OGX may present restructuring plan to bondholders on Tuesday

By Joan Magee

Thu Sep 5, 2013 6:18pm EDT

NEW YORK, Sept 5 (IFR) - OGX could ask bondholders as soon as Tuesday to inject USD250m-USD500m in cash alongside a plan to convert USD3.6bn in debt to equity, said an investor who had been involved in negotiations with the troubled oil company owned by businessman Eike Batista.

The decision on how to restructure has to be a quick one.

OGX faces bond interest payments of about USD40m in October and USD100m in December, but the investor called October 28 the "drop dead date," by which the company has to restructure in order to avoid default.

"Hearing this news is the quickest way to put fear into the bondholders," said the distressed debt investor. "Before they were afraid they wouldn't get their money back and now they're having to consider paying USD250m to USD500m in order to get any kind of return. I'd think the likely number would be closer to USD250m."

After the news came out earlier today through new Folha de S Paulo, the OGX 2022s dropped 15.75 mid-market, only to end the day at around 17.00 mid-market.

In the middle of last year, OGX failed to meet oil production targets, something the investor said came down to not having done the proper geological homework in terms of how to extract the oil once it had been found.

"There's not a tangible value here yet, so you're speculating and buying oil blocks and hoping the oil comes up," he added. "It was really an equity trade. You're really making equity bets when you're investing in something like that. It was the wrong capital structure to have USD4bn in debt."

This comes after Batista sold another 177.2m shares between August 29 to September 3, according to a regulatory filing. Since March 2013, Batista has sold 11.14% of the company. Batista asserted that he still controls over 50.01% of the outfit.

Last week, around 50% of holders of OGX's USD3.6bn in bonds assembled with the help of Rothschild to engage with the outfit. OGX hired Blackstone Group as a financial adviser earlier in August. Its cash position, as of end-June, stood at USD326m, an amount that would not cover expenses over the next six months.

"Some possibilities of what could happen are a pre-pack filing or a tender or an agreement to clip all the coupons until the end as they secure more capital," said the investor.

Meanwhile, Batista still hopes to sell a 40% stake in the Tubarao Martelo field for USD850m to state-owned Malaysian company Petronas, in a deal that would provide a lifeline to his company.

SECOND THOUGHTS

However, Petronas says it will only close the deal after OGX restructures its debt.

Petronas Chief Executive Shamsul Azhar Abbas said OGX's "debt restructuring has to happen first" for the deal to be finalized.

The acquisition of the stake "is still pending clarity with regard to the restructuring exercise," Abbas told reporters in Kuala Lumpur.

In a regulatory filing last week OGX responded: "Petronas does not have the right to delay the closing of the deal with OGX as long as the conditions established in the contract are met, none of which mentions debt restructuring."

"It is extremely complicated and there are a lot of moving parts," said the distressed debt investor. "At the end of the day, every premise is based on the success of Tuberao Martelo having oil and of the possibility that this oil may be lifted economically. It may be that Petronas is backing out after all, as it may be too hot for them to handle."

OGX had also been fined about USD1.41m for suspending development in the Tubarao Tigre, Tubarao Garo and Tubarao Areia fields. The company said it would not to take on any exploratory risk in areas where it had failed to secure partnerships.

"If there isn't a way to get that oil out of the ground, then the bondholders are losing that USD3.6bn in debt and another USD250m to USD500m if OGX is wrong again," said the investor. "It's not that they didn't find oil in other fields. It's that it was poorly executed, and that they didn't do the requisite analysis and ran out of money before."

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Credit Agricole adds new twist to CoCos to counter S&P changes

By Aimee Donnellan

Thu Sep 5, 2013 10:15am EDT

LONDON, Sept 5 (IFR) - Credit Agricole is preparing to break new ground in the burgeoning bank capital sector with the sale of a high-trigger permanent write-down bond that will convert to a more cost-efficient structure if S&P changes its rating methodology.

The French bank is planning to issue a 20-year non-call five-year US dollar denominated Tier 2 subordinated instrument as it seeks to address S&P's Risk-Adjusted Capital (RAC) ratio - the agency's way of assessing banks' capital adequacy positions.

Credit Agricole CIB is acting as the global coordinator, while Citi, Credit Agricole CIB, Deutsche Bank, Goldman Sachs, HSBC and UBS are joint lead managers. The borrower has been meeting investors around the globe this week, and sources say a deal could emerge as early as next week.

The structure is likely to raise a few eyebrows. The bond will be permanently written down to zero if the bank's Common Equity Tier 1 ratio falls below 7%. That ratio stood at 11.3% as of June of this year.

But more importantly, the issuer has included a coupon step-down provision, with the bonds converting into vanilla Tier 2 instruments if S&P changes its rating methodology.

Credit Agricole will also reduce the coupons if S&P deems the bonds no longer count as 100% equity credit.

It's easy to understand why Credit Agricole is going down this route. Societe Generale and Danske Bank were both burned by S&P in July when it changed its ratings methodology on the banks' subordinated debt, meaning the securities were no longer included in the RAC ratio.

Bankers are aware that the ratings clause will come at a price, as investors may lose out on precious spread if S&P changes its guidelines.

"We've been having some interesting discussions around the value of coupon deferrals, permanent write-down versus temporary write-down, and now we have the S&P clause to factor in," said a banker.

"Credit Agricole weighed up a few possibilities for issuing capital and decided that increasing their S&P equity credit was a much more near term driver for issuance," he added.

Barclays's two high trigger permanent write-down Tier 2 CoCos are being considered the best comparables for structure and pricing.

The USD3bn 10-year bullet Tier 2 that priced at 7.625% in November last year is bid at a yield to maturity of 7.9%, and a USD1bn 7.75% 10-year non-call five that priced in April is bid at a yield to call of 7.16%.

Last week's 8.25% USD1.25bn Additional Tier 1 instrument from Societe Generale is another reference point.

The 144A/Reg S bonds will be rated BBB-/BBB- by S&P and Fitch. Coupons will be paid semi-annually and will be fixed until the first call date in 2018. After that, coupons will reset to the then-prevailing five-year mid-swap rate plus a margin. (Reporting by Aimee Donnellan, editing by Julian Baker)

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PRESS DIGEST-New York Times business news - Sept 6

Sept 6 | Fri Sep 6, 2013 12:38am EDT

Sept 6 (Reuters) - The following are the top stories on the New York Times business pages. Reuters has not verified these stories and does not vouch for their accuracy.

* The Group of 20 summit meeting is expected to enact laws that would tighten rules for multinational companies that use subsidiaries in certain countries to legally avoid paying taxes. ()

* David Blech, who was once hailed as the king of biotechnology and was worth about $300 million, is about to begin a four-year prison term, having pleaded guilty to stock manipulation. ()

* Activist investors scored another victory on Thursday when the board of Timken Co agreed to spin off its steel business from its industrial bearings operations amid pressure from two big shareholders. ()

* The publisher and editor of The Las Vegas Sun, Brian Greenspun, is suing to block a deal that could force the newspaper to close. ()

* Russian Internet company Mail.ru has sold its remaining stake in Facebook for about $525 million, benefiting from a strong rebound in its share price. ()

* The National Security Agency has secretly circumvented or cracked much of the digital scrambling that protects global commerce, e-mails, phone calls, medical records and Web searches. ()

* Bangkok-based trader Badin Rungruangnavarat has agreed to pay $5.2 million to settle charges that he traded on insider information tied to Smithfield Foods' proposed $4.7 billion sale to a Chinese food processor, the Securities and Exchange Commission announced on Thursday. ()

* Anchor BanCorp Wisconsin, a small bank holding company in Wisconsin, plans to use Chapter 11 to recapitalize, not to liquidate as typically happens. The company hopes to use the bankruptcy to save its bank, AnchorBank. ()

* Brazil's securities and exchange commission says it has opened a new formal investigation into the business dealings of onetime billionaire Eike Batista and five other executives of the petroleum company OGX. ()

* Alliant Techsystems agreed on Thursday to buy Bushnell Group Holdings, a top maker of gun accessories like rifle scopes, for $985 million in cash. The deal is one of the first since the Newtown, Connecticut school shooting, an incident that has put pressure on some owners of gun manufacturers and related products to sell their holdings. ()

* Line, which has hundreds of millions of users in Asia and parts of Europe and Latin America, is beginning a push into the United States. ()

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Michigan governor seeks to dodge deposition in Detroit bankruptcy case

By Joseph Lichterman and Bernie Woodall

DETROIT | Fri Aug 30, 2013 7:13pm EDT

DETROIT Aug 30 (Reuters) - Michigan Governor Rick Snyder and other state officials are seeking to avoid being questioned by Detroit worker and retiree unions in the city's bankruptcy case, according to a motion filed on Friday.

Attorneys for the state, in a motion to quash depositions of Snyder, Michigan Treasurer Andy Dillon and others, said they would not be able to offer testimony relevant to the issue of whether Detroit is eligible to enter Chapter 9 protection.

The depositions, if they occur, would happen ahead of the late October start to hearings before U.S. Bankruptcy Judge Steven Rhodes on the eligibility issue.

The city filed the largest-ever municipal bankruptcy in U.S. history on July 18. Snyder, a Republican, had to approve a request from Orr to file for bankruptcy protection.

Ed McNeil of the American Federation of State, County and Municipal Employees Local 25 in Detroit, called Snyder's attempt to dodge being questioned "a cowardly attempt to hide behind a malicious legal maneuver."

The eligibility argument will focus on whether Detroit is insolvent, whether the city negotiated in good faith with its creditors, whether there were too many creditors to make negotiations feasible, and whether Detroit's bankruptcy petition of was filed in bad faith.

"The eligibility determination was made - and could only be made - by the city of Detroit and Emergency Manager Kevyn Orr," the state's motion said.

But McNeil said, "Every step of the way Governor Snyder has tried to stack the deck in his favor. He has blocked all opportunity for meaningful negotiations and mediation. Today's move is another attempt to bend the rules."

The state said the governor's reasoning for allowing the filing were laid out in a public letter Snyder wrote to Orr authorizing the city to seek bankruptcy protection.

It also argued that any request for discovery from state officials should be made after Orr and other city officials are deposed because "there has been no showing that the state officials were involved in any relevant eligibility determinations made prior to the filing of the petition."

Orr was deposed on Friday, but not on the question of the city's eligibility to file for bankruptcy protection.

Orr was deposed by attorneys representing objectors to a proposed deal that would terminate interest-rate swap agreements on casino tax revenue, which were used to hedge interest-rate exposure on some of the city's pension debt, at a discounted rate of as much as 25 percent, saving the city more than $70 million. (Reporting by Joseph Lichterman; Editing by Lisa Shumaker)

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Insolvent town exposes gulf between EU dreams and reality

Sun Sep 1, 2013 10:00am EDT

* Aninoasa is first Romanian town to file for insolvency

* Hundreds of Romanian towns can't support themselves

* EU membership not delivering hoped-for changes

By Luiza Ilie

ANINOASA, Romania, Sept 1 (Reuters) - On an abandoned storefront, an old poster advertises one of the few career opportunities available in this Romanian town: naked webcam models wanted for Internet chatrooms.

If joining the European Union was supposed to lift Romania out of poverty, it has yet to work in Aninoasa, a town of 4,800 people in the mountainous central region of Jiu Valley.

Six years after Romania's accession to the EU, not only is Aninoasa still poor - it has also become the first town in Romania to file for insolvency.

Town officials took out a bank loan to fund investment projects, they could not repay it, they fell behind on paying other bills and over the years they got themselves so deep in debt they could not carry on.

"Our mayor likes to joke there are only two major towns in insolvency in the world, Detroit and us," said deputy mayor Adrian Albescu, brought in last year after the previous administration lost the election. "For the past year we have done nothing else but pay debts."

Aninoasa's experience raises a question: did the European Union make a mistake when, six years ago, it admitted Romania, a country with living standards and levels of governance well below the average for the bloc?

It's not just about Romania. Bulgaria joined at the same time and is still saddled with corruption and poverty, Croatia joined in July bringing problems of organised crime and the legacy of war in the 1990s, and EU candidates such as such as Albania and Macedonia have even deeper troubles.

In Romania's case the calculation was that pressure from Brussels, coupled with EU development cash, would help the country catch up. In many ways it has: Romania's economic output has almost doubled since 2006.

But in other respects, the lessons learned with Romania, as well as neighbouring Bulgaria, could make the EU much more sceptical the next time it contemplates bringing in new members.

When enlargement is next on its agenda, the European Commission will view the experience with Romanian local administrations as a "negative example," said Sergiu Miscoiu of think tank CESPRI.

SPIRAL OF DEBT

One of the biggest difficulties for Romania is that, while billions of euros worth of EU funds are on offer, it often fails to qualify for the money because it cannot convince Brussels it will spend it honestly and efficiently.

In Aninoasa, former mayor Ilie Botgros held the office for 20 years until he was defeated in an election last year.

During that time the town's economy declined, a process which accelerated in 2006 when the government shut down the coal mine that was the town's sole employer.

As income from local taxes fell, the town hall's revenue shrank and officials now have only 4.2 million lei ($1.25 million) per year to cover staff wages, public utility bills and much-needed projects to improve infrastructure.

Many of the roads in the town are surfaced with gravel, some neighbourhoods are not connected to the sewage system or gas supply, and there are hundred-year-old buildings which have no central heating against freezing winter temperatures and are in dire need of repair.

The town currently has only two projects with European funding: one is a sewage scheme, the other a move to renovate Aninoasa's cultural centre, which should include a gym, a library and meeting hall.

Botgros went instead to the bank. In 2006 he took out a loan worth 3 million lei ($893,600) from Romania's top lender BCR, owned by Austrian Erste Bank. He said he used the money to pay off previous investments, including work on a bridge and a gas pipeline in the north of town.

But the debt was stacking up. By now, Aninoasa has debts worth a total of roughly 6 million lei. The town owes money to 70 service providers. Public lighting was cut off for months last year because of unpaid bills.

The town could have carried on getting deeper into debt, but this year Romania tightened up its rules on municipal finances.

It started enforcing a law that requires local governments to file for insolvency if they are 120 days or more behind with repayments and their debt exceeds 50 percent of revenue. Aninoasa filed for insolvency in June. A court-appointed administrator is working on a plan to tackle debts.

The new mayor has filed a criminal complaint against Botgros over his management of town finances, and prosecutors have launched an inquiry, but it is too soon to tell whether any charges will be made. Botgros denies any wrongdoing.

"Do you really think that after 20 years in office I went crazy or started stealing money or something," said Botgros, who is now a local council member and plans to run for mayor in the next election. "I say I did what was needed for the community."

WEAK INSTITUTIONS

Aninoasa is probably not the last town that will file for insolvency. A study from the independent Institute for Public Policy showed hundreds of towns cannot cover their running costs, let alone invest in basic infrastructure. Poor tax collection and one of the EU's highest inflation rates do not help.

As with Aninoasa, EU money is available in theory, but in practice a highly segmented local administration is too weak to be able to use the funds effectively.

Romania ranks 116 out of 144 states in an index of institutional strength, according to the World Economic Forum's competitiveness report.

The EU has set aside 20 billion euros in non-refundable development money for Romania to build roads, sewage systems and central heating facilities in its impoverished regions during 2007-2013, aimed primarily at local authorities.

The country has so far secured only a fifth.

Roughly one in two mayors that have tapped funds were penalised later for various irregularities. The European Commission briefly blocked funds last year.

"There is reluctance to talk about European funds given that it is not simple to tap them, it is not simple to implement projects," said Elena Iorga of the Institute for Public Policy.

A lack of competence is, in some cases, compounded by cronyism and corruption - adding to the EU's reasons for not allocating cash.

The National Integrity Agency, an anti-corruption watchdog, has ruled that 193 mayors, deputy mayors and councillors had conflicts of interest, falsified statements or had wealth they could not account for since the middle of last year.

A study by the agency of 2,856 local councillors from all political parties showed almost half of them or their spouses owned private service providers, several of which had been awarded public contracts.

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RPT-Insolvent town exposes gulf between EU dreams and reality

Mon Sep 2, 2013 1:55am EDT

* Aninoasa is first Romanian town to file for insolvency

* Hundreds of Romanian towns can't support themselves

* EU membership not delivering hoped-for changes

By Luiza Ilie

ANINOASA, Romania, Sept 1 (Reuters) - On an abandoned storefront, an old poster advertises one of the few career opportunities available in this Romanian town: naked webcam models wanted for Internet chatrooms.

If joining the European Union was supposed to lift Romania out of poverty, it has yet to work in Aninoasa, a town of 4,800 people in the mountainous central region of Jiu Valley.

Six years after Romania's accession to the EU, not only is Aninoasa still poor - it has also become the first town in Romania to file for insolvency.

Town officials took out a bank loan to fund investment projects, they could not repay it, they fell behind on paying other bills and over the years they got themselves so deep in debt they could not carry on.

"Our mayor likes to joke there are only two major towns in insolvency in the world, Detroit and us," said deputy mayor Adrian Albescu, brought in last year after the previous administration lost the election. "For the past year we have done nothing else but pay debts."

Aninoasa's experience raises a question: did the European Union make a mistake when, six years ago, it admitted Romania, a country with living standards and levels of governance well below the average for the bloc?

It's not just about Romania. Bulgaria joined at the same time and is still saddled with corruption and poverty, Croatia joined in July bringing problems of organised crime and the legacy of war in the 1990s, and EU candidates such as such as Albania and Macedonia have even deeper troubles.

In Romania's case the calculation was that pressure from Brussels, coupled with EU development cash, would help the country catch up. In many ways it has: Romania's economic output has almost doubled since 2006.

But in other respects, the lessons learned with Romania, as well as neighbouring Bulgaria, could make the EU much more sceptical the next time it contemplates bringing in new members.

When enlargement is next on its agenda, the European Commission will view the experience with Romanian local administrations as a "negative example," said Sergiu Miscoiu of think tank CESPRI.

SPIRAL OF DEBT

One of the biggest difficulties for Romania is that, while billions of euros worth of EU funds are on offer, it often fails to qualify for the money because it cannot convince Brussels it will spend it honestly and efficiently.

In Aninoasa, former mayor Ilie Botgros held the office for 20 years until he was defeated in an election last year.

During that time the town's economy declined, a process which accelerated in 2006 when the government shut down the coal mine that was the town's sole employer.

As income from local taxes fell, the town hall's revenue shrank and officials now have only 4.2 million lei ($1.25 million) per year to cover staff wages, public utility bills and much-needed projects to improve infrastructure.

Many of the roads in the town are surfaced with gravel, some neighbourhoods are not connected to the sewage system or gas supply, and there are hundred-year-old buildings which have no central heating against freezing winter temperatures and are in dire need of repair.

The town currently has only two projects with European funding: one is a sewage scheme, the other a move to renovate Aninoasa's cultural centre, which should include a gym, a library and meeting hall.

Botgros went instead to the bank. In 2006 he took out a loan worth 3 million lei ($893,600) from Romania's top lender BCR, owned by Austrian Erste Bank. He said he used the money to pay off previous investments, including work on a bridge and a gas pipeline in the north of town.

But the debt was stacking up. By now, Aninoasa has debts worth a total of roughly 6 million lei. The town owes money to 70 service providers. Public lighting was cut off for months last year because of unpaid bills.

The town could have carried on getting deeper into debt, but this year Romania tightened up its rules on municipal finances.

It started enforcing a law that requires local governments to file for insolvency if they are 120 days or more behind with repayments and their debt exceeds 50 percent of revenue. Aninoasa filed for insolvency in June. A court-appointed administrator is working on a plan to tackle debts.

The new mayor has filed a criminal complaint against Botgros over his management of town finances, and prosecutors have launched an inquiry, but it is too soon to tell whether any charges will be made. Botgros denies any wrongdoing.

"Do you really think that after 20 years in office I went crazy or started stealing money or something," said Botgros, who is now a local council member and plans to run for mayor in the next election. "I say I did what was needed for the community."

WEAK INSTITUTIONS

Aninoasa is probably not the last town that will file for insolvency. A study from the independent Institute for Public Policy showed hundreds of towns cannot cover their running costs, let alone invest in basic infrastructure. Poor tax collection and one of the EU's highest inflation rates do not help.

As with Aninoasa, EU money is available in theory, but in practice a highly segmented local administration is too weak to be able to use the funds effectively.

Romania ranks 116 out of 144 states in an index of institutional strength, according to the World Economic Forum's competitiveness report.

The EU has set aside 20 billion euros in non-refundable development money for Romania to build roads, sewage systems and central heating facilities in its impoverished regions during 2007-2013, aimed primarily at local authorities.

The country has so far secured only a fifth.

Roughly one in two mayors that have tapped funds were penalised later for various irregularities. The European Commission briefly blocked funds last year.

"There is reluctance to talk about European funds given that it is not simple to tap them, it is not simple to implement projects," said Elena Iorga of the Institute for Public Policy.

A lack of competence is, in some cases, compounded by cronyism and corruption - adding to the EU's reasons for not allocating cash.

The National Integrity Agency, an anti-corruption watchdog, has ruled that 193 mayors, deputy mayors and councillors had conflicts of interest, falsified statements or had wealth they could not account for since the middle of last year.

A study by the agency of 2,856 local councillors from all political parties showed almost half of them or their spouses owned private service providers, several of which had been awarded public contracts.

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RPT-Insolvent town exposes gulf between EU dreams and reality

Mon Sep 2, 2013 1:55am EDT

* Aninoasa is first Romanian town to file for insolvency

* Hundreds of Romanian towns can't support themselves

* EU membership not delivering hoped-for changes

By Luiza Ilie

ANINOASA, Romania, Sept 1 (Reuters) - On an abandoned storefront, an old poster advertises one of the few career opportunities available in this Romanian town: naked webcam models wanted for Internet chatrooms.

If joining the European Union was supposed to lift Romania out of poverty, it has yet to work in Aninoasa, a town of 4,800 people in the mountainous central region of Jiu Valley.

Six years after Romania's accession to the EU, not only is Aninoasa still poor - it has also become the first town in Romania to file for insolvency.

Town officials took out a bank loan to fund investment projects, they could not repay it, they fell behind on paying other bills and over the years they got themselves so deep in debt they could not carry on.

"Our mayor likes to joke there are only two major towns in insolvency in the world, Detroit and us," said deputy mayor Adrian Albescu, brought in last year after the previous administration lost the election. "For the past year we have done nothing else but pay debts."

Aninoasa's experience raises a question: did the European Union make a mistake when, six years ago, it admitted Romania, a country with living standards and levels of governance well below the average for the bloc?

It's not just about Romania. Bulgaria joined at the same time and is still saddled with corruption and poverty, Croatia joined in July bringing problems of organised crime and the legacy of war in the 1990s, and EU candidates such as such as Albania and Macedonia have even deeper troubles.

In Romania's case the calculation was that pressure from Brussels, coupled with EU development cash, would help the country catch up. In many ways it has: Romania's economic output has almost doubled since 2006.

But in other respects, the lessons learned with Romania, as well as neighbouring Bulgaria, could make the EU much more sceptical the next time it contemplates bringing in new members.

When enlargement is next on its agenda, the European Commission will view the experience with Romanian local administrations as a "negative example," said Sergiu Miscoiu of think tank CESPRI.

SPIRAL OF DEBT

One of the biggest difficulties for Romania is that, while billions of euros worth of EU funds are on offer, it often fails to qualify for the money because it cannot convince Brussels it will spend it honestly and efficiently.

In Aninoasa, former mayor Ilie Botgros held the office for 20 years until he was defeated in an election last year.

During that time the town's economy declined, a process which accelerated in 2006 when the government shut down the coal mine that was the town's sole employer.

As income from local taxes fell, the town hall's revenue shrank and officials now have only 4.2 million lei ($1.25 million) per year to cover staff wages, public utility bills and much-needed projects to improve infrastructure.

Many of the roads in the town are surfaced with gravel, some neighbourhoods are not connected to the sewage system or gas supply, and there are hundred-year-old buildings which have no central heating against freezing winter temperatures and are in dire need of repair.

The town currently has only two projects with European funding: one is a sewage scheme, the other a move to renovate Aninoasa's cultural centre, which should include a gym, a library and meeting hall.

Botgros went instead to the bank. In 2006 he took out a loan worth 3 million lei ($893,600) from Romania's top lender BCR, owned by Austrian Erste Bank. He said he used the money to pay off previous investments, including work on a bridge and a gas pipeline in the north of town.

But the debt was stacking up. By now, Aninoasa has debts worth a total of roughly 6 million lei. The town owes money to 70 service providers. Public lighting was cut off for months last year because of unpaid bills.

The town could have carried on getting deeper into debt, but this year Romania tightened up its rules on municipal finances.

It started enforcing a law that requires local governments to file for insolvency if they are 120 days or more behind with repayments and their debt exceeds 50 percent of revenue. Aninoasa filed for insolvency in June. A court-appointed administrator is working on a plan to tackle debts.

The new mayor has filed a criminal complaint against Botgros over his management of town finances, and prosecutors have launched an inquiry, but it is too soon to tell whether any charges will be made. Botgros denies any wrongdoing.

"Do you really think that after 20 years in office I went crazy or started stealing money or something," said Botgros, who is now a local council member and plans to run for mayor in the next election. "I say I did what was needed for the community."

WEAK INSTITUTIONS

Aninoasa is probably not the last town that will file for insolvency. A study from the independent Institute for Public Policy showed hundreds of towns cannot cover their running costs, let alone invest in basic infrastructure. Poor tax collection and one of the EU's highest inflation rates do not help.

As with Aninoasa, EU money is available in theory, but in practice a highly segmented local administration is too weak to be able to use the funds effectively.

Romania ranks 116 out of 144 states in an index of institutional strength, according to the World Economic Forum's competitiveness report.

The EU has set aside 20 billion euros in non-refundable development money for Romania to build roads, sewage systems and central heating facilities in its impoverished regions during 2007-2013, aimed primarily at local authorities.

The country has so far secured only a fifth.

Roughly one in two mayors that have tapped funds were penalised later for various irregularities. The European Commission briefly blocked funds last year.

"There is reluctance to talk about European funds given that it is not simple to tap them, it is not simple to implement projects," said Elena Iorga of the Institute for Public Policy.

A lack of competence is, in some cases, compounded by cronyism and corruption - adding to the EU's reasons for not allocating cash.

The National Integrity Agency, an anti-corruption watchdog, has ruled that 193 mayors, deputy mayors and councillors had conflicts of interest, falsified statements or had wealth they could not account for since the middle of last year.

A study by the agency of 2,856 local councillors from all political parties showed almost half of them or their spouses owned private service providers, several of which had been awarded public contracts.

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Michigan governor seeks to dodge deposition in Detroit bankruptcy case

By Joseph Lichterman and Bernie Woodall

DETROIT | Fri Aug 30, 2013 7:13pm EDT

DETROIT Aug 30 (Reuters) - Michigan Governor Rick Snyder and other state officials are seeking to avoid being questioned by Detroit worker and retiree unions in the city's bankruptcy case, according to a motion filed on Friday.

Attorneys for the state, in a motion to quash depositions of Snyder, Michigan Treasurer Andy Dillon and others, said they would not be able to offer testimony relevant to the issue of whether Detroit is eligible to enter Chapter 9 protection.

The depositions, if they occur, would happen ahead of the late October start to hearings before U.S. Bankruptcy Judge Steven Rhodes on the eligibility issue.

The city filed the largest-ever municipal bankruptcy in U.S. history on July 18. Snyder, a Republican, had to approve a request from Orr to file for bankruptcy protection.

Ed McNeil of the American Federation of State, County and Municipal Employees Local 25 in Detroit, called Snyder's attempt to dodge being questioned "a cowardly attempt to hide behind a malicious legal maneuver."

The eligibility argument will focus on whether Detroit is insolvent, whether the city negotiated in good faith with its creditors, whether there were too many creditors to make negotiations feasible, and whether Detroit's bankruptcy petition of was filed in bad faith.

"The eligibility determination was made - and could only be made - by the city of Detroit and Emergency Manager Kevyn Orr," the state's motion said.

But McNeil said, "Every step of the way Governor Snyder has tried to stack the deck in his favor. He has blocked all opportunity for meaningful negotiations and mediation. Today's move is another attempt to bend the rules."

The state said the governor's reasoning for allowing the filing were laid out in a public letter Snyder wrote to Orr authorizing the city to seek bankruptcy protection.

It also argued that any request for discovery from state officials should be made after Orr and other city officials are deposed because "there has been no showing that the state officials were involved in any relevant eligibility determinations made prior to the filing of the petition."

Orr was deposed on Friday, but not on the question of the city's eligibility to file for bankruptcy protection.

Orr was deposed by attorneys representing objectors to a proposed deal that would terminate interest-rate swap agreements on casino tax revenue, which were used to hedge interest-rate exposure on some of the city's pension debt, at a discounted rate of as much as 25 percent, saving the city more than $70 million. (Reporting by Joseph Lichterman; Editing by Lisa Shumaker)

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Insolvent town exposes gulf between EU dreams and reality

Sun Sep 1, 2013 10:00am EDT

* Aninoasa is first Romanian town to file for insolvency

* Hundreds of Romanian towns can't support themselves

* EU membership not delivering hoped-for changes

By Luiza Ilie

ANINOASA, Romania, Sept 1 (Reuters) - On an abandoned storefront, an old poster advertises one of the few career opportunities available in this Romanian town: naked webcam models wanted for Internet chatrooms.

If joining the European Union was supposed to lift Romania out of poverty, it has yet to work in Aninoasa, a town of 4,800 people in the mountainous central region of Jiu Valley.

Six years after Romania's accession to the EU, not only is Aninoasa still poor - it has also become the first town in Romania to file for insolvency.

Town officials took out a bank loan to fund investment projects, they could not repay it, they fell behind on paying other bills and over the years they got themselves so deep in debt they could not carry on.

"Our mayor likes to joke there are only two major towns in insolvency in the world, Detroit and us," said deputy mayor Adrian Albescu, brought in last year after the previous administration lost the election. "For the past year we have done nothing else but pay debts."

Aninoasa's experience raises a question: did the European Union make a mistake when, six years ago, it admitted Romania, a country with living standards and levels of governance well below the average for the bloc?

It's not just about Romania. Bulgaria joined at the same time and is still saddled with corruption and poverty, Croatia joined in July bringing problems of organised crime and the legacy of war in the 1990s, and EU candidates such as such as Albania and Macedonia have even deeper troubles.

In Romania's case the calculation was that pressure from Brussels, coupled with EU development cash, would help the country catch up. In many ways it has: Romania's economic output has almost doubled since 2006.

But in other respects, the lessons learned with Romania, as well as neighbouring Bulgaria, could make the EU much more sceptical the next time it contemplates bringing in new members.

When enlargement is next on its agenda, the European Commission will view the experience with Romanian local administrations as a "negative example," said Sergiu Miscoiu of think tank CESPRI.

SPIRAL OF DEBT

One of the biggest difficulties for Romania is that, while billions of euros worth of EU funds are on offer, it often fails to qualify for the money because it cannot convince Brussels it will spend it honestly and efficiently.

In Aninoasa, former mayor Ilie Botgros held the office for 20 years until he was defeated in an election last year.

During that time the town's economy declined, a process which accelerated in 2006 when the government shut down the coal mine that was the town's sole employer.

As income from local taxes fell, the town hall's revenue shrank and officials now have only 4.2 million lei ($1.25 million) per year to cover staff wages, public utility bills and much-needed projects to improve infrastructure.

Many of the roads in the town are surfaced with gravel, some neighbourhoods are not connected to the sewage system or gas supply, and there are hundred-year-old buildings which have no central heating against freezing winter temperatures and are in dire need of repair.

The town currently has only two projects with European funding: one is a sewage scheme, the other a move to renovate Aninoasa's cultural centre, which should include a gym, a library and meeting hall.

Botgros went instead to the bank. In 2006 he took out a loan worth 3 million lei ($893,600) from Romania's top lender BCR, owned by Austrian Erste Bank. He said he used the money to pay off previous investments, including work on a bridge and a gas pipeline in the north of town.

But the debt was stacking up. By now, Aninoasa has debts worth a total of roughly 6 million lei. The town owes money to 70 service providers. Public lighting was cut off for months last year because of unpaid bills.

The town could have carried on getting deeper into debt, but this year Romania tightened up its rules on municipal finances.

It started enforcing a law that requires local governments to file for insolvency if they are 120 days or more behind with repayments and their debt exceeds 50 percent of revenue. Aninoasa filed for insolvency in June. A court-appointed administrator is working on a plan to tackle debts.

The new mayor has filed a criminal complaint against Botgros over his management of town finances, and prosecutors have launched an inquiry, but it is too soon to tell whether any charges will be made. Botgros denies any wrongdoing.

"Do you really think that after 20 years in office I went crazy or started stealing money or something," said Botgros, who is now a local council member and plans to run for mayor in the next election. "I say I did what was needed for the community."

WEAK INSTITUTIONS

Aninoasa is probably not the last town that will file for insolvency. A study from the independent Institute for Public Policy showed hundreds of towns cannot cover their running costs, let alone invest in basic infrastructure. Poor tax collection and one of the EU's highest inflation rates do not help.

As with Aninoasa, EU money is available in theory, but in practice a highly segmented local administration is too weak to be able to use the funds effectively.

Romania ranks 116 out of 144 states in an index of institutional strength, according to the World Economic Forum's competitiveness report.

The EU has set aside 20 billion euros in non-refundable development money for Romania to build roads, sewage systems and central heating facilities in its impoverished regions during 2007-2013, aimed primarily at local authorities.

The country has so far secured only a fifth.

Roughly one in two mayors that have tapped funds were penalised later for various irregularities. The European Commission briefly blocked funds last year.

"There is reluctance to talk about European funds given that it is not simple to tap them, it is not simple to implement projects," said Elena Iorga of the Institute for Public Policy.

A lack of competence is, in some cases, compounded by cronyism and corruption - adding to the EU's reasons for not allocating cash.

The National Integrity Agency, an anti-corruption watchdog, has ruled that 193 mayors, deputy mayors and councillors had conflicts of interest, falsified statements or had wealth they could not account for since the middle of last year.

A study by the agency of 2,856 local councillors from all political parties showed almost half of them or their spouses owned private service providers, several of which had been awarded public contracts.

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