to issue $3 billion overseas bonds next year

Colombia revised its 2013 fiscal accounts and financing plans for next year, lowering the amount of domestic bond sales this year and stepping up both local and overseas debt next year, Finance Minister Mauricio Cardenas said on Friday.

 

Colombia plans to raise external debt in 2014 worth $5 billion, with $3 billion of that issued in overseas bonds and the remainder from multilateral lenders, Cardenas said during the annual revision of accounts.

That is more than the government aims for overseas debt this year. Cardenas maintained the level of international debt for this year at $2.6 billion, with $1.6 billion in global bond sales. Another $1 billion will come from multilateral lenders this year, he said.

In the local market, Colombia will issue a total of 30.5 trillion pesos ($16.1 billion) of Treasury bonds, known as TES, next year with 22.5 trillion sold at auction.

Cardenas lowered the total sale of TES bonds this year to 29 trillion pesos from an earlier goal of 30 trillion pesos. Of that, 21.5 trillion pesos will be sold at auction, down from an earlier estimate of 23 trillion.

He said the reduction in TES sales this year is possible because of the "flexible resources" the government has and lower amortization and interest payments, as well as a better-than-expected balance sheet at the central bank.

"This financing plan is a pathway to a reduction in deficit levels and public indebtedness that ratifies the Colombian government's commitment to responsible management of its public finances," Cardenas said of the changes to this year's financing plan. He did not provide details on the increase in debt in 2014.

The government expects the economy to grow 4.7 percent next year, up from the projected 4.5 percent in 2013, Cardenas said. Inflation will likely end this year at 2.5 percent and 3 percent in 2014.

IMPROVED 2014 GROWTH

Cardenas on Thursday lowered the government's estimate for economic growth from 4.8 percent, as weak overseas demand and sluggish manufacturing dent prospects.

Cardenas said the consolidated budget deficit - which include states, municipalities and state-run companies - for this year and next would reach 1 percent of gross domestic product. He kept the estimate for the central government's budget deficit at 2.4 percent of GDP for this year, and said it would be 2.3 percent in 2014.

The numbers were calculated using an estimate of oil at $99 per barrel for this 2013 and $100 per barrel in 2014. Cardenas gave an average peso currency level of 1,850 per dollar for this year and 1,874 for next.

_0">

The peso closed at 1,881 per dollar on Friday.

Cardenas maintained plans to raise 3 trillion pesos from privatization of state companies this year and another 1 trillion next year.

The government expects to collect 102.3 trillion pesos in taxes this year and another 113.8 trillion pesos in 2014, Cardenas said.

UPDATE 2-BTG Pactual snaps up Petrobras Africa stake for $1.53 bln

Brazil's Banco BTG Pactual SA agreed to buy 50 percent of the African operations of Petroleo Brasileiro SA, the state-run oil giant said on Friday, expanding the high-flying investment bank's role as a backer of cash-squeezed Brazilian companies.

 

BTG Pactual agreed to pay $1.53 billion for 50 percent of Petrobras' African unit, Petrobras Oil & Gas BV, which has offices in Angola, Benin, Gabon and Namibia and operations in Nigeria and Tanzania, the statement said.

Petrobras is trying to sell oil fields, exploration rights, refineries and other assets in the United States, Japan, Argentina, Peru and other countries to help finance a $237 billion, five-year investment plan, the world's largest corporate spending program.

It tried to sell the Nigerian assets alone for as much as $5 billion, Reuters reported on March 13.

"The operations represent an important step for Petrobras in its asset-sale program, allowing it to increase its activities in Africa and the sharing of investments needed to expand and develop its resources," a statement from Petrobras said.

BTG Pactual, founded and led by billionaire Andre Esteves, has taken advantage of sluggish world demand for commodities, soaring project development costs and rising corporate debt to buy assets or sell investment-banking services to cash-strapped and start-up resource companies.

In March BTG Pactual formed a partnership with Brazilian billionaire Eike Batista's troubled EBX Group, offering loans and helping its oil, mining, shipbuilding, port and electricity companies restructure.

The purchase of the Petrobras assets by Esteves' bank widens its investments in Africa, where it is seeking out mining and agricultural opportunities with B&A Mineração, founded by former Vale SA Chief Executive Roger Agnelli.

B&A is counting on a recent drop in world metals and commodities prices to snap up farming, fertilizer, iron ore and other investment ventures in Brazil and Africa at discount prices.

FINANCING HURDLES

Petrobras finds its revenue squeezed by falling output, delays at new fields and government-ordered fuel subsidies. These problems have made it hard to finance the five-year investment plan aimed at developing giant new offshore resources near Rio de Janeiro.

Instead, Petrobras has been forced to increase debt above its self-imposed limits and try to sell assets.

_0">

While Petrobras had hoped to sell $14.8 billion of Brazilian and international assets over five years, a lack of interest and low offers forced it to cut its estimate in March by nearly 40 percent to $9 billion.

Pactual's purchase of 50 percent of the Nigerian assets plus a half-stake in offices and operations in five other African countries weighs in at less than a third of the $5 billion Petrobras goal for the Nigerian assets alone

In December Reuters reported that Petrobras was having trouble selling an estimated $4 billion of assets in U.S.-waters in the Gulf of Mexico.

Rio de Janeiro-based Petrobras on May 24 rejected offers to buy 51 percent of its Argentine unit Petrobras Argentina SA , to Argentina's Oil Combustibles after trying to sell them since November.

_4">

It is also trying to leave Peru, where it has several natural gas blocks, Reuters reported June 7.

_5">

Petrobras said in a second statement on Friday that it is restructuring its petrochemical holdings by incorporating five petrochemical subsidiaries into the parent company.

_6">

The incorporation will not involve any sale of new stock in the companies, Petrobras said.

_7">

In a third statement, Petrobras said it was selling its 49-percent stake in Brasil PCH SA, a company that operates 13 small hydroelectric dams with 291 megawatts of capacity, to Cia Energética de Minas Gerais for 650 million reais ($303 million).

_8">

Czech President says charges in scandal "very serious"

Czech President Milos Zeman said on Saturday that abuse of power and corruption charges against a close aide of Prime Minister Petr Necas and other officials were "very serious" and seemed well founded.

_0">

When asked whether he thought the centre-right cabinet should stay in office, he said: "I consider the charges that have been brought to be very serious."

 

"After hearing from the police president and the supreme state attorney, I am coming to the conclusion that they are based on sufficient evidence," he added in his first remarks on the political turmoil.

"This is an indirect but clear answer to your question."

RPT-FEATURE-World Bank, U.N. join hands in conflict zones but face hurdles

When the heads of the World Bank and the United Nations flew into the violence-wracked African city of Goma on a cloudy day last month, it was the first time the giants of international development had joined forces in the struggle to help the world's most fragile regions.

World Bank President Jim Yong Kim and U.N. Secretary-General Ban Ki-Moon traveled to three countries in the Great Lakes region in East Africa to cement a new partnership, tying $1 billion in bank money to the U.N. peacekeeping efforts in the region.

 

They announced the funding in Kinshasa, the capital of the Democratic Republic of Congo (DRC), even as mortar shells were falling in the country's eastern edge in Goma. But the men, both born in South Korea, pledged to continue their trip.

"We're going there because our belief is that peace, security and economic development are intertwined," Kim said in Kinshasa. "We're going with a very specific purpose in mind: there must be a peace dividend."

The organizations admit the effort to work together faces hurdles. Both have vast, unwieldy bureaucracies that have historically competed with each other, and the bank had been wary of loaning to fragile states with shaky governments and murky institutions.

Further, development analysts warn that no one has yet figured out a surefire way to bring lasting development to countries caught in cycles of violence.

But with half the world's poorest people set to live in conflict-torn regions by 2018, the institutions can ill afford to do nothing, the World Bank and analysts say.

COMPETING FOR CREDIT

The organizations have already cooperated in some countries including Liberia and Bosnia. They even signed a framework agreement in 2008, vowing to work together in nations experiencing crises or just emerging from them.

But other efforts have fizzled, or been limited to one-off attempts in specific countries or situations, analysts say.

"There wasn't any kind of systematic, organizational way for the two institutions to work together," said Steven Radelet, a professor at Georgetown University. "Sometimes it has worked well, and sometimes there have been big gaps."

The United Nations and World Bank often have similar goals. But their approaches diverge and they use different vocabularies, with the bank focused on economics and the United Nations steeped in notions of security and human development.

Even on the trip to the Great Lakes, logistics officers grew frustrated trying to familiarize themselves with each other's protocols.

Competition over who gets credit for programs also has stymied efforts at cooperation.

Aid agencies tend to jump in to help countries, duplicating efforts and complicating matters for governments that have limited capacity to deal with so many organizations, said Laurence Chandy, a fellow at the Brookings Institution think tank.

_0">

"There's a subtle but massive distinction ... between coordinating and cooperating," he said. "The truth is, we really struggle even to coordinate.

"Cooperation is a whole new paradigm."

_2">

ELEPHANTS COOPERATE

_3">

The joint mission to Africa, which included visits to the DRC, Rwanda and Uganda, was meant to signal from the top that this time would be different, Kim said.

_4">

"There's this African saying, 'When the elephant fights, the grass suffers,'" he said in an interview in Entebbe, Uganda. "I've been the grass for most of my life, watching these powerful organizations fight each other on the ground."

_5">

Kim has spent most of his career in public health, unlike the diplomats and bankers who preceded him as head of the bank.

_6">

His work at the World Health Organization, a U.N. agency, gave him an insider's view of the United Nations' strengths and foibles, said Raymond Offenheiser, president of Oxfam America, a development group.

_7">

The idea behind the Great Lakes campaign is that development cannot exist without security, and security cannot last without giving people incentives to keep the peace, which development projects can offer.

_8">

On his trip to the region, Kim announced $1 billion in new funds for infrastructure projects, cross-border trade, and health and education services. It will be contingent on all countries in the region abiding by a U.N.-brokered peace deal from late February.

_9">

Researchers like Chris Blattman at Columbia University say there is evidence that large infrastructure projects like roads and power plants - a strength of the bank - can help stabilize a country and boost the economy.

_10">

But combating poverty in fragile states has been notoriously difficult. Those countries lag behind the rest of the world in standard measures of health, education and infant mortality, and are vulnerable to relapse when conflict returns.

_11">

Dealing with security is also a new thing for the World Bank, which in the past largely avoided fragile states.

_12">

"I'm not doing this just because I want to be the Kumbaya guy," Kim said, in reference to working with the United Nations. "I'm doing this because if we are to have any hope of ending poverty and boosting shared prosperity, there's just no question we have to work with everybody."

_13">

"To me, not to work with the U.N. means that you're admitting up front that you're going to have low aspirations."

_14">

As he approaches his one-year anniversary at the helm of the bank, Kim has made collaboration with development organizations, including the United Nations, a top priority. Kim and Ban have talked about doing another joint trip, this time to Africa's Sahel.

_15">

Several factors have driven the bank's shift in focus to countries in turmoil.

_0">

First, of the 82 countries qualifying for loans and grants from the bank's fund for the poorest nations, 31 are classified as fragile states. The bank now proposes that about 20 percent of such funds go to those states, up from 8 percent in the late 1990s.

_1">

The nature of fragility has also changed. The number of conflicts around the world is falling, but they now tend to last longer, blurring the distinction between humanitarian aid that rushes in when a crisis erupts, and long-term development.

_2">

Finally, the realities of population growth mean that half of the world's poorest people will live in conflict-torn regions by 2018, and more than two-thirds by 2030, according to a Brookings Institution analysis.

_3">

That suggests the World Bank cannot achieve its goal of eliminating extreme poverty by 2030 without focusing on conflict areas.

_4">

The DRC, where violence has repeatedly displaced people and hampered programs, could prove to be a particularly tough test case. More than 70 percent of its 67 million people live below the poverty line, despite billions of dollars in development aid over the past decade.

_5">

"It's easy to write off the chances in these sorts of situations. But it's really about what the alternative is," Chandy said. "If the bank isn't going to be there, who is?"

_6">

Second Greek coalition partner rebuffs PM offer on state broadcaster

Both junior partners in Greece's fragile coalition government have turned down a compromise proposal by the prime minister to avert a government crisis over the shutdown of public broadcaster ERT.

_0">

Prime Minister Antonis Samaras offered on Friday to rehire a smaller number of staff to resume news broadcasts, in an attempt to defuse an outcry over Monday's shock closure of ERT - part of savings under the terms of Greece's international bailout.

 

If no compromise is reached, the government might fall and new elections would be called, meaning almost certain derailment of the country's bailout programme.

"Our position remains the same. Any restructuring of ERT has to take place with the broadcaster open, as it was before," Andreas Papadopoulos, spokesman of the Democratic Left party, told Reuters on Saturday.

The proposal was also dismissed as inadequate late on Friday by the Socialist PASOK party, which is demanding the immediate reopening of ERT's television and radio stations.

The three coalition partners are expected to meet on Monday evening to try to reach an agreement over ERT.

Papadopoulos said Democratic Left leader Fotis Kouvelis would propose the immediate reopening of ERT and the creation of a committee to plan a restructuring within three months.

The government has always said the shutdown was temporary and that ERT would be relaunched as soon as possible in a downsized and more efficient form.

Egypt in late stages of verifying reform plan with IMF -c.bank

Egypt's government is in the late stages of verifying its economic reform programme with the International Monetary Fund before obtaining a $4.8 billion IMF loan, its central bank governor said on Saturday.

The loan, needed to help stabilise Egypt's balance of payments and state finances, has been under discussion for two years but agreement has repeatedly been postponed by political unrest in the country and the government's reluctance to commit to austerity measures.

 

"The IMF is verifying numbers with the government regarding the programme and they are in late stages of verifying all the numbers," central bank governor Hisham Ramez told reporters after a meeting of regional central bank chiefs in Abu Dhabi on Saturday.

There have been no changes to the plan or the amount of aid the country is seeking, he added.

"The programme is as it was planned by the Egyptian government. It is $4.8 billion that they have been talking to them about."

He said he could not offer any estimate for when the talks would finish, adding that as far as he knew, there were no talks underway with other countries for Egypt to obtain fresh financial aid in the form of deposits in its central bank.

Last month, the IMF's Deputy Managing Director Nemat Shafik told Reuters that the Fund was ready to sign the loan agreement with Egypt before or after the next parliamentary elections, but it was up to the government to move forward.

The IMF expects Egypt's budget deficit to widen to 11.3 percent of gross domestic product in the fiscal year which ends in June, the largest gap since 2002, from 10.7 percent in the previous year, it said in a regional outlook published in May.

ECONOMY

Egypt's central bank foreign currency reserves stand at $16 billion, Ramez said, referring to the latest published number. The reserves rose for a second consecutive month in May, boosted by deposits from Qatar.

"I'll be happy only if the reserves grow by the economy and not deposits," Ramez said when asked if he was comfortable with the level of reserves now.

Qatar deposited $3 billion at the central bank on May 9, but the bank sold about $800 million two weeks later in a special foreign exchange auction to help importers pay for essential imports.

"Our direct intervention with exceptional auctions in April and May had a big effect on inflation," Ramez said.

Asked whether it eased pressure on the central bank to tighten monetary policy, he said: "You can see from the numbers that it (inflation) is better than expected." He declined to give any inflation forecasts.

Egyptian inflation edged up to 8.2 percent in the year to May, boosted by food prices and a weaker currency.

_0">

Asked about Morgan Stanley Capital International's warning this week that Egypt could eventually be excluded from the MSCI Emerging Market Index used by many international fund managers, because of investors' difficulties in repatriating money, Ramez said: "They were talking about the availability of foreign currency.

_1">

"From our side, we opened the Repatriation Fund in March for any funds coming into stocks or the fixed income side. So anything that comes can go out at any point, there's no problem."

_2">

In March, the central bank opened a scheme giving foreign investors in the stock and government debt markets access to dollars despite severe shortages of foreign currency.

_3">

Egypt's bourse tumbled to an 11-month low on Wednesday after MSCI's warning.

_4">

Czech ruling partners say govt situation getting serious

A court decision to keep a close aide to Czech Prime Minister Petr Necas in custody due to corruption charges is seriously complicating the situation in the ruling coalition, his government partners said on Saturday.

_0">

"This piece of information of course significantly changes the situation. It is the first decision, albeit only partial," Petr Gazdik, head of party TOP09's parliamentary club, told Reuters, adding his party leadership would meet on Saturday evening to consider what to do.

 

Karolina Peake, the head of the second coalition partner LIDEM, a small liberal party, also said the situation "is more serious from hour to hour".

RPT-FEATURE-World Bank, U.N. join hands in conflict zones but face hurdles

When the heads of the World Bank and the United Nations flew into the violence-wracked African city of Goma on a cloudy day last month, it was the first time the giants of international development had joined forces in the struggle to help the world's most fragile regions.

World Bank President Jim Yong Kim and U.N. Secretary-General Ban Ki-Moon traveled to three countries in the Great Lakes region in East Africa to cement a new partnership, tying $1 billion in bank money to the U.N. peacekeeping efforts in the region.

 

They announced the funding in Kinshasa, the capital of the Democratic Republic of Congo (DRC), even as mortar shells were falling in the country's eastern edge in Goma. But the men, both born in South Korea, pledged to continue their trip.

"We're going there because our belief is that peace, security and economic development are intertwined," Kim said in Kinshasa. "We're going with a very specific purpose in mind: there must be a peace dividend."

The organizations admit the effort to work together faces hurdles. Both have vast, unwieldy bureaucracies that have historically competed with each other, and the bank had been wary of loaning to fragile states with shaky governments and murky institutions.

Further, development analysts warn that no one has yet figured out a surefire way to bring lasting development to countries caught in cycles of violence.

But with half the world's poorest people set to live in conflict-torn regions by 2018, the institutions can ill afford to do nothing, the World Bank and analysts say.

COMPETING FOR CREDIT

The organizations have already cooperated in some countries including Liberia and Bosnia. They even signed a framework agreement in 2008, vowing to work together in nations experiencing crises or just emerging from them.

But other efforts have fizzled, or been limited to one-off attempts in specific countries or situations, analysts say.

"There wasn't any kind of systematic, organizational way for the two institutions to work together," said Steven Radelet, a professor at Georgetown University. "Sometimes it has worked well, and sometimes there have been big gaps."

The United Nations and World Bank often have similar goals. But their approaches diverge and they use different vocabularies, with the bank focused on economics and the United Nations steeped in notions of security and human development.

Even on the trip to the Great Lakes, logistics officers grew frustrated trying to familiarize themselves with each other's protocols.

Competition over who gets credit for programs also has stymied efforts at cooperation.

Aid agencies tend to jump in to help countries, duplicating efforts and complicating matters for governments that have limited capacity to deal with so many organizations, said Laurence Chandy, a fellow at the Brookings Institution think tank.

_0">

"There's a subtle but massive distinction ... between coordinating and cooperating," he said. "The truth is, we really struggle even to coordinate.

"Cooperation is a whole new paradigm."

_2">

ELEPHANTS COOPERATE

_3">

The joint mission to Africa, which included visits to the DRC, Rwanda and Uganda, was meant to signal from the top that this time would be different, Kim said.

_4">

"There's this African saying, 'When the elephant fights, the grass suffers,'" he said in an interview in Entebbe, Uganda. "I've been the grass for most of my life, watching these powerful organizations fight each other on the ground."

_5">

Kim has spent most of his career in public health, unlike the diplomats and bankers who preceded him as head of the bank.

_6">

His work at the World Health Organization, a U.N. agency, gave him an insider's view of the United Nations' strengths and foibles, said Raymond Offenheiser, president of Oxfam America, a development group.

_7">

The idea behind the Great Lakes campaign is that development cannot exist without security, and security cannot last without giving people incentives to keep the peace, which development projects can offer.

_8">

On his trip to the region, Kim announced $1 billion in new funds for infrastructure projects, cross-border trade, and health and education services. It will be contingent on all countries in the region abiding by a U.N.-brokered peace deal from late February.

_9">

Researchers like Chris Blattman at Columbia University say there is evidence that large infrastructure projects like roads and power plants - a strength of the bank - can help stabilize a country and boost the economy.

_10">

But combating poverty in fragile states has been notoriously difficult. Those countries lag behind the rest of the world in standard measures of health, education and infant mortality, and are vulnerable to relapse when conflict returns.

_11">

Dealing with security is also a new thing for the World Bank, which in the past largely avoided fragile states.

_12">

"I'm not doing this just because I want to be the Kumbaya guy," Kim said, in reference to working with the United Nations. "I'm doing this because if we are to have any hope of ending poverty and boosting shared prosperity, there's just no question we have to work with everybody."

_13">

"To me, not to work with the U.N. means that you're admitting up front that you're going to have low aspirations."

_14">

As he approaches his one-year anniversary at the helm of the bank, Kim has made collaboration with development organizations, including the United Nations, a top priority. Kim and Ban have talked about doing another joint trip, this time to Africa's Sahel.

_15">

Several factors have driven the bank's shift in focus to countries in turmoil.

_0">

First, of the 82 countries qualifying for loans and grants from the bank's fund for the poorest nations, 31 are classified as fragile states. The bank now proposes that about 20 percent of such funds go to those states, up from 8 percent in the late 1990s.

_1">

The nature of fragility has also changed. The number of conflicts around the world is falling, but they now tend to last longer, blurring the distinction between humanitarian aid that rushes in when a crisis erupts, and long-term development.

_2">

Finally, the realities of population growth mean that half of the world's poorest people will live in conflict-torn regions by 2018, and more than two-thirds by 2030, according to a Brookings Institution analysis.

_3">

That suggests the World Bank cannot achieve its goal of eliminating extreme poverty by 2030 without focusing on conflict areas.

_4">

The DRC, where violence has repeatedly displaced people and hampered programs, could prove to be a particularly tough test case. More than 70 percent of its 67 million people live below the poverty line, despite billions of dollars in development aid over the past decade.

_5">

"It's easy to write off the chances in these sorts of situations. But it's really about what the alternative is," Chandy said. "If the bank isn't going to be there, who is?"

_6">

UPDATE 3-Czech PM in survival struggle after court keeps aide in custody

The coalition partners of Czech Prime Minister Petr Necas said they were considering whether they could stay in government with him on Saturday after a court ordered the detention of a close aide to Necas over corruption charges.

 

A court in the eastern Czech city of Ostrava ruled that Jana Nagyova, who has been in charge of Necas's office for years, be remanded in custody. Prosecutors allege she bribed politicians and illegally ordered intelligence agents to conduct surveillance operations.

After the court ruling, an official with TOP09, the bigger of two parties that are in coalition with Necas, said party leaders would meet on Saturday evening to decide what to do about staying in the coalition.

Karolina Peake, leader of the second junior partner in the coalition, the small liberal party called LIDEM, told Reuters: "The situation is becoming more serious from hour to hour."

Necas's Civic Democrat party alone does not have enough seats in parliament to hold on to power, so if either of the junior partners turn against the coalition, he would fall. That would lead to either a new election or president Milos Zeman could try to pick a new prime minister to form a new cabinet.

The government has been in turmoil since prosecutors charged Nagyova and seven other people as part of the biggest sweep against suspected political corruption in two decades.

Starting around midnight on Wednesday, around 400 officers, some clad in balaclavas to conceal their identity, raided 31 premises, including bank safe deposit boxes, and seized at least $6 million in cash and tens of kilograms of gold. Prosecutors said more charges may follow, but declined to give details.

The court in Ostrava did not rule on the substance of the charges, but by keeping Nagyova in jail it showed it believed prosecutors at least had a credible case. That made it harder for the governing coalition to dismiss the allegations as a witch-hunt by rogue prosecutors.

Nagyova's role is crucial to the prime minister's political survival because, even though there are no allegations he was involved, the two are known to have worked very closely together for years.

In a speech to lawmakers on Friday, the prime minister dismissed the allegations and said he would stay on. He said he had done nothing dishonest.

Speaking outside the court in Ostrava, Eduard Bruna, a lawyer for Nagyova, said she rejected some of the accusations against her and was arguing that she had acted in good faith on others.

Earlier on Saturday, Czech President Milos Zeman was asked by reporters whether he thought the centre-right cabinet led by Necas should stay in office.

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"I consider the charges that have been brought to be very serious," sad Necas, who is a political opponent of the prime minister.

"After hearing from the chief of police and the supreme state attorney, I am coming to the conclusion that they are based on sufficient evidence," he said in his first remarks since a series of police raids on government offices this week.

"This is an indirect but clear answer to your question," he said at a ceremony north of the capital to commemorate Czech victims of the Nazi occupation.

Czech PM says aide must quit after graft charges

Czech Prime Minister Petr Necas said a close aide must leave her job as the head of his office after she was charged with corruption and abuse of power and taken into custody on Saturday.

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Necas, under growing pressure to resign over the scandal, said in a statement he expected to meet his ruling coalition partners to discuss the political crisis after he returns from a scheduled foreign trip on Sunday.

Turkish police enter Istanbul's Gezi Park after PM's warning

Turkish riot police fired teargas and water cannon to try to clear protesters from a central Istanbul park on Saturday evening, hours after Prime Minister Tayyip Erdogan warned that police were ready to intervene.

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"We have our Istanbul rally tomorrow. I say it clearly: Taksim Square must be evacuated, otherwise this country's security forces know how to evacuate it," Erdogan had told tens of thousands of supporters at a rally in the capital Ankara.

 

UPDATE 5-Czech PM in survival struggle after court keeps aide in custody

Coalition partners of Czech Prime Minister Petr Necas said they were considering whether they could stay in government with him on Saturday after a court ordered the detention of his close aide on corruption charges.

 

A court in the eastern city of Ostrava ruled that Jana Nagyova, who had been in charge of Necas's office for years, be remanded in custody. Prosecutors allege she bribed politicians and illegally ordered military intelligence to spy on people in whom she had a personal interest.

The lawyer for another of the eight people charged in the case, head of military intelligence Milan Kovanda, said Kovanda admitted issuing orders for people to be put under surveillance and that one of the subjects of that surveillance had been the prime minister's wife.

Necas said earlier this week he and his wife, his college sweetheart, were jointly filing for divorce.

The corruption operation threatening the prime minister's job was the biggest in 20 years in the Czech Republic, a country that threw off Communism with a "Velvet Revolution" but where successive governments have been mired in sleaze.

After the court ruling, Karolina Peake, leader of one of two junior partners in the coalition, the small liberal party called LIDEM, told Reuters: "The situation is becoming more serious from hour to hour."

The other junior partner, TOP09, gave the prime minister a qualified reprieve. It said it wanted a meeting of the coalition for an honest discussion about the scandal. But it said its priority was to carry out the coalition's programme between now and scheduled elections in 2014.

"Everything will be decided after the coalition negotiations," said Foreign Minister Karel Schwarzenberg, TOP09 chairman.

Necas issued a statement saying Nagyova could no longer carry on in her job. But he said he had no knowledge of the offences she is alleged to have committed, and that some of the charges were "nonsense".

He said that when he returned on Sunday from a scheduled trip to Poland he would meet coalition partners. It could be a showdown that decides the fate of his government.

Necas's Civic Democrat party alone does not have a majority in parliament, so if either of the junior partners turn against him, he is likely to fall. A new election could follow, or President Milos Zeman could try to pick a new prime minister to form a cabinet.

PM'S WIFE

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Prosecutors have not officially named the people targeted in the alleged illegal surveillance, but media reports and lawyers for two of the defendants say prosecutors allege one of them was Radka Necasova, the prime minister's wife.

Tomas Matzner, lawyer for military intelligence boss Kovanda, told Reuters on Saturday his client, charged with abuse of power, admitted putting Radka Necasova under surveillance.

"He confirmed he did issue the order for surveillance," said Matzner. "He was not aware that he would damage the interest of the country in any way."

Starting around midnight on Wednesday, around 400 officers, some clad in balaclavas to conceal their identity, raided 31 premises, including bank safe deposit boxes, and seized at least $6 million in cash and tens of kilograms of gold. They did not say from whom they seized the assets.

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The court in Ostrava did not rule on the substance of the charges, but by keeping Nagyova in jail it showed it believed prosecutors at least had a credible case. That made it harder for the governing coalition to dismiss the allegations as a witch-hunt by rogue prosecutors.

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Nagyova's role is crucial to the prime minister's political survival because, although there are no allegations he was involved, the two have worked very closely together for years.

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Outside the court in Ostrava, Eduard Bruna, a lawyer for Nagyova, said she denied taking some of the actions alleged, while in other cases, she argued that she acted in good faith.

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Czechs are confronted daily with evidence of corruption, including reports about kickbacks paid to government officials and disdain for the law among the wealthy.

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The investigation into Nagyova and others appeared to show a new willingness by police and prosecutors to strike at well-connected people.

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That may be, in part, due to Necas himself. Under his watch, the government has tried to appoint prosecutors with a free hand to go after sleaze.

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UPDATE 2-Greek coalition partners rebuff PM offer on broadcaster

Both junior partners in Greece's ruling coalition have turned down a compromise by the prime minister over the shutdown of the public broadcaster ERT, raising the prospect that the rift among the parties might be impossible to mend.

 

Prime Minister Antonis Samaras offered on Friday to rehire a smaller number of staff to resume news broadcasts, in response to an outcry over Tuesday's abrupt closure of ERT to save money under the terms of Greece's international bailout.

But his concession did not satisfy the left-wing parties in the fragile coalition, the Socialist PASOK and the Democratic Left, who are demanding the immediate reopening of ERT's television and radio stations.

The failure to reach a compromise so far has led to speculation about an early election, which would almost certainly derail Greece's bailout programme - although all the party leaders have said they do not want a new vote.

"Our position remains the same. Any restructuring of ERT has to take place with the broadcaster open, as it was before," said Andreas Papadopoulos, spokesman of the Democratic Left party.

The three coalition partners are due to meet on Monday evening in an effort to find a way out of the impasse.

Papadopoulos said Democratic Left leader Fotis Kouvelis would propose the immediate reopening of ERT and the creation of a committee to come up with a restructuring plan within three months.

PASOK leader Evangelos Venizelos told the Ethnos newspaper: "PASOK doesn't want elections but we are not afraid of them."

Foreign Minister Dimitris Avramopoulos, who is also deputy chief of Samaras's New Democracy party, called for compromise to avert potential damage to the steps Greece has taken to exit its debt crisis.

While Greeks have little affection for the 75-year-old ERT, viewing it as a wasteful source of patronage jobs for political parties, the suddenness of the decision was a shock. Unions and the opposition have branded it a "coup-like move".

TV CLOSURE OR ELECTION?

Around 64 percent of Greeks are against the ERT shutdown, a Kapa Research poll published in Sunday's To Vima newspaper found. Another poll by Metron Analysis for the Ependytis newspaper found that 68 percent oppose the closure.

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But a majority of Greeks also want political stability, according to the Kapa poll, carried out on June 12-13, after ERT was taken off air. About 57 percent of respondents said there should not be another early election.

Both polls gave Samaras's New Democracy party a 0.3 percentage point lead over the opposition far-left Syriza party. No party enjoys enough support to rule on its own.

"Early elections would wipe out the sacrifices of Greek society and the struggles of the market in order to satisfy political egos," Vassilis Korkidis, head of the ESEE retail federation, wrote on Twitter.

Screens went black on Tuesday night just hours after the government's spokesman, himself a former state TV journalist, announced the move.

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Private-sector journalists also went on strike, causing a nationwide news blackout, although some returned to work on Saturday after a court ruled the strike illegal.

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The government has always said the shutdown is temporary and that ERT will soon be relaunched in a smaller and more efficient form.

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ERT's three domestic television channels, along with regional and national radio stations, have a combined audience share of about 10 percent and cost Greece as much as 300 million euros ($400 million) a year, the government has said.

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Samaras, who has branded defenders of ERT as hypocrites, insists that the reform is necessary for Greece to show it is making good on its reform promises to lenders.

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"Reforms and democracy go hand in hand," Samaras wrote in an opinion piece in the conservative daily Kathimerini. "None of this can happen if you're not prepared to break eggs."

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INSIGHT-Withdrawal syndrome sparks anxiety for Fed

When do you take the addict off the methadone?

 

That's essentially the dilemma facing the U.S. Federal Reserve's 19 policy makers when they meet in Washington this week.

Since the height of the financial crisis in 2008, the U.S. economy and everyone with a stake in it have become hooked on the massive amounts of stimulus injected by the U.S. central bank.

Now, though, consensus is building among policy makers that the time is nearing to adjust their $85 billion-a-month asset purchase program, dubbed quantitative easing, but divisions remain over just when to start reducing the dosage.

In recent weeks, even the program's most ardent supporters, including Chairman Ben Bernanke, have begun signaling a willingness to dial back the pace of bond buying before too much longer. Meanwhile, those who have never liked it insist the moment has arrived and worry the Fed's grip on markets is weakening the longer the program remains in full force.

"We haven't taken steps in the face of better data to scale it back. So I worry that the markets believe we don't have the capability or willingness to do that," Philadelphia Fed President Charles Plosser told Reuters in a recent interview.

Indeed, the question of the market's faith in the Fed has taken on added urgency in the weeks since Bernanke's May 22 comment that the Fed could reduce the pace of its quantitative easing in the "next few meetings" sparked a global bond and stock selloff that continues to reverberate.

It is a delicate balance Bernanke and his colleagues must now strike. Moving too soon risks jarring markets, sending interest rates higher and choking off credit to a sputtering recovery.

Still, it is also clear the center of gravity in the debate at the Fed has shifted closer to support for a slimmer program, with Chicago Fed's Charles Evans, centrist John Williams of the San Francisco Fed and dovish Boston Fed chief Eric Rosengren all growing warmer to the idea.

Some officials are eager to get away from the steady drip feed markets have come to expect in the hope this will break their habit of relying largely on guidance from the central bank, instead of shifts in the economy, to make their bets.

In this view, a policy meant to adjust dynamically to shifts in the economy has been held hostage to market expectations.

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WHEN, HOW AND BY HOW MUCH?

This week's two-day Federal Open Market Committee meeting, which wraps up on Wednesday, is a critical juncture in the debate over the program's future. While chances remain slim that the panel will vote to start the so-called tapering process now, the debate over that timing and execution will be in full swing.

Fed officials will discuss probable sizes of a reduction in bond buying, and what economic signals would merit a decision to ease off a bit.

One idea is to buy fewer Treasuries, while leaving in place the $40-billion-a-month purchases of mortgage-backed securities, which some officials believe are more effective in supporting the economy.

But as they gauge the economy's readiness for a policy downshift, Fed officials don't see eye to eye.

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To St. Louis Fed President James Bullard, for example, inflation is worryingly low; to Kansas City Fed President Esther George, who like Bullard has a vote on policy this year, the bigger risk is a future rise in inflation.

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But several of those closer to Bernanke's inner circle see little risk on either inflation extreme.

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At the Fed's last meeting on April 30-May 1, Dallas Fed chief Richard Fisher pushed for an immediate tapering, while another official, most likely Minneapolis Fed President Naryana Kocherlakota, wanted to step harder on the policy gas pedal.

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Most of the policy makers wanted evidence of continued progress from the economy before scaling back.

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The shift in views toward a potential easing in the pace of bond purchases is being driven by this year's sustained jobs growth, which has offered officials heart that the economy will emerge from its current fiscal policy-induced soft patch with a fair amount of vigor.

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Still, there is widespread agreement that the economy is not ready yet. That means financial market anxiety - and the risk of a damaging spike in bond yields - is likely to build as the subsequent meetings in July and September approach.

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A Reuters poll of economists on June 7 found that 42 of 48 expected the central bank to trim purchases before year-end. Of those, 21 said a reduction would likely occur in the third quarter; 19 specified September.

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MARKETS MORE ON EDGE

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The gravitation toward a September exit date from earlier views closer to year-end circles back to Bernanke and his "next few meetings" comment during congressional testimony last month.

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Some analysts speculate it was a deliberate move to shake up markets and remind them to pay attention to the economy.

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If shaking up markets was the goal, it worked; the yield on the benchmark 10-year U.S. Treasury note is near its highest level in more than a year and bond market volatility has spiked. From a record low on May 9, the Merrill Lynch Volatility Expectations index has jumped more than 55 percent.

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Goldman Sachs Chief Executive Lloyd Blankfein suggested last week that slightly edgier markets may be just what the Fed wants to recalibrate monetary policy expectations.

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"If you want to handle that in the best way, you create a little bit more uncertainty in the market," he told an event sponsored by Politico.

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By lifting bond yields now, it could make an eventual trimming of bond purchases easier, while taking a little steam out of frothy markets. But it also carries the risk of disabling an economy fighting its way through a soft patch.

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"It's created a lot of confusion in the market," said Scott Anderson, Bank of the West's chief economist and chair of the Economic Advisory Committee of the American Bankers Association, which meets regularly with Fed policymakers. "When I look at the economic numbers, I just don't see it yet, I just don't see the strength in the labor market that would require a scale back."

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RATE HIKE BETS MOVE UP

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Just as Bernanke drove up expectations for a near-term reduction in bond buying, his comments sparked bets that the Fed would raise interest rates sooner than had been anticipated.

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Before he spoke, interest rate futures markets were pricing in the first rate hike in April 2015. Early last week, they had October 2014. By Friday, they had moved back to January 2015.

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Even that may be early.

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Fed officials have said they do not plan to even consider raising rates until the unemployment rate, now at 7.6 percent, falls to at least 6.5 percent, as long as inflation does not threaten to go much above their 2 percent target.

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Based on the latest Fed forecasts, unemployment isn't likely to fall that low until well into 2015. The central bank will release new forecasts on Wednesday.

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"They are trying to keep the interest rate policy and the QE separate," said Ethan Harris, chief U.S. economist at Bank of America-Merrill Lynch. "They've got this guidance language in there on the interest rate that is supposed to anchor that. Well, the anchor is slipping fast here."

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After opening gambit, Detroit manager's next move vexes creditors

Now that Detroit's emergency manager has laid out a tough road that could include a bankruptcy filing for the city, the bondholders, pension managers and others with a stake in the outcome are left to assess his next steps while seeking to minimize any possible losses.

Kevyn Orr faces a difficult task, for he must either coerce the financially troubled city's creditors into cutting a deal that would leave many with just pennies on the dollar, or file for Chapter 9 bankruptcy, where his powers would be greater but the likelihood of long, costly litigation far higher.

 

Rather than a corporate setting, the city's emergency manager is acting in a political realm where the interests of Detroit's citizens and even credit ratings throughout the state of Michigan may hang in the balance.

There was a forceful start to negotiations with debtholders at a Detroit hotel on Friday, with the city represented by Orr saying it would stop making payments on some of its $18.5 billion in debt, which would put it in default.

Orr also presented a proposal on Friday to creditors, bondholders, pension funds and union representatives, laying out his case for concessions from them in a plan that ran to 134 pages.

Orr told reporters on Friday there was a 50/50 chance of bankruptcy for Detroit, which would be a first for a major U.S. city. At the same time, he insisted this was "not a jaded effort just to go through the process to get to a bankruptcy filing."

The emergency manager's proposal went to great lengths to detail the city's financial ruin, declaring in a stark subheader: "THE CITY IS INSOLVENT" and cataloguing Detroit's disastrous record of keeping its citizens safe and its streetlights on.

Detroit, the center of the U.S. auto industry, is the poorest large city in the country, with more than a third of its residents living below the official government poverty line.

At a minimum, Orr's opening move could be seen as part of a checklist he needs to tick off in order to meet legal requirements needed to declare a bankruptcy of America's most troubled metropolis. But some restructuring experts see in Orr's approach an attempt to put together a pre-packaged bankruptcy, a strategy that has been adopted for Chapter 11 bankruptcies in the corporate world but never before used for a municipality seeking Chapter 9 bankruptcy protection.

"Kevyn Orr is a bankruptcy lawyer and he's going down a checklist of the things he needs to do," said Michael Sweet, an attorney at Fox Rothschild who helped the city of Richmond, California, restructure its finances to avoid bankruptcy. "He's keeping all the options on the table."

A pre-packaged bankruptcy occurs when an entity has negotiated a deal with creditors and other interested parties in advance, put it into written form and received enough votes from creditors to get a judge's approval - forcing it on objecting creditors. Pre-packaged plans greatly reduce uncertainty and legal fees.

Without a pre-packaged plan, Chapter 9 proceedings for the city of 700,000 could be lengthy, litigious and expensive, and cash-strapped Detroit would have to foot the bill. Proving insolvency and demonstrating a municipality's inability to pay its bills would be critical to filing for Chapter 9.

"He (Orr) will get a pre-packaged plan," said James McTevia of Michigan-based consulting firm McTevia & Associates. "But it will be contentious and it will cost a lot."

"Ultimately, given the size of Detroit, the scale of its problems and the number of issues involved, this could go all the way to the Supreme Court."

PRESSURE POINTS

Unlike many lawyers in the consensus-building world of bankruptcy, Orr earned his keep as a litigator and he led automaker Chrysler's fight in 2009 to get approval to close a quarter of its dealerships early in its bankruptcy. The Chrysler experience was a factor when Michigan Republican Governor Rick Snyder tapped Orr in March to fix Detroit's finances.

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Those who have worked with Orr said he knew how to zero in on an adversary's pressure points and narrow their options. They cited his decision to make one presentation to all creditors on Friday.

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"If you want to do it right, you get all creditors in the same room and you tell the story one time so there's no misunderstanding," said Pat O'Keefe, president of O'Keefe and Associates, a turnaround firm based in the Detroit suburbs.

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O'Keefe added he expected Orr "will try to get some pre-negotiation done with creditors, then use Chapter 9 to implement his plan." He noted that Orr's warning on Friday to reporters that Detroit should know "within the next 30 days or so" if it can avoid bankruptcy could serve as one more proof of "good faith" if he does file for Chapter 9.

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Pre-packaged bankruptcy using Chapter 11 was pioneered by Jay Goffman of law firm Skadden, Arps, Slate, Meagher & Flom in New York. He said it could work for municipalities.

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"Whether it is a city or state or county, there's no reason that you can't get smart people together, figure out the right solutions from a business standpoint and essentially prepack the solution," Goffman said.

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But getting everyone on board for a pre-packaged plan is easier said than done, said Douglas Bernstein, a bankruptcy attorney at Plunkett Cooney in the Detroit area.

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"When it comes to a pre-packaged plan, the big question is whether he (Orr) would have enough acceptance going into court," he said. "He would need sufficient votes from all the creditor classes and that will not be easy."

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One problem is that Detroit's creditors or stakeholders have different priorities. The main areas of uncertainty surround its unions and pension funds, which may not have much bargaining room and may feel their best chance lies in bankruptcy proceedings rather than a negotiated pre-packaged deal.

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"It's quite possible that we will see infighting between Detroit's creditors," said John Pottow, a University of Michigan law professor who specializes in bankruptcy.

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'POWERFUL' TOOL

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Orr has options available to him that can give him leverage over the competing groups. If he goes to bankruptcy court as the sole representative of Detroit, experts say he would have more options and power, which he alluded to publicly last week.

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"I have a very powerful statute," Orr said Monday. "I have an even more powerful Chapter 9. I don't want to use it, but I am going to accomplish this job. That will happen."

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Orr would be able to drag recalcitrant creditors into court. While no one can force Detroit to sell assets involuntarily in bankruptcy, he can sell them voluntarily.

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Much has also been made of a clause in Michigan's constitution that specifically protects pensions and retirement benefits, and it is unclear how that provision would be treated in a federal bankruptcy.

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Fox Rothschild's Sweet said a judge would have to "determine whether the 10th Amendment (of the U.S. Constitution) trumps the notion that federal law is supreme." The amendment states that powers not delegated to the federal government by the Constitution or prohibited to the states are reserved for the states or the people.

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"The last thing (union pension funds) may want is for a judge to rule on that," he said. "Because if the judge ruled against them, it would open the floodgates" for similar cases.

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Time is also of the essence, as Detroit's default could hurt Michigan along with other municipalities in the state and make them "suffer higher interest costs and more difficulty borrowing," Richard Larkin, senior vice president at investment firm HJ Sims, wrote in a note on Friday.

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The longer a deal takes, the more likely Chapter 9 becomes, the University of Michigan's Pottow said, as that will be an indication of how much resistance Orr faces from stakeholders.

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"My heart says that Kevyn Orr will be able to get everyone around a table and hammer out a deal," Pottow said. "But my brain says that he is going to have no choice but to file" for Chapter 9.

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RPT-Wall St Week Ahead: Investors will look to Fed to ease volatility

Stock investors eager to hear from the Federal Reserve about its plans for continuing economic stimulus may get some soothing words from the U.S. central bank this week.

The Fed is unlikely to tip its hand about when it might begin to scale back its bond-buying program, but policymakers still may be inclined to try to tamp down recent volatility in financial markets with some mention of the issue.

The rally in stocks stumbled and Treasury bond yields rose to 14-month highs following Chairman Ben Bernanke's comments that the Fed may decide to begin scaling back its quantitative easing in the next few policy meetings if the economy improves.

As part of its quantitative easing policy, adopted more than four years ago, the Fed has been buying Treasury and other bonds each month to keep interest rates low and promote growth.

Interpreting Bernanke's words and recent signs about the economy has roiled markets since then. The Dow industrials climbed 200 points in eight of the 17 sessions since Bernanke's comments, and its daily average swing has been 191.5 points.

Stocks ended a third negative week in four last week. The Dow fell 1.2 percent, the S&P 500 slid 1 percent and the Nasdaq lost 1.3 percent.

"What (Bernanke) has done is create what I call an early summer market storm, not a huge one but enough to cause people to become a little nervous," said Fred Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon.

This week might offer a bit more clarity, he said, but probably not the details many investors are hoping for. Still, analysts said, the Fed may want to say something to remove some of the markets' anxiety.

The markets have priced in a sea change and seem to think that rates are going up soon, said Stephen Massocca, managing director at Wedbush Equity Management LLC in San Francisco. But "I think the Fed is not going to want that to be the market's impression."

The news may be that any change is going to be gradual, he added.

Comments from Fed policymakers in recent weeks have added fuel to the guessing game. Views have ranged from favoring continuing the stimulus policies for some time to starting the process of winding down quantitative easing in the near term.

But Bernanke's views hold the most weight, so investors will likely be on edge awaiting his comments. The Fed chairman is due to give a news conference at 2:30 p.m. EDT (1830 GMT) on Wednesday shortly after the Fed's policy committee ends a two-day meeting and issues a statement.

RALLY EASES

Although earnings have taken a back seat to Fed talk, forecasts for second-quarter profits have come down in recent weeks. Growth is forecast at 3.2 percent, down from an April 1 forecast of 6.1 percent, and negative preannouncements have outnumbered positive ones by a ratio of 6.9 to 1, according to Thomson Reuters data. That would be the most negative ratio since at least 1996.

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Investors worry speculation about the Fed's course alone may have been enough to spark the long-feared pullback in stocks, which have rallied for most of this year. Even with recent losses, the S&P 500 is up 15 percent for the year to date.

The benchmark index is down 2.5 percent since May 21, but there have been short-lived rallies in that period.

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Also the gains in bond yields since Bernanke's comments caused investors to rotate out of high-yielding dividend stocks. Dividend stocks had been among the market's leaders as investors favored those shares over fixed-income securities in a low interest-rate environment.

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The Dow shot up 200 points and scored its best day since Jan. 2 after the U.S. employment report for May showed 175,000 jobs were created, a positive sign but not strong enough for the Fed to abandon stimulus efforts to aid the economy.

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"As we see mixed signals in terms of economic growth from across the globe, a marginal tapering can have significant effects," said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.

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"What would happen if the tapering is too soon, I think, is that it puts risk into financial assets, both equities and bonds."

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Among this week's economic reports, the Consumer Price Report for May is due on Tuesday along with data on housing starts.

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Wall Street Week Ahead moves every Sunday. Comments or questions on this one can be sent to caroline.valetkevitch(at)thomsonreuters.com.

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Saudi Aramco-Dow JV raises funding for $19 bln project -sources

Sadara Chemical Co, a joint venture between Saudi Aramco and Dow Chemical , has signed a fundraising package for the $19.3 billion petrochemical complex it is building in the east of the kingdom, three banking sources said on Sunday.

The financing package totals around $12.5 billion and consists of loans from banks, export credit agencies and the state-owned Public Investment Fund, as well as proceeds from an Islamic bond issue. The remaining cost will be met by the two partners.

The facility, located at Jubail Industrial City in Saudi Arabia's Eastern Province, will be the world's largest chemical complex ever built in a single phase. It will produce more than 3 million tonnes of petrochemicals each year when completed in 2016.

 

Sadara was not immediately available for comment. The sources spoke on condition of anonymity as the matter has not been made public.

The split between the different portions of the facility were changed from an original outline released in May 2012 after the success of the sukuk, which was completed at the start of April, two of the bankers said.

Sadara raised 7.5 billion riyals ($2 billion) from the local currency Islamic bond, having increased the deal size from 5.25 billion riyals on strong demand from investors.

Also included is a $4.975 billion direct loan from the U.S. Export-Import Bank. Signed in September, it was the largest ever loan from the institution.

French Socialists call for weaker euro, eased EU budget rules

France's ruling Socialists called on Sunday for a weaker euro and changes to EU rules on budget deficits, accusing the centre-right governments of Britain and Germany of creating economic hardship across the European Union.

 

At a conference on Europe, Francois Hollande's party adopted a policy paper that toned down earlier attacks on German Chancellor Angela Merkel, providing some relief to the French president as he seeks to ease tensions with Berlin.

"Right-wingers have ruined Europe and thrown Europeans into precariousness," read the preamble to the 13-page policy paper which seeks to woo voters ahead of European Parliament elections in early 2014 where Eurosceptic and far-left and far-right parties are expected to make gains.

"The ambition of the (European) community has been destroyed by an alliance of convenience between British conservatives who only want a Europe on the cheap and a la carte, and the free-market intransigence of the German right," it concluded.

That was a watering-down of an earlier draft which accused a "self-centred" Merkel of wounding Europe with an austerity drive. The text also resisted demands from the left wing of the party for an outright suspension of EU budget deficit rules.

Instead, the paper said the EU Stability Pact, limiting national deficits: "should be revised to incorporate a spirit of cooperation rather than punishment and to prioritise support for growth in each country, respecting (national) specificities".

The text also called for a re-opening of EU austerity plans agreed for Greece, Portugal and Spain; the issue of Eurobonds; coordinated steps to allow a devaluation of the euro, notably against the Chinese and Japanese currencies; an easing of EU state aid rules; and increased funding for the EU.

The paper, while expressing the view of Hollande's party, will not necessarily translate into official government policy. But it will keep pressure on Hollande not to push too far ahead with budgetary rigour.

The two-day meeting in Paris heard an attack on EU leaders by former European Commission President Jacques Delors, who accused them of losing sight of the EU's main goals and creating a "Europe of punishment and alienation".

"I do not like it that when a government goes to Brussels it has the impression of going to see a tough teacher who is going to give it a lecture," the 87-year-old Delors, a former mentor of Hollande, said.

"For me there has been so much talk of the euro that we have completely lost sight of Europe's wider goals," he said to a standing ovation.

Opinion polls show Europeans losing faith in the EU, with disillusionment nowhere higher than in founder member France.

Brussels has given France two more years to bring its budget deficit below a ceiling of 3 percent of output after Paris acknowledged it could not meet the goal this year.

In return, it wants overhauls of France's state pension provision and its rigid labour market - both areas where efforts by past governments have triggered protests and strikes.

Brookfield to sell assets to Weyerhaeuser, KapStone for $3.68 bln

Brookfield Asset Management Inc on Sunday said it had agreed to sell all its Longview Timber holdings to Weyerhaeuser Co for $2.65 billion, including assumption of debt.

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The company also said it will sell its Longview Fibre Paper and Packaging operations to KapStone Paper and Packaging Corp for $1.025 billion.

"While the timing of the (separate) sale transactions is coincidental, for investors in our funds these transactions represent monetization at excellent returns and puts each of these assets into the hands of strategic buyers who will be able to take them to the next level," Cyrus Madon, Senior Managing Partner in Brookfield's Private Equity Group, said in a release.

RPT-Brookfield to sell assets to Weyerhaeuser, KapStone for $3.68 bln

Brookfield Asset Management Inc on Sunday said it had agreed to sell all its Longview Timber holdings to Weyerhaeuser Co for $2.65 billion, including assumption of debt.

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The company also said it will sell its Longview Fibre Paper and Packaging operations to KapStone Paper and Packaging Corp for $1.025 billion.

"While the timing of the (separate) sale transactions is coincidental, for investors in our funds these transactions represent monetization at excellent returns and puts each of these assets into the hands of strategic buyers who will be able to take them to the next level," Cyrus Madon, Senior Managing Partner in Brookfield's Private Equity Group, said in a release.

UPDATE 1-Bond insurer attorneys barred from San Bernardino bankruptcy

The judge overseeing the bankruptcy of San Bernardino, California, on Thursday disqualified a law firm from representing a major bond insurer in the case, because she said some of its lawyers had "switched sides."

Federal Bankruptcy Judge Meredith Jury said the law firm of Winston & Strawn can no longer represent one of the city's creditors, bond insurer National Public Finance Guarantee Corp.

She ruled that because Winston recently hired attorneys who had worked on the case for Calpers - the state pension fund and a direct adversary of National in the proceedings - the entire firm of Winston & Strawn should be disqualified.

 

Calpers, America's biggest pension fund and San Bernardino's biggest creditor, had asked the judge to ban Winston & Strawn after it hired several attorneys who had been working for Calpers in the bankruptcies of San Bernardino and Stockton, another California city seeking Chapter 9 protection.

National, the municipal bond wing of MBIA, opposes Calpers in both bankruptcies.

The disqualification of a law firm in such a high profile case is rare, according to experts, and a major blow to National.

"Changing attorneys in the middle of a case is never easy. Changing attorneys in a high-stakes, high profile case is particularly tough," said Michael Sweet, a bankruptcy attorney with Fox Rothschild in San Francisco who is not involved in either the San Bernardino or Stockton cases.

Sweet said he now expects Calpers to seek disqualification of Winston & Strawn in the Stockton case.

"There is a lot of institutional knowledge that is going to be lost to National," Sweet said. With key hearings due in July and August that could decide San Bernardino's eligibility for bankruptcy, "new attorneys will be under the gun to learn the case quickly."

The recently hired attorneys had worked for K&L Gates, the firm representing Calpers in the San Bernardino and Stockton cases. The attorneys worked for Calpers on both cases.

Judge Jury noted efforts by Winston to "screen off" the attorneys from the case. But, she ruled, because of Calpers and National's inherently conflicting positions in the case, the attorneys could not switch firms without violating their duty of loyalty to the former client.

"I am compelled to disqualify the law firm," Jury said.

San Bernardino and Stockton are considered test cases in the battle over whether municipal bondholders or current and retired employees will absorb most of the pain when a state or local government goes broke.

Detroit creditors brace for haircuts, or worse, at meeting to avoid bankruptcy

Detroit's creditors will begin to learn on Friday morning what they can recover without driving the financially troubled city into bankruptcy when the city's emergency manager unveils his restructuring plan.

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Manager Kevyn Orr has dropped hints that creditors would fare better by compromising now rather than in court should he opt to file what would be the biggest municipal bankruptcy in U.S. history.

 

He has begun laying a choice before creditors: Work with him by accepting cuts to what they are owed, or face the prospect of a Chapter 9 bankruptcy proceeding where they might have little influence on the outcome.

"I have a very powerful statute," Orr said at his first meeting with the public on Monday, referring to Michigan's new emergency manager law. "I have an even more powerful Chapter 9. I don't want to use it, but I am going to accomplish this job. That will happen."

Orr, the bankruptcy attorney Michigan officials tapped in March to run the city as emergency manager, has summoned public labor unions, bondholders, bond insurers and others to a Detroit airport hotel to present a 200-page restructuring plan.

With Michigan's biggest city buckling under more than $15 billion of debt, high unemployment and a sinking population base, Orr has contended Detroit is on an unsustainable path and that there is a 50/50 chance of a bankruptcy filing.

It would be a first for a major U.S. city as New York, Philadelphia and Cleveland all avoided formal bankruptcy filings, noted Jim Spiotto, a municipal bankruptcy expert at law firm Chapman and Cutler.

"The perception in the market today is that major municipalities don't file for Chapter 9," Spiotto said. "They are a safe investment and they will find a way to refinance and restructure. If that perception changes, that could increase the cost of borrowing" for Detroit.

Historically, bondholders have not lost the principal amount owed them as a result of financial restructurings of major cities.

Local media reports say that Orr will push creditors in his restructuring report to take as little as 10 cents for each dollar the city owes. Orr's spokesman declined to comment on the reports.

INSURERS LIKELY FIRST TO NEGOTIATE

Unlike in corporate Chapter 11 bankruptcies, judges have more limited powers in a municipal Chapter 9 proceeding. A judge in a Detroit bankruptcy could not replace Orr, liquidate the city, or force it to sell assets or raise taxes.

"All the protections for creditors in Chapter 11 are not applicable in Chapter 9," said Laura Bartell, a law professor at Wayne State University in Detroit.

Bartell added that the Friday meeting was just round one in a process that will take weeks.

"Of course this is going to be tough," Bartell said. "This is a massive financial morass with so many people and so many different interests."

In the meantime, Detroit's emergency manager says he intends to remain current on the city's debt payments including about $34 million due to owners of pension debt on June 15.

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Heightened concerns that Detroit's bondholders face payment risks due to a possible bankruptcy filing or debt restructuring led to credit rating downgrades deeper into the junk category for Detroit's bonds by Standard & Poor's Ratings Services on Wednesday and Moody's Investors Service on Thursday.

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Much of Detroit's debt is insured, giving bondholders protection against future defaults. Two of the insurers, MBIA, Inc and Assured Guaranty, will have someone at the Friday meeting, according to their spokespersons.

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James Schwartz, head of municipal credit research at BlackRock, said he expects insurers to be at the front lines in negotiations with the city. That is a role bond insurers have played in the case of Alabama's Jefferson County, which is in the midst of the current biggest-ever municipal bankruptcy.

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Also listening intently for details on Friday will be the presidents of the unions that represent Detroit's workers, from civil service to firefighters to police officers.

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Depending on what Orr has to say on Friday, several dozen to several hundred police and firefighters may decide to retire rather than wait for an emergency manager-imposed new contract, union leaders said this week.

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"We're going to lose the institutional knowledge and much of our leadership because they will not tell us what we need to know in order to make decisions for our families," said Dan McNamara, president of the 915-member Detroit Firefighters Association.

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