ANTIQUES SHOPS

The political machinations over who should fill the largely ceremonial post of president have proven a major distraction for the government at a time when investors and business leaders have been demanding that it take prompt action on the economy.

Congress, which has governed India for the most of the 65 years it has been independent, struggled to win support from key allies for its candidate. Analysts saw this as evidence of the weakness of India's grand old party in the face of increasingly powerful regional parties with their own agendas.

Mukherjee, 76, is expected to step down by June 24, and Prime Minister Manmohan Singh, 78, could take charge of his portfolio for the next several months, a source close to the finance minister told Reuters on condition of anonymity.

Singh's reputation as the architect of landmark economic reforms in 1991 that unleashed two decades of faster growth has been badly tarnished by widespread criticism of his leadership of Asia's third-largest economy. Critics say his government has failed to take concrete steps to rein in spending on subsidies and bring down stubbornly high inflation.

There is no obvious successor to Mukherjee, but analysts said filling the vacancy was less important than the government overcoming internal divisions that have led to policy flip-flops on major economic reforms and scared off investors.

"Whoever becomes the next finance minister will be key for the market. The person who takes charge will have to deal with the fiscal deficit, the slowing growth and the inflationary pressures," said Kumar Rachapudi, fixed income strategist at Barclays Capital in Singapore.

Several names have been floated in Indian media as possible successors, including Singh's influential and trusted advisers C. Rangarajan and Montek Singh Ahluwalia, Home Minister P. Chidambaram, Rural Development Minister Jairam Ramesh, and Trade Minister Anand Sharma.

Asked who would succeed him if he became president, Mukherjee told journalists: "The prime minister himself is an eminent economist. Under his stewardship we will overcome the temporary crisis."

But Congress has struggled to reach consensus within its own ranks and persuade often unpredictable coalition allies to support economic reforms that are widely seen as vital to India improving the lives of its 1.2 billion population.

Congress party leader Sonia Gandhi officially nominated Mukherjee at a meeting of the ruling coalition, though one key ally, West Bengal chief minister Mamata Banerjee who rejected Mukherjee's candidacy, did not attend the meeting.

Banerjee, who has proven an unpredictable ally, this week proposed that Singh's name be considered, an effective vote of no-confidence in the prime minister that raised the spectre of the fragile UPA coalition government breaking apart.

SONIA'S APPEAL

But Congress appeared confident on Friday that it had the votes for the July 19 presidential election by federal and state legislators as several other major regional parties said they, too, would back Mukherjee.

"The UPA appeals to all political parties ... to support Pranab Mukherjee for the office of president," Gandhi said.

With the next general elections in 2014 widely expected to produce a fragmented parliament with no clear winner, Congress wants to make sure it controls the presidency. The new president will play a key role in deciding which party takes the lead in forming a government.

The announcement of Mukherjee's candidacy came on the eve of Singh's departure to Mexico where he will attend next week's meeting of the Group of 20 leading industrial nations that is expected to be dominated by the European debt crisis.

Singh's government has largely blamed India's economic troubles on the euro zone crisis, drawing fire from economists and business groups who say it is ignoring the political paralysis at home that has left policy-making adrift.

Standard & Poor's rating agency warned this week that India could become the first so-called Bric nation to be downgraded to junk status, citing in part its concerns about the division of power between Singh and Sonia Gandhi.

"Paramount political power rests with the leader of the Congress party, Sonia Gandhi, who holds no cabinet position, while the government is led by an unelected prime minister, Manmohan Singh, who lacks a political base of his own," it said.

(Writing by Ross Colvin, reporting by Rajesh Kumar Singh, Arup Roychoudhury, Satarupa Bhattacharjya, Manoj Kumar, in New Delhi, and Shamik Paul in Mumbai, Editing by Ed Lane)

Factory production shrank 0.4 percent last month, the Federal Reserve said on Friday. Total industrial output, covering factories, mines and utilities, declined 0.1 percent.

Analysts polled by Reuters had expected industrial production to rise 0.1 percent.

The slackening U.S. recovery and a worsening debt crisis in Europe have increased expectations of a further easing of monetary policy by the Fed, although economists are divided on whether the central bank will act when it meets on Tuesday and Wednesday.

Hiring by U.S. employers has slowed for four straight months, while retail sales contracted in May and new applications for jobless benefits have risen for five of the last six weeks.

In a sign factory sector weakness could extend into June, the New York Federal Reserve Bank's "Empire State" index fell to 2.3, a 15-point drop from the month before and the lowest level since November 2011. That was far below economists' expectations of 13, although the level still points to some growth.

"That is another indication that the U.S. economy is slowing," said Justin Hoogendoorn, a fixed income strategist at BMO Capital Markets in Chicago. "It's an ugly situation."

U.S. stock indexes opened higher on Friday as optimism over possible coordinated action by major world central banks if Sunday's Greek vote causes financial turmoil offset disappointment over the factory data.

Europe's snowballing debt crisis threatens to send the global economy into recession.

Within the Fed's report on U.S. industry in May, the softness in the factory sector was widespread. Output for durable - or long-lasting - goods dropped 0.5 percent as auto production slid 1.5 percent. Production for nondurables fell 0.2 percent.

Utilities output increased 0.8 percent, while mining was up 0.9 percent.

Capacity utilization, a measure of how fully firms are using their resources, slipped to 79.0 percent in May from 79.2 in the prior month.

Officials at the Fed tend to look at utilization measures as a signal of how much "slack" remains in the economy - how far growth has room to run before it becomes inflationary.

(Additional reporting by Richard Leong in New York; Editing by Neil Stempleman)

June 15 -

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Summary analysis -- PT Medco Energi Internasional Tbk. ------------ 15-Jun-2012

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CREDIT RATING: B/Stable/-- Country: Indonesia

Primary SIC: Oil and gas

exploration

services

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Credit Rating History:

Local currency Foreign currency

07-May-2009 B/-- B/--

03-Feb-2002 B+/-- B+/--

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Rationale

The rating on PT Medco Energi Internasional Tbk. (Medco) reflects the company's exposure to volatile hydrocarbon prices, its large investment requirements, and its aggressive financial policy that relies on debt to fund growth. Medco's favorable location and cost structure, good growth potential in its development and exploration blocks, and its partial insulation from currency instability and sovereign-debt risk temper these weaknesses.

Medco's liquidity and operating cash flow are exposed to volatility in hydrocarbon prices. Nevertheless, liquidity and operating cash flow have benefited from an increase in average realized oil prices to $113.7 per barrel in 2011, from $81.4 per barrel a year earlier. Overall production remained broadly stable at 67.6 thousand barrels of oil equivalent per day. As a result, the company's debt-to-EBITDA ratio improved to 3.6x in 2011, from 4.1x in 2010, despite a 32% increase in debt.

Asset sales have also improved liquidity in the past 12 months. Medco sold a 20% stake in the Senoro-Toili production sharing contract to Mitsubishi Corp. (A+/Stable/A-1) for $260 million in early 2011. The company also sold Medco Tunisia Anaguid Ltd. for $58 million and a 51% stake in PT Medco Power Indonesia for $112 million in December 2011. These divestments have lowered Medco's future investment commitments under these projects.

We expect Medco's financial risk profile to remain "aggressive" in the next 12-24 months. This is due to the company's substantial estimated total capital expenditure of $695 million in 2012 and 2013. The spending relates to Medco's major development projects, namely the Senoro-Toili gas/liquefied natural gas development and the Block A gas reserves project in Indonesia. These projects will be predominantly debt-funded and would not generate any cash flows until 2014.

Progress at Medco's major projects is critical to prevent any deterioration in the company's "weak" business risk profile from the continuing decline in its producing asset: the Rimau block. In our view, the growth potential in Medco's major projects is solid. However, these projects expose the company to some execution and operational risks. Nevertheless, these projects are currently proceeding as planned. We continue not to factor in any benefit from Medco's Libya operations, given the contingent nature of the project and political instability in the region.

Liquidity

Medco has "adequate" liquidity, as our criteria define the term. We expect the company's sources of liquidity, including cash and available credit facilities, to exceed its uses of liquidity by at least 1.4x in the next 12 months.

Our liquidity assessment incorporates the following factors and assumptions:

-- As of Dec. 31, 2011, Medco has cash and cash equivalents of $703.9 million and short-term investments of $247.3 million, compared with $539.2 million of short-term debt due (including accrued interest).

-- As of March 31, 2012, Medco has access to unused committed credit facilities of $230 million. Some of these facilities are renewable every 12 months, which is in line with the typical banking practice in Indonesia.

-- Liquidity sources over the next 12 months include our expectation of FFO of about $190 million, short-term credit facilities, and cash and current investments.

-- Liquidity needs over the next 12 months include our expectation of capital expenditure of about $271 million and dividends and debt repayments of about $514 million.

-- We anticipate that the company's liquidity sources will exceed its needs even if EBITDA declines by 15%.

There are no rating triggers in Medco's current loan documents, but the company must comply with financial covenants on interest coverage, leverage, and liquidity. We believe Medco has been operating within these covenants.

Outlook

The stable outlook reflects our expectation that Medco's production and development projects will continue to progress as planned, and that oil prices will remain above US$90 a barrel and gas prices at about US$4.0 per million British thermal unit. Under this scenario, we expect the company's debt-to-EBITDA ratio to remain about 4.0x in 2012.

We may lower the rating if Medco's liquidity or financial risk profile weakens due to: (1) delays at the company's major projects that result in higher-than-expected capital expenditure or a delay in cash flow contributions; (2) lower-than-expected production in existing fields; or (3) a substantial fall in oil prices. A debt-to-EBITDA ratio rising to more than 4.5x on a sustained basis would indicate such a weakening.

We could raise the rating if the following occurs:

-- Higher-than-expected oil prices result in improved credit ratios and liquidity for Medco. A debt-to-EBITDA ratio of about 3.5x on a sustained basis would indicate such an improvement; and

-- The company's major development projects progress as planned. This includes a commercialization of the Block A gas reserves development by the second half of 2012 and timely progress of the Senoro-Toili block toward production in 2014.

Related Criteria And Research

-- Standard & Poor's Raises Its Oil Price Assumptions; Natural Gas Price Assumptions Unchanged, March 22, 2012

-- Key Credit Factors: Global Criteria For Rating The Oil And Gas Exploration And Production Industry, Jan. 20, 2012

-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009

-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008