Chinese security officials accused four detained staff of Anglo-Australian miner Rio Tinto Ltd of bribery on Friday as Australia sought to avert a diplomatic row centering on the massive iron ore trade.

The Shanghai office of China’s State Security Bureau accused the three local Rio staff and senior Australian executive Stern Hu of bribing Chinese steelmakers during tense iron ore price negotiations this year, said the China Securities Journal.

“This seriously damaged China’s economic security and interests,” said the paper, published by the state-run Xinhua news agency. “The activities of Stern Hu and the others violated Chinese law as well as international business morality.”

Chinese security authorities arrested the four on Sunday, alleging they were involved in stealing state secrets.

Australia’s Prime Minister Kevin Rudd, a Mandarin-speaking China expert, and Foreign Minister Stephen Smith both said Canberra was treading warily after the shock detentions, which have cast a shadow on ties between the two countries.

“Such a serious matter is a matter which goes very much to the relationship between Australia and China, so we are treating this as a very, very sensitive and difficult issue,” Smith told reporters in Perth, adding Hu had been well treated.

The arrests come as iron ore talks between the two sides miss a June 30 deadline, and after Rio Tinto ditched a $19.5 billion tie-up with Chinese state metals firm Chinalco last month.

Chinalco, Rio’s major shareholder, said the arrests were unrelated to dealings between the two firms and expressed “mutual concern for the current situation with their staff.”

Rudd, facing criticism at home for not intervening with China’s President Hu Jintao on behalf of Hu and his employer, promised any representations needed to secure their release. Trade Minister Simon Crean left for China on Friday.

China’s ambassador to Australia Liang Hong was summoned to the foreign ministry late on Thursday to discuss what local newspapers said was a fast-escalating crisis in relations.

Smith said China appeared to have a “broader” definition of what amounted to industrial espionage than many other countries.

“It’s very hard for the Australian government to see the connection between what might be daily commercial and economic negotiations and national security issues,” he said.

But Smith said the latest row would not derail negotiations with China on a free trade pact, underway since 2005.

The Australian dollar, knocked sharply lower on Thursday amid China export ructions, steadied on Friday, although the market was closely following developments. Rio shares traded up to 1.9 percent higher after a Standard & Poors rating upgrade.

RUDD CRUNCH

China is Australia’s second-largest export customer behind Japan, buying A$36 billion ($28 billion) of mostly commodities in the 11 months ended May 2009. In 2008, more than half of China’s imports from Australia were of iron ore.

Australia, along with Chile, is the largest recipient of Chinese investment this year, worth $3.9 billion, with Chinese companies anxious to lock-in access to resource exports.

Australian papers were critical of Rudd, pointing to a serious deterioration in Canberra’s relationship with its second largest export market.

“What does the much touted Australia-China relationship add up to if Beijing treats Canberra with such conspicuous discourtesy and indifference?” wrote the Australian newspaper’s foreign editor, Greg Sheridan.

Senator Steve Fielding, whose support Rudd’s center-left government needs in the upper house to pass crucial climate and budget laws, said Rudd had no idea how to look after Australians when China was involved.

“Here we have a Prime Minister who speaks Mandarin, tells everyone he has a relationship with China, yet he hasn’t a clue what to do when it comes to the crunch,” Fielding said.

(Additional reporting by Ben Blanchard and Alfred Cang in Shanghai, Fayen Wong in Perth; Editing by Sanjeev Miglani) – Reuters

General Motors on Friday prepared to exit bankruptcy with the message that a leaner and meaner automaker ready to win back American consumers and pay back taxpayers has emerged from its failure.

A whirlwind 40-day bankruptcy for GM was expected to conclude with the closing of a deal to sell key operations and core brands, including Chevrolet and Cadillac, to a new company that will be majority owned by the U.S. Treasury.

Chief Executive Fritz Henderson and Ed Whitacre, a veteran telecommunications executive and incoming chairman, were set to appear at a news conference 9 a.m. ET at the automaker’s Detroit headquarters to mark the launch of that “new GM.”

The automaker’s U.S. sales dropped 36 percent during June when it was mired in bankruptcy and executives said the relaunch of the company offered a chance to try and break that negative association for consumers.

“I’m very much looking forward to the point where we’re operating in the clean air and the name of the company not being associated with bankruptcy,” GM sales chief Mark LaNeve said on Thursday.

Henderson, who took over as CEO when his predecessor Rick Wagoner was ousted by the Obama administration at the end of March, has already detailed plans for a faster-moving and less-bureaucratic company with thinner executive ranks.

GM is cutting its white-collar work force by more than 20 percent by eliminating 6,000 jobs by October. The reduction in executive ranks will slice deeper, with 35 percent planned.

That bid to shake up GM’s long-criticized corporate culture will be a key issue for Henderson as the 100-year-old automaker seeks to relaunch itself.

Steve Rattner, the head of the Obama administration’s autos task force, said earlier this week that it would be “natural” for Henderson to cut layers of management to make the company “a bit closer to the ground, leaner and meaner.”

Another pillar of the plan is GM’s commitment to launch more fuel-efficient cars and to focus its resources on fewer brands, models and dealerships.

GM has burned through $40 billion over the past four years and posted losses of more than $80 billion.

The close of the court-approved sale would mark the completion of an unprecedented effort by the U.S. administration to save GM and Chrysler from liquidation by slashing debt, labor costs and dealerships.

The White House has also disbursed almost $80 billion to shore up the auto industry, including $5 billion in support for auto parts suppliers.

Of that total, $50-billion has been earmarked for GM, emergency financing that will give the U.S. government a more than 60-percent stake in the new GM.

Chrysler exited bankruptcy a month ago after blazing a precedent-setting trail for GM by following an asset sale plan that gave operational control of the smaller automaker to Italy’s Fiat SpA.

As part of the changes to be announced on Friday, Bob Lutz, GM’s outspoken and high-profile former product chief, has agreed to stay on in a new position, a person with direct knowledge of the plan said.

Lutz, 77, had earlier announced plans to retire at the end of the year.

The new GM will have slashed its debt and healthcare obligations by $48 billion, dropped almost 40 percent of the dealers from an unprofitable network and moved to cut loose laggard brands such as Saab, Saturn and Hummer.

The new GM will also take advantage of a new labor contract with the UAW that the company says will put its hourly operating costs on par with Japanese competitors led by Toyota Motor Corp.

(Editing Bernard Orr) – Reuters

China said on Thursday detained staff from Australian miner Rio Tinto had harmed China’s economic interests in a case that has rattled currency markets and raised questions about China-Australia relations.

Beijing confirmed on Thursday the detention of an Australian mining executive and three other Shanghai-based employees of global miner Rio Tinto.

Chinese authorities have “a vast amount of irrefutable evidence” which showed the four “pried and stole Chinese state secrets for overseas, gravely harming China’s economic interests and economic security,” Foreign Ministry spokesman Qin Gang said.

He said it was an “independent judicial case … and should not be gradually enlarged or politicized.” Doing the latter “would also be detrimental to Australia,” he added.

The head of the iron ore department with the foreign trade and investment unit of state-owned Chinese steel company Shougang Group has also been detained, newspaper reports and a Chinese steel industry executive said on Thursday.

Reports of the Rio Tinto detentions had already emerged from Australian sources in recent days, with investors concerned the affair could hurt Australia’s ties with its biggest trade partner.

It could also increase concerns about doing business in China generally, as sources told Reuters that computers, likely containing sensitive commercial information relating to iron ore contracts, have also been removed from Rio’s Shanghai offices.

“This really does highlight, possibly more than any other case in recent years, the potential vulnerability to the law (in China) being interpreted very flexibly, and the huge grey area especially around information and what constitutes a state secret,” said Andrew Gilholm, Control Risks’ senior analyst for China and Northeast Asia.

Australia’s Foreign Minister Stephen Smith said his officials were yet to talk to Stern Hu, Rio Tinto Ltd’s top iron ore salesman in China, after his weekend detention. An Australian foreign ministry statement said China would give consular access to Hu on Friday.

WELFARE WORRIES

“One of the reasons why we want access to him, is to satisfy ourselves as to his welfare, to satisfy ourselves as to his well-being,” Smith told Australian state television. He described the spying accusations against Hu as “very surprising.”

The executive detained from China’s Shougang Group — Tan Yixin, assistant general manager of China Shougang International Trade & Engineering Corp — was close to Hu, the official newspaper China Daily said on Thursday, citing unnamed sources.

The China Daily said steel firms were banned from signing long term iron ore contracts with foreign suppliers without permission.

Rio said its Shanghai office was mainly a sales and marketing operation for the company, the world’s second-biggest iron ore producer, which is listed in London and Australia.

Fears the issue could damage trade ties saw the Australian dollar slump against the yen in offshore trade in its biggest one-day drop in 2- months. By late in the Australian trading day it had regained some ground to 72.60 yen from an overnight 70.94 but was still vulnerable to China worries.

China is Australia’s second-largest export customer behind Japan, buying A$36 billion ($28 billion) of mostly commodities in the 11 months ended May 2009. In 2008, more than half of China’s imports from Australia were of iron ore.

Details about the detentions emerged just as a Shanghai newspaper reported Chinese steel mills had given in on annual iron ore prices, agreeing the same 33 percent cut that other Asian steelmakers set earlier.

But the Chinese agreement was for six months instead of a year, the China Business News said on Wednesday.

DEAL DENIED

Both Rio and an executive from a top Chinese steelmaker denied the newspaper report that they had struck a deal on prices, adding negotiations were still going on.

The detentions came as China-Australia relations had already been going through a rough patch, with the iron ore negotiations running past a June 30 deadline and Rio Tinto ditching a planned $19.5 billion investment by state-owned Chinese metals firm Chinalco last month.

Smith said he saw “no basis” for speculation of business feud payback behind the detentions.

But Greg Hallahan, a regional director of risk consultancy Pacific Strategies and Assessments, said:

“(My) colleagues and I are of the opinion that the arrests are probably payback for Rio’s rejection of the Chinalco investment offer. I think it was particularly galling for the Chinese to see such public opposition … to the extent that TV ads were taken out in Australia” against it.”

Hallahan said: “There are numerous precedents for such tactics and one needs to look no further than the arrest of journalists on trumped up espionage charges.

Chinese and foreign business people have been detained or even kidnapped in China during the course of business disputes, for alleged customs or tax evasion, or as a pressure tactic by government bureaux or state-backed rivals.

The episode has put the steel industry, which relies on open market information for trading and pricing, in an “ice box,” said one Chinese iron ore industry analyst.

“Right now everyone in the industry is afraid. No-one really knows if it’s for commercial reasons, or something else,” he said, declining to be identified.

(Additional reporting by Ben Blanchard, Tom Miles and Lucy Hornby in BEIJING and Wayne Cole and Mark Bendeich in SYDNEY; Writing by Jerry Norton; Editing by Sanjeev Miglani) – Reuters

Forecast-beating results from U.S. bellwether Alcoa helped lift European stocks and draw global equities out of the red on Thursday, while currency markets reversed some of their recent cautious patterns.

The U.S. aluminum giant kicked off the latest U.S. earnings season on Wednesday by reporting a third consecutive quarterly loss, but it beat estimates by a large margin due to cost cuts.

Equity markets have been hit over recent weeks as second thoughts about the chances of a quick global economic recovery have risen.

The corporate earnings reporting season is likely to dominate bourses as it gets under way properly next week for what it says about how companies are weathering the global recession.

“There has been nothing reassuring in macro data lately, so people are really hoping for good surprises on the earnings front,” said David Thebault, head of quantitative sales trading, at Global Equities, in Paris.

World stocks as measured by MSCI were up about a quarter of a percent, heading for a gain after seven consecutive session of losses.

The FTSEurofirst 300 index of top European shares was up 0.7 percent, bouncing back from a 10-week low hit on Wednesday. Earlier, however, Japan’s Nikkei closed down 1.4 percent on economic worries.

Investors were also eyeing a meeting of the Bank of England, which was expected to keep interest rates on hold at a record low of 0.5 percent but also looked likely to expand its 125 billion pound quantitative easing scheme to sustain attempts to lift Britain out of recession.

SLOW RECOVERY

Foreign exchange traders reversed some of their previous risk-aversion trades with Japan’s yen falling after hitting a five-month high against the dollar on Wednesday.

The dollar also dipped against currencies other than the yen.

Sentiment was helped by a report from the International Monetary Fund late on Wednesday saying that the global economy is slowly starting to pull out of a deep recession, although the recovery will be sluggish.

The euro was up half a percent at $1.3952 and the dollar lost 0.6 percent to 93.37 yen.

Euro zone government bond futures retreated from two-month highs hit in after-hours trade the previous session, tracking moves in U.S. Treasuries which succumbed to profit-taking after a sharp rally.

Treasuries shot higher, pushing 10-year yields to seven-week lows, after an auction of 10-year paper attracted surprisingly strong demand late on Wednesday. That gave Bunds a lift in after hours trading, also prompting investors to book profits.

(Additional reporting by Blaise Robinson) – Reuters

Economy jitters continued to sweep financial markets on Wednesday, weakening stocks, propelling the Japanese yen to a six-week high and dragging oil down to around $62 a barrel.

Investors have begun worrying that global economic recovery will not be as quick or robust as many had hoped.

Comments in particular that a second U.S. stimulus package may be necessary coupled with heavy U.S. job losses have hit risk appetite.

“Talk of more stimulus spending is making investors nervous,” said Kim Seong-joo, an analyst at Daewoo Securities in Seoul.

Markets were also gearing up for the new corporate earnings season, with aluminum giant Alcoa (AA.N: Quote) due to kick off later on Wednesday.

Most investors are still banking on a global recovery over the next year, albeit an undynamic one.

Barclays Wealth said on Wednesday, for example, it gave a 60 percent chance for a sluggish recovery, 20 percent for one with real momentum and a 20 percent chance of a slide to depression.

But the recent worries have prompted a pull back from the second quarter’s sharp rally which has left many European and U.S. stock indexes in the red for the year-to-date.

MSCI’s all-country world stock index was down three quarters of a percent, heading for its fifth day of losses in a row.

Japanese stocks closed down 2.4 percent.

European shares fell in early trade, mirroring big Tuesday losses on Wall Street, which are in the red for the year. The FTSEurofirst 300 .FTEU3 index of top European shares was down half a percent, around levels last seen in April.

Oil firms were among the biggest losers, reflecting the fall in energy prices. Oil fell more than $1 to $62 a barrel, on course for its sixth consecutive fall and longest losing streak since mid-December.

ASCENDANT YEN

Recovery doubts have helped pull currencies such as the Australian dollar, sterling and the euro well off peaks hit in June, and the dollar and the yen have risen in the past few weeks.

The yen hit its highest levels in around seven weeks against the dollar and euro.

“The sharp fall in the cross yen pairs is reflecting speculators closing long positions in risk assets,” said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.

“There is very little clarity on the global outlook, and there is uncertainty over the earnings season.”

The euro fell to as low as 130.43 yen, its lowest since late May. The dollar hit a six-week low of 94.09 yen, according to Reuters data. Sterling also reached its lowest in more than a month against the yen of around 151.01 yen.

The dollar index, a gauge of its performance against six major currencies, was steady at 80.77 .DXY.

Euro zone government bond futures gained half a point, hitting their highest intraday peak in two months as equities were dragged lower.

The interest rate-sensitive two-year Schatz yield was down 2.8 basis points at 1.196 percent. The 10-year Bund yield was down 4 bps at 3.267 percent. (Additional reporting by Tamawa Desai, editing by Mike Peacock) – Reuters

World stocks ticked lower for a fourth consecutive day toward a two-week low on Tuesday while the low-yielding yen rose as doubts persisted over how sustainable a global economic recovery would be.

Investors grew nervous ahead of upcoming second-quarter corporate results. Aluminum producer Alcoa will kick off the U.S. earnings season when it announces results on Wednesday.

“Coming into this earnings season, there is going to be plenty of speculation as to what are the results coming through, what are the guidance for the forthcoming quarters,” said Stephen Pope, chief global market strategist at Cantor Fitzgerald.

“To that regard, we are going to see the market’s pretty much on a day-by-day basis. I don’t think you can see a genuine pattern emerge until … we are, perhaps, a good third into the earnings season.” MSCI world equity index fell 0.1 percent.

The FTSEurofirst 300 index .FTEU3 fell a quarter percent.

According to Thomson Reuters data, analysts expect Standard & Poor’s 500 .SPX corporate earnings to fall 36 percent from a year earlier. This rate compares with a forecast for a decline of 31.1 percent back in April and an increase of 28.5 percent in October.

Analysts still forecast a sharp V-shaped rebound in earnings growth with an anticipated growth rate of 183.0 percent in the fourth quarter — leaving room for a sizeable downgrade if the economy did not recover as expected.

Emerging stocks .MSCIEF were steady on the day.

U.S. crude oil fell 0.6 percent to $64.65 a barrel, weighing on oil stocks.

The September Bund future fell 26 ticks, off a seven-week peak set in the previous session. Investors are focused on 7.2 billion euros of Austrian and Dutch supply, which if it attracts good demand could trigger a squeeze in prices.

The low-yielding yen rose a quarter percent to 95.16 per dollar while the U.S. currency .DXY rose a third percent against a basket of major currencies.

“The market environment now is one of investors reducing risk betting but it has not fully returned to risk aversion. It’s still in a phase of correcting excessive optimism over the economy recovery seen previously,” said Akira Takeuchi, manager at Chuo Mitsui Trust and Banking in Tokyo.

“The U.S. has had a mixture of positive and negative economic data, which needs to be examined closely. But the market is now prone to react to weak figures.”

Laura D’Andrea Tyson, an adviser to U.S. President Barack Obama, said the country should be planning for a possible second round of fiscal stimulus to further prop up the economy after the $787 billion rescue package launched in February.

(Additional reporting by Dominic Lau, editing by Mike Peacock) – Reuters

Japan’s leading global investment bank Nomura said Sunday it had launched investment banking operations in Saudi Arabia, becoming the first Asian securities firm to break into the lucrative, rapidly growing market.

“As the first Asian securities firm in Saudi Arabia, Nomura is especially well placed to bridge and facilitate the growing commercial interests between the Gulf and the Far East and strengthen emerging trading relationships,” Nomura’s chief executive for Middle East and Africa Philip Lynch said in a statement.

Nomura will offer corporate finance, capital market and wealth management services to local clients, as well as act as an agent for overseas transactions of securities.

“The Kingdom is making dramatic steps in modernizing and deregulating its economy, and public and private entities increasingly require sophisticated financial solutions to meet their development plans,” said Lynch.

Regional strategy

Although Nomura has been present in the Middle East with branches in Dubai and Bahrain since 1974, Lynch noted that Saudi Arabia accounts for about 50 percent of GDP in the Gulf region, making a presence there critical for the firm’s regional strategy.

The Japanese giant started its investment banking operations in the Saudi Arabia a year after the country’s Capital Market Authority granted it a license to operate there.

Last month, Qatar’s Financial Center Regulatory Authority authorized Nomura to provide investment banking and capital markets services from the Qatar Financial Center. – Al Arabiya

Markets got off to a hesitant start Monday as investor doubts on the staying power of a global recovery kept Asian stocks soggy and currencies subdued ahead of a much-expanded Group of Eight meeting this week.

With risk out of favor for the moment, Japan’s Nikkei .N225 fell 1.38 percent and the MSCI index of Asia ex-Japan eased 0.41 percent.

Indian shares .BSESN fell more than 2 percent and bonds yields rose as India’s finance minister outlined a stimulative budget that proposes a bigger-than-expected deficit.

Futures prices also pointed to a soft start for Europe.

The air of caution kept safe-havens like the yen and sovereign bonds supported, while pressuring commodity prices and leveraged plays. Crude oil futures were down near five-weeks lows below $65.00 a barrel.

Investors were still smarting from last week’s dismal U.S. payrolls report which put a question mark over the recovery there, and thus across the globe.

“The payrolls result doesn’t spell the end of the global sharemarket recovery,” said Craig James, chief economist at CommSec in Sydney, noting that forward-looking indicators were more encouraging.

One such indicator should be the ISM reading of the giant U.S. services sector due later on Monday, which is expected to show a rise to 46.0 in June from 44.0 the month before.

“But what the payrolls result does signify is that the U.S. economic recovery will be U-shaped, and very likely to be a very flat U,” said James.

Stock bulls had been hoping for something more “V”-shaped and the disappointment was clear in Thursday’s 2.9 percent drop in the S&P 500.

Having skipped a session on Friday for the Independence Day holiday, S&P 500 stock futures were off 0.78 percent in Asia at 886.30.

That implied the cash index was perilously close to breaking major chart support.

“The “neckline” of this pattern comes in at 886 and this is also very close to the much-watched 200-day moving average,” noted analysts at UBS in a note. “A break and close through these levels would be bearish for stocks and bullish for our fond leanings toward Treasuries.”

G8 TALKS DOLLARS

Investors were also wary ahead of the Group of Eight summit in L’Aquila, Italy on July 8-10, which has been expanded to include China and a host of developing nations.

China last week floated the idea of discussing the U.S. dollar’s place as the sole international reserve currency, causing a brief dip in the currency.

The G8 pushed back, however, with a source telling Reuters there was no appetite for such a momentous change.

“There is pretty broad consensus with the G8 that this is not the time to experiment with reserve currencies, however attractive it might seem,” the source said.

China also seemed keen to reassure Washington.

Speaking to reporters in Rome on Sunday, Chinese Vice Foreign Minister He Yafei said: “The U.S. dollar is still the most important and major reserve currency of the day, and we believe that that situation will continue for many years to come.”

That vote of confidence helped the U.S. dollar inch higher on the euro on Monday, though the yen made ground across the board.

For bond markets, supply will again loom large this week as the U.S. Treasury tests investor appetite with $73 billion in three-, 10- and 30-year paper.

The last batch of Treasury auctions drew surprisingly strong demand, crucially from foreign central banks who now hold almost $2 trillion of U.S. government debt.

However, traditionally central banks have been less keen on debt of 10-years or more and markets will be anxious in case demand at any of the tenders falls short of expectations. Yields on 10-year notes were little changed from Thursday at 3.50 percent.

(Editing by Neil Fullick) – Reuters

A U.S. federal judge in the GM bankruptcy case late Sunday approved the sale of the troubled automaker’s assets to a “new GM,” court documents showed.

Judge Robert Gerber, in giving his approval, said it “is the only available means to preserve the continuation of GM’s business.”

Lawyers wrapped up their closing arguments in the bankruptcy case Thursday, giving Gerber the long holiday weekend to make his decision.

Hanging over the case was a July 10 deadline imposed by the U.S. Treasury, which said it would walk away if a decision hadn’t been made.

Three days of hearings were held in bankruptcy court in New York, during which representatives of GM’s unsecured bondholders were able to present their arguments regarding the company’s reorganization.

The representatives said they shouldn’t be left behind in GM’s bankruptcy process, arguing that such a move is not legal.

Michael Richman — an attorney from the firm Patton Boggs, representing a group of dissident bondholders — addressed the judge about “the absence of real choice in the dominance of the government,” referring to the U.S. Treasury’s role in pushing forward the bankruptcy process.

He said the Treasury, in imposing its July 10 deadline, was using a “my way or the highway” attitude in refusing to consider alternate means of restructuring.

The court should not rush to get the deal done by July 10, he said.

“Since filing Chapter 11, GM’s assets are not wasting, not deteriorating and not melting,” he argued.

Oliver Parker, who said he was representing himself as a bondholder, told the judge, “it is not my interest, or any bondholder’s, for GM to liquidate. All we want is a chance to negotiate with the government fairly.”

David Jones, of the U.S. attorney’s office representing the federal government in the case said, “The government is not simply sacrificing principle for expediency, as we are accused of doing. We are using established law. The evidence is clear that the sale achieves the highest possible recovery for the assets being sold.”

Much of Wednesday’s testimony came from Harry Wilson, a member of the auto team that is helping GM and the U.S. Treasury with the bankruptcy process.

“This business can not withstand a process of uncertain duration,” said Wilson, who has made a career out of investing in distressed firms. “GM was far too large, too complex and too complicated to survive a [routine] Chapter 11 process.”

Mark Salzberg, an attorney with Washington-based Patton Boggs, representing unsecured bondholders of GM, asked Wilson a series of questions about the reasoning behind leaving bondholders out of the bankruptcy process.

Wilson said one of the strategic benefits of a 363 transaction, in which the preferred assets of the old GM are transferred to the new GM, is that “consent of bondholders was not required.”

Wilson said there were other benefits, including “speed, certainty and the ability to leave liabilities that did not have any benefit to the enterprise.”

New GM

The Detroit-based automaker, which filed for court protection on June 1, wants to use bankruptcy to create a new company and shed crushing debt and expensive contracts.

Under the plan, U.S. taxpayers would end up owning 60 percent of the new GM, with other stakes held by Canadian governments, bondholders and the United Auto Workers union.

Holders of $27 billion in GM bonds would get stock in the reorganized company, as would a union-controlled trust fund that would take stock rather than the $20 billion in cash it had been owed to pay future retiree health care costs. Those 650,000 retirees would have their coverage reduced.

GM plans to close more than a dozen factories, drop U.S. brands and close up to 40 percent of its network of 6,000 dealerships.

A successful and swift move through bankruptcy is crucial to GM’s restructuring and a key test of the Obama administration’s efforts to rescue GM and Chrysler.

Chrysler’s bankruptcy was approved on June 1, just hours before GM entered Chapter 11. The U.S. Supreme Court turned back an attempt by creditors to block the Chrysler bankruptcy.

In a move that could smooth its restructuring, GM filed documents in U.S. Bankruptcy Court in New York late last month, saying that it had agreed to accept legal responsibility, post-bankruptcy, for drivers who are injured by vehicle defects in old cars.

‘Business is doing better’

General Motors is trying to turn itself around amid slumping auto sales and a severe recession.

On Tuesday, GM’s chief executive testified that the company’s June sales were stronger than expected — partly because the bankruptcy process is going swiftly.

“Business is doing better for a number of reasons, one of which being that this process will be quick,” said General Motors CEO Fritz Henderson.

In 2008, GM announced its largest-ever annual loss, $38.7 billion. The company has $27 billion in debt. In May, its stock slipped below $1 a share for the first time since the Great Depression.

Lawyers representing a variety of claims against GM — including ones asbestos- and consumer-related — subjected Henderson to a barrage of questions in testimony. The decision to leave their clients’ claims out of the bankruptcy process was concluded during negotiations with the U.S. Treasury, he said. – CNN

European stocks dropped for a third straight week, the longest stretch of losses since March, as concern mounted that the economy won’t recover soon.

Volkswagen AG slumped 6.3 percent, leading declines in automakers, after U.S. car sales fell in June and Credit Suisse Group AG cut its assessment of the industry. ThyssenKrupp AG, Germany’s largest steelmaker, and Finland’s Outokumpu Oyj dropped more than 3 percent as an industry group said European steel consumption will fall in 2009.

The Dow Jones Stoxx 600 Index fell 0.2 percent this week to 204.08 after reports showed unemployment in Europe and the U.S. rose. The measure has fallen 4.8 percent since June 12 on speculation share prices have outpaced the outlook for economic growth after a three-month rally pushed valuations to 25.4 times earnings, near the highest level since 2004. The benchmark index for European equities still rose 17 percent in the second quarter, the biggest gain since 1999.

“Macroeconomic data are still disappointing and show economic recovery is not yet a reality,” said Emmanuel Soupre, who helps manage about $18 billion at Neuflize OBC in Paris. “We are going to keep fluctuating between optimism and pessimism in the months to come.”

Unemployment in the 16-member euro region increased to 9.5 percent in May from a revised 9.3 percent in April, the European Union statistics office in Luxembourg said this week. The U.S. unemployment rate rose to 9.5 percent in June, the highest since August 1983.

U.S. Consumer Confidence

A separate report showed confidence among U.S. consumers slipped unexpectedly in June. The Conference Board’s sentiment index decreased to 49.3 from a revised 54.8 in May.

National benchmark indexes fell in eight of the 18 western European markets. The U.K.’s FTSE 100 slipped 0.1 percent, while Germany’s DAX dropped 1.4 percent. France’s CAC retreated 0.3 percent as PSA Peugeot Citroen and Renault SA declined.

European Central Bank President Jean-Claude Trichet signaled the ECB has no immediate plans to cut interest rates again and said the euro region’s economy will start to recover in the middle of 2010. The ECB kept its key lending rate at a record low of 1 percent.

Volkswagen slumped 6.3 percent as Europe’s largest carmaker said U.S. sales in June fell 18 percent. Separately, German car production is expected to drop 17 percent this year, said Matthias Wissmann, the president of the country’s carmakers association, known as VDA.

‘Increasing Risk’

European auto shares were downgraded to “market weight” from “overweight” by Credit Suisse analysts, who said, “we see increasing risk to first half 2010 estimated cash flows as retail volume and price support from scrappage schemes fade.”

Automobile and parts shares lost 2.9 percent as a group, the second-biggest decline among 19 industry groups in the Stoxx 600. Peugeot, France’s largest carmaker, slid 2.8 percent, while smaller rival Renault declined 2.6 percent.

Basic-resource shares dropped 3 percent for the biggest decline in the Stoxx 600. ThyssenKrupp sank 4.4 percent and Outokumpu, a Finnish stainless-steel maker, dropped 3.2 percent. Steel consumption in the region will fall by almost 33 percent in 2009 as the economic slump saps demand, the European Federation of Iron and Steel Industries said this week.

Commerzbank AG, Germany’s second-largest bank, jumped 13 percent as lawmakers backed Finance Minister Peer Steinbrueck’s plan to purge state and private banks of toxic assets, more than nine months after the global financial crisis brought the banking system to its knees.

Best Performers

Bank shares were the best-performing group in the Stoxx 600 this week, adding 1.2 percent. Barclays Plc, the U.K.’s third- biggest bank, rallied 11 percent.

U.K. consumer confidence increased to the highest level in 14 months in June as shoppers became more optimistic that the worst of the recession is over, GfK NOP said. Debenhams Plc, the U.K.’s second-largest department-store company, rose 12 percent.

CSM NV, the world’s biggest supplier of ingredients to bakeries, added 18 percent as the shares were raised to “add” from “reduce” at Petercam SA. That was the steepest weekly gain on record and the best performance in the Stoxx 600.

Elan Corp. climbed 15 percent. Johnson & Johnson agreed to pay $1 billion for a stake in the Irish drugmaker and will develop the company’s medicines against Alzheimer’s disease.

To contact the reporter on this story: Julie Cruz in Frankfurt at jcruz6@bloomberg.net. – Bloomberg