Exterior view of Price, Birch & Co. slave pen, Alexandria, Virginia
Ilargi: Apart from Wal-Mart and Amazon (maybe), the holiday shopping season has been a disaster. Had anyone expected anything else? Anyone think this weekend will make it all "right"? The numbers coming out of the mess will be staggering, even for the hardened pessimists. According to researcher AlixPartners, 25.8% of US retailers have a “high possibility" of going bankrupt. And I'm sure Alix is not exaggerating, in fact I bet the number is higher. How many people work in retail? I don’t know the exact number, but there's an awful lot of millions. And a quarter of them will need a new job. Wait, that’s just from bankruptcies. We need to add the people who will be let go by stores that won't go bitty up just yet, but downsize.
In the UK, expectations are that commercial real estate will drop in price by 50% in one year. That's sort of like letting Bernie Madoff look after your buildings for you. No reason to think it'll be any different in the US. We've gotten used to an ever increasing variety in products in our stores. Well, that's over. From now on in the choices will decrease. We will no longer be the followers of fashion that have driven this economy at the speed of a dozen new fads a year.
I know, you're going to say: but I don't mind, we don't need all that choice, we can be happier people if we live simpler. And I would respond that I hope you are the one to lose your job. And then after a few months we'll talk again. Our economy is very much like a freight train or an oceanliner moving at high speed. if you pull the emergency break without telling anyone, there'll be a lot of casualties. Even if you do tell, just less of them. Not to mention that the engine and the rest of the machinery is highly unlikely to survive intact. We can't go back to more modest ways without making a lot of victims. For everyone idealizing simpler days, please understand that. There are far too many people like you, or like your friends and neighbors, who simply can't just take 5 or 10 or 20 steps back, whose prior obligations make that a non-option. And if there's enough of them, and trust me, there willbe, it will affect you no matter how cushioned your situation is, or your job.
Yes, US mortgage applications are up because interest rates finally go down a little (though not always). But 85% or more of those applications are for re-financing. And as industry insider Mr. Mortgage explains, the vast majority won't get the refinancing they want. Instead, their homes will now have a new, much lower, appraisal value, they can't get out of their mortgage, hence their home, while the payments remain what they were. Many of these home"owners" will be among those who are losing their jobs, looking for a strong ceiling beam and a solid piece of rope.
The havoc the first part of 2009 will bring in the US and UK is something I'd like to look away from. If stores close, their suppliers do too. And theirs. And the transport sector that depends on the business they got from them. And the suppliers of the transport companies. And the various levels of government that depend on all for their tax revenues. And the people working for those governments, who are also told that no, they can't refinance, they'll have to keep paying or be both without a job and without a home. And who, if they think they'll get another job, may get the same reaction as they did in the refinance submission.
Welcome to the credit crunch. I hope it's starting to dawn on you what exactly those two words really mean.
Doubts increase over Barack Obama's ambitious spending promises
Barack Obama is expected to spend so much propping up the world’s biggest economy in 2009 that the national debt will balloon by an astonishing $2 trillion (£1.36 billion). It is $2 trillion that the US Government will try to fund by selling Treasury bonds. But there are increasing expectations in Washington that by the time Mr Obama is sworn in on January 20, the financial burden on Capitol Hill will be so overwhelming that the man tipped to be America’s most radical President since Kennedy will be unable to fund the promises that secured his entry to the White House. Many economists, think-tanks and independent financial watchdogs believe that the combined cost of industry bailouts, soaring unemployment benefits, declining tax revenues, new fiscal stimulus packages and the $500 billion public infrastructure splurge will stymie Mr Obama’s plans to overhaul the American healthcare system and invest billions in alternative energy.
And there is increasing evidence that Mr Obama is already shifting his rhetoric to persuade Congress and the American people that his healthcare and environmental reforms should, like the bailout of the banks, be reclassified as emergency measures and therefore worthy of immediate funding. Earlier this month, Mr Obama, who was formally announcing Tom Daschle, the Senate majority leader, as his Health Secretary, said: "The time to solve this problem is now. It’s not something that we can sort of put off because we’re in an emergency. This is part of the emergency." Robert Bixby, the head of the Concord Coalition, a bipartisan financial responsibility think-tank, told The Times: "We can afford to spend like that, whatever ‘that’ ends up being, for a very short period of time. We can afford to spend that amount of money because we are in a period of economic emergency. And we are going to have to borrow a ton of money.
"But the only excuse for having this level of deficit is for an emergency. What my fear is — what is happening now — is that we are hearing Obama speak less about finding ways to fund his healthcare and environmental initiatives, such as using tax increases, and more about how these initiatives are an emergency." This is a dangerous tactic. America is already estimated to have a $12 trillion debt pile — roughly 70 per cent of gross domestic product. America’s annual deficit has now hit the highest level since the Second World War, running at an equivalent of about 7 per cent of GDP, surpassing the previous record in the early Reagan years of 6.5 per cent. But not all debt is the same. As Mr Bixby points out: "I am not in a panic about the national debt levels at all, so long as we don’t start adding to long-term problems. It is one thing to spend in order to alleviate a recession — I am willing to give them a short-term pass on that, because it is in no one’s interest to have another Great Depression.
"But I do worry that politicians will take the current climate as a signal that anything goes. ‘Let’s do healthcare’, ‘let’s cut taxes’ — all in the name of an emergency. If we are not careful, this culture will become ingrained." Economists differentiate between the long-term commitments triggered by different types of federal spending. All broadly welcome Mr Obama’s plan to spend $500 billion on public infrastructure projects, which would represent the biggest expenditure on roads, bridges, new schools and water systems since Eisenhower. According to Mike Lucki, an infrastructure specialist at Ernst & Young, the global consultancy group, federal spending on public projects is a clever way of making taxpayer funds stretch further: "For every dollar you spend on infrastructure, you get two or three out of it. The jobs you create, create other jobs and it ripples through to boost spending and increase tax revenues."
Apart from the hoped-for boost to job creation across a wide range of industries from construction, building materials firms, engineers, architects and all the support businesses which cater for them, there are no residual financial obligations. However, with healthcare reform, the long-term liabilities for helping Americans meet their medical bills are huge. Mr Bixby explains: "Once you’ve built a bridge, the only thing you have left is a new bridge. There’s no long-term obligation. But if you start entitlement programmes such as Medicaid, you are adding a permanent stream of spending." Steve Ellis, vice-president of Taxpayers for Common Sense, a US budget watchdog, predicts that Mr Obama will be forced to delay some of his reforms because of the increasing financial strain on the public purse. He said: "Something has to give. During the end of the election campaign both candidates were loath to say what they would jettison. But that train has now left the station. Obama will have to drop something or we will be in a much deeper hole."
However, Taxpayers for Common Sense urges Mr Obama to stick to his healthcare reforms and abandon other pricey programmes: "Medicaid is a budgetary time bomb. It is not going to get any easier. What is clear is that his tax increases that he planned for those earning more than $250,000 a year are off the table. It was those tax rises Obama hoped would pay for healthcare change." As the world’s largest economy deteriorated rapidly after the collapse of Lehman Brothers in September, Mr Obama has been forced quietly to change his tune. During the presidential campaign, he suggested that reforming the health system would cost about $65 billion a year, taking into account increased taxes. Since then, the recession has gained pace, unemployment has surged and the US car industry teeters on the brink of collapse. Such conditions make the prospect of income tax rises not only improbable but economically irresponsible. Mr Bixby concludes: "Obama will have to delay some of his reforms; I don’t know which. But in this climate he just can’t do it all."
Retailers Brace for Major Change
The good news for retailers reeling from the holiday sales season is that 2008 is almost over. The bad news: The fallout in 2009 could be worse. This year's retailing slide -- when stores were forced to cut prices to convince wary consumers to spend -- promises to have a lasting impact on the way the retail industry operates. Many retailers are rethinking how they do business, as others prepared for a large number of bankruptcies and store closures. The first retail casualty of the weak holiday season could be Goody's Family Clothing Inc., a Southeast apparel retailer. The 287-store chain emerged from bankruptcy court in October but its holiday sales were below plan and financing it was counting on didn't materialize, according to a person familiar with the situation. The retailer is negotiating with lenders to avoid potential liquidation, say two people familiar with the matter.
In October, Chief Executive Paul White was upbeat about its prospects, saying "we are energized by the opportunity in front of us and are focused on continuing to fulfill the Goody's mission." Other retailers are saying they will trim inventory and reduce the number of suppliers. That, in turn, will cause a ripple effect, prompting a number of weaker manufacturers, small brands and underfunded fashion labels to fail. New retail formats and concepts stores are likely to be curtailed in the coming year. And luxury-goods makers already are working to cut the long lead times between orders and store delivery as a way to reduce risk. "We will have a lot fewer stores by the middle of 2009," says Nancy Koehn, professor of business administration at Harvard Business School. "It's happening very, very quickly because of the financial crisis and the recession."
During the holiday season, when retailers typically generate as much as 40% of their annual sales, Americans cut their spending. Total retail sales, excluding gasoline and autos, were down between 2.5% and 4% this holiday season, compared with the same period in 2007, according to MasterCard Inc.'s SpendingPulse unit. That makes it among the worst holiday seasons of all time, says Michael McNamara, a vice president. There were exceptions. Amazon.com Inc. said Friday its holiday sales exceeded all prior years. Still, industry analysts say that online retail as a whole is down slightly from the year-ago holiday season. Retailers and their suppliers, who are hoping for a burst of sales this weekend and next week, are assessing the fallout to their industry. They and other retail watchers are forecasting big changes ahead:
More Bankruptcies: Corporate-turnaround experts and bankruptcy lawyers are predicting a wave of retailer bankruptcies early next year, after being contacted by big and small retailers either preparing to file for Chapter 11 bankruptcy protection or scrambling to avoid that fate. Analysts estimate that from about 10% to 26% of all retailers are in financial distress and in danger of filing for Chapter 11. AlixPartners LLP, a Michigan-based turnaround consulting firm, estimates that 25.8% of 182 large retailers it tracks are at significant risk of filing for bankruptcy or facing financial distress in 2009 or 2010. In the previous two years, the firm had estimated 4% to 7% of retailers then tracked were at a high risk for filing. Retailers are particularly vulnerable to a recession because of their high fixed costs.
The most vulnerable retailers are those with debt coming due, says AlixPartners Chief Executive Fred Crawford. "There are companies in virtually every retail sector in distress, whether it's a jeweler or a high-end luxury store. But if they have a lot of debt and it's coming due soon, that's probably a better predictor that they may need to file," said Mr. Crawford. Several turnaround experts said retail lenders including General Electric Co.'s GE Capital, CIT Group and Wachovia Corp. are dialing back lending to retailers. CIT, which lends money against vendors' receivables, recently withdrew coverage for orders to Bon-Ton Stores Inc., of York, Pa. Bon-Ton spokeswoman Mary Kerr said, "We are in the process of contacting those affected vendors with whom we have good relationships in order to work directly with them." A CIT spokesman declined to comment.
Recent changes in the bankruptcy code make it more difficult for retailers to emerge from bankruptcy reorganization. The changes, passed in 2005, shortened to 210 days the time retailers have to determine whether or not to assume real-estate leases, limiting the amount of time they have to complete their restructuring. Lawrence Gottlieb, a New York bankruptcy attorney at Cooley Godward Kronish LLP says that only two retailers have successfully emerged from bankruptcy proceedings since the amendments to the code were passed. In turn, because the debtor-in-possession market for financing bankrupt companies remains squeezed, many bankrupt retailers could quickly turn into liquidations -- as was the case earlier this year with chains Linens 'N Things, Mervyn's and Steve and Barry's.
Store Closings: The International Council of Shopping Centers estimates that 148,000 stores will close in 2008, the most since 2001, and it predicts that there will be an additional 73,000 closures in the first half of 2009. This underscores a sea change in retailers' business strategy. "Generally speaking the way retailers have grown is to get more volume, and open more stores," says Greg Maloney, chief executive of the retail practice at real estate services firm Jones Lang LaSalle. Despite the closures, the U.S. is still likely to see a net gain in square footage mostly due to projects under way before the credit crisis hit. Barclays Capital analyst Jeff Black says growth in retail square footage will slow to 5% in 2009 from 8% in 2008. Some retail sectors likely to see growth include specialty teen stores while cutbacks are coming in the women's apparel sector.
Already a number of specialty retailers have said they are closing stores, including AnnTaylor Stores Corp., Talbots Inc. and Charming Shoppes Inc. Those that aren't closing stores will likely curtail expansion to conserve capital. J. Crew Group Chief Executive Mickey Drexler said that the company is "revisiting all new store openings" and plans to cut square footage growth in half in 2009, excluding a new concept. Liz Claiborne Inc. is postponing store expansion until the economy improves.
Less Selection: Several department stores, including Saks Inc. and Neiman Marcus Group Inc., already have announced that they would narrow the range of merchandise they carry and drop vendors that don't perform. The cutbacks will ripple through the apparel industry, hurting the companies that are most exposed to the wholesale channel. Companies such as Jones Apparel Group Inc., for example, generate 50% of sales from department stores. Other manufactures, such as VF Corp., are less vulnerable because they have rolled out their own retail stores and realize only 10% of sales from department stores, according to J.P. Morgan Chase & Co. "We are so used to using history to guide our future," says Brendan Hoffman, chief executive of the 48-store Lord & Taylor chain. Setting inventory levels "will be a challenge until we get to some level of economic stability."
Meantime, Lord & Taylor, a unit of Hudson's Bay Trading Co. is buying conservatively, preferring to be out of stock on key items than over-stocked. Buyers at Lord & Taylor will purchase "deeper in merchandise we really believe in" and cut back on the rest. As a result of such cutbacks, a number of smaller fashion brands that have thrived over the past decade as luxury boomed, are expected to struggle or fail. "There's no question that you are going to see bankruptcies in the designer world," says Peter Boneparth, a Kohl's Corp. director and former chief executive of Jones Apparel. Contemporary clothing label Theory LLC, which had sales of about $600 million in 2008, already is planning to sell 25% less to retailers in 2009, says Andrew Rosen, the company's president and co-founder. "The consumer's shopping patterns are going to change from what we've come to know over the past few years," Mr. Rosen says.
Smaller vendors are also adjusting the way they operate. Chantal Bacon, chief executive officer of designer Betsey Johnson's firm, said the brand is bringing its international sales in-house for the Spring 2009 collection to lower prices by cutting out a distributor. Robert Burke, chief executive of Robert Burke Associates, a luxury-goods consultancy, said he is working with clients to shorten lead times between orders and deliveries, which are typically six to nine months. Long lead times, in part, are blamed for the inability of stores to respond quickly to the downturn. "There's a focus on identifying what the key items are for the season and making sure that there is fabric and production capabilities more quickly," Mr. Burke says.
Fewer Concept Stores: Many retailers invented new brands to spur rapid growth in recent years. But many such concepts already are being abandoned or cut back. Neiman Marcus said it would postpone plans to expand its Cusp store concept. Pacific Sunwear of California Inc. closed down its d.e.mo. stores earlier this year, and AnnTaylor abandoned plans for a "modern" baby-boomer concept. Closing unprofitable new store formats "is something investors would like to see," says Barclays' Mr. Black.
Amazon Claims ‘Best Ever’ Christmas (Whatever That Means)
For retailers, the holiday shopping season was the worst in decades. Even so, Amazon.com said Friday that it had its "best ever" holiday. On Amazon’s peak day, Dec. 15, customers ordered a record 6.3 million items, or almost 73 items each second, the company said. Last year, the peak day was Dec. 10, when customers ordered 5.4 million items. Amazon’s press release has all sorts of entertaining factoids: the weight of all GPS devices it sold from Black Friday through December equals the combined weight of 151 Mini Coopers; it sold enough "Breaking Dawn" books that, if stacked end to end, they would reach the summit of Mount Everest eight times; and its top sellers in electronics included a 52-inch Samsung LCD HDTV and the eight-gigabyte Apple iPod Touch.
But the numbers do little to tell us how good (or bad) Amazon’s season really was. The company didn’t disclose whether shoppers bought more or fewer high-priced items than in previous years or whether discounts ate into profit margins. It didn’t disclose revenue or even the total volume of products it shipped throughout the holiday season. What’s more, as consumers do more and more of their shopping online, where Amazon is the leading retailer, a "record" season at Amazon is hardly surprising. Amazon has claimed that its holidays were the "best ever" or "busiest ever" every year since at least 2002.
As Douglas Anmuth, an analyst at Barclays Capital, said in a note to investors early Friday: "AMZN’s announcement this A.M. that it posted another record holiday season should not come as a surprise given the ongoing secular shift toward e-comm., along w/ AMZN’s continued mkt share gains, but it appears likely to move the stock some in the N-T [near-term] given the lack of positive retail news flow & thin overall trading." The near-term stock gain did materialize, but it was short-lived. After the opening, Amazon shares traded as high as $53.95, a nearly 5 percent gain from their pre-Christmas close of $51.44. But shares slid throughout the day and closed at $51.78, up just 0.66 percent.
American shopping season 'worst in four decades'
Retailers opened their doors earlier than usual across the US yesterday, struggling to salvage what they could from the weakest holiday shopping season in four decades. Chain stores opened their doors at 5.30am and 6am to try to drum up interest in yet more price reductions. Companies have been left with large amounts of unsold merchandise after the holiday shopping failed to live up even to miserable expectations in the world's largest economy.
Prices for clothing and some electronics have been slashed by retailers, many of whom offered discounts of up to 75 per cent to shift unwanted stock, or ran special "early bird" promotions yesterday. The department store chain JC Penney even made wake-up calls to customers who signed up online. According to MasterCard, retail sales excluding petrol fell 4 per cent in the period from 1 December to Christmas compared with last year. The year-on-year decline for November was 2.5 per cent. Michael Niemira, chief economist at the International Council of Shopping Centers, expects that sales at established stores for November and December will fall 1.5 per cent to 2 per cent, which would make it the weakest holiday season since at least 1969, when the index began.
The online retailer Amazon at least posted positive year-over-year sales results yesterday. In a release titled "Amazon.com's 14th holiday season is best ever," the company said more than 6.3 million items were ordered on its site worldwide for the peak shopping day, 15 December. On its peak day, it shipped more than 5.6 million units.
Slump Batters Small Business, Threatening Owners' Dreams
After spending nearly 20 years building her own business, Cookie Driscoll thinks it might be over. Ms. Driscoll owns C. Cookie Driscoll Inc., of Fairfield, Pa., which sells animal-themed gifts and office-promotional products. In the past year, she has seen nine of the mom-and-pop shops that buy her goods shutter -- often without paying their outstanding invoices. Her bank revoked her credit line. She expects revenue to be under $60,000 this year, down from a peak of nearly $230,000 a few years ago. She is taking almost no income from her business and paying bills with the last $16,000 from her retirement account. "I'm as close to a panic as I've ever been," says the 57-year-old Ms. Driscoll. "This is the most terrified I've ever been in my life."
For many small businesses across the country, these are scary times. The dramatic pullback in consumer spending is only the latest blow threatening to push some strapped small businesses out of existence. Customers are paying their bills late, cutting off cash flow, the lifeblood of a small business. Even healthy companies are being choked by the lack of credit lines and bank loans. Others are still reeling from several years of high raw-materials prices. In a recent survey from the National Federation of Independent Business, more than a quarter of small business owners said the current economic downturn is threatening their ability to survive. Nearly half of respondents said slow or lost sales are their most immediate problem. In the months ahead, "we are going to see small businesses that were marginal go out of business," says William Dunkelberg, NFIB's chief economist. "We've never seen sales trends as weak."
Small businesses are a driver of the U.S. economy. In the past decade, small businesses -- those with fewer than 500 employees -- have created 60% to 80% of the nation's net new jobs each year, according to the Small Business Administration. More than half of Americans are employed by a small business, and these companies are responsible for more than half of the nation's nonfarm private gross domestic product. Most small businesses don't have big cash reserves like larger companies do. And they don't have lots of excess costs they can cut. Many are frustrated that Washington is bailing out some of the largest companies and banks. "Our members are angry that the federal government is giving taxpayer money to big companies that have been horribly irresponsible while small businesses are not getting the money they need to keep their doors open," Margot Dorfman, chief executive of the U.S. Women's Chamber of Commerce, told the House Small Business Committee earlier this year. The government should set aside money specifically to assist small businesses, she said.
It's always challenging to run a small business. More than a half-million small businesses close each year, according to the SBA. Two-thirds of new businesses survive at least two years, while just 31% survive at least seven years. But as the U.S. suffers its worse recession in a generation, entrepreneurs are battling a number of forces at the same time. For John Colón, who co-owns Bella Diamonds, two jewelry stores in northern Virginia, it was the sharp increase in metals prices two years ago that dealt the initial blow. Mr. Colón worked in sales for large jewelry companies before opening his business in 2005. As prices for his products rose, local real-estate prices started to struggle. Last year, as consumers became more cautious, his business "hit a brick wall," Mr. Colón says. He saw more people who wanted to sell their gold jewelry than those who wanted to buy. This year, he and his business partner cut their salaries to about $60,000, he says, from $90,000 or $100,000 in better times. They worked seven days a week at the stores. Mr. Colón already had a second mortgage on his home. Banks wouldn't extend more credit.
Though platinum and gold prices have fallen in recent months, some jewelry designers kept their prices higher, hoping to recoup losses, he says. Mr. Colón says he hasn't been able to bring his prices down. A few designers explicitly prohibit him from discounting their items because they want to maintain a luxury image. Foot traffic in his stores has trickled to as few as one or two customers a day, from 40 or 50 a year-and-a-half ago. The upshot: The owners are liquidating the two stores, which will close at the end of January. Mr. Colón, 38, sold his home in a short sale -- where the proceeds weren't enough to pay off the mortgage -- and filed for personal bankruptcy several months ago. The stress and financial strain affected his family life, he says, and he recently divorced. The experience "ruined my spirit. It crushed me," Mr. Colón says.
Even some small businesses that have seen a rise in demand are struggling, due to the credit squeeze. In October, the most recent data available, the Federal Reserve Board reported that 90% of U.S. banks had tightened lending standards on small businesses in the previous three months. That hurts young businesses that need to finance growth. Susan Knapp once sold yellow-pages ads to small businesses, meeting people who had turned their dreams into companies. It inspired her in the late 1990s to turn her love of making pear jelly into a side business. For years, she had collected pears from a Northern California farm, whipped up batches of jelly and passed it out at holiday time. In 2003, she quit her job and became a full-time entrepreneur, using credit cards, personal savings and an equity line against her home to get going. By 2007, her company, A Perfect Pear, was reporting $700,000 in sales. She says she is sitting on $100,000 in orders from specialty stores and grocers who want to buy her jellies and salad dressings. On the company's Web site, many items are on back order. And yet Ms. Knapp can't fill those orders: She doesn't have the money to buy the 300 cases of vinegar and 200 cases of olive oil she needs to make the products, and she hasn't been able to find funding.
Ms. Knapp, 56, says she has gone from making six figures to not taking an income. For the first time, she and her husband, a self-employed chiropractor, are without health insurance. In the past year-and-a-half she has nearly drained her $190,000 retirement account to pay for operations and two-part time employees. Her biggest mistake, she says now, was not securing a line of credit before she actually needed it. Though real estate in Napa Valley, where she lives and works, is still strong, her bank won't consider expanding her home-equity line, she says. These days, she spends time calling "angel" groups -- investors who specialize in fledgling companies -- searching for funding. Some have told her they have too much money tied to real estate or the stock market; others are focused on tech. She placed ads on two peer-lending sites but has only gotten a few questionable propositions, including an "investor" who asked for a $67,000 payment before he'd turn over any financing. She uses credit cards regularly, but one of her issuers recently changed a no-limit card to a $1,200 ceiling.
Without capital, she had trouble filling orders for Christmas -- her busiest time. Customers were calling her small commercial kitchen directly, she says, asking why they couldn't order products. She explained that "we've run into a challenge economically." She has applied for a $300,000 loan from the SBA, and is pinning hopes on that. "I'm a really, really positive person," she says. "I've got pictures of hundred-dollar bills all around my desk, for the power of positive thinking." If the loan doesn't come through, she says, A Perfect Pear may have to close temporarily. For all the positive thinking, Ms. Knapp hesitates when asked if she'd do it all again. "The last thing I want to do is stomp on someone's dream," she says. But knowing how hard it's likely to be, "I hate to see businesses trying to start right now." Some companies that are able to maintain credit lines still face other problems. One of the most prominent: increasingly slow-paying customers. Small companies don't have huge reserves, and even a delay of a few days can hurt cash flow.
Workplace Integra is a Greensboro, N.C., company that helps manufacturers adhere to workplace-noise restrictions. The 13-employee firm is protected somewhat by the nature of its business; its customers must comply with government rules. But that doesn't mean those customers will pay on time. As food companies, wood-products manufacturers and carpet makers face economic headwinds, they're taking longer to pay Workplace Integra for its consulting and software services, the company says. Over the course of this year, the average number of days the company waits to get paid has shot to the mid-50s, from 39. Customers "are hoarding cash," says Gregg Moore, the company's 45-year-old president. Because his company isn't getting paid on time, that means Mr. Moore can't use those funds to pay the company's own bills. So he's been forced to dip into the company's $100,000 line of credit -- something he hasn't done before. The balance is now around $30,000. "It's made for some harrowing months," Mr. Moore says. The lack of cash flow is stifling the company's growth. Though it has added customers, it can't afford to add staff. It has postponed plans to expand, and salary increases "are pretty much out," Mr. Moore says. "Right now we're hunkering down and weathering the storm."
Many small businesses may not have the luxury of waiting it out. The smallest companies are often first to feel all the pressures, struggling with higher costs, unwilling lenders and disappearing consumers all at once. Ms. Driscoll, in Pennsylvania, is one of those. As with many entrepreneurs, her one-woman business was the culmination of a lifetime of dreams. Tired of sales jobs where she didn't care about what she was hawking, such as a job selling ads for a radio station, in 1990 she poured her savings and her love of animals into her enterprise, at first running it out of her home. Eleven years ago, she bought property with a home, a small warehouse where she stores pet-themed window decals and corporate promotional items, and a nine-stall farm, where she boards horses. The boarding operation provides about about 20% of her income. Though income hasn't always been steady -- peaking at the end of the 1990s -- she was able to work near her now-grown son. She relishes the ability to hop in her pickup truck on her own schedule when it's time to call on customers. The trouble started, she says, with rising health-insurance costs. Then came higher electric bills. Two years ago, she stopped heating her office, wearing sweaters and a coat to work in winter. Last year's soaring gas prices brought shipping surcharges. Those ate into Ms. Driscoll's bottom line.
Like many small-business owners, she couldn't pass the increased costs on to her customers. Her customers are small pet stores and tack shops that buy her animal-themed decals and gifts, and small professional practices that buy personalized pens and mugs imprinted with corporate logos.
Now, a weak economy means customers are taking longer to pay -- about 12% of her customers are 30 days late on bills, she says, more than double the usual amount. Some have simply disconnected phones and walked away from their obligations, she says. In recent months, Ms. Driscoll says her phone rings with a customer canceling a pending order as often as new orders come in. She says a client who boarded a horse at her facility couldn't pay the $350 monthly bill any longer, and recently abandoned the horse with Ms. Driscoll. The credit squeeze has dealt a severe blow. In recent weeks, her credit-card company raised her rate, now at 23% from around 20%. Her bank converted her $16,000 credit line to a loan. With her health insurance now up to $600 per month, rising energy costs and mounting costs for hay for her boarding facility, the credit crunch has pushed her business to the edge.
"Not many people have a grasp on the downhill slide [in small businesses] that I've seen for the last two years," Ms. Driscoll says. "It has been a steady slope down -- and it recently fell off the cliff." In addition to working on an e-commerce site to bolster her business, she's looking for employment on the side, perhaps lecturing on equine management, or caring for show horses. Working for someone else isn't her first choice, but "I can be a good little employee," she says. She hopes to keep her business going long enough to get past the current crisis. "I've worked my whole life to have my own business and drive my 18-year-old truck," Ms. Driscoll says. "It's just astonishing to see it slip out of my hands."
Low Mortgage Rates to Spur New Wave of Defaults
Talk about unintended consequences. The following is significant insight from the street level. This is especially important for those of you thinking that these low mortgage rates will lead housing and the consumer to the Promised Land. Everyone wants to refinance right now - that’s a fact. Home owners and loan officers around the nation have not been this exited in years over the low rates. The media are actually quoting mortgage rates non-stop, which is a complete story in and of itself. Loan officers and banks are very busy taking loan applications, as reflected in the faulty MBA loan application survey data (Mr Mortgage story out next week). Loan approval times at some banks is at three to four weeks making for a two month start to finish.
Fall-out will be extreme over the near-term as brokers and borrowers switch banks three and four times trying to get the lowest rate available. Trying to hedge this chaotic mess is a mortgage secondary marketing manager’s worst nightmare and can lead to significant losses. Along side of being one of the biggest consumer ‘bait and switches’ of all time, this drop in rates should set the stage for a significant leg-up in mortgage loan defaults and leg down in house values and consumer / homeowner sentiment. In my opinion, the government artificially pushing rates down this quickly not only will cost the originators plenty but quickens the pace at which the Alt-A, Jumbo Prime, and ‘Prime’ implosions could begin in earnest.
Please note that 4.5% never really existed unless the borrower wanted to pay thousands of dollars to buy that rate through points, which is rare. For a perfect borrower with a 740 credit score, 80% loan to value and no second mortgage attached the lowest that rates got were roughly 4.875%. Since then they are hovering around 5.25% to 5.50%. This, from 6% before rates took their dive. I am not a believer that rates can sustain these low levels without .gov permanently ‘fixing’ them somehow. Left up to the mortgage bond market and there are just too many sellers over the past several months, especially on well bid days.
In the past the mortgage process involved getting a completed loan application, ordering the credit report and appraisal and processing the loan. In a couple of weeks when the appraisal came back from the appraiser, the loan was submitted into underwriting for approval. Everything went smoothly because the appraisal always came at or above borrower’s estimates. These days the process has changed a bit. Now the first thing done after the loan application is taken is to call the appraiser for a comparable sale check to see if the value at which the home owner states the house is worth is on target. Therein lays the rub.
From early reports since rates fell sharply in early December, 80% of the loan applications are not getting out of the starting gate easily. Loan officers are all saying the same thing — that appraisals are not coming at value due because ‘all of the foreclosures and REO sales have taken the value down’. In the majority of these cases, this kills the loan. The loan officer then notifies the borrower of the news and they are in disbelief. All home owners think that their home is worth the most on the block and I have been told that this is a tough pill to swallow. This brings the crisis home instantly. Everyone trying to refinance into lower rates at once should hasten the national reality that the largest portion of the home owner’s net worth has evaporated in the past year. One loan officer I spoke with equated this call to a Doctor notifying a patient that they had a terminal illness.
The other three top reasons that loans are not making it out of the application phase are because of credit scores coming in too low, interest rates not really being what the borrowers are hearing hyped and Jumbo money is near all-time highs. With respect to scores, many have been negatively affected by creditors bringing revolving lines down sharply over the past several months. If the outstanding balance is over the 30% and/or 50% threshold of the available credit it negatively affects the score. Lately, banks have been dropping available credit to just above the outstanding balance, which is over 50% and a large credit score hit. With respect to rates, most borrowers do not have a perfect 740+ score and 80% and below loan-to-value meaning they do not get the rates being advertised. Even a small deviation in borrower profile such as a subordinated second mortgage, 700 credit score or 90% loan-to-value can result in a 100bps rate spike at least. Only a year ago the latter profile would have been considered ‘Prime’ — their 90% loan-to-value today would have been 50% equity back then.
Lastly, Jumbo money both Agency Jumbo from $417k to $625k and bank portfolio over $625k are priced terribly in the 6.5% to 7% and 7.5% to 9% ranges respectively. That is if they can even get the loan made. The problem with this is once you get out of the Subprime universe, a large percentage of Alt-A and Prime loans are over $417k. The Alt-A, Jumbo Prime and Prime universes are on very shaky ground right now and these are the borrowers who could really benefit from a low fixed rate right now. This harsh reality could spur a new wave of defaults and walk-aways from borrowers that were not considered at-risk before. This takes the crisis into the ’Prime’ universe very quickly because Prime borrowers represent the majority of new refi applicants. This new wrinkle brings the Prime Implosion to the forefront much quicker than my original, more linear time-line of Subprime to Alt-A to Jumbo Prime then Prime with some overlap.
Additionally, when borrowers with Jumbo loan amounts over $417k find out that 30-year fixed rates are anywhere from 6.5% to ‘unavailable’ the reality that that they are stuck in that loan and likely that home indefinitely will set in. The macro-economic effects of this are unknowable. With underwater or ‘near’ underwater home owners that are unable to sell or refi totaling 42% nationally and about 65% to 70% in the bubble states, this news is not surprising. However, it likely will be surprising to the media, analysts and markets when the facts get out in a couple of months. In a nutshell those that don’t need the credit can get it and those that do can’t. This is the perfect credit crisis storm - one which low rates can’t fix. The only thing that can be done to get money into borrower’s hands quickly is to waive appraisals for Agency and FHA loans as Lockhart has suggested. That is of course if the borrowers are ignorant enough to consider this option.
"James Lockhart, Fannie and Freddie’s regulator, said last week they were considering waiving the requirement to get new home price appraisals before refinancing loans they hold – a move that could greatly increase the scope for refinancing." But ‘no appraisal’ refi’s are a disaster that takes the housing crisis to an entirely different level because now the tax payer will be on the hook for trillions in mortgages that are essentially unsecured credit lines. Nobody will ever buy these loans or securities derived from them. That being said, given the extent of the negative-equity in America with no way to fix it other than aggressive proactive loan modifications allowing principal balance reductions, my money is on them seriously considering this radically destructive move out of sheer panic.
Wall Street heads into the home stretch
Investors will return Monday for the final few trading days of the year, and with all three major indexes on track to suffer their worst declines in decades, it's easy to understand why the market is eager to close the books on 2008. The Dow Jones industrial average has tumbled 36% and is on track to suffer its worst annual decline since 1931. The S&P 500 is off a whopping 40.5% this year, and is headed for its worst performance since the large-cap index was created in 1957. As it stands, this year's decline is already much worse than the previous record decline of 29.7% in 1974.
The Nasdaq is down 42.5% versus last year. While the tech-heavy index is on the path to its worst annual performance in its 37 year history, the Nasdaq has seen much darker days. In the 12 months that ended March 2001, it fell nearly 60% as the dot.com bubble burst. "This has been a year of superlatives," said Hugh Johnson, chairman of Johnson Illington Advisors, an Albany, N.Y.-based firm with nearly $700 million in assets under management. " has been dark and dismal, but if I had to sum it up in one word, it would be: historic." Underlying these historic declines has been the worst economic shock since the Great Depression, and a full-blown recession that is now entering its second year.
What started as a "downturn" in the housing market, grew into a "mortgage-meltdown," which wreaked havoc on the "global financial system" and ultimately spawned a "credit crisis." Of course, the popping of a massive energy bubble didn't help matters. As the problems on Wall Street spilled over to Main Street, the two became locked in a "negative feedback loop," said Johnson. In other words, concerns about the health of the economy put pressure on the stock market, which further undermined the economy, driving stocks down further and putting more strain on the economy. While these things played out, the nation lost nearly 2 million jobs.
In response to these historic events, governments around the world have taken unprecedented steps, including drastically lowering interest rates and making direct investments in some of the largest financial institutions. Given the extraordinary challenges facing the world economy, what can investors expect going into 2009? "The current consensus is that the economy will recover in the second half of 2009," Johnson said. "But the consensus tends to be wrong." Based on historical patterns, however, an economic recovery could come suddenly and dramatically, Johnson said. "Turning points can be very sharp and completely unexpected," he said. "Very few will see it coming."
As for next week, trading is expected to be choppy, with the market closed Thursday and many market participants on vacation. But investors will have a few economic reports to digest. On Tuesday, the Conference Board will release its December index of consumer confidence, which is expected to rise to a reading of 45.2 from 44.9 in November. That would still be at the low end of the index on a historic basis, which reached an all-time low of 38.3 in October. The Labor Department will report on weekly jobless claims Wednesday, after a 26-year high of 586,000 initial filings in the week ended Dec. 20.
Investors will get a fresh reading on the manufacturing sector Friday when the Institute for Supply Management releases its December survey of purchasing managers. The ISM index is expected to fall to a reading of 35.4 from a 26-year low of 36.2 in November, according to consensus estimates compiled by Briefing.com. In corporate news, two of the nation's top automakers, General Motors and Chrysler LLC., will take possession of $13.4 billion in emergency loans from the government. Trading could be volatile next week due to low volume and selling related to year-end tax loss strategies.
Economy 'on knife-edge' as Japan faces deflation fear
Japan’s economy — the second-largest in the world and a barometer of global consumer demand — was described yesterday as being "on a knife-edge" amid fears that it might plum- met into deflation within months. The warnings, which come from senior private sector economists and from the Japanese Government, follow a Boxing Day release of dismal industrial, consumer and employment data. Within hours of passing a record 88 trillion yen (£660 billion) budget, senior government sources told The Times that Japan would "inevitably" be forced to adopt new measures to halt the meltdown.
The country’s spiraling economic crisis arises primarily from the sudden halt in American consumption and the acute slowdown in the flow of components and goods throughout Asia. The strong yen has savaged the competitiveness of Japanese goods such as cars and electronics at a critical moment. A record-breaking fall in industrial output figures for November showed that the country’s huge manufacturing economy is collapsing far more rapidly and painfully than even the bleakest market forecasts believed possible. The 8.1 per cent month-on-month slide — a dramatic collapse from the 3.1 per cent decline logged in October, stunned many economists. Richard Jerram, of Macquarie Securities, said that the pace of collapse had almost gone beyond the point of sensible analysis.
Employment is on track to fall rapidly as companies retrench at a pace not seen even during the worst days of Japan’s "lost decade". Economists at Nomura said that even though the employment figures suggested a measure of stability, deterioration is "unavoidable" as companies retract job offers and lay off temporary workers. The rate of consumer price growth dropped at its fastest pace since 1981: as commodity and energy prices nosedive on global markets, food is now the only component of the Japanese consumer price index that is still in positive territory.
Kyohei Morita, senior economist at Barclays Capital in Tokyo, yesterday brought forward to May his forecast of when Japan will once again confront deflation — a rare economic malaise that crippled the nation during the late 1990s. He pointed to the growing number of retailers — from luxury goods boutiques to family restaurants — which are passing the benefits of the strengthening yen on to customers in "strong yen sales". These have in turn pushed consumer prices lower more quickly than anyone predicted. Reflecting growing panic within the Japanese Government, and the darkening prospects for immediate recovery, Kaoru Yosano, the Economy and Fiscal Policy Minister, said that "both Japan and the world will be on knife’s edge for some time."
Commercial property in crisis as City faces a chill winter
Glut of premises and falling demand leave landlords facing 50% fall in values
Commercial property values will halve and rents and occupancy rates will suffer steep falls as the once-buoyant sector faces meltdown in 2009, according to property experts. Severe overcapacity in London after a rash of speculative office building and a collapse in demand is seen as the main reason for the expected crash. Hedge funds in Mayfair and St James's have led the way after many emerged as some of the biggest losers from the credit crunch. Rents of £105 to £110 a square foot for the swankiest offices have dropped to £95 in the last couple of months, according to agents Jones Lang LaSalle.
Offices in the City and the West End have also been hit by the collapse in the banking industry and other sectors. Rent-free introductory offers are becoming more popular and now average three years compared with 18 months at the beginning of the year. Analysts at Capital Economics said rents in the West End were down 8% from their peak, according to the latest IPD index. The fall in commercial property values has already helped claim some notable scalps. The troubles that led to the demise of David Ross as chairman of Carphone Warehouse are rooted in the falling value of his commercial property investments across Britain and John Duffield, one of the City's most colourful characters, has been forced to give up his New Star Asset Mangement empire after it was weakened by the collapse of one of its high-profile property funds.
This story is reflected across the property development industry with most of the big firms, including Land Securities, British Land and Hammerson, suffering huge drops in property values and plunging share values. Almost the entire sector has come under the gaze of speculators ready to bet that things will get worse. Hammerson has 16% of its equity on loan to hedge funds, all them believed to be shorting its shares to profit from further falls in values. The latest figures show the rest of the country is beginning to follow London as rental values across the entire commercial property sector fell in November for the first time since 2004. Capital Economics warned that a 0.5% fall in rents year on year in November was only the beginning of a more general malaise. Though many developers downed tools in the spring and mothballed hundreds of commercial developments, over-supply of offices remained a key factor.
"We still expect rental values to fall substantially, as weak demand overwhelms any beneficial effects of a smaller supply pipeline," it said. Analysts who have warned for years that commercial property was a bubble waiting to burst remain sceptical that it will recover before 2010 or even later. Mark Dampier, head of research at Hargreaves Lansdown, advises investors to stay away while the credit squeeze persists. "The whole of the property market - commercial and residential - is built on credit and when there is a credit crunch it is unable to function properly." Despite his protests small investors ploughed at least £20bn into commercial property funds in the five years to 2007. Much of that money, for the time being at least, has disappeared.
For Britain's largest property funds that has meant suffering a double whammy of falling capital values and a surge in redemptions by investors. New Star's UK property fund was worth £2.2bn in 2007 against £1.1bn last month. In 2007 it had 30% in cash as a cushion against further falls in values and to cover redemptions. Now that figure is nearer 10% and it is busy selling assets. Aviva's Norwich Union property unit trust was worth £4.4bn last year. That figure has dived to £1.87bn and its cash cushion is down to 5%. The derivatives market for property swaps provides a good indicator of where capital values in the sector are heading, according to Matthew Oakeshott, who advises pension fund consultant OLIM. Oakeshott, a Liberal Democrat Treasury spokesman in the House of Lords, said the swaps market, usually based on the IPD All Property index, is increasingly used by property fund managers looking to fix their returns.
According to figures for November, the market is pricing in a decline of 51% in values from peak to trough, signalling a further 32% decline in capital values. "Fifty per cent off capital values is a realistic estimate for commercial and residential property prices from last year's peak," Oakeshott said. "Income yields for shops, warehouses and offices let to strong tenants on long leases are attractive now at about 8%, more than double long gilt yields. But the banks have bucketfuls of property they must sell, so we few cash buyers are being very picky. "The real danger to commercial property values is from falling rents. Investors should steer well clear of London offices, out-of-town retail warehouses and anything with flaky tenants on short leases which you can't re-let."
Few analysts predict disaster for the major property developers, which despite the short sellers, the lack of borrowing and the continuing slide in values appear to have enough reserves to survive. Investors may also see a light in predictions by economists at Lombard Street Research that rising yields will soon bring back not only Lord Oakeshott and his pension fund investors, but from the second half of next year wealthy foreign investors keen to acquire prime properties cheaply. That is unlikely to happen until rents stabilise and unemployment begins to bottom out. Vulture funds, some financed by Chinese and Middle Eastern money, have been sitting on the sidelines waiting for improved conditions. They may be forced to stay put for another year.
British banks may face second credit crunch in the New Year
The worsening economic slowdown is increasing fears that Britain's banks will have to raise still more capital next year in a market starved of investors. Investment bankers are preparing for a second round of capital raising by UK lenders on top of the £65bn already declared. Having rebuilt their balance sheets after toxic debt writedowns, the banks face an increasingly dire economic outlook that threatens to take ordinary loan impairments from individuals and businesses to levels not seen since the early 1990s.
Under those worst-case conditions, impairment charges at the domestic banks – Barclays, Royal Bank of Scotland and the combined Lloyds Banking Group – could hit £60bn next year, according to Credit Suisse analysts. "There could be a second credit crunch for banks, with a whole new round of writedowns late in 2009 as the economy filters back to banks," a senior investment banker said. "They have so far only provisioned for the credit crunch – so they will need to undertake a whole new round of capital raising." A trading update earlier this year from HBOS, which will be bought by Lloyds next month, made grim reading for the sector. Impairments from commercial and residential property shot up, and the bank warned of more bad news to come as unemployment, the biggest driver of bad debts, continues to rise.
The economy is slowing faster than expected, official figures showed last week, with the key services sector suffering most. The authorities fear a continuing spiral of economic pain as a lack of credit forces businesses and individuals into bankruptcy, triggering further losses for banks and still tighter credit availability. The Governor of the Bank of England has said getting banks lending is the most important task for combating the recession and has not ruled out full nationalisation of the sector. Some industry analysts believe the Government could be forced to move early in the new year to enforce a further capital raising, this time to shore up credit for an economy moving sharply into reverse. But with cash in short supply the banks will struggle to raise the funds. Royal Bank of Scotland's share offer failed last month despite its deep discount, leaving the Government owning almost 58 per cent of Britain's second-biggest bank.
Barclays turned to sovereign wealth funds for its recent £7bn capital raising because it did not believe institutional investors had the appetite to provide funds. But sovereign wealth funds are either less willing to provide cash to the sector as the economic downturn spreads to markets like Dubai, India and China, or are determined to extract a high price for their support, as Abu Dhabi and Qatar did with Barclays. The UK authorities have not ruled out taking further stakes in the banks or even full nationalisation. The Government's holdings already include all of Northern Rock and a majority stake in RBS, and it is set to own more than 40 per cent of Lloyds Banking Group.
If the state is reluctant to spend more, the banks might have to turn to private equity, which has billions to invest but no access to the leveraged loans it traditionally uses to maximise returns. The banks could try to head off that outcome by encouraging restructurings at businesses struggling to repay their debt, rather than letting them go bankrupt and crystallising losses. This would lead to a slew of debt-for-equity swaps and leave swathes of the economy owned by the banks. "A lot of banks have been looking at debt for equity swaps because new money is harder to come by than equitising a company's historic debt," a leading corporate lawyer said.
Stampede for sales as shops fear the worst
Fears that a wave of high street retailers will go bust drove a frenzy of price cutting yesterday as shops made a desperate attempt to entice customers to spend. Prices were slashed by up to 90 per cent in department stores, fashion outlets and supermarkets across the country for the Boxing Day sales, evidence of the growing sense of crisis in the retail sector. Retailers called for an urgent government bailout to match financial assistance given to the banking sector and the auto- motive industry to protect three million jobs. Yesterday hefty discounting, the only option available to shift stock urgently and raise much needed cash, resulted in one of the busiest shopping days in living memory.
Thousands of bargain hunters formed queues outside stores from the early hours of the morning and many shopping centres reported higher footfall rates than during last year’s sales. Selfridges, the Oxford Street department store, turned over almost £1 million between 12pm and 1pm — the most successful hour in the store’s 100-year history. But despite the huge customer turnout, experts warned of grim times ahead and said that more than ten retail chains risked going under next month. The British Retail Consortium (BRC) called on the Government to support the industry to avert a wave of bankruptcies. Woolworths, the most high-profile of them, will close a quarter of its stores today.
On Christmas Eve, as surveys suggested that trading was at its worst levels in 25 years, Zavvi, the music, games and DVD chain, went into administration. Jason Gordon, retail director at Ernst and Young, said that retailers faced further difficulties in the coming months, including planned tax increases in April. Buying capacity is also being undermined by the weakness of sterling. Mr Gordon told The Times: "We will certainly see a higher level of profit warnings and companies going into administration in the next year. There are a whole host of challenges for the retailers that survive the first quarter."
Yesterday the Centre for Economics and Business Research warned that the UK economy would suffer its worst fall since 1946 next year. Richard Dodd, of the BRC, said that retailers had "no choice" but to discount heavily. "Quarterly rents were due yesterday and a lot of retailers have to find the upfront cash this week," he said. Analysts warned that some retailers would be forced to continue discounting into January, and possibly February. The sales continue today.
'Lipstick effect' in full swing, economists say
The so-called "lipstick effect" is in full swing with sales of cosmetics rising as women try to cheer themselves up during the financial crisis. Economists believe that during hard times people forego extravagant purchases like cars, holidays and kitchens and instead spend their money on small luxuries like make-up. Recent sales figures from some of the world's big cosmetic companies - L'Oréal, Beiersdorf and Shiseido - bear out the theory. In the first half of the year L'Oréal sales were up 5.3 per cent. The theory was first identified in the Great Depression. Between 1929 and 1933 industrial production in the US halved but sales of cosmetics rose.
RAB Capital analyst Dhaval Joshi said: "The evidence shows that when budgets are squeezed people simply substitute large extravagances for small luxuries." In the US the number of people working in the cosmetics industry actually increased during the recessions of 1990 and 2001 as demand for make-up rose. And during the long period of stagnation in Japan since 1997, spending on accessories has risen 10 per cent. After the 9/11 attacks on the US sales of lipstick doubled. The theory assumes that, in a crisis or when consumer trust in the economy is low, people will buy goods that have less impact on their available funds. Women buy lipstick and men spend money on items like gadgets rather than new cars.
Nine out of 10 shoppers plan to cut spending in new year
Britain is preparing for a bleak new year of spending cutbacks, job insecurity and prolonged recession, according to a Guardian/ICM poll published today. It shows consumer confidence has dropped sharply in the last month as the reality of the economic downturn hits home. The poll, carried out just before Christmas, finds near universal gloom about Britain's economic prospects: 86% say they plan to make cutbacks and live more cheaply in 2009 — only 13% expect to spend as much as they did last year. People expect to target their spending cuts on luxuries such as holidays and restaurants. But while 45% say they will spend less on travel and 46% plan to spend less on eating out, only 20% plan to cut back on buying food to eat at home, and 55% will maintain spending on clothes.
The findings come as hundreds of thousands of shoppers stormed high streets across the UK yesterday to take advantage of increasingly desperate retailers slashing prices heavily. Selfridges in London's Oxford Street recorded its busiest-ever hour of trading as nearly £1m went through the tills, while bargain hunters were in position by 7am at Manchester's Trafford Centre. Despite the crowds, the scale of the discounts being offered was still likely to leave takings down on last year as retailers brace themselves for a bruising 2009. The sector is reeling from a series of high-profile collapses, with Woolworths just 10 days away from closing its doors for the last time, entertainment chain Zavvi going into administration on Christmas Eve, and further collapses expected in the new year.
The British Retail Consortium said it had been "a poor Christmas". "We'll see the full December figures in a few weeks, but they won't be pretty," Stephen Robertson, the BRC director general, said. The ICM poll suggests that most people believe they will struggle financially in 2009. Even though homeowners have been helped by steep interest rate cuts, a total of 77% think they will find credit card and mortgage payments tough, and 80% expect the recession to carry on through 2009 and into 2010. Only 18% think things will improve by the end of the year, despite Alistair Darling's forecast in November's pre-budget report that growth would return by late 2009.
Confidence in the effectiveness of the government's economic rescue package is limited. Asked about prospects for the year ahead, people are almost entirely gloomy. There has already been a sharp fall in individual economic confidence, both on last month's figures and on a Guardian/ICM poll published exactly a year ago. In December 2007 most people believed the outlook remained positive. Today only 43% are confident about their financial position and their ability to keep up with the cost of living. That represents a seven-point drop in a month and a 13-point drop over the year. Meanwhile 57% say they are now not confident — including 21% who say they are particularly alarmed. That is an eight-point rise on last month, and a 13-point rise on December last year.
A recent increase in overall confidence, which was reflected in last month's figures and followed the government's bank bailout package, falling fuel prices and the VAT cut, has been reversed. The recession is hitting the poorest the hardest. Only 32% of people in the C2 economic category and 40% of DEs are now confident about their economic position. That compares with 56% of ABs who are still confident despite the downturn. Meanwhile, 68% of C2s are now not confident, against only 44% of ABs. The poll shows most people expect to be hit hard by the consequences of recession in 2009. Again, people at the bottom of the economic ladder are more alarmed — 85% of C2s think they could become unemployed.
UK housing market crash has so far led to 32,000 estate agents losing their job
More than 30,000 estate agents have lost their jobs since the start of the credit crisis, according to research which highlights how the housing crash has wreaked havoc across the economy. It means that almost half of the estimated 80,000 estate agents who were in work 18 months ago have since been made unemployed. The job losses are the result of a dramatic fall in house prices and house sales during the past year, which has caused severe hardship for the thousands of estate agency branches dependant on a vibrant housing market. Around 4,000 estate agency offices -approximately one in four - have closed, leading to the loss of jobs not just for the sales agents themselves, but also valuers, negotiators, weekend viewing staff, administrators and mortgage advisers. No official numbers exist for how many people estate agents employ, but research undertaken for The Daily Telegraph by Rosalind Renshaw, a senior consultant to the National Association of Estate Agents, calculates that the number of estate agents in work has fallen from 80,000 in the summer of 2007 to 48,000 at Christmas.
In May this year it was estimated that just 4,000 estate agents had lost their jobs. The latest calculations suggest the second half of the year has seen an avalanche of job losses in the industry. The job losses are contributing to the rising tide of unemployment across the entire economy. Ms Renshaw said: "I think the figures are reasonably conservative. It really has been a bleak year, and the losses faced by the estate agency industry have been mostly swept under the carpet." Most property experts reluctantly agree with her calculations, which have been based on a research into every major property firm in the country. Estate agency trainer and legal expert David Perkins says: "My feeling is that the industry has already virtually halved. Although a surprising number of agents have kept offices open, they now run on skeleton staff, perhaps just a manager and one other person."
Those affected have ranged from the country's biggest estate agency businesses, to the smallest. Trevor Kent, a former president of the National Association of Estate Agents, has laid off three of his six staff, including two of his sons – not unusual in an industry still characterised by family-run businesses. He specialises in upmarket properties: "In spring last year, I'd be selling a £1 million house at the rate of one a week. It's now one a month, and the price has dropped to £800,000. "The last housing recession, in the early nineties, was like a dimmer switch. The market deteriorated gradually. This time, it was like blowing a fuse – it went out immediately." The average price this year has fallen from £195,00 to £164,000, according to the country's biggest lender, Halifax. But the fall in sales has only been part of the problem. For estate agents what has been more damaging has been the dramatic slump in house sales, which was fuelled by the drying up of the mortgage market.
The credit crisis led to lenders making it very difficult for house buyers to find a cheap home loan. Estate agency sales have fallen to just one a week, according to the Royal Institution of Chartered Surveyors – the lowest level since it began collecting data in 1978. Data from the Land Registry shows that the number of houses changing hands has fallen by 64 per cent over the last year. Like many agents, Mr Kent has kept going because he also runs a successful lettings business. But he is not optimistic, believing the sales market will be dominated by repossessions for the next two or three years. Elsewhere, the picture is similar. In the midlands, Newmans estate agents had 127 staff and eight branches at the start of 2008. It now has 84 staff in six offices. In the north, Hunters started the year with 300 staff in 22 offices, and now has 180 in 16. Managing director Kevin Hollinrake says: "We used to sell 1,600 houses a year. This year, it will be 800. Not surprisingly, we have seen a significant number of agents closing – eight just recently in York. "Anyone who thinks this market is temporary is wrong. Low sales volumes and depressed house prices are here to stay for at least two more years."
The agencies have tended to cut staff less dramatically, but have suffered nonetheless. Halifax has cut 204 branches to 151 but won't comment on job losses, while Connells has cut its staff by over 850, down to 4,000. Kinleigh Folkard & Hayward, has cut its staff from 620 to 470. Peter Bolton King, the chief executive of the National Association of Estate Agents, said: "I know many people will not have sympathy with estate agents losing their job, but the vast majority do a very good job for their clients. "The downturn has been so rapid this time around. It is very sad to think how many have lost their jobs." The Centre for Economics and Business Research, a think tank, has forecast that to 46,000 workers in the property sector – including estate agents as well as property developers – could lose their jobs between 2007 and 2010.
Britain's GDP will decline at fastest pace since the 1940’s
The UK economy looks set to contract at its fastest pace since the 1940’s next year, according to a report by an independent group of economists. The Centre for Economics and Business Research (CEBR) expects the UK’s gross domestic product to decline by 2.9 per cent in real terms over the next year, the biggest annual fall since 1946, when the country faced mass de-mobilisation after the Second World War. Business investment – forecast to collapse by more than 15 per cent in 2009 – is pegged to pose the biggest risk to the economy while household expenditure is expected to fall by 1.8 per cent in the New Year.
CEBR’s managing director, Mark Pragnell, said his team "had to get the history books to find a year with as a large a fall in national output as we expect for 2009." "The government’s statisticians publish a consistent series of gross domestic product estimates back only to 1948. The worst year on these records was 1980, where output was 2.1 per cent lower than the preceding year." The grim forecasts come less than a week after the Office for National Statistics said gross domestic product from July to September was down 0.6 per cent compared to the previous quarter. The contraction – the fastest rate of decline since the recessionary times of the early nineteen nineties – trumped earlier expectations of a 0.5 per cent drop.
"It is easy to see that things could be even worse," CEBR economist Ben Read said, "Despite the public declarations by the government that the banks ought to be lending more it is clear that the primary concern of many of our largest banks is to shore up their balance sheets and, for those on the end of the government bail-outs, to pay back their Treasury paymasters." "With few incentives for banks to behave otherwise, credit availability to businesses may become even worse during 2009."
Why the British are saying au revoir to life in France
For half a century, France has been a haven for Britons seeking a better life. For many, thanks to the financial crisis, the dream is now over. This month, as the French government created a new cabinet post, Ministre de la Relance (Minister of New Beginnings) to deal with the financial crisis, marked the end of an era for a multitude of British expats. Hoping to find their new beginnings, they had relocated to France in their thousands over the past 50 years, trading up suburban semis for romantically run-down old gates in Brittany or the Dordogne, in what was referred to there (with the accompanying Gallic shrug) as l'invasion anglaise. Now, with new legislation demanding non-French European Union citizens take out private health insurance, and the pound at near-parity with the euro, 2009 looks set to be the year of the great British exodus. "For half a century we Brits have looked upon ourselves as the equivalent of the Americans in post-war Europe," says novelist and screen writer Frederic Raphael, who divides his time between the Dordogne and London, "all-capable with our 'almighty dollar'. But many of these expats might as well have relocated to Northumberland – they had no interest in enjoying France by learning, speaking or reading the language, they were just thinking 'we're making a killing'. So, as soon as the economic situation does not make it worth their while, they move back. The truth is that if you chase the pound, things will be good when they're good and bad when they're bad."
And they don't get much worse than this, according to Charles Gillooly, the chairman of the French Estate Agents' Federation's Dordogne Branch, the area where an estimated 20,000 of the 200,000 Anglo-Saxons currently living in France have settled. "We have a financial crisis which is compounded by a property crisis," he explains. "And Britons have been doubly hit." The estimated £174 million that British expatriates contribute to the French economy looks set to dwindle dramatically in the new year, with figures suggesting a 50 per cent fall in prospective homebuyers from the UK. "As a consequence of low interest rates and the fact that many expats have their pensions paid in sterling, lots of British people living here have lost 25 per cent of their revenues," says Bertrand Gillemot from the Brittany-based estate agent Bretagne Propriété Service, "so we have seen a lot of them selling off their homes in the past six months, and next year we expect to see still more." The closure of French News – the Dordogne-based newspaper which had served the thriving expatriate community for two decades – earlier this month was seen as further confirmation that this Christmas may have been the last one spent in France for many British expats.
It was in the 1960s that France first began to beckon genteel middle-Englanders with its promise of a good life, either in retirement or as a place to start a new business. Twenty years later, southern Spain emerged as a working-class haven, while the past decade has seen Portugal become a home to both stratas of society. There was that elusive sun, of course, but more importantly there was the "almighty pound", giving people the ability to "upsize" a class simply by crossing the channel. France had the enduring advantages of being the closest, and "most British" of the three. With its undulating green horizons, hedgerows and old stone houses it resembled the pastoral idyll (real or imagined) of 1950s Britain. Eymet, a 13th-century market town in the Dordogne, is so full of expats (one third of its 2,600 inhabitants are British) that it has become known as "Little England". Children walk to school unchaperoned and doors are left unlocked but the comforts of home are close at hand. A shop in the local square sells Heinz tomato soup, Branston Pickle, Tetley Tea and Marmite; the place has its own cricket club, a Franco-British choir and 800 British-run businesses. "If you want to live in France but don't speak French," says one expat website, "this is the place to be."
Yet even in Eymet, where the most fervent disciples of the French life – if not French culture – can be found, a slow drain has begun. Alan and Jean Chorely, who run the removal firm AC Light Haulage, moved three families back to the UK in the build-up to Christmas. "It's more than we would do normally," admits Jean. "A lot of people came here to retire and either became concerned about health issues, or found things too hard to deal with because they didn't learn the language. Those who are staying here have started using us now to transport cheaper goods from Britain to France, because it's so much cheaper than buying them in euros." At L'Epicerie Anglaise, Ilka Olivier says: "Many clients came here thinking life would be very cheap and it's not any longer. They can't sell their houses back in the UK, and they can't sell their houses here either, because the English pushed the prices up so much when they first came to France that no French people can afford to buy them." Pensioners are the hardest hit, she tells me, with many retired expats now unable to pay for care homes or utility bills. Irena Czekierska, 50, a teacher in the Dordogne, can no longer afford to keep her 91-year-old mother in a French nursing home. Her mother, a former teacher, relies on a British pension which has shrunk from 1,600 to 1,300 euros a month. Even the wealthier expats, like Jeannie Kilburn, who bought a chateau in Najac five years ago, have decided to sell up and move back to the UK. "We've left it as late as we could and we are very sad because we have been very enriched by the experience of living in France," she says, "but any longer and we might find ourselves too old to make the move."
Builder David Horlock, 42, from Plaisance, who captains his local cricket team, has lost two players to the exodus in the past year. Although he has no plans to follow the trend, he advises anyone with "entrepreneurial aspirations" not to move to France. "If you expect to come here with a big mortgage and earn a living you'll be in trouble. There isn't much work out here and the social taxes are huge: 43 per cent of your profits. Who knows what it'll be like next year?" Michael Wright, the best-selling author of C'est La Folie, which charts one man's attempt to start a new life in rural France, claims: "The average length of stay for les Anglais has always been two winters, which is roughly how long it takes for the money to run out, and for the realisation to dawn that – even in Arcadia – there are gas bills to pay." And BBC programmes depicting the Dordogne "as a land of milk and honey (or rather, cheap food and wine)" have as much to answer for as "flit-lit" like Peter Mayle's A Year in Provence, according to Susan Durst, who runs an Anglo Association in the Dordogne. "The few Brits who are moving back to the UK are people who still have a home to go to and are therefore relatively well off," she says. "The others moving out are those whose finances were stretched to start with, who miscalculated living expenses over here and were under the illusion they could somehow find employment without speaking a word of French. They seem to regard their adopted homeland as a kind of Disney-style backdrop for their idealised lifestyle."
Tony Martin, who runs French Liaison, a help centre for British people moving to south-western France, shares Durst's views, claiming the downturn is acting as an excuse for those expats who never really intended to "stick it out". "Of course people who are chasing the pound will go back, but the bottom line is: it's still a better way of life out here." "Nothing would make me leave France," Peter Mayle, who still lives in the Luberon, tells me. "If it came to it, I'd rather be poor in France than rich in England." Those who, out of genuine need or a nervous disposition, do "follow the pound" back to stricken, jobless and overpopulated Britain may find themselves regretting their decision. For other loyal Francophiles, the good life may be that little bit finer without so many of their countrymen to share it with. "It'll be a pleasure when people no longer roll their eyes when we tell them that our house is in the Dordogne," laughs Raphael. "Over a hundred years ago William Somerset Maugham said of the Brits: "They imagine that they are admired for their style and their moral superiority, just wait till the money runs out and then they will discover what the rest of the world really thinks about them."
Unclear if GMAC met final hurdle for bailout funds
The financing arm of General Motors Corp. wasn't immediately saying early Saturday whether it had met a midnight deadline to clear a final hurdle in its quest to become a bank holding company, which would allow it to access billions in federal bank bailout money. GMAC Financial Services LLC already received the Federal Reserve's stamp of approval earlier this week, but needed to complete a complicated debt-for-equity exchange by 11:59 p.m. EST Friday. In an e-mail at 12:45 a.m. Saturday, GMAC spokeswoman Gina Proia did not say whether the company met the deadline. She didn't respond to repeated requests for further comment.
Analysts have speculated that without financial help, GMAC would have had to file for bankruptcy protection or shut down, dealing a serious blow to GM's own chances for survival. When the Fed on Wednesday made GMAC eligible to access part of the government's $700 billion bank rescue fund, it was contingent ailing auto and home loan provider completing the debt exchange. The Federal Reserve apparently needed to see that the bondholders were willing to inject more capital into GMAC, a critical requirement to get bank holding status. GMAC bondholders needed reassurance that the Fed would approve GMAC's application to qualify for federal aid.
Sources close to the negotiations with bondholders said earlier this week that talks with GMAC were not going well, with creditors wanting more for their debt investments. But Scott Talbott, a financial services lobbyist in Washington, D.C., said that any stubbornness among bondholders might have softened in recent weeks given the stakes. "Anytime you ask investors to change their expectations and get less than anticipated, it causes strife," Talbott said Friday. "But as the weeks wore on it became clear that without change the choice was getting very little in bankruptcy or accepting the changes in order to ensure the strength of GMAC to get the bulk of their investment back." Shares of GM surged on Friday, the first day of trading since the Fed's announcement late Wednesday. Shares rose 41 cents, or nearly 13 percent, to $3.66.
The Fed's action Wednesday came as GMAC was still struggling to get bondholders to convert 75 percent of their debt into equity of the company. The Fed cited "emergency conditions" in justifying its decision. GMAC's goal is to reach $30 billion in capital, the majority of which would come from the exchange of debt. Another part of the equity requirement included a demand from the Fed that $2 billion of the total come from new equity. So far, GMAC has received a commitment of $750 million from its parents GM and Cerberus Capital Management. It's unclear whether that funding would come from the bridge loans the U.S. Treasury granted GM and Chrysler LLC — which is owned by Cerberus_ earlier this month. Becoming a bank holding company would qualify GMAC to access the government's bank rescue funds, and support GMAC loans to car buyers and GM dealerships.
GMAC has not said publicly how much it was requesting from the $700 billion bank bailout fund. CreditSights analyst Richard Hoffman estimated in a research note Friday that GMAC "could have applied for up to about $6.3 billion." GMAC, which is 49-percent owned by GM, provides auto financing to GM customers and dealerships. The Fed order says GM will reduce its stake to less than 10 percent of the voting and total equity interest of GMAC. GM's remaining equity interest in GMAC will be transferred to an independent government-accepted trustee who must dispose of the equity held in the trust within three years of the trust's creation. Cerberus, which led an investment group that bought a 51-percent stake in GMAC from the automaker for $14 billion in 2006, will reduce its stake in GMAC to no more than 33 percent of the lender's total equity.
The Fed's move to provide government aid to one of the nation's biggest suppliers of auto loans was just the latest extension of the federal bailout program, initially designed to shore up ailing banks. As the credit crisis kept ballooning, the program expanded to include insurers, credit card companies, and the automakers themselves. Just last week, President George W. Bush ordered an emergency bailout of the industry, offering $17.4 billion in rescue loans, and citing imminent danger to the national economy.
The Next Wave of State Taxes
Governors from Tennessee to Idaho have ordered deep cuts in spending as the recession continues to ravage state budgets. Can broad-based tax increases be far behind? State fiscal experts say the stage could be set for a wave of rises in state sales and personal-income taxes more widespread than any since the early 1990s. "My view is that cuts will become significant and touch enough people that tax increases will be more viable than they have been in the past," says Scott Pattison, executive director of the National Association of State Budget Officers in Washington. Taxpayers in most states escaped major tax increases after the 2001 recession for a couple of reasons, says Donald Boyd, a senior fellow at the State University of New York's Rockefeller Institute of Government. Many states fell back on large tobacco settlements to help them through the downturn. And that recession was much briefer than this one is projected to be. "The fiscal impact on states was severe and short," says Mr. Boyd. "This one looks to be every bit as steep and longer."
But governors aren't rushing out with proposals to boost personal income taxes just yet. There's a bit of a dance that has to happen first, as legislatures digest the opening bid from governor's mansions and all the various sacred cows that are passing under the ax. California, mired in a fiscal crisis of historic proportions, is the exception. A three-quarters percentage point sales-tax increase is on the table there, plus a 2.5% surcharge on 2009 personal income taxes. "California's pattern is not one that's going to be followed in the near term by very many states," says Harley Duncan, managing director of KPMG LLP's state and local tax practice. Instead, he says, states will likely follow the lead of New York Gov. David Paterson, who last week proposed a cornucopia of taxes and fees on items from soft drinks to yachts to digital music downloads. "If broad-based taxes are put on the table, it will be later in the spring, when states have dealt with the expenditure side. And we shouldn't be surprised if that happens," Mr. Duncan says. Until then, here are some revenue tricks states may employ to stave off the political Russian roulette of major tax increases:
- Tapping rainy-day funds. Excluding Texas and Alaska, which bolstered their reserves thanks to the energy boom, state reserve funds represent on average about 4% of annual general fund spending. By the end of the 2009 budget cycle, Mr. Pattison predicts, these funds will be virtually wiped out, as state legislatures use them to plug budget holes. "Why wouldn't you?" he says. "I mean, it's pouring rain."
- Increasing taxes on tobacco, alcohol and sugared drinks. Illustrating the depth of the fiscal pain, even states in the heart of the tobacco belt are considering cigarette tax-increase proposals. Virginia Gov. Tim Kaine proposed doubling Virginia's 30-cent-a-pack tax, now the third-lowest in the nation. Kentucky Gov. Steve Bashear would raise cigarette taxes from 30 cents to $1 per pack. Increasing excise taxes on alcoholic beverages is another popular tactic.
As many states have raised cigarette taxes to or past the point of diminishing returns, snacks and sugared soft drinks have emerged as the new favorite tax with a public-health rationale. Gov. Paterson proposed an 18% additional sales tax on nondiet soda and fruit drinks that contain less than 70% fruit juice. But Maine voters in November slapped down an excise-tax increase on soft drinks and beer and wine that would have helped fund a health-care initiative.
- Imposing sales taxes on services. State sales-tax regimes are a patchwork affair, with various types of goods and services exempt. In Washington State, the chairman of a legislative task force on education reform has proposed the state broaden its sales tax to cover such services as legal, accounting and architectural products. The broader task force didn't endorse that proposal. Washington Gov. Christine Gregoire has pledged she won't sign a tax increase, but would let such a proposal come before voters.
- Imposing luxury taxes. Gov. Paterson's plan would add a 5% luxury tax on the price of cars in excess of $60,000, of yachts in excess of $200,000, of jewelry and furs above $20,000, and of personal aircraft above $500,000.
- Dangling tax amnesties. Offering to waive penalties for those who voluntarily pay back taxes owed is a nearly surefire one-time revenue boost. Oklahoma, for example, says it collected $82 million from its amnesty program this fall, and Connecticut and Massachusetts have amnesty deals on tap for 2009.
- Adding an income surtax on the wealthy. Gov. Paterson has not yet requested a tax increase on higher-income earners, but has threatened to do so if the budget situation worsens. Meanwhile, a New York hospital trade group and the Service Employees International Union spent $1 million on statewide TV ads this week, urging viewers to support a surtax on incomes above $250,000. "Put it on your holiday list," the ad suggests. A similar proposal stalled this year in Albany. But State Sen. Eric Schneiderman says next year may be different: "Things that look very ugly under certain circumstances start to become more attractive when you're faced with catastrophe."
Schwarzenegger's $42 Billion Crisis Makes Judges Homeless, Derails Bridges
Just $5 million of work is needed to complete a new California Court of Appeals building in Santa Ana. The state may not have the money, and come July judges may be writing opinions in their living rooms. "I’ve been on the bench for 23 years, and I’ve never seen anything like this," said David G. Sills, the presiding justice for the Fourth District Court of Appeals, Division Three, in a telephone interview. California’s worst budget crisis has held up $3.8 billion in spending on public works, possibly including the courthouse adjacent to Santa Ana City Hall. Sills and his seven fellow jurists had planned to move in before the lease on their temporary offices expires June 30. "Everyone will have to work from home," said Sills, 70, "and we’ll have to rent a place for when we hear arguments."
Republican Governor Arnold Schwarzenegger and the Democratic-controlled Legislature are deadlocked on how to close a two-year budget gap that grew to $42 billion as job losses and stalled consumer spending reduced income and sales taxes. Schwarzenegger and Democratic leaders met yesterday without a resolution and are scheduled to continue talks through the holidays. The California Pooled Money Investment Board, a committee that manages state spending, voted Dec. 17 to halt construction outlays for six months, which could hurt an economy that has lost more than 118,000 construction jobs in the last two years. "The infrastructure work so vital to getting our economy back on track will lie crippled," California Treasurer Bill Lockyer said in a statement after the vote. The board’s members are Lockyer, state Controller John Chiang and the governor’s budget director, Michael C. Genest.
The decision to defer spending is forcing agencies to review their projects and decide which of 2,000 under way around the state should be delayed. Among them are highways, bridges, hospitals, levees and schools and other public buildings. California can’t afford to finance all of them and pay for such everyday needs as debt service on bonds and salaries and health-care benefits for the state’s 238,816 employees, H.D. Palmer, a spokesman for the Department of Finance, said in an interview. Schwarzenegger has said postponing so much construction may add to California’s unemployment rate, which at 8.4 percent is tied with South Carolina as the third-highest in the U.S. behind Michigan and Rhode Island. The national rate is 6.7 percent. About 3,000 people are working on 20 projects that Hensel Phelps Construction Co. of Greeley, Colorado, is overseeing in California, including a $110 million medical facility at the San Quentin State Prison near San Rafael, said Wayne Lindholm, executive vice president of the privately held company’s two California offices.
"These people are scared," Lindholm said. "They don’t know if they’ll be working in three months, a year, or where they go from here." South of downtown Los Angeles, a delay finishing a school building could put children in danger, said German Cerda, principal of South Gate Middle School. About a third of his 2,900 students are scheduled to move into the new building a half-mile away in 2012, relieving overcrowding inside and making nearby streets safer, he said. On Dec. 2, a 14-year-old South Gate student was killed when a car stuck him a block away, an accident Cerda attributed to congestion. "The biggest complaint we get from parents is what happens when the bell rings at 2:42 p.m. each day," Cerda said. That’s the time that his students are dismissed and 3,000 more are leaving a high school down the street. "They don’t want to see another tragedy."
The Los Angeles Unified School District, second largest in the country behind New York City’s, has $3 billion in construction projects under way, including 35 new schools and improvements to 1,500 buildings. The goal is to reduce bus rides of 60 minutes and more and eliminate schedules that deny some children 17 days of instruction a year. "Without the money, we have a poor educational environment for a while longer," said Guy Mehula, chief facilities executive of the school district. In Santa Ana, the appeals court typically handles 800 to 900 cases a year, and each of three judges hearing an appeal needs full access to the lower court record. Without a building, couriers will have to drive cartons of files from one judge’s house to the next before they can meet somewhere to rule, Sills said. "I haven’t the vaguest idea how we’re going to orchestrate all that, he said.
Bankruptcies Will Engulf Municipalities, Says Man Who Called Orange County
The accountant who predicted the nation’s largest municipal bankruptcy says as many as 10 insolvencies will roil the $2.7 trillion U.S. market for state, county and city debt next year as public finances worsen amid calls for federal aid to state and local governments. John Moorlach said in 1994 that Orange County, California’s leveraged investing strategy could wreck its finances. The county went bankrupt about six months later after losing $1.6 billion. As many as four cities in the Golden State and six others nationwide may seek court protection from creditors next year under Chapter 9 of the bankruptcy code, the section devoted to municipal governments, Moorlach said in an interview.
"The total could be higher," said Moorlach, 53, now chairman of the Orange County Board of Supervisors. He didn’t name any cities outside California, which has seen the cost of insuring state debt against default more than quadruple since September. He said his estimate was based on general economic conditions. States project a $97 billion shortfall over the next two years, according to the National Conference of State Legislatures. This mounting pressure on public finances gives President-elect Barack Obama’s administration "strong incentives" to provide federal aid, wrote George Friedlander, a municipal strategist at Citigroup Inc., the largest U.S. underwriter for tax-exempt bonds, in the firm’s Dec. 12 Municipal Market Comment. "In an environment where the federal government needs to stimulate the economy, keeping states from being forced to take steps that are rapidly and severely restraining will become absolutely essential," Friedlander wrote.
Two California cities, Rio Vista, with a population of 8,000, and Isleton, a 10th as large, have said budget gaps and debt loads may force them into insolvency. Likewise, Jefferson County, Alabama, which is trying to restructure $3.2 billion in sewer debt, has considered what would be the largest U.S. municipal bankruptcy. The most such filings in a year is 104 in 1940 at the end of the Great Depression, according to a 1964 study, "The Postwar Quality of Municipal Bonds." Since 1980, the record is 18 in 1987, the year of the Oct. 19 stock-market crash. There may be 36 bankruptcies over the next two years, said Richard Ciccarone, chief research officer of McDonnell Investment Management LLC of Oak Brook, Illinois. Ciccarone predicts a dozen defaults in 2009 "and at least double that number in 2010." He didn’t identify cities or counties and said his forecast is based on studying how municipalities respond to economic crises.
If well-known localities turn up among the insolvent, he said, borrowers’ costs will increase at least 50 basis points. A basis point is 0.01 percentage point. If the interest rate on 10- year bonds worth $1 million increases to 5.5 percent from 5 percent, borrowers pay an additional $50,000 over the bonds’ life. Tax-exempt yields on the Bond Buyer 20-bond index were at 5.46 percent on Dec. 19. Orange County sought court protection on Dec. 6, 1994, about six months after Moorlach, a Republican, predicted the bankruptcy while running for the treasurer’s office. Incumbent Robert Citron, a Democrat whose investment strategy required heavy borrowing to increase bets, resigned. Moorlach, a Republican, replaced him and held the office through 2006. Now, he says, three or four of next year’s insolvencies will be in California, the biggest borrower in the municipal bond market. State lawmakers are grappling with a $14 billion shortfall in the fiscal year that ends June 30. A $42 billion hole is projected for the year that begins July 1. The state this year has sold $21.6 billion in tax-exempt bonds while localities have sold $31.1 billion, according to data from Thomson Reuters.
Standard & Poor’s downgraded California’s short-term note rating to SP-2 from SP-1 on Dec. 10. The state has "some vulnerability to adverse financial and economic changes over the term of the notes," the New York-based company said. Notes rated SP-3 are deemed to be speculative. Spreads on credit-default swaps against 10-year California debt rose to 507 basis points on Dec. 12, more than double their value of 213 on Dec. 2, according to data compiled by Bloomberg. They declined to 400 yesterday, meaning investors would pay $400,000 annually to protect $10 million of California debt. California swaps are the most expensive of any state, followed by Michigan, at 365 basis points. The swap contracts, conceived to protect bondholders, pay a buyer face value in exchange for the underlying securities or the cash equivalent should an issuer fail to adhere to debt agreements. They increase in value as perceptions of credit quality deteriorate.
The market for municipal credit protection has "quite literally, gone haywire," Citigroup’s Friedlander wrote Dec. 12, noting that the cost for California debt was higher than for Turkey’s. "These prices bear no relationship to real risks whatsoever," he said in the report. More Chapter 9 filings are not inevitable, said Bruce Bennett, a partner at Hennigan, Bennett & Dorman law firm in Los Angeles who designed Orange County’s 1994 bankruptcy strategy. "Municipalities are unbelievably artistic at deferring liquidity problems," by tapping reserves and cutting expenses, he said. Moorlach said many California cities are watching Vallejo, a city of 117,000 on San Francisco Bay that filed under Chapter 9 in May. The city hopes to rewrite its labor contracts with police and firefighters.
"If Vallejo is successful in unwinding pension agreements, you could see Chapter 9 become a whole new industry," Moorlach said. Orange County needs to close a projected $84 million gap in next year’s $700 million general fund. On Dec. 11, after the state cut funding for social services, county leaders said they would lay off 210 workers. Nick Berardino, general manager of the Orange County Employees Association, the county’s largest union, said politicians have been slow to respond to suggestions on how to prevent layoffs. Berardino said he thought most municipalities would avoid bankruptcy and mass job cuts by slashing services this fiscal year. "After July of 2009, though, it’s a whole new ballgame," he said.
Lehman Bankruptcy Roils Municipal Swap Market as Failure Triggers Payments
Six years after embarking on an effort to lower borrowing costs using derivatives, New York is watching those savings evaporate. The state says it paid bankrupt Lehman Brothers Holdings Inc. and other Wall Street banks at least $75.9 million since March to end interest-rate swap contracts that were supposed to lock in below-market rates. That money and the costs of issuing new debt to replace bonds linked to swaps gone awry are eroding the $207 million in savings New York budget officials say the derivatives produced since 2002. New York isn’t alone. Lehman’s bankruptcy filing on Sept. 15 triggered the termination of similar contracts across the country, forcing state and local governments and other borrowers in the $2.67 trillion municipal-debt market to buy out the agreements. They suddenly find themselves making unexpected payments at a time when their revenue is already under pressure from the worst recession since World War II.
"People are fixing problems right now," said Nat Singer, managing partner at Swap Financial Group in South Orange, New Jersey, and the former head of municipal derivatives at Bear Stearns Cos. The number of new deals has shrunk to a "fraction" of the amount a year ago as issuers unwind failed swaps with Lehman, Singer said. Bentley University in Waltham, Massachusetts, and a school district in Pennsylvania vowed never to use swaps again after losing money. The added costs in New York come as the state faces a record $15.4 billion budget deficit over the coming 15 months. In a swap, parties agree to exchange interest payments, usually a fixed payment for one that varies based on an index. Borrowers may benefit by using swaps to lower interest expenses or lock in rates for future bond sales.
New York agencies used them to lower the cost of almost $7 billion in bonds sold between 2002 and 2005, according to an Oct. 30 report from the budget division. The average fixed rate the agencies agreed to pay Lehman and other banks was 3.78 percent, compared with 4.5 percent if they had sold conventional tax-exempt debt, officials calculated. The state failed to comprehend the extent of the risks involved in entering into the long-term contracts, which often last more than 20 years, the report said. They included the likelihood an investment bank would go out of business, triggering the termination of the agreement. "One of the main risks with swaps, which is that a sudden bankruptcy of a counterparty could terminate a swap in unfavorable mark-to-market conditions, was not effectively addressed in the existing laws and agreements," the budget division wrote in its annual report.
A budget-division spokesman, Matt Anderson, said in an e- mail that "given the current volatility in the market, we currently don’t anticipate entering into further swap agreements at this time." Lehman had about 930,000 derivatives contracts of all types when it collapsed, according to bankruptcy filings. About 30,000 remain open, Robert Lemons, a Weil, Gotshal & Manges lawyer representing Lehman, said last week. The contracts are worth billions of dollars to Lehman’s creditors, though their exact value isn’t clear, he said. The cost of ending a contract depends on current interest rates. Since New York and other issuers agreed to pay a fixed rate to Lehman when borrowing costs were higher, they must pay the bank to end the deals. The three-month dollar London interbank offered rate, or Libor, upon which many agreements are based has tumbled to 1.466 percent from 5.5725 percent in September 2007.
Because they are private agreements, no comprehensive data exist on how many municipalities are involved in the almost $400 trillion interest-rate derivatives market or the total paid to exit the contracts. Derivatives are contracts whose value is tied to assets including stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather. New York passed a law in 2002 expanding the ability of state agencies and authorities to use swaps. It was signed by then-Governor George Pataki, a Republican. New Jersey, California and other states also use derivatives in their public financing. Bentley University entered into swaps with Lehman and Charlotte, North Carolina-based Bank of America Corp. on $85 million of debt between 2003 and 2006. The school also had to pay a fee to end the swaps when Lehman collapsed, based on its contracts with the bank. "It’s going to take awhile for people to get comfortable again, if ever," said Paul Clemente, the chief financial officer at Bentley, who declined to disclose the amount of the fee. "As far as the future for interest-rate swaps, for me there is no future."
Some borrowers also use swaps as a way to generate upfront cash, an attractive feature as the recession eats into municipal finances. At least 41 states and the District of Columbia face a combined budget shortfall of $42 billion this fiscal year, the Center on Budget and Policy Priorities in Washington, a non- partisan budget and tax analysis group, said Dec. 23. The estimate on Oct. 10 was $8.9 billion. The Butler Area School District in Pennsylvania decided in August to pay JPMorgan Chase & Co. $5.2 million to back out of such a deal, more than seven times what it was paid to enter the agreement, rather than risk losing even more money over the 18- year contract. The district superintendent, Edward Fink, said he now thinks it’s inappropriate for school systems to dabble in such trades, even though they were explicitly backed by the General Assembly in 2003.
JPMorgan said in September it would stop selling derivatives to states and local governments amid federal probes into financial advisers and investment bankers paying public officials for a role in swap agreements. Borrowers "never put a value on the risks associated with the swaps," said Joseph Fichera, president of New York-based Saber Partners LLC, a financial adviser to corporate and public sector borrowers. They only estimated the savings investment bankers and advisers were telling them they would get, he said. The use of swaps began faltering in February when the market for auction-rate securities collapsed. States, local governments and nonprofits sold about $166 billion of the debt, and as much as 85 percent of that was then swapped to fixed rates, according to Fichera. The collapse of the auction-rate market left issuers such as the Port Authority of New York and New Jersey paying weekly or monthly rates of up to 20 percent. The swap agreements failed to adjust to swings in the underlying variable rates, leaving New York and others exposed to higher borrowing costs.
Interest rates on other types of municipal variable-rate debt also rose this year as investors boycotted bonds backed by MBIA Inc., Ambac Financial Group Inc. and other insurers that lost their AAA ratings because of their expansion into subprime- linked credit markets. Some borrowers entered into new swaps after Lehman’s collapse, agreeing to pay higher than market rates in exchange for upfront payments to help cover the termination fees they owed Lehman, according to Swap Financial’s Singer. London-based Barclays Plc, which acquired Lehman’s brokerage, is among the banks bidding on this business, he said. "The combined message from all of that is you cannot have complete confidence in your counterparty," said Milton Wakschlag, a municipal finance lawyer in Chicago at Katten Muchin Rosenman LLP. "People will be taking a hard look at some of the conventions of the marketplace" after they finish cleaning up from Lehman’s bankruptcy.
Singer Bjork Starts Fund to Boost Iceland’s Economy
Icelandic singer Bjork is seeking investors in a venture-capital fund she helped start to finance new businesses and boost the struggling economy in her home country. Audur Capital, a Reykjavik-based investment company founded and managed by women, will run the fund, which is named Bjork after the 43-year-old singer. It was started with an initial investment of 100 million Icelandic kronur ($790,000) and will close to new investors by March 2009, according to Halla Tomasdottir, Audur’s executive chairman.
The new venture, which was reported earlier this week by the New York Times DealBook, aims to boost Iceland’s economy after a five-year economic boom ended this year with the collapse of the U.S. subprime mortgage market and the resulting failure of the local banking system. Audur is hoping to raise as much as 1.5 billion kronur by the end of March and invest in environmentally friendly businesses and technologies.
"We are attracting a lot of interest from Iceland and abroad as increasingly more people are looking for investments whose returns aren’t only financial," Tomasdottir said in an interview.
Bjork, whose swan dress at the 2001 Academy Awards ceremony earned her a place on Hollywood’s worst-dressed lists, intends to invest "in companies that create value through the uniqueness of Iceland’s nature and culture," Audur said on the Web site. Bjork’s last single, Nattura -- a call to respect Iceland’s environment -- was released in October. Tomasdottir declined to give details about the singer’s personal investment in the fund.
The International Monetary Fund predicts Iceland’s economy will shrink 9.6 percent next year. The Washington-based IMF put together a rescue package for the country worth as much as $5.3 billion last month. The krona has lost half its value in the past year, which Tomasdottir said is helping attract investors because "it represents a lower barrier to entry" in Iceland’s economy.
Iceland inflation still spiralling
Over the last 12 months the cost of living in Iceland has increased by 18.1 percent, and the inflation rate excluding housing stands at 20.7 percent. Over the last three months, costs have risen by 5.5 percent, which would equate to an annual inflation rate of 24 percent. The figures come form Statistics Iceland, which says that one month inflation in December has been 1.52 percent, and the rate shoots to 1.71 percent when housing is excluded. The cost of furniture, electronics and home equipment has gone up 4.4 percent and home maintenance products by 7.2 percent. Food and drink has gone up by 2.1 percent and alcohol by 9.2 percent; although that is largely due to the recent hike in alcohol, tobacco and fuel tax. Recreational products, toys and publications have increased in price by 2.4 percent and air fares to other countries by 14.6 percent.
Petrol and oil products have decreased in price by 8.6 percent, despite the recent tax increases. The cost of owning a house has decreased by half a percent in one month, partly due to decreasing house prices and the reduction in real interest, although mortgage interest has had no effect on the inflation rate since November 2005, Visir.is reports. Sales tax revenues were not reported, as there has not yet been enough time to include details for the increase in tax on alcohol, tobacco and oil products since 11th December. Inflation and sales tax figures will next be released in January.
Pawn Shops Lead China Small-Business Loans as Bank Credit Wanes
After months of rejection from Beijing banks, Wang Fei got the money to start a dried-fruit business by pledging his apartment to a pawnbroker. The 25-year-old law-school graduate is following a path taken by a growing number of Chinese entrepreneurs and small businesses. Within days of offering his 90 square meter (969 square feet) flat as security, Wang got 400,000 yuan ($58,421) from Baoruitong Pawnshop Co., the nation’s biggest pawnbroker. "We were desperate," said Wang in an interview in Beijing’s Viva shopping mall, where his stall is. "The banks said they need at least a month to give us the loan, but our business will vanish if it takes that long."
Pawn shops, banned during more than three decades of Communist rule from 1956 to 1987, are making a comeback as China’s government tries to ease the credit crunch that is strangling small businesses. Baoruitong’s loans have risen by more than 70 percent per year since 1997, said Xu Yunpeng, manager of the firm’s real-estate department. In 1997, Beijing only had four pawn shops. This year, Beijing and Shanghai authorized a record 94 new outlets for 2009 in an effort to channel funds to the entrepreneurs who drove the nation’s biggest economic boom, according to the Beijing Pawn Trade Association and Shanghai Pawn Trade Association. In Beijing, home to 336,684 private companies, lending by pawn shops increased by 71 percent to 9 billion yuan in the first nine months from a year earlier, according to the Beijing association. The Ministry of Commerce in Beijing issued 46 new pawn-shop licenses for 2009, adding to 115 existing outlets.
"Pawn shops are filling in the financing gap by lending to small and medium-sized companies and there is still room to expand that function," said Yi Xianrong, a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences in Beijing. At Baoruitong, 90 percent of clients are companies, said Xu. The shop accepts everything from jewelry to property and raw materials as collateral and can approve loans within minutes, he said. "Bank loans extended to small and medium enterprises in the first three quarters this year have dropped from the same period a year earlier," said Jia Kang, head of Institute of Fiscal Science at the Ministry of Finance. He declined to give figures. "Speed and simple procedure is our lifeblood," said Xu in an interview at the company’s two-floor Beijing headquarters. "Our industry serves people in need. Clients can get cash in minutes if they bring in diamonds, jade, and watches." For autos and real estate, "we aim to hand clients their cash within 12 hours."
In the lobby, a security guard oversees rows of diamond rings, jade and Rolex watches. In the parking lot, two more guards watch over at least 50 cars, including a blue Maserati and a silver Ferrari. Baoruitong charges as much as 3.2 percent per month for loans backed by real estate and 4.7 percent those with movable assets such as cars as collateral. The rates are approved by the Ministry of Commerce. Chinese banks offer loans to small start- ups at around 0.75 percent per month. Banks, rattled by the global credit crunch and seeking to avoid a repeat of the bad-loan crisis that engulfed them early this decade, have become more cautious in handing out new loans. About 67,000 smaller enterprises filed for bankruptcy in China in the first half the year, according to government figures.
China’s economy, which drove global growth as it doubled in size over the past five years, is losing steam. Industrial production grew 5.4 percent in November, the slowest in almost a decade, and exports fell for the first time in seven years, according to government data.
"The pawn shops have the ability to work with the government during this global financial crisis and domestic economic slowdown," said Duan Wei, deputy director of the local Ministry of Commerce bureau. "Together we’ll help small and medium companies pass this financial winter." Pawnbrokers have become so important for entrepreneurs that Bank of Communications Ltd., China’s fifth-largest bank by assets, has teamed up with Beijing Huaxia Pawnshop Co. to target small and medium-sized businesses. Under their joint project, "Bank- Pawn-Expressway," a borrower can get a quick loan from Huaxia to meet urgent funding needs and then repay the pawn shop once it gets a cheaper bank loan, which the pawn shop guarantees.
"We work 24 hours a day and we can burn the midnight oil to do due diligence, which banks won’t," said Huaxia Chairman Yang Yong, in a Dec. 8 interview. "And we can deliver to your home." Still, even pawnbrokers are feeling the effects of China’s slowing growth. Yang said loan defaults, rare in normal years, are on the rise. A recent attempt to recover a loan by selling the pledged year-old Mercedes S350 returned only 900,000 yuan, or 90 percent of the loan, he said. "We thought there won’t be a problem selling a car like that for 1.1 million," he said. A new S350 costs as much as 1.45 million yuan. The company has scaled down the percentage of loans on collateral to 60-65 percent for real estate, from 70 percent, and no more than 85 percent for cars, from 90 percent.
Companies like Huaxia are among those that can get bank financing. Bank of Communications granted a 300 million yuan credit line for Bank-Pawn-Expressway program, which can double if needed, said Yang. "We still have loans from China Construction Bank," he said. "We’re not feeling we don’t have enough money to lend." For entrepreneur Wang and business partner Dong Huan, the pawn-shop loan allowed them to buy their first batch of dried jujubes and raisins from Xinjiang province and pay rent on their 20 square-meter booth. "The interest rate they charge is high, but they are so fast and easy," said Wang, who paid the debt in four months. "If I ever need cash again, I will go to the pawn shops."
China’s state sector urged to boost economy
Senior government officials have publicly called on China’s state-owned sector to increase its dominance in the economy in response to rapidly cooling growth and plummeting profits. Analysts say while no one in the Communist-controlled government favours a return to traditional central planning, advocates of continued state dominance of the economy are clearly ascendant in Beijing. In comments reported by state media on Friday, Zhang Dejiang, vice-premier, “urged state-owned enterprises to further expand domestic and international markets . . . assume the responsibility and continue playing the leading role” in the economy in the face of the global crisis. Li Rongrong, chairman of the state-owned Assets Supervision and Administration Commission, on Friday issued a decree to state-controlled holding companies telling them they must continue to “actively increase” their stakes in publicly listed subsidiaries.
China has moved from a centrally planned, wholly state-owned economy to a much more vibrant capitalist society over the past 30 years, but the Communist party has insisted on maintaining control over large parts of the economy it considers essential to keeping its grip on power. “Technocratic ideology – the belief that for one reason or another the government is better suited to run the commanding heights of the economy – is very strong in China,” said Huang Yasheng, a management professor at MIT and author of the recent book Capitalism with Chinese Characteristics. Within the private sector, many are wondering whether the government is implementing an approach known as guo jin min tui or “the state advances as the private sector recedes”. Mr Li has denied that such a policy exists but government subsidies to state companies in the past two months have clearly put private enterprises at a disadvantage in many industries. The state has handed out billions of renminbi to debt-ridden, lossmaking, state-controlled airlines while the country’s first privately owned airline has been forced to halt services.
Li Yizhong, minister of industry and information technology, this month said the government would “encourage big steel companies to acquire small ones”. Most big ones are state-owned while many of the small ones are private. According to state media reports, the government had budgeted at least Rmb27bn ($4bn) in subsidies by the end of November to help state enterprises that are “important to national economic security” weather the economic crisis. “The government is taking these measures to help these companies maintain employment growth and social stability,” said Ha Jiming, chief economist at China International Capital Corp, the Chinese investment bank. “If a more market-oriented economy at this moment could help grow employment then the government would go for that, but right now increased state involvement in the economy is a common phenomenon everywhere in the world, including the US and Europe.” If state-owned companies start playing an even bigger role in the economy, however, this will probably come at the expense of more profitable and efficient private companies.
U.S. debt approaches insolvency; Chinese currency reserves at risk
In the United States, the danger of debt insolvency is growing, putting at risk the currency reserves of foreign countries, China chief among them. According to new figures published by Bloomberg in recent days, the American government has employed a total of 8.549 trillion dollars to stop the financial crisis. This means a total of about 24-25.4 trillion dollars of direct or indirect public debt weighing on American taxpayers. The complete tally must also include the debt - about 5-6 trillion dollars - of Fannie Mae and Freddie Mac, which are now quasi-public companies, because 79.9% of their capital is controlled by a public entity, the Federal Housing Finance Agency, which manages them as a public conservatorship.
In 2007, public debt in the United States was 10.6 trillion dollars, compared to a GDP (gross domestic product) of 13.811 trillion dollars. Public debt in 2007 was therefore 76.75% of GDP. In just one year, direct and indirect public debt have grown to more than 100% of GDP, reaching 176.9% to 184.2%. These percentages exclude the debt guaranteed by policies underwritten by AIG, also nationalized, and liabilities for health spending (Medicaid and Medicare) and pensions (Social Security). In this case, exluding AIG policies, one arrives at a total equal to 429.37 of GDP. By way of comparison, the Maastricht accords require member states of the European Union (EU) to reduce their public debt to no more than 60% of GDP. Again by way of comparison, in one of the EU countries with the largest public debt, Italy, public debt in 2007 was equal to 104% of GDP.
In 2007, 61.82% of America's public debt was held by foreign investors, most of them Asian. So the U.S. public debt held by nonresident foreigners is equal to about 109.39% (113.86%) of GDP. According to a study by the International Monetary Fund, countries with more than 60% of their public debt held by nonresident foreigners run a high risk of currency crisis and insolvency, or debt default.
On the historical level, there are no recent examples of countries with currencies valued at reserve status that have lapsed into public debt insolvency. There are also few or no precedents of such a vast and rapid expansion of public debt. The United States also runs large deficits in its public balance sheet and balance of trade. Families and businesses are also deeply in debt: in 2007, American private debt was equal to a little more than 100% of GDP. At the moment, it is not clear how much of America's private debt has been "nationalized" with the recent bailouts.
In the early months of next year, when the official data are published, the United States will run a serious risk of insolvency. This would involve, in the first place, a valuation crisis for the dollar. After this, the United States could face a social crisis like that in Argentina in 2001. A crisis in U.S. public debt would likely have a severe impact on the Asian countries that are the main exporters to the United States, China first among them. Chinese monetary authorities, thanks to a steeply undervalued artificial exchange rate, by about 55%, have limited imports (including food) and have achieved an export surplus. This has allowed them to accumulate a large stockpile of dollar reserves.
In a currency crisis, China risks losing much of the value of its accumulated currency reserves. At the same time, pressure on imports (wheat, other grains, and meat) have led to inflation in the prices of food, the most important expenditure for more than 900 million Chinese. This is nothing more than a small confirmation of the recent statements of the pope, in his message for the World Day for Peace, where the pontiff calls the current financial system and its methods "based upon very short-term thinking," without depth and breadth, preoccupied with creating wealth from nothing and leading the planet to its current disaster.
US, China and the coming monetary storm
After the crises in subprime lending, the banking sector and the stock market, the same tsunami is sending a new tidal wave that could crash against the dollar and the Euro but also against China and Asia, Eastern Europe as well other emerging nations. This view does not fit well with the agreement reached in Washington by G-20 heads of government and heads of state whose countries represent almost 90 per cent of the world Gross Domestic Product (GDP). In the US capital the leaders of these countries pledged not to erect new trade barriers. In their view globalisation must not stop; we should not return to protectionism, making the same error made in the 1929 crisis. However, such a unanimous consensus seems more lips service to an idea than any actual meeting of the minds. In reality the development of globalisation has been based on an unbalanced economic model. Until now it has relied on controlling monetary emission and non tariff barrier protectionism. The coming monetary storm will thus be a violent and dangerous rebalancing act of the system of international exchange.
Many countries, especially the United States, have printed more money in order to cope with the crisis. Solvency, not liquidity is at the root of the current economic turmoil. Flooding the system with debt liquidity will exacerbate the problem, not solve it. In a short period of time the US Federal Reserve and the US Treasury Department are raking up a mammoth level of debt for US taxpayers—US$ 7,740 billion according to Bloomberg , 11 times what was in Secretary Paulson’s original plan, or 56,19 per cent of the US GDP in 2007. It is not even clear whether this is legal, but one can wonder whether it is fair not only to the American people but also towards the rest of the World, especially to Asian countries which are among the major holders of wealth in US dollars.
Globalisation is based on an unbalanced economic model. So far public and private consumption in the United States have driven world demand. US consumers made export-driven growth in many countries possible. The absurdity of this method lies in the fact that producers get underpaid and are forced into saving in order to provide credit for those who do not produce and could hardly afford to buy. Workers in China, Brazil and India get starvation wages to produce goods tailored-made for the US (and Western) market whilst US consumers are unable to generate corresponding resources and value. In fact, the trend for the US GDP is negative since the third quarter of 2000 when calculated on the basis of inflation as calculated prior to the Clinton era. Yet US consumers have been pushed, flattered and funded to live above their means, almost forced to buy every kind of goods. This is why there is a solvency problem.
Two factors are at the basis of this absurdity: available financial liquidity and accumulation of monetary reserves. On the one hand, US monetary authorities had agreed to an extraordinary increase in financial bank money supply, the so-called M3. Too much of this, even in the form of large or medium term securities, reduces its real value. It should have led to the devaluation of the dollar, but instead, the monetary mass in dollars as a means of payment was maintained an unchanged worth, especially in Asia and emerging countries. This was possible by the role of the dollar, which was boosted by the collapse of the Soviet Union, as the world’s reserve currency as well as by deliberate policies of the Federal Reserve and the US Treasury Department. Thanks to a series of financial engineering instruments made possible by the abolition of the Glass-Steagall law in 1999 like ABSs, CDSs, interest rate forward contracts, securities in US dollars were declared to be "secure".
Credit rating agencies rated these securities as safe (like those of Lehman Brothers for example), giving them the famous AAA or Triple-A grade. This way debt by private institutions could be treated like currency, at face value, and could be registered as balance sheet without the need to set aside reserves for any risk. Similarly greatly underestimating the exchange rate of some emerging economies, especially China’s, in terms of purchasing power parity resulted in what is an actual subsidy to their exports with the effect that their take-off was far greater than their capacity to guarantee quality, delivery, service, sale network, etc.
Rapidly, the monetary reserves of countries like China, Brazil, India and Russia, not to mention oil exporters, shot up quickly to the benefit of local oligarchies. At this juncture an absurd situation turnes into a tragic one as the international system becomes more unstable. In fact since most people in emerging countries are paid in local currencies, they are denied the benefits brought by higher currency reserves. In China alone this means some 900 million people. The consumptions priorities of by local oligarchies are quite different from those of the rest of the population. Not only can the former expand their ideological or religious influence, but they can also push their countries into a military build-up (conventional and nuclear), raise national prestige (space exploration), and buy luxury items and so on.
This could have meant that people in emerging nations might get more food supplied by countries like the United States, Canada, Australia and even the European Union that are rich in water and farmland. Higher food consumption in emerging economies could have balanced capital flows. Instead artificially low exchange rates for emerging nations’ currencies, especially China, pushed up the cost of food. This, in turn, raised domestic tensions to which local ruling oligarchies reacted by re-directing attention externally. In some countries and under some historical circumstances, export-driven expansion can go hand in hand with a stable system as long as monetary circulation is not distorted. Above all this can happen if the solvency of the system is not jeopardised. But under present circumstances, this risk is high because certain levees have been breached.
A first parameter of instability is the gross US foreign debt, which rose from US$ 6,946 trillion as of 31 December 2003 to US$ 13.427 trillion as of 31 December 2007. This is internationally circulated currency. As of the end of last year it was almost equal to 100 per cent of the US GDP. Even though it doubled in a just a few short years, the US economy is not big enough to continue to provide sovereign debt (as monetary reserve currency) in accordance with the growth needs of the world economy.
A second parameter is the staggering rate of growth of the total public debt of the United States. Until 31 December last year, the US public debt stood at US$ 10.6 trillion or 76.75 per cent of GDP. Adding the Paulson plan and the rescue package for Fannie Mae and Freddie Mac (but not counting that of AIG), the ratio jumped to 118.02 per cent. If the these figures published by Bloomberg are correct—US$ 7.74 trillion in rescue packages—we arrive at about US$ 23.3 trillion of public debt for a ratio of 169 per cent of GDP. In just a short period of time the public debt of the United States almost doubled or tripled. Whatever the case may be, it is by far too high.
Although important, these parameters are not decisive. A study by the International Monetary Fund (IMF) found that when the foreign-owned public debt of a country reaches 60 per cent of the GDP that country is in dangerous territory and risks a major monetary crisis. Similarly, other circumstances—a high current government deficit and a negative trade balance—contribute to this kind of risk. At present, all of them come together in the United States. A crucial point is the high percentage of public debt held by foreign investors. For many years after the Second World War the United States was a net creditor to the rest of the world. Since 1987 that is no longer the case. What proportion of the US public debt is held by non-resident foreigners after the United States adopted a number of rescue packages this fall remains unclear. The latest available official figures show that at the end last year the ratio between gross foreign debt and net claims of foreigners on the United States (Table 13-5 of the US Government budget for the 2009 Fiscal Year) stood at 61.82 per cent, up from 54.42 per cent in the previous year.
It is probable that this year it rose even further. But let us assume that it was the same as that of 2007. Even on the basis of the first number (118.02 per cent of the public debt with respect to the GDP), the threshold indicated by the aforementioned IMF study has been crossed (the ratio is about 73 per cent of the US GDP). One thing must be made clear. The IMF study obviously referred to emerging economies whose currencies unlike the US dollar are not reserve currencies. It is therefore impossible to determine with any certainty what the level is in the current US case. We can none the less roughly assume that a breaking point is quickly coming up because if we add up US public debt and spending commitment in health case (Medicaid and Medicare) and pensions (social security) we get to 429,27 per cent of GDP. Last but not least let us not forget that in 2007 Asian investors, especially Japanese and Chinese, were the main foreign investors in US financial assets.
For years AsiaNews has been focusing on another danger, namely the highly and arbitrarily undervalued currencies of many emerging economies. In the case of China the currency is undervalued by 55.54 per cent. In practice this has enabled China to maintain the devaluation it carried out on 1 January 1994 when it set the yuan (CNY) or renminbi (RMB) at 8.62 against the US dollar when it unified the two different exchanges rates that existed at the time. Devaluation gave China an opportunity to create favourable conditions for itself before it had to drop custom duties to join the World Trade Organisation (WTO).
Currently, because the exchange rate is controlled by the People’s Bank of China, the US dollar is worth about 6.8798 CNY. A simple calculation using 2007 World Bank data can show how much the yuan is undervalued. At the current exchange rate China’s GDP stands at US$ 3.280 trillion. But if that same data is expressed in terms of Purchasing Power Parity (PPP), it rises to US$ 7.055 trillion. What this means is that the real exchange rate should be quite different were it to express the same purchasing power. In fact if we applied the same relationship between China’s GDP in current dollars (6.04 per cent of world GDP) and China’s GDP at purchasing power parity (which is 10.78 per cent of World GDP), a US dollar should be exchanged at 3.821 yuan (hence the latter is undervalued by 55.54 per cent).
At such an exchange rate however, Chinese exports would collapse and most Chinese factories would have to shut down and lay off workers. This would cause social upheavals and threaten the country’s ruling class. Seen as the world’s workshop, China is a great success, but if we consider the amount of human resources, capital and raw materials used with regards to GDP growth per unit then its system of production appears very inefficient. What is more, China’s yuan devaluation in 1994 led right to the 1998 Asian crisis. For Asia that crisis was the price to pay for China’s transition from Communism to a market economy, the equivalent in some ways of the collapse of the 1989 Berlin Wall. Ten years later economic history seems to be repeating itself, many times over.
For its transition out of Communism China has adopted an export-driven development model. As economic history shows, this model lacks internal balance as we are now realising. At present it has led to a mad dash for industrial delocalisation and is a contributing cause of the world’s current financial meltdown. If it goes on any further it runs the risk of provoking an unprecedented monetary crisis with a brutal re-adjustment of the system. So far the model has survived because it has served the interests of those in power, of those who control the purse (the US Federal reserve and to a lesser extent the European Central Bank), manpower (China’s Communist Party for example) and raw materials (Gulf sheiks and Russia’s ruling oligarchy, etc.).
Also the decisions made by the G-20 in Washington to lay the grounds for a new world monetary system in order to save globalisation can serve the transnational oligarchy. Controlling the instruments of payment is the basis of power. Today an attempt is underway to create on the ashes of the dollar a new de facto world central bank, or perhaps a new Euro-American currency, or perhaps only a North American currency, the Amero. We don’t know. This may be good for the World Bank, the World Trade Organisation, the International Monetary Fund, the Financial Stability Forum, and the various United Nations agencies, the people in charge of the US Federal Reserve, the European Central Bank, the People’s Bank of China, and other central banks. It is not clear whether it is good for the rest of the world.
Qualifying Tests for Chinese Financial Workers
Li Wuchen is 33 years old and has worked as a stock broker for three years, but he looked as nervous as a high school student facing the SAT as he stood outside a university building on a recent Saturday morning and studied a government-issued manual one last time. "This is my third time taking the test," he said. "I must pass by the end of this year or lose my job." Chinese regulators have stepped up their policing of banks, ordered them to limit their counterparty risk in overseas derivatives transactions and reviewed trust companies to make sure that they are not taking inappropriate risks. But China’s most unusual response to international financial turmoil has been the government’s decision to increase rapidly the number of qualification tests that are required for workers in the financial sector. The government has also increased the number of people required to take these tests.
The improvements that China is starting to make in its financial regulatory system are likely to be tested heavily in the next few months. Recently Chinese banking regulators have taken a series of steps to encourage banks to lend much more heavily, as part of a broader government effort to halt an economic slowdown unfolding with alarming speed. State-controlled banks — and almost all banks in China are still majority-owned by the government — are being told to lower the required down payments on home mortgages, lend more money to exporters and provide much greater financing for local and provincial governments engaged in building new roads and other infrastructure projects. Yet the longer-term health of the Chinese economy may depend on regulators’ and bank managers’ ability to accomplish all of this without impairing the credit quality and risk management systems still being introduced here. Failure could expose Chinese banks to the kinds of problems now bedeviling their Western rivals.
Testing managers could be part of the answer. China has a long history of relying much more heavily than Western countries on tests to choose winners and losers — imperial officials were tested for their knowledge of literature as early as 2,000 years ago. Mao eliminated many examinations, but Deng Xiaoping began to revive them after 1978, partly as a way to weed out incompetent officials who had risen through the ranks based only on political connections or seniority. As the number of college graduates rises steeply in China and universities struggle to maintain the quality of education in a rapid expansion, the number of exams is rising even more quickly. That is particularly true in financial services, as the government worries about repeating the West’s financial mistakes. More cautious and more heavily regulated, Chinese financial institutions appear to have weathered the crisis better so far. Chinese banks require down payments of 20 to 50 percent on mortgages to discourage borrowers from reneging on debts, and since 2004 have been forced by the government to limit their real estate lending.
But like the United States and many other countries, China faces falling real estate prices and steeply declining share prices — and regulators are increasingly worried. "Bad loans are already showing an upward trend, especially in the property market, where the mortgage default risk is growing at an accelerating pace," said Jiang Dingzhi, the vice chairman of the China Banking Regulatory Commission, at a conference this autumn. He provided no details, nor have Chinese banks released any recent updates on their nonperforming loans. Bush administration officials have pushed China to open up its financial markets and allow greater financial innovation. "That need not be at odds with learning the lessons from the recent turmoil in the United States," David H. McCormick, the under secretary of the Treasury for international affairs, said, adding that improvements in international financial regulation were also needed. Without singling out China, Mr. McCormick cautioned that protectionism was "a very real risk — throughout history in times of stress, in times of turmoil and anxiety, there’s a tendency to turn inwards."
Chinese banks have disclosed holdings of American mortgage-backed securities, but such holdings have been tiny compared with the banks’ total assets. Yet — despite signs of trouble in the domestic real estate sector — regulators have focused on foreign transactions in particular, fearing that international turmoil in financial markets will spread to China. "There are new sources of volatility that threaten our sound and stable growth," the China Banking Regulatory Commission said in a statement in October. "It is important to recognize these new problems and make careful decisions to cope with them." Some financial experts warn that China may go too far in continuing to limit competition for its banking system through heavy regulation. "Strengthening regulation of risk control, strengthening bank examination — all of these are good in principle," said Shang-jin Wei, a Columbia University finance professor. "It’s always difficult to resist the temptation to go overboard, and China might miss the chance to strengthen its banking system." For instance, with the government maintaining very large majority stakes in each bank, Chinese banks remain susceptible to pressures to lend to politically connected borrowers.
The China Banking Regulatory Commission already has a basic competence test for bankers but abruptly authorized three more in July, all of which are supposed to be ready by the end of this year. The new tests are for risk managers, certified financial analysts and information security engineers. Approximately 200,000 people in the banking sector alone will be required to pass the risk management test within one year or lose their jobs, said Walter Wang, the president of ATA, a Beijing-based company traded on Nasdaq that administers many of the Chinese government’s financial regulatory tests. Even bank branch employees who sell products like mutual funds and currencies will be required to pass the risk management test. The only limit on how many times someone can try to pass the test is that the tests are typically administered three or four times a year. Chinese regulators are also preparing to require bank employees involved in the issuance of mortgages to start taking a national qualification test late next year as well, Mr. Wang said. The China Insurance Regulatory Commission is also drafting extensive new test requirements, and the government is considering certification tests for real estate brokers and other professionals. "The authorities are paying attention to what is happening outside of China, and they are reacting," said Carl Yeung, ATA’s chief financial officer.
Mr. Li, the stock broker, took his recent test at the College of Computer Science and Technology at the Beijing University of Technology. He was one of 2,500 men and women taking the brokerage test, most of whom appeared to be in their 20s or 30s. Age discrimination is widespread in China, partly because many people who grew up during the Cultural Revolution in the late 1960s and early 1970s were denied years of formal education. The college, on the northeast outskirts of Beijing, has a leafy campus that rivals those of many American universities, and is certainly well equipped. Each of the 2,500 test takers was sent to a different desktop computer, arranged in rows on desks in a series of well-lighted halls.
Before taking the test, each test taker was photographed and the image stored. Some in China try to send ringers to take the test for them. When there is any hint of fraud, the photos taken at the test center are compared with reliable photos of the person who was supposed to be taking the test. In some cases, the tests offer a guide to where China wants to go someday in financial deregulation: Mr. Li had to take the stock brokerage test for a third time because he had previously failed twice a section involving financial derivatives. "The financial derivatives are not even launched yet in the market," he said, "so we don’t have practical experience."
Russia braced for unrest
Russia is bracing for further unrest as the rouble on Friday slid to a new low against the euro after a succession of moves to devalue its currency. A cut on Friday extended six weeks of devaluations by Russia’s central bank designed to offset the impact of the global economic crisis and falling oil prices as the country’s main export commodity approached its lowest level since 2004. Mikhail Gorbachev, the former Soviet leader, warned Russia faced “unprecedentedly difficult and dangerous circumstances” and could be “heading into a black hole”. “It is not clear what the fate of our rouble will be or if society has sufficient financial and moral resources,” he said. After the depreciation, which was the eighth so far this month, the rouble declined as much as 1.2 per cent to Rbs29.06 versus the dollar on Friday, a four year low. The rouble has now lost nearly 20 per cent of its value against the US currency since August. Analysts at Barclays Capital said the best case scenario would see Russian policymakers, facing the mounting evidence of a recession, allowing a one-off depreciation of 10 per cent or more.
The rouble’s slide comes as the government faces scrutiny over its policies. A demonstration earlier this month in the far eastern city of Vladivostok marked the first major challenge to the Kremlin since the onset of the global financial crisis. Mikhail Sukhodolsky, a deputy interior minister, warned on Christmas Eve that there could be further protests. “The situation may be exacerbated by a growth in frustration of workers over the non-payment of wages or those threatened with dismissal,” he said. His remarks coincided with criticism of the Kremlin’s rough handling of the protests in Vladivostok. Moscow-based Omon riot police detained about 61 people in the protests against car import duties designed to prop up domestic car producers, but making foreign vehicles prohibitively expensive for ordinary Russians.
Mikhail Kasyanov, the former prime minister who now leads the liberal People’s Democratic Union opposition movement, said that an unspoken social contract between the government and the people, swapping political freedoms for prosperity and consumer goods, had broken down. “It was a deal,” he told the FT in an interview this week. “But it has fallen apart and that is why people are appearing on the streets. The process has started . . . Things could spin out of control when people wake up and realise their neighbours have lost their jobs and they are at risk of losing theirs.” He added that “the authorities had reacted “cynically and in a very nervous manner for nothing,” against a peaceful demonstration. Boris Gryzlov, the pro-Kremlin speaker of parliament, on Friday accused the opposition of provoking the demonstration. Moscow, which has pledged $200bn to mitigate the effects of the economic downturn, late on Thursday published a list of 295 strategic enterprises entitled to preferential government support. Amid suspicions that the money will not be distributed transparently, the government said the list published on its website was not complete and did not guarantee financial support for those on it.
Russia Again Warns of Gas Supply Disruption
Russia's state natural gas monopoly OAO Gazprom warned Saturday that a pricing dispute with Ukraine could disrupt gas supplies to Europe. Ukraine could use its pipeline to divert Russian natural gas intended for European customers even if it fails to pay its multibillion debt to Gazprom by Jan. 1, said company spokesman Sergei Kupriyanov. If that happened, the company was "not sure we could fulfill our transit obligation" of Europe-bound gas supplies, he said. He said Gazprom could not prevent the "unsanctioned" diversion of gas and Ukrainians would "just have to keep burning gas in their stoves."
Europe gets about a quarter of its gas from Russia, and most of it goes through Ukraine. The warning from Gazprom will likely unnerve European nations who fear a replay of January 2006 supply shortages amid a pricing tug-of-war between Moscow and Kiev. Ukraine then siphoned Russian gas intended for Europe from a transit pipeline crossing its territory after Gazprom cut supplies. Mr. Kupriyanov said Ukraine might fail to pay off its $2.4 billion debt before Jan. 1, but expressed hope that Gazprom and Kiev will work out "other ways" of settling the dispute. "We're considering prepayment for transit of gas that goes to Europe," he said. He did not elaborate, saying the details were confidential.
Ukraine is scrambling for the money amid a devastating financial crisis and relentless political turmoil. Ukrainian officials have accused Moscow of trying to exploit the situation to force it to surrender control of its gas transportation network. Russia's ties with its former Soviet neighbor are badly strained over Ukraine's aspirations to join NATO, and Kremlin leaders were angered by Kiev's staunch support of Georgia in its August war with Russia. Gazprom's statement follows a stern warning from President Dmitry Medvedev Wednesday that Russia could cut gas supplies to Ukraine. Russia urged European countries to put pressure on Kiev to avoid a repeat of the 2006 gas crisis. The other transit country for Russian gas to Europe is Belarus, but its transportation network has a limited capacity.
Gazprom Says Ukraine ‘Unconstructive’ on Gas Talks
OAO Gazprom, Russia’s gas-export monopoly, said "extremely unconstructive" talks with Ukraine over a debt dispute may trigger to the second cutoff of fuel shipments to the former Soviet state in three years. "In such a situation there will be no legal grounds" to deliver gas to Ukraine as of Jan. 1, Gazprom Chief Executive Officer Alexei Miller said in a letter to European customers. A copy of the letter was e-mailed to reporters today. Gazprom, which supplies one-fourth of Europe’s gas, mainly through Ukraine’s pipeline system, refuses to sign a new delivery contract until Ukraine pays off a debt of $2.1 billion. The Moscow-based company curtailed deliveries to the country in January 2006 on a price dispute. That led to natural-gas shortfalls throughout Europe and called into question Russia’s reliability as an energy supplier.
"To prevent hardship to vulnerable populations at a time of economic stress, it is important that the parties to this dispute devote the time and effort necessary to resolving it," U.S. State Department spokeswoman Joanne Moore said. "The predictable flow of energy to Ukraine and the rest of Europe under market-based, transparent conditions is essential for stability and reliability in regional and global markets." Russian President Dmitry Medvedev threatened Dec. 24 to sanction Ukraine if the debt isn’t paid "to the last ruble" by next week. Speaking in an interview broadcast on state- controlled television channels, he said relations with Ukraine have reached the lowest point over the past few years and the neighboring country "lacks efficient leadership."
Ukrainian President Viktor Yushchenko has clashed with Yulia Timoshenko since she assumed the post of prime minister in his country a year ago. Yushchenko criticized Timoshenko for not paying for gas supplies. Medvedev sent condolences yesterday to Yushchenko following an explosion that ripped through an apartment block in the Black Sea resort town of Yevpatoria, killing 26. Medvedev said units of Russia’s Black Sea fleet based in Crimea, which has a large Russian-speaking population, were ready to help with the rescue effort, the Kremlin press service said in a statement. Gazprom will "do all possible to avoid gas delivery disruptions to Europe," Gazprom’s Miller said in the letter made public today. "However, we see it as our duty to warn that systematic violation by NAK Naftogaz Ukrainy of its obligations under gas delivery contracts does not give us confidence that these transit obligations will not be violated." Naftogaz Ukrainy is Ukraine’s state-run energy company.
Conflict with Ukraine over gas deliveries has been one of most contentious issues between the countries. Russia also is challenging Ukraine’s aspirations to join the North-Atlantic Treaty Organization and blames Ukrainian leadership for supplying weapons to the Georgian army, which fought Russia in August over the breakaway region of South Ossetia. "Plans remain to repay the debt by the new year," Naftogaz spokesman Dmytro Marunych said by telephone from Kiev today. "A compromise will be found by our top management." He added that efforts will be made so that "European and Ukrainian consumers will not feel the effect of a cutoff should it happen." Gazprom spokesman Sergei Kupriyanov said in a separate statement today that the situation over Ukraine’s gas debt is "critical" and that it is "obvious" that it will not pay off the debt by year’s end. He said that Ukraine is not suggesting real ways of regulating the problem.
Ukraine owes $806 million for November gas and $862 million for December, plus about $450 million in fines. A cutoff in Russian supplies of the heating and power-plant fuel would worsen the outlook for Ukraine’s economy, which is already in danger of its worst decline since the mid-1990s aftermath of the Soviet Union’s collapse. Its gross domestic product, which has expanded at an average annual rate of 7 percent since 2000, may shrink 5 percent next year, Oleksandr Shlapak, deputy chief of staff to the country’s president, said last month. The nation, like other emerging markets, has been shaken by a lack of credit, a weakening currency and plunging demand for its products due to the global financial crisis. Last month, Ukraine received approval for a two-year, $16.4 billion International Monetary Fund loan to help support its banking system and widening current-account deficit.
A fuel crisis would also risk hammering Ukraine’s steel industry, which accounts for 40 percent of the country’s exports. Ukrainian industrial production shrank by a record 28.6 percent in November as steel, machine building and oil refining slumped, after a 19.8 percent decline in October, the statistics office said earlier this month. Gazprom’s Kupriyanov denied a statement by Yushchenko that Gazprom agreed to restructure the gas debt. "A unilateral debt restructuring usually happens only after a default," Kupriyanov said in the statement. "There are no agreements on debt restructuring as part of bilateral relations and no documents have been signed on that."
Kupriyanov said that Gazprom representatives have toured European capitals to inform their partners on the situation with Ukraine’s gas debt. U.K. gas pries climbed as much as 4.9 percent on Dec. 18, after Gazprom threatened to halt deliveries to Ukraine again. "Russia right now is doing everything they can to jawbone energy prices higher," said Michael Rose, a director of trading at Angus Jackson Inc. in Fort Lauderdale, Florida. "It’s just more rhetoric and more bark than anything of substance right now. It’s kind of like OPEC saying something. People don’t really do anything until action is taken.
Mexico suspends purchases from 30 U.S. meat plants
Mexico suspended purchases from 30 U.S. meat plants due to sanitary issues, which sent U.S. cattle and hog prices sharply lower on Friday and prompted speculation the ban was retaliation against a U.S. labeling law. Early on Friday, U.S. analysts said the bans were likely because of Mexico's opposition to a recently enacted meat labeling law. The law, commonly called Country-of-Origin Labeling or COOL, requires that meat packages in U.S. supermarkets carry labels stating the countries where the meat animals were raised. Mexico and the U.S. Agriculture Department both denied the retaliation charge.
"Countries would go through dispute settlement under either (the North American Free Trade Agreement) or (World Trade Organization) -- not use the action of plant-by-plant delistment," said Amanda Eamich of USDA Food Safety and Inspection Service. USDA listed the affected plants on its website on Friday, but the suspensions became effective on Tuesday. The listed plants produce beef, lamb, pork, and poultry. Many of the banned plants are owned by the largest U.S. meat companies, including Cargill Inc , Tyson Foods Inc, JBS, Seaboard and Smithfield Foods. Mexico is a leading buyer of U.S. meat and said that purchases from the affected plants could resume as early as Monday. "If everything goes well, the plants could be re-listed next Monday," Mexico's agriculture ministry said on Friday. The ministry said the affected plants fell short on standards like packaging, labeling, and some transport conditions.
USDA said it is working with Mexico and the meat companies to resolve the issues. U.S. consumer and farm groups say the labeling rules will distinguish U.S.-grown food from imports on the grocery shelf and fulfill the shopper's right to know about products. Canadian and Mexican officials have opposed the law arguing that it will have U.S. meat plants and consumers discriminating against non-U.S. animals and meat. Both countries ship livestock into the United States. "It appears they (Mexican officials) are using this to send a signal to our government that they don't like COOL," Don Roose, analyst at U.S. Commodities, said earlier on Friday. Earlier this year, Mexico had warned many U.S. meat plants of alleged "point of entry violations" and Friday's suspensions may have been related to that, Jim Herlihy, spokesman for the U.S. Meat Export Federation, said early on Friday.
Point of entry violations could be a number of things including incorrect paperwork or labeling issues, he said. Prior to Mexico saying shipments could resume on Monday, Roose had predicted the bans would be short, because Mexico needs the meat for its population. "You have to feed the masses," he said. News of the bans prompted selling in U.S. cattle and hog markets at the Chicago Mercantile Exchange on Friday, with cattle prices dropping 2 to 2.5 percent and hog prices dropping about 3 percent. "That is bad news," Jim Clarkson, Chicago-based analyst at A&A Trading said of Mexico's action. "They (Mexico) are fighting COOL." After Mexico denied it was retaliating for COOL, Clarkson still predicted the labeling law may have helped prompt the bans.
Ilargi: I haven't talked much about it -yet-, perhaps because for me it seems such a given. The credit crunch will lead to very destructive practices for our environment and our climate. If you can't pay your heating bill, you will resort to coal, and start tearing down every tree you can find. A lot of noble climate initiatives can conveniently be buried with the rubble of removed mountaintops. We will yet see the true nature of man.
Burning Coal at Home Is Making a Comeback
Kyle Buck heaved open the door of a makeshift bin abutting his suburban ranch house. Staring at a two-ton pile of coal that was delivered by truck a few weeks ago, Mr. Buck worried aloud that it would not be enough to last the winter. "I think I’m going through it faster than I thought I would," he said. Aptly, perhaps, for an era of hard times, coal is making a comeback as a home heating fuel. Problematic in some ways and difficult to handle, coal is nonetheless a cheap, plentiful, mined-in-America source of heat. And with the cost of heating oil and natural gas increasingly prone to spikes, some homeowners in the Northeast, pockets of the Midwest and even Alaska are deciding coal is worth the trouble.
Burning coal at home was once commonplace, of course, but the practice had been declining for decades. Coal consumption for residential use hit a low of 258,000 tons in 2006 — then started to rise. It jumped 9 percent in 2007, according to the Energy Information Administration, and 10 percent more in the first eight months of 2008. Online coal forums are buzzing with activity, as residential coal enthusiasts trade tips and advice for buying and tending to coal heaters. And manufacturers and dealers of coal-burning stoves say they have been deluged with orders — many placed when the price of heating oil jumped last summer — that they are struggling to fill.
"Back in the 1980s, we sold hundreds a year," said Rich Kauffman, the sales manager at E.F.M. Automatic Heat in Emmaus, Pa., one of the oldest makers of coal-fired furnaces and boilers in the United States, in a nod to the uptick in coal sales that followed the oil crises of the 1970s. "But that dwindled to nothing in the early 1990s — down to as many as 10 a year," he said. "It picked up about a year ago, when we moved about 60 units, and then this year we’ve already sold 200." Dean Lehman, the plant manager for Hitzer Inc., a family-owned business in Berne, Ind., that makes smaller, indoor coal stoves, said his stoves were on back order until March. And Jeffery Gliem, the director of operations at the Reading Stove Company and its parent, Reading Anthracite, in Pottsville, Pa., which supplies coal and stoves to 15 states in the Northeast and Midwest, said the uptick in interest was the largest he had seen in 30 years.
"In your typical year you might have five, six, seven thousand stoves being sold," Mr. Gliem said. "This year it was probably double that." The coal trend is consistent with steep increases in other forms of supplementary heating that people can use to save money — most of them less messy than coal. Home Depot reports that it has sold more than 80,000 tons of pellet fuel, a sort of compressed sawdust, for the season to date. That is an increase of 137 percent compared with the same period last year, said Jean Niemi, a company spokeswoman. Coal may never make economic sense in areas far from where it is mined. But in places within reasonable delivery range, the price tends to be stable, compared with heating oil or natural gas. Prices for natural gas more than tripled in recent years before plunging in the last few months amid the downturn.
Coals vary in quality, but on average, a ton of coal contains about as much potential heat as 146 gallons of heating oil or 20,000 cubic feet of natural gas, according to the Energy Information Administration. A ton of anthracite, a particularly high grade of coal, can cost as little as $120 near mines in Pennsylvania. The equivalent amount of heating oil would cost roughly $380, based on the most recent prices in the state — and over $470 using prices from December 2007. An equivalent amount of natural gas would cost about $480 at current prices. Mr. Buck said he could buy coal for $165 a ton. On a blustery afternoon recently, he was still studying the manual for his $2,300 Alaska Channing stoker, which gave off an intense heat in the den. An automated hopper in the back slowly dispensed fine anthracite coal chips into the stove’s belly, and every couple of days, Mr. Buck emptied the ash. He said he hoped the stove would cut his oil consumption in half.
"Now, somewhere, you’ve got to take into account the convenience of turning up your thermostat, versus having two tons of coal to shovel and the hopper and ashes to deal with," Mr. Buck said. But if the $330 worth of coal in his makeshift bin "heats the house for the winter," he added, "you can’t beat it." Wesley Ridlington, a homeowner in Fairbanks, Alaska, bought an outdoor coal furnace for $13,000 in March and uses it as his main source for heat and hot water. On a recent evening, as the temperature hovered around 23 below zero, Mr. Ridlington worked to free up the rotating burning plate inside the furnace, which he figured was jammed by a pebble. He did not seem to mind the glitch, or, for that matter, loading the furnace twice a week and emptying the ash pan every night. "It takes a little bit of time," he said, "but for the savings, it’s worth it." Mr. Ridlington said he was typically burning 1,500 gallons of oil each winter to heat his 3,300-square-foot home. At last year’s prices, that would have cost about $7,000, he said. This winter, he expects to burn nine tons of coal at a cost of about $1,400.
"The initial cost was expensive," he said. "But in three to five years, it’ll be paid for, even with prices going down. And if fuel goes back up again, it’ll be even more savings." Rob Richards, who owns a business in Fairbanks that sells spas, pool tables, and now outdoor coal furnaces, said that when oil prices were higher, he could promise fuel cost savings of more than 75 percent and a payback of 18 months for an outdoor coal furnace. With oil prices down again, orders for furnaces have dropped off, and the savings are closer to 50 percent with a few years’ time to recoup the cost, he said. "Still, you’re looking at a quick payback," Mr. Richards added. Coal was a dominant source of heat for American homes for much of the late 19th and early 20th centuries. Americans were still burning more than 50 million tons for heating in 1950, according to the federal statistics.
But coal, primarily used today in power plants and steelmaking, has not been used for heating on a large scale for decades. Cleaner and more easily distributed forms of heating fuel — including natural gas, electricity and oil — displaced coal, and residential use dropped precipitously, to 2.8 million tons by 1975, and then to less than 500,000 tons by 2000. Even with the recovery of the last couple of years, residential use of coal in the United States, at less than 300,000 tons today and representing a fraction of 1 percent of all coal use, is "not even a blip on the screen," said Carol Raulston, a spokeswoman for the National Mining Association. Still, even amid the steep decline, small upticks similar to the current one have appeared from time to time, and residential use of coal never entirely went away.
In Homer, Alaska, fall storms wash crude coal onto the beach from underwater deposits. In the mountains of eastern Kentucky or the hills of central Pennsylvania, residents can simply dig it out of the ground. "As long as people have been mining coal up there," said John Hiett of Kentucky’s Office of Mine Safety and Licensing, "people have burned coal in their houses." Government data suggest that about 131,000 households use coal as their primary source of heat, with perhaps 80,000 more using it as a secondary source. Those numbers are small enough that issues relating to pollution and greenhouse gas emissions have remained largely off the radar. Burning coal does throw fine particles into the air that can pose problems for some people, similar to the problems involved in burning wood — though wood stoves and fireplace inserts are increasingly subject to regulation to cut down on pollutants.
"Coal stoves don’t have that," said James E. Houck, the president of Omni Environmental Services, a firm in Portland, Ore., that tests air quality. "And there’s no regulatory pressure for them to have it." In some localities where residential coal burning is becoming a factor, that might be changing. In Fairbanks, air quality experts suspect the increase in coal burning — along with increased wood burning — is contributing to concentrations of fine particles well above federal limits. "We see it as a real health hazard to Fairbanks," said Jim Conner, the Fairbanks North Star Borough’s air quality specialist. Concerns like these have not deterred companies marketing coal. Back East, the Blaschak Coal Corporation, a midsize supplier of anthracite in Mahanoy City, Pa., still emblazons company trucks and baseball caps with images of Santa Claus lugging a sack of coal. "Everybody’s looking at wherever they can to save money," said Daniel Blaschak, a co-owner of the company." ’Cause guess what? We no longer have disposable income. We are up to our necks in debt. And there’s very few things we can’t live without, but heat is one of them."
Architects create American-style suburbs overseas
Architect Andy Feola keeps running into Southern California colleagues in some of the world's most exotic locations -- from the Egyptian desert to China to Azerbaijan. "We'll scratch our heads and ask 'Why are you here?'" said Feola, president of F+A Architects in Pasadena. "Well, I'm here for the same reasons you're here." A growing number of architects and urban planners are finding work overseas as the domestic real estate slump persists. An emerging affluent class abroad is drawn to suburbs with U.S. names that mimic the American ideal -- down to the master bathroom and tree-lined sidewalk. A 2006 survey of American Institute of Architects members shows that large architecture firms with more than 100 employees reported billings from international work doubled in four years. Meanwhile, billings in the U.S. this year dropped to the lowest point in the 12 years the survey has been conducted.
While there's no hard data, more American-made windows, roofing systems, furnaces and other specialized materials are being shipped overseas because projects designed by Americans are built to U.S. construction standards, said Jim Haughey, an economist with Reed Construction Data, which tracks the construction industry. "The English concept of a man's home is his castle is true in most parts of Asia, the Mideast and Eastern Europe," said Jeff Rossely, a Bahrain-based developer of shopping malls, resorts and residential communities in the Middle East. "If you look at how countries are moving up the socio-economic ladder, some of the things they all want is a car, a house, a nice view and air conditioning." The trend started during the early 1990s U.S. housing downturn and has intensified in recent years. Firms that ventured abroad since that time say doing so has helped them weather economic slowdowns in certain markets.
It has also created opportunities to design on a grander and more creative scale. At times, architects are creating huge master-planned communities encompassing a mix of single-family homes with high rises, parks and shopping centers. Feola's firm is designing a shopping and entertainment complex for New Cairo, a metropolis built from scratch for roughly 200,000 residents in Egypt. The idea is to avoid some of the mistakes of the past and create a mixed-use environment where people rely less on their car to get to shops and services. American firms are behind an eco-friendly island connected to Shanghai by rail, and a new township in northern Indian loaded with luxury villas, apartments, shops, parks and schools. Curiously, some of the developments overseas look and sound a lot like California suburbs marketed to affluent customers who have spent time living in the U.S. or attracted to an American suburban lifestyle.
Feola's firm, which does 90 percent of its projects outside the U.S. and is best known for designing a shopping mall in Dubai with an indoor ski slope, was responsible for a development outside of Beijing called Napa Valley that has little resemblance to the winemaking region. Grassy front lawns and driveways lead to pastel-colored homes that mimic French, Italian or Spanish architectural styles. Customized kitchens, screening rooms and basement wine cellars are very different from Chairman Mao's vision of communal living. "It's hard to tell you're not in Southern California," Feola said. Another Beijing suburb is aptly named Orange County, which sold out within days of opening in 2002. Chinese developers hired Newport Beach firm Bassenian Lagoni to make a replica of homes they saw south of Los Angeles. With the eerie resemblance to the American suburb, critics derided the homes as "McMansions."
"It's too bad that we as Americans are turning away from suburban sprawl as Asia adopts it," said Robert Fishman, a professor of architecture and urban planning at the University of Michigan. Architect Aram Bassenian, whose Mediterranean-style homes have come to define California's ritzy suburbs, contends that architects shouldn't shoulder all the blame. California borrows ideas from elsewhere, and for centuries cities have been designed or influenced by outsiders. Many advances in green home design that were developed in the U.S. are being introduced overseas, including better insulation or ventilation to rely less on fossil fuels for heating and air conditioning. To make the homes fit with the local culture, outdoor kitchens are added in Asia for frying food, and trellises are installed to protect Mediterranean homes from intense sunlight. "We don't create the demand, we respond to people's needs for shelter, for housing," Bassenian said.
Despite criticism, suburban communities are sprouting in Latin America, North Africa, South Asia and Eastern Europe. To promote developments that won't deplete natural resources, land use experts at the Urban Land Institute has been taking foreign groups on "study tours" of U.S. communities and recently opened an education center in the United Arab Emirates. Developers say they look to American architects because they have a track record of designing successful shopping malls, resorts and other high-end projects. Bassenian said he doesn't take lightly the task of creating a built-in environment for people millions of miles away. "It is both a daunting responsibility as well as an incredible privilege to think that what we do here will shape how somebody lives around the world," Bassenian said.
Ilargi: Economics professor Willem Buiter on the bigots that stole Christ.
Another unholy mess created by a message from the Pope
The Pope ruined my Christmas. What is it about the Judeo-Christian-Islamic religious tradition that leads so many of its most prominent spokespersons to make hateful, bigoted, life-diminishing and personal security-endangering statements when it comes to human sexuality? Perhaps there was something inherent in the environment and culture of the Fertile Crescent, and of the Middle East in general, that predisposed the religions it brought forth to declare anathema anything other than abstinence and heterosexual behaviour (the latter only in a setting of monogamy or polygyny, not polyandry, of course).
Even so, one would have hoped that the civilising influence of Greek and Hellenistic culture would have filtered most of the sexual bigotry out of the European religious mainstream, and out of its offshoots in the former European colonies. Apparently not. The current Pope, Benedict XVI is right at home in the abhorrent main-stream Christian tradition of sexual intolerance. In his address ‘Christmas greetings to the members of the Roman Curia and Prelature (December 22, 2008)’ (available thus far only in German and Italian from the Vatican website), the Pope makes a number of extremist, bigoted and intolerant statements about homosexuality and transsexuality.
People are responsible for those results of their words and actions that can reasonably be foreseen. Those uttering the statements or carrying out these acts may not have intended these consequences. They may even deplore them. If, however, these consequences could be foreseen even by a bear of very little brain, let alone by a pontiff with, by all accounts, a mass of grey matter between the ears, then the person using these words or engaging in these actions is responsible even for these unintended consequences. This statement by the Pope will lead to more harassment of homosexuals and transgendered persons and to more discrimination against them in a range of activities, including participation in religious worship. It will probably lead to more acts of violence against homosexuals and transsexuals.
In his address, Pope Benedict argues that saving humanity from homosexual or transsexual behaviour is as important as saving the rain forest from destruction. He also urged humanity to listen to the "language of creation" to understand the intended roles of man and woman. Finally, he argued that behaviour beyond traditional heterosexual relations between a man and woman (married - preferably to each other) was a "destruction of God’s work". How a man reputed to be as educated and intelligent as Benedict XVI can confuse the accumulated prejudice of centuries of dysfunctional organised religion with the message of the founder of Christianity is a mystery to me. Christ, as far as we know from the gospels, never said a word about homosexuality - let along about transgender sexuality.
We don’t know whether He was single, married or divorced, monogamous or polygamous, straight, gay, or interested in transgender sexuality. We know nothing of Him between His early teens and His early thirties. When He starts His ministry He travels around with 12 male disciples and associates with a number of female camp followers. We know He liked wine - His first miracle was to change water into wine - but know nothing of His other interest, hobbies and vices. Christ taught us to love God and to love our neighbour as ourself - the two Great Commandments from both the Old and the New Testaments. If my neighbour is gay, lesbian, transgendered or transsexual, God’s glory is revealed in his or her sexuality as much as it is in the sexuality of my heterosexual neighbour or in the voluntary abstinence of the Pope.
If my neighbour is an adult and wishes to express his sexuality with another consenting adult, that sexual sharing is blessed by God regardless of whether is it homosexual, transgender or heterosexual, whenever it enhances the humanity of the other. Did God make a mistake when She allowed homosexuality to evolve in the human species, as it has in countless other animals? Or was She only joking? Surely, whether something qualifies as right or wrong, moral or immoral, righteous or sinful depends on whether the act, the deed or the behaviour is both motivated by and expresses respect and love for all others affected by it? Homosexuality and homosexual behaviour, transgender sexualty and sexual behaviour and any form of sexuality and sexuality that does not hurt or diminish others but confirms and affirms them, cannot possibly contradict the teachings of Christ.
His church, unfortunately, is another matter. When the teachings of an institutional expression of Christianity like the Roman Catholic Church are so radically at variance with the fundamental teachings of the founder of the religion, voluntary receivership and liquidation, with the proceeds distributed amongst the wretched of the earth, may be the best solution. I consider the Pope’s views on sexuality, as expressed in his 22 December statement, to be a violation of everything Christ taught us and stood for. It is deeply un-Christian and must be rejected and fought wherever similar hateful prejudice and bigotry rear their ugly heads.