FT : Germany faces €170bn budget gap despite massive borrowing

Germany faces €170bn budget gap despite massive borrowing
Finance minister Lars Klingbeil says deep cuts needed in areas other than infrastructure and defence

Germany’s finance minister Lars Klingbeil has warned that a €170bn budget shortfall poses a “massive challenge” to the ruling coalition even as Europe’s largest economy embarks on a debt-funded splurge to bolster its military and modernise its infrastructure.

In March, Germany relaxed its constitutional borrowing limit to enable increased defence spending and to set up a €500bn special fund for its ageing infrastructure — a historic pivot from Berlin’s traditionally conservative fiscal stance. However, the constitutional rule that limits net borrowing to 0.35 per cent of GDP annually continues to apply to other areas of the federal budget.

Presenting next year’s budget on Wednesday, Klingbeil said Berlin must close a budget hole of €170bn by 2029. As the coalition agreed not to increase taxes, this was likely to require deep cuts across ministries and reforms of the welfare system, he added.

“There is no time to waste,” he said. The 2027 budget alone will have to cover a €30bn gap, “one of the biggest domestic challenges that we have to overcome in the next twelve months”.

“It may seem paradoxical,” said Jens Südekum, an economist who advises Klingbeil. “With the reform of the debt brake, the casual observer may think there’s money for everything, but that’s not the case.”

The looming cuts pose a political risk for the government led by Chancellor Friedrich Merz, who has pledged to move from the infighting that plagued the previous coalition.

Merz’s Christian Democrats, which govern with Klingbeil’s Social Democrats with a razor-thin majority of 13 seats in parliament, have lately experienced their first significant tensions since taking office in May.

Earlier this month, the chancellor was forced to delay a parliamentary vote on nominating three supreme court judges at the last minute due to dissent within his own ranks.

In June, Markus Söder, the leader of the CSU, the CDU’s Bavarian sister party, criticised Klingbeil for failing to deliver on electricity price cuts for consumers. In return, Söder secured an early implementation of a campaign promise of offering additional benefits to mothers.

The coalition also agreed to offset revenue losses for municipalities resulting from planned corporate tax cuts, while the finance ministry raised its interest payment forecasts upwards in light of increased borrowings.

The squeeze comes amid persistent uncertainty over Germany’s growth prospects. The export-heavy economy has stagnated over the past five years and is the most exposed to planned US tariffs of 15 per cent on EU goods. Südekum estimates that the tariffs could shave 0.2 to 0.3 points off GDP growth.

A finance ministry official noted that the government’s growth assumptions remained cautious — zero projected for this year, and 1 per cent annually between 2026 and 2029. Some analysts predict that Germany could grow by up to 2 per cent next year thanks to its spending plan in defence and infrastructure and tax cuts aimed at spurring corporate spending.

“The nice solution would be that growth picks up,” Südekum said, adding that it would not be enough to plug the budget gap however.

“Everyone sitting in the cabinet will have to save money,” Klingbeil warned on Wednesday. “I am sure that the finance minister’s popularity will not particularly increase in the next twelve months.”

FT : UK energy bills could be set according to ‘wealth’, says regulator

UK energy bills could be set according to ‘wealth’, says regulator
Ofgem asks for feedback on plans to overhaul pricing structure

Britain’s energy regulator has proposed making changes to energy bills so that households would be charged different rates depending on their wealth or income.  

Ofgem is floating the idea of a “progressive approach” to the standing charge portion of the bill, as part of efforts to make sure the costs of the shift to cleaner power are fairly distributed. 

“We think now is the right time to review how the transition to a greener and more secure energy system should be paid for by consumers,” it said, as part of a “call for input” on a wide-ranging review of energy system costs launched on Wednesday.

Ofgem’s chief executive Jonathan Brearley raised the prospect of such reforms in April. 

“Over the next few years, we do expect variable costs to come down, but the proportion of costs that are fixed will rise, which, if unchecked, could exacerbate inequalities that we see today,” Brearley said at the time.

“We want to at least ask the question — whether or not we can allocate costs more progressively.”

The ideas are at an early stage, with no decisions made and details not yet fleshed out.

The standing charge is currently a daily flat rate on energy bills, used to pay for costs such as investment in the gas and electricity networks.

Critics have long argued it is unfair, as it does not reflect households’ actual electricity use. 

The huge investments required in new pylons and cables to move electricity from wind and solar farms is now adding to the impetus for reform.

Ofgem’s review on Wednesday suggests a range of potential reforms, including charges varying depending on ability to pay. 

“For example, if a progressive approach was desired, then energy system fixed costs could be allocated and recovered (pre-distribution) based on a proxy for wealth . . . council tax is funded in this way,” it said in the document.

It suggests an “income-based standing charge” and a “wealth-based standing charge”. 

This could be combined with other ideas, such as standing charges that vary depending on how much electricity the consumer uses at peak times. 

Household energy bills remain a potent political issue for the government despite wholesale energy costs falling since the energy crisis of 2021-22 triggered by global gas supply shortages. 

Typical household energy bills remain hundreds of pounds higher than pre-crisis levels, partly due to higher network costs, while household energy debt levels are at record highs.

The Labour government pledged during the election campaign to bring bills down by £300 by 2030, although critics have questioned how it will manage this.  

Britain’s price cap on energy bills, which governs typical domestic bills, is currently almost 10 per cent higher than in July last year, when Labour took power. 

As well as the investment required in electricity networks, Ofgem is also grappling with changes to the way people use electricity. 

More households use solar panels, for example, and more are being encouraged to use time-of-use tariffs exposing them to fluctuations in wholesale prices throughout the day. 

FT : Iveco to sell defence and truck units in deals worth €5.5bn

Iveco to sell defence and truck units in deals worth €5.5bn
Van and truckmaker backed by Agnelli family finalises transactions with Leonardo and Tata Motors

Iveco, the van and truckmaker backed by Italy’s Agnelli family, has agreed to sell its defence unit to Leonardo and its commercial vehicle division to Tata Motors, in two deals totalling €5.5bn.

The sale capped months of negotiations, with several European players interested in Iveco’s defence division at a time when many countries across the continent are increasing their military budgets to address rising geopolitical tensions. 

Leonardo, the Italian defence group which has partnered with its German joint venture partner Rheinmetall, emerged as the successful buyer after Rome demanded Iveco’s defence unit be sold to a domestic buyer, according to people familiar with the negotiations.

Leonardo chief executive Roberto Cingolani said in a statement that the €1.7bn deal, including debt, reinforced Leonardo’s position as a key player in the European land defence market.

The sale of the defence division paved the way for Exor, the Agnelli family holding group which also owns stakes in Stellantis and Ferrari, to offload Iveco’s other businesses, including its trucks, buses and industrial power trains units, as it attempts to diversify away from the automotive sector, the people said.

India’s Tata Motors, which owns British carmaker Jaguar Land Rover, is expected to pay around €3.8bn for Iveco’s non-defence business after it takes on Exor’s 27 per cent financial stake in the group.

The combination will give the Indian group the scale to compete against global rivals Daimler Truck and Volkswagen-owned Scania.

The offer price of €14.10 per share represents a premium of up to 41 per cent based on the average price of Iveco shares in the past three months after taking out a special dividend linked to the sale of its defence business.

Iveco sells defence and civil protection vehicles under the IDV brand, and heavy-duty trucks for quarries and mines under the Astra brand — which will both be sold to Leonardo.

“Our colleagues in the defence business will become part of a group with the scale and integrated capabilities to compete on all levels and for all platforms,” said Iveco’s chief executive Olof Persson.

The company’s valuation has more than doubled this year to around €5bn, making it the right time for Exor to consider offloading Iveco to Tata, the people said.

Past attempts to sell Iveco, which employs more than 14,000 in Italy, had failed owing to the strategic nature of its defence vehicle business. Under the so-called golden power rules, the Italian government has veto powers over deals involving assets operating in strategic sectors. 

Government officials on Wednesday welcomed the twin deals, which they said would facilitate Iveco’s future growth.

The officials said India is an increasingly important strategic partner for Italy, after the two countries recently signed a deal for closer economic and industrial co-operation. 

No loss of jobs in Italy — either in Iveco or among its suppliers — are envisaged as part of the transaction, they said, adding that the government supports “quality foreign investments” and will “closely monitor” the operation.

Tata’s purchase of Iveco’s commercial vehicle division also “represents recognition of the value of Italian technologies”, one of the officials said, noting that the strategy of the new owners would be to “achieve solid international expansion”.

Leonardo last year agreed a joint venture with Rheinmetall to build tanks for the Italian army in a deal that both companies hailed as a step towards consolidating Europe’s fragmented land vehicle industry.

The Italian defence group’s Cingolani has been an outspoken proponent of the need for Europe’s contractors to collaborate in order to boost the region’s sovereign capabilities.

The deal came as Leonardo reported a 9 per cent increase in second-quarter operating profit to €243mn, boosted by an increase in orders for its aircraft and defence electronics divisions.

The company predicted that higher military spending in the EU and individual defence budgets would boost its revenue by €4 to €6bn by the end of 2029.

The company raised its outlook for orders, free cash flow and net debt for the full year. Leonardo said new orders at the end of the year would be between €22.25bn and €22.75bn, up from a previous estimate of €21bn.

FT : Arm to explore designing its own chips, CEO says

Arm to explore designing its own chips, CEO says
SoftBank-backed UK group’s strategic shift would upend the chip ecosystem

UK chip company Arm confirmed it was exploring the idea of launching its own chips on Wednesday in a move that would represent a significant shake-up in its relationship with big customers such as Nvidia.

Arm chief executive Rene Haas said the company, which offers the designs that other companies base their chips on, was accelerating its research and development spending as it considers offering “full end solutions” — suggesting it wants to design complete chips.

SoftBank-owned Arm’s designs dominate the smartphone chip ecosystem, with Apple and Samsung using Arm-based chips in their products. Nvidia also incorporates them into its artificial intelligence data centre products.

Yet the desire to take a larger cut of the vast semiconductor industry has prompted Arm to explore moving up the design “stack” towards its own end products.

The Financial Times reported in February that Arm was planning the move.

The market for AI data centre chips is already crowded. Nvidia’s dominance in the AI data centre business has been met with competition from the likes of Amazon and Microsoft, who have designed their own custom chips. Rival providers such as AMD are also seeking a larger share.

SoftBank chief executive Masayoshi Son has placed Arm at the centre of his efforts to capture a larger share of the money being made in the AI boom.

SoftBank has already partnered with OpenAI, Oracle and the UAE’s AI fund MGX in the $500bn Stargate project to build data centres in the US over the next four years.

“Many of the chiplets that are being developed are mostly Arm IP . . . and with that we are looking now at the viability of moving beyond the current platform,” Haas told analysts on a call on Wednesday.

Shares in Arm fell about 8 per cent in after-hours trading on Wednesday as it gave a lacklustre revenue forecast for the third quarter, with a midrange of $1.06bn compared with the $1.07bn expected.

It said it expected earnings per share of between $0.29 and $0.37, with a mid-range lower than the $0.35 anticipated.

Revenue for the quarter to the end of June was $1.05bn, up 12 per cent year-on-year but still slightly below the $1.06bn analysts were anticipating. 

Of that, royalty revenue — the cut paid to Arm by customers on the chips they sell — was $585mn, up 25 per cent year-on-year, while licensing revenue was $468mn, down 1 per cent.

FT : US adds 40% tariff on Brazil and places sanctions on judge trying Bolsonaro

US adds 40% tariff on Brazil and places sanctions on judge trying Bolsonaro
Move by Washington takes levies on country to 50% for alleged unfair trade practices and trial of former president

The US has imposed steep tariffs on Brazil and sweeping financial sanctions on the nation’s supreme court judge trying former president and Donald Trump ally Jair Bolsonaro on charges of plotting a coup.

The action against justice Alexandre De Moraes under the Magnitsky Act, which is reserved for serious human rights offenders, marks a significant escalation in the US president’s campaign against Brazil’s democratically elected leftwing government and the nation’s top court.

Trump also signed an executive order on Wednesday confirming a 50 per cent tariff on Brazilian imports, a measure he had threatened earlier in the month after demanding a halt to Bolsonaro’s trial, which he described as a “Witch Hunt”.

The order indicated the tariffs would come into effect in seven days but exempted several hundred Brazilian products which experts say are more difficult to substitute in large quantities quickly, such as orange juice, iron ore and aircraft. Other exports such as coffee and meat will be hit.

The White House said the additional 40 per cent tariff on top of the baseline 10 per cent was imposed “to deal with recent policies, practices and actions by the Government of Brazil that constitute an unusual and extraordinary threat to the national security, foreign policy and economy of the United States”.

Alberto Ramos, chief Latin America economist at Goldman Sachs, estimated that the measures could have a net negative impact on Brazil’s GDP of 0.25 per cent.

Trump has previously complained about Brazilian supreme court actions against US social media companies and alleged unfair trade practices from South America’s most populous nation.

Brazil’s President Luiz Inácio Lula da Silva responded to the US measures with a statement saying that “the interference of the North American government in Brazilian justice is unacceptable”. He expressed solidarity with de Moraes, but stopped short of taking any retaliatory action.

“Brazil continues to be ready to negotiate commercial aspects of the relationship with the United States but will not relinquish the instruments to defend our country which are provided for in our legislation,” Lula said.

Brazil’s government has said it is readying a package of support for companies affected by the measure but has not yet given details.

The US Treasury’s Office of Foreign Assets Control said de Moraes had been added to Ofac’s specially designated nationals list. It freezes any US assets he may hold and bans US nationals or institutions from doing business with him.

“The United States is sanctioning Brazilian Supreme Court Justice Alexandre de Moraes for serious human rights abuses, including arbitrary detention involving flagrant denials of fair trial guarantees and infringing on the freedom of expression,” US secretary of state Marco Rubio said in a statement.

Others who have featured on the Magnitsky sanctions list include Russian intelligence officers accused of poisoning Alexei Navalny, the critic of President Vladimir Putin who later died in prison, and Dan Gertler, an Israeli billionaire sanctioned in 2017 for alleged corruption over mining deals in the Democratic Republic of Congo.

Earlier this month Rubio imposed a visa ban on eight Brazilian supreme court judges including de Moraes over their role in the Bolsonaro trial and other moves the court has made against US social media networks.

Brazil’s court has been among the most aggressive globally in making tech companies legally liable for removing content it deems hate speech or anti-democratic, prompting accusations by Trump of “secret and unlawful censorship orders to US social media platforms”.

Bolsonaro’s congressman son Eduardo moved to the US earlier this year to lobby the Trump administration to impose sanctions on Brazil to help his father. “Mission accomplished,” he posted on Instagram after the measures were announced.

Jair Bolsonaro has offered to travel to the US to help negotiate over the tariffs and sanctions on Brazil if the authorities return his passport, which was confiscated after he was deemed a flight risk.

De Moraes ordered Bolsonaro on July 19 to wear an ankle monitor, to observe a curfew and not to give interviews, amid fears he might abscond. Brazil’s supreme court is expected to give its verdict in August or September.

Bolsonaro faces decades in jail if the top court finds him guilty on charges of plotting a coup to stay in power with the help of the military after losing the 2022 election.

>>> US After Hours Summary: PI +19.5%, CVNA +17%, META +11.5%, EBAY +9.6%, FFIV

After Hours Summary: PI +19.5%, CVNA +17%, META +11.5%, EBAY +9.6%, FFIV +9.4%, MSFT +8.5% higher on earnings; ALGN -36.5%, CFLT -26.1%, ARM -8.5%, QCOM -6.2% lower on earnings

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: PI +19.5%, ALHC +19.4%, CVNA +17%, RSI +16.5%, MDXG +14.7%, MYRG +12.3%, CGNX +12.2%, APLD +11.9%, META +11.5%, MOD +11%, UDMY +10.9%, EBAY +9.6%, FFIV +9.4% (also Chair Alan J. Higgingson to retire), TENB +8.6%, MSFT +8.5%, CLMB +8.3%, TMDX +8.2%, VAL +6.8%, EZPW +6.6%, AMSC +6.3%, WDC +6.3%, ALB +5.9%, SPOK +5.7%, COMP +4.9%, UIS +4.6%, PBI +4.5% (also names new CFO; also increases dividend, repurchase authorization), NTGR +4.4%, SIMO +4.3%, SKWD +3.8%, AEM +3.6%, PTC +3.4%, RGR +3.4%, KGC +3.3%, MUSA +3.1%, WAY +3.1%, MEOH +3.1%, HST +2.9%, BKH +2.7%, BHC +2.6%, TYL +2.5%, AM +2.4%, TTMI +2.1% (also CEO to retire), MKL +2.1% (also to sell the renewal rights for its Global Reinsurance business to Nationwide), GNW +1.8%, VICI +1.4%, MMSI +1.3%, MAA +1.1%, MTG +1.1%, QTWO +1%, SCI +1%, AR +0.9%, SFM +0.9%, AGI +0.9%, TTEK +0.8%, EVTC +0.7%, FMC +0.6%, UDR +0.6%, ZIMV +0.6%, CP +0.5%, HOOD +0.5%, GFL +0.5%, ALL +0.4%, EPR +0.4%, EQIX +0.4%, NFG +0.4%, HOLX +0.3%, MGY +0.3%, SAGE +0.2%, CNMD +0.1%, CTOS +0.1%, TSLX +0.1%

Companies trading higher in after hours in reaction to news: AUR +7.8% (expands its commercial operations), CCRD +7.6% (EEFT and CCRD to merge), BTG +1.5% (to begin underground ops at Fekola Mine), HWKN +0.7% (increases dividend), WCN +0.5% (COO retires), VFS +0.3% (Q2 global deliveries), JD +0.3% (to make takeover offer and investment partnership with CEconomy), BXMT +0.2% (files mixed securities shelf offering), KWR +0.1% (increases dividend), FCFS +0.1% (reports H&T Group transaction update), PDM +0.1% (files mixed securities shelf offering)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: ALGN -36.5%, CFLT -26.1% (also announces $200 mln investment to fuel its partner ecosystem), EOSE -13%, FORM -12.8%, ARM -8.5%, TROX -8.1%, CVI -7.8%, QCOM -6.2%, EXR -6%, CSL -4.8%, IRT -4.8%, LRCX -4.7%, INVH -4.4%, WHD -4.4%, AVB -4.2%, FE -3.9%, F -3.7%, DXCM -3.6% (also names new CEO), GRBK -3.6%, VTR -3.3%, BHE -2.8%, CTSH -2.1%, MGM -1.9%, CRK -1.6%, PRU -1.5%, EIG -1.4%, GKOS -1.4%, PSA -1.4%, NWE -1.3%, PPC -1%, GH -0.8%, ALKT -0.7%, FICO -0.7%, TNK -0.6%, EG -0.5%, ETD -0.5% (also declares special dividend of $0.25/sh), MCW -0.5%, SUI -0.5%, TS -0.5%, CHRW -0.3%, NBIX -0.2%, RDN -0.2%, AIN -0.1% (also names new CFO), AWK -0.1%, CBZ -0.1%, ESI -0.1%, THG -0.1%, ACT -0.1%

Companies trading lower in after hours in reaction to news: PRME -10.2% (commences stock offering), FHN -2.1% (releases results of stress test), CLX -0.5% (increases dividend), FSLR -0.4% (enters into a Tax Credit Transfer Agreement), MRNA -0.2% (receives European Commission approval for updated COVID-19 vaccine), KKR -0.1% (to develop new 190 MW hyperscale data center), ESI -0.1% (files mixed securities shelf offering)

The Information : OpenAI Hits $12 Billion in Annualized Revenue, Breaks 700 Mill

The Information : OpenAI Hits $12 Billion in Annualized Revenue, Breaks 700 Million ChatGPT Weekly Active Users

The Takeaway
• OpenAI appears likely to meet or pass its $12.7 billion revenue projection for 2025
• Fast growth prompted OpenAI to raise its cash burn projection $1 billion
• The company is nearing the close of $7.5 billion of new funding from Sequoia, Tiger and others

OpenAI roughly doubled its revenue in the first seven months of the year, reaching $12 billion in annualized revenue, according to a person who spoke to OpenAI executives. That figure implies the ChatGPT maker is generating $1 billion a month, compared to about $500 million a month at the start of the year.

The growth comes as the company logs roughly 700 million weekly active users for its ChatGPT products used by both consumers and business customers, up from 500 million weekly active users OpenAI said all of its products had in late March.

The revenue progress suggests the company could beat its projection of $12.7 billion in revenue for the year, up from around $4 billion in 2024, as more enterprises and individuals subscribe to its chatbot for coding and other tasks.

The fast growth is coming at a cost. OpenAI has increased its cash burn projection to roughly $8 billion in 2025, up $1 billion from the cash burn it projected earlier in the year, according to the same person. That suggests it could raise its earlier projection of $14 billion in spending on renting servers to power its technology in 2025.

The booming growth, which rivals such as Anthropic are also experiencing, appears to be helping OpenAI finalize commitments to an unprecedented $40 billion in funding, at a pre-money valuation of $260 billion, five months ahead of the schedule set by lead investor SoftBank in April.

After receiving $10 billion in funding in June, OpenAI has been lining up investors for the second, $30 billion portion of its funding round. Investors besides SoftBank are close to finalizing $7.5 billion in commitments to that second portion.

Most of these backers have committed at least $500 million each to that installment. Existing shareholders Sequoia Capital and Tiger Global Management are each committing hundreds of millions of dollars in the round, according to the same person. Other firms such as Dragoneer and Founders Fund have also committed to the second portion of the round.

The Japanese conglomerate has committed to funding the other $22.5 billion of that $30 billion installment by year-end as long as OpenAI reorganizes its corporate structure this year or early next year so that OpenAI’s for-profit arm would eventually be able to go public. (OpenAI and Microsoft, its largest outside shareholder, are negotiating the terms of that restructuring.)

OpenAI has said that it plans to use its money to rent more chips to expand and run its AI models. The company and SoftBank have also committed to invest $18 billion each in a data center joint venture. The two companies have discussed locations for data centers in Ohio and Nevada, among other states.

Tens of millions of people and businesses subscribe to ChatGPT, and OpenAI wants to make the app a gateway through which consumers and enterprises use online services or get work done.

In a push to get more enterprises to buy ChatGPT subscriptions, OpenAI is selling a customized version of its ChatGPT Deep Research feature, which produces full-fledged reports, and has offered 10% to 20% discounts on its ChatGPT for Enterprises product when customers buy tools like these. This month, it also released features for ChatGPT subscribers to create and edit spreadsheets and presentations, which could heighten its competition with Microsoft and Google.

OpenAI’s archrival Anthropic, whose annualized revenue recently hit $4 billion, up almost four times from the start of the year, is in talks to raise a new round of funding that would value it at $170 billion, triple its valuation from a funding round earlier this year.

Anthropic previously told investors it will burn $3 billion this year after burning $5.6 billion last year, and it projected rapid growth to as high as $12 billion in revenue in 2026 on the strength of its market-leading AI for coding-related tasks.